Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 39398-MG

PROJECT PAPER

PROPOSED ADDITIONAL FINANCING CREDIT

IN THE AMOUNT OF SDR 5.3 MILLION (US$8 MILLION EQUIVALENT)

TO THE

FOR A

MINERAL RESOURCES GOVERNANCE PROJECT

April 23,2007

Oil, Gas, Mining and Chemicals Department Botswana, Lesotho, Madagascar, Mauritius, Namibia, South Africa and Swaziland Country Management Unit Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS Exchange Rate Effective March 3 1,2007

AFD AfDB ANGAP

ASM BCM BCMM BPGRM CAS CASM

CBO

CEM DBG

DCA E A EI EIR EITI EMP FM FMR GoM

GDP GIs ICR IDA

IGM 12G ISR

Currency Unit = Malagasy Ariary 2000 = US$1

0.6625 US$ = SDR 1

FISCAL YEAR

January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

French Development Agency Afiican Development Bank Protected Areas National Management Agency Artisanal and Small-Scale Mining Central Bank of Madagascar Mining Cadastre Office of Madagascar Mineral Resources Governance Data Bank Country Assistance Strategy Communities and Small-Scale Mining

Community-Based Organization

Environmental Mining Cell Good Governance Directorate (under the Presidency) Development Credit Agreement Environmental Assessment Extractive Industries Extractive Industries Review Extractive Industries Transparency Initiative Environmental Management Plan Financial Management Financial Management Report Government of Madagascar

Gross Domestic Product Geographical Information System Implementation Completion Report International Development Association

Gemological Institute of Madagascar Integrated Growth Poles Project Implementation Status Report

LIL LCC LGIM

MAP MdM MdE NGO NGS NORAD

OMNIS

ONE PGE

PGRM PIU PIM PRSM PRISMM PRSP PSC QMM SESA

SOE SDM UCPM USAID

WB WWF

Learning and Innovation Loan Local Coordination Committee Large-scale Mining Investment Law

Madagascar Action Plan Ministry of Mines Ministry of Energy Non Governmental Organization National Geological Survey Norwegian Agency for Development Cooperation National Office for Mines and the Strategic Industries National Office for the Environment Environmental Management Plan

Mineral Resources Governance Project Project Implementation Unit Project Implementation Manual Mining Sector Reform Project Mining Institutional Strengthening Project Poverty Reduction Strategy Paper Production Sharing Contract QIT Madagascar Minerals. Strategic Environmental and Social Assessment Statement of Expenses Strategic Decision Meeting Mining Project Coordination Unit United States Agency for International Development The World Bank World Wildlife Fund

Vice President: Obiageli Ezekwesili Country DirectorIManager: Ritva Reinikka /Robert Blake

Sector Manager: Peter van der Veen Task Team Leader: Gotthard Walser

FOR OFFTCIAL USE ONLY

REPUBLIC OF MADAGASCAR

ADDITIONAL FINANCING CREDIT FOR A MINERAL RESOURCES GOVERNANCE PROJECT

TABLE OF CONTENTS

I . INTRODUCTION ......................................................................................................... 1 I1 . BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE AMOUNT OF US$8 MILLION ... '. ......................................................................... 1

A . Extractive Industries Development in Madagascar ................................................... 1 B . Original Project .......................................................................................................... 2 C . Rationale and Reasons for Requesting the New Credit ........................................ 3

I11 . PROPOSED CHANGES .......................................................................................... 5 A . Description of new proposed activities ...................................................................... 5 B . Project Implementation. Financial Management. Disbursement and Procurement

.................................................................................................................. Arrangements 9 IV . CONSISTENCY WITH CAS .................................................................................... 9 V . APPRAISAL OF SCALED-UP PROJECT ACTIVITIES .................................... 10

A . Implementation Mechanisms ................................................................................... 10 B . Financial Management ............................................................................................. 10 C . Procurement ............................................................................................................. 12 . . D . Environmental and Social issues .............................................................................. 12

VI . EXPECTED OUTCOMES ...................................................................................... 13 VII . BENEFITS AND RISKS ........................................................................................ 14 VIII . FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING ................................................................................................................... 15 IX . Schedule A .................................................................................................................. 16 X . Schedule B - Financial management Assessment Report ........................................... 18 XI . Schedule C: Timetable of Key Project Processing Events ........................................ 26 XI1 . Schedule D Madagascar Mineral Resources Donor Coordination Matrix ................ 27 XI11 . Map IBRD 33439 ..................................................................................................... 30

This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its coiltents may not be otherwise disclosed without World Bank authorization .

Project Paper Data Sheet

Sector Directormanager: Peter van der Veen

oYes o N o

The development objectives of the original Credit have not been revised

I. INTRODUCTION

1. This Project Paper seeks the approval of the Executive Directors to provide an additional credit in an amount of US$8 millionlSDR5.3 equivalent to the Republic of Madagascar for the Mineral Resources Governance Project (P076245) - Credit 3754- MAG. The proposed additional credit would help finance the costs associated with scaled-up activities to enhance the impact of a well-performing project and meet the Government of Madagascar's demands for assistance in sustainable development and transparent management of the extractive industries.

2. The operation was prepared in form of scaled up activities under existing project components. The additional financing credit fully matches the development objectives of the original credit. Therefore, no new development objectives are defined. The additional financing meets the demands of the recent Government minerals sector strategy and increased interest in technical assistance. Government focus on the minerals sector has been refined in 2005 and fully outlined during the September 2006 Strategic Decision Meeting (SDM). Mining sector is prominently featured in the Madagascar Action Plan (MAP). The additional financing activities will be implemented by the same project implementation unit as the original credit.

3. The proposed project would work in close cooperation with the Norwegian government's Oil for Development program (parallel financing), which is going to provide US$5 million for the establishment of a legal and regulatory framework and for institutional strengthening for the development of the country's petroleum resources. The operation will also liaise with other donor agencies involved in supporting the minerals sector, such as USAID and the French Cooperation. Implementation of the Extractive Industries Transparency Initiative (EITI), in cooperation with the African Development Bank (AfDB) will be another focus of the proposed additional financing. The envisaged set-up of Community Development Funds would be partly supported by the WBG CommDev grant facility, a Sustainable Community Development Fund for Oil, Gas, and Mining.

11. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE AMOUNT OF US$8 MILLION

4. Madagascar is geologically rich and has good mining potential for gold, titanium (ilmenite sands), iron, nickel, chromite, bauxite, and coal, as well as industrial and ornamental stones. It is also famous for its rich gemstones deposits (emeralds, rubies and sapphires). Historically, small-scale mining dominated the Malagasy minerals sector. Large-scale mining operators, while interested in the country's mining sector potential,

were deterred by unstable and opaque regulatory and legal frameworks. The Malagasy Government, with the assistance from the World Bank and other donors, set out to develop and reform its minerals sector in the 1990s. A new, modem mining law was passed in 1999 and updated in 2005. A Large-scale mining investment law (LGIM) was adopted in 2002 and amended in 2004 to promote large-scale mining in Madagascar. Furthermore, Madagascar set up a world class mining cadastre service (BCMM), which is currently considered to be the best in Africa for the management of mining rights. It also developed the sector environmental management capacity through the set up of decentralized Environmental Mining Cells (CEM), of Mines-Forest Committees and joint regulations between environmental and mining authorities. A core unit of the planned National Geological Survey, the Mineral Resources Governance Data Bank (BPGRM), with a wealth of geological data, is also operational.

5. The first large-scale mining company to proceed with its investment was Rio TintoIQMM (QIT Madagascar Minerals), supported not only by an investor-friendly regulatory and legal framework, but also by the world commodities boom. After 15 years of preparation in the Fort Dauphin region, the decision to undertake the QMM ilmenite project was taken in 2005. Other investors shortly followed suit - currently, Dynatec, in association with Sumimoto Corporation, a consortium of Korean companies and SNC Lavalin, is constructing a cobaltlnickel mine in Ambotavy, on Madagascar's east coast. The investment is estimated at US$2.5 billion and is expected to go into production in 2008. The operation would include the set up of a refinery in Tarnatave and the improvement of associated port facilities. Kumba Resources is developing a Tolear mineral sands project on the country's west coast through its Ticor subsidiary. Also, the Canadian giant Alcan in association with the Malagasy Access Madagascar is evaluating the possibility of building a bauxite mine and an aluminum smelter in Manantenina in the south-west part of the country.

6. In 2006, the multi-stakeholder Strategic Decision Meeting (SDM), focused on oil and large-scale mining was held, and a follow-up small-scale mining SDM is planned for mid-2007. As a result, the Malagasy minerals sector strategy has been carefully outlined and fully thought out on the Governmental level.

7. In December 2002 the Government of Madagascar, with the support from the World Bank, designed the Mineral Resources Governance Project (PGRM) with the following objectives: (i) strengthening of accountability and transparency in mining; (ii) promotion of key institutional reforms for the decentralized management of mineral resources; and (iii) promotion of private investments and value-added in the sector. The objectives of the project under Additional Financing would remain unchanged.

8. The project finances four components:

Component 1 - Strengthening Transparency and Governance in Mining. This component finances improved governance in the management of mineral resources, with a special focus on the small-scale miners.

Component 2 - Key Institutional Reforms for the Decentralized Management of Mineral Resources. This component focuses on strengthening the decentralized management of mineral resources through re-organization and capacity building of mining public administration at the provincial and communal level, and the empowerment of communities in the management of their mineral resources.

Component 3 - Promoting Private Investment and Value-Added in the Sector. Various activities, aiming to bring large-scale private investment in the Malagasy mining sector are supported by this component, which finances strengthening of geo-scientific information infrastructure, assistance to the creation of the mining promotion agency, and the mineral resources governance promotion database, among others.

Component 4 - Project Coordination and Management. PGRM operating costs and actions necessary to meet World Bank fiduciary obligations are included in this component.

9. The PGRM is implemented by the Ministry of Mines through the Mining Project Coordination Unit (UCPM). The UCPM has an excellent performance track record, and has been meeting the World Bank fiduciary requirements successfully for the last seven years (under PGRM and during the implementation of an earlier Mining Sector Reform Project Learning and Innovation Loan (LIL PRSM project).

10. The PGRM has been successful in meetings its original project objectives, and has also been able to keep abreast of growing focus on the minerals sector and new Governmental priorities. The credit has kept all of the covenants and has maintained "Satisfactory" ratings on the Implementation Status Reports (ISRs).

11. The Mineral Resources Governance Project (PGRM), Credit 3754-MAG in the amount of SDR 23 million (US$32 million equivalent) was approved by the Board on May 13, 2003, became effective on September 22, 2003 and is scheduled to close on December 31, 2008. The current closing date for PGRM would be extended by two years, until December 31, 2010 to assist the Government of Madagascar in continued sustainable management and good governance of the mineral resources.

12. Each of the three technical project components would be adjusted to accommodate a number of new activities envisioned under additional financing that would enhance project impact for scale up.

C. RATIONALE AND REASONS FOR REQUESTING THE NEW CREDIT

13. In January 2007, following the Presidential elections, the Ministry of Energy and Mines was split into two entities, Ministry of Mines (MdM) and Ministry of Energy (MdE), thus giving the mining sector more focused attention. The Ministry of Energy concentrates on administering the petroleum sector, which has also experienced an increase in investor interest. Currently, a number of companies hold on-shore and off- shore exploration permits and, while no major discovery of oil has yet been made, exploration activities are on the rise.

14. While the originally identified project activities dealt with overall mineral sector issues (including promotion of large-scale operations in mining), there was a clear focus on field work related to artisanal and small-scale mining (ASM), which was then the main Government objective. A number of critical successes have been registered in relation to this issue since then, including an increasing formalization of the ASM sector.

15. In June 2005 the sector strategy was adjusted, and the project activities re- focused, to respond to the recent surge of large-scale mining projects in Madagascar. In addition, as a response to increasing oil prices, oil exploration in Madagascar surged. The overall mining and energy institutional structure thus faced more pressure and, in spite of earlier successful reforms (i.e. the Mining Cadastre, Environmental Mining Cells, the Mines-Forest Committees and the Mineral Resources Governance Data Bank), it currently needs more comprehensive integration, streamlining andlor restructuring, including modifications to the oil (upstream) sector and a fine-tuned strategy of a key parastatal entity National Office for Mines and the Strategic Industries (OMNIS).

16. The Government of Madagascar recognizes the importance of the extractive industries sector. The mining sector features prominently in the Madagascar Action Plan - MAP, the Government's development strategy for 2007-2012. Challenge 7 of the MAP ambitiously specifies that the sector should significantly increase its contribution to GDP in the coming years, up from the estimate of 4% in 2005. The MAP also states that "Madagascar will help current mining projects enter the production phase quickly while respecting the communities and the environment. It will unleash its extractive potential by attracting more explorers and promoting its natural assets."'

17. Madagascar has stated its intention to join the EITI during the EITI event in Oslo, Norway in October 2006. A formal letter of intent and a request for assistance from the Government of Madagascar was received in March 2007. The EITI Trust Fund to assist Madagascar in implementing EITI is currently under preparation.

18. Besides EITI, the IDAlWorld Bank minerals sector strategy in Madagascar is comprehensive. Along with PGRM, other IDA projects, such as the Integrated Growth Poles Project (I2G), the World Bank provides assistance to the Extractive Industries Transparency Initiative (EITI), and to the Bonne Gouvernance (Good Governance) through the Governance and Institutional Development Project. Coordination with other donors active in the minerals sector such as the Norwegian Oil for Development Initiative, United States Agency for International Development (USAID) the French Development Agency (AFD), the A D B and others is another important aspect of PGRM implementation.

19. Fully aware of the fact that the extractive industries revenues will continue to have a substantial impact on Malagasy economic development, the Government of Madagascar requested additional financing from the World Bank to receive technical assistance and to extend its capacity building efforts in the minerals sector.

The Madagascar Action Plan, Commitment 6 , High Growth Economy, Action 7. p 092.

4

20. Lessons learned from implementation of the original credit will be considered in the implementation of the PGRM additional financing. The additional financing will benefit from experience in the mining and petroleum sectors in the post-~lR2 era. This includes implementation of the original credit, lessons learned from EITI implementation in a number of countries and extractive industries technical assistance operations in Africa.

111. PROPOSED CHANGES

21. The original project development objectives and components will remain unchanged under the additional financing. Considering that petroleum is regarded as a mineral resource3, the proposed operation will contribute to all of the existing project objectives. The additional financing will be used to scale up and strengthen current activities to increase project impact and to meet expanded Government objectives and focus on the minerals sector.

22. Institutional arrangements under the existing Mineral Resources Governance Project will remain unchanged for the implementation of the Additional Financing. An additional position of an Extractive Industries Government Coordinator will be supported by the Additional Financing to harmonize Project activities work undertaken by other donors (in particular, the Norwegian Cooperation work with OMNIS). A matrix, summarizing Additional Financing activities and complementary Norwegian cooperation engagements is presented in Schedule D.

A. DESCRIPTION OF NEW PROPOSED ACTIVITIES

23. The proposed Additional Financing will cover the following five areas of focus in its activities: (i) policy, legal and regulatory framework; (ii) institutional restructuring and strengthening of the Extractive Industries public sector, particularly under the Ministry of Mines; (iii) support to integration of large-scale mining projects to regional development; (iv) management of potential conflict between environmental protection and large- scale/small-scale mining; and (v) improved government and management capacity of small-scale mining activities. All of these activities fit into the three technical assistance components of the original credit. The original components will be scaled up as follows:

24. The policy, legal and regulatory framework reforms under the scaled up credit will reinforce activities under Component 1 of the original credit (Strengthening transparency and governance in mining). The initial focus of this set of activities will be on formulating a comprehensive, updated mining and petroleum policy and strategy, based on the results of the September 2006 "Strategic Decision Meeting" (SDM), the 2006 Madagascar Action Plan (MAP), the continuous dialogue with the MAP

Extractive Industries Review: a process through which the WBG reviewed and assessed its activities within the oil, gas and mining fields between 2001 and 2004. www.eireview.org

As implied, for example on the mission statement of the Oil, Gas and Mining Policy unit of the WBG: "Helping clients manage mineral resources in a sustainable and transparent way to reduce poverty."

Advisory Team under the Presidency, with the regional and central-level authorities and with stakeholders from the private sector and the civil society.

25. The sector legal and renulatow framework will be further developed, including: (i) a revision~reformulation of the hydrocarbons law and model production sharing contract on the basis of a streamlined institutional structure, eliminating potential conflicts of interest and regulatory gaps and (ii) adjustments to the mining legal and regulatory framework, including possibly a revision of the 199912005 Mining Code and the "Law on Large-scale Mining Investments." The petroleum sector work will be done in coordination with the project supported by the Norwegian Government Oil for Governance Initiative, as well as other initiatives such as EITI, as outlined in Schedule D.

26. The fiscal framework for the mining and petroleum sectors will also be assessed and legal adjustments that would optimize the Malagasy growth potential and sector contribution to the national and regionaVloca1 economies would be proposed, including the preparation of regulations and mechanisms which might be needed for the proper transfer and management of fiscal revenues to the regions or municipalities. In addition, in coordination with the EITI process, needed modifications would be identified to improve transparency in the flows of revenues generated by the EI sector.

27. Because of its close link with the modernization of the petroleum legal framework, support to the restructuring of the upstream hydrocarbons institutional framework would be provided under this component, and would be carried out through, La., (i) restructuring and strengthening OMNIS, better defining and separating the agency's present functions as a regulator and operator in the upstream hydrocarbons sector and through transferring upstream hydrocarbons regulatory functions to a specific entity under the MdE; and (ii) transferring the non confidential mining, oil and gas geo- information of OMNIS data to the National Geological Survey established under the scaled up Component 3. Assistance will be provided through the provision of services and in cooperation with the assistance provided by the Government of Norway, in particular with respect to the strategy and pace of the institutional reform.

28. Overall support to the removal of barriers to investments in the extractive industries by improving coordination among ministries, streamlining procedures and strengthening capacities will be provided.

29. Scaled up institutional reforms aimed at improved public governance and management capacity related to large and small-scale mining under the proposed Additional Financing would reinforce the second component of the PGRM (Key institutional reforms for the decentralized management of mineral reforms). Activities under the second component of PGRM would be scaled up through the implementation of (i) the revised sector strategy developed in 2005 by MdM to respond to the recent surge of large scale mining; (ii) the recommendations of studies carried out in 2006 regarding streamlining and strengthening of the public mining institutions; (iii) the recommendations of the 2006 sector SDM and MAP regarding management of the

large and small-scale mining; and (iv), policies and strategies developed under Component 1 (see above).

30. Activities aimed at integration of large-scale mining projects into regional development. Under PGRM and in cooperation with the Integrated Growth Poles (I2G) project, a series of activities in the Anosy region (Fort Dauphin area) have been developed to support the integration of large-scale mining into local, regional and national economies. It is critical to continue implementation of the Anosy region program and to extend them to two other areas where (i) large-scale mining exploitation is planned and (ii) the existing community and municipal management are in need of capacity reinforcement to optimize smooth integration of such programs. The following activities are planned to be added under component 2 of PGRM in this context:

3 1. Anosy region/Fort Dauphin/QMM ilmenite project. In coordination with the 12G project and other donors, continued support to: (i) Local Coordination Committee (LCC) for the coordination of local development plans in the Anosy region. The Anosy LCC is already established and its activities would be supported, in coordination with the WB 12G project, through technical assistance and the provision of goods and works. (ii) The Chief of Region Office: implementation, monitoring and update of regional community development plans; (iii) Local Development Fund (cooperation with Commdev, a joint PC-World Bank grant facility to support communities in extractive industries areas)

32. Amatory (DynatedNickel mine) and Tulear (Madagascar Sanddilmenite) regions would benefit fi-om the following activities under the Additional Financing: (i) Dynamic Natural Resources Management platform: development of an integrated information and management system aiming at facilitating identification, decision making and monitoring of local and regional development plans; (ii) capacity building at municipal and community levels; (iii) consultative and participatory processes, Local Development Plan formulation and set-up of development f h d s in coordination with other similar initiatives; and (iv), set-up and support to LCC(s).

33. Component 2 of PGRM will also be reinforced with activities aimed at environmental and social issues in the mining sector (large-scale and small-scale) and proper coordination with the management of protected areas. Following the Durban Declaration (September 2003) by the President of Madagascar and the decision by the Government to triple the size of the protected areas, the potential conflicts with large, artisanal and small-scale mining have increased. A number of mining permits overlap with such areas - or potential future ones - and initial successful efforts to manage this issue need to be systematized and strengthened. To respond to this situation, activities to be implemented include: (i) strengthening of capacity of the established "Inter-ministerial Mines-Forests Committee"; (ii) establishment and capacity building of a proper mining inspectorate unit; (iii) mapping and prioritization of areas that may pose potential conflicts, and development and implementation of an action plan to solve such conflicts optimizing both conservation and development goals; (iv) clear identification of environmental "no go" zones; (v) management of ASM in relation to protected areas (based on earlier success stories); and (vi) coordination with National Environmental Agency (ONE) and National Park Agency (ANGAP).

34. A streamlined mining inspectorate entity, based on the existing Mining Inspection Service under the Directorate of Mines (DM), and including the "Environmental Mining Cells" (CEM) already established through PGRM, would be organized and supported.

35. The Madagascar Gemological Institute (IGM), already established under the PGRM, would continue to benefit from support under the proposed additional financing, including support to its regional training facilities. A sustainable regulatory and financial support mechanism for mining institutions would be created to ensure their sustainability beyond the life of the project.

36. The new activities planned under Component 2 would also focus on implementing of the new action plan for improved governance and capacity building in the small-scale mining sector, which is being developed by the Ministry of Mines (EI SDM 2006, recommendations from the Antsirabe Communities and Small-scale Mining (CASM) initiative annual conference and ASM SDM to be held in May 2007). The following new activities will be included: (i) monitoring and evaluation of small-scale mining practices; (ii) carrying out sensitization and education campaigns to familiarize small-scale miners with applicable legal and regulatory texts and procedures; (iii) provision of technical assistance and capacity building, especially best practice training; (iv) increased push on small-scale mining sector formalization and legalization, registration services, rapid response to mining rush situation; and (v) community development.

37. Support to the set-up of regulatory and financial mechanisms to ensure the long- term sustainability of extractive industries institutions and of their functions will be provided.

38. Finally, activities aimed at strengthening of mining entities and agencies that fall under the responsibility of the Ministry of Mines would be added to reinforce component 3 of the original credit (Promotingprivate investments and vahe-added in the sector. A National Geological Survey (NGS) entity will be set up based on the integration and streamlining of the recently established Geological Directorate as well as the Mineral Resources Governance Data Bank (BPGRM) and the Geological and Mining Information System (SIGM) already established under, respectively, PGRM and the French AFD-funded Mining Institutional Strengthening Project (PRISMM). The NGS will benefit through the provision of services, goods and works.

39. As part of the support to the NGS, synthesis and broad dissemination of the geo- scientific information infrastructure developed under the PGRM and other initiatives, such as the PRISMM and others, will be carried out through the provision of services.

40. Project Coordination and Management. The UCPM will continue to be responsible for the management, monitoring and evaluation, of the Project and will benefit from increased operational costs under the Additional Financing. Considering the importance of policy, strategy and actions coordination between the different stakeholders involved in the reform of the EI sector in Madagascar, an Extractive

Industries Coordination Unit has recently been established by the Presidency, and will benefit from support under the Additional Financing through the provision of services and operational costs.

41. Donors Coordination. Close coordination with other donors and WBG operations will be an important factor for the success of the Additional Financing. (See also Section I above).

B. PROJECT IMPLEMENTATION, FINANCIAL MANAGEMENT, DISBURSEMENT AND PROCUREMENT ARRANGEMENTS

42. The total project cost, including taxes and duties, is estimated at US$8.8 million. The breakdown of estimated costs is shown in Schedule A. Schedule B demonstrates the project financing plan and disbursement schedule. A summary of procurement and financial arrangements is included under Section V below.

43. The implementation mechanisms would be the same under the Additional Financing as under the PGRM. Implementation of PGRM has been successful, and all fiduciary requirements have been met.

44. A new project implementation manual (PIM) will be issued to reflect changes under the Additional Financing. Updates in the Financial Management arrangements will be reflected in the new PIM.

45. The proposed additional financing will use the same procurement arrangements as the original credit. The 2004 Procurement Guidelines will apply. A separate procurement plan for the additional financing has been prepared and approved by the World Bank procurement team. This procurement plan will be updated annually to reflect actual project implementation progress and needs.

46. The closing date of the initial credit will be extended by two years fi-om December 3 1, 2008 to December 3 1, 201 0 and the Additional Financing closing date will also be December 3 1,20 10.

IV. CONSISTENCY WITH CAS

47. The last Country Assistance Strategy (CAS) for Madagascar was reviewed by the Board on October 20,2003. The new CAS was presented to the Board on April 3, 2007. Both documents underscore the importance of the minerals sector for the country's economic growth and good governance development. The 2003 CAS highlights the importance of the PGRM's ability to focus on "establishing and enforcing rules and regulations in the high potential mining sector in ~ a d a ~ a s c a r . " ~ The mining sector reforms are also identified as having contributed to economic growth in the 1990s, while

World Bank Report Number 27053-MAG, 2003 CAS, p.17.

weak governance prevented fiu-ther sector development. The new CAS centers around two pillars: (i) activities that will help remove key bottlenecks to investment and growth in rural and urban areas and (ii) bringing together activities geared toward improving access to, and quality of, services. The 2007 CAS identifies the mining sector's strong potential and the governance challenges that remain, stating that the mining sector regulatory framework and implementation capacity are in need of further improvements. The proposed additional financing supports the first pillar of the new CAS by improving the investment climate and governance in the minerals sector.

V. APPRAISAL OF SCALED-UP PROJECT ACTIVITIES

48. No exceptions to Bank policies will take place under the Additional Financing.

49. Although the project is being scaled up, the program remains as originally designed and appraised. The economic, fiduciary, institutional, technical, environmental and social would remain the same as under the original credit.

50. Implementation mechanisms would remain the same under the additional financing as for the ongoing project, as they are working well. The present UCPM will be maintained and will be responsible for the operational and fiduciary management of the Project. An overall extractive industries sector coordination unit will be set up and will be maintained, and will carry out the donor harmonization function. The project's implementation capacity was assessed during preparation and the activities and targets were agreed upon. The project will continue to provide capacity enhancement assistance to project staff to support the scale-up activities, including training and short term technical assistance as required.

51. The financial management arrangements of the UCPM responsible for the implementation of the components/activities under the Mineral Resources Governance - Additional financing have been reviewed to determine whether they are acceptable to the Bank. This review is rather an update since the FM system of this entity has already been assessed in the context of the ongoing Mineral Resources Governance Project. The conclusion resulting from this review determined that the UCPM continues to maintain an adequate financial management system as required by the OPIBP 10.02. The UCPM system is strengthened by the following salient features: i) existence of qualified and skilled accounting staff acquainted with Bank procedures; ii) adequate internal control system including suitable authorization procedures, appropriate segregation of duties and responsibilities, reliable budgeting system, and adequate measures for safeguarding assets; iii) use of an accounting system following generally accepted accounting standards and capable of producing in a timely manner all relevant information required

for managing and monitoring project activities; iv) existence of an accounting manual of procedures providing clear guidance to staff. The financial management risk is assessed as being moderate. Yet, the review of the project's Chart of accounts is needed to reflect new activities outlined in the Project Paper in order to satisfy reporting requirements under the additional financing. Since the UCPM has already started updating the chart of accounts which is expected to be completed prior to April 30, 2007, this measure does not constitute a condition for the processing of the Additional Financing. The UCPM would continue to prepare quarterly Financial Management Reports (FMRs) to track expenditures for the project. The form and content of FMRs has been determined as part of project appraisal and agreed at negotiations. The chart of accounts and the models of FMRs will be formalized in the new accounting manual of procedures, to be approved by IDA as a condition of effectiveness.

52. Transaction-based disbursement procedures (traditional mode) would continue to be followed throughout the implementation period of the project. To ensure timely and reliable flow of funds, the UCPM will use a new designated account as for the original credit, opened in a commercial bank acceptable to IDA. Denominated in $ US, disbursements from IDA credit will be deposited on this account to finance all project eligible expenditures inferior to 20% of the authorized allocation. The authorized allocation for the designated account covering IDA'S contribution would be $ US 500,000 covering IDA'S share of four (4) months of estimated expenditures Further deposits by IDA into the designated account would be made against withdrawal applications submitted at least on a monthly basis and supported by appropriate documents. The UCPM would be responsible for preparing disbursement requests. All supporting documents will be retained by the UCPM and made available for review by periodic Bank supervision missions and external auditors. Disbursements will be made against Statement of Expenses (SOEs) for contracts and goods not requiring the Bank's prior review.

53. The accounting manual of procedures describes in details the disbursement procedures as well as the application steps and requirements for requesting a reimbursement, replenishment of the designated account, direct payment for third party, and applying for a special commitment. The minimum value established by IDA is documented in the disbursement letter related to the additional financing.

54. The project financial statements will be audited annually by an international accounting firm acceptable to IDA, in accordance with International Standards of Auditing. For this purpose, the contract with the current external auditors will be amended in order to include the audit of the additional financing. Recruitment of auditors acceptable to IDA is a condition of effectiveness. The terms of reference of the audit will be reviewed by the financial management specialist of the BankIIDA to ensure the adequacy of the audit scope. The auditors will be required to: i) express an opinion on the project financial statements; ii) cany out a comprehensive review of the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit reports will be submitted to IDA not later than six months aRer

the end of each fiscal year. The FM assessment report is provided in Schedule B of the Project Paper.

55. Procurement arrangements under the proposed additional financing will be the same as the arrangements under the Mineral Resources Governance Credit; however, the updated Guidelines of 2004 will apply.5 For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are outlined in the Financing Agreement, the Operational Manual and the Procurement Plan.

56. A separate procurement plan for the additional financing has been prepared and approved by the Bank procurement team. It will not be integrated into the Global Procurement Plan of the Mineral Resources Governance Credit and will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. ENVIRONMENTAL AND SOCIAL ISSUES

57. The Borrower has been successfully implementing the existing credit since 2003. The project has a number of safeguards issues, which the Borrower was able to address under the Environmental Management Plan disclosed in December 2002. The environmental classification of the Additional financing remains Category B. The mission undertaken in January-February 2007 analyzed the various environmental tools available in the current phase of implementation. The mission determined and agreed with the Borrower that: (i) the Borrowers will lay out and strengthen a structure responsible for management of environmental and social risks in the mining sector; (ii) environmental guidelines will be available by December 2007 and used in the sector. A sectoral environmental assessment was carried out during the original project preparation. The environmental structure in charge of managing the safeguard aspects of the mining sector works under the supervision of the National Office for the Environment (ONE), department in charge of the environmental assessments and the Environmental impact studies in Madagascar under the supervision of the Environmental and Forest Ministry and in coordination with the CEMs under MdM.

58. A review of the sector environmental management capacity and an environmental analysis of the project components, including the adequacy of the existing environmental management tools, were carried out prior to project appraisal. The assessment provided a clear evaluation of the sector institutional framework, and an analysis of coherence, strengths and weaknesses of the environmental tools available in the sector. It resulted in a proposal of measures and indicators for mitigation and recommendations regarding

Procurement of goods and works required for the project and to be financed out of the proceeds of the grant shall be governed by the "Guidelines for Procurement under IBRD Loans and IDA Credit" published by the Bank in May 2004. Procurement of consultants' services shall be governed by the "Guidelines for the Selection and Employment of Consultants by World Bank Borrowers" published by the Bank in May 2004.

environmental management and monitoring of the sector. This study was reviewed and approved by the Bank on March 23,2007, and disclosed on March 3 1,2007 in country.

59. During implementation of the Additional Financing, the multi-sectoral platform for environmental management will be consolidated and an extended audit of sector environmental management capacity, achievements and recommendations for adjustments will be implemented, at the latest by September 2009. Environmental guidelines for environmental management of the mining sector satisfactory to IDA should be developed no later than December 2007.

VI. EXPECTED OUTCOMES

The additional activities proposed will extend the impact of the original project development objectives. The following additional indicators are proposed:

(i) No later than 18 months after the date of effectiveness, updated hydrocarbons law and regulations, also addressing environmental concerns have been prepared in line with of international practice, and a draft law has been submitted to the Parliament;

(ii) The Production Sharing Contract model, to be applied to new petroleum permits, has been revised in line with international practices and in agreement with relevant Madagascar laws, 18 months after effectiveness;

(iii) No later than December 31, 2008, the Borrower shall have adopted a plan with specific time based measures for the restructuring of OMNIS;

(iv) No later than 18 months after the date of effectiveness, the fiscal framework for mining, including large scale investments, has been reviewed to include adjustments to optimize fiscal revenues, while maintaining a competitive edge to investments, and a draft law has been submitted to the Parliament.

(v) Barriers to investments and development of large scale mining projects have been minimized through implementation of inter-ministerial coordination and adjustments to the legal and institutional frameworks, 18 months after effectiveness;

(vi) Mechanisms to ensure a fair participation and usage of mining fiscal revenues for the regions and municipalities have been defined and agreed, and the relevant adjustments or development of laws and regulations drafted and proposed to the Assembly 18 months after effectiveness;

(vii) Training of staff at the agencies in charge of hydrocarbons (upstream) and mining implemented;

(viii) Education and training programs related to Extractive Industries at Madagascar universities have improved and been modernized to respond to the evolution of the EI industries in the country;

(ix) Methodologies to facilitate and promote the integration of large scale mining projects into local economic development have been developed and are applied by regional and local authorities and CBOs, 18 months after effectiveness;

(x) No later than 18 months after the date of effectiveness, methodologies to control ASM rushes and to manage conflicts between ASM activities and protected areas have been developed and are ready for implementation at central and decentralized level;

(xi) Within 24 months from the date of effectiveness, the National Geological Survey and the integrated sector data bank and information systems have been established and are operative;

(xii) The mining inspectorate regulatory functions, as defined under the 2005 Mining Code and its regulations, and under the responsibility of MdM, have been streamlined 18 months after effectiveness;

(xiii) No later than by December 2009, financial mechanisms for long term sustainability of mining institutions have been established and are operative.

VII. BENEFITS AND RISKS

60. BENEFITS. The new activities will W h e r involve sector stakeholders and will broaden the contribution of international expertise to Madagascar mining and hydrocarbons sector management. It is expected that the additional financing will facilitate sector monitoring and dialogue and improve sector management to maximize extractive industries benefits for the country. Furthermore, relevant sector stakeholders (i.e. GoMIMdM; OMNIS; local communities at selected sites) will gain an improved understanding of mining sector operations and of management of flow of revenues. Private sector operators in the Madagascar extractive industries sector will benefit from improved institutional framework stability and conditions for investment, including enforcement of environmental rules and regulations. Civil society counterparts will also gain from improved awareness of mining and oil development effects and transparency.

61. RISKS. The table below outlines the risks faced by the proposed component, along with the proposed risk mitigation measures.

Risk

Government commitment to governance and transparent oil revenue management procedures

Lack of human resources capacity to act as local counterparts

Risk Mitigation Measure

Coordination with other WB operations and other partners (AfDB, GoN, French Cooperation), implementation of EITI program Resources for capacity buildingltraining

Evaluation

Medium

MediumILow

VIII. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING

The additional financing will be provided in the form of an IDA credit. The additional Conditions of Effectiveness consist of the following:

The Extractive Industries Coordinator has been recruited under terms, conditions and terms of reference acceptable to the Association; The Project Implementation Manual has been finalized in form and substance acceptable to the Association; and The Recipient has employed the independent auditors referred to in Section 4.09 (b) of the General Conditions. No later than December 31,2008, the Borrower shall have adopted a plan with specific time based measures for the restructuring of OMNIS. The Recipient shall deposit into the Project Account sufficient resources to provide counterpart funding in connection with the Financing.

Evaluation

Medium

MediumIHigh

HighIMedium

Risk

Communication difficulties among stakeholders

Conflicts between extractive industries development projects, including ASM, and protected areas

ASM sector fails to contribute to local and national economic development

Risk Mitigation Measure

Increased institutional capacity to manage the extractive industries sector, implementation of the EITI and integration of large scale mining in local economic development will facilitate the dialogue between government, private sector partners and communities Increased environmental management capacity and coordination; streamlined monitoring; land use conflicts management mechanism; increased awareness. Strengthen outreach programs based on lessons learned during the original PGRM; further support to IGM.

IX. Schedule A

SOURCE OF FINANCING (in US$ million equivalent)

FINANCING PLAN (by Project Component) (in US$ million equivalent)

IDA

GOVERNMENT

Total

Project Cost By Component and/or Local Foreign Total Activity Component 1 : Strengthening Transparency 0.100 0.320 0.420 and Governance in Mining

Local

1.50

0.80

2.30

Component 2: Key institutional reforms for 1.450 4.030 5.480 Decentralized management of mineral resources Component 3: Promoting Private investment 0.350 0.950 1.300 and Value Added in the Sector Component 4: Coordination and management 0.150 0.450 0.600 Total Baseline Cost 2.050 5.750 7.800 Contingencies 0.250 0.750 1 .OOO

Total Project Costs 2.300 6.500 8.800

Total Financing Required 2.300 6.500 8.800

Foreign

6.50

0.00

6.50

DISBURSEMENT SCHEDULE (in US$ million equivalent)

Total

8.00

0.80

8.80

Percentage of Foreign Expenditures

100

0.00

73.86

IDA FY

Annual Cumulative

2011

0.5 8.0

2008

1.5 1.5

2009

3 .O 4.5

2010

3 .O 7.5

ALLOCATION AND DISBURSEMENT OF ADDITIONAL FINANCING (in US$)

Category

(1) Goods, works and consultants' services for the Project

TOTAL AMOUNT

Amount of the Financing Allocated (expressed in SDR)

8,000,000

8,000,000

Percentage of Expenditures to be Financed

[(inclusive] [exclusive of Taxes])

100% of Foreign Expenditures and 85% of Local Expenditures

X. Schedule B

FINANCIAL MANAGEMENT ASSESSMENT REPORT

1- Introduction

62. In accordance with Bank policy and procedures, the financial management arrangements of the UCPM (Mineral Project Coordination Unit) responsible for the implementation of project activities supported under the additional financing have been reviewed to determine whether they are acceptable to the Bank. This review is rather an update since the FM system of this entity has already been assessed in the context of the ongoing "Mineral Resources Governance Project".

2- Fiduciary

63. The overall conclusion of this review is that the UCPM financial management is still acceptable but the project chart of accounts needs to be updated to reflect new components and activities outlined in the Project Paper in order to satisfy reporting requirements under the additional financing. Since the UCPM has already started updating the chart of accounts which is expected to be completed prior to April 30, 2007, this measure does not constitute a condition for the processing of the Supplemental Financing. The UCPM would continue to prepare quarterly FMRs to track expenditures for the project. The form and content of FMRs have been determined as part of project appraisal and agreed at negotiations. The chart of accounts and the models of FMRs will be formalized in the accounting manual of procedures.

64. The project financial statements will be audited annually by an international accounting firm acceptable to IDA, in accordance with International Standards of Auditing. For this purpose, the contract with the current auditors will be amended in order to include the audit of the supplemental financing. This measure is a condition of effectiveness. The terms of reference of the audit will be reviewed by the financial management specialist of the BankIIDA to ensure the adequacy of the audit scope. The audit reports will be submitted to IDA no later than six months after the end of each fiscal year. In Madagascar no significant problems have been encountered in terms of audit covenants: all audit reports related to Bank financed projects have been received in time. The Implementation Completion Report (ICR) will be prepared within six months after the closing of the Credit and of the Additional Financing..

3- Summary Project Description

65. The development objectives of this project would be the same as for the original credit. (see Section I11 of the Project Paper).

4- Country issues

66. The World Bank's CFAAICPAR, completed in 2003, and some diagnostic works carried out over the last three years by the Bank and other donors, identified a range of weaknesses and issues hampering the performance of Madagascar's budget and expenditure management system. To address these issues, the government has developed in 2004, 2005 and 2006 in conjunction with all key development partners, a priority action plan for public finance reform.

67. While overall implementation progress of the reform program is encouraging, significant works remains, including the following: i) improvement of budget execution rate in priority sectors; ii) reinforcement of the capacity of the line ministries in public financial management, especially in the implementation of the new program budget structure; iii) strengthening of cash management; iv) production of the treasury accounts within the legal timeframe; v) insufficient number of skilled and experienced auditors at the "Charnbre des comptes" commensurate with the complexity and increased number of missions to be undertaken; vi) reinforcement of control over State owned companies and national public institutions. To mitigate risks in public expenditure management, the World Bank, through the on going Governance and Institutional Development Program (PGDI), and a number of donors, continue to support Government's public finance reforms, as reflected in its annual priority action plan.

68. Regarding the accounting profession, some positive developments have been noted over the last three years. However, a number of local accounting firms continue to operate below the international standards. To improve the capacity and the competitiveness of local auditing firms, the following measures have been recommended while auditing BanMIDA financed projects: i) obligation for local auditors to enter into partnership with international accounting firms; ii) effective participation of the international accounting firm in audit fieldworks and submission of audit report jointly signed by the local and international audit firms. An accounting and auditing ROSC would be certainly helpful to identify clearly both issues and actions to be taken to strengthen the capacity of the accounting profession in Madagascar.

69. The use of country systems still remains risky for Madagascar due to some fiduciary weaknesses that will require much more time in order to improve. As a result and after exchanges of views with the borrower (Ministry of Finance) it was agreed, in the context of this additional financing, to use partially the country system and to establish transitional financial management system arrangements while the sectorlnational fiduciary systems are being strengthened.

5- FM Risk Assessment and Mitigation

70. The following table identifies the key risks that the project management may face, and provides the measures to be taken to mitigate these risks:

Risks

1- Inherent Risk

Country Level. Delays in the production of public accounts, and audit may not be conducted in compliance with international auditing standards due to: weak capacity of the accounting profession in Madagascar, and; ii) inadequate number of skilled and experienced auditors at the "Chambre des comptes" in particular.

Entity Level The use of country systems still remains risky for Madagascar due to some fiduciary weaknesses that will require much more time in order to improve. But the UCPM FM system is working well and its performance in accounting, financial reporting and auditing is globally satisfactory.

Project Level The BNP has strong experience with implementing an IDA- financed project.

Overall Inherent Risk

2- Control Risk

Budgeting Budget preparation clearly defined and variances

Risk rating

S

M

L

M

L

Residual Risk

rating

M

L

L

Risk Mitigation Measures

These issues are being addressed through the ongoing PFM reforms supported by IDA (through the Governance and Institutional Development Project) and other donors. In the meantime, the audit of the WB-financed projects will be carried out by international accounting firms or by international accounting firms associated with local auditing firms, with effective participation of the former (international accounting f m ) in the fieldwork.

Development partners will continue to support the GoM priority action plan for public finance reforms including training and capacity building in the area of public financial management.

While the national fiduciary systems are being strengthened, the financial management (FM) aspects of this project will be entrusted to the UCPM which has extensive experience from previous IDA projects in implementing activities of this nature.

Condition of

Board or Effectiveness

NO The amendment of the contract of the current auditors of UCPM is being processed and the new is expected to be finalized prior to May 15,2007.

NO

6- Strengths, Weaknesses and Action Plan

The project financial management strengths are as follows:

Risks

monitored closely

Accounting

Transactions may not be accounted for properly due to Chart of accounts not updated yet.

Internal control

Funds flows

Financial Reporting:

Content and format of the FMRs not yet defined: risk of delays in the production and submission of FMRs

Auditing:

The quality of the audit may not be acceptable and the report not delivered in time due to the limited number of skilled and experienced auditors within the General Audit Office (Chambre des comptes)

Overall Control Risk OVERALL RISK RATING

Risk rating

M

L

L

M

S

M M

Risk Mitigation Measures

Review of the UCPM chart of accounts to reflect new components and activities to satisfy reporting requirements under additional financing.

The content and format of the FMRs needs to be defined to ensure proper monitoring of project activities.

Reviewlamendment of the contract of the current auditors of UCPM in order to include the audit of the financial statements under the supplemental credit. Possibility for the Auditor General to join the team while carrying out this audit.

Condition of

Board or Effectiveness

NO: the review of the Chart of accounts is underway and expected to be completed prior to April 30,2007.

NO: Quarterly financial statement reporting arrangements and formats agreed during project negotiations.

YES Recruitment of auditors acceptable to IDA is a condition of effectiveness

Residual Risk

rating

L

L

L

M

L L

the UCPM has strong experience in managing World Bank funds for being in charge of the implementation of the ongoing Mineral Resources Governance Project; the organizational structure in place defines the lines of responsibilities and authority that exist and it is appropriate for planning, directing and controlling operations; the accounting/budgeting system is adequate: it follows accounting standards generally acceptable to IDA and is capable of producing in a timely manner all relevant information required for managing and monitoring project activities the accounting staff is qualified and knowledgeable with Bank procedures; the internal control is adequate: suitable authorization procedures, appropriate segregation of duties and responsibilities, reliable budgeting system, and adequate measures for safeguarding assets; the UCPM has an administrative and accounting manual of procedures.

The main weaknesses noted in the UCPM financial management systems are summarized in the followinrr table which also ~rovides relevant measures to address them:

Si~nificant weaknesses

1- Chart of accounts not updated yet to reflect new components/activities.

Action

Reviewlupdate of the existing Chart of accounts accounting manual of procedures to reflect new components/activities and satisfy reporting requirements.

Date - due by

0413012007

Responsible

UCPM: Chief accountant

2- Content and format of the FMRs not yet defined: risk of delays in the production and submission of FMRs

3- Absence of arrangement regarding the audit of the supplemental financing.

The content and format of the FMRs needs to be defined to ensure proper monitoring of project activities.

UCPM Completed at negotiations.

Reviewlamendment of the contract of the current auditors of UCPM in order to include the audit of the financial statements under the supplemental credit.

UCPM: Procurement Officer

0511 512007

7- Institutional and Implementation arrangements

71. The Ministry of Mines, through the existing UCPM (Mining Project Coordination Unit) will be responsible for the overall implementation of the project. The UCPM will continue to maintain records and accounts for all transactions related to the project supported under the additional financing, manage disbursements from the designated account, and prepare its financial statements and other basic information on project managementlmonitoring as required by the financing agreement.

8- Budgeting

72. Budgeting arrangements for UCPM are described clearly in its accounting manual of procedures. The accounting software in place will be adequate for the budgeting arrangements of the project.

9- Accounting

73. The accounting system in place is in compliance with generally accepted accounting standards. It uses standard book accounts (journals, ledgers and trial balances) to enter and summarize transactions and operates on a double entry accrual principle. The UCPM maintains financial records for all transactions under its responsibility and is in charge of timely production of project financial statements and quarterly FMRs.

74. To satisfy reporting requirements the existing Chart of accounts will be updated in order to reflect new components/activities to be implemented under the supplemental credit. This update is expected to be finalized prior to April 30,2007. The UCPM is using an integrated computerized system acquired within the context of the ongoing Mineral Resources Governance Project. It facilitates annual programming of activities and project resources, record-keeping (general accounting and cost accounting), financial and budgetary management and preparation of project financial statements, including FMRs. However, the reconfiguration of this software will be needed to take into account the new Chart of accounts and allow for timely production of the annual financial statements and quarterly FMRs. For this purpose, the project is invited to finalize the update of the chart of accounts within the agreed timeframe.

10- Internal Control

75. The UCPM has a good internal control system: proper authorization of transactions, adequate separation of duties, reliable budgeting system, and adequate measures for safeguarding assets. In addition a financial management manual is available describing clearly the lines of responsibilities and authority that exist with appropriate segregation of duties, the tasks to be performed by each member of staff, documentation to be used, and controls to be applied. This manual provides also a detailed description of: i) the configuration of the financial management and accounting system, and the models of reports to be produced. The project accounting staff is qualified, acquainted with Bank procedures, and has relevant experience in accounting. The staff is composed of a chief accountant and an accountant. Since the project organizational structure is centralized, no internal audit function is required at the present time.

11- Funds Flow and Disbursement arrangements

The flow of funds from IDA is presented as follows:

I World BaokllDA I

UCPM Designated account

Project account

v ,

Contractors, suppliers of goods and services

Disbursement from IDA credit and Government counterpart funds

76. For the implementation of this project, the UCPM will use the following accounts opened in local commercial banks under conditions satisfactory to IDA:

One designated Account: Denominated in $ US, funds from the IDA credit will be deposited on this account to: i) finance project components/activities agreed with IDA in accordance with the disbursement percentage(s) indicated in the DCA. A project account: Denominated in local currency, the counterpart funds from the government will be deposited on this account opened in a local commercial bank to ensure prompt payment of contractors/suppliers, in conformity with the disbursement percentages indicated in the DCA.

77. The project implementation and accounting manuals will describe in details all procedural aspects regarding financial management and disbursements from the designated account and project account (payments, replenishment, accounting, reporting and internal controls).

78. Method of Disbursement: The UCPM would follow the transaction-based disbursements procedures (traditional mode). Annual PERs have been providing the analytical base on budget issues.

79. Minimum of Application Size: The minimum application size for direct payments, to be withdrawn directly from the Credit Account, and special commitments is 20% of the amount advanced to the related designated account.

80. Use of Statements of Expenses (SOEs): Disbursements would be made against Statement of Expenses (SOEs) for contracts and goods not requiring the Bank's prior review. SOE statements would be audited annually by independent auditors acceptable to the Bank.

81. Designated Account: The amount of the designated account opened in the name of the PGRM would be USD 500,000. The UCPM would be responsible for preparing disbursement requests. The designated Account would finance all project eligible expenditures inferior to 20% of the authorized allocation, and replenishment applications would be submitted at least on a monthly basis. Further deposits by IDA into the designated Account would be made against withdrawal applications supported by appropriate documents.

82. The designated account would be replenished on the basis of documentary evidence of payments, eligible for financing under the IDA supplemental Credit. All SOEs supporting documentation will be kept by the UCPM and made available for review by bank supervision missions and internallexternal auditors.

12- Financial Reporting

83. To monitor project implementation, The UCPM will produce the following reports in compliance with international accounting standards:

The Projectfinancial statements comprising: i) Summary of Sources and Uses of Funds (by components/activities/credit category and showing all sources of funds); ii) the Accounting Policies Adopted and Explanatory Notes; iii) a Management Assertion.

Quarterly FMRs: The FMRs to be prepared by the UCPM will include financial reports, physical progress reports and procurement reports related to all project components to facilitate project monitoring. The project FMRs should be submitted to IDA within 45 days of the end of the reporting period (quarter).

The form and content of quarterly FMRs and annual financial statements were determined as part of project appraisal and agreed at negotiations. Models of these reports will be presented in the project accounting manual of procedures.

13- Auditing

84. The project financial statements will be audited annually by an international accounting firm acceptable to IDA, in accordance with International Standards of Auditing. For this purpose, the contract with the current external auditors will be amended in order to include the audit of the supplemental financing. This measure is a condition of effectiveness. The terms of reference of the audit will be reviewed by the financial management specialist of the BanklIDA to ensure the adequacy of the audit scope. The auditors will be required to: i) express an opinion on the project financial statements; ii) carry out a comprehensive review of the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit reports will be submitted to IDA not later than six months after the end of each fiscal year.

14- Conditions

Audit Report 1- Project specific financial statements

a. Effectiveness Conditions: Recruitment of auditors acceptable to IDA.

Due Date Within six months after the end of each financial year.

b) Financial covenants:

The PGI financial statements shall be audited annually by independent auditors acceptable to IDA; Production of quarterly FMRs.

19- Supervision Plan

85. A supervision mission will be conducted at least twice every year based on the risk assessment of the project. The mission's objectives will include that of ensuring that strong financial management systems are maintained for the project throughout its life. A review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. The FMS will also review quarterly FMRs, the audit reports and follow-up on timely implementation of recommendations from auditors. The Implementation Status Report (ISR) will include a financial management rating for the component.

XI. Schedule C - Timetable of Key Project Processing Events

(a) Time taken to prepare 2 months

(b) Prepared by Gotthard Walser (Task Team Leader); Alexandra Pugachevsky (Operations Officer), Sylvain Rambeloson (Senior Procurement Specialist); Gervais Rakotoarimanana (Sr. Financial Management Specialist), Paul-Jean Feno (ETC, Environment), Yves Prevost (Senior Environmental Specialist);

(c) Appraisal March 2007

(d) Planned date of Effectiveness: July 2007

(e) Project Closing December 3 1,20 10

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AASS

II NNAA

ANTSIRANANAANTSIRANANA

TTsivorsivoryy

BeraketeBerakete

BelohaBeloha

BetrokaBetroka

ManjaManja

MandabeMandabe

AnkazoaboAnkazoabo

BerorohaBeroroha

SakarahaSakaraha

BetiokyBetioky

AmpanihyAmpanihy

Midongy-Midongy-AtsimoAtsimo

IhosyIhosy

AmbohimahasoaAmbohimahasoa

MoramangaMoramanga

AntanifotsyAntanifotsy

AmbositraAmbositra

Ambatofinan-Ambatofinan-drahanadrahana

AntsirabeAntsirabe

MiandrivazoMiandrivazo

MalaimbandyMalaimbandy

VVohidialaohidiala

AndilamenaAndilamena

AndriamenaAndriamena

MaevatananaMaevatanana

KandrehoKandreho

AnkazobeAnkazobe

SoavinandrianaSoavinandriana

AmbaravaranalaAmbaravaranala

AmbilobeAmbilobe

AndapaAndapa

MandritsaraMandritsaraMampikonyMampikony

BefandrianaBefandriana

BealananaBealanana

AmboasarAmboasaryy

AmbovombeAmbovombe

FianarantsoaFianarantsoa

ANTANTANANARIVOANANARIVO

F I A N A R A N T S O A

M A H A J A N G A

T O L I A R A

ANTANANARIVOTO

AM

AS

I NA

ANTSIRANANA

Vatomandry

Mahanoro

Varika

Mananjary

Manakara

Farafangana

Tsivory

Berakete

Beloha

Betroka

Manja

Mandabe

Morombe

Ankazoabo

Beroroha

Sakaraha

Betioky

Androka

Ampanihy

Midongy-Atsimo

Ihosy

Ambohimahasoa

Antalaha

Maroantsetra

Mananara

Fenoarivo-Atsinanana

Moramanga

Antanifotsy

Ambositra

Ambatofinan-drahana

Antsirabe

Miandrivazo

Malaimbandy

Belo Tsiribihina

Morondava

Vohidiala

Andilamena Soanierana-Ivongo

Andriamena

Maevatanana

Soalala

Besalampy

Maintirano

Antsalova

Kandreho

Ankazobe

Soavinandriana

Ambaravaranala

Sambava

VohimarinaAmbilobe

Andapa

MandritsaraMampikony

Befandriana

BealananaAntsohihy

Ambanja

TolanaroAmboasary

Ambovombe

Toamasina

Antsiranana

Mahajanga

Toliara

Fianarantsoa

ANTANANARIVO

Mayotte(France)

Manambaho

Mah

avav

y

BetsibokaMahajam

baBemarivo

Sofia

LakeAlaotra

Mangoro

Mangoky

Mania

Tsiribihina

MananaraFih

erecha

na

Onilahy

Man

drav

e

Menara

ndra

I N D I A N

O C E A N

Mo z a m

b i q u eC

h a n n e l

Ank

arat

a

Massi fTsaratanana

Androy Plateau

Cl i

ff

of

An

ga

vo

Cl i

f fo f

B on g o l a

v a

Maromokotro(2,876 m)

Pic Boby(2,658 m)

Tsiafajovona(2,642 m)

45°E 50°E

50°E

45°E

25°S

20°S

15°S

20°S

15°S

MADAGASCAR

0 40 80 120 160

0 120 Miles8040

200 Kilometers

IBRD 33439

NOVEMBER 2004

MADAGASCARSELECTED CITIES AND TOWNS

PROVINCE (FARITANY) CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE (FARITANY) BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endorsemen t or a c c e p t a n c e o f s u c h boundaries.