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The World BankFOR OMCIAL USE ONLY

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Report No. P-4438-MAG

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN AN AMOUNT OF SDR 19.8 MILLION (US$ 25.0 MILLION EQUIVALENT)

TO THE

DEMOCRATIC REPUBLIC OF MADAGASCAR

FOR AN

ENERGY PROJECT

April 9, 1987

I This documcnt has a restricted distribution and may be used by recipienis only in the performanceof their official duties. Its contents may not otherwise be discicqed without World Bank authorization.

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DEMOCRATIC RlEUBLIC OF MADAGASCAR

CURRENCY EgUrIVATgNTS

Calendar 1986 January 19117

Currency Unit Malagasy P onc (FMG)US$ 1.00 - FHG 676 FMG 755FMG 100 - US$ 0.15 USS 0.13SDR 1.00 11U$ 1.11 US$ 1.25US$ 1.00 - SDR 0.85 SDR 0.80

EKchange rate used in Appraisal and President'a Reports USS 1o00 FMG 750 (amof July 1986),

WEIGHTS AND MEASURES

1 cubic meter (m3) - 35.29 cubic feet1 kilometer (km) - 0.621 mile1 kilovolt (KY) - 1,000 volts1 megawatt (MW) - 1,000 kilowatte1 gigawatt hour (G0H) - I million kilowatt hours (KWH)1 ton of oil equivalent (toe) - 10,500,000 kilocalories1 gigawatt (OW) - 1,000 MW1 hectare (ha) - 2.47 acre

ABBREVIATIONS

BADEA - Banque Arabe pour le Developpement Economique enAfrique (Arab Bank for Economic Development in Africa)

INI - Banque Nationale pour l'Industrie (NationalBank for Industry)

CCCE - Caisse Centrale de Cooperation Economique (France)CIDA - Canadian International Development AgencyDEE - Department of Electricity and WaterDEF - Department of Fishery and ForestryDGP - Planning DirectorateESMAP - Energy Sector Management Assistance ProgramFAC - Fonds d'Aide et de Cooperation (France)FANALAMANGA - Malagasy Industrial Wood Plantation AuthorityFAO - Food and Agriculture OrganizationFED - Fonds Europ;en de Diveloppement (European

Development Fund)GOM - Gover nment of MadagascarICS - Inter-Connected SystemJIRAMA - Malggasy Electricity and Water CorporationMIEM - Ministry of Industry, Energy and MinesMPAEF - Ministry of Animal Production, Fisheries and ForestsMPABA - Ministry of Agricultural Production and Agrarian

ReformOMNIS - National Military Office for Strategic IndustriesPSIP - Public Sector Investment ProgramRIP - Power Sector Reference Investment ProgramSOLIMA - Malagasy National Petroleum CompanyUNDP - United Nations Development ProgramUSAID - United States Agency for International DevelopmentEZ - Major Power Production Zone Outside ICSIZ - Small Isolated Power Systems

FISCAL YEAR

January 1 - December 31

FOR OFFICIL USE ONLY

MADAGASCAR

ENERGY PROJECT

CUEDIT AND PROJECT SUMMARY

Borrowers Government of Madagascar.

Amounts SDR 19.8 million (US$25.0 million equivalent).

Beneficiaries: The Malagasy Electricity and Water Corporation (JIRAMA);the Ministries of Industry, Enqrgy and Mines, ofAgricultural Production and Agrarian Reform and of AnimalProduction, Fisheries and Forests; public enterprLsesinvolved in the boiler program; local private charcoalers;and the Hmlagay Industrial Wood Plantation Authority(FANALAMANA).

Terms: Standard IDA terms.1i

ProlectOblectives: The purpose of the credit is to: help the Government and

JIRAMA improve the reliability of power production andsupply through the rehabilitation and expansion of existinginfrastructure; strengthen JRAMA&'s financial andoperational performance; maximize the commercial use ofexisting hydropower resources and other economicallyaccessible household energy resources; and strengthenenorgy sector institutions, particularly in the area ofpolicy formulation, planning, and investment programming.

ProlectDescription: The project would finance the hlghost priority components

of JIRAHA's investment plan for 1987-92, and equipment andtechnical assistance for strengthening energy sectorplanning capability and developing economically accessibleenergy resources. The project consists of the followingmain components: (a) for the power sector: rehabilitationand expansion of high-priority generating plants andtransmission and distribution facilities; provision oftelecommunication equipment and vehicles and related spareparts; mobile maintenance equipment, computer hardware andsoftware in support of planning and investment programming;staff training, technical assistance and studies; andinstallation of electric boilers to use the surplushydropower in the Inter-Connected System; and (b) for theenergy sector: equipment for production of pine charcoaland rice husk briquettes; and technical assistance andstudies to strengthen energy planning and support householdenergy demand strategy formulation.

I/ Onlending terms to IrRAhA would be 1.1 times the interest rate of the Bankat the time of Board presentation for a period of 25 years including agrace period of 5 years.

This document has a restricted distribution and may be used by recipients only in the performanceof their oficia duties. Its contents may not otherwise be dislobsed without World Bank authorization.

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Beneflt.: By reducing outages, the proposed project would help tostabilize power supply, facilitate Industrial output andexport growth, and the connection of new domesticconsumers. It would lead also to savings In imported fueloil and coal, as well as to sound financial management inJIRAM& and energy sector investment planning and investmentprogramming.

Risks: The two main risks facing the project are that: JIRAMAcould have difficulty in administering the rehabilitationworks and Government could delay required tariff increasesand other financial measures. These risks would beminimized by the hiring of consultants to assist with theimplementation of the rehabilitation program and throughthe careful definition of precise conditions tied to therelease of the proposed IDA credit. Other major physicalrisks are minimal since the project concentrates mostly onrehabilitation and JIRAMA has a good record of safeengineering practices.

Local Foreign Total-5- US$ Million -------

Estimated Costs

I. Power componentsGeneration 1.9 13.4 15.3Transmission and Substations 0.6 2.2 2.8Distribution 1.1 11.1 12.2General Plant 0.0 4.4 4.4Power Sector Institution Building 0.3 0.9 1.2Feasibility Studies 0.1 1.0 1.1Electric Boiler Program 0.2 1.4 1.6

Sub-Total Power Components 4.2 34.4 38.6

II. Energy componentsHousehold & Industrial Fuels Production 0.1 1.2 1.3Energy Planning Support 1.8 2.8 4.6Studies 0.0 0.6 0.6

Sub-Total Energy Components 1.9 4.6 5.5

ProIect Preparation 0 0.9 0.9

Base Cost 6.1 39.9 46.0

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Contingeancess Physical 0.4 2.6 3.0Price 0.4 2.3 2.7

Duties and Taxes 8I1 0.0 8.1

Total Project Cost 15.0 44.8 59.8

Local Foreign Total-------US$ Million-------

Financing Plan

IDA 25.0 25.0EIB 14.4 14.4BADEA 5.4 5.4JIRAMA 10.5 - 10.5Others 0.2 - 0.2Government 4.3 - 4.3

Total Financing 15.0 44.8 59.8

Estimated IDA Disbursements

Bank Fiscal Years 1988 1989 1990 1991 1992---- US$ Million -

Annual 1.0 4.0 7.5 7.0 5.5Cumulative 1.0 5.0 12.5 19.5 25.0

Economic Rate of Return: 33 percent for the JIRAHA power system46 percent for the Inter-Connected System alone

Appraisal Report: 6405-MAG

Na-p:. IBRD No. 18816

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT

TO THE DEMOCRATIC REPUBLIC OF MADAGASCARFOR AN ENERGY PROJECT

1. I submit the following report and recommendation on a proposedIDA credit of SDR 19.8 million (US$25.0 million equivalent) to theDemocratic Republic of Madagascar on standard IDA terms to help finance anEnergy Project. Out of the credit proceeds, (a) US$17.9 million would beonlent to JIRAMA at 1.1 times the Bank's interest rate at the time of Boardpresentation for 25 years including a grace period of 5 years; and (b)US$1.8 million would be channeled through BNI, to private charcoalers andselected enterprises for the purchase of electric boilers to use surpluspower generated by JIRAMA. Cofinancing for the project is expected to beprovided by the European Investment Bank, and by BADEA.

PART I - THE ECONOMY

2. A report entitled "Current Economic Situation and Prospects"(Report No. 5996-MAG) was distributed to the Executive Directors and toparticipants in the Madagascar Consultative Group in March 1986. Itsconclusions as well as the results of IMF negotiations on a Sixth StandbyProgram are reflected below. Country data sheets are provided in Annex I.

3. With a population of 10 million and a per capita income of US$250in 1985, Madagascar is one of the poorest countries in the world. Thecountry is sparsely settled, with a population density of about 17inhabitants per square kilometer. While generally well endowed withnatural resources and a variety of soils, there are large regionalvariations in ecology and climate. Agriculture is the mainstay of theeconomy, providing employment for 85 percent of the population, creatingtwo fifths of GDP and generating more than 80 percent of export earnings(coffee, vanilla and cloves).

4. The years following 1972 marked a turning point in Madagascar'spolitical and economic development. The government that took office in1972 emphasized national control of the economy. It introduced inward-looking policies aiming at self-sufficiency in industry and agriculture,nationalized most of the larger private companies (which were essentiallyforeign-owned), and established direct or indirect state control over thegreater part of agricultural marketing. A new system of regional and localgovernment (the fokonolona system) was introduced, intended to provide fordecentralization within a framewqrk of centralized control. The presentregime, which came to power in 1975, intensified, extended, and codifiedthese policies. Pricing policies became biased in favor of urbanconsumers. Fiscal and external economic policy remained cautious throughmost of the decade, and the level of public external debt was extremelylow. In 1978, however, Government decided to diversify the economy, takingadvantage of Madagascar's borrowing potential, and adopted a policy of

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"all-out investment." Many new parastatal companies were created.Unfortunately, many of the projects selected made very little contributionto GNP, exports, or debt-servicing capacity, so that by 1980 the debtservice ratio was rising sharply.

5. From 1973 to 1982, real per capita GDP fell by an estimated28 percent. The main factors behind this decline were: (a) the persistentclimate of uncertainty within the private sector created by thenationalizations of the mid-1970s, combined with the rapid expansion of aninefficient and unmanageable public sector; (b) excessive marketregulation, through price fixing and controls that favored urban consumers,restrictive licensing legislation, quantitative import restrictions andexchange controls, and the establishment of national and regional marketingmonopolies (cereals, agricultural inputs, basic comnodities, road and seatransport, financial institutions); and (c) the neglect of smallholderagriculture in favor of import-substitution manufacturing, includingenterprises of dubious economic value.

6. The financial crisis that started in 1980 was the result both ofinappropriate policies and of external shocks. While export prices flaggedand international oil prices doubled, GDP and export volumes continued todecline, the budgetary deficit rose to 18 percent of GDP, domesticinflation reached 30 percent per year, external debt service obligations(before rescheduling) relative to exports escalated from about 4 percent in1978 to a peak 90 percent in 1985, and the current account deficit of thebalance of payments reached 18 percent of GDP. As resource constraintstightened, domestic investment plummeted. Under the impact of heavyexternal payment obligations, declining export earnings, and reducedcreditworthiness, severe foreign exchange shortages prevailed. Importconstraints, the severe rationing of foreign exchange, and an overvaluedexchange rate contributed to a sustained decline in industrial andagricultural production.

7. Faced with an unsustainable external current account gap,Government began to implement stabilization measures in 1981 with IMFassistance. From 1983, aggregate expenditure was steadily reduced andgross domestic savinge increased. Among the notable measures taken tocontrol demand were the abolition of consumer subsidies and tight monetarymanagement. Sustained austerity combined with measures to boost revenueshelped reduce the budget deficit;and inflation. Measures were also takento restore production incentives. Throughout 1982-85, the FMG underwent areal depreciation of 25 percent vis-a-vis the SDR, and a further 20 percentdepreciation was implemented in August 1986. Public sector tariffs wereincreased, while a program of liberalization of prices and markets wasundertaken in the agricultural, industrial, and transport sectors.

8. Between 1980 and 1985, agricultural output fluctuated. Productionof rice remained at around 2 million metric tons of paddy per year.Madagascar had to continue importing rice throughout the period, althoughthe volume imported declined steadily from a peak 356,000 metric tons in1982 to about 105,000 metric tons in 1985. The decline in rice imports,however, was due to foreign exchange scarcity rather than any markedincrease in domestic self-sufficiency. Production of other food crops(maize, potatoes, cassava, sweet potatoes) grew steadily and significantly,following higher demand for these crops as a result of increased riceprices. Coffee exports since 1982 averaged 50,000 tons per year, compared

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to 70,000 tons in 1980. The decline was the result of low producer prices,shortages of inputs and transportation bottlenecks. Cotton production grewrapidly in response to increased producer prices and, with the support of aproject financed by IDA and France, Madagascar became a net exporter ofcotton fiber. The production of other industrial and export cropsgenerally stagnated (e.g., tobacco and pepper) or declined (e.g.,groundnuts) due to inappropriate pricing and marketing policies whichreduced incentives to producers and traders. The output of two otherprincipal export crops, vanilla and cloves, was stagnant in the face oflimited world market demand.

9. Industrial output declined sharply between 1980 and 1984 with amodest recovery in 1985 and 1986. Industrial manufacturing capacity hasbeen heavily underutilized in recent years owing to shortages ofdomestically supplied and imported inputs and spare parts. Theconstruction industry also remained slack. On the policy front, Governmentinitiated positive changes, easing pricing controls, improving theadministration of foreign exchange allocation, and legislating a newInvestment Code aimed at attrseting foreign private investors. Aliberalized import regime is being implemented which will eliminatequantitat'ive restrictions on about 15 percent of merchandise imports.

10. Owing to the slow growth of agriculture and industry, transportactivity also stagnated. Costs escalated due to the dilapidated state ofthe transport system. Low admin.'stered tariffs reduced incentives toprivate transporters, thus further discouraging the provision of services.To improve the transport system and the policy environment, Governmentselected an "economic network" of about lO,000 kms of primary and secondaryroads for priority rehabilitation; established a road fund for maintenance;and permitted tariff increases for the roads, railways, and the nationalairline. A national transport plan is now being prepared with IDA support.

11. Public Finance. The "all-out investment" campaign of the late1970s caused an unprecedented growth in public capital expenditures. Itwas largely financed by external loans and substantial budget deficits,leading to the accumulation of arrears. Between 1981 and 1985, the bulk ofthe fiscal adjustment was accomplished by cutting capital expenditures,reducing general Government activity, containing the expansion of thepayroll, and phasing out budgetary subsidies to parastatals (many of whichsubsequently became indebted to the banking system). Given the low levelof activity of the economy, attempts to increase revenues were generallyless successful. The magnitude of the overall budgetary deficit, whichstood at 18 percent of GDP in 1980, was reduced to 4.5 percent in 1985.Current budgetary deficits were eliminated from 1983 on, so that theGovernment was in a position to contribute to development expenditures.Nevertheless, the size of the current surplus remains small relative topublic investment needs, so that the execution of a number of foreign-financed projects is stifled due to the lack of local cost financing.

12. Monetary developments during 1980-85 were generally in line withfiscal developments, reflecting implementation of stabilization measures.Throughout the period, the growth of credit to Government was reduced and,beginning in 1982, credit to the non-government (i.e., parastatal andprivate) sectors generally expanded faster than credit to the Government.Domestic inflation was reduced, from about 30 percent in 1981 and 1982 toapproximately 11 percent in 1985. The reduction of inflation during theperiod was all the more remarkable in that it occurred at a time when theMalagasy Franc was depreciating.

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13. Madagascar's balance of Payments remained weak throughout 1980-85,despite substantial annual reductions in the volume of imports to the pointof adversely affecting economic activitiss. The position remaiAed weakowlng to poor export performance and heavy debt service payments.Stabilization efforto throughout the period led to steady and markedImprovements in the resource and current balances. In 1985, the resourcegap (US$140 million) and current account deficit (US$258 million) hadfallen to 25 percent and 45 percent of their respective 1980 levels.

14. Based on the external debt portfollo at and 19B6 and after takinginto account pipeline disbursements, Madagascar will need gross capitalinflow of about US$450 million per year during the 1987-90 period to covercurrent account deficits, meet scheduled debt repayments, and maintain amodest amount of gross reserves. The country will therefore continue toneed increased financial assistance from the international community in theform of grants, concessional borrowings and debt relief. The conditionsunder which Madagascar is able to obtain new finance and reschedule thedebt are of crucial importance and will determine whether the country willbe able to overcome present external payment constraints, even with a high-quality policy program.

15. Financial Strategy. Sincc the emergence of the debt crisis at thebeginning of the 1980s, Madagascar has managed the balance of payments bycutting imports, through the demand management measures described above,complemented by substantial debt rescLeduling. These measures are verycostly, involving disruption of economic activity and refinancing of someoriginally concessional loans at less concessional terms. Even moreimportant, they have yet to lead to a viable balance of payments, which canonly be achieved by restoring growth in export earnings. Madagascar nowhas probably reached a limit to further cuts in imports as these are downto bare essentials. While the country's creditors may continue to accorddebt rescheduling, to generate significant amounts of debt relief therescheduling arrangements would need to be more concessional thanpreviously. In the future, therefore, Madagascar must attempt to boostexport earnings as a means of strengthening the balance of payments andreducing the debt burden. Concessional balance of payments support willcontinue to be needed.

16. Relationship with the IMF. The Government complied with theperformance crlteria of the Fifth Standby Agreement signed in April 1985.Most of the important program targets were achieved. A Sixth StandbyProgram was approved by the Fund Executive Directors in September 19B6, andthe first review of it was completed by the Fund Board in March 1987.While continuing measures to stabilize the economy, the program emphasizesthe promotion of economic growth by means of further liberalization of theexternal account, the rehabilitation of selected parastatals, improveddomestic producer prices and marketing systems, and a substantial stepdevaluation of the FMG. Madagascar is eligible for IMF StructuralAdjustment Facility resources, and a medium-term program is beingformulated with the help of the Bank and the IMF.

17. The third meeting of the Consultative Group for Madagascar tookplace on April 25 and 26, 1986. The participants agreed that theGovernment's program of policy reforms was on the right path and it wasurgent that It be pursued and developed further. It was recognized that ifGovernment's efforts were to succeed, Madagascar needs substantial externalsupport. This would be provided by a combination of higher official

development asuimtance, particularly in the form of quick disbursing aid,and debt rescheduling. Agreement on rescheduling was reached at a meetingof the Paris Club on October 25, 1986, and the Consultative Group isexpected to moet again in late 1987.

PART II- BANK GROUP OPERATIONS IN MADAGASCAR

18. Overall Lending Lbvels and Sectoral Composition. As of September1986, IDA credits to Madagascar amounted to US$607.9 million (includingUS$29.9 million from the Special Fund) and Bank loans totaled US$32.6million. Bank Group assistance to Madagascar has been concentrated oninfrastructure, including urban and social infrastructure (48 percent oflending), agriculture and industry (41 percent), and onergy (11 percent).IFC has four investments in Madagascar, in textiles, footwear, andfisheries. Annex II contains a summary statemont of past loans and IDAcredits as of September 30, 1986.

19. Energv lending. The energy sector has received growing Bank Groupattention. In 1978, IDA participated with several co-lenders in thef.nancing of the large Andekaleka hydroelectric project, which wassuccessfully completed in June 1982. The Petroletum Exploration PromotionCredit (US$12.5 million) and the Tsimiroro Heavy Oil Exploration Credit(US$11.5 million) approved respectively in 1980 and 1982, have bothsupported Government's efforts in attracting foreign oil companies forexploration development.

20. Infrastructure Lending. The Bank has supported eleven transportprojects with IDA credits totaling US$201.8 million. Six credits (US$147.2million) were for the construction, maintenance, and rehabilitation ofhighways; two (US$23.6 million) in 1970 and 1986 to improve Madagascar'smain port of Toamasina and sector institutions; and three (US$31.0 million)to support the railway's modernization efforts in 1974, 1979, and 1986.Out of the eleven projects, seven have been completed. Urbaninfrastructure development benefited in 1980 from a Water Supply andSanitation Credit for the capital city of Antananarivo (US$20.5 million)and an urban development project (US$12.8 million) in 1984. In 1984, IDAresponded to the need to reconstruct cyclone damage with a US$15 millioncredit. A supplemental credit of US$10 million, following the March 1986cyclone, was signed in August 1986.

21. Agricultural Lending. The Bank has supported 15 agriculturalprojects, of which five have been completed. This has included projects inlivestock development (three), irrigation (four), agricultural institutiondevelopment (two), forestry (two), agricultural credit (one), riceintensification (one), and cotton development (one). An AgriculturalSector Adjustment Credit, with complementary Special Facility for Africaand Special Joint Financing resources, was approved in May 1986.

22. Other Lending. In 1980, a US$5 million credit was made to theIndustrial Development Bank of Madagascar. An Industrial Sector AdjustmentCredit of US$40 million became effective in August 1985, and a SupplementalCredit of US$20 million from the Special Facility for Africa was approvedin December 1985. In the social sectors, education has been the majorrecipient of Bank assistance, with two credits in 1967 and 1976 totalingUS$11.8 million. A credit of SDR 9.4 million (US$11.5 million) for anaccounting and audit training project was approved in 1981; and a second

credit of US10.3 million for management and acccQnting training inFebruary 1986.

23. Implementation Problems. Problems encountered in the execution ofa number of projects included mainly delays, cost overruns, deficiencies inmanagement, and inadequate financial performance. Current problems centeron difficulties linked to the country's economic crlsis, notably the acuteshortage of foreign exchange and budget funds, and Institutional problemswith the parastatal system. The Bank has addressed generic issues in partthrough Country Implementation Reviews, technical assigtance and secondmentstaff. The Government h%s been responsive and there have been improvementsin Government portfolio management.

24. Prolect Evaluation. Eight completed projects have been auditedby the Operations Evaluation Department. Audit Report No. 1622 of December1976 on the first Lac Alaotra project concluded that the project wasgenerally successful. However, the Impact Evaluation Report No. 3600 ofAugust 1981 concluded that earlier assessments of project performance hadbeen over-optimistic, and that the actual rate of return was probablynegative. Audit Report No. 1143 of April 1976 of the first EducationProject concluded that the education and manpower training objectives weresatisfactorily achieved. Report No. 2143 of July 1978 concluded that theThird Highway project was well justified and had a satisfactory rate ofreturn despite substantial cost overruns. Report No. 2299 of December 1978concluded that the physical objectives of the Tamatave Port project weresatisfactorily achieved, but pointed out that the institutional objectivewas not accomplished during project implementation because of inadequaciesin the staffing of the port authority. Report No. 5434 of January 29,1984, on the first Railway Project concluded that due to overruns anddelays, the scaled-down project had an estimated rate of return of lessthan 10 percent. Report No. 5403 of December 28, 1984, covered twoagricultural projects: the Morondava Irrigation and Rural DevelopmentProject was a profoundly disappointing operation, but the Village Livestockand Rural Development Project contributed to laying the groundwork for moreeffective services for traditional livestock owners, with good prospectsfor sustainability.

25. Bank Stratexy and Future Program. The Bank strategy is to supportthe Government's efforts to rehabilitate and restructure the economy by:(a) promoting policies and programs aimed at reforming incentivestructures, setting a more favorable climate for private sector initiativeand investments, and providing financial and other support for appropriatepolicy prograns; (b) supporting sectoral strategies aimed at rehabilitatingproductive infrastructure and establishing conditions for long-term growth,and providing financial and technical assistance for these programs; (c)strengthening the institutions responsible for sectoral policy formulationand management; and (d) helping Madagascar to mobilize and to makeeffective use of donor financial and technical support.

26. Lending Program Development. On the assumption of continuedGovernment responsiveness, the Bank plans to support Government adjustmentefforts with sectoral and, possibly, structural adjustment lending.Further sector adjustment operations in agriculture and industry are beingprepared. These would support continued market deregulation, exportpromotion, cost recovery, private investment, parastatal reform, andrehabilitation of productive and economic assets. The program would alsoaddress longer term issues in human resource development, health,

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agricultural research, and forautrylenvironmentsl degradation. Overall,future landing would concentrate mainly on agriculture, Industry, andtransport.

27. Tho main vehicle for aid coordination has bean the ConsultativeGroup (CO). An Important element of the Bank country assistance strategyhas been to make the CG a more effective means of addressing Madagascar'seconomic and financial problems, with a belief that donor and creditorsupport of a comprehensive financing stratogy, combined with a soundGovernment program to stimulate real growth, would offor the best prospectsfor future development.

28. Economic and Sector Work. Tho Bank Group economic and sector workprogram for the next three years is intended to support the identificritionof future adjustment measures, am wll as donor coordination within the CGframework. It Is directed at parastatal reform, improvement in sectorplanning and public investment program formulation, and development of acore medium-term lending program. UNDPIIBRD technical assistance projectsto assist the Directorate-General for Planning in investment planning andaid coordination have recently been signed. A study of the population andhealth sector has recently been carried out. The Bank Group is alsoproviding technical assistance in policy analysis and selectiveinstitution-building; two Bank staff members have been seconded to assistthe Government (irn public lnvestment programning and ln the management ofthe livestock sector). The Bank's Resident Mission has been strengthenedby a resident economist.

PART III. THE ENERGY SECTOR

29. Madagascar's main indigenous energy resources are hydropower,woody biomass from forests and agriculture, heavy oil and oil shale, coal,and peat. Although Madagascar is endowed with substantial energyresources, economically recoverable quantities are not known as theirphysical and technical accessibility is generally difficult. Inefficientplanning and coordination within the sector has resulted in inadequateutilization of those resources that are economically accessible,particularly in hydropower and woody biomass.

30. In 1984, at the request of the Government, the Bank conducted anoverall assessment of the energy sector under the joint UNDP/World BankEnergy Sector Assessment Program. The study concluded that sector issuesrequiring the most urgent actions are (a) deforestation and the relatedenvironmental deterioration; (b) poor condition of power subsectorinfrastructure; (c) substantial under-utilization o existing hydropowersurplus available from the Andekaleka hydroelectric generating stationwithin the inter-connected zone; (d) definition of the future form ofpetroleum product supply and the need to assess the viability of andoptions for rehabilitating the SOLIMA refinery and its distribution system;(e) inadequate definition of the physical availability and the economicaccessibility of the major potential energy resources, particularly inregard to hydropower and woody biomass; and (f) general weaknesses inenergy policy formulation and planning.

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Energy Resources and Network

31. Electric Power. The total installed capacity in Madagascar is 267MW, of which 77 percent is owned by the public sector, managed by JIRAMA,the Malagasy Electrici4y and Water Corporation, and 23 percent by theprivate sector. The public power system comprises 169 diesel generatingunits and 30 hydropower generating units with a combined installed capacityof 205 MW. The public supply is organized in three supply zones: theInter-Connected System (ICS), the External Zone, and the Isolated Zone,with the major supply zone being the hydropower-dominated ICS. In 1985,the ICS included 51 percent of the total installed capacity in the publicsector and provided 64 percent of total electricity (318 GWH) supplied fromthe public sector, 73 percent of which was generated from hydropowergeneration capacity (105 MW). All urban centers are served by electricityprovided from public supply. Only 6 percent of the total population isconnected to electricity, and per capita consumption is 33 KWh per year;the level of electrification in Madagascar is relatively low by regionalstandards.

32. Very little of Madagascar's hydropower potential has beenexploited, due in part to limited information on the potential toeconomically displace existing diesel generating plants with micro-hydropower installations and to the absence of a comprehensive least-costdevelopment plan. Weaknesses in Government investment planning have led toa serious imbalance within the system between generation expansion (thereis excess hydropower in the ICS) and maintenance and rehabilitation of theexisting infrastructure. Electricity supply in Madagascar from hydropoweris expected to grow from 68 percent of total public supply in 1985 to 84percent in 1995. A medium-term strategy for the power subsector is tointer-connect major isolated power systems to stabilize supply and increasethe consumption of hydropower in substitution for imported fuels.

33. Petroleum. Most exploration has been concentrated in theMorondava basin located in the west, where tar sands and heavy oil depositshave been found. Deposits in this basin are estimated to contain roughly 5to 20 billion barrels of oil equivalent. Since 1979, some majorinternational companies, notably Mobil, AGIP, Amoco, and Occidental, haveinvested about US$220 million in oil exploration in Madagascar. However,most wells drilled by these companies or under the ongoing IDA heavy oilexploration project in the Tsimiroro arda were found dry or withoutsufficient oil saturation for commercial exploration. Nevertheless,exploration activities are still being pursued, and the Government isreinforcing its promotional activities. Although petroleum import volumeshave been declining since 1978, in 1983 Madagascar's net petroleum importsrepresented a third of total merchandise imports and absorbed half of non-energy export revenues.21 Because of foreign exchange constraints,Madagascar continues to procure its crude and refined products at pricesconsiderably higher than those achievable under optimal arrangements.

34. SOLIMA, the Malagasy National Petroleum Company, is responsiblefor petroleum importing, refining, distribution, and marketing. Presently,the refinery is operating below its full capacity and is in deterioratedcondition due to lack of maintenance and rehabilitation. In addition, at

21 Fuel oil surplus to country requirements is re-exported from theToamasina refinery.

the Port of Toamasina, where moat petroleum imports are unloaded, handlingfacilities and storage as well as coastal transport and inland distributionsystems are all in poor operating condition, causing substantial productlosses. The Government is planning a major rehabilitation program for theSOLIHA refinery, and the French Caisse Centrale de Cooporation Economiquehas expressed interest in partial financing of this program, although nofirm arrangements have been made. The petroleum subsector requires anoverall review, in order to: define ways to minimize costs of procurementof crude and products; improve the operation, marketing and distributionsystems of the refinery; prepare a master plan; and rationalize overallsubsector organization and policy, particularly in the area of pricing.

Forests

35. There are about 12.5 million ha of natural forests and about265,000 ha of eucalyptus and pine plantations. Only about 20 percent ofthe natural forest is economically accessible under environmentally soundmanagement practices. Because of the current regional imbalances and thefact that surplus production in other regions cannot be economicallytransported to deficit areas, major demand centers for woodfuels areexperiencing serious shortages leading to substantial increases in pricesover the past decade. In 1983, household energy represented 83 percent offinal energy consumption, of which firewood and 'charcoal represented 96percent. This situation is unlikely to change over the next decade.Without appropriate interventions, the supplyldemand imbalance projectedfor the period 1988-95 will lead to a loss of about 1.5 million ha ofnatural forests, or 12 percent of present forest resources. It is probablynot feasible to reforest the country at the pace of the anticipateddeforestation. This problem can be ameliorated through a variety ofhousehold energy supply interventions, inclading expanded use of modernfuels (kerosene, electricity) as well as improved recovery of woody biomassand forest residues as part of a better management of existing forestresources.

36. The FANALAMANGA parastatal (Malagasy Industrial Wood PlantationAuthority) has about 80,000 ha of industrial pine plantation in the HautMangoro region. A thinning program for this plantation is planned to startin 1987, to thin commercially viable stands within the plantation.Presently, thinning products have higher value as a charcoal feedetcck thanfor other uses. A minimum of 250,000 m3 per year would be available,representing about 25,000 tons of pine charcoal or more than 25 percent ofthe Antananarivo market. Quantities may reach more than 500,000 m3 peryear in the medium term. Utilization of this resource for householdcooking fuel could substantially reduce regional deforestation. Afeasibility study of Haut Mangoro pine charcoal production completed inJuly 1986, under UNDP and USAID financing, showed that such activity couldyield a financial rate of return of 20 to 30 percent if market acceptancewere achieved, and if appropriate technical and financial assistance wereprovided to FANALAMANGA as well as to interested private charcoalers forcarbonisation of this pine smallwood resource.

37. Other Biomass Resources. The main agricultural crop residues thatcould eventually be used as fuels for domestic and industrial consumptionare rice and sugar crop residues. Cellulosic residues generated annuallyfrom rice, the main agricultural crop in Madagascar, are estimated to beabout 4.6 million tons of which 500,000 tons are rice husks. Except forthe Lac Alaotra Region where about half of the rice husk residues are used

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am fuel for rice milling, rice husks are mostly disposed of as wastes,while they could be briquetted and used as household fuels in substitutionfor woodfuels. Bagasse and cane field residujes also offer a long-termpotential economic source of energy that could be used to produceelectricity for sugar mills and serve regional demand within the publicdistribution syutems.

38. Coal, Limnite and Peat. The main coal reserves are in the SakoaBasin located in the southwest part of the country. Coal resources areestimated at about one billion tons, of which 82 million are recoverable byunderground methods and only 23 million by open pit methods. At present,the exploitation of coal resources seems uneconomic, and the presentindustrial demand of about 30,000 tons per year is met through imports.Lignite resources are mainly in the central highland region. Provenlignite reserves are estimated at about 11 million tons, but their lowquality makes them uneconomic to mine. Peat resources scattered around thecountry could also be substantial, but no national inventory has been made.Peat resources are used widely for brick production.

Energy Policy and Planning

39. The Ministry of Industry, Energy and Mines (MIEN) is responsiblefor formulating energy policy and preparing energy pLans and investmentprograms, although the National Military Office for Strategic Industries(OMNIS) has also played an Important role in this area until recently. Theother two agencies under the authority of MIEN are JIRAMA (the NationalElectricity and Water Corporation) and SOLIMA (para. 34). Other ministriesand government agencies involved with woody biomass fuel management includethe Ministry of Animal Production, Fisheries and Forests (MPAEF), theparastatal timber producer, FANALAMANGA, which is under the authority ofMPAEF with respect to woodfuel production (especially charcoal), and theMinistry of Agricultural Production and Agrarian Reform (MPARA), withrespect to agricultural residue fuels. Coordination among these ministriesand agencies has not been effective; and formulation of a coherent energypolicy and development of adequate planning and investment programming havebeen inadequate. Currently, there is no explicit energy sector investmentprogram. Energy sector components included in the Public Sector InvestmentPlan have been compiled from the plans and programs provided by the variousagencies and ministries involved in the energy sector without prior reviewand consideration of sector-wide priorities and least-cost solutions.

40. During the preparation of the proposed energy project, theGovernment agreed to the need for strengthening MIEN, particularly inregard to its planning functions, and confirmed the central role andresponsibility of MIEM for energy policy formulation and investmentplanning and programming. To address the above issues, MIEN requiressubstantial technical assistance and supporting facilities (such ascomputers) to develop effective energy planning and administration withinits Energy and Water Department (DEE).

JIRAMA

41. Management and Organization. JIRAMA is a parastatal created in1975 to own and operate all public electricity and water supply facilitiesin Madagascar. JIRAMA is managed by a Director General under the general

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supervision of a Board of Directors which is presided over by the Ministerof HIEM. JIRAMA enjoys reasonable autonomy in the conduct of its day-to-day operations, but is subject to Government control over its electricitytariffs and interference in its investment decisions. JIRAMA has recentlybeen reorganized, and all planning activities and economic studies have nowbeen consolidated within the single Department of Planning and EconomicStudies, which will be strengthened with technical assistance under theproject proposed in this report.

42. JIRAHA's managerial efficiency continues to be constrained byinefficient and obsolete telecommunications equipment combined with adeteriorated vehicle fleet, which is rendering communications betweenheadquarters and the regional offices extremely difficult. There is a needto modernize JIRAMA's communications for efficient operations. Also, inorder to help JIRAMA to improve the quality of its services and reduce itsfinancial dependency, there is a need for a complete review and reform ofthe commercial and administrative relationship between the Government andJIRAMA. Government is taking important steps toward such an objectivethrough measures adopted for the financial restructuring of JIRAMA underthe proposed project (see pares. 48, 49 and 50). Government and JIRAMAwould prepare and present for IDA review by December 31, 1987, a reformpackage in the form of a draft Contract Plan that would outline mutualresponsibilities and obligations regarding power sector financial,management, and administrative matters; and provide IDA by June 30, 1988with the final contract plan. This would aim to lead JIRAMA to a greaterfinancial viability and management autonomy based on a commitment toachieve certain minimum performance criteria consistent with increasinglysound financial performance and reliable low-cost power supply.

43. To facilitate improvement in JIRAMA's management, a simplemanagement information system (MI$) is required to monitor agreed financialand technical indicators. This MIS would also help the newly createdDepartment of Planning and Economic Studies to monitor and evaluate keytechnical and cost parameters as part of the ongoing planning process.JIRAMA would require technical assistance and computer facilities toimplement this MIS, as well as for the computerization of consumer billingand accounting in regional supply centers, the asset inventory, andmaintenance management systems.

44. StaffinR and Training. As of mid-1986, JIRAMA had a total ofabout 4,100 employees, about half of whom were concerned with electricityoperations. JIRAMA's staffing level for electricity operations isconsidered satisfactory (58 consumefs per employee) by regional standards,although there is scope for increasing the number of consumers served peremployee as anticipated growth in connections materialize under theproposed project. JIRAMA's salaries are reasonably competitive, and thecompany has been able generally to attract suitable staff. JIRAMA'straining activities are well organized; and most training is providedthrough its in-house training facility. Training abroad has been severelyrestricted due to lack of foreign exchange resources. Although JIRAMA hascompetent technical staff, 'it has been to some extent isolated from thelatest techniques. JIRAMA requires some overseas training in the form ofrefresher and short courses on recent developments in the power industryand utility administration, and needs to strengthen its local trainingprogram with the introduction of modern preventive maintenance methods.

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45. Infrastructure. Most generating plants and transmission anddistribution facilities are in poor condition, due to age, shortages ofbasic spare parts, materials and consumables, and hence lack of routinemaintenance over a long period. Many supply centers are also sufferingfrom serious imbalances between capacity and system demand. Consequently,plant availability is low, and generation costs are high. These problems,combined with a weakened transmission and distribution system, mean thatpower supply in several major towns is now seriously jeopardized.Moreover, poor communications between power plants and load dispatchcenters hamper the efficient use of available hydropower resources withinthe ICS. There is an urgent need to rehabilitate key power subsectorinfrastructure, to improve the reliability of supply, and to provide JIRAMAwith an adequate supply of spare parts, consumables, equipment andmaterials to maintain the network and expand the transmission anddistribution system to supply the present considerable unmet demand throughthe use of the existing hydropower surplus in the ICS.

46. Financial Performance. During the period of 1983-85, JIRAMA hasnot been able to meet its debt service obligations, nor to contribute toits investment programs. Rates of return on revalued net fixed assets forthe same period were, respectively, 1.9 percent, 1.5 percent, and 3.7percent against the agreed 8 percent rate of return under the completedAndekaleka project (Cr. 817-NAG, closed in September 1986). Return onassets is presently not a meaningful performance indicator because JIRAMA'sasset base is significantly overvalued due to overinvestment in generatingcapacity, a substantial proportion of which still remains unutilized.Presently, there is a need for a detailed review of JIRAMA's asset base andfor its revaluation and computerization. JIRAMA would prepare and completethis asset revaluation for IDA review by June 30, 1909.

47. In addition to inadequate investments and tariff adjustments,JIRAMA's poor financial situation results mainly from a number ofstructural weaknesses that include: (a) accounts receivable from Governmentand municipalities represent 12 to 14 months of sales; (b) payables arehigh and include about 11.4 months obligations towards SOLIMA for fuelsupplies; (c) a significant portion of other current assets and liabilitiescannot be collected until a trilateral clearance of accounts takes placeamong the Government, the municipalities and JIRAMA; (d) JIRAMA'slightbulb, electrical appliance, and water meter manufacturing subsidiariesare highly unprofitable; (e) to compensate for operating cash shortfalls,JIRAMA has had to rely heavily on an overdraft facility with BNI thatcarries an annual interest rate of 21 percent; and (f) the Andekalekahydropower plant for which most of the long-ternm debt was incurred iscurrently operating at only 35-40 percent of its capacity due to lack ofdemand in the ICS. In addition, devaluation of the Malagasy currency hasincreased JIRAMA's foreign exchange risk exposure.

48. In order to restore its short and medium-term financial viability,JIRAMA requires a set of reform measures that would call for a fullfinancial restructuring including: tariff increases to improve its internalcash generation and additional capital to strengthen its capital basethroughout the period 1987-92 (paras. 86 and 88); simplification ofexisting tariff structure and system (para. 51) for more equity among itsconsumers; reductions in its outstanding accounts receivable and payablethrough the settling of Government and municipality arrears; restructuringof JIRAMA's outstanding short and long-term debts to limit payments of debtservice obligations to fixed assets in operation; and increasing use of the

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existing hydropower surplus in the ICS through the installation of largeelectric boilers, and extension of the distribution system to serve theunmet demand and enhance JIRAMA's revenues.

49. The Government has introduced a tariff increase of 17 percenteffective February 1, 1987. The Government has, effective February 1987:(i) increased .1IRAMA's capital by FMG 7.42 billion; (Li) consolidated FMG1.73 billion ot JIRIMA's overdraft into a five-year loan; (iii) rescheduledits outstanding long-term debts relating to the Andekaleka and Namoranaloans in line with the utilization of these assets; and (iv) divestedJIRAMA's lightbulb and electric appliance activities.

50. Payment to JIRAMA of an amount equivalent to 50 percent of theaggregate arrears of the Government and the "Collectivites Dacentralisaes"relating to water and electricity sales, adoption by the Government and the`Collectivites Decentralisees" of new payment modalities for futureelectricity consumption, and the signing of agreed boiler contracts betweenJIRAMA and interested enterprises would be conditions of effectiveness ofthe proposed credit. The remaining 50 percent of arrears between JIRAMA,Government and "Collectivites decentralisees" will be settled by September30, 1987.

51. Tariff Structure and Policy. JIRAMA's tariff structure iscomplex, cumbersome and costly to administer. There are several hundredtariffs, and large arbitrary differences exist between them for the sameconsumer group in the same supply zone. Tariff levels are historicallybased and bear virtually no relation to the cost of s'tpply. A tariffreform study is required to adjust tariffs closer to economic costs,introduce incentives to stimulate demand in regions of surplus supply andsimplify tariff structure and administration. The number of tariffs wasrecently reduced by 50 vercent, as a first step towards rationalizingtariff structure. Government and JIRAMA would prepare a tariff study forIDA review before September 30, 1988, and implement an agreed new tariffstructure by January 1, 1989.

52. Investment Plan. JIRAMA's and Government's main objectives forthe power subsector are to; (i) improve the reliability of production andsupply throughout the country at the least cost; (ii) increase the use ofindigenous natural resources for electricity generation wherevereconomically justified; (iii) maximize the use of existing low-costproduction capacity; and (iv) improve the financial management of the sub-sector. Achievement of these objectives would require the preparation.ofan adequate least-cost power system expansion plan and detailed feasibilitystudies for economically attractive major power developments. However,JIRAMA has never prepared a comprehensive least-cost expansion plan as itlacks experienced personnel, as well as the required supporting facilitiesfor effective planning. Planning weaknesses have led to overinvestment ingeneration capacity in certain regional centers and limited utilization ofavailable hydropower supply in the main ICS. The most serious problemarises from the construction of the 58 MW Andekaleka hydropower plant inthe ICS feeding the Antananarivo region. Projected load growth, whichinitially justified this investment, did not materialize due to economicstagnation and abandonment of a number of planned industries. In 1985,about 64 percent of this plant capacity was unutilized. JIRAMA wouldrevise its commercial policies to increase household electricityconnections and to promote the use of hydropower electricity whereverfinancially and economically justified.

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53. During appraisal, JIRAMA, Government and IDA reached agreement onreasonable load forecasts based on a tentative minimum Reference PowerSector Investment Program (RIP) for the period 1987-91, pending thecompletion of a least-cost expansion and rehabilitation plan under theproposed project. The RIP is estimated to cost US$57.5 million including aforeign exchange cost of US$50 million. No major investment in generationexpansion is envisaged for the ICS for the next seven years, sinceinstalled capacity will continue to exceed demand in peak hours until themid-1990s. However, the RIP assumes for the External Zone the constructionof a new diesel power station for the Nosy-Be region required in 1990-91and a start on the Ambodiroka hydropower project by 1991. Other than theseprojects, the RIP emphasizes the rehabilitation of high-priority generationplants and distribution and transmission systems in major demand centers.

54. JIRAMA would have the RIP reviewed annually by each September30th, and revised as appropriate in agreement with IDA, particularlyfollowing the completion of the planned least-cost expansion plan study. Inaddition, until the completion of the proposed project, JIRAMA would notundertake any major investment (i.e., greater than US$2 million or 1percent of JIRAMA's net fixed assets, whichever is smaller) that is notincluded in the agreed RIP unless the economic and technical justificationof such investment is established in consultation with IDA.

Bank Group Involvement in the Energy Sector

55. The Bank Group strategy in the energy sector is to: (a) promotethe economic use of indigenous energy resources, power sector efficiency,and the formulation of comprehensive energy policies leading to rationalenergy pricing and import substitution; and (b) enhance the role of theprivate sector in energy resource management and development. From 1974 to1986, the energy sector benefited from about US$64.6 million or 11 percentof Bank Group financing, of which US$40.6 million was for the Andekalekahydropower project financed in 1978, and US$24 million for the twoprojects financed in 1980 and 1982 for the petroleum subsector.

56. The Andekaleka hydropower project partly achieved objectives of:(a) utilizing an important portion of the country's hydropower resources insubstitution for thermal power generation in the ICE; (b) strengtheningJIRAMA's staff competence in major project design and implementation; and(c) improving JIRAMA's organizational and managerial practices. But theproject did not achieve its objectives of strengthening planning and ofmaintaining a sound financial situation for JIRAMA. Lessons learned fromthe project include the need (a) for improved demand forecasting techniquesand market analysis to reduce the risk of premature investments; and (b) tofocus on financial policies designed to foster sustained sound financialperformance. The petroleum exploration promotion project was satis-factorily completed. The Tsimiroro heavy oil exploration project is stillongoing. These projects allowed OMNIS to establish an appropriate legaland fiscal framework for petroleum exploration by foreign oil companies andto gather the required data base on the subsector for flurther oilexploration; approximately $220 million in exploration investment has beenmade.

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PART IV - THE PROJECT

57. The proposed project was appraised in February 1986. A staffappraisal report entitled "Democratic Republic of Madagascar - EnergyProject" (6405-MAG) dated March 31, 1987 is being distributed separately.A supplementary project data sheet is attached as Annex III. Negotiationswere held in Washington, D.C. from February 24, 1987 through March 2, 1987.The Madagascar Delegation was led by Mr. Jose Rakotomavo, Minister ofIndustry, Energy and Hines.

Prolect Background and Preparation

58. The objectives of the proposed project were largely formulated andagreed with the Government during the energy sector assessment carried outin 1984-85 under the joint UNDP/World Bank Energy Sector Assessmentprogram. This assessment was followed up, under the joint UNDP(World BankEnergy Sector Management Assistance Program (ESMAP), by a power sectorefficiency audit study, which helped define all priority infrastructure andfacilities in need of rehabilitation and repair In the power subsector.The agreed RIP has been framed within the priorities defined by this study.US$870,000 from the proceeds of the proposed IDA credit has been providedunder two Project Preparation Facility (PPF) advances to finance anengineering study for the rehabilitation and expansion of the Volobehydropower plant damaged by the March 19B6 cyclone; and consultant servicesto undertake the detailed preparation of Phase I of the diesel andhydropower rehabilitation program (para. 76) and the formulation of thopreventive maintenance program and to assist in the preparation of theelectric boiler program and the establishment of the MIEM PMU projectmanagement unit (para. 77). Detailed specifications and pre-feasibilityand feasibility studies carried out for overall project preparation wereundertaken, under IDA coordination, by consultants financed mostly undergrants provided by several bilateral aid agencies3/ and internationalorganizations.41

Project Objectives

59. The proposed operation carries through, at the project level, oneof the central themes of the IDA country strategy: supporting sectoralstrategies aimed at rehabilitating productive infrastructure andestablishing the conditions for long-term growth (para. 25). The mainobjectives of the proposed project are to help improve the reliability ofpower production and supply throughout the country and the power sector'sfinancial and operational performance; maximize the efficient use oflocally available and economically accessible energy resources; andstrengthen energy sector planning capability. To achieve these objectives.the project would: (a) help rehabilitate, maintain and expand the powergeneration, transmission and distribution network in order to maximize theproductive use of existing assets; (b) strengthen JIRAMA's planningcapability and prepare a least-cost power system expansion plan; (c)increase JIRAMA's financial autonomy and strengthen the efficiency of its

31 USAID, FAC, Swedish Agency for International Cooperation ana SwissGovernment.

4/ UNDP and FAD.

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management system; (d) increase the use of existing hydropower surpluscapacity and energy in the ICS by expanding the electricity distributionsystem and encouraging increases in large-scale industrial consumption ofelectricity whenever economically justified; (e) encourage the productionof economically accessible energy resources such as charcoal and rice huskbriquets by the private sector for household and industrial fuels; and (f)help develop, within MIEM, the capability to prepare and evalL..Le energysector policies and inveso;ment plans and programs and to initiate householdenergy sector planning.

Project Description

60. The proposed project would include the following components: (a)for the power subsector: generation rehabilitation and expansion;transmission and substation improvement; distribution rehabilitation andexpansion; improvement in general plant and services; power sectorinstitution building; power sector studies; and an electric boiler program;and (b) for the energy sector: household and industrial fuels; energyplanning support; and energy sector studies.

Power Sector Components

61. Generation Rehabilitation and Expansion. This component wouldinclude the provision of four 800 KW units for a new Nosy-Be dieselgenerating station; and rehabilitation of two priority diesel generatingstations5i as well as other smaller diesel generating stations in theExternal Zone, and four hydropower generating stations.61 Restoration ofthese plants to full operational capacity would require the pur.hase ofurgently needed spare parts and consumables, and provision of additionalspare parts and required mobile maintenance equipment to ensure adequateroutine maintenance during the project period.

62. Improvement in Transmission and Substations. The proposed projectwould include the completion of the ongoing rehabilitation of the 63 KVline between Antananarivo and Antsirabe, the provision of new poles andlightning protection, and the repair and maintenance of other prioritytransmission lines to prevent outages and enable stable long-termoperations. Switchgears and new transformers would also be provided forsubstation rehabilitation and to cover system expansion and improvedistribution reliability.

63. Distribution Rehabilitation and Expansion. Rehabilitationmaterials including conductors, pole hardware, and distributiontransformers would be procured under the proposed project to reinforce theexisting distribution system. The project would also include newconnection materials that would expand the system to supply about 6,500 newcustomers per year; there is presently a backlog of about 10,000 newconsumers. A pilot project would also be undertaken to establish reviseddesign criteria that could eventually reduce the cost of the distributionsystem serving households and small commercial consumers.

5/ Mahajunga and the existing Nosy-Be diesel generating stations.

6/ Antelomita, Manandray, Manandona and Mandraka hydropower generatingstations.

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64. Improvement In General Plant and Services. This component wouldinclude provisions for (a) the purchase of new vehicles and the spare partsneeded for their maintenance over the project period, now tele-communications facilities for communications between power plants andsupply centers and spare parts for existing telecommunication facilities;(b) meter testing equipment; and (c) new computer hardware and softwarecompatible with existing computer facilities. About 7 man-months oftechnical assistance would also be provided to review JIRAMA'scomputerization policy and planning and to train its staff in computermaintenance.

65. Power Sector Institution Building. About 87 man-months oftechnical assistance will be provided as follow: (a) 24 man-months of aresident consultant advisory service for the Energy Department in MIEM tohelp strengthen power sector planning; (b) 27 man-months of back-upconsulting services to strengthen JIRANA's Department of Planning andEconomic Studies and its Department of Electrical Equipment, and provideon-the-job training in planning, including overseas training and studytours; and (c) 36 man-months to improve hydropower resource assessment anddevelopment management. Computer hardware and software, as well asspecialized office equipient, would also be provided under the proposedproject in support of planning improvement.

66. Power Sector Studies. These would include the preparation of arational least-cost power sector master plan including a national powertariff review, and supplemental funding to complete the feasibility studyfor the Ambodiroka hydropower plant. Terms of reference for the hydropowerfeasibility study have been prepared and agreed upon with Government.Terms of reference for the least-cost power sector master plan werecompleted in March, 1987.

67. Electric Boiler Program. To increase the use of the existinghydropower surplus within the ICS, about 18 NW of electric boiler capacity,requiring an annual energy supply of about 96 GWH, would be installed infour enterprises, which are expected to be PAPNAD (paper mill), SavonnerieTropicale (soap factory), SOMACOU (textile factory), and the Hilton hotel.The proposed project would finance boiler procurement for theseenterprises.

Energy Components

68. Household and Industrial Fuels. The proposed project wouldattempt to launch commercial production of charcoal from the pine thinningproducts of the Haut Mangoro pine plantation and to achieve under a pilot-scale project the production of about 1,500 tons of rice husk briquettesper year from the substantial volume of rice husk residues that areavailable in the surroundings of Antananarivo. About 30 man-months oftechnical assistance as well as production equipment and material would beprovided to train and assist traditional private charcoalers in improvingcharcoal production methods and to review the voodfuel business, andcarbonization efficiency. The project would also provide equipment andconsultancy services to commission and monitor rice husk briquetteproduction.

69. Energy Planning Support. This component would include about 63man-months of technical assistance and consulting services, and computerequipment and materials to strengthen energy planning and staff training

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within MIEM, and about 118 man-months of technical assistance andconsulting services to support the development of household energy supplyand demand management strategies; this work would include the introductionon a trial basis of various cooking efficiency interventions, and petroleumsupply and distribution studies (para. 34).

70. Enerrg Sector Studies. Two energy sector studies would beundertaken under the proposed prn-jft. They are: (a) industrial energyaudits to review industrial energy conservation needs and design changesrequired to reduce energy costs in manufacturing industries; and (b) a LacAlaotra regional energy planning study to prepare a least-cost master planfor energy development in the Lac Alsotra region. Terms of reference forthese studies were prepared by IDA staff and agreed upon with theGovernment during appraisal.

Project Cost

71. The total project cost for the five-year implementation period(1987-91) is estimated at FMG 65.5 billion (US$59.8 million) includingforeign exchange costs of FMG 50.0 billion (US$44.8 million) or 71 percentof the total cost. Baseline costs were estimated at January 1987 pricesand were increased by an average of 6 percent to include physicalcontingencies. Price escalation for foreign costs is estimated at 3percent in 1987, 1 percent in 1988-90 and 3.5 percent in 1991. Local costescalation assumes a price inflation of 17 percent for 1986-88 and15 percent for 1989-91. Adjustments in project cost have been made toreflect the 20 percent devaluation in August 1986, and an allowance forfurther currency depreciation. Local taxes and duties are estimated atUS$8.1 million or 14 percent of total costs. Project costs include US$5.5million for technical assistance and consultancy services.

Financing Plan

72. The total foreign exchange cost of the project is US$44.8 million,of which IDA would finance US$25 million equivalent, and cofinanciers wouldfinance US$19.8 million. Cofinanciers are the European Investment Bank(EIB) for US$14.4 million, and the Banque Arabe de Developpement Economiqueen Afrique (BADEA) for US$5.4 million. Local project costs total US$15.0million equivalent of which JIRAMA would finance US$10.5 million equivalentand GOM US$4.3 million equivalent. Local funds (US$0.2 million equivalent)for the electric boiler component would be obtained by the firms concerned.In addition, financing has been obtained for the balance of the powersubsector RIP which, in addition to the above-mentioned cofinancing,includes parallel financing by Caisse Centrale de Cooperation Economique(CCCE) of US$13.5 million, and by the Swiss Government of US$1.5 million.

The IDA Credit

73. About US$0.9 million equivalent has been provided under ProjectPreparation Facility (PPF) advances to finance preparation and projectstart-up work, and the engineering study for the rehabilitation andexpansion of the Volobe hydropower plant. The advances would be refinancedfrom the proceeds of the proposed IDA credit. Out of the US$25.0 millionIDA credit, the Government would (a) onlend to JIRAMA US$17.9 million; and(b) channel up to US$1.8 million through the National Industrial Bank(BNI), to enterprises interested in procuring electric boilers and toprivate entrepreneurs involved in the lmplementation of the Haut Mangorocharcoal component.

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74. Conclusion of a subsidiary loan agreement, acceptable to IDA,between JIRAMA and the Government would be a condition of crediteffectiveness. This agreement would include a final maturity of 25 years,including five years of grace, an interest rate 10 percent above IBRDleanding rate at the time of Board presentation, and the foreign exchangerisk to be borne by JIRAMA.

Project Implementation

75. Project execution would start in July 1987 and is expected to becompleted in December 1991. Project ManagementrUnits (PMU) would beestablished within JIRAMA and MIEM, which would co-ordinate implementation,with the implementing agencies being the ministries and the parastatalconcerned.

76. Power Sector Components. Most of the proposed power subsectorrehabilitation components would be carried out in two phases. The firstphase would include mainly the most urgently required spare parts that areneeded to prevent disruption of the power supply in the short term, andconsultant services to define precisely the rehabilitation needs in thediesel and hydropower generation areas. The second phase would representworks and provision of spare parts required to restore the reliability ofthe power system in the medium ternm.

77. The repair and rehabilitation of power facilities would be carriedout primarily by JIRAMA's staff, with support from local contractors.Consultants would be retained to supervise the management and coordinationof the generation rehabilitation component, and would be under theresponsibility of a Project Manager to be appointed from within JIRAMA.The formal establishment of a PMU in AIRAMA and the appointment of aProject Manager woula be conditions of effectiveness of the proposedcredit. For the institution building component, a consulting company wouldbe retained to provide an advisor to the Planning and Economic StudiesDepartment of JIRAMA, and to assist with the coordination of back-upconsulting services, and with on-the-job training of JIRAMA's st&ff inpower system planning. Great emphasis would be placed on JIRAMA staff'sdirect participation to ensure that they would benefit from appropriatetraining during the project period.

78. The Electric Boiler Program. This component would be implementedby the four enterprises concerned (para. 67) with assistance from theJIRAM& PMU. Financing for the procurement of the boilers will be channeledthrough the National Industrial Bank (BNI). The foreign exchange portionfor the imports of the boilers will come from the proceeds of the IDAcredit (para. 73); and BNI will provide the local currency financing fromits own resources. Each enterprise is willing to install electric boilerssubject to the establishment with JIRAMA of satisfactory electricity supplycontracts. JIRAMA has already provided the enterprises with fulldocumentation on the technical and financial implications of each boilerproposal in order to facilitate the negotiation of such contracts. Withassistance from consultants, JIRAMA will help the enterprises to preparethe required technical specifications and documentation for the procurementof the boilers and their related ancillary equipment, which would begrouped in one package.

79. Energy Components. The energy components would be implemented byfour departments under three ministries and by the FANALAMANGA parastatal.

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The Department of Energy and Water (DEE) within MIEM would be responuiblefor the energy planning support component; the Minisetry of AgriculturalProduction and Agrarian Reform (MPARA) for the rice husk briquetting pilotproject and agriculturdl reeidue resource assesoment; the Department ofWater and Forests (DEF) within the Ministry of Livestock Production,Fisheries and Forests (MPAEF) for the review of woodfuel business andcarbonization efficiency improvements; and the FANALAMANGA parastatal forthe pine charcoal production component. Each of these departments andFANALAMANGA would nominate a focal point for communications with the MIEMPMU for project execution. The MIEM PMU would be the local counterpart forIDA and cofiniancing agencies, consultants, and contractors involved in theimplamntation of the energy components and would handle correspondence,progress reports, proctrement and requests for disbursement. The variousministries would be assisted by experienced consultants and contractors whowould work under torms of reference or technical specificationssatisfactory to IDA. Accounting for the energy components will be carriedout by the MIEM PHU. Government would have energy component accountsaudited by independent auditors, satisfactory to IDA, six months after theend of each fiscal year.

80. Because of the importance of the MIEN PMU role in coordinating andsupervising the implementation of the proposed project, establishment ofthe MIEM PMU headed by a Halagasy manager, acceptable to IDA, and staffedadequately would be a condition of effectiveness of the proposed credit.Also, following established practice between JIRAMA and MIEM, the MIEM PMUwill review, record, and forward to IDA all project implementationdocumentation and disbursement requests for the power subsector components.The MIEM PHU manager would report to the DEE Director, and would beassisted in his functions by a steering committee representing the otherimplementing ministries, ard the FANALAMANGA parastatal.

81. Since the Haut Mangoro charcoal production component represents anopportunity to involve the private sector in the commercial exploitation ofGovernment-owned timber resources, Government and FANAIAHANGA wouldactively seek private sector participation in the implementation of thiscomponent. If by the end of 1987 achievement of full-scale private sectorinvolvement should fail, a commercial scale pilot project of 5000 tons peryear of pine charcoal production would be financed by IDA through HPAEF andimplemented by FANALAMANGA, which would be adequately equipped and providedwith technical assistanice.

Procurement

82. The proposed procurement arrangements are summarized in thefollowing table. Many of the items to be purchased from the proceeds of thepropoard IDA credit are proprietary in nature and can be supplied only bythe original manufacturer (e.g. diesel engine parts). The total cost ofthese items is not expected to exceed US$2.6 million (about 10 percent ofthe credit) and would be purchased directly Vy JIRAMA from the suppliers.The other materials and equipment financed by IDA would be assembled intogroups of similar iters, and purchased either through internationalcompetitive bidding, following IDA's procurement guidelines, for contractsvalued at or exceeding US$100,000, or under international shoppingprocedures for items costing less than US$100,000 for which severalsuppliers would be !nvited to submit proposals. Thus, all contracts aboveUS$100,000 would be subjected to IDA's prior review and approval. Smallcivil works would be carried out by local contractors through local

- 21 -

competitive bidding, using procedures satisfactory to IDA. Items of theprojeat financed by other lending agencies would be purchased In accordancewith their respective procurment guidelines. Consultants to be hiredunder the proposed project would be selected in accordance with IDAguidelines, end their terms of reference and conditions of employment wouldbe satisfactory to IDA.

- 22 -

PROCUREMENT METHOD/I (US$ millions)

N.1. Consul- Cofinan-Item ICB LCB Otherb/ cl tsntad/ ciers Total

Power Sector ComponentsNosl-Be New Diesel - - - 0.3 - 1.9 2.2Hydropower Rehab. 2.9 0.5 0.6 0.2 0.2 - 4.4

(2.9) (0.5) (0.6) (0.2) (4.2)Diesel Reht.o. 3.2 - 2.0 1.6 0.3 3.5 10.6

(3.2) - (2.0) (0.3) (5.5)Transmission - - - 0.6 - 2.5 3.2Electric Boilers 1.5 - - 0.2 0.1 - 1.8

(1.5) (0.1) (1.6)Distribution 3.0 - - 1.3 - 9.9 14.2

(3.0) (3.0)Support Servicesel 0.6 - - - 0.5 2.0 3.1

(0.6) (0.5) (1.1)Vehicles 1.7 - - - - - 1.7

(1.7) (1.7)T.A. Planning&/ 0.4 - - 0.3 0.4 - 1.1

(0.4) (0.4) (0.8)Training 0.2 - - - - - 0.2

(0.2) (0.2)Studies - - - 0.1 1.1 - 1.2

(1.1) (1.1)Subtotal 13.5 0.5 2.6 4.6 2.6 19.8 43.6

(13.5) (0.5) (2.6) (2.6) (19.2)Energy Sector ComponentsEnergy PlanningAdministration 0.7 - - 0.5 0.7 - 1.9

(0.7) - - (0.7) - (1.4)Household Energy 0.6 - - 1.6 1.0 - 3.2

(0.6) (1.0) (1.6)Energy ProductionCharcoale/ 0.7 - - 0.1 0.3 - 1.1

Rice Husksel (0.7) (0.3) (1.0)0.2 - - - 0.1 - 0.3

(0.2) (0.1) (0-3)Energy StudiesIndustrial energy - - - - 0.6 - 0.6

- - - - (0.6) - (0.6)Subtotal 2.2 - - 2.2 2.7 - 7.1

(2.2) (2.7) (4.9)PPF 0.9 0.9

(0.9) (0.9)Overall Totalf/ 15.7 0.5 2.6 6.8 6.2 19.8 51.6

(15.7) (0.5) (2.6) (6.2) (25.0)

a/ Amounts in parenthesis are IDA-financed.b/ Proprietary spare parts that can only be purchased from manufacturers of

original equipment.c/ Design and labor to be provided by local implementing agency.dI Consulting services retained in accordance with IDA guidelines.ej Includes training aids and equipment.f/ Does not include duties and taxes

_ 23 -

Disbursement

B3. The proposed credit would be disbursed against 100 percent offoreign expenditures for civil works, imported materials, equipment,consultancy services and training abroad, and against 80 percent of localexpenditures eligible for IDA financing (in the table on the preceedingpage). All disbursements would be fully documented except that statementsof expenditures (SOE) will be used for all proprietary parts costing lessthan US$50,000 and for local civil works. These SOEs will be kept at thePMUs for verification by IDA supervision missions and by auditors. Fundsfor spare parts, materials, equipment and vehicles would be disbursedmostly in 1988 and in 1989, though high priority items would be receivedduring 1987. In order to expedite project execution and give theimplementing agencies rarid access to IDA credit proceeds, the Governmentwill open two Special Accounts at the Central Bank. Account A, for theMIEM MPU, will have an initial deposit of US$300,000 and Account B, forJIRAMA, an initial deposit of US$1,000,000. The disbursement schedule forthe proposed project conforms with the standard profile for Bank loans andIDA credits for power projects in the Eastern and Southern Africa Region.

84. Conclusion of an intermediary agreement,'acceptable to IDA,between the Government and BNI, would be a condition of disbursement forthe electric boiler and the Haut Hangoro pine carbonization components.Under such agreement, BNI would earn a one-time coomission of 0.5 percentfor all funds channeled through it; and the private charcoal companies andenterprises interested in procuring electric boilers would either bear theforeign exchange risk with an interest rate equal to the prevailing lendingrate of IBRD multiplid by a factor of 1.1, or the prevailing interest rateof BNI plus a foreign exchange risk premium of 3 percent per annum.Establishment of commercial arrangements, satisfactory to IDA, maximizingthe private sector's involvement in the implementation of the Haut Mangoropine carbonization component, would be a condition of disbursement for thiscomponent. The closing date for the credit would be December 31, 1992. Toensure that Government would allow appropriate adjustments in JIRAMA'stariffs and capital contributions in a timely manner, the proposed projectwould be phased into two well-defined investment segments for whichproposed IDA financing would be released as JIRAMA achieves specific agreedfinancial performance covenants as described in paras. 86 and 88.

Project Phasing and Financial Covenants

85. JIRAMA's financial performance will be monitored during projectimplementation and by each September 30, an annual review process will beundertaken jointly by JIRAMA, GOM, and IDA to ensure the company'ssound finarcial position. The review process and associated criteria havebeen defined, and are contained in six formal measures, reflected infinancial covenants ard conditions of effectiveness and disbursement.

86. The first measure establishes that the investments to be financedby the credit will be phased in two well-defined phases. The magnitude andrequired timeliness of the financial measures to be adopted to ensure theshort to medium term financial viability of JIRAMA warrant phasing of theproject. The proposed phasing is in synchrony with the annual in-depth IDAreviews of JIRAMA's financial performance, which will lead to adetermination of the precise measures to be adopted to meet the performancecriteria required for undertaking the second phase of investment. The

- 24 -

first phase, comprising US$15 million of investments, will be undertakenupon credit effectiveness, and the second phase of US$10 million willbecome eligiBle for financing subject to meeting other specified financialperformance criteria. The financial performance criteria targeted foreffectiveness are: (i) that generation of internal funds is sufficient tomake a positive contribution (defined as one percent) to the investmentprogram of 1988; (ii) that JIRAMA has at its disposal adequate funds in1988 to cover the local cost of that year's investment program; and (iii)that the Government has made a capital increase of at least 4 billion FMG.For 1988 this is expected to require a tariff increase of not less than 9percent as of January 18t of that year and a combination of capitalincrease and import duty exemption on spare parts and rehabilitationmaterials yielding about 7.6 billion FMG.

87. The second phase of investment will become eligible for IDAfinancing when revenue increases and other measures are adopted which willlead to (1) generation of funds from internal sources sufficient tocontribute not less than 15 percent to the 1989 investment program; (ii) adebt service coverage ratio for that year of not less than 1.2; and (iii)definitive resolution of the outstanding issue between the Municipality ofAntananarivo and JIRAHA of disputed ownership of water and electricitynetworks and installations. The goods to be included in the proposedsecond phase are distribution materials, vehicles, diesel plant spare partsand computers and related services, which can be easily prepared asdiscrete packages for procurement and implementation. Urgently requiredspare parts and distribution materials are provided by cofinanciers, orthrough parallel donor financing, during the period of the first phase ofthe proposed credit.

88. The second measure, a financial covenant, stipulates that JIRAMAduring each year after 1989: (i) maintain a rate of return of not less than8 percent on net fixed revalued assets as indicated by the assetrevaluation study whose results would be available by June 30, 1989; (ii)generate funds from internal sources of not less than 30 percent of theaverage of that year's investment program; and (iii) maintain a debtservice coverage of not less than 1.4. The third measure is a covenant,stipulating that prior to September 30 of each year, GOM will review withIDA whether JIRAMA would meet the covenant requirement set out as thesecond measure above for the ongoing as well as upcoming phase ofInvestment. If the review were to show that the requirement would not bemet, JIRAMA and GOM would need to promptly take all necessary measures,including tariff adjustment, in order to meet such requirements. Thefourth measure is a covenant confirming that JIRAMA will seek IDA approvalfor changes in the agreed investment program of any given year if suchchanges represent more than the lesser of either 1 percent of JIRAMA's netfixed assets or US$2 million. The fifth measure is a financial covenant,whereby JIRAMA agrees that it will not Incur any debt without IDA'sagreement unless reasonable financial projections indicate that the debtservice coverage, including the new debt, will not be less than 1.4 timesin any given year of the projection period. The sixth measure is afinancial covenant, whereby JIRtAMA agrees that it will reduce its accountsreceivable by 1988 and maintain them thereafter at no more than 90 days ofsales and its accounts payable at no more than 90 days of non-payroll cashoperating expenditures.

- 25 -

Protect Benefits and Risks

89. Benefits. The main benefits of the proposed project are to allowthe power sector to provide more reliable output; increase the consumptionof the existing hydropower surplus; improve the use of economicallyaccessible energy resources, and strengthen energy sector planning andinvestment programming. These benefits would enhance JIRAMA's revenuegeneration, and provide substantial savings in imported fuel oil and coal.Without the proposed investments, JIRAMA's effective generating capacitywould be gradually eroded, resulting in substantial increases in systemoutages and important losses in the production of export goods. Thecombination of the electric boiler program, the rehabilitation andexpansion of transmission and distribution facilities, and increases inconsumer connections will utilize a substantial proportion of the existingsurplus hydropower capacity in the ICS. The rehabilitation of the 63 KVtransmission line would contribute to meeting peak demand in the Antsiraberegion.

90. Economic rate of return. The calculation of the economic rate ofreturn (ERR) for the project is based on the agreed reference investmentprogram (RIP) for the power subsector for the period 1987-92. Two majorERRs have been calculated; the ERR for the entire JIRAMA system is 33percent and ICS alone is 46 percent. These ERRs are high because of thedistortion in financial prices for key inputs, such as fuel oil, and thesunk-cost effect of substantial hydroelectric and diesel electricgenerating plants which will be used to meet much of the incremental demandfor energy foreseen during the 1987-1992 period.

91. Project risks. There is little physical risk associated with theproject because civil works would be minimal. The main risk to the powersubsector components is institutional in nature, as JIRAMA may encounterdifficulty in administering the project, and Government may not promptlyallow required tariff increases. These risks would be minimized by theemployment of consultants to assist in the supervision of the project, bythe conditions tied to the release of proposed credit, and by theundertaking of joint and regular review of JIRAMA's financial performance.Cost overruns also represent another financial risk. However, the natureof the project is such that the works and materials to be purchased couldbe reduced in scope with no detrimental effect on the completed portion.

92. Environmental aspects. The power subsector components do notinvolve any significant negative environmental aspect. The electric boilerprogram and the biomass fuel production components would have a positiveimpact, by reducing the exploitation of forests in the hinterland ofAntananarivo. Energy components place heavy emphasis on improvedmanagement and efficient utilization of natural forest resources; and theproposed charcoal component, as envisaged, would displace charcoal producedfrom untramelled harvesting of the natural forest with charcoal made fromthinnings and clear-fell smallwood from the Haut Mangoro pine plantation.The rice-husk briquette pilot project would also examine the commercialprospect of producing good quality cooking fuels from otherwise discardedcellulosic residues in substitution of firewood and charcoal.

- 26 -

PART V - RECOMMENDATION

93. I am satisfied that the proposed credit would comply with theArticles of Agreement of the Association and recommend that the ExecutiveDirectors approve the proposed credit.

Barber B. ConablePresident

AttachmentsWashington, D.C.April 9, 1987

-27- ANNEX I

WDAOAcM- flffHhC DSRCA!3N1Page 1 of 3

Mlid-3,116 Pepuletlia (mile.) IC16oo Pa. Capita 0W is WURI S8

A. hunts of Orgem Dastle Product P. GetA Estee (II per aomue)(free correct priee dante) (fern amuSes prig. dat.)

toes we 1lee 10014 I"Sa lI'ee 1We-3 aen3-e togaO-H iWiop 1low

oreat, geastla Produas e.p. we0 1oo me0 10 iO "a .. a -1.4 2.2 0.9M4b at im reat Tame, 11.0 33.4 . . . ..

Aerlcaltura . . ItS3 a6.1 .2.4 4 3.2. 0.;. 1 9 2.2* Iimdemttjt ..00,0 201.2 is 18.6 16.4 iLl . 1.6 -4.? LI1 -1.0

Wa u*1c abrufactulrlne) 2.

saraiegee. 47.4 450 4 41.6 42. 1.0 -. 2 15 .

Rmaeurca ft.m.a -1.4 -4 -17.1 -4.4 4.8 -4.7 .

Cuperte ofOam 15.7 14.9 itO0 ILl11 14.8 1s.1i -1. 1.0 _lo:; 4.a IIlmpara of unp fl.1 20.9 02.0 20 10.8 11.6 0.6 2.? -14.5 '-0.8 7

ImijI lapanilturee 106.41 101 117.1 106.4 106.3 104.7 .. 1.3 -Li3 11.6 1.6

Total Comnmaptiif 0.11 89.7 90.8 90.6 01.3 00.6 . 0.9 -1.5 1.5 - .Poulitn Canamptlm. 72.6 72.4 71.4 7.3 77.c 77.7 .. 0.2 -1.5 1.4 1.2Genearl ioerment 2.11 17.8 17.1 135. 18.8 12.e 3.3 4.3 -1.8 1.0 0.?

Grom. DaMMtLc lmeat.satwe 10.1 14.3 2U.S 13.3 14 14.2 4.2 3.2 -11.6 2 4.6Plead briassmnt .. 18.8 n2.m . . .

OMengastoi St"c . 0.3 0.7 .. . ...

Cream Smatis Savins 3.6 10.3 6.1 01.2 1.7 4.5 .. .4. 10.8 -8.1 8.91M1n Factor beam -4.1 -2.2 -1.4 4.1 4 -. 3 -4.6 .

Hot Currant Treamfara L. .4 Li1 4.1 ...

Crm" Rbtianal Saving .. .. 6. 6.1, 7.5 ... -n.22 .1 -3.

In dIliias of LACIJ' 10611 1978 10610 161 I0Sp 1066.Cat camatmnt 1060 pricsm) -

Cream Uomiasti Product .. 235 60 668 680 66" I -1.41 2.12 0.91Capacity to xmpa. 12in lie WS a2 4i2 3..4 . -4.7 44 -7 u.s.16"Mr if Trada Adjuatment 40 64 0 1o 10 17 .

Creame omeahic Inenc. .. so VWo us in0 an . ... -4.6 o.e ieCreamsP' Naiconl Product .. 62 66 7 7 90 .. 1.2 *W-3.0 0.9 2.3

Cram. blEat Lnaio as65 60 8 6 36. -8.1 -0.6 3.6

C.- PrimO IadiCaa 1060 io 103 1964 lOge. long 1965-73 107840 1900-64 LiIMP time

CAnmuame Prica (IFS H4) 100 172 25.3 225.8 .. . .4 WAi 22.1Whulamala Prima (IF-S 63) lo... . . ...

Implicit (W Oaf late 100 1594.8 103.7 212 2383' 278.9 .. 1.2 21.3 Is 17.3Implicit lipenditorma DOaf lter 100 1357.6 100.3 207.2 213. 270.6 .. 11.7 20.5 12.7 11.8

DI. Otuer Indi caters 2965-73 11173-fl 100-&ISp

Ilates CS P.m.)-~~~~lte. -

Populatian 2.4 2.? 3.0 Vitanlm onteconomic ladiscaterm tibiaeLabor Pwart ... . haud foil. thei dtmfingteoa andCrmam National lace.o p.c. . -2.7 -5.5 concepts of th.m Standard Tabias andPrivate Conump.tion p.c. . -2.4 -. 0. Standard Attachainta. The 'indicatire

dha l nclude data Sternc the meet,:aPert Clamilcity: ricantly compiatad cmladiar year; (ir

ImOrert (0095) / CDP (NW) .2.7 fiseal game ink the coam if fijcal yer

Countries). Stiff ecastite nag ha usedtereimmi Sv.ngm Roatin: If flail or prealiminary metuale ere nel.

Cries National So.;.m ye..pt sal labia. The tea of Atimatam madCries Ceieatc Swivni pailminmftry figoree .1hiold bem indicated

byg-:cm (peri.Odaveaa:...-

aaeatisatad dtAenar if TitalI i4ces ion3 iaw IOSP p aprelimimarp data.sherPirVcs int-

Aericultur. 88.2 82.0 30.9 Ue

Ind""r 4.3 8.2 5.9 2.7Se"kea 10.8 11.9 18.1 9.2TotlM

*NOT'E: Certain anomalies in the present tables, possibly including minor incontsistenceiesvis.-8-vis text data. are attributable to the very recent change in format of theseEconomic Indicator Tables. - Staff are working to resolve these problems.

-28 - ANNEX I

MOACASA - WIlcC POICAT M I* Page 2 of 3_._................. _....

Volu .. nd.. (I.O - 1002: val .t Current Prise (! lIlens 16),I

--------------...... -..-------------- _ ---- .. ..-- .... . .... . ... ---- .-.---.-...I. H|erWshudE lee tt. 130 3632 16331 164 163w 3633 1630 163 163 163 16

8 1*3

Ce1medit s I I cu.. 10O.0 74.2 72.7 74.0 34.3 72.1 214 120 141 160 104 126C__dl4g 2 Vaillla 100.0 21.3 23.0 201.7 103.7 165.1 16 3 7a 71 44 UL

cemSI4 3 Clawse 100.0 240.1 33.2 143.1 334.4 233.7 81 101 32 43 36 30Cmwmdlw 4 .. ..

atr2 m r.. .. .. .. .. .. .. 27 1as 3 3 20iber rpert. .. .. .. .. .. .. 143 1I0 62 lOg 72 72Tetel Norchendllj Eapertm POI 0.O 110.6 1IT.3 I1J.1 105.4 123.0 433 421 351 443 2=1 0

P. Hledetedllee Import.

Few 100.0 333.5 Uli.a 10.0 120.2 146.3 36 102 33 3O so 51PO, end Other Energy 100.0 140.7 U1e.3 13.9 133.2 94.3 70 137 133 133 a5 40Sib., lmperts

Other Ceneumr Gasd 1O0.0 43.5 16.1 43.3 0.0 43.6 aS 4e 36 47 82 43Other Xnter.mdinete 0 . 1o00.0 32.7 3s.3 83.2 31.3 44.0 22 147 146 liO IoC lSCe;p1el aeedm 100.0 33.9 27.3 26.6 26.6 30.4 173 146 114 I 66 10L

ToLal Herlbspdile Zweerts CIF 100.0 03.7 4d.1 42.9 42.4 4 49.0 913 676 m U43 461 - 373

0. Term S Trade (1660 - 100) 1660 IO2 1963 1904 169Uw 1966. ------ -------_-___ -___________… __ __ __ _____________ _______- - -- - -H-- -Hmes

eNot. Eeprt Prism [In-la 100 90.3 61.3 63.1 64.4 101.1Kent. import. Prime Wade 100 iS 63.8 93.3 61.4 60.3 ente en the Ecomwic Indsetlorm tAklesKrsebndiso Teem of Trado 100 94.1 64.6 U .3 16.3 111.3 should follow Om definitions and

cencente of tlhe Sanderd Thles medOAS Illimei (et errent price.): Standerd Atecteente. The ildleeoro

------------------------------ --- hweald include date threadh the et

H. Slance of Pymante 1i63 19o2 1933 1634 IUSl lBe recentil smpleted caelendr yper Car________-___ __ … … flscel peer in the aome of fiecel peer

erte of bade e IFS 541 30 36 373 32 300 cauntrlee. Liff eUetiaeeea hbe se"dnerchendlee (FM) 433 327 310 317 270 239 if findl or prellminery ectuele ere net

len-FecLor lereic. 62 b3 47 U5 31 C2 yet aveileble. The use at emntimlei endpreli.rnary figures eheld be indieted

heart. ef Goad. and IFS 10715 4C2 51 490 463 366 by:Herdendilm (FOB) 74 AM2 370 33O 326 230Me-Pester Srwice. 311 21o0 173 1S 137 13 meiltied data

P P wrelimiry p dtoRe-mrc BHe lence -W7 -272 -164 -113 -1Ul -q6

Ret Faetor Incm -46 -6 -113 -127 -34 -221(intereet pem OAS) 27 37 34 37 53

ets Current Trmnearem 4i n O0 74 6O 67(merhere remittonce.) 0 0 0 0 0 0

Curret Acounet -88W -200 .47 -171 -160

Long-Trm Cepitel Inlow 375 121 167 182 143 134Direceb Invoieet 0 0 0 0 0 0Officiel Cepibtl Orante 0 0 0 0 0 0Not LT Lonet (S dew) 357 2D0 163 97 63Otter LT inflowe (Net)is lB -36 14 oS 5l

Total Other Ito_m (Net) 233 13 30 25 2e -24Fe Start-tr Ceplel 223 130 30 25 2 -24CmpieLl FlwN .ElI. 0 0 0 0 0 0Errors end O-lairns 0 0 0 0 0 0

Cheag.a in Net Reserve -51 4* 21 -7 16 -16Not Crdit free LF 46 57 7 I1 -3 3Otter Rosee. ChengeC - ndiceate increw-) -100 -6 14 -24 16 -20

Am mree of W:Resourse alense -17.1 -96. -4.6 -5 -5. 6Int-r_mt Payment. 0.3 1.3 1.2 1.6 2.3Current Account 1elence -17 -10.8 -6.7 -7.2 -3 .

lemerendlm Items:IntrneL' I Remerv (.,I. U!SS) 6 20 29 Si 4Bisteree, intl. Col (.;i. LoS) 9 20 29 56 41Offisiel X-ftaO .LCP-eJUS2) 211.3 346.71 430.5 576.5 632."4Wad-e R.el Ef N X-ft a.e. I13 10o 117. B 1 I7C01 300.5 6 _.4 . --- _________________________---…-- -- -- __

32C (mil io;n of curre,t USl) 326 264 233 2374 2345

- 29 -ANNEX I

HAAR. - ICMC noIcATMPage 3 of 3

Sht.. of CD (1) aCreSt Ruto. (in ueruat prie.)- ----^ ------------------ '----- ----................... '.-..... . ....

1. hips 1U0 icl 13 19"4 1limp lou. III - U4ie low asu

C,rrnt Wedge hi|s* ........ 3. nU 0o.43 4.73 .1* .. 202.3 a 3n7.iIl 13.33

Cupita. Re ei. .. .. .. .. .. .. -- -

Caitoil Eaudlur.. 11.13 9.9 9.43 9.11 7.73 .. 3.13 20o.1 n..0usrull fIat 13.41 I. 11. 3.1 5.41 5. -13.1 -4.13 .13.9n

lrfcliul capital Gram" eu 0 .m 9.13 1.01 o.K .. a2m.u o..Eutrual hrruleig (nut) 6."1 6.45 4.61 .1N 3.7* .. -1.S 4.13 -21.01Dueatlu Nu-a Plaune" lap 11. 5 4.35 31.711 * 1.6 . -e20.4r1 7.7r -i3SDouesuti Weak nau nsDlag 0.11 0.36 *.01 4.13 0.01 . 101.91 -144.43 100.0)

Net Dlabaaroaoatu (ME mlIlie) Debt Ostotouodles A Diuhuruod VW5 El .,

J. Eut.rsul Cuplitu Pleov.Dlbt ---- - ------- --- -- --- - ---sud Oeb%rda Nti..l 1wo 313 ls" is" n - Ieee Lim0 m2m iso a"4 ,lb -low -

Puble I Pubiluel turawed LY ii? 210 I33 07 9e u.a im ino IaZ a s40

Offclib Cditura 231 1a M2 aU lMS . UD 1039 12Y. 14ff 137 .

lblLilse rtl 36 61 55 41 73 . 2. O 33 33 407 493

or Wuhich 1 0 -1 l -1 3. 0 Al 30 27ofUkiahMA S M 36 s 3 o ar 1 1d 217 25 S

lilabtrul 1 7 n 46 as .. 40 718 n 1ol 1=.1

Mtr.u Crudltwa 126 2S 51 it .11 .. si t3 M62 49 alSupplier. 62 la 0 2 5 .. los 197 202 1SO 13

Plasalal Ibrketo 64 10 U 9 -20 .. 171 ae 30 30 307

Prite n- saoS T .. .. .. .. .. .. .. .. .. .. .. .'e5. LT 3Sp 210 me 97 iS .. 9 a13s 10o 167 2340

No CredIt 43 e 2 7 r 8 4 .. S 140 139 13 1.2

Nub Short-Tarm CaputIX 233 ISO 30 25 29 24 2B or 143 U 86TItul Incluing IFW & nt ST on 391 no 142 l" . . 121 1361 2141 mm us

uith und WDA Rutle 1960 3o2 1933 14 MAbP l066.

Suore of TOal Lang-Turu DD 3. 11 1.87 l.a 1.43 1.13

1. 15 ba S of Totl 12.72 11.19 11.66 12.31 13.17 .Duts en the Eenr_ic ludieatare tab3le. SPA an 3 of Total 15.63 13.06 13.25 13.74 14.3 .... ld fo llw the deE 0inilern NW

S. IRD5IDA us 2 ot Total ceno of tla SLondord Tublus NsSharu of Total LT Debt lerr.ics stue'd Attadiuuao. Tha lidlc*ets

1. 1DR a S or Total 4.72 3.74 3.89 4.44 2.62 elhwld inlIde Cuts throuch Utu at2. IDA - S of TOtal 1.80 2.22 3.44 4.03 2.6 recnntly ru_lte eslendr year (ar

3. I1I#1DA as £ of Total 6.13 1.82 9.2 6.47 1.47 fiscal year Is the me of fuIscl vaurcountieas). Stf et*laum my ha wand

-to-Erporte tles If final or Prelilinary actual-ae satgat__va I shoa . Th. ua of u-sts;e and

1. Una-Taru DehtjDlorta 34.91 427.62 119.67 6.113 6S9S6 prellaimnry fires shd e IndWioes2. 30 Cradit/Eaporte e0.-5 13.63 3.093 39.21 48.01 by -g

3. Shoru-Tar D&eb parta 45.962 227r 40.8 21.00 25.864. LT.FWSrT W/WEporta 24I.50 487 12 5W. 567.32 769.17 a a tlautd 4t.

p - praliainary u ats

D-to-WP Ratieo

1. Lan-Tsro- 0ubL/" 20.35 37.39 63.58 63.58 99.79

2. 1W Cradit/Wl 12.6 4.1 4.91 1.23 6. -

3. Sihrt-Ter DubS/CF 7.29 3.05 6.15 3.6 3.674. LT.IWDST 0D60/ 8.320 65.35 75.65 93.41 110.31

CubL Ser.1cu/exporta

1. Publis Crsntsed LT 1144 I2111 1. J 158 19.71 34.71

2. Pr;.uts No-CarsnatsaC LT3. Total LT Debt Sorvice 11.44 16.0 21.U 10.71 34.7

4. LW Resreus"as-* San Chan.

5. lateret Only on ST Debt6. Total (LT-DU.ST I.E..)----------

- 30 -ANNEX II

STATUS OF BANK GROUP OPERATIONS Page 1 of 1IN THE DEMOCRATIC REPUBLIC OF MADAGASCAR

A. Statement of Bank Loans and IDA Credits (as of September 30 1986)1

Loan orCreditNumber Year Borrower Purpose Bank IDA1 Undisbursed

-- (US S Millions)------Fifteen Credits and Five Loanshave been fully disbursed 32.57 181.43 --

CR 817-MAG 1978 Madagascar Andekaleka Hydroelectric 40.602 0.30CR 531-MAG 1979 Madagascar Mangoky - Agriculture 12.00 1.92CR 1002-MAG 1980 Madagascar Water/Sanitation 20.50 1.51CR 1064-MAG 1981 Madagascar Agriculture Bank - BTH 11.50 1.80CR 1086-MAG 1981 Madagascar Plain of Antananarivo T.A. 2.30 0.57CR 1155-MAG 1981 Madagascar Accounting & Audit 11.50 1.70CR 1161-MAG 1981 Madagascar Forestry II 20.00 6.60CR 1211-MAG 1982 Madagascar Village Livestock II 15.00 9.90CR 1249-MAG 19B2 Madagascar Agriculture Institutions 5.70 0.92CR 1298-MAG 1982 Madagascar Tsimiroro Heavy Oil Exploration 11.50 4.48CR 1337-MAG 19B2 Madagascar Lac Alaotra 18.00 13.65CR 1391-MAG 1983 Madagascar Sixth Highway 25.00 8.80CR.FO04-MAG 1983 -- ----- ----''--- 20.00 9.00CR 1433-MAG 1983 Madagascar Cotton Development 7.90 1.78CR.F008-MAG 1093 "--- --- ------ ' ------ 9.90 5.20CR.F1497-MAG 1983 Madagascar Urban 12.80 12.87CR 1526-MAG 1984 Madagascar Cyclone Rehabilitation 15.00 1.65CR 1541-MAG 1985 Madagascar Industrial Assistance 40.00 28.40CR.A0070-MAG 1985 Madagascar Industrial Assistance (SFA) 20.00 15.60CR 1589-MAG 1985 Madagascar Irrigation Rehabilitation 12.00 14.08CR 1661-MH&3 1986 Madagasear Accounting & Mgtmt Training 10.30 10.30CR 1694-MAG3 1986 Madagascar Third Railway 12.00 12.00CR 1709-MAG3 1986 Madagascar Second Ag. Institutions 10.00 10.00CR 1691-MAG3 1986 Madagascar Ag. Sector Adjust. Credit 20.00 20.00CR A16-MAG3 1986 Madagascar U " " " 33.00 33.00CR 1526-MGA 1986 Madagascar Cyclone Supplemental 10.00 10.00

TOTAL 32.57 607.93 236.63of which has been repaid 6.37 4.37

TOTAL now outstanding 26.20 603.56

Amount soldof which has been repaid -- 6.40

TOTAL now held by Bank and IDA 26.20 597.16

TOTAL undisbursed 236.63

1/ The status of projects listed in Part 'A' is described in a separatereport on all Bank/IDA-financed projects in execution, which is updatedtwice yearly and circulated to the Executive Directors on April 30 andOctober 31.

2/ Including a supplemental credit of USS 10 million of 1980.3| Not yet effective

- 31 -

ANNEX IIIPage 1 of 3

MADAGASCAR

Supplementary Project Data Sheet

Energy Proiect

I. Time-table of Key Events:

a. Time taken to prepare the project: Six months (Dec.1985-May 1986)

b. Agencies which have prepared JIRAMA; MIEM; MPARA;the project: FANALAMANGA

c. Date of identification mission: June 1985d. Date of appraisal mission: June 1986e. Date f negotiations: February/March 1987f. Planned date of credit effectiveness: August 1987

II. Conditions of Effectiveness

(a) The subsidiary loan agreement on behalf ofthe Government and JIRAMA will be executed(para. 74);

(b) The MIEN and JIRAMA Project ManagementUnits will be established and staffed andrespective PMU managers appointed (pars. 80);

(c) 50 percent of the aggregate arrears betweenJIRAMA, GON and "Collectivites d&centralisies'will be settled (para. 50);

(d) JIRAMA's capital will be increased by FMG4 billion (para. 86);

(e) Government will take and communicate toJIRAMA a decision to rake, effective January 1,1988, a tariff increase of not less than 9 percent anda combination of capital increase and import dutyexemption on spare parts and rehabilitation materialsto ensure that during 1988 JIRAMA will (i) generatefrom internal sources not less than 1 percent of itsinvestment program for FY88; and (ii) have at itddisposal adequate funds to cover the local expenditurerequirements of its investment program (para. 86);

(f) Contracts between JIRAMA and boiler users willbe signed (para. 50); and

- 32 -

ANNEX IIIPage 2 of 3

(g) New payment modalities for electricity bills forGovernment and 'Collectivitis d6centralis6es" willbe implemented (para. 50).

Conditions of Disbursement

(a) Before Phase II of the investment program becomeseligible for financing, JIRAMN and the Government willtake the necessary tariff, capital increase and othermeasures so that for 1989, based on reasonablefinancial projections acceptable to IDA, internalsources can be expected to contribute not less than 15percent to JIRAMA's 1989 investment program; andJIRAMA will be able to maintain a debt service coverageof not less than 1.2. In addition, the issue ofownership of all water and electricity networks andInstallations operated by JIRAMA will be resolved in adefinitive manner (para. 87);

(b) An intermediary agreement satisfactory to IDA willbe executed by the Government and BNI for the electric-boiler and the Haut Hongoro pine carbonizationcomponents (para. 84); and

(c) Government will mike commercial arrangements, forthe exploitation for charcoal production ofFANALAAMNGA'S pine smallwood satisfactory to IDA(para. 84).

IV. Special Conditions

(a) The remaining 50 percent of arrears betweenJIRAMA, GOM and *Collectivites decentralisees will besettled by September 30, 1987 (para. 50);

(b) Government and JIRAMA will prepare a tariff studyfor IDA review before September 30, 1988, and implementan agreed new tariff structure by January 1, 1989(para. 51);

(c) The RIP will be reviewed annually on eachSeptember 30, and revised, as appropriate, in agreementwith IDA; and JIRAMS will not undertake any majorchanges in its investment program (i.e. in excess of 1percent of its net fixed assets or US$2 millionwhichever is smaller), that is not included In the RIPunless the economic justification of such investmenthas been established in consultation with IDA(para. 54);

- 33 -

ANNEX IIIpage 3 of 3

(d) JIRAMA will not incur any medium or long-term debtwithout IDA's prior approval, unless reasonableprojections indicate that the debt service coverageratio, including the new debt, will not be less than1.4 times in any given year of the projection period(para. 88); and

(e) By each September 30, the Government, JIRAMA andIDA will undertake an annual review of JIRAMA'sfinancial performance to ensure that agreed financialcovenants are met in any given year during the projectimplementation period (para. 85).

MADAGASCAR

PUBLIC POWER STATIONS AND TRANSMISSION UNES

Power Stations: Transmission Unes: AN-B A vca2r

* Hydro -- 20kV A Ambanp

A Diesel 35kV ANTSERANANA63kV

Installed Capacity:

* A '_500kW Analaa A* A 500-1000kW AAn sohiyh h

* A 1000-5000kW A AAnahidrano A

U A ~~~~~~ooo~~~~w ~A tu. I* * >5000kW p .L S. !Stn

Mahajanga A pot.E.. A

AMaravoay An'Fo I, I

MAHAJANGA r : A u

A Al°Boeny!f

Mawyatanana A %Soarawan A A SadWa

| M rtionoA r < r

* U kYobe j TOAMASINA( ./ ANTANANARIVO I

TLnomrdwy .uA

4 J ANTANANARIVO

Tskanmmndi* 4A 1½ Ulauinarivo Al iS;nCr

AMiandrivazo FaralArna1 oAn y An aft

Beal-Tairibihina- AL i

Uorondava A ',

AmbatofinandrahanA £ Ambositra Cawal

I ~~~~~~~~~~~~Rh- _. _ Faflhry Bndari

,Jt + ~~~~Ahmaso

j fi~~~amarants aiNvnworna

/ Manan Žr% A uy

/M oAmbaIsvuo 1 _1

FIANARANTSOA A m5ws

TOLIARA (

A nIahvga.

Toilers atngk) Yndrao A Z- E TJWA~~~~~~~~~~~

Hetiokyr V r_1 -w ZDABAIDA() -L

at B. flW \ ,, E

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