Madagascar: Integrated Growth Poles Project (Cr. No. 4101) Project ID PO83351

Proposed Amendment to the Development Credit Agreement

DATA SHEET

Borrower: Ministry of Finance and Budget-Madagascar Responsible agency: National Project Secretariat-Madagascar

Date: February 13,2008 Country: Madagascar Project Name: Integrated Growth Poles Project Project ID: PO8335 1

Revised estimated disbursements (Bank FY/US$m) FY 1 07 1 08 1 09 1 10 I l l

Task Team Leader: Ganesh Rasagam Sector Manager: Gerardo Corrochano Sector Director: Marilou Jane. D. Uy Country Director: Ritva S. Reinikka Environmental category: Full Assessment

Current closing date: December 3 1,2010

Annual Cumulative

Revised closing date [if applicable]: not applicable Indicate if the restructuring is:

Board approved -

RVP approved 2-

14.2 32.5

Revised project development objective1outcomes [Ifapplicable] Not applicable

33.8 66.3

Does the restructured project require any exceptions to Bank policies? Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

Does the restructured project trigger any new safeguard policies? If so, click here to indicate which one(s) [selection box like the one in the new ISR] No

- Yes X-No -Yes X-No

Yes X-No

41.9 108.2

Borrower IBRDIIDA Others Total

Revised Financing Plan (US$m.)

14.5 122.7

Source

7.1 129.8

Local I Foreign I Total

42600

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Restructuring of the Madagascar: Integrated Growth Poles Project

Project Paper

I. INTRODUCTION

1. This Project Paper seeks the approval of the Regional Vice President to introduce the following changes in the Madagascar Integrated Growth Poles Project (Cr. No.4101), Project ID PO83351 and any accompanying amendments to the Project's legal documents. The proposed changes are to better align the Project support for implementation of the Borrower's new poverty reduction strategy for 2007-20 12: the Madagascar Action Plan (MAP) and the Bank's Africa Action Plan. Specifically, the Borrower has requested support for the establishment and operation of the Economic Development Board of Madagascar (EDBM), a new state entity led by a joint private- public Board, responsible for investment promotion and facilitation. There is also a need to re-allocate resources between the original Project activities to respond to new realities on the ground after almost two years of Project implementation. The major modifications being proposed are: (i) support for the operations of EDBM for a period of three years through streamlining and consolidation of approved activities in the DCA under Parts A. 4(b), 4(c) (i) to (iv), Parts B.l (a), C.3, C.5(b) and D.3 (ii) of the Project; (ii) re-allocation of funds between categories to provide for 100 percent financing for all eligible expenditures in each component; (iii) dropping activities that have since been financed by the private sector; (iv) increasing resources for skills development through private-public partnerships, as well as supporting new activities i.e. malaria eradication and development of renewable energy resources; and (v) increasing resources for strengthening project implementation capacity in the Municipalities and Regions. The expected outcomes of these modifications are enhanced effectiveness of the component on strengthening the business environment and strengthening Project implementation towards achievement of the development objectives.

11. BACKGROUND AND REASONS FOR RESTRUCTURING

A. Project description and implementation

2. The Project was approved on July 12, 2005 and became effective on September 28, 2005. The original credit amount was SDR 85.9 million, equivalent to US$129.8 million. The overall objective of the Project is to help provide a business environment adequate to stimulate and lead economic growth in three regional poles in the areas of Antananarivo-Antsirabe, Nosy Be and Taolagnaro. The specific objectives are to assist the Government of Madagascar to: (i) construct and rehabilitate critical infrastructure essential for sustained economic activity in the tourism, manufacturing, agribusiness and mining sectors; (ii) put in place appropriate incentive measures to achieve rapid growth; (iii) develop the instruments to ensure equitable, sustainable growth; and (iv) strengthen the capacity of local authorities to formulate, prepare, implement and manage medium and long term integrated regional development projects in the future.

3. The Project comprises five components: (a) strengthening the business environment; (ii) supporting export led growth in Antananarivo-Antsirabe; (c) supporting tourism led growth in Nosy Be; (d) supporting mining and tourism led growth in Taolagnaro; and (e) support to the National Project Secretariat for Project implementation, evaluation and monitoring.

4. Two years after effectiveness, project implementation is satisfactory and according to schedule. Both achievement of the Project Development Objectives and overall Project Implementation were rated as Fully Satisfactory following the last implementation support mission in May 2007. Total cumulative disbursements as at September 2007 stand at SDR 32 million (37 percent) which is well on track while 70 percent of the Credit is already allocated (contracts signed) primarily for infrastructure works.

5. The Project's overall financial management and procurement are also satisfactory. The Project has either fully or partially met all the legal and dated covenants to date (Article I11 Sections 3.05, 3.06, 3.07, 3.08 and 3.09 and Article V Section 5.01 of the DCA) as well as the disbursement conditions for the Ehoala Port in Taolagnaro as in Schedule 1 A.3 (d). The Borrower had requested Bank financing of 100 percent of project costs in line with the approved Country Financing Parameters, and this was approved without reallocation in January 2007.

B. Rationale for the restructuring

6. While the Project is performing satisfactorily, the restructuring would allow for enhanced outcomes as follows: (i) resources to support investment promotion and improvement of the business environment which were previously dispersed through allocations for various Ministries will now be consolidated and concentrated under the EDBM which will provide greater focus and impact on results; (ii) the reallocation of resources from savings of the proceeds of the Credit to activities strengthening project implementation capacity in the Municipalities and Regions will strengthen support for the Borrower's decentralization program and enhance delivery of results; and (iii) modifications to some of the Project activities to better respond to current needs not anticipated previously such as support for malaria eradication, development of wind energy resources and establishing private-public partnerships for effective delivery of skills development programs are expected to enhance results on the ground.

7. The Borrower has decided to consolidate and streamline investment promotion and business registration activities under the EDBM. During project preparation, these activities were envisaged to be carried out by the Ministry of Trade, Industry and Private Sector Development (MPSI), the Ministry of Economy, Finance and Budget (MEFB) and GUIDE (an existing one stop business registration center under the MPSI). The EDBM is positioned to function as the premier agency for investment promotion and facilitation as well as investment climate improvement and build upon the success of the one-stop centre for business registration (GUIDE) which was transferred to the EDBM in April 2007. The EDBM is expected to play a critical role in achieving the MAP high growth

strategy through increasing foreign direct investment, creating a competitive business environment, strengthening the Micro, Small and Medium Enterprise (MSME) sector and enhancing the international trade competitiveness of Madagascar.

8. The Project will support the operations of EDBM for a period of three years through streamlining and consolidation of approved activities in the DCA under Parts A. 4(b), 4(c) (i) to (iv), Parts B.l(a), C.3, C.5(b) and D.3 (ii) of the Project. These activities are (i) strengthening the promotion of investments and the registration of MSMEs; (ii) supporting the monitoring of institutional reforms to increase private sector investments; (iii) enhancing the competitiveness of the Export Processing Zone (EPZ) and manufacturing sector; and (iv) supporting the development and implementation of business incentives to attract investments. These activities will now be implemented by the EDBM through a Subsidiary Agreement with the National Project Secretariat and a Project Agreement with the Bank.

9. The Project will support new activities as follows: (i) identifying and developing wind energy resources in Fort Dauphin and Nosy Be which will provide much needed additional clean energy capacity at lower costs; (ii) a program in Nosy Be in partnership with the private sector for the eradication of malaria, filariaris, soil-transmitted helminthiasis and insect infestation of beaches to reduce the health related socio- economic impacts on the population as well as improve conditions for tourism development; (iii) establishing training centers and enterprise-based training programs in partnership with the private sector to ensure that the skills delivery system is demand driven and private sector led; and (iv) rehabilitation of infrastructure, providing office equipment, technical assistance and training to the offices of the Regions (in addition to the Municipalities) which will significantly enhance their capacity to plan, coordinate and manage development activities.

10. An amendment to the Development Credit Agreement (DCA) is justified based on the need to (a) reallocate funds between categories; (b) drop activities related to improvement of existing ports, provision of telecommunications infrastructure, strengthening capacity of Antananarivo Municipality; (c) include new activities to support development of wind energy resources, malaria eradication, strengthening implementation capacity in the Municipalities and Regions and private-public partnerships in skills development; and (d) establish a second Special Account for the EDBM, a Subsidiary Agreement between the EDBM and the National Project Secretariat, a Project Agreement between the EDBM and the IDA and a revised Project Implementation Manual.

111. PROPOSED CHANGES

11. There are no changes proposed to the Project's development objectives and outcomes. The closing date and implementation schedule also remain unchanged. The major design changes are the establishment of a new Project Implementation Agency (EDBM) and a Second Special Account. The objectives are to amend Schedule 1 (Withdrawal of the Proceeds of the Credit) and Schedule 2 (Description of the Project) of the Development Credit Agreement (DCA). Amendments to Schedule 1 will require re-

allocation of funds between Categories, the percentage of expenditures for items to be financed in each Category (as previously approved) and the opening of a Second Special Account. These amendments are reflected in the proposed Revised Schedule 1 in Annex A.

12. The amendments to the Description of the Project are: (i) Modifications of the sub-components under Part A: Improving the business environment as follows:

Part A. 2(a): will include provision of business development services to micro, small and medium enterprises in the tourism and other sectors including those in the Antsirabe Region as well Part A. 3(a): will include provision of goods as well in addition to technical advisory services and training to the Ministry of Tourism and Transport, Regional Tourism Offices and the National Tourism Office Part A. 3(c): will include strengthening the Borrower's national tourism and other related technical training systems, through (i) the provision of technical advisory services to the Ministry of Tourism and Transport and the Ministry of Education, (ii) the rehabilitation of selected public training facilities for management through public-private partnerships, and (iii) the training of trainers Part A. 4(b): will be amended as strengthening the promotion of investments and the registration of enterprises including micro, small and medium enterprises through (i) supporting the establishment and operational costs of the EDBM for an initial period of three (3) years to carry out investment promotion activities needed to attract foreign direct investment; and (ii) establishing EDBM operations in Nosy Be, Taolagnaro and Antsirabe for business registration, investment facilitation and investment promotion activities Part A. 4(c): will be amended as supporting the EDBM in the facilitation and monitoring of institutional reforms to increase private sector investments through (i) coordination and leading reform measures geared towards improvements in the overall business environment as measured by the Doing Business Indicators for Madagascar, (ii) dialogue with the private sector including both existing and potential foreign and domestic investors and micro, small and medium enterprises, (iii) adoption and implementation of the new Investment Law and amended Free Zone Law,(iv)coordination with the Ministry o f Tourism and Transport to achieve an efficient air access policy; and (v) provision of technical advisory services and goods to the Ministry of Agriculture and Land to improve access to land by private investors. Part A. 4(d) will remain unchanged. Part A.4(e) will be amended as Supporting NPS and MED to design and implement enterprise-based training activities such as training of trainers and the establishment of training programs through private-public partnerships and the providing technical advisory services, training and goods for the establishment of skills development centers and enterprise-based skills programs through public- private partnerships.

(ii) Modifications of the sub-components under Part B: Supporting export led growth in the Antananarivo-Antsirabe area as follows:

Part B.l will be amended as enhancing the competitiveness of the EPZ and manufacturing sector through: (a) the adoption and implementation of a new regulatory framework for private sector investment in the Borrower's territory; and (b) the facilitation of development of industrial zones in strategic locations through private-public partnerships. Part B.3 will be amended to replace support for the Municipality of Antananarivo with support for the Vakinankaratra Region besides the Municipality of Antsirabe and will include provision of goods and minor works as well.

(iii) Modifications of the sub-components under Part C: Supporting tourism led growth in Nosy Be as follows:

Part C.3 will be amended to include support for the EDBM in addition to the Ministry of Finance and Budget Part C.5 will be amended to include support for upgrading Hellville and Ankify ports through private-public partnership Part C.7 will be amended as supporting the development of a reliable telecommunication network through the provision of only technical advisory services to the Ministry of Telecommunications instead of works and goods Part C.8 will include support for identifying renewable energy resources as well. Part C.10 will include support for the Ministry of Health to establish a malaria eradication program in partnership with the Municipality and the private sector Part C. 11 will include support for the DIANA Region besides the Municipality of Nosy Be and will include provision of goods and minor works as well

(iv) Modifications of the sub-components under Part D: Supporting mining and tourism led growth in Taolagnaro as follows:

Part D. 1 (b) on supporting the rehabilitation of the existing port will be dropped Part D.3 will be amended to include support for works as well Part D.4 will be amended as supporting the development of a reliable telecommunication network through the provision of only technical advisory services to the Ministry of Telecommunications instead of works and goods Part D.5 will include support for identifying renewable energy resources as well. Part D.9 will include support for the Anosy Region besides the Municipality of Taolagnaro and will include provision of goods and minor works as well

(v) Modifications of the sub-components under Part E: Support to project implementation, evaluation and monitoring as follows:

Part E. 1 will be amended to include communication activities.

IV. ANALYSIS

13. The reallocation of funds is sought from savings realized under the Project as follows: (i) rationalization and consolidation of activities related to investment promotion and facilitation in Parts A.4(b), A.4(c), B.l (ii) Parts (2.5, and D.1 as the upgrading of the

existing port in Taolagnaro was carried out by the private mining company, QIT Minerals Madagascar (QMM) and that of the Nosy Be ports will be through private-public partnerships; (iii) Parts C.7 and D.4: the telecommunications infrastructure is being developed by the private sector and (iv)Part D.6 as the upgrading of the water supply production in Taolagnaro will be undertaken in partnership with QMM.

14. No additional funds are involved and the original economic and financial aspects of the Project are enhanced with the increased investments from the private sector in infrastructure and skills development. The institutional capacity for project implementation is considerably strengthened with the establishment of the EDBM as a second implementation agency dedicated to investment promotion and facilitation. The EDBM is already operational and has taken over the functions of the previous one-stop business registry (GUIDE). Key positions have been filled and activities are being implemented according to the agreed Business Plan. The EDBM will play a key role in making available sites for potential tourism investments through a transparent and predictable process which is critical for the achievement of the Project outcomes.

15. The social aspects of the Project are enhanced through support for the malaria eradication program in Nosy Be (the program in Taolagnaro will be supported by QMM) while the environmental benefits will also be enhanced through support for renewable energy resources. While the environmental category of the Project remains unchanged, a new safeguard policy will be triggered i.e. OP 4.09 on Pest Management. An Integrated Pest Management Plan will be a disbursement condition for the malaria eradication program activity and is expected to be submitted for Bank review by January 2008. The strengthening of implementation capacity in the Municipalities and Regions (through the provision of technical assistance, equipment and training) will improve the quality of environmental monitoring and management of the social and environmental impacts according to the Environmental and Social Management Plans. The restructuring does not require any exceptions to Bank policies.

V. OUTCOMES

16. The proposed changes will enhance the development objectives through greater focus on investment climate reform related to achieving rapid growth through private investments. The current outcome indicators that would be directly impacted through targeted improvements in the business environment and investment promotion are the creation of new jobs in the tourism and related sectors, increased exports, increased tourist arrivals and creation of new enterprises. In addition, the performance of the EDBM will be tracked through the Subsidiary Agreement based on established targets in: (i) volume of private investments per year; (ii) volume of foreign direct investment per year; (iii) ranking of Madagascar in the Doing Business Report; (iv) number of new enterprises registered; (v) number of new investment projects greater than US$10 million; and (vi) number of inward investment missions to Madagascar. Minor changes have been made to the Results Matrix (especially on the use of project outcome information) without changing any of the indicators. The revised Results Matrix is in Annex B. No changes are proposed to Schedule 5 of the DCA at this stage as the indicators will be revisited during the upcoming Project Mid Term Review).

VI. BENEFITS AND RISKS

17. The reallocation of funds to allow 100 percent financing of all eligible expenditure categories will eliminate the risks of unavailability of counterpart funding which have delayed payments to contractors and suppliers and subsequently impacted project implementation.

18. The EDBM is established under the mandate of the Office of the Presidency and is well placed to function as the apex body for investment promotion, business facilitation and dialogue with the private sector on investment climate reform. The Project will now be able to support this bold and timely initiative of the Government by concentrating support to the EDBM instead of providing dispersed technical advisory services to various Ministries which is both difficult to coordinate and monitor as well as lacks synergy.

19. The establishment and staffing of the EDBM has to date taken much longer than expected due to difficulties in completing agreed prior actions before the Credit amendment. These include (a) appointment of the three key positions based on the recommendations made to the EDBM Board; (b) finalization of -the Subsidiary Agreement and Project Agreement including the Business Plan, Operational Budget, Deliverables and Performance Indicators; (c) formal transfer of the use of a building for the EDBM; (d) submission of the final version of the Investment Law and amended Free Zone Law to the National Assembly; and (e) satisfactory transfer of GUIDE functions and operations to the EDBM through a decree. These actions have now been completed and the EDBM is ready to operate a second Special Account. However, there are still risks such as the delay in the appointment of a suitably qualified permanent Chairman preferably from the private sector or civil society, the effectiveness of private sector representation and leadership on the Board, the quality of staff employed and the potential capture of EDBM by vested political interests. The Project mitigates these risks through ensuring that: (i) the Board consists of an equal number of representatives from the Government and the private sector and the selected Board members and Chairman are satisfactory to IDA; (ii) the key positions in the EDBM are filled through a transparent, competitive selection process based on international recruitment by a reputable executive search firm and these candidates are acceptable to the Bank; and (iii) EDBM enters into a Subsidiary Agreement with the National Project Secretariat and a Project Agreement with the Bank which define clearly the EDBM Business Plan and deliverables through a time-bound Action Plan as well as performance indicators, submitting a Project Implementation Manual and demonstrating Financial Management and Procurement capacity satisfactory to IDA.

20. There are no additional costs incurred as the reallocation will take place within the approved total amount of the Credit of SDR 85,900,000.

ANNEX A SCHEDULE 1 (REVISED)

Withdrawal of the Proceeds of the Credit

1. The table below sets forth the Categories of items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each Category and the percentage of expenditures for items so to be financed in each Category:

Category

(1) PCGs

(2) Grants

(3) Works

(a) under Part A. of the Project (i) under Part A.4(b) (ii) under Part A other than Part A.4(b)

(b) under Part B of the Project "per memoria" (i) under Part B. 1 (a) (ii) under Part B other than Part B.l(a)

(c) under Part C of the Project "per memoria" (i) under Part C.3 and C.5(b) of the Project (ii) under Part C other than Part C.3, C.5(b) and C. 1 O(b)

(d) under Part D of the Project (i) under Part D. 1 of the Project

(ii) under Part D of the Project other than Part D. 1 "per memoria" (iii) under Part D.3(ii) of the Project (iv)under Part D of the Project other than Parts D. 1 and D3 (ii) (4) Equipment and goods

(a) under Part A of the Project (i) under Part A.4 (b) and (c) (i) to (iv) (ii) under Part A.4(d) "per memoria" (iii) under Part A other than Part A.4 (b) and (c) (i) to (iv) and Part A.4(d)

Amount of the Credit

Allocated (Expressed in

SDR Equivalent)

1,700,000

% of Expenditures

to be Financed

100% of amounts disbursed 100% of amounts disbursed

100% of amounts disbursed

(b) under Parts B, C, D and E of the Project "per memoria"

360,000

Amount of the 1 % of

(c) under Part B of the Project (i) under Part B. l (a) (ii) under Part B other than Part B. I (a)

(d) under Part C of the Project (i) under Parts C.3 and C.5(b) (ii) under Part C. 10 (b) (iii) under Part C other than Parts C.3,C.5(b) and :. 1 O(b)

(e) under Part D of the Project (i)under Part D.3 (ii) (ii)under Part D of the Project other than Part D. (ii)

(e) Under Part E of the Project

(5) Engineering and Consultants' Services and Audits "per memoria"

(a) under Parts A.4(b) and (c) (i) to (iv), B.1 (a), C.3, C.5(b) and D. 3 (ii) of the Project

(b) under Part C. 10 (b) of the Project (c) under any other Part of the Project (6) Training "per memoria" (a) under Parts A.4(b) and (c) (i) to (iv), B.l (a), C.3, C.5(b) and D. 3 (ii) of the Project (b)under any other Part of the Project (7) Operating costs "per memoria" (a) under Parts A.4(b) and (c) (i) to (iv), B.l (a), C.3, C.5(b) and D. 3 (ii) of the Project (b) under any other Part of the Project

(8) Mitigation costs

(9) Refunding of Project Preparation

Advance

(10) Unal located

Credit Allocated

(Expressed in SDR

Equivalent)

Expenditures to be Financed

100% of amounts disbursed

100% of amounts disbursed

100% of amounts disbursed

100% of amounts disbursed

-

100% of amounts disbursed Amount due pursuant to Section 2.02 (b) of this Agreement

% of Expenditures

to be Financed

Category

TOTAL

Amount of the Credit

Allocated (Expressed in

SDR - Equivalent)

85,900,000

ANNEX B RESULTS FRAMEWORK (REVISED)

PDO 1 Outcome Indicators I Use of Project Outcome Information

T o help provide an adequate business environment t o stimulate and lead economic growth in three selected regional poles.

1. Increase in international tourists arriving at Nosy Be (from 40,875 in 2005 to 80,000 by 20 10) and Taolagnaro (from 13,9 1 1 in 2005 t o 3 1,000 by 20 10)

2. Increase in volume of merchandise shipped through the Taolagnaro port (under construction and tbd), Tamatave port (2.0 million tons in 2005 to 3.2 million tons by 20 10) and Ivato airport (from 7,34 1 tons in 2005 to 8,800 tons by 201 0)

3. Number o f j o b s created in the tourism sector in Nosy Be (from 1,386 in 2005 to 4,000 by 20 1 O), in the ICT sector in Antananarivo- Antsirabe (from 3,366 in 2005 to 4,500 by 201 0) and in the tourism sector in Taolagnaro (from 1 1 1 in 2005 to 1,500 by 20 10)

YR2 Assess progress towards achieving PDO and revise component strategies a s needed

Y R5 Evaluate project success: assess relative effectiveness o f various components to inform future Government policy formu lation and programs on growth

Intermediate Outcomes

Component A: Strengthening the business environment

Improved access to finance, comprehensive supply chain strategy and moveable collateral registry established for the benefit of Malagasy firms

Intermediate Outcome Indicators

Component A: I . Participating banks MSME

loan portfolio increases from less than 2% in 2005 to 10% by 2010

2. Number of leasing transactions increase from 0 in 2005 to at least 50 by 20 10

3. Volume of sales flowing out of the value chains increases by over 259'0 by 20 10

4. Increase of number of

Use of Intermediate Outcome Monitoring

Component A

YRI -Y R2 Measure the results to determine if changes are necessary; feed lessons into the remaining program; re-allocate resources from other componentslactivities at mid term

YR3-YR5 Monitor progress towards targets

collateral registrations by 100% by 2010

Component C: Tourism led growth in Nosy Be

YRI -Y R2 Monitor progress towards targets; determine if

Component B: Export led growth in Antananarivo

Upgrading o f tourism and urban infrastructure through provision o f roads, public utilities, and other urban and tourism services

Component B :

changes are necessary into the remaining program

upgrading of ICT business ' I . At least 10 firms will have

Component D: Mining and Tourism led growth in Taolagnaro

park through provision of hard and soft infrastructure

Open the region up through upgrading of tourism infrastructure, including roads , public utilities, ports, urban and tourism services

set up operations in the ICT park by 20 10

Component C:

1 . Increase in international tourists arriving at Nosy Be (from 40,875 in 2005 to 80,000 by 20 1 0)

Component D:

I. Increase in international tourists arriving at Taolagnaro (from 1 3,9 1 1 in 2005 to 3 1,000 by 20 10)

2. Increase in volume of merchandise shipped through the Taolagnaro port (under construction, target will be determined at mid term)

YR I -YR3 Monitor progress towards targets; determine if changes are necessary into the remaining program

YR I -YR3 Monitor progress towards targets; determine if changes are necessary into the remaining program

Component E: Implementation arrangements

Component E: YR I -YR2 Measure the results to determine if changes are

Antsirabe

Delivery o f an integrated platform for growth by the 4th project year in Nosy Be, Taolagnaro and Antananarivo-

YR3-YR5 Monitor progress towards targets

I. Objectives of the Project Implementation Plan met

- necessary; feed lessons into the remaining program; re-allocate resources from other components/activities at mid term