34788 I.INTRODUCTION 1. This memorandum seeks the approval of the Executive Directors to amend the Development Credit Agreement (DCA) for the Madagascar Transport Infrastructure Investment Project (Cr. 3836-MAG). The project (SDR 104.4 million, US$lSO million equivalent) was approved on December 8, 2003 and became effective on March 10, 2004. Since then, project implementation has encountered difficulties, there have been significant changes in the institutional structure, and the transport sector priorities o f the Government have shifted to respond to changing country needs. In addition, the Country Financing Parameters for Madagascar have been amended and the Bank has revised its procurement guidelines for all its project. Together, these factors warrant a project restructuring, both to ensure that the project i s more in line with the changed country circumstances and, ultimately, to ensure that the Project Development Objectives will be achieved. A. Sector background 2. The transport sector plays a key role in Madagascar's growth and poverty alleviation strategy. Increased foreign investment, development of the country's eco-tourism and mining potential, growth in agricultural output, and reduction o f rural isolation, all depend on the efficiency o f transport services and the availability o f appropriate transport infrastructure. Unfortunately, three decades (1970-2000) o f inappropriate sector policies have led to a serious deterioration o f the country's transport infrastructure. During this period the country lost on average 1,000 km of roads per year due to lack o f maintenance. InApril 2000, after almost ten years o f sector dialogue with the World Bank, but no IDA lending, the country adopted a comprehensive transport sector policy and strategy, which aims at (i) focusing the government's role on strategic planning, sector oversight and coordination; (ii)creating public-private controlled and user-financed agencies for sub-sector management and regulatory functions; (iii) divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing the local private sector for works design and execution; and (v) rehabilitatingtransport infrastructure to appropriate levels. The Bank provided financial support to the implementationo f this strategy through a three-phase Adaptable Program Loan (APL), the first phase o f which was launched shortly after the finalization o f the strategy. The APL was designed and i s beingimplementedjointly with other donors, users, and the private sector. 3. Presidential elections were disputed in December 2001 and a prolonged political and economic crisis followed. In July 2002 a new and reform-minded President was sworn into office. The population and the donor community placed substantial hope in the new President and his Government and expected that they would be in a position to quickly reverse the thirty- year decline from which the country had suffered. The PRSP was finalized in Novemer 2002 and i s being implemented satisfactorily since then, with substantial achievements recorded to- date. The PRSP recognizes the importance o f the transport sector to Madagascar's development and improvements in all aspects o f road, rail and port infrastructure are placed at center-stage in the strategy. 4. The new Government that took power in2002 inheritedan institutional structure that had two ministries active in the Transport Sector - the Ministry o f Public Works (MPW) and the \ 1 Ministryof Transport (MOT). Recognizing that this institutional structure was sub-optimal; in March 2003, the Government merged their functions in the Office o f the Vice Prime Minister (VPM). Despite some concerted efforts on the part of Government to make this new set-up work, in March 2005, the Government again took the initiative to improve the institutional structure through the establishment of the Ministry of Public Works and Transport (MPWT) which i s now responsible for all aspects of the transport sector. B. Programdescription 5. The Transport Infrastructure Investment Project is the third part o f a three-phase Adaptable Program Loan (APL). The first part - APL1, the Transport Sector Reform and Rehabilitation Project, was approved on June 1,2000 and closed as scheduled on July 31,2005. -The originalRural Transport Project, was approved on November 14,2002 and became effective credit amount was SDR 48.4 million (US$65 million equivalent). The secondphase APL2, the on March 13, 2003. The original credit amount was SDR 60.7 million (US$80 million equivalent) ,of which approximately SDR 26.2 million ($35 million, equal to 43% o f the credit) has been disbursed as o f November 1, 2005. The third and final phase APL3, the Transport - Infrastructure Investment Project, was approved on December 8,2003 and will close on June 30, 2008. The credit amount i s SDR 104.4 million (US$l50 million equivalent), o f which SDR 11.8 million (US$ 17.7 million, equal to 11.3% o f the credit) has been disbursed as o f November 15, 2005. 6. The APLl 's development objectives were a reduction intransport costs and a sustainable improvement of accessibility especially in rural areas. The project had a substantial agenda on institutional reforms and focused on: (i)strengthening the Civil Aviation Regulatory Agency (Aviation Civile de Madagascar, ACM); (ii)setting up an autonomous Ports and Shipping Regulatory Agency (Agence Portuaire, Maritime, et Fluviale, APMF) and autonomous port agencies for secondary and tertiary ports; (iii) concessioning o f airport and railway facilities, as well as of container handling facilities at the country's main Port o f Toamasina; (iv) closing down the public works force account units; and (v) preparing a social mitigation plan for Ministry o f Public Works and Transport (MPWT) staff made redundant by the creation o f the autonomous sector agencies. The APL1 also provided financing for the periodic maintenance and rehabilitation of national roads; and rehabilitation of the secondary ports o f TulCar and Mahajanga. Moreover, APLl was an instrument for capacity building in the MPWT and its agencies, and it also fundedpreparation studies for APL2 and APL3. 7. APL2, the Rural Transport Project, aims to sustainably improve the access o f rural communities to markets, schools, health centers, and other economic and social infrastructure, and to enhance the mobility o f the rural population, in order to improve their quality o f life and promote economic development. The project supports; (i)capacity building for the rural transport unit of the MPWT, (ii) rehabilitation and maintenance o f rural (provincial) roads, (iii) rehabilitation of the corridor Fianarantsoa-Manakara, and (iv) promotion o f intermediate means of transport. The implementation o f the project has been more-or-less satisfactory to date although certain elements of the project are currently being amended to reflect the new institutional structure, as well as to benefit from the new Country Financing Parameters for Madagascar. 2 8. APL3, the Transport Infrastructure Investment Project, aims to assist the Government to rehabilitate the country's main transport infrastructure in order to reduce transport costs and to facilitate trade, The components of the project prior to restructuring were: (i) national road maintenance, rehabilitation and upgrading, (ii) port upgrading, coastal protection and maritime signals enhancement, (iii) airport safety and security equipment and co-financing of secondary airports through public-private partnerships, and (iv) support to the MPWT. The last component continues the substantial assistanceto the reformprocess o f APLl and includes financing for the ministry's strategic staffing plan, technical assistance, and preparation studies for future programs. C. Implementationarrangementsof the program 9. Implementation arrangements in the Transport sector are highly susceptible to institutional changes and the reorganizations of the ministry mentioned above (para. 4) have caused disruptions. The initial set-up of the APL called for the establishment of a Program Executive Secretariat (PCU) to coordinate project implementation. Two project units, one inthe then-existing Ministry o f Transport and the other inthe Ministry o f Public Works were to assist the PCU. Each unit would keep an accounting system satisfactory to IDA standards; prepare tender documents; manage contracts; and prepare all basic information on project management as required by PCU. The intention was that the PCU would coordinate project activities (particularly for fiduciary aspects) and that implementation and technical management would be ensured by the respective ministries. At the beginning o f APL-1 implementation, the level o f activities was limited and the PCU was able to carry out its responsibilities correctly. However, as the activities increased, the project set-up required complete cooperation from the two Ministries, which was not always satisfactory as the staff inthe Ministries believedthat the PCU staff should carry the burden o f implementing the program. This problem did not become apparentuntilmuch later inAPL-1's implementation. . 10. During the preparation o f APL2 inmid-2002, the Bank fully assessed the implementation arrangements and the project's organizational structure. This occurred at a time when the problems between the PIU and the Ministries had not yet arisen. While it was recognized that the structure neededstrengthening to perform better, the conclusion reached was that it was by- and-large an appropriate structure for planning, directing, and controlling o f operations. Authority and responsibility assignments within the organization structure were considered to be clearly defined. A Rural Transport Unit (RTU) was created and attached to the PCU. The RTU was in charge o f overseeing the implementation of the rural transport policy and strategy. The project design also incorporated the creation of Provincial Road Agencies (PRA) which would operate like delegated contract management agencies. It was expected that the PRAs would be fully operational by the end of 2003 andwould handle the substantial amount ofprocurement for rural roads contracts financed under APL2. In 2003, Government decided that a skills shortage and potential conflicts between PRAs and the Ministry o f Public Works weighed against the creation of the PRAs and abandoned the concept. Instead, Government directed the reforms towards the creation o f an autonomous Roads Authority, which itself would have de- concentrated offices. The resulting delay o f creating additional capacity in the roads sector should have been compensated with recruitment of staff into the PCU but this did not happen. Furthermore there were frequent staff changes inthe RTU and inthe management o f PCU. Key positions, such as technical assistance to the RTU and PCU were not filled. The Government 3 tried to manage this situation by consolidating the functions of the two existing Ministries (Ministry of Public Works and Ministry of Transport) into the Office of the Vice Prime Minister (VPM). The Bank welcomed this institutional change and worked closely with the Government to improve project implementationunder the auspices of the VPM. The general expectation was that this decision would lead to improvedleadership and a strengtheningo f the reform process. 11. During the preparation of APL3 in early 2003, the institutional arrangements which entrustedthe PCU with oversight management, focusing on procurement, financial management and project reporting were again confirmed. It was recommended that the PCU hire additional procurement and financial management staff to strengthen overall capacity. The Government, for its part, was committed to making the Roads Authority fully operational at the end o f 2005 with the intention that this Authority would ensure technical management of the large works contracts to be financed under APL3. 12. Despiteall these efforts, towards the end o f 2004, the Government and the Bank became concerned with a constant decline o f programperformance which was manifestedby stakeholder complaints, poor technical execution, and a decline in disbursement rates. The Government again took the initiative and commissioned an institutional audit which highlighted the inconsistencies between the PCU's oversight and coordination mandate and the substantial implementationresponsibilities that it was expected to carry out. The institutional audit revealed that the staffing o f the PCU was inadequate and was further weakened by staff turnover, including at the management level. The institutional audit was followed in June 2005 by an Independent Procurement Review (IPR). The IPR audited a sample o f the three APLs and showed a decline in the quality o f procurement which mirrored staff changes, interference by ministerial staff, and the increased implementation responsibilities. The Government was informed o f the preliminary findings o f the audit and took decisive action: the PCU was closed on June 30, 2005 and an international fiduciary management agent (FMA) was immediately appointed. The FMA, which was a private company - Ernst & Young/Mpanazava, had full fiduciary responsibilities and was based in the MPWT. All technical and coordination responsibilities for project implementation were assigned to the MPWT and its technical agencies. The Bank fully supported this whole process during its June 2005 supervision mission and agreedwith the Government that the project would needto be restructured to reflect this new institutional set-up. D.Achievementsof the program(APL 1,2 and3) 13. The Implementation Completion Report (ICR) o f APLl is currently being prepared and, amongst other issues, it provides a comprehensive assessment o f the impact o f the institutional changes that impacted project performance. The ICR also provides details on the many achievements of the project which included (i) the successful completion o f the national road rehabilitation and the works at the ports o f TulCar and Mahajanga, (ii)the maintenance o f the rehabilitated national roads through the road fund, and (iii) progress made inthe institutional the reforms (disengagement o f Government from force account work; setting up o f the Civil Aviation Authority and the Ports, Maritime, and River Agency; adoption o f the decree for the Land Transport Agency; and preparation o f the social mitigation plan for redundant staff o f the Ministry of Public Works and Transport). As a result, it is expected that the project's outcome 4 and sustainability will be rated moderately satisfactory and that the institutional development impact will be rated substantial. 14. As regards APL2, the previously mentioned implementation weaknesses have had an impact on the provincial road rehabilitationprogram. The reliance on deconcentrated ministerial staff and on the planned Provincial Road Agencies ( P u s ) failed to ensure adequate procurement and contract management of the substantial provincial roads program. In early 2005, Government commissioned permanent technical assistance and bi-annual technical audits. InMay 2005 the decision was taken to separate the rural transport unit from the PCU (which itself was to be closed just a month later at the end of June 2005) and place it with the Large Works Unit (LWU) o f the Ministry; a unit which has an excellent reputation for contract management. Additional staff have been recruited to the LWU to take on these additional functions. To date, the APL2 has supported the rehabilitation o f about 9OOkm of rural roads and another 300km of works are currently ongoing. 15. APL3's implementation was also affected by the institutional problems and already in December 2004, the Government took the decision to transfer contract management for the rehabilitation of national roads to the LWU. So far, the ports and airports components are progressing satisfactorily. Technical assistance has been called upon for the finalization of the legal framework of the Roads Authority and implementation o f the redeployment plan i s about to start. Moreover, the MPWT i s working on improving its Monitoring and Evaluation responsibilities. 16. The recruitment of the private firm as the FMA (see paragraph 12) is showing positive results. The FMA first addressed the very substantial backlog in payments to contractors and consultants and has reviewedthe entire financial management system. Procurement processing was reorganized and i s now working satisfactorily. The FMA i s also assisting the MPWT inits reporting requirements. 11. PROJECT IMPLEMENTATIONEXPERIENCE A. Achievementof development objectives 17. Achievement of the Project Development Objective (PDO) is rated as moderately satisfactory to reflect mixed progress to-date and the expectation that the PDO will be fully achieved by the end o f the project. B. Status of implementation 18. Government and the World Bank team are working closely together to improve project implementation. The detailed action plan that was agreed upon during the last supervision mission is being implemented with continuous support from the Bank's country office. Project implementation is currently rated moderately satisfactory with one out of five components rated unsatisfactory. Performance i s unsatisfactory for counterpart funding (particularly for VAT payments). Performance i s rated moderately unsatisfactory for monitoring and evaluation. Due 5 to the progress in implementing the action plan, it i s expected that project performance will returnto satisfactory by the next full supervision mission, scheduled for December 2005. As of November 15, 2005, SDR 11.8 million (US$ 17.7 million equivalent, 11.3% o f the credit) has beendisbursed, and45% o f project funds were committedbyNovember 2005. 19. The PCU was replaced by the FMA and the project's technical management was transferredto the autonomous agencies - the A C M and the APMF, as well as the LWU inthe MPWT which constitutes the core o f the future Roads Authority. These three entities are critical to improved project performance and they are expected to step up their role and gradually take on board the technical leadership. The railway component will be managed by the concession company which i s fully qualified to do so. The performance o f the FMA i s satisfactory, resulting insatisfactory project ratings for projectmanagement,procurement, and financial management. C. Fiduciary aspects 20. The project's overall financial management has been satisfactory since the start of APL1. All audit and financial management reports have beentransmittedon time andthe opinion ofthe auditors on the special account andthe statements of expenditure review were unqualified. 21. As mentioned above, the Bank commissioned an independent procurement review in May 2005 to audit APLI, APL2, and APL3. The findings confirmed deterioration in procurement practices over time and a number of irregularities which were not reported in the audit reports, thereby prompting the Bank to comment accordingly on the last audit report. The findings of the IPR resulted in an action plan that is being implementedby Government and is being supervisedby the Bank. 22. As previously highlighted, the Government took a decisive step when it closed the PCU and engaged the FMA. The FMA i s now fully operational and procurement and disbursements have returnedto a satisfactory performance. D. Safeguards policies 23. Compliance with safeguard policies i s rated moderately satisfactory. The Ministry is in the process of strengthening its safeguards unit by adding technical assistance. The LWUis also hiringa safeguardsspecialist becausethe bulkof safeguards work is inthe roads program. 24. A newlyrecruited safeguards specialist inthe World Bank's country office works closely with the Ministryto implement the safeguards action planthat was agreed upon duringthe June 2005 supervision mission. These arrangements are considered satisfactory to ensure compliar 7e. 25, Safeguard requirements for the new railway component have been complied with. The transport sector EA, which was disclosed in 2000, included an analysis o f the railways. A specific EA for the northern railway was disclosed in country and at the Infoshop. The ResettlementPolicy Framework was disclosed in January 2002. The Resettlement Action Plan (RAP) for Madarail i s being prepared. No investment will take place in areas that require the implementation o f a RAP until that process has been concluded to the satisfaction o f the World Bank. Madarail has recruited a safeguards specialist to provide guidance for the implementation 6 of its environmental management plan and the RAP. A company-specific HIV/AIDS prevention programwill be implemented. E. Legalcovenants 26. All legal covenants ofthe DCA have beencompliedwith. F. Rationale for the amendment 27. During the June 2005 supervision mission, the Government and the Bank fully agreed that a restructuring o f the APL3 was needed to reflect the substantial institutional changes introduced since the beginning o f project implementation. Inaddition, the Government signaled that some sectoral priorities had shifted as a result o f country conditions and that it would like to see the Bank respond positively to these shifts by amending certain aspects o f the project's components. In parallel, the Bank had revised the Country Financing Parameters for Madagascar and its procurement guidelinesfor all IDAprojects and it was agreed that the project should take advantage o f these positive changes. The exact modalities o f the restructuring are outlined inthe following paragraphs. 28. Institutional Changes: The creation o f the Ministry o f Public Works and Transport (MPWT) in March 2005 i s considered a welcome and satisfactory change because the MPWT combines the areas o f public works and transport which are inherently complementary both for policy requirements and physical asset management. It also provides a tighter sectoral focus by moving decentralization and land planning to a separate ministry. The Government also has confirmed the separation o f the sector's strategic mission which resides with MPWT and the management and regulatory functions which are assigned to the autonomous sector agencies - the Civil Aviation Authority, the Ports, Maritimeand River Agency, the Land Transport Agency (yet to be set up) andthe Roads Authority (yet to be set up). 29. Closure of the PCU: The design o f the three projects had relied on a fast execution of sector reforms including the creation o f the above-mentioned autonomous agencies. This would have enabled the agencies to take over project implementation responsibilities from the PCU. The PCU was therefore conceived as a coordination unit and thus not staffed to handle the considerable implementation work load o f three projects. However delays in the reform process hinderedthe performance o f the PCU so much so that by end-2004/early-2005, the Government and the Bank decided to carry out a number o f audits which revealed the PCU's weaknesses, and showed that the organizational arrangements were suboptimal and in need o f change. As a result, the Government decided to close the PCU and contracted a private firm as the FMA to handle all fiduciary aspects. Technical management of the project was transferred to the two already existing autonomous agencies (the Civil Aviation Authority - ACM, and the Ports, Maritime and River Agency APMF) andto the Large Works Unit (LWU) inthe MPWT which - i s responsible for the rehabilitation o f national and provincial roads. 30. Changed Sectoral Priorities: The Government came to realize that the successful operation of its first concessioned public enterprise, the northern railway, had become a development priority for both the transport sector and the country as a whole. This railway links the country's capital and main economic center, Antananarivo, with the main commercial port, 7 Toamasina. The concession agreement had been signed in October 2002 and Government had already invested US$13 million from the proceeds of the Emergency Economic Recovery Credit (Cr. 37160-MAG) to finance salary arrears of the defunct national railway company, a social plan for retrenched workers, and the initial installment in an investment program. This program constituted an integral part of the concession agreement and Government had pledged to on-lend a total of US$25 million to the private operator, Madarail, to fund this program. On that basis, Madarail had also obtained a loan from the European InvestmentBank (EIB). Government had intended to mobilize funding from a variety of sources but a growing fiscal deficit and competing development priorities made funding scarce and Government therefore turned to the World Bank as the lender o f last resort. The World Bank has carried out a due diligence review and has found the Government's request to be eligible for funding in terms o f sector development priorities and commercial viability of the concession. Details are provided in Annex 1. 31. Amendment of the Proiect's Components: The Government requested a reduction in APL3's funding for the roads, ports and aviation sectors to allow for funding o f the railway component. The Government's decision on utilizing the available funding from APL3 was determinedby its short-term priority needs which are primarily the railway, rehabilitation of the strategic national roads RN2/RN44 and RN7, rehabilitation o f the Mahajangaport, and funding of the social mitigation plan for MPWT redundant staff. While the restructuring will delay improvements to certain elements o f the country's road infrastructure, it will not lead to a serious deterioration or failure o f the infrastructure. It is hoped that additional funding can be quickly mobilized. Component Initial activities Proposed amended activities 1) National Road Upgrading, RN2IRN44 RN2/RN44 Rehabilitation and Maintenance RN7 RN7 RN32 (initially underfunded) Replacement o friver ferries RN5A (initially underfunded) Replacement o f river ferries 2) Ports upgrading, maritime signals, I1Rehabilitation o f Port o f Mahajanga Rehabilitation o f Port o f Mahajanga institution-ai strengthening Improvement o f docks Maritime signaling Maritime signaling Environmental protection 1 I Environmental protection 3) Airport Safety and Promotion o f public-private Promotion o f public-private , - facilitation o fpublic-private partnerships partnerships partnership Safety and security enhancement o f Safety and security enhancement o f main airports main airports 4) Support to MPWT Social Plan Social Plan General support General support Studies Studies Operarting costs Operarting costs 5) NorthernRailway Investment Track rehabilitationheplacement Program Social and environmental mitigation measures Operating cost 8 32. Based on the points outlined above, an amendment to the Development Credit Agreement (DCA) is justified based on the need to: (a) confirm new implementation arrangements, (b) take into account revised sector priorities, (c) revise the performance indicators in line with the new project components, (d) apply revised procurement guidelines; and (v) apply the new Country Financing Parametersfor Madagascar to the project. 33. These changes suggested inthe proposed Amendment are relevant to the project activities and are consistent with the original project development objective which i s to rehabilitate the country's maintransport infrastructure inorder to reduce transport costs and facilitate trade. 111.PROPOSEDAMENDMENT 34. The specific aspects ofthe Amendment are: (a) To (9 add a componentfor thefinancing of the investmentprogram of the already concessioned northern railway line (see Annex 1 for a detailed component description); and (ii) as a consequence, reduce allocationfor the national roads, ports and aviation components rn Theproposal to includethe railway investment component is due to changed Government sector priorities. The investment program was agreed upon at the signing o f the concession contract but ,has been under-funded since 2002. The resulting delays inthe investmentprogram are now seriously impacting the commercial viability o f the company, Madarail. In addition to the original infrastructure improvement program, an update includes provisions for road safety, resettlement, and HIV/AIDS prevention. The economic and financial analyses are satisfactory and show returns o f 17.5%. The railway connects the main commercial port o f Toamasina to the capital city o f Antananarivo and provides an essential transport link which is complementary to the national road. It is expected that reliable rail operations will be of particular interest for the shipment of oil and containers thereby reducing transport costs and improving road safety. Efficient rail operations were an important aspect that attracted bidders to the concessioning of the Toamasina container terminal. The contract was awarded in June 2005 to ICTSI, a Philippino company. Assessments have been carried out for Madarail's ability to carry out safeguards, procurement, and financial management and the company's competence is rated satisfactory. The estimated cost of the new component is US$31.7 million distributedas follows: US$21.5 million for the railway infrastructure investment not yet implemented.This will cover: a) 145 km o f rail replacement betweenKM226 and KM 371 o f the Tana-CBte Est (TCE) line, b) 226 km o f rail reinforcement between KM 0 and KM 226 o f the TCE line, c) rehabilitation works on several bridges between Toamasina and Andovoranto, d) equipment and tools for workshops, and e) equipmentto improve communications capacity - US$ 7.6 million for social and environmental program; and US$2.6 millionfor operating expenses. 9 2005 2006 2007 2008 Total Railway infrastructure 5.5 12.4 3.2 0.4 21.5 Social and environmental program 0.0 2.4 4.0 1.2 7.6 Operating expenses 2.6 0.0 0.0 0.0 2.6 Total 8.1 14.8 7.2 1.6 31.7 The performance indicators ofthe new component are: Evaluation indicators Unit I 2005 I I I Baseline 2006 2007 2008 The cost of the new component will be covered by the project's original un-allocated amount of US$18 million and a reductioninthe allocation for the roads, ports, and civil aviation components. It is argued that a certain delay in the rehabilitation will not lead to serious deterioration or failure of the national roads which were originally targeted but additional funding will have to mobilized reasonably quickly to avoid substantial rehabilitation and transport operating costs. (3) To change arrangementsfor project implementation w The Government's decision to close the PCU is justified after several restructuring initiatives failed. Audits had highlighted the problems which included project management, procurement, and disbursement. Inlight of the Government's strategy to focus on oversight and regulatory functions, it i s a positive development that the sector agencies take on the technical management o f their components for which they have the necessary capacity and that the ministrybe assistedinfiduciary matters by an independentFMA; (c) Toapply the revised countryfinancing parameters e The Bank's Executive Directors were notified on May 16, 2005 of the revised country financing parameters (CFP) for Madagascar which allow for 100 percent financing of taxes and recurrent expenditures under Bank projects. These new CFP were justified on the basis of Madagascar's status as one o f the poorest countries inthe world (per capita income o fjust $290 in 2003) and on the proven commitment of the Government to the PRSP and its overall development agenda. More specifically, the Government has shown its commitment to the Transport sector through its pro-active and constructive organizational changes, as well as through its goal of ensuring sustainability o f the road infrastructure through the establishment o f the Road Maintenance Fund. The new CFP are appropriate for the APL3 as there have been 10 significant delays in the payment to companies of that portion of project costs which i s the Government's responsibility, as well as inthe provision of counterpart funds. These delays are not due to lack o f willingness to provide counterpart funds but rather due to weak revenue generation across the public sector which leads to a critical shortage o f Government funds. The application o f the new parameters would be beneficial for private sector development and avoid artificial increase o f unitcosts; (d) To revise the output indicators (Supplemental letter) The output indicators for the national road rehabilitationare revisedto reflect the smaller number ofroadkilometers improved: 4,045 kmofnational roads rehabilitatedby average annual tranches of about 630 km (of which 613 km by IDA) so that by end o f 2008 the majority o f national roads are in good and fair condition; and (ii) performance indicators are added for the railway component: wagon turnaround time, personnel productivity, liquidity ratio, long-term debt/equity ratio, and debt coverage ratio. The other output indicators remain unchanged, the new indicators are listedinAnnex 1Fofthe MOP. w The indicators for sector performance, end-of-program and outcomehmpact indicators are not revised; (e) To apply the new procurement guidelines InMay 2004, the Bank revisedits procurement guidelines for all its project. These revised guidelines will be applied to the restructured project. IV.BENEFITSAND RISKS 35. The new arrangements for project implementationwill ensure better achievement of the project development objective, improve accountability for fiduciary management and empower the autonomous sector agencies to assume technical leadership. They also reflect the Government's decision to outsource operational activities. 36. The proposed investment in the Railway Component is expected to yield substantial direct economic benefits:- the ERR is estimated at 17.5%. The investment will improve the traffic flow betweenthe country's economic center and the main commercial port and conserve road infrastructure. A successful concession will have reputational benefits for Madagascar which i s actively seeking foreign direct investment. 37. The revised indicators for the Madarail component are measurable and have targeted values. The monitoring system o f the project has beenstrengthened to improve its efficiency. Risks Mitigationmeasures I Madarail(ComponentE):Lack of Government IEmpowerautonomousRailOversightCommittee 11 commitment to operationalize supporting to hold Government accountable for measures for rail-road competition implementation Madarail (Component E): Failure by Government Ensure provision in2006 budget to support further cash flow assistanceto Madarail in2006 Overall project: Delay in mobilizing technical Close and pro-active follow-up with Ministry assistance for safeguards and monitoring and evaluation These risks and mitigation measures are discussed indetail inAnnex 1. 12 V. PROPOSEDREALLOCATION 39. The revised Schedule 1 o f the DCA with the original allocations andpercentage change i s set forth below: Category Amount ofthe Credit Original Amount ofthe %of Expendituresto befinanced Allocated (expressed Credit Allocated inSDR equivalent) (expressedin SDR equivalent) (1) Works 69,280,000 69,600,000 100 (a) Under Parts A through D o f 61,620,000 the Project (b) UnderPart Eofthe Project 7,660,000 (2) Goods 16,340,000 8,800,000 100 (a) Under Parts A through D 6,960,000 o f the Project (b) UnderPart E ofthe Project 9,380,000 (3) Consultants' services and 12,740,000 12,630,000 100 audits (a) Under Parts A through D o f 10,440,000 the Project (b) UnderPart E o fthe Project 2,300,000 (4) Training 700,000 710,000 100 (5) Operating costs 3,620,000 170,000 100 (a) Under Parts A through D of 1,810,000 the Project (b) UnderPart E ofthe Project 1,810,000 (6) Unallocated 1,720,000 12,490,000 TOTAL 104,400,000 104,400,000 13 ANNEX 1 A. Introduction This annex presents the rationale for the Bank's support to the efforts by the Government of Madagascar (GOM) to restructure Madarail. It argues that assisting GOM in saving the northern railway concession from dire financial difficulties would not only strengthen GOM's overall privatizationprogram but also benefit directly the economy through more competitive transport costs as internodal competition betweenthe road and rail sectors would be enhanced. This memorandum outlines the reasons behind the necessary restructuring of Madarail's concession and the rationale for Bank's support through the restructuring of the APL-3. It then provides a detailed descriptiono fthe proposed restructuring plan as well as the indicators usedto monitor its impact and the necessary supporting measures that will have to be adopted by the GOM to ensure fair roadhail competition. It concludes by providing a detailed description o f the proposed investment program, the disbursement schedule and the fiduciary and safeguard arrangements. B. Railway sector reform InApril 2000, the GOM adopted a new transport sector policy and strategy which aims, inter alia, at (i)focusing the GOM's role on strategic planning, sector oversight and coordination, and (ii) divesting operational activities to the private sector through privatization and concessioning arrangements. As part o f this strategy, the GOM elected to privatize several State-Owned transport companies, including the northernrailway whose network extends over a lengtho f 732 km and serves the most important transport corridor in the country; connecting the capital of Madagascar, Antananarivo, to Toamasina, its main port. Since the 1990s, rail services on the northern railway network have come to a virtual standstill because of poorly maintained railway tracks and rolling stock. In line with its privatization policy, GOM launched in 1999 an international competitive bidding aimed at concessioning the railway network and reversingthe decline of the railway. Delays inthe procurement process and the political crisis of 2002 delayed the contract award. Finally, GOM and the private operator, Comazar, signed the concession agreement on October 10, 2002. Madarail, the concession company in which Comazar has majority shareholding, was given the task to manage, maintain, renew, and operate the northern rail network for 25 years. As part of this agreement, Madarail agreedto implement a five-year investmentprogram valued at US$ 39.57million with US$24.22 million earmarked for track rehabilitation, US$ 11.87 million for rolling stock acquisition and refurbishment, and US$ 3.48 million for the construction o f a multi-modal platform in Antananarivo. Financing of this investment plan was to be provided in part by the European InvestmentBank (EIB) for a total of US$ 13.20 million and for the most part by the GOM (i.e., through a US$ 25.18 million loan). Madarail's shareholders (ie., Comazar) invested US$ 4.00 million. Delays in finalizing the EIB loan' led to postponing the start o f Madarail freight operations untilJuly lst, 2003. I The EIB loan was signed on July 17,2003. 14 C. Rationale for the proposed support During its first 18 months of operations, Madarail's business was affected by three external shocks. First, it had to cope with the severe contraction of the Malagasy economy following the 2002 political crisis which translated ina 32% fall intransport volumes at the port o f Toamasina. Second, during the first half of 2004 ,operational costs related to fuel, equipment and spare parts soared because the Malagasy franc2 depreciated 70% against the Euro. Finally, Madarail had to lower its tariffs by more than 25% to withstand fierce competition from the trucking sector after GOM decided to provide tax exemption on the import of trucks. The impact of these external shocks was further compounded by Madarail's inability to implement its investment plan as GOM proved unable, due to fiscal constraints, to provide the funding for the 2004 investment program which accounted for US$ 10.07 million of the US$ 25.18 million program3.Madarail therefore had to stop its track and rolling stock renewal plan which curtailed its ability to improve productivity and reduce operating costs. The financial fallout from these problems became clear by early 2005 when Madarail's 2004 financial results were released. Duringthat single year, Madarail suffered a net loss of MGF 49.1 billion for a total turnover o f MGF 33.2 billion5. Indeed, by the end o f 2004, Madarail cumulative losses since July 2003 amounted to no less than 225% o f its capital structure making it, under Malagasy accounting rules, technically bankrupt6.Worse, with no serious prospects of obtaining the balance o f the money necessary to complete its investment plan from GOM, Madarail's freight activities, although on a steady increase (see Table l), seemed unlikely to reach the 350,000 tons o f annual freight traffic estimated to be necessary to enable it to generate a positive cash flow7.Additionally investments made inrailway sleepers and tracks were at risk to be lost since they could no longer be installed. Source: Madarail, September 2005 Table 1: Madarail freight traffic activities BetweenJanuary and June 2004, the Malagasy franc lost 70.7% of its value: one euro was equal to MGF 8,131 in January, vs. MGF 13,884 inJune. Includingan advance payment of US$2.04 million for investments to be financedunder the EIB Loan. EIB suspended its own loan disbursement inJanuary 2005 after providing Madarail with about US$7.19 ofthe US$13.20million it had committed when it became evident that the GOM would not be able to fulfill its financing obligations vis-a-vis Madarail. Or about US$ 5.2 million, with the applicable exchange rate inDecember2004. The total turnover would be about US$3.6 million andthe cumulative loss for 2003 and2004: US$ 6.0 million. Under Malagasy accountingrules, whenever a company's cumulative loss exceeds 75% of the value of its capital, it is consideredbankrupt andmustbe liquidated. Before debt reimbursement. 15 Inlight of this critical situation, GOM requested inearly 2005 the assistance of the World Bank in order to find a solution to this crisis. Working in close cooperation with the EIB, the Bank commissioned a technical, financial and legal review* of the concession to ascertain viability of a renegotiated concession contract. The review concluded that, were the investment program completed in earnest, Madarail would indeed be a viable concession. Furthermore, the Bank's own updated economic analysis (see Annex la) also showed that Madarail operations were likely to generate positive economic benefits to the country with a calculated direct Economic Rate of Return(ERR) of 17.5%. Accordingly, the Bank decided to consider favorably GOM's request to includefunding for Madarail inthe restructured APL3 project. D. Proposedrailway concession restructuringplan GOM and Madarail signed Amendment Ito the concession agreement on June 30fh, 2005. The amendment establishesthat: GOM will finance the five year investment plan covering railways infrastructure rehabilitation for a total amount of US$28.42 milliong.This financing will apply retroactively to investments already made. Accordingly, it will cover both investments financed by GOM (US$10.07 million) and by Madarail; Assets financed by GOM will be the GOM's property and will revert to it at the end of the concessioncontract; rn Equipment andparts already financed by Madarailwill be credited back to Madarail and will be paid for by GOM through quarterly deductions from Madarail concession fee payments to the GOM; rn GOM will provide Madarail with US$6.72 million incash to help it overcome its current liquidity crisis. Subsequently, it was agreed that due to fiscal constraints, GOM would only make available US$2.40 million in cash as well as US$3.56 million intax credits". GOM would also be required to provide additional cash assistance to the railway in 2006 in the amount of US$2.02 million in cash and US$1.29 million in tax credits as well. By 2007, this contribution would fall to US$0.65 million intax credits only; GOM will provide up to US$2.58 million o f the APL3 credit proceeds to retro-finance twelve months of Madarail's eligible operating and investment expenses. This retro-financing will take place within one month ofthe effectiveness ofthe DCA amendment; Madarail shareholders will provide US$ 1.OO million inadditional equity financing; w Madarail concession fee payment to GOM will be increased by 1% o f annual turnover before taxes starting in2006. This additional payment will be subjected, however, to Madarail's compliance with the financial ratios contained for its EIB loan; and * Examen criticlue du promamme de redressement de la concession dureseau nord des chemins de fer malgaches - May 2005, Benoit Allix, Karim-Jacques Budin. 1 Initially, this sum should have been financed by the GOMfor US$25.18 millionand Madarail for US$3.24 million. lo Tax credits include VAT on locally purchased items, VAT on imported items as well as import tax on these items. These credits correspondto tax payments that, under normal circumstances, Madarail shouldhave made to the Government but was granted exemption from as part o f the concession agreement signed with the GOM. As such these credits do not per se represent cash outlays for the G O M but rather non-collected amounts. 16 w Madarail will pay GOM 25% o f its yearly net cash flow starting in2008. This payment, as the additional concession payment, will be also contingent on Madarail respecting the financial ratios o f the EIB loan. Financial projections for Madarail operations show that the additional payments agreed to by the concessionaire would more than compensate GOM for its financial contribution to the concession. Indeed, with an estimated cumulative concession fee, income tax and net cash flow sharing payments to the GOM of US$11.15 million between 2006 and 2014, the State would earn an estimated 4.3% rate o f return on its investment. This figure would exceed significantly the 0.75% interest rate that these funds bear. Overall financial projections for Madarail, including the above mentioned measures, are presented in Table 2 below. As can be seen, the impact of the proposed financial restructuring should enable the company to achieve as early as 2008 all three key financial ratios (see Annex 1b). 3.9 1.2 -4.5 -6.4 1.6 4.9 5.7 3.6 -1.4 2.8 5.6 9.4 1 -0.42 I 1.38 I 3.52 I 4.56 I 3.99 I 3.48 I 3.95 I Source: Madarail, September 2005 Table 2: Madarailfinancial projections(in millionsof US Dollarswhere applicable) E. Supporting measures and evaluation indicators The success of this railway operation dependsto a large extent on fair and equitable competition between rail and road. Accordingly, key supporting measures have been identified in order to ensure a level playing field for these modes. These are: Enforcement of axel load regulations: regulation stipulates maximum weight o f 13 tons per axle and 19 tons for a tandem axle (Decree no2000-187 o f March 22, 2000). The regulation is, however, not enforced and trucks are frequently overloaded causing damage to the road network and undercutting freight rates. It i s therefore recommended that strategically located weighing stations be installed by the Government outside the port o f Toamasina on the RN2 and outside Antananarivo on the RN7. These stations should, preferably, be managed by the private sector undera concession agreement; Enforcement of technical regulations: to ensure road safety and reduce air pollution it i s important that trucks comply with minimal technical standards; currently technical inspections are disregarded and measures must be taken to increase truck technical inspection rates nationwide; 17 w Enforcement o f VAT collection for truck haulage contracts: a significant portion of haulage contracts today do not comply with local tax regulation (i.e., fail to itemize VAT payment from total payment), thus raising questions on the effective VAT payment by some trucking companies; w Exemption for Madarail of the portion of the fuel tax related to the financing of the road fund (article 1.04 o f the concession contract): Madarail should be exempted from contributing to the road maintenance fund as it i s responsible for maintaining its own rail infrastructure; w Re-location of the container scanner device at the port of Toamasina: this scanner i s operated by a private operator (SGS) on behalf of the Malagasy customs; its current location imposes additional handling charges on containers transported by the railway; Reform of the petroleum product transport policy: The GOM needs to ensure that, whenever a fuel depot i s connected to a rail line, petroleum products are supplied to this depot via rail, as rail transport i s inherently far safer than road transport. However, this preference for rail transport should be carefully implementedso as not to translate into higher transport cost for fuelproducts. Improved GOM oversight of the concession activities: per the concession agreement, the Ministry of Public Works and Transport participates with Madarail representatives in an oversight committee. Unfortunately, as o f today, this Committee has failed to fulfill its promises because o f technical capacity shortfall on the part of the Ministry. It i s therefore proposed to strengthen this Oversight Committee by creating a technical railway unit within the soon-to-be- established Land Transport Agency, under the Ministry of Public Works and Transport, to monitor the concession and report to the Oversight Committee. The World Bank has agreed to include technical assistance funding in the APL3 re-structuring to help finance the creation and initial operations of this Committee andUnit. The Bank will monitor the implementationof these key measures by GOM under its supervision mandate. In addition, indicators have been selected to monitor Madarail operational performance. The following evaluation indicators are commonly usedfor railway concessions: w -- Operational: Locomotives reliability rate (number o f breakdowns per 100,000 km); -- Wagon turnaround time (indays); Lengthoftrack (inkm) subjected to slowdownfor morethan90 days; and Personnelproductivity expressedintraffic unit' '. w Financial(similar to those use by the EIB): -- Liquidity ratio; - Long term debt/equity ratio; and Debt coverage ratio. A detailed table presenting what performance levels are expected from Madarail for each of these evaluation indicators i s presentedinAnnex 1b. l1Traffic unit i s calculated as the sum o f thenumber o f fieight ton-kilometers transported + the number o f passenger multipliedby the distance o ftheirjourney/ 2.5. 18 F. Proposeduse of re-allocatedfunds and disbursementschedule As indicated earlier, GOM has requested the re-allocation of US$ 31,700,000 from the current APL3 credit proceeds to f h d the following commitments of Madarail's restructuring: US$ 21310,000 for the remaining railway infrastructure investment. This will cover: a) 145 km of rail replacement betweenKM 226 and KM 371 o f the Tana-CGte Est (TCE) line, b) 226 km o f rail reinforcement between KM 0 and KM 226 o f the TCE line, c) rehabilitation works on several bridges between Toamasina and Andovoranto, d) equipment and tools for workshops, and e) equipment to improve communication capacity; US$7,590,000 for the social andenvironmental program; and US$2,600,000 for operating expenses. Expected disbursement schedule for this component i s shown inTable 3, below. Table 3: Madarail Componentdisbursementschedule(in millionsofUS Dollars) G. Fiduciary arrangementsand safeguardsissues A project agreement will be signed betweenthe World Bank and Madarail that will stipulate in detail the legal and fiduciary obligations. The credit proceeds that are dedicated to this component will be transferred in installments to a special account which will be managed by Madarail. This arrangement will ensure availability o f funds and accountability. The assessment of Madarail's financial capacity i s presented in Annex IC and the procurement assessment is presentedinAnnex 1d. An environmental assessment has been cleared by the Bank and the Malagasy National Environmental Office. It was disclosed in country on July 29, 2004 and at the Bank's Infoshop on November 1, 2005. The main environmental issues for this component are: a) possible contamination o f ground and surface waters, b) slope erosion, c) obstruction o f water flows, and d) emission of dust and air pollution. Appropriate environmental mitigation measures have been identified and will be implementedthrough the Environmental Management Plan (EMP). The EMP will be monitoredby Madarail's environmental unit, the environmental unito f the Ministry of Public Works and Transport, as well as the World Bank's task team. Resettlement caused by this component is covered under the Government's Resettlement Policy Framework which was disclosed on 07/08/2002 (this was done under APL2 preparation) and a Resettlement Action Plan 19 (RAP) is being prepared and will be implemented according to Bank's safeguards policies. It was agreed between GOM and the World Bank that the RAP will be implemented in location sections and that works may only begin once a section has been satisfactorily completed. An updated ISDS i s presented inAnnex le. 20 ANNEX 1A Direct economic impact analysis The economic analysis model for this component was developed with the intention to measure the direct net economic benefits that Madarail operations would generate. This model is based upon information provided by the railway operator to the World Bank and the EIB in June o f 2005 (i.e., freight traffic projections and financial projections). Although some o f the information used, such as traffic volumes, is likely to change over time, the World Bank is confident that the overall results o f the model are unlikelyto be affected significantly by such revisions. A similar economic analysis model was carried out in2002 to evaluate the economic viability of the concession. The model's output illustrates primarily the difference intransport costs between truck and rail for various freight commodities traffic levels. The following assumptions were retained: I Without the concession, all rail freight traffic would be transported by trucks. Therefore, the impact analysis is based on a principle of substitution whereby the model measures the difference incosts for similar traffic levels betweenrail and road; I Regarding the level o f traffic and operating costs to be achieved by Madarail, the figures used are those provided by the concessionaire and validated by the Bank in September 2005 basedon an in-depthreview o f Madarail revisedfinancial model; I The currency used for computation purpose is the Ariary (MFA) at its July 2005 exchange rate; Local inflation rate is assumedto be 7% annually throughout the projectedperiod; I Starting in2007, the MFGwill depreciate 3% per annum against the Euro; I The cost of the funds lent to Madarail by the EIB and GOM in both 2006 and 2007 is reflected in the model at the time o f its disbursement rather than when it i s actually paid back which i s once against a very conservative way to treat Madarail's debt cost by frontloading all o f its repayment. Prior loan costs (i.e., covering the amount already lent by both entities to Madarail in2003 and2004) are accounted for over time basedonreimbursement schedule providedbythe concessionaire to the World Bank; I The average truck tariff is assumed to increase significantly starting in 2006 to reach a more realistic US cents 10.4 per Tkm so as to reflect: a) the end o f GOM's exemption on import taxes for new trucks (practice stopped since September lst, 2005), b) the enforcement o f technical and axle load standards for trucks and, c) significant and durable increase inpetroleum and spare part prices. It should be also noted that the truck tariff level retained i s on the lower end ofratespracticed s inSub-SaharanAfrica which vary from US cents 8.0 to 14.0per Tkm. m Madarail operating cost per Tkm reflects the latest financial projections provided by the operator to the World Bank in September 2005; and The model analyzes price differences betweenroadandrail over a ten year period from 2005 to 2014. 21 Traffic projections: The table below presents the traffic projections in millions of Tkm used for the model. These numbers are similar to those provided by the concessionaire to the World Bank in September 2005. Year 2005 2006 2007 I 2008 I2009 I 2010 I 2011 I 2012 I2013 I 2014 Modelinput , II 83 II103 II129 I185 I217 I273 I293 I302 I316 I329 Transport costs projections (inbillions of constant 2005 MFA): The table below provides a comparative review of rail versus road costs for the traffic projections presentedabove. Note that the apparent discrepancy in rail costs for 2006 and 2007 reflect the application o f 2006 and 2007 investmentcosts as operating costs for these two years. Over the period 2005-20 17, it is expected that rail costs will be MFA 82 billion lower than road costs, or about US$9.7 million, after full reimbursement of Madarail's 33.0 million loan. This figure should be treated as the most pessimistic projection since it does not account for: a) the cost of maintenancehehabilitation o f the roads, b) indirect costs linked to truck operations such as pollution and road accidents as well as better tax collection from rail versus road operator and, c) induced costs such as greater economic productivity entailed by lower transport costs. Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total (1)Road costs 16 19 24 35 41 51 55 57 60 62 420 (2) Railcosts 81 33 21 21 28 31 34 36 39 338 Difference (1-2) +142 -62 -9 +14 +20 +23 +24 +23 +24 +23 +82 Direct economic rate o f return: Based on the costs figures presentedinthe previoustable, the direct economic rate of return of the concession i s 17.5%. Sensitivity analysis show that this rate o f return would still exceed 10.0% ifassumedroadtariffs were U S cents 9.5 versus the U S cents 10.4 used. 22 ANNEX 1B Railway concession project evaluationindicator targets I Reliability rate forBB 1200 1Number o f I I I I I IDebt coverage ratio >=1.2 23 ANNEX 1C Financialmanagementassessmentreport A. ExecutiveSummary The financial management arrangements of the MADARAIL have been reviewed to determine their adequacy with the Bank requirements. Significant progress has been made in the implementation o f the agreed action plan that was developed during the appraisal mission: i) MADARAIL's chart of accounts has been updated to reflect components and activities to be financed under IDA credit to satisfy reporting requirements; ii)the accounting manual o f procedures i s in the process of being finalized: the final version has been made available to the Bank; iii)the recruitment o f an accounting firm acceptable to IDA to audit MADARAIL accounts is underway: the TORSand the Request for proposal have been reviewed by IDA and the appointment is expected to be effective prior to November 30, 2005; iv) the consultants in charge of the implementation o f the new computerized systemhave been recruited: they already started working and the new system i s expected to be fully functional prior to December 15, 2005 after users training. The main action to be done relates therefore to the implementation of the new computerized system to allow for automatic and timely production of financial reports requiredfor managing and monitoring MADARAILactivities. However, as the consultants have strong experience in the implementation o f such an integrated information system, we are confident that it will be completed successfully and will be functional within the defined time limit. B. SummaryProjectDescription The IDA credit proceeds will finance railway infrastructure, a social and environmental mitigation program, and retro-financing o f eligible operating expenses for the twelve-month periodprior to this amendment. C. Countryissues The CFAA diagnostic completed in June 2003 determined that the country's public financial management including budgeting, financial accounting and auditing systems poses a major fiduciary risk.A number of accounting firms were operating below the international standards due to the lack of regulatory framework, proper auditing standards, clearly defined guidelines and procedures for systematic peer reviews, continuing education requirements, and quality control mechanisms to harmonize methodology. To improve the capacity and the competitiveness o f the local auditing firms, the following measures have been taken: i)obligation for local auditors to enter into partnership with international accounting firms while auditing Bank/IDA financed projects in order to improve the quality o f audit reports and ensure practical training and real transfer of methodology in the areas o f organization and execution o f audit assignments; ii) effective participation o f the international accounting firm while carrying out audit works in the field and submission of audit reportjointly signedbythe local andinternational audit firms. 24 D. FMRiskAnalysis Riskrating RiskMitigation Measures Low NIA Funds Flow Low NIA Staffing: Inadequate knowledge o f Moderate A quick presentation o f Bank procedures (including Bank procedures by the preparation o f Financial Management Reports, FMRs) accounting staff due to lack o f has been provided by FMS within the fiamework oi experience inmanaging World MADARAIL FM assessment to familiarize the Senior Bank financed project. Accountant with the Bank procedures and strengthen their capacity inpreparing FMRs. Organization o f a workshop before the transfer o f finds to MADARAIL to familiarize the accounting staff with Bank procedures (financial management, disbursements). Accountingpolicies and procedures: Low N/A Internal Audit Low N/A External Audit The CFAA for Madagascar Substantial Local auditors who intend to audit the concluded that country public financial statements o f Bank financed financial management poses a projects were invitedto enter into major fiduciary risk. partnership with international auditing firm to strengthen their capacity. Effective participation o f the international auditing fm inthe fieldwork. Necessity o f a ROSC to allow for an adequate knowledge o f local auditors capacity Monitoring and Reporting: Risk ofdelays inthe Moderate 4ssistance inthe designo f the content and formats o f production and submission o f 'Inancia1 statements and FMRshas been carried out; financial reports required for managing and monitoring Iesign and implementation o f new accounting software project activities due to weak s in place to satisfy users requirements and allow for capacity o fthe accounting imelylautomatically production o f project frnancial software actually inplace. itatements and FMRs. rraining session organized by the manufacturer to ensure :fficient use o fthe new computerized system by the staff, Information Systems The accounting software in Moderate (ecruitment o f a consultant in charge o f the design and place does not satisfy the mplementation o f a new computerized system to satisfy MADARAIL requirements (or isers requirements and allow for timely/automatic the Bank requirements) in roduction o f all financial information required for terms of financial reporting nanaging and monitoring MADARAIL activities including FMRs ncluding FMRs. 25 E.Strengthsandweaknesses The MADARAIL has the following strengths in the area of financial management: i) the current organizational structure defines the lines of responsibilities and authority that exist and provides an overall framework for planning, coordinating and controlling operations; ii)the accounting staff inplace i s qualified with practical accounting experience but not quite familiar with Bank procedures; and iii)the accounting system in place follows general accounting standards acceptable to the Bank. With regard to internal controls, the Bank's team has taken note of the existence of proper authorization to initiate and execute transactions, appropriate segregation of duties and responsibilities, appropriate documentation and records, and adequate measuresfor safeguarding assets (fixed assets, inventory, cash and bank balances). Significant Weaknesses Resolution The accounting staff is not familiar with Bank Organizationof an intensivetraininghas beencarried out proceduresregardingFManddisbursementareas. to familiarize MADARAIL accounting staff with Bank proceduresinfinancial managementanddisbursement. Lack of capacity of the accounting software in place Acquisition of a new computerized system to allow for to satisfy MADARAIL and IDA reporting timely productionofall financial informationrequiredfor requirements. managing and monitoring MADARAIL activities, includingFMRs. Organizationofuserstrainingto ensure efficient use of the new system. The accounting frm in charge of the audit of As the TORSand the Request for proposal have been MADARAIL and the project accounts is not reviewedby the Bank, the bidprocesshas beenlaunched appointedyet. to allow for the appointment of auditors prior to November30.2005. F. ImplementingEntities The overall coordination and implementationof the project will be carried out by MADARAIL. Headed by senior management, MADARAILwill be responsible for project execution, including procurement, financial management, and monitoring and evaluation, o f the various activities supported under the project. Its main activities include: (i) elaboration o f the work programs and budgets; (ii) implementation o f all activities; (iii) maintenance o f records and accounts for all transactions eligible under the credit; (iv) preparation and production o f annual financial statements and quarterly FMRs; (v) contracting and supervision; (vi) management of disbursements for components under its responsibility and; (vi) monitoring and evaluation of the various activities supported under the project. 26 . Funds Flow The flow of funds from IDA is presented as follows: WorldBank 0ther donors Equity 4 (One Special Account per donor) (MADARAILaccount) Suppliers ofgoods, works and services To ensure timely and reliable flow of funds, a special account will be opened in a local commercial bank under conditions satisfactory to IDA. Denominated in $US, disbursements from the IDA credit will be deposited on this account to finance activities to be implementedby MADARAIL in accordance with the disbursement percentages indicated in the DCA. The contractors/suppliers will submit their invoices to MADARAIL who will pay them after appropriate authorization and approval. The accounting manual of procedures will describe in details all procedural aspects regarding management of the special account (payments, reporting, internal controls). MADARAIL will retain all documents supporting its expenditures and will make them available for review by internal auditors, Bank/donors supervision missions and the independentauditors as necessary. Funds generatedby MADARAIL activities are deposited into a separate account denominated in local currency (Ariary). Unless the borrower i s required to provide MADARAIL with specific counterpart funds, funds deposited on this account could be used to finance project activities in accordancewith the disbursementpercentages indicated inthe DCA. Staffing 27 MADARAIL accounting staff has appropriate educational background and strong experience in accounting but is not familiar yet with Bank procedures in financial management and disbursements.To strengthen their capacity, an intensive training on financial management and disbursement has been provided by the WB Financial Management Specialist based in Madagascar Country Office. G. AccountingPoliciesand Procedures MADARAIL through its Finance Department will be responsible for all aspects of the project financial management including budgeting, administration o f the special accounts, record keeping, and production of the project financial statements and quarterly FMRs. MADARAILi s using an accounting system in compliance with generally accepted accounting standards and IDA requirements. This accounting system uses standard book accounts (journals, ledgers and trial balances) to enter and summarize transactions and will operate on a double entry cash basis. To ensure timely production o f financial information required for managing and monitoring project activities, MADARAIL will be equippedwith a new computerized system. MADARAIL has a good internal control system: proper authorization, adequate separation of duties, budgeting system, adequate measures for safeguarding assets. A financial management manual is also available, For each o f the main sequences o f operations, this manual o f procedures describes the tasks to be performed by each member o f staff, the documentation to be used, the records to be completed and the controls to be applied. To facilitate record-keeping and ensure timely preparation of reliable information the manual provides also a detailed description of: i)the design and configuration of the financial management and accounting system; ii)the budgetary procedures and process (preparation, monitoring); iii)and the relevant accounting controls to be applied regarding purchasing procedures and the management o f the funds. Inour opinion, the manual of procedures contains enough information to facilitate sound accounting practices and to ensure that assets are properly controlled. H. InternalAudit To obtain assurances as to the proper functioning of internal control system, an internal audit Department has been established. The responsibility o f this Department i s to give assurance and report to the senior management on the extent to which reliance can be placed on the internal control system (continuing adequacy o f and conformity with the approved policies and procedures). The nature, extent and strength o f controls depend on factors such as the nature o f operation, the importance o f the system and the degree o f risk. I. ExternalAudit MADARAIL financial statements will be audited annually by a qualified international accounting firm acceptable to IDA, in accordance with International Standards o f Auditing and the new Guidelines describing Audit Policy and Practices for World Bank-financed Activities. The audited financial statements should reflect the activities supported by the credit. The auditors will be required to: i)express an opinion on the audited financial statements; ii) carry out a comprehensive review o f the internal control procedures and provide a management report 28 outlining any recommendations for their improvement. The audit report will be submittedto IDA not later than six months after the end o f each fiscal year. The recruitment process o f the external auditor i s underway: the terms o f reference of the audit as well as the Request for proposal have been reviewed by the bank staff and the auditing firm is expected to be appointed prior to November 30,2005 (the process is already well-advanced). J. ReportingandMonitoring To monitor project implementation, the MADARAIL will produce the following reports that should: i)reflect all MADARAIL activities, including those financed by IDA and other donors; ii)bepreparedincompliancewithaccountingstandardsacceptabletoIDA: rn Annualfinancial statements comprising: a) Balance Sheet; b) Statements of income, retained earnings, and change infinancial position; c) Summary o f sources and uses o f funds associated with the Bank-financedactivity; d) The accounting policies adopted andexplanatory notes; e) A management assertion. rn Quarterly FMRs The FMRs includes financial reports, physicalprogress reports andprocurement reports to facilitate project monitoring. The FMRs should be submittedto IDA within 45 days of the endofthe reportingperiod (quarter). The form and content of FMRs and annual financial statements will be determinedand agreed at negotiations. Models o f these reports will be presented in the project accounting manual of procedures. K. InformationSystems MADARAIL will use a computerized system capable of recording and producing in a timely manner all financial reports required for managing and monitoring project activities. This computerized systemwould inparticular facilitate: annual programming o f activities andproject resources, record-keeping (general accounting and cost accounting), financial and budgetary management, inventory and fixed assets management, procurement management, preparation o f annual financial statements and quarterly Financial Monitoring Reports as required by the Bank/IDA. Itwould befully functional before project implementationbegins. L. Impactof procurementarrangements Procurement arrangements do not present substantial risk. 29 M. DisbursementArrangements Method of Disbursement: During the first year o f project implementation, MADARAIL would follow the transaction - based disbursements procedures (traditional mode) outlined in the Bank's Disbursement Handbook. The use o f report-based disbursements could be possible if requested by the project and if the following criteria are met: i)the FM rating has been maintained at satisfactory level; and ii)the submission o f at least three quarterly satisfactory FMRs that could be reliedupon for purposes o f disbursement. Minimum of Applicable Size : The minimum application size for direct payments, to be withdrawn directly from the Credit Account, and special commitments i s 20% of the amount advanced to the related special account. N. SpecialAccount Transfer of funds from IDA would be administered by MADARAIL from a special account which would be opened in a commercial bank on terms and conditions acceptable to IDA. The authorized allocation for the special account would be US$4,000,000 covering IDA'Sshare of four (4) months of estimated expenditures. Further deposits by IDA into the special account would be made against withdrawal applications supported by appropriate documents. MADARAIL would be responsible for preparing disbursement requests. The Special Account would be used for payments o f all eligible expenditures inferior to 20% o f the authorized allocation and replenishment applications would be submitted at least on a monthly basis. The special account would be audited annually by independentauditors acceptable to the Bank. 0. Action Plan The present action planagreed with the recipient describes main actions to betaken to strengthen the accounting and financial management systems of Madarail and to build capacity to produce quarterly FinancialMonitoring Reports: Actions Completiondate Responsible 1 Recruitmentprocessof external auditors: Finalization and issuance of the Requestfor Proposal Completed ProcurementDepartment WP); Receptionof proposals, evaluation, selection; 12/09/2005 ProcurementDepartment Appointment ofexternal auditors; 12/12/2005 SeniorManagement 2 Finalization and issuanceofthe Requestfor Proposal(RFP) Completed ProcurementDepartment concerningthe provision of services for the designand implementationof anew computerizedsystem. Receptionof proposals, evaluation, negotiationand award of the Completed ProcurementDepartment contractto the firm selectedto implementthe new computerized system. 30 Actions Completiondate Responsible Consultantstarts the implementationofthe new computerized system: Installation ofthe computerizedsystem after necessary Completed Consultant adjustments Consultant Systemtestingto ensure compliancewith project's 12/02/2005 expectationsand IDA specifications: Consultant Correctiveactions and retesting; 12/09/2005 Consultant Completeusers training and start operatingthe system; 1211512005 MADARAIL Obtainuser acceptanceand approval 12/22/2005 P. Conditions 1 FinancialManagementConditions - a. Effectiveness Condition: Implementation of a computerized system acceptable to IDA capable of producing financial reports including quarterly FMRs; w Recruitment of auditors acceptableto the Bank; 2 FinancialCovenants - rn MADARAILshall maintainrecords andaccountsinaccordance with sound accounting practices; rn Records and accounts shall be audited by independent auditors acceptable to IDA; w Production o f quarterly FMRs. Q. SupervisionPlan 0 Periodic review of implementation progress. 31 ANNEX 1D ProcurementAssessment A reviewhas beencarried out to assess Madarail's capacity to carry out procurement activities compliant with World Bank's guidelines. The concession agreement provides that Madarail may use its own procurement rules for self-fundedactivities.. When usingAPL3 credit proceeds, Madarail will, however, have to apply World Bank guidelines. The assessmentalso takes into accounts findings of the CPAR that was conducted in2003. A. Analysis of Madarail's procurementcapacity and specific risks,on: (i)Organization; Head office of Madarail includes a financial section and a procurement unit (Unitede Programmation et de Suivi des Investissements -UPSI) which i s managed by the chief procurement officer. (ii)Facilities and support capacity; Madarail has delegated management authority from the Ministry o f Transport as defined in the concession agreement and conducts its businesswithin this framework. Madarail has satisfactory manuals for procurement and disbursement (iii)Staffing; Madarail has adequately trained procurement staff. Agreement was reached to provide capacity building to improve knowledge o f World Bank procurement procedures. (iv) Professional experience; Madarail has the right to enter into civil proceedings in all matters relating to its operations including contracts, to acquire, hold and dispose o f assets, to let or hire plant, machinery, equipmentor goods. MADARAILhas limitedexperience ininternational procurement process. (v) Record-keeping and filing system; The systemhas beenstrengthened, is acceptable and meets the Bank's requirement. Procurementdata. A systemis inplace to collect extensive data on procurement and this can be adapted to publishkey information on procurement, including number of contracts awarded to the same supplier, reasons for termination o f contracts, time and cost overruns; (vi) Procurement planning andmonitoring/control systems used; 32 Madarailhas the obligation to manage all fhds inthe appropriate manner and the accounts relating to a specific funding agency must be audited annually by an independentauditor. MADARAIL already has aprocurement planthat has beenupdated to conformto World Bank's reporting requirementsand that reflects the new budget. So far, procurement planning is not systematically linkedto the budgeting process which leads to suboptimal contract management, such as the needfor recurringcontracts, contract extensions, urgent purchases requiring exemption from regular procurement guidelines; often leading to higher costs; (vii) Capacity to meet the Bank's procurement reporting requirements; Madarail currently has the capacity to produce financial andprocurement reports but improvements are neededto meet the World Bank's requirements. The lack of funds which has severely handicapped Madarail's investmentprogram also has let to delays inthe payment o f contractors and suppliers. Invoices frequently are not treated within 30 days, eventually leading to cost o f business. Iti s expectedthat invoices will be paidon time once Madarail manages its own budget. Tenders are advertised inthe daily major newspapers. w Recommendations Recommendations were agreed on with Madarail on how to address the risks identified, particularly on the needof additional capacity, staffing, training, support by consultants, and improvements requiredinfacilities, organization, record-keeping, reporting, andplanning and monitoring; Deficiencies Recommendations Completiondate Generalweaknesses and Use o f Bank's procedures Duringimplementation deficiencies Procurementplanning Use of Bank's template and finalize 11/15/2005 the procurementplan. . Training Procurementstaffwill receive Duringimplementation Recordkeeping Separate filing for the APL 3 Duringimplementation financinn 33 B. Overallriskassessment and recommendationon prior-reviewthresholdlevels and proposedfrequency of procurementpost-reviewmissionsor the use of independentpost review of procurement. Proposed supervision plan (This includes the thresholds for prior review and frequency of post- review missions). (Procurement Specialist/Accredited staff assignedto the project) -~ --- _ll-l____lll I- p i gnature: I IIDate: August gfh,2005 I I __. - - --- -.-_ I__I Ix I komments: C. ProcurementArrangements General: Procurement for the proposedproject would be carried out inaccordancewith the World Bank's "Guidelines:Procurement under IBRDLoans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, andthe provisions stipulated inthe Legal Agreement. The various items under different expenditure categories are described ingeneral below. For each contract to be financed by the Credit, the differentprocurement methods or consultant selection methods, the needfor pre-qualification, estimated costs, prior reviewrequirements, and time frame are agreed between the Borrower andthe Bank inthe Procurement Plan. The Procurement Planwill beupdated at least annually or as requiredto reflect the actual project implementationneeds and improvements ininstitutional capacity. Procurement of Works: Works procured under this project would include: the rehabilitation and renewal of railways. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank. Since no major works are expected for this Project, for contract estimated to cost less than USD500,OOO equivalent per contract, civil work procurement may be carried out through National Competitive Bidding and contracts for small works, estimated to cost less than 34 USD50,000, will be procured through quotations procedures. Nevertheless, for railways maintenance works to be procured during the first two years, MADARAIL is allowed to sub- contract on force account and direct contracting basis with a firm earned by former MADARAIL employees. Specific procedures details can be found inthe Project ImplementationManual. Procurement of Goods: Goods procured under this project would include: ballast furniture, optic fiber connection, furniture for equipment rehabilitation, other equipment, office equipment and IT and software. The procurement will be done using the Bank's SBD for all ICB and National SBD agreed with or satisfactory to the Bank. To the extent practicable, contracts shall be grouped into bid packages estimated to cost the equivalent of US$250, 000 or more and would be procured through International Competitive Bidding (ICB) procedures. For contract estimated to cost less than US$250, 000 equivalents per contract, procurement of goods may be carried out through National Competitive Bidding (NCB) procedures and purchase of small furniture estimated to cost less than US$30, 000 will be conducted through prudent shopping procedures. Procurement of non-consulting services: Rehabilitation and maintenance works for railways. The project will contract under partnership convention specific firms earned by former employees coming from privatized railways companies on direct contracting. Selection of Consultants: technical assistance, financial and technical audits, and capacity building. Firmswill be recruited on the basis o f the Quality and Cost Based Selection (QCBS) method, using the Bank's Standard Request for Proposals. Selection based on consultants' qualifications (CQ) can be used for the recruitment of training institutions and for assignments that meet criteria set out in section 3.7 o f the Consultant Guidelines. Single source selection can be used to contract firms for assignment that meet criteria set out in section 3.9 to 3.13 of the Consultant Guidelinesand for contract which amount do not exceed $100,000. OperatingCosts: The project will finance goods andother furniture needed by MADARAILon day-to-day works and withinagreedprogramwith the Bank. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Implementation Manual. D. Assessment of the agency's capacityto implement procurement Procurement activities will be carried out by MADARAILLJPSI. The agency i s staffed by a general Manager, a deputy general manager, and the procurement function under UPS1 i s staffed by Procurement Officer and a Procurement Assistant. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by the Bank's Senior Procurement Specialist on August gth, 2005. The assessment reviewedthe organizational structure for implementing the project and the 35 interaction between the project's staff responsible for procurement Officer and the Management's relevant central unit for administration and finance. The key issues and risks concerning procurement for implementation of the project have been identified and include the phasing of activities to be undertaken and possible emerging of emergency cases. The corrective measureswhich have beenagreed are the close follow-up of the agreed procurement plan and activity scheduling. A procurement action plan will be fine tuned quarterly and the mainprocurement planwill be up-dated accordingly. The overall project risk for procurement is Average E. ProcurementPlan The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on November 15, 2005 and i s available at MADARAIL office. It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated inagreement with the Project Team annually or as requiredto reflect the actual project implementationneeds and improvements ininstitutional capacity. F. Frequency of ProcurementSupervision In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended annual supervision missions to visit the field to carry out post reviewofprocurement actions. G. Details of the ProcurementArrangementsInvolvingInternationalCompetition 1. Goods,Works, andNonConsultingServices (a) List o f contract packages to be procured following ICB and direct contracting: Contract Estimated Procurement P- Domestic Review Expected Comments (Description) Cost Method Q Preference by Bank Bid-Opening (yedno) (Prior / Post) Date Railrenewal 3,417,000 Direct No Yes Prior To be decided KM226 to 371 contracting Track works 1,93 1,000 Direct No Yes Prior To be decided KM0 to 226 contracting Ballast 1,130,000 ICB No No Prior Dec 2005 Rehabilitation Direct No No Prior Jan 2006 of tractorcrane 107,000 contracting Framafer Fiber optic 173,236 Direct No No Prior Jan 2007 connection contracting 36 (b) ICB contracts estimated to cost above US$500,000 for works and US$250,000 for goods per contract and all direct contracting will be subject to prior review by the Bank. 2. ConsultingServices (a) List of consulting assignments with short-list of international firms. Descriptionof Estimated Selection Review Expected Comments Assignment Cost Method by Bank Proposals (Prior / Submission Post) Date Financial audit 287,000 QCBS Prior Dec 05 The audit will be financed by Madarail (b) Consultancy services estimated to cost above US$lOO,OOO per contract and single source selection o f consultants (firms) and for individual consultants assignments estimated to cost above US$50,000 will be subject to prior reviewby the Bank. (c) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract, may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 of the Consultant Guidelines. 37 ANNEX 1E Integrated SafeguardsData Sheet (Updated) Report No: AC220: Section I-Basic Information Date ISDS Prepared/Updated: 10/23/2003, 11/06/2005: updatefor project restructuring (changes in italics) A. Basic Project Data (from PDS) LA.1.Project Statistics Country: MADAGASCAR Project ID: PO82806 Project:TRANSPORT INFRASTRUCTURE Task Team Leader: Dieter Schelling/SusanneHolste INVESTMENT PROJECT Authorizedto Appraise Date: October 14,2003 .. IBRDAmount ($m): Bank Approval: December4,2003 1 I IDA Amount ($m): 150.00 ManagingUnit: AFTTR Sector: Roads andhighways(69%); Ports, LendingInstrument:Adaptable ProgramLoan(APL) waterways and shipping (17%); General transportationsector (8%); Aviation (6%) Status: Supervision Theme: Trade facilitation andmarket access (P); Infiastructureservicesfor privatesector development (S); Railways (23%) I.A.2. Project Objectives (From PDS): The Transport Infrastructure Investment Project (TIIP) supports the CAS objective to accelerate poverty reduction, and, inconjunction with APLl and APL2, the goals o f the country's transport sector policy and strategy. The specific development objective o f this project i s to rehabilitate the country's major transport infrastructure in order to reduce transport cost and to facilitate trade. I.A.3.Project Description(From PDS): 1. National Road Maintenance, Rehabilitation and Upgrading (Total $588 millionof which IDA $ 91 million) Reflecting the Government's development priorities, this component i s the most important o f the project. The program for upgrading, rehabilitationand maintenance aims at bringing all the primary and secondary national roads (7,313 km) to good and fair condition by end of 2008. The overall program for the national road comes to $588 million o f which this credit will finance US$ 91million for the following interventions: 38 - 112 kilometers o f upgrading to paved standard on the RN44 from Morarano to the junction with RN3A.This secondary national road connects the "rice bowl" o f the country; - Lac Alaotra region - with the main road linking the capital Antananarivo with the main port Toamasina (RN2). RN44 i s currently inaccessible during the rainy season; - 69 kilometers o f rehabilitation o f the gravel road from Ambatondrazaka to Vohitraivo RN44), 249 kilometers o f periodic maintenance on the RN2 betweenAntananarivo and Brickaville; - 295 kilometers o f periodic maintenance on various sections o f the RN7 between Antananarivo and Fianarantsoa, the highest trafficked trunk road inthe country; - 186 kilometers o f rehabilitation and periodic maintenance on the bituminous RN32 from Ansohihy to Mandritsara, a departmental capital and a major agricultural production zone; - Repair o f 40 ferries within a national plan for the renewal o f the ferries system and the involvement o f the private sector for their operation. 2. Ports and Maritime Transport (Total $50 million of which IDA $22.51million) The Government's ports and maritime transport upgrading, rehabilitation and maintenance program aims at contributing to trade facilitation, by increasing the efficiency o f the system, its connectivity with other segments o f the transport network, consequently lowering overall transport costs. The total program cost amounts to $ 117 million (excluding the planned construction o f the new port at Fort Dauphin), To be realistic the program was divided into first priority actions, to be achieved between 2003 and 2008 (the time frame o f the APL) and those planned for beyond 2008. The first priority actions amount to $50 million, out of which IDA is expected to finance $22.5 1for the following actions: rn Technical assistance, equipment and training for APMF, as well as setting up o f a management information system inAPMF; rn Rehabilitationand extensiono f the Mahajanga port; rn Rehabilitation o f four main lighthouses in Madagascar and coastal navigation aids, as well as services and supplies to help make Madagascar compliant with the IMO-MARPOL convention it hasjoined inMay 2003. 3. US$56Airportof which IDA US$7.24million) Safety and Facilitation of Public-PrivatePartnership (Total requirement million The government's aviation policy aims at promoting trade and tourism, through institutional strengthening, airport infrastructure rehabilitation, safety and security development and general modernization o f the airport system o f Madagascar. Total investments programmed amount to about $56 million. Out o f this, IDA i s planning to finance $7.24m. IDA'Ssupport includesthe following: 39 provision o f respective up-to-date equipmentto comply with ICAO standards; and .. Safety and security enhancements on the entire Malagasy airport network through the Financing o f the necessary government contribution to complement private sector financing related to the rehabilitation of 7 provincial airports, which are to be managed by private operators under a lease farming arrangement. These secondary airports are critical from an economic development point o f view but their traffic volume will not allow full cost recovery. 4. Support to the Ministry of PublicWorks and Transport (Total requirementUS$12 million, of which IDA US$9.67 million) This component will focus on strengthening the Ministry of Public Works and Transport to execute its function to oversee and coordinate the sector, and to finalize the reform process. It will finance the following: (i)the social plan for the redeployment of about 2,700 of the current 3,015 employees of the VPM; (ii)the provision o f technical support including technical assistance, training and equipment; and (iii) feasibility studies, preliminary design, detailed design and preparationo f bidding documents for future requirements inthe sector. 5. Northern Railway Investment (Total requirement US$39.6million, of which IDA US$31.7million) This investment intends to ensure more efJicient and effective rail transport. The Northern Network consists of approximately 700 km of rail connecting Antananarivo - Antsirabe (MT), Antananarivo - Toamasina (TCE) and Moramanga - Lake Alaotra (MLA). This component will support thefollowing actions: I45 km of rail replacementrehabilitation between KM226and KA4371 of the TCE line, .. .. 226km of rail reinforcement betweenKM0 and KM226of the TCE line, Rehabilitation works on several bridges between ToamasinaandAndovoranto; .. Equipment and toolsfor workshops; Implementation of social and environmental mitigation measures; and Operating costs. I.A.4. Project Location: (Geographic location, information about the key environmental and social characteristics o f the area and population likely to be affected, and proximity to any protected areas, or sites or critical natural habitats, or any other culturally or socially sensitive areas.) As mentioned inthe project description, sites specific to the project are the national roads and the port of Mahajanga inthe second year. Population impacted, proximity of sub-projects to protected areas, cultural sites, etc. are assessed indetail inthe EA report. As mentioned in the Memorandum to the President whichpresents the restructured project, sites specijk to the new component are located along the corridor of the northern rail network. Population impacted,proximity of sub-projects toprotected areas, cultural sites, etc. are assessed in detail in the ESIA reports. 40 B. Check EnvironmentalClassification:A (FullAssessment) Comments: As stated earlier, the APL3 Project will finance the rehabilitation o f existing transport infrastructure including national roads, ports and airports. Although most investment concerns the rehabilitation o f existing infrastructure, the general environmental situation in Madagascar and the size and nature of the infrastructure concerned requires that the project be classified A - full assessment. The Project EA i s rather specific in terms of the roads component where all sub-projects are clearly defined, where detailed design i s on-going and which are considered as "first year projects". In respect o f the ports and airports, investments are planned as residuals to private sector investments as part o f concessioning agreements with private sector operators. Since this process is only commencing now, these investments are considered as "second year investments".Thus, the EA focuses on specific National Roads only. A comprehensive transport EA was elaborated during the preparation of APLl and disclosed in September 1999. The railway sector is covered in this analysis. A separate EA for Madarail was carried out and was disclosed in compliance with national environmental legislation on July 29, 2004. It was disclosed at the Infoshop in November 2005. C. Safeguard Policies Triggered@,omPDS) (click on Q for a detailed descriptionor click on the policy number for a brief description) Policy Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) YesX No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) Yes No X Forestry (OP 4.36, GP 4.36) Yes N o X Pest Management (OP 4.09) Yes N o X Cultural Property (OPN 11.03) Yes N o X Indigenous Peoples (OD 4.20) Yes N o X Involuntary Resettlement (OP/BP 4.12) YesX No Safety o f Dams (OP 437, BP 4.37) Yes N o X Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Yes N o X Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* Yes N o X SectionI1 Key SafeguardIssues and Their Management - D. Summary of Key Safeguard Issues. Please fill in all relevant questions. If information is not available, describe steps to be taken to obtain necessary data. 41 1I.D.1.a. Describe any safeguard issues and impacts associated with the proposed project. Identify and describe any potential large scale, significant and/or irreversible impacts. The potential environmental and social impacts may include: soil erosion ("lavaks" or erosion gullies), noise and dust presumedto induce adverse physical environmental impacts during road construction works, increase of accidental risks, impairment o f natural habitat close to quarries, disturbance in water quality, marine and aquatic disturbances (contamination, oil/waste spills/disposal). To address these issues, the following safeguards were suggested: sowing the slopes with grass seeds, canal constructions, material and road dampening, avoidance of dangerous works during rush hours, elaboration o f emergency plans, application o f technical and work standards for the selection o f workers and machines, installation o f working areas in sites which are poor in biodiversity, prohibition of dredging works in the vicinities of fauna reproduction areas and sensitive areas, as well as during aquatic fauna reproduction cycles. Project activities of the new railway component might have the following potential environmental impacts: contamination of ground and surface waters, erosion of the slopes, and obstruction of water flows. To address these issues, the following safeguard measures are proposed: provisions in the workshops and rail stations to dispose of used water; stabilization of slopes using community-based activities of vetiver grass planting and sustainable agriculture; waterflows will be reestablished and drainage canals repaired. 1I.D.lb.Describe any potential cumulative impacts due to applicationofmorethanone safeguardpolicy or due to multipleproject component. No cumulative impacts are anticipated at this point. However, the depth and breadth of the EMPs to be prepared will provide a better indication of this and will take into consideration any mitigation relatedto longer-term impacts. 1I.D.1c Describe any potentiallongterm impacts due to anticipated future activities in the project area. Improved access to rural areas could trigger: deforestation, unless controlled by national policy against deforestation; development of transmittable diseases, especially HIV/AIDS. II.D.2. Inlight o f 1, describe the proposed treatment o f alternatives (ifrequired) At this point, there are two main alternatives: one can encourage the synergy among various stakeholders, especially among Ministerial Departments (Transport, Environment, Health, Agriculture,. .) for better coordination, and promote the use o f other means of transportation, , especially fluvial and railroad transportation which have lower risks o f accidents, cause less pollution and less infrastructure deterioration. As is practiced in other railway concession, for example Cameroon, the concessionaire will work closely with theforestry department to ensure that no transport of illegally cut timber will takeplace. It should be noted that deforestation in Madagascar is often linked toproduction of charcoal and slash-and-burn agriculture which result from lack of sustainable development opportunities. It is expected that the railway will provide employment in routine track 42 maintenance and slope stabilization as is already successfully practiced along the southern railway network. Madarail is planning to implement a comprehensive HIV/AIDS education campaign for its work force and the network communities. This will be one of the first HIV/AIDS initiatives in country implemented by aprivate transport company. 1I.D.3. Describe arrangement for the borrower to address safeguard issues An EA for APL3 was disclosed August 4,2003, A resettlement framework was prepared as a part of the APL2 and was disclosed inJuly 2002. The EA for Madarail was disclosed in country on July 29, 2004 and at the Infoshop on November I,2005. Theproposed environmental mitigation measures ensure the restoration and stabilization of the ground through the installation and maintenance of side and transverse ditches, stabilization of slopes, installation a drainage system, industrial waste collection and decontamination. Mitigation measures suggested for impacts related the multimodal platform relate to the restoration and stabilization of embankments. A social impact assessment of the component shows the need for resettlement of people and relocation of fields within the right-of-way. A Resettlement Action Plan (RAP) is currently beingprepared with the participation of thepopulation affected by the project. The RAP will be submitted to thepublic and made availablefor consultation in the affected areas after the Bank clearance. Activities Estimated date RAPfor review by ASPEN 02/2006 RAPfor disclosure in country and at the infoshop 03/2006 II.D.4. Identify the key stakeholders and describe the mechanisms for consultation and disclosure on safeguard policies, with an emphasis on potentially affected people. Participatory approaches are applied during the preparation o f the EA and EMP. Thus, various public consultations have been carried out through consultations and discussions with public authorities and local governments during field missions; media campaigns, including compiling records in books to display at various public authorities offices and public places, for observation; and the in-country disclosure workshop was conducted on July 18, 2003. Along with this EA, the entire APL i s supported by a sectoral environmental assessment as well as a resettlement policy framework. Both have beenapproved and disclosed. Subsequent EAs and RAPS,where needed, will be prepared, approved and disclosed according to Bank and nationalpolicies. The main stakeholders who participated in these consultations are: the various sectoral Ministries (Transport & Public Works; Environment & Water and Forests; Health; Agriculture; Communication); specialized institutions, especially the main NGOs like the National Environmental Office (ONE) ; various regional associations (carriers; farmers; water users; port users;...); and the Mayors. 43 E. Safeguards Classification (select in SAP). Category is determined by the highest impact in any policy, on a basis o f cumulative impacts from multiple safeguards. Whenever an individual safeguard policy i s triggered the provisions o f that policy apply. [ ] S1. - Significant, cumulative and/or irreversible impacts; or significant technical and institutionalrisks inmanagement o f one or more safeguard areas [XI S2. -One or more safeguard policies are triggered, but effects are limited in their [ ] S3. -impact and are technically and institutionally manageable No safeguard issues [ ] SF. - Financial intermediaryprojects, social development funds, community driven development or similar projects which require a safeguard framework or programmatic approach to address safeguard issues. F. DisclosureRequirements Environmental Assessment/Analysis/Mgt Plan Expected Actual Date of receiptby the Bank 613012003 Date of "in-country"disclosure 711812003 Date o f submissionto InfoShop 8/4/2003 Date of distributingthe Exec. Summaryofthe EA to the 811812003 Executive 811112003 Directors (For category A projects) Date of receipt by the Bank (Sector EA, incl. railways) 01/28/2001 Date of "in-country disclosure (Madarail EA) 7/29/2004 Date of receipt by the Bank (Madarail EA) 10/26/2005 Date of submission to Infoshop 11/01/2005 Resettlement Action Plan/Framework: Expected Actual Date of receiptby the Bank 09/14/2001 1011012001 Date of "in-country"disclosure 1012512001 01/17/2002 Date of submissionto InfoShop 1012512001 01I1712002 Date ofreceiptby the Bank (RAP Madarail) 0212006 Date of "in-country'' disclosure 0312006 Date of submissionto Infoshop 0412006 Indigenous Peoples Development Plan Framework: Evpec Actual Date o f receiptby the Bank Not Applicable Not Applicable Date of "in-country"disclosure Not Applicable Not Applicable Date o f submissionto InfoShop Not Applicable Not Applicable Pest Management Plan: Expected Actual late o f receipt by the Bank Not Applicable Not Applicable l a t e o f "in-country"disclosure Not Applicable Not Applicable late of submissionto InfoShop Not Applicable Not Applicable 44 Dam Safety Management Plan Ian: Evpected Actual Date ofreceiptby the Bank Not Applicable Not Applicable Date of "in-country"disclosure Not Applicable Not Applicable Date of submissionto InfoShop Not Applicable Not Applicable Ifinacountrydisclosure,anyoftheabovedocumentsisnotexpected,pleaseexplainthe reasons. Signedand submittedbv - Name - Date Task Team Leader: Dieter E. Schelling 10/23/2003 Project Safeguards Specialists 1: Nina Chee 10/23/2003 Project Safeguards Specialists 2: Edeltraut Gilgan-Hunt 10/23/2003 Project Safeguards Specialists 3: Yvette Laure Djachechi 10/23/2003 Approvedbv Name - Date Regional Safeguards Coordinator:Thomas E. Walton 10/23/2003 Sector Manager C. Sanjivi Rajasingham 10/23/2003 Signed and submittedbv Name - Date Task Team Leader: Susanne Holste 11/14/2005 Project Safeguards Specialists 1: Nina Chee 11/16/2005 Project Safeguards Specialists 2: Dan Aronson 11/16/2005 Project Safeguards Specialists 3: Paul-Jean Fen0 11/14/2005 Approvedby: Name - Date Regional Safeguards Coordinator: Thomas E. Walton 11/17/2005 Sector Manager: C. Sanjivi Rajasingham 11/17/2005 45 ANNEX 1F Project Design Summary MADAGASCAR:TRANSPORT INFRASTRUCTUREINVESTMENTPROJECT Key Performance Data CollectionStrategy Critical assumptions Indicators Sector Indicators: Sector country reports: (from Goal to Bank mission) Improvedquality of life of Improved rural well-being Socioeconomicbaseline Macro-reform program the ruralpopulation indicators study in 90 villages along remainson track through economic growth the alignment ofthe rural and better roads andfollow up survey accessto economic and at completionof project social facilities Strengtheningthe public Implementationo f the Quarterlyreportsof FMA As above sector's ability to deliver transport sector reform quality services and create programas per the sector an enablingbusiness policy environment Program Purpose: End-of-Program Program reports: (from Purposeto Goal) Indicators: Transportcostsreduced Reductionof average Respective surveys are Concessionaires operate and accessibility improved transit cost andtime in currently being carriedout. properly. Especiallyinrural areas main corridors Follow up surveys will be (from APL1) carried out intermittently [mprovedaccessibility and at the end of the RoadMaintenanceFund from remote areas of the project. financesrehabilitatedrural :ountry to the main Number of persons roads adequately. productionand providedwith reliable :onsumption centers access monitored as part of APL2 ProjectDevelopment Outcome IImpact Projectreports: (from Objectiveto Objective: indicators: Purpose) To rehabilitatethe I,Increasedtrafficthrough Surveys of respective Government's general country'smajor transport mprovedtransport agencies of MTPT and economicprogramand its infrastructurein order to nfrastructure(both F M A transport sector reform iassengers and freight). programremain on course 4verage annual traffic ncrease: 10% after ,ehabilitation L. Decreased user costs: )etween 20% and 60% lependingon road link see economic analysis) I.Decreasedusertime Ielays:between30% and 100% dependingon link see economicanalysis) Output from each htput Indicators: Projectreports: (from (from Outputsto Component: 3utputsto Objective) Objective) 1. National roads .,045km of national roads 2nnual report of Road Sufficient private sector rehabilitatedand ehabilitatedby average luthority (and until its capacitycan be mobilized maintained nnual tranches of about :reationthe annual report o to executethe program, 13okm(of which 613km ;theRoadDepartmentof other donor financing is ly IDA) so that by end o f he MTPT forthcoming, and Road 008 the majority of MaintenanceFund operates ational roads (RNP & properly. N S ) are ingood and fair 46 condition. 2. Mainportsrehabilitated Main ports concessioned Annual report ofAPMF Private sector respondsto and well operated and smaller ports under bids global concession arrangements. 3. Main airportswell Ivato concessioned, seven Annual report ofACM Private sector responds to operatedand safety and secondary airports bids securityenhanced