World Bank DocumentNVot For Public s
Fiscal Year = January 1 to December 31
As at the time of negotiations in November 1973.
INTERNATIONAL DEVELOPMENT ASSOCIATION
REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT
TO THE MALAGASY REPUBLIC FOR A RAILWAY PROJECT
1. I submit the following report and recommendation on a proposed development credit to the Malagasy Republic for the equivalent of US$6.0 million on standard IDA terms to help finance a railway project. US$5.2 million of the proceeds of the credit would be relent to the Reseau National des Chemins de Fer Malagasy (RNCFM) for 20 years, including 3-1/2 years of grace, with interest at 7-1/4 percent per annum.
PART I - THE ECONOMY
2. An economic report entitled "Recent Economic Position and Prospects of the Malagasy Republic" (Report No. AE-11a) was distributed to the Executive Directors on January 27, 1971 (R71-17). A basic economic mission visited Madagascar in November 1972. A basic economic report has been prepared and has been submitted to the Government of Madagascar for review; it will be distributed to the Executive Directors early in 1974. Country data are attached as Annex I.
3. The economy of Madagascar has developed at a rather slow pace since the independence of the country in 1960. There was virtual stagnation up to 1965-1966 and income per capita actually declined during this period. .,.n the second part of the 1960s, the growth in real GDP barely kept up with :-ae population increase of about 2.5 percent annually. In 1970 a substan- tial rise in agricultural output and increases in world market prices for some of Madagascar's main exports resulted in a 10 percent growth in GDP. This was followed, however, by less favorable developments in 1971. Since then, the uncertainties about future economic strategy and policies result- ing from the change in Government have adversely affected production and incomes.
4. The sluggishness of. agriculture accounts for Madagascar's limited growth performance. Agricultural output has risen at about the same rate as population whereas production of foodstuffs lagged behind growth in domestic demand. Agriculture supports directly about 80 percent of the population and contributes about one-third to GDP. The development potential was there: the diversity of climatic conditions and the relative abundance of fertile land should have allowed faster agricultural growth. The relative stagnation can be explained largely by two major constraints, namely the difficulties of both internal and external transport and the lack of appropriate Government policies.
5. Most of the country is well suited for diversified agriculture. The
hot and humid coast produces coffee and bananas. in the northeast, there are
timber and vanilla, while the west is suited for cotton production and cattle
raising. Rice is the staple food; it is grown on more than half of the area
under cultivation and accounts for about half of the country's crop production.
About 15 percent of the island is considered as potentially arable land, of
which less than one-third is presently under cultivation.
6. While the country is sparsely populated - 13 inhabitants per square
kilometer - there is great pressure on cultivable land in specific regions.
In these areas, people have standards of living close to subsistenc:e level;
nutrition is deficient and child mortality can reach 44 per thousand. Another
difficulty has been the lack of an adequate inland transportation network.
Despite the heavy investments which took place in the last decade, only one-
third of the highway network is all weather roads and only 3,000 kilometers are
paved in a country where production centers may be as far as 1,200 kilometers
from the capital. Finally, it seems that the Government has not taken the
appropriate steps to ensure the farmers - through price incentives and
marketing facilities - that additional efforts in increasing output would be
rewarded. This may not have been particularly significant for some of the
main commodities that are exported, such as coffee, cloves and vanilla which
face inelastic international demand. With respect to rice and meat, however,
this policy which was aimed at maintaining low retail prices for the urban
consumer, affected adversely domestic production. Madagascar, which was a
net exporter of these two commodities in the 1960's is now facing shortages.
In recent years there have been net imports of rice and a substantial de-
crease in exports of meat. As a first step to rectify this situation, pro-
ducer price for paddy was recently increased by 40 percent which Government
cornsiders adequate at this stage, but little has been done as yet with respect
to meat prices.
7. Manufacturing has made a small contribution to overall econoiTic
growth although it has expanded faster than national income. It still is a
small sector occupying about 3,000 people or less than one percent of total
labor force; it contributed about 12 percent to GDP in 1972. Industrial
production is almost entirely devoted to consumer goods for domestic use.
As it expanded, th? -imports ct aood consumer goods declined as a percen-
tage of total merchandise imports frclm 42 percent in 1960 to 30 percent in
1971 However, the scope for furth;er import substitution is limited by the
.a:. ;'.-s of the monetized domestic DiarrEA. In addition, this industrial
g,7owth has required high protection agairst .rapilt.:itive imports and resulted
ia a sharp increase in imports of raw materials and intermediate products
utiized for local processinig.
8. During 1966-71, total capital formation averaged 15 percent of GDP,
a ratio probably too low for a country which needs to build its inf.astruc-
ture, promote its industry and develop its agriculture. During this period,
domestic savings financed 95 percent of investment and increased from 12.4
percent of GDP in 1966 to 15.6 percent in 1971. The Government contributed
about one-third to this increase. In fact, the private sector only saved
about 14 percent of its disoosable income between 1966 and 1971 and invested
less than it saved. According to the national accounts, private transfers
ab:'osRd aTmuncef cuiuThatirJy t about Fl'x? 32 billion (US$125 million) during t hisq : riJt
'G,otterinent p'il.i,.Les were not sufficiently geared to economic and social development. To a certain extent. they favored manufacturing and trade through protective policy; they favored urban consumers through price controls onl donestically produced "'mucdities; they favored high income groups through liberal fmnorts of g-oods that did not compete with local production. Invest- ments in agriculture and transportation were too low and the education system ,LS not adapted to the development needs for skilled and technical manpower.
Pi: the same time, reliance on foreign techlnical assistance was heavy and xccottrre to external capital aid was limited. This relative conservatism c.an be ex-plained in part by the inertia of a tradition-bound society, the
%O:r.ai fragme-ntation anJ the ethntc diversitv. It can also probably be capiaThaI bY oen institutior.al framewcrk inherited from the colonial period ;htcn wa:s unsuftable to a vigorous developmental effort.
10. Other impediluents to faster economic growth probably were insuffi- ci.ent investment in development projects, and inappropriate development pvllcies and programs. Madagascar's f!rst five-year development plan (1964- 68's vas based on specific production objectives, but the investment program was en;pressed In general terms only. In 1967, it became clear that progress of both investment and production was insufficient. By that time, public capital expenditure in the transportation sector had amounted to almost half of the target program, hut agriculture was lagging behind with only 34 per- cent. The Government decided to take remedial action and in 1968 introduced an iaterim program "Le Programme des Grandes Operations" which consisted in a number of investment projects, mainly in agriculture to be implemented over the subsequent two years. Since then, Madagascar has not had a formal deue:;nrpment program. A draft interim plan for 1972-1974 was prepared but r.,gz; never adopted.
H; . New economic policies have recently been announced as a result of more tchan a year of intern-al deliberations and international negotiations. The Government has decided to tighten its control on a number of basic sectors - including manufacturing - to increase the role of nationals in the management and ownership of private enterprises and to apply austerity ne.asures with respect to fiscal and import policies. In the framework of new cooperation agreements with France, Madagascar left the Franc Zone in -lily 1973. This withdrawal has been accompanied by the introduction of exchange :ontrol regulations and the establishment of an autonomous central bank, In August 1973, the Government announced its decision to prepare specif ic actioni programs and a set of economic policies which are expected to be discussed with a Bank mission in early 1974.
E2. The proposed economic organization thus entails a greater role for the pxublic sector as the most appropriate means to bring about changes in economic and social development, reduction in unemployment and income dis- parities. As a first step to establish closer relationship with the peasaut
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communities, the Government has abolished the head tax and the cattle tax, in addition to increasing the producer price for paddy mentioned in paragraph 6 above. In the longer run, it intends to associate villages with the manage- ment of development projects, the marketing and processing of agriLculture commodities and the distribution of agricultural inputs, including credit. To meet the goals set by the Government, substantial efforts have to be made by the country in terms of organization, investment, savings and mobilization of talents.
13. The Government intends to reduce its reliance on foreign technical assistance. In fact, Madagascar has a relatively large number of people with a high level of education and only a few positions in the Administration are occupied by non-Malagasy. In 1971, however, there were about 100,000 foreign- ers in Madagascar of whom 34,000 were French, mainly in industry and trade. Technical assistance provided by individuals or consulting firms was substan- tial. In order to avoid any disruption in the economy, detailed plans have to be prepared to train local management staff and technicians.
14. The balance of payments prospects of Madagascar are uncertain. The country's export trade is already diversified and, if appropriate policies are implemented, export earnings could increase by about 6 percent annually. Cof- fee, cloves, vanilla and sugar face inelastic demands on international markets; their future depends to a great extent on developments in these markets. They account, however, for only half of total Madagascar's merchandise exports. Investments and policies favoring production of meat, high quality rice, fish and medicinal herbs should permit Madagascar to regain its traditional export position. In addition, the association with the EEC should provide in the long run markets for an iTidustry more oriented cowards exports. There is al.so some potential for tourism.
15. Changes in the composition of imports are likely to take place. Import controls that were recently established will probably result in some reduction in imports of non-primary necessity. ALt the same time, if invest- ment is stepped up as is the fkovernment's intention, additional imports will be required. Imports of goods and non-factor services may go up by about 7.0 percen-- anrnually. This would be in line with the savings effort planned by tPc- 'ovcrnmcnt co achieve a S percent: growth rate in Gr&P. The savings rate woil-d increase from a current level of 15 p2rcent to about 22 percent by 1980, ,hus allowing for a 4 percent annual increese in domestic consump- tion.
16. Future gross capital requirements should be much higher than they were in the past. In the 1966-71 period, official capital inflows averaged $32 million annually, of which $20 million were foreign grants. While these grants roughly matched the outflow of private transfers, loan disbursements were equivalent to net imports of goods and services of $7 million annually (about 5 percent of total investment) and debt repayment of about $5 million per year.
1k; At: the eni of 1972, foUl'VwiaS cancellation by the French Governnient of about 45 percent cK Mhdagascar<s debt vis-a-vis France, Madagascar's dis-
burs,d external publii rle't anounte to about US$90 million of which the Bank
GrouF's share 3--e 37 cercect. At thie same time, total external public debt, including undisbuT.sed, amounted to IJS$141 million, of which the Bank Group's
share represented 63 percent. The .l-w level of Madagascar's external debt
is due primarily to the importance of capital grants which represented 60 percent of net disbursements on public capital aid in 1971, and to the fact
that Government made little use of suppliers' credits (less than 9 percent of
net disbursements on public capital aid in 1971). In 1972, the service on pub-
lic debt amounted to about t1S$8 million (of which the Bank Group's share was
about IJS$350,000) representing 5 percent of merchandise export earnings. At
present, it is difficult to forecast how Madagascar's projected resource gap
will be financed. If one third of the gap is assumed to be financed on com-
mercial terms, the debt service ratio could reach 12-16 percent by 1980. This
points out to the need that most of external assistance should continue to be
provided on concessionary terms.
PART II - BANK CROUT OPERATIONS
1S. Madagascar has received six IDA credits totalling $59.4 million and four Bank loanas totalling $26.1 million. About 67 percent of the total lending has been for transport. 27 percent for agriculture and the balance
fo$; education. There have been no IPC invastments. Annex II contains a
stumary statement of Bank loans and IDA credits as of November 30, 1973 and
notes on the execution of on-going projects. Except for the Livestock project
(Loan 585-MAG) and to some extent for the Tamatave Port project (Credit 200-
MAG), beth of which are covered in greater detail in Annex II, the execution
of Bar.k Group financed projects has been satisfactory.
19. The emphasis in our lending for transport and agriculture conforms
to Madagascar's development requirements and objectives. Our program in
transport is geared to: (i) the development of the main road network; (ii)
the construction of penetration roads into promising agricultural areas; (iii)
the imorovement of port facilities; and (iv) the strengthening of the rail- road which provides the most economic means of transportation in certain areas and for certain commodities. 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
.econdary network, however, is largely lacking and secondary roads in exist-
ence are in poor physical condition; this hinders the development of poten-
tially rich agricultural areas. Under the proposed project, assistance will
be given to prepare a program of secondary road improvement.
20. 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 implemen-
tation of this policy with the three projects for which assistance has been
provided. Several additional projects for general agricultural developme..t are at various stages of preparation ard should result in Bank Group financing
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in this and the next two fiscal years. A second Livestock project, appraised last October, is designed to help traditional farmers and part of it would permit the expansion of the technology developed under the first project to neighboring villages. A forestry project was appraised a few weeks ago and preparation is underway for a scheme to rehabilitate various irrigation works, which would enable Madagascar to expand rice production. In addition, an agricultural project identification mission visited Madagascar in July and specific proposals for Bank Group assistance are being prepared. A project in education, as well as a hydro-electric power project and a development finance company project are also under preparation.
PART III - TRANSPORT IN MADAGASCAR
The Transport System
21. The lack of efficient means of communication has hindered Madagascar's economic development. While considerable progress has been achieved over the past decade in developing Madagascar's transport: facilities, particularly the primary road network, the country still lacks a comprehensive transport system. There are several isolated regions, mainly in the north and south, which rely solely on coastal shipping, particularly during the rainy season, as a means of communication with other parts of the country. The size of the country, the ruggedness of its terrain, the dearth of good road building materials and the fact that the population tends to cluster in dense but small and isolated pockets exacerbates transport problems and makes their solution very expensive. At present, the transport system consists of 883 km of railway; about 32,000 km of roads, including 3,000 km paved roads; four main ports and twelve secondary lighterage ports; and seventeen all- weather airfields of which two can handle international jet aircraft.
_r.e Hi.way Nietwork
22. The highway network consists of a primary network of 8,500 km, 19,000 km of secondary roads and about 4,500 km of other roads. Road density is low and not uniforrm; Jarge regions 'ike Diego Suarez, Morondava and Fort Dauphin are not yet connected with the rest of the island by all-weather rc.As. With the exception of about 1500 km of asphalt pavead primary roads *_cnstzuc'ed since 1964, road standards are gerserally low with poor alignments and narrow 'oaveiments IThrough three past project;s in 1966, 1968 and 1973, the Bank Group lhas contributed to constructing some 700 kiii of roads and fifteen major bridges (see Annex II). Regional capitals are gradually being connected to Tananarive by all-weather roads. The highway to Majunga was completed partly with Bank Group assistarnce. On the route to Diego Suarez, two sec- tions have been built under previous Bank Group projects, and the last section of this road will be engineered under the Bank-financed third
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highway project. Priorities for the future appear to be developing reliable roads in the eastern region, providing adequate highway maintenance and es- tablishing secondary and feeder roads throughout the country in support of agricultural development programs.
23. External financing for highways has been provided largely by the European Development Fund and to a lesser extent by the Bank Group. There has also been participation by the Governments of Italy and the Federal Re- public of Germany who are currently helping to finance projects costing ap-
proximately US$8.8 million and US$16 million respectively.
Ports
24. Madagascar relies on its ports not only for foreign trade, but to an important extent for domestic commerce as well. Coastal navigation is the only means of transport between many areas; this traffic amounted to about 700,000 tons in 1971. An IDA credit of $9.6 million made in June 1970 (Credit No. 200-MAG) and recently increased to $11.4 million to reflect realignment of currencies, is financing the extension of the Port of Tamatave
- the country's largest port - and technical assistance in port management and operations. Tamatave handles over 70 percent of the country's international trade and about 26 percent of its coastal traffic. The Government has sought for some time to rationalize coastal shipping and port operations by concen- trating international trade in the four major ports and confining coastal traffic to the smaller ones, some of which would eventually be closed down; but little progress has been made to date.
Airports
25. Madagascar has a fairly extensive air transport network. Of its 59 airfields, 17 are built to all-weather standards. The rest have unpaved runways which may be closed during bad weather. The island is poorly and
infrequently connected with the outside world by air transport. Only the
airports at Tananarive and Majunga can take modern long-distance jets.
The Railway
26. RNCFM is a single-track meter-gauge railway comprising 883 km in two unconnected sytems. The northern system includes a 376 km section be-
tween Tananarive and the Port of Tamatave, a 158 km section from Tananarive
south to Antsirabe, and a 167 km section from the Tananarive-Tamatave line north to the paddy fields near Lake Alaotra, with a 19 km branch line to
chromite mines. The southern system connects Finanarantsoa with the east coast port of Manakara, 163 km away. There is a gap of about 180 km between the northern and southern systems. Under Italian technical assistance, final engineering of a line to connect the two systems is underway, but the RNCFM has agreed, in principle, not to proceed with construction of this line prior
to completion of the railway rationalization study to be carried out under the proposed project.
2>7 The railway has been fully dieselized since 1966. The locomotives are in good condition but fourteen of the thirty-one locomotives are more than twenty years old. Rail renewal and sleeper replacement are urgently needed on parts of the Tananarive-Tamatave line. In addition, the provision of new rolling stock is essential to allow the railway to scrap unserviceable wagons, some of which are 60 years old, and to provide a modest increase of capacity. Operations of the RNCFri are reasonably efficient but with room for improvement. Utilization of rolling stock and motive power is good, and ma-ntanance of railway property is satisfactory. Derailments, however, have increased since 1967, partly due to deteriorating track quality.
28. Almost all imports and exports shipped through Tamatave use the railway, which is the only reliable means of surface transportation between the port and Tananarive. Traffic averages about 680,000 tons of freight and a million passengers a year. The other three lines that complete the system carry much lighter traffic, but play an equally important role in view again of the lack of reliable alternative modes. While studies are currently underway to investigate the possibility of improving some of these competitive road sections, it is unlikely that projects, such as a better road between Tananarive and Tamatave, could be completed and competitive before 1980. If this road is improved, the railway would lose a significant amount of its traffic, but in the meantime, will have to continue transporting almost all of the increasing import and export trade shipped through Tamatave.
Transport Coordination
29. Transport planning and coordination in Madagascar is the respon- sibility of the Service Central de la Programmation (SCP) in the Ministere de il'Arnenagement du Territoire (MAT) which has direct responsibility for all transport modes except aviation. The highest review is made by the Direction du Plan, which is responsible for coordination among sectors, al- though in fact there has been little coordination between SCP and the agencies responsible for planning in such other sectors as agriculture, tourism and industry.
30. The Government is becoming increasingly aware of the problems of transport coordination and, in connection with the Bank-financed third high- way project approved in December 1972, agreed to take steps to rationalize resource allocations in the transport sector to ensure sound development and efficient use of all transport modes.
PART IV - TIIE PROJECT
31. A report entitled "Madagascar - Appraisal of a Railway Project" (No, 232a-MAG dated December 26, 1973) is being circulated separately. A credit and project summary is provided in Annex I-i.
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32. The project was appraised in the field in January/February 1973. Negotiations were held in Washington from November 12 to November 20, 1973. The Malagasy delegation was led by General Andriamahazo, Ministre de l'Amenagement du Territoire, and included Mr. Henry Raharijaona, Ambassador of Madagascar to the United States, Mr. Ratsimba, Director General, Ministere de l'Amenagement du Territoire, Mr. Ranaivoarivelo, Director General of the RNCFM, Mr. Rasamoely, Director of the Treasury, Ministry of Finance and Mr. Adriambelomiadana of the Directorate of Planning.
The Investment Plan
33. Government proposals for a major modernization program for the RNCFM have been under discussion for some time. In 1971, a Bank mission identified a possible project consisting of the 1972-74 portion of RNCFM's proposed 1972-76 investment plan, which called for a total investment of about US$16.0 million. The plan was subsequently changed several times and the version presented at the time of appraisal in February 1973 covered the period 1973-77, total investments having been increased to about US$43.0 million. Many of the investment proposals, which included the construction of new lines and major acquisitions of rolling stock were not, however, ac- companied by sufficient technical and economic data. Moreover, these in- vestments would be premature, given the uncertainties of the role to be played by the railways in the future, if the competing road between Tananarive and Tamatave were to be reconstructed (see para. 28). The Gov- ernment and the RNCFM agreed that the time span and composition of the in- vestment plan should be limited to immediate needs for the period 1973-75 and that the major investments originally envisaged should be deferred until the completion of the railway modernization and rationalization study pro- posed for inclusion in the project.
34. The agreed investment plan for 1973-75 includes completion of the on--going realignment of the Ambila-Brickaville section of the main line financed by the United States Agency for International Development (USAID); provision of seven locomotives financed by the French Caisse Centrale de Cooperation Economique (CCCE) and a minimum of rolling stock, track renewal and track maintenance equipment to enable the railway to carry projected traffic through 1976; and services of consultants to improve the railway's management and operational efficiency.
The Project
35. The proposed project has therefore been designed as a "holding operation" to assist the RNCFM in replacing outdated equipment and to deter- mine the railway's long-term prospects and requirements as well as the needs in the transport sector as a whole. It comprises that portion of the rail- way's 1973-75 investment plan for which financing has not yet been arranged and technical assistance to the MAT on transport planning and coordination. It comprises:
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(a) Works: renewals of rails and replacement of sleepers on the Lohariandava-Andasibe section (about 60 km) of the main line, extension of yards and sidings and construction of a. few buildings;
(b) Equipment and Materials: 50 freight wagons and 20 passenger coaches, track materials comprising 130 km of 36 kg/m rails, 16,000 steel sleepers and 20,000 m3 of ballast, and track main- tenance equipment;
(c) Technical assistance to the RNCFM in management, accounting, and operations; and
(d) Technical assistance to the MAT in transp)ort planning and coordination.
36. The relaying of track and related works con the 62 km section of the main line between Loh)ariandava and Andasibe is of high priority. This section has the highest traffic density in the system and, because of poor track conditions, presently accounts for about 80 percent of all derailments on the line. The rails are over 15 years old and considerably worn, ballasting is inadequate and the number of sleepers is insufficient. Track rehabilitation is required to (a) maintain the capacity of the line, eliminate temporary speed restrictions, and avoid interruption of rail service, and (b) reduce maintenance costs on track and rolling stock.
37. A review of locomotives and rolling stock required to carry freight traffic through 1976 shows that additional locomotives, besides those being financed by CCCE, are not required; 50 more freight wagons and 20 more passenger coaches are needed. Without these freight wagons, the railway would be unable to meet efficiently and economically all of the increased freight traffic demand. Thze 20 passenger coaches to be procured under the project will re- place twenty-six 43--year old coaches which are irn very poor condition and are currently being scrapped; they will also be able to meet the increased traffic, projected conservatively to grow at 3 percent per annum.
38. Consultants will be engaged- under the project to assist the RNCFM in setting up an appropriate management and accounlting system and to recomnmend anid asJsls in irplementing improvements of operational, financial ac,d as srtng nature including the appropriate adjustment of tariff structure aT..d levelo, as agreed with tl-e RNCFY. In addini,In, they will prepare a long- term investric-nt plan for 'he railway and undertake on-chc:-job training of key personnel. The consulting services are to be conducted in two 12-month phases. Detailed terms of reference have been agreed uponl by the Government, the RNCFM and the Association during credit negotiations.
39. Madagascar lacks qualified planning experts to evaluate and advise on the economic and technical issues in the transport sector. The project, therefore, includes the service of five transport experts for a period of two
years, who will be attached to the MAT and will cooperate with the Direction du Plan on matters of intersectoral coordination. Specifically, they will assist the MAT to (a) plan, review and coordinate transport studies; (b) form- ulate policy regarding transport pricing and coordination; (c) prepare coordi- nated sectoral investment plans; (d) undertake specific studies such as the preparation of a plan for the development of feeder roads; and (e) train Malagasy nationals in transport planning. Agreement has been reached with the Government on the consultants' terms of reference and on the timing of their services.
Project Costs and Financing
40. The total cost of the project is estimated at US$8.9 million, exclud- ing taxes, with a foreign exchange component of US$6.0 million. The proposed IDA credit of US$6.0 million will finance the foreign exchange cost of the project. The local costs of the railway components (about US$2.7 million equivalent) will be covered by the RNCFM out of its orn resources, while the Government will finance the local cost of technical assistance to the MAT (US$200,000 equivalent). The IDA credit of US$6.0 million will be made to Madagascar which will onlend US$5.2 million to the RNCFM for repayment in 20 years, including 3-1/2 years of grace at 7-1/4 percent interest per annum.
4t. At the time of negotiations, it was expected that certain measures to be taken by Government before presentation of this project to the Executive Directors--particularly the enactment of the legislation mentioned in paragraph 43 below--might take some time. Since an early start of the railway consultants' services is desirable, a provision was included in the credit documents that would permit retroactive financing up to $100,000 for these services. The consultants are expected to be hired shortly but in view of the speed with
which the Government has acted on the other measures, which makes it possible to present the project to the Executive Directors earlier than anticipated, retroactive financing is unlikely to be needed.
Procurement and Disbursement
42. Procurement of rolling stock, equipment and materials financed by IDA will be on the basis of international competitive bidding in accordance with Bank/IDA guidelines. Disbursements from the credit will be made-on the basis of CIF cost (Tamatave) of imported equipment and materials, and actual foreign currency outlays for consultants.
Project Implementation
43. The RNCFM will be responsible for the execution of the project (other than technical assistance for transport planning and coordination) under the overall supervision of the MAT. The RNCFM, with technical assistance to be provided, is competent to carry out all parts of the project for which it is responsible. Until 1965, the RNCFM operated as a "Regie Autonome" with a substantial degree of autonomy. In January 1965, the RNCFM became a state enterprise directly attached to the Ministry of Public Works and run as an ordinary Government Department, subject to all civil service rules and fi- nancial and budgetary procedures. A decree enacted in July 1972 abrogated
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c.<e .riginal RNCFM decree of January, 1965. and until very recently the rail- w&ay has been operating in a legal vacuum. The Government has, however, by Drdicance published on December 8, 1973, transforned RNCFM into a public enterprise with adequate financial and operationaL autonomy in matters such as -Cariff setting, personnel administration, railway operations arLd accounting.
I_-na-,nces of RNCFI
44. Freight traffic is the railway's principal source of income, account- ifg ror some 75 percent of revenues. Total commercial tonnage in 1971 amounted to 888,000 tons of which 40 percent were imports, 20 percent exports, and the remainder local traffic. Six commodity groups (petroleum products, chromite, charcoal and firewood, rice, cement, and boxes, crates and containers) account for about two-thirds of total tonnage. Excluding chromite and petroleum products, traffic growth between 1965-1971 averaged 9.6 percent per annum in tenns of ton-km. Freight traffic earnings in the years 1969-1971 grew at an average annual rate of 11 percent. Figures for 1972 show a sharp decline in traffic, largely attributable to the uncertainties that resulted from the change of Government in May of that year. This situation, however, is ex- pected to be only temporary, and the railway's earnings, after regaining their 1971 level by 1975, are expected to grow at an annual average rate of 6 percent.
45. The annual return on net fixed assets in use was about 2 percent in 1969 through 1971 which, after dropping in 1972 to 0.1 percent due to the cir- cumstances mentioned above is not expected to register a recovery until 1974, when it should reach a level of 2.5 percent. The Government and the RNCFM have agreed that they will take all necessary measures including an upward adjustment of tariffs by 5 percent by April 1, 1974, to maintain a return of at least 2.5 percent through 1976 and 3 percent thereafter. This rate is con- sidered satisfactory, and would enable the railway to meet the full cost of services, debt service, working capital requirements and make a reasonable contribution toward investment needs including replacements. To ensure that future tariffs are adequate to achieve this goal, a costing and tariff study by consultants would be financed under the project, following which, not later than March 31, 1975, the RNCFM, after consultation with the Association, will further adjust their tariffs accordingly. However, should the railway be unable to contribute fully toward the financing of the project because of lower earnings or unforeseen expenditures, the Government would make available all funds necessary to complete the project.
Economic Benefits and Rate of Return
46. The project will provide a modest increase in RNCFM's capacity,allow it to meet short-term traffic requirements, and contribute to improving its overall operating efficiency. The proposed investments are required in spite of longer-term developments (such as road competition) that may adversely affect the railway, and are well Justified even assuming that the life of the new assets will be limited by future competition and possible traffic diversion. The overall economic return on the investments is very favorable, amounting to some 35 percent over the period 1974-1983.
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PART V - LEGAL INSTRUMENTS AND AUTHORITY
47. The draft Development Credit Agreement between the Malagasy Republic and the Association, the draft Project Agreement between the Association and the Reseau National des Chemins de Fer Malagasy, the Recommendations of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association and the text of a resolution approving the pro- posed credit are being distributed to the Executive Directors separately.
48. The draft Agreements contain provisions to reflect the various arrangements described in Part IV above, including the usual covenants for railroad projects. The employment of railway consultants, satisfactory to the Association, will be a condition of effectiveness of the proposed credit. 49. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.
PART VI - RECOMMENDATION
50. I recommend that the Executive Directors approve the proposed credit.
Robert S. McNamara President
COUNTRY DATA - MALAGASY REPUBLIC
AREA 2 POPULATION DENSITY 590,000 km 7.4million (mid-1972) 13 per
Rate of Growth:2.5% (from 1966to 1972) 85 per km 2
of arable land
POPULATION CHARACTERISTICS (1966) HEALTH (1972) Crude Birth Rate (per 1,000) 146 Population per physician 10,500 Crude Death Rate (per 1,000) 21 Population per hospital bed 390 Infant Mortality (per 1,000 live births)102
INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of national income, lowest quintile *% owned by top 10% of owners
highest quintile *- % owned by smallest 10% of owners
ACCESS TO PIPED WATER (1972) ACCESS TO ELECTRICITY (1972) % of population - urban 30.0 % of population - urban 40.0
- rural - rural
NUTRITION (1962) EDUCATION Calorie intake as % of requirements 100.0 Adult literacy rate %39 (1970) Per capita protein intake 52 grams Primary school enrollment %49 (1971)
1/
GNP PER CAPITA in 1971 US $ 140
GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (%, constant prices)
US $ Mln. % 1960-65 1967-70 1971
GNP at Market Prices 940.3 100.0 5- 2.4 Gross Domestic Investment 163.5 17.4 7.4 12.0 Gross National Saving 140.1 14.9 Current Account Balance - 23.4 2.5 Exports of Goods, NFS 256.4 27.3 1.5 Imports of Goods, NFS 269.0 28.6 .. 3.5 19.2
OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1970
Value Added Labor Force- V. A. Per Worker US $ Mln. % Mln. % US $ 70
Agriculture 265 29.5 2.6 81.3 102 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 899 100.0 3.2 100.0 281 100;0
GOVERNMENT FINANCE General Government Central Government 3/
FMG Bln. ) % of GDP (FMG Bln. ) % of GDP 1971 1971 1969-71 1971 1971 1969-7
Current Receipts 58.7 22.0 21.5 U1.2 16.5 16.1 Current Expenditure 45.1 17.0 17.5 12.2 12.0 12.6 Current Surplus 13.3 5.0 4.0 12.0 4.5 3.5 Capital Expenditures 14.6 5.5 5.4 12.7 4.7 4.7 External Assistance (net) 2.9 1.1 1.3 2.9 1.1 1.3
1/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered.
2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job.
3/ Exclusive of annexed budgets. External assistance includes only that registered in Treasury accounts; most capital aid is not recorded in the budget.
not available not applicable
COUNTRY l)ATA - MALAGASY REPUBLIC
MONEY, CREDIT and PRICES 1966 1969 1970 1971 1972 June 1972 June 1973
(Billion FMG outstanding end periocl)
Money and Quasi Money 34.1 45.6 52.3 55.9 62.3 58.6 63.1
Bank Credit to Public Sector - 6.1 0.9 - 3.a - 4.0 1.2 - 1.3 2.2
Bank Credit to Private Sector 31.2 41.2 48.5 54.8 55.4 52.5 52.0
(Percentages or Index Numbers)
Money and Quasi Money as % of GDP 18.8 20.4 21.0 20.9
General Price Index (1963 = 100) 108.4 11l.5 117.8 124.2 110.2 129.6 135.7
Annual percentage changes in: General Price Index 2.7 3.8 2.9 5.4 4.8 4.7 Bank credit to Public Sector . . . .
Bank credit to Private Sector . 5.5 17.7 13.0 1.1 Lo 1.0
LALANCE OF PAYMENTS MERCIHANDISE EXPORTS (AVERAGE 19 70-7 2) Average 1967-69 1970 1971 US $ Mln %
(Millions US $) Coffee 41. 28.6
Cloves 17.9 12.h
Exports of Goods, NFS 202.3 236.6 256.4 Vanilla 13.6 92 j Imports of Goods, NFS 215.3 217.5 269.0 Beef 13.2 9.1
Resource Gap (deficit = 3) - o T-. -1.-6 Sugar 5.1 3.5 Minerals 6.4 4-4
lnterest Payments (net) ) All other commodities 46.9 31.5
Workers' Remittances )-25.5 - 21.6 - 23.0 Total L443 lOO O
Other Factor Payments (net) )
Net Transfers 15.4 10.1 12.2 EXTERNAL DEBT, DECEMBER 31, 1972
Balance on Current Account - 23.1 7.6 - 3.T4 US $ Min
Direct Foreign Investment - 0.8 - 2.9 - 0.7
Net MLT Borrowing Public Debt, incl. guaranteed 89.5
Disbursements (9.3) (9.7) (15-1) Non-Guaranteed Private Debt
Amortization (4I9) (5.0) (6.1) Total outstanding & Disbursed
Subtotal 4.4 4.7 9.0 2
Capital Grants 15.4 17.3 16.2 DEBT SERVICE RATIO for 1972-/
Other Capital (net) ..
Other items n.e.i - 1.6 - 2.8 - 4.2
Increase in Reserves (+) 5.7 + 23.9 - 3.1 Public Debt. incl. guaranteed 5.0
Non-Guaranteed Private Debt
Gross Reserves (end year) 32.9 60.0 54.8 Total outstanding & Disbursed
Net Reserves (end year) 26.0 49.9 146.8
RATE OF EXCHANGE IBRD/IDA LENDING, November 30,'73,Million US $)
Up to August 1969: US $1.00=FMG 246.85 IBRD IDA
FMG 1.00oUS $o.00105 Outstanding & Disbursed 10.5 26.9
From August 1969: US $1.00=FMG 277.71 Undisbursed 15.6 35.5 FMG 1.OO=US $0.00360 Outstanding incl. Undisbursed 26.i 672t
From December 1971: US $1.00=FMG 255.79
FMG 1.00=US $0.00391
From February 1973: US $1.00=FMG 230.21 FMG 1.00=US $0.0043
1/ At market prices
2/ Ratio of Debt service to Exports of Goods only
not available
not applicable
Office
IN MALAGASY REPUELIC
A. STATEMENT CF BANK LOANS AND IDA CREDITS (As at November 30, 1)73)
US$million Amount (less cancellations)
Loan or Credit Number Year Borrower Purpose Bank IDA Undisbursed
90-MAG 1966 MALAGASY REP. Roads 10.0 0. 510-MAG 1967 Education 4.8 o.L 134-MAG 1968 Roads 4.5 - 570-NAG 1968 Roads 3.5 5b5-NAG 1'WG6'? Livestock 2. 8 1/.2 2k60-MAG 1970 Port 9.6 3.2 214-MAG 1970 Irrigation 5.0 1.5 322-MAG 1972 Irrigation 15.3 15.3 351-MAG 1°72 11 Roads 15.0 15.0 876-NAG 1972 it Roads 15.0 15.0
Total 26.1 59.4 51.1 of which has been repaid - _
Total now held by Bank & IDA 26.1 59.4
Total undisbursed 15.6 35.5 51.1
1/ An agreement to provide for an additional $1.8 million was signed on October 1'9, 1 973 but is not yet effective.
2/ Prior to exchange adjustments.
ANNEX II Page 2
B. PROJECTS IN EXECUTION 1/
Credit No. 90-MAG Road Project; $10 million credit of August 2, 1966; Closing Date: June 30, 1974.
The project is now completed with the exception of a feasibility study and a master plan of three road sections, scheduled for
completion in the next few_months.
Loan No. 510-MAG Education Project; $4.8 million loan of August 23, 1967.
Closing Date: January 31, 1974.
The project has been completed. At the Government's request, the Closing Date has been postponed until January 31, 1974 to give the Government sufficient time to submit all requests for reimbursement.
Loan No. 585-MAG - Beef Cattle Development Project; $2.8 million loan of Februay 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 stylo legumes for pasture improvements. In certain respects, particularly in pasture
development, the project has been extremely 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 stentotricosis which was not foreseen at appraisal. The surviv- ing 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 into ac- coutnt 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 :v1positior agwrnst the ranch and resulted in substantial cattle theft, desctr;ction of fences and burning of pasture. Relations were al30 made more difficult bv the fact that ranch management had been entrusted to ax:^;riates who were unable to estabiish contact with the local population. -ollowini- discussions with the Government durinp the last few months, how- ever, considerable progress has been made in modifying the concept of the prcject to nake it possible fcr the local popuilation gradually to share in the benefits of the project and to use the ranch as a focal point to spread
1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being 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 weaknesses in project execution.
ANNEX II Page 3
modern technology in the area. Agreement in principle has been reached
with the Government in this respect and detailed plans are expected to be
formally approved in the near future. The proposed second Livestock project would include a component designed to assist in this respect. 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 during the
current dry season was virtually eliminated. In short, the beginning of an
effort to relate the ranches to the people of the area has been made. The
results appear to be favorable but further developments will need to be followed very closely.
Credit No. 200-MAG - Tamatave Port Project; $9.6 million credit of June 19, 1970; Closing Date: December 31, 1974.
Civil works are proceeding satisfactorily and com- pletion on schedule by July 1974 is expected. On the other hand, the re-
organization of port administration is proceeding more slowly than expected, since management assistance provided under the Credit has not been very effec-
tive. This resulted in serious management and financial problems. At the
Government's request IDA has agreed to the employment of Malagasy nationals
in the most important posts of Director General and Chief of Finance. In
addition, consultants are expected to be hired shortly to assist in streng-
thening the Port's finances. The Association has also agreed to increase
the amount of the Credit from US$9.6 million to US$11.4 million to cover the shortfall in foreign exchange requirements; the necessity for the increase
arises entirely out of the realignment of currencies.
Credit No. 214-MAG - Lake Alaotra Irrigation Project; $5 million credit
of August 17, 1970; Closing Date: June 30, 1976.
Overall project execution is satisfactory, although disbursements were slow because of delays in submitting timely and adequate
renuests for reimbursement. Steps have been taken to improve the pace of
disbursements.
Credit No. 322-MAG - Morondava Irrigation and Rural Development Project; $15.3 million credit of June 30, 1972; Closing Date:
June 30, 1979.
The date of effectiveness has been postponed several
times and the Credit became effective only on April 30, 1973. Engineering
consultants are working on the detailed design of the project.
ANNEX II Page 4
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. Project execution is progressing satisfactorily.
ANNEX III Page 1
MALAGASY REPUBLIC - RAILWAY PROJECT
CREDIT AND PROJECT SUMMARY
Amount: US$6.0 million equivalent
Terms: Standard
Relending Terms: US$5.2 million with interest at 7-1/4 percent per annum for 20 years, including a 3-1/2 year grace period.
Project Description: The project consists of: (A) part of RNCFM's 1973-1975 investment plan, including; i) track renewal)the provision of rolling stock and track material, and track maintenance equipment; (ii) services of consultants to im- prove the railway's management and operational efficiency; and (B) technical assistance to the Ministere de l'Amenagement du Territoire on transport planning and coordination.
Estimated Cost: The estimated cost of the project (excluding taxes) is US$8.9 million equivalent, including a foreign exchange component of US$6.0 million. Details are given on the following page.
ANNEX III Page 2
A. RNCFM Investments
Works 1. Track renewal 0.61 0 0,61 2. Other 0.93 0 0.93
Rolling Stock, Materials and Equipnent
3. Freight wagons 0.04 0.87 0.91 4. Passenger wagons 0.02 1.21 1.23 5. Track materials 0.19 1.65 1.84 6. Miscellaneous equipment 0.33 0.30 0.63
Consulting Services 7. Technical assistance in
management and accounting 0.16 0.65 0.81
8. Miscellaneous studies 0.05 0 0.05
Contingencies Physical: 10% on A2 0.09 0 0.90 Price: 7% p.a. 0.25 0.52 0.77
Total RNCFM 2.67 5.20 7.87
B. NAT Technical Assistance About 130 mani-months 0.18 0.70 0.88 Contingencies: 7% p.a. 0.02 0.08 0.10
iotal MAT 0.20 0.78 0.98
TOTAL PROJECT COST 2.87 5.98 8.85
Rounded totals 2.90 6.oo 8.90
:ln.r.--,:. Plan: (US$ million) Local Foreign Total
DA - 6.oo 6.00 RN CFN 2.70 _ 2.70 Government 0.20 - 0.20
Total 2.90 6.00 8.90
1974 1.15 1975 5.10 1976 6.oo
ANNEX III Page 3
Procurement Arrangements: All equipment and materials to be financed by the IDA Credit will be procured through inter- national competitive bidding in accordance with Bank/IDA guidelines.
Consultants: Consultants will be employed under terms and conditions acceptable to the Association: (i) to give technical assistance to the railway in accounting and management; to study the railway's long-term investment requirements; and (ii) to assist the Ministere de l'Amenagement du Territoire in transport planning and coordination.
Rate of Return: Overall economic return on the project is estimated at about 35 percent.
Appraisal Report: Report No. 232a-MAG dated December 26, 1973.
Map: Attached is a map, IBRD No. 10493 'Madagascar - Railway Project - Transport System'.
IBRD 10493 RAILWAY NETWORK ~~~~~~~~~~46' 48' 510 JULY 1973
RAILWAY NETWORK )(~~~~tbotoSototro ~2 MADAGASCAR 2t2
Sud ,~~~~~~~~~~~~~~~~~~~" ~~~~~~Diego Suarez Vohiio 6 RAILWAY PROJECT
To~~~~~ TRANSPORT SYSTEM T
....... R.iloay Realigneent Underway Hi 110Vhno
TANANARIVE So~~~~~~~~~ Bnk Finonced Rood ProjectSt Hell Aeohe,. TANANARIVE o ,/ PKZO CConstruction Completed
FK22I1 ------- R Constrction Underwy ~.t 1974- 75 St.dieS Underway
P0844 Ambatolompy - - - - ~~~~~~~Other Roads Under Construction )Sobovo
Situn,mnous Surfaced Roods ,holnn All Weathe, Roads . n lr0
Non Permannt Roads -- AdP.
Majungo c
18 - ~~~~~r0 .i.•~ A n,uo
by~~~~i Ac~'n1 OT-w-
5jMainrirann~~~~~~~~~~~~~~~~~~~~~~~~~rv
22~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~n, Mi.nd'- -a -j 4. -~~~~~~~~~~~~~~~~~~~~~~~~2
'f I M.nd.to~~~~~~~~~~~~~~~~~MIE
AA. bo ~ M. ,bonodybeO'