AFRICAN DEVELOPMENT FUND

PROJECT: INSTITUTIONAL GOVERNANCE SUPPORT PROJECT (PAGI)

COUNTRY: MADAGASCAR

PROJECT APPRAISAL REPORT

Date : June 2013

OSGE/GECL DEPARTMENT

August 2013

Translated document

Appraisal Team

Regional Director : Mrs. M. KANGA, ORCE

Sector Director : Mr. I LOBE NDOUMBE, OSGE

Sector Manager : Mr. J. MUKETE, OSGE.2

Team Leader : Mr. L. BASSOLE, OSGE.2

TABLE OF CONTENTS

I- STRATEGIC THRUST AND RATIONALE ........................................................................1

1.1 Project Linkages with Country Strategy and Objectives ............................................................1

1.2 Rationale for Bank's Involvement ...............................................................................................2

1.3 Aid Coordination ......................................................................................................... ………..4

II- PROJECT DESCRIPTION ………………………………………………………………….5

2.1 Project Components ....................................................................................................................5

2.2 Technical Solutions Adopted and Alternatives Considered .......................................................7

2.3 Project Type ................................................................................................................................7

2.4 Project Cost and Financing Arrangements .................................................................................7

2.5 Project Target Area and Beneficiaries ........................................................................................9

2.6 Participatory Approach ..............................................................................................................9

2.7 Bank Group Experience and Lessons Reflected in Project Design ...........................................9

2.8 Key Performance Indicators .....................................................................................................11

III- PROJECT FEASIBILITY ....................................................................................................11

3.1 Financial and Economic Performance.......................................................................................11

3.2 Environmental and Social Impact .............................................................................................11

IV- PROJECT IMPLEMENTATION.........................................................................................12

4.1 Implementation Arrangements .................................................................................................12

4.2 Project Monitoring and Evaluation ...........................................................................................13

4.3 Governance................................................................................................................................14

4.4 Sustainability ............................................................................................................................14

4.5 Risk Management .....................................................................................................................15

4.6 Knowledge Building .................................................................................................................15

V- LEGAL FRAMEWORK ........................................................................................................16

5.1 Legal Instrument .......................................................................................................................16

5.2 Conditions for Bank Intervention .............................................................................................16

5.3 Compliance with Bank Policies ...............................................................................................16

VI- RECOMMENDATION ........................................................................................................16

LIST OF TABLES

Table 1: Donor Interventions in Areas Covered by the Project

Table 2 : Project Components and Sub-components

Table 3 : Project Cost Estimate by Component

Table 4 : Sources of Financing

Table 5 : Project Cost by Expenditure Category (UA thousand)

Table 6 : Expenditure Schedule by Component

Table 7 : Expenditure Schedule by Category (UA thousand)

Table 8 : Lessons Learnt from Previous Institutional Support

Table 9 : Milestones in PAGI Execution

Table 10: Risks and Mitigation Measures

LIST OF ANNEXES

Annex I: Country’s Comparative Socio-economic Indicators

Annex II: Table of AfDB Portfolio in Madagascar

Annex III: Map of Project Area

LIST OF TECHNICAL ANNEXES

Technical Annex A – Country Development Agenda, Sector Brief and Project

Background

A1. – Country Development Agenda

A2. – Sector Brief

A3. – Donors’ Technical Assistance in Public Finance

A4. – Lessons from Institutional Support Projects

Technical Annex B – Support of Key Arguments of the Report

B1. – Detailed Project Costs

B2. – Implementation Arrangements

B3. – Financial Management and Disbursement Arrangements

B4. – Procurement Arrangements

B5 – Environmental and Social Analysis

Annex C – Additional Technical Annexes

C1. – Detailed Outline of Project Activities

i

Currency Equivalents

(May 2013)

Madagascar Currency Unit = Ariary (MGA)

UA 1 MGA 3 346.97

UA 1 USD 1.51

UA 1 EUR 1.15

USD 1 MGA 2 218.00

EUR I MGA 2899.33

Fiscal Year

January - December

List of Abbreviations

ADF African Development Fund

AfDB African Development Bank

ARMP Public Procurement Regulatory Authority

BdG Bureau Unique de Gestion (Centralized Project Management Office)

BIANCO Independent Anti-Corruption Bureau

CdC Audit Bench

COS Orientation and Monitoring Committee

CSI Council for the Safeguard of Integrity

CSP Country Strategy Paper

DBIV Inspection and Audit Directorate

DGB General Budget Directorate

DGCF General Financial Control Directorate

DGI General Taxation Directorate

DGT Directorate General of the Treasury

DRG Governance Enhancement Department

EARC East Africa Resource Centre

EITI Extractive Industries Transparency Initiative

GDP Gross Domestic Product

IMF International Monetary Fund

MAP Madagascar Action Plan

MFB Ministry of Finance and Budget

MGFO Bank’s Madagascar Field Office

MoV Means of Verification

N/A Not Applicable

ORDSEC Secondary Authorizing Officer

PAGI Institutional Governance Support Project

PCR Project Completion Report

PEFA Public Expenditure and Financial Assessment

PFM Public Finance Management

PGDI Governance and Institutional Development Support Project

PIU Project Implementation Unit

PREA Administration Efficiency Reform Programme

PRIBG Good Governance Capacity Building Project

PRSP Poverty Reduction Strategy Paper

SADC Southern African Development Community

SIPFM System of Integrated Public Finance Management

TFP Technical and Financial Partners

TI Transparency International

UA Unit of Account

UNCTAD United Nations Conference on Trade and Development

WB World Bank

ii

LOAN/GRANT INFORMATION

Client Information

BORROWER : Republic of Madagascar

EXECUTING AGENCY : Prime Minister’s Office, Administration Efficiency Reform

Programme (PREA)

Financing Plan

Source Amount

(UA) Instrument

ADF (including balance from loan

cancellation of UA 0.97 million) 4.320 million Loan

ADF (reuse of balance from grant

cancellation) 0.180 million Grant

Government 0.318 million

Total amount 4.818 million Loan /Grant

Key ADF Financial Information

* relating to

ADF loans

Timeline –

Main

Milestones

(Expected)

Activities Dates

Preparation October 2012

Appraisal April-May 2013

Negotiation July 2013

Project Approval September 2013

Effectiveness December 2013

Mid-Term Review June 2015

Completion December 2016

Last Disbursement March 2017

Loan / Grant Currency UA

Interest Type * Not Applicable

Interest Rate Margin* Not Applicable

Commitment Fee * 0.5% (5 basis point)

Other Charges* 0.75% (service charge)

Tenor 50 years

Grace Period 10 years

NPV (baseline scenario) Not Applicable (NA)

ERR (baseline scenario) N/A

iii

PROJECT SUMMARY

Project

Overview

Project Name: Institutional Governance Support Project (PAGI)

Geographic Scope: Nationwide

General Schedule : 36 months, from 1 January 2014 to 31 December 2016

Financing: UA 4.818 million (ADF: UA 4.5 million; counterpart contribution: UA 0.318

million)

Operational Instrument: Institutional Support Project

Expected Outcomes: The main outcomes sought by PAGI are: (i) a better public resource

mobilization framework leading to a revenue increase from 10.9% of GDP in 2012 to 13%

in 2016; (ii) strengthening of internal and external control; (iii) strengthening of anti-

corruption structures; and (iv) promotion of transparency in extractive industries

management in Madagascar.

Direct Project Beneficiaries: Institutions engaged in public finance management, notably

DGB, DGD, DGI, DGT, DGCF, ARMP, Audit Bench, BIANCO, Ministry of Mines, EITI

Executive Secretariat.

Needs

Assessment and

Relevance

Madagascar is going through a protracted political crisis that has weakened its institutions,

leading to a deterioration of public finance management (PFM) and governance. PAGI’s

objective is to contribute towards restoring material, human and technical capacity for

public resource mobilization, expenditure control, the fight against corruption in and good

governance of the extractive sector. Therefore, the project rationale falls within the broader

context of supporting Madagascar's efforts to promote growth and reduce poverty, through

improved governance, notably in public resource management. The Malagasy

government’s finances face several challenges including: weak public resource

mobilization (the tax ratio dropped from an average of 11.8% between 2004 and 2008 to

10.9% in 2012), weak decentralization and devolution of fiscal management, weak internal

and external control of State budget management, conflicts of interest, corruption, low

level of fiscal resources, illicit trafficking, fraud, non-transparent and inefficient

management of extractive industry resources.

Bank’s Added

Value

The project aims to assist the Government to gradually halt the deterioration of public

finance management and help restore the achievements of previous interventions.

Furthermore, this operation forms part of concerted efforts by development partners to lay

the groundwork for rapid and effective resumption of financial support, in response to

various development challenges. The Bank has acquired substantial knowledge and

experience on Madagascar’s economic challenges through its previous interventions, such

as PRIBG. The Bank’s presence on the ground also constitutes a major advantage that

enables it to participate fully in dialogue with the authorities on improving public finance

management and extractive sector governance.

Knowledge

Management

The project will contribute to institutional development and knowledge building in

Madagascar, notably in the areas of public finance management and governance.

Knowledge will be acquired through skills transfer from advisors and consultants to staff

of beneficiary institutions. Additionally, different information, data platforms, users’

manuals and various training courses and workshops will also contribute to knowledge

building. The project will finance a pilot project to address the entire Tuléar town, PEFA

self-assessments and studies. Procedures manuals in several public finance management

areas will also be produced. Furthermore, the knowledge acquired from this project will be

built upon through a rigorous system to monitor and evaluate expected outcomes and

outputs. Project supervision and completion missions will also be fielded, and the related

reports prepared.

iv

Results-Based Logical Framework

Country and Project Name: Madagascar – Institutional Governance Support Project (PAGI)

Project Goal: To contribute to strengthening institutional capacity for improved public resource mobilization, strengthening of financial governance and

transparency in the extractive sector

RESULTS CHAIN PERFORMANCE INDICATORS

MOV.

RISKS/MITI

GATION

MEASURES Indicator (including CSI) Baseline Target

IMP

AC

T

Impact : Economic

management and control

capacity are enhanced and

contribute to improved

corporate governance

Economic growth rate (GDP) 1.9% (2012) 4% (2018)

AfDB, Mo-

Ibrahim

report

Mo Ibrahim "accountability" and "public

administration" rating

51.7/55.5

(2012) 54/58 (2018)

Outcome I: Public resource

mobilization and control

systems are improved

Tax revenue (% of GDP) 10.9% (2012) 13% (2016)

PREA

reports on

the execution

of the

project;

MFB, PEFA

self-

evaluation,

Audit Bench,

BIANCO, TI

and EITI

Risk 1:

Political and

Institutional:

The

deterioration of

the political

situation,

institutional

fragility and

economic

shocks

constitute

political and

economic risk

factors.

Mitigation

measures:

Project

activities aimed

at

strengthening

governance and

capacity, and

prospects of

holding

elections in

2013 help to

mitigate this

risk.

Risk 2:

Operational:

Inadequate

institutional

capacity

implies a risk

of delay in

project

implementation

and inadequate

coordination of

TFP

interventions.

Mitigation

measures: The

training

activities under

the project and

the institutional

anchoring and

Number of newly identified taxpayers 4 500 (2012) 10 000 new taxpayers

(cumulative 2013-16)

Time-frame for tabling budget review bills

before Parliament after receipt by the Audit

Bench (number of months) (*)

Over 24

months (2006)

Less than 15 months by

2016

Outcome II : Anti-

corruption and transparency

in the extractive sector are

strengthened

PEFA PI-21-i and ii) Effectiveness of internal

audit

PI-21 i: A and

ii : B (2008) P-21-i and ii: A (2016)

Transparency International Perception of

Corruption Index 32 (2012) 36 (2016)

Madagascar’s EITI status Suspended

candidate EITI compliant in 2016

OU

TC

OM

ES

I. IMPROVEMENT OF PUBLIC RESOURCE MOBILIZATION AND CONTROL SYSTEMS

I.1. Improvement of the public resource mobilization framework

(I.1.1.) Improvement of the

fiscal and para-fiscal

revenue collection

framework

Studies on internal revenue mobilization and

addressing of Tuléar town No study

Reports and studies

available before 2016 DGI and

MFB reports Number of taxation centres operational

Not available 20 by 2016

(I.1.2.) Improvement of the

customs revenue collection

framework

Number of officers trained in: the fight against

fraud, audit, control, customs operations, IT ,

training of trainers, management and related

subjects (of which % women)

50 officers in

2011

150 officers

cumulatively between

2014 and 2016, of

which 25% women

DGD report

I.2. Improvement of accounting and auditing

(I.2.1.) Improvement of

public accounting system

Feasibility study on dematerialization of

accounting operations processing No study

Feasibility study report

available before end

2015 MFB and

DGT

reports

Accounting data collection and securement

tools None

Tools put in place and

being used at end-2015

(I.2.2.) Improvement of

accounts auditing system

Number of DBIV officers trained in

international auditing norms (including %

women)

No officers

trained

15 officers trained, of

which 25% women in

2015.

I.3. Improvement of internal and external control

(I.3.1.) Strengthening of the

internal budget

implementation control

system

Number of Financial Control Delegations

operational

Not available 21 delegations equipped

before project

completion

MFB and

DGCF

reports

Number of staff trained on services rendered

and post-auditing, monitoring and evaluation,

change management (including % women)

5 persons 50 officers trained in

2016, of which 25%

women

Monitoring and evaluation system None System in place at MFB

by 2015

v

(I.3.2.) Improvement of the

external control system

Computer system (SIPFM module) to prepare

the Budget Review Act None System in place in 2015

CDC report

close

coordination of

TFPs

Risk 3:

Fiduciary

Weakness of

internal control

system and

procurement,

and PFM

capabilities

increase

fiduciary risks

Mitigation

measures:

Adoption of a

procedures

manual, annual

audits, Bank

supervision and

use of the

Bank’s rules

and procedures.

PIU within

PREA and in

common with

PGDI-II

Number of officers trained in external control-

related areas (including Audit Bench training

of parliamentarians) (of which % women)

None 100 officers trained

(25% women) by 2016

Public Entities Audit Manual Draft

manual

Manual finalized,

validated and used by

2015

(I.3.3.) Improvement of

transparency of the

government procurement

system

Public procurement post-audit report

Last report

dates back to

2010

At least one report

finalized and available

in 2015 ARMP

reports Number of contracting authorities under the

Code making correct entries on SIGMP 119 (2102)

834 at end- 2015 and

900 in 2016

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

II.1. Strengthening the fight against corruption and fraud

(II.1.1.) Strengthening of

anti-corruption

Number of people trained in investigative and

prevention techniques, IT and anti-corruption

(of which % women) None

300 persons trained

(25% women)

BIANCO

reports Number of campaigns and % entities

sensitized and mobilized to adopt the culture

of integrity and transparency (workshops,

audio-visual and radio campaigns)

None 9/ 70% cumulatively in

2013-16

II.2. Improvement of transparency in the extractive sector

(II.2.1.) Strengthening of

mining sector information

Statistical monitoring mechanism and

information system set up in the Ministry of

Mines None

System put in place and

functional in 2014 Mining

observatory,

Ministry of

Mines Number of Ministry of Mines officials trained

in IT (including % women)

Not

available

100 officers trained by

2016 (25% women)

(II.2.2.) Improvement of

transparency in extractive

sector governance

Number of people trained in extractive

resources None

50 persons between

2014 and 2016

EITI

Secretariat

reports Number of sensitization and communication

campaigns conducted (workshops, radio

campaigns, press, TV) on extractive industries

None

10 (cumulatively

between 2013 and

2016) sensitization and

communication

campaigns conducted

KE

Y A

CT

IVIT

IES

ACTIVITIES RESOURCES

Component I (Cf. Activities Matrix, Technical Annex C1)

- Technical assistance activities: provision of national and international experts and consulting firms in the

following General Directorates: Taxation, Customs, Budget, Treasury, Financial Control and Good Governance

Enhancement Department, the Audit Bench and the Public Procurement Regulatory Authority.

- Human capacity building activities: training for all of the above structures.

- Capacity building in equipment: computer, automotive and office equipment for all of the above structures

Component II (Cf. Activities Matrix, Technical Annex C1)

- Technical assistance activities: provision of national and international experts and consulting firms at BIANCO,

the mining observatory and the EITI Secretariat.

- Human capacity building activities: training for all of the above structures.

- Capacity building in equipment: computer and office equipment for all of the above structures

Resources :

Component I : UA 3.134

million

Component II : UA 1.203

million

Component III : UA 0.481

million

Total cost: UA 4.818

million

vi

Estimated Project Implementation Schedule

Years

Activities/Months J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

Prior to Start-up

Board presentation

Grant effectiveness

Loan effectiveness

Selection of other BdG members

Project launching mission

Equipment and Supplies

Bid invitation for IT and office equip.

Bid invitation for vehicles& other wheeled mach.

Bid invitation for other equipment

Goods delivery

Consultancy Services

Preparation of BDs and SLs

Bid invitation, analysis and contract award

Delivery of consultancy services

Training and Miscellaneous

Preparation of BDs and SLs

Bid invitation, analysis and contract award

Delivery of consultancy services

Operating expenses

Mid-term review

Monitoring/Evaluation

Audit

Annual accounts audit

Final accounts audit

2013 2014 2015 2016

1

MANAGEMENT’S REPORT AND RECOMMENDATIONS TO THE BOARD OF

DIRECTORS CONCERNING A PROPOSAL FOR ADF FINANCING OF THE

INSTITUTIONAL GOVERNANCE SUPPORT PROJECT (PAGI)

This proposal submitted by Management to the Board concerns the granting of an amount of

UA 4.5 million from ADF-12 resources to the Republic of Madagascar to finance the

Institutional Governance Support Project (PAGI). The ADF financing comprises a loan of UA

4.32 million under ADF-12 (including a loan cancellation balance of UA 0.97 million) and a grant

of UA 0.18 million, following a grant cancellation. This is an institutional support operation

designed to contribute towards restoring public resource mobilization and control capacity, ensuring

good governance in the extractive sector and preparing for re-engagement by technical and financial

partners (TFPs) after the political and institutional crisis.

I. STRATEGIC THRUST AND RATIONALE

1.1. Project Linkages with Country Strategy and Objectives

1.1.1. The country’s development strategy (Madagascar Action Plan) which covered the

2007-2012 period laid special emphasis on improving governance, including strengthening

public finance management (PFM) and fighting corruption. This strategy having expired,

another national strategy will be prepared by the new authorities that will emerge from the

upcoming elections to be held before end 2013.

1.1.2. Currently, despite the absence of a national development strategy formally adopted

by the Government, the authorities place a high premium on good governance and

transparency in government action. Accordingly, the implementation of the National Good

Governance Policy adopted in 2006 is on-going. Indeed, the activities of the Administration

Efficiency Reform Programme (PREA) and of the Council for the Safeguard of Integrity (CSI) put

in place under the said Policy, continue. Also, Madagascar adopted a National Anti- Corruption

Strategy in 2004. It is still being implemented by the Independent Anti-Corruption Bureau

(BIANCO). This strategy aims to substantially curb corruption in Madagascar by 2015.

Furthermore, during a government workshop on Public Governance in January 2012, the authorities

reiterated the need for good governance, notably in public finance management.

1.1.3. The Ministry of Finance and Budget (MFB) is preparing a short- to medium-term

action plan (MFB), with a view to improving public finance management. The said action plan

focuses on priority activities that are crucial to sound financial and economic governance, and aims

to consolidate public finance management gains. PAGI will support the MFB in preparing the

action plan. Thus, this project is in line with the national policy on good governance, the national

anti-corruption strategy and the priority activities of the public finance management action plan

being prepared. Therefore, it aligns with the country's priorities.

1.1.4. The project is in line with the Bank’s strategy for Madagascar. The Country Strategy

Paper (CSP)1, which was extended to 2013, has two pillars: improving infrastructure (Pillar 1) and

improving governance (Pillar 2). The CSP objectives include: (i) contributing towards reducing the

country's fragility and the vulnerability of its people by responding to some of its pressing needs,

notably in terms of rehabilitating the productive and transport infrastructure; (ii) strengthening

public finance management, the anti-corruption drive and illicit trafficking; and (iii) preparing for a

more speedy re-engagement of the Bank in case of normalization of the political situation through a

number of analytical and project preparation works. Under CSP Pillar II, this will notably include

institutional support to strengthen economic and financial governance. Thus, PAGI is fully in line

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

2

with Madagascar’s CSP. As operational priorities, the Bank’s Ten-Year Strategy, 2013-2022

(approved in April 2013) has, inter alia, governance and accountability (including improving PFM),

resource mobilization and strengthening of institutions that support the accountability process.

Therefore, PAGI is consistent with the Bank’s Ten-Year Strategy. Lastly, the project is in line with

the operational priorities of ADF-12 which lays emphasis on the promotion of sound financial and

economic governance.

1.2 Rationale for Bank’s Involvement

1.2.1. Since 2009, Madagascar has endured a political crisis with severely adverse socio-

economic effects. International mediation led to the signing by almost all Malagasy political groups

of a roadmap in September 2011. Thus, the transitional institutions (Government, Parliament and

Independent Electoral Commission) were put in place and Presidential and Legislative elections

could be held before end 2013. On the economic level, the growth rate that stood at 7.1% in 2008

fell sharply to -4.1% in 2009 following the outbreak of the crisis which severely crippled the

productive system, before averaging 1.1% over the period 2010-11. With a Human Development

Index of 0.483 in 2012 (151st out of 187 countries), the lowest among Indian Ocean countries (with

the exception of the Comoros), and 76% of the population living below the poverty line in 2010, the

incidence of poverty in Madagascar is among sub-Saharan Africa’s highest. This situation stems

from the political crisis that was accompanied by a 40% drop in international aid between 2009 and

2011, and the consequent plunge in the State budget. Therefore, the Government has been forced to

pursue a fiscal austerity policy, thanks to which it was able to contain the budget deficit at 3.1% of

GDP in 2012.

1.2.2. Against this backdrop, the project aims to contribute towards addressing a number

of challenges facing the public finance management system highlighted by the main

recommendations of recent studies2 (see Technical Annex A2 on the sector overview). In so doing,

the Bank will help to gradually restore the State’s public finance management capabilities to enable

it to fulfil its economic role, including poverty reduction. Since the outbreak of the political crisis in

2009, revenue has declined by 20% in real terms. Furthermore, the lack of government credibility

and visibility limits its borrowing capacity on international private capital markets. Besides the

decline in financial resources for State intervention, poor monitoring of budget execution and

control of public spending are unlikely to lead to efficient public finance management.

1.2.3. Despite improvements in the performance of tax (Directorate General of Taxation -

DGI) and customs (Directorate General of Customs- DGD) administrations, notably in 2010,

public revenue collection remains weak. The tax ratio, which went from 13% in 2008 to 10.9% in

2012, remains among sub-Saharan Africa’s lowest. For instance, the VAT recovery rate is a mere

24% of its potential tax base, whereas it stands at 78% and 47% in Mauritius and Senegal,

respectively. Regarding customs duties, the collection rate is barely 29% of the potential amount

that could be generated from imports declared in Madagascar, while it reaches 41% in Mozambique

and 60% in Senegal (see Technical Annex C1 for a detailed presentation of the tax context). This

weak public revenue mobilization capacity is attributable to: (i) the existence of a number of

companies, which although registered, pay little or no tax due to the tax administration’s weak

capacity; (ii) under-taxation of large companies, whereas they are the country’s largest taxpayers;

2 World Bank (2011) Public Expenditure Review. Bitz, Michael (2011), Assessment of the Implementation of the Malagasy Integrated Public

Finance Management System (SIPFM), Interim Report, World Bank. Ibrahim, Mamane (2011), Madagascar: Public Finance Management

Assessment Mission, World Bank, Public Finance Management Performance Measurement Report of the Republic of Madagascar, March 2008.

European Union (2012), Budget Support Assessment and Public Finance Management Review of the health and education sectors - Madagascar:

Update on Public finance management and health/education sector analysis, review of eligibility criteria; Phase 2 Report (Summary of the

Interim Report).

3

and (iii) the attitude of taxpayers who are unconcerned about fulfilling their civic duty, especially

given the extremely low risk of sanctions. Lastly, the inadequate capacity and logistics of public

finance management institutions is not conducive to devolution and decentralization for greater

public revenue mobilization in the regions.

1.2.4. The control system is marked by inefficiency, duplication of interventions of the

bodies concerned and lack of control of services provided and reference prices. The lack of

human and material resources also limits the control system’s efficiency. Although all internal

control services focus on controlling regularity of expenditure, there is none that checks results and

performance. The system is undermined by the weak capacity of public institutions or lack of

accountants in some of these institutions as well as the lack of appropriate penalties for perpetrators

of misappropriations revealed through controls conducted by the General Financial Control

Directorate (DGCF), the Treasury and the General Inspectorate.

1.2.5. External control remains weak despite some progress illustrated notably by the

adoption of the Budget Review Act reports for the 2005 and 2006 fiscal years. External

monitoring institutions have neither the information nor the tools to analyze and, where necessary,

punish deviations. The external audit conducted by the Audit Bench remains inefficient because of

non-enforcement of the penalties provided by law. With no regular reporting on external control,

Parliament exercises no control. No audit of management of the State’s central administration has

been validated by the National Assembly. Since 2008, the Public Procurement Regulatory Authority

(ARMP) routinely publishes information on all contracts, resulting in a significant drop in the

number of directly negotiated contracts between 2008 and 2012 (i.e. from 25% to 6.84% between

2008 and 2012). However, a review of works procurements casts doubt on the quality of the

controls carried out by ARMP or, at least, the information it publishes on its website.

1.2.6. In terms of governance, conflicts of interest, corruption, illicit trafficking, lack of

transparency and inefficient management of mining resources also constitute obstacles to the

promotion of good governance. While Madagascar had already lost 13 points between 2007 and

2010 in the ranking of the Mo Ibrahim African Governance Index, with an index of 46%, it ranked

35th

in 2011 compared to 33rd

in 2010. Having attained the candidate country status in February

2008, Madagascar was suspended in October 2011 from EITI, pending normalization of its political

situation. With the political crisis, the opportunities for corruption and related offences increased

sharply in 2010, according to BIANCO.

1.2.7. Thus, the project will contribute to efforts by Malagasy authorities to gradually

restore the public finance management capacity in a context of protracted political crisis that

has weakened institutions and led to the deterioration of governance3. In this regard, several

Malagasy institutions are making efforts to improve. Despite the difficult environment, the Bank is

determined to maintain its leadership role in economic and financial governance. PAGI is also part

of concerted efforts by development partners to lay the groundwork for a speedy and effective

resumption of financial support in response to various development challenges.

1.2.8. The Bank’s experience in implementing institutional support projects in difficult

contexts of fragile institutions also gives it a significant comparative advantage that justifies

its intervention in Madagascar. Through similar interventions in countries such as Guinea, Côte

d'Ivoire, Sierra Leone and Liberia, the Bank has acquired experience in designing these operations,

whose primary objective is to restore technical, material and human capacity in public finance

management. PAGI complements other Bank interventions in Madagascar given that by restoring

the public revenue mobilization capacity, it will first facilitate the mobilization of various

counterpart funds to help finance these projects (e.g. The Agricultural Infrastructure Rehabilitation

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

4

Project in the South-West region, whose counterpart contribution stand at UA 3.2 million).

Secondly, by restoring good governance and transparency conditions, PAGI will contribute

indirectly towards improving the management of different projects.

1.3 Donor Coordination

1.3.1. Due to the political crisis, donors have suspended many of their interventions and

currently few donors are involved in the area of public finance management. The pre-crisis

partnership framework has slackened significantly. The Bank will actively contribute towards

revitalizing the partnership framework once the current crisis ends. Despite the lack of formal

coordination mechanisms, the Bank has coordinated closely with other TFPs in preparing this

project. Coordination meetings among the donors, on the one hand, and between TFPs and the

authorities, on the other, were held. A two-day workshop was organized during the preparation

mission between TFPs and the Malagasy authorities to identify needs and the potential support that

TFPs could provide to meet them. The meetings helped to identify priority activities that

complement the support of other TFPs and that should be supported by PAGI. The Bank has

reviewed the MFB’s draft action plan with development partners to ensure that PAGI is

complementary to the activities of other TFPs. Thus, PAGI will finance emergency priority

activities with a rapid and significant impact on improving public resource mobilization, good

financial governance, the fight against corruption and transparency in the extractive sector.

1.3.2. Besides the Bank, the Government is also supported by the French Cooperation and

the World Bank (WB). More specifically, French assistance has focused exclusively on tax

revenue from customs and tax administrations, while the public spending cycle was supported by

the Bank and the World Bank. The World Bank and the Bank provide funding for the deployment

of taxation centres. WB and French Cooperation are also working to develop a culture of activity

monitoring and control. Lastly, the PAGI appraisal mission coincided with a European Union (EU)

preparation mission for the Institutional Governance Support Project that will be approved and

implemented once elections are held and the crisis ends. The EU support will mainly cover the

strengthening of the budget making process, citizen participation, civil service reform and judicial

reform. This synergy and complementarity of TFPs will create conditions conducive to effective

restoration of physical, human and institutional capacity for better public finance management,

increased transparency and further pursuit of the fight against corruption.

1.3.3. Using a common project implementation unit (see § 4.1.1) to implement projects attached

to the Prime Minister’s Office will facilitate interdepartmental coordination of interventions by

institutions (see Table 1 below for a summary).

5

Table 1

Donor Interventions in Areas Covered by the Project

Partners

Public

Finance

Management

Extractive

Industries

Governance

Fight

Against

Corruption

Justice

Public

Service

World Bank X X

European Union 4 X X X X

AfDB X X X

French Cooperation X

2 PROJECT DESCRIPTION

2.1 Project Components

2.1.1 The project’s overall goal is to contribute towards restoring institutional capacity for

better public resource mobilization, strengthening financial governance and transparency in

the extractive sector. The project will also contribute towards preparing for donors’ re-

commitment after the political and institutional crisis. The project’s specific operational objectives

will be to: (i) improve public resource mobilization and control systems by improving the

mobilization of tax and quasi-tax revenues and customs revenues, public accounting and accounts

auditing, and internal and external ex-post control, (ii) strengthen anti-corruption and improve

transparency in the extractive sector, by supporting anti-corruption and improving transparency in

the extractive sector

2.1.2. PAGI comprises two operational components, namely: (i) improving public resource

mobilization and control systems; (ii) strengthening the fight against corruption and

improving transparency in the extractive sector. There is a third component concerning project

management, research and knowledge management. The three components are mutually

complementary and reinforcing. Indeed, increasing public resource mobilization without

strengthening public expenditure control cannot lead to increased and improved efficiency of

government interventions. The fight against corruption cannot improve without an appropriate

public spending control system. Furthermore, greater transparency in the extractive sector improves

the mobilization of tax and non-tax revenue. Table 2 below provides details on the components.

Technical Annexes B1 and C1 provide detailed costs for each component’s activities and a

comprehensive list of goods and services to be procured under the project, as well as a detailed

description of project activities.

4 The EU Institutional Support Project is being prepared.

6

Table 2

Project Components and Sub-Components

Code Components Costs (UA ‘000) Description of Components

I. Component I 3 119.6 Improvement of public resource mobilization and

control systems

I.1.

Improvement of the

public resource

mobilization framework

1 274.2

Improvement of tax and quasi-tax revenue collection:

technical support for addressing Tuléar town, study on

the assessment of tax reforms, deployment of a

computerized monitoring and evaluation system at MFB,

monitoring and evaluation training for DGI and MFB

officials;

Improvement of the customs revenue collection

framework: training in several customs-related domains

(fight against fraud, strategic management,

popularization of e-learning, etc.).

I.2. Improvement of

accounting and auditing 656.9

Improvement of public accounting: feasibility

study/implementation of paperless processing of

accounting transactions; Improvement of auditing: SIPFM system deployment,

training of trainers on the new SIPFM system, training

IPSAS, IAS / IFRS in fraud and collusion;

I.3.

Improvement of internal

and external ex post

control

1 188.5

Strengthening the internal control system: training in ex

post control of services rendered and exchange of

experiences abroad;

Improving the external ex post control system: production

of the public institutions audit manual for the Audit

Bench; training on several performance-related terms;

and logistic support to control and audit missions.

Improving transparency in public procurement:

logistic/operational support for sensitization on the public

procurement code of ethics, assessment of procurement

after ex post control, sensitization of the private sector

stakeholders and civil society on public procurement.

II. Component II 1 203.0 Strengthening the fight against corruption and

improving extractive sector transparency

II.1.

Strengthening the fight

against corruption and

fraud

610.0

Strengthening the fight against corruption and fraud:

study on illicit trafficking; develop a computerized data

processing system, training on illicit trafficking,

corruption prevention techniques; nationwide

sensitization on corruption and fraud , updating and

maintenance of the BIANCO website;

II.2.

Improvement of

transparency in the

extractive sector

592.0

Improving extractive sector information: setting up a

statistical monitoring system and an information system;

training in statistical monitoring, acquisition of computer

hardware;

Improving transparency in extractive sector governance:

preparing mining sector audit reports; support to

Madagascar’s EITI validation process and extractive

industries, sensitization on extractive industries;

procurement of sundry equipment;

III. Component III 495.4 Project Management

Coordination 386.5 Compensation and miscellaneous operation; material

assets and office equipment

Audit 66.9 Project financial audit

Knowledge Management 42.0 Studies, PEFA Self-Assessment

Total Project Cost 4818.0

7

2.2 Technical Solutions Adopted and Alternatives Considered

2.2.1 During project preparation and appraisal, and in light of lessons learned from

implementing the Good Governance Capacity Building Project (PRIBG)5, several options

were presented concerning notably the project’s institutional anchoring. To enhance the

efficiency and complementarity of activities, it was deemed that the project should be anchored at

the Prime Minister’s Office (see para. 2.7.2). The establishment of a Centralized Project

Management Office (BdG) attached to the Prime Minister’s Office will ensure improved

interdepartmental coordination within the government and among the TFPs.

2.2.2. In addition, important and fruitful discussions were held on the intervention areas,

the number of institutions to support and the type of capacity building. Trade-offs were made

to be able to: (i) set project objectives that are consistent with the country's priorities; and (ii) factor

in synergy with interventions of other TFPs. PAGI has chosen the option to reduce the number of

direct beneficiary institutions (10 under PAGI against 32 under PRIBG) and focus on a limited

number of components and activities to ensure the project’s success.

2.2.3. Regarding training arrangements under this project, several beneficiary institutions

proposed the option of training abroad. However, in light of experience from PRIBG, the project

team, following discussions with the authorities, opted for short-term training in the country or in

Africa by/in known institutions or regional/international experts. This choice will increase the

number of people trained and help to develop and strengthen the training capacity at country and

regional level.

2.3 Project Type

PAGI is an institutional support project that focuses on improving public finance

management systems, internal and external control, and mining sector governance. It was designed

to gradually put a halt to the deterioration of public finance management and contribute towards

restoring the achievements of previous interventions in the area of revenue mobilization, internal

and external auditing, the fight against corruption and transparency in the extractive sector.

2.4 Project Cost and Financing Arrangements

The total estimated project cost, excluding taxes and customs duties, stands at UA 4.818

million. Through ADF resources, the Bank will provide UA 4.5 million and the Government UA

0.318 million (6.6% of total project funding) as counterpart contribution to partially cover operating

costs. ADF funding is broken down as follows: UA 4.32 million as a loan, and UA 0.18 million as a

grant6. Provisions of 3% and 2% respectively for price escalation and physical contingencies have

been included in the project cost. Tables 3 to 7 present the project

cost estimates by component and sub-component, by source of financing and expenditure category

per year. A detailed table of costs is presented in Technical Annex B1.

5 The Good Governance Capacity Building Project (PRIBG) was executed between 2004 and 2012, and financed by the World Bank through a UA

5.86 million grant (Project Completion Report- ADF/BD/IF/2012/144) 6 It should be noted that despite budgetary constraints, the Government of Madagascar has always demonstrated its willingness to contribute to the

financing of Bank projects. Accordingly, it was recommended that the ADF finance 93% of the project’s local currency and foreign exchange

costs under the Bank Group’s Policy on Eligible Expenditure (ADB/BD/WP/2007/106 / Rev.2 ADF/BD/WP/207/72/Rev.2-2 May 2008). This

departure from the 10% counterpart funding required was approved by OPSCOM at the 11April 2013 Concept Note review.

8

Table 3

Project Cost Estimate by Component

Component Total Cost (MGA million) Total Cost (UA ‘000) %

F.E. F.E. L.C. Total F.E. L.C. Total

Improvement of public resource

mobilization and control systems 7 262.7 2 655.5 9 918.2 2.175.6 795.5 2 971.1 73.2%

Improvement of public resource

mobilization framework 3 288.4 762.8 4 051.1 985.1 228.5 1 213.6 81.2%

Improvement of accounting and auditing 1 709.9 378.5 2 088.4 512.2 113.4 625.6 81.9%

Improvement of internal and external

control 2 264.5 1 514.1 3 778.7 678.4 453.6 1.131.9 59.9%

Strengthening the fight against

corruption and improving extractive

sector transparency

2 378.8 1 445.8 3 824.5 712.6 433.1 1.145.7 62.2%

Strengthening the fight against corruption

and fraud 924.7 1 014.7 1 939.4 277.0 304.0 581.0 47.7%

Improvement of transparency in the

extractive sector 1 454.0 431.1 1 885.1 435.6 129.1 564.7 77.1%

Project Management 300.6 1 274.4 1 575.0 90.0 381.8 471.8 19.1%

TOTAL BASE COST 9 942.1 5 375.7 15 317.8 2 978.2 1 610.3 4 588.6 64.9%

Physical contingencies 2% 198.8 107.5 306.4 59.6 32.2 91.8 64.9%

Price escalation 3% 298.3 161.3 459.5 89.3 48.3 137.7 64.9%

TOTAL PROJECT COST 10 439.2 5 644.4 16 083.6 3 127.2 1 690.8 4 818.0 64.9%

Table 4

Sources of Financing

Sources Total cost (MGA million) Total cost (UA ‘000)

F.E. L.C. Total F.E. L.C. Total

Loan - ADF 9 838.3 4 582.9 14 421.2 2 947.2 1 372.8 4 320.0

Grant - ADF 600.9 - 600.9 180.0 - 180.0

Malagasy Government - 1 061.6 1 061.6 - 318.0 318.0

TOTAL PROJECT COST 10 439.2 5 644.4 16 083.6 3 127.2 1 690.8 4 818.0

Table 5

Project Cost by Expenditure Category (UA ‘000)

EXPENDITURE CATEGORY F.E. L.C. Total % F.E.

Goods 1 530.5 64.4 1 594.9 96.0%

Services 1 447.7 774.7 2 222.4 65.1%

Operation - 771.3 771.3 0.0%

TOTAL BASE COST 2 978.2 1 610.3 4 588.6 64.9%

Physical contingencies 2% 59.6 32.2 91.8

Price contingencies 3% 89.3 48.3 137.7

TOTAL PROJECT COST 3 127.2 1 690.8 4 818.0 64.9%

Table 6

Expenditure Schedule by Component (UA ‘000)

COMPONENTS 2014 2015 2016 Total

Improvement of public resource mobilization and control systems 1 536.5 936.9 646.2 3 119.6

Strengthening the fight against corruption and improving extractive

sector transparency 687.4 409.9 105.6 1 203.0

Project management 172.6 161.4 161.4 495.4

TOTAL PROJECT COST 2 396.5 1 508.2 913.3 4 818.0

9

Table 7

Expenditure Schedule by Category (UA ‘000)

EXPENDITURE CATEGORY 2014 2015 2016 Total

Goods 1 124.2 322.2 228.3 1 674.7

Services 988.4 916.1 429.0 2 333.4

Operation 284.0 270.0 255.9 809.9

TOTAL PROJECT COST 2 396.5 1 508.2 913.3 4818.0

2.5 Project Area and Beneficiaries

The project area is the Malagasy territory. The main project beneficiaries are: (i) the State

of Madagascar as a whole, whose institutional capacity will be strengthened (about 800 different

supported structures will be trained, and the material capacity of these structures restored, the

SIPFM system will be deployed nationwide, the country’s public resources will be increased, its

accounting and auditing accounts improved, its internal and external control systems improved, its

anti-corruption institutions strengthened (e.g. as direct beneficiary, BIANCO’s computer system

will be developed, over 100 people will be trained in investigative techniques, and about 80 persons

will be trained and sensitized on illicit trafficking and corruption control); the mining observatory as

well as the EITI Executive Secretariat will also be strengthened; (ii) the Malagasy people who will

be the indirect end beneficiaries of the improved management of public finances, the strengthening

of corruption control and transparency in the extractive sector; and (iii) government departments

and agencies, non-state actors, civil society and the private sector will also be indirect beneficiaries

of PAGI.

2.6 Participatory Approach in Project Identification, Design and Implementation

The participatory approach was used at project appraisal and design, in close

collaboration with the technical services of the Malagasy Government and various donors

operating in Madagascar. During the preparation and appraisal missions, the project team held

several meetings with Malagasy Government stakeholders, namely the MFB directorates, the

Ministry of Justice, PREA, IGE, the Audit Bench, the Council for the Safeguard of Integrity (CSI),

BIANCO, the Ministry of Mines, the EITI National Secretariat, the private sector and civil society.

During the preparation mission, a 2-day workshop was held between donors and the Malagasy

authorities to identify needs and potential donor support to cover them. During both missions, the

team also held discussions with donors, including the World Bank, EU, UNDP, Norway, the United

States, Switzerland, Japan, Britain, and French Cooperation. The purpose of the meetings was to

harmonize and coordinate the different interventions and initiatives in Madagascar. Project

implementation will also follow a participatory approach, through quarterly meetings of the

Technical Committee involving all project beneficiaries. The workshops that will be organized

during the mid-term and project completion report missions will be further opportunities for public

consultation.

2.7 Bank Group Experience and Lessons Reflected in Project Design

2.7.1 The volume of the Bank's portfolio in Madagascar in late May 2013 represented UA

187.95 million for eleven (11) operations. The sectors covered by the portfolio are: industry

(52%), water and sanitation (23%), agriculture (17%), social (5%) and energy (3%). The public

sector comprises nine (9) projects amounting to UA 83.2 million or 44% of the portfolio. Besides

projects financed through loans, there are two emergency aid and two other operations7 financed

through grants. The performance of the Bank's public sector portfolio, rated at 2.18 out of 3 exceeds

7 Emergency Humanitarian Assistance for the Prevention of Epidemics; (ii) Emergency Assistance for the Rehabilitation of Social Infrastructure

Following the Passage of Cyclone Giovanna Irina (iii) PPR-Rehabilitation and Extension of the Lower Mangoky Scheme (iv) PPF - Mid-West Young Rural Enterprises

10

the 2012 and 2009 performance levels (1.8 and 2.14 out of 3, respectively). As at 10 May 2013, the

public portfolio’s disbursement rate was 37% against 44.1% in March 2012. The low disbursement

rate is partly due to the poor performance of four projects in terms of disbursement8 and the

completion of two projects (PRIBG and PRPT9) in 2012. The portfolio has no problematic project.

However, there are three risky projects representing 33.33% of the public portfolio (Annex II).

2.7.2 The implementation of PRIBG (closed in 2012, Completion Report ADF/BD/IF/2012/144)

contributed to improving public finance management in Madagascar, notably through PFM training

of 11,000 government officials, the deployment of ASYCUDA + + (Customs) and SIGTAS

(Taxation), the establishment of SIEA (Registration) and the deployment of procurement

management software. PRIBG helped to improve tax mobilization, budget preparation and

management, and strengthened the procurement system. Besides the aforementioned gains, the

PRIBG completion report highlighted a number of lessons that are reflected in the design of the

operation under consideration. Table 8 summarizes the key lessons and how they were factored in

during PAGI preparation (Technical Annex A4 on lessons learned in Madagascar, Liberia, Sierra

Leone and Burundi).

Table 8

Lessons Learnt from Previous Institutional Support Projects

Lessons Learnt Measures to Reflect Lessons in the Project

Too broad a scope

At identification, discussions focused on limiting the number of project beneficiary

structures and continued during the preparation and appraisal missions. They helped to

limit the number of beneficiary structures to 10 against 32 under PRIBG.

Too many micro-

activities

At identification, discussions focused on limiting the number of project beneficiary

structures and continued during the preparation and appraisal missions. They helped to

limit the number of project components to 3 with 6 sub-components.

Project

Implementation Unit

anchored at the

Presidency

The Project Implementation Unit was identified at preparation and an agreement was

reached with the Malagasy party on the institutional anchoring of the PIU at the Prime

Minister’s Office, more specifically at COS/PREA. As a technical body, its anchoring

at the Prime Minister’s Office strengthens efficiency and complementarity with other

donors whose projects are also attached to it. The project will be managed by a

centralized management office which is common to all projects that are institutionally

attached to COS/PREA.

Weak coordination of

different technical and

financial partner

interventions in the

sector

The project design was closely coordinated with the interventions of other

development partners. Using the same Project Implementation Unit with all projects of

the same type attached to the Prime Minister’s Office (e.g. the World Bank’s on-going

PGDI-II) will help harmonize the interventions of the two banks in the sector.

8 (i) Tuléar Fishing Communities Support Project (60%, 7 months to the end), (ii) Drinking Water Supply Project (31%, 7 months to the end) (iii)

Supplementary Loan to PRBM (1% over 4 years after approval but with only one year of implementation due to the crisis), and (iv) PPF for the

preparation of PRBM -II (0%). 9 The PRPT completion report was prepared in May 2013. Its validation is on-going.

11

2.8 Key Performance Indicators

The key performance indicators identified and PAGI’s expected outcomes on completion are shown

in the results-based logical framework. They are mainly:

Box 1

Key Performance Indicators Output indicators

Addressing of Tuléar town completed by 2016

At least 20 decentralized taxation centres operational by 2016

21 financial control delegations operational by 2016

At least 50 persons trained in extractive resources between 2014 and 2016

Outcome indicators

Improved fiscal resource mobilization with an increase in government revenue, from 10.9% in

2012 to 13% in 2016

Improved internal and external control systems with shorter timeframes for tabling budget

review bills before Parliament below 9 months between 2006 and 2016 (24 months for the last

bill tabled in 2006, less than 15 months in 2016)

The fight against corruption is scaled up with Transparency International’s corruption index

moving from 32 in 2012 to 36 in 2016;

Madagascar acquires the status of EITI compliant country in 2016

Impact Indicators

The GDP Economic Growth Rate rises from 1.9% in 2012 to at least 4% in 2018

The ratings for the Mo Ibrahim governance index relating to “accountability” and “public

management” rise from 51.7 and 55.5 in 2012 to 54 and 58 in 2018, respectively.

III. PROJECT FEASIBILITY

3.1 Economic and Financial Performance

This project does not generate direct revenue which would help establish a financial

return. Accordingly, the project’s performance is assessed based on the direct and indirect impact

of its achievements at the economic and social level in the medium and long term. The rationale for

the proposed operation is its contribution towards enhancing government’s performance by

improving public finance management. Such benefits will result from restoring human and

technical capacity to improve public resource mobilization, internal and external controls,

strengthen the fight against corruption and increase transparency in the extractive industry. Through

better public finance management, the project targets a positive medium-term impact on economic

growth, access to social services and poverty reduction.

3.2. Environmental and Social Impact

3.2.1. The proposed project will have no negative environmental impact. Rather, greater

transparency in the extractive industry sector will probably have a positive effect on the

environment. Support to capacity building for the Mining Sector Observatory will also enable better

monitoring of the environmental impact of mining. The project is classified in Category 3 in terms

of environmental impact.

3.2.2. The proposed project will improve gender equality outcomes in terms of human

resource development. For instance, in organizing training, efforts will be made to target women

candidates. This will enable the training of over 200 women in the various beneficiary institutions.

Similarly, ARMP’s training activities under this project will seek to provide capacity building for

women so as to increase women entrepreneurs’ participation in bidding for public contracts.

Generally, at least 25% of trainees in each case will be women.

12

3.2.3. Social Impact: The project will contribute to increased public resources (10.9% of GDP in

2012 to 13% of GDP in 2016), thus supporting improved access to social services and poverty

reduction (the incidence of poverty stood at 76% in 2010) thanks to an increase in pro-poor

spending and infrastructure, as well as better governance in the financial and extractive sectors.

3.2.4. Impact on overall governance: The project will contribute directly towards improving the

country’s public finance management system, notably through capacity building in public resource

management, public procurement, and control of public spending. The project will lead to, inter

alia, better collection of tax and non-tax revenue (about 90% of the municipalities will be subject to

local taxation and Tuléar town will be addressed by 2016), the deployment of transparent public

procurement systems that are consistent with the principle of accountability, and improved

transparency (establishment of a monitoring and evaluation system at the mining observatory) in the

extractive sector through support for the preparation of mining sector audit reports by 2015.

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

IV. PROJECT IMPLEMENTATION

4.1. Implementation Arrangements

4.1.1. Executing Agency: Under the guidance of a Steering and Monitoring Committee (COS),

PREA which is attached to the Prime Minister’s Office will coordinate PAGI implementation

through a Centralized Project Management Office (BdG) set up by the Prime Minister. The BdG

currently acts as implementation unit of the World Bank’s Governance and Institutional

Development Support Project, Phase II (PGDI-II). It is expected that its mandate will be extended

to PAGI’s implementation. In this regard, COS, which comprises representatives of institutions

involved in BdG-managed projects (including representatives of regions, municipalities, civil

society and the private sector), will approve the PAGI annual work programme. Furthermore, a

COS select committee will carry out quarterly monitoring of PAGI implementation. At the end of

each year, COS will approve the annual project progress report (see Technical Annex B2 on the

detailed implementation arrangements).

4.1.2. The BdG is currently headed by a Director who is assisted by a monitoring and evaluation

Officer, a PDGI-II components management officer and a fiduciary and support staff management

officer. PAGI will recruit the BdG deputy director, the fiduciary staff and other personnel to

manage and monitor PAGI components. Recruitments will be on a competitive basis in line with

the Bank’s rules and procedures, based on terms of reference approved by the Bank. The BdG will

be responsible for preparing all reports, budgets and terms of reference as well as the fiduciary

management of the project. The Government through PREA will provide the BdG with adequate

office space. The BdG was evaluated during the appraisal mission and its performance was deemed

satisfactory overall.

4.1.3. Financial Management: The BdG will carry out the financial management of project

resources according to Bank rules and procedures. The BdG already has an official for the fiduciary

management of PGDI-II. The fiduciary staff recruited on a competitive basis (administrative and

financial officer (RAF) and an accountant) have been in place for several years (the accountant’s

contract was renewed in late 2012) and master financial management procedures of the TFPs. The

terms of reference of the fiduciary team in place will be amended so that the team is in charge of the

fiduciary management of all PREA-supervised projects. Financial management software is in place

and will be adapted to also manage the ADF resources. An administrative and financial

management procedures manual already exists and will be amended to reflect the financial

management of ADF funds and factor in the external auditors’ recommendations. An assessment of

13

the BdG shows that the project’s overall financial management risk is considered moderate. The

project’s fiduciary team will be strengthened with the recruitment of an Assistant Accountant for

procurement and an internal auditor. The recruitments will be on a competitive basis and in line

with Bank procedures. The BdG will prepare an annual work programme and the related budget

before the beginning of each fiscal year, that will be approved by COS and transmitted to the Bank

for comments (cf. Para. 4.1.1 and Technical Annex B3). The BdG will prepare quarterly activity

reports and financial reports in a format acceptable to the ADF, which will be forwarded to the ADF

for comment within 45 days of the end of each quarter.

4.1.4. Disbursements: Disbursements will be made in accordance with Bank rules and

procedures. Possible disbursement methods will be: direct payment and revolving fund. A

disbursement letter will be sent by the ADF specifying the disbursement details. Two special

accounts will be opened in a bank acceptable to the ADF, to exclusively receive the revolving fund

(ADF loan and grant) managed by the fiduciary team. A deposit account will be opened at the

Treasury to receive project funds that will be included annually in the Finance Act.

4.1.5. Audit: The project’s annual financial statements and financial monitoring reports prepared

by the BdG shall be audited by a competent and independent audit firm. The audits will be

conducted according to the Bank’s auditing Terms of Reference. Each audit will cover the

Borrower’s fiscal year period. The audited financial statements will be submitted to the Bank no

later than 6 months after the end of the year to which it relates. The cost of the audit will be

financed from the ADF loan resources. The status of implementation of audit recommendations will

be monitored regularly by the Bank. In accordance with the Bank’s information policy, the project

will publish on its website, within the month following the validation of the final audit report, audit

reports including qualified audit reports.

4.1.6. Procurement Arrangements: All goods and consultancy services financed from Fund

resources (grants and loans) will be procured in accordance with Bank Rules and Procedures for the

Procurement of Goods and Works, and Rules and Procedures for the Use of Consultancy Services

(May 2008 Edition, Revised 2012), using the Bank’s standard bidding documents. The BdG (see

para. 4.1.1.) will be responsible for the procurement of goods and consultancy services financed by

the Fund. The BdG has the capability to manage procurements and has solid experience that it has

acquired by managing the World Bank-financed PGDI II. However, to efficiently implement the

additional volume of procurement activities generated by PAGI, it will be provided with

supplementary material and human resources, including recruitment of an assistant procurement

officer. A draft procurement plan prepared by the BdG will be submitted to the Bank for review and

approval prior to negotiations (see Technical Annex B4 for details on procurement).

4.2. Monitoring and Evaluation

In collaboration with the beneficiary institutions, COS, PREA and BdG are responsible for

all monitoring and evaluation (M&E) activities. PREA and BdG will prepare quarterly project

progress reports that will be sent to COS, beneficiary institutions; project stakeholders and the ADF

(see Section 4.1 and Technical Annex B2 and B3). PAGI plans to recruit a monitoring and

evaluation specialist for the BdG. The reports shall present the project progress according to the

logical framework. These reports will also be published on the project website. Furthermore,

periodic M & E supervision missions (two per year) will be fielded, in collaboration with MGFO,

and a mid-term review to assess project implementation performance conducted in close

coordination with the World Bank. In addition, the Bank will prepare a project completion report

within three months of the last disbursement. The project milestones are indicated in the table

below.

14

Table 9

Milestones in PAGI Implementation

Timeline Milestone Monitoring Process/Feedback

Loop

September 2013 Board Approval Board Resolution /Letter to the

Government

December 2013 Effectiveness Bank

January 2014 Finalization of management team

recruitment

Government

January 2014 Project start-up/ launching mission Bank/Government

January 2014 – June

2016

Goods and services procurement Government/PREA

Twice yearly Project Supervision Bank/Government/PREA

End of each quarter Quarterly progress reports Government/PREA

3rd quarter of 2015 Mid-term review Bank/Government/PREA

January 2017 Project Completion Report Bank/Government/PREA

4.3 Governance

A rigorous project governance structure has been put in place to manage the

implementation, monitoring and fiduciary aspects, including the project audit, as presented in

Sections 4.1 and 4.2 above and in Technical Annexes B2, B3 and B4. The preparation and regular

updating of a procurement plan, preview of procurement operations by the National Tenders Board

(NTB), formation of the qualified Tenders Committee (TC), the application of Bank rules and

procedures for procurement and financial management, the use of a procedures manual for

administrative and financial management, the preparation of project implementation reports, regular

financial reports and regular audits will strengthen project governance. A rigorous process of

selecting training beneficiaries, the formal appointment of focal points in the beneficiary institutions

responsible for monitoring activities, the involvement of project stakeholders through COS, regular

consultations and the recruitment an internal auditor for the BdG are also measures to help mitigate

the risks. Monitoring and regular supervision, including joint supervision of the project with TFPs

mainly through the Bank’s office in Madagascar will strengthen the verification of project

governance and performance.

4.4 Sustainability

The sustainability of PAGI10

gains rests first and foremost on the determination of

the Malagasy authorities to support improvements in public finance management and

transparency in the extractive sector. By focusing on domestic revenue mobilization and

improving the effectiveness of public expenditure through reinforcement of control systems and

steady pursuit of the fight against corruption, PAGI will enable the authorities to improve the tax

revenue level. This will help to strengthen the State’s poverty reduction effort. Staff of different

beneficiary structures will be trained locally by trainers from the administration. The trainers

themselves will also be trained, to ensure continuity of training for future generations. Knowledge

acquisition and mastery of modern management tools will enable better qualification and

performance of the Malagasy public administration. Under PAGI, manuals and guides will be

prepared for beneficiary structures. The formal designation of focal points in beneficiary institutions

under the project will help to sustain activities over time within such structures. Lastly, the

establishment of a Centralized Project Management Office (BdG) with the World Bank and other

projects attached to PREA will also contribute to project sustainability.

10 However, it is difficult to strike the right balance between tangible achievements and sustainable capacity in a country that is going through a

political crisis, which has led to a weakening of the State and its institutions.

15

4.5 Risk Management

Table 10 below provides a summary of the residual risks (other than those related to governance

and sustainability) as well as mitigation measures.

Table 10

Risks and Mitigation Measures Risks Level Mitigation Measures

Political, institutional and macro-economic risk:

Since 2009, Madagascar has been going through a

political crisis that has led to a weakening of

institutions, a significant decline in revenue and the

implementation of fiscal austerity. Institutions have

been weakened by macroeconomic shocks as well

as repeated cyclones. A protracted political crisis

and macro-economic shocks could jeopardize

project implementation and attainment of project

objectives. The lack of political stability and the

fragility of institutions could delay the

implementation of reforms, due notably to the

absence of strategic orientation of the reform

programme and resistance to change.

High

The international community’s on-going support

and mediation for the holding of elections and

ending of the crisis probably before end 2013 is

a factor that can mitigate this major risk.

Improved revenue mobilization, the authorities’

continued prudent fiscal policy, project activities

and those of other TFPs to strengthen

governance are all risk mitigation measures.

Lastly, support by the project and other TFPs for

the preparation of a public finance management

reform strategy and capacity building for change

management are also risk mitigation factors.

Operational risk: The lack of institutional

capacity implies a risk of project implementation

delays and inadequate coordination of donor

interventions. There is also a risk of departure of

people trained under the project. Average

The project’s targeted approach, the

establishment of a Centralized Project

Management Office (BdG) within PREA, close

coordination between TFPs, notably in

monitoring project implementation and regular

supervision of PAGI will help to mitigate this

risk. Project activities will also reduce

institutional capacity weaknesses. The risk of

departure of trained persons is mitigated by the

large number of persons that will be trained.

Fiduciary risks and corruption. The weakness of

internal control, procurement and PFM capacity

increase fiduciary, conflict of interest and

corruption risks. This could lead to embezzlement

or misappropriation of funds or project resources Average

The risk mitigation measures are presented in

Section 4.1 and the technical annexes. The

project funds will be managed in line with

Bank's rules and procedures for financial

management, procurement, disbursement and

auditing; also, project management will be

transparent. Moreover, monitoring and

supervision by the Bank in close collaboration

with the other TFPs will help to mitigate this

risk.

4.6 Knowledge Building

Knowledge will be acquired through skills transfer, thanks to technical assistance and

training at the local, regional and international level. PAGI will contribute towards knowledge

building and skills development, notably in public finance management, fraud and corruption

control as well as transparency in the extractive industry. Under public finance management,

knowledge will be acquired through technical assistance and training in the following areas: (i)

revenue mobilization; and (ii) internal and external ex post control. The project will also develop

manuals and finance studies, including a study on illicit trafficking, assessment of the fiscal policy

and development of a public finance management strategy. Furthermore, the project will support the

PEFA self-assessment. The introduction of a mining sector statistical monitoring mechanism and

information system will allow for better knowledge of Madagascar’s mining sector.

16

V. LEGAL FRAMEWORK

5.1. Legal Instrument

The project’s financing instrument is an ADF-12 loan of UA 3.35 million, an ADF loan of

UA 0.970 million (reuse of the balance from cancellation of ADF loans) and a grant of UA 0.180

million (reuse of the balance from an ADF grant cancellation). The loan and grant protocol

agreements between the Government of Madagascar and the African Development Fund shall be

signed by the parties concerned.

5.2. Conditions for Bank’s Intervention

5.2.1. Conditions precedent to loan and grant effectiveness: The loan agreement shall become

effective on the date of fulfilment, to the Bank’s satisfaction, of the conditions under Section 12.01

of the General Conditions Applicable to ADF Loan Agreements and Guarantee Agreements. The

grant protocol agreement shall become effective on the date of its signature by the Malagasy

Government and the African Development Fund.

5.2.2. Conditions precedent to first disbursement of the ADF loan and grant: The first

disbursement of the loan and grant resources shall be subject to effectiveness of the said grant

protocols, and to:

(i) submission of the text: (a) attaching the Project to the Administration Efficiency

Reform Programme (PREA) to enable it supervise the project; and (b) defining the

mandate of BdG and its Director;

(ii) submission of the originals or certified true copies of the certificate showing the

opening of: (a) a special account in the name of the project with a bank acceptable to

the Fund to receive the loan resources, and bearing the complete bank references of

the account; and (b) a deposit account in Ariary with the Antananarivo General

Revenue Office to receive the Government’s counterpart contribution.

5.3. Compliance with Bank Policies

The project complies with all applicable Bank policies.

VI. RECOMMENDATION

Management recommends that the Board approve the proposal to: (i) grant an ADF loan not

exceeding UA 4.320 million; and (ii) award an ADF grant not exceeding UA 0.180 million to the

Republic of Madagascar to finance the Institutional Governance Support Project, under the terms

and conditions set forth in this report.

Annex I

I

MADAGASCAR COMPARATIVE SOCIO-ECONOMIC INDICATORS

YearMadagasca

rAfrica

Develo-

ping

Countries

Develo-

ped

Countries

Basic Indicators

Area ( '000 Km²) 2011 587 30 323 98 458 35 811Total Population (millions) 2012 21,9 1 070,1 5 807,6 1 244,6Urban Population (% of Total) 2012 31,0 40,8 46,0 75,7Population Density (per Km²) 2012 36,3 34,5 70,0 23,4GNI per Capita (US $) 2011 430 1 609 3 304 38 657Labor Force Participation - Total (%) 2012 47,5 37,8 68,7 71,7Labor Force Participation - Female (%) 2012 49,1 42,5 39,1 43,9Gender -Related Dev elopment Index Value 2007-2011 0,541 0,502 0,694 0,911Human Dev elop. Index (Rank among 186 countries) 2012 151 ... ... ...Popul. Liv ing Below $ 1.25 a Day (% of Population)2010-2011 81,3 40,0 22,4 ...

Demographic Indicators

Population Grow th Rate - Total (%) 2012 2,8 2,3 1,3 0,3Population Grow th Rate - Urban (%) 2012 4,1 3,4 2,3 0,7Population < 15 y ears (%) 2012 42,4 40,0 28,5 16,6Population >= 65 y ears (%) 2012 3,1 3,6 6,0 16,5Dependency Ratio (%) 2012 83,7 77,3 52,5 49,3Sex Ratio (per 100 female) 2012 99,4 100,0 103,4 94,7Female Population 15-49 y ears (% of total population) 2012 23,8 49,8 53,2 45,5Life Ex pectancy at Birth - Total (y ears) 2012 66,9 58,1 67,3 77,9Life Ex pectancy at Birth - Female (y ears) 2012 68,6 59,1 69,2 81,2Crude Birth Rate (per 1,000) 2012 34,7 33,3 20,9 11,4Crude Death Rate (per 1,000) 2012 6,3 10,9 7,8 10,1Infant Mortality Rate (per 1,000) 2012 40,8 71,4 46,4 6,0Child Mortality Rate (per 1,000) 2012 57,2 111,3 66,7 7,8Total Fertility Rate (per w oman) 2012 4,5 4,2 2,6 1,7Maternal Mortality Rate (per 100,000) 2010 240,0 417,8 230,0 13,7Women Using Contraception (%) 2012 42,9 31,6 62,4 71,4

Health & Nutrition Indicators

Phy sicians (per 100,000 people) 2004-2010 16,1 49,2 112,2 276,2Nurses (per 100,000 people)* 2004-2009 32,0 134,7 187,6 730,7Births attended by Trained Health Personnel (%) 2009-2010 43,9 53,7 65,4 ...Access to Safe Water (% of Population) 2010 46,0 67,3 86,4 99,5Access to Health Serv ices (% of Population) 2000 38,0 65,2 80,0 100,0Access to Sanitation (% of Population) 2010 15,0 39,8 56,2 99,9Percent. of Adults (aged 15-49) Liv ing w ith HIV/AIDS 2011 0,3 4,6 0,9 0,4Incidence of Tuberculosis (per 100,000) 2011 238,0 234,6 146,0 14,0Child Immunization Against Tuberculosis (%) 2011 82,0 81,6 83,9 95,4Child Immunization Against Measles (%) 2011 70,0 76,5 83,7 93,0Underw eight Children (% of children under 5 y ears) 2004-2011 36,8 19,8 17,4 1,7Daily Calorie Supply per Capita 2009 2 117 2 481 2 675 3 285Public Ex penditure on Health (as % of GDP) 2010 3,8 5,9 2,9 8,2

Education Indicators

Gross Enrolment Ratio (%)

Primary School - Total 2010-2012 148,4 101,9 103,1 106,6 Primary School - Female 2010-2012 147,1 98,4 105,1 102,8 Secondary School - Total 2009-2012 31,1 42,3 66,3 101,5 Secondary School - Female 2009-2012 30,2 38,5 65,0 101,4Primary School Female Teaching Staff (% of Total) 2011 55,8 43,2 58,6 80,0Adult literacy Rate - Total (%) 2009-2010 64,5 67,0 80,8 98,3Adult literacy Rate - Male (%) 2009-2010 67,4 75,8 86,4 98,7Adult literacy Rate - Female (%) 2009-2010 61,6 58,4 75,5 97,9Percentage of GDP Spent on Education 2008-2011 2,8 5,3 3,9 5,2

Environmental Indicators

Land Use (Arable Land as % of Total Land Area) 2011 6,0 7,6 10,7 10,8Annual Rate of Deforestation (%) 2000-2009 1,0 0,6 0,4 -0,2Forest (As % of Land Area) 2011 21,5 23,0 28,7 40,4Per Capita CO2 Emissions (metric tons) 2009 0,1 1,2 3,1 11,4

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

UNAIDS; UNSD; WHO, UNICEF, WRI, UNDP; Country Reports.

Note : n.a. : Not Applicable ; … : Data Not Available.

COMPARATIVE SOCIO-ECONOMIC INDICATORS

Madagascar

May 2013

0

10

20

30

40

50

60

70

80

90

2004

2005

2006

2007

2008

2009

2010

2011

2012

Infant Mortality Rate( Per 1000 )

Madaga scar Africa

0

200

400

600

800

1000

1200

1400

1600

1800

2003

2004

2005

2006

2007

2008

2009

2010

2011

GNI Per Capita US $

Madaga scar Africa

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

2004

2005

2006

2007

2008

2009

2010

2011

2012

Population Growth Rate (%)

Madagascar Africa

1

11

21

31

41

51

61

71

2004

2005

2006

2007

2008

2009

2010

2011

2012

Life Expectancy at Birth (years)

Madaga scar

Africa

Annex II

II

Table of AfDB Portfolio in Madagascar

PUBLIC SECTOR PORTFOLIO

PROJECT NAME Status Sector

Loan

Amount

(UA)

Amount

Disbursed (UA)

Disbursement

Rate

Approval

Date

Signature

Date

Disbursement

Effectiveness

Loan

Effectiveness

Last

Disbursement

Date

1. MANOMBO SCHEME REHABILITATION PROJECT

OnGo Agriculture 9 497 277 7 032 223 74% 21.11.2007 25.03.2008 06.05.2008 06.05.2008 31.12.2013

PPF- MANOMBO SCHEME REHABILITATION

PROJECT OnGo Agriculture 300 000 297 270 99% 10.07.2012 14.09.2012

14.09.2012 31.03.2015

2. PPF – MID-WEST RURAL ENTERP. PROJ. APVD Agriculture 450 500 -

24.09.2012 08.11.2012 11.04.2013 08.11.2012 31.12.2014

3. LOWER MANGOKY SUPPLEMENTARY

LOAN OnGo Agriculture 15 000 000 136 857 1% 03.12.2008 22.01.2009 22.12.2011 22.12.2011 31.12.2015

4. PPF - LOWER MANGOKY II

PREPARATION OnGo Agriculture 500 000 - 0 10.07.2012 14.09.2012

14.09.2012 31.03.2015

5. TUL .FISHING COMMUNITIES SUPPORT OnGo Agriculture 6 325 000 3 767 331 60% 16.11.2005 02.03.2006 26.10.2006 21.04.2006 30.12.2013

6. DRINKING WATER SUPPLY PROGRAMME OnGo Water

Sup/Sanit 43 839 689 13 707 900 31% 21.12.2005 02.03.2006 08.06.2006 08.06.2006 31.12.2013

7. COMMUNICABLE DISEASES CONTROL OnGo Social 6 000 000 4 353 146 73% 08.12.2004 13.01.2005 05.12.2005 13.01.2005 30.11.2013

8. GIOVANNA IRINA TORNADO

EMERGENCY AID OnGo Social 663 570 663 570 100% 12.07.2012 23.08.2012

23.08.2012 31.03.2013

9. EMERGENCY HUMANITARIAN

ASSISTANCE EPIDEMICS PREV. OnGo Social 623 383 623 383 100%

30.01.2012

TOTAL 83 199 419 30 581 679 37%

PRIVATE SECTOR PORTFOLIO

PROJECT NAME Status Sector

Loan

Amount

(UA)

Amount

Disbursed (UA)

Disbursement

Rate

Approval

Date

Signature

Date

Disbursement

Effectiveness

Loan

Effectiveness

Last

Disbursement Date

AMBATOVY NICKEL PROJECT OnGo Ind/Mini/Quar 99 535 501 99 535 501 100 02.05.2007 22.08.2007 26.03.2008 26.03.2008 22.08.2011

SAHANIVOTRY SMALL HYDRO POWER

OnGo Power 5 218 480 5 218 480 100 05.07.2007 25.09.2007 04.10.2007 28.09.2007 30.06.2008

TOTAL

104 753

981 104 753 981 100

Annex III

III

MAP OF PROJECT AREA

This map has been provided by the staff of the African Development Bank Group exclusively for the use of the readers of the

report to which it is attached. The names used and the borders shown do not imply on the part of the AfDB Group and its

members any judgment concerning the legal status of a territory nor any approval or acceptance of these borders.