Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD1090 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT FOR A PROPOSED CREDIT IN THE AMOUNT OF SDR 33.8 MILLION (US$50 MILLION EQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR THE SECOND INTEGRATED GROWTH POLES AND CORRIDOR PROGRAM NOVEMBER 25, 2014 Trade and Competitiveness Global Practice AFCS2 – Africa Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to information. CURRENCY EQUIVALENTS (Exchange Rate Effective September 30, 2014) Currency Unit = SDR SDR0,6745 = US$1 US$1.4826 = SDR 1 MGA2654.98473 = US$1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ADAPS Association pour le Développement de l’Agriculture et du Paysannat du Sambirano ADEMA Aéroports de Madagascar AFD Agence Française de Développement AfDB African Development Bank AGOA African Growth and Opportunity Act APMF Agence Portuaire Maritime et Fluviale BIANCO Bureau Indépendant Anti-Corruption BOO Build, Own, Operate BoP Bottom of the Pyramid CAMM Chambre d’Arbitrage et de Médiation de Madagascar CAS Country Assistance Strategy CCI Chamber of Commerce and Industry CGA Centre de Gestion Agréé CIRAD Agricultural Research for Development CMU Country Management Unit CNaPS Caisse Nationale de Prévoyance Sociale CB Capacity Building CPIA Country Policy and Institutional Assessment CRDA Commission pour la Réforme du Droit des Affaires CTHT Centre de Technique Horticole de Tamatave DBI Doing Business Indicators DL Disbursement Letter DTIS Diagnostic Trade Integration Study EDBM Economic Development Board of Madagascar ERR Economic Rate of Return EOI Expression of Interest ESMF Environmental and Social Management Framework EU European Union FDL Fonds de Développement Local FDI Foreign Direct Investment FOFIFA Le Centre National de Recherche Appliquée au Développement Rural FY Financial Year GDP Gross Domestic Product GIS Geographic Information System GoM Government of Madagascar ii GP Global Practice IC Investment Climate ICAO International Civil Aviation Organization ICB International Competitive Bidding ICT Information and Communication Technology IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund INSTAT Institut National de la Statistique de Madagascar IPF Investment Project Financing IPP Independent Power Producer IRR Internal Rate of Return IS Investment Services ISN Interim Strategy Note ISO International Organization for Standardization IT-BPO Information Technology-Business Process Outsourcing JIRAMA Jira sy Rano Malagasy KFW Kreditanstalt für Wiederaufbau M&E Monitoring and Evaluation MBIF Madagascar Business and Investment Facility MFI Micro Finance Institutions MNP National Parks of Madagascar MSME Micro, Small and Medium-sized Enterprise MGA Malagasy Ariary NGO Non-Governmental Organization NPV Net Present Value OCAI Opération Communale d’Appui Intégré OFID OPEC Fund for International Development OM Operation Manual ONTM Madagascar National Tourism Office OP/BP Operational Policy/Bank Procedure OPEC Organization of the Petroleum Exporting Countries ORT Regional Tourism Office OSS One Stop Shop PAD Project Appraisal Document PCGS Partial Credit Guarantee Scheme PCN Project Concept Note PDO Project Development Objective PGDI Governance and Institutional Development Project PIC1 Madagascar Integrated Growth Poles Project PIC2 Second Integrated Growth Poles and Corridors Project PIM Project Implementation Manual PIU Project Implementation Unit PPD Public Private Dialogue PMP Pest Management Plan PPP Public Private Partnership PPP Purchasing Power Parity QCBS Quality and Cost Based Selection QMM QIT Madagascar Minerals RPF Resettlement Policy Framework RN National Road iii SADC Southern African Development Community SBD Standard Bidding Document SCIM Société Commerciale et Industrielle de Madagascar SDR Special Drawing Rights SEP Secretariat Exécutif du Projet Pôle de Croissance SGS Syndicat Malgache de l’Agriculture Biologique SME Small and Medium-Sized Enterprise SNFI National Strategy of Inclusive Finance SNFR National Strategy in Rural Finance SOP Series of Projects SPS Sanitary and Phytosanitary SYMABIO Syndicat Malgache de l’Agriculture Biologique TA Technical Assistance VC Value Chain TMP Tourism Master Plan TVET Technical and Vocation Education and Training USC Use of Country Systems WBG World Bank Group WDR World Development Report WTP Water Treatment Plant WTTC World Travel and Tourism Council Regional Vice President: Makhtar Diop Country Director: Mark R. Lundell Senior Director: Anabel Gonzalez Practice Manager: Ganesh Rasagam Task Team Leader: Michael Olavi Engman iv REPUBLIC OF MADAGASCAR: Second Integrated Growth Poles and Corridors Program (SOP-1) TABLE OF CONTENTS Page PAD DATA SHEET ..................................................................................................................... vii I. STRATEGIC CONTEXT ....................................................................................................1 A. Country Context ............................................................................................................ 1 B. Sectoral and Institutional Context................................................................................. 2 C. Higher Level Objectives to which the Project Contributes .......................................... 5 II. PROJECT DEVELOPMENT OBJECTIVES......................................................................5 A. Project Development Objective .................................................................................... 5 B. Project Beneficiaries ..................................................................................................... 5 C. PDO Level Results Indicators ....................................................................................... 6 III. PROJECT DESCRIPTION..................................................................................................7 A. Project Components ...................................................................................................... 7 B. Project Financing ........................................................................................................ 17 C. Program Phases and Component (Series of Projects) ................................................. 18 D. Lessons Learned Reflected in the Project Design....................................................... 19 IV. IMPLEMENTATION ........................................................................................................20 A. Institutional and Implementation Arrangements ........................................................ 20 B. Results Monitoring and Evaluation ............................................................................ 21 C. Sustainability............................................................................................................... 22 V. KEY RISKS AND MITIGATION MEASURES ..............................................................22 A. Risk Ratings Summary Table ..................................................................................... 22 B. Overall Risk Rating Explanation ................................................................................ 22 VI. APPRAISAL SUMMARY ................................................................................................22 A. Economic and Financial Analysis ............................................................................... 22 B. Technical ..................................................................................................................... 24 C. Financial Management ................................................................................................ 25 D. Procurement ................................................................................................................ 25 v E. Social and Environment (including Safeguards) ........................................................ 26 Annex 1: Results Framework and Monitoring...............................................................................30 Annex 2: Detailed Project Description ..........................................................................................36 Annex 3: Implementation Arrangements .......................................................................................57 Annex 4: Operational Risk Assessment Framework (oraf) ...........................................................79 Annex 5: Implementation Support Plan.........................................................................................83 Annex 6: Selection of Proposed Regions and Sectors ...................................................................84 Annex 7: Economic and Financial Analysis ..................................................................................90 Annex 8: Map of Madagascar with Spatial Focus Areas ...............................................................98 vi PAD DATA SHEET Madagascar Second Integrated Growth Poles and Corridor Program (P113971) PROJECT APPRAISAL DOCUMENT . AFRICA Report No.: PAD1090 . Basic Information Project ID EA Category Team Leader P113971 B - Partial Assessment Michael Olavi Engman Lending Instrument Fragile and/or Capacity Constraints [ X ] Investment Project Financing - Fragile States Financial Intermediaries [ ] Series of Projects [ X ] Project Implementation Start Project Implementation End Date Date 18-Dec-2014 31-Mar-2019 Expected Effectiveness Date Expected Closing Date 31-May-2015 30-Sep-2019 Joint IFC Joint Level Complementary or Interdependent project Yes requiring active coordination Practice Senior Global Practice Country Director Regional Vice President Manager/Manager Director Ganesh Rasagam Anabel Gonzalez Mark R. Lundell Makhtar Diop . Borrower: Republic of Madagascar Responsible Agency: National Project Secretariat Contact: Eric Rakoto Andriantsilavo Title: Secretaire Nationale Telephone No.: 261-2022-36777 Email: eric.ra@pic.mg . Project Financing Data(in USD Million) vii [] Loan [] IDA [] Guarantee Grant [X] Credit [ ] Grant [] Other Total Project Cost: 50.00 Total Bank Financing: 50.00 Financing Gap: 0.00 . Financing Source Amount BORROWER/RECIPIENT 0.00 International Development Association 50.00 (IDA) Total 50.00 . Expected Disbursements (in USD Million) Fiscal Year 2014 2015 2016 2017 2018 2019 2020 Annual 1.00 8.00 11.00 12.00 12.00 6.00 0.00 Cumulative 1.00 9.00 20.00 32.00 44.00 50.00 50.00 . Institutional Data Practice Area / Cross Cutting Solution Area Trade & Competitiveness Cross Cutting Areas [] Climate Change [X] Fragile, Conflict & Violence [] Gender [X] Jobs [X] Public Private Partnership Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Agriculture, fishing, and General agriculture, fishing 15 forestry and forestry sector Public Administration, Law, General public administration 18 and Justice sector Transportation General transportation sector 14 viii Water, sanitation and flood Water supply 26 protection Industry and trade Other domestic and 27 international trade Total 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. . Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Public sector governance Other public sector governance 7 Financial and private sector Infrastructure services for private 38 development sector development Financial and private sector Micro, Small and Medium Enterprise 25 development support Trade and integration Export development and 22 competitiveness Trade and integration Technology diffusion 8 Total 100 . Proposed Development Objective(s) The Project Development Objective is to contribute to increased economic opportunities and access to enabling infrastructure services, as measured by an increase in jobs and formal firms, in Targeted Regions. The Program objective of the Series of Projects (SOP) is the same as the PDO of this Project. . Components Component Name Cost (USD Millions) COMPONENT 1: STRENGTHENING THE ENABLING 11.00 ENVIRONMENT FOR ENTREPRENEURSHIP AND INVESTMENT COMPONENT 2: SECTOR BASED GROWTH IN THE 35.50 ATSIMO-ANDREFANA, ANOSY AND DIANA REGIONS COMPONENT 3: PROJECT IMPLEMENTATION, 3.50 M&E, SAFEGUARDS, IMPACT EVALUATION ix . Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [ X ] respects? . Does the project require any waivers of Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ] Does the project meet the Regional criteria for readiness for Yes [ X ] No [ ] implementation? . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . Legal Covenants Name Recurrent Due Date Frequency PIU Staff 31-May-2015 Description of Covenant Without limitation to the provisions of paragraph (a) of Schedule 2, Section 1.2 of the Financing Agreement, the PIU shall include, inter alia: (i) at the central level: (A) a coordinator; (B) a procurement specialist; (C) a financial manager; (D) an accountant; (E) a monitoring and evaluation specialist; (F) an environmental and social safeguard specialist; and (G) an accounts assistant; recruited in accordance with the provisions of Section III of Schedule 2 of the Financing Agreement, and on the basis of terms of reference, qualifications and experience acceptable to the Association. x Name Recurrent Due Date Frequency External Auditor 31-Aug-2015 Description of Covenant In addition, no later than three (3) months after the Effective Date, the Recipient shall recruit an internal auditor in accordance with the provisions of Section III of Schedule 2 of the Financing Agreement, and on the basis of terms of reference, qualifications and experience acceptable to the Association, to be assigned at the central level. Name Recurrent Due Date Frequency PIU Staff-Internal Auditor 31-Aug-2015 Description of Covenant In addition, no later than three (3) months after the Effective Date, the Recipient shall recruit an internal auditor within the PIU in accordance with the provisions of Section III of Schedule 2 of the Financing Agreement, and on the basis of terms of reference, qualifications and experience acceptable to the Association, to be assigned at the central level. Name Recurrent Due Date Frequency PIU Staff-Targeted Regions 30-Nov-2015 Description of Covenant In each Targeted Region: No later than six (6) months after the Effective Date, the Recipient shall recruit (x) a coordinator and (y) one (1) account assistant, all in accordance with the provisions of Section III of Schedule 2 of the Financing Agreement, and each on the basis of terms of reference, qualifications and experience acceptable to the Association, to be assigned one in each Targeted Region. Name Recurrent Due Date Frequency Investment Climate Reform Committee 31-Aug-2015 Description of Covenant No later than three (3) months after the Effective Date, the Recipient shall establish and thereafter maintain a structure satisfactory to the Association to lead and manage the investment climate reform process within the country of the Recipient to be established under the control of the Office of the President, with mandate, composition and resources acceptable to the Association. Name Recurrent Due Date Frequency Project Monitoring, Reporting and 31-Mar-2016 Evaluation Description of Covenant No later than twelve (12) months after the Effective Date, or such other date agreed with the Association, and each year afterwards, the Recipient shall cause an operational audit for subcomponent 1.2(d) of the Project (or selected activities under said subcomponent) to be carried out by an independent auditor. xi Name Recurrent Due Date Frequency Financial Management, Financial 18-Sep-2015 Reports and Audits Description of Covenant In order to ensure the timely carrying out of the audits referred to in Section II. B.3 of this Schedule, the Recipient shall engage independent auditors for the purpose not later than six (6) months after the Effective Date, in accordance with the provisions of Section III of the Schedule 2 of the Financing Agreement. Name Recurrent Due Date Frequency Investment Climate Reform Committee 31-Aug-2015 Description of Covenant No later than three (3) months after the Effective Date, the Recipient shall establish and thereafter maintain a structure satisfactory to the Association to lead and manage the investment climate reform process within the country of the Recipient to be established under the control of the Office of the President, with mandate, composition and resources acceptable to the Association. Name Recurrent Due Date Frequency Project Monitoring, Reporting and 20-Jun-2017 Evaluation Description of Covenant Twenty-four (24) months after the Effective Date, or at any other date agreed with the Association, the Recipient shall, in conjunction with the Association, carry out a mid-term review of the Project (the “Mid-term Review”), covering the progress achieved in the implementation of the Project. Name Recurrent Due Date Frequency Project Monitoring, Reporting and 20-Mar-2017 Evaluation Description of Covenant The Recipient shall prepare and furnish to the Association not less than three (3) months prior to the beginning of the Mid-term Review, a report integrating the results of the monitoring and evaluation activities performed pursuant to this Agreement, on the progress achieved in the carrying out of the Project during the period preceding the date of such report, and setting out the measures recommended Name Recurrent Due Date Frequency Project Monitoring, Reporting and 29-Mar-2019 Evaluation Description of Covenant For purposes of Section 4.08 (c) of the General Conditions, the report on the execution of the Project and related plan required pursuant to that Section shall be furnished to the Association not later than six months before the Closing Date. xii Conditions Source Of Fund Name Type IDA Project Manuals for the Project Effectiveness Description of Condition The Recipient has revised the PIC1 Project Manuals for the Project, in form and substance acceptable to the Association and the revised manuals include a complaint management system for procurement acceptable to the Association. Source Of Fund Name Type IDA Decree Effectiveness Description of Condition The Recipient has adopted the Institutional Decree for the Project, in form and substance acceptable to the Association and established both the Steering Committee and the PIU with mandates, compositions, staff and resources satisfactory to the Association, as further set out in Section I.A of Schedule 2 of the Financial Agreement.. Source Of Fund Name Type IDA PIU Staff Effectiveness Description of Condition The PIU shall include, inter alia, at the central level: (A) a coordinator; (B) a procurement specialist; (C) a financial manager; (D) an accountant; (E) a monitoring and evaluation specialist; (F) an environmental and social safeguard specialist; and (G) an accounts assistant; recruited in accordance with the provisions of Section III of Schedule 2 of the Financing Agreement, and on the basis of terms of reference, qualifications and experience acceptable to the Association. Source Of Fund Name Type IDA Withdrawal Conditions Disbursement Description of Condition Under Category 1 unless and until the Association is satisfied, and has notified the Recipient of its satisfaction, that the Recipient has adopted a revised EDBM Decree in form and substance satisfactory to the Association. Source Of Fund Name Type IDA Withdrawal Conditions Disbursement Description of Condition Under Category 3 unless and until the Association is satisfied, that all of the following conditions have been met: (i) The Recipient has entered into the Fund Management Agreement in accordance with Section I.B.1 of Schedule 2 of the Financing Agreement; (ii) The Fund Manager has established an investment committee for the review of sub-projects; and (iii) The Recipient has adopted a Matching Grant Manual for the Project, in form & substance acceptable to the Association xiii Source Of Fund Name Type IDA Disbursement Condition Disbursement Description of Condition Under Category 4 unless and until the Association is satisfied, and has notified the Recipient of its satisfaction, that all of the following conditions have been met in respect of said activities: (i)The Recipient has entered into an agreement with FDL setting forth FDL's role in the selection and monitoring and evaluation process of Sub-projects financed out of OCAI Grants; Source Of Fund Name Type IDA Disbursement Condition Disbursement Description of Condition Under Category 4 unless and until the Association is satisfied, and has notified the Recipient of its satisfaction, that all of the following conditions have been met in respect of said activities: (ii) The Recipient has adopted an OCAI Grant Manual for the Project, in form and substance acceptable to the Association. Team Composition Bank Staff Name Title Specialization Unit Hajarivony E T Consultant Governance GGODR Andriamarofara Johanne Buba Economist M&E and economic and GTCDR financial analysis Joseph Byamugisha Financial Management Specialist Financial management GGODR Laurent Olivier Corthay Senior Private Sector Taxation, commercial GTCDR Development Specialist justice Jeffrey John Delmon Senior Private Sector PPPs GCPDR Development Specialist Aissatou Diallo Senior Finance Officer Disbursement CTRLA Willem Douw Senior Operations Officer Investment promotion GTCDR Michael Olavi Engman Senior Economist Team Lead GTCDR Cemile Hacibeyoglu Operations Officer Investment climate GTCDR reforms Eneida Fernandes Private Sector Development Tourism. GTCDR Mateev Specialist Nathalie S. Munzberg Senior Counsel Senior Counsel LEGEN Irene Marguerite Program Assistant Program Assistant GTCDR Nnomo Ayinda-Mah Noroarisoa Sr Transport. Spec. Transport GTIDR xiv Rabefaniraka Ellena Rabeson Operations Officer Operations AFMMG Vonjy Miarintsoa Energy Specialist Energy GEEDR Rakotondramanana Patrice Joachim Nirina Senior Municipal Engineer Municipal engineering GSURR Rakotoniaina Sylvain Auguste Senior Procurement Specialist Procurement GGODR Rambeloson Harisoa Danielle Education Spec. TVET Rasolonjatovo Andriamihamina Loraine Ronchi Senior Economist Agribusiness GTCDR Lisa Kristina Stahl Jr Professional Officer Finance GFMDR Andre Teyssier Sr Land Administration Specialist Land administration GSURR Rehana Vally Senior Agribusiness Specialist Agribusiness GFADR Fred Zake Senior Operations Officer Investment climate GTCDR reforms Non-Bank Staff Name Title City David A. Phillips Consultant Washington DC . Locations Country First Location Planned Actual Comments Administrative Division Madagascar Atsimo- Toliara X Andrefana Madagascar Anosy Fort Dauphin X Madagascar Diana Antsiranana X Madagascar Analamanga Antananarivo X xv I. STRATEGIC CONTEXT A. Country Context 1. Madagascar is slowly emerging from a protracted period of economic stagnation. The Presidential elections in 2013-14 and the international recognition of the newly elected Government of Madagascar (GoM) brought an end to a period of turbulence and led to the normalization of the country’s relationship with the International Development Association (IDA). GoM now needs to implement an economic policy agenda that tackles unemployment and strengthens governance that are needed for the country to avoid slipping further into economic decline and fragility. An inclusive, comprehensive and consistently implemented approach to promote private enterprise and investment would likely push the country’s growth trajectory back to, or above, the 5 percent level that the country enjoyed leading up to the political crisis. 2. The unconstitutional change of power in February 2009 disrupted the positive growth trajectory that the country had embarked upon following economic reforms undertaken in the previous decade. In 2005-08, GDP per capita (PPP, US$) expanded by 25 percent as the tourism sector grew rapidly; a textiles and clothing industry flourished on the back of African Growth and Opportunity Act (AGOA) trade preferences; and two large investments in the mining industry were boosting economic development in Tolagnaro, Ambatovy and Toamasina. In 2009-12, however, GDP per capita declined by 3 percent and it led to an increase in Madagascar’s already high poverty rate. With a successful and recognized election outcome, the GoM now intends to support market oriented reforms, promote development programs in the country’s poorer regions, strengthen governance at the national and regional level, and improve basic service delivery in order to help return the economy to a higher growth trajectory and lift the population out of poverty. 3. Two-thirds of the working-age population is out of work or underemployed and the lack of productive opportunities comes at huge economic and social costs. The collapse in economic activity in 2009 and the stagnation that followed in 2010-13 has led to an increase in underemployment. Formal employment particularly in manufacturing dropped as many firms exited the market or sought protection in the informal sector. The textiles and garment sector dismissed more than 30,000 mostly female workers in 2010. Investments linked to public funding remain in disarray: for example, in 2008-10, public investment fell by 30 percent. Foreign direct investment (FDI) inflows were at historically high levels in 2008-2012 due to Rio Tinto’s and Sherritt’s mining investments but investments in other sectors have been modest. The agricultural sector which absorbs almost four out of five citizens has been relatively resilient but it continues to depend on weather conditions and subsistence farming. 4. More than four-fifths of the Malagasy population lives in extreme poverty (205,000) and an increase in the number of people with access to improved water resources by 125,000. Decentralized water supply solutions will also benefit specific unserved rural locations like Anakao and Ankarana. Sub-Component 2.3: Promoting sustainable tourism development (US$6.5 million) 43. This sub-component will: (a) improve the enabling environment for tourism sector development at the national level; and (b) promote tourism development in the Atsimo- Andrefana and Diana Regions through targeted interventions that increase the competitiveness of these destinations. The Diana Region is already the country’s most visited region (outside of the capital) with 204,200 visitors in 2013; and the corridor between Nosy Be and Antsiranana is referred to as the ‘northern tourist circuit’. Toliara in Atsimo-Andrefana is the end point in the second most visited tourist circuit which begins in Antananarivo. The city hosted 58,500 visitors in 2013. Both regions have strong potential to improve management of tourist attractions and attract domestic and foreign direct investment in the hospitality sector in particular linked to eco- tourism in national parks and in beach tourism. 44. The tourism development activities will follow a phased approach. The first phase will develop and implement a sector recovery strategy following five years of political turbulence. The objective is to strengthen capacity for strategic tourist development and create conditions for private sector investments. The objective is also to support the local private and public sectors improve management and realize the commercial potential of key tourist attractions and prepare for the procurement of critical public infrastructure works that in the second phase will be 48 launched to improve access by land, air and sea, and target an expansion of hotel investments and implementation of a lodging grading system. The expected outcomes are: (a) more private investment in the tourism sector; (b) an increase in the number of tourist arrivals; (c) an increase in the number of days spent by tourists in the target regions; (d) an increase in the daily spending by tourists; and (e) an increase in the number of jobs in the tourism and associated service sectors. 2.3.1: Strengthening the enabling environment for tourism development (US$2.5 million) 45. Building capacity for strategic tourism development (US$0.7 million). The Malagasy tourism sector lacks a vision and market oriented sector coordination for sector development. GoM needs to elaborate a sector friendly policy that will promote sustainable and higher quality investment. This sub-component will finance: (a) TA and CB for the Public-Private Tourism Platform that convene the main stakeholders and for the Ministry of Tourism to upgrade its statistics and information system and update the tourism policy/master plan and the legal and regulatory framework to promote investment and create an enabling environment for development of the tourism sector; (b) TA to conduct a functional review of the Madagascar National Tourism Office (ONTM) to help it develop and implement a sustainable business model and refine the country’s marketing strategy for the twin goals of increasing arrivals from established markets and identifying and targeting new markets. 46. Improving competitiveness in the air transport sector (US$1.8 million). High cost and unreliable air transport services are key constraints to the development to Madagascar’s tourism sector. Lowering cost, increasing flights and improving services both to and within Madagascar are essential to develop the tourism sector. Limited liberalization of air services has restricted the number of long haul carriers servicing the country. Unreliable domestic air transport is often the only realistic option to access the island’s main tourist attractions. This sub- component will improve international air access by financing: (a) TA to develop a National Airport Master Plan (including a vision and categorization of the airport network), identify investment priorities, develop an airport management scheme with specific focus on airports within the targeted regions that complies with International Civil Aviation Organization (ICAO) standards; (b) TA to develop the National Air Transport Strategy that will: (i) define the country vision in regards to implementing the liberalization policy endorsed by the government under the civil aviation law (2013) and the Yamoussoukro Declaration with the goal of developing the air transport sector (passengers and cargo); and (ii) clarify the roles of the public and the private sector, including the evaluation of main stakeholders; (c) CB at the Civil Aviation Agency (ACM) to enhance the technical oversight capacity of the sector according to best practices of the International Civil Aviation Agency (OACI); and (d) TA to promote attractiveness of the Madagascar Air services providers of countries whose carriers have expressed interest in serving the country. 47. The outcome will be further air transport services liberalization and more competition among long haul and regional carriers and a lower risk for Malagasy air carriers to be banned from accessing international markets due to weak technical oversight. This will help develop the tourism sector and increase the availability and lowering the cost of air cargo services. 49 48. PIC2-2: Phase II activities would build upon the activities in Phase I and provide additional TA to enable a further increase in the competition level within Madagascar’s air transport market. Based on the findings of the strategic positioning exercise for ADEMA and Air Madagascar undertaken in PIC2-1, the Project would finance TA to assist the GoM recruit a transaction advisor for IVATO Airport and possibly other major airports, assist the Ministry of Transportation and the Civil Aviation of Madagascar strengthen their regulatory capacity and devise and implement the strategic positioning strategy for Air Madagascar;. It would enable GoM to attract private operators in the provision not only of air services domestically but also in the financing of much needed airport infrastructure and aviation supporting infrastructure. Besides the immediate impact on the air transport and tourism sectors, the support program would help reduce the fiscal burden imposed on GoM through its SOEs. 2.3.2: Promoting regional tourism sector development (US$4.0 million) 49. This sub-component will support the development of integrated tourism destinations in the Atsimo-Andrefana and Diana Regions by addressing constraints pertaining to underdeveloped tourism products and weak management of key tourist attractions, limited supply and quality in the accommodation sector and weak local skills. The Project Preparation Advance recently financed a demand assessment, site identification and methodological framework for investment promotion and marketing aimed at encouraging resort/hotel development projects in the Atsimo-Andrefana and Diana Regions. The GoM launched an expression of interest supported by the investment promotion framework which attracted responses from twelve hotel investors/management companies as well as four investors/managers. Site visits are being organized in September-October for these investors and the project will continue to work with these prospective investors to facilitate deals throughout the implementation process. Regional tourism sector development will be promoted by: 50. Improving management of popular tourist attractions, diversifying tourism value propositions and enhancing local value addition (US$3.0 million). The project will finance: (a) TA to support integrated tourism development plans in the Atsimo-Andrefana and Diana Regions and help align regional objectives with the national strategy to promote private investment; (b) TA, equipment and public works to upgrade and strengthen management of select tourism attractions (e.g. Mikea and Tsimanampetsotse National Park, Nosy Hara, Ankarana and Montagne d'Ambre National Parks, Windsor Castle, Montagne des Français and Mer D’Emeraude), including by erecting visitor and interpretation centers, signage, interpretation and the development of hiking trails and site development; (c) CB and public works to strengthen artisans, support local product design and rehabilitate artisanal markets; (d) TA and CB of tourism workers and entrepreneurs in the hospitality industry and raise workforce professionalization standards through local TVET and tourism schools; and (e) TA to improve revenue generation and management of select national parks, through the promotion and facilitation of ecologically sustainable investment within national parks, and the design and implementation of a commercialization strategy that enables Madagascar National Parks (MNP) improve ecological integrity and financial sustainability. 51. Promoting and marketing regional destinations (US$0.5 million). The Regional Tourism Offices (ORTs) have a critical role to develop and market regional destinations. The ORTs in Antsiranana and Toliara do not currently have the technical and financial capacity to 50 properly promote the destinations abroad. The project will finance: (a) TA to improve management in the ORTs and strengthen payment compliance for the small tourist fees collected by hotels; (b) TA for promotion material and implementation of small scale marketing plans in collaboration with ONTM; and (c) TA to create a platform for collaboration between local hotels and tourism operators to facilitate joint reservation tools and joint local procurement. 52. Preparing feasibility studies for improved access by road, air and sea to main tourist attractions (US$0.5 million). The upgrading of secondary roads and port infrastructure is critical for the development of Atsimo-Andrefana as a tourism destination. Highly popular tourist attractions such as Salary Bay, Anakao and Saint Augustin are almost inaccessible by rural road. Toliara is increasingly frequented by cruise ships but amenities and facilities are poor. The project will finance feasibility studies for public works to be launched under Phase II with the aim of facilitating and enhancing access to key tourism sites 53. PIC2-2: Conditional upon the feasibility studies, Phase II would finance the following infrastructure: (a) the rural access roads along Toliara-Anakao and Toliara-Salary in Atsimo- Andrefana and the Saline Road in the Diana Region; (b) the reception area for cruise ship passengers in Toliara; (c) the landing jetty in Salary and Anakao to facilitate cruise ship access, and (d) river crossing between Anakao and Toliara (i.e. the river delta that divides the region). Sub-Component 2.4: Promoting sustainable agribusiness development (US$6.5 million) 54. Madagascar’s agribusiness sector in the Atsimo-Andrefana, Anosy and Diana Regions has expanded rapidly throughout the political crisis. Between 2008 and 2013—covering roughly the period from pre-crisis to post-crisis—the volume of agriculture and seafood exports by regional seaports increased by 267 percent in the Diana Region, 228 percent in the Atsimo- Andrefana Region, and 57 percent in the Anosy Region. In 2013, the value of agribusiness exports by sea from the three regions reached nearly US$150 million. The regions’ total exports are significantly higher when output exiting by air freight (e.g. lobster/prawn, essential oils, vanilla, and chocolate) or from seaports in other regions (e.g. regional commodities processed in Antananarivo and shipped from Toamasina Port) are included. The dynamism and expansion in the sector is partly due to the entry of new private investors and entrepreneurs—domestic as well as foreign—who are starting to rejuvenate dilapidated production assets and organize supply chains previously controlled by bankrupt or collapsed state-owned companies. From cotton in the southeast to sugar and cocoa in the north, the scope to generate more jobs, better livelihoods, and more foreign exchange is considerable. 55. This sub-component will support growth and competitiveness in a number of agribusiness value chains in which Madagascar has a proven comparative advantage, and where market dynamics indicate strong investment and poverty reduction potential. These include value chain support programs that will help unlock inclusive private investments to increase quality, productivity, sustainable production and local value addition around the cotton value chain in the Atsimo-Andrefana Region (with 50,000 producers and 6 formal operators), the pink pepper and dry beans value chains (with 5,500 producers and 5 formal operators) in the Anosy Region, and the cocoa value chain in the Diana Region (with 33,000 producers and 8 formal operators). Other value chains will also benefit when there are strong synergies that can be generated with the lead value chains of the program. Such synergies are evident, for example, for pepper and vanilla 51 which are frequently intercropped with cocoa plantations in the Diana Region; and for groundnut intercropped with cotton plantations in the Atsimo-Andrefana Region. This could also include support to produce fodder for the planned export-oriented feedlot and abattoir project in Ehoala Park once it is announced. 56. The support activities will both strengthen the enabling environment for agribusiness development at the national level and implement a series of integrated value chain support programs at the regional level. The outcomes will be increases in private investment, exports, local value addition and livelihoods for value chain participants. The development of agribusiness is impeded by numerous constraints. First, the poor state of the national road network leaves large proportions of local communities without market access. However, WBG, OFID, EU and AfDB funding will rehabilitate many of these national roads in the coming few years. Second, some key rural and feeder roads are also in disrepair which leaves smallholders vulnerable to weather conditions and many communities are cut off from main roads and markets. For example, some of the best cocoa in Haut Sambirano never reaches the market or is sold at below market price to any operator that accesses the landlocked communes. Third, the policy and regulatory framework for agribusiness is largely out of date; and it is often weakly implemented and enforced. Fourth, standard control entities such as Direction de la Protection des Végétaux–DPV, quality control and export authorization offices have modest capacity or are largely missing. Fifth, rural insecurity is a problem that limits capital investment and leads many operators to rely on contract farming and/or ad hoc collection from smallholders. Sixth, the lack of data and traceability hampers development of commercial value chains and export markets. Appropriate data records are essential to develop standards and certifications, which are often required to raise value addition, brand recognition, and improve price premiums. There is generally high demand for certified products and therefore real potential to develop specific, tasteful and organic products in Madagascar, including the elaboration of “terroir” oriented specifications and organic labels. Seventh, there is insufficient collaboration and organization of most value chains. Finally, there is much need to improve knowledge of good post-harvest operations. The sector specific support activities outlined below will be complemented by the MBIF that will support private investment and entrepreneurship more broadly. 2.4.1: Strengthening the enabling environment for agribusiness value chain development (US$2.5 million) 57. The project will help build capacity and strengthen market orientation of a few key support institutions that provide inputs, generate knowledge, regulate, enforce, organize and monitor the value chains. It will allow for a more efficient allocation of resources and help create more sustainable income opportunities for farmers through the introduction of a market oriented vision for value chain development and effective support mechanisms to promote good post- harvest operations, value addition, and trade. The project will finance TA, CB and minor equipment to: (a) support the Ministry of Agriculture and the Ministry of Trade to review and update the legal and regulatory framework covering key value chains; support their ability to monitor and enforce this framework; and strengthen data collection (of prices, production volumes, traded values) and dissemination mechanisms in collaboration with Customs and INSTAT. The objective is to introduce growth inducing regulations at the value chain level around marketing, licensing of operators, quality standards and certification; (b) conduct functional reviews and help strengthen a few essential standards and export control entities like 52 phytosanitary control (fumigation, authorization of export) and certification bodies that provide training, monitoring, accreditation and other essential services; (c) strengthen expertise within EDBM to promote inclusive and sustainable investments in the priority value chains; and (d) organize south-south peer learning events to leading import and exports markets with the aim to improve quality control and promote new certifications. These activities will improve the enabling environment for agribusiness value chain development and support the development of a market driven and competitive agribusiness sector. These activities will be complemented by future IDA-funded interventions supporting a broader dialogue on agriculture development, including on important issues like land tenure linked to agribusiness. The parallel work on improvements in the distribution of electricity (OFID funded), national roads (AfDB, EU, OFID funded) and water supply will also benefit the agribusiness sector. 2.4.2: Strengthen information, coordination and linkages in the targeted value chains (US$4.0 million) 58. This sub-component will promote the development of competitive value chains by addressing market and coordination failures at the individual value chain level in the Atsimo- Andrefana, Anosy and Diana Regions. The value chain programs will support activities that improve transparency and trust and promote better coordination within the target value chains. The project will finance: (a) TA to improve overall value chain and policy coordination through introduction of more structured, inclusive and evidence based public private dialogue (PPD) at the value chain level; (b) TA to develop a market based vision and strategic action plan for each value chain; (c) a detailed census of producers engaged in the value chains and suitable land for intensification; (d) CB to local TVETs and producer organizations’ introduction and use of certification and traceability among members; (e) TA to allow MBIF to realize catalytic and inclusive investment opportunities along target value chains, including nucleus and contract farming opportunities, development of commercially operated seed banks and nurseries as well as PPP opportunities linked to for example the cocoa plantations owned by the GoM; (f) TA to help strengthen contractual farming arrangements; and (g) feasibility studies for rural feeder roads.. 59. The project will work closely with major investors, traders and light manufacturers downstream to support value chain participants upstream. This includes potential new IFC IS investments in the cocoa (Diana), cotton (Atsimo-Andrefana) and abattoir (Anosy) sectors. The value chain support programs will be implemented in close collaboration with local partners that provide agricultural extension services like Centre de Technique Horticole de Tamatave (CTHT), Agricultural Research for Development (CIRAD), and Centre National de Recherche Appliquée au Développement Rural (FOFIFA). It will also partner with large producer organizations such as Plateforme du Coton, Plateforme du Pois du Cap, Plateforme du Grains Secs, etc. for interactions upstream in the value chain. It will also provide TA to help address strengthen contractual farming arrangements. 60. PIC2-2: The second phase would continue supporting local linkages and contract farming. It would also improve access to key production areas through the rehabilitation of rural feeder roads that would greatly improve access to some of the most productive areas for agribusiness. Semi-landlocked areas that are only accessible by foot or bike for much of the year result in rotting crops and depressed and volatile prices for upstream value chain participants and uncertain inputs and quality for processors and traders. The project would finance public works 53 to upgrade rural feeder roads in: a) the Atsimo-Andrefana Region—43 km of feeder roads will unlock a large production area of cotton and dried beans, and complement the imminent rehabilitation of RN9 by AfDB; and b) the Diana Region—30 km of the Haut Sambirano road will improve access to the most important production area for cocoa in Madagascar. Furthermore, Phase II would explore PPP options for the secondary irrigation network in Manombo in Atsimo-Andrefana and to possibly extend the Manombo trunk channel recently built through funding from AfDB. The objective would be to save water and irrigate some 2,900 ha for cotton and dried beans producers. COMPONENT 3: PROJECT IMPLEMENTATION, M&E, SAFEGUARDS, IMPACT EVALUATION (US$3.5 MILLION) 61. This component will finance the PIU to allow it to manage and implement the project, comply with safeguards, and fulfill M&E commitments. The project will retain its head office in Antananarivo with strong decentralized technical units in the targeted regions that oversee implementation, act as focal points, and lead the dialogue with local authorities, private partners and beneficiaries. The current office in Nosy Be will move to Antsiranana to oversee the development of the northern growth corridor. The current office in Tolagnaro will remain and a new office will be setup in Toliara. 62. Output-related M&E is the responsibility of the PIU. This will ensure effective and timely monitoring of progress towards achieving the development objectives as set out in the Results Framework in Annex 1. Data will feed into the implementation support missions. The progress will be followed through: (a) an annual household survey carried out on a restricted sample of households, (b) data from the Caisse Nationale de Prévoyance Sociale (CNaPS), EDBM and DBI. 63. A rigorous impact evaluation will be an integral part of the project. The primary aim of the analytical work is to measure, investigate and explain intended and unintended benefits of the project interventions, and in particular in the informal sector. The impact evaluation will hence allow for a comprehensive stocktaking and review of the project's achievements. The analysis will also help to determine whether pre-identified constraints limiting the project beneficiaries' ability to materialize their commercial and professional potential are effectively lifted by support activities. 64. The impact evaluation will to a large extent be based on quantitative comparison of a treatment group with an adequate control group. In the case of a growth pole approach, there will be different “doses” of treatment, with some benefiting from more activities than others. The project has been designed to provide activities in well-defined areas (the so-called “target poles” or “target corridors”). Populations located within these spatially confined areas are thus the treatment group while populations located outside these areas are potentially control groups. It is crucial to tailor the selection of the treatment and the control group to the activities of interest. This step is elementary to guaranteeing statistical identification of changes that can be causally linked to the project’s activities and these activities only. The main challenge will be to identify project features that offer the potential to select a control group suitable to allow for such rigorous analysis. The impact evaluation team will work closely with the PIU, INSTAT and 54 other project stakeholders, through an initial IE workshop and regular consultations, to develop research designs that will outline in detail the selection of appropriate counterfactuals. 65. The empirical analysis will mainly build on survey data collected for this purpose and for the M&E framework: first, a complete baseline survey (household survey), which will be carried out prior to respondents' exposure to any relevant intervention activities – this survey is underway and carried out by INSTAT; second, an end line survey which will be administered after the project has been well into operation; and third, conditional on sufficient implementation and funding, a “lighter” version of the household survey to capture shorter term impact and fill the M&E framework. The information will be collected from representatives of both the treatment group and the control group. Frequently, the same individuals, households or firms will be re-visited over time to create panel datasets. Sample sizes will be informed by statistical power calculations and determined to adequately reflect the requirements of the respective study. The survey tools will include a broad range of indicators that will cover the socio-economic status of households, information on labor, living conditions, health, education and agriculture activities (if relevant). Finally, the survey instruments will be gender-informed in order to be able to shed light on differential project effects on men and women. The entire survey work will be coordinated by a field coordinator hired as a consultant under the direct supervision of the impact evaluation team. 66. This sub-component will also finance the operational costs associated with designing, implementing and maintaining a fully functional Monitoring Evaluation (M&E) system to accurately track and analyze the implementation progress of the project. In particular, this system will facilitate the timely and thorough reporting of the progress that this project is achieving against its targets formulated in the PDO level and intermediate indicators. The system will supply the project management team with in-depth information on the progress and performance of the project’s sub-components and activities. The system will also contribute to an evidence base that can help inform and guide decision-making for feedback and learning purposes. Furthermore, regular and timely reporting will be instrumental in providing inputs for the implementation support missions, the implementation status and results reports, and for the final evaluation of the project performance in the implementation completion and results report. 67. The current PIU has built a strong M&E capacity during PIC1. Most of the indicators in the M&E framework in PIC1 will be used in PIC2. Two new and innovative indicators have been added. First, the number of wage jobs in the target poles will be measured through a household survey. This indicator will help assess the spillovers of the project to the informal sector. As a matter of fact, rehabilitation of roads as well as an increase in tourist arrivals and agricultural production will not only benefit formal firms but will also foster the development of micro and small enterprises. Second, the Local Governance Index captures how public policy decisions are made and implemented in the target municipalities. It was developed in 2005 by Impact Alliance and tested in various countries and settings in Africa. It was first implemented in the Anosy region in 2008. This index has a scale from 0 to 10. In Madagascar, it comprises 34 sub-criteria grouped into 6 dimensions: (a) participation covering the existence and the elaboration process of a clear vision and strategic/operational plans, leadership, the existence of a dialogue platform between local authorities, private sector, citizens, etc.; (b) equity covering the participation of women and equal opportunities for vulnerable populations; (c) transparency and accountability, covering in particular the availability and access to information for citizens 55 (related to service delivery, procurement and utilization of resources); (d) rule of law covering the existence and application of an institutional legal framework, respect of public procurement guidelines, respect of the procedures for development and adoption of the municipal budget and for budget management, implementation of (internal and external) control mechanisms; (e) effectiveness covering access to basic services (education, health, water, security and land rights), satisfaction of the population vis-à-vis delivery of documents by local authorities, efficiency in managing financial resources, ration of mandates of actual tax collection; and (f) transversally, i.e. integration of sector challenges in the elaboration of the strategic/operational plans (health, education, water, waste management, etc.). 56 Annex 3: Implementation Arrangements MADAGASCAR: Second Integrated Growth Poles and Corridors Program (SOP-1) FINANCIAL MANAGEMENT Introduction 1. A financial management assessment was undertaken in order to evaluate the adequacy of the project arrangements in accordance with OP/BP 10.00 Investment Project Financing and the Financial Management Practices Manual as issued by the Financial Management Sector Board. The assessment covered the implementing agency of the ongoing Integrated Growth Poles Project scheduled to close in December 2014. The existing PIU structure will be retained for the implementation of the Second Integrated Growth Poles and Corridor Project. Financial Management Arrangements for the Project 2. Budgeting and planning: The PIU will prepare the annual budget which will be approved by the Project Steering Committee. The PIU will be responsible for producing variance analysis reports comparing planned to actual expenditures on monthly and quarterly bases. The periodic variance analysis will enable the timely identification of deviations from the budget. These reports will be part of the interim unaudited financial reports (IFRs) that will be submitted to the Association on a quarterly basis. An external auditor will need to be recruited within six months following effectiveness. 3. Accounting software: The PIU will use their existing accounting software for transaction processing and preparation of the quarterly interim financial reports and the annual financial statements. 4. Internal controls/FM procedures manual: The PIU will amend their existing FM procedures manuals in order to meet the requirements of this project. The implementing entities will periodically review the manuals over the project life to ensure their continued adequacy and compliance with the requirements set out therein. 5. Internal audit: The PIU will recruit an Internal Auditor who will continuously review the governance, risk management and control aspects of the project. The Internal Auditor will prepare quarterly reports for submission to the Project Steering Committee. The internal audit department will perform an objective assurance function and will not be involved in carrying out operational tasks to ensure their independence in executing their work. 6. Financial reporting: The PIU will prepare quarterly un-audited IFRs for the project in form and content satisfactory to the Association, which will be submitted to the Association within 45 days after the end of the quarter to which they relate. The project prepared and agreed with the Association on the format of the IFRs at the time of the negotiations. The annual financial statements will be prepared using internationally accepted accounting standards. At the end of each fiscal year, the project will prepare annual financial statements which will be subjected to an external audit. 57 7. Staffing: The PIU has the financial management staff that possess the relevant qualifications and the appropriate experience with regard to the Bank Financial Management (FM) procedures and requirements. However, the current Finance Manager is seconded to the PIU by an accounting firm that was contracted to carry out the financial management function. The PIU will therefore need to recruit a Finance Manager (as an individual Consultant) who will supervise the financial management team. In addition, the PIU will recruit a total of three Accounts Assistants (one for each regional office) who will be responsible for the financial management at the Antsiranana, Toliara and Tolagnaro regional offices. The PIU will retain the current Chief Accountant and Accounts Assistant to ensure continuity in the new project. The overall financial management risk rating is assessed as Moderate. Disbursement arrangements and flows of funds 8. Flows of Funds - Designated Account. The PIU will open a Designated Account (DA) denominated in US Dollars to enable payment of eligible project expenditures. The DA will be opened in the Central Bank of Madagascar in compliance with the legal requirements. The PIU will also open Project Accounts denominated in local currency to facilitate payment of eligible expenditure incurred in Ariary. Interest income received on the DA will be deposited into the DA to be used for eligible project expenditures. 9. Disbursement arrangements. Upon the effectiveness of the financing, transaction-based disbursements will be used. An initial advance up to the ceiling of the DA and representing four months forecasted project expenditures payable through the DA will be made into the designated account and subsequent disbursements will be made on a monthly basis against submission of the Statement of Expenditures (SOEs) or other documents as specified in the Disbursement Letter (DL). 10. In addition to the “advance” method, the option of disbursing the funds through direct payments to a third party will also be available. Another acceptable method of withdrawing proceeds from the IDA credit is the special commitment method whereby IDA may pay amounts to a third party for eligible expenditures under special commitments entered into, in writing, at the request of the Recipient and on terms and conditions agreed between the IDA and the Recipient. The SC is issued in connection with the issuance of an irrevocable Letter of Credit (LC). 11. The credit will disburse 100 percent of eligible expenditures (inclusive of taxes) in line with the Country Financing Parameters (CFP) for Madagascar. The proceeds of the credit have been allocated as per Table 4. 58 Table 4: Categories to be financed Category Amount of the Percentage of Expenditures to Financing be Financed Allocated (inclusive of Taxes) (expressed in SDR) (1) Goods, works, non-consulting services, and 5,100,000 100% consultants’ services including Operating Costs and Training for Component 1 of the Project, except Matching Grants under subcomponent 1.2(d) of the Project (2) Goods, works, non-consulting services, and 24,700,000 100% consultants’ services including Operating Costs and Training for Component 2 and 3 of the Project, except goods, works, non-consulting services, and consultants’ services under subcomponent 2.1(a) (y) of the Project (3) Matching Grants. 2,400,000 100% of amounts disbursed by the Recipient under the Matching Grant (4) OCAI Grants 300,000 100% of amounts disbursed (5) Refund of Preparation Advance 1,300,000 Amount payable pursuant to Section 2.07 of the General Conditions TOTAL AMOUNT 33,800,000 12. Disbursement of Funds to Service Providers, Contractors and Suppliers. The PIU will make payments to service providers’, contractors and suppliers of goods and services for specified eligible activities under the Credit. Such payments will be made on the basis of the terms and conditions of each contract (see Figure 4). 59 Figure 4: Funds Flow Diagram 13. External Audit: The project accounts will be audited annually and the audit report will be submitted to the World Bank no later than 6 months after the end of each financial year. At the time of this appraisal, there is no overdue audit report for the sector. The Project will comply with the Bank disclosure policy on audit reports (including making publicly available, promptly after receipt of all final financial audit reports (including qualified audit reports) and place the information provided on the official website within one month of the report being accepted as final by the Association. 14. Supervision plan: Based on the current overall residual FM risk, the project will be supervised at least twice a year, in addition to routine desk-based reviews, to ensure that Project’s FM arrangements operate as intended and that funds are used efficiently for the intended purposes. 15. FM Risk assessment and mitigation. The Association’s principal concern is to ensure that project funds are used economically and efficiently for the intended purpose. An assessment of the risks that the project funds will not be appropriately used is an important part of the financial management assessment work. The risk features comprise two elements: (i) the risk associated to the project as a whole (inherent risk), and (ii) the risk linked to a weak control environment with regard to the project implementation (control risk). The content of these risks is described in Table 5: 60 Table 5: Risks and mitigation measures Conditions for Resi- Risk Risk Mitigating Measures Incorporated Risk Effectiveness dual Rating into Project Design (Y/N) Risk Inherent risk S S Country level: The Public The implementation of PFM reform stalled Expenditure and Financial owing to the limited donor engagement with Accountability (PEFA) the de facto government. The revamping of assessment identified critical S PFM reform process will be a critical part of N S Public Financial Management the re-engagement with the new government. (PFM) weaknesses at central The continued use of a standalone PIU will and decentralized levels mitigate these weaknesses. The PIU will retain the existing financial Entity level: The implementing management personnel (Chief Accountant and entities may not be able to meet Accounts Assistant) that possess adequate the financial management M N M experience and competence. A Finance requirements due to lack of Manager and Regional Accounts Assistants financial management capacity will also be recruited. The PIU will comply with the internal control processes as set out in the respective FM Project level: The resources of procedures manuals. The internal audit unit the project may not be used for M N M will also continuously review the adequacy of the intended purposes. internal controls and make improvement recommendations. Control Risk M M Budgeting: Weak budgetary execution and control leading The FM procedures manuals will spell out the to budgetary overruns or M budgeting and budgetary control arrangements N M inappropriate use of project to ensure appropriate budgetary oversight. funds. The PIU will recruit/retain suitably qualified Accounting: The accounting and experienced FM personnel to ensure function might not be able to appropriate performance of the accounting execute its duties and to M and financial management functions. The N M generate financial information financial reporting processes will also be in a timely manner. facilitated by use of the existing information systems. Internal Control: Specific The FM Procedures Manual will be reviewed aspects of the project activities to ensure continuing adequacy over the course may not be appropriately M of the project life. The manual will contain all N M addressed in the FM procedures the key internal control processes pertaining to manuals; the various project activities. The rigorous review of all transactions prior to final payment will be performed by the Funds Flow: Risk of misused Project Coordinator and the Finance Manager. M N M and inefficient use of funds; Internal audit reviews will also mitigate the risk of the use of funds for unintended purposes. 61 Conditions for Resi- Risk Risk Mitigating Measures Incorporated Risk Effectiveness dual Rating into Project Design (Y/N) Risk The PIU will retain the existing financial management personnel (Chief Accountant and Financial Reporting: The Accounts Assistant) that possess adequate project may not be able to experience and competence. A Finance produce the financial reports M Manager and Regional Accounts Assistants N M required in a timely manner as will also be recruited. The PIU will use the required for project monitoring existing computerized accounting system that and management will enable the efficient and timely generation of financial information. An independent external audit firm will be Auditing: Delays in hired by the project with regard to the audit submission of audit reports or submission timelines set out in the financing delays in implementing the M agreement. The Association will monitor audit N L recommendations of the submission compliance and ensure management letter. implementation of management letter recommendations. Robust FM arrangements (including a Governance and comprehensive annual audit of project Accountability: Possibility of accounts, Association FM supervision corrupt practices including including review of transactions and asset bribes, abuse of administrative S verification) designed to mitigate the fiduciary S & political positions, risks in addition to the PIU’s overall internal misprocurement and misuse of control systems. The project will also publicly funds etc., are a critical issue. disclose the audit report and all critical financial and contract information. OVERALL FM RISK M M 16. The overall FM risk rating, taking into account the mitigation measures, is deemed Moderate. Financial Management Action Plan 17. The Financial Management Action Plan described in Table 6 has been developed to mitigate the overall financial management risks. Table 6: Financial Management Action Plan Responsible Effectiveness Issue Remedial action recommended Completion date entity Conditions Internal 3 months following Recruitment of an Internal Auditor PIU auditor effectiveness No Recruitment of Accounts Assistants 6 months following FM Staffing PIU No for the 3 field offices effectiveness Procedures Amendment of the FM Procedures PIU Prior to effectiveness No Manuals Manual 62 LIST OF CONDITIONALITIES AND COVENANTS 18. Financial covenants/ Dated covenants  Recruitment of an Internal Auditor (3 months following effectiveness)  Recruitment of Accounts Assistants for the 3 field offices (6 months after effectiveness) 19. Other FM standard covenants  IFRs will be prepared on a quarterly basis and, submitted to the Association with 45 days after the end of each quarter.  Annual detailed work program and budget including disbursement forecasts will be prepared each year by end of December.  The overall FM system will be maintained operational during the project’s entire life in accordance with sound accounting practices. PROCUREMENT General 20. Madagascar is in the process of major procurement reforms. The last CPAR was conducted jointly by the Association and the Government of Madagascar (GoM) in December 2002. The document was revised in May and June 2003. In July 2004, the GOM approved a procurement law (No 2004-009) governing the procurement activities in Madagascar (Loi portant Code des Marchés Publics). The Senate and Parliament passed the new Procurement Code which became effective in July 2004. The main pillars of the code are transparency, efficiency and economy, accountability, equal opportunity for all bidders, prevention of fraud and corruption, and promotion of local capacity. The Procurement Code was complemented by new regulations and procedure manuals as well as standard bidding and other procurement documents. The Procurement Code defines methods of procurement and review procedures. In 2006, and in line with the code the Public Procurement Oversight Authority (Autorité de Régulation des Marchés Publics) was created. ARMP oversees the National Tender Board (Commission Nationale des Marchés) for procurement reviews and the Regulatory and Appeals Committee (Commission de Régulation et de Recours) for handling norms and complaints. Finally, the code provides for the creation of Procurement Units (Unités de Gestion de la Passation de Marchés) under the leadership of a Head of Public Procurement (Personne Responsable des Marchés Publics, PRMP), as well as a Tender Commission (Commission d’Appel d’Offres) in each ministry and decentralized departments of national public institutions. In 2005 and 2006, the GOM has adopted a series of eight decrees and ten “arrêtés” to better organize and implement the procurement process. There are no provisions in the procurement law that are contrary to the Bank’s Guidelines. 21. The Procurement Code is largely consistent with good public and international practices and includes provisions for: (i) far-reaching and effective advertising of upcoming procurement opportunities (issuance of general procurement notices for each procuring entity and their inclusion on the Public Procurement Oversight Authority website); (ii) open public bidding; (iii) 63 pre-disclosure of all relevant information, including clear and transparent bid evaluation and contract award procedures; (iv) clear accountabilities for decision making; and (v) an enforceable right to review for bidders when public entities breach the rules. The Country Procurement Assessment Report (CPAR) was submitted to the government and adopted in June 2003. The CPAR action plan was agreed upon and approved by the government at the December 2003 CPAR mission and workshop. Use of guidelines 22. Procurement will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated January 2011, revised July 1st, 2014 and “Guidelines Selection and Employment of Consultants by the World Bank Borrowers” dated January 2011, revised July 1st, 2014, and in accordance with provisions stipulated in the Legal Agreement. 23. The “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants,” dated October 15, 2006, and revised in January 2011, will apply to this project. Fraud, Coercion, and corruption 24. All procuring entities, as well as bidders, suppliers, and contractors shall observe the highest standard of ethics during the procurement and execution of contracts financed under the project in accordance with paragraphs 1.15 & 1.16 of the Procurement Guidelines and paragraphs 1.25 & 1.26 of the Consultants Guidelines. Advertising 25. General Procurement Notices, Specific Procurement Notices, Requests for Expression of Interest, Invitation to Bid, results of the evaluation, and awards of contracts should be published in accordance with advertising provisions in the following guidelines provisions. The borrower will maintain a list of responses received from potential bidders interested in the contracts. 26. A draft General Procurement Notice (GPN) has been prepared and will be posted on Development Business online, in international magazines when deemed necessary, and in national newspapers at the latest after board approval. It shall include contracts under International Competitive Bidding (ICB) and consulting contracts (i.e. estimated to cost $200,000 or more). Specific procurement notices are required for all goods and works to be procured under ICB and Expression of Interest (EOI) for all consulting services costing more than US$ 200,000 equivalent or more. All NCB procurement packages for goods and works will be advertised in the national newspapers as required by the procurement code of Madagascar. 27. For ICB and requests for proposals that involve international consultants, the contract awards shall be published in UN Development Business online within two weeks of receiving IDA’s "no objection" to the contract award recommendation. 64 Procurement Methods 28. Procurement of Works: Works procured under this program will include upgrading urban roads, improving access to water and sanitation, and rehabilitation of offices, upgrading of tourism sites and craft markets, in accordance with an approved annual work program. Contracts estimated to cost more than the equivalent of US$5,000,000 will be procured using ICB. Contracts estimated to cost more than US$100,000 but less than US$5,000,000 will be procured using NCB in accordance with the national procurement law. Small works estimated to cost less than US$100,000 equivalent per contract may be procured through price comparison received from at least three contractors in response to a written invitation. When it is the only way to get the works executed, and with prior approval of the Association, small works may be procured through direct contracting in accordance with clause 3.7 of the Guidelines. 29. Procurement of Goods: Goods procured under this project would include: computer hardware and software, and vehicle as well as office equipment and furniture. Contracts for goods estimated to cost US$500,000 equivalent and above will be procured through ICB and those below US$500,000 but above US$50,000 through NCB. For contracts below US$50,000, prudent shopping may be used. The procurement will be done using the Bank’s SBD for all ICB and National SBD agreed with or satisfactory to the Association. Goods of 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. Procurement for vehicles and other transportation means may be done through UNOPS. 30. Procurement of non-consulting services: Procurement of non-consulting services will be procured using acceptable SBD consistent with IDA guidelines. And will include various services related to the deployment of information technology systems 31. Selection of Consultants: Consultancy services required for the project would cover consultancies to: technical assistance, technical and financial audits, analytic studies, hiring of NGOs, and training. All consulting services contracts costing more than US$200,000 equivalent for firms will be awarded through Quality and Cost Based Selection (QCBS) method. Contract for specialized assignments to cost less than US$100,000 equivalent may be contracted through Consultant’s Qualifications (CQ) method. Contracts for standards accounting audits and for missions of routine nature may be awarded under Least Cost Selection (LCS). Single Source Selection (SSS) may be employed with prior approval of the Association and will be in accordance with paragraphs 3.9 to 3.12 of Consultant Guidelines. All services of individual consultants will be procured under individual contracts in accordance with the provisions of paragraphs 5.1 to 5.4 of Consultant Guidelines. Short lists of consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 32. Operating Costs: The operating costs for this project will include expenses related to management of the project by the PIU. These expenses shall consist of some staff salary costs and employment benefits of support staff, office supplies, travel expenses and subsistence expenditures, operation, repair and maintenance costs for vehicles and equipment, office rental and maintenance, materials, supplies and utilities and media information campaigns and 65 communication expenses. Procurement will follow PIU’s administrative procedures which were reviewed and found acceptable to the Association. 33. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Implementation Manual. Table 7 presents the thresholds for procurement methods and prior review. Table 7: Thresholds for Procurement Methods and Prior Review Contract Value Contracts Subject to Prior Review Expenditure Category Threshold Procurement Method (US$) (US$) 1. Works >5,000,000 ICB All 100,000-5,000,000 NCB First contract <100,000 Shopping None All amount Direct contracting All 1. Goods >500,000 ICB All 50,000-500,000 NCB First contracts <50,000 Shopping None 2. Services Firms >200,000 QCBS All Above US$200,000 <100,000 QCBS , CQ and LCS Two First contract 3. Individual Cons. >50,000 ICS All <50,000 None 4.Firms and All amount SSS All Individuals Assessment of the agency’s capacity to implement procurement 34. An assessment was conducted to confirm that the Secretariat Exécutif du Projet Pôle de croissance (SEP) has the capacity to carry out procurement activities. 35. The overall project risk for procurement is Moderate Table 8: Risk Assessment and Mitigation Designation Concerns Risk mitigation Due date Lack of budget forecast Capacity building on budgeting and cost At effectiveness Planning and and costing of activities estimation for consultancy services budgeting subject to be procured Execution and Lack of internal Audit Development of cost and contract At effectiveness monitoring management control Project No manual in place for Development of complaint management At effectiveness management complaint management within Project implementation manual 66 Procurement Plan 36. 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 and the Project Team on October 23, 2014 and is available at SEP. It will also be available in the project’s database and in the 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 in institutional capacity. Frequency of Procurement Supervision 37. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended Annual supervision missions to visit the field to carry out post review of procurement actions. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting: 1 2 3 4 5 6 7 8 9 Re Contract Estimat Procureme P- Domestic Revie Expected Comments f. (Description) ed nt Q Preferen w Bid- No. Cost Method ce by Opening X $1,000 (yes/no) Assoc Date iation (Prio r/ Post) 2 Sector based growth in the 3 poles and corridors 2.2 Removing infrastructure impediments 2.2.1 Upgrading urban roads Rehabilitate urban bypass road that links RN6 with 2,500 NCB No No Post 30 Aug15 12 months the Antsiranana Port Rehabilitate urban link road, in Toliara, urban access to Toliara Port and 4,000 ICB No No Prior 30 Aug15 12 months access to embarkation area for the Anakao ferry 2.2.3 Improving access to water and sanitation Upgrade water supply in 3,500 NCB No No Post 30 Aug15 10 months Toliara Partial upgrading of water 15 Dec supply and distribution in 8,500 ICB No No Prior 12 months 15 Diego 67 2.3 Promoting sustainable tourism development 2.3.2 Promoting regional tourism development Upgrade of 3 select tourism attractions 10 Feb 325 NCB No No Post 4 months (National Park other) in 16 Diana Upgrade of two select tourism attractions 10 Feb 325 NCB No No Post 4 months (National Park and other) 16 in Antsiranana Public works to 30-Nov- rehabilitate artisanal 350 NCB No No post 4 months 16 markets (b) ICB contracts estimated to cost above $5,000,000 for works and $500,000 for goods per contract and Direct contracting will be subject to prior review by the Association. 2. Consulting Services (a) List of Consulting Assignments with short-list of international firms. 2.1 Firms 1 2 3 4 5 6 7 8 9 Prior Submission Financial Contract Comments Ref. Contract Estimated Selection and and Proposal Signature No. (Description) Cost Method Post Opening Opening Date X $1,000 Review Date Date) 1. Strengthening the enabling environment for entrepreneurship and investment 1.1 Improving the investment climate Consultancy to design and 300 QCBS Prior 24 Apr 15 1 Sept 15 1 Oct 15 6 Months implement ICT systems Consultancy to: (i) identify and implement select reforms PPD Platform and IC reforms (ii) identify issues and recommend 20 Mar 800 ICS Prior 3 Feb 15 1 Mar 15 3 months improvements to 15 issuing of permits/licenses and (iii) identify and implement select PPD Platform and IC reforms agenda 68 1.2 Promoting private investment 1.2.2 Building capacity to design and implement PPPs Technical and legal (pre)feasibility 600 QCBS Prior 24 Apr 15 1 Sept 15 1 Oct 15 3 Months studies for select pilot PPPs Support to implementation of 300 QCBS Prior 24 Apr 16 1 Sept 16 1 Oct 16 12 Months select PPPs 1.2.3Madagascar Business and Infrastructure Development Facility (MBIF) MBIF fund 25 1,200 QCBS Prior 16 Dec 14 25 Apr15 Continuous Manager May15 2. Sector based growth in the 3 poles and corridors 2.3 Promoting sustainable tourism development 2.3.1 Building capacity for a better Tourism Governance (institutional framework) Support to Ministry of Tourism and Public Institutions Review and update the tourism master plan and 200 QCBS Prior 22 Jan15 1 Jun15 1 Jul 15 3 Months /implement clear plan Design a sustainable 100 ICS prior 15 Jan 16 1 Jun15 1 Jul 15 3 months business model for ONTM Improving competitiveness in the air transport sector TA to outline the 600 QCBS Prior 15 Jun15 30Jun 15 15 Jul 15 4 Months National Air Transport Plan and international air access strategy and strategic positioning of ADEMA and Air Madagascar Design of National 10 Airport Master 500 QCBS Prior 3 Apr16 10 Aug16 3 Months Sept16 Plan TA to upgrade security standards of the Civil 25 Mar 400 QCBS Prior 17 Oct 15 25 Feb16 3 Months Aviation Authority 16 and drafting of BASAs (ACM) 2.3.2 Promoting regional tourism development Improve access to key tourist attractions Design and prepare bidding documents for 30 Mar rural access roads 400 QCBS Prior 26 Apr14 30 Feb 15 3 Months 15 (Toliara-Salary, Tulear-Anakao, Salines Diana) 69 2.2. Individual Consultants Contract 1 2 3 4 5 6 7 8 9 Contract Comments Ref. Contract Estimated Selection Prior Submission Financia Signature No. (Description) Cost Method and Post and l Date X $1,000 Review Opening Proposal Date (T) Opening Date) 1. Component Strengthening the enabling environment for entrepreneurship and investment 1.2 Promoting private investment 1.2.1Building capacity to attract and manage private investment Design promotion strategy and 360 ICS Prior 31 Mar15 15 Apr15 15 May15 2-3 months coaching of staff 1.2.2 Building capacity to design and implement PPPs Capacity building GoM on PPPs 180 ICS Prior 31 Mar15 15 Apr15 15 May15 8 months design international good practices Consultancy for Ehoala Port concession 340 ICS Prior 31 Mar 15 15 Apr15 15 May15 6-9 months agreement and international promotion. 2. Sector based growth in the 3 poles and corridors 2.3 Promoting sustainable tourism development 2.3.1Building capacity for a better Tourism Governance (institutional framework) Review of sector institutional 100 ICS Prior 26 Mar15 10Apr15 10 May15 2 months arrangement National Tourism marketing strategy 180 ICS Prior 26 Jun15 10Juil15 10 Aug15 8 months and market research 2.3.2 Promoting regional tourism development Improving management of tourism attractions in Atsimo Andrefana and Diana Master plan design select tourism 300 ICS Prior 15 Jun15 30 jun15 30 Jui15 6 months attractions (MNP sites and others) Develop 15 commercialization 300 ICS Prior 1 Aug15 15 Sept15 6 months Aug15 strategy for MNP Promoting and marketing regional destinations Branding and marketing strategies 200 ICS Prior 25 Jan16 10 Apr16 10 Mar16 3 months for Diana and Atsimo Andrefana International 10 promotion coaching 100 ICS Prior 26 Apr16 10 jun16 4 months may16 sessions 70 2.4 Promoting sustainable agribusiness development 2.4.1Strengthening the enabling environment for agribusiness development Review and update the legal and institutional framework TA to update legal and institutional 60 ICS Prior 1 May15 15 Apr15 15 Jun15 6 months regulatory framework 2.4.2 Promoting growth and competitiveness of agribusiness value chains Promoting catalytic and inclusive investment opportunities in select value chains TA to identify and promote catalytic and inclusive 6 months 90 ICS Prior/Post 18 Dec15 10 Jan 16 1 Feb 16 investment (discount.) opportunities in agribusiness 3 Project implementation, M&E, safeguards and impact evaluation 3.2 Impact evaluation, external audit and mitigation measures Impact evaluation 40 ICS Prior 18 Juil16 1 Aug 16 1 Sept 16 5 months activities (b) Prior review: (a) each contract estimated to cost more than US$200,000 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 of contracts raising the initial contract value by more than 15 percent of original amount or above the prior review thresholds will be subject to IDA prior review mandatory in paragraphs 2 and 3 of Annex 1 of the Bank’s Consultants selection Guidelines. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the 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 of Annex 1 of the Bank’s Consultant selection Guidelines. The post review will be based on a ratio of at least 1 to 5 contracts. Madagascar NCB Exceptions (Based on the Procurement Guidelines as revised Jan. 2011) General 38. The procedures to be followed for National Competitive Bidding (NCB) shall be those set forth in “Law no. 2004-009 of July 2004 portant Code des Marchés Publics”—the Public Procurement Law (PPL)—with the modifications described in the following paragraphs. Eligibility 39. The eligibility of bidders shall be as defined under Section I of the Procurement Guidelines; accordingly, no bidder or potential bidder shall be declared ineligible for contracts financed by the Association for reasons other than those provided in Section I of the 71 Procurement Guidelines. The requirement of producing a registration number (Numéro d’Immatriculation) for any bidder to participate in the bidding process shall not be interpreted as a prior requirement to any sort of local registration, license, or authorization. 40. Government-owned enterprises or institutions of the Republic of Madagascar shall be eligible to participate in the bidding process, only if they can establish that they are legally and financially autonomous, operate under commercial law, and are not dependent agencies of the Borrower or Sub-Borrower. Bidding Documents 41. Standard bidding documents acceptable to the Association shall be used so as to ensure economy, efficiency, transparency, and consistency with the provisions of Section I of the Procurement Guidelines. Participation by Joint Ventures 42. Participation shall be allowed from joint ventures on condition that such joint venture partners will be jointly and severally liable for their obligations under the Contract. Therefore, the “Groupement Conjoint,” as set forth in the PPL, shall not be allowed under NCB. Preferences 43. No domestic/regional preference, or any other kind of preferential treatment, shall be given for domestic/regional bidders, and/or for domestically/regionally manufactured goods, and/or for domestically/regionally originated related services. Applicable Procurement Method 44. Subject to these provisions, procurement shall be carried out in accordance with the “Open Competitive Bidding” method (Appel d’offres ouvert) set forth in the PPL. Qualification 45. Qualification criteria shall entirely concern the bidder’s capability and resources to perform the contract, taking into account objective and measurable factors. The qualification criteria shall be clearly specified in the bidding documents, and all criteria so specified, and only such criteria so specified shall be used to determine whether a bidder is qualified. Qualification criteria shall be assessed on a “pass or fail” basis, and merit points shall not be used. Bidders’ qualifications shall be assessed by post-qualification. Fees for Bidding Documents 46. If a fee is charged for the bidding documents, it shall be reasonable and reflect only the cost of their typing, printing or publishing, and delivery to prospective bidders, and it shall not be so high as to discourage bidders’ participation in the bidding process. Bids may be submitted by electronic means only provided that the Association is satisfied with the adequacy of the system, including, inter alia, that the system is secure, maintains the integrity, confidentiality, and 72 authenticity of the bids submitted, and uses an electronic signature system or equivalent to keep bidders bound to their bids. Bid Validity and Extension of Bid Validity 47. The bid validity period required by the bidding documents shall be sufficient to complete the evaluation of bids and obtain any approval that may be required. If justified by exceptional circumstances, an extension of the bid validity may be requested in writing from all bidders before the original bid validity expiration date, and it shall cover only the minimum period required to complete the evaluation and award of the contract. The extension of the bid validity requires the Association’s no objection for those contracts subject to prior review, if it is longer than four (4) weeks, and for all subsequent requests for extension, irrespective of the period. Bid Evaluation 48. (a) Evaluation of bids shall be made in strict adherence to the evaluation criteria declared in the bidding documents. Evaluation criteria other than price shall be quantified in monetary terms, and the manner in which they will be applied for the purpose of determining the lowest evaluated bid shall be established in the bidding documents. A weighting/scoring system shall not be used. (b) A contract shall be awarded to the qualified bidder offering the lowest-evaluated and substantially responsive bid. No negotiations shall be permitted. (c) Bidders shall not be eliminated on the basis of minor, non-substantial deviations. (d) In case of requests for clarifications, bidders shall not be asked or permitted to alter or complete their bids. Rejection of All Bids and Re-bidding 49. All bids shall not be rejected, the procurement process shall not be cancelled, and new bids shall not be solicited without the Association’s prior concurrence. Securities 50. Securities shall be in the format included in the bidding documents. No advance payment shall be made without a suitable advance payment security. Publication of Contract Award 51. Information on contract award shall be published at least in a national newspaper of wide circulation within two (2) weeks of receiving the Association’s no objection to the award recommendation for contracts subject to prior review, and within two (2) weeks from the award decision for contracts subject to post review. Publication shall include the following information: (a) the name of each bidder which submitted a bid; (b) bid prices as read out at bid opening; (c) evaluated prices of each bid that was evaluated; (d) the names of bidders whose bids were rejected and the reasons for their rejection; and (e) the name of the winning bidder, the final total contract price, and the duration and summary scope of the contract. 73 Contract Modifications 52. In the case of contracts subject to prior review, the Association’s no objection shall be obtained before agreeing to: (a) a material extension of the stipulated time for performance of a contract; (b) any substantial modification of the scope of services or other significant changes to the terms and conditions of the contract; (c) any variation order or amendment (except in cases of extreme urgency) which, singly or combined with all variation orders or amendments previously issued, increases the original contract amount by more than 15 percent; or (d) the proposed termination of the contract. A copy of all contract amendments shall be furnished to the Association for its records. Right to Inspect/Audit 53. In accordance with the Procurement Guidelines, each bidding document and contract financed from the proceeds of the Financing shall provide that bidders, suppliers, and contractors, and their subcontractors, agents, personnel, consultants, service providers or suppliers, shall permit the Association, at its request, to inspect their accounts, records and other documents relating to the submission of bids and contract performance, and to have them audited by auditors appointed by the Association. Acts intended to materially impede the exercise of the Association’s inspection and audit rights constitute an obstructive practice as defined in the Procurement Guidelines. Fraud and Corruption 54. Each bidding document and contract financed from the proceeds of the Financing, and as deemed acceptable by the Association, shall include provisions stating the Bank’s policy to sanction firms or individuals found to have engaged in fraud and corruption as defined in the Procurement Guidelines. Debarment under National System 55. The Association may recognize, if requested by the Borrower, exclusion from participation as a result of debarment under the national system, provided that the debarment is for offenses involving fraud, corruption, or similar misconduct, and further provided that the Association confirms that the particular debarment process afforded due process and the debarment decision is final. ENVIRONMENTAL AND SOCIAL (INCLUDING SAFEGUARDS) 56. The proposed Second Integrated Growth Poles and Corridors Project will potentially induce adverse environmental and social impacts; land acquisition and involuntary resettlement; health and safety risks; use of potentially harmful pesticides and other biocide products; harm to potential chance finds of physical cultural resources. These impacts are, however, expected to be site specific and not have large scale impacts. Potential investments that might induce the above adverse impacts include: rehabilitation of roads - urban and rural, including feeder roads – and, possibly, bridges, and also water supply, and promotion of tourism and agribusiness. 74 57. The Project will intervene in the linking of small-holders with medium to larger investors throughout grower schemes. The proposed model is that investors will work with the small holders to improve the quality of the agricultural products, will at the time of harvesting collect and/or buy the products, possibly process the products, store them and sell them to large consumers, as for example some of the large farmer companies in Diana Region. The investors themselves, as well as the out growers, should not need to obtain large tracks of land, which could lead to social and environmental problems and the introduction of Genetically Modified Organisms (GMOs) will not be allowed in this phase of the project. Other negative lists have been provided in the ESMF. 58. Selection criteria for investors covering the above mentioned issues will be established and include environmental, social and gender aspects, and mitigate health and safety impacts. The Project will help build capacity to handle these issues. The planned activities will have low environmental and social impacts and they will be easy to mitigate since no sensitive natural habitats or forest areas are concerned. The tourism activities around protected areas will be implemented in compliance with the protected areas master plan approved under the environmental program and in a participatory manner with local populations following biologic and socio-economic studies. PIC2-1 could directly or indirectly have an impact at work sites, including possible camps and quarries for the rehabilitation of urban roads; and agricultural activities under the agribusiness component. The expected impact on the environment is modest with the most significant relating to land use. Land issues and temporary resettlement will be the main issues in the Toliara growth pole and corridor area for the urban road rehabilitation. However, the potential road sections are occupied within the existing right-of-ways so the local population activities could be affected during the civil works. Moreover, civil works and tourism activities may expose significant risks of HIV/AIDS, and damage to social environments due to the migration resulting from poorly-controlled land development. In the Diana Region, there could also be some indirect impact associated with tourism activities on small sensitive islands. 59. The proposed project is classified as a Category B project according to OP/BP 4.01. Since the sub-projects to be financed are not yet well defined before appraisal, the borrower has prepared, consulted upon and disclosed an Environmental and Social Management Framework (ESMF), a Pest Management Plan (PMP), a Resettlement Policy Framework (RPF). Public consultations on the ToR of environmental and social safeguard studies were conducted in the project areas in the second half of May of 2014. The public and local communities’ preoccupations have been incorporated in the final version of the ToRs of the safeguards instruments: ESMF, PMP and RPF. Madagascar is considered a Fragile and Conflict State after five years of political crisis. The PMP was cleared by the Association and disclosed in the country and in the Infoshop on September 16, 2014, and the ESMF and RPF were cleared and disclosed in the country and in Infoshop on November 3-5, 2014. 75 60. The borrower has been actively responsive in addressing safeguards issues. At the national level, Madagascar has a legislative and regulatory framework which is conducive to good environmental management. In addition, Madagascar has signed a number of international treaties and conventions to ensure sound environmental management. 61. At project level, PIC1 laid a sound institutional foundation for preparing, managing and monitoring potential adverse environmental and social impacts of Bank funded projects. The PIU has the ultimate responsibility for the project’s compliance with World Bank safeguards guidelines. This PIU has long experience of implementing Bank funded investments. In PIC1, the PIU prepared and successfully implemented the required safeguards instruments (ESMF, ESIAs and RAPs) in a timely manner. A safeguards coordinator, with the assistance of an environmental and a social specialist, has ensured safeguards compliance. This arrangement will continue under PIC2. Nevertheless, to ensure compliance with Bank safeguards policies, the project will make provisions for enhancing the technical capacity of the Borrower on Bank social and environmental safeguards policies. The Malagasy Environmental law mentions that Environmental assessment for both private and public development is regulated under Décret N°2004-167 (MECIE). This is fairly effective but institutional capacity needs to be developed to ensure more widespread application and improved monitoring. The national environmental law will be reinforced by the World Bank safeguard policies for the proposed project. 62. The PIU has engaged the services of a consultant firm to support the preparing of three separate safeguards instruments. These instruments assess the potential impacts of all activities to be supported by the project with their expected adverse environmental and social impacts and mitigation measures, including the principles, and procedures to be followed for the safeguards policies triggered: OP 4.01 (Environmental Assessment); OP 4.04 (Natural Habitat); OP 4.11 (Physical Cultural); OP 4.12 (Involuntary Resettlement) and OP 4.09 (Pest Management). 63. Based on the screening outcome of the Environmental and Social Screening Form (ESSF) and checklist in ESMF it will be decided if the sub-project will need to prepare an Environmental and Social Impact Assessment (ESIA), a freestanding Environmental and Social Management Plan (ESMP), and/or a Resettlement Action Plan (RAP). ESIAs and RAPs will be prepared in parallel of technical studies of identified subprojects during the implementation phase. Each ESIA will include an environmental and social management plan to deal with the direct social and environmental impacts. The screening of the sub-projects will be done by safeguard specialists, who are part of the Project Task Team. In case safeguard instruments need to be prepared by the PIU, the safeguard specialist will prepare the ToR for these safeguard instruments, be responsible for the procurement of consultants to prepare them, supervise the consultants and M&E for the ESMP, PMP and RAP in collaboration with the regional and local authorities. Positive gender impact will be sought and the safeguard specialist will ensure that contracts include environmental and social clauses, which are attached as an annex to the ESMF, in order to ensure adequate environmental and social management practices during construction and operation. The ESMF proposes of relevant environmental and social impacts/risks assessments for the various subprojects could be financed by the project with mitigation measures. 76 64. The estimated total budget for implementation of the environmental mitigation measures and the compensation measures for resettlement of affected populations is US$0.86 million with Government contribution to implement resettlement plans at US$0.5 million. As sub- projects/activities to be financed under the catalytic funds have yet to be identified, the ESMF sets forth the principles and guidelines to be followed by the borrowers to comply with the requirements of the triggered policy. It includes the criteria to select the small industrial projects, a mechanism to review and conduct an environmental screening to avoid and mitigate the environmental and social impacts risks of potential subprojects eligible for financing. The steps and due diligence to identify eligible activities includes the following: (i) activities classified as Category B, according to World Bank OP 4.01, where the proposed subproject/activity presented should receive an environmental license delivered by the Malagasy Environmental Authority (National Office of Environment) and implemented in a manner satisfactory to the Environmental and Social Management Plan (ESMP) that would be prepared for each subproject, and monitored by the Malagasy Environmental Authority; and (ii) activities classified as Category C according to World Bank OP 4.01(i.e. negligible or no environmental and social impacts). 65. Tombs are common in the Toliara region and so are sacred places in the North. However, to date, no project activity will trigger OP 4.11 (Physical Cultural Resources). Concerning infrastructure subprojects (mainly roads), no archaeological vestiges will be impacted because the project will work under the existing right-of-ways. For more assurance, the ESMF has made provisions for cultural resources management if it happens that this policy is triggered during the implementation phase and includes “chance finds” procedures for inclusion in the contractors’ contract. 66. Pest Management (OP 4.09) is triggered mainly because of the likelihood of pesticides use in the project targeted areas by farmers and the potential magnitude of the agribusiness investments where these activities would encourage farmers groups to use more inorganic fertilizers and pesticides. To appropriately manage the health and environmental impacts of increased use of processed pesticides, the Borrower has prepared a standalone Pest and Pesticide Management Plan (PPMP). It includes a number of implementable guidelines/actions aiming at reducing/mitigating farmers groups/communities' (especially children/toddlers, elderly, women and other vulnerable groups) exposure to pesticides used in agricultural production system. Moreover, this PPMP proposes to develop a set of training kits and envisages to further strengthen the technical capacity of Plant Protection Services at regional and local levels with the overall objective of reinforcing the control of pesticide usage, improve the knowledge of various key stakeholders (farmers, local vendors, regional agricultural technicians such as extension- workers, etc.) on the safe transportation, storage/disposal and application of agrochemicals products. Finally, it recommends the application of an integrated pest management approach coupled with the promotion of agro-ecological practices by the farmers' groups. The PMP was prepared and approved by the Association and disclosed both in-country and in the Infoshop on September 16, 2014. Involuntary Resettlement (OP/BP 4.12) is triggered due to the proposed Infrastructure and Agribusiness investments under the project since they could result in some acquisition of land, loss of income revenues/socioeconomic assets and livelihoods support resources. Since the physical locations of the proposed activities are unknown, the Borrower has prepared a detailed Resettlement Policy Framework (RPF). It builds upon the RPFs/RAPs prepared under PIC1. The RPF includes detailed information on legal and institutional 77 frameworks, eligibility criteria, assets evaluating methods, implementation arrangements, grievances redress mechanisms, resettlement budget totally covered by the Government and monitoring and evaluation. The RPF sets forth the basic principles and procedures/directives to be followed by the Borrower for the preparation of the Resettlement Action Plan (RAP) once the physical locations of the proposed activities are known. The RPF as well as the ESMF were disclosed on the project website (www.pic.mg) as well as in printed media (Midi Madagasikara and L’Express de Madagasikara) on November 3-5, 2014. Both documents were also disclosed in the Infoshop on November 5, 2014. 78 Annex 4: Operational Risk Assessment Framework (ORAF) MADAGASCAR: Second Integrated Growth Poles and Corridors Program (SOP-1) Project Stakeholder Risks Stakeholder Risk Rating Moderate Description: Risk Management: Ownership and commitment by local The task team will continue to engage closely with all relevant stakeholders to the project throughout stakeholders are essential for successful implementation such as Chief of Regions, Mayors and head of local communes; the main business project implementation. Unless all key associations and key business leaders—in particular existing and new partners, as well as local stakeholders and consulted and community leaders. The Project Steering Committee made up of key line ministries will meet on a involved there is a risk that reforms get regular basis. Local consultative committees will be continue to be used at the regional level. stuck, complaints surface and Resp: Stage: Implementation Recurrent: Due Date: Frequency: Status: implementation progress stalls. Bank and Client Governance Risk Description: Risk Management: Moderate Governance weakened during the The project is designed to focus strongly on improving economic governance through capacity building political crisis and a return to pre-crisis and economic reforms in PIC2-1 before more elaborative activities linked to public private partnerships levels may take time. and SOE reforms are undertaken in PIC2-2. The task team will also continue to rely on the experience and proven track record of the PIU core management team for PIC1. To lower the risk of a deterioration in the integrity linked to financial management and procurement, external accounting competence would be hired and embedded at arms-length distance in the PIU to control that procedures and sign off are handled correctly throughout project implementation. 79 Resp: Stage: Implementation Recurrent: Due Date: Frequency: Status: Bank and Client Implementing Agency Risks (including fiduciary) Capacity Rating Low Description: Risk Management: Project Implementing Agency Risk is a PIC1 is rated Satisfactory across all its indicators. The current core management team in the PIU has concern in general in Madagascar. eight years of experience of successfully implementing a large and complex development program. The smooth transfer from PIC1 to PIC2 keeping with the existing management team would ensure that the current satisfactory capacity stays intact. The task team would also encourage the PIU to access select and necessary training of quality training institutes. Resp: Stage: Implementation Recurrent: Due Date: Frequency: Status: Client Project Risks Design Rating Substantial Description: Risk Management: Technical Complexity. The project is First, the integrated approach gives rise to complexity but it also lowers project implementation risk since complex since it involves two sectors it addresses several issues in parallel in order to achieve the PDO. Second, PIC2 is less risky than PIC1 and stakeholders in three regions. with the SOP approach allowing for an initial phase of capacity building to improve governance and The PIU and task team is implementing reform the investment climate before larger PPP transactions are expected in the second phase. The PIU an agribusiness pilot in Anosy and its and task team also have eight years of successful implementation experience. The cost of transition partnerships at the lower end of the would therefore be minimized. The stakeholders in the regions, except for Atsimo-Andrefana, are agribusiness value chains are familiar with the mode of operation. Third, the design risk is reduced by a strong central team in the encouraging. However, a closer and capital and competent technical teams decentralized to the regions that lead the daily dialogue with public larger scale engagement further and private partners and oversee contractors. Fourth, the design is based on inclusive consultations with upstream poses more of a risk all stakeholders and this inclusive approach would continue throughout project implementation with local depending on the level of coordination Steering Committees (as now) in addition to a strong central board anchored at the top of the GoM to and organization by the economic ensure full commitment and ownership. Fifth, the project is strengthening its approach to rely on PPPs to agents. crowd in private investment and ensure private participation in designing, implementing, monitoring, and maintaining public investments. 80 Resp: Stage: Recurrent: Due Date: Frequency: Status: Client Implementation Social and Environmental Rating Substantial Description: Risk Management: The project will cover investments in The great majority of the proposed activities would improve social and environmental standards but hard infrastructure as well as basic specific activities could have adverse effects. The PMP, ESMF and RPF have all been prepared and services which will include civil works disclosed and will guide the management of associated risks. and potential concerns linked to environmental and social outcomes. Resp: Stage: Recurrent: Due Date: Frequency: Status: Agribusiness develop could result in soil degradation. Client Implementation Tourism investments could affect coastal areas and involve an adverse environmental and/or social impact. Program and Donor Rating Moderate Description: Risk Management: There is a risk of misalignment among Several infrastructure upgrading projects are currently undertaken by development partners in the partners on similar activities and targeted regions. All major donor partners have been consulted extensively and critical road transport competing projects may overstretch the corridor upgrading for >$100million by donor partners will drastically improve market access in each PIU and stakeholder capacity and slow region. These works are already underway and there is little risk that contracts entered into by these down implementation. development partners with private contractors will be negated. The OFID energy activities will benefit Development partners such as OFID, private investors and households alike in the targeted regions. Importantly, while these separate activities AfDB and EU are covering energy are advantageous to the private sector development and investors the Project and its achievement of the sector activities and national road PDO are not relying on these rehabilitation works. rehabilitation schemes in the regions. Resp: Stage: Recurrent: Due Date: Frequency: Status: Extensive delays or cancellations of agreed donor partner investments could Client Implantation reduce the return on investment within the targeted regions. Delivery Monitoring and Rating Low Sustainability Description: Risk Management: 81 There is a risk is that the capacity for The capacity of the PIU on M&E has been strengthened through successive restructurings (2008 and M&E, planning and coordination by the 2012) and it has been brought up to best practice levels in the new project with the Enterprise Survey PIU would deteriorate. providing micro-level and baseline data for 2,100 formal and informal enterprises in addition to the project’s established relationship with EDBM and INSTAT. A household survey is being prepared for the fall of 2014 and an economic impact assessment report builds on the enterprise survey data from 2014 and provides input and lessons learned for the project design as well as M&E work. Resp: Stage: Recurrent: Due Date: Frequency: Status: Client Implementation Overall Risk Implementation Risk Rating: Rating High Comments: Project implementation risk is rated high due to the country risk and the complexity of the proposed project. However, the continuation of the existing project approach, PIU and task teams do mitigate some of these risks as do the strong partnership and engagement with the private sector, local authorities, and other donor partners. The phased approach—focusing on improving governance and building government capacity before implementing activities with involving more risk—allows for a reduced implementation risk profile in PIC2-1. The implementation risk is sensitive to donor partner funding and timely execution of energy and national road works on key road transport corridors. SOE engagements with ADEMA, Air Madagascar and JIRAMA are unpredictable given these companies’ fragile finances, weak governance and monopoly positions. 82 Annex 5: Implementation Support Plan MADAGASCAR: Second Integrated Growth Poles and Corridors Program (SOP-1) Strategy and Approach for Implementation Support Implementation Support Plan Time Focus Skills Needed Number of Resource Trips Estimate Task Management Project management (HQ 12 staff weeks 3 and Antananarivo) (SWs) Implementation support Investment Climate Team and Monitoring (Nairobi based) and PPP 4 4 SWs Specialist (Dar es Salam based) Year 1 Procurement support Procurement Specialist 0 2 SWs (Antananarivo based) FM supervision FM Specialist (Pretoria 2 4 SWs based) Performance Standards Environmental/Social Specialists (Antananarivo 2 3 SWs and HQ based) Task Management Project Management (HQ 2 per year 10 SWs per year and Antananarivo based) Implementation support Investment Climate Team and Monitoring (Nairobi based) and PPP 3 per year 4 SWs per year Specialist (Dar es Salam based) Year 2-4 Procurement support Procurement Specialist 0 2 SWs per year (Anatananarivo based) FM supervision FM Specialist (Pretoria 2 per year 4 SWs per year based) Performance Standards Environmental/Social Specialists (Antananarivo 2 per year 3 SWs per year and HQ based) Partners Name Institution/Country Role African Development Bank Cote d’Ivoire Road Sector Partner European Union Belgium Road Sector Partner OPEC Fund for International Austria Energy Sector Partner Development (OFID) 83 Annex 6: Selection of Proposed Regions and Sectors MADAGASCAR: Second Integrated Growth Poles and Corridors Program (SOP-1) 1. The task team visited Antsirabe, the Diana Region (Antsiranana, Ambilobe, Ambanja, Nosy Be) Tolagnaro, Mahajanga, Toamasina and Toliara during scoping missions in FY13 to meet with public and private sector representatives. The missions were used to collect data, solicit public and private sector interest for partnerships with the WBG, and assess the regions’ potential for private sector-led job creation and growth. 2. The matrix below summarizes the main conclusions of these visits. First, Toamasina was considered risky from a project design and implementation perspective with social and environmental concerns. Toamasina is an established growth center in Madagascar due to Sherritt’s US$6.0 bn investment and it is unclear what additionality the project would offer. For Antsirabe, the region is economically rich with a strong private sector and impressive human capital and institutions but, due to the limited available budget, a strategic choice had to be made and the selection of other regions (i.e. Toliara) with higher poverty levels than Antsirabe and with high growth potentials was prioritized. Antsirabe could be considered in a later phase of the project. 3. Three regions showed all the promising signs that the task team sought: (i) presence of an anchor investor(s) and/or sizeable cluster(s) of competitive export-oriented firms willing to invest and expand; (ii) the potential for adopting a multi-sector approach; (iii) a strong public and private interest in partnering with the WBG to promote private sector development, employment, and shared prosperity; and (iv) real potential to leverage new infrastructure investments and ability to unlock economic potential through the removal of key bottlenecks—particularly through public private partnerships. The expansion of PIC1 from Nosy Be to cover the 250 km northern corridor from Ambanja to Antsiranana would bring more jobs and basic services to an area covering up to 660,000 inhabitants. It would be a low-risk and natural next phase in the development of the region. The continued presence of PIC1 in the Anosy Region would allow the project to leverage its partnership with Rio Tinto QIT Madagascar Minerals (QMM) to develop Ehoala Park, next to Ehoala Port, into a world class facility that would spur tourism, fishing and agribusiness development in the poor southeastern region. The continued presence in both the Anosy and Diana Regions would also help protect the legacy of PIC1 in terms of good governance and maintenance of shared infrastructure. Finally, the Atsimo-Andrefana Region is host to a large population suffering some of the highest levels of extreme poverty in Madagascar (see Figure 5). 10 It is also home to a largely untapped mineral wealth which a large number of mining companies are prospecting. AfDB sponsored road rehabilitation in the region would also unlock some rich agriculture regions that previously lacked decent access to seaports. 10 The latest poverty analysis conducted the by the World Bank presents a national poverty rate of 92.8% for Madagascar in 2010 (as per a threshold of US$2 per day). At the regional level, 18 of the 22 regions of the country have an average poverty rate higher than the national level. 84 Summary assessment of regions Strengths/Opportunities Disadvantages/Threats Conclusion - Established seaport facing Mayotte and good airport - Largely deindustrialized Negative outlook provided by the private sector. Mahajanga - Good urban roads and road connection to capital - Unpredictable and costly electricity Lack of anchor sector and partners as economy - Lots of idle land with poor accessibility - Concerns about governance in the port is informal and linked to fishing and trading. - Popular destination for domestic tourists from the capital 3 months per year - Few private sector partners - Potential partnership with AFD to upgrade local markets - Informal economy - Established long-term anchor investor in Sherritt willing to partner - Already established growth pole Already an established center of sustained Toamasina - Madagascar’s main seaport - High social, environmental and governance economic growth due to Sherritt’s US$6.0 bn - Madagascar’s second economic center risks investment and the hosting of the country’s - Unclear additionality of project main seaport and nation’s oil storage. Social, environmental and governance issues would expose the project to very high risks. - Presence of world class deep water seaport (Ehoala Port) with idle capacity - Lack of decent road connections to the The scope to help create jobs linked to Ehoala along major international shipping lane capital and other major towns Port and Ehoala Park is significant and project - Possible future construction of a second wharf with containerization - Disorganized agricultural value chains interventions would not be too costly given the Anosy Region (Tolagnaro) terminal for transshipment. - Depressed (price) outlook for the achievements of PIC1. The strong partnership - Potential to develop Ehoala Park into a regional state-of-the-art multi- mining/ilmenite industry has postponed large with Rio Tinto QMM to upgrade and/or purpose mixed industrial, logistics and commercial facility. planned investments maintain basic services and shared - Strong partnership with anchor investor (Rio Tinto QMM) with the infrastructure would continue. The organization ambition to invest and develop a new mine at the right time. of commercial agriculture along value chains - Possibility to protect achievements in PIC1 regarding sanitation, water has promising potential to reduce extreme supply, solid waste management, and energy supply poverty in the region. - Continuation of an 8-year presence with strong local PIC1-business networks and commitment by local authorities and businesses to collaborate. - Potential to leverage EU’s rehabilitation of RN12A and RN13 to connect to agricultural heartland and expand agribusiness pilots. - Ideal for fighting extreme poverty and promoting shared prosperity. - Urban infrastructure upgraded by PIC1 and in good shape. - Privately operated seaport and airport. - High expectations of economic upswing Region with particularly high poverty levels but - Large population in desperately poor area in need of jobs and risk of social unrest rich in natural resources. One of few cities with Atsimo-Andrefana Region (Toliara) - “Madagascar’s next mining center” - City prone to flooding a good road connection to the capital and - Presence of two local universities - Low levels of human capital recently upgraded seaport and airport facilities - End of established and leading wildlife and eco-tourism trail - Dry region with scarce water sources on the beaten track for the rapidly growing - Large cluster of hotels - Large inflows of migrants tourism sector. Extensive consultations at all - Good road connection (RN7) to capital - Windy conditions reducing potential for public levels and with the private sector indicate - Partnership with AfDB that is rehabilitating RN9 unlocking agribusiness beach tourism (but great for surfers) strong support for project engagement in the potential north of Toliara -Volatile power supply region. - Presence of several commercial agriculture and aquaculture value chains 85 - Extension from an 8-year presence in Nosy Be to cover the Northern - Upgrading of RN6 essential between A natural development to expand from the Corridor from Ambanja to Antsiranana Ambilobe and Antsiranana to realize successful tourism growth pole in Nosy Be to - Strong local PIC1-business networks and commitment by local authorities potential cover the northern growth corridor between Diana Region/northern circuit and businesses to collaborate. - Jirama in Antsiranana is struggling Nosy Be/Ambanja and Antsiranana, leveraging (Nosy Be to Antsiranana) - Strong existing tourism sector in Nosy Be can be leveraged to grow the - Freeing up public land for productive the northern tourism circuit, and its cluster of northern tourism circuit investments risky process given governance seafood and agribusiness firms in one of - Sizeable existing cluster of commercial agriculture and processing facilities situation. Madagascar’s most fertile areas. - Idle land for expansion of agribusiness in Ambanja and Ambilobe and tourism in the old town of Antsiranana and surrounding beaches and parks - Upgraded seaports in Nosy Be and Antsiranana - Sizeable industries linked to aquaculture, salt production, and cocoa, tuna, sugarcane and essential oils processing - Potential partnerships with AFD and AfDB - Feasibility work for regional renewable energy pilot with an autonomous local Jirama branch - Lots of unexploited public land. - Strong human capital and local colleges Strong contender with most attributes for a - Decent infrastructure and free zones - Wealthy area (reducing the relative scope growth poles approach: governance, strong - Strong public and private institutions for tackling extreme poverty) human skills, strong established firms, strong Antsirabe - Good road connections private sector demand for Bank partnership. - Potential to upgrade “almost completed” airport for commercial cargo However, due to political factors the Project - Cluster of light manufacturing firms Design and Project Implementation risks would - Established firms willing to partner in light manufacturing and agribusiness be difficult to mitigate. - Existing PIC1 network from 2006-09 activities - Low power prices 86 Figure 5: Poverty rate among the regions (US$2, PPP per day) 100 90 80 70 60 50 Moyenne nationale Alaotra Mangoro Anosy Itasy DIANA Sofia Ihorombe Vatovavy Fitovinany Atsimo Atsinanana Atsimo Andrefana Androy Analamanga Boeny Atsinanana SAVA Bongolava Melaky Betsiboka Menabe Matsiatra Ambony Amoron'i Mania Vakinankaratra Analanjirofo 4. The task team studied five sectors in which Madagascar has a revealed comparative advantage. Four of them—tourism, agribusiness, textiles and clothing, and IT-BPO—are sectors that are labor-intensive and have the potential to produce a large number of jobs to poor communities and idle youth. Tourism and agribusiness are important sources of employment in the three regions identified above. The mining sector is strong in the Anosy and Atsimo- Andrefana Regions. Textiles and clothing and IT-BPO are predominantly located in and around Antananarivo and a few other towns in the highlands of Madagascar. These latter two sectors would benefit from the proposed interventions on the national level but not be covered by the activities in the proposed regions. 5. Tourism: Madagascar’s most compelling draw for tourists is its distinctiveness with an astounding biodiversity of endemic flora and fauna. It also offers beach tourism, hiking, adventure sports, cultural encounters, etc. and the sector enjoys a high average length of stay (21 days) and return rates (40 percent) among leisure tourists. After years of strong growth, international tourist arrivals plummeted by 57 percent in 2009. Since then, however, the sector has displayed impressive resilience with arrivals growing by an annual 16 percent on average. 5.4 percent of GDP can be directly attributed to tourism and 14.9 percent of GDP can be attributed to tourism when indirect and induced impacts are factored in. The sector directly employs 6.5 percent of the country’s formal workforce and 12.5 percent if both direct and indirect jobs are counted. The main constraints for the sector include the high price and poor reliability of air access, the poor road network, policy framework gaps, limitations in tourism infrastructure, inconsistent quality standards, unclear land administration, the supply and cost of electricity, and increasing insecurity. Tourism could become an important contributor to the country’s economic revival through job creation and income generation across the country’s regional and socio-economic spectrum if the constraints were addressed. 6. Agribusiness: Malagasy agriculture generates around 30 percent of GDP and serves as the principal livelihood source for 70 percent of the population. Madagascar produces and exports a large number of cash crops, including cashew, cloves, cocoa, coffee, cotton, pepper, sugar, vanilla and essential oils. For those high value crops, almost 90 percent of the production 87 is sold. Malagasy cocoa is one of the highest quality cocoa products in the world. Malagasy agriculture is characterized by smallholder farms with an average cultivated area of 1.5 ha but only a few of them participate in commercial activities. Fewer than 25 percent of rural households derive a significant portion of their income from sales of agricultural commodities and 40 percent of agricultural output is ever sold. The five major constraints that contribute to Madagascar’s stagnant agricultural sector are: (i) low productivity at the farm level, (ii) high transportation costs, (iii) disorganized marketing channels, (iv) an unfavorable business climate, and (v) weak institutions and inconsistent policies. Madagascar could achieve its national poverty reduction objectives if it builds a modern, commercially-oriented agriculture sector that can compete in domestic and foreign markets. This would require a rise in yields at the farm- level and improved performance of agricultural value chains. More and better use of certification of origin and organic or fair trade certifications could help increase both the quality and price of cash crops. Enhancing quality control and organizing producers along value chains would be essential activities. 7. Textiles and clothing: the Malagasy garment sector is based on FDI in particular from East Asia and Mauritius and it is based mainly around Antananarivo and in the Analamanga region in addition to smaller clusters in the Antsiranana, Vakinankaratra and Diana regions. In 2008, the export-oriented sector covered 108 free-zone enterprises, employing 51,000 staff, and exporting US$937 million worth of goods (HS50-63). The United States absorbed most output until 2009 when Madagascar lost duty-free access to the US market under AGOA. Malagasy exports of textiles and clothing dropped by 51 percent in 2009 and an additional 29 percent in 2010 (to US$330 million). In 2010, the sector employed 39,000. The situation improved in 2011 as exports bounced back by 22 percent with a revival of exports to the EU, which exceeded the 2008 level. Local, non-exporting firms suffered more than international, export-oriented firms. Main impediments are relatively high electricity, water and transport costs, and the unreliable and volatile cotton quality of local producers which has increased the dependency on imports. Burdensome customs procedures, inadequate technical and vocational training, and Air Madagascar and Air France’s air cargo duopoly are other issues raised by the industry. 8. Business process services: international sourcing of IT and business process services (IT-BPO) is a global industry that generates >US$100 bn in export revenue and millions of jobs for young staff with tertiary education and language skills in low- and lower-middle-income countries. Madagascar’s IT-BPO industry is still modest but it has expanded rapidly since 2005 with improved telecoms (through the EASSY and LION cables), very inexpensive skills and decent offices in Antananarivo, and an annual output of 57,000 mostly francophone graduates. Jouve Madagascar and Vivetic employ 1,950 and 1,400 staff respectively, tapping into the US$3.5 bn IT-BPO offshoring market in France. Another four firms have 200-660 BPO agents and a large cluster of companies have less than 100 staff. A five year period of relative stability and trend growth would likely at least triple employment in the sector to 20,000 staff according to sector representatives. It could be a strong jobs platform absorbing the country’s highly skilled but mostly unemployed urban youth. The entry wage for a BPO agent is thrice the monthly wage of a garment worker in Madagascar and yet a third of the entry wage in competing export markets. The main challenges that the sector face are linked to moving up the value chain, generating more firms with scale, organizing the sector, strengthening technical education, improving the reliability and lower the cost of electricity, improving the regulatory and taxation environment, and upgrading select techno parks. 88 9. Mining: while artisanal mining employs up to half a million Malagasy, the mining sector has recently been boosted by the mining investments of Rio Tinto QMM ($1.2bn) in Taolagnaro and Sherritt ($5.5bn) in Ambatovy. Rio Tinto QMM started shipments in 2009 and Sherritt in 2012 and these long-term projects have had a strong impact on Madagascar’s trade and investment flows. But both companies have been victims of the deteriorating governance situation in the country. Rio Tinto QMM announced in the fall of 2012 that it would shelve its plans to develop a new $2bn ilmenite mine in the Anosy Region and few companies have obtained mining permits since 2009 as part of the restrictions under the political roadmap. In Toliara Province, where most identified deposits are located, a large number of mining companies are awaiting mining permits to commence operation once a new administration is in place. An investment boom is expected once the political environment stabilizes and governance improves. 89 Annex 7: Economic and Financial Analysis MADAGASCAR: Second Integrated Growth Poles and Corridors Program (SOP-1) 1. This economic and financial analysis is based on a cost-benefit analysis (CBA) that identifies the costs and benefits to whoever and wherever they accrue. The assessment measures the wider economic impacts on welfare, revenue and trade from the government perspective. The analysis provides an assessment of three sectors: (a) the tourism sector, (b) the agribusiness sector, and (c) the private sector in urban areas. TOURISM SECTOR 2. The growth of the sector has been impaired by political instability and the weak and expensive services provided by the domestic de facto air access monopoly. The most recent period of political unrest that struck Madagascar in early 2009, and which lingered until peaceful elections in early 2014, put an end to years of strong growth in tourist arrivals. International tourist arrivals plummeted by 57 percent in 2009; or from 375,000 in 2008 to 163,000 in 2009. Since then, however, the sector displayed impressive resilience and the number of tourist arrivals grew by an average of 16 percent per year over the last three years—despite the lack of resolution to the political crisis and economic stagnation in Madagascar’s principal source markets in Europe. This is testament to Madagascar’s enduring appeal as well as the sector’s ability to adapt to challenging conditions. The 255,000 international arrivals in 2012 are still lower than the corresponding number in 2008. 3. The objective of tourism support activities under the project is to increase tourist arrivals in the target regions of Diana and Atsimo-Andrefana, and facilitate FDI in the sector. This objective will be met through various activities (investment promotion, improvement of the business environment, strengthening of stakeholders’ coordination, development of new touristic sites, roads rehabilitation, development of sanitary infrastructures (water and sanitation and electricity), and the provision of tailored training programs). FINANCIAL ANALYSIS 4. This section first looks at the internal rate of return (IRR) of a new hotel in Madagascar and in particular in the two target poles. Assumptions are taken from the Enterprise Survey 2014 and it corresponds to a high-standard hotel. The main assumptions are summarized in Table 9. Table 9: Assumptions for a hotel in Madagascar Assumptions Investment per room (US$) 300,000 Costs of raw materials per guest-full time per day (US$) 22 Number of employees (number per room) 2.1 Average salary of employees per month (US$ per employee) 50 Price of a double room per night (US$) 110 Source: ES 2014 and authors’ assumptions * Include food, drinks and other activities proposed by the hotel 90 5. Given these assumptions, the financial balance sheet of the hotel indicate that a 16 percent IRR over a 10-year period requires an 65 percent occupancy rate (average calculated per annum) and daily expenditures for an average tourist (excl. airfares) of US$220. These results have to be compared to the analysis conducted in the Madagascar Tourism Value Chain Study (2007) which indicates that in 2007, a median tourist spent on average US$156 per day (excl. airfares). An increase in daily expenditure seems reasonable if we assume that new marketing strategies, the establishment of high-standard and luxurious hotels and the upgrading of existing hotels will attract wealthier tourists. In addition, the reform of the air sector may result in a decrease of ticket prices. For a tourist, this saving is likely to be partly re-used and spent in the country. Regarding the occupancy rate, the Enterprise Survey 2014 indicates that most hotels reported an occupancy rate equal to about 63 percent during the peak season and about 33 percent during the low season, resulting in a much lower occupancy rate on average over the year than the 65 percent calculated above. 6. This financial analysis indicates that more efforts are needed to: (a) increase the occupancy rate, which means an increase in tourist arrivals but also an increase in the duration of the stay, and (b) attract tourists with a higher purchasing power or willing to spend more on activities in the country. As shown in Figure 6 and Figure 7, the IRR of a high-standard establishment is particularly sensitive to the daily expenditure of tourists at the hotel. This may also explain why there are a handful of high-standard hotels currently operating in the target regions (see Figure 8). As a matter of fact, most hotels in the target poles do not have any international classification while in Nosy Be (target pole of the PIC1), 44 percent of the establishments have a hotel star rating. Figure 6: IRR for a high-standard hotel – Variable Figure 7: IRR for a high-standard hotel – Fixed occupancy rate (%) and fixed daily expenditure (US$) occupancy rate (%) and variable daily expenditure (US$) Note: Here we assume that tourists spend 80 percent of their daily expenditures in the hotel (room price but also food, beverages and any other activities). 91 Figure 8: Proportion of registered hotels by category in 2013 Sources: Ministère du Tourisme, Directions Régionales du Tourisme et Offices Régionaux du Tourisme Economic analysis 7. Most of the project investments provide necessary infrastructure to attract hotel capacity development, enabling regions to support a greater tourist inflow both in existing and new properties. Methodology 8. The economic benefits of the project are based on a projected increase in additional tourist activity in two target poles (both in terms of volume and daily expenditure), compared with tourist activity in the without project situation. Specifically, the economic analysis of the incremental economic benefits from the various activities depends: (a) the additional number of tourists that will come to the Diana and Atsimo-Andrefana Regions staying in existing and future hotel capacity, and (b) the economic rents that will be collected from current and additional tourists. 9. Tourism rents can be captured through airport and visa fees, hotel taxes (room fees, value added tax and income tax) and fees to enter tourism sites, such as national parks and reserves. If GoM, as the owner of these natural resources, is not putting forth the efforts and regulations necessary to capture these rents, they ultimately end up in the hands of the private sector (which is not necessarily bad if rents remain within the country as extra-wage earnings for the local population) or remain in the pockets of tourist (that is, the tourists’ full willingness to pay to enjoy these natural resources is not maximized). 10. Consequently, major categories of incremental economic benefits from the component will be: (a) direct revenues to GoM and local municipalities from tourism (visa fees, hotel taxes), (b) fiscal revenues from additional touristic activities (income tax paid by hotels, restaurants, transportation services, and other services activities), (c) additional revenues for the local population employed in the new hotels or existing hotels experiencing an increase in activity, and (d) the portion of tourist’s willingness-to-pay surplus that can be tapped through an excursion site entrance fee or any other activity, assuming a demand for recreation inelastic to a moderate price or fee. 92 Economic benefits 11. Hotel taxes. Hotels collect a nightly hotel tax on the room, food and other services provided to guest. This tax is between MGA600–3,000 per night, depending on the standard of the hotel. This tax is independent of the total bill and earmarked for the National Office of Tourism. In addition, hotels should pay a 20 percent income tax on net revenue. 12. Fiscal revenues linked to additional touristic activities–new hotels. The economic analysis is based on the assumption that new investment in tourism does not generate a crowd- out effect. In other words, in a pessimistic scenario, the number of tourists would not increase rather tourists will go to new hotels, limiting the revenues generated under the project as a whole. In an optimistic scenario, a new marketing strategy, new air transport routes, new and/or better managed touristic site, and upgraded rural and urban infrastructure will attract more tourists. We assume that the number of tourists is proportional to new investment in the target poles. 13. Fiscal revenue linked to additional touristic activities–additional revenues for existing hotels. As calculated above, the project expects a tourist to spend on average US$220 per day (including hotel room) and stays on average 21 days in the country. This generates additional activity in the poles because visitors spend their money on hotels, restaurants, transportation, guide services, souvenirs and other day-to-day expenditures. Although not all of these expenditures directly benefit the Malagasy economy (for example, vehicles and fuel used for transportation are usually imported), a portion of the expenditure (here we assume 80 percent) can be counted as tourism rents. We consider that each enterprise that is involved in the tourism sector (restaurants, other hotels, transportation services) and benefited from this tourism rent will want to have the same IRR as the hotel taken as reference in the Financial Analysis (see above) and will pay taxes to the government on their revenues. 14. Additional income for new employees. First, new hotels will create new jobs (2.1 per room). According to the Enterprise Survey (2014) and interviews, workers are paid between MGA1.5 million and MGA3.0 million per year (equivalent to US$600-1,200 per year) depending on the type of hotels and qualifications of employees. Second, if tourists spend four nights on average in a hotel, they spend 21 days in total in the country. New visitors will then generate additional activity in existing hotels. These hotels are likely to employ new workers to meet the additional demand. 15. Willingness-to-pay and entrance fees. Many national parks do not impose entrance fees at all and tourists are not asked to comply with any rules or regulations concerning the use of the natural resources. The tourism support program will design and develop well-managed touristic sites and support GoM in setting up the ‘right’ entrance fees and mechanisms to collect them in order for the sites to be financially viable and sustainable. In this analysis, we consider that foreign visitors would pay a fee of about US$11 per site. We also assume that tourists have an elastic demand to moderate entrance fees for excursions and natural parks. Therefore these entrance fees are not part of the daily expenditures (US$220) but are considered an additional expenditure. Half of this revenue is given back to the local authorities. We assume three visits per tourist per stay. 93 Economic Costs 16. Economic costs associated with the tourism support activities are:  Investment Climate and Investment Promotion will help attract investors and indirectly affect the rooms and the number of visitors;  Strengthening the enabling environment for tourism sector (US$5.8 million) will affect: (a) the crowd-out effect – without a proper marketing strategies, the number of new visitors will be smaller and existing tourists will go to new hotels, lowering the impact the additional touristic activity; (b) the daily expenditures. In particular, the development of new air transport routes will increase competition among companies, decreasing ticket prices and increasing visitor’s daily expenditures; and (c) the establishment of an entrance fee for national parks and new sites being designed and developed under the project;  Regional Tourism Sector Development (US$5.0 million) will affect: (a) the crowd-out effect (see above), (b) develop new touristic sites, thereby affecting the number of national parks that tourists will visit during their stay in Madagascar;  Urban and rural road infrastructure and water, sanitation and solid waste management will affect the number of tourists visiting the country;  Local governance activities will affect the amount of money flowing to municipalities; and  Training programs (US$1.5 million attributed to tourism) will directly affect worker productivity and indirectly the daily expenditures. Results and Scenarios 17. Results for PIC2-1. A study on potential investors in tourism financed under the PPA resulted in expressions of interest for investing in tourism in the targeted regions from seven companies, for a total of US$145 million in the Diana Region and US$123 million in Atsimo- Andrefana Region. The Atsimo-Andrefana region has experienced a substantial growth in hotel developments over the last years. The number of rooms has more than doubled in these regions between 2005 and 2013 (from 730 to 1465 rooms). For Phase I, we estimate that by 2024, some US$60 million and US$45 million will be invested in hotels in the Diana and Atsimo-Andrefana Regions respectively. Overall, this will translate into 1,500 new rooms, i.e. a 60 percent increase compared to the current situation. For these hotels to be profitable (about 16 percent IRR), the number of tourists has to increase substantially. If we assume that 60 percent of the tourists will visit both places, the total amount of investment needs to translate into 19,000 additional tourists minimum per annum by 2024. If this number seems realistic given the current tourist arrivals in 2012 (255,000), it will likely be driven by exogenous factors, such as improved political stability. 18. Results for PIC2-1 and PIC2-2. The overall SOP will translate into a total of 140,000 new tourist arrivals in the country by 2024. 94 AGRIBUSINESS SECTOR 19. Malagasy agriculture generates around 30 percent of GDP and serves as the principal livelihood source for 80 percent of the population (INSTAT). Madagascar produces and exports a large number of cash crops, including cashew, cloves, cocoa, coffee, pepper, sugar, vanilla and essential oils. For these high value crops, almost 90 percent of the production is sold. Exports (both in volume and value) decreased from 2008 to 2010 but are increasing since 2011. Malagasy agriculture is characterized by smallholder farms with an average cultivated area of 1.5 ha but only a few of them participate in commercial activities. Fewer than 25 percent of rural households derive a significant portion of their income from sales of agricultural commodities and 40 percent of agricultural output is ever sold. 20. The objective of the agribusiness support program is twofold: (a) to boost exports for target cash crops; and (b) to promote inclusive growth through larger benefits accrued to the rural population and producers and an increased productivity. These objectives would be met through various activities (improvement of the business environment, strengthened coordination along the value chains, support to key research institutions and TVET institutes, the provision of tailored training programs, rural road rehabilitation, construction of key priority projects in villages, etc. 21. This analysis covers the two main value chains: (a) cotton in Atsimo-Andrefana, and (b) cocoa in Diana. Methodology for the economic analysis 22. The economic benefits of the project are based on a projected increase in agriculture production in two target poles but also an enhanced organization of the value chains that will lead to a better redistribution of benefits across the value chain. This will be compared with agricultural production and revenues in the without project situation. Specifically, the economic analysis of the incremental economic benefit from the various activities depends on: (a) the number of additional producers that will participate in the cotton and cocoa value chains in the Diana and Atsimo-Andrefana Regions; and (b) the yields for each of these cash crops (or in other words, the productivity of farmers). 23. As for tourism, there are many ways of capturing the benefits of the project. One is to look at exports and contribution to GDP. Another is to assess the impact at the micro level by considering the key stakeholders of the value chains (producers, collectors, exporters) and the revenues accrued to GoM. This analysis is based on the second option. Consequently, major categories of incremental economic benefits from the component will be: (a) fiscal revenues to GoM and local municipalities from additional economic activity generated in the two regions; and (b) additional revenues for producers. Economic benefits 24. Additional revenue for producers. The value chain studies indicate that along the Sambirano river (Ambanja district), about 33,000 people (on 23,000 ha) are involved in cocoa production. However, two-thirds of the production is only accessible by boat, motorcycle, or walking, thereby lowering the total production, discouraging producers to invest in their cocoa 95 trees and/or leading to very thin margins for producers. Cocoa represents 60-80 percent of farmers’ revenues; the remaining is earned from vanilla, pepper and coffee as well as other activities. The average yield is 300-500 kg of dried cocoa per ha per year. The actual purchasing price is MGA1,200-1,800 per kg. The overall program will open up new regions, thereby increasing the number of producers involved in cocoa production and the number of cultivated and marketed land (up to 50,000 additional ha). Training programs, inputs and equipment will also increase the yield (up to 650 kg per ha) and increase the quality of the product. An enhanced coordination among the various stakeholders (producers, collectors and exporters) may bring transparency to the functioning of the value chain and lead to a more equitable redistribution of margins across the actors in this value chain. Figure 9: Purchasing price, costs and margins for stakeholders along the cocoa value chain (for 3 kg of fresh cocoa or 1 kg of dried) 6500 6000 5500 5000 4500 4000 Producer Producer with Collector Exporter PH activities Price Costs Margin Source: Authors’ computation from field interviews 25. About 30,000 producers (50,000 ha) are involved in cotton production. Based on the assumption that a farmer has 2 ha with an average yield of 650 kg per ha, a farmer produces about 1.3 ton of raw cotton a year. Cotton production requires a substantial amount of inputs, which are usually pre-financed by an exporter (about MGA430,000 per ha). The current purchasing price of cotton in Madagascar is MGA840/kg. Similarly to cocoa production, the project will lead to new arable land being used for cotton, thereby increasing the number of ha with cotton (about 50,000 additional ha). In addition, the project will support farmers in increasing their productivity (up to 1,000 kg per ha). Economic Costs 26. Economic costs associated with tourism are:  Strengthening the enabling environment for agribusiness sector (US$2.5 million) will help producer associations to coordinate, thereby increasing the transparency of the sector;  Regional Agriculture Sector Development (US$4.0 million) will raise the quality of the products being targeted under the project (thereby increasing the export prices) and provide inputs and equipment for farmers to increase productivity; 96  Urban and rural road infrastructure will increase the number of farmers involved in agricultural production.  Local governance activities will finance priority projects for each fokontany (US$1.0 million), especially water sources, water sanitation, inputs for agriculture, thereby increasing the production of workers in these fokontany; Economic Benefits 27. Phase I of the project will lay the foundations for a sound development of cash crop value chains but rural infrastructures will be financed under Phase Two. Technical assistance to farmers, a better coordination and organization of the value chains and a higher transparency of price setting will improve farmers productivity and rent, albeit not substantially. With Phase One only, the project will result in a slight increase in dried cocoa production from 5,000 tons in 2014 to 8,000 tons in 2019 and in ginned cotton from 11,000 tons to about 17,000 tons in 2019. 28. With Phases One and Two of the SOP, we find that the project will boost cocoa exports from about 5,000 tons of dried cocoa in 2014 to 21,000 tons in 2020 and the cotton exports from 11,000 tons of ginned cotton to 36,000 tons in 2020. It will result in a substantial increase in income for farmers that are involved in these two value chains. URBAN DEVELOPMENT AND PRIVATE SECTOR 29. The project will support urban development in all its aspects and will therefore foster the development of a private sector in the target poles. Urban development nurtures economic growth through different channels. First, urban transportation projects alleviate poverty, in particular because improved transportation access might increase the likelihood that individuals are employed, or allow already employed persons to access better jobs, or simply reduce commute times and possibly increase individual welfare. Second, urbanization and improved transportation systems foster the creation of new firms. As a matter of fact, a better connectivity may increase the relative attractiveness of the location but also the concentration of firms is likely to bring important economies of scale and/or enhance firm-level productivity (better knowledge spillovers, match between workers and employers resulting in higher labor productivity and lower search costs for skills). To the extent that profit seeking entrepreneurs are drawn to more productive locations, it will result in higher firm birth rates than elsewhere. Third, as a result, more productive regions will grow more rapidly than less productive regions. Therefore these regions will exhibit higher employment growth. The economic analysis here assumes that improved access to basic services, enhanced urban transportation systems and a more conducive business environment will increase the number of new firms (both formal and informal) in the target regions: an average 210 new firms per annum in Antsiranana (compared to 160 without project) and 136 new firms in Toliara (compared to 105 without the project). This translates into additional revenues for the municipalities, which falls into the ‘fiscal revenues’ category. Based on the experience of the PIC1 project, new registered firms are mainly micro-firms. Therefore, the economic analysis is not capturing job creation here. 97 Annex 8: Map of Madagascar with Spatial Focus Areas MADAGASCAR: Second Integrated Growth Poles and Corridors Program (SOP-1) 98