Document o f The World Bank FOR OFFICIAL USEONLY Report no. 44953-MG PROJECT PAPER O N A PROPOSEDADDITIONAL CREDIT INTHEAMOUNT OF SDR 18.5 MILLION(US$30 MILLIONEQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FORTHE RURALDEVELOPMENT SUPPORT PROJECT SEPTEMBER 23,2008 Agriculture andRural Development Sustainable Development Department Country Department AFCOl Africa Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (ExchangeRate Effective July 31,2008) CurrencyUnit = MalagasyAriary US$1 = Ar1,566 SDRl = US$1.6275 FISCALYEAR January 1to December 31 ABBREVIATIONS AND ACRONYMS ACS Agricultural Service Center AF Additional Financing ASP Agriculture Sector Program CAS Country Assistance Strategy CPS Country Program Strategy CROA (Comite Re'gional d 'Orientation et d'Allocation) Regional Grant Approval Committee DISE (Direction de 1'Information et du Suivi Evaluation) Directorate o f Information and Monitoringand Evaluation DO Development Objective EA Environmental Assessment EMP Environmental Management Plan ERR Economic Rate o fReturn EU EuropeanUnion FA0 Food andAgriculture Organizatin FCRA (Fonds Compe'titifde RechercheAgricole) Competitive Agricultural Research Fund FMR FinancialMonitoringReport FOFIFA National Center for Applied Research for Rural Development (Centre National de la RechercheApplique'e au De'veloppementRural) FRDA Fonds Re'gional deDe'veloppementAgricole (Regional Fundfor Agricultural Development) FRR FinancialRate o f Return GDP Gross Domestic Product G o M Government o fMadagascar GTDR (Groupe de Travail deDe'veloppementRural Re'gional) RegionalRural Development Committees IBRD InternationalBank for ReconstructionandDevelopment IDA InternationalDevelopment Association IFAD InternationalFundfor Agricultural Development IP Implementation Progress ISR Implementation Status Report MAEP (MinistBre de 1'Agriculture, de 1'Elevage et de la PZche) Ministryo f 11 .. FOR OFFICIAL USEONLY r Agriculture, Livestock and Fisheries MAP Madagascar Action Plan MOU Memorandum of Understanding NPIU (Unite' nationale d 'exe'cutionduprojet) National Project Implementation Unit PADR (Plan d 'Actionpour le Dkveloppement Rural) Rural Development Action Plan PDO Project Development Objective PO Producer Organization RADF (Fonds re'gional de dkveloppement agricole) Regional Agricultural Development Fund RDSP Rural Development Support Project RPIU (Unite' re'gionale d 'exe'cutionduprojet) Regional Project Implementation Unit SDR Special DrawingRight SIL Specific Investment Loan SWAP Sector-Wide Approach TOR Terms o fReference UPDR (Unite' de Politique de Dkveloppement Rural) Unit for Rural Development Policy USD United States Dollar WFP World FoodProgram This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. ... 111 REPUBLICOFMADAGASCAR RuralDevelopmentSupportProject Content Project Paper Data Sheet..................................................................................................... v I Introduction.......................................................................................................... . 6 I1 . Background andRationale................................................................................... 6 111 . ProposedChanges................................................................................................ 9 Iv. Consistency with CAS or CPS........................................................................... 12 V . Appraisal ofRestructured or Scaled-upProject Activities ................................ 13 VI. Expected Outcomes ........................................................................................... 19 VI1. Benefits andRisks .............................................................................................. 20 VI11. Financial Terms And Conditions For The Additional Financing ...................... 22 Annex 1:Financial Management and DisbursementArrangements......................... 23 Annex 2: Statement of Loans andCredits ....................................................... 37 Annex 3: Country at a Glance ..................................................................... 39 iv PROJECTPAPERDATASHEET Borrower: Republic o fMadagascar Responsible agency: Ministry of Agriculture, Livestock andFisheries Reviseddisbursements (Bank FY/US$m) (Bank FY/US$m) FY 2007 2008 2009 2010 2011 Annual 9.0 18.0 3.0 Cumulative 9.0 27.0 30.0 I Current closing date: December 31,2008 Revised closing date: June 30,201 1 Does the restructured or scaled-up project require any exceptions from Bankpolicies? oYes X N o Have these been approvedby Bank management? oYes o N o I s approval for any policy exception sought from the Board? oYes X N o Revisedproject development objectives/outcomes: N/A Does the scaled-up or restructuredproject trigger any new safeguard policies? No For Additional Financing [ ] Loan [XICredit [ ] Grant For Loans/Credits/Grants: Total Bank financing (US$m.): US$30million equivalent Proposed terms: Standard IDA terms FinancingPlan(US$m.) Source Local Foreign Total Borrower - IBRD/IDA 29.5 0.5 30.0 Beneficiaries 6.1 - 6.1 r Total 35.6 0.5 36.1 V I. Introduction 1. This Project Paper seeks the approval o f the Executive Directors to provide an additional credit in an amount o f SDR 18.5 million (US$30 million equivalent) to the Republic o f Madagascar for the Rural Development Support Project. The proposed Additional Financing Credit would help finance the costs associated with scaled-up activities to enhance the impact o f a well-performing ongoing project andcontribute to an enhancement o f its impact and development effectiveness. The financing would be made available on standard IDA terms (40 years maturity, 10 years grace period). There would be no co-financing from other donors to this project. 2. There are no major changes to the project, although a number o f incremental changes will be adopted to increase efficiency. The scaled up activities would target additional beneficiaries among the poorer segment o f the country's population and promote increased implementation effectiveness. They would extend the life o f the project (which i s performing satisfactorily and i s fully meeting its development objectives to date) by two and a half years to June 30, 2011. The Project Development Objective (PDO) has not changed. The expected outcomes have been slightly modified to reflect the impact o f the additional financing and permit a better and more precise monitoring o f results. 11. BackgroundandRationale Context andPrior Bank Involvement inAgriculture Sector: 3. Madagascar i s one o f the poorest countries inthe world, with per capita income o f about US$330 per year (2007). Poverty remains predominantly rural with about 80 percent o f the rural population being poor, compared to 54 percent in urban areas. The economy is basically rural, with agriculture as an important engine o f growth, contributing one-third o f total GDP and 40 percent o f total exports. About one-half o f Madagascar's landarea i s cultivable, but little more than 5 percent o f the landis currently under crops, with a large part o fthe cultivated area under irrigation (40 percent). Farming systems are still very traditional. Two-thirds o f rural households live at subsistence level and yields are generally low. Rice is the main crop, accounting for 70 percent o f total farm output. Traditional exports include vanilla, coffee and cloves. Livestock is widespread, with about 60 percent o f rural families depending on it for their income. Fishing and aquaculture have become increasingly important sub-sectors o f the Malagasy economy. 4. Performance o f the agricultural sector has not been in line with its potential despite economic liberalization policies and macroeconomic stabilization. The average annual agricultural GDP growth rate during 1990s was 1.9 per cent per annum. The growth has picked up, however, in 2000s (with the exception o f 2002 which was a year o f political crisis), with agriculture GDP increasing at the rate o f 2.6 percent annually over 2003- 2006 period. Sustaining this level o f agricultural growth in the long-term i s at the heart o f government's poverty alleviation strategy. This will require sustained and broad-based on-farm productivity gains and a diversification toward high value crops. Growth 6 - prospects for rice and the main cashlexport crops (e.g. coffee, cloves, sugar, sisal, groundnuts) are good. However, in the medium term, a sustained increase in rice production is expected to be the main engine o f sector growth, given its overwhelming dominance in the Malagasy farming systems. The current very low paddy yields, even under irrigation, suggest that there i s considerable potential for substantial productivity gains with improved access to technical advisory services and essential inputs. 5. The original RDSP Specific Investment Loan (SIL) o f SDR 69.2 million (US$ 89.05 million) was approved on June 19, 2001 and became effective on September 20, 2001. The original closing date o f June 30, 2007 had been extended by 18 months to December 31, 2008. The current funds o f the RDSP have been filly disbursed or committed. 6. The original Project Development Objective (PDO) was to increase incomes and reduce poverty in rural areas, while preserving the country's natural resource base. The Additional Financing (AF)will have the same PDO. The project has met all its covenants andthere are no significant issues relatedto Bank Safeguard Policies. 7. The Implementation Status Report (ISR) ratings have been "satisfactory" or "moderately satisfactory" for both Implementation Progress (IP) and Development Objectives (DO), except during two distinct periods - June 2002 to June 2003 and October 2005 to June 2006 - when the IPSwere rated "unsatisfactory" or "marginally unsatisfactory". The first period reflected significant slow-down o f project implementation due to the political crisis that hampered Madagascar during 2002. Subsequently, the project was formally restructured on November 14, 2002 as part o f an overall portfolio restructuring exercise. The second period o f less than satisfactory performance o f the project reflected issues related to mis-procurement o f a number o f sub-projects, which was resolved by removing them from the project's portfolio o f sub- projects. 8. The RDSP has four components: (A) Productive Investments Component provided funds on a demand-driven basis for the following types o f sub-projects: (i) investments in productive rural infrastructure, (ii)productive agricultural activities, (iii) productive non- agricultural activities, and (iv) the provision o f advisory services and capacity building support to Producer Organizations (POs); (B) Support Services Component provided support to agricultural research and funded a demand-driven competitive research grant program; (C) Capacity Building and Policy Development Component supported strengthening o f the capacity o f the Ministry o f Agriculture, Livestock and Fisheries (MAEP) in policy making and decentralizing policy implementation; and (D) Project Administration and Monitoring Component. As a result o f the project restructuring in 2002, the activities previously included under Component C for the sub-project preparation and implementation were transferred into Component A. Also transferred into Component A was the first sub-component o f the original Component B supporting extension services for POs. The second sub-component o f the original Component B (Le. support to adaptive research) became a stand-alone component. 7 9. The RDSP has been a cornerstone o f IDA'S rural development program in Madagascar. It is the only program in the sector with a nation-wide scope. The preliminary results o f the on-going ex-post evaluation o f the project (for a period of 2004-06) confirm that the sub-projects have reached the intended beneficiaries and had significant impact on both productivity levels and incomes. The project had reached some three-quarters o f the country's rural communes, half o f which are located in isolated areas. About 9,560 farmer organizations (target was 4,000) and 1.4 million persons (equivalent to about 10.4 percent o f rural population o f Madagascar) in 229,071 rural households (target 150,000 rural households) have to date directly benefited from the project's activities. Rationale for Additional Financing: 10. The rationale for the proposed AF credit is to allow the very successful RDSP to expand its operations under the ongoing Productive Investments Component to meet a large number o f additional requests for sub-projects received from poor rural communities, in addition to existing commitments that it has been unable to attend to, primarily due to lack o f funds. The AF will also help to increase the impact o f the existing sub-projects on productivity and incomes o f small farmers by strengthening the capacities o f the benefiting POs to access decentralized agricultural and financial services. In addition, the AF will help to avoid an institutional and funding vacuum in agriculture development in Madagascar until the Government has put in place institutional arrangements for a Sector-Wide Approach (SWAP) as envisioned in the Agriculture Sector Program (ASP). Inthis regard, the AF will support: (i) preparation the o f the proposed sector-wide medium-term agricultural sector program, to be launched before end-2010; and (ii) establishment o f the decentralized institutions responsible for the implementation o f this strategy -Agricultural Service Centers (ACSs) and Regional Agricultural Development Funds (RADFs). By continuing to support priority productive agricultural investments, the AF will bridge the financing gap until the launch o f Government's Agricultural Sector Program (ASP). 11. Critically, the AF credit will also help to address the issue o f rising food prices in Madagascar by providing immediate support for bolstering food production by POs. The bulk o f the Madagascar population lives in rural areas, with rice being the main food crop. Rice production alone accounts for about 10 percent o f GDP. Madagascar remains a net rice importer and domestic rice prices, particularly in the post harvest period align with the price o f imported rice. As such, recent increases in international rice prices could lead to potentially serious income shocks, particularly for the poorest segments o f the population inurban areas. The recent World Bank estimates indicate that urbanpoor could lose more than 10 percent o f their monetary income as a result o f a 50 percent increase in the price o f rice. At the same time, it is important to maintain appropriate incentives for domestic rice production. To address this problem, a recent FAO/WFP/FAD mission has recommended an integrated approach to address potential food crisis inMadagascar. Inthe short run,the emphasis should be on boosting domestic rice production through promotion o f a second cropping season (i.e. contre season), while protecting vulnerable groups through school feeding and cash for work programs. In the medium term, the emphasis is on increasing agricultural productivity and food 8 production with the view o f gradually eliminating the need for commercial imports duringthe leanperiods. 12. The AF credit is envisioned to make an important contribution to support the medium-term response supply response. Inparticular, the Component A would support the expansion o f rice production, contributing thus to the transformation o f Madagascar into net rice exporter. About half o f the funds under Component A is expected to be utilized for the construction o f productive agricultural infrastructures, including small- scale irrigation perimeters, and processing and storage facilities. The rest o fthe funds are expected to support agricultural productivity improvements through the provision o f some technology packages and strengthening o f capacities o f POs. It is expected that about two thirds o f the subprojects supported under the AF credit will be carried out in remote areas, contributing to the mitigation o f food crisis in the poorest regions o f Madagascar. The target groups remain smallholder farmers organized under POs. The poorest and most vulnerable groups, including women, would receive special attention under the AF credit. 13. To complement the medium-term interventions for food crop production, the activities under Components B and C o f the AF credit would improve POs access to agricultural advisory services and new production technologies for productivity improvements. The AF would support national agricultural research systems and the establishment o f a new extension services systems. The specific activities would include the production o f base and pre-base seeds; development o f high yielding rainfed and irrigated rice varietals; dissemination o f successful agricultural technologies to POs, such as the Intensive Rice System (SRI), through development o f on-farm trials and technology demonstrationplots; andpromotion o f fertilizer use. 111. Proposed Changes 14. The AF will have the same components than the current project. It will scale-up support to productive investments under Component A, and support continuation of critical agricultural research and policy development activities under Components B and C. 15. Component A: Productive Investments (US$28.2 million). The component will finance the same menu o f demand-driven productive activities for the same type o f beneficiaries as the original project. Specifically, the component will finance the following types o f sub-projects: (Al) investments inproductive rural infrastructure; (A2) productive agricultural activities; (A3) productive non-agricultural activities; and (A4) the provision o f advisory services and capacity building support to POs. It is expected that the AF credit will finance about 2,200 subprojects that are categorized as types Al, A2 and A3 as described above, and about 3,800 capacity building activities that are categorized as type A4. Inremote areas which are not well linked to markets, particular attention will be given to increasing producer's on-farm productivity and food security. Inareasthat are well connected to markets, the focus will be onthe development ofvalue chains where POs participate. The main change from the original project will be that the level o f matching grant contribution for sub-projects will no longer be uniform but 9 tailored to the specific nature o f the activity (i.e. infrastructure or productive activities}, the characteristics o f the beneficiaries (Le. degree o f integration into agricultural markets), and their access to financial services. Greater attention will also be given to the provision o f more effective implementation support to POs and better linkages to micro- finance institutions for increased access to savings and credit services. 16. Component B: Support Services (US$l.S million). This component will provide support for the strengthening o f the capacity o f main agricultural research institutions in the preparation o f the Government's forthcoming SWAP and better dissemination o f the stock o f new and promising technologies. The component will finance: (i) the preparation o f the National Agricultural Research Strategy; (ii) the institutional audit o f the National Center for Applied Research for Rural Development (FOFIFA) and the Competitive Agricultural Research Fund(FCRA) to identify the reforms necessary for improving their organization, staffing, internal processes and financing mechanisms; (iii) grants for the priority on-demand agricultural research designed to address thematic or long-term constraints to the intensification, diversification or sustainability o f agricultural production systems; (iv) grants for the establishment o f on-farm demonstrationplots and dissemination o f new technologies; and (v) grants for the production and multiplication o f improved seed and planting material for the distribution to POs. 17. Component C: Capacity Building and Policy Development (US$2.1million). The component will support the following activities: (i)provision o f technical advisory services and material assistance to build capacity within MAEP at central and regional levels (i.e. MAEP's Policy PlanningDepartment and Regional Directorates), and o f its main partners at regional level, such as Regional Rural Development Committees (GTDRs), for the preparation, implementation andmonitoring o fthe ASP at national and regional levels; (ii) provision o f technical advisory services and material assistance to establish ASCs and a decentralized mechanisms for a shared financing o f agriculture at the at regional level (Le. R4DFs); and (iii) provision o f technical advisory services and material assistance to strengthen the capacity o f MAEP andprofessional organizations to ensure the development o fpriorityvalue chains. 18. Component D: Project Administration and Monitoring (US$4.3 million). The component will support: (i) operating costs o f the project management unit at national level, and establishment o f 8 Regional Project Implementation Units (RPIUs) in line o f the Government new decentralizationpolicies; (ii) critical capacity buildingactivities to ensure the quality o f the services provided to POs, such as informatiodmobilization o f POs, screening o f sub-projects, provision o f technical assistance for the sub-project preparation and implementation, monitoring o f the sub-project economic and social impacts and compliance with safeguard policies; and (iii)project's monitoring and evaluation, including project's financial audits and external impact evaluation. It i s expected that the regional project implementation units established under this component will continue to implement the ASP after the closing o f the AF credit, through gradual transition o fthe project management structures ininto R4DFs andACSs. 10 FinancingPlan 19. The total Project cost i s estimated at US$36.1 million equivalent. Cost estimates by component andthe indicative financing planare shown below inTable 1: Table 1: Estimated Project Costs andIndicative FinancingPlan(inU S Dmillion) Disbursements 20. The following are the changes in disbursement arrangements: (i) moving from transaction-based disbursement method under the original credit to report-based disbursement method under AF; and (ii) the original credit had two Designated Accounts, while the AF will have only one Designated Account, since the AF credit will finance 100% of all eligible expenditures under Categories 1to 4, as shown inTable 2 below: Table 2: Disbursements Category Amount of Credit % o fexpenditure to allocated (in be financed USD) 1AGrants under the sub-projects or activities 8,900,000 100% undercomponents A2 or A3 1B Grants under the subprojects or activities 13,700,000 100% under components A1, A4, andB. (2) Material, vehicles, equipment 400,000 100% (3) Consultant Services, Training, Audits 3,000,000 100% (4) Operating Costs 4,000,000 100% Total 30.000,OOO 11 Other Changes 21. A summaryo fother changes is shown inTable 3 below: Table 3: Surnmarv o f Other Complementary Changes Description Remarks Development Objective PDO has not beenchanged. Results Framework has been strengthenedto focus onprecise outcomes. Institutional and Project Nomajor changes inproject implementation and Management Arrangements management arrangements. The provincial PIUs will be decentralized into kPIUs. Project Costs Total cost of USD 36.1 million includes IDA Additional FinancingCredit of US$30 million and beneficiary contribution of US$6.1 million. FinancingPlan Financingplan adjusted to reflect the changes. Financial Management (FM) Moving from transaction-based disbursement procedures underthe original credit to report-based disbursement , procedures under AF credit. The number o f Designated Accounts will be reduced from two to one under the AF credit whichwill finance 100% o f each disbursement category. Disbursement Arrangements No changes indisbursementarrangements from the original project except for changes inthe inthe percentageof expenditures to be financed, as shown inTable 2. Procurement No changes inprocurement arrangements. Closing Date Closing Date extended from December 31,2008 to June 30, 2011. Implementation Schedule Theproposedprogramwill be implementedover a two and a halfyear period. FinancingTerms Standard IDA Terms IV. Consistencywith CAS or CPS 22. The proposed AF is fully consistent with the Bank's 2007-2011 CAS for Madagascar, which in turn is aligned with the Government's development strategy for 2007-2012 called Madagascar Action Plan (MAP). Specifically the new CAS supports the GoM's commitment to rural development and setting the stage for a green revolution. The AF credit would support the strategic and longer-term MAP outcomes which are linked to the first pillar o f the CAS, which i s to help remove constraints to investments and growth in rural and urban areas. Specific outcome o f the MAP'Srural development and green revolution goal is increased competitiveness and diversification o f agriculture in Madagascar. Furthermore, the CAS emphasizes the need for the scaling up of successful activities inorder to consolidate achievements so far. 12 V. Appraisalof Restructuredor Scaled-upProjectActivities Economicandfinancial 23. Given the demand driven nature o f the project, an economic and financial analysis was carried out for a sample of sub-projects which are expected to have the highest demand by POs duringthe AF, based on the revealed demand under the original project. Following activities were included inthe analysis: (i) rehabilitation and intensification o f new irrigated rice schemes; (ii)improved poultry farming; (iii) production; (iv) beef dairy fattening; and (v) fish farming. Models for each o f these productive investments have been developed at farm level based on conservative estimates o f productivity levels. The average o f 50% o f beneficiary self-contribution to the total investment cost has been assumed for the financial analysis. 24. The economic analysis shows that all production systems are feasible. The estimated Economic Rate o f Return (ERR) ranges from 27 percent for fish faming to 62 percent for rice production. The estimated financial rates o f return (FRR) are generally attractive and vary from 25 percent for fish production to 149% for dairy when considering 50 percent subsidy. The FRR with no subsidy i s still highwhich shows that most proposed sub-projects are profitable even without subsidizing investments cost. Sensitivity analysis shows that the results are robust for the decline o f farm gate prices o f outputs andincrease ininput costs. Fiscal 25. Under the new country financing parameters the IDA Credit will finance 100 percent o f the project expenditures. The IDA Credit would thus not generate any other costs to the Government during the project period other than the service charge. Sub- projects require on average about 23 percent contribution from beneficiary POs. This is expected to amount to approximately US$6.1 million equivalent, or 18 percent o f the total project costs. Technical 26. Sub-projects implemented to date are generally o f good quality, both in terms o f design and actual execution. According to the on-going ex-post evaluation, some 95 percent o f POs were satisfied with the amount o f resources provided to sub-projects and some 89 percent o f POs indicated that sub-projects have generated expected results. The main technical change o f the AF is the adjustment o f subsidy levels for productive activities, which will be modulated on the basis o f the characteristics o f the beneficiaries, availability o f rural credit, and the nature o f investment. This will permit a more economically efficient allocation o f government's support and a better targeting o f public fimds toward poorer beneficiaries inremote areas. It will also permit to avoid substituting project finding for funds that could be mobilized by the beneficiaries themselves, either from own savings or from micro-credit institutions. To strengthen sub-project technical quality and sustainability, more capacity building support will be provided to beneficiaries for detailed technical design and implementation o f sub-projects, as well as 13 to those POs which have already benefited from sub-projects during original project and may need additional technical advisory support. More attention will be also given to the expertise o f service providers, moving away from "generalist" in favor o f technical experts well suitedto the specific requirements o f a wide range o f sub-projects. Institutional 27. The AF credit will introduce only marginal changes in the current RDSP implementation arrangements. These changes have been incorporated into the revised Implementation Manual. The National Project Implementation Unit (NPIU), under the guidance and supervision o f the Project Steering Committee chaired by the Minister o f MAEP, will retain the overall responsibility for the implementation, coordination and oversight o f the project activities, including: (i) consolidation o f annual work programs and budget; (ii) maintenance o f records and separate accounts for all transactions related to the NPIU; (iii)preparation, consolidation and production o f the project financial statements, quarterly Interim Financial Reports (IFRs), disbursement applications, procurement documentation and progress reports; (iv) cash management and replenishment applications for the Designated Account; and (v) M&E o f the various activities supported under the project. The NPIU would also retain the overall responsibility for the implementation, coordination and oversight o f project activities under the Components B and C which will be implementedby MAEP and the two main research institutions (FOFIFA and FCRA). The NPIU will be headed by a director and assisted by a team o f technical experts in accordance with the procedures set out in the Procedures Manual. All project implementing agencies (Le. FOFIFA, FCRA, UPDR, DISE, PADR, GTDR, FRDA)will continue to keep an accounting system satisfactory to IDA and prepare their own financial statements and basic information on project management and monitoring as requiredbythe NPIU. 28. Consistent with the Government decentralization process from provinces to regions, the 4 Provincial Project Implementation Units under the RDSP will be decentralized into 8 Regional Project Implementation Units (RPIUs). Each o f the 8 RPIUs will be headed by a regional director assisted by a small administrative team and team o f technical experts which composition will vary according to the specific needs o f the regions. Each RPIU would manage disbursements from its own regional bank account, maintain records and accounts for all transactions related to its activities, and prepare financial and other basic information on the project management/monitoring as required by the NPIU Financial Directorate. The RPIUs will assist POs to identify sub- project proposals. These proposals will then be submitted to the Regional Committee o f Grant Approval (CROA) for review and approval. The approved sub-project proposals will then betransmitted to the RPIUfor the preparationo fthe detailed feasibility studies. Ineach Region, a pool of technical experts (Technical Pool) recruited on a competitive basis will assist POs in preparing these documents which will be then reviewed by the RPIU. The RPIUs will be responsible for the preparation o f annual regional programs, coordination o fproject activities and implementationo f activities under Component A. 29. Although no formal partnership or co-financing arrangements exist, the project will continue to collaborate closely with other donors involved in agriculture and rural 14 development sector including the EUand IFAD. The main mechanism for ensuring tight coordination and synergy will be the regional governments and their regional stakeholders (GTDRs) through the preparationof annual regional development programs. Social 30. The project's primary beneficiaries are poor agricultural producers organized in POs, with special emphasis on the poor and vulnerable in isolated areas. It is expected that about 2/3 o f sub-projects will be inremote areas. Sub-projects with a focus on value chain development will mostly target rural communities which are already relatively well connected to markets. The project gives a particular attention to proposals that benefit women or are submitted bywomen's groups. 31. The on-going ex-post evaluation o fthe RDSP shows that 97 percent of POs agree that the sub-projects were consistent with their priorities and 93 percent o f POs reported that the project contributed to resolving their production problems. Furthermore, 96 percent o f the beneficiary households reported that they were filly consulted during sub- project identification phase. The activities financed under the AF will continue to utilize the inclusive consultation process established during the original project to ensure the broad-based participation o fpoor rural households andto meet their needs. Environmental 32. The AF financing credit has the same scope and activities as the original project. No new environmental risks havebeen identified. Therefore, the safeguards category "B?' remains unchanged, since it i s expected that AF credit will not raise any new safeguard issues. A fill Environmental Assessment (EA) for the rural development sector has been carried out in 2001, This assessment, together with the accompanying Environmental Management Plan (EMP), provides a systematic analysis o f all potential environmental and social adverse impacts o fthe implementationofthe sub-projects supported under the AF and filly meets the Bank's safeguard requirements. Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [XI [I Physical Cultural Resources (OP/BP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP4.36) [I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects inDisputed Areas (OP/BP 7.60)* [I [XI Projects on InternationalWaterways (OP/BP 7.50) [I [XI * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties` claims on the disputed areas 15 33. The RDSP has sufficient tools and capacities to manage the safeguard aspects. The project has established mechanisms for screening, supervision and monitoring o f sub-projects with regard to potential negative impacts. Potentially environmentally sensitive sub-projects have been subjected to an additional environmental screening, which identify appropriate mitigation measures. Special attention is given to the environmental sustainability o f rural development activities and the preservation o f the natural resource base. For example, the RDSP has collaborated closely with the Bank supported Third Environmental Program inpromoting sustainable development activities for communities living around protected areas. Access to sub-project grants would be subject to commitment by beneficiaries not to engage in practices that harm the environment. The sub-project fimding agreements include MOUs with beneficiaries which specify measures to mitigate environmental impacts and agreed changes innatural resource use during implementation. Since 2008, environmental mitigation costs o f the approved activities are included insub-project budgets. 34. The AF credit will continue to provide training and capacity building for the project beneficiaries to ensure proper consideration o f environmental and social dimensions in the sub-project design and implementation. The project will reinforce environmental education to beneficiaries, as well as environmental monitoring o f sub- projects. Fiduciary Financial Management 35. In accordance with the Bank policy and procedures, the Financial Management (FM) arrangements o f the NPIU, RPIUs and implementing agencies (FOFIFA, FCRA, UPDR, DISE, PADWGTDR, FRDA) have been reviewed inorder to determine whether they are acceptable to the Bank. These entities continue to maintain an adequate financial management system in line with the OPBP 10.02. The financial management risk i s assessed as moderate. No significant problems have been encountered in Madagascar in terms o f audit covenants. All audit reports related to Bank financed projects have been received in due time. However, to better meet the needs o f the AF credit, an agreed project FM action plan has been developed. The plan aims at further strengthening the NPIU/RPlUs FMsystem and ensuring efficient use o freport-based disbursements. 36. The following actions will be taken to mitigate risks raised bythe FMassessment. First, the project will hire, as an condition o f effectiveness, a Fiduciary Agency, under terms and conditions acceptable to IDA, familiar with both national and IDA FMsystems to lead, supervise and assist the NPIU/RPIU accounting staff in performing FM tasks during implementation o f AF credit. Secondly, the project will appoint a qualified accountants in RPIUs who will be selected among accountants working presently with RDSP. This selection will be based on their performance and should be completed prior to credit effectiveness. Third, the project Administrative, Accounting and Financial Manual, which will be reviewed and approved by the Bank as part o f the effectiveness conditions, will be updated to include additional FM and disbursement measures to mitigate identified risks (Le. new chart o f accounts, agreed changes in the project 16 structure and disbursement procedures, and models o f IFRs). Fourth, the project will install customized and upgraded computerized accounting system, as a condition o f effectiveness, to ensure timely production o f all financiaYtechnica1 information (including IFRs) required for monitoring project activities. The new software should be functional prior to credit effectiveness. The Bank continues to provide close oversight to the NPIU to reconcile the original project accounts. Standard disbursement procedures for closing the original project accounts will be applied to recover any possible remaining fimds following the reconsolidation o f the accounts. To avoid repetition o f such issues in the context o f the AF, the internal and external auditors are required to conduct a systematic review o f the quarterly IFRs, including the Designated Account Activity Statement. The Bank will review the TORSfor the external audit with the special focus on pro-actively identifying and mitigating the risk o f unaccounted funds. Finally, to mitigate risks raised by the limited capacity o f the Auditor General, the audit o f the AF credit accounts will be carried out annually by an international auditing firm under arrangements acceptable to IDA. Audit will be conducted in accordance with the International Standards of Auditing. Auditors will be recruited within three months after the effectiveness date. To strengthen their capacity, the auditors from the Auditor General office can participate inthis audit assignment, but they should be properly supervised by the staff members o f the selected international auditing firm. The TOR o f the audit will be reviewed by the IDA FM Specialist to ensure the adequacy o f the audit scope. Auditors will be required to express an opinion on the project financial statements, carry out a comprehensive review of the internal control procedures, and provide a management report outlining any recommendations for their improvement. Audit report will be submittedto IDAnot later than6 months after the end of each financial year. Procurement 37. The RDSP NPIU procurement officer shall work in the same capacity under the AF, including training andmonitoring communities implementingsub-projects. The 2004 IDAprocurement and consultant guidelines, revised in2006, apply to the AF credit. The Procurement Plan as prepared by the Borrower will be updated from time to time in accordance with paragraph 1.16 o f the Procurement Guidelines andparagraph 1.24 o f the Consultant Guidelines, based on the following agreed arrangements: 38. Goods and Non-Consulting Sewices Procurement. Decisions subject to Prior Review by IDA are as stated inAppendix 1 to the Guidelines for Procurement: Goods ProcurementMethod Procurement Threshold PriorFostReview Internationalcompetitive Contractamount equalto or Prior review bidding above US$lOO,OOO Nationalcompetitive Contractamount between Priorreview bidding US$lOO,OOO andUS$50,000 Contractamount below Postreview US$50,000 Shopping .. Contractamount below Postreview ~ US$30,000 Singlesource All amounts Priorreview 17 5. Procurement fiom United Vehicles Prior review Nations Agencies 6. Community participation Contract amount below Post review 39. Selection of Consultants Selection. Decisions subject to Prior Review by IDA are stated inAppendix 1 to the Guidelines Selection and Employment o f Consultants (2006). Short-lists o f consultants for services which are estimated to cost less than US$50,000 equivalent per contract may be comprised entirely of national consultants in accordance with the provisions o fparagraph 2.7 o fthe Consultant Guidelines. Selection Method Selection Threshold Priorlpost Review 1. Quality and Cost Based Contract amount above Postreview Selection (QCBS)/Quality US$50,000 Based Selection (QBS) (competitive research Contract amount below Postreview grants) US$50,000 2. Least cost selection (LCS) Contract amount above Prior review (financial audit, contract US$50,000 amount below US$50,000) Contract amount below Post review US$50,000 3. Selection basedon the Contract amount equal or above Prior review consultants' qualifications US$50,000 (CQS) (training, contract Contract amount below Post review amount below US$lOO,OOO) US$50,000 * 4. Individual consultants Contract amount equal or above Prior review US$30,000 Contract amount below Post review US$30,000 4. Single Source Selection All contract amounts Prior review 40. BeneJiciaiy Participation in Procurement. Sub-project components to be carried out with the community participation shall be conducted in accordance with paragraph 3.17 o f the Procurement Guidelines, with the procurement procedures defined in the ImplementationManual. Disbursements 41. The AF will use the report-based disbursement method. A new Designated Account in USD for the AF credit will be opened at a commercial bank acceptable to IDA. Regional project bank accounts to be managed by RPIUs will be opened. Disbursements from the Designated Account will be deposited on these accounts opened in local commercial banks acceptable to IDA to ensure prompt payment of contractorshuppliers operating at the regional level for goods and services eligible under the AF credit. 18 42. Disbursements from the Designated Account will be done based on a quarterly Interim Financial Reports (IFRs). Under this disbursement method, a forecast o f the project expenditures will be agreed between the project and IDA, covering a period o f six months. The recipient may request an advance for an amount not exceeding this cash forecast. Supporting documentation for the disbursement (i.e. IFRs) will be submitted and reviewed by IDA to confirm the eligibility o f expenditures. 43. The proceeds of each category in the original credit will be fblly disbursed before Commencement o f disbursements o f the proceeds o f the respective category in the AF credit. The expenditures under the original and AF credits will be recorded separately in the project's accounting systems (Le. separate accounts) inorder to avoid confusion with regardto the disbursement percentages to be applied. Exceptions 44. There will beno exceptions to the Bankpolicies under the Additional Financing. VI. ExpectedOutcomes 45. The proposed changes are not expected to affect the project outcomes in a substantive way. The results framework for the AF has been strengthened to improve the focus on outcomes to be achieved duringthe project. The indicators have been revised so that they better correspond to the expected outcomes andnew targets. The revised project indicators are presented inthe project results framework below. Table 4: RevisedResults Framework PDO Project OutcomeIndicators Use of Project Outcome Information Increase incomes and reduce Percentageofbeneficiary To assistthe Government of poverty inrural areas while households registering 30 Madagascar improve the lives preservingthe country's percent increase inrevenues o fpoor producers naturalresource base. at the endo fthe Droiect IntermediateOutcomes IntermediateOutcome Use of Intermediate Indicators OutcomeMonitoring ComponentA POs access to productive Additional area under To monitor project outcomes infrastructureincreased. irrigation systems (ha) and ensure hightechnical quality o f implementation. POs increase agricultural Percentageofbeneficiary production volumes households with 50 percent increase inproduction volumes following subproject assistance. Capacities of POs are Number of POs having strenethened 19 receivedtechnical support services POs have access to project resourcesto prepare, Number of sub-projects implement and maintain financed and executed productive investments ComponentB Increased efficiency of FOFIFA restructuringplan, This informationwill beused FOFIFA to respond to and new statutesifnecessary, bythe Government of researchneeds andpromote approved by appropriate legal Madagascar, PIUand the WB adoption of newtechnologies. instrument and ready for to monitor progress inthe implementation. promotion of improved agricultural technologies and Increased efficiency o f FRCA FRCS institutional audit and to prepare an action plan to to identify,manage and restructuringplan prepared addresspossible problems. execute competitive grants and approved by the programs. Government ComponentC ASP fully developed and Government approval o f This informationwill be used operational onregional and annual work plans and budgets bythe Government of sub-sector level for 2010and 2011 Madagascar and the WB to monitor implementation Newagriculture service ACS established in5 districts progress and to prepare an provision and sub-projects' and of CROAs established in action plan to addresspossible funding structuresestablished 16regions problems. VII. Benefitsand Risks 46. The project will provide access to productive infrastructure, modem inputs, equipment, and support services to poor POs and rural communities. The main expected benefits o f the project are increased farmer incomes. Investments in productive infrastructure, adoption o f improved technologies and capacity building o f POs will increase productivity and create new market opportunities. The AF i s expected to extend project benefits to an estimated 2,200 additional POs under types Al, A2, A3 sub- projects; and 3,800 additional POs under type A4 sub-project. The AF i s expected to benefit 70,000 rural households in 117 districts. The AF would fund monitoring o f 2,500 sub-projects which were funded under the original project, but where the POs may need additional technical advisory support or capacity buildingservices. 20 Risks 47. The overall risk for the Additional Financing Credit is M, basedon the following considerations: Potential Risks Mitigation Measures Ratingwith Mitigation ToProject Development Objective Government interferes inthe project Policy dialogue with Government inthe M management to allocate resources framework of multi-donor meetings. Bi- for politically motivated annual project supervision missions and expenditures or recurrence in evaluation. procurement irregularities. External shocks (climate, pests) Incorporation of riskmanagement M prevent achievement o f expected principles as an integral part o f farmer's benefits training. I ComponentA: Productive Investmei F The POs arenot able to find Service POshave access to the largeproject M providers with appropriate technical database on service providers. The project skills. also provides on-demand training to service providers M POs are not able to access micro- The project supports POs indeveloping finance institutions for input coherent credit requests, including financial return and risk analysis. Low demand by POs for applied The project supports identification o f M research sub-projects knowledge and technology related constraints of POs. I I Component C: CapacityBuilding and Policy Development The GTDR will not follow the Selection of sub-projects i s made by a N principles o f economic efficiency CROA headedby the Chiefo f Region. The and poverty reduction inplanning project will provide training and support to and implementingthe Rural GTDRs. DevelopmentAction Plan (PADR) priorities. Fiduciaw The risk o f mis-procurement and Recruitmento f an external Fiduciary M mis-use o f the project funds. Agency, acceptable to the Bank, as a condition o f effectiveness, to Riskof significant discrepancies handlehtrengthenthe FMarrangement between the amount o f advances duringthe implementationofthe AF credit. received from IDA for a given period, and amount spent on The project will carry out regular internal eligible expenditures and closing audits of sub-projects to ensure use of finds 21 DAbalancesfor this perioddue to for the purposesintended. lack of follow-up anderroneous application of exchange rates in The project will carry out atechnical audit withdrawal applications. of a sample of sub-projectsby endof February2010. The project will hire aprivate auditing firm, acceptableto IDA, to carry out audit. The internal andexternalauditorswill conduct systematicreviews of the IFR, includingthe DA Activity Statement,to ensure timely submissionto IDA, by NPIU, of all eligible expendituresfrom RPIU.The ProceduresManual, which i s acondition of effectiveness,will describeall control proceduresrequiredto mitigate this risk. IDAwill continueto provide close oversightto the NFWandreview the TORS for the externalaudit with specialattention OverallRisk Rating :=High; S = Substantial, M=Modest; P Low or Negligible. VIII. FinancialTermsAnd ConditionsForTheAdditionalFinancing 48. The Additional Financing o f US$30 million equivalent will be provided on standard IDA terms (40 years maturity, 10 years grace). The Borrower is the Republic o f Madagascar represented by the Minister of Finance and Budget o f the Government. The IDA financing will be made available to the RDSP AF under the same terms and conditions used for the original credit and specified in a new Financing Agreement betweenthe Borrower and IDA. 49. The following effectiveness conditions apply to the AF credit: (i) The Implementation Manual and the Administrative, Accounting and Financial Manual have been updated by the Recipient, in form and substance satisfactory to the Association, andthe computerized accounting system has been upgraded ina manner satisfactory to the Association; (ii) TheRecipienthasestablishedRPIUinformandsubstancesatisfactoryto the Association, including the recruitment o f a regional executive director, a financial management specialist, and a procurement specialist, all with qualifications and experience satisfactory to the Association; and (iii) TheRecipienthascausedtheNPIUtorecruittheFiduciaryAgent. 22 Annex 1 FinancialManagementandDisbursementArrangements Introduction The Additional Financing would help the RDSP to scale-up the ongoing operations under following components: (A) Productive Investments; (B) Support Services; (C); and (D) Project Administration and Monitoring. The FM assessment carried out at the concept stage determined that the risk associated with the Government systems is significant. This is derived from the fact that the public financial management systems inMadagascar are generally weak and the capacity i s low. The Ministry of Agriculture, Livestock and Fisheries i s no exception. To address this fiduciary risk and meet efficiently the challenges o f this project, it was agreed with the M o A L F that the financial management (FM) aspects o f this project will continue to be entrusted to the ongoing Rural Development Support Project (RDSP) which has extensive experience in managing Bank Funds. The four components will be implemented by the NPIU, RPIU and operating units (FOFIFA, FCRA, UPDR, DISE, PADWGTDR, FRDA) located at the national level. The NPIU will be in charge o f overall coordination o f the program as well as the fiduciary aspects, including budgeting, accounting, financial reporting, disbursement operations andprocurement. Based on this institutional arrangement, the FM arrangements o f the NPIU, RPIU and operating units have been reviewed in order to determine whether they are acceptable to the Bank. This review is in fact an update since the FM systems o f these entities have already been assessed inthe context o f the ongoing Rural Development Support Project. Given the decentralized nature o f the project and the number o f operating units involved, the coordination andreporting mechanisms between these entities and the NPIU has been also reviewed to ensure that the arrangements in place will allow for smooth implementation o f project's activities as well as to ensure that credit proceeds are used only for the purposes for which the credit was granted, with due regard to economy, efficiency, and the sustainable achievement o f the project's development objectives. The assessment also includes a determination o f the program's readiness for the report -based disbursement process. The financial management assessment was carried out in accordance with the World Bank Financial Management Practices Manual issued by the Financial Management Board on November 2005. The content o f this report has been discussed with the RDSP representatives i.e the national Director and the Director of Finance o f the Rural Development Support Project. The overall conclusion o f this review is described inthe FinancialManagement section o f the Project Paper. SummaryProjectDescription: (see SectionI1of the ProjectPaper) Criticalrisks andpossiblecontroversialaspects The following table identifies the risks that the project management may face, and provides the measures to be taken to mitigate them: 23 I E -4- , --r E I ..0 Y * M ;?.ak W c ; E rl E E 3 I4 I4 rg N I4 E E I d I M E E I P x Strengths,Weaknesses andActionPlan The RDSP financial management is strengthened bythe following salient features: Existence o f adequate organizationalstructure defining clearly the lines o f responsibilities andauthority that exist andbeingappropriate for planning, directing andcontrolling operations. 0 Existence o f qualified and skilled accounting staff very knowledgeable with Bank procedures andhaving strong experience inmanaging World Bank funds. Adequate internal control system including suitable authorization procedures, appropriate segregation o f duties andresponsibilities, reliable budgeting system, andadequate measures for safeguarding assets; 0 Use o f an accounting system incompliance with generally accounting standards andIDA requirements, facilitating the management o fproject operations and providing relevant information for managingproject activities; 0 Existence o f an internal auditor within RDSP. The main deficiencies noted inthe Project financial management system are summarized inthe following table which also providesrelevantmeasures to addressthem: Sipnificant weaknesses Actions - Date ResDonsible due bv 1-Proceduresmanualnot yet Update ofthe existingaccounting Prior to DAF(RDSP) updated to: i)reflect agreed manual of procedures to ensure credit changes inthe project consistent applicationo fpolicies and effectivene structure and disbursement operating instructions, proper record ss procedures and controls; ii) keepingand adequate safeguarding o f include the new Chart of assets. accounts and models o f IFRs. Users training will be provided to ensure effective application o f control procedures; 2- Vacancy o f the Director Recruitmentunder terms and conditions Prior to MoALPand of Finance position from acceptableto IDA, o f a Fiduciary credit ProjectNatid next December 2008 due to Agency acquainted with bothnational effectivene Dimtor expiration of the current FMsystemandBankFMprocedures to ss Fiduciary Agency contract lead, supervise and assistthe NpIU/RPIUaccounting staff in Absence o f systematic performing FMtasks. FMA,, 29 Significant weaknesses Actions - Date ResDonsible due by review o f the Designated Systematic review of the Designated Account Activity Account Activity Statementby Statement by internayexternal auditors and close internayexternal follow-up by Bank staf. Inclusion o f auditors. this activity inthe TORSof internayexternalauditors. 3- The accountants for RPIU Assignment to RPIUo f qualified Prior to DAF(RDSP) have not been officially accountants selectedamong those ones credit appointed yet. working presentlywithinPSDR .This effectivene selection will bebased on their ss performance. 4- Incapacity o f the Customizing and upgradingthe Prior to Consultant computerized systemin computerized accounting system credit place to satisfy entirely the acquired within the context of the effectivene users needs. RDSP inorder to: i)meet the users ss needs and; ii)ensure timely production o f all financiaytechnical information (including IFRs)required for monitoringproject activities. Organization o f users training by the consultant to ensure efficient use of all modules offered by the software. 5- Absence o f acceptable Recruitment of an international private Three MoALP/IDA arrangement in auditing firm acceptable to IDA to carry months auditing. out the audit of the project accounts. after This audit will be performed annually effectivene and conducted in accordance with ss date International Standardsof Auditing. Institutionaland Implementationarrangements (see SectionV of the ProjectPaper) Staffing The RDSP's accounting staff is qualified and have relevant experience to be completely successful in carrying out their functions. However, due to the expiration in next December 2008 o f the contract o f the Fiduciary Agency, presently in charge o f the FM aspects o f the on-going RSDP the Finance Director position will be vacant in December 2008. To address this issue a new Fiduciary Agency will be recruited to lead, supervise 30 and assist the NPIURPIU accounting staff in performing FM tasks. The recruitment process should be conducted inconformity with the Bankprocedures and completedprior to credit effectiveness. The accountants in charge o f the FM aspect at the regional level have not been officially appointed yet. They will be selected among the current RDSP staff based on their qualification and performance. Their appointment should be effective prior to credit effectiveness. Budgeting The expected Program period for this AF credit is two and a half years. A project implementationplan and disbursement schedule has been drawn up and is included inthe Project Appraisal Document. It is from this disbursement schedule (as may be subsequently revised) that annual budgetswill be drawn. The Project Director will be responsible for coordinating the preparation o f an annual budget for the project. Budgeting arrangements for the Project will be described indetails in the project accounting manual of procedures. The annual estimates will reflect financial requirements o f the project and should be finalized three months before the beginning o f the financial year, and submitted to the Ministry o f Finance for discussion and decision-making inconformity with the defined calendar. The budget format will be based on the Project components/activities/categories/geographic codes. It will show: i) expenditure estimates per quarter and a total expenditure for the whole year; andii)funds expected from IDA, government and beneficiaries. The upgraded accounting software to be implemented will be able to cater adequately for the budgeting arrangements, comparing planned and actual costs and reporting variances. Prior to credit effectiveness, the RDSP staff will attend a specific training to ensure efficient use o f the new system andproper preparationo f IFRs. Accounting The RDSP (NPIU and RPIU) accounting system is in compliance with generally accounting standards. It uses standardbook accounts ('journals, ledgers and trial balances) to enter and summarize transactions and operates on a double entry accrual principles. However, to ensure proper monitoring o f budgetary execution, the NPlU will provide the Budget Directorate o f the Ministry o f Finance with monthly statement o f commitment and payment drawn under the project credit lines. NPIU will be in charge o f timely production o fthe project quarterly IFRsand annual financial statements. The operating units will maintain a simple cash book showing clearly cash received, payments made for each component/activities they have implementation responsibility, and cash balances. They also will prepare on a quarterly basis a more simplified form o f reporting on sources and uses o f funds, and send it to NPIU for consolidation with their activity reports. 31 To ensure better understanding and proper application o f policies and procedures by the project staff, the current accounting manual o fprocedures usedby RDSP will be updated to reflect agreed changes in the project structure and procedures (disbursement method), the new chart o f accounts as well as the model o f IFRs to be produced. This procedures manual describes inter alia the outline o f the project accounting system, the accounting policies and disbursement method to be followed, the formats o f books and records, the Chart o f accounts, the financial reporting, and relevant information to facilitate record keeping and maintenance o f proper control over assets. The update o f this manual o f procedures should be completed prior to effectiveness. Thereafter, an adequate training will be provided to NPKJ/RPIU staff to ensure better understanding and proper application o f all procedures described in this manual. To ensure timely production o f financial information required for managing and monitoring project activities, RDSP will use the computerized system acquired within the context o f the on-going project, which inparticular facilitates: annual programming of activities and project resources, record- keeping (general accounting and cost accounting), financial and budgetary management, fixed assets management, procurement management, preparation o f RDSP financial statements and quarterly Interim Financial Reports as required by IDA. However, this software needs to be customized and upgraded to: (i) meet the users needs; (ii) satisfy other donors (government) requirements in financialhechnical information. To avoid double data capture, this system should also allow for extracting efficiently all required information from the Data Base ORACLE presently inplace and usedby the MoALF for recording commitments, "liquidations" and settlement orders. The consultant incharge o f this update will provide users training to ensure efficient use o f all modules offered by the software. The TORS for this consultant will be reviewed by the Bank Financial Management Specialist. The new computerized system will be fully functional prior to credit effectiveness. InternalControlandInternalAuditing The RDSP internal control system i s globally satisfactory: proper authorization to initiate and execute transactions, accounting and budgeting system ensuring timely preparation o f reliable information, adequate measures for safeguarding assets. The NPIURPIU and operatingunits have an accounting manual o fprocedures providing sufficient information to facilitate record-keeping and the maintenance o f proper control over assets. However, the NPKJRPKJ manual needs to be updated in order to reflect agreed changes in the project structure and disbursement procedures and controls, and to include the new Chart o f accounts, and the content and format o f new IFRs to be prepared under this additional financing. To ensure efficient use o f credit funds for the purposes intended and consistent application o f procedures on procurement, financial management, disbursement, an internal audit Department i s currently in place within the RDSP. This Department will collaborate closely with the General Inspectorate for Finance (IGF) when this later i s fully functional, and will report directly to the Minister o f Finance and the Minister o f Agriculture. Internal auditor will also carry out a systematic review o f IFR, including the Designated account Activity Statement to address the risk of unaccounted funds. All 32 issues identified during internal audit should be addressed quickly to improve the program performance. FundsFlow andDisbursementarrangements Funds flow arrangements for the project are as follows: World Bank NPIU: DesignatedAccount (IDA) - I I Beneficiaries: - RegionalbankAccount (IDA) Participation OperatingUnits (PADR,UPDR , DISEetc...): Bankaccount(s) services Bank account I I I For the implementation o f RDSP - Additional Financing, one Designated account to be managed byNPIU will be opened inlocal commercial bank under conditions satisfactory to IDA. Denominatedin$ US, disbursements from IDA will be deposited on this account to: i)finance works/goods /services eligible under the FA credit as indicated inthe DCA; ii)replenishregionalbank accounts managed byRPIU. Contrary to what hasbeen applied inthe previous project (original credit), the use o f two designated accounts i s not justified in the context o f this additional financing since this later i s proposed to finance 100% o f each category o f expenditures. To facilitate the management o f this additional financing it was decided to use only one designated account. While disbursing proceeds from IDA FA credit account, IDA may: (i) advance grant proceeds into the Designated account opened in a commercial bank acceptable to IDA; (ii) adirectpaymenttoathirdparty;(iii) intospecialcommitmentsinwriting make enter to pay amounts to a third party inrespect o f expenditures to be financed out o f the grant 33 proceeds, upon the borrower's request and under terms and conditions agreed by donor andthe recipient. The accountingmanual o fprocedures describes indetail the application steps and requirements for requesting an advance, a direct payment for third party, and applying for a special commitment. To ensure prompt payment o f contractors/suppliers operating inthe regions, the borrower may open "Regional bank accounts - IDA"to be managed by each RPIU. Denominated inlocal currency, disbursements from the DesignatedAccount will be deposited onthese accounts opened in local commercial banks to ensure the payment o f works/goods /services eligible under the FA credit; To ensure implementation o f activities entrusted to the operating units a bank account will be opened by each unit ina local commercial bank to receive transfer o f funds from IDA. Denominated in local currency this bank account will be managed by each operatingunit to finance activities eligible under the credit. The initial advance paid to each regional account and operating unit account would represent funds covering no more than 30 days estimated expenditures based upon submission o f satisfactory budgeted work plans. Subsequent payments will be based on SOEs submitted by RPIU and operating units after appropriate authorization and approval by NPIU. The RPIUwill submit at least monthly expenditure reports indicating sources and uses o f finds andjustifying the use o f funds, and accompanied by reconciled bank statements. To implement subprojects and ensure timely payment o f contractors/suppliers, a Community bank account will be opened in a local commercial bank to receive transfer o f funds from IDA and community contribution. Denominated inlocal currency this bank account will be managed by each community recipient. The transfer o f fund to this community bank account would be made as follows: i)70% upon signature o f the contract/convention between RDSP and Communities; ii)20% based on physical progress (at least 50% o f the works have been achieved) after appropriate authorization andapprovalbyNPIU/RPIU;10%after final reception. The Designated Account would be replenished on the basis o f documentary evidence provided to IDA by NPIU (see below paragraph "Designated account "), justifying the payments o f expenditures that are eligible for financing under the credit. All supporting documents will be retainedby the project (NPIU, RPIU), operating units and communities, and made available for review by periodic Bank supervision missions, internal and external auditors. The accounting manual will describe in details all procedural aspects regarding financial management (payments, replenishment, accounting, reporting and internal controls). 34 Disbursementfrom the DesignatedAccount Since December 2006, the project maintains an adequate FMsystem and submit timely acceptable FMRs and quality project audit. It was therefore agreed with the borrower that disbursements from the FA will be done based on quarterly IFRs. Under this disbursement procedure, a forecast ofproject expenditures will be agreed between the RDSP andthe World Bank, covering a period of six months. The recipients may request an advance for an amount not exceeding this cash forecast. Supporting documentation for this disbursement (i.e. the FRs) willbesubmittedandreviewedbythe WorldBankto confirm eligible expenditures duringthe period coveredbythe FR.Detailed disbursement procedures will be described inthe project accounting manual o f procedures. DisbursementsCategories The table below sets out the expenditure categories andpercentages to be financed out o f the grantproceeds. Allocationof Credit Proceeds Categoryof Expenditures (3) Consultant Services, Training, Audits 3,000,000 100% (4) Operating Costs 4,000,000 100% Total 30,000,000 FinancialReporting To monitor the implementation of the RDSP Additional Financing, the NPlU will produce the following reports that should be prepared in compliance with international accounting standards: 0 Annualfinancial statements comprising: (i) Summary o f Sources and Uses o f Funds (by components/project activitieshredit category and showing all sources o f funds); (ii) Project Balance Sheet; (iii) Accounting Policies Adopted and the ExplanatoryNotes; (iv) a Management Assertion. 35 0 Quarterly ZFRs: This financial report with the physical progress report will be needed to facilitate project monitoring. The IFRs should be submitted to IDA within 45 days o f the end o f the reporting period (quarter). The form and content o f quarterly IFRs and annual financial statements was agreed duringnegotiations. Models o f these reports will be presented in the project accounting manual o f procedures. Auditing The financial statements o f the RDSP, including the Additional Financing will be audited by an international private auditing firm acceptable to IDA. This audit will be performed annually and conducted in accordance with International Standards o f Auditing. The auditors should be recruited within three months after the effectiveness date. The audit report will be submitted to IDA not later than 6 months after the end o f each period. The auditors will be required to: (i)express an opinion on the project financial statements; (ii) carry out a comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The terms o f reference o f the audit will be reviewed by the financial management specialist o f the Bank/IDA to ensure the adequacy o f the audit scope, drawing special attention to particular risk areas identified duringproject preparation. Regarding the transfer o f funds to beneficiary communities, it i s envisaged that semi annual audits o f the use of funds would be carried out by the auditors. The modalities, including timing andobjectives for such audits would be described indetail inthe TORS. SupervisionPlan Taking into account the level o f risk associated with the FM aspect of this program, the FMS will pay more frequent visits to the RDSP to ensure timely implementation o f all effectiveness conditions. When project expenditures begin, a supervision mission will be conducted at least twice a year based on the risk assessment o f the project. The mission's objectives will include that o f ensuring that strong financial management systems are maintained for the project throughout its life. A review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for the FA credit. The Implementation Status Report (ISR) will include a financial management rating for the component. The FMS will also review quarterly FMRs, the audit reports and follow-up on timely implementation o f recommendations from auditors. 36 Annex 2: Statementof LoansandCredits MADAGASCAR: RuralDevelopmentSupportProjectAdditionalFinancing Differencebetween expected and actual Original Amount inUS$Millions disbursements Project ID FY Purpose IBRLI IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd P103950 2008 MG-Governance& Inst. Dev. I1TAL 0.00 40.00 0.00 0.00 0.00 39.78 0.00 0.00 PO74086 2007 MG-Irrigation & Watershed Project (FY07) 0.00 30.00 0.00 0.00 0.00 26.88 2.01 0.00 PO95240 2007 MG-Pw/Wtr Sect. Recoveryand Restruct. 0.00 10.00 0.00 0.00 0.00 6.69 5.32 0.00 P103606 2007 MG-Sust. Health SystemDev. (FY07) 0.00 10.00 0.00 0.00 0.00 1.66 -1.50 0.00 PO90615 2006 MG-MultiSec STVHIVIAIDS Prev I1 0.00 30.00 0.00 0.00 0.00 19.72 11.56 0.00 (FY06) PO83351 2006 MG-IntegGrowthPoles 0.00 129.80 0.00 0.00 0.00 82.64 5.08 -4.35 PO82806 2004 MG-Transp InfrastrInvestPrj (FY04) 0.00 150.00 0.00 0.00 0.00 40.69 16.03 16.03 PO74448 2004 MG-Gov & Inst Dev TAL (FY04) 0.00 30.00 0.00 0.00 0.00 1.30 -7.03 0.00 PO74235 2004 MG-Env Prgm3 (FY04) 0.00 40.00 0.00 0.00 0.00 13.54 7.77 r 0.00 PO76245 2003 MG-Mineral Res Gov SIL (FY03) 0.00 32.00 0.00 0.00 0.00 7.55 -3.96 0.00 PO73689 2003 MG-Rural Transp APL 2 (FY03) 0.00 80.00 0.00 0.00 0.00 32.23 16.40 16.46 PO72160 2002 MG-Priv Sec Dev 2 (FY02) 0.00 23.80 0.00 0.00 0.00 4.54 -0.01 -3.99 PO51922 2001 MG-Rural Dev Supt SIL (FYO1) 0.00 89.05 0.00 0.00 1.23 8.67 -3.23 -3.23 PO55166 2001 MG-ComDev Fund SIL (FYOl) 0.00 110.00 0.00 0.00 0.00 0.52 -81.82 -31.82 PO52186 1999 MG-Microfinance(FY99) 0.00 16.40 0.00 0.00 0.00 4.20 -1.85 1.04 PO01568 1998 MG-CommunityNutrition I1(FY98) 0.00 27.60 0.00 0.00 0.00 7.61 -13.84 1.01 Total: 0.00 848.65 0.00 0.00 1.23 298.22 - 49.07 - 8.85 MADAGASCAR STATEMENT OF FC's HeldandDisbursedPortfolio InMillionsofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1997 AEF GHM 0.46 0.00 0.00 0.00 0.46 0.00 0.00 `0.00 1995 AEF Karibotel 0.19 0.00 0.00 0.00 0.19 0.00 0.00 0.00 BFV-SocGen 6.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 BNI 0.00 2.09 0.00 0.00 0.00 2.09 0.00 0.00 2005 BNI 6.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 BOA-M 0.00 0.82 0.72 0.00 0.00 0.82 0.72 0.00 2004 BP Madagascar 0.00 3.51 0.00 0.00 0.00 0.00 0.00 0.00 CREDIT LYONNAISl 6.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Totalportfolio: 19.76 6.42 0.72 0.00 0.65 2.91 0.72 0.00 37 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2001 Besalampy 0.02 0.00 0.00 0.00 2006 IDA-IFCPCG 0.01 0.00 0.00 0.00 Total pendingcommitment: 0.03 0.00 0.00 0.00 38 Annex 3: Country at a Glance MADAGASCAR:RuralDevelopmentSupport ProjectAdditionalFinancing Sub- POVERTY and SOCIAL Saharan LOW- Madagaacar Afrlcs Income Development dlamond. 2007 Population, midyear (miliions) 8.7 800 e96 GNIpercapita (Atlasmethod, US$j 320 952 578 Life expectancy GNi(AtIasmethod, US$ blliions) 6.3 762 749 Average annual growth, 200147 Population(%) 2 8 2.5 2.2 Labor force (O%j 3.3 2.6 2.7 capita i+;nro"r "1 m a n Moat recent estlmate (latest year avallable, 2001-07) Poverty (%of population belownatbnalpo vedylinej Urbanpopulation (%of tofalpopulatlonj 29 38 32 Lifeexpectancyat birth(parsj 59 51 57 Infantmortality(par t000iivebidhsj 72 94 85 Childmalnutrition (%of chlldrenunder5j 37 27 29 Access to improvedwatersource Access to animprovedwatersource(%ofpopulation) 47 58 68 Literacy(%ofpopulationage69 I 59 81 Grossprimaryenroliment (%of school-agepopulation) 139 94 94 - Madagascar Male n2 e9 a0 - Lowincomegroup Female 8 7 88 89 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1987 1997 2008 2007 Economlc ratlo#* GDP (US%billions) 2.8 3.5 5.5 7.3 Gross capltalformation/GDP a.1 P.8 24.8 29.2 Exports of goods andservices/GDP 18.8 219 29.7 24.7 Trade Gross domestic savlngs/GDP 4.2 4.7 Q.6 9.9 GrossnationalsavingslGDP 4.4 7.3 18.0 113 T Currentaccount baiancdGDP -4.8 5.6 -8.7 -Q.5 InterestpaynentslGDP 4.0 2.8 0.4 Domestic Capital TotaldebVGDP W3.0 115.8 26.4 savings formation Totaldebt service/exports 50.3 28.7 4.0 Present valueof debt/GDP 115 Present valueof debtlewrts 37.8 Indebtedness 1987-97 199747 2008 2007 2007-11 (averageannualgmnth) GDP 0.9 3.1 4.9 6.5 8.1 -Madagascar GDP percapita -2.0 0.2 2.1 3.7 8.1 -Lowincomegroup Eqorts of goods andservices 4.3 14 23.6 42 28.1 STRUCTURE of the ECONOMY 1987 1997 2006 2007 (%of GDPj Growth of capltal and GDP (%) Agriculture 36.2 315 27.5 28.5 lWT I industry 0.7 0.4 8.3 8.0 Manufacturing 114 113 Q.4 P.8 w Services 50.1 55.0 572 58.4 0 Householdfinalconsumptionexpenditure 88.7 87.5 77.6 80.5 .M Generalgov't final consumptionexpenditure 9.1 7.8 8.8 9.8 Imports of goods andservices 22.5 30.0 40.9 44.0 1987-97 1 ~ 7 . 0 7 2006 2007 (average annuaigmu4hj Growth of exports and Imports ('h) Agriculture 19 2.0 2 2 2.4 50 Industry 0.8 2.5 2.7 4.8 Manufacturing 0.1 2.5 2.7 4.8 Services 11 3.3 7.0 9,5 -25 Householdfinal consumption expenditure 13 2.6 -2.8 /-16l -50 Generalgov't finalconsumptionexpenditure -14 5.8 20.5 25.7 Gross capitalfonation -0.8 Q.0 15.1 42.7 I imports of goods andservices 3.0 8.7 3.9 38.8 -Exports -Inports Note 2007 data are preliminaryestimates This tablewas producedfrom the Development Economics LDB database 'Thediamonds showfourkeyindicators inthecountry(in bo1d)comparedmthitsincomegroupaverage if data aremissing,thediamondmil be incomplete 39 Madagascar , PRICES and GOVERNM ENT FINANCE I987 1997 2006 2007 Domestlc prices (%change) Consumer pnces 8 9 45 0 8 0 3 ImplicitGDP deflator 230 7.3 113 95 Government finance (%of GDP,includescurrentgranfs) Currentrevenue 13.0 116 P O 129 Current budget balance 8.7 0 9 0 8 04 I Overallsurplus/deficit 17 -5.6 -94 -96 -----GDPdeflator -CPI I 7 TRADE 1987 1997 2006 2007 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 329 507 982 1097 Coffee 34 64 51 34 Vanilla 89 r) 48 30 3,OW Manufacturas 65 346 905 1061 Total imports (cif) 409 802 1,790 2.872 2,000 Food 52 49 Fuelandenergy 55 17 377 429 1.ow I I Capitalgoods 0 2 146 225 282 0 Exportprice index(2000=X)O) 94 87 IT7 Q4 01 02 03 04 05 OB 07 Importprice index(2000=00) 89 0 3 161 152 Exports BImpOrtS T e n s of trade(20W=00) 06 85 73 82 BALANCE o f PAYMENTS 1967 1997 2006 2007 (US$ millions) Current account balance to GDP (%I Evertsof goodsandservices 425 774 1646 1993 Imports of goods andservices 552 1,061 2,256 3,lQ Resource balance -P7 -286 -60 -IT20 Netincome -149 -91 -80 -56 Netcurrenttransfers 154 8 2 214 8 8 Currentaccount balance -P2 -86 -476 -988 Financingitems (net) 8 1 250 508 1059 Changes in net reserves -69 -54 -32 -71 M erno: Rasarvasincludinggold (US$ millions) 25 280 532 602 Conversionrate (DEC,/oca//US$) 20.8 108.2 2,1423 18739 EXTERNAL DEBT and RESOURCE FLOWS 1987 1997 2006 2007 (US$ millions) Total debt outstandinganddisbursed 3.668 4,099 1,453 IBRD 35 3 0 IDA 550 12Q 636 G: B9 Total debt service 245 2t? 68 IBRD 4 4 0 IDA 6 8 28 Composition of net resourceflows Official grants 66 566 2,543 Official Creditors 273 2 8 235 Private creditors -15 1 -3 Foreigndirect investment (net inflows) 3 14 230 Portfolio equity(net inflows) 0 0 0 WorldBank program Commitments 08 777 TI8 E-Bilatffsl Disbursements 93 0 0 l78 A-IBRD B IDA - D Othw rmltilatffd - F- Private Pnncipalrepayments 3 14 8 C-IMF G-Short-tmi Net flows 90 113 132 Interest payments 7 9 Q Net transfem 83 m7 150 Note This tablewas producedfromtheDevelopment Economics LDB database 9/l7/08 40 MAP SECTION IBRD 33439 45°E 50°E Antsiranana MADAGASCAR Mayotte (France) Ambilobe Ambilobe Vohimarina Ambanja ANTSIRANANAANTSIRANANA MaromokotroMaromokotro e l (2,876 m) (2,876 m) MassifMassif Sambava n n Tsaratanana saratanana h a Bealanana Bealanana 15°S C Antsohihy Andapa Andapa Antalaha 15°S q u e Sofia Befandriana Befandriana Maroantsetra b i Mahajanga Mandritsara Mandritsara m Mampikony Mampikony o v Mananara o z a Soalala MahajambaBemarivo a M g Besalampy Bongol a v a M A H A J A N G A n A Maevatanana Maevatanana of Betsiboka Andilamena Andilamena f Soanierana-Ivongo o Cliff LakeLake A Manambaho Kandreho Kandreho Fenoarivo-Atsinanana Andriamena Andriamena AlaotraAlaotra A C Maintirano Mahavavy SIN liff Vohidiala hidiala Ankazobe Ankazobe M A Toamasina Ambaravaranala Ambaravaranala ANTANANARIVOANTANANARIVO Antsalova ANTANANARIVOANTANANARIVO TO Moramanga Moramanga I N D I A N Soavinandriana Soavinandriana Tsiafajovona siafajovona (2,642 m) (2,642 m) Vatomandry Miandrivazo Miandrivazo a O C E A N Belo Tsiribihina Antanifotsy Antanifotsy Tsiribihina Mangoro Mahanoro 20°S AnkaratAntsirabe Antsirabe 20°S Morondava Malaimbandy Malaimbandy Mania Ambatofinan- Ambatofinan- drahana drahana Ambositra Ambositra Varika Mandabe Mandabe Ambohimahasoa Ambohimahasoa Manja Manja Fianarantsoa Fianarantsoa Mananjary 0 40 80 120 160 200 Kilometers Beroroha Beroroha Morombe Mangoky F I A N A R A N T S O A 0 40 80 120 Miles Manakara Ankazoabo Ankazoabo Ihosy Ihosy Pic Boby Pic Boby (2,658 m) (2,658 m) 50°E T O L I A R A Farafangana Toliara Fiherechana Sakaraha Sakaraha Mananara MADAGASCAR Betroka Betroka Onilahy SELECTED CITIES AND TOWNS Betioky Betioky Midongy- Midongy- Atsimo Atsimo PROVINCE (FARITANY) CAPITALS Tsivory ivor NATIONAL CAPITAL Berakete Berakete This map was produced by RIVERS the Map Design Unit of The World Bank. The boundaries, colors, denominations and Ampanihy Ampanihy Mandrave MAIN ROADS any other information shown PlateAmboasary au on this map do not imply, on Amboasar RAILROADS the part of The World Bank randra Androy Tolanaro 25°S Group, any judgment on the Androka Ambovombe Ambovombe PROVINCE (FARITANY) BOUNDARIES legal status of any territory, MenaBeloha Beloha or any endorsement or a c c e p t a n c e o f s u c h INTERNATIONAL BOUNDARIES boundaries. 45°E NOVEMBER 2004