Madagascar - African Development Bank

AFRICAN DEVELOPMENT FUND

PROJECT: INSTITUTIONAL GOVERNANCE SUPPORT PROJECT (PAGI) COUNTRY: MADAGASCAR PROJECT APPRAISAL REPORT Date

:

June 2013

Appraisal Team

Regional Director : Mrs. M. KANGA, ORCE Sector Director

: Mr. I LOBE NDOUMBE, OSGE

Sector Manager

: Mr. J. MUKETE, OSGE.2

Team Leader

: Mr. L. BASSOLE, OSGE.2

OSGE/GECL DEPARTMENT

August 2013 Translated document

TABLE OF CONTENTS

I- STRATEGIC THRUST AND RATIONALE ........................................................................1 1.1 Project Linkages with Country Strategy and Objectives ............................................................1 1.2 Rationale for Bank's Involvement ...............................................................................................2 1.3 Aid Coordination ......................................................................................................... ………..4 II- PROJECT DESCRIPTION ………………………………………………………………….5 2.1 Project Components ....................................................................................................................5 2.2 Technical Solutions Adopted and Alternatives Considered .......................................................7 2.3 Project Type ................................................................................................................................7 2.4 Project Cost and Financing Arrangements .................................................................................7 2.5 Project Target Area and Beneficiaries ........................................................................................9 2.6 Participatory Approach ..............................................................................................................9 2.7 Bank Group Experience and Lessons Reflected in Project Design ...........................................9 2.8 Key Performance Indicators .....................................................................................................11 III- PROJECT FEASIBILITY ....................................................................................................11 3.1 Financial and Economic Performance.......................................................................................11 3.2 Environmental and Social Impact .............................................................................................11 IV- PROJECT IMPLEMENTATION.........................................................................................12 4.1 Implementation Arrangements .................................................................................................12 4.2 Project Monitoring and Evaluation ...........................................................................................13 4.3 Governance................................................................................................................................14 4.4 Sustainability ............................................................................................................................14 4.5 Risk Management .....................................................................................................................15 4.6 Knowledge Building .................................................................................................................15 V- LEGAL FRAMEWORK ........................................................................................................16 5.1 Legal Instrument .......................................................................................................................16 5.2 Conditions for Bank Intervention .............................................................................................16 5.3 Compliance with Bank Policies ...............................................................................................16 VI- RECOMMENDATION ........................................................................................................16

LIST OF TABLES Table 1: Donor Interventions in Areas Covered by the Project Table 2 : Project Components and Sub-components Table 3 : Project Cost Estimate by Component Table 4 : Sources of Financing Table 5 : Project Cost by Expenditure Category (UA thousand) Table 6 : Expenditure Schedule by Component Table 7 : Expenditure Schedule by Category (UA thousand) Table 8 : Lessons Learnt from Previous Institutional Support Table 9 : Milestones in PAGI Execution Table 10: Risks and Mitigation Measures LIST OF ANNEXES Annex I: Country’s Comparative Socio-economic Indicators Annex II: Table of AfDB Portfolio in Madagascar Annex III: Map of Project Area

LIST OF TECHNICAL ANNEXES Technical Annex A – Country Development Agenda, Sector Brief and Project Background A1. – Country Development Agenda A2. – Sector Brief A3. – Donors’ Technical Assistance in Public Finance A4. – Lessons from Institutional Support Projects Technical Annex B – Support of Key Arguments of the Report B1. – Detailed Project Costs B2. – Implementation Arrangements B3. – Financial Management and Disbursement Arrangements B4. – Procurement Arrangements B5 – Environmental and Social Analysis Annex C – Additional Technical Annexes C1. – Detailed Outline of Project Activities

Currency Equivalents (May 2013)

UA 1 UA 1 UA 1 USD 1 EUR I

Madagascar Currency Unit = Ariary (MGA) MGA 3 346.97 USD 1.51 EUR 1.15 MGA 2 218.00 MGA 2899.33 Fiscal Year January - December List of Abbreviations

ADF AfDB ARMP BdG BIANCO CdC COS CSI CSP DBIV DGB DGCF DGI DGT DRG EARC EITI GDP IMF MAP MFB MGFO MoV N/A ORDSEC PAGI PCR PEFA PFM PGDI PIU PREA PRIBG PRSP SADC SIPFM TFP TI UA UNCTAD WB

African Development Fund African Development Bank Public Procurement Regulatory Authority Bureau Unique de Gestion (Centralized Project Management Office) Independent Anti-Corruption Bureau Audit Bench Orientation and Monitoring Committee Council for the Safeguard of Integrity Country Strategy Paper Inspection and Audit Directorate General Budget Directorate General Financial Control Directorate General Taxation Directorate Directorate General of the Treasury Governance Enhancement Department East Africa Resource Centre Extractive Industries Transparency Initiative Gross Domestic Product International Monetary Fund Madagascar Action Plan Ministry of Finance and Budget Bank’s Madagascar Field Office Means of Verification Not Applicable Secondary Authorizing Officer Institutional Governance Support Project Project Completion Report Public Expenditure and Financial Assessment Public Finance Management Governance and Institutional Development Support Project Project Implementation Unit Administration Efficiency Reform Programme Good Governance Capacity Building Project Poverty Reduction Strategy Paper Southern African Development Community System of Integrated Public Finance Management Technical and Financial Partners Transparency International Unit of Account United Nations Conference on Trade and Development World Bank

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LOAN/GRANT INFORMATION Client Information BORROWER EXECUTING AGENCY Programme (PREA)

: :

Republic of Madagascar Prime Minister’s Office, Administration Efficiency Reform

Financing Plan Source ADF (including balance from loan cancellation of UA 0.97 million) ADF (reuse of balance from grant cancellation) Government Total amount

Amount (UA)

Instrument

4.320 million

Loan

0.180 million

Grant

0.318 million 4.818 million

Loan /Grant

Key ADF Financial Information * relating to ADF loans

Loan / Grant Currency

UA

Interest Type * Interest Rate Margin* Commitment Fee * Other Charges* Tenor Grace Period NPV (baseline scenario) ERR (baseline scenario)

Not Applicable Not Applicable 0.5% (5 basis point) 0.75% (service charge) 50 years 10 years Not Applicable (NA) N/A

Activities Preparation Appraisal Negotiation Project Approval Effectiveness Mid-Term Review Completion Last Disbursement

Dates October 2012 April-May 2013 July 2013 September 2013 December 2013 June 2015 December 2016 March 2017

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Timeline – Main Milestones (Expected)

Project Overview

PROJECT SUMMARY Project Name: Institutional Governance Support Project (PAGI) Geographic Scope: Nationwide General Schedule : 36 months, from 1 January 2014 to 31 December 2016 Financing: UA 4.818 million (ADF: UA 4.5 million; counterpart contribution: UA 0.318 million) Operational Instrument: Institutional Support Project Expected Outcomes: The main outcomes sought by PAGI are: (i) a better public resource mobilization framework leading to a revenue increase from 10.9% of GDP in 2012 to 13% in 2016; (ii) strengthening of internal and external control; (iii) strengthening of anticorruption structures; and (iv) promotion of transparency in extractive industries management in Madagascar. Direct Project Beneficiaries: Institutions engaged in public finance management, notably DGB, DGD, DGI, DGT, DGCF, ARMP, Audit Bench, BIANCO, Ministry of Mines, EITI Executive Secretariat.

Needs Assessment and Relevance

Bank’s Added Value

Knowledge Management

Madagascar is going through a protracted political crisis that has weakened its institutions, leading to a deterioration of public finance management (PFM) and governance. PAGI’s objective is to contribute towards restoring material, human and technical capacity for public resource mobilization, expenditure control, the fight against corruption in and good governance of the extractive sector. Therefore, the project rationale falls within the broader context of supporting Madagascar's efforts to promote growth and reduce poverty, through improved governance, notably in public resource management. The Malagasy government’s finances face several challenges including: weak public resource mobilization (the tax ratio dropped from an average of 11.8% between 2004 and 2008 to 10.9% in 2012), weak decentralization and devolution of fiscal management, weak internal and external control of State budget management, conflicts of interest, corruption, low level of fiscal resources, illicit trafficking, fraud, non-transparent and inefficient management of extractive industry resources. The project aims to assist the Government to gradually halt the deterioration of public finance management and help restore the achievements of previous interventions. Furthermore, this operation forms part of concerted efforts by development partners to lay the groundwork for rapid and effective resumption of financial support, in response to various development challenges. The Bank has acquired substantial knowledge and experience on Madagascar’s economic challenges through its previous interventions, such as PRIBG. The Bank’s presence on the ground also constitutes a major advantage that enables it to participate fully in dialogue with the authorities on improving public finance management and extractive sector governance. The project will contribute to institutional development and knowledge building in Madagascar, notably in the areas of public finance management and governance. Knowledge will be acquired through skills transfer from advisors and consultants to staff of beneficiary institutions. Additionally, different information, data platforms, users’ manuals and various training courses and workshops will also contribute to knowledge building. The project will finance a pilot project to address the entire Tuléar town, PEFA self-assessments and studies. Procedures manuals in several public finance management areas will also be produced. Furthermore, the knowledge acquired from this project will be built upon through a rigorous system to monitor and evaluate expected outcomes and outputs. Project supervision and completion missions will also be fielded, and the related reports prepared.

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Results-Based Logical Framework Country and Project Name: Madagascar – Institutional Governance Support Project (PAGI) Project Goal: To contribute to strengthening institutional capacity for improved public resource mobilization, strengthening of financial governance and transparency in the extractive sector PERFORMANCE INDICATORS

RESULTS CHAIN

Indicator (including CSI) Impact : Economic management and control capacity are enhanced and contribute to improved corporate governance

Baseline

Economic growth rate (GDP)

1.9% (2012)

Mo Ibrahim "accountability" and "public administration" rating

51.7/55.5 (2012)

IMPACT

Tax revenue (% of GDP)

PEFA PI-21-i and ii) Effectiveness of internal audit Outcome II : Anticorruption and transparency Transparency International Perception of in the extractive sector are Corruption Index strengthened

(I.1.2.) Improvement of the customs revenue collection framework

OUTCOMES

54/58 (2018)

AfDB, MoIbrahim report

10 000 new taxpayers (cumulative 2013-16)

EITI compliant in 2016

IMPROVEMENT OF PUBLIC RESOURCE MOBILIZATION AND CONTROL SYSTEMS Improvement of the public resource mobilization framework

(I.1.1.) Improvement of the fiscal and para-fiscal revenue collection framework

Studies on internal revenue mobilization and addressing of Tuléar town Number of taxation centres operational

No study

Reports and studies available before 2016

DGI and MFB reports

Not available 20 by 2016

Number of officers trained in: the fight against fraud, audit, control, customs operations, IT , training of trainers, management and related subjects (of which % women)

150 officers 50 officers in cumulatively between 2011 2014 and 2016, of which 25% women

DGD report

Improvement of accounting and auditing

(I.2.1.) Improvement of public accounting system

(I.2.2.) Improvement of accounts auditing system

Feasibility study on dematerialization of accounting operations processing Accounting data collection and securement tools Number of DBIV officers trained in international auditing norms (including % women)

No study None No officers trained

Feasibility study report available before end 2015 Tools put in place and being used at end-2015 15 officers trained, of which 25% women in 2015.

I.3.

MFB and DGT reports

Improvement of internal and external control Number of Financial Control Delegations Not available 21 delegations equipped operational before project completion (I.3.1.) Strengthening of the Number of staff trained on services rendered 5 persons 50 officers trained in MFB and internal budget 2016, of which 25% and post-auditing, monitoring and evaluation, DGCF implementation control women reports change management (including % women) system Monitoring and evaluation system

None

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RISKS/MITI GATION MEASURES

4% (2018)

PREA reports on the execution Less than 15 months by of the project; 2016 MFB, PEFA selfPI-21 i: A and P-21-i and ii: A (2016) evaluation, ii : B (2008) Audit Bench, BIANCO, TI and EITI 32 (2012) 36 (2016) Suspended candidate

Madagascar’s EITI status

I.2.

Target

10.9% (2012) 13% (2016)

Outcome I: Public resource Number of newly identified taxpayers 4 500 (2012) mobilization and control systems are improved Time-frame for tabling budget review bills Over 24 before Parliament after receipt by the Audit months (2006) Bench (number of months) (*)

I. I.1.

MOV.

System in place at MFB by 2015

Risk 1: Political and Institutional: The deterioration of the political situation, institutional fragility and economic shocks constitute political and economic risk factors. Mitigation measures: Project activities aimed at strengthening governance and capacity, and prospects of holding elections in 2013 help to mitigate this risk. Risk 2: Operational: Inadequate institutional capacity implies a risk of delay in project implementation and inadequate coordination of TFP interventions. Mitigation measures: The training activities under the project and the institutional anchoring and

(I.3.2.) Improvement of the external control system

Computer system (SIPFM module) to prepare the Budget Review Act Number of officers trained in external controlrelated areas (including Audit Bench training of parliamentarians) (of which % women)

II. II.1.

System in place in 2015

None

100 officers trained (25% women) by 2016 CDC report

Manual finalized, validated and used by 2015 Last report At least one report Public procurement post-audit report dates back to finalized and available ARMP 2010 in 2015 reports Number of contracting authorities under the 834 at end- 2015 and 119 (2102) Code making correct entries on SIGMP 900 in 2016 Draft manual

Public Entities Audit Manual (I.3.3.) Improvement of transparency of the government procurement system

close coordination of TFPs

None

STRENGTHENING OF THE ANTI-CORRUPTION FIGHT AND IMPROVEMENT OF TRANSPARENCY IN THE EXTRACTIVE SECTOR

Strengthening the fight against corruption and fraud Number of people trained in investigative and prevention techniques, IT and anti-corruption (of which % women) (II.1.1.) Strengthening of anti-corruption Number of campaigns and % entities sensitized and mobilized to adopt the culture of integrity and transparency (workshops, audio-visual and radio campaigns) Improvement of transparency in the extractive sector Statistical monitoring mechanism and information system set up in the Ministry of Mines (II.2.1.) Strengthening of mining sector information

None

300 persons trained (25% women) BIANCO reports

None

9/ 70% cumulatively in 2013-16

II.2.

KEY ACTIVITIES

(II.2.2.) Improvement of transparency in extractive sector governance

None

System put in place and Mining functional in 2014 observatory, Ministry of 100 officers trained by Mines

Number of Ministry of Mines officials trained in IT (including % women)

Not available

Number of people trained in extractive resources

None

50 persons between 2014 and 2016

None

10 (cumulatively EITI between 2013 and Secretariat 2016) sensitization and reports communication campaigns conducted

Number of sensitization and communication campaigns conducted (workshops, radio campaigns, press, TV) on extractive industries

2016 (25% women)

ACTIVITIES Component I (Cf. Activities Matrix, Technical Annex C1) Technical assistance activities: provision of national and international experts and consulting firms in the following General Directorates: Taxation, Customs, Budget, Treasury, Financial Control and Good Governance Enhancement Department, the Audit Bench and the Public Procurement Regulatory Authority. Human capacity building activities: training for all of the above structures. Capacity building in equipment: computer, automotive and office equipment for all of the above structures Component II (Cf. Activities Matrix, Technical Annex C1) - Technical assistance activities: provision of national and international experts and consulting firms at BIANCO, the mining observatory and the EITI Secretariat. - Human capacity building activities: training for all of the above structures. - Capacity building in equipment: computer and office equipment for all of the above structures

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Risk 3: Fiduciary Weakness of internal control system and procurement, and PFM capabilities increase fiduciary risks Mitigation measures: Adoption of a procedures manual, annual audits, Bank supervision and use of the Bank’s rules and procedures. PIU within PREA and in common with PGDI-II

RESOURCES Resources : Component I : UA 3.134 million Component II : UA 1.203 million Component III : UA 0.481 million Total cost: UA 4.818 million

Estimated Project Implementation Schedule Years Activities/Months

2013 2014 2015 2016 J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

Prior to Start-up Board presentation Grant effectiveness Loan effectiveness Selection of other BdG members Project launching mission Equipment and Supplies Bid invitation for IT and office equip. Bid invitation for vehicles& other wheeled mach. Bid invitation for other equipment Goods delivery Consultancy Services Preparation of BDs and SLs Bid invitation, analysis and contract award Delivery of consultancy services Training and Miscellaneous Preparation of BDs and SLs Bid invitation, analysis and contract award Delivery of consultancy services Operating expenses Mid-term review Monitoring/Evaluation Audit Annual accounts audit Final accounts audit

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MANAGEMENT’S REPORT AND RECOMMENDATIONS TO THE BOARD OF DIRECTORS CONCERNING A PROPOSAL FOR ADF FINANCING OF THE INSTITUTIONAL GOVERNANCE SUPPORT PROJECT (PAGI) This proposal submitted by Management to the Board concerns the granting of an amount of UA 4.5 million from ADF-12 resources to the Republic of Madagascar to finance the Institutional Governance Support Project (PAGI). The ADF financing comprises a loan of UA 4.32 million under ADF-12 (including a loan cancellation balance of UA 0.97 million) and a grant of UA 0.18 million, following a grant cancellation. This is an institutional support operation designed to contribute towards restoring public resource mobilization and control capacity, ensuring good governance in the extractive sector and preparing for re-engagement by technical and financial partners (TFPs) after the political and institutional crisis. I.

STRATEGIC THRUST AND RATIONALE

1.1.

Project Linkages with Country Strategy and Objectives

1.1.1. The country’s development strategy (Madagascar Action Plan) which covered the 2007-2012 period laid special emphasis on improving governance, including strengthening public finance management (PFM) and fighting corruption. This strategy having expired, another national strategy will be prepared by the new authorities that will emerge from the upcoming elections to be held before end 2013. 1.1.2. Currently, despite the absence of a national development strategy formally adopted by the Government, the authorities place a high premium on good governance and transparency in government action. Accordingly, the implementation of the National Good Governance Policy adopted in 2006 is on-going. Indeed, the activities of the Administration Efficiency Reform Programme (PREA) and of the Council for the Safeguard of Integrity (CSI) put in place under the said Policy, continue. Also, Madagascar adopted a National Anti- Corruption Strategy in 2004. It is still being implemented by the Independent Anti-Corruption Bureau (BIANCO). This strategy aims to substantially curb corruption in Madagascar by 2015. Furthermore, during a government workshop on Public Governance in January 2012, the authorities reiterated the need for good governance, notably in public finance management. 1.1.3. The Ministry of Finance and Budget (MFB) is preparing a short- to medium-term action plan (MFB), with a view to improving public finance management. The said action plan focuses on priority activities that are crucial to sound financial and economic governance, and aims to consolidate public finance management gains. PAGI will support the MFB in preparing the action plan. Thus, this project is in line with the national policy on good governance, the national anti-corruption strategy and the priority activities of the public finance management action plan being prepared. Therefore, it aligns with the country's priorities. 1.1.4. The project is in line with the Bank’s strategy for Madagascar. The Country Strategy Paper (CSP)1, which was extended to 2013, has two pillars: improving infrastructure (Pillar 1) and improving governance (Pillar 2). The CSP objectives include: (i) contributing towards reducing the country's fragility and the vulnerability of its people by responding to some of its pressing needs, notably in terms of rehabilitating the productive and transport infrastructure; (ii) strengthening public finance management, the anti-corruption drive and illicit trafficking; and (iii) preparing for a more speedy re-engagement of the Bank in case of normalization of the political situation through a number of analytical and project preparation works. Under CSP Pillar II, this will notably include institutional support to strengthen economic and financial governance. Thus, PAGI is fully in line 1

Combined Report of the Portfolio Review and the 2012-2013 Extended Country Strategy Paper (ADF/BD/WP/2012/32/Rev.1)

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with Madagascar’s CSP. As operational priorities, the Bank’s Ten-Year Strategy, 2013-2022 (approved in April 2013) has, inter alia, governance and accountability (including improving PFM), resource mobilization and strengthening of institutions that support the accountability process. Therefore, PAGI is consistent with the Bank’s Ten-Year Strategy. Lastly, the project is in line with the operational priorities of ADF-12 which lays emphasis on the promotion of sound financial and economic governance. 1.2

Rationale for Bank’s Involvement

1.2.1. Since 2009, Madagascar has endured a political crisis with severely adverse socioeconomic effects. International mediation led to the signing by almost all Malagasy political groups of a roadmap in September 2011. Thus, the transitional institutions (Government, Parliament and Independent Electoral Commission) were put in place and Presidential and Legislative elections could be held before end 2013. On the economic level, the growth rate that stood at 7.1% in 2008 fell sharply to -4.1% in 2009 following the outbreak of the crisis which severely crippled the productive system, before averaging 1.1% over the period 2010-11. With a Human Development Index of 0.483 in 2012 (151st out of 187 countries), the lowest among Indian Ocean countries (with the exception of the Comoros), and 76% of the population living below the poverty line in 2010, the incidence of poverty in Madagascar is among sub-Saharan Africa’s highest. This situation stems from the political crisis that was accompanied by a 40% drop in international aid between 2009 and 2011, and the consequent plunge in the State budget. Therefore, the Government has been forced to pursue a fiscal austerity policy, thanks to which it was able to contain the budget deficit at 3.1% of GDP in 2012. 1.2.2. Against this backdrop, the project aims to contribute towards addressing a number of challenges facing the public finance management system highlighted by the main recommendations of recent studies2 (see Technical Annex A2 on the sector overview). In so doing, the Bank will help to gradually restore the State’s public finance management capabilities to enable it to fulfil its economic role, including poverty reduction. Since the outbreak of the political crisis in 2009, revenue has declined by 20% in real terms. Furthermore, the lack of government credibility and visibility limits its borrowing capacity on international private capital markets. Besides the decline in financial resources for State intervention, poor monitoring of budget execution and control of public spending are unlikely to lead to efficient public finance management. 1.2.3. Despite improvements in the performance of tax (Directorate General of Taxation DGI) and customs (Directorate General of Customs- DGD) administrations, notably in 2010, public revenue collection remains weak. The tax ratio, which went from 13% in 2008 to 10.9% in 2012, remains among sub-Saharan Africa’s lowest. For instance, the VAT recovery rate is a mere 24% of its potential tax base, whereas it stands at 78% and 47% in Mauritius and Senegal, respectively. Regarding customs duties, the collection rate is barely 29% of the potential amount that could be generated from imports declared in Madagascar, while it reaches 41% in Mozambique and 60% in Senegal (see Technical Annex C1 for a detailed presentation of the tax context). This weak public revenue mobilization capacity is attributable to: (i) the existence of a number of companies, which although registered, pay little or no tax due to the tax administration’s weak capacity; (ii) under-taxation of large companies, whereas they are the country’s largest taxpayers; 2

World Bank (2011) Public Expenditure Review. Bitz, Michael (2011), Assessment of the Implementation of the Malagasy Integrated Public Finance Management System (SIPFM), Interim Report, World Bank. Ibrahim, Mamane (2011), Madagascar: Public Finance Management Assessment Mission, World Bank, Public Finance Management Performance Measurement Report of the Republic of Madagascar, March 2008. European Union (2012), Budget Support Assessment and Public Finance Management Review of the health and education sectors - Madagascar: Update on Public finance management and health/education sector analysis, review of eligibility criteria; Phase 2 Report (Summary of the Interim Report).

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and (iii) the attitude of taxpayers who are unconcerned about fulfilling their civic duty, especially given the extremely low risk of sanctions. Lastly, the inadequate capacity and logistics of public finance management institutions is not conducive to devolution and decentralization for greater public revenue mobilization in the regions. 1.2.4. The control system is marked by inefficiency, duplication of interventions of the bodies concerned and lack of control of services provided and reference prices. The lack of human and material resources also limits the control system’s efficiency. Although all internal control services focus on controlling regularity of expenditure, there is none that checks results and performance. The system is undermined by the weak capacity of public institutions or lack of accountants in some of these institutions as well as the lack of appropriate penalties for perpetrators of misappropriations revealed through controls conducted by the General Financial Control Directorate (DGCF), the Treasury and the General Inspectorate. 1.2.5. External control remains weak despite some progress illustrated notably by the adoption of the Budget Review Act reports for the 2005 and 2006 fiscal years. External monitoring institutions have neither the information nor the tools to analyze and, where necessary, punish deviations. The external audit conducted by the Audit Bench remains inefficient because of non-enforcement of the penalties provided by law. With no regular reporting on external control, Parliament exercises no control. No audit of management of the State’s central administration has been validated by the National Assembly. Since 2008, the Public Procurement Regulatory Authority (ARMP) routinely publishes information on all contracts, resulting in a significant drop in the number of directly negotiated contracts between 2008 and 2012 (i.e. from 25% to 6.84% between 2008 and 2012). However, a review of works procurements casts doubt on the quality of the controls carried out by ARMP or, at least, the information it publishes on its website. 1.2.6. In terms of governance, conflicts of interest, corruption, illicit trafficking, lack of transparency and inefficient management of mining resources also constitute obstacles to the promotion of good governance. While Madagascar had already lost 13 points between 2007 and 2010 in the ranking of the Mo Ibrahim African Governance Index, with an index of 46%, it ranked 35th in 2011 compared to 33rd in 2010. Having attained the candidate country status in February 2008, Madagascar was suspended in October 2011 from EITI, pending normalization of its political situation. With the political crisis, the opportunities for corruption and related offences increased sharply in 2010, according to BIANCO. 1.2.7. Thus, the project will contribute to efforts by Malagasy authorities to gradually restore the public finance management capacity in a context of protracted political crisis that has weakened institutions and led to the deterioration of governance3. In this regard, several Malagasy institutions are making efforts to improve. Despite the difficult environment, the Bank is determined to maintain its leadership role in economic and financial governance. PAGI is also part of concerted efforts by development partners to lay the groundwork for a speedy and effective resumption of financial support in response to various development challenges. 1.2.8. The Bank’s experience in implementing institutional support projects in difficult contexts of fragile institutions also gives it a significant comparative advantage that justifies its intervention in Madagascar. Through similar interventions in countries such as Guinea, Côte d'Ivoire, Sierra Leone and Liberia, the Bank has acquired experience in designing these operations, whose primary objective is to restore technical, material and human capacity in public finance management. PAGI complements other Bank interventions in Madagascar given that by restoring the public revenue mobilization capacity, it will first facilitate the mobilization of various counterpart funds to help finance these projects (e.g. The Agricultural Infrastructure Rehabilitation 3

Madagascar: “Towards an Agenda of Economic Recovery” June 2010 and the World Bank Public Expenditure Review of October 2011.

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Project in the South-West region, whose counterpart contribution stand at UA 3.2 million). Secondly, by restoring good governance and transparency conditions, PAGI will contribute indirectly towards improving the management of different projects. 1.3

Donor Coordination

1.3.1. Due to the political crisis, donors have suspended many of their interventions and currently few donors are involved in the area of public finance management. The pre-crisis partnership framework has slackened significantly. The Bank will actively contribute towards revitalizing the partnership framework once the current crisis ends. Despite the lack of formal coordination mechanisms, the Bank has coordinated closely with other TFPs in preparing this project. Coordination meetings among the donors, on the one hand, and between TFPs and the authorities, on the other, were held. A two-day workshop was organized during the preparation mission between TFPs and the Malagasy authorities to identify needs and the potential support that TFPs could provide to meet them. The meetings helped to identify priority activities that complement the support of other TFPs and that should be supported by PAGI. The Bank has reviewed the MFB’s draft action plan with development partners to ensure that PAGI is complementary to the activities of other TFPs. Thus, PAGI will finance emergency priority activities with a rapid and significant impact on improving public resource mobilization, good financial governance, the fight against corruption and transparency in the extractive sector. 1.3.2. Besides the Bank, the Government is also supported by the French Cooperation and the World Bank (WB). More specifically, French assistance has focused exclusively on tax revenue from customs and tax administrations, while the public spending cycle was supported by the Bank and the World Bank. The World Bank and the Bank provide funding for the deployment of taxation centres. WB and French Cooperation are also working to develop a culture of activity monitoring and control. Lastly, the PAGI appraisal mission coincided with a European Union (EU) preparation mission for the Institutional Governance Support Project that will be approved and implemented once elections are held and the crisis ends. The EU support will mainly cover the strengthening of the budget making process, citizen participation, civil service reform and judicial reform. This synergy and complementarity of TFPs will create conditions conducive to effective restoration of physical, human and institutional capacity for better public finance management, increased transparency and further pursuit of the fight against corruption. 1.3.3. Using a common project implementation unit (see § 4.1.1) to implement projects attached to the Prime Minister’s Office will facilitate interdepartmental coordination of interventions by institutions (see Table 1 below for a summary).

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Table 1 Donor Interventions in Areas Covered by the Project Partners World Bank European Union 4 AfDB

Public Finance Management X X X

French Cooperation 2

Extractive Industries Governance X X

Fight Against Corruption X X

Justice

Public Service

X

X

X

PROJECT DESCRIPTION

2.1

Project Components

2.1.1 The project’s overall goal is to contribute towards restoring institutional capacity for better public resource mobilization, strengthening financial governance and transparency in the extractive sector. The project will also contribute towards preparing for donors’ recommitment after the political and institutional crisis. The project’s specific operational objectives will be to: (i) improve public resource mobilization and control systems by improving the mobilization of tax and quasi-tax revenues and customs revenues, public accounting and accounts auditing, and internal and external ex-post control, (ii) strengthen anti-corruption and improve transparency in the extractive sector, by supporting anti-corruption and improving transparency in the extractive sector 2.1.2. PAGI comprises two operational components, namely: (i) improving public resource mobilization and control systems; (ii) strengthening the fight against corruption and improving transparency in the extractive sector. There is a third component concerning project management, research and knowledge management. The three components are mutually complementary and reinforcing. Indeed, increasing public resource mobilization without strengthening public expenditure control cannot lead to increased and improved efficiency of government interventions. The fight against corruption cannot improve without an appropriate public spending control system. Furthermore, greater transparency in the extractive sector improves the mobilization of tax and non-tax revenue. Table 2 below provides details on the components. Technical Annexes B1 and C1 provide detailed costs for each component’s activities and a comprehensive list of goods and services to be procured under the project, as well as a detailed description of project activities.

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The EU Institutional Support Project is being prepared.

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Table 2 Project Components and Sub-Components Code

Components

Costs (UA ‘000)

I.

Component I

3 119.6

I.1.

Improvement of the public resource mobilization framework

Improvement of tax and quasi-tax revenue collection: technical support for addressing Tuléar town, study on the assessment of tax reforms, deployment of a computerized monitoring and evaluation system at MFB, monitoring and evaluation training for DGI and MFB officials; Improvement of the customs revenue collection framework: training in several customs-related domains (fight against fraud, strategic management, popularization of e-learning, etc.). Improvement of public accounting: feasibility study/implementation of paperless processing of accounting transactions; Improvement of auditing: SIPFM system deployment, training of trainers on the new SIPFM system, training IPSAS, IAS / IFRS in fraud and collusion; Strengthening the internal control system: training in ex post control of services rendered and exchange of experiences abroad; Improving the external ex post control system: production of the public institutions audit manual for the Audit Bench; training on several performance-related terms; and logistic support to control and audit missions. Improving transparency in public procurement: logistic/operational support for sensitization on the public procurement code of ethics, assessment of procurement after ex post control, sensitization of the private sector stakeholders and civil society on public procurement.

1 274.2

I.2.

Improvement of accounting and auditing

656.9

I.3.

Improvement of internal and external ex post control

1 188.5

II.

Component II

1 203.0

II.1.

Strengthening the fight against corruption and fraud

610.0

II.2.

Improvement transparency in extractive sector

592.0

III.

Description of Components Improvement of public resource mobilization and control systems

Strengthening the fight against corruption and improving extractive sector transparency Strengthening the fight against corruption and fraud: study on illicit trafficking; develop a computerized data processing system, training on illicit trafficking, corruption prevention techniques; nationwide sensitization on corruption and fraud , updating and maintenance of the BIANCO website; Improving extractive sector information: setting up a statistical monitoring system and an information system; training in statistical monitoring, acquisition of computer hardware;

of the

Component III Coordination Audit Knowledge Management Total Project Cost

Improving transparency in extractive sector governance: preparing mining sector audit reports; support to Madagascar’s EITI validation process and extractive industries, sensitization on extractive industries; procurement of sundry equipment;

495.4 386.5

Project Management Compensation and miscellaneous operation; material assets and office equipment Project financial audit Studies, PEFA Self-Assessment

66.9 42.0 4818.0

6

2.2

Technical Solutions Adopted and Alternatives Considered

2.2.1 During project preparation and appraisal, and in light of lessons learned from implementing the Good Governance Capacity Building Project (PRIBG)5, several options were presented concerning notably the project’s institutional anchoring. To enhance the efficiency and complementarity of activities, it was deemed that the project should be anchored at the Prime Minister’s Office (see para. 2.7.2). The establishment of a Centralized Project Management Office (BdG) attached to the Prime Minister’s Office will ensure improved interdepartmental coordination within the government and among the TFPs. 2.2.2. In addition, important and fruitful discussions were held on the intervention areas, the number of institutions to support and the type of capacity building. Trade-offs were made to be able to: (i) set project objectives that are consistent with the country's priorities; and (ii) factor in synergy with interventions of other TFPs. PAGI has chosen the option to reduce the number of direct beneficiary institutions (10 under PAGI against 32 under PRIBG) and focus on a limited number of components and activities to ensure the project’s success. 2.2.3. Regarding training arrangements under this project, several beneficiary institutions proposed the option of training abroad. However, in light of experience from PRIBG, the project team, following discussions with the authorities, opted for short-term training in the country or in Africa by/in known institutions or regional/international experts. This choice will increase the number of people trained and help to develop and strengthen the training capacity at country and regional level. 2.3

Project Type

PAGI is an institutional support project that focuses on improving public finance management systems, internal and external control, and mining sector governance. It was designed to gradually put a halt to the deterioration of public finance management and contribute towards restoring the achievements of previous interventions in the area of revenue mobilization, internal and external auditing, the fight against corruption and transparency in the extractive sector. 2.4

Project Cost and Financing Arrangements

The total estimated project cost, excluding taxes and customs duties, stands at UA 4.818 million. Through ADF resources, the Bank will provide UA 4.5 million and the Government UA 0.318 million (6.6% of total project funding) as counterpart contribution to partially cover operating costs. ADF funding is broken down as follows: UA 4.32 million as a loan, and UA 0.18 million as a grant6. Provisions of 3% and 2% respectively for price escalation and physical contingencies have been included in the project cost. Tables 3 to 7 present the project cost estimates by component and sub-component, by source of financing and expenditure category per year. A detailed table of costs is presented in Technical Annex B1.

5

6

The Good Governance Capacity Building Project (PRIBG) was executed between 2004 and 2012, and financed by the World Bank through a UA 5.86 million grant (Project Completion Report- ADF/BD/IF/2012/144) It should be noted that despite budgetary constraints, the Government of Madagascar has always demonstrated its willingness to contribute to the financing of Bank projects. Accordingly, it was recommended that the ADF finance 93% of the project’s local currency and foreign exchange costs under the Bank Group’s Policy on Eligible Expenditure (ADB/BD/WP/2007/106 / Rev.2 ADF/BD/WP/207/72/Rev.2-2 May 2008). This departure from the 10% counterpart funding required was approved by OPSCOM at the 11April 2013 Concept Note review.

7

Table 3 Project Cost Estimate by Component Total Cost (UA ‘000)

Total Cost (MGA million)

Component Improvement of public resource mobilization and control systems Improvement of public resource mobilization framework Improvement of accounting and auditing Improvement of internal and external control Strengthening the fight against corruption and improving extractive sector transparency Strengthening the fight against corruption and fraud Improvement of transparency in the extractive sector Project Management TOTAL BASE COST Physical contingencies 2% Price escalation 3% TOTAL PROJECT COST

F.E.

L.C.

Total

F.E.

L.C.

Total

% F.E.

7 262.7

2 655.5

9 918.2

2.175.6

795.5

2 971.1

73.2%

3 288.4

762.8

4 051.1

985.1

228.5

1 213.6

81.2%

1 709.9

378.5

2 088.4

512.2

113.4

625.6

81.9%

2 264.5

1 514.1

3 778.7

678.4

453.6

1.131.9

59.9%

2 378.8

1 445.8

3 824.5

712.6

433.1

1.145.7

62.2%

924.7

1 014.7

1 939.4

277.0

304.0

581.0

47.7%

1 454.0

431.1

1 885.1

435.6

129.1

564.7

77.1%

300.6 9 942.1 198.8 298.3 10 439.2

1 274.4 5 375.7 107.5 161.3 5 644.4

1 575.0 15 317.8 306.4 459.5 16 083.6

90.0 2 978.2 59.6 89.3 3 127.2

381.8 1 610.3 32.2 48.3 1 690.8

471.8 4 588.6 91.8 137.7 4 818.0

19.1% 64.9% 64.9% 64.9% 64.9%

Table 4 Sources of Financing Total cost (UA ‘000)

Total cost (MGA million)

Sources Loan - ADF Grant - ADF Malagasy Government TOTAL PROJECT COST

F.E. 9 838.3 600.9 10 439.2

L.C. 4 582.9 1 061.6 5 644.4

Total 14 421.2 600.9 1 061.6 16 083.6

F.E. 2 947.2 180.0 3 127.2

L.C. 1 372.8 318.0 1 690.8

Total 4 320.0 180.0 318.0 4 818.0

Table 5 Project Cost by Expenditure Category (UA ‘000) EXPENDITURE CATEGORY

F.E.

L.C.

Total

% F.E.

Goods Services Operation TOTAL BASE COST Physical contingencies 2% Price contingencies 3% TOTAL PROJECT COST

1 530.5 1 447.7 2 978.2 59.6 89.3 3 127.2

64.4 774.7 771.3 1 610.3 32.2 48.3 1 690.8

1 594.9 2 222.4 771.3 4 588.6 91.8 137.7 4 818.0

96.0% 65.1% 0.0% 64.9%

64.9%

Table 6 Expenditure Schedule by Component (UA ‘000) COMPONENTS

2014

2015

2016

Total

Improvement of public resource mobilization and control systems Strengthening the fight against corruption and improving extractive sector transparency Project management TOTAL PROJECT COST

1 536.5

936.9

646.2

3 119.6

687.4

409.9

105.6

1 203.0

172.6 2 396.5

161.4 1 508.2

161.4 913.3

495.4 4 818.0

8

Table 7 Expenditure Schedule by Category (UA ‘000)

2.5

EXPENDITURE CATEGORY

2014

2015

2016

Total

Goods Services Operation TOTAL PROJECT COST

1 124.2 988.4 284.0 2 396.5

322.2 916.1 270.0 1 508.2

228.3 429.0 255.9 913.3

1 674.7 2 333.4 809.9 4818.0

Project Area and Beneficiaries

The project area is the Malagasy territory. The main project beneficiaries are: (i) the State of Madagascar as a whole, whose institutional capacity will be strengthened (about 800 different supported structures will be trained, and the material capacity of these structures restored, the SIPFM system will be deployed nationwide, the country’s public resources will be increased, its accounting and auditing accounts improved, its internal and external control systems improved, its anti-corruption institutions strengthened (e.g. as direct beneficiary, BIANCO’s computer system will be developed, over 100 people will be trained in investigative techniques, and about 80 persons will be trained and sensitized on illicit trafficking and corruption control); the mining observatory as well as the EITI Executive Secretariat will also be strengthened; (ii) the Malagasy people who will be the indirect end beneficiaries of the improved management of public finances, the strengthening of corruption control and transparency in the extractive sector; and (iii) government departments and agencies, non-state actors, civil society and the private sector will also be indirect beneficiaries of PAGI. 2.6

Participatory Approach in Project Identification, Design and Implementation

The participatory approach was used at project appraisal and design, in close collaboration with the technical services of the Malagasy Government and various donors operating in Madagascar. During the preparation and appraisal missions, the project team held several meetings with Malagasy Government stakeholders, namely the MFB directorates, the Ministry of Justice, PREA, IGE, the Audit Bench, the Council for the Safeguard of Integrity (CSI), BIANCO, the Ministry of Mines, the EITI National Secretariat, the private sector and civil society. During the preparation mission, a 2-day workshop was held between donors and the Malagasy authorities to identify needs and potential donor support to cover them. During both missions, the team also held discussions with donors, including the World Bank, EU, UNDP, Norway, the United States, Switzerland, Japan, Britain, and French Cooperation. The purpose of the meetings was to harmonize and coordinate the different interventions and initiatives in Madagascar. Project implementation will also follow a participatory approach, through quarterly meetings of the Technical Committee involving all project beneficiaries. The workshops that will be organized during the mid-term and project completion report missions will be further opportunities for public consultation. 2.7

Bank Group Experience and Lessons Reflected in Project Design

2.7.1 The volume of the Bank's portfolio in Madagascar in late May 2013 represented UA 187.95 million for eleven (11) operations. The sectors covered by the portfolio are: industry (52%), water and sanitation (23%), agriculture (17%), social (5%) and energy (3%). The public sector comprises nine (9) projects amounting to UA 83.2 million or 44% of the portfolio. Besides projects financed through loans, there are two emergency aid and two other operations7 financed through grants. The performance of the Bank's public sector portfolio, rated at 2.18 out of 3 exceeds 7

Emergency Humanitarian Assistance for the Prevention of Epidemics; (ii) Emergency Assistance for the Rehabilitation of Social Infrastructure Following the Passage of Cyclone Giovanna Irina (iii) PPR-Rehabilitation and Extension of the Lower Mangoky Scheme (iv) PPF - Mid-West Young Rural Enterprises

9

the 2012 and 2009 performance levels (1.8 and 2.14 out of 3, respectively). As at 10 May 2013, the public portfolio’s disbursement rate was 37% against 44.1% in March 2012. The low disbursement rate is partly due to the poor performance of four projects in terms of disbursement8 and the completion of two projects (PRIBG and PRPT9) in 2012. The portfolio has no problematic project. However, there are three risky projects representing 33.33% of the public portfolio (Annex II). 2.7.2 The implementation of PRIBG (closed in 2012, Completion Report ADF/BD/IF/2012/144) contributed to improving public finance management in Madagascar, notably through PFM training of 11,000 government officials, the deployment of ASYCUDA + + (Customs) and SIGTAS (Taxation), the establishment of SIEA (Registration) and the deployment of procurement management software. PRIBG helped to improve tax mobilization, budget preparation and management, and strengthened the procurement system. Besides the aforementioned gains, the PRIBG completion report highlighted a number of lessons that are reflected in the design of the operation under consideration. Table 8 summarizes the key lessons and how they were factored in during PAGI preparation (Technical Annex A4 on lessons learned in Madagascar, Liberia, Sierra Leone and Burundi). Table 8 Lessons Learnt from Previous Institutional Support Projects Measures to Reflect Lessons in the Project

Lessons Learnt Too broad a scope

Too many activities Project Implementation anchored at Presidency

micro-

Unit the

Weak coordination of different technical and financial partner interventions in the sector

8

9

At identification, discussions focused on limiting the number of project beneficiary structures and continued during the preparation and appraisal missions. They helped to limit the number of beneficiary structures to 10 against 32 under PRIBG. At identification, discussions focused on limiting the number of project beneficiary structures and continued during the preparation and appraisal missions. They helped to limit the number of project components to 3 with 6 sub-components. The Project Implementation Unit was identified at preparation and an agreement was reached with the Malagasy party on the institutional anchoring of the PIU at the Prime Minister’s Office, more specifically at COS/PREA. As a technical body, its anchoring at the Prime Minister’s Office strengthens efficiency and complementarity with other donors whose projects are also attached to it. The project will be managed by a centralized management office which is common to all projects that are institutionally attached to COS/PREA. The project design was closely coordinated with the interventions of other development partners. Using the same Project Implementation Unit with all projects of the same type attached to the Prime Minister’s Office (e.g. the World Bank’s on-going PGDI-II) will help harmonize the interventions of the two banks in the sector.

(i) Tuléar Fishing Communities Support Project (60%, 7 months to the end), (ii) Drinking Water Supply Project (31%, 7 months to the end) (iii) Supplementary Loan to PRBM (1% over 4 years after approval but with only one year of implementation due to the crisis), and (iv) PPF for the preparation of PRBM -II (0%). The PRPT completion report was prepared in May 2013. Its validation is on-going.

10

2.8

Key Performance Indicators

The key performance indicators identified and PAGI’s expected outcomes on completion are shown in the results-based logical framework. They are mainly: Box 1 Key Performance Indicators Output indicators  Addressing of Tuléar town completed by 2016  At least 20 decentralized taxation centres operational by 2016  21 financial control delegations operational by 2016  At least 50 persons trained in extractive resources between 2014 and 2016 Outcome indicators  Improved fiscal resource mobilization with an increase in government revenue, from 10.9% in 2012 to 13% in 2016  Improved internal and external control systems with shorter timeframes for tabling budget review bills before Parliament below 9 months between 2006 and 2016 (24 months for the last bill tabled in 2006, less than 15 months in 2016)  The fight against corruption is scaled up with Transparency International’s corruption index moving from 32 in 2012 to 36 in 2016;  Madagascar acquires the status of EITI compliant country in 2016 Impact Indicators  The GDP Economic Growth Rate rises from 1.9% in 2012 to at least 4% in 2018  The ratings for the Mo Ibrahim governance index relating to “accountability” and “public management” rise from 51.7 and 55.5 in 2012 to 54 and 58 in 2018, respectively.

III.

PROJECT FEASIBILITY

3.1

Economic and Financial Performance

This project does not generate direct revenue which would help establish a financial return. Accordingly, the project’s performance is assessed based on the direct and indirect impact of its achievements at the economic and social level in the medium and long term. The rationale for the proposed operation is its contribution towards enhancing government’s performance by improving public finance management. Such benefits will result from restoring human and technical capacity to improve public resource mobilization, internal and external controls, strengthen the fight against corruption and increase transparency in the extractive industry. Through better public finance management, the project targets a positive medium-term impact on economic growth, access to social services and poverty reduction. 3.2.

Environmental and Social Impact

3.2.1. The proposed project will have no negative environmental impact. Rather, greater transparency in the extractive industry sector will probably have a positive effect on the environment. Support to capacity building for the Mining Sector Observatory will also enable better monitoring of the environmental impact of mining. The project is classified in Category 3 in terms of environmental impact. 3.2.2. The proposed project will improve gender equality outcomes in terms of human resource development. For instance, in organizing training, efforts will be made to target women candidates. This will enable the training of over 200 women in the various beneficiary institutions. Similarly, ARMP’s training activities under this project will seek to provide capacity building for women so as to increase women entrepreneurs’ participation in bidding for public contracts. Generally, at least 25% of trainees in each case will be women. 11

3.2.3. Social Impact: The project will contribute to increased public resources (10.9% of GDP in 2012 to 13% of GDP in 2016), thus supporting improved access to social services and poverty reduction (the incidence of poverty stood at 76% in 2010) thanks to an increase in pro-poor spending and infrastructure, as well as better governance in the financial and extractive sectors. 3.2.4. Impact on overall governance: The project will contribute directly towards improving the country’s public finance management system, notably through capacity building in public resource management, public procurement, and control of public spending. The project will lead to, inter alia, better collection of tax and non-tax revenue (about 90% of the municipalities will be subject to local taxation and Tuléar town will be addressed by 2016), the deployment of transparent public procurement systems that are consistent with the principle of accountability, and improved transparency (establishment of a monitoring and evaluation system at the mining observatory) in the extractive sector through support for the preparation of mining sector audit reports by 2015. 3.2.5.

Involuntary Resettlement: The project will not entail any population displacement.

IV.

PROJECT IMPLEMENTATION

4.1.

Implementation Arrangements

4.1.1. Executing Agency: Under the guidance of a Steering and Monitoring Committee (COS), PREA which is attached to the Prime Minister’s Office will coordinate PAGI implementation through a Centralized Project Management Office (BdG) set up by the Prime Minister. The BdG currently acts as implementation unit of the World Bank’s Governance and Institutional Development Support Project, Phase II (PGDI-II). It is expected that its mandate will be extended to PAGI’s implementation. In this regard, COS, which comprises representatives of institutions involved in BdG-managed projects (including representatives of regions, municipalities, civil society and the private sector), will approve the PAGI annual work programme. Furthermore, a COS select committee will carry out quarterly monitoring of PAGI implementation. At the end of each year, COS will approve the annual project progress report (see Technical Annex B2 on the detailed implementation arrangements). 4.1.2. The BdG is currently headed by a Director who is assisted by a monitoring and evaluation Officer, a PDGI-II components management officer and a fiduciary and support staff management officer. PAGI will recruit the BdG deputy director, the fiduciary staff and other personnel to manage and monitor PAGI components. Recruitments will be on a competitive basis in line with the Bank’s rules and procedures, based on terms of reference approved by the Bank. The BdG will be responsible for preparing all reports, budgets and terms of reference as well as the fiduciary management of the project. The Government through PREA will provide the BdG with adequate office space. The BdG was evaluated during the appraisal mission and its performance was deemed satisfactory overall. 4.1.3. Financial Management: The BdG will carry out the financial management of project resources according to Bank rules and procedures. The BdG already has an official for the fiduciary management of PGDI-II. The fiduciary staff recruited on a competitive basis (administrative and financial officer (RAF) and an accountant) have been in place for several years (the accountant’s contract was renewed in late 2012) and master financial management procedures of the TFPs. The terms of reference of the fiduciary team in place will be amended so that the team is in charge of the fiduciary management of all PREA-supervised projects. Financial management software is in place and will be adapted to also manage the ADF resources. An administrative and financial management procedures manual already exists and will be amended to reflect the financial management of ADF funds and factor in the external auditors’ recommendations. An assessment of 12

the BdG shows that the project’s overall financial management risk is considered moderate. The project’s fiduciary team will be strengthened with the recruitment of an Assistant Accountant for procurement and an internal auditor. The recruitments will be on a competitive basis and in line with Bank procedures. The BdG will prepare an annual work programme and the related budget before the beginning of each fiscal year, that will be approved by COS and transmitted to the Bank for comments (cf. Para. 4.1.1 and Technical Annex B3). The BdG will prepare quarterly activity reports and financial reports in a format acceptable to the ADF, which will be forwarded to the ADF for comment within 45 days of the end of each quarter. 4.1.4. Disbursements: Disbursements will be made in accordance with Bank rules and procedures. Possible disbursement methods will be: direct payment and revolving fund. A disbursement letter will be sent by the ADF specifying the disbursement details. Two special accounts will be opened in a bank acceptable to the ADF, to exclusively receive the revolving fund (ADF loan and grant) managed by the fiduciary team. A deposit account will be opened at the Treasury to receive project funds that will be included annually in the Finance Act. 4.1.5. Audit: The project’s annual financial statements and financial monitoring reports prepared by the BdG shall be audited by a competent and independent audit firm. The audits will be conducted according to the Bank’s auditing Terms of Reference. Each audit will cover the Borrower’s fiscal year period. The audited financial statements will be submitted to the Bank no later than 6 months after the end of the year to which it relates. The cost of the audit will be financed from the ADF loan resources. The status of implementation of audit recommendations will be monitored regularly by the Bank. In accordance with the Bank’s information policy, the project will publish on its website, within the month following the validation of the final audit report, audit reports including qualified audit reports. 4.1.6. Procurement Arrangements: All goods and consultancy services financed from Fund resources (grants and loans) will be procured in accordance with Bank Rules and Procedures for the Procurement of Goods and Works, and Rules and Procedures for the Use of Consultancy Services (May 2008 Edition, Revised 2012), using the Bank’s standard bidding documents. The BdG (see para. 4.1.1.) will be responsible for the procurement of goods and consultancy services financed by the Fund. The BdG has the capability to manage procurements and has solid experience that it has acquired by managing the World Bank-financed PGDI II. However, to efficiently implement the additional volume of procurement activities generated by PAGI, it will be provided with supplementary material and human resources, including recruitment of an assistant procurement officer. A draft procurement plan prepared by the BdG will be submitted to the Bank for review and approval prior to negotiations (see Technical Annex B4 for details on procurement). 4.2.

Monitoring and Evaluation

In collaboration with the beneficiary institutions, COS, PREA and BdG are responsible for all monitoring and evaluation (M&E) activities. PREA and BdG will prepare quarterly project progress reports that will be sent to COS, beneficiary institutions; project stakeholders and the ADF (see Section 4.1 and Technical Annex B2 and B3). PAGI plans to recruit a monitoring and evaluation specialist for the BdG. The reports shall present the project progress according to the logical framework. These reports will also be published on the project website. Furthermore, periodic M & E supervision missions (two per year) will be fielded, in collaboration with MGFO, and a mid-term review to assess project implementation performance conducted in close coordination with the World Bank. In addition, the Bank will prepare a project completion report within three months of the last disbursement. The project milestones are indicated in the table below.

13

Table 9 Milestones in PAGI Implementation Timeline September 2013

Board Approval

December 2013 January 2014

Effectiveness Finalization of management recruitment Project start-up/ launching mission Goods and services procurement

January 2014 January 2014 – June 2016 Twice yearly End of each quarter 3rd quarter of 2015 January 2017

4.3

Milestone

Project Supervision Quarterly progress reports Mid-term review Project Completion Report

team

Monitoring Process/Feedback Loop Board Resolution /Letter to the Government Bank Government Bank/Government Government/PREA Bank/Government/PREA Government/PREA Bank/Government/PREA Bank/Government/PREA

Governance

A rigorous project governance structure has been put in place to manage the implementation, monitoring and fiduciary aspects, including the project audit, as presented in Sections 4.1 and 4.2 above and in Technical Annexes B2, B3 and B4. The preparation and regular updating of a procurement plan, preview of procurement operations by the National Tenders Board (NTB), formation of the qualified Tenders Committee (TC), the application of Bank rules and procedures for procurement and financial management, the use of a procedures manual for administrative and financial management, the preparation of project implementation reports, regular financial reports and regular audits will strengthen project governance. A rigorous process of selecting training beneficiaries, the formal appointment of focal points in the beneficiary institutions responsible for monitoring activities, the involvement of project stakeholders through COS, regular consultations and the recruitment an internal auditor for the BdG are also measures to help mitigate the risks. Monitoring and regular supervision, including joint supervision of the project with TFPs mainly through the Bank’s office in Madagascar will strengthen the verification of project governance and performance. 4.4

Sustainability

The sustainability of PAGI10 gains rests first and foremost on the determination of the Malagasy authorities to support improvements in public finance management and transparency in the extractive sector. By focusing on domestic revenue mobilization and improving the effectiveness of public expenditure through reinforcement of control systems and steady pursuit of the fight against corruption, PAGI will enable the authorities to improve the tax revenue level. This will help to strengthen the State’s poverty reduction effort. Staff of different beneficiary structures will be trained locally by trainers from the administration. The trainers themselves will also be trained, to ensure continuity of training for future generations. Knowledge acquisition and mastery of modern management tools will enable better qualification and performance of the Malagasy public administration. Under PAGI, manuals and guides will be prepared for beneficiary structures. The formal designation of focal points in beneficiary institutions under the project will help to sustain activities over time within such structures. Lastly, the establishment of a Centralized Project Management Office (BdG) with the World Bank and other projects attached to PREA will also contribute to project sustainability.

10

However, it is difficult to strike the right balance between tangible achievements and sustainable capacity in a country that is going through a political crisis, which has led to a weakening of the State and its institutions.

14

4.5

Risk Management

Table 10 below provides a summary of the residual risks (other than those related to governance and sustainability) as well as mitigation measures. Table 10 Risks and Mitigation Measures Risks Political, institutional and macro-economic risk: Since 2009, Madagascar has been going through a political crisis that has led to a weakening of institutions, a significant decline in revenue and the implementation of fiscal austerity. Institutions have been weakened by macroeconomic shocks as well as repeated cyclones. A protracted political crisis and macro-economic shocks could jeopardize project implementation and attainment of project objectives. The lack of political stability and the fragility of institutions could delay the implementation of reforms, due notably to the absence of strategic orientation of the reform programme and resistance to change. Operational risk: The lack of institutional capacity implies a risk of project implementation delays and inadequate coordination of donor interventions. There is also a risk of departure of people trained under the project.

Fiduciary risks and corruption. The weakness of internal control, procurement and PFM capacity increase fiduciary, conflict of interest and corruption risks. This could lead to embezzlement or misappropriation of funds or project resources

4.6

Level

High

Average

Average

Mitigation Measures The international community’s on-going support and mediation for the holding of elections and ending of the crisis probably before end 2013 is a factor that can mitigate this major risk. Improved revenue mobilization, the authorities’ continued prudent fiscal policy, project activities and those of other TFPs to strengthen governance are all risk mitigation measures. Lastly, support by the project and other TFPs for the preparation of a public finance management reform strategy and capacity building for change management are also risk mitigation factors.

The project’s targeted approach, the establishment of a Centralized Project Management Office (BdG) within PREA, close coordination between TFPs, notably in monitoring project implementation and regular supervision of PAGI will help to mitigate this risk. Project activities will also reduce institutional capacity weaknesses. The risk of departure of trained persons is mitigated by the large number of persons that will be trained. The risk mitigation measures are presented in Section 4.1 and the technical annexes. The project funds will be managed in line with Bank's rules and procedures for financial management, procurement, disbursement and auditing; also, project management will be transparent. Moreover, monitoring and supervision by the Bank in close collaboration with the other TFPs will help to mitigate this risk.

Knowledge Building

Knowledge will be acquired through skills transfer, thanks to technical assistance and training at the local, regional and international level. PAGI will contribute towards knowledge building and skills development, notably in public finance management, fraud and corruption control as well as transparency in the extractive industry. Under public finance management, knowledge will be acquired through technical assistance and training in the following areas: (i) revenue mobilization; and (ii) internal and external ex post control. The project will also develop manuals and finance studies, including a study on illicit trafficking, assessment of the fiscal policy and development of a public finance management strategy. Furthermore, the project will support the PEFA self-assessment. The introduction of a mining sector statistical monitoring mechanism and information system will allow for better knowledge of Madagascar’s mining sector.

15

V.

LEGAL FRAMEWORK

5.1.

Legal Instrument

The project’s financing instrument is an ADF-12 loan of UA 3.35 million, an ADF loan of UA 0.970 million (reuse of the balance from cancellation of ADF loans) and a grant of UA 0.180 million (reuse of the balance from an ADF grant cancellation). The loan and grant protocol agreements between the Government of Madagascar and the African Development Fund shall be signed by the parties concerned. 5.2.

Conditions for Bank’s Intervention

5.2.1. Conditions precedent to loan and grant effectiveness: The loan agreement shall become effective on the date of fulfilment, to the Bank’s satisfaction, of the conditions under Section 12.01 of the General Conditions Applicable to ADF Loan Agreements and Guarantee Agreements. The grant protocol agreement shall become effective on the date of its signature by the Malagasy Government and the African Development Fund. 5.2.2. Conditions precedent to first disbursement of the ADF loan and grant: The first disbursement of the loan and grant resources shall be subject to effectiveness of the said grant protocols, and to:

5.3.

(i)

submission of the text: (a) attaching the Project to the Administration Efficiency Reform Programme (PREA) to enable it supervise the project; and (b) defining the mandate of BdG and its Director;

(ii)

submission of the originals or certified true copies of the certificate showing the opening of: (a) a special account in the name of the project with a bank acceptable to the Fund to receive the loan resources, and bearing the complete bank references of the account; and (b) a deposit account in Ariary with the Antananarivo General Revenue Office to receive the Government’s counterpart contribution.

Compliance with Bank Policies

The project complies with all applicable Bank policies. VI.

RECOMMENDATION

Management recommends that the Board approve the proposal to: (i) grant an ADF loan not exceeding UA 4.320 million; and (ii) award an ADF grant not exceeding UA 0.180 million to the Republic of Madagascar to finance the Institutional Governance Support Project, under the terms and conditions set forth in this report.

16

Annex I MADAGASCAR COMPARATIVE SOCIO-ECONOMIC INDICATORS

Madagascar COMPARATIVE SOCIO-ECONOMIC INDICATORS Develo- Developing ped Countries Countries

2012 2012

90 80 70 60 50 40 30 20 10 0

last update :

2012

Madaga scar

2011

I

2011

Note :

UNAIDS; UNSD; WHO, UNICEF, WRI, UNDP; Country Reports. n.a. : Not Applicable ; … : Data Not Available.

Infant Mortality Rate ( Per 1000 )

2010

Sources : AfDB Statistics Department Databases; World Bank: World Development Indicators;

2011

10,8 -0,2 40,4 11,4

2011

10,7 0,4 28,7 3,1

2010

7,6 0,6 23,0 1,2

Africa

2009

6,0 1,0 21,5 0,1

2010

2011 2000-2009 2011 2009

2010

Environmental Indicators Land Use (Arable Land as % of Total Land Area) Annual Rate of Deforestation (%) Forest (As % of Land Area) Per Capita CO2 Emissions (metric tons)

2009

106,6 102,8 101,5 101,4 80,0 98,3 98,7 97,9 5,2

Madaga scar

2008

103,1 105,1 66,3 65,0 58,6 80,8 86,4 75,5 3,9

2009

101,9 98,4 42,3 38,5 43,2 67,0 75,8 58,4 5,3

2009

148,4 147,1 31,1 30,2 55,8 64,5 67,4 61,6 2,8

2008

2010-2012 2010-2012 2009-2012 2009-2012 2011 2009-2010 2009-2010 2009-2010 2008-2011

71 61 51 41 31 21 11 1

2007

Education Indicators Gross Enrolment Ratio (%) Primary School - Total Primary School - Female Secondary School - Total Secondary School - Female Primary School Female Teaching Staff (% of Total) Adult literacy Rate - Total (%) Adult literacy Rate - Male (%) Adult literacy Rate - Female (%) Percentage of GDP Spent on Education

Africa

Life Expectancy at Birth (years)

2008

276,2 730,7 ... 99,5 100,0 99,9 0,4 14,0 95,4 93,0 1,7 3 285 8,2

2008

112,2 187,6 65,4 86,4 80,0 56,2 0,9 146,0 83,9 83,7 17,4 2 675 2,9

2007

49,2 134,7 53,7 67,3 65,2 39,8 4,6 234,6 81,6 76,5 19,8 2 481 5,9

Madagascar

2006

16,1 32,0 43,9 46,0 38,0 15,0 0,3 238,0 82,0 70,0 36,8 2 117 3,8

3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0

2007

Health & Nutrition Indicators Phy sicians (per 100,000 people) 2004-2010 Nurses (per 100,000 people)* 2004-2009 Births attended by Trained Health Personnel (%) 2009-2010 Access to Safe Water (% of Population) 2010 Access to Health Serv ices (% of Population) 2000 Access to Sanitation (% of Population) 2010 Percent. of Adults (aged 15-49) Liv ing w ith HIV/AIDS 2011 Incidence of Tuberculosis (per 100,000) 2011 Child Immunization Against Tuberculosis (%) 2011 Child Immunization Against Measles (%) 2011 Underw eight Children (% of children under 5 y ears) 2004-2011 Daily Calorie Supply per Capita 2009 Public Ex penditure on Health (as % of GDP) 2010

Africa

Population Growth Rate (%)

2007

0,3 0,7 16,6 16,5 49,3 94,7 45,5 77,9 81,2 11,4 10,1 6,0 7,8 1,7 13,7 71,4

2006

1,3 2,3 28,5 6,0 52,5 103,4 53,2 67,3 69,2 20,9 7,8 46,4 66,7 2,6 230,0 62,4

2005

2,3 3,4 40,0 3,6 77,3 100,0 49,8 58,1 59,1 33,3 10,9 71,4 111,3 4,2 417,8 31,6

2006

2,8 4,1 42,4 3,1 83,7 99,4 23,8 66,9 68,6 34,7 6,3 40,8 57,2 4,5 240,0 42,9

Madaga scar

2006

2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2010 2012

2005

Demographic Indicators Population Grow th Rate - Total (%) Population Grow th Rate - Urban (%) Population < 15 y ears (%) Population >= 65 y ears (%) Dependency Ratio (%) Sex Ratio (per 100 female) Female Population 15-49 y ears (% of total population) Life Ex pectancy at Birth - Total (y ears) Life Ex pectancy at Birth - Female (y ears) Crude Birth Rate (per 1,000) Crude Death Rate (per 1,000) Infant Mortality Rate (per 1,000) Child Mortality Rate (per 1,000) Total Fertility Rate (per w oman) Maternal Mortality Rate (per 100,000) Women Using Contraception (%)

GNI Per Capita US $ 1800 1600 1400 1200 1000 800 600 400 200 0

2004

35 811 1 244,6 75,7 23,4 38 657 71,7 43,9 0,911 ... ...

2004

98 458 5 807,6 46,0 70,0 3 304 68,7 39,1 0,694 ... 22,4

2005

30 323 1 070,1 40,8 34,5 1 609 37,8 42,5 0,502 ... 40,0

2004

587 21,9 31,0 36,3 430 47,5 49,1 0,541 151 81,3

2005

Basic Indicators Area ( '000 Km²) 2011 Total Population (millions) 2012 Urban Population (% of Total) 2012 Population Density (per Km²) 2012 GNI per Capita (US $) 2011 Labor Force Participation - Total (%) 2012 Labor Force Participation - Female (%) 2012 Gender -Related Dev elopment Index Value 2007-2011 Human Dev elop. Index (Rank among 186 countries) 2012 Popul. Liv ing Below $ 1.25 a Day (% of Population) 2010-2011

2004

Africa

2003

Madagasca r

Year

Africa

May 2013

Annex II Table of AfDB Portfolio in Madagascar Loan Amount (UA)

Amount Disbursed (UA)

Disbursement Rate

Approval Date

Signature Date

Disbursement Effectiveness

Agriculture

9 497 277

7 032 223

74%

21.11.2007

25.03.2008

06.05.2008

Agriculture

300 000

297 270

99%

10.07.2012

14.09.2012

APVD Agriculture

450 500

-

24.09.2012

08.11.2012

Agriculture

15 000 000

136 857

1%

03.12.2008

22.01.2009

Agriculture

500 000

-

0

10.07.2012

14.09.2012

OnGo

Agriculture

6 325 000

3 767 331

60%

16.11.2005

02.03.2006

6. DRINKING WATER SUPPLY PROGRAMME

OnGo

Water Sup/Sanit

43 839 689

13 707 900

31%

21.12.2005

7. COMMUNICABLE DISEASES CONTROL

OnGo

Social

6 000 000

4 353 146

73%

8. GIOVANNA EMERGENCY AID

OnGo

Social

663 570

663 570

100%

9. EMERGENCY HUMANITARIAN OnGo ASSISTANCE EPIDEMICS PREV.

Social

623 383

623 383

100%

PUBLIC SECTOR PORTFOLIO PROJECT NAME

Status

1. MANOMBO SCHEME REHABILITATION OnGo PROJECT PPF- MANOMBO SCHEME REHABILITATION OnGo PROJECT 2. PPF – MID-WEST RURAL ENTERP. PROJ.

3. LOWER MANGOKY SUPPLEMENTARY OnGo LOAN 4. PPF - LOWER MANGOKY II OnGo PREPARATION 5. TUL .FISHING COMMUNITIES SUPPORT

IRINA

TORNADO

Sector

83 199 419

TOTAL

PRIVATE SECTOR PORTFOLIO PROJECT NAME AMBATOVY NICKEL PROJECT

Status OnGo

SAHANIVOTRY SMALL HYDRO OnGo POWER

30 581 679

Last Loan Disbursement Effectiveness Date 06.05.2008

31.12.2013

14.09.2012

31.03.2015

11.04.2013

08.11.2012

31.12.2014

22.12.2011

22.12.2011

31.12.2015

14.09.2012

31.03.2015

26.10.2006

21.04.2006

30.12.2013

02.03.2006

08.06.2006

08.06.2006

31.12.2013

08.12.2004

13.01.2005

05.12.2005

13.01.2005

30.11.2013

12.07.2012

23.08.2012

23.08.2012

31.03.2013

30.01.2012

37%

Loan Amount (UA)

Amount Disbursed (UA)

Disbursement Rate

Approval Date

Signature Date

Disbursement Effectiveness

Loan Effectiveness

Last Disbursement Date

Ind/Mini/Quar

99 535 501

99 535 501

100

02.05.2007

22.08.2007

26.03.2008

26.03.2008

22.08.2011

Power

5 218 480

5 218 480

100

05.07.2007

25.09.2007

04.10.2007

28.09.2007

30.06.2008

Sector

TOTAL

104 981

753 104 753 981

100

II

Annex III MAP OF PROJECT AREA

This map has been provided by the staff of the African Development Bank Group exclusively for the use of the readers of the report to which it is attached. The names used and the borders shown do not imply on the part of the AfDB Group and its members any judgment concerning the legal status of a territory nor any approval or acceptance of these borders.

III