PROJECT INFORMATION DOCUMENT (PID)APPRAISAL STAGE

Report No.: AB1375Project Name Integrated Growth PolesRegion AFRICASector Ports, waterways and shipping (30%);General industry and trade

sector (30%);General transportation sector (20%);General water, sanitation and flood protection sector (10%);Power (10%)

Project ID P083351Borrower(s) GOVERNMENT OF MADAGASCARImplementing Agency Secrétariat National du PIC

Ministry of FinanceMadagascardps@mttpat.gov.mg

Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined)Safeguard Classification [ ] S1 [X] S2 [ ] S3 [ ] SF [ ] TBD (to be determined)Date PID Prepared March 10, 2005Date of Appraisal AuthorizationDate of Board Approval July 7, 2005

1. Country and Sector Background

Madagascar is recovering strongly from an historical decline in per capita income. During the past three decades, Madagascar’s per capita GDP declined by 40 percent to US$220 in 2002. Structural reforms in the late 1990s played an important role in supporting growth performance up to 6.0 percent in 2001, the second highest rate in Africa at the time, mostly in the manufacturing sector (approximately 12 percent of total GDP), vanilla and shellfish exports.

Despite these positive developments, the impact on poverty reduction on the 16 million Malagasy was modest, and poverty in the rural areas increased. Corruption and rent seeking were also widespread. This contributed to the 2002 political crisis, stigmatized by a stand-off between the two presidential candidates. The crisis led to the destruction of key infrastructure and economic activity ground to a standstill, with Export Processing firms stopping all production.

The post-crisis period was marked by renewed strong economic growth, reaching 9.8 percent in 2003, bringing per-capita GDP to just below its 2001 level. This growth, however, relies on continued investor confidence in Madagascar and on some external factors influencing the tourism, fisheries and garment industries. In particular the tourism sector, exports of coffee, shellfish and litchis depend on strong growth in Europe, while the health of the garment industry depends on how competitive the industry is in a post multifiber agreement, quota-free US market, and anticipated changes in the EU garments trade regime.

Private capital flows are still extremely limited and unsustainable

The current growth of the Malagasy economy is unlikely to be sustained. While Madagascar evidences good labor productivity rates in terms of factory floor and labor costs1, and while preferential trade agreements are currently favorable to Madagascar, private capital flows into the country are still extremely limited (amounting to approximately 10 percent of the total foreign aid since 1997, at US$270 million2). This shows that the market response to current Malagasy reforms is timid, at best, and that negative changes in external factors could trigger further losses in competitiveness, divestiture from productive assets and reduced growth3.

Poor geographic redistribution of wealth

Madagascar’s recent growth had a comparatively low overall impact on poverty reduction; much lower than successful countries in South-East Asia 4. Evidences suggest that growth between 1999 and 2001 was beneficial mainly to the people at the top of the civil society or individuals above the poverty threshold. Except for the province of Antananarivo, all the five provinces became poorer over that time span. Other provinces5 have consistently displayed high poverty rates. The trends of poverty within region follow that of national headcount index with regional poverty gap improving only for the provinces of Antananarivo and Toliary between 1993 and 2001. Similarly, at a 85 percent head count index, the regional poverty gap is becoming deeper in rural areas for all provinces, except in Antananarivo. This demonstrates growth in Madagascar has not been shared.

Cost structure for Malagasy firms

Initial data on the Investment Climate Assessment in Madagascar (2005), indicate that indirect costs on firms exceed 40% of their total operating costs, when compared to approximately 20% in China6. These indirect costs are immediately attributable to the poor physical infrastructure available, including road networks, deficient power supply, high telecommunication costs and tax and policy inefficiencies.

Undeveloped EPZ cluster and value chain

In spite of numerous reforms launched since 2002, investor confidence in the EPZ sector has not totally recovered. The garment industry in particular is heavily dependant on imported inputs with few domestic linkages such as sub-contracting and supplier relationships. The overall growth and competitiveness of the industry is affected by weaknesses in the value chain in areas such as infrastructure and logistics, trade facilitation and domestic inputs. The industry also faces

1 Source: Cadot and Nasir (2001), the number of men’s casual shirts per machine operator per day in Madagascar equals that in South Africa; labor cost per shirt is at $0.16 while China evidences a labour cost of $0.29.2 Source: Global Development Finance 2004 – The World Bank 3 Source: World Economic Forum rankings on competitiveness, where Madagascar is at the 85th place; DoingBusiness 2005 data.4 Source : Madagascar Country Assistance Strategy - 2003.5 In 2003, on average, 85percent of the population in Fianarantsoa and Mahajanga and 78percent of the population in Toamasina and Toliary were poor.6 Source: Investment Climate Assessment Madagascar 2005 – Preliminary conclusions

considerable uncertainty as the global textile and garments production networks adjust and realign to cope with the changes in the trade regime.

Sources of growth are untapped

Tourism is a growing sector contributing largely to the 6 percent annual growth rate. In spite of the country’s extraordinary flora and fauna, it is better known to the scientific community than to tourists and the tourism sector remains under-developed. Madagascar receives approximately 100,000 visitors per annum while Mauritius receives approximately 700,000 visitors. Similarly, litchi, sisal and shellfish production, which are Toalognaro’s main wealth, and which are in demand, cannot be exported. The large ilmenite deposits in Toalognaro are the world’s highest grade, but have never been mined to this day.

This context creates the justification for regional growth poles providing appropriate business environments

Current growth in Madagascar is not spurred by the private sector, because of a deficient investment climate showing poor and unreliable infrastructure and high risks associated with the policy environment. In addition, wide ranging reforms addressing the structural issues described above will yield results only in the medium to long-term. To jump-start this process, the Government has therefore identified three regions where appropriate market conditions could be created to generate high private sector growth in the tourism7, mining and manufacturing8 sectors. These regions were selected for their growth potential, as well as regional balance they represented. Transversal activities targeting the business environment and supporting the development of these regions were also identified to help realize the growth potential:

The Nosy Be region: with a population of 61,000, the economic activity of the island of Nosy Be has been concentrated around sugar production and tourism. The sugar company, SIRAMA, which employs approximately 2,000 people, is in a de-facto bankrupt situation, while the unemployment rate on the island exceeds 90%. Tourism sector is underdeveloped with only some 25,000 tourists, visiting the island annually. Less than 20% of the population has access to potable water, and 43% is officially connected to the electrical grid. The port, which is used for tourism, container traffic and fisheries is clogged and does not meet basic safety requirements. The road network does not ensure access to the most spectacular sites of the island.

The Antananarivo-Antsirabé region: Export processing zone (garment) firms are scattered in and around Antananarivo with a few in Antsirabe. Firms cite the proximity to readily trainable and productive labor, urban and government services and the cooler climate as factors that attract them to locate in this area. There are a couple of privately developed and managed industrial zones but none of them has adequate infrastructure, proper customs and other facilities and services associated with a modern EPZ. The Government is currently supporting the development of a modern industrial zone in Tamatave through a public-private partnership arrangement. There is potential for similar

7 See World Bank’s Economic Sector Work of the Tourism sector published in 20038 See World Bank’s Economic Sector Work of the Export sector in Madagascar completed in 2003

public-private partnerships in developing modern industrial facilities in this pole to overcome the current constraints such as poor infrastructure and logistics. In the ICT sector the Association of Private ICT service providers GOTICOM is actively pursuing discussions to establish an ICT training center and ICT business park in Antanetibe on a public private partnership basis with strong possibilities to mobilize private financing.

The Toalognaro region: due to the poor conditions of the road network connecting Toalognaro to Toliary or to Anatanarivo, the Anosy region is landlocked. This situation has created endemic famine situations over the past years, making the 60,000 population of Toalognaro one of the poorest in Madagascar. The region’s main wealth has been, in the past, sisal production, shellfish and litchis exports. The existing port condition, however, severely constrains most economic activity. Solid waste collection covers only 15% of the population’s needs while the sewerage and sanitation system is not functioning. Only 31% of the population has access to electricity; power shortages are often registered. The promise of a large investment in an ilmenite mining operation has stalled most infrastructure investments during the last ten years. Tourism, which represents a promising economic potential, is underdeveloped.

Transversal issues to the three regions: Across the country, access to finance is difficult (less than 5% of the population has access to credit) while no specific facilities or services have been set up for medium and small enterprises. Leasing activities are not developed, credit bureaus do not exist and repossession of moveable assets is virtually impossible, given the lack of registry and cumbersome and time-consuming judicial procedures. Business linkages, training on business or sector specific matters generally does not exist, which creates difficult entry conditions for new entrepreneurs. Despite huge potential, tourism development has been very slow and SMEs in tourism have little support. This situation should also be seen as a hurdle to the development of larger firms, which often depend on the provision of products and services from smaller companies. Finally trade and investment promotion activities do not take place in a concerted way. The movability of firms fixed assets during the 2001 crisis shows that the business environment is not conducive enough to attract sustainable and long term investments in Madagascar.

2. Objectives

The overall purpose of the proposed project is to help provide the adequate business environment to stimulate and lead economic growth in three selected regional poles.

The specific objectives are to assist the Government to: (i) construct and rehabilitate critical infrastructure essential for sustained economic activity in the tourism, manufacturing, agribusiness and mining sectors; (ii) put in place appropriate incentive measures to achieve rapid growth; (iii) develop the instruments to ensure equitable, sustainable growth; and (iv) strengthen the capacity of local authorities to formulate, prepare, implement, and manage medium- and long-term integrated regional development projects.

The key indicators to monitor to measure the impact of the objectives are:

The increase in the number of tourists arriving at Nosy Be and Toalognaro airports and ports, as a proxy for growth measurement in the tourism sector via stimulus of micro, small- and medium-sized Malagasy firms;

The volume of merchandise and minerals shipped through the Toalognaro and Tamatave ports (proxy for growth measurement in agriculture, mining and manufacturing in Toalognaro and in the Antsirabe –Antananarivo components;

The number of new jobs created in the three poles (proxy for shared content of growth).

The Government recently completed its Poverty Reduction Strategy Paper (PRSP) with the objective of reducing poverty by half in ten years. The three key priorities set out by the PRSP are: (i) improving governance; (ii) promoting broad based growth; and (iii) providing security.

The Bank’s Country Assistance Strategy (CAS), which was approved by the Board in November 2003, focused on two projects for FY05 delivery, namely the first Poverty Reduction Strategy Credit (PRSC), which was approved by the Board on July 22, 2004, and the proposed project: the Integrated Growth Poles Project (IG2P).

The IG2P will contribute to the Government’s and Bank’s overarching CAS goal to foster broad based economic growth by focusing on export processing zones (Antananarivo-Antsirabe), the tourism and agribusiness sectors (Nosy Be and Toalagnaro), and the mining sector (Toalognaro). The IG2P will complement ongoing sector reforms, for example, in the telecommunications, power, and transport sectors. It will address constraints in human capital formation, governance, the business environment, institutional capacity and enterprise development identified as impediments to economic and social development. As a project catalyzing an integrated approach, the IG2P will not, however, be a proxy for the definition and implementation of sectoral policies, but will help remove impediments through concrete actions on the ground.

Private sector will use the public investments made under the project to leverage its own investments and reduce its risk for doing business in Madagascar. The IG2P will be a catalyst of private sector investment.

Private sector will use the public investments made under the project to leverage its own investments and reduce its risk for doing business in Madagascar. The IG2P will be a catalyst of private sector investment.

3. Rationale for Bank Involvement

The Government has requested Bank assistance to prepare and finance the proposed project to stimulate and sustain private sector led growth in the identified three poles. The Bank Group plays a unique role among the donor community in Madagascar: with the largest disbursing portfolio and it is seen as the Government’s main partner for alleviating poverty. It is the only donor with sufficient capacity and resources to take an integrated and multi-sectoral approach to stimulating economic growth. The European Union, the Agence Francaise de Développement, the European Investment Bank, the African Development Bank and the Millennium Challenge Account have also shown some interest in the project, but with a more sectoral focus and with different timelines. While a partnership with other donors interested in the project is likely, no commercial bank would have the ability to provide the width of technical and financial assistance required under the project.

The proposed project is a central element of the Bank’s strategy in Madagascar. It provides a platform for hard and soft infrastructure delivery in a coordinated and integrated manner (as defined in the Africa Region FPSI Strategy); and supports the Government’s decentralization initiative. It further draws on the joint IDA-IFC MSME Program for Africa, intended to achieve greater impact for the client through leveraging of the comparative advantages of each institution. Finally, this project heavily draws on the conclusions of the World Development Report 2005 (“A Better Investment Climate for Everyone”), and the 2005 Madagascar Investment Climate Assessment, which both demonstrate that the investment climate is central to growth and poverty reduction. A better investment climate can be achieved by alleviating constraints and addressing policy-related risks.

4. Description

The proposed project comprises five components: one corresponds to transversal activities in support to business environment activities, and three correspond to the regional growth poles.  The fifth component addresses and includes all activities related to project implementation, evaluation and monitoring. Annex 4 gives a detailed description of the components and activities under the project.

In each of the three growth pole components, a combination of investments and technical assistance is proposed:

Component A: Strengthening the business environment(US$51 million of which IDA will contribute US$15 million). Based on demand, the project will aim to provide proactive support to the MSME sector and to strengthen the business environment in the three geographic poles to allow Malagasy firms play a greater role in the economy. The component will also provide support for capacity building in tourism and will monitor specific policy changes. The main activities under this component to be developed and implemented in cooperation with the IFC and MIGA include: (i) improving MSMEs' access to finance by

bridging the gap between the financial institutions and the MSMEs; (ii) MSME capacity building to develop value chains; (iii) tourism capacity building; and (iv) improving the MSME business environment including monitoring of policy and regulatory changes to be taken by the Government, strengthening of the investment promotion agency and creation of registries.

Component B: Export led growth in Antananarivo-Antsirabe(US$8 million of which IDA will contribute US$6 million). Based on demonstrated private sector demand, the project will help develop off-site investments allowing the creation of an ICT business park in Antananarivo (Antanetibe site) and provide technical assistance for an industrial and agribusiness zones in Antananarivo and Antsirabe. The main activities of this component include: (i) improvement of the EPZ administration; (ii) improvement of the EPZ and customs procedures for EPZ firms; (iii) definition of a skills development program; (iv) construction of an ICT Business park in Antanetibe; and (v) technical assistance for the development of one or more industrial parks (EPZ) in Antananarivo and Antsirabe. Finally, the project will provide support to the municipalities of Antananarivo and Antsirabé through: technical assistance, training, rehabilitation of existing facilities.

Component C: Tourism led growth in Nosy Be(US$56 million of which IDA will contributeUS$36 million). The project will create an infrastructure platform and regulatory environment to expand the tourism industry significantly. The infrastructure will be designed to accommodate a demand of 2000 international-level hotel rooms by 2010. Core activities under this component include: (i) adoption of a tourism development master plan and urban development plan for Nosy Be to regulate and manage development in existing protected areas; (ii) upgrading of the road network to provide access to the isolated eastern part of the island and improve travel conditions between the airport, the main city (Hellville) and tourism sites; (iii) upgrading of the Hellville and Ankify ports (the latter under another ongoing IDA project); (iv) upgrading the public utilities system by supporting power generation and distribution, upgrading the water and sewerage system, upgrading urban solid and liquid waste management, and telecommunications; and (v) upgrading the urban infrastructure of Hellville and providing its hospital with a surgery block. Finally, the project will provide support to the municipality of Hellville and the regional Office National du Tourisme through: technical assistance, training, rehabilitation of existing facilities and creation of ecotourism facilities.

Component D: Mining and Tourism led growth in Toalognaro(US$174 million of which IDA will contribute US$58 million). The project will create the infrastructure platform and regulatory environments to open up the landlocked region of Toalognaro to facilitate the growth of tourism, agribusiness and to catalyze private sector growth in ilmenite mining. The infrastructure will be designed to accommodate a demand of 850 international-level hotel rooms by 2010. The principal activities under this component include: (i) the development (under a public private partnership) of a new public port on the Eahola peninsula to support the ilmenite mining operations and to facilitate market access for local production and exports, (ii) a partial rehabilitation of the existing port of Toalognaro to provide continuity for traffic during construction of the new port; (iii) upgrading the access road network,

notably RN13 and RP118 and the main rural roads, which could also become a support to tourism activities; (iv) upgrading the key public utilities services (power, water, sanitation, urban infrastructure and services and solid waste management) and telecommunications to support the growth of tourism and other economic activities in the region. The project will provide support to the municipality of Toalognaro, the regional Office National du Tourisme and the Chambre des Metiers through technical assistance, training, rehabilitation of existing facilities, construction of basic sanitary facilities, development a strategic urban and regional development plan to regulate and manage development of Toalognaro.

Component E: Program and project implementation, evaluation and monitoring(US$16 million of which IDA will contribute US$12 million). At the central and regional levels, the project will provide support for: (i) follow-up for the Environmental and Social Impact Assessment and the financing needs of the Environmental Management Plan Implementation (EMIP); (ii) GOM’s contribution to the financing of the main EMIP mitigation measures; (iii) expertise and advisors to the Steering Committee Secretariat to ensure proper monitoring of the program and project implementation; (iv) recruitment of adequate technical assistance and training to support the project management activities; (v) the preparation and update of the Project Management Procedures Manual, the financial management system (FMS), the project financial audits, training and the equipment and logistic support to the project management units (Antananarivo-Antsirabe, Toalognaro, Nosy Be); and finally; (vi) operating expenses of the project management unit.

5. Financing

Annex 5-Table ARepublic of Madagascar

Integrated Growth Poles Program & ProjectComponents Project costs Summary

(US$ million)Project Components % % Total

Foreign BaseLocal Foreign Total Exchange Costs

A. Strengthening the business environment 16 31 47 66 17B. Export led growth in Antananarivo & Antsirabe 3 4 7 51 3C. Tourism led growth in Nosy Be 22 28 50 55 18D. Mining and Tourism led growth in Tolagniaro (Fort Dauphin) 42 112 154 73 57E. Program and Project Implementation, Evaluation and Monitoring 6 9 15 50 5Total Baseline Costs 90 183 272 58 100Physical Contingencies 5 9 15 65 5Price Contingencies 5 12 16 72 6Total Project Costs 99 204 303 67 111

Note: Figures may not add up to total due to rounding

Annex 5-Table CRepublic of Madagascar

Integrated Growth Poles Program & ProjectComponents Project costs and financing

Local Foreign Total % Foreign % Total

Program Cost by Component Exchange Base Costs

A. Strengthening the business environment 16 31 47 66 17

1. Access to finance 12 26 38 69 142. MSME capacity building 2 2 3 50 13. Country-wide tourism development initiatives 1 2 3 59 14. Improving the business environment 1 2 3

B. Export led growth in Antananarivo & Antsirabe 3 4 7 51 3

1. Enhance EPZ competitivenes 1 1 2 68 12. ICT Business Park Development 2 1 3 47 13. Support to Antananarivo and Antsirabe municipalities 1 1 2 51 3

C. Tourism led growth in Nosy Be 22 28 50 55 18

1. Infrastructure upgrading 22 26 48 55 172. Social and Sanitary Infrastructure 0 0 1 51 -3. Local Institutions Strengthening 0 1 2 76 1

D. Mining and Tourism led growth in Tolagniaro (Fort Dauphin) 42 112 154 73 57

1. Infrastructure upgrading 40 109 149 73 552. Social and Sanitary Infrastructure 1 1 2 51 13. Local Institutions Strengthening 1 2 3 76 1

E. Program and Project Implementation, Evaluation and Monitoring 6 9 15 50 5

1. Support to program & project monitoring and evaluation 3 4 7 56 32. Support to project management and training 0 2 2 83 13. Technical assistance for project management & monitoring 1 3 3 83 14. Operating expenses for project management 2 0 2 8 1

Total Baseline Costs 90 183 272 58 100

Physical Contingencies 5 9 15 65 5Price Contingencies 5 12 16 72 6

99 204 303 67 111

99 204 303 100%

Government 46 0 46 15%IDA 28 100 127 42%IFC 5 11 16 5%Private Sector 6 68 75 25%Other identified donors 12 19 31 10%To be financed 3 5 8 3%Note: Figures may not add up to total due to rounding

________US $ million________

Total Project Costs

Total Financing, of which

6. Implementation

Project implementation period. The project will be implemented over a period of five calendar years and six fiscal years, completed by June 30, 2010, and closed by December 31, 2010.

Given the complexity and scope of the project, a lean and efficient implementation structure will be put in place:

Project oversight. During the project implementation, a Steering Committee (Comité national de pilotage), chaired by the Minister of Finance, composed of representatives of the sector

ministries, public utilities entities, region and town administrations, Office National de l’Environnement, the Office National du Tourisme, and relevant ministries, will be established. The Steering Committee will be responsible for policy guidance and overall project oversight, and will ensure communication and cooperation among stakeholders (including the private sector). Only when performance objectives given to the NPMU are not met (see below), will the Steering Committee be in a position to influence or delay the project implementation process. The Steering Committee’s Secretariat will be assumed by the NPMU.

Project coordination and implementation (NPMU). The overall coordination and implementation of the project will be carried out by the National Project Management Unit (NPMU), established at the national level, with three regional representations. Headed by a national project implementation coordinator recruited on a competitive basis, the NPMU will be responsible for project execution, including procurement, financial management, and monitoring and evaluation, of the various activities supported under the project. The NPMU’s performance will be benchmarked against timely implementation of the project implementation plan.

The main activities of the NPMU will be: (i) consolidation of the work programs and budgets; (ii) implementation of all activities; (iii) maintenance of records and accounts for all transactions related to NPMU; (iv) preparation and production of consolidated annual financial statements and quarterly FMRs; (v) contracting and supervision; (vi) management of disbursements for components under its responsibility and replenishment applications for the special account; and (vi) monitoring and evaluation of the various activities supported under the project.

The three regional representations will be based in Antsirabe, Toalognaro and Nosy Be. These regional representations will have a monitoring and coordinating role mostly. In order to enhance responsibility of the regional centers and implement the decentralization strategy of the Government, it is expected that some transfer of financial management and procurement responsibilities from NPMU to regional representations may take place during the second half of the implementation period (after the Mid Term Review) when capacities are deemed adequate following the assessment carried out by the Bank’s specialists.

To allow rapid implementation, execution of most activities under components A, B, C and D will be entrusted to different agencies under several service contracts “Contrat d’Appui à la Maîtrise d’Ouvrage Déléguée” (referred as CAMODs) or Contrat à la Maîtrise d’Ouvrage Déléguée” (referred as CMODs). The service agencies will be selected on a competitive basis, and will meet IDA procurement capacity requirements.

Steering Committee headed by Presidency(Government and stakeholders)

National Project Management Unit (Secrétariat national)

Implementation and management contracts (CAMOD, CMOD)

Contractors, suppliers of goods and services

Delegation of procurement and supervision only

Steering Committee headed by Presidency(Government and stakeholders)

National Project Management Unit (Secrétariat national)

Implementation and management contracts (CAMOD, CMOD)

Contractors, suppliers of goods and services

Delegation of procurement and supervision only

Procurement: . Procurement of works, goods and services under the project will follow World Bank Guidelines9. To ensure that the project is executed in a timely, transparent, efficient and integrated approach, it is expected that all procurement under components B, C and D will be carried out under service contracts (CAMOD) and will follow a Procedures Manual, satisfactory to IDA. Component A will be implemented under one or several CMODs. All other procurement activities will be carried out by the NPMU. For components B, C and D, Contractual relationships will be managed by the CAMOD agencies, while signature of contracts and disbursement will be done by the NPMU. Signature of contracts and disbursement will be managed by the service agency in the case of Component A. The NPMU will be strengthened to ensure that staff has adequate skills and competence to implement and monitor the project. Audits of procurement and disbursement of IDA funds and of other donors will be undertaken at regular intervals by internal and external auditors.

A manual of procurement procedures (covering all components of the project) for the activities financed by IDA as part of the project, is being drafted by the Borrower and should be finalized to the satisfaction of IDA before the proposed IDA-financed project is effective. The manual, which could also be adopted by other participating partners under the project, incorporates a range of procurement methods successfully implemented in Madagascar which will be used for the procurement of works, goods and equipment, consulting services, service contracts and operating costs.

9 Works and Goods wholly or partly financed by IDA will be procured in accordance with the Bank’s guidelines for Procurement under IBRD Loans and IDA Credits of May 2004. Consultancy services wholly or partly financed by IDA will be procured in accordance with the Bank’s Guidelines for Selection and Employment of Consultants by World Bank Borrowers dated May 2004.

Institutional arrangements for the port of Eahola. It is expected that the Eahola port would be constructed on a public private partnership basis with QMM, Rio Tinto’s subsidiary in Madagascar. Nevertheless, institutional arrangements for the construction and operation of the Eahola port were not finalized at time of Appraisal. As a result, while the port construction is part of the Growth Poles program, the proposed project will not finance its construction. In particular, the Government and Rio Tinto still needed to agree on: (i) the final design of the proposed port; (ii) the procedures to be put in place for the ESIA (Environmental Social Impact Assessment Study) to meet the World Bank safeguards requirements (including public disclosure); (iii) the institutional framework of the PPP between Madagascar and Rio Tinto which would allow the negotiations of the appropriate arrangements for the construction and operation periods, safeguarding the World Bank requirements for transparency, efficiency and competition bidding procedures, (iv) the detailed costing of the investment and finally (v) the firming up of the port financing plan. IDA is supporting this process, through the PPF advance, and international experts are already involved in advising the Government. Further advisory services will be provided under the project. Rio Tinto has informed the Government and the Bank that a final mining investment decision would be requested from their Board in July 2005, after an investment committee scheduled for June 2005.

7. Sustainability

8. Lessons Learned from Past Operations in the Country/Sector

ODA to create economic growth: With private investments representing only 10% of official development aid, the Malagasy economy seems to be over-dependant on public funding. While proposing an additional public investment, this project is designed to be leveraged by private sector investments and to create a context for public private partnerships. Investments in public infrastructure in Toalognaro should foster the Rio Tinto mining investment. Investments in infrastructure and business environment in Nosy Be and Toaglianaro should allow the development of a larger tourism industry. Investments in Antananarivo/Antsirabe should enhance the development of textiles and garments, ICT activities and agro businesses. Technical assistance and financing to MSMEs will help widen the financial markets and will be done in partnership with the local banks, mainly.

Focusing on delivering the basics: Broad-ranging improvements in the investment climate and in infrastructure provision through regulatory, institutional reforms and sector investment are typically done with national coverage. However, experience shows that such a strategy does not bring results in the short-term, and, more important, does not necessarily allow the emergence of a better business environment to foster private sector investment10. Given the importance of a reliable business environment for the success of this project, a combination of targeted investments and regulatory reforms focusing on (i) security; (ii) regulation and taxation (iii) finance and infrastructure and (iv) labor markets, will be financed through the project. These should allow generating pockets of growth in the shorter term.

10 Source: World development report 2005: “A better investment climate for everyone”

An integrated approach: Delivering sector investments sequentially will not yield the expected results and the project will not reach its objectives until the platform for growth is completed. Each sector investment implementation schedule will be carefully timed to coincide with other sector investments in order to allow the delivery of the integrated services essential to the platform, which will then support economic growth. The integrated approach is a results-based approach combining all segments of the project to attain one single objective.

A regionally focused approach: An emerging lesson is that a more regionally focused approach to development in response to private sector demand might better enhance impacts on growth and poverty reduction. Focusing on selected areas allows optimal allocation of scarce public resources and strategic deployment of limited institutional capacity. It also builds best practices for future integrated poles in Madagascar.

Decentralized and independent implementation arrangements: The IG2P is a regional project. To achieve better ownership, accountability and monitoring over the life of the project and to ensure quick delivery of the planned investments, the project will be executed with one central implementation unit reporting to the Vice Prime Minister’s office with three regional representations, each based in the regional pole concerned. Following discussions with the Government, it is expected that this unit will be independent and fully empowered to implement the project. Close collaboration will be sought with the new regional “Chefs de regions” and the mayors to promote ownership for economic development. The project will promote the active and significant participation of the private sector (under the MSME component). Over the life of the project, as capacities develop, these regional representations will take on more and more responsibility for implementation of specific activities. Catalyzed by the project, regional tourism offices will also be developed.

9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project Yes NoEnvironmental Assessment (OP/BP/GP 4.01) [X] [ ]Natural Habitats (OP/BP 4.04) [X] [ ]Pest Management (OP 4.09) [X] [ ]Cultural Property (OPN 11.03, being revised as OP 4.11) [X] [ ]Involuntary Resettlement (OP/BP 4.12) [X] [ ]Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [X]Forests (OP/BP 4.36) [X] [ ]Safety of Dams (OP/BP 4.37) [ ] [X]Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [X]Projects on International Waterways (OP/BP/GP 7.50) [ ] [X]

The project is classified in Category A for environmental assessment purposes. The approach to the safeguards triggered is presented below, and the results are summarized in Annex 10.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas.

OP 4.01 Environmental Assessment. The borrower’s consultants have prepared an Environmental and Social Impact Management Framework (ESMF) that will guide the screening, analysis, and safeguards approval of future subprojects in IG2P, not as yet defined. The ESMF also presents the guidelines and terms of reference for environment-based regional planning to be applied in the growth poles. The consultants carried out a “gap analysis” of QMM’s ESIA for the proposed mine, port and supporting facilities. In addition, an ESIA has been prepared for each growth pole, focusing on the subprojects planned for implementation in the first year of the project and including management and monitoring plans. Because of the particular needs of the marine protected area at Nosy Tanikely, a separate EMP was prepared for that subproject. An independent panel of experts engaged by the borrower to advise on social and environmental issues conducted its first field mission in December 2004 and submitted its initial report in January 2005.

OP 4.04 Natural Habitat. No critical natural habitat is being converted. QMM is compensating for the conversion of the brackish lagoon system to fresh water, primarily through provisions to sustain fish migration and to introduce native species adapted to the new conditions, including fish that can be managed for the artisanal fishery in the lagoons. QMM plans to protect the remnant of relatively undisturbed natural forest on the mine site, to revegetate mined areas, and to restore wetlands that are lost in the dredging operations. A significant portion of the beach and dune system at Ehoala will be placed in protected status as an offset for the portion of the beach that will be converted for the new port.

OP 4.09 Pest Management. The ESMF provides guidelines for application of the pest management policy should it in fact be triggered by any subproject.

OPN 11.03 Cultural Property. A Cultural Property Policy Framework has been prepared, and its application is explained in the ESMF. Known locations of cultural property are mapped in the ESIAs. The ring road for Nosy Be has been realigned to avoid a sacred tree, in consultation with the local community as specified in the Framework for all such cases.

OP 4.12 Involuntary Resettlement. A Resettlement Policy Framework (RPF) has been prepared to guide resettlement and land acquisition planning and implementation in future subprojects. Resettlement Action Plans (RAPs) have been prepared for two subprojects in Taolognaro and one in Nosy Be, as described below.

RAP for Rehabilitation of National Route 13 at Toalognaro – 44 street vendors to be temporarily relocated to continue their business at nearby sites until the rehabilitation is complete.

RAP for the access road from the mine to the new port, the quarry from which materials for the breakwater will be obtained, and the haul road from quarry to port –283 ha of agricultural land, 841 ha of house plots, 95 households to be relocated, total of 1046 individuals affected.

RAP for Rehabilitation and Improvement of Ring Road at Nosy Be – 10 ha of farmland and woodland, 14.5 ha of house plots affected, 14 households to be resettled, total of 814 individuals affected.

A Process Framework has been prepared for the marine protected area to be established at Nosy Tanikely (near Nosy Be), since its establishment may restrict access to customary resources by present users.

OP 4.36 Forests. It is unlikely that this OP will be triggered, but procedures for applying it are defined in the ESMF in case a future subproject should involve community forest management.

Consultation and Disclosure. Extensive consultation was carried out as the safeguards documents were prepared. All except the gap analysis (which is a working paper rather than a normal safeguards document) were publicly disclosed in Antananarivo and the relevant growth pole as well as in the InfoShop, with disclosures completed on March 8, 2005. The gap analysis will be made available to any interested party on request. A public comment period began under Government regulations with the disclosure, and the Government is conducting a series of consultations on the documents in each growth pole. overnment will conduct a series of consultations on the documents in each growth pole.

10. List of Factual Technical Documents

11. Contact pointContact: Ivan RossignolTitle: Sr Private Sector Development Spec.Tel: (202) 473-0105Fax: Email: Irossignol@worldbank.org

12. For more information contact:The InfoShopThe World Bank1818 H Street, NWWashington, D.C. 20433Telephone: (202) 458-5454Fax: (202) 522-1500Web: http://www.worldbank.org/infoshop