The World Bank Madagascar - Infrastructure Governance and Lifeline Connectivity Program for Results (P173932) Program Information Document (PID) Concept Stage | Date Prepared/Updated: 07-Jul-2020 | Report No: PIDC226883 Jul 06, 2020 Page 1 of 15 The World Bank Madagascar - Infrastructure Governance and Lifeline Connectivity Program for Results (P173932) BASIC INFORMATION A. Basic Program Data OPS TABLE Country Project ID Parent Project ID (if any) Program Name Madagascar P173932 Madagascar - Infrastructure Governance and Lifeline Connectivity Program for Results Does this operation Region Estimated Appraisal Date Estimated Board Date have an IPF component? AFRICA EAST 11-Jan-2021 31-Mar-2021 No Financing Instrument Borrower(s) Implementing Agency Practice Area (Lead) Program-for-Results Ministry of Finance Ministry of Energy and Energy & Extractives Financing Hydrocarbons (MEH), Ministère des Transports, du Tourisme et de la Météorologie, JIRAMA, Ministère de l’Aménagement du Territoire, de l'Habitat et des Travaux Publics Proposed Program Development Objective(s) Provide more inclusive access to infrastructure services; enhance the financial and fiscal sustainability of infrastructure service delivery; and improve the environmental sustainability, health and safety in the electricity and transport sectors in Madagascar COST & FINANCING FIN_SRC_TABLE1 SUMMARY (USD Millions) Government program Cost 400.00 Total Operation Cost 400.00 Total Program Cost 400.00 Total Financing 400.00 Financing Gap 0.00 Jul 06, 2020 Page 2 of 15 The World Bank Madagascar - Infrastructure Governance and Lifeline Connectivity Program for Results (P173932) FINANCING (USD Millions) Total World Bank Group Financing 400.00 World Bank Lending 400.00 Concept Review Decision The review did authorize the preparation to continue B. Introduction and Context Country Context A. Country Context 1. Development in Madagascar, a low-income country of 26 million people with a gross domestic product (GDP) of about US$14 billion (2019), was marked by a succession of deep crises and modest recoveries. Following a prolonged period of political instability and economic stagnation over the period 2009-13, growth accelerated over the last five years to reach an estimated 4.8 percent in 2019, its fastest pace in over a decade. The return to constitutional order was instrumental to this economic revival, as it contributed to restore investor confidence, reopen access to key export markets, reinstate flows of concessional financing, and encourage structural reforms. Between 2012 – 2019, the percentage of the population living below the international poverty line of US$1.90 (2011 purchasing power parity) per day is estimated to have fallen only slowly, from 77.6 percent to 74.5 percent, and remains significantly higher than the regional average of 41 percent. According to the Human Capital Index1, a child born in Madagascar today will be 37 percent as productive when she grows up as she could be if she had enjoyed complete education and full health. Madagascar is also highly vulnerable to natural disasters, including cyclones, droughts, and flooding. 2. The adverse economic, social, and fiscal impact of the COVID-19 crisis in Madagascar will be very substantial in 2020, calling for renewed attention to poverty reduction and more inclusive growth towards resilient recovery. Global trade and travel disruptions associated with the COVID-19 pandemic as well as domestic containment measures are expected to result in the first recession in Madagascar since the 2009 crisis, with GDP predicted to contract by 1.2 percent in 2020. Assuming successful containment measures, growth would recover to an estimated 4.0 percent in 2021, leaving a cumulative effect of the coronavirus outbreak after 2 years of -7.8ppt of GDP. Formal employment will be significantly impacted by contracting activity in tourism and manufacturing sectors, notably textile and apparels, while revenues from informal jobs in large urban areas affected by lockdowns will be significantly reduced. In this context, extreme poverty is predicted to increase in 2020 to 76.8 percent (US$1.9/day), undoing three years of consecutive declines. Vulnerable populations in urban areas are particularly exposed to economic hardship and poverty traps reflecting strict confinement measures. 3. The country’s development vision laid out in the National Development Plan (NDP) 2015–2019, is aligned with the multidimensional approach to development set out in the United Nations (UN) Sustainable Development Goals 1 Madagascar ranks 140 out of 157 economies. Jul 06, 2020 Page 3 of 15 The World Bank Madagascar - Infrastructure Governance and Lifeline Connectivity Program for Results (P173932) (SDGs). National reconciliation, reinforcement of democratic institutions, and better management of the economy are the NDP’s high-level objectives. The NDP is the Government’s medium-term planning tool to progress on the overarching ambition of the General Policy of the State (Politique Générale de l’Etat) to transform Madagascar into a modern and prosperous nation, characterized by sound governance, strong and stable growth, and wide access to high-quality public services. 4. Madagascar has limited fiscal space for public investment to meet its development objectives, in part because its fiscal balance is compromised by subsidies to state-owned enterprises. Tax revenue, as a share of GDP, has historically been among the lowest in the world, reaching 10.5 percent in 2019, still well below the regional average of 18 percent of GDP. Strategies for increasing tax revenue have been elaborated and efforts are under way, but progress has been slow and the COVID-19 crisis will set the domestic resource mobilization agenda several years back. Furthermore, the Government still allocates a large share of discretionary spending to: (I) unaffordable and poorly targeted subsidies and transfers to finance the losses of state-owned Madagascar’s Electricity and Water Utility (Jiro sy Rano Malagasy, JIRAMA) estimated at 1.5 percent of GDP in 2019 and (ii) inefficient and short-lived transport network rehabilitation investments that are not properly followed by maintenance policies. 5. The scaling-up of public investment to reinforce connectivity infrastructure is at the core of the government’s development strategy for post-COVID recovery. Over the past decade, annual public investment averaged 4.4 percent of GDP and the quality of overall infrastructure as measured by the Global Competitiveness index is low hovered at 3 (on a scale of 1 to 7). To fill key infrastructure gaps, the authorities aim to increase public investment to 10 percent GDP in 2023, and infrastructure is at the core of the Government’s Plan Emergence Madagascar (PEM; see below for details) as well as its post-COVID recovery strategy. Sectoral (or multi-sectoral) and Institutional Context of the Program 6. Madagascar urgently needs better infrastructure connectivity in energy and transport to improve people’s access to markets and basic public services. Madagascar’s challenging topography, mostly characterized by thin coastlines separated by a rugged high plateau cut by deep gorges and waterfalls, complicates the establishment of regional transport infrastructure and interconnected power grids. Only 12 percent of the Malagasy population is connected to the electricity grid. Even in the larger economic centers, electricity service quality is poor, severely impairing key export-oriented industries such as garment manufacturing and seafood processing. Frequent power outages and oscillating voltage cause an average Madagascar company losses equivalent to 13.6 percent of sales per year outside the capital city of Antananarivo, by far the highest among benchmark countries.2 Generators offer an alternative to firms that can afford it, but fuel logistics are costly and prone to shortages. More generally, limited transport connectivity leads to high costs and time for trade logistics and only 58 percent of the country’s population is estimated to live in areas where agricultural goods can be delivered at affordable transport prices (