Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 45675 - MG

PROJECT PAPER

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 26.9 MILLION (US$40.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MADAGASCAR

FOR AN

EMERGENCY FOOD SECURITY AND RECONSTRUCTION PROJECT

November 18,2008

Human Development I11 Country Department 1 Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not otherwise be disclosed without

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CURRENCY EQUIVALENTS (Exchange Rate Effective September 20,2008)

Currency Unit - - Ariary (MGA) U S $ 1 SDR 1

- MGA 1,610 - U S $ 1.49 - -

FISCAL YEAR

January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

AEP AFR AGEX BE BNGRC

CAS CDSP C F M C P A R

C R A M

CPAR CPIA DAF

EPP FDL FID

FM FY GIDP G o M GPN HIM0 IAD IBRD I C B I C R IDA IFR IMF IRD

Adduction d 'Eau Potable [drinking water system] Africa Region Agence d 'Exe'cution [Executing Agency] Bureau d'Etudes Bureau National de Gestion des Risques et des Catastrophes [National Bureau for Risk and Catastrophe Management] Country Assistance Strategy Commune Development Support Program Country Financial Accountability Assessment / Country Procurement Assessment Report Commission Inter-Re'gionale d 'Attribution des Marche's [Inter- Regional Commission for awarding o f contracts] Country Procurement Assessment Review Country Policy and Institutional Assessment Directeur Financier et Administratif [Financial and Administrative Director] Emergency Project Paper Fonds de De'veloppement Local [Local Development Fund] Fonds d 'Intervention pour le De'veloppement [Community Development Fund] Financial Management Fiscal Year Governance and Institutional Development Project Government o f Madagascar General Procurement Notice Haute intensite' de main d 'a?uvre [labor intensive] Internal Audit Department International Bank for Reconstruction and Development International Competitive Bidding Implementation Completion Report International Development Association Interim unaudited Financial Report International Monetary Fund Inter-Regional Directorate

i

FOR OFFICIAL USE ONLY

ISR M&E MAP M I S M O P N C B NGO PDO PEFA P M F PIM PlLT P M R PRGF RDSP ROSC RVP SDR SIGFP

SME SOE SPP T I TOR UNDB VAT WBI

Implementation Status Report Monitoring and Evaluation ,

Madagascar Action Plan Management Information System Memorandum o f the President National Competitive Bidding Non-Governmental Organization Project Development Objective Public Expenditure and Financial Accountability Performance Measurement Framework Project Implementation Manual Project Implementing Unit Project Management Report Poverty Reduction and Growth Facility Rural Development Support Project Report on Observance o f Standards and Codes Regional Vice President Special Drawing Right Systime Intkgrk de Gestion des Finances Publiques [Integrated Financial Management Information System] Small and Medium Enterprise Statement o f Expenditures Simplified Procurement Plan Transparency International Terms o f Reference United Nations Development Business Value Added Tax World Bank Institute

Vice President: Obiageli K. Ezekwesili Country Director: Ruth Kagia

Sector Director: Yaw Ansu Acting Country Manager: Jacques Morisset

' Sector Manager: Lynne D. Sherburne-Benz Task Team Leader: Philippe Auffret

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

Madagascar Emergency Food Security and Reconstruction Project

AFRICA

TABLE OF CONTENTS

EMERGENCY PROJECT PAPER (EPP) DATA SHEET ................................... iv

A . Introduction ........................................................................................................ 1

Proposed Bank Emergency Project ......................................................................... 2

B . Emergency Challenge: Country Context, Recovery Strategy and Rationale for

C . Bank Response and Strategy .............................................................................. 3

D . Appraisal o f Project Activities and Benefits and Risks ..................................... 7

E . Implementation Arrangements and Financing Plan ......................................... 11

F . Project Risks and Mitigating Measures ............................................................ 17

G . Terms and Conditions for Project Financing ................................................... 19

Annex 1 . Detailed Description o f Project Components ........................................ 20

Annex 2 . Results Framework and Monitoring ...................................................... 28

Annex 3 . Summary o f Estimated Project Costs .................................................... 33

Annex 4 . Financial Management and Disbursement Arrangements .................... 34

Annex 5 . Procurement Arrangements ................................................................... 45 Annex 6 . Implementation and Monitoring Arrangements .................................... 49

Annex 8 . Project Preparation and Appraisal Team Members ............................... 56

Annex 7 . Government Strategy regarding the FID ............................................... 54

... 111

Madagascar Emergency Food Security and Reconstruction Project

AFRICA

Project ID: P113134

Proposed terms: Credit repayable in 40 years, with a grace period o f 10 years. Expected effectiveness date: December 31,2008

Borrower: Republic o f Madagascar

EMERGENCY PROJECT PAPER (EPP) DATA SHEET

Total Amount: US$40 mi l l ion

Expected implementation period: 3 years

Expected closing date: December 3 1, 201 1

Responsible agency: Fonds d ’Intervention pour le Ddveloppement (FID)

Date: November 18, 2008 Country Director: Ruth Kagia Sector ManagedDirector: Lynne Sherburne-Benz / Yaw h s u Lending instrument: Emergency Recovery Loan (ERL)

Team Leader: Philippe Auffret Sectors: Other social services (35%); Primary education (20%); Sub-national government administration (20%); General water, sanitation and flood protection (1 5%); Roads and highways (10%). Themes: Global food crisis response (P); Social safety nets (P); Social risk mitigation (P); Rural services and infi-astructure (S); Natural disaster management (S) Environmental catenorv: B

(i) increase access to short-term employment in targeted food-insecure areas; and (ii) restore access to social and economic services following natural disasters in targeted

communities.

Short Description:

Madagascar i s facing a very challenging situation created by the combined impacts o f the food price crisis, the o i l price shock, and a devastating cyclone season. Faced with this emergency situation, the Government o f Madagascar has been working with development partners to prepare a coordinated response. This proposed Project i s the safety net component o f the Bank’s three- pronged response: i t seeks to provide support to vulnerable groups who are particularly affected by the crisis, in addition to supporting the Government’s disaster response program.

Specifically, the Project would finance: (i) a cash-for-work program to increase access to short-term employment in targeted food-insecure areas; (ii) community-based infrastructure sub-projects to increase access to social and economic services among participating communities; (iii) restored access to social and economic services in the aftermath o f catastrophic events; and (iv) project management, monitoring and evaluation, and audit.

i v

Source Local Foreign I Total Borrower Total IBRD/IDA Trust Funds Others Total

0.00 0.00 0.00 39.00 1 .oo 40.00

0.00 0.00 0.00 0.40 0.00 0.40

39.40 1 .oo 40.40

(a) The Subsidiary Agreement has been executed o n behalf o f the Recipient and the Project Implementing Entity.

2007 2008 2009 2010 Total IBRD/IDA _ _ _ _ 7.00 13 .OO

(b) The Project Implementing Entity has updated i t s Procedures Manuals, including the Administrative and Financial Manual, and Environmental Procedures Manual, to meet the requirements o f the Project, and the updated Procedures Manuals have been approved by the Association, and adopted by the Recipient and the Project Implementing Entity.

201 1 2012 13 -00 7.00

(c) The Additional Legal Matter consists o f the following, namely, that the Subsidiary Agreement has been duly authorized or ratified by the Recipient and the Project Implementing Entity, and i s legally binding upon the Recipient and the Project Implementing Entity in accordance with i t s terms.

Trust Funds

V

_ _ _ _ _- -- -- _- Does the emergency operation require any exceptions f rom Bank policies? Have these been approved by Bank management?

Yes [ ] N o [XI Yes [ 1 No [ 1

Are there any critical r isks rated “substantial” or “high”?

What safeguard policies are triggered, if any? Yes [ ] N o [XI Environmental Assessment (OP/BP 4.01)

A. Introduction

1. This Project Paper seeks the approval o f the Executive Directors to provide a credit in the amount o f SDR 26.9 mil l ion (US$40.0 mi l l ion equivalent) to the Republic o f Madagascar for a proposed Emergency Food Security and Reconstruction Project.

2. Madagascar i s facing a very challenging situation created by the combined impacts o f the food price crisis, the o i l price shock, and a devastating cyclone season. While rice represents one third o f the consumption basket among Madagascar’s poorest households, i t s domestic price has been steadily increasing and i s expected to further substantially increase during the last quarter o f 2008 as domestic prices align with international prices between harvest seasons. Oil prices increased, and while prices have lately declined, i t wil l take some time before this decline trickles down to end users. Ultimately, the 2008 cyclone season was particularly devastating with damages estimated at US$174 million. ’ 3. Faced with this emergency situation, the Government o f Madagascar has been working with development partners to prepare a coordinated response. A supplemental Budget was adopted in early July 2008 which included fiscal measures to alleviate the strain on the population caused by the combined impacts o f the food and o i l crises and the cyclones. Madagascar’s development partners simultaneously announced a number o f accompanying measures. The Bank developed a three-pronged response. First, a budget support operation amounting to US$lO mi l l ion helped alleviate the immediate impact o f the crises. Second, a US$30 mi l l ion additional financing to the existing rural project aimed at increasing agricultural production in the medium-term. This proposed Project i s the safety net component o f Bank’s response: i t seeks to provide support to vulnerable groups who are particularly affected by the crisis.

4. The proposed Project would finance a cash-for-work program to increase access to short-term employment in targeted food-insecure areas. The Project would also seek to restore access to social and economic services (schools, health centers, small roads, water systems, etc.) in the aftermath o f catastrophic events, including cyclones. Finally, the Project would finance community-based social infrastructure sub-projects in order to increase access to social and economic services among the poorest communities.

5. The proposed Project would be implemented by the Fonds d’htewent ion pour le De‘veloppement (FID), which has a strong record o f successfully implementing similar emergency r e l i e f projects.

Government o f Madagascar, M a y 2008, “Damage, Loss, and Needs Assessment for Disaster Recovery 1

and Reconstruction after the 2008 Cyclone Season in Madagascar.”

1

B. Emergency Challenge: Country Context, Recovery Strategy and Rationale for Proposed Bank Emergency Project

6. With stable political and macro-economic environments, Madagascar’s economy has grown about 6 percent annually over the period 2003-08. This economic performance has led to improved social indicators, particularly in education. However, Madagascar remains one the poorest countries in the world, with an average income per capita o f US$330. Two-third o f i t s households are living in poverty. Chronic malnutrition (stunting) remains high, at about 44 percent, while one third o f children are underweight. Consequently, Madagascar’s population i s particularly vulnerable to shocks as any additional hardship can have devastating effects on an already impoverished population.

7. A recent study by the IMF has identified Madagascar as one o f the sub-Saharan countries most affected by the combined impact o f the fue l and food price increases. Despite an appreciation o f the local currency and, in July 2008, the application o f macroeconomic measures intended to lessen the impact o f food prices on the population (rice imports at subsidized prices, decrease in VAT on rice), the domestic price o f rice -- which represents one third o f the consumption basket among Madagascar’s poorest households -- has been steadily increasing. In Antananarivo, the price o f rice increased by 15 percent from August 2007 to August 2008. The poorest segments o f the population, especially those who are net consumers o f rice in rural areas (which i s particularly the case in the South and South East regions) and those who l ive in urban areas, have been most affected by this food price increase. This situation i s expected to worsen during the last quarter o f 2008, as the country relies on rice imports to fill the gap between domestic consumption and production between harvest seasons and the domestic price o f rice aligns with international prices (Figure 1).

Figure 1 : Domestic and International Prices of Rice 1,200

1,100

1,000

900

800

700

600

500

400

300

(US$ per tonne) 1,200

1,100

1,000

900

800

700

600

500

400

300 Jaw36 J11-06 Jam07 J11-07 Dec-07 - Domestic price - - lntemtioml price (import panty)

Source: IMF staf f

2

8. The impact o f the food and o i l crisis i s compounded by the fact that three consecutive cyclones have struck Madagascar in early 2008 affecting 17 o f 22 regions. These cyclones have caused extensive physical destruction to the country’s infrastructure, and eroded the livelihoods o f an already struggling population. A comprehensive damage, loss and needs assessment estimated the total damages to be US$174 mi l l ion while losses were estimated to be another US$l58 million.2 The poorest segments o f the population have been particularly affected by the cyclones, through the loss o f family members, houses, or assets and tools. The recent cyclones have also damaged a large number o f schools, which need to be reconstructed or rehabilitated. There i s also an urgent need to rehabilitate or reconstruct essential infrastructure, including feeder roads, bridges, and micro irrigation schemes, which are essential to food production and distribution.

9. Faced with these crises, the Government o f Madagascar has been working with development partners to prepare a coordinated response. The Government adopted a supplemental Budget [Loi des Finances rectz~cative] in early July 2008, which includes some selected fiscal measures to alleviate the impacts o f the food and o i l crises and the cyclones on the population, including a temporary reduction on the V A T on rice and an allocation o f additional fiscal resources to social safety nets. Simultaneously, Madagascar’s development partners announced a number o f accompanying measures including supplemental support to the Budget support, and additional resources to increase domestic food production in the medium-term and strengthen the existing social protection programs to protect the most vulnerable groups in the short-term (cash-for- work and school nutrition programs). The Government has also created a supervisory body, the Office for Emergency Prevention and Management [Cellule de Prevention et de Gestion des Urgences, or CPGU] chaired by the Prime Minister, to monitor closely the implementation o f these measures.

C. Bank Response and Strategy

10. In line with the overall response o f Madagascar’s development partners, the Bank has worked with the Government to propose this Project as the third component o f i t s three-pronged response. In August 2008, a budget support operation (US$lO million) contributed to alleviate the immediate macroeconomic impacts o f the crises. In October 2008, the Bank provided additional financing (US$30 million) to the existing IDA’S rural project to increase agricultural production and productivity in the medium-term. The proposed Project seeks to provide a safety net in targeted food-insecure areas and to rehabilitate and reconstruct the damages created by cyclones in targeted communities.

1 1. The Global Food Response Program (GFRP) Secretariat found that the safety net component o f the proposed Project (US$12.3 mi l l ion out o f US$40 million) i s consistent

Government o f Madagascar, M a y 2008. Ibid. 2

3

with the objectives and modalities o f the GFRP Framework and should be considered as part o f GFRP response under IDA.3

12. The implementing agency, the Fonds d ’Intervention pour le De‘ve‘loppement (FID), was established in 1993 to implement community development projects. The proposed Project supports i t s refocusing on disaster crisis management, a task it has already been undertaking since 2000. The FID operates efficiently, and i t has already established the staff and Manuals o f Procedures to implement the scheduled activities.

Project Development Objectives

13. The Project Development Objectives are to: (i) increase access to short-term employment in targeted food-insecure areas; and (ii) restore access to social and economic services following natural disasters in targeted communities.

14. The attainment o f these objectives would address the emergency challenges described in Section By by (i) contributing, through the provision o f cash-for-work, to improve food consumption in targeted food-insecure areas; and (ii) lessening the impact o f natural disasters on vulnerable groups by rehabilitating and reconstructing basic social and economic infrastructures which have been damaged by cyclones.

Summary of Project Components

15. Annex 1):

The Project would comprise the following four components (further described in

Component 1: Social safety net (cash-for-work) (US$12.3 million). This component would finance a cash-for-work program to increase access to short- term employment in targeted food-insecure areas, as identified by the National Bureau for Risk and Catastrophe Management [Bureau National de Gestion des Risques et des Catastrophes, or BNGRC] - the national office responsible for officially defining the catastrophe-affected areas. By providing employment, this component would raise disposable income, and thus improve food consumption o f vulnerable groups, including women. The program would use local groups to determine which members o f the community are most in need o f the cash-for- work program, while ensuring that women are fairly represented among benef i~ iar ies.~ Sub-projects would be selected by local authorities in collaboration with communities. They would include prevention o f soil erosion, feeder roads, small bridges, and small irrigations schemes5, which would

For more details, see W o r l d Bank, June 26, 2008, “Framework Document for Proposed Loans, Credits, and Grants in the amount o f US$1.2 b i l l i on equivalent for a Global Food Crisis Response Program,” Report No. 43841.

Female participation has been above 50 percent throughout the implementation o f the US$178 m i l l i on IDA-f inanced Community Development Fund Project (see Annex 1). A Protocol would be established between the FID and the ongoing Rural Development Support Project to

take advantage o f synergies and complementarities between the two projects in this area.

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4

5

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contribute to improved food distribution and production. This component would also provide training to the agencies involved in i t s implementation.

Component 2: Community-driven basic infrastructure (US$S.O million). This component would finance community-based infrastructure sub-projects in order to increase access to social and economic services among participating communities. Based on the recent Commune Census, regional development plans [Plans Re‘gionaux de De‘veloppement] and input from regional and local representatives, the Project - which would finance anti-erosion sub-projects, water points, feeder roads, micro irrigation schemes, etce6 -- would target the poorest communities. Selection o f sub-projects would result from a participatory process. This component would also provide training to the agencies involved in i t s implementation.

0 Component 3: Rehabilitation and reconstruction in response to natural disasters (US$12.8 million). This component would restore access to social and economic services in the aftermath o f catastrophic events, including cyclones. This component would be available to communities in areas identified as catastrophe- affected areas by the National Bureau for Risk and Catastrophe Management. Representatives o f the region, commune and communities would prioritize sub- projects most in need o f rehabilitation or reconstruction.. Special attention would be given to rehabilitating cyclone-damaged health facilities and nutrition sites. As these works would be implemented over three years, they would encompass both immediate needs (post 2008 cyclonic season) as well as expected needs in the next two years. Recommendations from the M a y 2008 Damage, Loss and Needs Assessment Report prepared by the Government o f Madagascar have been incorporated in the Operating Manual prepared for this Project, particularly those related to construction standards and risk management.’ This component would also provide training to the agencies involved in i t s implementation.

0 Component 4: Project management, monitoring and evaluation, and audit (US$6.9 million). This component would finance (i) project management, operating costs and training; (ii) technical advisory services such as activities to support communities in good proposal development; and supervision o f sub-proj ect implementation; (iii) media information campaigns and communication; (iv) financial and technical audits and monitoring and evaluation including development o f FID’s website; and (v) equipment and vehicles.

This component would not finance sub-projects in areas under local governments’ (communes) responsibilities (such as health centers o r schools), as such activities are expected to be implemented through a decentralization program currently under preparation.

and Reconstruction after the 2008 Cyclone Season in Madagascar.” Government o f Madagascar, M a y 2008, “Damage, Loss, and Needs Assessment for Disaster Recovery 7

5

Eligibility for Processing under OP/BP 8.00

16. The flexible and accelerated procedures provided under OP/BP 8.00 are vital to the timely implementation and the success o f the Project. The domestic price o f rice which has been increasing i s expected to further substantially increase by the end o f 2008. With the school year just beginning, i t i s also vital to start rehabilitating cyclone- damaged schools and classrooms as quickly as possible to ensure that this work i s underway before the next cyclone season.

17. The Project would contribute to effective emergency response in support o f the following O P B P 8.00-sanctioned objectives: (a) supporting measures to mitigate the potential effects o f the imminent food and o i l crises; (b) rebuilding and restoring physical and social and economic infrastructures in the aftermath o f the cyclones. Without the provisions o f O P B P 8.00, Project resources would not be mobilized quickly enough to address the urgent needs o f the population.

Consistency with Country Strategy (CAS)

18. The proposed Project i s fully consistent with the March 2007 Country Assistance Strategy (CAS), which outlines IDA’S support to the Government o f Madagascar for the period 2007-11. The CAS supports the implementation o f the Government’s poverty reduction strategy: the Madagascar Action Plan 2007-12 (MAP). The Project would address key challenges outlined by the MAP, including: (i) improving nutrition and food security; (ii) improving support for very poor and vulnerable segments o f the population; and (iii) restoring basic social and economic infrastructure in the aftermath o f natural disasters such as cyclones.

Expected Outcomes

19. The expected outcomes o f the Project are to: (i) increase access to short-term employment in targeted food-insecure areas; and (ii) restore access to social and economic services following natural disasters in targeted communities. Project development outcomes, outcome indicators, intermediate results and intermediate result indicators, and arrangements for results monitoring for each component are presented in Annex 2.

20. More specifically, to measure success towards the achievement o f the outcome indicators, the proposed Project would: (i) finance a social safety net program to provide cash-for-work manual labor to at least 160,000 beneficiaries among poor segments o f the population in targeted food-insecure areas; (ii) complete the rehabilitation and reconstruction o f at least 75 percent o f the initiated sub-projects within six months.

21. The expected results o f the Project are to: (i) provide 7.8 mi l l ion person-days o f cash-for-work manual labor in targeted food-insecure areas; (ii) complete 1,600 sub- projects under the social safety net program; (iii) ensure that women represent at least hal f the beneficiaries under the social safety net program; (iv) complete 152 community-

6

based sub-projects to benefit 76,000 beneficiaries under the community-driven basic infrastructure component; (v) rehabilitate or reconstruct 2 10 social and economic basic infrastructures damaged by natural disasters.

22. Regarding Project implementation, expected results are to: (i) maintain management costs below 15 percent o f cumulative disbursement; (ii) complete at least 75 percent o f sub-projects within the contracted period; (iii) have unqualified financial audits; and (iv) complete assessments o f the social safety net and the post-cyclone reconstruction components o f the proposed Project.

D. Appraisal of Project Activities and Benefits and Risks

23. the proposed Project activities are detailed below:

The economic, financial, technical, institutional, fiduciary, and social aspects o f

Economic and Financial Assessment. Sub-projects that would be financed under the Project are not known a priori, as they are chosen by communities. As such, i t i s difficult to assess their economic and financial rates o f return. However, the economic analysis o f sub-projects financed by a project with similar activities (the US$178 mi l l ion IDA-financed FID-implemented Community Development Project) shows high rates o f economic and financial returns.'

Technical Assessment. The Project would promote the use o f simple, appropriate, and environmentally sound technologies and investments so that sub- projects could be operated and maintained easily. The Project would benefit from the Manuals o f Procedures o f the FID, which result from over 15 years o f accumulated experience. Construction works would conform to existing agreements with sectoral ministries [Protocoles d 'Accord] and would apply national construction standards enhanced with the risk-reduction norms established in the 2008 post-cyclone assessment rep01-t.~ The process outlined in the Manuals o f Procedures would continue to ensure that sub-projects are aligned with sectoral strategies. When appropriate, the Project would also provide the skills necessary to use new technologies. The Manuals o f Procedures also outline the steps to be followed in sub-project implementation for each component in each area o f investment.

0 Institutional Assessment. The FID would be responsible for Project implementation. A General Manager [Directeur Ge'nkral] i s responsible for day- to-day Project implementation. S h e i s assisted at the central level by a General Directorate composed o f three directors, respectively in charge o f financial management, operations, and monitoring and evaluation, and six inter-regional offices. The FID has consistently demonstrated a strong capacity to implement past projects (see Para. 25).

See Fruchard V., March 2005. "Revue a Mi-parcours du Projet de Dkveloppement Communautaire. ))

Government o f Madagascar, May 2008. h id . 8

9

7

0 Financial Management Assessment:

(i) In accordance with Bank policy and procedures, FID’s Financial Management (FM) arrangements have been reviewed to determine whether they are acceptable to the Bank. This review amounts to an updated evaluation, since the FM system o f the FID has already been assessed in the context o f the ongoing Community Development Project (Additional Financing: Credit 3498-2 MAG). The overall conclusion o f this review is that the national and inter-regional directorates o f the FID continue to maintain a sound financial management system in line with the requirements o f OPBP 10.02. However, in order to strengthen further i t s financial management system, the FID would need to update the existing Administrative and Financial Manual to include the revised Chart o f Accounts [Plan Comptable], institute changes in the f low o f funds as agreed with IDA, and incorporate models o f quarterly Interim unaudited Financial Reports (IFRs) and procedures, especially those required for sub- projects. The content and formats o f IFRs was decided during negotiations. The update o f the Administrative and Financial Manual in a manner satisfactory to IDA i s a condition o f effectiveness.

The FM risk i s rated moderate.

(ii) Beneficiary communities would be identified during Project implementation. Consequently, an FM assessment o f communities cannot be conducted. However, a review o f the Manuals o f Procedures indicate that FM arrangements for communities are satisfactory, as evidenced by the fact that (i) the FM arrangements for beneficiary communities (including accounting system, internal control procedures, external audit) are adequate; (ii) appropriate measures are included to strengthen communities’ FM capacity and to monitor FM activities during subproject implementation. As a condition o f effectiveness, the Manuals would be updated to include the following measures: (i) review and approval o f the progress report and financial report submitted by communities before the release o f the third installment; and (ii) wide dissemination o f the financial report (source and uses o f funds) after the use o f each installment (see Annex 1).

(iii) To mitigate risks raised by the limited capacity o f the Auditor General [Chambre des Comptes] the audit o f the project accounts would be carried out annually by an international auditing firm deemed acceptable to IDA. This audit would be conducted in accordance with International Standards o f Auditing. The auditors would be recruited within three months after the effectiveness date. To strengthen their capacity, the auditors from the Auditor General would be able to participate in this audit but they should be properly supervised by the staff members o f the selected international auditing firm. The terms o f reference o f the audit would be reviewed by IDA to ensure the adequacy o f the audit scope. The auditors would be required to: (i) express an opinion on the project financial statements; (ii) carry out a comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit report would be submitted to IDA, together with the management letter and management’s response to the letter, no later than 6

8

months after the end o f each financial year. N o significant problems have been encountered to date in terms o f audit covenants in Madagascar and al l audit reports related to Bank-financed projects have been received in due time;

(iv) To efficiently address the governance and accountability challenges o f the proposed Project and to ensure high level o f transparency and accountability, measures have been taken to strengthen the FM arrangements o f this project at both Project- and community-level including recommendations from the Anti- Corruption Guidelines.”

0 Procurement Assessment: The overall procurement risk o f the project has been rated low. The procurement assessment showed that the FID has proficient procurement staff to prepare adequate procurement documentation and implementation o f contracts. The procurement staff currently in place i s conversant with the Public Procurement Act No. 21 o f 2004, and World Bank Procurement Guidelines and Consultants’ Guidelines o f M a y 2004, revised October 2006. The summary o f Procurement Capacity Assessment Report i s available in project file.

Social Assessment. The social benefits from the Project are expected to be very high. First, the cash-for-work program i s a mechanism which, by offering wage rates below the market rate, only attracts the most vulnerable segments o f the population. In addition, this social safety net would be monitored to ensure that at least hal f the beneficiaries are women. Last but not least, a day care system would continue to be implemented to allow single mothers to leave their children with older women (who would also receive the program wage rate). This would allow mothers to benefit from the program without leaving their children unattended. Second, sub-projects implemented under the community-driven basic infrastructure component would target poor communities while the selection o f sub-projects would be done by a highly participatory social process among community members. Third, the rehabilitation and reconstruction in response to natural disasters component would have a very high social rate o f return as reconstructing social and economic infrastructure is an integral part o f rebuilding communities in the aftermath o f a catastrophic event.

Lessons Learned from Previous Country Experience

24. The Project would be implemented by the Fonds d’Intewention pour le Dkveloppement (FID) which has accumulated years o f experience in implementing cash- for-work programs for vulnerable groups (including women), supporting community development and building small-scale community-driven social and economic infrastructures on a large scale, and implementing rehabilitation and reconstruction in the aftermath o f cyclones. In doing so, the FID has continuously revised i t s procedure manuals in order to incorporate lessons derived from experiences. The manuals would be further revised for the proposed Project, in close collaboration with FID management so

lo World Bank. October 2006. “Anti-Corruption Guidelines.”

9

that the proposed Project incorporates the latest lessons from the US$178 mi l l ion IDA- financed Community Development Fund Project which the FID has been implementing since 2001. For example, the labor intensity o f sub-projects in the cash-for-work program was decreased to 75 percent (down from 80 percent under the Community Development Fund Project), as i t was deemed too stringent by practitioners. The revised manual o f procedures would also incorporate recommendations from the June 2008 review o f labor intensive public works in Madagascar” which were discussed in detail with the FID during project preparation. The revised manual would also incorporate recommendations from the June 2008 post-cyclone damage assessment report,12 including the mainstreaming o f the targeting mechanism (through a close collaboration with the National Bureau for Risk and Catastrophe Management), and the incorporation o f cyclone-proof norms and standards in the design o f sub-projects.

Environmental Category and Safeguards

25. The environmental classification o f the Project i s Category B.

26. The FID adopted an Environmental Manual as an outcome o f an environmental study conducted in February 1999. This manual has been further refined to incorporate the lessons learned from years o f accumulated experience with the implementation o f the Community Development Project. More recently, the manual was revised to incorporate the lessons from an ex-post environmental impact assessment o f sub-projects recommended by the September 2007 Quality at Entry Assessment (QEA) for the second additional financing to the Community Development Project. The manual has been further updated in preparation for the proposed Project.

27. The Environmental Manual includes an assessment o f environmental impacts and mitigation measures o f sub-projects. More specifically, this manual describes: (i) the screening procedures and classification process o f sub-proj ects; (ii) the required mitigation measures; (iii) the monitoring and evaluation system to follow up on the environmental impact o f sub-projects and on the implementation o f mitigation measures. I t also defines the roles and responsibilities o f the entities involved in sub-project preparation and implementation, including community associations, local consulting f i rms, construction f i rms, etc.

28. The FID has environmental specialists located in the General Directorate and in each Inter-Regional Directorate. This capacity would be maintained under the proposed Project.

29. Activities under the proposed Project would be o f the same scale and scope as those implemented under the Community Development Project also implemented by FID. Therefore, since there would be no new or unanticipated impacts, existing

N. Andrianjaka, and A. Milazzo, June 2008, “Travauxpublics a haute intensite‘ de main d’a?uvre (HIMO)

Government o f Madagascar, May 2008, hid. pour la protection sociale a Madagascar: probl2mes et options de politique.” 12

10

environmental safeguards are adequate. The FID has sufficient resources and capacities to manage the safeguard aspects o f the Project.

30. that OP/BO 4.12 would not be triggered.

The proposed Project would not lead to any resettlement or land acquisition so

3 1. The proposed Project does not involve any exceptions to Bank policies.

E. Implementation and Financing Arrangements

32. Project implementation. The Fonds d ’Intervention pour le De‘veloppement (FID) has been selected to implement this Project for several reasons. First, i t i s the only agency with the readily available capacity and a track record o f experience to implement the proposed Project under emergency conditions. Under i t s current structure, the FID has the capacity to commit and disburse about US$20 mi l l ion per annum on a permanent basis. Second, the FID has extensive accumulated experience with the implementation o f IDA-financed projects. Since i t was established in 1993 as an association o f public interest [“association prive‘e Li but non-lucratf reconnue d ’utilite‘ publique”] with administrative and financial autonomy, the FID has successfully implemented several IDA-financed projects, including the US$178 mi l l ion IDA-financed Community Development Fund Project, which i s closing on December 31, 2008. During the implementation o f this project, the FID has been an effective mechanism for responding to emergencies through the prompt implementation o f a cash-for-work program for vulnerable groups, and for rehabilitating and reconstructing basic infrastructures in the aftermath o f catastrophic events, including cyclones. Third, the Government i s currently using the FID to build schools to implement the Education-For-All Fast Track Initiative (EFA FTI). Fourth, the Government o f Madagascar considers the FID to be a critical mechanism in responding to catastrophic events and remains committed to continue financing the FID from domestic resources (see Annex 7). During Project implementation, the FID wil l ensure that i t operates efficiently and that it has the staff numbers and ski l ls appropriate for implementing the scheduled activities.

11

33. Project oversight. Policy guidance and overall project oversight would be the responsibility o f the Board o f Directors o f the FID under the chairmanship o f the Prime Minister. The Board o f Directors would be comprised o f nine members, including one representative nominated by the Prime Minister, and representatives from the Ministry o f Finance, mayors o f rural communes, c iv i l society, and socio-professional organizations. The Government indicated that the composition o f FID's Board o f Directors would be revised for the proposed Project so that i t includes the Executive Secretaries [Secre'taires Exe'cutif] o f the BNGRC and the Office for Emergency Prevention and Management [Cellule de Pre'vention et de Gestion des Urgences, or CPGU].

34. Financial management of FID. The Director o f Administration and Financial Management (Directeur des Affaires FinanciBres et Administratives, or DAF) at the central level i s in charge o f the financial management o f the Project, including budgeting, maintenance o f records and accounts o f al l transactions related to the General Directorate, consolidation and production o f the Project financial statements and quarterly Interim unaudited Financial Reports (IFRs), and administration o f the Designated Account. The Inter-Regional Directorates manage disbursements from regional bank accounts, maintain records and accounts for al l transactions under their jurisdiction, send the balance sheet to the General Directorate for consolidation on a monthly basis and prepare financial and other basic information on Project management/monitoring as required by the General Directorate. To do so, each Inter- Regional Directorate would have an accountant in charge o f regional accounts. These accountants are already in place.

35. The FID's operational Manuals o f Procedures have been updated for this Project. Under each component o f the Project, a Manual o f Procedures would outline the process for sub-proj ect implementation including the identification o f beneficiaries. There would be three operational manuals o f procedures: (i) the Manual o f Procedures for Social Protection [Manuel Protection Sociale]; (ii) the Manual o f Procedures to implement community-based sub-projects [Manuel Projets Communautaires]; and (iii) the Manual o f Procedures for post-cyclone reconstruction [Manuel Reconstruction et Rkhabilitation Post-Catastrophe] . The updated operational Manuals o f Procedures have been submitted to IDA prior to negotiations.

Operational Manuals o f Procedures. l3

36. The operational Manuals o f Procedures would ensure that the FID continues to apply the policies, standards and norms defined by sectoral ministries. For example, schools would be reconstructed and rehabilitated in accordance with standards defined by the Ministry o f Education, and updated following the M a y 2008 Damage, Loss and Needs Assessment Report (see above). The FID would also continue to implement existing agreements with sectoral ministries ["Protocoles d 'Accord"], which specify the rights and responsibilities o f each party in sub-proj ect identification and implementation, and which demand a close coordination with District Chiefs and decentralized ministerial staff at the local level.

The Manuals of Procedure consist o f three operational Manuals of Procedure (one per Project 13

component), one Environmental Manual of Procedures and the Administrative and Financial Manual.

12

37. Project cost and financing. Total Project cost, including taxes and duties, i s estimated at US$40.4 million equivalent, with the following breakdown: US$40 mi l l ion provided by IDA, and US$0.4 million provided through community contributions either in cash or in kind to sub-projects. Table 2 provides a breakdown o f estimated costs. Further details are provided in Annex 3.

I 2. Community-driven basic infrastructure I 8.00 I 0.40 1 8.40 I

38. Disbursement. The project would use the report-based method. For the implementation o f this Project a Designated Account would be opened in a local commercial bank under conditions satisfactory to IDA. Denominated in US$, disbursements from the IDA credit would be deposited on this account to finance 100 percent o f al l expenditures eligible under the Credit. Disbursement from the Designated Account would be done based on quarterly Interim Financial Reports (IFRs). Under this disbursement method, a forecast o f project expenditures covering a period o f six months would be agreed between FID and IDA. The recipient may request an advance for an amount not exceeding this cash forecast. The IFRs would be submitted and reviewed by IDA to confirm that expenditures are eligible.

39. To ensure prompt payment o f contractors and suppliers operating in the regions, the borrower may open inter-regional bank accounts (to be managed by each Inter- Regional Directorate) in local commercial banks. Denominated in local currency (MGA), disbursements from the Designated Account (IDA Credit) would be deposited in this account to finance 100 percent o f a l l expenditures agreed with IDA and eligible under the Credit. The init ial advance paid to each inter-regional bank account would represent funds covering no more than 30 days’ estimated expenditures based upon submission o f satisfactory budgeted work plans. Subsequent payments would be based on Statement o f Expenditures (SOEs) submitted by Inter-Regional Directorates after appropriate authorization and approval by FID. The Inter-Regional Directorates would submit expenditure reports to the General Directorate, indicating sources and uses o f funds and justifying the use o f funds, and accompanied by reconciled bank statements. These reports would be provided at least on a monthly basis.

40. To implement eligible subprojects under component 2 “Community-driven basic infrastructure” and component 3 “Rehabilitation and reconstruction in response to natural disasters” and ensure timely account could be opened in a regional FID bank accounts.

payment o f contractors and suppliers, a Community bank local commercial bank to receive IDA funds from the inter- The transfer o f funds to these community bank accounts

13

would be made as follows: (i) 30 percent upon signature o f the contract/convention between FID and Communities; (ii) 30 percent upon notification o f the enterprise in charge o f the works; (iii) 30 percent based on physical progress (at least 50 percent o f the works have been achieved) after appropriate authorization and approval by the FID; and (iv) 10 percent upon receipt o f a completion certificate.

41. The Designated Account would be replenished on the basis o f quarterly IFRs provided to IDA by the FID General Directorate, justifying that expenditures are eligible for financing under the Credit. The minimum application size for direct payments to be withdrawn directly from the Credit Account, and special commitments, i s 20 percent o f the amount advanced to the related Designated Account.

42. Annex 4 provides disbursement arrangements and a disbursement schedule.

43. Procurement arrangements and procurement plan. Procurement o f goods and services would be carried out as stated in the Financing Agreement, the Project Agreement, and FID’s Manual o f Procedures, and would be undertaken in accordance with World Bank Procurement Guidelines for the procurement o f goods and works under IDA Credits o f M a y 2004 (as revised in October 2006) and World Bank Guidelines for Selection and Employment o f Consultants by World Bank Borrowers o f M a y 2004 (as revised in October 2006). The following procurement methods would be applied to the Project: international competitive bidding, national competitive bidding, national shopping, and community participation for goods and works. The selection o f consultants would be done through: quality and cost-based selection, least cost selection, single source selection, procedures set forth in paragraphs 5.2 and 5.3 o f Consultant Guidelines for the selection o f individual consultants, and procedures set forth in paragraphs 3.16 and 3.21 o f Consultant Guidelines for the selection o f NGOs and service delivery contractors for consultancy services and community activities. Procurement would be conducted in accordance with the 18-month Procurement Plan agreed upon during negotiations. Procurement arrangements are further described in Annex 5.

44. Supervision, and monitoring and evaluation arrangements. The FID has an adequate monitoring and evaluation system which has been progressively upgraded during the implementation o f the IDA-financed Community Development Project. The system includes modules on: (i) management o f beneficiary request from the time o f receipt until the completion o f works; (ii) management o f al l documents related to sub- projects implementation (from selection o f beneficiaries and identification o f sub-projects to their completion) in compliance with the process outlined in the Manuals o f Procedures; (iii) management o f the annual work program; (iv) management o f contracts with local consulting f i rms, small and medium enterprises (SMEs), and NGOs; (v) preparation o f monthly and quarterly reports; and (vi) monitoring performance o f outcome and intermediate results indicators. The FID’s Management Information System i s linked to i t s accounting system.

45. The Project would also finance (i) a technical audit in 2010, (ii) an impact evaluation of the community-driven basic infrastructure component o f the Community

14

Development Fund Project (the baseline has already been completed) so that lessons can be drawn to improve on component 2 o f the proposed Project; and (iii) mid-term review o f the cash-for-work and post-cyclone reconstruction components.

46. Closing date and implementation schedule. The closing date o f the Project would be December 3 1 , 201 1. Annex 6 provides an implementation schedule for the f i rst 18 months.

47. Coordination with other IDA-financed projects. Table 3 indicates IDA- financed Projects which are related to the proposed Project.

48. These projects are related to the proposed Project as follows:

Community Development Project (US$178 million): As stated above, the Project would benefit from FID’s successful implementation o f the Community Development Project. Activities financed by the Community Development Project already included a cash-for-work program, implementation o f community- based small infrastructures and basic infrastructure reconstruction in response to natural disasters, among others. As such, the Manuals o f Procedures developed for the Community Development Project have been updated and can be used for this Project.

Supplemental Financing to Fifth Poverty Support Credit (US$lO million): The Supplemental Financing to the Fifth Poverty Support Credit i s one component o f IDA’s three-pronged response to Government’s request to donors to help alleviate the impact o f the food price crisis (see Para. 10).

Additional Financing to Rural Development Support Project (RDSP) (US$30 million): The Additional Financing to the RDSP i s another component o f IDA’s

15

three-pronged response to Government’s request to donors to help alleviate the impact o f the food crisis (see Para. 10). The RDSP helps finance productive investments including the rehabilitation o f irrigation schemes, and the additional financing would continue to do so. Historically, the FID has financed the rehabilitation o f micro irrigation schemes. A Protocol would be established between the FID and the ongoing Rural Development Support Project to take advantage o f synergies and complementarities between the two projects.

0 Commune Development Support Program (CDSP) (US$130 mi l l ion o f which US$26 mi l l ion from IDA): The proposed CDSP i s consistent with Madagascar’s incipient decentralization strategy, which seeks to strengthen the capacity o f local governments (communes) to provide basic social and economic infrastructure at the local level. The Government has created a public agency (the Fonds de DBveZoppement Local or FDL) which wil l build the capacity of, and transfer funds to, communes to implement sub-projects in areas under their responsibilities. The present proposed Project would complement local government activities in the aftermath o f catastrophic events.

49. Alternatives considered and reasons for rejection. During Project preparation, the Project team discussed the possibility o f substituting the cash-for-work program with a cash or in-kind (rice ration) program to the most poor which would be a first-best solution. This option was rejected because a cash or in-kind program does not currently exist and given the urgency o f the crisis, i t was more appropriate to use the existing cash- for-work program successfully implemented by the FID since 2001,

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F. Project Risks and Mitigating Measures

50. The specific country-, sector- and project-specific r isks that could jeopardize the success o f this Project are summarized in the following table, along with mitigation measures.

Rlsk factors

I. Country- andlc Macroeconomic Framework

Country Engagement with the World Bank

Country Governance

Systemic Corruption

Financial management at the country level

Description of risk

Sub-National Level Risks External shocks - Terms of Trade (oil, rice)

Appreciation in the exchange rate

Continued low revenue generation.

Maintaining strong government ownership o f the development program (An ambitious and far- reaching development strategy -Madagascar Action Plan - i s in place since late 2006. This has strong ownership and was developed in a fully participatory way.)

Weak institutional capacity

There are concerns about conflict o f interests within highest level of Government. At the same time, the World Bank Institute’s governance indicators place Madagascar ahead o f most low-income countries, especially on controlling corruption. Madagascar i s among very few low-income countries in the 50th- 7Sth percentile o f the Composite Governance Indicator, up from the 4gth percentile rank in 2003.

Questionable reliability o f accounting and reporting system (PFM) due to cumbersome and ineffective expenditure process, and ineffective internal controls.

Mitigation measures

1 IMF PRGF program; . Prudent fiscal controls; . Tax reforms; . Extra financial and technical support from donors to respond to external shocks.

. Increased support from international community to the implementation o f the MAP; . Technical and financial support to Government for further articulation o f sectoral strategies as part o f the MAP; . Good support from donors for putting in place a comprehensive M&E system o f the MAP.

. PEFAs are carried out every two years, the last one was completed in FY08;

IDA i s supporting the first and second Governance and Institutional Development Projects which focus on governance reforms.

. T h e Government o f Madagascar has demonstrated continued commitment to fighting corruption, as evidenced by its increased TI ranking and WBI governance indicators;

m An anticorruption program and a functioning anticorruption agency (BIANCO) are in place.

These issues are being addressed through the ongoing PFM reforms supported by IDA (Governance and Institutional Development Project) and other development partners;

Development partners continue to support the GoM priority action plan for public finance reforms including capacity building o f key line ministries in the area o f public financial management.

Project design Project not reaching intended beneficiaries . Targeting mechanisms based on transparent multi-stage processes with participation o f authonties and community leaders and poverty

M

L

M

M

M

M

17

Risk factors

Financial management o f grants at the community level

Accounting and internal control o f FID

Auditing

Social and Environmental Safeguards

111. Overall Risk

Description of risk

Weak technical design of sub-projects

Weak F M capacity o f communities to manage grants to implement sub-projects

Outdated Chart o f Accounts

Audit may not be conducted in compliance with international auditing standards

Environmental impacts o f sub-projects

icluding Reputational Risks)

Mitigation measures

proxies (see Annex 1)

1 Technical design follows national norms and standards; - FID has 15+ years o f proven experience in ensuring adequate technical design o f sub- projects.

FID provides training to communities prior to sub-project implementation;

0 Disbursement of grants from FID to communities are based on satisfactory implementation o f sub-projects;

0 FID closely supervises sub-project implementation.

The updated Manual of Procedures would (i) incorporate the revised Chart o f Accounts; and (ii) provide clear guidance regarding classification o f expenditures to project staff and communities.

Recruitment of an international auditing firm acceptable to IDA to audit the Project financial statements.

1 FID has a proven record to incorporate environmental impacts o f sub-projects;

Environmental Manual would be updated;

1 FID has safeguard experts to monitor compliance.

M

L

M

L

I

Abbreviations: L =Low: M =Moderate: S = Substantial: H =High

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G. Terms and Conditions for Project Financing

51. The Country Financing Parameters allow for up to 100 percent Project financing, including taxes. The financing parameters also allow for recurrent cost financing when required, as the Project i s not expected to have a negative impact on Madagascar’s fiscal situation and debt sustainability.

The Project would be provided as an IDA credit.

52. The terms and conditions are as follows:

(i) Conditions For Effectiveness

a. The Subsidiary Agreement has been executed on behalf o f the Recipient and the Project Implementing Agency (FID);

b. The Project Implementing Agency (FID) has updated the current Manuals o f Procedures including the Administrative and Financial Manual in a manner satisfactory to IDA.

c. The Additional Legal Matter consists o f the following, namely, that the Subsidiary Agreement has been duly authorized or ratified by the Recipient and the Project Implementing Entity, and i s legally binding upon the Recipient and the Project Implementing Entity in accordance with i t s terms.

(ii) Conditions For Disbursement

a. None

(iii) Covenants

a. Recruitment within three months after the effectiveness date o f an international auditing firm acceptable to IDA, to audit FID’s financial statements in accordance with consistently applied auditing standards;

b. Production no later than 45 days after the end o f each quarter o f quarterly Interim unaudited Financial Reports (IFRs);

c. Submission to IDA no later than six months after the end o f each calendar year o f audited financial statements covering the calendar year by independent auditors acceptable to IDA.

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Madagascar Emergency Food Security and Reconstruction Project

Annex 1. Detailed Description o f Project Components

Component 1 : Social safety net (cash-for-work) (US$12.3 million)

1. This component would finance a cash-for-work program to increase access to short- term employment in targeted food-insecure areas. This component would also provide training for the staff members o f the Executing Agency [Agence d ’exkcution, or AGEX] who are engaged in the implementation o f the cash-for-work program.

2. Targeting mechanism. The targeting mechanism for the cash-for-work program would be as follows: (i) elaboration by the National Bureau for Risk and Catastrophe Management [Bureau National de Gestion des Risques et des Catastrophes, or BNGRC] o f a l i s t o f areas that have been affected by a catastrophic event; (ii) identification o f the most affected communities through a transparent process o f consultation with authorities at the region, district and commune levels, including those responsible for catastrophe management; and (iii) targeting the most affected households in each community, through a process o f consultation with community leaders (including teachers, police and NGO representatives). The consultation process would ensure that at least ha l f o f the beneficiaries are women. The mechanism would also limit the number o f days an individual or a household could work, in order to help spread benefits. The mechanism wil l be further described in the Manual o f Procedures for Social Protection [Manuel Protection Sociale].

3. Selection o f sub-projects. This component would finance labor intensive [haute intensitk de main d ’ceuvre] cash-for-work sub-projects selected by the initiator and presented to the FID. Sub-projects would benefit a majority o f the population and would receive the approval o f local authorities (at the commune and fokontany levels). The component would not finance sub-projects which are on a negative l i s t o f investments, kept by the FID. Sub-projects would be subject to the following breakdown:

4. Following the recommendations o f a recent study, the daily labor wage for cash-for- work sub-projects would be kept much below the national minimum wage (1,600 Ariary compared to 2,012 Ariary for five hours o f work) so that the cash-for-work program would self-target poor segments o f the population and would not distort the labor market.14

N. Andrianjaka, and A. Milazzo, June 2008, “Travauxpublics a haute intensit6 de main d ’ m v r e (HIMO) 14

pour la protection sociale a Madagascar: p rob lhes et options de politique. ’’

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5 . Implementing agency. The FID would be responsible for the overall coordination, management, and financing o f this component in accordance with i t s Manual o f Procedures. I t would work with several stakeholders: initiators, beneficiaries, and Executing Agencies.

6. Implementation arrangements. In order to implement a cash-for-work sub-project, the Regional Directorate o f the FID would s ign an agreement [Convention de Financement] with an Executing Agency, thereby authorizing a transfer o f FID funds to the Executing Agency. The Executing Agency would agree to implement the sub- project: (i) as specified in the sub-project plan [Mkmoire DescriptfEstimatzy ; (ii) within the contracted period; (iii) in conformity with the appropriate administrative, technical, and financial norms; and (iv) with due attention paid to the environment. The FID would be responsible for the financial, technical and environmental auditing o f completed sub- projects.

7 . The FID would select Executing Agencies either on the basis o f an expression o f interest or by means o f a pre-selection register handled in each implementing area. The FID would consider a potential Agency’s operational characteristics, competence and experience in the relevant sector. The Executing Agency would be either a faith-based organization [association culturelle ou kglise], or an NGO that i s legally permitted to have a bank account and to make contracts, including a financing agreement with the FID .

8. Financial Arrangements. The program would finance the total cost o f a cash-for- work sub-project in conformity with the clauses o f the Financing Agreement. The FID would provide no more than the equivalent o f US$20,000 for any sub-project. Depending on its competence and experience, an Executing Agency may receive financing for many sub-projects, but the total cost o f sub-projects implemented by a single Executing Agency at any given time would not exceed the equivalent o f US$lOO,OOO. N o contributions would be demanded from beneficiaries.

9. Funds would be transferred into the bank account o f the Executing Agency in three installments (50 percent, 45 percent and 5 percent) so that the Executing Agency may organize and supervise the sub-project and so that workers are ensured the expected remuneration. The Regional Directors o f the FID may, at their discretion, decide to transfer the amount o f the financing in two installments only (95 percent and 5 percent).

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Component 2: Community-driven basic infrastructure (US$S.O million)

10. This component would finance community-based infrastructure sub-proj ects in order to increase access to social and economic services among participating communities. This component would also provide training to the agencies involved in i t s implementation.

1 1. Targeting mechanism. The targeting mechanism would proceed by: (i) ranking communities along a poverty scale based o n the recent commune census and a transparent process o f consultation with authorities at the regional, district and commune levels; (ii) launching a public awareness campaign to advertize the Project in the poorest communities; and (iii) selecting beneficiary communities, after reception o f a technically and financially viable sub-project, on a first-come first-serve basis.

12. Selection of sub-projects. Sub-projects would include feeder roads, water points, micro irrigation schemes, prevention o f soil erosion, etc. Table 1.2 provides an indicative l i s t o f sub-projects financed by this component in rural and urban areas.

Table 1.2: Sub-pr Location Rural areas

Urban areas

gects financed under Component 2

hectares 1 Anti-erosion measures (roads and water sources) 1 Community maintained vil lage water systems [Adduction d’Eau Potable, or

1 Feeder roads (not under communal responsibility) 1 Non-motorized boats for community use 1 Vaccination pens, drinking troughs . Community storage facilities 1 Maintenance and sanitation works . Preventative measures against natural disasters . Urban maintenance and sanitation works

AEP]

13. The Project would not finance sub-projects which fal l under local governments’ (communes) jurisdiction (such as health centers or schools); local governments would be responsible for implementing these activities through a decentralization program under preparation: the Commune Development Support Program.

14. Implementing agency. The FID would be responsible for the overall implementation o f this component in accordance with i t s Manual o f Procedures. The community association established for each sub-project would be responsible for the preparation o f sub-projects, including technical studies and supervision o f works. Where necessary, community associations would be able to contract the assistance o f NGOs, consulting agencies or individual consultants; or to ask the FID for technical assistance.

15. Implementation arrangements. The community association would identify the sub- project and make a formal request to the FID. Identification o f the sub-project by the beneficiaries would follow a participatory process and would include the elaboration o f a

22

community development plan [Plan Villageois de De'veloppement] . The formal request would be prepared by the community and addressed to the FID. The local mayor would ratify the request to ensure that commune authorities are informed o f sub-projects implemented within the commune. Upon receipt o f the request, the FID would verify that: (i) the requested sub-project i s sanctioned by the Manual o f Procedures for the Project; (ii) the commune has given i t s consent to the sub-project; and (iii) the sub-project i s not receiving financial aid from other sources. When the sub-projects are technically too complex for the community to implement, the community could delegate the responsibility for sub-project implementation to the FID [Convention de Maitrise d 'Ouvrage De'le'gue'e] .

16. I f the request fulfills these conditions, the FID would visit the site o f the proposed sub-project in order to ascertain that: (i) the request was agreed through a participatory process; (ii) the request i s a top priority in the community; (iii) the sub-project fulfills al l technical and financial conditions for eligibility, specifically that:

a. the estimated cost o f the sub-project does not exceed US$42,000 equivalent; b. the sub-project i s technically viable and conforms to the FID's regular anti-

cyclone standards or -- in the case o f NGO-implemented contracts -- standards that have received the prior approval o f the FID;

c. the sub-project i s o f substantial benefit to the community and contributes to the achievement o f the Project development objectives;

d. sub-project implementation wil l not have a harmful impact on the environment.

17. The FID may provide community mobilization and capacity-building assistance to the intended beneficiaries to enable them to form a community association and cellule de projet. This would include: (i) assisting the community association to establish i t se l f as a legal entity with its own bank account, and entitled to s ign a contract with the FID; and (ii) building the capacity o f the cellule de projet to enable it to manage al l aspects o f the sub-project, including procurement, simplified financial management, technical management, and operation and maintenance.

18. Once the above conditions are fulfilled, the request would be approved by the FID and the sub-project included in the FID's annual work plan [Programme de Travai l ] . The FID would then assume responsibility for the procurement, management, financial management and maintenance o f the sub-project, thereby providing capacity-building for the community association's cellule de projet. The community association and the FID would enter into a financing agreement [Convention de Fznancement] by which financing, disbursement, bank account, implementation and future maintenance arrangements for the sub-proj ect are determined.

19. Financing arrangements. In order to qualify for Project financing, sub-projects must cost less than US$42,000 including any capacity-building training that may be required. Beneficiaries would co-finance 5 percent o f sub-project costs in cash or in kind (materials or labor), ensuring that the component emphasizes sustainability and that

23

investments would not exceed the community's capacity for co-financing or maintenance.

20. Once a financing agreement has been signed, funds are transferred in the form o f a transfer from the FID into the community association's bank account in four installments as the sub-project advances. The FID may monitor use o f this account, which must conform to the detailed payment plan joint ly established by the FID and the community association.

21. The community association, through i t s cellule de projet, would have exclusive responsibility for the procurement and provision o f services to implement the sub-project. The cellule de projet would engage either an individual consultant or a Bureau d 'Etude (BE) (from a pre-selection register maintained by the FID) to supervise sub-project implementation. The consultant or the BE would be responsible for the preparation o f technical studies and for overseeing the works. Technical studies must receive the non- objection o f the FID.

22. The community association may decide to implement the works itself with hired labor [tcicheron] or i t may subcontract a construction firm after a process o f competitive bidding. For investments greater than US$10,000 equivalent, the selection o f the construction firm must be done by a competitive bid at the national level.

23. The construction firm would be paid by the community as the sub-project i s implemented. The construction firm would give a financial guarantee (in the form o f a deposit [caution de bonne exicution] o f 10 percent o f the estimated cost o f the sub- project) to ensure that works would be well implemented. The community association would return 5 percent o f this deposit upon provisional completion o f the sub-project [Re'ception Provisoire] (Le. at the end o f the contracted period). The remaining 5 percent would be returned one year after provisional completion [Re'ception Dkfinitive].

24. The FID would maintain the aforementioned pre-selection register o f only those BEs and construction firms that have been screened by the FID and deemed eligible to submit bids for sub-projects. In each o f the FID's Regional Directorates, a commission to award contracts [Commission Inter-Rigionale d 'Attribution des Marche's, or C I R A M ] would: (i) preselect BEs and construction f i r m s ; (ii) approve shortlisted BEs; and (iii) make recommendations to the Director General o f the FID to award contracts to BEs, construction f i rms, and suppliers o f goods and services.

25. The Regional Directorate o f the FID would monitor sub-projects to ensure that they are implemented adequately as the adequate implementation o f sub-projects i s a condition for continued funding from the FID. Alongside each request for payment, the cellule deprojet would send a progress report to the FID. At the close o f a sub-project, the cellule de projet would submit to the FID a completion report which details the technical, financial and institutional aspects o f the completed sub-project.

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Component 3: Rehabilitation and reconstruction in response to natural disasters (US$12.8 million)

26. This component would restore access to social and economic services (schools, health centers, small roads, water systems, etc.) in the aftermath o f catastrophic events, including cyclones. This component would also provide training to the agencies involved in i t s implementation.

27. Targeting mechanism and selection of sub-projects. The targeting mechanism would be as follows: (i) elaboration by the National Bureau for Risk and Catastrophe Management [Bureau National de Gestion des Risques et des Catastrophes, or BNGRC] o f a list o f areas that have been affected by a catastrophic event; (ii) identification o f al l infrastructures in need o f rehabilitation or reconstruction; (iii) prioritization o f these infrastructures through a transparent process o f consultation with authorities at the region, district and commune levels, including those responsible for catastrophe management; and (iv) rehabilitation and reconstruction o f infrastructures whose priority rank highest. The mechanism would also include a limitation on the number o f rehabilitated infrastructures per commune, to help spread benefits. The mechanism would be further described in the Manual o f Procedures for post-cyclone reconstruction [Manuel Reconstruction et Re'habilitation Post-Catastrophe].

28. Implementing Agency. The FID would be responsible for the overall coordination, management, and financing o f this component in accordance with i t s Manual o f Procedures. Sub-proj ects would be implemented by community associations, except for complex or large sub-projects, which would be implemented by the FID on the community's behalf. Where necessary, communities may contract the assistance o f NGOs, BEs or individual consultants.

29. Implementation Arrangements. For community-executed sub-projects, implementation arrangements would be identical to those outlined for Component 2. Complex or large sub-proj ects such as rehabilitation or reconstruction o f micro irrigation schemes or small bridges [petits ouvrages de franchissement] would be implemented by the FID. For the sub-projects implemented by the FID, the community would s ign two agreements with the FID. The f i rst agreement [Convention de Maitrise d'Ouvrage Dkl4gukel would delegate responsibility for sub-project implementation to the FID. The second agreement [Convention d 'Entretien] would specify the conditions under which the community would operate and maintain the sub-project. Both agreements would be preconditions for the FID's formal approval o f the sub-project.

30. Before the implementation o f the sub-project, beneficiaries would approve a detailed sub-project plan [Avant Projet De'taille'] prepared by the FID. The community would monitor the progress o f sub-project implementation and communicate i t s observations to the sub-project manager or directly to the FID.

31. In order to implement a sub-project, the FID would contract a BE to take responsibility for the sub-project's management and to report on the status o f i t s

25

implementation, procurements, and expenses. The FID would also invite tenders from pre-selected construction f i r m s to implement sub-proj ects. The FID would select construction f i r m s on the basis o f their competence, experience in the relevant sector, and the proposed cost o f the works.

32. For this component also, the FID would maintain a pre-selection register o f BEs and construction f i r m s that are eligible to submit tenders for sub-projects. Only those BEs and construction f i r m s which have been preselected by the FID would be eligible to submit tenders for works. In each o f the FID’s Regional Directorates, a commission to award contracts [Commission Inter-Rkgionale d ’Attribution des Marchks, or CIRAM] would: (i) preselect BEs and construction f i rms; (ii) approve shortlisted BEs; and (iii) make recommendations to the Director General o f the FID to award contracts to BEs, construction f irms, and suppliers o f goods and services.

33. The FID would be responsible for the financial, technical and environmental auditing o f completed sub-projects.

34. Financial Arrangements. The FID would finance sub-projects up to a maximum o f US$75,000 equivalent (US$130,000 equivalent in the case o f roads). As this component seeks to rehabilitate infrastructures in the aftermath o f natural disasters, the community would not be expected to co-finance the sub-project.

Component 4: Project management, monitoring and evaluation, and audit (US$6.9 million)

35. This component would provide support in the form o f technical advisory services and other material assistance for the benefit o f the FID to facilitate Project management, monitoring and evaluation and audit. More specifically, the component would finance (i) consultant fees and allowances o f FID’s higher-level employees, local contractual support staff salaries and employment benefits, travel expenditures and other travel- related allowances, equipment rental and maintenance, vehicle operation, maintenance and repair, office rental and maintenance, materials and supplies, and utilities, media information campaigns and communication; (ii) yearly financial audits, a technical audit, the second part o f the impact evaluation o f the Community Development Project (the baseline has already been completed), assessments o f the cash-for-work and post-cyclone reconstruction components, training o f FID staff and website development; and (iii) equipment and vehicles.

36. Communication and outreach. The FID would develop, operate and maintain an internet website to inform the public o f i t s activities. The FID would also carry out media information campaigns and communication activities which could be contracted out to specialized agencies, if necessary.

37. Monitoring and evaluation. The FID has an adequate monitoring and evaluation system which has been progressively upgraded during the implementation o f the IDA- financed Community Development Project. The system includes modules on: (i)

26

management o f beneficiary requests from the time o f receipt until the completion o f works; (ii) management o f a l l documents related to sub-projects implementation (from selection o f beneficiaries and identification o f sub-projects to their completion) in compliance with the process outlined in the Manuals o f Procedures; (iii) management o f the annual work program; (iv) management o f contracts with local consulting f i r m s , small and medium enterprises (SMEs), and NGOs; (v) preparation o f monthly and quarterly reports; and (vi) monitoring performance o f outcome and intermediate results indicators. The FID’s Management Information System i s linked to i t s accounting system.

27

Madagascar Emergency Food Security and Reconstruction Project

1. Increased access to short- term employment in targeted food-insecure areas 2. Restored access to social and economic services

Annex 2. Results Framework and Monitor ing

RESULTS FRAMEWORK

1. Beneficiaries o f cash-for-work program (cumulative number o f individuals) (a) (b)

2. Percentage o f initiated social and economic services restored within 6 months fol lowing a natural disaster

Moni tor assistance to population affected by hunger including women Moni tor Project capacity to respond to natural disasters in

The Project Development Objectives are to: (0 increase access to short-term employment in targeted food-insecure areas; and (ig restore access to social and economic services following natural disasters in targeted communities.

Increased scope o f cash-for- work program

Increased availability o f infrastructure in targeted areas

Component 2: Community-driven Improved basic infrastructure in participating communities

Component 3: Rehabilitation Restored basic infrastructure in disaster affected communities

1.1 Person-days o f employment created (number of) 1.2 Social protection sub-projects completed (number

1.3 Roads rehabilitated, rural areas (km) (b) (‘I 1.4 Percentage o f women among beneficiaries

Moni tor impact o f efforts to improve food security

of)

I

basic infrastructure

(number of) economic services 2.1 Community-based sub-projects completed

2.2 Beneficiaries f rom sub-projects (number of) 2.3 Irrigated land rehabilitated (hectares) (‘I 2.4 Roads rehabilitated, rural areas (km) (b)(c)

and reconstruction in response to natural disasters 3.1 Sub-projects rehabilitated or reconstructed

3.2 Schools built or rehabilitated (number of) (‘I 3.3 Classrooms built andor rehabilitated (number) (b)

3.4 Health centers built or rehabilitated (number) (a) (‘I 3.5 Roads rehabilitated, rural areas (km) (‘)

Moni tor access to social and

Moni tor the effectiveness o f

reconstruction in the aftermath o f natural disasters by sectors

(number of) rehabilitation and

(‘1

ComDonent 1: Social safetv net (cash-for-work)

Component 4: Project mana Efficient Project implementation

ement, monitoring and evaluation and audit 4.1 Management costs (percentage o f disbursement) (dl 4.2 Percentage o f sub-projects completed within

4.3 Unqualif ied financial audits 4.4 Technical audit completed 4.5 Impact evaluation completed 4.6 Assessment o f cash-for work completed 4.7 Assessment o f post-cyclone reconstruction completed

contracted period

Moni tor progress o f Project implementation

28

Notes: (a) Global Food Crisis Response Program indicator, (b) IDA- 15 indicator,

Targets regarding these results indicators would be used for monitoring purposes (but not for evaluation) as the types o f sub-projects are not known a priori, but instead result f rom the demand o f communities, (d) Management costs include consultant fees and allowances o f FID's higher-level employees, local contractual support staff salaries and employment benefits, travel expenditures and other travel-related allowances, equipment rental and maintenance, vehicle operation, maintenance and repair, office 'rental and maintenance, materials and supplies, and utilities, media information campaigns and communication. Salaries o r allowances o f c i v i l servants are not covered under this Project.

29

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Madagascar Emergency Food Security and Reconstruction Project

Category Local Foreign Total Foreign as YO oftota l

(1) Goods, works, consultants’ services, operating costs, training and Grants for sub- 39.40 1 .oo 40.40 2.48 projects Total Project Costs 39.40 1.00 40.40 2.48

Annex 3. Summary of Estimated Project Costs

IDA Communities Total

Local Foreign Total Percentage o f Foreign

39.00 1 .oo 40.00 2.50 0.40 0.40 0.00

39.40 1.00 40.40 2.48

Expenditures

FINANCING PLAN (by Project Component)

Note: Total Project cost, including taxes, i s US$40.4 million.

33

Madagascar Emergency Food Security and Reconstruction Project

Annex 4. Financial Management and Disbursement Arrangements

FINANCIAL MANAGEMENT ASSESSMENT REPORT

I. Introduction

1. Based o n the institutional arrangement described in the ma in text, the FM arrangements o f the FID (including the General and the six inter-regional Directorates) responsible for the implementation o f components/activities to be supported under the Project, have been reviewed to determine whether they are acceptable to the Bank. T h i s review i s in fact rather an update since the FM systems o f these entities have already been assessed in the context o f the ongoing Community Development Project. Given the decentralized nature o f the project, the coordination and reporting mechanisms between IRD and the General Directorate have been also reviewed to ensure that the arrangements in place wil l a l low for smooth implementation o f project’s activities as w e l l as to ensure that credit proceeds are used on ly for the purposes for which the credit was granted, with due regard to economy, efficiency, and the sustainable achievement o f the project’s development objectives. The content o f this report has been discussed with FID representatives i.e the national Director and the Director o f Finance. The overall conclusion o f this review i s described in the ma in text o f the Project Paper.

11. Summary Project Description

2. The Project’s Development Objectives are to: (i) increase access to short-term employment in targeted food-insecure areas; and (ii) restore access to social and economic services fo l lowing natural disasters in targeted communities. This Project would finance the fol lowing components: (i) a cash-for-work program to increase access to short-term employment in targeted food-insecure areas; (ii) community-based infrastructure sub-projects in order to increase access to social and economic services among participating communities; (iii) the rehabilitation and reconstruction o f social and economic services in the aftermath o f catastrophic events, including cyclones; and (iv) support in the fo rm o f technical advisory services and other material assistance for the benefit o f the FID to facilitate efficient Project management, monitor ing and evaluation and audit.

3. The FID General Directorate and the six inter-regional offices are the administrative/executing entities which deal with the day-to-day operations o f the Project. The FM assessments have therefore taken this into consideration.

34

111. Country issues

4. The World Bank’s C F M C P A R , completed in 2003, and some diagnostic works carried out over the last three years by the Bank and other donors, identified a range o f weaknesses and issues hampering the performance o f Madagascar’s budget and expenditure management system. To address these issues, the government has developed in conjunction with all key development partners, priority action plan for public finance reform in 2004, 2005,2006 and 2007.

5. While overall implementation progress o f the reform program i s encouraging, significant efforts remain to be done to strengthen internal and external control systems. The deficiency o f the control system i s perceived throughout the whole expenditure circuit o f budget execution, and especially on the control o f salary payment and on delivery o f goods and services to the administration. Moreover, the control agencies neglect the quality control o f budget management as they are more concerned about irregularities and mismanagement. With regard to external audit, the main weakness i s the lack o f skilled and experienced auditors at the Auditor General [Chambre des Comptes] commensurate with the complexity and increased number o f missions to be undertaken. As a result, significant delays have been noted regarding the presentation o f the budget execution laws to the Parliament. To mitigate r isks in public expenditure management, the World Bank, through the Governance and Institutional Development Program (PGDI), and a number o f donors continue to support Government’s public finance reforms reflected in i t s annual priority action plan.

6. Regarding the accounting profession, some positive developments have been noted over the last three years. However, a number o f local accounting f i r m s continue to operate below the international standards. To improve the capacity and the competitiveness o f local auditing f i rms, the following measures have been taken while auditing BanWIDA financed Projects: (i) obligation for local auditors to enter into partnership with international accounting f i rms; (ii) effective participation o f the international accounting firm in audit fieldworks and submission o f audit report signed by the international audit firm. An accounting and auditing ROSC (Report on Observance o f Standards and Codes) has been carried out and finalized in June 2008 to identify issues and propose recommendations for improvement. The preparation o f a country action plan i s currently underway describing key actions to be implemented to strengthen the accounting profession in Madagascar.

7. The use o f country systems s t i l l remains risky for Madagascar due to certain fiduciary weaknesses: inefficient and cumbersome expenditure process, poor and ineffective internal control, weak external control, incapacity o f the SIGFP to satisfy reporting requirements. As such, it was agreed, in the context o f this Project, to use partially the country system and to establish transitional financial management system arrangements while the sectorhational fiduciary systems are being strengthened.

35

IV. Financial Management Risk Assessment and Mitigation

Risk Risk Mitigation Measures rating Risks

8. and provides the measures to be taken to mitigate them:

The fol lowing table identifies the key risks that the Project management may face,

Residual Risk

rating

Condition of Negotiations,

Board or Effectiveness

Country Level. The reliability of the accounting and reporting system within the country (PFM) may be questionable due to cumbersome and ineffective expenditure process, and ineffective internal control.

Audit may not be conducted in compliance with international auditing standards due to: weak capacity o f the accounting profession in Madagascar, and; ii) inadequate number of skilled and experienced auditors at the Chambre des comptes in particular

Entity Level The use o f the national system still remains risky due to some fiduciary weaknesses that require much more time for their improvement. However, the FID financial management system i s working well and i t s performance in accounting, financial reporting and auditing i s globally satisfactory.

- S

M

k

These issues are being addressed through the ongoing PFM reforms supported by IDA (Governance and Institutional Development Project) and other development partners. A country action plan has been prepared by authorities to strengthen the accounting profession. An IDF would be prepared for the implementation of these actions. In the meantime, the FM aspect of this Project would be entrusted to FID (PIU) which has strong experience in managing donor funds, and the audit of the Project accounts would be camed out by an international accounting firm or by an international accounting firm associated with local auditing f i rms , with effective participation o f the former (international accounting firm) in the fieldwork. The selected auditing firm i s invited to perform the audit jointly with the Auditor General. Development partners continue to support the GoM priority action plan for public finance reforms including capacity building of key l ine ministries in the area of public financial management: planning, budgeting, accounting, reporting as well as monitoring and evaluation

While the sector fiduciary systems are being strengthened, the financial management (FM) aspects of this program would be entrusted to FID which has extensive experience in managing Bank Funds within the context o f the ongoing Community Development Project (Additional Financing: Credit 3498 - 2 MAG). The FID would be in charge of the fiduciary aspects of the Project, Internal audit functions would be enhanced to ensure i t monitors the

NO: The international accounting firm in charge o f the audit of Project accounts should be recruited within three months after the effectiveness date

M

NO (see Auditing I

36

Risk Risk Mitigation Measures rating Risks

activities and checks against

Project Level Communities may not have relevant capacity to implement subprojects.

Condition of Residual Negotiations,

Board or Effectiveness

Risk rating

section)

Overall Inherent Risk I M

2. Control Risk

Budgeting

Accounting Componentdactivities to be implemented under this Project m a y not be properly accounted for since they are not reflected yet in the current Chart o f accounts

Internal Controls Procedures may not be properly applied since the manual i s not updated yet to reflect the revised Chart o f accounts, the new IFR format and agreed changes in procedures, especially those required for communities.

Funds may not be used by communities for the purposes intended

- L

M

M

malpractices that couldlead to fraud and corruption. The Project financial statements would be audited annually by an international accounting firm acceptable to IDA joint ly with the

Update/elaboration o f the procedures manual for communities to provide clear guidance to beneficiary communities, and organization o f users training before the first transfer o f funds to strengthen their capacity in F M area and ensure proper application o f procedures described in the manual,

governance arrangement o f electing leadership and conducting their activities in a transparent manner to avoid fraud and corruption.

Communities would have

Update the Manuals o f Procedures to include the revised Chart o f Accounts and the templates o f IFRs to reflect new activities and components to be implemented under the Project.

Update o f the Manual o f Procedures to provide clear guidance to project staff and communities, including al l relevant measures to prevent misuse o f funds b y communities, facilitate adequate record keeping o f transactions, and satisfy reporting requirements.

Organization o f users training

Strengthening the capacity o f communities in managing subprojects and funds.

Regular audit carried out by the Internal Audit Department (IAD)

YES: The procedures manual was updated and approved b y I D A prior to negotiations. Users training should be provided prior to transfer o f funds to communities.

L

YES: Manual updated

YES: Manual updated

NO: The training should be provided prior to transfer o f funds to communities.

NO: To be indicated in I A D annual work program

L

L

L

37

Risks

Funds flow T h e financial contribution o f communities for maintenance may not be available

Financial reporting

Auditing The audit may not be conducted in compliance with international auditing standards due to the consideration that a number o f local accounting firms have continued to operate below international standards Overall Control Risk

Overall Risk Rating

Risk rating

- M

- L

S

M

M

Risk Mitigation Measures

complemented by the annual audit conducted by qualified external auditors

Semi annual supervision missions including review o f the use o f funds would be carried out b y IDA.

The financial contribution for maintenance i s required before the first transfer o f funds to communi ties

Recruitment o f an international auditing firm acceptable to IDA to audit the Project financial statements. Review o f the TORS by IDA

Negotiations, Board or

Effectiveness rating

annual supervision is already scheduled in the FM Plan

NO: This measure i s already included in the Manuals o f Procedures.

L

I L NO: The auditors would be recruited within three months after the effective- ness date.

M

38

V. Strengths and Weaknesses

9. The FID has strong experience in managing World Bank funds from being in charge o f the implementation o f the previous Community Development Projects. The accounting/budgeting system i s adequate and the internal control procedures appropriate. I t has also a qualified and trained accounting staff which i s very knowledgeable with Bank procedures. However, to further strengthen the Project financial management system, a few measures need to be taken. The following table provides relevant measures to address main deficiencies identified in the FID financial management system:

Manuals o f Procedures not being updated to include the revised chart o f accounts, the new IFR format, agreed changes in f low o f funds and procedures, especially those required for subprojects.

Auditors in charge o f the review o f the Project accounts within the context o f this Project have not been recruited vet.

Update o f the accounting manual o f procedures to provide clear guidance to project staff and communities, include al l relevant measures required to prevent misuse o f funds by communities, facilitate adequate record keeping o f transactions, and satisfy reporting requirements. The revision would also make sure that internal audit functions would be strengthened to focus on risks in order to ensure (i) transparency, (ii) compliance with oversight and controls, and (ii) identification o f malpractices that could result in fraud and corruption.

Organization o f user training to strengthen their capacity in F M area and ensure proper application o f procedures described in the manual.

Recruitment o f an independent audit firm acceptable to IDA to cany out the audit o f the Project accounts.

Prior to credit effectiveness

Three months after effectiveness date

D A F (FID)

FID

VI. Institutional and Implementation Arrangements

10. with administrative and financial autonomy, i s responsible for implementing the Project.

FID [Fonds d'lntewention pour le De'veloppement], an association o f public interest

1 1. The overall Project coordination i s undertaken by the FID General Directorate headed by a General Manager. The latter i s assisted by six inter-regional Directors and three directors at the central level, respectively in charge o f financial management, operations, and monitoring and evaluation. The Director o f Finance, at the central level, i s in charge o f the overall aspect o f the Project financial management including budgeting, maintenance o f records and accounts for al l transactions related to General Directorate, consolidation and production o f the Project financial statements and quarterly IFRs, and administration o f the Designated Account. The Inter-Regional Directorates manage disbursements from the regional bank accounts, maintain records and accounts for all transactions under their responsibilities, send on a monthly basis the balance sheet to the General Directorate for consolidation, and prepare financial and other basic information on Project managementlmonitoring as required by the General Directorate.

39

12. Annex 1 provides a description o f the four components included in the proposed Project including the targeting mechanisms. The operating Manuals o f Procedure provide additional details.

VII. Staffing

13. The FID’s accounting staff are qualified and have relevant experience to be completely successful in carrying out their functions. Their number i s deemed adequate.

VIII. Budgeting

14. Budgeting arrangements for the Project are described clearly in i t s accounting manual o f procedures. The accounting software in place can adequately cater for the budgeting arrangements o f the Project.

IX. Accounting

15. The computerized accounting system in place i s in compliance with generally accepted accounting standards, and IDA requirements, and capable o f recording and producing in a timely manner al l financial reports required for managing and monitoring Project activities. I t operates on a decentralized basis with six (6) inter-regional Directorates and uses standard book accounts (journals, ledgers and trial balances) to enter and summarize transactions. The Chart o f Accounts has already been reviewed to reflect new components and activities to be financed under this Credit. The computerized system has also been adjusted to satisfy reporting requirements.

X. Internal Control and Internal Auditing

16. The FID internal control system i s satisfactory: proper authorization to initiate and execute transactions, accounting and budgeting system ensuring timely preparation o f reliable information, adequate measures for safeguarding assets. An accounting manual o f procedures i s also available. However this manual needs to be updated in order to include the new Chart o f accounts, the content and format o f new IFRs to be prepared under this Project, and the procedures to be applied when implementing subprojects under components 1,2 and 3.

17. In addition, to ensure consistent application o f the procedures and eff icient use o f funds by communities the internal audit department staff would carry out regular audits which would be complemented by the annual audit conducted by qualified external auditors. The close collaboration between internal auditors, the Monitoring & Evaluation regional staff and the agents in charge o f operations i s also highly recommended to strengthen the Project internal control.

18. Governance and Accountability: To efficiently address the challenges o f the proposed project and to ensure high levels o f transparency and accountability, measures have been taken to strengthen the FM arrangements o f this project at both Pro’ect- and community- level including recommendations from the Anti-Corruption Guidelines. 1-4

l5 World Bank. October 2006. “Anti-Corruption Guidelines.”

40

19. Successful internal control and financial management o f the proposed Project require that beneficiaries and other stakeholders be kept we l l informed at a l l times and at a l l levels about their entitlements, rights, obligations, and the project's costs and benefits. This information would be provided in a manner understandable to a l l interested parties. Before the release o f each tranche, summaries o f subproject expenditures combined with a simplif ied physical progress report would be posted in a public place to help inst i l l public confidence and t rust in the Project. It would also facilitate the comparison o f expenditures against targets. Internal audit by regionalAoca1 government or simply by trained members o f the community would be also encouraged as an integral part o f the internal control system. A simple, inexpensive internal ex-post audit o f community sub-projects designed to conf i rm that funds have been spent o n the intended purpose and that the community has received value for money could also contribute to improve the quality o f the internal control framework. This ex-post audit i s often l inked to the overall monitoring and evaluation o f the community subproject.

XI. Funds Flow and Disbursements Arrangements

20. The f l ow o f funds f rom IDA and the government i s presented as follows:

(Credit Account)

(Project Implementation Unit) (Designated account)

FID: Regional Directorates (Inter- regional bank account)

Communities

Contractors / Suppliers o f goods and services

21. Fo r the implementation o f this Project a Designated account would ,e opened in a local commercial bank under conditions satisfactory to IDA. Denominated in US dollars, disbursements f rom the IDA Credit would be deposited o n this account to finance 100 percent o f a l l expenditures eligible under the Credit.

22. Wh i le disbursing proceeds from Credit account, IDA may: (i) advance credit proceeds in to the Designated Account opened in a commercial bank acceptable to IDA; (ii) make direct payments to third parties; (iii) issue special commitments to pay amounts to third parties in respect o f expenditures to be financed out o f the Credit proceeds, upon the borrower's request and under terms and conditions agreed by IDA and the recipient. The accounting manual o f procedures describes in details the application steps and requirements

41

for requesting an advanceheplenishment, a direct payment to a third party, and applying for a special commitment.

23. To ensure prompt payment o f contractorshppliers operating in the regions, the borrower may open an inter-regional bank account in a local commercial bank to be managed by each Inter-Regional Directorate. Denominated in local currency (MGA), disbursements from the Designated Account (IDA Credit) would be deposited on this account to: finance 100 percent o f all expenditures agreed with IDA and eligible under the credit. The init ial advance paid to each inter-regional bank account would represent funds covering no more than 30 days estimated expenditures based upon submission o f satisfactory budgeted work plans. Subsequent payments would be based on SOEs submitted by the Inter-Regional Directorate after appropriate authorization and approval by FID. The Inter-Regional Directorate would submit monthly expenditure reports indicating sources and uses o f funds and justifying the use o f funds, and accompanied by reconciled bank statements. The Financial Directorate has put in place an adequate monitoring system to ensure that advances from the Designated Accounts to accounts o f Inter-Regional Directorates and communities are accounted for and are properly documented in a timely manner. According to this system, al l expenditures made at the regional level for a given week would be presented for replenishment to the. national Directorate within the next week. This replenishment application would be supported by an appropriate bank conciliation and weekly bank statement. The Administrative and Financial Manual would be updated to include this control procedure. There i s no unaccounted amount under the ongoing Community Development Fund Project IDA Credits (3498-0, 3498-1 and 3498-2).

24. To implement eligible subprojects under component 2 “Community-driven basic infrastructure” and component 3 “Rehabilitation and reconstruction in response to natural disasters” and ensure timely payment o f contractors and suppliers, a Community bank account could be opened in a local commercial bank to receive IDA funds from the inter- regional FID bank accounts. The transfer o f funds to these community bank accounts would be made as follows: (i) 30 percent upon signature o f the contract‘convention between FID and Communities; (ii) 30 percent upon notification o f the enterprise in charge o f the works; (iii) 30 percent based on physical progress (at least 50 percent o f the works have been achieved) after appropriate authorization and approval by the FID; and (iv) 10 percent upon receipt o f a completion certificate.

25. The Designated Account would be replenished on the basis o f quarterly IFRs provided to IDA by the FID General Directorate (see below paragraph “Designated Account ”), justifying that expenditures are eligible for financing under the Credit. The minimum application size for direct payments to be withdrawn directly from the Credit Account, and special commitments i s 20 percent o f the amount advanced to the related Designated Account.

26. Supporting documents would be submitted with al l requests for direct payment and special commitment. For reporting on the use o f advances, the Bank would require the interim unaudited financial report mentioned in the Financing Agreement. The disbursement letter would specify the disbursement arrangements while the accounting manual would describe in detail all procedural aspects regarding financial management and disbursement.

42

Disbursement Arrangements

27. Since the FID continues to maintain an adequate FM system and submits timely acceptable IFRs and quality project audits within the context o f the on-going Community Development Fund Project, disbursements from this new Credit would be done based on quarterly IFRs. Under this disbursement procedure, a forecast o f project expenditures covering a period o f six months would be agreed between FID and IDA. The recipient may request an advance for an amount not exceeding this cash forecast. The IFRs would be submitted and reviewed by IDA to confirm eligible expenditures during the period covered by the IFRs. Detailed disbursement procedures would be described in the Project accounting manual o f procedures.

Method of Disbursement:

28. Minimum Application Size: The minimum application size for direct payments, to be withdrawn directly from the Credit Account, and special commitments i s as specified in the disbursement letter issued by the Bank.

29. Designated Account; Payments from the IDA Credit would be administered by the FID General Directorate from a Designated Account which would be opened in a commercial bank on terms and conditions acceptable to IDA. The FID General Directorate would be responsible for preparing disbursement requests. The Designated Account would finance al l Project eligible expenditures, on the basis o f the quarterly IFRs. Further deposits by IDA into the Designated Account would be made against withdrawal applications supported by appropriate documents.

XII. Financial Reporting

30. should be prepared in compliance with international accounting standards:

To monitor Project implementation, FID would produce the following reports that

Annualfinancial statements for FID Association comprising: o Balance Sheet; o Statements o f income, retained earnings, and change in financial position; o The accounting policies adopted and explanatory notes; o A management assertion.

Annualfinancial statements for FID Project comprising: o Balance Sheet; o Summary o f sources and uses o f funds (by components/Project

activitiedcredit category, showing year-to-date and cumulative Project funds inflow, expenditures by disbursement category and by component, and closing cash and bank balances;

o The accounting policies adopted and explanatory notes; o A management assertion.

3 1. Quarterly IFR: Quarterly Interim unaudited Financial Reports (IFRs) would be produced to facilitate Project monitoring, and submitted to IDA within 45 days from the end o f the reporting period. The form and content o f quarterly IFRs and annual financial statements were agreed at negotiations. Format o f these reports would be an annex to the Project accounting manual o f procedures. To facilitate the consolidation o f IFRs at the FID General Directorate level, the format o f the expenditure report to be produced by the Inter-

43

Regional Directorates has been agreed during appraisal and would be submitted to the FID National Directorate by the 30th o f every month. The format o f this report would be also presented in the Annex o f the accounting manual o f procedures

XIII. Auditing

32. The entity and Project financial statements would be audited annually by an international private auditing firm acceptable to IDA, in collaboration with the Auditor General. This audit would be conducted in accordance with International Standards o f Auditing. The auditors should be recruited within three months after the effectiveness o f the credit agreement. The audit reports, together with management letter and management response to the letter, would be submitted to IDA not later than six months after the end o f each financial year. The auditors would be required to: (i) express an opinion on the Project financial statements; (ii) carry out a comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The terms o f reference o f the audit would be reviewed by IDA to ensure adequacy o f the audit scope, drawing special attention to particular risk areas identified during Project preparation or implementation.

33. Regarding the transfer o f funds to beneficiary communities, payments would be made through tranches and would therefore already be included in the project accounts which are subject to an annual audit. However, the community’s own expenditures would remain outside the scope o f the audit. In this case, i t would be useful to have an internal ex-post audit o f community sub-projects designed to confirm that funds have been spent on the intended purpose and that the community has received value for money. Following this internal ex-post audit, an external audit o f a random sample o f subprojects would be conducted. The auditor would be required to report on compliance with the internal control mechanisms described in the project implementation manual. The modalities, including timing, objectives, audit approach and selection o f subprojects for such audit would be described in detail in tk Terms o f Reference to be reviewed by IDA.

XV. Supervision Plan

34. A supervision mission would be conducted at least once every year based on the risk assessment o f the Project. The mission’s objectives would include that o f ensuring that strong financial management systems are maintained for the Project throughout i t s l i fe. A review would be carried out regularly to ensure that expenditures incurred by the Project remain eligible for the IDA funding. The Implementation Status Report (ISR) would include a financial management rating for the component. The FMS would also review quarterly IFRs, the audit reports and follow-up on timely implementation o f recommendations from auditors.

44

Madagascar Emergency Food Security and Reconstruction Project

Annex 5. Procurement Arrangements

A. General

1. Madagascar i s in the process o f major procurement reforms. A new Procurement Code was passed by the Parliament and the Senate and became effective in July 2004. The main pillars o f the code are transparency, efficiency and economy; accountability; equal opportunity for al l bidders; prevention o f fraud and corruption; and promotion o f local capacity. The Procurement Code was supplemented by regulations, procedures manuals, and standard bidding and other procurement documents. The Procurement Code defines methods o f procurement and review procedures. The Code also created (i) the Public Procurement Oversight Authority (Autori t i de Rigulation des Marchis Publics, or ARMP) in 2006, which includes oversight o f the National Tender Board (Commission National des Marchis, or CNM) for procurement reviews, and the Regulatory and Appeals Committee (Commission de Rigulation et de Recours, or CRR) for the handling o f complaints and norms. Finally the Code provides for the creation o f procurement units (Unit is de Gestion de la Passation de Marchis, or UGPM) under the leadership o f a person responsible for public procurement (Personne Responsable des Marchis Publics, or PRIMP), and a Public Tender Commission (Commission d’Appel d’OfSres, or CAO) in each Ministry, and decentralized departments o f national public institutions.

2. The Procurement Code i s generally consistent with good public and international practices and includes provisions for: (i) effective and wide advertising o f up-coming procurement opportunities (general procurement notice for each procuring entity and ARMP website); (ii) public bid opening; (iii) pre-disclosure o f al l relevant information, including transparent and clear bid evaluation and contract award procedures; (iv) clear accountabilities for decision-making; and (v) an enforceable right o f review for bidders when public entities breach the rules. The Country Procurement Assessment Report (CPAR) was submitted to Government and adopted in June 2003. The action plan o f the CPAR was agreed upon with Government during the December 2003 CPAR mission and workshop. During the preparation o f successive PRSCs, four key ministries (education, health, transport and agriculture) were assessed on the application o f the new procurement code provisions, with these assessments being used as triggers from one PRSC to the next.

B. Use of Bank Guidelines for procurement by FID and use of Simplified Procedures for Sub-projects as specified in FID’s Manual of Procedures

3. Procurement for the proposed project would be carried out in accordance with World Bank’s “Guidelines: Procurement under IBRD loans IDA Credits dated may 2004, revised October 2006; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers dated may 2004, revised in October 2006, and the provisions stipulated in the Financing Agreement. The general descriptions o f various items under different expenditure categories are below. For each contract to be financed by the credit, the different procurement methods or consultants selection methods, estimated costs, prior review requirements, and

45

time frame are agreed between the Borrower and the Wor ld Bank project team in the procurement plan.

4. Procurement of Goods: Goods procured under this project would include: computer hardware and software, and vehicles as well as office equipment and furniture. Contracts for goods estimated to cost US$250,000 equivalent and above wi l l be procurement through I C B and those below US$250,000 through N C B . Procurement wil l be done using the Bank’s standard bidding documents for al l I C B and national standard bidding documents that have been agreed to by the Bank for NCB.

5. Ma in consultant services required under the project include: technical and financial audits, and training. Contracts for consulting services costing more than US$lOO,OOO equivalent or more for f i r m s will be awarded through Quality and Cost Based Selection (QCBS). Contracts for specialized assignments to cost less than US$ 1 00,000 equivalent may be selected through Consultant’s Qualifications (CQ) method. Least Cost Selection (LCS) may be used for the recruitment o f financial auditors. Single Source Selection ( S S S ) may be employed with prior approval o f the Bank and wil l be in accordance with paragraphs 3.9 to 3.12 o f Consultant Guidelines. All services o f individual consultants will be procured under individual contracts in accordance with the provisions o f paragraphs 5.1 to 5.4 o f Consultant Guidelines. Short l i s t s o f consultants for services estimated to cost less than $50,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

Selection of Consultants:

6. Operating Costs: The operating costs for this Project would include the salaries and employment benefits o f support staff, travel expenditures and other travel-related allowances, equipment rental and maintenance, vehicle operation, maintenance and repair, office rental and maintenance, vehicle operation, maintenance and repair, office rental and maintenance, materials, supplies and utilities and media information campaigns and communication expenses. Procurement will follow FID’s administrative procedures which were reviewed and found acceptable to the Bank.

7. For al l sub-projects under Component 2 (Community-driven basic infrastructure sub- projects), procurement o f civil works, goods and services will be done in accordance with FIDFS Manual o f Procedures, which has been approved by the Government and IDA. The objectives o f the Manual, which i s based on the AFR Simplified Procurement Procedures or Small Projects, are to promote transparency and responsibility, and to prevent fraud.

Manual of Procedures

8. accordance with FID’s Manual o f Procedures, which has been approved by IDA.

IDA-financed procurement under Component 1 (Social Safety Net) would be done in

9. Procurement under Component 2 (Community-driven basic infrastructure) would also be done in accordance with the Manual o f Procedures. The value o f contracts for Community Participation and for c iv i l works for this component would generally not exceed US$42,000 equivalent, and the value o f consulting contracts would generally not exceed US$5,000 equivalent and, in most cases, would be in the US$2,00O-US$3,000 range. They would be implemented by the beneficiaries, with the exception o f micro irrigation schemes that would be implemented by FID under a delegated contract management approach.

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The implementation o f the contracts under Communi ty Part icipation may involve a mixture o f force account by the beneficiaries16 and small c iv i l works contracts with contractors or individual artisans (tdcherons).

10. IDA-financed procurement under Component 3 (Rehabilitation and’reconstruction in response to natural disasters) would be done in accordance with the Manual o f Procedures acceptable to IDA and in conformity to FID’s regular or approved anti-cyclone standards. I f necessary, and in consultation with IDA, streamlined procedures applicable to emergency operations subject to OP/BP 8.00 would be applied.

1 1. The Bank’s Guidelines for Simplified Procurement for Small Projects and standard bidding documents have been used for the preparation o f the Manual o f Procedures, which wil l be followed by the beneficiaries and FID for procurement o f sub-projects. This Manual i s a living document, subject to changes which result from recommendations from supervision missions and technical, financial, and procurement audits. The legal documents for the Project state that a l l procurement related to community sub-projects would be done in accordance with the Manual o f Procedures. Any substantive amendment to the Manual would have to be acceptable to.

12. The procurement o f works by communities would generally be done through shopping involving the receipt o f at least three quotations. In the case o f works done by the communities under force account with the help o f a tdcheron, the direct contracting o f that t2cheron would be acceptable (provided o f course that the value o f that contract does not exceed US$lO,OOO equivalent), but, the choice o f that tdcheron by the “project cell” o f the beneficiary association would have to be approved by a general meeting o f a l l members o f that beneficiary association. The procurement o f goods by communities would be based on a minimum o f three price quotations. For the recruitment o f consultants or consulting f i rms, communities wil l follow the procedures followed laid down by FID in accordance with the Bank’s Guidelines (short l ist, letter o f invitation, evaluation o f proposals, etc.), but direct contracting would be acceptable, subject again to the approval o f a general meeting o f al l members o f the association o f beneficiaries and to FID’s non-objection to the choice o f the consultant (based on qualifications and experience) and to the terms and conditions o f the contract.

Advertising

13. A General Procurement Notice (GPN) will be published in the United Nations Development Business (UNDB) to advertise contracts involving international competition, including I C B for goods o f US$250,000 equivalent and above. The GPN wil l mention that the procurement for c iv i l works, goods, and consulting services for sub- projects would be done for the most part by the beneficiaries themselves and that FID, in i t s quarterly newsletter, wou ld publish the l i s t o f a l l upcoming small contracts for goods and works. Specific procurement notices for goods and works would be advertised in the national press o f wide distribution and internationally for I C B contracts.

The term “force account” refers to the labor hrnished by beneficiaries as part o f their contribution to 16

subprojects and the direct supervision o f activities by FID who is acting on behalf o f GOM.

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Procurement Plan

14. A work program and a procurement plans for the f i rst 18 months o f project implementation, both for sub-projects and for goods and services procured by FID have been prepared based on beneficiary requests and FID's annual work program. For each subsequent year, an annual work program and a corresponding procurement plan would be prepared and submitted to IDA for review and approval at the same time as FID's annual work program around November o f each year for the following year. These plans would include relevant information on goods, works, and consulting services contracted under the project, as well as the timing o f each milestone in the procurement process. In collaboration with the beneficiaries, FID would monitor the procurement scheduling. These plans would be reviewed during the supervision mission conducted by IDA.

Procurement Capacity assessment of FID

15. FID would be the executing agency for this project. The FID has been in place since 1993. It was created for the Food Security and Nutr i t ion Project (Cr. 2474-MAG). Since then i t has been operating for the Second Social Fund Project (Cr. 2778-MAG), the Third Social Fund project (Cr. 3 180-MAG) and the on-going Community Development Project (Cr. 3498-MAG). The FID has accumulated a considerable experience in procurement, in particular procedures applicable to small contracts for communal infrastructure.

16. review in detail contract award mechanisms for about 10 percent o f contracts.

Provisions have been made under the credit to finance one technical audit, which will

Procurement Monitoring

17. A procurement monitoring system i s already in place, which among other things ensures that the aggregate values for works and goods are not exceeded. In the case where the aggregate value for goods or works i s exceeded, IDA'S final non-objection wil l be requested.

Prior review thresholds

18. Contracts for goods and works with an estimated value o f US$250,000 equivalent and above would be subject to IDA'S prior review. All other goods and works contracts would be subject to post review. A technical audit would be performed during project implementation.

19. Prior IDA review for consultant services wil l be required for (a) all contracts for individuals costing US$50,000 and more; (b) all contracts (for any amount) for FID's high level staff including the general director and directors at the national level, and the regional directors except for the directors already in place; (e) all contracts (any amount) for the financial and technical audits; and (d) al l contracts with f i r m s costing US$50,000 and more. For contracts valued at US$lOO,OOO and more, the technical evaluation report for the recruitment o f consulting f i r m s would be subject to prior review before the financial evaluation. All other contracts would be subject to post review.

48

Madagascar Emergency Food Security and Reconstruction Project

Annex 6. Implementation and Monitoring Arrangements

Implementation Arrangements

1. The Fonds d ’Intervention pour le Dkvkloppement (FID) would be the implementing agency for the Project. The FID was established in 1993 as a not-for-profit association [“association privke ri but non-lucratfreconnue d ’utilitk publique”]. The Board o f Directors o f the FID i s comprised o f nine members including one representative nominated by the Prime Minister, and representatives from the Ministry o f Finance, mayors o f rural communes, c iv i l society and socio-professional organizations.

2. The FID i s headed by a General Manager [Directeur Gkniral] who would be responsible for day-to-day Project implementation. S h e i s assisted by a General Directorate [Direction Gknkrale] at the central level and six inter-regional offices in accordance with the provisions o f i t s Articles o f Agreement, by-laws, Manual o f Procedures, and i ts Subsidiary Agreement [Accord Subsidiaire] with the Government. Each inter-regional office i s headed by an Inter-Regional Director [Directeur Inter-Rdgional], who i s assisted by three managers [Chef de Services] respectively in charge o f financial management, operations, and monitoring and evaluation.

3. The FID’s Manuals o f Procedures would be updated in preparation for this Project. Three volumes o f the Manuals o f Procedures will define the process to be followed in the implementation o f sub-projects under each component o f the project: social protection program [Manuel Protection Sociale], community-based sub-projects [Manuel Projet Communautaire] and post-cyclone reconstruction [Manuel Reconstruction et Rkhabilitation Post-Catastrophe]. Sub-projects implemented under Component 2 do not correspond to an emergency situation. For these sub-projects, beneficiaries would contribute to the cost o f sub-projects either in kind (materials and labor) or in cash. The updated Manuals o f Procedures would be approved by the Association, and adopted by the Recipient and the Project Implementing Entity prior to credit effectiveness.

4. The FID would continue to respect sectoral policies as defined by the Ministries o f Education, Health, Agriculture, Energy and Mines, and Civ i l Works. The FID would also continue to implement agreements with sectoral ministries, which specify the rights and responsibilities o f each party in sub-project identification and implementation, including close coordination with decentralized ministerial staff at the local level.

5. The FID i s committed to ensuring efficient Project implementation. During Project implementation, the FID will ensure that i t operates efficiently and that i t has the staff numbers and sk i l ls necessary to implement the scheduled activities.

Implementation Schedule

6. The Project i s expected to be implemented over a period o f three years. The agreed implementation schedule for the f i rst 18 months o f the Project i s summarized in Table 6.1.

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Alternatives considered and reasons for rejection

7. During Project design, i t was discussed whether or not to implement Project activities under the Commune Development Support Program (CDSP) which seeks to strengthen the capacity o f local government (communes) to provide basic social and economic infrastructure at the local level. This option was rejected for two reasons:

a. The implementing agency for the CDSP -- the Fonds de Dkveloppement Local (FDL) -- i s newly created and untried, whereas the FID has consistently demonstrated capacity to (i) implement self-targeted labor-intensive public works (cash-for-work) for vulnerable groups, including women, (ii) support community development and build small-scale social and economic community-driven basic infrastructures on a large scale, and (iii) provide an effective mechanism to respond to catastrophic events including cyclones.

b. The FDL i s not an emergency response agency, but rather aims to build the capacity o f and transfer funds to communes to implement sub-projects in areas under their responsibility. Considering the strategic positioning o f the CDSP within Madagascar’s incipient decentralization strategy, i t i s important not to confuse the objectives o f the CDSP during the initial 4-year implementation phase

8. I t was decided that the FID should be the implementing agency. In order to avoid overlap o f responsibilities with the forthcoming CDSP, i t was decided that the Project would reconstruct and rehabilitate social infrastructures in areas under communal responsibilities (e.g. schools and health centers) only in the aftermath o f catastrophic events (under Component 3). The Project would not otherwise finance sub-projects which fal l under communal responsibility as such activities could be financed by the FDL. This division o f responsibility would ensure that there i s no overlap in terms o f having two mechanisms to deliver basic social infrastructure at the local level.

Financial Management, Disbursement, and Procurement Arrangements

9. A Financial and Administrative Director [Directeur Financier et Administrats or DAF] located in the FID’s central office i s in charge o f the overall financial management o f the Project including budgeting, maintenance o f records and accounts for all transactions related to the General Directorate, consolidation and production o f the Project financial statements and bi-annual Interim unaudited Financial reports (IFRs), annual audited financial reports and administration o f the designated account.

10. Each inter-regional office would have an accountant responsible for regional accounts as well as the electronic transmission o f regional accounts to the central level, using the computerized accounting and financial management system. These accountants are currently in place. The computerized accounting and reporting system used during the implementation o f the Community Development Project would continue to be used for this Project. The format and the frequency o f periodic reporting would be described in the updated Manuals o f Procedures. The Manuals o f Procedures would be submitted to IDA prior to credit effectiveness.

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11. Independent auditors, acceptable to IDA, would audit the use o f al l funds available under the Project, including the designated account and the Statements o f Expenditures (SOE). Interim unaudited Financial Reports (IFRs) wil l be submitted semi-annually to IDA no later than 45 days after the end o f each calendar semester. Audited financial reports would be submitted to IDA no later than six months after the end o f each fiscal year. External auditors acceptable to IDA would be recruited no later than three months after credit effectiveness. The project wil l use IFR-based disbursement (per Annex 4).

12. Procurement o f goods and services would be carried out as stated in the Financing Agreement, the Project Agreement, and FID’s Manual o f Procedures and would be undertaken in accordance with World Bank Guidelines for procurement o f goods and works under IDA Credits (as revised in May 2004) and World Bank Guidelines for Selection and Employment o f Consultants by World Bank Borrowers (as revised in M a y 2004). The following procurement methods would be applied to the Project: international competitive bidding, national competitive bidding, national shopping and community participation for goods and works. Selection processes would be as follows: quality-based and cost-based selection, least cost selection, single source selection, procedures set forth in paragraphs 5.2 and 5.3 o f Consultant Guidelines for the selection o f individual consultants and procedures set forth in paragraphs 3.16 and 3.21 o f Consultant Guidelines for the selection o f NGOs and service delivery contractors for consultancy services and community activities. Procurement would be conducted in accordance with the 18-month procurement plan agreed upon during negotiations. Procurement arrangements are further described in Annex 5.

Environmental and Social Safeguards

13. The environmental classification o f the Project i s Category B. The environmental and social impacts o f the Project activities are expected to be minimal, site-specific, and manageable to an acceptable level. Social aspects o f the Project have been reviewed in the Environmental and Social Management Framework (ESMF), which was commissioned by the Government.

14. The FID established an Environmental Manual o f Procedures following the environmental study o f February 1999. The Environmental Manual has been updated for the proposed Project in the following manner: (i) an environmental analysis i s taken at each stage of sub-project preparation; (ii) environmental mitigation measures are assessed upon completion o f the sub-project and during the ex-post review. The updated Environmental Manual also includes: (i) the training o f FID staff on environment-related matters; (ii) a plan to train and create awareness o f environmental concerns for FID’s partners (community associations, local consulting f irms, the regional consultative committee o f the FID, etc.); (iii) procedures to follow for approval o f sub-projects; and (iv) monitoring and evaluation systems to follow up on the impact o f sub-projects. IDA has reviewed the updated Environmental Manual and deemed i t satisfactory.

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Supervision, Monitoring and Evaluation Arrangements

15. The FID has an adequate monitoring and evaluation system which has been progressively upgraded during the implementation o f the IDA-Financed Community Development Project. The system includes modules on: (i) management o f beneficiary requests from the time o f receipt until the completion o f works; (ii) management o f follow-up documents related to sub-projects described in the Manual o f Procedures; (iii) management o f the annual work program; (iv) management o f contracts with local consulting f i rms, small and medium enterprises (SMEs), and NGOs; (v) preparation o f monthly reports; (vi) preparation o f semi-annual reports; and (vii) monitoring performance o f outcome and intermediate results indicators. The FID’s Management Information System i s linked to i t s accounting system.

16. The Project would also finance (i) a technical audit in 2010, (ii) impact evaluations in early 2009 (the baseline has already been completed), and in 2011; and (iii) a beneficiary assessment in 201 1. Together with the financial and technical audits, the impact evaluations and beneficiary assessments would be used as inputs for the Implementation Completion Report (ICR).

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Annex 7. Government Strategy regarding the FID

A r c d n d d P J J z ) - ?V ‘ I LE PREMIER MINISTRE, REPUBLIQUE DE MADAGASCAR CHEF DU GOUVERNEMENT Tanindrazana - Fahafahana - Fandrosoana

No 4% I PM I,SP

Madame Sofla BETTENCOURT Acting Country Manager Banque Mondiale

101 - ANTANANARIVO

: Strategic du Gouvernernent relative au Fonds d’lnvestissernent et de Dbveloppernent

Madame,

En vous remerciant d’avoir consider6 positivement la dernande formulee par le Ministre des Finances dans sa lettre du 21 juillet 2008, je voudrais par la presente vous dire I’inter8t que le Gouvernernent porte au Fonds d’lntervention pour le D6veloppernent (FID) et au nouveau Projet en cours de preparation.

Cornrne vous le savez, Madagascar est visit6 reguli6rernent par les cyclones. Avec I’appui de la Banque, nous avons rnis au point un projet dont I’objet principal est d’en mitiger dans la rnesure du possible les effets. Ce projet dont la mise en muvre relhve de la Cellule de Prevention et de Gestion des Urgences (CPGU), sous tutelle de la Prirnature, est en cours d’exbcution.

Cependant, si on p u t limiter les impacts nefastes des castrophes naturelles, on ne peut pas les Blirniner. Dans le contexte actuel, force est de, constater qu’apds le passage des cyclones, des travaux de rehabilitation et des activites de protection sociale sont toujours nbcessaires. Le FID a rnontrb son efficacite dans ce domaine. C’est pourquoi le Gouvernement voit en lui une agence incontournable dans la reponse aux catastrophes.

Pour qu’il y ait parfaite harrnonie dans I’action du FID, celle du Bureau National de Gestion des Risques et des Catastrophes (BNGRC) et celle de la CPGU, il a et6 decide :

1 que le FID interviendra en priorM dans les zones identifies par le BNGRC, 2. que le Secretaire Executif du BNGRC et le Secrbtaire Executif de la CPGU

participeront au Conseil d’Adrninistration du FID.

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II a bt6 Bgalement decide que le budget de I’Etat apportera, dans la mesure de ses moyens, sa contribution dans la gestion des catastrophes . Cest ainsi que dans la loi rectificative 2008 ainsi que dans le projet de loi de finances 2009 ii a et6 prevu un fonds de contingence d’un montant d’un milliard d’Ariary (soit approximativement 600.000 USD) A gerer par la CPGU. Dans cette meme loi des finances 2009, le FID s’est vu dot6 d’une RPI d’un montant d’un milliard d’ariary. Par ailleurs, le renforcement du BNGRC, qui est reconnu comrne reference dans la zone Afrique, sera poursuivi.

J’apprecierais que 1’8quipe de preparation du Projet prenne en compte dans ses travaux cette vision du Gouvernement quant au rble du FID et 18s efforts financiers qu’il deploie pour faire face aux catastrophes naturelles.

Veuillez agrber, Madame, I’expression de ma consideration distinguee.

Code A : Monsieur Philippe Auffret Econorniste Banque Mondiale Washington

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Annex 8. Project Preparation and Appraisal Team Members

TENTATIVE TIMETABLE OF KEY PROJECT PROCESSING EVENTS

Milestone Available Date

Time taken to prepare

Prepared by

PreparatiodAppraisal

Decision meeting October 24,2008

2 months

Government with assistance o f World Bank Staff

September 15 - October 3,2008

Negotiation November 10,2008

Estimated Board Approval* November 25,2008

Planned Date o f Effectiveness December 3 1,2008

Project Completion June 30,201 1

Credit Closing December 3 1,201 1

* Under OP 8.00, the Project shall be processed with RVP approval and circulated to the Board o f Directors for Information. In the absence o f objections, the Project shall become effective ten daw after circulation to the Board.

Project Team: The preparation team included: Philippe Auffret, Task Team Leader (AFTH3); Paul-Jean Feno, Environmental Specialist (AFTEN); Gervais Rakotoarimanana, Sr. Financial Management Specialist (AFTFM); Sylvain Rambeloson, Sr. Procurement Specialist (AFTPC); Renganaden Soopramanien, Sr. Counsel (LEGAF); Anton Le is Garcia, Consultant (LEGVP); Suzanne Morris, Sr. Finance Officer (LOAFC); Tristam Barrett, Consultant; Julia Honvitz, Consultant; Josiane Luchmun, Program Assistant; Norosoa V. Andrianaivo, Language Program Assistant (AFTH3); and Herinjara Maria Ranohatra, Team Assistant (AFMMG). The team greatly benefited from guidance from Lourdes Pagaran, Sr. Operations Officer (AFTRL); Victoria Gyllerup, Operations Officer (AFTRL); Norbert Mugwagwa, Operations Advisor (AFTHD) and Surendra Aganval, Consultant (AFTQK). A n n e Anglio, Sr. Program Assistant (AFTH3) provided invaluable help in processing this operation.

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