Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 36416-MG

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 26.9 MILLION

(US$40 MILLION EQUIVALENT)

TO

THE REPUBLIC OF MADAGASCAR

FOR A

THIRD POVERTY REDUCTION SUPPORT OPERATION

June 14,2006

Human Development 3 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I ts contents may not otherwise be disclosed without Bank authorization.

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AAA AAP ACM ADER AEPG AEPP AES AFD AfDB AGOA ARMP APL APMF AR ATC AT1 ATT NEAP BIANCO CAF CAPE CAS CBM CDE CEM CFAA CGDIS CHD CHRR CHU CIF CIFL CISCO CM1 CNFA CNLS CNN COMESA CSLCC CP CPAR CPGU CPI CPIA CRESED CROCC CSAs

CURRENCY EQUIVALENTS (as o f June 7,2006)

Currency unit = Ariary US$1 = 2169 Ariary

FISCAL YEAR January 1 - December 3 1

WEIGHTS AND MEASURES Metric System

ABBREVIATION AND ACRONYMS Analytical and Advisory Activities Africa Action Plan Civil Aviation Agency Agency for the Development o f Rural Electrification Water Supply Program Water Supply Program Water Supply in the South French Development Agency African Development Bank The African Growth and Opportunity Act Agence de RCgulation des Marchts Publics Adjustable Project Loan Maritime, Ports and River Agency Road Authority Agreement on Textiles and Clothing African Trade Insurance Agency Agency for Terrestrial Support National Environment Action Plan Bureau Independent Anti Corruption Cost and freight Steering Committee for Enterprise Promotion Country Assistance Strategy Central Bank of Madagascar Committed Expenses Monitoring Country Economic Memorandum Country Financial Accountability Assessment General Commission for Development of the South Hospital at district level Hospital at regional level Centre Hospitalier Universitaire Cost insurance and freight Interministerial committee on Local Revenues School District Agency Course Middle National Center for Administrative Training ComitC National de Lutte Contre L e Sida National Council for Malnutrition Common Market for Eastern and Southern Africa Conseil SupCrieur de Lutte Contre la Corruption Course Preparatory Country Procurement Assessment Review Cellule de Prevention et de Gestion des Urgences Consumer Price Index Country Policy and Institutional Assessment Credit for Strengthening the Education System in Madagascar Technical Working Group on Anticorruption Agricultural Service Centers

.. 11

CSB CSLCC DEA DFID DHS DMFAS DOTS DPT DTP EA EBFs EFA ENAM ENMG EPM EPZ EU F A 0 FERHA FCE FID FDI FDL FMG FNE FOB FRAM FSAP FTI F Y GDP GNFS GNI GOM GTZ GUIDE HASYMA HIPC HR IBRD ICA ICT IDA IFC IFMS IFMIS IGE IGF IG2P

IMF INSTAT JIRAMA JSA LCU MAP MAEP MBB MCA

IMCI-C

Centre de Santk Base Anticorruption Commission Directorate o f Water and Sanitation Department for International Development Demographic and Health Survey Debt Management and Financial Analysis System Directly Observed Therapy System Diphtheria, Pertussis, Tetanus Diphtheria, Tetanua and Pertussis Environmental Assessment Extra Budgetary Funds Education for A l l Malagasy National School for Administration National School for Magistrates Household Survey Export Processing Zone European Union World Food Program Irrigation Maintenance Fund Concessioning o f the Southern Railway Community Development Fund Foreign Direct Investment Local Development Fund Malagasy Franc National Fund for Electricity Free On Board Student-Parent Association Financial Sector Assessment Fast Track Initiative Fiscal Year Gross Domestic Product Goods and non-factor services Gross National Income Government o f Madagascar German Technical Cooperation Agency One Stop Shop for Investment and Enterprise Development Cotton Company Highly Indebted Poor Countries Human Resources International Bank for Reconstruction and Development Investment Climate Assessment Information Communication and Technology International Development Association International Finance Corporation Integrated Financial Management System Integrated Financial Management Implementation System General Inspectorate for the State General Inspectorate for Finances Integrated Growth Poles Project Integrated Management o f Childhood Illness International Monetary Fund National Institute for Statistics Electricity and Water Company Joint Staff Assessment Local Currency Unit Madagascar Action Plan Ministry of Agriculture, Livestock and Fishery Marginal Budgeting for Bottlenecks Malagasy Challenge Account

M D G MDRI M&E MECIE MEFB MEMDEA MENRS MENSUP METFP MFA M F N M G A MICTSL MIGA MINESEB

MMR M O H M O U MSME MTEF MTPT NEAP NER NGO NNP NPV ONG ONE ONN OPBP ORE PAEPAR PADR PARP PASEC PB PC PCR PDD PDIS PDRH PDSI PEFA PER PGDI PIP PNAEPA PPP PRGF PRM PRS PRSC PRSP PSI PSIA PTA

RA

MINSAN-PF

QMM

Millennium Development Goal Multilateral Debt Relief Initiative Monitoring and Evaluation National Environment Impact Legislation Ministry o f Economy, Finance and Budget Ministry o f Energy and Mining/ Department o f Energy and Sanitation Ministry o f National Education and Scientific Research Ministry o f Higher Education Ministry o f Vocational and Technical Education and Training Multi-Fibre Agreement Most Favored Nation Status Agreement Malagasy Ariary Madagascar International Container Terminal Service Ltd. Multilateral Investment Guarantee Agency Ministry o f Basic and Secondary Education Ministry o f Health and Family Planning Maternal Mortality Ratio Ministry o f Health Memorandum o f Understanding Micro, Small and Medium Enterprises Medium Term Expenditures Framework Public Works and Transport National Environment Action Plan Net Enrolment Rate Non-Government Organization National Nutrition Policy Net Present Value Non-Governmental Organization National Office o f Environment Office National de Nutrition Operational PolicyBank Policy Regulatory Agency for Electricity Water Project Action Plan for Rural Development Budget Support Program for Poverty Reduction International Surveys by Francophone Africa Project Brief Rice Platform Primary Completion Rate District Plan Development Integrated Development Program for Health Human Resources Development Pian Integrated Health Development Program Public Expenditure and Financial Accountability Public Expenditure Review Governance and Institutional Development Project Public Investment Program National water supply and sanitation program Public Private Partnerships Poverty Reduction and Growth Facility Procurement Responsible Person Poverty Reduction Strategy Poverty Reduction Support Credit Poverty Reduction Support Paper Population Services International Poverty and Social Impact Analysis Annual Work Program QIT Madagascar Minerals Road Authority

iv

RMF RMSP ROC RWSS SACU SADC SAPM SBD SDB SDP SEECALINE SGS SIGFP SIRAMA SNDS STA STI SWAP SY SYGADE TA TCSP TELMA TPI TSA TVET UAT UNCTAD UNDP UNICEF U S USAID VAT VHF VPM WASH WB WE31 ZAP

Road Maintenance Fund Risk Management and Social Protection Strategy Regional Operations Committee Rural Water and Sanitation Supply Southern African Customs Union Southern African Development Community National System of Protected Areas Standard Bidding Documents Small Disadvantaged Business Sector Development Program Nutrition Project General Inspection Society Integrated Financial Management System Malagasy Sugar factory National Strategy for the Development o f Statistic Technical Secretariat for Adjustment Sexually Transmitted Infection Sector Wide Approach School year Debt Management System and Analysis Technical Assistance Technical Committee on Social Protection Telecom Malagasy Court of First Instance Treasury Single Account Technical and vocational education and training Technical Support Unit United Nations Conference on Trade and Development United Nations Development Organization United Nations Children’s Fund United States United States Agency for International Development Value Added Tax Very High frequency Vice Prime Minister Water, Sanitation and Hygiene Committee World Bank World Bank Institute Pedagogical Administrative Zone

V

Vice President Gobind Nankani Country Director James Bond Sector Director Y a w Ansu Sector Manager Laura Frigenti Task Team Leader Stefano Paternostro

The PRSC Team includes Stefano Patemostro (Task Team Leader), Benu Bidani, Nor0 Aina Andriamihaja (Macroeconomics); Guenter Heidenhof, Slaheddine Ben-Halima, Emile Louis Rene Finateu, D. Randriamanampisoa, Gervais Rakotoarimanana, Sylvain Rambeloson, (Public expenditure management and governance); Sajitha Bashir, Patrick Ramanantoanina (Education); Anwar Bach-Baouab, Montserrat Meiro-Lorenzo (Health); Claudia Rokx, Anne M. J. Bossuyt (Nutrition); Christophe Prevost, Patrice Rakotoniaina (Rural water supply); Susanne Holste, Noroarisoa Rabefaniraka (Transport); Bienvenu Rajaonson (Environment); Sofia Bettencourt, Ziva Razafintsalama (Rural development); Nadine T. Poupart (Social protection); Ganesh Rasagam, Josiane Raveloarison (Integrated growth poles), Aline Coudouel (Monitoring and Evaluation) Sarah Keener (PSIA) Jan Walliser (Advisor) Andrianina Nor0 Rafamatanantsoa and Jenny Rahamefy (overall support) and Gilles Marie Veuillot (Legal). Elisabeth Huybens (EACDF) and Sanjay Pradhan (PRMPS) are the peer reviewers.

v i

THE REPUBLIC OF MADAGASCAR

THIRD POVERTY REDUCTION SUPPORT CREDIT

TABLE OF CONTENTS

I . Introduction .......................................................................................................................................... 1

I1 . Recent Economic Developments .......................................................................................................... 2 A . Macroeconomic Performance .......................................................................................................... 2 B . Medium Term outlook 4 C Debt Sustainability 7

..................................................................................................................... . ...........................................................................................................................

I11 . Madagascar’s Poverty Reduction Strategy ...................................................................................... 8 A . B . C . D .

Poverty in Madagascar ..................................................................................................................... 8 The Government’s Strategy for Reducing Poverty and i t s Implementation .................................. 10 World Bank Country Assistance Strategy and Support to the Implementation o f the PRSP ......... 12 Donor Collaboration in Supporting the Implementation o f the PRSP ........................................... 15

IV . Poverty Reduction Support Credits Program ................................................................................. 16 PRSC 4 ........................................................................................................................................................ 24 Improving Governance ................................................................................................................................ 25

A . B . Fighting Corruption ........................................................................................................................ 32 C . Justice ............................................................................................................................................. 33 D . Customs .......................................................................................................................................... 35 E . Decentralization ............................................................................................................................. 36

Public Expenditure Management ................................................................................................... 25

..................................................................................................... F . Training and Capacity Building 37 Providing Human and Material Security ..................................................................................................... 38

A . Education ....................................................................................................................................... 39 B . Nutrition ......................................................................................................................................... 41 C . Health ............................................................................................................................................. 44 D Rural Water Supply 48 E . Social Protection ............................................................................................................................ 49

. ........................................................................................................................

Strengthening Monitoring and Evaluation o f the PRSP .............................................................................. 51

V . Credit Implementation and Risks ....................................................................................................... 52 A . Credit Sdministration ..................................................................................................................... 52 B Environmental Aspects 53 . .................................................................................................................. C . Risks ............................................................................................................................................... 53

Annexes Annex 1 Policy and Institutional Reform Matrix ........................................................................................ 56 Annex 2 Letter o f Government Policy ........................................................................................................ 70 Annex 3 Status of actions for PRSC 3 Policy Matrix ................................................................................ 81 Annex 4 Progress in Supporting Broad-Based Growth .............................................................................. 88 Annex 5 Madagascar at a Glance ................................................................................................................ 93 Annex 6 Madagascar Key Economic Indicators ......................................................................................... 95 Annex 7 Monitoring Indicators ................................................................................................................... 97

vi i

Boxes Box 1 Madagascar’s Development Vision and Strategy ............................................................................. 11 Box 2: Lessons Learned . Implementation of PRSC 1 and PRSC 2 .......................................................... 13

Figures Figure 1: The Three Year PRSC Program .................................................................................................. 17

Tables Table 1: Selected Indicators of Real Sector Activity. 1997 . 201 1 ............................................................. 4 Table 2: Exports 2004-2005 .......................................................................................................................... 5 Table 3 Financing Requirements 2006-201 1 ............................................................................................... 6 Table 4 Macroeconomic Framework 2004-201 1 ......................................................................................... 6 Table 5: Analytical and Advisory Activities ............................................................................................... 14 Table 6 Broad-Based Growth - Key Policies ............................................................................................. 19

Table 8: Key Development Outcomes 2003-2006 ...................................................................................... 23 Table 9: Prior Actions for PRSC 3 and Indicative Triggers for PRSC 4 .................................................... 24

Table 1 1 : Expected Results o f the EFA Program ....................................................................................... 41 Table 12: Key Intermediate Outputs of the Nutrition Program ................................................................... 43

Table 7: Status o f Indicative Triggers for PRSC 3 ...................................................................................... 20

Table 10: Key Policy and Institutional Reforms in Governance since July 2005 ....................................... 25

... V l l l

THE REPUBLIC OF MADAGASCAR

THIRD POVERTY REDUCTION SUPPORT CREDIT

CREDIT SUMMARY

Borrower: The Republic o f Madagascar

Amount: SDR 26.9 mill ion (US$40 mil l ion equivalent) credit

Terms: Standard IDA terms: 40-year maturity

Description: In l ine with the Bank’s Country Assistance Strategy for Madagascar, a series o f single tranche Poverty Reduction Support Credits (PRSCs), provided in the form o f budget support, i s envisaged to support implementation o f two o f the three main axes o f the PRSP: governance and providing human and material security.

PRSC 3 support to the strategic axis o f governance aims at consolidating and deepening reforms commenced with PRSC 1 and PRSC 2 . This includes assistance to the Government in continuing to implement i t s 2005 Priority Action Plan for public expenditure management reforms, and developing and implementing its 2006 Priority Action Plan. These reforms include improving the alignment o f the 2006 budget to the priorities o f the PRSP, the reform o f the Treasury, the installation o f a transitional integrated financial management system, taking steps to make the new procurement code operational, and the preparation o f draft budget execution laws (Projet de loi de rkglement). Following the operationalization o f the Anti-Corruption Agency (BIANCO), PRSC 3 deepens support for the Government’s anti-corruption agenda. It also supports the implementation o f a reform program for customs.

PRSC 3 consolidates support to the strategic axis o f providing human and material security, by supporting the Government’s Education for All Agenda and improving service delivery in nutrition, health and rural water supply. A very large increase in primary school enrolments has been supported by key policy reforms which have included a continued increase in the share o f the education budget, continued measures to decrease education costs for poor households starting with the school year 2002/2003 (suppression o f school fees, provision o f learning materials to al l primary students), actions to increase access for students (through school construction, salary compensation for teachers paid by parents, teacher recruitment) and reinforcement o f management capacity at central and decentralized levels. PRSC 3 continues to support policy and institutional reform in the nutrition sector, following the establishment o f the National Council for Nutrition and the establishment o f i t s secretariat (Office National de Nutrition). In rural water, PRSC 3 supports the implementation o f the water and sanitation strategy for all. In health, following the national policy on health and the development o f a Medium Term Expenditure Framework, the PRSC supports improvements in sector budgeting and fmancing as well as improved access and quality o f service delivery. An IDA-supported Technical Assistance Credit (Good Governance and Institutional Development), approved in November 2003, i s assisting the

ix

Benefits:

Risks:

government in putting in place the systems to strengthen budget management, and finance technical assistance and capacity building needs.

The Country Financial Accountability Assessment (CFAA, 2003), the Country Procurement Assessment Report (CPAR, 2003), and the 2005 Public Expenditure Review (PER) provide the analytical underpinnings for the public sector reform agenda o f the PRSC series. Updated analysis for the Education for All underpins the education reforms. A Health Sector Note has provided the foundations for the health policy reforms.

The proposed operation i s the third PRSC in the series and will continue to contribute to Madagascar reaching i t s development goals. The reforms supported w i l l strengthen the institutional infrastructure needed to improve the public sector’s capacity to carry out i ts role more effectively. Improved delivery o f public services is essential if the Government i s to reach i t s goals for poverty reduction and improve the quality o f l i fe in Madagascar. In addition, strengthened monitoring and evaluation w i l l lead to an enhanced accountability and results focus.

The implementation o f this operation continues to be exposed to risks, many o f which were already identified in previous PRSC operations. The main risks include: (i) vulnerability to external shocks, particularly cyclones and changes in global commodity prices, such as o i l and rice; (ii) political issues, particularly in an election year, present a risk; (iii) maintaining a stable macroeconomic environment, which is critical to the successful implementation o f the PRSC and i s a core area o f focus o f the future poverty reduction strategy; (iv) the implementation o f public finance reforms poses challenges and risks negatively impacting service delivery (v) capacity constraints also present significant risks to the effective implementation o f the poverty reduction strategy.

The Government and Bank are undertaking several measures to mitigate risk. The Bank has finalized a Risk Management and Social Protection Review to assess risk prevention and mitigation strategies, and has modified procedures for i t s Community Development Project to rapidly respond to emergencies. On political issues the Bank continues to focus on transparency and anti-corruption, with the PRSC and the Governance and Institutional Development Project being the main instruments. On the macroeconomic environment and overall governance, the Bank i s continuing to support reforms in the areas o f public financial management and capacity building through ongoing investment operations, the PRSC series and the Governance and Institutional Development project, i ts AAA programs and W B I capacity building support. The Bank w i l l also continue to- coordinate i ts support in these areas with the IMF in the framework o f the new PRGF program. On capacity constraints, the donor community has intensified efforts at coordinating assistance programs, harmonizing disbursements and procurement procedures and developing common programmatic approaches around the PRSP. The donor community i s also increasing i t s level o f technical assistance and support for capacity building.

Estimated Disbursement: SDR 26.9 mil l ion (US$40 mil l ion equivalent) wil l be disbursed in a single tranche

following effectiveness.

X

Project ID Number: PO96102

xi

THE REPUBLIC OF MADAGASCAR

THIRD POVERTY REDUCTION SUPPORT CREDIT

PROGRAM DOCUMENT

I. INTRODUCTION

1. This Program Document proposes a third Poverty Reduction Support Credit (PRSC) for Madagascar for US$40 million. This operation follows the f i rst two PRSC operations approved by the Board on July 20, 2004, and July 12, 2005. It continues the implementation of the three-year policy and institutional reform agenda as first laid out in the PRSC 1 policy matrix. This operation i s consistent with the Bank’s Country Assistance Strategy (CAS) to support the implementation o f the Government’s Poverty Reduction Strategy Paper (PRSP). The objective o f Madagascar’s PRSP i s to promote rapid and sustainable development to reduce poverty by half in ten years. To attain this objective, the PRSP lays out three key axes: (i) improving governance; (ii) promoting broad based growth; and (iii) providing human and material security. A cross-cutting pillar o f monitoring and evaluation underpins the strategy.

2. The PRSC program for the first three PRSCs focuses explicitly on the strategic axes of governance and human development, and includes specific policy actions in these areas. The PRSC does not include any specific policy actions on the other PRSP pillar of broad-based growth. While there i s a policy dialogue in these areas as part o f the PRSC, the Bank support for growth i s through its significant portfolio of ongoing investment projects in infrastructure, environment, mining, rural development, the Integrated Growth Poles project and a new Irrigation and Watershed project being presented at the Board in FY07.

3. The implementation of the program supported under the first two operations (PRSC 1 and PRSC 2) i s satisfactory and the indicative triggers for PRSC 3 have been fulfilled. The program document reviews the progress made in implementing the poverty reduction strategy, with particular emphasis on the areas of focus of PRSC support (governance and human development). The reform program supported under PRSC 3 continues to assist the consolidation of reforms f i rst commenced with PRSC 1 in fighting corruption, improving public expenditure management and customs, and in implementing the Education for All and nutrition programs. In addition, reforms to expand access to safe drinking water, improve health outcomes and provide protection from shocks have also advanced.

4. I n 2005 Madagascar continued to make satisfactory progress in implementing its poverty reduction strategy, despite another difficult year marked by exogenous shocks. Madagascar has continued to maintain i t s focus on implementing i ts poverty reduction strategy, with good results evident particularly in the implementation o f the roads program, Education for All, nutrition and health reforms. However, adding to an already difficult 2004 with two devastating cyclones, in 2005 Madagascar suffered from the increase of world petroleum prices and the financial crisis o f the electric parastatal JIRAMA which has had a disruptive effect on economic activity as production was negatively affected by the ensuing power cuts and subsequent tariff increases. The Government has responded to this situation and has put in place a recovery plan for JIRAMA that i s now being implemented. Inflation has slowed considerably to 11.4 percent in 2005 from a rate o f 27 percent in 2004 and the price o f rice has started to

1

decline since March 2005 and has now stabilized. Measures to enhance exchange rate stability and secure an adequate level o f international reserves were also successful in ensuring greater stability o f the market- determined exchange rate

5. GDP growth in 2005 i s estimated to be at 4.6 percent compared to the 5.3 percent recorded in 2004. The main sources o f growth for 2005 have been the agricultural sector, particularly with higher rice production, tourism and public investment programs. Growth projections forecast an average growth rate of over 5 percent over the 2007-2010 period. After having reached the Heavily Indebted Poor Country (HIPC) Initiative Completion Point in October 2004, Madagascar wil l now benefit from the G8 Multilateral Debt Rel ie f Initiative (MDRI), with significant debt re l ie f and improved prospects to maintain sustainable debt levels in the medium term. Madagascar i s also a recipient o f the U S Millennium Challenge Account (was the f i rst country to become eligible).

6. Moving forward, the Government of Madagascar i s in the process of elaborating its second- generation poverty reduction strategy (called the Madagascar Action Plan - MAP) which will be completed over the course of this year. The Bank’s new CAS for FY07-11 i s currently under preparation and wi l l serve as the Bank’s program of support to the implementation o f the MAP. It i s expected that the CAS wi l l be presented to the Board in January 2007 and that it wi l l include the proper mix of instruments between investment and budget support. In particular, the CAS wi l l outline the focus of the future PRSC series which wil l be the core element o f the Bank’s financial support to the MAP.

7. A fourth PRSC - that will be fully aligned with the first three PRSCs - i s proposed for July 2007. The PRSC 4 wil l bridge the time-lag between finalizing the MAP and the CAS and designing the future PRSC series. It wi l l ensure continued annual PRSC financing to Madagascar’s poverty reduction efforts and wi l l be fully harmonized with other donors’ annual support.

11. RECENT ECONOMIC DEVELOPMENTS A. MACROECONOMIC PERFORMANCE

8. The macro-economic environment in 2005 was marked by several shocks, including an increase in world petroleum prices and a financial crisis at the electric parastatal, JIRAMA, which disrupted economic activity through power cuts and subsequent tariff increases. These shocks caused a reduction in the economic growth projections for 2005 to 4.6 percent. Growth came largely through improved performance in agriculture, especially higher rice production, higher tourism receipts, and continued public investments. Growth in the textile sector stagnated with the phasing out o f the Most Favored Nation Status agreement (MFN). The textile sector i s in a consolidation phase, with some closures, and some re-positioning to continue to benefit from low labor costs. Tourism arrivals in 2005 were 21 percent higher than in 2004. Growth in 2006 i s projected to be under 5 percent, with slower agricultural growth than in 2005, due to the rain shortfalls in the early part o f the year which are likely to impact the rice harvest.

9. Despite significant inflationary pressures, inflation moderated to 11.4 percent at year end in 2005 from a high of 27 percent at year end in 2004 linked to a tight monetary policy. Rice prices, which rose sharply from late 2004 through February 2005, started declining after March 2005 and have stabilized at around 900-1000 Ariary/kilo for local rice. Higher producer prices which gave a positive incentive to farmers have contributed to higher local production and clear signals by Government to leave the r ice market to the private sector have ensured that adequate rice imports were available in the market during the lean season. The Government also reduced the import taxes on rice to zero in July 2005. As noted above, world petroleum prices increased dramatically, further exacerbating inflationary pressures.

2

The Government’s m o n e t q policy was tight, with broad money increasing by only 2.8 percent year-on- year in December 2005 and yields on Treasury bills increased from 17.4 percent at year end in 2004 to 18.6 percent in 2005. Year-on year inflation at end-April 2006 has declined further to 10.4 percent. Overall, higher than expected oil prices in 2006, are expected to result in inflation of around 11 percent for the year 2006 (at year end).

10. The measures adopted to ensure exchange rate stability and competitiveness, and secure an adequate level o f international reserves were broadly successful with the market-determined exchange rate exhibiting greater stability in 2005. Foreign reserves also increased to 2.9 months o f imports by year end in 2005 up from 2.8 months a year earlier. The guidelines adopted by the Central Bank for intervention in the foreign exchange market with the aim o f directing Central Bank (BCM) interventions to achieving i t s foreign assets objectives and at dampening sharp swings that would create uncertainty were broadly followed. The BCM has also received further technical assistance in exchange rate management from the IMF in early 2006. The continuous inter-bank foreign exchange market with an electronic trading system is functioning well, providing increased information to the operators and contributing to reducing the volatility o f the exchange rate.

1 1. The electricity parastatal’s (JIRAMA) structural and financial difficulties had a negative impact on growth in 2005, but a recovery plan i s now being implemented. JIRAMA presented this financial recovery plan in January 2006 and received donor support for i t s implementation. As part o f the plan, JIRAMA has implemented two tariff increases for electricity o f 30 percent and 35 percent in July and November 2005 respectively to bring tariffs more in line with production costs. Further tariff increases of 10 percent for electricity were implemented in April 2006. Measures to improve the efficiency of JIRAMA are also under implementation, as are measures to reduce the dependence on diesel generated electricity. JIRAMA is currently operating under a management contract which i s due to terminate in April 2007. The Government has committed to a longer-term public-private partnership solution in the form of an affirmage for JIRAMA after the current management contract i s completed.

12. However, significant revenue shortfalls in customs and tax collections, linked to weaknesses in administration, have led to a decline in the share of tax revenues in GDP from 10.9 percent in 2004 to 10.1 percent in 2005. The persistent problems in revenue mobilization have hampered the Government’s ability to implement i t s ambitious poverty reduction strategy, with mid-year expenditure cuts implemented to maintain overall fiscal discipline. In 2005, year-end expenditure overruns also highlighted problems o f expenditure management, and the Government i s currently undertaking an audit o f the expenditure commitment process, which wil l form the basis for improvements to the system (see Section N A for a detailed discussion of the public expenditure reform program). The Government i s implementing a customs reform program (see Section N, D for the details o f the status of the reform program).

13. Overall, the macroeconomic situation remains fragile, especially as revenue mobilization remains weak. This i s due to long term structural problems which the Government i s committed to tackling, and the PRSC i s supporting reforms to strengthen fiscal management. Given that achieving results i s linked to deep institutional reforms, the reform program requires sustained engagement and support. The IMF has concluded discussions on a new Poverty Reduction and Growth Facility (PRGF) arrangement with the Government, and the new program i s expected to be presented to the IMF Board in July 2006.

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B. MEDIUM TERM OUTLOOK

14. Despite adverse external shocks, growth has remained at respectable levels after the 2002 crisis and i s expected to remain at over five percent in the medium term. After a sharp decline o f 13 percent in 2002, growth rebounded to 9.8 percent in 2003, was 5.3 percent in 2004 and i s projected at 4.6 percent in 2005. The macroeconomic projections forecast an average growth rate o f around 5.6 percent over the medium term (2007-2010).

Table 1: Selected Indicators of Real Sector Activity, 1997 - 2011

1997- 2007- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011

GDP growth 4.6 -12.7 9.8 5.3 4.6 4.7 5.6 5.6 5.6 5.6 5.6 5.6 Primary 2.5 -1.3 1.3 3.1 2.5 2.1 3.1 3.2 3.2 3.2 3.2 3.2

ofwhichagriculture 1.8 0.8 2.6 3.5 4.5 2.6 3.5 3.5 3.5 3.5 3.5 3.5 Secondary 5.8 -20.7 14.5 6.5 3.0 4.8 5.4 5.5 5.5 5.5 5.5 5.5

o f which EPZ 22.9 -40.0 76.0 25.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 o f which mining -5.5 -34.0 10.0 7.7 4.4 3.7 5.0 5.0 5.0 5.0 5.0 5.0

Tertiary 5.3 -15.0 10.6 6.0 6.1 6.2 6.9 6.9 6.8 6.9 6.9 6.8 ofwhichconstruction 10.1 -15.1 30.0 29.0 18.8 20.9 17.5 17.0 15.0 15.0 13.0 15.5 of which passenger

transportation(tourism) 11.2 -35.4 13.0 6.3 7.4 7.8 7.0 7.0 7.0 7.0 7.0 7.0

ofwhichtelecom. 9.3 -5.7 8.4 5.0 5.3 5.0 6.5 6.5 6.5 6.5 6.5 6.5 Source: Ministry o f Finance and IMF Staff projections, May 2006

15. The main sources of growth include tourism, mining, construction and, most important for the poor, improved growth prospects in agriculture. The EPZ sector i s not expected to grow due to the impact o f the expiration o f the MFA. Tourism and related activities are expected to continue to grow further given the planned private investment in hotels and the increasing number o f tourists. In mining, the recently approved ilmenite mining project financed by Rio Tinto in the Fort Dauphin region i s under implementation.

16. Agriculture i s projected to sustain the good performance initiated in 2003 in the medium- term, with an annual growth rate of over 3 percent. Agriculture grew by about 4.5 percent in 2005. The increase in producer prices in rice in 2004 provided incentives for producers which contributed to increased rice production. Growth in 2006 i s projected to be slower, due to rain shortfalls, which has affected agricultural production. Overall, the implementation o f the irrigation and roads program i s designed to relax the constraints facing rural producers and continue to lead to improved growth prospects in the sector, with reduced vulnerability to natural shocks. Thus, the improved performance i s expected to be sustained over the medium term with the emphasis on rural development in the Government’s vision “Madagascar Naturellement” (see Box 1) and with investments under the proposed IDA Irrigation and Watershed Management project and the Millennium Challenge Account program.

17. Investment levels needed to generate this growth are expected to average just under 23 percent o f GDP and this i s expected to be driven mainly by an increase in private investment.

4

Private investment in 2005 was over 12 percent, compared to an average o f 8.1 per cent o f GDP between 1997 and 2001. Private investment i s expected to average 12.4 percent o f GDP over the 2007-1 1 period. Foreign direct investment (FDI) i s increasing and reached 1.9 percent o f GDP in 2005, and i s projected to increase to over 3 percent o f GDP in 2010. Investment in tourism and mining and the investment related to the implementation of the management contracts in infrastructure (airports, ports, electricity and water) wi l l give impetus to an increase in FDI.

Export(Fob SDR millions) 2004 2005

2004 In % of Total Exports

18. Exports are projected to grow at over 6 percent per year over the forecast period. In 2005, with the expiration of the Multi-Fibre Agreement, textile exports were almost o f the same value as in 2004, and the value of vanilla exports was significantly lower due to the collapse of world vanilla prices. But tourism exports are expected to be higher. In the medium term, export growth i s likely to come through tourism, mining and a more diverse range of agricultural products.

Textiles' Mining Shrimp Vanilla Total 268.3 8.9 68.47 94.8 669.1 25 1.9 10.6 50.00 27.4 569.0

40.10 1.33 10.23 14.17 65.83 2005 I 44.27 1.86 8.79 4.82 59.74

Source: Central Bank o f Madagascar and World Bank Staff May 2006 'Includes EPZ 'Chrome and graphite

19. I n the medium term, the balance of payments i s projected to improve with the level of international reserves reaching the equivalent of 3.1 months of GNFS imports in 2011 higher than the 2004 level of 2.8 months. Along with an improvement of the capital and financial account due to the net increase in FDI, the current account balance deficit, including grants, i s projected to decrease steadily from 10.8 percent o f GDP in 2005 to 10.1 percent o f GDP in 201 1.

20. Government expenditures are expected to average over 21 percent of GDP over the forecast period, with capital expenditures averaging over 10 percent o f GDP versus 7.4 percent o f GDP for the 1997-2001 period. Government expenditures on capital reflect the significant investments in roads, in irrigation and the planned investments under the Bank's Integrated Growth Poles Project on energy, water and sanitation investment in Nosy Be as well as additional infrastructure around the EPZ and information communication and technology (ICT) parks o f Antananarivo.

21. Overall, foreign assistance, including assistance under the enhanced HIPC and the MDRI, plays an important role in macro management and poverty reduction in Madagascar. The financing requirements shown in Table 3 are met through significant donor assistance, in the form o f project and budget financing, and improved revenue mobilization. The Government is committed to implementing a program to increase tax revenues to support i t s development objectives and revenue mobilization i s expected to reach 13.4 percent o f GDP in 201 1 up from 10.1 percent o f GDP in 2005. To this effect, the Government i s implementing an ambitious customs reform program, which i s finally beginning to show results (see section IV D).

5

Table 3 Financing Requirements 2006-2011 (% o f GDP unless otherwise indicated)

2004 2005 2006 2007 2008 2009 2010 2011 Financing

Foreign (net) Drawings Budget Project

o f which MDRI assistance from IDA o f which M D R I assistance from A D B

Amortization due 1

Change in external arrears External debt relief

Domestic (net) o f which: Banking system

o f which M D R I Account Non-banking System

Privatization receipts

Memorandum items: Nominal GDP (in billions o f ariary) Resources freed by MDRI debt relief

IMF IDA

5.7 6.4 7.1 1.8 5.3 -2.3

0.0 1.6

-1.0 -2.6

0.4

8,156

4.3 3.8 4.5 1.6 2.9 -1.8

0.0 1.1

0.5 -1.1

1.2 0

10,095

-38.7 -35.7 6.0 1.2 4.8

-41.7 -34.6 -6.0 0.0 0.0

-3.1 -3.1 -2.8 0.0 0.0

11,795 0.6 0.3 0.3

5.7 5.0 5.4 1.1 4.3 -0.4

0.0 0.0

0.6 0.4 0.3 0.2 0.0

13,722 0.8 0.3 0.5

5.3 5.2 4.5 4.4 4.8 4.7 1 .o 1 .o 3.8 3.7 -0.3 -0.3

0.0 0.0 0.0 0.0

0.8 0.8 0.6 0.6 0.3 0.2 0.2 0.2 0.0 0.0

15,686 17,580 0.8 0.8 0.2 0.2 0.5 0.5

5.1 4.3 4.6 1 .o 3.6 -0.3

0.0 0.0

0.8 0.6 0.2 0.2 0.0

19,513 0.8 0.2 0.5

4.8 4.3 4.5 1 .o 3.5 -0.1

0.0 0.0

0.5 0.3 0.2 0.2 0.0

2 1,664 0.8 0.2 0.6

A D B 0.1 0.1 0.1 0.1 0.1 0.1 Sources: Ministry o f Economy, Finance and Budget and Fund staff estimates and projections, May 2006 Note: ’ After MDRI relief from 2006 onwards. 2006 numbers reflect accounting o f MDRI.

Table 4 Macroeconomic Framework 2004-2011 (“h o f GDP, unless otherwise indicated)

2004 2005 2006 2007 2008 2009 2010 2011 GDP Growth (% change)

Real GDP growth Consumer Price Index (period average) Consumer Price Index (end o f period)

Investment Government Non-Government

Central Government Account Total Revenue (excluding grants) o f which: Tax revenue

Grants

Total Expenditure Current Expenditure Capital Expenditure

Domestic Balance Overall balance (commitment basis, excluding grants) Overall balance (commitment basis, including grants)

Trade balance Exports f0.b. Imports c.a.f

Current Account (excluding grants) Current Account (including grants)

5.3 13.9 27.3

24.3 12.5 11.8

12.0 10.9 8.2

25.1 12.6 12.5

-2.3 -13.9 -5.7

22.9 39.0

-13.1 -9.3

4.6 18.4 11.4

22.5 10.3 12.3

10.9 10.1 5.7

21.2 11.0 10.3

-2.2 -10.1 -4.3

16.7 33.4

-12.1 -10.8

4.7 11.2 11.3

21.8 11.5 10.3

11.7 11.0 49.5

21.9 10.4 11.5

-0.9 -10.6 38.7

15.4 30.4

-1 1.6 -10.5

5.6 9.9 9.0

22.3 10.7 11.5

11.9 11.5 4.2

21.5 10.8 10.7

-1.7 -9.8 -5.7

15.3 30.6

-10.7 -11.4

5.6 8.0 7.0

22.5 10.4 12.1

12.4 12.0 3.9

21.4 11.0 10.4

-1.7 -9.2 -5.3

15.2 30.0

-11.1 -10.5

5.6 6.0 5.0

22.7 10.3 12.4

12.9 12.5 3.9

21.7 11.4 10.3

-1.7

-5.2 -9.0

15.0 29.6

-1 1 .o -10.4

5.6 5.0 5.0

22.9 10.2 12.7

13.4 13.0 3.8

22.1 11.8 10.2

-1.6 -8.9 -5.1

14.8 29.0

-10.7 -10.2

5.6 5.0 5.0

23.2 10.1 13.1

13.8 13.4 3.7

22.2 12.1 10.1

-1.4 -8.6 -4.8

14.7 28.5

-10.6 -10.1

3.0 3.0 3.0 3.0 3.1 Gross oficial reserves (in months o f imports o f GNFS) 2.8 2.9 2.9 Sources: Ministry o f Economy, Finance and Budget and Fund staff estimates and projections May 2006

6

C. DEBT SUSTAINABILITY

22. Madagascar attained the Heavily Indebted Poor Countries (HIPC) completion point in October 2004, and i s subsequently benefiting from debt relief under the Multilateral Debt Relief Initiative (MDRI). Madagascar’s Ne t Present Value (NPV) of external debt at end-2004, after assuming full delivery o f HIPC debt relief, was projected at about 186 percent o f exports at the time of HIPC completion point’. Most Paris Club creditors have also granted bilateral debt re l i e f beyond HIPC that together with the recently approved MDRI would further reduce the ratio to about 75 percent by end- 2006.

23. IMFDDA DSA under the L IC framework. analytical features are presented below. 0

An assessment of Madagascar’s risk of debt distress will be presented in the upcoming joint Although work on the DSA i s s t i l l ongoing the main

Under the baseline scenario, Madagascar’s external debt indicators remain well below the thresholds throughout the projection peri0d.3’~ The debt indicators drop sharply (by 50 percent) in 2006 as result of the MDRI. After the initial decrease due to the delivery o f MDRI, the debt burden indicators exhibit a hump reflecting relatively high new borrowing (albeit in concessional terms) to finance needed investment expenditures. Given the highly concessional nature o f the existing debt and new borrowing; the debt service ratio i s well below the threshold level throughout the period but has a slightly rising trend due to the accumulation o f new borrowing. External debt indicators could deteriorate with inappropriate policies, and/or if confronted by adverse shocks Debt burden indicators deteriorate under most stress tests, but cross the indicative thresholds (although declining gradually towards the end o f the period) only under the “most extreme stress tests’’.

0

24. I n conclusion, the debt situation seems sustainable but would be importantly influenced by policies. Given the macroeconomic framework, the debt situation in Madagascar appears sustainable. However there i s need for good implementation o f policies and also a need for careful monitoring of borrowing policies and export performance. Given the forward looking nature o f sustainability, the stress tests point to the debt becoming vulnerable to shocks to GDP and particularly to exports. The latter i s critical given the risks to Madagascar’s exports. The termination of the ATC and AGOA renders exports highly vulnerable given the concentration of exports in textiles and clothing. The baseline projections assume that structural weakness in this sector wi l l be somewhat offset by a positive response to the large depreciation which has taken place in 2004 and from the increased exports expected from mining. Additional borrowing or borrowing at anything other than nonconcessional rates could impose a burden for future debt service payments which would come due should exports weaken further.

25. Debt Data Management. The authorities have undertaken steps to improve debt data management. All the loans for which the Central Bank and the Ministry o f Finance were responsible had

Report No29984-MG. The final results o f the joint I M F N o r l d Bank DSA will be available in July 2006. Madagascar i s rated as a medium performer with regard to i t s policies and institutions according to the Bank’s

Country and Policy Institutional Assessment (CPIA) Index. As a medium performer, the indicative thresholds relevant for Madagascar are: (i) 150 percent for Net Present Value (NPV) o f debt-to-exports, (ii) 40 percent for the N P V o f debt-to-GDP and (iii) 250 percent for the N P V o f debt to fiscal revenues. The relevant debt service thresholds are (i) 20 percent o f exports and (ii) 30 percent o f revenues. Madagascar’s risk o f debt distress i s assessed in relation to these thresholds.

The baseline scenario i s built on key macroeconomic assumptions, the implementation o f sound macroeconomic and structural policies and external financing in highly concessional terms.

7

been entered into the UNCTAD’s (DMFAS) new database system (SYGADE) and an integrated data management system w i l l be established between the Central Bank and the Ministry o f Finance. In addition, the authorities have contacted relevant international agencies to build capacity, on debt analysis.

111. MADAGASCAR’S POVERTY REDUCTION STRATEGY

A. POVERTY IN MADAGASCAR

26. Between 1970 and 2001, per capita income in Madagascar declined from US$409 to US$257, and as a consequence poverty increased, especially during the 1980s. The long economic decline impacted adversely on people’s quality o f l i fe as demonstrated by the low levels o f many social indicators and access to basic utilities. With the resumption o f sustained growth during the period 1997-2001, there was some progress in poverty reduction, but it was limited to urban areas. The results o f the 2004/5 household survey have recently been released and this section presents the updated poverty profile based on this survey as well as trends in indicators wherever possible.

27. I n 2004, the overall incidence of poverty stands at 72.1 percent, significantly lower than the 2002 crisis high o f over 80 percent, but still higher than the 2001 poverty rate of 69.7 percent. The preliminary analysis from the 2005 household survey shows a continuation o f this trend, with the overall poverty rate declining to 68.7 percent. In 2004, the intensity o f poverty, which i s sensitive to the distance o f the poor from the poverty line, has declined from i t s 2001 level o f 39.8 percent to 34.8 percent in 2004. The distribution o f income has also improved with the Gini coefficient declining from 0.468 to 0.385, with the declines mirrored in both urban and rural areas.

28. Poverty in Madagascar remains predominantly rural with 77 percent of the rural population being poor in 2004, the same level as in 2001, compared to 54 percent in urban areas in 2004 higher than the 2001 levels of 44 percent. The preliminary 2005 household survey shows that rural poverty incidence is decreasing with a rate in rural areas o f 73.5 percent and urban poverty decreasing to 52 percent. This might be the result o f many factors: greater emphasis on rural development, the accelerated implementation o f the roads program, and the higher rice prices which gave incentives to rural farmers. Another potential factor i s that the nature o f the economic shocks (strong depreciation, high international o i l and rice prices) in 200415 which affected the richer segments o f society more adversely.

29. Education outcomes have improved between 2001 and 2004, with the percentage of the population 6 years and older without any education declining from 48 percent to 35 percent. Literacy rates remain different across urban and rural areas. While one in two individuals 15 years and older in rural areas is literate, about four in five in urban areas are literate. With the implementation o f the Government’s Education for All program, which included the abolition o f school fees, recruitment o f teachers in rural areas, re-construction o f school establishments, payment o f FRAM teachers’ salaries and distribution o f materials and supplies, there has been a dramatic increase in enrolments, with primary net enrolment rates increasing by 20 percentage points between 2001 and 2004. While the expansion in education has been pro-poor, there remains a small difference in enrolment rates across quintiles, with the net primary enrolment rate for the poorest quintile at about 81 percent, in contrast to the richest quintile where the net primary enrolment rate i s 91 percent. The differences are sharper at the secondary level, with the net lower secondary enrolment rate varying between 7 percent for the poorest quintile to 41 percent for the richest quintile. There are limited gender differences in enrolment rates, and also in promotion, repetition and drop-out rates.

8

30. The overall incidence of illness in 2004 was 11 percent, with fever and suspected malaria being the most frequent causes of illness accounting for over 4 in 10 cases, and diarrhea being a distant second accounting for 12 percent o f all cases. About 4 in 10 people who are ill visit a health facility to seek care. Among those who do not seek care, half do not since the illness is not severe, but over one in four do not seek health care for financial reasons, and one in ten because the facility i s too far, the latter reason being particularly important in rural areas. Over 4 in 10 people visit a Centre de SantB de Base 2 (CSBZ), and another 12 percent visit a CSB1, and about 2 in 10 visit a private doctor. The cost o f consultation averages 1,080 Ariary per visit, with the cost at CSB2 only 200 Ariary. In addition, the cost o f medicines averages 5,200 Ariary per visit, with the CSB2 costing 3,600 Ariary per visit.

3 1. Immunization coverage improved sharply between 2001 and 2004, with complete vaccination rates improving from 36 percent in 2001 to 63.4 percent in 2004, based on the household survey. Immunization rates show that 63.4 percent o f children between the ages o f 12 and 23 months have a complete set of vaccinations in 2004, ranging from 62.4 percent in rural areas, to 61.5 percent in the secondary urban centers, and 75 percent in big urban centers. But, there i s wide divergence across provinces, with three provinces o f Antananarivo, Fianarantsoa and Toamasina having rates well over 70 percent for complete immunizations, but Antisranana having a very low rate o f only 31 percent, and Toliara and Mahajanga ranging around 45 percent.

32. The rate of prenatal consultation stands at 80 percent overall, ranging from 78.6 percent in rural areas to 91 percent in big urban centers. The variation across provinces remains, with Mahajanga having the lowest rate (62 percent), and Toamasina the highest rate (88.6 percent). Over 6 in 10 people aged 15 years and older have knowledge o f family planning, with knowledge among 15-20 year olds the lowest (48 percent). Knowledge o f family planning i s significantly lower in rural areas (only 57 percent) compared to those living in big urban centers (88.4 percent). Almost 7 in 10 people aged 15 and older believe that family planning i s useful, and there i s no difference in this perception across urban or rural areas. Despite the be l ie f in i t s utility, only 15 percent o f this age group use family planning, and the rate i s lowest among 15-20 year olds (4.3 percent). The rate o f utilization i s particularly low in rural areas (only 13 percent) in contrast to bigger urban centers (25 percent).

33. About one in three households had access to safe drinking water in 2004, and the differences remain very sharp across urban and rural areas. The source o f lighting varies across poor and rich households. Electricity i s used by about 14 percent o f the population, with almost no one in the lowest quintile using electricity and about 45 percent o f the richest with access to electricity. In contrast, the major source o f lighting i s kerosene, with 4 in 5 people using it. Almost all o f the poor use this as their source o f lighting. Wood collected by households i s the primary source o f cooking fuel, with almost 96 percent o f the poor utilizing this. In contrast the richest quintile i s likely to use charcoal (46 percent) and collect (42 percent) or purchase (1 0 percent) wood. There i s very limited use o f gas or other fuels for cooking.

34. Households in Madagascar are vulnerable to a range of shocks (natural and economic). In 2004, almost all households (98.5 percent) faced at least one shock. Among the households that faced a shock, about 4 in 10 faced a climatic shock (mainly cyclone or flooding) and an equal number faced economic shocks (inflation primarily). Insecurity and health shocks affect 1 in 20 o f the population. Rural households were more affected by climatic/environmental shocks, while urban households faced a higher incidence o f economic shocks. In the face o f these shocks, households responded by working more (adopted by 2 in 5 households), reducing food consumption (1 in 5), or doing nothing (1 in 5 households). In terms of the time taken to recover from the shock, only 6 percent had recovered a month after the shock, over a third (38.4 percent) had recovered between 1 and 12 months after the shock, and over half (55 percent) had s t i l l not recovered to their initial levels o f welfare at the time o f data collection, indicating that shocks often have longer t e r m effects.

9

B. THE GOVERNMENT’S STRATEGY FOR REDUCING POVERTY AND ITS IMPLEMENTATION

35. The main objective of the Government’s PRSP i s to promote rapid and sustainable development to reduce poverty by half in ten years. To attain this objective, the PRSP has three strategic axes (i) good governance; (ii) broad-based growth; and (iii) human and material security. A cross-cutting axis o f monitoring and evaluation underpins the strategy. In the area o f governance, the main elements o f the PRSP include the fight against corruption, improved public expenditure management, respecting democracy, establishing an equitable justice system, and implementing decentralization. The Government’s strategy for broad-based growth is geared toward maintaining macroeconomic stability and achieving high annual growth through facilitating private sector development, accelerating the roads program, rural development, fostering public-private partnerships and greater opening up o f the economy. Under the strategic axis o f human and material security, the main objective i s to enhance human capacity and strengthen individual assets, through education, health and nutrition. The PRSP views the commune as the main local service provider and the anchor for al l interventions in this domain.

36. The Government of Madagascar updated its PRSP in mid-2005. The PRSP was updated to incorporate the longer term vision (to 201 9, Madagascar Naturellement, which foresees a transition from a subsistence economy to a market economy, to realize i t s potential through optimal use o f i t s resources, while respecting the environment. The vision puts an enhanced emphasis on rural areas, through improved productivity, increased value added, improved infrastructure, technology and partnerships.

37. I n 2005, implementation of the PRSP continued to be satisfactory. The Government prepares i t s PRSP Progress Reports (PRSP-PR) on a calendar year basis to correspond to the budget cycle, with a mid-year report on implementation in July to inform the budget preparation for the following year. The 2005 Annual PRSP Progress Report has been prepared in April 2006 and provides a comprehensive overview o f the results achieved, an analysis o f the results, lessons learnt and challenges faced in implementing the poverty reduction strategy paper. This report provides an update on the poverty situation in Madagascar (with details on the decrease in poverty from 72.1% in 2004 to 68.7% in 2005) and summarizes that - on balance - positive progress has been achieved in the 15 PRSP priority programs.

38. The 2005 PRSP-PR concludes that there have been significant results achieved in human and physical capital. This i s evidenced by the continued positive trend in human development indicators, e.g. the net enrollment rate remains at over 90 percent in the 2005/06 school year. The report also provides details on the improvements in infrastructure, particularly the rehabilitation o f the road network, as well as progress on rural development. Section IV o f this document provides further details of achievements and outstanding challenges.

39. Nevertheless, the PRSP-PR also emphasizes that implementation of the strategy faces many constraints which have hampered progress. These constraints include weak progress on pro-poor growth with the relatively well-off parts o f the population mainly benefiting from the economic growth achieved. There has also been insufficient progress on governance reforms and limited private sector contribution to the country’s development. The Government i s taking steps to address these constraints through renewing its focus on the governance agenda and stepping up efforts at private sector development such as focusing on improving the investment climate

40. The Government i s in the process of formulating its second-generation poverty-reduction strategy, the Madagascar Action Plan (MAP), a five-year plan to produce a quantum leap in the

10

development process by mobil izing the Malagasy people and the international partners, to ignite rapid growth, reduce poverty and ensure that the country develops in response to the challenges o f globalization and in accordance with the national vision - Madagascar Naturellement (see B o x 1).

41. The Joint Staff Advisory Note on the 2005 PRSP-PR, to be distributed to the Board in July 2006, attests the good progress made in the implementation of the poverty reduction strategy and identifies key priorities to be addressed by the Government in formulating the new MAP. The main recommendations are: (i) identification and elaboration o f the key structural and binding constraints to shared growth; (ii) alternative macroeconomic scenarios within a realistic medium-term framework consistent with the analysis o f sources o f growth and (iii) inclusion o f a policy reform matrix which outlines the sequencing and prioritization o f the key policy and institutional reforms to achieve the MAP results.

Box 1 Madagascar’s Development Vision and Strategy The Madagascar Action Plan

The Madagascar Action Plan (MAP) 2012 i s the Government’s new vision that sets out a “roadmap” for development. The purpose o f the MAP is to produce a quantum leap in the development process by having a five year plan that wil l mobilize the Malagasy people and the country’s international partners to ignite rapid growth, thus leading to the reduction of poverty. I t s goal i s also to ensure that the country develops in response to the challenges of globalization and in accordance with the national vision “Madagascar Naturellement” that was previously defined by the President in November 2004 (and i s described below). Madagascar Naturellement i s the long-term vision for the country and the MAP i s the 5-year strategy that works towards achieving this vision.

Madagascar Naturellement i s the statement of the country’s development vision in 2015 that was defined by the President of Madagascar in late-2004. It states that Madagascar wil l be a newly industrialized country with maximized competitiveness by 2020. The core of growth wil l be derived from the country’s unique natural resources and from the transformation o f i t s natural products. The vision aims to develop a diversified and rich natural resource base (agriculture, livestock, fisheries, and mining) that wil l contribute to the creation of products with high value added such as essential oils, agri-business, pharmaceuticals, and mining products. A broader impact of growth and a progressive redistribution o f i t s benefits wil l help reduce poverty substantially. Madagascar wil l be known worldwide for the beauty o f i t s rich and well-protected biodiversity and i ts environment wi l l be cherished and protected and used in a wise and responsible way to enhance development. The Malagasy people, both in rural and urban areas, wil l be healthy and well-educated, wi l l be active participants in the development process and wi l l be gainfully employed in agriculture, industry and the provision o f services. Education and health wi l l be accessible to the population and infrastructure wil l be developed allowing for free movement o f goods and people.

The MAP’S goals are ambitious targets that the Government i s committed to achieving over the coming five years. It i s recognized that these targets are challenging but, at the same time, it i s expected that results wil l be delivered through the mobilization o f the full array o f the available resources (human, technical and financial), combined with strong leadership, hard work, creativity and excellent coordination. The MAP outlines eight specific areas of focus; (i) good governance; (ii) educational transformation; (iii) health and family planning; (iv) infrastructure; (v) rural development; (vi) the economy and the private sector; (vii) environment; and (viii) national solidarity. There are quantifiable goals set out for each of these areas o f focus to be achieved by 2012; these goals wi l l be further refined, costed and clearly linked to the MDGs.

The MAP i s a direct follow-on from the PRSP and covers the five year period 2007-2011. The Government believes that it has effectively implemented the initial PRSP and intends now for the MAP to supersede the PRSP as the country’s main development strategy. The MAP wi l l be finalized in October 2006 and presented to Parliament together with the 2007 budget.

La Politique Gknkrale de 1’Etat sets out the Government’s actions and desired results in 2006 that are critical steps towards attaining the objectives o f the MAP and Madagascar Naturellement in 2015. There are 3-5 results by Ministry which form part o f the results agreement between the President and his Cabinet.

11

C. WORLD BANK COUNTRY ASSISTANCE STRATEGY AND SUPPORT TO THE IMPLEMENTATION OF THE PRSP

42. The Bank’s support to Madagascar, as outlined in the Country Assistance Strategy of November 2003, supports the implementation of the PRSP, using ongoing and new investment lending and budget support, analytical work, and the services o f the broader Bank Group (IFC, MIGA, and WBI). The FY05 program for Madagascar reflected the transition to programmatic lending with the first single-tranche annual Poverty Reduction Support Credit approved in July 2004. This was followed by the PRSC2, approved in July 2005. New investment projects in several sectors - supplemental credits for the Health Sector ($18 million) and for the Community Development Project ($50 million) were approved in FY05. In FY06, the Integrated Growth Poles Project and the second HIV/AIDS project were approved. For FY07, in addition to the PRSC 3, a new Supplemental Credit for the Community Development Project and an Energy Investment project are all planned for presentation to the Board at the same time. An Irrigation and Watershed Management project wi l l be presented to Board in September 2006.

43. As noted in the PRSC 1 and PRSC 2 Program Documents, the CAS also outlines a program of analytical and advisory activities (AAA) to underpin the Bank’s policy dialogue and programmatic lending. Furthermore, analytical and advisory work has been conducted or is planned beyond what was envisioned in the CAS to respond to Government needs (see Table 5). This year, key analytical reports completed include: the Investment Climate Assessment, the Financial Sector Assessment Program and the land tenure review; which wil l underpin the reforms under the growth pillar in subsequent PRSCs, as well as the Local Development Fund (FDL) feasibility study, led by the Government, which wil l form the basis for the operational design o f the new Government institution for local development. PRSC 3 continues to benefit from the integrative Development Policy Review on Sustaining Growth for Enhanced Poverty Reduction (FY05) which outlines the growth strategy and priorities for reform for Madagascar to achieve shared growth. The Public Expenditure Review (FY05), which provides recommendations on the public expenditure reform agenda and specific recommendations for the transport, education and environment sectors, also helped underpin the key reforms for PRSC 2 and now PRSC 3. The findings o f the Country Financial Accountability Assessment (CFAA, FY03) and the Country Procurement Assessment Review (CPAR, FY03), as noted before, have also been critical in defining the reform program o f the Government.

44. The Government remains committed to monitoring progress in implementing i ts public expenditure reform program under the HIPC Public Expenditure Assessment and Action Plan. Madagascar was also a pilot country for the Public Expenditure and Financial Accountability (PEFA), which is a joint initiative of the World Bank, EU, IMF, DFID, France, Norway and Switzerland, to develop a strengthened approach to public financial management. The PEFA approach includes a country-led strategy on public financial management reforms, a coordinated program o f assistance by donors and a performance measurement fiamework. Madagascar i s just completing i t s first PEFA assessment o f the public financial management system which wi l l be used as a baseline to measure progress. Furthermore several analytical activities recently completed or on-going, support the Government in i t s efforts to complete i ts strategy for post-primary education. In the same vein, the health sector dialogue benefits from an array o f analytical work including recently completed surveys (the Demographic and Health Survey, and the Study of the efficiency and equity o f health facilities I and 11) and the National Health Accounts study.

12

Box 2: Lessons Learned - Implementation o f PRSC 1 and PRSC 2

Overall Context: Almost two years since the first PRSC was approved, there has been tangible progress in some areas, while others lag. The overall economic context in both 2004 and 2005 continued to complicate budget management and implementation. Three key factors were dominant.

First, both 2004 and 2005 were uncertain economic years. 2004 was marked by a sharp depreciation o f the exchange rate and two back-to-back cyclones, which led to unforeseen expenditures and sharp inflation. 2005 was marked by high international oil prices, and a structural and financial crisis in the energy parastatal JIRAMA, which led to unprogrammed budgetary outlays. Second, the trend of signifcant revenue shortfalls in 2004 continued in 2005 and into the first part o f 2006, impacting budget management and the ability to deliver on the strategy, since expenditures adjusted to the reduced resource envelopes, with mid-year expenditure blockages limiting sector ministries capacity to implement their programs. Third, the introduction of the program budgets complicated budget execution: The 2005 budget introduced program budgeting, a large-scale reform, without adequate preparation, which complicated budget execution and stretched limited capacity.

Response: Sustained donor co-ordination among budget support donors. The joint donor mission launched in October 2004 was followed by one in October 2005. Starting in 2006, two joint-donor missions are planned (in April and SeptembedOctober each year) and the first one was completed end-April 2006. The Partnership Agreement between the Government and budget support donors was also signed by the African Development Bank (in addition to the original signatures o f the World Bank, E U and France, with the U S as participant but not signatory). Sustained co-ordination and harmonization especially in the areas o f public financial management, education, nutrition and health. In the education sector, two joint-donor missions a year monitor progress on the Education for A l l Agenda. In public financial management, a joint-donor assessment o f the public finance system -the public expenditure and financial accountability (PEFA) assessment was recently completed - under EU leadership in April/May 2006- and the report i s being finalized. A joint donor round table on public financial management to discuss implementation issues and find real-time solutions for implementation problems for the priority action plan i s being revitalized. Greater attention to capacity needs, especially in financial management and procurement, and longer term vision for technical assistance for priority ministries. In education, a two year technical assistance plan was prepared and i s under implementation with the Ministry o f Education, with financing from the PGDI, to provide assistance in budget formulation, execution and policy advice. A similar plan i s under preparation for nutrition and health. SimpliJication and greater preparation for the 2006 budget: The presentation o f the 2006 budget was simplified, and more attention was paid to training responsible ministry staff upfront to facilitate budget execution in 2006. Monitoring budget execution: The integrated financial management system i s operational in Antananarivo and five principal provincial treasuries, covering about 80 percent o f all expenditures. The Government i s using this information and presenting this at 3 conferences each year to follow the execution o f the Government’s program.

Moving forward Greater attention to prioritizing reforms and monitoring and learning in real time: The Ministry o f Finance’s reform agenda i s wide-ranging, and the challenge remains greater prioritization and staying the course on implementing the reform program. While fine-tuning and adjusting i s a critical element o f a successfil program this needs to be balanced with the need to have stable procedures (changes each year complicate implementation).

a Continue to support key ministries, extending capacityhraining to de-concentrated levels in key sector ministries (education and health).

13

Table 5: Analytical and Advisory Activities

Dverail

Ytrategic A x i s 1: < Public expenditure nanagement

Sources o f Growth

Private sector development Rural development and environment Transport

Opening up to

Education

Health

~~

Nutrition

Rural Water

Social Protection

Country Procurement Assessment Review (CPAR, FY03) Country Financial Accountability Assessment (CFAA, FY03) Public Expenditure Review ( PER FY05) HIPC AAP Tracking (FY03, FY04) Public Expenditure and Financial Accountabilitv (PEFA. FY05) Decentralization Study (FY03)

Development Policy Review (FY05) Export Processing Zone Report (FY03) Tourism Sector Study (FY03)

Rural and Environment Sector Review (FY03) and PER FY05 include a focus on environment. PER FY05 includes focus on transport sector. Integrated Framework (FY03)

Education and Training Report (FYOI, FY02, FY03) PER (FY05) includes education chapter and PSIA background work includes focus on expenditure management and institutional bottlenecks Human Resource Development plan (FY05) Health Sector Note (FY05) Poverty and Social Impact Analysis of reinstatement of cost recovery in health sector (FY06)

Impact Evaluation of nutrition program

Water Sector Review (FYOI) Public Expenditure Review on rural water (FY05)

Note: This table updates Table 6 in the PRSC 2 Program Document.

14

Public Expenditure Review (FY07)

FDL feasibility Study (FY06)

Investment Climate Assessment (FY06) Financial Sector Assessment Program (FY06) Land Tenure Review (FY06)

School construction review (FY06) Secondary education and training review (FY06) Current status, issues and strategic directions for TVET (FY06) Evaluation of pilot reforms in primary education management (FY07) Public Expenditure Tracking Survey(FY07)

National Health Accounts (FY06) Efficiency and Equity o f Health Facilities Survey (FY06) Human Resources Development Plan (FY07) Public Expenditure Tracking Survey(FY07) PER FY07 includes health chapter PER FY07 includes nutrition chapter. Institutional Assessment (FY07)

Risk Management and Social Protection Review (FY06) Poverty and Social Impact Analysis of oil price changes(FY07) Weather risk insurance feasibility study (FY07)

45. At the time of the last CAS, it was expected that PRSC lending would account for a large part of the IDA envelope for Madagascar each year. However, with the decrease in the IDA-15 allocation for Madagascar, the distribution of available financing between budget support and investment operations had to be realigned within this allocation. In addition, the experience in the implementation of the first two PRSCs, described in detail below, and the fragile macroeconomic environment also called for a re-alignment between investment operations and budget support to assist Government in implementing i t s PRSP. These considerations, along with the new available resources from the MDRI have resulted in a smaller financing amount for PRSC 3 as compared to PRSC 1 and 2.

46. Moving forward, the Government of Madagascar i s in the process of elaborating its second- generation poverty reduction strategy -the MAP- which will be completed over the course of this year. The Bank’s new CAS for FY07-11 i s currently under preparation and wil l serve as the Bank’s program o f support to the implementation o f the MAP. It i s expected that the CAS wil l be presented to the Board in early 2007 and that it wi l l include the proper mix o f instruments between investment and budget support. In particular, the CAS wil l outline the focus of the future PRSC series which wil l be one of the key elements o f the Bank’s financial support to the MAP.

47. The MAP will outline the country’s poverty reduction strategy for the next five years and will identify prospects for scaled-up assistance should additional financing become available. The program in the new CAS wil l assist the Government in providing a suitable framework for absorbing additional resources to support a possible scaling-up: the proposed projects in the CAS wi l l be identified and prepared with the intent that they could be expanded should additional resources from other donors or the private sector become available (catalytic approach). To this end, the CAS wil l maintain a concerted focus on public expenditure management, institutional capacity building and sector-wide approaches.

48. A fourth PRSC - that will be fully aligned with the first three PRSCs - i s proposed for 2007. The PRSC 4 wil l bridge the time-lag between finalizing the MAP and the CAS and designing the future PRSC series. It wi l l ensure continued annual PRSC financing to Madagascar’s poverty reduction efforts and wil l be fully harmonized with other donors’ annual support.

D. DONOR COLLABORATION IN SUPPORTING THE IMPLEMENTATION OF THE PRSP

Cooperation with the Multilateral and Bilateral Donors

49. The donors are collaborating to support Madagascar in implementing its development vision, by providing financial and technical support in a coordinated way. A partnership agreement (Cadre de Partenariat) was signed between the Government and the key budget support donors -European Union (EU), France (Agence Franqaise de DCveloppement, and the French Co-operation), and the African Development Bank- to provide a framework and to lay out procedures and modalities for a multi-donor approach to budgetary support. This Budget Group initiated joint-donor missions in October 2004 to review the implementation of the PRSP and supervise their respective budget support operations. This i s part of the overall effort to harmonize assistance and reduce the transactions cost for the Government. A follow-up joint donor mission was held in September-October 2005 to review the Annual PRSP Progress Report for calendar year 2004, and the draft budget for 2006. Starting with 2006, two joint-donor missions are envisaged in April and September/October o f each year, the first o f which was recently completed in late-April2006.

15

50. I n the joint supervision missions, common areas of support with the EU’s program of budget support (Programme d’Appui BudgCtaire la RCduction de la PauvretC, PARP) include the public sector reform agenda, education and health. The public expenditure reform agenda support i s coordinated to support the Government’s Priority Action Plan. The Government has convened meetings periodically with the key donors to inform them o f progress on implementation. Key reforms in public financial management and fighting corruption are being supported by financing from IDA together with technical assistance from the EU, GTZ and the French Cooperation. Donor coordination around implementing customs reforms has also improved. In health, the key donors are also coordinating support and are .moving towards using a sector-wide approach. In addition, HIV/AIDS, transport, water, agricultural and environmental sector reforms and investment continue to be approached together with other partners.

5 1. The Ministry of Education (MENRS) has continued to lead the dialogue with donors in the education sector. The FTI process with the EFA National plan has strengthened the Ministry further in this role and has given a focus to the Donor Group. Regular donor meetings are organized and through this, a deeper sharing o f information on appraisal missions, TA and studies. Whilst there are diverse support mechanisms, donors take a holistic approach and are concerned about the progress o f the EFA Plan overall as well as individual projects.

52. Capacity constraints hamper Madagascar’s ability to achieve its development objectives. The donor community i s supporting Madagascar in strengthening capacity, through a range o f technical assistance grants and training initiatives designed to enhance the implementation o f the PRSP. The key donors involved in supporting the strategic pillar o f governance, include the World Bank, European Union, UNDP, French Co-operation, the African Development Bank, GTZ, and USAID. A number o f donors are very active in supporting education (UNICEF, French Co-operation, AfDB, AFD, Japan, USAID and World Bank). Donor coordination, to support capacity building efforts, i s also being enhanced through the round table for public expenditure management reforms, and through the Budget Support Group.

Coordination with the IMF

53. The Bank closely collaborates and coordinates activities with the IMF. The staff o f the two institutions conduct regular joint assessments o f the PRSP implementation and also work closely together on (i) analysis and reforms in public financial management; (ii) other governance reforms, including customs; (iii) support o f the privatization program; and (iv) trade.

54. The IMF completed technical discussions for its new Poverty Reduction and Growth Facility (PRGF) arrangement with Madagascar in May 2006 and i s expected to present the program to their Board in July, at the same time of the Bank Board discussion of the proposed PRSC 3. The Government has implemented measures to continue to adequately manage a fragile macroeconomic environment and reached agreement with the IMF for a new program. The staff o f IDA and IMF will continue to coordinate the content o f the PRSC and PRGF to ensure that the instruments complement one another. In general, the structural and social benchmarks wil l be covered by the PRSC, while the PRGF wi l l cover macroeconomic issues.

IV. POVERTY REDUCTION SUPPORT CREDITS PROGRAM 55. The first Poverty Reduction Support Credit (PRSC 1) approved in July 2004 was the first of a series of annual single tranche development policy lending operations provided as budget support for the implementation of key elements of the PRSP. The design o f the PRSC program, comprising

16

the first three PRSCs (see Figure l), was based on discussions with the Government, the pace o f the reform agenda, the existing knowledge base and analysis o f development issues, other donor programs, and IDA resources. The objective o f the f i rst three PRSCs (2004-2006) i s to consolidate reforms underway in the public sector, fight corruption, improve transparency and accountability, and improve service delivery in education, health, water supply and nutrition. As outlined in the PRSC 1 Program Document, a set o f clear, well-defined milestones, policy actions or indicators have been defined to transition f rom PRSC 2 to PRSC 3.

Figure 1: The Three Year PRSC Program

Note: The striped blocks in the PRSC 1-PRSC 3 rows indicate that that it is an area o f focus under the respective PRSC.

56. The PRSC program for the first three PRSCs focuses explicitly on the strategic axes of governance and human development, and includes specific policy actions in these areas. The PRSC does not include any specific policy actions on the other PRSP pillar o f broad-based growth. Whi le there i s a policy dialogue in these areas as part o f the PRSC, the Bank support for growth is through its significant portfolio of ongoing investment projects in infrastructure, energy, environment, mining, rural development, the Integrated Growth Poles project and a new Irrigation and Watershed project being presented to the Board in FY07. Annex 4 summarizes the main elements o f the reform agenda and the Bank’s program in the PRSP pil lar o f broad-based growth (PRSP strategic axis 2). Table 6 outlines the key policies for Growth under implementation and Bank portfolio supporting Government efforts. In particular, the new operations in Energy and Watershed management wi l l reinforce support t o broad-

17

based growth assisting Government in restructuring the electricity parastatal J IRAMA and in improving r ice and agricultural p rod~ct iv i t y .~

57. The implementation of the program supported under the first two operations (PRSC 1 and PRSC 2) i s satisfactory and the indicative triggers for PRSC 3 are broadly fulfilled. As specified in Table 8 below, there i s just one trigger in the area o f procurement where the original plan has not been fully implemented and the final trigger has thus been revised. Delays s t i l l persist in the final implementation o f the new Procurement Code, although progress in this regard has been notable. In the area of public finance reform, the implementation o f the 2005 Priority Action Plan was satisfactory overall; progress has been made in improving both budget preparation and execution. The Education For Al l initiative continues to be implemented steadily with enrolment rates remaining high and well above the original expectations. Government’s focus on improving quality o f service i s also starting to show positive results. Delays however s t i l l persist in school construction. The elaboration o f a post-primary education strategy is also advancing and should be completed in the next year. The institutional structure for delivering nutrition services has been further strengthened and delivery has improved in the last months. Government has also launched a new review o f the current institutional structure for nutrition to assess in greater detail i t s efficiency and identify additional improvements as needed. The Government is making progress to transition towards programmatic support in the health sector. Capacity at the Ministry of Health for budget planning and execution i s being strengthened. Work on the National Health Accounts i s now nearing completion and costing for the health MDGs, using a marginal bottlenecks approach, i s being further refined. Plans are also in place to elaborate a health services financing strategy and to update the medium expenditure framework (MTEF) for the health sector, f irst prepared last year. The rural water supply program i s also progressing well as the Government has implemented all the recommendations set out in the 2005 sector review. Annex 2 provides greater details on progress on al l the actions originally envisioned for PRSC 3.

Other donors also support growth enhancing measures with dedicated operations. Most notably the EU, the largest donor engaged in budget support after the World Bank, provides dedicated financing to a large road program and rural development.

18

Table 6 Broad-Based Growth - Key Policies

Broad based Growth

Creating conditions for growth

Making growth inclusive

Notee: Updates Table 7 in

World Bank Project Support

1 Integrated Growth Poles 1 Transport program (APL2 and

1 Private Sector Development

1 Mining Project 1 Proposed Irrigation and

Watershed Management project (FY07)

1 Proposed Energy project (FY07)

APL3)

Project

Transport program (APL2 and APL3) Integrated Growth Poles Environment project Rural development project Microfinance project Community Driven Development project. Proposed Irrigation and Watershed management project(FY07) Proposed Energy project (FY07)

'RSC 1 Program Document.

Actions

Increase investment promotion: the Economic Development Board o f Madagascar (EDBM) i s being set up as a private-public partnership to be the premier agency for investment promotion and investor facilitation. Remove Administrative barriers (creation o f GUIDE) Foster Dialogue with private sector to identify and remove bottlenecks Increase service delivery in telecom, transport (airports and ports), water and electricity, cotton and sugar production through the reform o f the public enterprises Restructure public utility JIRAMA Improve Madagascar's image through marketing campaigns, active participation in trade fairs Improve performance o f large-scale irrigation schemes through integrated package o f investments at watershed level. Address political risks concerns through provision o f guarantees Improve access to finance through provision o f leasing services, SME finance Improve trade links with strategic partners (Agreement on Textiles and Clothing (ATC), SADC and COMESA trade agreements) Improve supply chains through rehabilitation o f national and regional roads Rehabilitation o f ports (Toamasina, Nosy Be) Construction o f new port in fort Dauphin to support mining and agricultural exports Upgrading airports Focus on decentralizing growth through creation o f growth poles around tourism, industrial zones, agri-business and mining Improve productive assets o f poor rural households through matching grants for demand-driven agricultural investments. Capture economic benefits associated with natural resource conservation through investments in protected areas, natural forest protection and community management transfers. Delivery o f socio-economic infrastructure to communes and communities

19

Table 7: Status o f Indicative Triggers for PRSC 3

Governance ublic Financial Ianagement

udget ormulation

udget xecution

rocurement

Satisfactory implementation o f Priority Action Plan for 2005. Budget for 2006 allocates adequate resources to PRSP priority sectors.

Monthly accounts produced by the 15" o f the following month in the five regional treasuries and central treasury where the transitional financial management system i s fully operational.

New Procurement Code applied, Procurement Oversight Institution, procurement entities in the sector ministries, and the Appeal system operational.

Satisfactory implementation o f Priority Action Plan for 2005. Budget for 2006 allocates adequate resources to PRSP priority sectors.

Monthly accounts produced by the l S h ofthk following month in the five regional treasuries and central treasury where the transitional financial management system i s fully operational.

(i) Implementing rules and regulations together with Standard Bidding Documents (SBD) submitted by MEFB for Cabinet approval.

(ii) Key personnel (head and directors) for the Procurement Oversight Institution nominated by MEFB on an interim basis until final approval by Cabinet.

(iii) Procurement entities in key ministries (education, health, agriculture and transport) operational.

The trigger i s fulfilled

The trigger is fulfilled. The 2006 Budget allocates 20 percent to education, 18 percent to infrastructure, 7.1 percent to health, 5 percent to agriculture, and 1.3 percent to justice.

The trigger i s fulfilled.

(i) Adjusted prior action i s fulfilled. Implementing rules and regulations have been submitted and already approved by Cabinet in May 2006. The SBD wi l l automatically adopted by MEFB following cabinet approval o f the implementing rules and regulations.

(ii) Adjusted prior action i s fulfilled. Based on the decree establishing the ARMP which was passed in May 2005 government has begun the staffing process. The General Director and the board have already been nominated. For the other director positions, nominations have been made on an interim basis by the Minister o f Finance.

(iii) Adjusted prior action i s fulfilled. Every ministry has identified staff to whom all procurement matters have been delegated in accordance with the provisions o f the new procurement Code. Key ministries (education, health, agriculture and transport) have put in place procurement management units. These units are operational and their performance wi l l be assessed after a period o f one year. Additional units wi l l be established in other ministries in 2006

20

ecentralization

ustoms

ducation

rater Supply

*Duetoatyp

Increase resource allocation for the communes. Satisfactory implementation o f customs action plan. erial Security ~

Implementation o f the National Education for A l l (EFA) on track. The Ministry and i ts main partners begin implementation o f the recommendations o f the sector review in the program budget 2006-2008*.

in the PRSC 2 document

Increase resource allocation for the communes. Satisfactory implementation o f customs action plan.

Implementation o f the National Education for All (EFA) on track The Ministry and i ts main partners begin implementation o f the recommendations o f the sector review in the program budget 2006-2008’.

The trigger i s fulfilled; albeit increase o f allocations to the commune in the budget 2006 i s modest (the allocation increased by 3.6%) The trigger i s fulfilled.

The trigger i s fulfilled .The joint donor assessment o f April 2006 endorsed the revised EFA prepared by Government in March 2006, following the EFA FT I secretariat guidelines. The trigger i s fulfilled. The MEM/DEA and i t s main partners have implemented all the recommendations o f the 2005 sector review. Key actions include i) creation o f a new department in the DEA dedicated to the preparation and monitoring o f the program budget; ii) definition o f criteria to select communities to be included in the program; iii) Advertisement o f bidding documents for works, goods and services at the provincial and regional levels iv) dissemination to all stakeholders o f the national manual o f procedures for implementing and managing water systems and sanitation facilities.

; relevant period was erroneously reported as 2007-2009.

58. While overall program implementation i s satisfactory there are areas where progress has been mixed. Reforms initiated in several areas need more time to consolidate than originally envisioned. As discussed below, in the last twelve months advancements in anti-corruption and judiciary reforms have been lingering. Similarly, customs reform is proceeding slower than expected. Moreover, while progress in public expenditure management i s encouraging, significant challenges st i l l persist, particularly in budget preparation, and execution. Nevertheless it i s important to note that the governance framework in Madagascar remains wel l above the Sub-Saharan average. Furthermore, the commitment shown and the actions taken by the new Government since 2002 are in stark contrast with the previous administration’s hesitant pace o f reforms in this area.

59. The experience accumulated with the first two PRSCs i s providing valuable lessons for the way forward. Box 2 provides an overview o f the main lessons learned to date f rom PRSC implementation. As discussed in section I1 above, the implementation o f the first two PRSCs took place during years o f unanticipated adverse macroeconomic shocks. The resulting pressures o n the budget in both 2004 and 2005 had a clear adverse impact o n the implementation o f the two operations as Government was faced with the management of diff icult events. On the resources side, the revenue collection was below expectation and donor aid flows were delayed. The Government had to adjust through a curtailment of expenditures, including freeze o f commitments in March 2005, a reduction in expenditures, and a shortened expenditure cycle. In addition to this overall budgetary constraint, l imited capacity for budget execution within the sector ministries was manifest and contributed to the execution delays observed in most sectors. Budget execution was further complicated with the transition to the program budgets without adequate preparation or training o f ministry staff.

21

60. As the Government made good progress in implementing the policy and institutional program, reforms took in general longer to accomplish than originally anticipated. The main reasons include over-optimism at the design stage, insufficient prioritization o f actions, and under-estimation of the capacity constraints and implementation lead times. This was particularly true for measures aimed at strengthening the procurement framework and the accountability and transparency of budget execution. This situation has been further exacerbated by the initial lack o f understanding o f the PRSC instrument in sectors accustomed to investment projects. For example, starting with PRSC I the nutrition program transitioned to budget support, but while to date it has resumed a good level o f service delivery, it took over two years to create a functioning institutional setting and reach an acceptable level o f budget implementation.

61. Despite these shortcomings budget support remains central to Bank assistance in Madagascar as it has nonetheless proved an effective instrument in fostering a much more concerted focus on key issues such as public expenditure management and institutional capacity building. The next CAS wi l l clarify the areas o f focus for the next series and wi l l provide the new proposed mix o f budget support and investment operations to support the MAP.

62. Based on the data available to date, the Government’s strategy i s delivering results. Despite the challenges described, the Government i s using i t s budget in line with its strategic priorities - roads and education command large shares. These resources are being translated into results on the ground. More children are in school today than ever before (over 90 percent), and a larger percentage are likely to complete primary school. With the implementation of the roads program in rural areas, the percentage of the rural population with reliable access to transport has increased from 46 percent in 2003 to 57 percent in 2005. The condition of the main road network has also improved; in 2004 and 2005, the Road Maintenance Fund (RMF) contracted for the maintenance of 6,800km and 7,OOOkm respectively. Rice productivity has increased from 2.3 tonshectare in 2003 to 2.4 tonshectare in 2004, and is now 2.57 tonshectare. This increase i s however lower that originally planned6. Access to safe drinking water in rural areas has also improved with an increase in access from 14 to 16 percent between 2004 and 2005. Immunization rates have remained stable and more women give birth in health centers than before. Infant and child mortality rates have declined’significantly between 1997 and 2003/04, with the child mortality rate declining from 163.9 to 94 per 1000 over this period7. A recent evaluation o f the nutrition program, i s also showing a positive impact o f such interventions. Table 8 reviews progress in achieving the key development objectives that were established for the PRSC series at the time o f PRSC 1.

~

At the time o f PRSC 1 preparation the available 2003 figure for the average rice yield was 1.88 tonsha, which led to set the target outcome for 2006 at 2.4. As the 2003 figure was subsequently revised to 2.33, the increase in productivity over time has therefore been lower than originally anticipated.

remarkable, data revision might lead to a lower improvement. Further work i s however under way to validate the actual scale o f improvements in child mortality. While s t i l l

22

Table 8: Key Development Outcomes 2003-2006 Key Monitoring Indicators

Poverty reduction Good Governance Budget management benchmarks met as defined in the HIPC AAP

~

~

Budget (2004-2006) includes proper planning and monitoring for public spending in high poverty relevant areas

Government has introduced and published service delivery standards in key services with a large public- private interface

Broad-based Growth

Percentage of the (main) roads in good and fair condition Percentage of rural population with reliable access to transport Increasing rice productivity (average rice yield) Human and material security

Primary net enrolment rate' primary school completion rate'

Number o f textbooks per primary school student

HIV prevalence in sex workers', DTP3 vaccination rate of children below 1 year' Skilled attendance at birth in Centre Santk Base (CSB) and Centre Hospitalier de District (CHDl) ' Utilization rate in CSB'. Reduction in child underweight rate (MDG indicator)

Percentage of people with access to safe drinkine water in rural areas

- 2003

73%

- 3 out of 15 benchmarks

Budget planning process for 2004 led to increased

allocation for key PRSP sectors

(education, health, infrastructure)

No standards

47%

46%

2.33 tonsha

P

82%' 39.5%

1 book per 3 students

n.a. 85.8%

28%

0.57 43% (1997)

13%

2004

12 1%

,. 4 out of 16

benchmarks.

Budget for 2004 led to increased

resources for key PRSP sectors

(education, health, infrastructure,

drinking water and nutrition).

Development of service delivery

standards in justice and education

_=.__

53%

48%

2.4 tonsha

97% 47%

0.9

ma. 75.1%

26.1%

0.49 35%

14% -

Note: ' These are indicators that are common with the EU budget support operation on the revised numbers produced by the Government for the PARP in May

2005

68 1%

6 out of 16 benchmarks*

Budget for 2005 led to increased

resources for key PRSP sectors

(education, health, infrastructure,

drinking water and nutrition).

Implementation of service delivery

standards in justice and education commences.

59%

57%

2.57 tonsha

98% 60%

TBD

n.a. 86. 6%4

19.7%

0.45 N/A

16%

'ARP) and the level of

Expected outcomes in 2006 as originally set in PRSC 1.

68%

- 10 out o f 16 benchmarks met

(including reforms in the Treasury, Auditor General,

budget execution, and procurement)

Increased allocation o f public resources in line with strategic

objectives of the PRSP

Transparency and service delivery significantly improved as evidenced by independent

audits

80%'

65%

2.4 tonsha

97% 60% - 80%

3 0%

~ 20.8%

ldicators and objectives are based 06; 'annual survey wil l be conducted starting with 2005,

TBD means 'to be determined'; '2003 refers to school year 2002/2003; 2004 refers to school year 2003/2004 and so on; Based on Anthropometric surveys by INSTAT for 2004 and 2007; totalnumber of curative outpatient visits out of the total population. *The HIPC benchmarks are now being replaced by PEFA indicators, therefore assessment o f progress in 2005 was abandoned. The preliminary PEFA report does however assess good progress in budget management between 2005 and 2006.

23

PRSC 4

63. A fourth PRSC i s envisaged which would bridge the time-gap between the conclusion of the first PRSC series (PRSCs 1,2 and 3) and delivery of the second PRSC three-year series, which itself depends on the finalization of the MAP. The PRSC-4 wil l be aligned with the f i rst PRSC series and will thus continue to support the Government in the areas o f Governance and Human and Material Security. In addition, it will propose a new policy reform matrix and results framework for the next series aligned with the MAP and consistent with the strategic support proposed in the new CAS. A number o f core monitorable actions are proposed as indicative triggers (Table 9) which are aligned to the previous triggers of the f i rst three PRSCs. For the area o f improving governance they reaffirm Government commitment for reform particularly in the areas where progress has recently been slower such as in procurement, customs, decentralization, and anticorruption. Under human and material security the proposed triggers maintain the emphasis o n ongoing reforms and, in the case o f health, accompany the Government towards the envisaged SWAP approach for the sector. The Government has also completed the update o f the PRSC policy and institutional reform matrix (see Annex 1) to identify the key actions for the next twelve months in l ine with progress to date and consistent with the original objectives o f the PRSC program.

Table 9: Prior Actions for PRSC 3 and Indicative Triggers for PRSC 4

Management Budget Formulation

Budget Execution

Procurement

Decentralization

Corruption

Education

Health

PRIOR ACTIONS FOR PRSC 3

Satisfactory implementation o f Priority Action Plan for 2005. Budget for 2006 allocates adequate resources to PRSP priority sectors.

Monthly accounts produced by the 15th o f the following month in the five regional treasuries and central treasury where the transitional financial management system i s fully operational.

(i) Implementing rules and regulations submitted by MEFB for Cabinet approval and Standard Bidding Documents (SBD) ready for MEFB adoption (ii) Key personnel (General Director and directors) for the Procurement Oversight Institution nominated by MEFB on an interim basis until final approval by Cabinet (iii) Procurement entities in key ministries (education, health, agriculture and transport) operational. Increase resource allocation for the communes.

(EFA) on track.

TRIGGERS FOR PRSC 4

Satisfactory implementation o f Priority Action Plan for 2006 Budget for 2007 allocates adequate resources to PRSPMAP priority sectors. All sector ministries submit budget execution reports based on an economic classification to MEFB within four weeks after the end o f the reference period (every four months) Procurement Audits are carried out by or under the oversight o f the ARMP in at least 3 key ministries (education, health, transport) to assess compliance with new rules and regulations.

Government adopts new regulations on fiscal decentralization to be reflected by the 2007 Budget Law. Develop and adopt conflict-of- interest regulations

I

Implementation o f National EFA Plan on track. Prepare and validate the Health Sector Development Program.

24

I Nutrition I Water Supply

sector I Elaborate nutrition institutional assessment, validate it and implement i ts recommendations.

The Ministry and i ts main partners begin The Ministry and i ts main partners implementation o f the recommendations o f the implement the recommendations o f sector review in the program budget 2006-2008. 2006 joint donorslgovernment sector

review in the program budget 2007-

IMPROVING GOVERNANCE

64. PRSC 3 will continue to support the first strategic axis o f the PRSP, and consolidate reforms initiated under PRSC 1, in public finance, anti-corruption and strengthening the judiciary. Assistance by the Bank wil l also focus on deepening reforms in the areas of customs, decentralization, and capacity building. The reform program is based on strong analytical underpinnings, in particular the 2005 PER and the budget notes for 2005 and 2006. The IDA-supported Governance and Institutional Development Project (PGDI), which became effective in March 2004, i s providing technical assistance for the implementation of these reforms.

A. PUBLIC EXPENDITURE MANAGEMENT

65. I n 2005 Madagascar has immersed itself in important budgetary reforms by passing a new budget law that introduced a Medium Term Expenditure Framework (MTEF) and Program Budgeting (PB) at the same time. The reforms aim to improve the macroeconomic stability o f the country and the effectiveness and efficiency o f public resource use. Madagascar did make significant gains in the process, but it also faced several challenges, particularly with regard to coordination and sequencing o f the many reforms that are going on in parallel. These reforms and their implementation status are summarized in (Table 10) below. They constitute an ambitious and far-reaching reform program that addresses existing problems and bottlenecks in all important areas o f public expenditure management.

Table 10: Key Policy and Institutional Reforms in Governance since July 2005

Overall implementation

Budget Formulation

Budget Execution

Satisfactorily implemented 2005 Priority Action Plan for public finance reforms. Developed 2006 Priority Action Plan for public finance reforms. Joint preparation o f the PER 200617 by the Government and the World Bank Continued support to several PRSP priority sectors in 2006 budget relative to 2005. Strengthened the capacity o f three sector ministries (Education, Transport, Public Work, and water and sanitation) on their 2006 Program Budget as well as regular budget preparation.

Rationalization o f administrative procedures (merger o f the previous positions o f the “sous-ordonnateur” and the credit manager that were replaced by the “ordonnateur secondaire) Consolidated the introduction o f the regulations for supporting documents (“nomenclature des pi2ces justijicatives)

Training and capacity building Prepared “support packages” including a pool o f international consultants that were

Streamlining of expenditure procedures

25

Procurement

Accountability

available for the specific needs o f a sector ministry on budget execution and planning over a two year period (applied on a pilot basis to Education, a similar program i s being prepared for Health and then to Transport)

Strengthening of the treasury 0 Made operational the IFMS in all six provincial treasuries (Antsiranana, Fianarantsoa,

Toamasina, Mahajanga, Antananarivo, and Diego) Strengthened internal control by improving the operational efficiency o f the Treasury Brigade Submitted for Cabinet approval the implementing rules and regulations for the new Procurement Code. Standard bidding documents are ready and wi l l be automatically adopted after Cabinet approval o f implementing rules and regulations. Establishment o f the Procurement Oversight Institution: Based on the decree establishing the ARMP which was passed in May 2005 government has begun the staffing process. The General Director and the board have already been nominated. For the other director positions, nominations have been made on an interim basis by the Minister o f Finance. Begun build up o f procurement capacity in sector ministries: every ministry has identified staff to whom all procurement matters have been delegated in accordance with the provisions o f the new procurement Code. Key ministries (education, health, agriculture and transport) have put in place procurement management units. These units are operational and their performance wi l l be assessed after a period o f one year. Additional units wi l l be established in other ministries in 2006 Submitted final accounts for 2000,2001,2002 and 2003 to the Cour des Comptes. Lo i de Rhglement for 2000 and 2001 voted by Parliament Lo i de Reglement for 2002 and 2003 examined by Cour des Comptes and wi l l be sent to Parliament before June 2006

66. key issues continue to pose significant challenges:

While overall implementation progress of the reform program i s encouraging a number of

0 The fiscal framework (2005-2007) was hastily prepared - delays in the macro framework preparation resulted in unilateral cuts by the MEFB o f budget proposals submitted by sector ministries. The framework i s also not fully aligned with the PRGF macro and fiscal framework. Fo r example, the growth rate o f 64 percent for the 2006 budget projections and a drop o f the overall budget envelope by 22 percent in 2007 is not supported by a sustainable macroeconomic framework. The 2005 framework overestimated revenues resulting in revenue shortfalls during the f i rst semester which caused significant budget cuts in mid 2005.

0 Overall budget execution in particular o f non salary recurrent and capital expenditures was relatively high, reaching 93 percent for non salary recurrent expenditures and 105 percent for investment expenditures by the end o f 2005. PRSP priority sectors benefited only partially f rom the high execution rate (55 percent in health, 77 percent in education, 99 percent in transport). The execution rate of HIPC expenditure was 80 percent. M a i n reasons for the continuing execution problems are (i) cumbersome procedures for budget reallocations, (ii) delays in the nominations o f key spending agents, and (iii) revenue shortfalls in the f i rst six months o f the fiscal year resulting in the freezing o f expenditures. Government had to cut o n average one fifth (about 22 percent) o f the available budget for non salary recurrent and investment expenditures but excluded priority sectors such as health, education, agriculture and justice.

Though applied in general, sector ministries faced substantial problems in applying the new program budget structure (e.g. line i tem budgets are often not consistent with the program activity they

26

intended to support and the new nomenclature is complex resulting in wrong imputations and duplications o f codes). Training and capacity building needs at the national and sub-national levels o f government were initially seriously underestimated. The training program set up by the Government subsequently addressed some o f the major execution problems but further significant investments in training and capacity building are required to fully conceptualize and institutionalize the new program budget structure.

0 Reform coordination remained a key issue in 2005. The difficulties by sector ministries in implementing the new program budget structure forced the MEFB into almost constant crisis management with l i t t le time for strategic reform management.

0 Efforts to improve monitoring and evaluation yielded l i t t le results for the 2005 budget year. Lack o f clarity regarding monitoring responsibilities among the executing agents (e.g. procedural manuals were not adequately distributed to the periphery) as well as a poor selection o f indicators (too numerous, often l i t t le reliable and without benchmarks) constrained the monitoring o f expenditures.

Reform Program

67. The Government’s 2006 priority action plan sustains the continuation of public expenditure reforms by building on the successful implementation of two priority action plans launched since 2004. Following the difficulties in the 2005 program budget implementation, the 2006 priority action plan reflects more interventions needed to ensure a better implementation o f the 2006 program budget and the 2007 program budget preparation. Compared to 2005, actions have expanded to include capacity building and training o f sector ministries, a strategic plan to address expenditure arrears and a more transparent accounting system. The 2006 priority action plan aims to: (i) strengthen reform coordination and implementation capacity, (ii) improve the efficiency o f budget preparation and execution, (iii) strengthen controls and reporting on budget execution, and (iv) improve performance o f the fiscal and customs administration. The 2006 plan also integrates several key recommendations o f the PER such as the development o f a budget framework paper, the improvement o f the budget preparation calendar, the preparation o f budget execution reports and the financial evaluation o f state owned enterprises and communities.

68. Government’s public finance reform agenda i s mainly supported by the World Bank Governance and Institutional Development Program (PGDI) and by several other donors (e.g. IMF, EU, AfDB, France, and the GTZ). The donor community also signed a partnership agreement to better coordinate aid and missions. A f i rst joint mission was conducted in October 2005. Following the benchmarking o f Madagascar’s public finance reform program by the Joint Secretariat on Public Expenditure Management and Financial Accountability (PEFA -Secretariat) in 2005, a f i rs t (joint) review of the PEFA-benchmarks i s programmed for May 2006.

69. The PRSC 3 builds on the reforms started under PRSC 1 and PRSC 2 and continues to support the Government’s public reform program in line with the implementation of the priority action plan. Progress under PRSC 3, i s presented below and summarized in Table 9 above:

(0 0

0

Co-ordination of the Reform Program The Government satisfactorily implemented the priority action plan for 2005. The Government developed a priority action plan for 2006 to sustain the reforms started in 2004 and 2005.

27

0 Reform coordination in MEFB was further strengthened: the reform coordinator, nominated by the MEFB to coordinate and monitor the implementation o f the public finance reform, received support through the recruitment of an international consultant by the MEFB. To harmonize the support to Government and to facilitate reform coordination the Government signed a partnership agreement with the donor community. The strategic coordination o f the multiple reforms, however, was negatively impacted by the problems arising with the implementation o f the program budget.

(ii) Enhancing Budget Formulation 0 The 2006 L o i des Finances continues to put emphasis on several key PRSP priority sectors

(education, agriculture, justice and environment). The education sector takes the largest share o f the budget (19.3 percent) but its envelope increased only marginally by 0.3 percent between 2005 and 2006. The second important sector continues to be transport (1 8.2 percent o f the total budget), though its budget envelope dropped slightly by 0.5 percent in 2006 compared to 2005. Whereas the budget envelope o f most priority sectors increased in real terms, their share o f the budget, with the exception o f environment, declined (all together from 49.5 percent in 2005 to 44.3 percent in 2006), mainly at the benefit o f the Ministry o f Finance and Ministry o f Energy. Some o f the higher allocations o f resources to both ministries can be attributed to the management o f the Millennium Challenge Account (MCA) and the restructuring o f public electricity company JLRAMA. To rectify problems encountered during the 2005 fiscal year o f program budget under PRSC 11, the Government set up a task force to assist priority sectors in the preparation o f the 2006 and 2007 budget. This task force streamlined the program budget for 2006 with a particular focus on a more simplified presentation and a better alignment of the program budget with the sector ministries’ budget. The revised program budget was applied on a pilot-basis to three sector ministries (education, transport and public works, and water and sanitation) in their 2006 budget. In 2006, the task force intends to expand its assistance to more sector ministries, particularly on budget execution in the health and agriculture sectors. For the 2006 budget the MEFB applied a revised preparation schedule which aimed at improving the quality o f the submissions by the line ministries. First attempts were also undertaken to develop a budget framework paper with macro-economic projections and a definition o f the expected spending envelope. It i s also envisaged to further strengthen the quality o f the budget preparation process for the 2007 budget preparation.

0

0

(iii) Strengthening budget execution 0 Following the increasing dissatisfaction by line ministries with the quality o f the training program for

the new program budget structure (not customized to the specific needs o f the ministries and too short), the Government began to prepare training “support packages” including a pool o f international consultants that are available for the specific needs o f a sector ministry on budget execution and planning over a two year period. In 2005 the Ministry o f Education was the first to benefit by technical assistance provided by the pool o f consultants. A similar program i s being prepared for the health and the transport sectors. A technical team, nominated by MEFB, wil l assist l ine ministries to overcome budget implementation difficulties. The Treasury continues to implement the recommendations o f an independent audit conducted in 2003. In 2004/2005 treasury accounts were updated and the final accounts (comptes de gestion) for the year 2000, 2001, 2002 and 2003 have been submitted to the Auditor General. The accounts for 2004 w i l l be submitted by the end o f June 2006 and the accounts for 2005 in December 2006. The Treasury agents benefited from significant training and capacity building (e.g management guidelines for the staff were distributed in 2005) which contributed to improving i t s operational effectiveness. In 2005, the integrated financial management system (IFMS) was deployed to six treasuries (Antananarivo, Toamasina, Mahajanga, Antsiranana, Fianarantsoa, and Toliary). Though there are some differences in the use of the system across various local and operational units (the fiscal,

0

0

28

custom, budget and CDE administrations and the treasuries agencies), efforts are underway to address the IFMS challenges with a particular focus on customs. The introduction of the system has improved timeliness and quality o f information. In 2006, the IFMS introduction wil l be consolidated and extended to other administrations. It is envisaged that by the end o f 2006 the Central Bank, some key l ine ministries and big urban centers wil l be connected to the SIGFP. Additional attention wil l be given to (i) developing standardized reporting formats for strategic and monitoring purposes and (ii) a substantial revision of budget execution procedures by the MEFB and their integration in the new system. Progress in applying the new Procurement Code which was adopted by Parliament in 2004 i s mixed: (i) the development o f the standard bidding documents (SBDs), and o f the implementing rules and regulations has taken much longer than expected due to difficulties in finding suitable consultants. Eventually, drafts of the implementing rules and regulations were delivered by the consultantAawyer in late 2005. A workshop to validate the texts and carry out sensitization training was held in Antsirabe in January 2006. Subsequently, draft standard bidding documents have been finalized taking into account comments by the Government. SBDs are automatically validated following the ratification o f procurement rules and regulations by the Cabinet which took place in May 2006. Training and capacity building activities for the new procurement regulations are also under way. These activities focus on conceptualizing the new regulatory framework; they intend to pave the way for the full application o f the regulations. (ii) work on the institutional framework i s ongoing. The decree establishing the new Procurement Oversight Institution known as A M P (Agence de RCgulation des MarchCs Publics) was issued in May 2005. Based on this decree the Government began the selection process o f the key staff. This process took more time than expected because the Government wanted to ensure that the most qualified people were recruited for the respective positions. The head and board of directors have been nominated by the Cabinet in May 2006 along with the interim appointment by the minister of Finance of the other directors It i s presently envisaged that the ARMP (including the Appeals System) i s fully operational in June 2006. (iii) Activities are under way to strengthen capacity and quality o f procurement in line ministries. Every ministry has i t s PRM (procurement responsible person) to whom all procurement matters have been delegated in accordance with the provisions of the Code. Key ministries (education, health, agriculture, environment, transport) have put in place procurement management units. They are operational and wil l be assessed after a period of one year. The assessment wi l l determine quality and level of performance. The establishment o f similar units in other ministries is planned.

(iv) Strengthening Accountability

0

Progress with regard to the improvement o f the internal and external control functions has been equally mixed: A General Inspectorate for Finances (IGF) was established in 2004, as the principal controller o f the Ministry o f Finance, in l ine with the recommendations o f the CFAA. Problems in defining the role of the IGF vis-a-vis other internal control bodies, in particular the Inspection GBnkrale de 1’Etat (IGE), continue to delay the beginning of the work o f the IGF. In the interim phase, the internal control function has been ensured by the IGE. In 2005, the Brigade du TrCsor, the internal control mechanism o f the Treasury, was transformed to a Directorate to be more independent and sufficiently autonomous vis-a-vis the other Treasury services. The Directorate was strengthened by recruiting additional staff, by specialized training to enhance their accounting capacities, and by modernizing i t s operations. The oversight function of Parliament has been further strengthened through capacity building and training of the Public Finance Committee. The Auditor General has cleared the backlog o f accounts and examined draft budget execution laws (“projet de loi de rbglement”) sent by MEFB for the years 1998 until 2003. The 1998 law has been examined by Parliament and the draft budget execution laws for 1999 until 2001 have been voted by

0

0

29

Parliament. The Auditor General has also examined the draft budget execution laws for 2002 and 2003, and these drafts wi l l be submitted by the Government to Parliament during the f i rs t session of 2006. Voting by Parliament i s expected before the end o f June 2006. The draft budget execution law for 2004 wi l l be sent by MEFB to the Auditor General in June 2006. It i s presently envisaged by the Auditor General to finalize the examination o f the draft budget execution laws for 2004 by September 2006.

(v) 0

Results Focus: Introduction of basic performance management under way. The Government has continued to strengthen the results focus for all ministries and departments. Based on an’evaluation of the “Politique GCndrale de 1’Etat pour 2005” a new one-year action plan for 2006 (“la Politique GCndrale de 1’Etat pour 2006”) has been developed to improve results-focus and performance orientation o f the administration. This plan is derived from a strategic framework that presently consists o f two documents, the PRSP and the strategic vision for Madagascar (“Madagascar Naturellement”). It i s envisaged to replace the PRSP with a new 5-year strategic framework that sets out the main focus areas for the development o f Madagascar (the MAP). Work has also continued to integrate the different activities into a coherent results-based management framework. Under such a system policy-related information is systematically collected at all levels o f Government, consolidated by a well-functioning mechanism at the Prime Minister’s Office and scrutinized for potential follow-up. The system should generate regular reports about the status o f the implementation of the Government program, which should be sent to the Cabinet for discussion and strategic decision-making.

70. The indicative triggers for the PRSC 3 for public expenditure management include the satisfactory implementation of the priority action plan for 2005. The overall implementation i s satisfactory as the majority of the intended reforms are well under way. The implementation status of the other public expenditure triggers are as follows:

0

0

Budget for 2006 allocates adequate resources to PRSP priority sectors. Fully accomplished. Monthly accounts produced by the 15th o f the following month in five provincial treasuries and the central treasury office where the transitional integrated financial management system (SIGFP) i s operational. Fully accomplished as execution reports can be produced in real time in the treasuries where SIGFP is operational. Implementing rules and regulations as well as Standard Bidding Documents issued. Procurement Oversight Institution, procurement entities in the sector ministries and the Appeal system operational. The activity i s in progress and almost completed. Implementing rules and regulations submitted by MEFB for Cabinet approval and Standard Bidding Documents (SBD) ready for MEFB adoption. The recruitment for the personnel for the Procurement Oversight Institution (including the Appeal system) i s almost complete. The General Director and the board have already been nominated. For the other director positions, nominations have been made on an interim basis by the Minister o f Finance. Procurement entities in line ministries are operational. The final trigger for PRSC 3 has been revised accordingly.

0

Expected Results

71, 0

At the end of the PRSC 3, the expected results include: An increase in the number o f HIPC AAP benchmarks met from four in 2004 to ten in 2006. The HIPC benchmarks are now being replaced by PEFA indicators, therefore assessment o f progress in 2005 was abandoned. The preliminary PEFA report does however assess good progress in budget management between 2005 and 2006.

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Budget Formulation: 0 The budget i s aligned to the strategic priorities o f the PRSP including an increase in budgetary

allocations to tangible poverty reduction programs. This activity i s in progress. As the PRSP i s being replaced by the Madagascar Action Plan (MAP) the budget will be aligned with the objectives and priorities of the MAP. Budget preparation process adjusted to allow for better strategic decision making and implication o f the sector ministries, and ensure greater consistency between recurrent and investment budgets. This has been partially accomplished with a budget calendar which allows for more meaningful discussions between the MEFB and sector ministries. Preparation processes for the recurrent and the investment budgets aligned and integrated to improve consistency o f the budget. This i s outstanding. Budget execution rate increased from 80 percent in 2003 to 90 percent in 2006 On track to be Fully accomplished as the 2005 execution rate was 93 percent for non salary recurrent expenditures and 105 percent for investment expenditures.

0

0

0

Budget Execution 0 The treasury provides accurate and timely information. Partially accomplished for the six treasuries

where the IFMIS i s fully operational; this represents roughly 80 percent o f a l l treasury operations. 0 Improvement o f the treasury’s operational efficiency. Activity i s ongoing based on the

recommendations o f the independent audit o f the Treasury in 2003. 0 Treasury produces monthly accounts by the 15th o f the following month. Accomplished for the six

treasuries where the LFMIS i s fully operational. 0 Treasury submits quarterly accounts no later than four weeks after the close o f the previous month.

Not yet accomplished as this requires a further improvement o f the information exchange between the capital and the periphery. Treasury submits final accounts within the statutory timeframe to the Auditor General. Not yet accomplished. The submission i s however envisaged within the statutory timeframe.

0

Procurement 0 New Procurement Code in l ine with international standards. Fully accomplished. New Procurement

Code passed by Parliament in July 2004. Application decrees and SBDs are almost complete. 0 Institutional framework put in place. I n progress with establishment of ARMP and some sectoral

procurement units. 0 Adequate capacity to implement new procurement regulations exists. I n progress, with

commencement o f the capacity building program.

Strengthening Accountability 0 Internal and external control functions (IGF, Brigade du TrCsor, Auditeur General) significantly

strengthened. In progress as the efficiency of the Brigade du TrCsor and the Auditor General has significantly improved. At the same time, role and functions o f IGF/IGE remain unclear. In addition, the commitment control (CDE) remains dysfunctional; an audit of the CDE i s planned for 2006.

Accountability and transparency of budget execution 0

0

0

Monitoring of budget execution by the administration and the Cabinet has improved. Not yet accomplished; preparation of reporting formats and standards is planned for 2006. The treasury had produced accounts within the legal timeframe. Not yet accomplished. Application o f regulations in a transparent and equitable manner. Not yet accomplished.

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Timely examination of accounts by the Auditor general 0 The (( Projets de lois de reglement )) are submitted to parliament within the legal timeframe to allow

the National Assembly’s control o f public accounts. I n progress, with Auditor General clearing backlog o f audited accounts.

B. FIGHTING CORRUPTION

72. The 2004 W B I governance indicators continue to confirm that Madagascar is well above Sub-Saharan African average in all examined areas and in particular in the control o f corruption, regulatory quality as well as voice and accountability. At the same time, progress i s slower than expected as confirmed by the Transparency International Corruption Perception Index of 2005: Madagascar was ranked 97th out o f 158 countries (its previous rankings were no. 82 out of 145 in 2004, no. 88 out o f 133 in 2003 and no. 98 out o f 102 in 2002). It seems that the governance reforms initiated by the Government need time to consolidate despite continued high expectations by the citizenry and the development partners. The Government continues to emphasize that corruption i s one o f the main reasons for the lack o f progress in the socio-economic development o f the country. The key issues include: 0 Pervasive corruption in a number of sectors (Le. mining, judiciary, forestry) and public services (i.e.

customs, medical services, traffic police), which severely affects overall efficiency and delivery o f services. Problems with conflict-of-interest o f public and elected officials. The lack o f ethical standards in the public services with widespread non-application o f formal rules and regulations by public servants. Informal and/or corrupt behavior remains by-and-large unpunished.

Progress in the fight against corruption has been mixed.

0

0

0

Reform Program

73. Reforms started under PRSC 1 and 2 have been deepened and extended, with important improvements in the public awareness about causes and incidence of corruption. The Anti- corruption Commission (Conseil SupBrieur de Lutte Contre la corruption, CSLCC), which was established in 2002 to raise awareness about corruption and co-ordinate all governance and anti- corruption efforts, focused i t s activities in 2005 mainly on a public information campaign to address corruption in government services and on the preparation o f the independent anti-corruption survey which i s being implemented with support from WBI. The preliminary results from this survey confirm widespread corruption in the above mentioned services but also indicate a somewhat declining interest in corruption issues. This i s mainly due to preoccupation with the economic situation which i s considered by the population the most important issue that should be addressed by Government. The survey also indicates significant regional differences in the incidence o f corruption. It i s envisaged to publish the results of the survey widely (in June 2006) and to initiate a comprehensive debate about the findings o f the survey. In March 2006, the mandate o f the Anti-Corruption Commission was enhanced to include the development o f a national integrity framework; the Commission was transformed into the national Integrity Committee (ComitB pour la Sauvegarde de l’IntBgrit8). The implementation o f the revised regulations for the declaration o f assets by public and elected officials i s progressing reasonably well. In 2005, the majority o f the administrative and justice personnel submitted the requested declaration which constitutes a major improvement over 2004. At the same time, the compliance rate remains weak in some key areas (e.g. police, members o f Parliament, mayors). The new law regulating political parties and their financing that was submitted to Parliament in 2005 is stalled, mainly due to the unwillingness o f the political establishment to restrict party financing in the run-up to the general elections. A decree to regulate recruitment into the public sector was approved in 2005. A legal framework governing access to

32

information i s being prepared. It i s envisaged to develop an application decree specifying the rules and regulations concerning conflict-of-interest issues in 2006.

74. The key instrument to fight corruption, the independent Anti-Corruption Agency (Bureau IndCpendant Anti-Corruption, BIANCO) became operational in October 2004. Since i t s inception BIANCO has focused on three areas (i) the examination o f corruption complaints (the office has received 7492 complaints in 2005, the majority o f which deal with the police, the judiciary, land titling and forestry. Based o n the B I A N C O investigations 214 people were arrested), (ii) prevention, in particular training and sensitization o f public servants o f the police, tax administration, health, education and land titling services. In this context, BIANCO has also provided support to manage several recruitment processes into the public sector; and (iii) further investigation. This includes the implementation o f independent audits of public services (in 2005, the audit for the land titling service as wel l as independent procurement reviews for the transport program and for the education-for-all program were completed; discussions are under way with the respective sectors to address the findings and recommendations o f the audit reports). Additional audits are planned for 2006 for the forestry and mining sectors.

75. Moving ahead, in 2006, the government intends to introduce the concept of labeling of public services (“clean”/ “not clean”), to pi lot citizens’ report cards for suitable public services, to address corruption in the judiciary as well as to strengthen the activities in the area o f ‘grand corruption’.

Expected results

76. 0

The main results at the end of PRSC 3, and their current status, include: Adopt sectoral anti-corruption strategies and begin implementation- this activity i s under way: a general anti-corruption strategy has been validated which includes the establishment o f an independent anti-corruption agency (BIANCO). Sectoral strategies have been developed to complement these activities. The regulatory framework for the fight against corruption improved - this activity i s under way; a new anti-corruption and money laundering legislation has already been passed; next steps include regulations concerning conflict-of-interest and the financing o f political parties Independent audits and evaluations have been commissioned to address corruption in targeted sectors/public services -this activity i s under way. An anti-corruption survey confirms a reduction o f corruption in Madagascar - this activity i s under way. A baseline survey wil l be published shortly; it i s envisaged to review the prevalence o f corruption every two years.

0

0

0

C. JUSTICE

77. While the Government continues to emphasize the importance of judicial reforms as a critical element of its overall governance strategy overall reform progress has been extremely slow. M a i n reasons include a lack o f a consistent implementation strategy for legal and judic ia l reforms as wel l as lack o f funding to implement more comprehensive reforms. T o support justice reforms the European Union i s preparing a 5-year program with an overall envelope o f EUR 25m. The main issues that would need to be addressed in the judiciary include: 0 Lack of credibility of the judiciary The credibility o f the judiciary has been seriously undermined

by widespread corruption and inefficiencies. The new anti-corruption survey confirms that the judiciary i s considered one o f the most corrupt services. The Government put under investigation a number o f magistrates because o f corruption charges; some o f them have been sanctioned. Low performance of the judiciary: This i s due to procedural and institutional inefficiencies as wel l as lack o f performance orientation o f the existing staff. This problem affects a l l areas o f the judiciary

0

33

and has led to a significant backlog o f cases, in particular at the lower courts. A key reason i s the lack of service standards and evaluation methods to examine judicial work. In many areas the case load handled by magistrates and other personnel i s not in line with international standards. In areas that require specialization such as commercial proceedings not enough trained magistrates are available to deal with existing cases. Human rights concerns. There are also serious concerns about the conditions in the prisons and about the rights o f the accused. International organizations working in this area consider the prison conditions in Madagascar among the worst in the world. It i s presently estimated that about 14,000 prisoners are awaiting trail and prosecution. The regulatory framework for temporary detention o f people under criminal investigation i s not in line with international human rights standards as it does not limit the time a prisoner can be held in detention. A new law with new standards for temporary detention is being prepared and is expected to be approved by Parliament in late 2006.

0

Reform Program

78. As noted in previous PRSC documents, the Government has identified five broad priority areas which form the basis for its reform strategy: (i) fight against corruption, (ii) expedition o f proceedings, (iii) reform o f business laws, (iv) rehabilitation o f court and prison infrastructure, and (v) humanization o f detention facilities. The reforms intend to further deepen previous reforms and to consolidate the achievements, in particular in the areas o f training, capacity building and codification o f texts and regulations. The needs o f the private sector are a major consideration in the legal and judicial reform strategy.

79. The implementation of this strategy i s severely hampered by budgetary constraints; after 2005 the year 2006 i s the second year that has seen a net reduction of the (already low) recurrent budget of the Ministry of Justice which raises concerns about feasibility and sustainability o f the government strategy. The Government intends to increase funding for the judiciary in the revised budget law 2006 which wil l be presented to Parliament in the third quarter o f the year 2006.

80. PRSC 1 and 2 supported the development of the reform strategy which would form the basis for the implementation of the reform program. The implementation of this strategy has seen mixed results in 2005/2006. To address deficiencies at the level o f the commercial sections o f the courts a number o f magistrates were trained in commercial proceedings. The Ministry has also continued the work to establish “model courts” in Antananarivo and Ambatolampy which would serve as a reference for the reform o f other jurisdictions. The program to reduce the existing backlog o f cases which was successfully completed in the capital Antananarivo has been expanded to other jurisdictions o f the country (Fianarantsoa, Tamatave, Antsiranana). Since the inception o f this program more than 41,000 pending cases were processed. The extension o f the program to three additional jurisdictions (Ambatondrazaka, Farafangana, Toliary) i s planned for 2006.

81. The introduction of service standards, however, which i s seen as a key instrument to improve individual performance and the performance of the jurisdiction has made little progress. The service standards for the lower courts that were developed in 2005 are st i l l awaiting validation. Standards for the higher courts are s t i l l outstanding. Key problems include difficulties to conceptualize service standards, resistance in the judiciary as well as lack o f reliable statistical data which could serve as the basis to systematically monitor and evaluate performance. It i s presently envisaged to introduce the new standards on a pilot basis in two jurisdictions (TPI Antananarivo, Ambatolampy) before June 2006. In addition, the technical assistance provided to improve internal control o f the Ministry o f Justice has yielded very l i t t l e results. An area o f concern remains the fight against corruption in the judiciary: the anti-corruption survey confirms the continued prevalence o f corruption; the disciplinary commission in

34

the Ministry o f Justice has not been able to effectively address this issue and to improve ethical standards in the judiciary. Efforts to revamp the commission (to make it more effective) appear to be stalled.

Expected Results:

82. The expected results at the end o f PRSC 3 and their current status include: Backlog o f pending court decisions reduced - this activity i s in progress. The year 200415 has seen a net reduction o f the backlog o f cases o f more than 41,000 in the targeted courts. The program i s being expanded to other jurisdictions. Significant increase o f outputs in the judicial system with the introduction o f service standards - this activity i s in progress. Pilot introduction o f service standards in two lower courts i s planned for June 2006. Reduction o f corruption as confirmed by an independent anti-corruption survey - not accomplished yet. Anti-corruption survey confirms continued prevalence o f corruption. Establish financial and administrative tribunals in the provinces - Fully accomplished. Tribunals exist in al l six provinces since June 2005.

D. CUSTOMS

83. Despite some progress in 2005/2006 customs reforms i s st i l l lagging behind expectations. Key problems include revenue generation -s t i l l significantly below projections- as well as the perception that corruption has not yet been effectively iiddressed. In addition, service standards (i.e. time for the clearance o f shipments) are not systematically enforced.

Reform Program

84. There has been some progress in the functioning of customs since July 2005. A customs strategy and action plan designed to improve revenue generation, introduce service standards and reduce corruption, was adopted in June 2005. To monitor the implementation o f the strategy a coordination mechanism (cellule de suivi) was put in place in 2005. A long-term technical advisor from the World Customs Union w i l l be hired in 2006 to support the coordination o f the reform program. The following reforms have been undertaken: The tariff system was simplified with the merger o f the customs and import duty in the 2005 L o i des Finances. The customs regulations were modernized, including the elimination o f the customs duties credit (crddit de droit); instituting mandatory payments o f the customs duties through the banking system since April 2005; and abolishing the immunity o f customs agents from enquiries and prosecution. The customs administration i s also expanding the coverage o f i t s automated data processing system (SYDONIA) to improve operational efficiency. The new system has been installed in all main customs offices, in particular in Tamatave and in Antananarivo. A roll-out to additional customs offices i s planned for 2006. Pre-shipment inspection continues to be done by the private company SGS. A pre-shipment inspection report i s now required for customs clearance and a system o f valuation o f imports based on the PSI company’s (rather than customs) valuation has been in put in place. Government i s also introducing a comprehensive customs management system (TRADENET) which i s expected to be operational in the main port Tamatave in September 2006. According to statistics produced by the customs service the time for customs clearance o f containers has been reduced from an average o f 10 days in 2002 to 48 hours in 2004 in the main customs office in Tamatave. To address corruption more effectively, the customs directorate i s working closely with the Anti-Corruption Agency (BIANCO) with activities focusing primarily on training, sensitization, as well as application o f administrative sanctions (i.e. regular rotation o f customs agents). These measures have had a positive impact in increased customs receipts and there has been a notable increase o f satisfaction

35

among private sector operators. B U N C O i s also involved in monitoring the recruitment process into the customs administration. The agency i s presently reviewing the asset declarations submitted by customs officials. In 2005, 10 customs agents were suspended because o f fraud and corruption charges, an additional 20 agents are under investigation. Under the L o i des Finance 2006, the Government has further simplified the tariff structure, with three non-zero rates o f 5, 10 and 20 percent, and an un-weighted average rate o f 13.6 percent. The Government i s also addressing tax administration weaknesses and efforts are ongoing to broaden the tax base. A major area o f focus i s currently on clearing i t s existing arrears on VAT refunds and improving the system o f VAT refunds in 2006 and beyond.

85. At the same time, revenue generation by the customs directorate remains fragile. In 2005 customs was able to generate in nominal terms 86.5 percent o f the revenues projected in the budget -this performance i s significantly better than in 2004 but s t i l l below expectations. The customs directorate generated 86.2 percent o f projected revenues in January 2006 and 91.2 percent in February 2006. Main reasons include stagnating imports, the implications o f the changes o f the customs tariffs, and continuing governance problems in the customs directorate. To address existing problems the Government intends to further streamline customs operations as well as to intensify the collaboration with the pre-shipment agent and the port authorities. I t i s also envisaged to shift the authority to exemptions from the Minister o f Finance to the Cabinet.

86. 0

The implementation status o f the trigger for the PRSC 3 i s as follows: Implement satisfactorily the customs reform action plan, in particular consolidate the introduction o f Sydonia ++ and extend the system to the customs office in Antananarivo. Fully accomplished as the new system i s fully operational in Tamatave and Antananarivo.

Expected Results:

87. 0

The expected results at the end o f PRSC 3 and thei r current status include: Overall quality o f customs services improved, more revenue generated, and corruption reduced. Not accomplished yet as revenues are s t i l l weak and governance issues continue to negatively impact customs performance.

E. DECENTRALIZATION

88. In 2005, the Government continued to strengthen the new regions which were established in 2004 and have become (together with the communes) the second operational level below the central government. The main functions o f the regions are to facilitate commune development and to represent the central government. The legal framework for the regions also stipulates that the de-concentrated services o f the central government report to the regional chiefs. The implementation o f these regulations i s uneven with significant regional differences. Major problems include the relationship between line ministries, their de-concentrated services, regions and communes as well as the lack o f resources at the regional and communal levels. In 2005 most regions prepared Regional Development Plans.

89. Public finances in Madagascar are heavily centralized with about 95% of revenues and expenditures managed by central authorities. Financial capacities at the communal and regional levels are constrained by insufficient and poorly targeted transfers and a regulatory framework that leaves the collection o f most local revenues in the hands o f inefficient deconcentrated state agents. Compared to the 2005 budget, the increase o f allocation to the communes i s small with an overall increase o f only 3.7%, reaching 29 bil l ion Ariary. This modest increase i s due to the fact that the Government also has to ensure some transfers to the regions. However, a significant step has been made because the budget foresees for the first time allocations (4bn Ar) to the new Local Development Fund (FDL) which i s expected to be

36

operational in late 2006. The Government considers the FDL as the principle instrument to channel funds to the sub-national levels. The main objective of the FDL i s to integrate support to the communes both by the Government and the donor community under a single mechanism and with harmonized procedural and institutional arrangements. In parallel the Government wants to strengthen the resources base at the commune level, in particular by improving revenue collection.

90. The Government i s addressing the existing shortcomings through four major interventions: (i) preparing a local government finance law (loi sur la fiscaliti) that would regulate sources and modality o f funding o f regions and communes including the transfer system and formula; (ii) scaling up o f pilot experiences with decentralized tax collection; (iii) establishing the FDL to provide block-grants to communes for local investments and capacity building and (iv) reinforcing communal capacities and create synergies between communes by supporting the creation of inter-communal associations and regional training and resource centers. .

91. 0 Increase resource allocation to the communes. Fully accomplished. However, allocations to the

communes increased only modestly in the 2006 budget. Another key issue remains the actual transfer which in 2005 was significantly below the budgetary allocations.

The implementation status of the trigger for the PRSC 3 i s as follows:

Expected Results:

92. 0

0

The expected results at the end of PRSC 3 and their current status include: Resource allocation to the communes increased by at least 20% - this activity has not been accomplished. Capacity o f the communes to deliver services strengthened. This activity i s under way and is expected to be supported through the FDL and the new local government finance law.

F. TRAINING AND CAPACITY BUILDING

93, The implementation of the governance reform program continues to require substantial investments in training and capacity building, in particular in the areas of public financial management, planning, change management and monitoring and evaluation. In collaboration with the World Bank, the Government i s implementing an innovative capacity building and change management strategy that consists o f the following elements:

0 Cabinet retreats focus on better defining the overall vision and implementation strategy. In 2004, the f i rs t retreat took place with participants from all over the world who commented on the Government strategy, as well as shared experiences and best practice. The results from these events were used to refine the Government program. The second retreat focused on improving service delivery. A third retreat, held in May 2005, was designed to foster cross-sectoral collaboration within the government ministries, and included a focus on using a rapid results initiative to improve implementation (see below). Another retreat i s planned for May 2006 and wil l focus on the implementation of the new Madagascar Action Plan.

0 Leadership training for the senior management level within government i s aimed at strengthening consistency and cohesion of the core government leadership team (President, Prime Minister, Vice Prime Minister, Ministers and Permanent Secretaries) as well as to strengthen their ability to manage and direct rapid change. Complementary leadership training has focused on enhancing the capacity o f the Regional Chiefs. In 2006, additional training i s programmed to assist senior government officials in implementing complex changes. This program wi l l be directed by a

37

change management team which is led by Prof. Dean Williams, a leadership expert from Harvard University. Additional capacity building activities will target the middle management in the public sector to improve overall performance orientation and the link between political decision making and administrative implementation. The basis for the training w i l l be the results framework developed by the Presidency (‘Politique GBnBrale de 1’Etat’). To improve cross-sectoral collaboration and the focus on tangible results the Government has decided to extend the application o f the “rapid results” approach to other areas, in particular in the health sector. A first exercise, launched in early 2005, focused on the production, importation and distribution o f rice. Cross-sectoral teams were created who worked out ‘rapid results action plans’. The results o f this work are encouraging as the methodology has proven effective to overcome the existing administrative bottlenecks and the lack o f coordination within the Malagasy administration. As a consequence, the Government intends to apply this methodology in other high priority areas, in particular in the health sector. The government teams will continue to be supported by international experts for the ‘rapid results’ methodology. To better institutionalize the significant changes in the area of public finance a comprehensive support package has been developed to support the big spending ministries. This package has been developed by a task force which was set up by the Ministry o f Economy, Finance and Budget (MEFB) in 2005 to organize professional training for the public finance personnel at the central and deconcentrated levels o f Government. The package comprises initial training in the context o f the introduction o f public finance reforms, coaching and change management support to institutionalize the new rules into the existing business process as well as institutional development support to strengthen the capacity o f the relevant directorates in the line ministries. The Ministry o f Education has piloted this approach which i s being rolled out to other priority ministries (e.g. health, transport). In parallel the Government continues to strengthen quality and effectiveness of local training institutions, in particular in high priority areas such as development planning, public financial management and monitoring and evaluation. The two professional training institutions for the public sector (Centre National de Formation Administrative, CNFA, and Ecole Nationale de 1’Administration Malgache, ENAM) have received substantive support to modernize their curricula and equipment as well as to improve quality and quantity o f their trainers. The Government intends to establish a National Leadership Inst i tute to provide high-quality training for future senior managers in the public and the private sectors. The Insti tute i s expected to be operational in June 2006.

Expected Results:

94. 0

The expected results at the end o f PRSC 3 and their current status include: Effectiveness o f the Government leadership team enhanced; consistency between political decision making and administrative implementation improved - this activity has been partially achieved; additional activities are planned for 2006 and 2007. Capacity in critical areas in core government services strengthened - training and capacity building i s ongoing in the areas o f public financial management, development planning, change management and monitoring and evaluation. Capacity and quality o f local training institutions improved - this activity i s ongoing; it i s anticipated that capacity and quality o f ENAM and CNFA will be significantly strengthened by the end o f 2006.

0

0

PROVIDING HUMAN AND MATERIAL SECURITY

95. The three PRSCs will support the third strategic axis of the PRSP on human development through a sequenced and gradual process. PRSC 1 supported the implementation o f the Government’s

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Education for Al l (EFA) program and improved service delivery in nutrition. PRSC 2 has deepened the engagement by supporting policy and institutional reforms in health, rural water supply and social protection. PRSC 3 continues to consolidate the reforms started under the previous two operations.

A. EDUCATION

96. Basic education i s an important priority of the Government and has recently received additional grant financing from the multi-donor EFA-FTI Catalytic Fund. The PRSP commits the government to allocating 25 percent o f the domestic budget to education. In 2003, the Government prepared a Strategic Plan for the Reform and Development o f the Education Sector along with a detailed plan o f action for Education for All (EFA), which covers the first nine grades o f school (called “Education Fondamentale”), with concrete proposals for achieving the target o f universal completion o f the primary cycle (grades 1-5). Following local donors’ endorsement o f the updated EFA National Action Plan in April 2005, the Steering Committee o f the EFA-Fast Track Initiative (FTI) secretariat agreed to provide interim grants from the Catalytic Fund to bridge the financing gaps for three years on a multiyear additional fund for Madagascar (US$lO mill ion for 2005, US$25 mill ion for 2006 and US$25 mill ion 2007). These additional grants are provided on the understanding that government w i l l continue to increase i t s budgetary allocations to through the EFA catalytic funds to primary education (using own resources and aid from budgetary support programs/HIPC funds) and are not meant to substitute for them.

97. Primary completion rates have improved but an important proportion of children do not complete yet the primary cycle. Since the suppression o f school fees in 2002, the N e t Enrollment Rate registered an increase of 16 points, shifting for 82% to 98% between 2002/2003 to 2004/20058. The surge o f enrolments in 2002-03 associated with this has now stabilized; new intakes into class 1 decreased around 9% between 200415 and 2005/6. Efforts have been developed in order to reduce the repetition rate from 30% in 2002 to 19% in 2005 and positive impacts are expected on the student retention rate. The Primary Completion Rate (PCR) improved significantly from about 30% in 2002 to 60% in 2005(which means that 40% o f children in primary school do not yet complete the primary cycle).

98. A major issue remains the poor quality o f primary education and this will take concerted action on a number o f fronts over several years to show results. According to the results from the PASEC test in 2003/04 students registered lower scores in comparison to 1997/08, in particular in French and in general for grade 5. The decline in the repetition rate i s largely the result o f administrative measures on the suppression o f repetitions in CP and in CM1. As a result o f the huge increase in student enrollment, despite the high number o f new teachers (about 2,000 per year) the pupil-teacher ratio stagnates around 60. Although recruitments o f regular teachers are on track, redeployment and recruitments in remote areas remain a challenge. As o f end October 2005, out o f the 7,500 FRAM teachers’ posts, only 5,800 have been trained and recruited. The provision o f school grants and student learning materials are s t i l l facing some delays due to difficulties in budget execution; school budget as well as school supplies are not delivered timely at the beginning o f the school year. The objective o f one textbook per student per subject i s not yet met

99. Concerns also persist on the shortfall in construction o f additional classrooms for primary schools. The target o f building 2,000 classrooms per year i s not yet met: Only 375 classrooms were built

* The 2004 Household surveys (EPMs) showed an increase o f 14 points o f the NER for the same period; from 72% in 2002/2003 to 86% in 2004/2005. Differences between both sources are noted because MENRS’ calculations are based on projections from the 1993 population census, while EPMs figures are from direct calculation from household data. Nonetheless, the significant increase o f the NER during the period is valid.

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in 2004 and 885 in 2005. Long delays in classroom installation are the main reason for the shortfall; against a target o f 1,400, only 823 have been completed. Moreover, quality issues have also been raised. Delays in the execution o f some externally assisted projects have also slowed down construction activity. Apart from the shortfalls in physical progress, concerns were raised in the April 2006 joint donor review of EFA implementation about the adequacy o f financial management procedures to oversee such a large construction program. The Ministry i s however fully committed to address the situation and, under i t s leadership, has proposed, to carry out a full financial and technical audit o f i t s construction program.

Reform Program

100. The Ministry has carried forward its reform program for primary education and begun elaborating a strategy for post-primary education. A major achievement in managing the program i s donor alignment around the EFA plan, the creation o f structures within the Ministry to provide leadership to EFA implementation and manage the additional funds for EFA, the institutionalization o f a process o f joint donor reviews conducted bi-annually and government leadership both for the plan and for donor coordination. The World Bank has provided leadership for initiating and sustaining these processes, including the supervision o f the Catalytic Fund grant. The MENRS i s initiating a process in order to develop a strategy for post primary education and technical assistance i s provided mainly by the World Bank.

101. The April 2006 joint Government EFA review noted major progress on areas of concern identified by the previous year’s review. The review positively endorsed Government progress, further confirming the mid-term review o f November 2005. Teaching conditions are improving with the implementation o f the 2005’06 teachers recruitment plan, the increase o f FRAM teacher remunerations and the arrangements for a closer teacher-salary payment mechanism. On quality, many actions are underway, namely the introduction o f bilingual textbooks, the launching o f a competitive grants program to develop local initiatives, the introduction o f innovative supports to teachers such as distance learning and the creation o f resources centers. Efforts have been made to rationalize the human resources management and about 2,000 posts are being reutilized by the MENRS. Measures to improve the education system management are being implemented as the creation o f the regional directorates with increased responsibilities for the implementation o f key activities faced delays during the year 2005. At the central level better management i s observed with the Steering committee and the Technical Management Unit for the EFA, which work closely with the district level. Appropriate management tools such as annual and comprehensive workplans are developed at al l levels o f the education system and better donor coordination i s observed in practical terms.

102. Looking forward the EFA Review identified areas where further efforts are needed: (i) endorse the ministry proposal to undertake a financial and technical audit o f the government financed primary classroom construction program (ii) produce an action plan to enhance national classroodschool capacity and which would refer to the recommendations provided by the January 2005 construction study, that would be prior conditions to include construction expenditures in the 2006 and 2007 Madagascar additional grants from the FTI catalytic fund, (iii) pursue the progress made on solving the problem o f “postes budg6taires”, (iv) evaluate options regarding linguistic policy, (v) improve budget preparation, presentation and reporting for 2006 and using effectively related budget management tools (cash flow and procurement plans), (vi) agree with the MFB on a global waiver to commit more than 40 percent o f the allocated amount for specific budget items and (vii) improve the training program particularly for ‘in service’ training for FRAM teachers. The FTI process has enabled the MENRS in its role o f donors’ coordinator. For the implementation o f the EFA Plan, the “Unit6 d’Appui Technique - UAT” has been created inside the MENRS and it will manage the domestic and external additional funds for the EFA plan.

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103. e

The status o f the education trigger for the PRSC 3 i s as follows: The implementation of the EFA remains on track as assessed by the joint donor reviews of November 2005 and April 2006. The next review i s scheduled for November 2006. The Trigger i s fulfilled.

Expected Results

104. As noted above, there has been significant increase in enrolments and quality i s also improving, but some of the other expected results have not yet been fully achieved. However, as assessed by the April 2006 joint Donor assessment, the expected results for the EFA plan, which underpin those of this PRSC series, are likely to be achieved and Madagascar has already been granted additional financing from the FTI Catalytic Fund for 2005,2006 and 2007.

Table 11: Expected Results of the EFA Program

Note: The numbers in the table correspond to the updated EFA plan o f April 2006.

B. NUTRITION

105. Ongoing nutrition interventions show that successful reduction of malnutrition rates among young children i s possible in Madagascar. An impact-evaluation o f the community-based nutrition program, which i s implemented in 62 districts, demonstrates a 10%-point reduction in underweight malnutrition in the poorest areas of Madagascar where the program intervenes for at least two years. Despite this reduction, national level malnutrition rates remain high and more i s needed, especially to reduce chronic malnutrition rates, or stunting. Decreasing stunting takes long-term commitment and intensified attention towards pregnant women in order to reduce low birth weight. Impressive improvements have been made concerning exclusive breastfeeding o f children under six months (from 43 percent in 1997 to 67 percent in 2003/04 based on the DHS) and Vitamin A supplementation among children under five (from 4 percent to 76 percent over the same period). However, iron-deficiency anemia among young children remains very high, with more than two-thirds o f children under the age of five suffering from anemia. In addition, seasonal short-term hunger among school-aged children has been

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highlighted as a major impediment to learning. Deworming o f school-aged children and supplementation with iron to the same age-group has been successfully carried out in the last 5 years in Madagascar, but again in this area, more remains to be done.

106. I n recent years efforts are made to improve the quality o f nutrition services, the integration of basic health services at the community-level, and to strengthen the referral system for severely malnourished children, but more attention i s required to address the remaining challenges - iron deficiency anemia among young children, seasonal hunger, systematic nutrition surveillance, the nutritional status o f pregnant women and the collaboration with the health sector. Improving quality and extension o f services to the national level i s needed to attain the MDG for nutrition in 2015.

107. The reversal of the negative trends and improvements in the nutrition situation in Madagascar are the results of years of Government investment in community based nutrition activities, improved quality of nutrition services, and more recently the strengthened capacity to develop policies as well as increased attention to institutionalization of nutrition and allocation of budget for nutrition services. However, further progress is needed to consolidate capacity and coordinate within the key-sectors, such as health and agriculture. The recently created National Nutrition Office (ONN) should take on these extra efforts and should be encouraged to continue the use o f existing implementation capacity in Madagascar, particularly the executing unit SEECALINE, the former implementing agency o f the community based nutrition programs. More work needs to be done to consolidate the institutional set up of Nutrition, such as the further integration o f SEECALINE in the ONN, guidelines on the collaboration with the other sectors and - most o f all - getting the National Nutrition Council operational, as it was officially created together with the ONN, but i s not functional yet, while the final definition o f i t s role, responsibility and constitution has been postponed at several occasions.

Reform Program

108. The Government i s committed to continuing the reduction of malnutrition as evidenced by the adoption of the first National Nutrition Policy in April of 2004 under PRSC 1 and the creation of the National Council for Malnutrition (CNN) and its secretariat, the Office National de Nutrition (ONN) in November 2004 to lead the implementation o f the Nutrition Policy and programs. A National Nutrition Action Plan was developed and validated in March 2005 and i s being implemented. The Government o f Madagascar and Parliament also demonstrated a political commitment by approving increased budget-allocations for nutrition programs in 2005. On the other hand, the Council i s not functional yet, while the 2005 budget for Nutrition was only made available at the end o f the year, which created major implementation issues. Furthermore, the 2006 budget has been severely reduced, which may lead to significant problems not only with the implementation o f projected extension o f the number of nutrition sites in poor districts, but also to maintain the current school and community based activities.

109. Local level support i s strongly committed to maintaining the nutrition program and there is high demand for extension. Despite financial delays o f more than 8 months in 2004 and 2005 the field based activities o f the program continued to function due to a high local commitment (beneficiary- communities, NGOs and local government). Maintaining current efforts and extending efforts to more communities are crucial to ensure the attainment o f the MDG for nutrition. At present the 3600 sites continue to function and an additional 1800 community sites would be functional by the end o f 2006. All sites w i l l progressively adopt the new approach which decentralizes implementation responsibility to the local government level with supervision o f quality s t i l l maintained by the central level.

110. The comprehensive school nutrition and health program i s reaching almost 2 million school-aged children in the program areas and will maintain current interventions. Projected

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extensions have been cancelled due to budget cuts. Efforts to provide seasonal school-feeding programs to address the short-term hunger problem during the lean period in food-insecure areas continue. More work i s needed to develop a comprehensive School Health and Nutrition Policy.

1 1 1. The integration of the implementing agency SEECALINE into the ONN and the piloting of the new approach (decentralized responsibility to local government) in 22 communes are both in process. The ONN has integrated SEECALINE as i t s operational branch which i s mandated with the implementation o f the community-nutrition program, but the process i s not yet totally finalized. Many institutional issues remain unclear while the whole set up needs further reflections and political commitment in final decision making. For example, it remains to be clarified how SEECALINE staff wi l l be absorbed into the ONN structure once the project wi l l close. Progress has also been made with the preparation o f the pilot o f the new approach of the community-based nutrition program, the PNNC, in 22 communes and 1 10 sites. The communes have been selected and awareness about the program i s created, the NGOs (first-line implementers) have been selected and contracted to start interventions when financing wi l l be made available (estimated around July 2006) in July 2006. Training manuals have been developed and training of trainers and implementers is ongoing. The actual activities in the pilot sites were delayed due to the lack o f financing in early 2005. The pilot wi l l be closely supervised and evaluated for possible further extension.

Expected Results

112. 0

The main expected results at the end of PRSC 3 and their current status is: The main overall outcome i s a reduction in the child underweight rate o f 20 percent between 2004 and 2007, based on the results o f anthropometric surveys (2004 & 2007/8). The available information suggests that there i s progress towards meeting the objective. In addition, the institutionalization of nutrition and the implementation of the National Community Nutrition Program would lead to sustained commitment and investment in nutrition for the long term at the national, regional and commune level (integration of nutrition indicators in the Regional and Commune Development Plans).

0

Table 12: Key Intermediate Outputs of the Nutrition Program

I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 Children 0-3 years in I 344,000 I 493,000 I 625,300 I 650,000 1 650,000 I 987,900* I 1,200,000*

* Most intensive interventions are for children under age 2.

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C. HEALTH

113. The sector continues to make steady progress in improving access to and quality o f maternal and child health services. Despite changes in organization and personnel within the M O H and insufficient medical specialists and paramedical staff, the sector retains i ts focus on reform to improve governance and service delivery, and to reduce the vulnerability o f poor households to health risks. Coverage o f high impact interventions such as immunization, vitamin A supplementation and impregnated bed-net distribution i s expanding along with efforts to further improve the quality and access to health care at primary and f i rst level referral facilities and the promotion o f health insurance schemes and solidarity mechanisms built around user fees and cost recovery for drugs. The number o f skilled health workers posted in rural areas i s also increasing albeit at a slower pace than expected, and the associated approaches o f community workers and social marketing i s also having positive impacts notably on the use o f modern contraceptive methods

114. The maternal mortality ratio (MMR) has remained stable since 1997 around 470 jeopardizing the likelihood that Madagascar will reach this MDG by 2015. While antenatal care has increased to 80 percent and the presence o f skilled staff at birth has increased from 47 percent to 54 percent, the full benefit o f skilled attendance at birth can only be realized if the referral system, comprising all o f the essential elements o f access to the whole spectrum o f obstetric care including emergency services, i s fully functional. Some progress has been achieved under PRSC3 in addressing this challenge through the setting up o f better communication networks between primary and f irst level referral facilities using solar based VHF radios; the strengthening o f blood banks at district level, provision o f ambulances and obstetric care equipment and the rehabilitation and re-equipping o f some district and referral facilities. However, efforts for more systematic improvements in referral services and emergency obstetric care, particularly in rural areas, w i l l be intensified. Moreover, deaths due to abortion are likely to contribute significantly to the MMR (40 percent in rural areas, and approximately 52 percent in Antananarivo alone), thus improved access to family planning would considerably improve maternal health in the medium term.

115. Madagascar had been making some headway on the control of malaria, tuberculosis and leprosy; however these efforts seem to have been losing some ground due mainly to delays in access to resources, and the deterioration of the existing surveillance system. Madagascar has secured sizable resources for the control o f Malaria, tuberculosis and HIV/AIDS treatment mainly through the Global Fund grant facility. Recently however, delays in implementation have occurred due lengthy processes in defining appropriate strategies (i.e. malaria) or delays in access to the funds available. Nevertheless, social marketing o f highly subsidized permanently impregnated bed nets increased mother and child prevention in the coastal regions. Diagnosis and treatment o f tuberculosis improved with the expansion o f DOTS (directly observed therapy system) and increased drug availability nationwide.

116. With the prevalence rate of pregnant women testing positive for H I V at 0.93 percent nationwide, the HIVIAIDS epidemic could be contained if major Government and donor efforts are continued. While occurring later than in most o f its neighbors in Africa, the Madagascar HN/AII)S epidemic has increased. High rates o f Sexually Transmitted Infections (STIs), together with risky sexual behavior, represent major vulnerability factors for a quick spread o f the virus. In 2005 an estimated 180,000 persons were living with HN. Since the establishment o f the ComitC National de Lutte contre le Sida (CNLS) to implement the HIV/AIDS program, a SWAP approach has been put in place with the main partners (World Bank, Global Fund, ADB, USAID, GtZ, UNICEF, UNAIDS, etc.) to implement numerous activities (information, education, mass media communication, cinemobiles in villages, distribution o f STI treatment kits, etc.). While knowledge o f HN/AIDS satisfactorily progressed between 1997 and 2003/04 f iom 69 percent to 79 percent for women, and to 88 percent for men, behavior change has lagged behind among high-risk groups in hot spot areas as well as among the general population. The

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CNLS i s rightly reorienting i ts strategy to: (i) concentrate activities on behavioral change and in the most high risk zones; (ii) strengthen mass and peer communication on STI, HIV testing, and reduction o f stigma; (iii) develop routine testing, and voluntary counseling; and (iv) strengthen public private partnerships as a way to address the weakness o f public health services.

Reform Program

117. The M O H i s continuing implement initiatives to prepare the sector for the transition to programmatic lending. The first round o f the National Health Accounts i s completed and dissemination w i l l be done shortly. Several studies to measure the effectiveness and efficiency o f public health service provision have also been initiated. In addition to the activities completed in the last few years, this work w i l l further strengthen the analytical background necessary for M O H to transition to programmatic lending.

118. Under the new sector policy, which was adopted in June 2005, emphasis i s placed on the need to re-orient health resource allocations to underserved areas and improve public expenditure management. Prevention and treatment o f malaria and other major communicable diseases are also among the key priorities. Moreover, the policy seeks to achieve closer integration and coordination o f health sector interventions with other activities that impact health status such as water and sanitation, nutrition, transport, and rural development, and aims to expand the coverage o f risk-coping strategies such as mutual health insurance schemes and solidarity mechanisms. To implement the policy, the M O H i s planning to adopt a sector wide approach (SWAP) and has initiated the preparation o f a comprehensive sector development program (SDP). The process will require an increased leadership from MOH and includes an assessment o f the human resources and financial inputs required to sustain policy implementation over the next five years, along with specific health improvement targets to be attained in order for the country to achieve the health-related MDGs. The M O H expects to organize a review o f the SDP and i t s accompanying medium term expenditure framework (MTEF for 2007-2009) by June 2006, and to finalize both documents soon afterward.

119. To estimate the sector’s investment needs over the next ten years, a process of analytic work was initiated using the Marginal Budgeting for Bottlenecks (MBB) programming tool. The analysis has highlighted the importance o f adequate investment both in human resources development and in infrastructure - especially referral facilities. The analysis i s based on a dynamic path characterized by various growth scenarios including linear increases in service delivery and/or frontloading for infrastructure and equipment supply. Preliminary estimates from the modeling exercise indicate that significant resources would be necessary to enable Madagascar to meet the health-related MDGs by the target date o f 201 5. The planned expansion o f essential health services, including enhanced clinical referral capabilities for neo-natal and obstetric care, would require additional resources over the short to medium term to set the country on a dynamic path toward realizing the MDG. The first base scenario calls for an increase of US$3.80 per capita and aims at progressing steadily towards the child mortality, malnutrition, malaria and HIV MDG targets through increased use o f well known high impact health interventions such as immunization, family planning, use o f impregnated bed-nets and social marketing o f health and sanitation products including oral re-hydration therapy. The other scenarios call for a tripling to quadrupling o f spending on health to support a significant expansion o f clinical services which will be necessary to make progress on the maternal mortality MDGs.

120. The M O H intends to organize a consultation around the SDP to ensure predictable and sustained financing of the program. The IDA Health Sector Project will close on December 3 1 , 2006 and further Bank support to the health sector, in addition to the PRSC, i s now being explored in the context o f the new CAS via other instruments possibly within a SWAP approach.

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121. Health system management at the local level i s also improving although budget management capacity remains a major challenge. The planning, programming and monitoring functions o f regional and district health management teams have been strengthened. All regions and districts have adjusted their budgeting process to the new budgetlprogram format, and some have begun to introduce performance-based planning using management tools and technical support from various partners. The performance o f the district management teams has started to improve as a result o f technical support and staff recruitment. All but a few o f the districts are now able to formulate their three year plans and develop annual work programs along clear norms and criteria. However, implementation o f those annual plans i s s t i l l weak due to poor implementation capacity, insufficient resource flows to the regions and districts and low capacity for procurement o f the large quantities o f commodities and equipment needed to expand health services. Furthermore support from regional and communal administrative authorities i s s t i l l weak. This situation i s in part due to substantial limitations at central level. For instance, budget management functions remain weak and require increased efforts to strengthen the administrative and managerial capacity o f the health system. The M O H budget execution in 2005 has remained deceptively low. The focus under this PRSC is on continuing efforts aimed at developing capacity at central, regional and district levels and at devoting increased attention for more systemic support and monitoring o f budget distribution and implementation.

122. Regarding improvements in health care services, progress has been moderate in the key areas o f hospital reform, defining and validating service standards and in finalizing the inventory o f maintenance systems and testing different options to set up a national maintenance system. On the other hand, the pharmaceutical policy was reviewed as planned

123. On hospital reform, while the quality of basic health care i s acceptable, the health system performs poorly at hospital level, limiting referral to urban areas and, only then, when it i s not further compounded by financial barriers. The quality o f services at hospital level i s affected by the lack o f proper medical specialists, equipment, maintenance, proper drugs and consumables, etc. However, the creation o f the health regions has significantly modified the set up o f district health facilities and reference hospitals. With support from WBI and in partnership with other donors, hospital level services are being reviewed and should lead to a reorganization o f the referral system and a transformation o f the role and mandates o f district and regional hospitals for more effective and efficient service delivery. The program o f creation o f essential services particularly in surgery and emergency medicine and the re-equipment and rehabilitation o f health facilities i s progressing well and will continue. However, the overall reform program for hospitals i s somewhat delayed if compared with the initial chronogram proposed for PRSC 2.

124. On human resources reform, although limited, the appointment and redeployment o f general practitioners and paramedical staff has contributed to improve the functioning o f existing facilities. The Ministry has prepared a training plan for human resources which it expects to finalize shortly. The human resource development plan and health infrastructure development plan currently under preparation, including an assessment o f bio-medical equipment and maintenance requirements, will help assess resource requirements and inform the development o f a sustainable medium-term hospital expansion program, and the needed human resources redeployment.

125. Adequate supply of drugs was restored with the reintroduction of cost recovery in January 2004 (after a period of free distribution during the 2002 crisis), and the 35 percent markup on generic drugs i s among the lowest in Africa. However, this low level o f mark-up does not leave much room for additional resources to improve quality. While the Government has succeeded in maintaining low drug prices through subsidies to compensate for the high devaluation during 2004, it will have to carefully manage the restoration o f prices reflecting drugs’ real cost in the near future. Moreover, a substantial number o f drugs and products (mainly the ones with the highest externalities) distributed in

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the public as well as in the private sector are highly subsidizedg. Given that drugs and consumables are cheap, free or highly subsidized at f irst contact level, health care i s affordable for most o f the people at the periphery, allowing for a relatively simple exemption system. In addition, special services have been organized for the poor in several areas, including free nutritional rehabilitation services for severely malnourished children and mothers in 35 hospitals nationwide (contracted out to NGOs).

126. Cost-recovery was reinitiated at health center level, but with accompanying exemption policy measures for the poor at this level. Despite the documented high prevalence of poverty among the general population and the introduction of payment mechanisms to assist those who have been identified as poor to have access to basic health services vonds d’iquite‘), the small number of persons who claim to be indigent indicates that there may be significant cultural barriers to identifying oneself publicly as poor or indigent. Similar measures have been gradually introduced in hospitals, given the impoverishing effects of hospitalization, where most surgical and other consumables are not available and must be purchased in private outlets, ending up in unreasonably expensive bills.

127. Madagascar’s efforts to provide services to the poor focus on increasing the availability of quality services and ensuring the financial accessibility of these services. The M O H commitment to assess funding mechanisms for health centers and hospitals remains strong. The program o f piloting equity funds at regional and districts hospitals which i s proceeding as planned wi l l continue over the next year. The organization of pilot mutual health insurance schemes i s advancing a bit slower than planed with only 12 out o f 20 districts having developed such a scheme. An evaluation o f the results so far is expected before the end of the year and the lessons learned wi l l help with identifying a more realistic schedule. The f irst round of the national health accounts study completed in 2005 should help improve the data base on private and public expenditures and contribute to better budget allocations. Preparation of the 2007-2009 MTEF i s initiating and the process o f developing sustainable health care financing projections i s currently underway and wi l l help determine the financing framework required for Madagascar to achieve the MDGs.

128. There i s still a significant need to improve the monitoring and evaluation of the health sector. The health information system i s not fully functional and most importantly the data collected are not effectively used to manage the services, monitor and evaluate policies or alert authorities of potential epidemics.

129. Overall, there has been substantial progress on PRSC 3 planed actions, although some areas remain weak, namely, budget execution and management, as well as the capacity of the MOH to translate the overall policy into an operational plan that would be financially sustainable. In addition to actions that address these issues the proposed actions for the next twelve months wil l continue to focus on activities to increase access to health services by the poor, further reduce existing financial barriers to access to basic services, and delivering preventive services to remote populations. Achieving these goals requires an increase in the overall financial allocations to the health sector (both as a percentage of the government budget and as additional donor funding), as well as a close monitoring o f how those resources are spent and the results achieved

Expected Results:

130. following:

The main results expected at the end of PRSC3 and their current status include the

Vaccines, prenatal vitamins and malaria chemoprophylaxis, TB and leprosy drugs, malaria treatment for children; plague treatment, STI treatment kits, permanently impregnated bed nets, contraceptives.

47

DPT3 vaccination rate o f children below 1 year, not to decline below 80% in 2006. DPT3 vaccination among under one year olds, i s currently about 86 percent. The objective has been accomplished. The Sector’s financial framework guarantees: a) the provision o f drugs and medical material at the level o f the health centers and district hospitals; and b) financial accessibility o f a basic package o f services for all. This i s an ongoing process Increased percentage o f deliveries at health services. The situation has not improved yet despite the increase percentage substantial o f prenatal consultations. MTEF valued as a programming tool for MINSAN-PF and partners. This now an on-going activity as the f i rs t MTEF was completed last year and w i l l now be updated. Increased access to health services. The government has increased the number o f health facilities particularly in previously underserved areas; progress i s still needed in improving quality at the hospital level

D. RURAL WATER SUPPLY

131. The provision of drinking water services figures prominently in the PRSP as part of the objective to promote Human Development in particular for the poor and i s among the top five priorities of the agenda in “Madagascar Naturellement”. Access to improved water supply and better sanitation accompanied by effective hygiene education are critical to reach the Millennium Development Goals, because o f their complementary role in improving both health and productivity and providing increased opportunities for education and employment, especially for women and girls.

132. Access rate to potable water in rural areas has increased from 13% to 16% between 2003 and 2005. In 2005, an additional 245,000 persons living in rural area gained access to potable water against 220,500 in 2004. Reaching the MDG, i.e. providing 52 percent o f the rural population with access to potable water by 2015, wil l require providing 6.6 mill ion additional people with potable water, or about 660,000 people per year. That wil l necessitate increasing significantly the overall sector capacity through improved activities planning, increased responsibility for service delivery at deconcentrated and decentralized levels and increased public expenditures efficiency and sector financing support.

Reform Program

133. The Government has continued to make significant progress in setting up the necessary building blocks to move to programmatic approach and enhanced budget support for the rural water sector. In June 2005, the Government endorsed the national water supply and sanitation program (PNAEPA) aimed at reaching the MDG for the water and sanitation sector. The Directorate o f Water and Sanitation (DEA) o f the Ministry o f M i n e and Energy (MEM) has definitively adopted in 2005 the program budget approach to plan and monitor all sector activities. A manual o f procedures for implementing and managing water and sanitation projects was disseminated to al l sector stakeholders in order to standardize technical norms and practices all over the country. A water point computerized database i s in place at the DEA for measuring sector progress. The DEA has recruited 13 staff to strengthen i t s central and deconcentrated capacity. Finally, annual water and sanitation review has been institutionalized in 2005 to offer the opportunity to review through a participative approach sector performance, past DEA program budget execution and address key sector issue and make recommendation to remediate sector weaknesses. About one hundred people participated in such event, from the government, donors’ community, NGO’s, private sector, mayors, and chef o f region. The f i rst one was organized in June 2005 and the second one in April 2006.

134. Total budget for the DENMEM has continued to substantially increase over the past years, but remains still insufficient to expect to reach the MDG’s. Expenditures increased from US$10.6

48

mill ion in 2004 to US$13 mill ion in 2005, with domestic funding representing 45 % o f the total 2005 budget o f the DEA: 87% o f the budget was dedicated to rural water, 11% to urban water and 2% to rural sanitation. DEAMEM 2006 budget i s estimated at US$ 19.5 million, representing an increase o f 33 %, which i s coherent with the G O M PRSP priorities. However, it i s estimated that about US$ 31 million would be needed annually to reach the MDG target for rural water supply.

135. The overall implementation of the national water supply and sanitation program (PNAEPA) continues satisfactorily. Building on the positive trend and results o f last year, DEAMEM continues to lead the work o f the sector wide approach (SWAP) in close collaboration with other donors (AfDB, EU, JICA, WaterAid, UNICEF, USID) to increase i t s absorptive execution capacity. More specifically, on-going activities support the sector: 1) strengthening the medium term results oriented program budget planning process in order to increase sector execution capacity, public expenditures efficiency, and monitoring and evaluation; 2) harmonizing stakeholders' approaches; 3) increasing responsibility and resources to deconcentrated levels as well as to regions and communes in decision making for programming and supervising o f service delivery; 4) increasing support to sanitation and hygiene promotion to maximize health benefits for the population and 5) promoting innovative water service delivery mechanism using local Public Private Partnership, where half o f the capital investment i s provided to local governments (mostly by supplying pipes, equipment and meters) and where private operators and community/local government provide the remaining 50% and sign a medium term management contract for the service.

136. The PRSC3 trigger for the rural water sector i s fully met. The MEMDEA and i t s main partners have implemented as expected all the recommendations o f the 2005 sector review in the program budget 2006-2008. Key actions taken include the following : i) Creation o f a new department in the DEA dedicated to the preparation and monitoring o f the program budget; ii) Definition o f criteria to select communities to be included in the program; iii) Advertisement o f bidding documents for works, goods and services at the provincial and regional levels; iv) Dissemination to all stakeholders o f the national manual o f procedures ; v) Setting up o f new procedures for collecting data to update the DEA water points database; vi) Recruitment o f a consultant to operate the computerized national water points database; vii) Agreement with INSTAT on data to be collected for water in national surveys and viii) Increased allocation for sanitation in 2006 DEA budget.

Expected Results

137. e

The main results at the end of PRSC 3 and their current status are as follows: Increase in overall sector capacity. As discussed above, a number o f actions have been taken by the DEA to increase sector capacity, as recommended by the stakeholders during the 2005 sector annual review. This i s now an ongoing activity The Program budget o f the DEA i s the reference framework for strategic and operational programming and the monitoring and evaluation o f all sector activities. This i s now a going activity Access to safe water w i l l increase from 13 percent in 2003 to 18 percent at the end o f 2006 in rural and semi-urban areas. Available data suggest that this result will likely be achieved.

e

e

E. SOCIAL PROTECTION

138. Seventy two percent of the population lives in poverty and shocks are widespread. In terms of natural disasters alone, more than 30 cyclones, 6 droughts and 2 famines have hit the island nation since about 1970. Madagascar's on-going risk and vulnerability analysis finds that other shocks,

49

including human disease, locust infestation and livestock disease, are widespread, if less visible than natural disasters.

139. Existing safety net programs are ill-adapted to effectively managing these risks. The current system o f safety nets has evolved in response to various crises. As a consequence, much o f today’s spending appears to be crisis-driven, to the detriment o f longer term strategic aims. Moreover, beneficiary groups have not been rigorously defined nor prioritized. Although social protection spending comes to about 1 percent o f i t s GDP, the lack o f a clear definition and prioritization o f vulnerable groups creates the risk that these resources w i l l be spread across broad beneficiary populations, to l i t t le effect, rather than concentrated on the neediest groups. In order for Madagascar’s social protection resources to achieve maximum impact, a greater portion o f resources need to be invested further upstream, in risk prevention and mitigation instruments; in a more coordinated fashion, with less overlap between different partners’ activities; and fot the benefit o f well-defined, agreed-upon vulnerable groups.

140. In 2002, the Government created a Technical Committee on Social Protection (TCSP) to address the issues raised above, through development o f a comprehensive Risk Management and Social Protection (RMSP) Strategy. Though the TCSP has been effective in this role (the RMSP Strategy i s expected be completed in FY06), it i s not a permanent Government body, and i t s mandate does not extend to implementing the strategy nor undertaking social protection reforms. Madagascar now needs a permanent institutional framework for social protection, with a mandate to implement the RMSP Strategy, to lead social protection reforms, and to guidekoordinate future investments in the sector.

Reform Program

141. The TCSP has prepared a Social Protection Policy Note that was validated in M a y 2005, and has produced a draft RMSP Strategy that was presented for international peer review at a workshop on the development o f social protection strategies in Africa (Tunis, June 2005). Final comments by the Bank and donors are being integrated. The strategy wil l help Madagascar to set clear objectives, reform goals, and cost-effective interventions. They w i l l be based on an assessment o f the priority areas o f vulnerability, and w i l l take into account the need to balance short-term, risk-coping instruments with long-term, growth-enhancing social protection interventions. The Strategy provides the analysis necessary for social protection reforms envisioned under PRSC3.

142. The TCSP has also done initial research on the creation of a permanent institutional framework for social protection. Because resources are over-invested in emergency management and response, it i s critical that the mandate o f this social protection agency/committee/secretariat encompass management o f all welfare-harming risks, and not only highly visible natural disasters and other emergencies.

Expected Results

143. 0

0

At the end o f PRSC 3 the expected results and thei r current status are as fo l lows: The Finalization and validation o f the Risk Management and Social Protection Strategy i s ongoing will be completed by July 2006. Implementation o f social protection reform program, and accompanying interventions. This activity i s delayed as it i s contingent on the validation o f the Strategy.

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STRENGTHENING MONITORING AND EVALUATION OF THE PRSP

144. The PRSP lays out the objectives, institutional framework and operational modalities of the Monitoring and Evaluation (M&E) system. The objectives o f the system are to monitor inputs, outputs and outcomes, and evaluate impacts. The system, anchored in the Secretariat Technique a l’Ajustement, has produced regular reports and updates o f the strategy. However, it suffers from the limited capacity o f some o f i ts actors, in particular some o f the sector ministries. In addition, the analytical content o f the reports i s limited, as the links between activities/expenditures and outcomes or impacts are not systematically established or analyzed.

145. The institutional arrangements for the monitoring and evaluation system are a critical element of the results-based Madagascar Action Plan. A clear logical framework for the Madagascar Action Plan i s essential to ensure that monitoring and evaluation can become a tool for greater evidence- based policy making. The structure o f the monitoring and evaluation system i s currently being revised. In particular, the government plans on simplifying and harmonizing the reporting requirements for i t s agencies, clarifying the roles and responsibilities o f all actors, as well as developing a clear calendar o f activities aligned with the decision-making processes, which w i l l improve the analytical content and provide meaningful feedback into the policy making processes. Once the system i s clearly established and i t s work program identified, these can form the basis for the coordination o f donor support.

146. As part o f the framework for M&E, the Government i s currently elaborating a national strategy for the development of statistics (Strategic Nationale de Developpement de la Statistique, SNDS). This framework w i l l help strengthen the statistical capacity, coordinate and rationalize the statistical system, improve the quality o f the statistics, ensure greater access and use o f data for policy making, update the legal framework, and coordinate external assistance. The Government prepared the road map, which outlines the process for the elaboration o f the SNDS, in September 2005 (with representation from the PARIS 21 secretariat and key donors, including the World Bank, European Union, United Nations system, IMF and France). The diagnostic, expected by endJune 2006, wil l form the basis for the elaboration o f the strategy and a detailed action plan.

147. The PRSCs are promoting the M&E of the PRSP to improve the results focus of the strategy, the alignment of the programs to the PRSP, and data quality and accessibility. This includes the development o f a concrete plan for strengthening the M&E system, supported also by an Institutional Development Grant. It also includes the elaboration and implementation o f the national strategy for the development o f statistics, through direct guidance, the Institutional Development Grant, and the Accelerated Data Program. The PRSCs have also supported the improvement o f statistics and indicators in selected sectors, among which education, health, and infrastructure. Finally, the PRSCs have supported the elaboration and analysis o f the 2004 household survey.

Poverty and Social Impact Analysis

148. The proposed PRSC 3 does not support any reforms that are expected to have significant distributional impacts. The Government however remains committed to understand the distributional impact o f key policy reforms and economic events. Ex-ante poverty and social impact analysis (PSIA) has been undertaken in the past or i s planned in the coming months to inform critical policy issues. In the last two years distributional analysis has been conducted to understand the impact o f the reduction in rice tariffs o f 2005 and the implementation o f land tenure securitization. To date, PSIA i s ongoing to understand (i) the poverty and social impact o f health care and the poor by investigating Government efforts to meet the health care needs o f the poor in the context o f the reinstatement o f cost recovery for drugs and (ii) the impact of o i l price increases; following the 2004 fuel price liberalization and the

51

subsequent sharp increase in world oil prices in 2005, i s essential to investigate the impact that such changes are having in Madagascar, including their effect on household spending patterns

V. CREDIT IMPLEMENTATION AND R I S K S A. CREDIT ADMINISTRATION

Fiduciary Aspects

149. Foreign exchange system: an IMF safeguards assessment was completed in March 2006 and identified continued weaknesses in the BCM’s system o f internal controls, financial reporting, and legal framework. The assessment made recommendations to address the observed vulnerabilities, which included (i) an annual external audit report on the BCM’s transactions with the government and their compliance with the central bank law; (ii) quarterly reviews by the BCM’s internal audit function o f monetary program data reported to the Fund; (iii) adoption o f International Financial Reporting Standards as the BCM’s accounting framework; and (iv) measures to strengthen the quality o f the BCM’s external audit. An agreed action plan with the Central Bank authorities has been developed by the IMF to ensure adequate and timely implementation of these recommendations. A previous assessment was completed in November 2001. While some recommendations to strengthen the safeguards framework o f the BCM have been put in place, others required more time and are now being addressed in the context o f the new assessment and included in the above mentioned action plan monitored by the IMF.

150. Public Finance Management System: the World Bank’s CFAAICPAR, was completed in 2003. Other diagnostics carried out over the last three years by the Bank and other donors, identified a range o f issues hampering the performance of Madagascar’s budget and expenditure management system. To address these issues, the Government has developed since 2004, an annual priority action plan for public finance reform which have been successfully implemented. Details o f implementation for 2005 are provided in section IV A above along with the challenges ahead.

Disbursement, Reporting and Auditing Arrangements

15 1. The proposed credit will follow the Bank’s disbursement procedures for development policy support. Credit proceeds wil l be disbursed against satisfactory implementation o f the development policy program and not tied to any specific purchases or be subject to procurement requirements. Once the credit i s approved by the Board and becomes effective, the proceeds o f the credit wi l l be disbursed in compliance with the stipulated single tranche release conditions. Once the Bank’s Board approves the credit and at the request o f the Borrower, IDA wi l l disburse the proceeds o f the credit into an account designated by the Borrower that is part o f the country foreign exchange reserves account at the Central Bank of Madagascar. The Borrower shall ensure that upon the deposit o f the Credit into said account, an equivalent amount i s credited in the Borrower’s budget management system, in a manner acceptable to the Bank. Based on previous experience, the execution o f such transaction from the Central Bank to the Treasury (Ministry o f Finance) doesn’t require more than four days. The Borrower wi l l report to the Bank on the amounts deposited in the foreign currency account and credited in local currency to the budget management system. While no external audit wi l l be required it i s expected that this written confirmation wil l be signed of f by both the Accountant General and the Auditor General, and wil l be supported by a credit note from the Central Bank. If the proceeds o f the credit are used for ineligible purposes (i.e. to finance goods or services on the standard negative list), as defined in the Financing Agreement, IDA wil l require the Borrower to promptly upon notice from IDA, refund an amount equal to the amount o f said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration of this credit wi l l be the responsibility o f the Ministry o f Finance. As required by law,

52

the Auditor General wi l l carry the audit o f public accounts and submit the annual report to the Parliament prior to the date o f i t s f i rst session following the year o f the review o f these accounts by the General Audit Office. IDA will have access to this report. IDA wi l l also receive a copy o f the annual financial statements o f the Central Bank audited by an international audit firm in accordance with International Auditing Standards, within six months after the end o f each fiscal year.

Implementation

152. The responsibility for implementing the PRSC program in Government rests with the Ministry of Economy, Finance and Budget. The Government has continued to take the lead in updating the program policy matrix, and the Ministry o f Economy, Finance and Budget is coordinating inputs from al l the relevant ministries to update the policy matrix. The updated policy matrix w i l l be discussed during pre-appraisal mission in April 2006.

B. ENVIRONMENTAL ASPECTS

153. The proposed PRSC 3 i s a development policy credit in support o f a broad program o f policy and institutional reforms, for which the environmental requirements o f OPBP 8.60 apply. The PRSC 3 program does not pose any significant environmental impacts. The Bank’s overall strategy has focused on further strengthening o f the Government’s legislative and institutional capacity to address environment and natural resource management.

C. R I S K S

154. risks, many o f which were already identified in previous PRSC operations. The main r isks include:

The implementation o f the poverty reduction strategy in Madagascar continues to be exposed to

(a) Madagascar remains vulnerable to external shocks, particularly cyclones and increases in global commodity prices, such as oil and rice. As detailed earlier, these shocks impact negatively on growth and poverty reduction. The Bank has now finalized a Risk and Social Protection Review to assess risk prevention and mitigation strategies. Init ial steps have been taken to investigate the feasibility o f specific options for risk mitigation to the external shocks faced by Madagascar (e.g. weather risk insurance schemes). The Bank has also modified procedures for i t s Community Development Project (FID IV) to allow the project to respond to emergencies rapidly; the supplemental IDA credit for the FID project in FY05 was delivered in response to the two cyclones o f 2004. In addition, the construction o f schools, and re- construction o f damaged infrastructure have been greatly improved to withstand the effects o f cyclones. The Cellule de Prevention et de Gestion des Urgences (CPGU) i s operational and is charged with managing programs to prevent crises and mitigate their impacts when they do occur. Finally, the Government has made rice an important policy focus, with an emphasis on the entire rice value chain (production, distribution, marketing), and i s also looking at policy options to better stabilize prices. Political issues, particularly in an election year, present a risk The political situation in Madagascar is relatively stable, especially compared to many countries in sub-Saharan Africa. The President’s popularity remains high and his political party i s dominant. The Presidential elections - scheduled for the end o f 2006 - will likely lead the policy agenda this year and carry the main risk that they could distract focus from reforms. There are also some concerns that the Government’s ambitious and initially fast-moving efforts on fighting corruption have stagnated recently. However, at the same time, the elections also present an opportunity as they place extra

(b)

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pressure on the Government to deliver results to the population in 2006 which could ensure renewed vigor in implementing reforms and poverty-reduction programs. The political leadership has a clear vision o f reform and i s strongly committed to moving the PRSP agenda forward. The initial draft o f the MAP i s a testament to such Government commitment. The Bank’s focus in this regard continues to be on issues o f transparency and anti-corruption, with the PRSC and the Governance and Institutional Development Project being the main instruments of IDA support, and WBI playing a key role through various governance and capacity programs.

(c) Maintaining a stable macroeconomic environment remains critical to the successful implementation of the PRSP and i s a core area of focus of the future MAP. The Government has already made significant progress in 2005 in managing the high inflation in the face o f continued high international prices. Nevertheless, further inflationary pressures caused by world price volatility wi l l continue to present a challenge. The successful completion of the restructuring plan o f the electric power utility, JIRAMA, i s also essential for the maintenance of a stable macroeconomic environment given the negative repercussions on the whole economy that another crisis, as experienced in mid-2005 would have. The recent agreement with the IMF on a new PRGF program i s a key aspect in managing these risks. The implementation of public finance reforms poses challenges and r i s k s negatively impacting service delivery. As detailed earlier, Madagascar has carried out an ambitious set o f budgetary reforms that are already yielding results. Nevertheless, a number of key issues are worrisome such as a weak fiscal framework that over-estimated revenues, unpredictable budget execution, capacity weaknesses in applying the new program budget structure and poor reform coordination and M&E. The Government has recognized these issues and has laid out a priority action plan for 2006 that continues and deepens the reform program. Successful implementation of this priority action plan wil l be critical to ensure real impact on service delivery and poverty reduction. The Bank continues to support the reforms proposed in the areas o f public finance, budget programming, procurement, institutional development and capacity building through the PRSC and the Governance and Institutional Development Project. The Bank’s on-going investment portfolio also focuses on institutional strengthening, training and capacity building at the sectoral level. Capacity weaknesses present significant risks to the effective implementation of the poverty reduction strategy. As noted above, to mitigate this risk the Bank i s supporting institutional strengthening, training and capacity building. In particular, the on-going portfolio o f IDA investment operations focuses on building capacity at the sectoral level, as well as building capacity among development actors such as the private sector, community and farmers organizations and NGOs. WBI i s also active in building capacity within Government for managing the PRSP. Reaching and maintaining the economic growth targets laid out in the PRSP and the MAP - while feasible - will be difficult. Sustainable poverty reduction depends on maintaining growth at high levels, attracting private investment into the labor-intensive manufacturing sector and into agro-businesses. The erosion o f trade preferences and the expiration of the MFA have already impacted the growth of the textile sector in the EPZ (textile exports in 2005 were almost the same as for 2004). Providing a favorable investment climate i s crucial in this regard in order to attract higher levels o f FDI. The recently-completed Investment Climate Assessment (ICA) outlines a set o f recommendations for mitigating this risk including accelerating reforms to improve competitiveness and attract private sector development. IDA’S AAA program - including the ICA, the 2005 Development Policy Review and the up-coming CEM - focuses specifically on growth issues to assist the Government prioritize and implement reforms.

(d)

(e)

( f )

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MADAGASCAR THIRD POVERTY REDUCTION SUPPORT CREDIT

ANNEXES

Annex 1 Policy and Institutional Reform Matrix .......................................................................... 56 Annex 2 Letter o f Government Policy .......................................................................................... 70 Annex 3 Status o f actions for PRSC 3 Policy Matrix ................................................................... 81 Annex 4 Progress in Supporting Broad-Based Growth ................................................................ 88

Annex 6 Madagascar Key Economic Indicators ........................................................................... 95 Annex 5 Madagascar at a Glance .................................................................................................. 93

Annex 7 Monitoring Indicators ..................................................................................................... 97

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Annex 2 Le t te r of Government Policy

REPOBLIKAN'I MADAGASIKARA Tanindrazuna - Fahafahana - Fandrosoana

MINISTERE DE L'ECONOMIE DES FINANCES ET DU BUDGET

Antananarivo, le 12 avril2006

L e Ministre de l'Economie, des Finances et du Budget

a

Mr Paul Wolfowitz President

Banque Mondiale 1818H Street NW Washington DC

Cher Monsieur Wolfowitz,

2.

La R6publique de Madagascar mene sa politique de dkveloppement sur la base du Document de Strat6gie pour la Rbduction de la Pawret6 qui traduit me feme volont6 du pays d'auvrer pour une croissance Cconomique Cquitable, durable et forte. Le but principal que se sont assignbes les autorit6s est l'atteinte des Objectifs du Mi l l ba i re pour le Dkveloppement, notamment la rifduction de moiti6 de la pauvret6 d'ici 2015. Conqu et &is6 dans un esprit et un processus participatif, la version complkte du DSRP a 6t6 adoptke en Juillet 2003. Afm d'intbgrer la vision ((Madagascar naturellement )) et les nouvelles r6formes administratives entreprises, ce document a 6t6 m i s Q jour en Juin 2005. Il sera relay6 en 2006 par un plan innovant sur cinq ans ddnomme << Madagascar Action Plan D.

Dans la version mise Q jour du DSRP, le choix de politique 6conomique est orient6 vers Une croissance forte ax6e sur la relance de l'offre globale et l'accroissement de l'investissement. La stratbgie repose sur : (i) le dbveloppement des sectem portem, (5) la mise en place d'un cadre incitatif et shurisant pour les investissements M~~OMUX et 6tmigers, (iii) le dheloppement du capital humain par l'am6lioration de I'accks de la population a m services de SantC, d'Education, d'Eau et Assainissement. Sont recensbs en tant que secteurs porteurs : l'industrie manufactmitre tournhe vers

'industrie minibe, le tourisme et surtout l'alpiculture. Pour ce dernier, culier eat accord6 Q l'amklioration de l'infi-astructure et le relkvement de qui seront r6alisCs avec l'appui des partenaires financiers B travers des

projets et programmes tels que le Millenium Challenge Account (MCA) et l e P6le Intkgrk de Croissance (PIC).

70

71

72

73

5

74

75

Unofficial Translation

REPUBLIC OF MADAGASCAR Tanindrazana - Fahafahana - Fandrosoana

MINISTRY OF ECONOMY, FINANCE, AND BUDGET

Mr. Paul WOLFOWITZ Chairman World Bank 1818H Street NW Washington DC

The Minister of Economy, Finance, and Budget

Antananarivo,

Mr. Chairman,

1. The Republic o f Madagascar i s conducting its development policy based on the Poverty Reduction Strategy Paper which expresses the country’s strong wil l to work for an equitable, sustainable and strong economic development. The main purpose which the authorities set to themselves i s achieving the Millennium Development Goals, namely reducing poverty by half by 2015. The document was designed in a participatory spirit, and the final version of the PRSP was completed through a participatory process, which culminated in its adoption in July 2003. In order to integrate the Madagascar Naturally )) vision and the new administrative reforms which were undertaken, the document was updated in June 2005. It wi l l be taken over by a five year innovative plan called (( Madagascar Action Plan D.

2. In the updated PRSP version, the choice for economic policy i s directed to a strong growth focused on boosting global supply and increase in investment. The strategy rests on: (i) developing buoyant sectors, (ii) setting up an incentive and securing framework for national and foreign private investment, (iii) developing the human capital through enhanced access of the population to services in Health, Education, Water and Sanitation. The following are considered buoyant sectors: export oriented manufacturing, mining industry, tourism and, especially agriculture. Regarding the latter one, a particular emphasis i s laid on improved infrastructure and enhanced productivity which wil l be achieved with the support from financial partners through such projects and programs as the Millennium Challenge Account (MCA) and the Integrated Growth Pole (IG2P) [P61e IntCgrC de Croissance (PIC)].

3. In 2003, the f i rst year for implementing PRSP, the economic growth rate was 9.8%, and inflation was curbed. Such growth increased in 2004, despite exogenous shocks - cyclones and rice and oi l prices on the international market - that the country had to undergo, and which entailed overall increase in prices and depreciation o f the national currency. The efforts led by the Government for keeping economic stability and implementing numerous institutional reforms came up with the attainment o f the completion point in October 2004. Therefore, Madagascar was granted a significant cancellation of foreign debts within Paris Club. The year 2005 witnessed the

76

continuation o f inflationary tensions which were contained at the end of the f i rst quarter. Growth was somehow slowed down by problems in electric energy provision and the consequences of the dismantled Multi Fiber Agreement, but it nevertheless amounted to a 4.6% rate.

4. The actions and reforms started during these last years indicate that the country i s determined to move forward. In the area of good governance 22 regions, which are provided for in the Constitution, are effectively established. Fight against corruption i s materialized in tangible actions: the anti-corruption law and the law relative to money laundering were adopted in Parliament; the texts relative to their implementation were decreed by the Government; the Independent Anti-Corruption Office (Bureau Independant Anti-Corruption (BIANCO)) i s operational; anti-corruption strategies were developed and implemented within the Ministry of Justice through reinforcement o f internal control. In the mining and the forestry sectors, transparency i s ensured through a biannual publication o f l ists o f operation permit holders, as well as o f fees collected from each operator.

5. As regards public finance, the Government implemented the 2005 Priority Action Plan (PAP 2005), which continued public finance reform. Such reforms relate to both revenues and expenditures. Regarding revenues, important improvement was brought to taxation for better revenue performance. Concerning internal taxation, tax and duty rates were revised downward, and the base was broadened through better inspections and controls by strengthening the economic role of the taxation system (modification of the base for Professional Tax, modification of Corporate Tax ( B S ) ....); the SIGTAS software was operational in August 2005. As regards ,

customs, the f i rst year in the implementation o f the Customs Action Plan enabled restructuring and rationalizing the rates in import duties and taxes (DTI), accelerating customs clearance, effective commissioning o f the SYDONIA++ software among customs offices in Toamasina, and instituting the payment for D T I through the banking system.

6. Efforts were also deployed for the sake of transparency and good public expenditure management. The new programmatic budget was introduced by the texts governing the public finance reform as a whole, which were passed during the year 2004 and applied starting from the year 2005. The organic law on Finance Laws namely instituted the Medium Term Expenditure framework (MTEF) and the programmatic budget so as to ensure consistency between the budget and the development strategy. An Integrated Public Finance Management System was also established to strengthen transparency. Such a system i s operational in the Treasury (Paierie et la Recette GBnBrale) o f Antananarivo, as well as in the five main treasuries of the main towns of Faritany. It enables producing the budget execution reports within 15 days following the closing of monthly entries in the locations where it i s implanted. The Procurement Code was adopted and the texts for i t s implementation are being finalized.

7. In order to reach the objectives which the Government set forth, the intention i s to take appropriate actions and to implement adequate reform programs. Priority wi l l be granted to actions in good governance and rational management o f the State finance, which wi l l be accompanied by appropriate macroeconomic, structural, and sector-based policies.

8. The reforms undertaken in the area of public finance management wi l l be strengthened both in formulation and execution o f the State budget, and in control. Budget allocations are in line with PRSP priorities. As regards public investment program for 2006, the social sector which i s composed o f education and health, benefited from 27.2% of the total amount, and infrastructure from 39.7%. Concerning 2006 budget execution, training for (( ordonnateurs secondaires )) and activity managers were provided at the beginning o f the 2006 in all provinces and former prefectures which are equipped with financial districts. A budget execution guide was edited and distributed to (( ordonnateurs secondaires )) and activity managers in the course o f such training sessions. The efficiency and the quality o f the control mechanisms in public finance management wil l be improved as regards the management o f committed expenditures through the

77

establishment of an organizational and analytical audit o f the Financial Control. Budget execution reporting based on an economic and functional nomenclature wil l be performed with the International Consultant recruited for such a purpose regarding training MEFB technicians. The budget execution report in the framework of the four month review with donors wil l be extended to all ministries in 2006.

9. The 2000 and 2001 Reports on Budget Execution (Lois de reglement) were passed in Parliament in 2005. The 2002 and 2003 Draft Reports on Budget Execution were reviewed by the Auditor General (Cour des Comptes) and forwarded to Parliament for including them on the agenda of i ts sessions for this year 2006. The 2004 Draft Report on Budget Execution wi l l be forwarded to the Auditor General at the end of June 2006.

10. Budget preparation for 2007 wi l l start earlier than in previous years: the f i rst phase o f budget conferences wil l take place before July 2006.

11.

12.

Procurement reforms wi l l be continued. In application of part o f the code, the procurement management units in ministries are operational. The application texts o f the new code adopted in 2004 were developed by international Firms and reviewed by the Steering Committee. They wil l be presented to a Cabinet meeting for approval in May 2006. The Procurement Oversight Organization (Autoritd de Rkgulation des Marchks Publics ( A M P ) ) members wi l l be appointed at the end of May 2006. Training sessions for users o f the new Procurement Code at both the central government level and local government level wi l l be provided following the approval o f application texts by the Government. Such application texts wil l be gradually established in the course o f 2006 second quarter.

In the framework of good governance, actions wi l l be taken as regards fight against corruption, decentralization and justice. A sector-based anti-corruption strategy wi l l be adopted and implemented. The reinforcement o f the regulatory framework i s continued, amongst others, through the adoption o f an application decree governing issues in conflict o f interest, and a decree involving recruitment and selection procedures for the public service. Anti-corruption officials wi l l also conduct the following actions: independent reviews o f procurement in large investment projects, independent audits o f customs directorates, enquiries on probable conflicts o f interest in specific areas. In order to fight against corruption within customs departments, service standards in line with international standards wi l l be gradually established.

13. With a view to having effective decentralization, budget allocations to communes wi l l be revised upward. Such allocations already increased by 20% between 2003 and 2005, and by 42.5% between 2004 and 2006. The commune budget allocation system wi l l be reviewed. The Local Development Funds wil l be made operational for building commune capacities in public service provision.

14. With a view to enhancing transparency and efficiency in the judiciary system, service standards wi l l be developed, and which set the number o f cases to be processed by magistrates and court clerks. The program for reducing backlogs in f i le processing wi l l be extended to lower courts.

15. The social sectors are also covered by the Government program. The educational policy has an important role to play for strengthening Madagascar competitiveness and for training skilled labor. The actions taken under the implementation o f the policy o f Education For All (EFA) are strengthened. In the second year o f i t s implementation, it enabled to further strengthen the educational system, especially the primary education. Thus, the net enrolment rate increased from 82% in 2002103 to 98% in 2004105 -thanks to the construction o f 920 additional classrooms and the recruitment o f about 2,000 additional teachers. The efforts wi l l be continued in both areas with a view to broadening education supply, as well as to promoting non formal education in order to valorize the human capital. Primary education receives particular attention from the authorities. The actions aiming at enhancing its quality are strengthened: introduction of the Skill

78

based Approach, developing adequate training strategies for primary school teachers, modification in the number o f learning years for primary school, defining criteria in FRAM teacher recruitment, instituting a new status to encourage teachers to settle in remote areas o f the island.

16. Improvement in the health sector i s also o f prime importance for development and poverty reduction. The actions aiming to promote mother and child health, to combat malnutrition and diseases, as well as to improve health infrastructure will be continued for the upcoming three years. Furthermore, a plan for redeploying human resources i s being developed to improve service provision. Finally, capacity building in programming and budgeting at the central, intermediary, and peripheral levels was started for a rational use o f resources.

17. Three programs related to water, nutrition, and social protection will be implemented. Regarding the water sector, the National Program for Drinking Water Supply and Sanitation, which aims to achieve the Millennium Goals, was approved by the Government in July 2005. Between 2003 and 2005, the access rate, in rural areas, increased form 14 to 16%. The Government intends to continue the efforts in such an area by setting up a programmatic approach, a medium term planning with the programmatic budget, standardization in l ine with the manual o f procedures, coordination and harmonization o f actions by donors, namely through the annual sector review. Regarding nutrition, the plan i s to integrate the current SEECALINE project into the National Office which wil l provide the coordination and the execution o f the strategies in the National Policy and the shift to the pilot phase o f the National Community-based Program for Nutrition in the 22 regions. In terms o f social protection, the focus i s on making operational the related strategy through the development o f an action plan, as well as the establishment o f an institutional framework and a monitoring evaluation system. The provision o f safety nets will also be effectively implemented.

18. The Government wil l grant particular interest to the monitoring and evaluation o f poverty reduction for which a plan wil l be developed. Besides, as the appraisal o f actions requires adequate, reliable, and relevant information, the policy on access to data wil l be prepared and adopted.

19. As Madagascar opted for an investment pulled growth, actions are provided for with the aim o f attracting both national and foreign investment and, therefore, o f developing the private sector. Apart from good governance, fight against corruption, and public finance reform, a larger consultation o f the private sector i s instituted to bring to perfection the credibility o f the State, and restore mutual trust. The authorities are seeking to bring in economic operators so that they are involved in policy processes and decisions related to generating wealth and growth. Support to accelerated growth in regions and sectors with a high economic potential i s provided thanks to the establishment o f infrastructure and services required in a business enabling environment. Investment promotion continues through the security it i s provided, the development o f a promotion strategy for foreign direct investment, and the extension o f legal and regulatory provisions in the business laws, which are in compliance with the international and regional agreements to which the country has adhered.

20. The implementation o f such actions wil l result in a consolidated growth. In the long term, the subsistence economy wil l change into a market economy, the rural economy wil l extend into an industrial economy, and the opening to foreign countries wil l be strengthened because o f increase in export. In the short term, the 2006 economic growth rate wil l be 5.2% and the poverty rate w i l l decrease to 68%. The crosscutting actions undertaken wi l l certainly have an impact on the economic sectors, which w i l l develop in total synergy for the achievement o f the growth announced. Moreover, the projects achieved by the Government in agriculture and rural areas wil l bear their fruit. The secondary sector will experience a new lease o f l i f e in i ts activities following the resolution o f power cut problems. The dynamism in industries related to agriculture, tourism

. 79

and mining wil l be boosted. The tertiary sector wi l l go on being flourishing thanks to the programs for developing and intensifying infrastructure: buildings and public works, roads, telecommunications. Transport as a branch wil l also benefit from the overall improvement. Exports wi l l definitely increase by 10.6% in terms o f SDR.

21. The Malagasy Government i s determined to achieve the objective of substantial poverty reduction. We rely on the support from the international community, namely the International Development Association to supplement the resources required by the State for the achievement of such an objective, preferably in the form o f budgetary aid.

80

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Annex 4. Progress in Supporting Broad-Based Growth

1. The Bank’s support for the second strategic axis o f the PRSP on broad-based growth includes a significant portfolio o f investment lending, and policy dialogue. The first three PRSCs do not include any specific policy actions on growth as triggers but it i s intended that the engagement in this area wil l be deepened under future PRSCs. As noted in the PRSC 1 Program Document, the Bank’s support for the growth pillar i s provided through i t s significant investment lending operations in private sector development; transport, rural development and environment (see Table 7). This Annex summarizes progress in three key areas: private sector development, transport and rural development and environment.

PRIVATE SECTOR DEVELOPMENT

2. The PRSP emphasizes the importance of creating an investment climate that i s conducive for private-sector led growth. Since PRSC 2, additional steps have been taken in 2005 to improve the investment climate, to implement public-private partnerships (PPP), and to improve co-ordination o f policies and to give voice to the private sector and civil society, more broadly. GUIDE, the one-stop shop for enterprise creation, has continued to perform well and facilitates setting up enterprises. Although there were no new privatization transactions since the sale o f HASYMA in July 2004, the management contracts for JIRAMA (energy) and SRAMA (sugar) are in place and the Government i s examining options to restructure these enterprises.

3. Reforms in the energy sector have advanced slightly in 2005, but much remains to be done, and the energy situation remains critical. In April 2005, a two-year, IDA-funded management contract took over responsibility for JIRAMA. The Government implemented tariff increases in July and November 2005 after tar i f fs remained frozen from 2001 even though this was a period of high inflation, sharp devaluation o f the local currency and rising world oi l prices. Very limited new investment has taken place to increase power supply, while demand has increased substantially. JIRAMA’s operational performance i s unsatisfactory, with high losses and poor maintenance. A donor’s conference was held in Paris in January 2006 to secure financing for JIRAMA and the Government i s now implementing the agreed restructuring plan.

4. There has also been some progress in improving prospects for the key export-oriented sectors that are driving growth. The tourism sector has shown continued strong growth in 2005 and new investors have expressed interest in Nosy Be (one o f the growth poles). Despite the overall decline in the textiles and garments sector, there are signs o f some new investments and consolidation taking place in the industry as f i rms adjust to the increasing competition from Asian exporters. The mining company Rio Tinto confirmed their decision to launch the long awaited ilmenite mining project in 2005 and the new port being financed by the Government through a private-public partnership with Rio Tinto/QMM i s expected to boost agricultural exports from the region. Other new mining investors have shown interest, including in the petroleum sector.

5. The Government i s in the process of establishing a new investment promotion and business facilitation agency that will function as an apex body for private sector development. The IDA- supported Integrated Growth Poles Project (IG2P) was launched in 2005 and i s expected to increase private investments in the three geographical growth poles (Nosy Be, Antananarivo-Antsirabe, and Fort Dauphin) in the key sectors of the economy. The IG2P supports infrastructure investments, support to MSMEs, improving the policy and regulatory regime and strengthening institutional capacity to leverage

88

private investments, including support for reviewing the legislation governing both Zone Franche and domestic enterprises.

6. The Bank completed an Investment Climate Assessment (ICA) and a Financial Sector Assessment (FSAP) in FY05. A high level workshop was held to disseminate the findings and recommendations of these studies which highlighted the poor business environment for f i r m s which hampers their productivity. The Government has initiated follow up action from the workshop to make policy and regulatory changes that w i l l improve the investment climate in Madagascar in areas such as ease o f entry for new enterprises, import-export processes, tax administration and construction licensing.

TRANSPORT

7. The transport sector, particularly the roads program, plays a key role in Madagascar’s growth and poverty alleviation strategy. As noted before, remoteness i s associated with poverty, and improving access i s critical for enhancing productivity in rural areas, improving access to social services and expanding access to markets. Three decades o f inappropriate sector policies have led to serious deterioration o f the country’s transport infrastructure. It i s estimated that from 1970 onwards the country lost on average 1,000 kilometers o f roads per year due to lack o f maintenance, or the loss and deterioration o f over 80 percent of the network over the last 30 years. In April 2000, after almost ten years o f sector dialogue and very l i t t le investment, the country adopted a comprehensive transport sector policy which aims at (i) focusing the Government’s role on strategic planning, sector oversight and coordination; (ii) creating agencies for sub-sector management and regulatory functions that are jointly controlled by the public and private sectors and gradually user-financed; (iii) divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing the local private sector for works design and execution; and (v) rehabilitating transport infrastructure to appropriate levels and ensuring their maintenance thereafter.

Reform Program

8. After the 2002 crisis, the Government launched- an ambitious road rehabilitation and maintenance program (2003 - 2008) with the objective to rehabilitate or provide periodic maintenance for approximately 2,000 km per year. The road network consists o f about 25,100 km o f national and provincial roads of which 5,600 km are paved and 19,500 km unpaved. Overall 32% o f the network i s in good or fair condition and 66% o f the paved roads i s in good condition. Since 2003, nearly 3,300 km o f national and provincial roads have been improved. For rural roads, between 2003 and 2005 about 2,000 km were improved. Regarding the program financed by the Bank’s Transport APL2, 1,300km have been rehabilitated so far. To rationalize the management o f the rural roads, the Ministry o f Public Works and Transport (MTPT) has created a rural roads unit which i s part o f the well-functioning Large Works Unit. In 2004 and 2005, the RMF contracted for the maintenance o f 6,800 km and 7,000 km of roads respectively. The organizational effectiveness o f the RMF needs to be strengthened and i t s resource base needs to be enhanced. Currently the RMF collects between 30 to 40 bil l ion MGA annually whereas i t s needs are 90 bil l ion MGA and increasing with the continuing improvement o f the network.

9. There has been some progress in setting up the autonomous sub-sector agencies. The Maritime, Ports and River Agency (APMF) has been operational since October 2004 and i t s board has been able to install a measure o f independence. The appointment o f staff i s virtually complete and the private sector i s satisfied with the functioning o f the agency. The Civ i l Aviation Agency (ACM), which has been operational since 2000, has been restructured based on an organizational audit, to be more efficient and to enhance the capacity of the technical personnel. Laws creating the Roads Authority (AR) and the Land Transport Agency (ATT) were voted by the Parliament during 2005 but have not yet been ratified.

89

10. I n March 2005, the Vice Primature Office in charge of Economic Programs, Ministry of Transport, Public Works, and Regional Planning was dissolved, and two separate ministries were created: the Ministry o f Public Works and Transport and the Ministry o f Decentralization and Regional Planning. This reorganization has provided a better focus for policy and planning but the restructuring brought with it further delays in implementing institutional reforms. The Minister has made a considerable effort to appoint qualified staff for his cabinet and improvements are beginning to show.

1 1. The Government i s using public-private partnerships for managing the transport infrastructure. As noted before, Air Madagascar is operating under a management contract and i s performing well. The privatization o f the company should now be prepared. The concessioning o f the airports i s under way. The IDA-financed Transport Infrastructure Investment Project (APL3) has been restructured and now includes a component to finance the investment program o f the Northern Railway which was concessioned in 2002 to Madarail. The Government, in agreement with the donors, has decided to delay the concessioning o f the Southern Railway (FCE) because the tender did not result in an acceptable offer. The FCE w i l l be under management contract with Madarail for the next two years at which time a new tender wil l be issued. The main port o f Toamasina, which handles more that 80 percent of the total traffic, has been restructured: i t s container terminal was concessioned and i s now operated by the Philipino company MICTSL. The operations o f the secondary ports Tulkar, Mahajanga, and Antsiranana/Nosy BeJAnkify wil l be concessioned by mid-2006.

RURAL DEVELOPMENT AND ENVIRONMENT

12. Rural development and environment are critical elements of the PRSP, since over four in five poor people live in rural areas. Agricultural productivity i s low and natural resource degradation i s widespread. The main elements o f the Government’s rural development sector strategy reform agenda adopted under the Rural Development Policy letter recognizes the need for approaches to provide integrated solutions to multiple problems simultaneously (e.g. through growth poles, value chains etc). The strategy aims to address five main challenges: i. Make the institutional framework o f the sector more effective and efficient by completing the public

administration reform and implementing the newly approved decentralization policy. ii. Facilitate access to capital and production factors by improving producers’ and investors’ access to

land, developing sustainable financing mechanisms to facilitate access to working capital, technologies and equipments, and developing rural electrification

iii. Improve food security and food production through investment that increases productivity, diversification o f agricultural production, and better risk management

iv. Promote better natural resources management through sustainable use o f soils, water, biodiversity, ecosystems, forest resources and rural spaces, and

v. Develop markets and promoting a commodity approach by encouraging public-private partnerships, supporting non traditional agricultural exports and emergence o f new markets participants, and developing o f norms and standards.

13. I n the vision, Madagascar Naturellement, there i s a renewed focus on rural development. In 2004, despite the losses associated with the cyclones, agricultural growth was 3.5 percent, significantly higher than the 1.3 percent recorded in 2003. Rice policy has been a dominant policy issue in Madagascar since mid-2004. In early 2004, the reduction in the rice production due to the cyclones, the sharp depreciation in the local currency and an increase in the international price o f rice contributed to price increases. Early announcements o f state intervention in case o f a steep increase in the price o f rice created uncertainty among private sector importers. Rice imports in the f i rst half o f the year in 2004 were only 59,000 tons as compared to 150,000 tons in 2003 during the same period. The shortage in rice with high prices triggered a Government facilitated rice import operation. In 2005, the Government removed

90

the import tariff on rice, while maintaining the VAT. This contributed to strengthening the rice market as r ice traders responded by importing sufficient quantities o f rice in 2005/2006. Producers also responded to price signals with a significantly higher yield (2.57 MT/ha) and production increase (13%) in 2005. The Government i s focusing on the entire r ice value chain and intends to improve access to agricultural inputs, privatize the seed multiplication centers and rehabilitate the irrigation schemes in high potential agricultural areas. The Madagascar Action Plan for 2012 proposes an increase o f 150% in rice production, from a current production o f 3.42 mill ion tons o f paddy.

Reform Program

14. The implementation of the Government’s institutional reform program for the Ministry o f Agriculture, Livestock and Fisheries has started, aimed at supporting the decentralization process and improving the quality of services. Re-assignment o f staff and budget towards the regions has begun, with deconcentration o f responsibilities to the Regional Directors for Regional Development (DRDR). Decentralization efforts are also under way: the Ministry aims to establish district-level Agriculture Service Centers (CSAs) as a consultative and service platform between farmers, private sector, NGOs and the Government. Two CSAs are currently being piloted in Itasy and Ambohimahasoa, and five more are planned in the near future.

15. The Government has developed its Land Policy Letter which was validated by a wide range of stakeholders in February 2005 and adopted on May 3,2005. Under the National Land Program the Government intends to put in place a land rights registration system based on the principles o f (i) decentralization o f the land administration to the lowest level o f local government; (ii) improvement o f land tenure information; (iii) simplified land tenure legislation; and (iv) capacity building, through a pilot, learning-by-doing approach. Pilot activities have started in one area (guichet foncier communal) and 7 more are underway, with a target o f 50 guichets fonciers by end-2006. The Bank i s completing a AAA on Land and Property Rights Review which has served as an input to the National Land Tenure Program.

16. The implementation issues for making the maintenance fund for irrigation schemes (Fonds d’Entretien des RCseaux Hydro Agricoles, FERHA) which was established in September 2003 are being addressed. A Task Force i s finalizing the operations manual for FERHA. Financing mechanisms for FERHA are under discussion, and wil l be finalized as part o f the Bank’s planned Irrigation and Watershed Development Project (FY07).

17. Food security and agriculture productivity are being strengthened through the National Program o f Watershed Management and Irrigated Perimeters (to be supported under the Irrigation and Watershed Development Project), promotion o f agriculture diversification, improved planning o f infrastructure in enclaved areas, a new rice observatory and diffusion o f agriculture statistics, and consolidation o f early warning systems for disaster management.

18. Market development i s being promoted through public-private partnerships (PPPs), the strengthening o f professional organizations such as the recently created Rice Platform (PC Riz) and Dairy Board, establishment o f Agriculture Chambers o f Commerce, promotion o f agriculture growth centers in major potential areas (Alaotra, Itasy, Andapa, and Marovoay), and reinforcement o f quality standards (namely through the Aquatic Surveillance Agency, ASH).

19. The Government has continued to expand its national System of Protected Areas (SAPM), now at 2,750,000 ha. The SAPM i s expected to attain 6 million ha by 2010 (about 10% o f the national territory). The Foundation for Protected Areas was established in January 2006 to help finance the SAPM. The National Environmental Program - supported by the Bank’s Third Environment Project - i s now in i t s third phase.

91

20. The Ministry of Environment, Water and Forestry i s undertaking a reform program focusing on strengthened forestry and environmental governance. The Government has strengthened its forest exploitation adjudication system, by publishing the status o f forest exploitation permits on newspapers. A Forestry Observatory and a mobile control unit are now operational. Mining and forest exploitation has been prohibited in the new system of Protected Areas of Madagascar. Fire monitoring committees have been created and are being strengthened at commune level. The decree making the Office National pour 1’Environnement (ONE) the one-stop shop for enforcing the MECIE (National Environmental Impact) law passed in February 2005. The Ministry wil l be also creating Environmental Units in each o f the 22 regions, starting from 2006, to help mainstream environmental concerns into regional plans.

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Annex 5 Madagascar at a Glance

POVERTY and SOCIAL Madagascar

2005 Population, mid-year (millions)

GNI (Atlas method, US$ billions)

Average annual growth, 1999-05

Population 1%) Labor force (%)

Most recent estimate (latest year available, 1999-05)

Poverty (% of population below national poverty line) Urban population (% of total population)

Infant mortality (p Child malnutrition (% of children under 5) Access to an improved water source (% of population) Literacy (% of population age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

GDP (US$billions) Gross capital formationlGDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savings/GDP

Current account balancelGDP Interest paymenWGDP Total debffGDP Total debt servicelexpotts Present value of debffGDP Present value of debffexports

(average annual growth) GDP GDP per capita Exports of goods and Services

1985

2.9 8.5

12.2 0.3

-0.2

-8.2 2.1

88.2 36.1

1985-95 1995-05

1 .o 2.8 -1.8 -0.1 4.4 0.8

18.6 290 5.4

2.8 3.1

71 27 56 76 42 31 68

134 136 131

1995

3.2 10 9 24.1 3.6 0.4

-8 4 0.6

136.2 7.1

2004

5.3 2.4 1.5

Sub- Saharan

Africa

726 600 437

2 3 2 4

37 47

101

58 60 93 98 87

2004

4 4 24 3 32 6 7 8

13 5

-10 8 0 7

79 5 5 6

2005

4 6 1 8 8 1

Low- income

2,343 510

1,188

1.9 2.2

31 58 79 43 75 61

100 105 94

2005

5.0 22.4 25.6 7.7

11.1

-11.3 0.8

70.3 9 6

50.9 195.0

2005-09

6.7 4 0

11.9

3evelopment diamond-

Life expectancy

GNI Gross per primary capita enrollment

Access to improved water source

-Madagascar - Low-income group

Economic ratios"

Trade

T

Indebtedness

-Madagascar - - Low-ncornegroup

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1985 1995 2004 2005

35.1 26.7 28.8 28.1 13.3 9.2 16.0 15.9 11.3 7.9 14.2 14.1 51.5 64.1 55.2 56.0

90.0 89.9 82.7 84.2 9.8 6.7 9.6 8.1

20.5 31.7 49.2 40.3

1985-95 1995-05 2004 2005

2.2 2.0 3.1 2.5 1 .o 2.7 6.5 3.0 0.4 3.5 6.1 5.8 1 .o 2.8 6.0 6.1

0.6 4.4 8.1 9.2 -1.2 3.1 -6.6 5.4 1.7 10.4 57.6 2.3 0.7 8.6 24.8 18.5

Growth of capital and GDP (%) 80 I 60 40 20 0

-20 -40

I Growth of exports and imports (%) / B O i

40 20 0

-20 4 0

Note: 2005 data are preliminary estimates.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

93

Madagascar at a Glance (continued)

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Coffee Vanilla Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100) Import price index (2000=1001 Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ mi//ions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1985

10.4

13.7 7.0 1 .o

1985

291 22 44 42

466 50 85 98

104 72

145

1985

350 569

-21 9

-112 98

-233

217 16

49 132.5

1985

2,520 28

316

150 3 3

60 133

5 0 0

73 56 2

56 4

52

1995

49.0 45.2

9.0 -1.6 -7.9

1995

566 59 41

296 739 67 81

141

119 107 111

1995

803 992

-1 89

-158 80

-267

328 -6 1

110 853.6

1995

4,302 12

1,110

58 5

15

102 70 -4 10 0

65 76 11 65

9 56

2004

14.0 14.3

16.0 3.4

-9.1

2004

997 47

140 737

1,634 83

204 300

’ 176 103 170

2004

1,423 2,143 -720

-79 330

-470

488 -1 8

489 1,871.8

2004

3,462 0

2,269

81 0

27

251 484 4 0 0

260 318

10 307

16 291

2005

18.4 18.3

12.3 1.4

-8.7

2005

788 26 34

671 1,733

79 253 293

125 106 118

2005

1,291 2,030 -739

-84 249

-568

569 -1

495 2,005.7

2005

3,536 0

2,485

127 0

48

154 -1 0

227 30

198 18

179

[Inflation I

-GDPdeflator *CPI I I

I Export and import levels (US$ mill.)

2,000

9s aa a i 02 03 04

t4 Exports Imports

1 Current account balance to GDP (“A) 0

2

-4

-6

8

-1 0

-12

:omposition of 2005 debt (US$ mill.)

\ - IBRD E - Bilateral F - Privata G -Short-term

D -Other multilateral

~

Development Economics 611 3/06

94

Annex 6 Madagascar Key Economic Indicators

National Accounts

Gross Domestic Product

Agriculture

Industry

Services

Investment

Public Investement Private Investement

Grass National Saving

Public Saving

Pnvate Saving Current account balance (excluding grants)

Export f.0.b

Import c i.f

Memorandum item

GDP per capita (in U.S. dollars)

Nominal GDP @illions of Anary)

National income and prices

Nominal GDP growth Real GDP growth

GDP deflator

Consumer price index (period average)

Consumer price index (end of period)

Balance o f Payments

Export (GNSF)

Import (GNSF)

Net factor income (excluding interest payments)

Interest payments Net current transfers

Current account, including official tranfen

Current Account, excluding official transfers

Capital transfen (government project grants) Financial operations

Net Foreign direct investment

Net long-term bcnowng

Disbursements Program

Project

Amortization Overall Balance

I00 32.7 11.6 47.4

17.9 7.8

10.1 13.0 3 1 9.9

-7.5 17.2 24.4

323.9 6,778.6

12.8 9.8 2.8

-1.7 -0.8

1,277 7 1,848.5

-20 0

59 7 302.7

-268.1 -410.8

89 3 40 4 12.7 66 6

169.2 52.5

116.8 -102 6

As % o f GDP 100 I00 100

32.0 31.4 30.6 11.8 11.6 11.6 47.8 48.4 49.1

24.3 12 5 11.8 15.0 6.8 8.2

-13.1 22.9 39.0

22.5 21.8 10.3 11.5 12.3 10.3

11.7 11.4 6.0 50.4 5.8 -39.1

-12.1 -11.6 16 7 15 4 33.4 30.4

251.0 281.8 294.5 8,155.6 10,095.1 11,794.6

Annual percent change

20.3 23.8 5.3 4.6

14.3 18.3 13.9 18.4 27.3 11.4

In US% million 1,437 5 1,366.2 2,173.0 2,152.7

-15.0 -28.9 64.3 50.0

329.9 241 2 -405.6 -545 4 -572.7 -609.5

1,564.1 159.9 -1,147.1 265.9

52.9 93.8 -1,182.5 176.6

302.0 265.5 74.3 79.5

227.7 185.9 -1,484.5 -88.8

-36.9 -55.8 -63.8

16.8 4.7

1 1 5 11.2 11.3

1,356.1 2,157.4

-36.6 23.2

235.6 -565.7 -628.7

2,601.2 -1,861.1

86.3 -1,940. I

326.0 65.2

260.8 -2,266.1

174.5

100

29 9 11.6 49.7

22.3 10.7 11.5 11.5 5.0 6.5

-11.4 15 3 30.6

309.7 13,722.1

16.3 5.6

10.2 9 9 9.0

1,452 2 2,297.8

-35.0 19.4

217.4 -628.2 -664.1 193 4 411.9 116.9 294.9 3167 65.2

251.4 -21.7 -23.0

I00 29.2 11.6 50.4

22.5 10.4 12.1 12.0

5. I 6.8

-11.1 15.2 30.0

325.7 15,685.5

14.3 5.6 8.3 8.0 7.0

1,550.0 2,440.4

-36.6 22.4

226 5 -664.0 -699.3 197.8 440 3 158.0 282.3 303.8 65 3

238.5 -21.5 -25 9

100

28.5 11 6 50.9

22.7 10.3 12.4 12.3 5.1 7.2

-11.0 15.0 29.6

342.4 17,580 4

12.1 5.6 6.2 6.0 5.0

1,650.0 2,599.4

-38.2 25.6

238 9 -710.5 -748.3 212.0 485.5 187.6 297.9 320.0 69 1

250 9 -22.0 -13.0

100 27.9 11.6 51.6

22.9 10.2 12.7 12.7 5.2 7.6

-10.7 14.8 29.0

360.1 19,513.5

11.0 5.6 5.1 5 0 5.0

1,755.6 2,758.4

-39.9 29.0

252.0 -750.8 -791.3 226.0 555 2 239.3 315 9 336.9 73.0

263.8 -20.9 30.3

100

27.2 11.6 52.1

23.2 10.1 13.1 13.1 5.3 7 8

-10.6 14.7 28.5

379.0 21,664.5

11.0 5.6 5.1 5.0 5.0

1,868.6 2,933.5

-41.6 33.1

264.6 -800.3 -842.5 240.9 602.4 258.3 344.1 354.6 77.3

277.4 -10.6 43.0

95

Annex 6 Madagascar Key Economic Indicators (continued)

Public finance Total revenue (excluding grants)

Ofwhich: tax revenue

Total grants

Current expenditure

Capital expenditure

Total expenditure Domestic balance

Overall balance (cash basis, incl. grants)

Overall balance (cash basis, excl. grants) Domestic financing

Monetary Indicators

Broad money (M3) Net foreign assets Net domestic assets

Credit to government

Credit to the private sector Broad money growth (“70) MZIGDP (%)

Debt Indicator

Net present value (NPV) of external debt NPV o f debt-to-GDP ratio

10.3 10.0 5.1

11 4 7.8

19.5 -3.5 -4.8 -9 9 1.8

25.1 7.3

17.8 9.1 8.8 8.2

21 9

...

(in percent o f GDP)

12.0 10.9 10.9 10.1 8 2 5 7

12.6 11.0 12.5 10.3 25.1 21.2 -2.3 -2 2 -5.7 -4.3

-13.9 -10.1 -1 0 0.5

11.7 119 12.4 12 9 13.4 11.0 11.5 12.0 12.5 13.0 49.5 4.2 3.9 3.9 3.8 10.4 10.8 11.0 11.4 11.8 11.5 I O 7 10.4 10.3 10.2 21.9 21.5 21.4 21.7 22. I -0.9 -1.7 -1.7 -1.7 -1.6

38.7 -5.7 -5.3 -5 2 -5.1 -10.6 -9.8 -9.2 -9.0 -8.9

-3.1 0.6 0.8 0.8 0.8

13.8 13.4 3.7

12.1 10 1 22.2 -1.4 -4 8 -8.6 0.5

(in percent o f GDP)

25.9 21.6 21.3 21.3 21.3 21.3 21.4 21 4 10.9 9.2 12.2 12.1 11.8 11.4 11.2 11.0 14.9 12.3 9. I 9.2 9.5 10.0 10 3 10.5 5 0 2.9 -0.6 -0.1 0.5 1 .O 1 5 1.7

10.0 9.9 10.5 11.0 11.4 11.8 12.2 12.5 23 8 3.1 15.6 16.3 14 3 12.1 11.3 11.3 21 6 18.3 18.5 187 18.9 19.0 19.3 19.5

41 3 194 208 21 9 22 9 23 8 24 6

NPV of debt-to-exports ratio 154 8 75.1 81.1 86.2 91 3 96.3 101.2

Source : IMF macroframework and World Bank staf f calculation, June 2006

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