PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: 33226

Project Name

/ Integrated Growth Poles
Region / AFRICA
Sector / Ports, waterways and shipping (30%);General industry and trade sector (30%);General transportation sector (20%);General water, sanitation and flood protection sector (10%);Power (10%)
Project ID / P083351
Borrower(s) / GOVERNMENT OF MADAGASCAR
Implementing Agency / Secrétariat National du PIC
Ministry of Finance
Madagascar

Environment Category / [X] A [ ] B [ ] C [ ] FI [ ]
Safeguard Classification / [ ] S1 [X] S2 [ ] S3 [ ] SF [ ]
Date PID Prepared / June 22, 2005
Date of Appraisal Authorization
Date of Board Approval / July 12, 2005
  1. Country and Sector Background

Madagascar is recovering strongly from an historical decline in per capita income. During the past three decades, Madagascar’s per capita GDP declined by 40 percent to US$220 in 2002. Structural reforms in the late 1990s played an important role in supporting growth performance up to 6.0 percent in 2001, the second highest rate in Africa at the time, mostly in the manufacturing sector (approximately 12 percent of total GDP), vanilla and shellfish exports.

Despite these positive developments, the impact on poverty reduction on the 16 million Malagasy was modest, and poverty in the rural areas increased. Corruption and rent seeking were also widespread. This contributed to the 2002 political crisis, stigmatized by a stand-off between the two presidential candidates. The crisis led to the destruction of key infrastructure and economic activity ground to a standstill, with Export Processing firms stopping all production.

The post-crisis period was marked by renewed strong economic growth, reaching 9.8 percent in 2003, bringing per-capita GDP to just below its 2001 level. This growth, however, relies on continued investor confidence in Madagascar and on some external factors influencing the tourism, fisheries and garment industries. In particular the tourism sector, exports of coffee, shellfish and litchis depend on strong growth in Europe, while the health of the garment industry depends on how competitive the industry is in a post multifiber agreement, quota-free US market, and anticipated changes in the EU garments trade regime.

Private capital flows are still extremely limited and unsustainable

The current growth of the Malagasy economy is unlikely to be sustained. While Madagascar evidences good labor productivity rates in terms of factory floor and labor costs[1], and while preferential trade agreements are currently favorable to Madagascar, private capital flows into the country are still extremely limited (amounting to approximately 10 percent of the total foreign aid since 1997, at US$270 million[2]). This shows that the market response to current Malagasy reforms is timid, at best, and that negative changes in external factors could trigger further losses in competitiveness, divestiture from productive assets and reduced growth[3].

Poor geographic redistribution of wealth

Madagascar’s recent growth had a comparatively low overall impact on poverty reduction; much lower than successful countries in South-East Asia [4]. Evidences suggest that growth between 1999 and 2001 was beneficial mainly to the people at the top of the civil society or individuals above the poverty threshold. Except for the province of Antananarivo, all the five provinces became poorer over that time span. Other provinces[5] have consistently displayed high poverty rates. The trends of poverty within region follow that of national headcount index with regional poverty gap improving only for the provinces of Antananarivo and Toliary between 1993 and 2001. Similarly, at a 85 percent head count index, the regional poverty gap is becoming deeper in rural areas for all provinces, except in Antananarivo. This demonstrates growth in Madagascar has not been shared.

Cost structure for Malagasy firms

Initial data on the Investment Climate Assessment in Madagascar (2005), indicate that indirect costs on firms exceed 40% of their total operating costs, when compared to approximately 20% in China[6]. These indirect costs are immediately attributable to the poor physical infrastructure available, including road networks, deficient power supply, high telecommunication costs and tax and policy inefficiencies.

Undeveloped EPZ cluster and value chain

In spite of numerous reforms launched since 2002, investor confidence in the EPZ sector has not totally recovered. The garment industry in particular is heavily dependant on imported inputs with few domestic linkages such as sub-contracting and supplier relationships. The overall growth and competitiveness of the industry is affected by weaknesses in the value chain in areas such as infrastructure and logistics, trade facilitation and domestic inputs. The industry also faces considerable uncertainty as the global textile and garments production networks adjust and realign to cope with the changes in the trade regime.

Sources of growth are untapped

Tourism is a growing sector contributing largely to the 6 percent annual growth rate. In spite of the country’s extraordinary flora and fauna, it is better known to the scientific community than to tourists and the tourism sector remains under-developed. Madagascar receives approximately 100,000 visitors per annum while Mauritius receives approximately 700,000 visitors. Similarly, litchi, sisal and shellfish production, which are Toalognaro’s main wealth, and which are in demand, cannot be exported. The large ilmenite deposits in Toalognaro are the world’s highest grade, but have never been mined to this day.

This context creates the justification for regional growth poles providing appropriate business environments

Current growth in Madagascar is not spurred by the private sector, because of a deficient investment climate showing poor and unreliable infrastructure and high risks associated with the policy environment. In addition, wide ranging reforms addressing the structural issues described above will yield results only in the medium to long-term. To jump-start this process, the Government has therefore identified three regions where appropriate market conditions could be created to generate high private sector growth in the tourism[7], mining and manufacturing[8] sectors. These regions were selected for their growth potential, as well as regional balance they represented. Transversal activities targeting the business environment and supporting the development of these regions were also identified to help realize the growth potential:

·  The Nosy Be region: with a population of 61,000, the economic activity of the island of Nosy Be has been concentrated around sugar production and tourism. The sugar company, SIRAMA, which employs approximately 2,000 people, is in a de-facto bankrupt situation, while the unemployment rate on the island exceeds 90%. Tourism sector is underdeveloped with only some 25,000 tourists, visiting the island annually. Less than 20% of the population has access to potable water, and 43% is officially connected to the electrical grid. The port, which is used for tourism, container traffic and fisheries is clogged and does not meet basic safety requirements. The road network does not ensure access to the most spectacular sites of the island.

·  The Antananarivo-Antsirabe region: Export processing zone (garment) firms are scattered in and around Antananarivo with a few in Antsirabe. Firms cite the proximity to readily trainable and productive labor, urban and government services and the cooler climate as factors that attract them to locate in this area. There are a couple of privately developed and managed industrial zones but none of them has adequate infrastructure, proper customs and other facilities and services associated with a modern EPZ. The Government is currently supporting the development of a modern industrial zone in Tamatave through a public-private partnership arrangement. There is potential for similar public-private partnerships in developing modern industrial facilities in this pole to overcome the current constraints such as poor infrastructure and logistics. In the ICT sector the Association of Private ICT service providers GOTICOM is actively pursuing discussions to establish an ICT training center and ICT business park in Antanetibe on a public private partnership basis with strong possibilities to mobilize private financing.

·  The Toalognaro region: due to the poor conditions of the road network connecting Toalognaro to Toliary or to Anatanarivo, the Anosy region is landlocked. This situation has created endemic famine situations over the past years, making the 60,000 population of Toalognaro one of the poorest in Madagascar. The region’s main wealth has been, in the past, sisal production, shellfish and litchis exports. The existing port condition, however, severely constrains most economic activity. Solid waste collection covers only 15% of the population’s needs while the sewerage and sanitation system is not functioning. Only 31% of the population has access to electricity; power shortages are often registered. The promise of a large investment in an ilmenite mining operation has stalled most infrastructure investments during the last ten years. Tourism, which represents a promising economic potential, is underdeveloped.

·  Transversal issues to the three regions: Across the country, access to finance is difficult (less than 5% of the population has access to credit) while no specific facilities or services have been set up for medium and small enterprises. Leasing activities are not developed, credit bureaus do not exist and repossession of moveable assets is virtually impossible, given the lack of registry and cumbersome and time-consuming judicial procedures. Business linkages, training on business or sector specific matters generally does not exist, which creates difficult entry conditions for new entrepreneurs. Despite huge potential, tourism development has been very slow and SMEs in tourism have little support. This situation should also be seen as a hurdle to the development of larger firms, which often depend on the provision of products and services from smaller companies. Finally trade and investment promotion activities do not take place in a concerted way. The movability of firms fixed assets during the 2001 crisis shows that the business environment is not conducive enough to attract sustainable and long term investments in Madagascar.

  1. Objectives

The overall purpose of the proposed project is to help provide the adequate business environment to stimulate and lead economic growth in three selected regional poles.

The specific objectives are to assist the Government to: (i) construct and rehabilitate critical infrastructure essential for sustained economic activity in the tourism, manufacturing, agribusiness and mining sectors; (ii) put in place appropriate incentive measures to achieve rapid growth; (iii) develop the instruments to ensure equitable, sustainable growth; and (iv) strengthen the capacity of local authorities to formulate, prepare, implement, and manage medium- and long-term integrated regional development projects.

The key indicators to monitor to measure the impact of the objectives are:

·  The increase in the number of tourists arriving at Nosy Be and Toalognaro airports and ports, as a proxy for growth measurement in the tourism sector via stimulus of micro, small- and medium-sized Malagasy firms;

·  The volume of merchandise and minerals shipped through the Toalognaro and Tamatave ports (proxy for growth measurement in agriculture, mining and manufacturing in Toalognaro and in the Antsirabe –Antananarivo components;

·  The number of new jobs created in the three poles (proxy for shared content of growth).

The Government recently completed its Poverty Reduction Strategy Paper (PRSP) with the objective of reducing poverty by half in ten years. The three key priorities set out by the PRSP are: (i) improving governance; (ii) promoting broad based growth; and (iii) providing security.

The Bank’s Country Assistance Strategy (CAS), which was approved by the Board in November 2003, focused on two projects for FY05 delivery, namely the first Poverty Reduction Strategy Credit (PRSC), which was approved by the Board on July 22, 2004, and the proposed project: the Integrated Growth Poles Project (IG2P).

The IG2P will contribute to the Government’s and Bank’s overarching CAS goal to foster broad based economic growth by focusing on export processing zones (Antananarivo-Antsirabe), the tourism and agribusiness sectors (Nosy Be and Toalagnaro), and the mining sector (Toalognaro). The IG2P will complement ongoing sector reforms, for example, in the telecommunications, power, and transport sectors. It will address constraints in human capital formation, governance, the business environment, institutional capacity and enterprise development identified as impediments to economic and social development. As a project catalyzing an integrated approach, the IG2P will not, however, be a proxy for the definition and implementation of sectoral policies, but will help remove impediments through concrete actions on the ground.

Private sector will use the public investments made under the project to leverage its own investments and reduce its risk for doing business in Madagascar. The IG2P will be a catalyst of private sector investment.

  1. Rationale for Bank Involvement

The Government has requested Bank assistance to prepare and finance the proposed project to stimulate and sustain private sector led growth in the identified three poles. The Bank Group plays a unique role among the donor community in Madagascar: with the largest disbursing portfolio and it is seen as the Government’s main partner for alleviating poverty. It is the only donor with sufficient capacity and resources to take an integrated and multi-sectoral approach to stimulating economic growth. The European Union, the Agence Francaise de Développement, the European Investment Bank, the African Development Bank and the Millennium Challenge Account have also shown some interest in the project, but with a more sectoral focus and with different timelines. While a partnership with other donors interested in the project is likely, no commercial bank would have the ability to provide the width of technical and financial assistance required under the project.

The proposed project is a central element of the Bank’s strategy in Madagascar. It provides a platform for hard and soft infrastructure delivery in a coordinated and integrated manner (as defined in the Africa Region FPSI Strategy); and supports the Government’s decentralization initiative. It further draws on the joint IDA-IFC MSME Program for Africa, intended to achieve greater impact for the client through leveraging of the comparative advantages of each institution. Finally, this project heavily draws on the conclusions of the World Development Report 2005 (“A Better Investment Climate for Everyone”), and the 2005 Madagascar Investment Climate Assessment, which both demonstrate that the investment climate is central to growth and poverty reduction. A better investment climate can be achieved by alleviating constraints and addressing policy-related risks.

  1. Description

The proposed project comprises five components: one corresponds to transversal activities in support to business environment activities, and three correspond to the regional growth poles. The fifth component addresses and includes all activities related to project implementation, evaluation and monitoring. Annex 4 gives a detailed description of the components and activities under the project.