FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1539-MAG REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO THE MALAGASY REPUBLIC FOR A FORESTRY PROJECT December 5, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Currency Equivalents Unit = Malagasy Franc (FMG) US$1 = FMG255 FTMIG1 = Us$o0.o39 F4G1,OOC = US$3.92 FMG1,OOO,OOO = US$3,921 FMGl,OOO,OOO,OOO= US$3,921,569 Fiscal Year January 1 - December 31 At the time of project appraisal in November/December 1973. INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMEDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO THE MALAGASY REPUBLIC FOR A FORESTRY PROJECT 1. I submit the following report and recommendation on a proposed Development Credit for the equivalent of $6.75 million and a proposed Loan for the equivalent of $6.75 million to the Malagasy Republic to help finance a forestry project. The credit would be on standard IDA terms. The loan, which would be utilized after the credit, would have a term of 25 years, including 10 years of grace, with interest at 8 percent per annum. PART I - THE ECOTOMY 2. An economic report entitled "'The Economic Development of Madagascar: Main Issues" (Report No. 167a-MAG) was distributed to the Executive Directors on July 15, 1974. Country data are attached as Annex I. 3. Madagascar, the fourth largest island in the world, has a popula- tion of nearly 8 million, with an average per capita income of about $140. Its economy is dominated by the agricultural sector. In the 1960's agricul- tural production only rose at the same rate as population and lagged behind the growth in the domestic demand for foodstuffs. Agriculture supports directly about 85 percent of the population and contributes approximately one third of GDP. Recent fluctuations in GDP may be attributed in part to changes in weather. In 1973, harvests were poor and real GDP fell sharply. In 197h, there was a good harvest and a modest increase in real GDP is forecast. 4. The two main crops are rice, which is the staple food, and coffee,which is the most important export. Rice is grown on more than half of the area under cultivation and accounts for about half of the country's crop production by value. Nevertheless, Madagascar has increasingly imported rice to make up a domestic deficit. The quantity of rice marketed in 1973 was well below the 1970-72 level, not only because of the poor harvest, but also because a low producer price discouraged farmers from selling their crop. Consequently, shortages led to the import of an exceptional 124,000 tons of rice, equivalent to about 9 percent of annual consumption. In the past year, to provide improved incentives to the farmers, the price of paddy has been increased by nearly 90 percent. The producer prices of beef, groundnuts, pepper and coffee have also been substantially raised. Rice production in 1974 was about 15 percent higher than in 1973 and the quantities of most other crops produced also increased. 5. While the country is sparsely populated--?3 inhabitants per square kilometer--there is great pressure on cultivable land in specific regions. In these areas, people have standards of living close to subsistence level; nutrition is deficient and child mortality is high. A particular difficulty is the lack of an adequate inland transportation network. Despite the heavy irnvestments which took place in the last decade, only one-third of the highway network is all-weather and only 3,000 kilometers of road are paved in a country where production centers may be as far as 1,200 kilometers from the points of consumption. 6. Manufacturing has made only a small contribution to overall economic growth although it has expanded faster than GDP. It provides employment for no more than 42,000 people or under 2 percent of the total active population; it contributed about 12 percent of GDP in 1972. Produc- tion is almost entirely devoted to consumer goods for domestic use. As manufacturing expanded, the imports of non-food consumer goods declined as a percentage of total merchandise imports from 42 percent in 1960 to 28 percent in 1972. However, the scope for further import substitution is limited by the smallness of the monetized domestic market. In addition, this industrial growth has required high protection against competitive imports and has resulted in a sharp increase in imports of raw materials and intermediate products utilized for local processing. 7. Between 1966 and 1971, real GDP per capita rose by only 1 percent per annum. During this period Government policies did not sufficiently support economic and social development. They favored urban consumers through price controls on domestically produced commodities and they favored high income groups through liberal imports of luxury goods. At the same time, reliance on foreign technical assistance was substantial and recourse to external borrowing was limited. This relative conservatism can be explained in part by the inertia of a tradition-bound society, regional fragmentation and ethnic diversity. It can also be partly explained by an institutional framework inherited from the colonial period which did not favor rapid development. 8. In 1972, the Government of President Tsiranana was replaced by a new Government led by General Ramanantsoa. The economic policies of the present Government have been set out in a new National Development Plan covering the period 1974 to 1977 published in May 1974. The Plan proposed a target rate of growth of GDP of 3.2 percent per year, calling for an investment program totaling $700 million over the four year period. The Directorate of Planning is currently preparing a detailed public sector investment program in conformity with the policies elaborated in the Plan. The two most important objectives of the Government's development strategy are clear. First, the rural people are to be much more closely involved in the development process. To achieve this, regional and local government is being reorganized using the traditional village councils or "fokonolonas". The fokonolonas are being associated with the management of small scale development projects, the marketing and processing of agricultural commodities and the distribution of agricultural inputs, including credit. Second, Malagasy nationals are to take control of the management of the economy. - 3 - Foreign executive staff in private enterprises, most of which are foreign- owned and managed, are being replaced as far as possible by Malagasy, in keeping with schedules agreed upon with the owners. To achieve the same objective, the Government is gradually extending its control over important sectors--namely banks, insurance companies, external trade, domestic and external transport, energy and mines--by purchasing majority interests in existing firms, and by establishing public corporations to be run commercially. 9. Uncertainties about economic policies associated with the change in Government in 1972 adversely affected private investment. There was a downturn in the economy in 1972 and 1973 which was reflected in lower public savings and a decline in public investment. Consequently, total capital formation amounted to only 13.2 percent of GDP in 1972 and 12.3 percent in 1973. There are indications of a small increase in total investment in 1974, mainly as a result of a rise in public capital formation. 10. To further its aim of bringing the economy more fully under Malagasy control, Madagascar left the Franc Zone in July 1973. This withdrawal has been accompanied by the introduction of exchange control regulations and the establishment of an autonomous central bank. Imports of non-essential commodities have been curbed by licensing and an increase in import taxes. In 1973, despite Madagascar's internal economic difficulties, the overall balance of payments showed a surplus of about $10 million. However, over the past twelve months, the cost of rice imports has approached $50 million, and imports of oil products have cost about $15 million. These and other factors are likely to result in an overall balance of payments deficit in 1974. Net foreign exchange reserves currently account for about three months of merchandise imports and are likely to decline further in ine short term. The Government is actively considering ways to redress the situation, including measures to restrain domestic consumption and to promote investment and exports. Nevertheless, it is likely that there will be a severe shortage of foreign exchange over the next two to three years. 11. The long-term prospects of the balance of payments are favorable. The country's export trade is already diversified. Coffee, cloves and vanilla face inelastic demands on international markets, but they account for only half of Madagascar's total merchandise exports. Investments and policies favoring the production of meat, high quality rice, fish and sugar should permit Madagascar to improve its export position. In addition, the association with the European Communities should provide in the long run markets for industry more oriented towards exports. There is also some potential for tourism. 12. Disbursements on medium and long term official aid averaged about S12 million in thie 1970-71 period and reached $23 million in 1973. As a result of concessionary external assisLtance and a 1972 agreement canceling about 45 percent of debt owed to France, the current level of Madagascar's indebtedness is relatively low. The external public debt disbursed and out- standing at the end of 1973 was estimated at about $117 million, of which the Bank Group's share was 33 percent. The service on public debt amounted to $11 million in 1973 or about 4.9 percent of export earnings, of which the Bank Group's share was S0.8 million. In the next few years, the need for foreign exchange will be greater than the imported component of the public investment program. It would therefore be appropriate for external assistance to be used to finance a substantial share of local costs. 13. If one assumes that about one-fifth of Madagascar's future borrowing will be financed on soft (IDA-type) terms, three-fifths on IBRD-type terms and the balance on commercial terms, the debt service ratio would remain below 1IJ percent by 1980, but would rise steeplv thereafter, to reach close to 20 per- cent by 1985. This points to the need for most external assistance to continue to, be provided on concessionary terms, although Madagascar is considered credit- worthy for moderate amounts of Bank lending. Even with some increase in our program, the Bank Croup's share in Madagascar's disbursed foreign debt is ex- pectod to decline gradually over the next 10 years to reach about 25 percent by 1985. Over the same period, the Bank Group's share in Madagascar's debt service is expected to increase somewhat but would not exceed 15 percent. PART II - BANK GROUP OPERATIONS 14. Madagascar has received eight IDA credits totaling $76.8 million and four Bank loans totalling $25.8 million. About 64 percent of the total lending has been for transport, 32 percent for agriculture and the balance for education. There have been no IFC investments. Annex II contains a summary statement of Bank Loans and IDA Credits as of October 31, 1974 and notes on the execution of on-going projects. Project execution is generally satisfactory, with three exceptions. The Livestock Project (Loan 585-MAG) has encountered major problems but remedial measures, agreed upon between the Government and the Bank are being implemented. The Morondava Irrigation Project (Credit 322-MAG) and the Third Highway Project (Loan 876-MAG and Credit 351-MAG), both of which are covered in greater detail in Annex II, are facing serious problems due to heavy increases in implementation costs. 15) The emphasis in our lending for transport and agriculture conforms to Madagascar's development requirements and objectives. Our program in trans- port is geared to: (i) the development of the main road network; (ii) the construction of penetration roads into promising agricultural areas: (iii) the improvement of port facilities; and (iv) the strengthening of the railroad which provides the most economic means of transportation in certain areas and for certain commlodities. The Tamatave Port Project, currently in execution, will soon provide an improved outlet for exports. Roads financed by the Bank and IDA in the central, northern and part of the western regions have helped to increase all-weather land connections within the island. A secondary net- work, however, is largely lacking and secondary roads in existence are in poor physical condition; this hinders the development of potentially rich agricul- tural areas. Under the Railway project, assistance is given to prepare a program of secondary road improvement. 16. In agriculture, Madagascar's development objective is to regain self sufficiency in rice by expanding production, and to diversify and increase production for export. The Bank is assisting the Government in the implementation of this policy by two ongoing projects whose principal production will be rice, while the recently approved livestock project will increase beef exports. Additional projects for agricultural development are at various stages of preparation and should result in Bank Group financing in the next three fiscal years. The Government is currently preparing, with Bank assistance, a scheme to rehabilitate various irrigation works that would enable Madagascar to expand rice production. Consideration is being given to devising mechanisms whereby financial assistance could be provided to local communities to finance small development projects. Project preparation in agriculture, however, is hampered by a serious shortage of expertise. The proposed project therefore includes funds that would enable the Government to hire, as and when needed, individual experts to strengthen its own services in this respect. In education, an important reform is under- way, on the basis of which a project, suitable for Bank Group financing, may materialize in FY 1976. Finally, a hydro-electric power project and a devel- opment finance company project are also under preparation. PART III - THE AGRICULTURAL AND FORESTRY SECTOR IN MADAGASCAR 17. Agriculture is the most important sector in the economy of Madagascar. It directly supports about 85 percent of the population, contributes about one- third of GDP, and is the source of about 85 percent of foreign exchange earn- ings. On-farm consumption absorbs about 60 percent of total agricultural pro- duction. Basic food crops are rice, maize and manioc. The principal agricul- tural exports are coffee, cloves, vanilla, pepper, beef, sugar and sisal. Livestock production accounted for about 10 percent of total GDP in 1972, and contributed about 11 percent of total exports. lF. There are five major agricultural production regions in the country: the central highland, accounting for most of the irrigated rice grown; the east coast, where the main products are coffee, cloves, pepper, vanilla and bananas; the northern zone, which has a tropical climate, growing mainly cash crops such as sugarcane, cocoa and spices; the middle west, where soil and climate conditions are ideal for livestock development; and the west coast, where the population is scarce and where food crops (maize, cassava) and livestock are the main traditional activities. The high fertility of some of the alluvial flood plains in this latter region has led to the development of cotton and tobacco cultivation as well as to the production of hiigh qualiyv rice for export. 19. One of the main objectives of the Malagasy Government over the next few years is the expansion of marketable production of agricultural commod- ities in order both to satisfy the basic needs of the rural population and to generate foreign exchange resources. Agricultural exports, including exports of forestry products, will have a special significance in this context, as alternative means of meeting the countryts growing foreign ex- change requirements are limited. 20. About a third of Madagascar's land area is covered with forests consisting mainly of indigenous tropical hardwood and some pine and eucalyptus plantations. About 12 million ha are state forests, a third of which has been demarcated as Forest Reserve. However, most of the indigenous forests have limited economic significance because of difficult access and low value of the wood. 21. The Government has initiated afforestation programs in various areas where soils are inadequate for agriculture or livestock. The afforestation programs are also expected to create employment opportunities and help control Madagascar's serious erosion problem. By 1973 about 65,000 ha of commercial pine plantations had been established, of which 56,000 ha are mainly in three areas: 7,500 ha in Antsirabe, 30,000 ha in Matsiatra and 18,500 ha in the Mangoro valley. The Mangoro valley offers encouraging prospects for a large scale afforestation program, to which the Government has given the highest priority. The program provides for the planting of 96,000 ha with pine trees to be used as raw material for a pulp mill to be constructed in Moramanga. The pulp mill is expected to be operational by 1985 with a planned annual production of 200,000 tons of bleached sulphate pulp, most of which is expected to be sold in W4estern Europe. The proposed project would finance the planting of 35,000 ha under this afforestation program. 22. Forest-related industry in Madagascar is in an early stage of development. About 400,000 cubic meters of hardwood saw timber are annually extracted from the forests. Most of the logs are converted to lumber in the forest by hand sawing, which causes substantial waste. The forest industry consists of about 60 saw mills, which processeed 48,000 cubic meters of timber in 1972, a fiber board plant at Moramanga and a small pulp and paper mill at Tananarive and some smaller factories producing furniture, parquet floor- ing and matches. A particle board mill is being constructed in Tananarive. 23. The Ministry of Rural Development is responsible for forestry through its Directorate of Forestry (DF). The Directorate plans and imple- ments forestry development and administers the state forests and provincial forest service. It is also responsible for the protection of national parks and wildlife, fresh water fisheries and soil conservation. Its tasks are carried out by three departments: (i) reforestation and forest industries management; (ii) national parks, wildlife and fisheries: and (iii) soil conservation. The DF is efficiently organized with a competent staff con- sisting of 45 professional foresters and forest technicians, 400 forest rangers and guards, and a small research unit. In 1973, the DF's budget amounted to $6.3 million of which about 60 percent was used for afforestation projects throughout the country. The DF also collects Government's revenues from wood extracted from the state forests, which are paid directly to the Ministry of Finance. - 7 - PART IV - THE PROJECT 2b. A report entitled "Madagascar - Appraisal of a Forestry Project" (No.-50-F4LG),dated December 6, 197lL, is being circulated to the Executive Directors separately. A loan/credit and project summary is provided in Annex III. 25. The project, which would be the Bank Group's first for forestry in Madagascar, was prepared by the Government with the assistance of the FAO/ IBRD Cooperative Program and the Bank Group and appraised in November/December 1973. Negotiations were held in Washington in August 1974. The Malagasy delegation vas led by Mr. Pierre Rajaonah, Secretary General of the Ministry of Rural Development and included Mr. Raphael, Director of Forestry, Mr. Razakaboaha, Director at the Planning Department, Mr. Ravelonarivo of the Ministry of Finance and Mr. Randrianasolo, First Secretary of the Malagasy Embassy in Washington. The Project Area 26. The project area is located in the Mangoro Valley which runs parallel to the eautern coast of the island at about 75 km from Tananarive (see maps IBRD 10923/4 attached). The valley is about 130 km long and about 20 km wide, with an altitude varying between 900 and 1,100 meters. Annual rainfall aver- ages 1,400 mm with the wet season occurring between December and March. It ig surrounded by high mountain ridges and features rolling grasslands affected by heavy soil erosion. The Mangoro and Sahabe rivers provide the major water sources. The valley is served by a railroad which runs from Lake Alaotra to Moramanga, the main city in the area, and then connects with the Tananarive- Tamatave railroad. About 3,n00 peasant families, grouped in 36 villages, live in the project area around and between the areas earmarked for the plantations and practice rice farming for subsistence on small plots of about 1.5 ha. They keep about 8,000 cattle mainly as work animals and for- milk production. Much of the land in the Mangoro Valley is almost totally unsuitable for agri- cultural production other than extensive poor quality grazing for cattle. Employment possibilities in the valley are limited and the only cash incomes are derived from some temporary work in the afforestation program. 27. To avoid possible conflicts with villagers over customary grazing rights, the boundaries of the plantations thus far established have been drawn in agreement with the village communities in the project area. This practice would be continued during the Mangoro afforestation program. Valley bottoms would continue to be used for rice cultivation and neither these areas nor the better grazing lands would be included in the areas to be planted under the project. Thus any interference with local land use patterns as a result of the project is expected to be minimal. Nonetheless, should some of the farmer's land be affected by the afforestation program, the Government would compensate the farmers in accordance with Malagasy law (Section 3.08 of the Loan Agree- ment and corresponding supplemental letter). In addition, all farmers in the project area would benefit from expanded health and educaTion facilaiiva and irproved rice cultivation through existing and future Government programsa. 23. The project to be implemented over a period of five years (1974/75- 1978/79) would be Part of the ongoing Government program to afforest 96,000 ha in the Mangoro valley. Specifically it would include: (a) afforestation of 35.000 ha of pilne plantations; (bl fire control and maintenance of all plantations within the project area, (c) construction and maintenance of about 60 km of service roads, and 1,750 km of plantation rcads (d) construction of project headquarters and three divisional h.ead quarters and staff and labor facilities; (e) technical assistance in research, training and preparation of future forestty projects; and (f) pasture improvement on about 2,000 ha within the project area. 29. As indicated in paragraph 16 above, the project would also include funds to assist the Government in preparing additional projects in agriculture. Detailed Features of Prpiect Compnents Establishment of Plantations 3Y. The methods used thus far in .adagascar to establish tree pl&atations were developed jointlv by the DF, INDP/FAO and French bilateral assistance. They have proved successful and would be continued under the proposed project. About 7,000 ha would be planted each year. The works would start with land and soil surveys, which would be based on earlier surveys made with the assist- ance of the IJTD/?FAO. About 12 million seedlings would be needed to complete the annual planting program and would be provided by several nurseries in the project area. To ensure a rapid growth of the pines, a small application of fertilizer would be required prior to planting. To facilitate the implementa- tion of the prograr., the project area would be divided Lnto Nlor-:hern,Central and Southern Divisions. Mhe project provides for -he procurement of anuir- reor, including btulldozcrs, graders, tractors and other vehicles to carry out the programu. -9- Fire Control 31. To control fires, a permanent fire unit would be created and equip- ned in each of the three divisions. Nine fire towers would be constructed at i5 km intervals and various water points would be installed. About 400 km of fire breaks would be constructed throughout the project area, while slopes of hills and valley bottoms would serve as natural fire breaks. The fire breaks would be cleared annually, including those in about 25,000 ha already planted under the Mangoro afforestation program. Construction of Roads and Buildings 32. About 60 km of gravelled service roads would be constructed linking the project area with the outside all weather road network. In addition, about 840 km of plantation truck roads and 910 km of access roads would be built. rhe fire breaks would be connected with the plantation road system. 33. The project would provide housing, schools, stores, water supply facilities and village halls in each of the three Divisions to accommodate the project staff and laborers permanently employed under the plantation program. In addition, the quarters would have offices, a garage and a work- shop. The main quarters of the project area would be located in Moramanga. Buildings for the Central Division have already been constructed, while those for the Southern Division would be improved and expanded. The Northern Division, however, has not yet been established and new buildings would be constructed there. Research and Training 3L. A considerable amount of research has been carried out by the Government in the Mangoro plantation area. This research would be continued under the project to facilitate further development of the afforestation program. It would include studies on yields, growth, use of fertilizers and disease control measures. 35. A training center would be established at the central division, headed by a professional forester. Plantation staff would be instructed on the establishment and maintenance methods of large scale plantations. The project includes funds for the provision of staff and equipment for the center. Pasture Improvement 36. During project implementation the Government plans to improve pastures and rice cultivation for subsistence in the project area. In support of this program the project would provide $100,000 mainly for the introduction of stylosanthes (a subtropical legume, which remains green and provides good feed during the dry season) on 2,000 ha of pasture within the project area. The use of stylo has been successfully tested in Madgascar and should considerably increase the carrying caDacity of the natural pastures used by the villagers for communal grazing. -10 - Future Project Preparation 37. The project includes funds for technical assistance to the Government to prepare a second phase of the project. About $500,000 is included for the preparation of other projects within the agricultural sector as referred to in paragraph 16, This would enable the Government to hire experts when needed to strengthen its own services. Project Implementation 3P. The project would be executed by FANALAMANGA, a corporation (Societe d'Economie Mixte) to be established by the Government with substantial admin- istrative and financial autonomy. Initially, all shares of FANALAMANGA would be owned by the State, except for one percent of the shares, which will be held by the Banque Nationale Malgache (BNM), the Malagasy Development Bank. The structure of FANALAMANGA would allow for local and foreign private partici- pation at later stages of the Mangoro afforestation program. As a contribution to its equity capital, the Government would make available to the corporation: (i) the existing plantations, facilities and equipment of the Mangoro plantation scheme; (ii) the Government's own contribution to the cost of the proposed pro- ject, and (iii) an amount equivalent to the proceeds of the Bank loan and IDA credit as they are withdrawn from Bank/IDA for project implementation. The establishment of FANALAMANGA would be a condition of credit and loan effectiveness (Section 6.01 (b) of the Loan Agreement). 39. The Director General of FANALAMIANGA would have overall responsibility for project implementation, and the appointment of a suitable candidate to this post would be a condition of credit and loan effectiveness. (Section 6.01 (c) of the Loan Agreement) He would be responsible to a Board of Directors, including representatives of the Directorate of Forestry (DF) within the Ministry of Rural Development, as well as representatives of the Ministries of Economy and Finance, Interior, Planning, Public Works, and Tranport. The Board would have full responsibility for policv and financial matters. FANALAMAINGA would take over part of the existing organization of the Directorate of Forestry, and would take over the budget, personnel and functions of the existing Mangoro plantation scheme. The Director General would be supported for two years by an internationally recruited Forestry Specialist who would advise on overall project implementation. bo. The day to day management of the project would be under the direct supervision of three Assistant Project Directors -- the Plantation Director, the Engineering Director and the Financial Director. The Plantation Director would oversee the afforestation program, fire control and village development. The Engineering Director would be responsible for the construction of roads and fire breaks and the maintenance of equipment in the workshops and would supervise a Workshop and an Electrical Engineer to be stationed at the Central Division. At the Government's request, the Workshop Engineer would be re- cruited abroad and assisted by a local counterpart. The Financial Controller would be responsible for the project accounts, cost control and procurement. - 1J - The Plantation Director, the Financial Controller, the Forestry Expert and the Workshop Engineer whose qualifications and experience should be satis- factory to the Bank, would be employed within 7 months of the signing of the Development Credit and Loan Agreements (Section 4.03 (b) of the Loan Agreement). Ecology 41. The Mangoro afforestation program would improve the ecology of the Mangoro Valley by reducing erosion and improving soil fertility and water retention. The Government has given assurances that during implementa- tion of the program sound environmental practices would be followed, in partic- ular with respect to the eventual construction and operation of the pulpmill in order to minimize any adverse ecological effects (Section 3.07 (a) of the Loan Agreement). Project Costs and Financing L2. The total cost of the project, exclusive of taxes, is estimated at $17.2 million with a foreign exchange component of $4.5 million. Imported materials and equipment required for the project are exempt from taxation. While some value added tax is levied on the purchase of local materials, their impact is negligible. The costs of the project include about S3.2 million for the afforestation program (including $0.9 million for fertilizer to be applied before first planting), $2.9 million for roads and tracks and fire protection, $5.8 million for project management, buildings, vehicles and equipment, $0.8 million for research, training and studies and $0.1 million for pasture improvement. Cost estimates are based on 1974 price levels; physical contingencies and provisions for expected price increases amount to $4.4 million. The proposed IDA credit and Bank loan would cover 78 percent of the total project cost, including a substantial portion of the local cur- rency cost. The Government would finance the balance of the local cost esti- mated at $3.7 million. Procurement and Disbursement 2J3. Contracts for service roads and staff houses and for vehicles, eluip- ment and fertilizers exceeding $30,000 would be awarded after international competitive bidding in accordance with Bank/IDA guidelines. Domestic contrac- tors would be granted a margin of preference of 7.5 percent. Domestic manufac- turers would be granted a margin of preference equal to the amount of customs duties or 15 percent of the c.i.f. price of these goods, whichever is lower. Orders below $30,000 would be awarded in accordance with Government procurement procedures which are satisfactory. In view of the remo eness of the project area, and the nattire of the work, other infrastructure- work anid the ei:tablish- ment of the platntations are unlikely to attract either Iccal or international competitive bidding and would thierefore be carried out under fcrct acc(c.nt. - 12 - J4!I. The proceeds of the Bank loan and the IDA credit would be disbursed over a period of six years, first from the credit and then from the loan, against (a) 75 percent of both foreign and local expenditures for civil works by contractors and by force account, (b) 100 percent of foreign expenditures or 75 percent of local expenditures for vehicles, equipment and fertilizer, (c) 100 percent of foreign expenditures and 75 percent of local expenditures for pasture improvement, consultant services for research, training, for pre- paration of a second phase project, as well as other projects within the agricultural sector. Since the afforestation program for 1974-1975 has already begun, an amount up to $100,000 would be retroactively financed to cover salary expenditures and administrative costs after November 1, 1974. Economic Benefits and Rate of Return )5. As indicated in paragraph 21, the purpose of the 35,000 ha of pine plantations is to produce raw material for a pulp mill to be constructed near Moramanga. The economic justification of the project is therefore based on the entire Mangoro afforestation program including the plantation of a total area of 96,000 ha, logging operations over 6,000 ha of 15-year-old pines each year, the construction of the pulp mill and the subsequent wood processing. The economic benefits of the program are chiefly determined by the revenues from the expected pulp sales. 46. On the basis of experiences obtained in similar afforestation pro- grams in Madagascar and other countries, it can be expected that by 1985 the pines of the Mangoro plantations will have grown sufficiently to permit log- ging operations and pulp production to start. The construction of the mill at Moramanga would begin in 1982 and would be completed in 1985. The site of the mill has been projected at the junction of the Mangoro river and the highway and railway from Tananarive to Tamatave Seaport. Total construc- tion costs are estimated at about $140 million with a foreign exchange component of about S80 million. The mill is expected to operate at a satisfactory profit. FANALAMANGA will eventually be in charge of the construction and operation of the pulp mill and the Government will explore and request the financial partici- pation of the private sector in the corporation for this purpose. L7. While prices for pulp remained stagnant over the last two decades, in 1972 increasing demand reached the point where shortages started to occur, resulting in a significant price increase. Although consequently pulp produc- tion is expected to expand, a recent analysis by FAO based on current projec- tions of consumption and production indicates that the current shortage of pulp will continue at least during the next decade. Tests of pulp produced from pines grown in the project area compare favorably with pulp produced in other parts of the world. In addition, the location of the plantations and the pulp mill close to the Indian Ocean, provides Madagascar with an advantageous position for exports of pulp products. As most of the pulp is expected to be sold on the West European markets, the reopening of the Suez Canal would strengthen the competitive position of the mill. At ftll develop- ment (21 years after project inception), the annual value of production of - 13 - the Mangoro afforestation program (including the pulp mill) is expected to reach S56 million. After deducting the cost of production, the net annual incremental economic benefits attributable to the program would be about $31 million. I8. The economic rate of return of the program is estimated at 13 per- cent. The project would provide regular employment for about 1,600 workers who to the extent feasible would be recruited from the villagers living in the Mangoro valley. The villagers would also gain opportunities to sell agricultural products to project laborers. The ecology of the valley would be substantially improved by preventing further erosion, increasing soil fertility and water retention. In addition rural roads in the project area would be upgraded and pastures improved. 4O. The main risk involved in the project concerns the projected price of pulp and consequently the viability of the proposed pulpmill. Therefore, although present. price forecasts for pulp are favorable, a conservative market price has been used in the economic evaluation to take into account the possibility of a slower price increase than expected. A substantial re- duction in pulp prices, however.is not likely in view of the projected in- crease in demand for pulp and the limited possibilities for expanding mill capacity and wood resources in the world in the next ten years. Another element of risk is that the projected yields of the plantations,and hence the production rate of the pulp mill,are based on yields from the first years of the Mangoro afforestation program and from programs in comparable areas in Madagascar and elsewhere in the world. A slower growth rate of the pines than expected would necessitate a larger plantation area than the 96,000 ha envisaged or a reduction in the size of the pulp mi11. If growth and price conditions during the further development of the Mangoro afforestation pr6- gram were to alter present forecasts significantly, sufficient flexibility as to the size of the plantations, the scope of the mill and the type of pulp to be produced would still be available at the beginning of the second phase of the plantation program when growth and market conditions would be reevaluated.Comparative calculations at present price levels show hatn. there are several alternative uses of the plantations' output for different vpes of pulp or pulD and paper mills with rates of return at acceptable levels. 50. In the unlikely event that neither the proposed pulp mill nor any other type of wood processing facility were built, the raw material from the project plantations could be exported as logs or wood chips. There is an increasing demand for these products on the world market, and current indica- tions are that there should be little difficulty in marketing the project output. If the output from the Mangoro plantations were to be exported as wood chips, it is estimated that the economic rate of return of the project would be about 10 percent. - 14 - PART V - LEGAL INSTRUNENTS AND AUTHORITY 51. The draft Loan Agreement between the Malagasy Republic and the Bank, the draft Development Credit Agreement between the Malagasy Republic and the Association, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association and the text of draft resolutions approving the proposed loan and credit are being distributed to the Executive Directors separately. 52. Features of the Loan and Development Credit Agreements of special interest, dealing with the protection of the rights of the villagers in the project area and the creation and management of FANALAMANCA, are referred to in paragraphs 27, 38, 39 and 40 of this report. In addition attention is drawn to Schedule 1, para. 4 of the Development Credit Agreement, which pro- vides that disbursements will be made first from the Credit and then from the Loan, except in regard to special commitments provided for under Section 5.02 of the Bank's General Conditions. 53. I am satisfied that the proposed Loan and Credit would comply with the Articles of Agreement of the Bank and of the Association. PART VI - RECOMMENDATION 5~4. I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President Attachments December 5, 19/4 ANNEX I Peg. 1 of 3 pges IUJNTRY DATA-- MALAGASY REP. ARIU k 2 POPULATION DENSITY 592,000 k42 77 illion (mid-1973) 85 Per 1n2of arable land SOCIAL flDICATORS Reference Countries Mala3 e 5nw SyrrMic/oalOJ _g a. 1.20 19 970 19 f0 fNlP PER CATA US$ (ATLAS IXASIS) .. 140/a 170 /a1 320 /a 1.30/a DfEMGRAPITC Crd3iTrth rate (per thousand) 44 /n 46 /c 4l /d ,.i /d 3I /e Crude death rate (per thousand) 256T 1S77 [5 / 77 Infant mortality rate (per thouand live birtha) 133 /b 102 T 55 2 4I T tLfe expectancy at birth (years) 42- 4d /d 51b S9 Oross reproductime rate 2 2.9 /b 3.2 J 3.S 2.l Population growth rate /3 2 - 2.5 /3 2/ 29 /g PImpulatios growth rate - urba 4/h 5 T, 5 Age struoture (percent) O-14 39 /1 4; 4d /w g 43A 15-6b 5 77 52 iTh "d 7e3T 65 and over 37T 3 0T 3 477 10.eodency ratio A o1 0 ,n 0.9 /n 1.2 7T 1.0 in 1 7.nP Urban populatio- a0 percent of total 11 /h h!, / j gn IV, /k 2 /e - Family planning: N. of acceptors naoulativ- (thoo. .. 20 T No. of ueers (% of married asoonn) iS 7T 91lPL0Y)WX Mt b- force (thouoande) 2.1X() /r 3,200 /n 5,103 /IC , 2,100 /m, j ) /e Percentage ewplcyed in agricoltors 93 77T T 90 /m,o /5. 77 Percentage unewployod . - 4 T, t 7T INOOhB DISTRINUTIIN Percent of national Lcose roceiced by highest 5% 39 .22 / n,a Percnat of national income received by higheot 20% h1 .2 /0,vu Percent of national inceoe recnived by lowest 20% c . . / w Pereent of national income raceivod by lowest 50% 14 12 /m,v DlSlRIWTI3O OF LAND OIEN3RSM S ownad by top 10% of oneors % owned by semallet 10% of owoers HEALTH AND NU1TITION Population per ydsicion 9, /10 /o 10,120 lab 'y 3 ,,0 3 r00 /e Popelatioc per nursing per-so 2,42077 a 3 300 l,30 T a,4fC 1,Od) 77t0 Population per bospital bed 4,70 T 30 770 1,010 30 Per capita calorie supply as % of requirements /5 .r /ab 91 "lo 10 /ac /e an Per capita protein supply, total (grams per dayrf6 S1 777 51 d0 :o9 /ac ' /e 7t Of which, animal and poise 1' los 1' 250 3 laT 20 /0,0 Death rate 1-8 years /7 3, 6^ /ad ZEDCATION AdJuated /8 primary school earolilent ratio 52 4 6. A8Jak - e Adjusted Z! secondar,y schol scrollmnt ratio L1 9 /ao 39/7ak Ia T Tears of schooling previded, first end second leve1 13 31 13 129 k 33 Vocational enrollment 00 S of saec. chool enrollment 9 2 1 3 /c Adult literacy rate % ; / 30lL af 4 a 09 T.a hOUSDIC Average No. of persons per room (Crban) Percent of occupied units withxt piped water Access to electricity (as % of total population) Percent of ta-r population connected to electricity R2adlo reroI-- per loro population 1S / do /t 4c /n- a 220 /t 56 Passenger oars per 1000 pnpulation 4 77T 7t,h 9 777ai 5- 2 al e Electric poer cmemption (kwh p.o.) 20 3o al 152 3.7 Newsprint con-omption p.c. kg per year C 33 0,0 0.5 0.2 3.; 77 Noteos Figures refer either to the latest periodo or to account of onniro-anntal tenperatore, body weights, and the latest year, latent perioda refer in principle to, diatribatlon by age and osx of national populations the yea-. 1956-60 or 1966-70; the latest yaars in prin.. / Protea s- n.ad (requirwtant) for all countries an eotab- ciple to 1960 and 1970. loibd by UKIA Eoonmlin Reaearch Service provide for a sininam /I The Par Capita GNP e.tioate ia at mrrket prices for slLovca-, of 60 graote of total protein Per day, and 20 grams of yraro other tko, 1960,calcu.ated by the anse coovaraion a-i-u .L.__ psIse protein, of which 10 grvan hoald be anaml technique as the 1972 World Beak Atlaes protein. Tese atandard. are somwehat lower than thoas of 75 12 Average smber of daughters per woano of reproductive graos of total protein and 23 grars of aninrl protein as an age. average for the world, proposed by FAO in the Third World Food ¾ Polpulation gro-th rates are for the decod ending in SurV. 1960 and 1970. /7 Some stadso I ays suggested that crude death rates of children A¾ Ratio of under 15 and 65 and -ocr oge brackete to ages 1 throagh 4 say be used ao a first appromtiation index of those io lobor force bracket of ages 15 through 64. salcotriti-o 7¾ FAO reference standards represect physiological re- A Parceotage enroll d of correspooding popaiation of school age quiremnct6 for ocnoal oCtiity and health, taking as deftoed for each country. /a 1972 /o 1962, roseS pop;lotion only; /c 196n; / I, cd i,,ntc- /e West loloycon /f inoiat So-rnon t-ce-s sooo ? i Iote oJ t cords; /g 19fO-72; /i C-t-cs hanng soe ti -a 5,000 - / 2-a5i 2,000 or (ore lhalitanto; /0 r Citieo, Mohalcaz bt._and Mo/tika C=nters a I IR /n iiatbn af oopalotiola nder 1S and 67and over age gro t? to p5 0at0o0 i¾.a ago gr.so /a L fr-n i. ge oracoo. 15-59; /p Ratio of populatono under 15 and b and over to total labor for-a /7i ikac: a-oo 0.) 10,000 or nore inhabitants; /r 1957; /o 1965; /t Eitanic;e /0 ORG en,oaate /v Raly- 01 is /w [Cn; A/x 1962; / N-ocor aIn thc regtster, no al woking in j u couotry /z onsoo 0)0 00, antoa:) viuxoc ad oqinantearec; /a denoo 1) uc-acnt oraice ol, /777 1.0ab 3 /an er sss v/ad 1968; /oe ineadingteach-rirail at thir' lovl; /.i 15 ye s a 777, -hal.. ..lp .:d0y- /an Inclading venicl oporatyd 02 psl o ,-the g-aernn--tah -anoroty , araiatons 7 10<1) 1 i:: ncom rrcTal vohcles; /aJ Inai.deLg oll pr-nng 000d -a_sr,g paper; /ak Includicg IfRRWA schools /0.~~~ ~ . .. 3z1)0)010 0 mnotnoil. L OlarSofatinc of ito econooic strnct-e, -fl1nta4n-g a 9 igi rate o- -oocn -owth -)0 - 0 :00 - !,I.0 loeot -1 fnlfire nakes it an app-p0-Late 'anj-otiajc 00 ry. R5 Ontobir 11. 1974 ANNEX I Page 2 of 3 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1972 ANNUAL RATE OF GRO'TH (%, constant prices) us$ Mln. % 1967 -71 1972 GNP at Market Prices 1,041 100.0 3.6 1/ - 3.2 1/ Gross Domestic Investment 148 14.2 4.1 _24.5 Gross National Saving 89 8.5 3.7 / -10.7 2/ Current Account Balance - 59 _5.7 Exports of Goods, NFS 199 19.1 3.4 - 1.9 Imports of Goods, NFS 2314 22.5 3.7 -14.3 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1970 Value Added Labor Force-/ V. A. Per Worker US$ Mln. % Mln. % US $ % Agriculture 265 29.5 2.6 81.3 103 36 Industry 267 29.7 0.2 6.2 1,335 475 Services 368 40.9 0.4 12.5 920 327 Unallocated .__ Total/Average 9 100.0 3.2 100.0 281 100.0 GOVERNMENT FINANCE General Government Central Government (FMG Bln.j % of GDP (FMG Bln. ) % of GDP 1972 1973 1972 19 -7 2 1972 1972 1970- 72 Current Receipts 52.5 52.3 19.2 20.8 41.4 15.2 15.7 Current Expenditure 49.1 50.4 18.0 18.3 34.7 12.7 12.5 Current Surplus 3.4 1.9 1.2 2.5 6.7 2.5 3.2 Capital Expenditures j 18.8 11.6 6.9 4.9 15.0 5.5 4.9 External Assistance (net) 3.5 5.4 1.3 1.5 MONEY, CREDIT and PRICES 1966 1,69 1970 1971 - 19 72 1973 !Billion FMG outstanding end period) Money and Quasi Money 344.1 45.6 52.3 55.9 62.3 67.3 Bank credit to Public Sector - 6.1 0.9 - 3.4 - 4.0 1.2 3.0 Bank Credit to Private Sector 31.2 41.2 48.5 54.8 55.4 55.2 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 18.8 20.4 21.0 20.9 23.1 General Price Index (1963 = 100) 108.4 114.5 117.8 124.2 131.1 135.1 Annual percentage changes in: General Price Index 2.7 3.8 2.9 5.4 5.6 6.1 Bank credit to Public Sector .. . . . . 150.0 Bank credit to Private Sector . 5.5 17.7 13.0 1.1 0.14 NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 1/ GDP Domestic Savings / Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. 4/ Budzets of the Central Government and of the Drovincial zovernments and the annexed budgets. / Capital expenditures do not include those financed by foreign grants. not available not applicable ANNEX I Page 3 of 3 pages TRADE PAYMENTS AND CAPITAL FWWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1970-72) *20 1971 1972 US $ Mln % (Millions US $) Exports of Goods, NFS 171.0 185.8 199.0 Coffee 41.2 28.6 Imports of Goods, 14FS 196.2 24h.9 234.6 Cloves 17.9 12.4 Resource Gap (deficit -7-) " - 59-1 - 35-° Vanilla 13.6 9.4 Beef 13.2 9.1 interest Payments (net) - 1.9 - 2.6 - 2.2 Sugar 5.1 3.5 Workers' Remittanc2s - 8.6 - 8.6 - 9.0 Minerals 6.4 4.4 Other Factor Paymenits (net) - 11.1 - 12.5 - 14.9 Net Transfers - 1.8 .2 2.3 All other commodities 6 32.5 Balance on Current Account - 48.6 - 79.6 - 4 Total 144.3 100.0 Direct Foreign Investment 0.4 3.2 - 0.4 EXTERNAL DEBT. DECEMBER 31, 1973 Net MLT Borrowing Disbursements (9.9) (15.3)( 11.2) US $ Mln Amortization -(S.) (6.2 ) O ) Subtotal 4.9 9.1 5.2 Public Debt, incl. guaranteed 116.S Capital Grants 66.3 66.6 66.o Non-Guaranteed Private Debt Other Capital (net) - 3.6 _ - 0.8 Total outstanding & Disbursed Other items n.e.i 4.3 - 2 6.°. Increase in Reserves (+) 23.7 - 3.1 17.5 DEBT SERVICE RATIO for 1973 Gross Reserves (end year) 60.0 54.8 73.5 Net Reserves (end year) 49.9 46.8 63.3 Public Debt, incl. guaranteed 4.9 Non-Guaranteed Private Debt F'uel and Related Materials Total outstanding & Disbursed Imports 9.6 10.5 13.4 of which: Petroleum 9.6 10.5 13.4 Excports of Refined Products 5.6 5.3 6.5 2 IBRD/IDA LENDING,October 31, 1971 (Million US RATE OF EXCHANGE IBRD IDA 1970-1971 1972 Outstanding & Disbursed 10.5 -..6 US $ 1. 00 FMG 277.71 TuS $ 1.00 F MG 252Uniure1.244. FMG0 1. 00 = US $ 0.00360 FMG 100 - US $ 0O 0396 Outstanding l. Undisbursed 24u 1?73 Jan.-1Sept. 197 US $1.00 - T-'l* 2" US $ 5. d 1 = FMG 243.24 FMG 1.0o = Us $ 0.00451 FMG 1.00 = US $ 0.00111 l/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. 2/ Prior to exchange adjustments. not available not applicable November 25, 1971 Eastern Africa Regional Office ANNEX II Page 1 THE STATUS OF BANK GROUP OPERATIONS IN MALAGASY REPUBLIC A. STATEMEMT OF BANK LOANS AND IDA CREDITS (As at October 31, 1974) US$Million Amount (less cancellations) Loan or Credit Number Year Borrower Purpose Bank IDA IJndisbursed 90-MAG 1966 MALAGASY REP Roads 10.0 0.1 510-MAG 1967 Education 4.5 -- 134-MAG 1968 Roads 4.5 -- 570-MAG 1968 Roads 3.5 -- 585-MfG 1969 Livestock 2.8 0.2 200-MAG 1970 Port 11.4 1 3.1 214--AG 1970 " Irrigation 5.0 0.5 322-MAG 1972 Irrigation 15.3 14.9 351-MAG 1972 Roads 15.0 11.1 876-MAG 1972 Roads 15.0 15.0 488-MAG 1974 " Railways 6.0 4.9 506-MAG 2/ 1974 tt Livestock _9.6 9.6 TOTAL 25.8 76.8 59.4 of which has been repaid _ Total now held by Bank & IDA 3/ 25.8 76.8 Total undisbursed 15.2 4h.2 59.1 1/ Including a supplementary credit of US $11.8 million made in 1973. 2/ Not yet effective. 3/ Prior to exchange adjustments. ANNEX II Page 2 B. PROJECTS IN EXECUTION-:/ Credit No. 90-MAG - Road Project; $10 million credit of August 2, 1966; Closing Date: December 31, 1974 The project is now completed with the exception of a feasibility study and a master plan of three road sections, scheduled for completion by December 31, 1974. Loan No. 585-MAG - Beef Cattle Development Proiect; $2.8 million loan of February 14, 1969; Closing_Date: June 30, 1975 This project was intended to introduce to Madagascar a new system of land use for beef production. To that end, six cattle ranches were to be developed, one of which would also produce stylosanthese seeds to improve pasture. In certain respects, particularly in pasture development, the project has been successful. On the other hand, it has encountered from the outset a number of serious problems. Some of them were of a technical nature in that the imported Brahman bulls were susceptible to steptotricosis which was not foreseen at appraisal. The surviving animals and their progeny, which proved resistant to this disease, will, in fact, make a useful contribution to the improvement of Malagasy livestock but at a considerably greater cost than would have been encountered had this problem been anticipated. The major problems, however, resulted from the fact that the scheme had been devised as an enclave without taking full account of the presence, on the ranch area, of farmers who had been using large tracts of land for traditional grazing and for the cultivation of paddy. This created strong opposition against the ranches and resulted in substantial cattle theft, destruction of fences and burning of pasture. Relations 'were also made more difficult by the fact that ranch management had been entrusted to expatriates who were unable to establish contact with the local population. Following discussions with the Government, however, considerable progress has been made in modifying the concept of the project to make it possible for the local population gradually to share in the benefits of the project and to use the Oranch as a focal point to spread modern tehnology in the area. The second livestock project (Credit 506-MAG of August 21, 1974) includes the financing of three pilot development schemes in this region which would assist villagers in the development of livestock and mixed farming enterprises. In addition, expatriate ranch managers have been replaced by Malagasy nationals. As a result, relations with local farmers have improved considerably, cattle theft has been drastically curtailed and the burning of pasture has been reduced. In short, the beginning of an effort to relate the ranches to the people of the area has been made. The results 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any prob- lems which are being encountered and the solutions taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weak- nesses in project execution. ANNEX II Page 3 appear to be favorable but further developments will need to be followed closely. A Bank supervision mission just returned from Madagascar and its report is under preparation. Credit No. 200-MAG - Tamatave Port Proiect; $11.4 million credit of June 19, 1970: Closing date: December 31, 1974 Construction of the largest project element, the port extension and improvement, has been completed four weeks ahead of schedule. Considerably delays, however, have been experienced in inviting bids for the tanker terminal, consequently the closing date will need to be extended by about two years. On the other hand, the reorganization of port administration is proceeding more slowly than expected. As management assistance provided under the Credit had not been very effective, IDA agreed at the Government's request to the employ- ment of Malagasy nationals in the most important posts of Director General and Chief of Finance of the Port Authority. Port financial and administrative management is still unsatisfactory, partly as a result of labor unrest. The Government has agreed to give administrative support to the Director General and engage accounting consultants for the port. Credit No. 214-MAG - Lake Alaotra Irrigation Project; $5 million credit of August 17, 1970; Closing Date: June 30, 1976 The project's main objective is the expansion and intensification of paddy production in the Lake Alaotra Region by rehabilitation of the irrigation and drainage networks on 4,000 ha and construction of such net- works on about 6,000 ha of marshland. In addition to the 1,200 families already on Project lands, some 1,700 farming families will be settled. After initial delays, Project construction has been progressing satisfactorily and the major civil works were completed by the end of 1973. in accordance with the revised schedule. SOMALAC, the Project Authority, has suffered from poor management which has had several consequences, principallv the fact that virtually no progress has been made so far with respect to settlement of farmers. However, changes have been made and indications are that satis- factory progress will be achieved in the near future. A competent new manager is in post, a study of infrastructure and general layout of the villages has just been completed and works have started. Finally, a competent consulting firm has been engaged to re-structure SOMALAC's accouning system. Credit No. 322-NAG - Morondava Irrigation and Rural Development Project; $15.3 million credit of June 30, 1972: Closing Date: June 30, 1979 The projecL as appraised aimed at the production of rice on 4,f(JU ha and tobacco and cotton on 2,70U ha and 1,9Ul0 respectively. Pro&ect works in- clude construction of a diversion darn, rehabilitation of main canals., gravity and sprinkler irrigation systems, drainage, on-farm developnient works and construction and extension of villages. The credit became effective in April 1973. Since then, progress on preparatory work has been broadly satisfactory but the Project is facing serious problems due principally to heavy increases ANNEX II Page 4 in implementation costs. Recent tenders for the major civil works are more than double the appraisal estimates and it is probable that overall imple- mentation costs will be greater in about the same proportion. The cost in- crease is approximately equally attributable to both design changes and to increases of costs for materials and construction. Estimated total project costs would amount to at least $6U million, instead of S27 million as ap- praised. Because project benefits have not risen commensurately it would now seem that the project as initially envisaged is unlikely to be economi- cally viable. Any substantial reduction of project costs would require a restructuring of the Project and a reduction in its scope. A recently re- turned IDA supervision mission, which held lengthy discussions with the Covernment on the suitability of alternative options, will complete its economic and technical analysis in early December. Credit No. 351-MAG - ($15 million) and Loan No. 876-MAG ($15 million); Third Highway Project of January 17, 1973: Closing Date: December 31, 1977 The major components of the project are construction works on about 400 km of primary roads in the central part of the country, and consulting services for detailed engineering of a further 200 km of primary roads. Consid- erable project cost increases are expected as a result of price escalation. Most of the contracts under this project have been awarded, and physical pro- gress of the project is generally satisfactory. Bid proposals for the recon- struction of the road RN1 between Arivoninamo and Analavory were about 50 per- cent higher than the original estimates. A contract for the construction of this road has not yet been awarded pending discussions between the Govern- ment and the Bank on design standard reductions. Credit No. 488-MAG - Railway Project: $6.0 million credit of June 27, 1974; Closin_ Date: June 30, 1976 The Project will assist in financing part of the Malagasy Railways' 1973-75 investment program, services of consultants to improve the railways' management and operations; and technical assistance to strengthen the planning cell of the Ministry of Amenagement du Territoire. The credit was declared effective in September 1974, and project execution is progressing satisfac- torily. Credit No. 506-MAG - Village Livestock and Rural Deyelomen Project: $9.6 million credit of August 21, 1974; Closing Date: December 31,L 1979 The project is a broadly based program to assist traditional live- stock and rural development in the Majunga Province and the Tsiroanomandidy Sub-prefecture of Tananarive Province, through the provision of improved veterinary and extension services, as well as essential rural infrastructure in about 2,000 villages in the project area. Conditions of effecitveness are to be fulfilled by December 30, 1974. ANNEX III Page 1 MALAGASY REPUBLIC FORESTRY PROJECT Loan/Credit and Project Summary Borrower: Malagasy Republic Amount: Bank loan and IDA credit, each in various currencies equivalent to $6.75 million. Terms: Bank loan: 25 years, incluiding a 10-year grace period with interest at 8 percent per annum. IDA credit: standard. Project Description: The project would assist the Government in implementing an afforestation program of 96,000 ha pine plantations in the Mangoro valley and consists of: (i) Afforestation of 35,000 ha of pine plantations; (ii) fire control and maintenance of all plantations within the project area; (iii) construction and maintenance of service roads and plantation roads. (iv) construction of Project Headquarters and staff and labor facilities (v) research, training and future project preparation of future forestry projects and other projects within the agricultural sector; and (vi) pasture improvement on about 2,000 ha within the project area. Estimated Costs: The estimated cost of the project is US$17.2 million equivalent including a foreign exchange component of US$4.5 million. Details are as follows: ANNEX III Page 2 Foreign Exchange Local Foreign Total Component ----(US$ million) (%) Afforestation 2.0 0.3 2.3 13 Fertilizer 0.4 0.5 0.9 66 Roads and Tracks 1.3 0.5 1.8 28 Fire protection 1.0 0.1 1.1 9 Project management 1.9 0.1 2.0 5 Buildings and housing 1.7 0.2 1.9 10 Vehicles and Equipment 0.6 1.3 1.9 68 Research, training and studies 0.3 0.5 0.8 63 Pasture improvement 0.1 - 0.1 0 Sub-total 9.3 3.5 12.8 27 Physical Contingencies and price escalation 3.3 1.1 4.4 23 Total Project Cost 12.6 4.6 17.2 26 Financina Plan: Percent of Local Foreigpi Total Total ---(US$ '000) … Bank Loan/IDA Credit 9.0 4.5 13.5 78 Government 3.7 - 3.7 22 Total 12.7 4.5 17.2 100 Estimated Disbursement: Bank Fiscal Year IDA Bank (USS Million) 1975 1.10 - 1976 4.60 - 1977 1.05 0.80 1978 - 1.70 1979 - 1.90 1980 - 2.35 13.5 Procurement: Procurement of equipment and vehicles (S2.0 million) fertilizer ($0.9 million' and civil works contracts ($2.1 million, for service roads and housing) exceeding $30,000 would be awarded after international. competitive bidding in accordance with Bank/IDA guidelines. Domestic ANNEX III Page 3 civil works contractors would be granted a preference of 7.5 percent. Domestic manufacturers would be granted a preference equal to customs duties or 15 percent of the c.i.f. price whichever is lower. Contracts below $30,000 would be awarded in accordance with Government procurement procedures. The establishment of the plantations and other infrastructure work would be carried out under force account. Consultants: The following consultants would be internationally recruited: (1) a forestry specialist, who would assist the Director-General of FANALAMANGA, the corporation to be created to execute the project; (2) a workshop engineer, who would be stationed at the Central Division of the project headquarters in the Mangoro plantation area: (3) consultants to assist the Government in the prepa- ration of specific agricultural projects. Economic Rate of Return: 13 percent, based on sales of pulp. Appraisal Report: Report No. _590-MAG, dated Deccinber i, J?7. Maps: IBRD 10923, 10924 MANA - F~~~ ~~~~~ . , - -,=_ ii~~~ ~~~~ M~ ,';;;4. _; I I~~ ,'' ._. . ..~~. .. - I~. I,,_'. > ~ ~ ~~~~~~~~~~~~~~~~~ ,- X 1. a r '~ ~ ~ ~ ~ ~~ ~ ~~~~~~~~~~~~~~~~~~~.. t I I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ i - I - .~~ ~ . , _ / --~~~~~~~~~ IBRD 10924 4t 4' 'o 4E 50 MAY 1974 -12 l 2t MADAGASCAR - Diego Suarez MANGORO FORESTRY PROJECT + PINE PLANTATIONS NOSSI-BE mbilobe OM Mangoro Pwiect Area 1 + 1 Haut Onive Hell-villA + l Vohem . Antsirabe Antonio ? FMM MaMtsiwtra 4 : ExISTING ROADS J t \ N 1i Bituminous surfaced roads 'I All weother roads n i qeolonono Non permanent roads Anctlo$g9 ,p Railroads 7'Antisohihy - Antalaha 4 All weather airports Y LI ,, C + Rivers Belondrio'-o 0 so IODMI es IF VP 2 Majung. Mooonsetro Mitts r*,~~~~~~~~ungo + r ~~~~~~~~'~~k WSrl 0 50 100 350 200 2sa50 NXabnrloc9 ___ __ __ ___ __ __ ___ __ __ ___ __ __ ,3 *1 MopircI rirsoro <-,w - I r A i SO)' 6esolombyX Q -M _ , / ' : ~~~~~~Moentoa /t13boinoLely >)O°Tsorolonono gzSeorserono manon9 ; n..6Kn K i\Anororry.3M, Anoglo.enin t ~~~~~~~~Andrtomepoo ~ erive ( t / a °o rA }Z4 Vav ten'no Mozamibique , Mnooenvbn Z onoo '7 MoinSm n cn X XM 165t ; y .-boiond,oIco V1 PRCtK A..' - 4fl% +~Tarntave Ankozobe Tsiroonomandidy o / n Channel / arFa-jakomardraso n , am-I riro50 >1 adrornonji,~~~~~~~~~~~~~~~~ann / M,nndroozo MoIl3 %nv,r 1 7h~~~~~~~~~~~~~~~~~~~~~~~~Oe b.,tisornbo,o aEn Afrt tl drpso not 1arafanganao r-t tt r h, T ulearl\ IlOhJ}>f ~~~~~ j>Be~troko - 5 t.etiot y n __Midongy.do-Sod 2d B iet.oky / I -24- \ /24-- ; .- t a Bebly Berckctrs <-~M onnte.ino t;- X \ }1 _ - - ^ ~~~~~~~~~~~~~~~~~~~~~~~~F P I C A Arnponiy._/ : tA - F o r t ~~~~~~ ~~Dauphin s; 4A4AGASCA. 4? 4A- 46e 46