AFRICAN DEVELOPMENT FUND

MEMORANDUM TO THE BOARD OF DIRECTORS

SUPPLEMENTARY LOAN

LOWER MANGOKY IRRIGATION AREA REHABILITATION PROJECT

REPUBLIC OF MADAGASCAR

AGRICULTURE AND AGRO-INDUSTRY August 2008 DEPARTMENT - OSAN

TABLE OF CONTENTS Page

EQUIVALENTS AND ABBREVIATIONS, i

UPDATED PROJECT MATRIX, EXECUTIVE SUMMARY ii-iv

1. INTRODUCTION ............................................................................................................................................................... 1

2. THE INITIAL PROJECT ................................................................................................................................................... 1

2.1 Objective of the Initial Project and Description of Components.............................................................................. 1 2.2 Cost of Initial Project and Financing Arrangements................................................................................................... 2 2.3 Loan Conditions ............................................................................................................................................................ 2 2.4 Implementation Status of Initial Project .................................................................................................................... 2

3. APPRAISAL OF THE SUPPLEMENTARY LOAN......................................................................................................... 3

3.1 Justification for the Supplementary Loan.................................................................................................................. 3 3.2 Objective and Description............................................................................................................................................. 4 3.3 Estimated Cost of Additional Activities ....................................................................................................................... 4 3.4 Sources of Finance......................................................................................................................................................... 5 3.5 Project Implementation Schedule ............................................................................................................................... 6 3.6 Project Sustainability and Risks.................................................................................................................................. 6 3.7 Environmental and Social Impacts ............................................................................................................................. 7 3.8 Project Executing Agency ............................................................................................................................................. 9 3.9 Procurement of Works, Goods and Services................................................................................................................ 9 3.10 Disbursement Arrangements ...................................................................................................................................... 10

4. JUSTIFICATION IN LIGHT OF THE SUPPLEMENTARY FINANCING POLICY ................................................ 10

4.1 Justification in light of the General Conditions ....................................................................................................... 10 4.2 Justification in light of the Specific Conditions........................................................................................................ 11

5. ECONOMIC AND FINANCIAL ANALYSIS.................................................................................................................. 11

5.1 Financial Analysis........................................................................................................................................................ 11 5.2 Economic Analysis....................................................................................................................................................... 11 5.3 Sensitivity Analysis ...................................................................................................................................................... 12

6. CONCLUSIONS AND RECOMMENDATIONS ............................................................................................................ 12

6.1 Conclusions .................................................................................................................................................................. 12 6.2 Recommendations ....................................................................................................................................................... 12

LIST OF ANNEXES

ANNEX 1: Map of Madagascar with Project Site 1 ANNEX 2: Summary Economic Analysis 2 ANNEX 3: List of Goods and Services 1

This report was prepared by Messrs. Ould-Tolba Mohamed, Principal Agricultural Economist, OSAN.3, and Mission Leader (Ext. 2452), Mouldi Tarhouni, Principal Rural Engineer, OSAN 2 (Ext. 2235) and Louis-Philippe Mousseau, Principal Environmentalist, OPSM.0 (Ext. 3540), following a mission to Madagascar from 25 April to 9 May 2007. Questions on this document should be referred to the authors or to Messrs. J. COOMPSON, Acting Division Manager, OSAN 3 (Ext. 2037) and M. A. Abou-Sabaa, Director, OSAN (Ext. 2037).

EQUIVALENTS

Currency Equivalents

(July 2008)

UA 1 = MGA 2654.43

Fiscal Year in Madagascar

1 January – 31 December

ACRONYMS AND ABBREVIATIONS

ADB African Development Bank ADEMO Morombe Development Association ADF African Development Fund AMVR Rural Development Area COS Steering and Monitoring Committee ESAP Environmental and Social Assessment Procedures ESIA Environmental and Social Impact Assessment ESMP Environmental and Social Management Plan FAMA Federation of Mangoky Associations FD Final Design FERHA Irrigation Systems Maintenance Fund ICDR International Centre for Development and Research LOC Line of Credit MAEP Ministry of Agriculture, Livestock and Fisheries MFI Micro-Finance Institution NGO Non-Governmental Organization ONE National Environmental Authority OPEC Organization of Petroleum Exporting Countries PD Preliminary Design PDC Community Development Plan PIU Project Implementation Unit PNVA National Agricultural Extension Programme PPI Irrigated Areas Programme PRPBM Lower Mangoky Irrigation Area Rehabilitation Project RN National Highway UA Unit of Account VM Vola Mahasoa WUA Water Users’ Association

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MADAGASCAR Lower Mangoky Irrigation Area Development Project and Supplementary Loan

Results-Based Logical Framework

HIERARCHY OF OBJECTIVES

EXPECTED OUTCOMES SCOPE PERFORMANCE

INDICATORS

INDICATIVE TARGETS AND TIMEFRAMES

ASSUMPTIONS/ RISKS

1. SECTOR GOAL Strengthening of food security

Impact 1.1 The incomes of farmers

are increased

1.1 The country’s

population, particularly the most underprivileged

1.2 The population of the

project area, i.e. 28,000 inhabitants

1.1 Income of farmers of the

irrigation area (source: Survey of incomes on the area)

1.1 The average income of

farmers in the irrigation area increases from MGA 1 million in 1999 to MGA 3 million in 2011

1.1 The macro-

economic framework remains stable

1.2 The promotion of

rural development and agriculture remains one of the Government’s priorities, as indicated in the Madagascar Action Plan (2007-2011)

2. PROJECT OBJECTIVE Increase rice production and improve productivity

Impact 2.1 Paddy rice production is

improved 2.2 Paddy rice yields are

improved

Beneficiaries 2.1 Project area

population of 28 000 inhabitants of whom 33% are female farm-heads.

Impact Indicators

2.1 Output of the irrigation area (source: Project Report)

2.2 Average paddy rice yield (source: Project Report)

Target Indicators 2.1 Paddy production

increases from 17,000 tonnes in 1999 to 60,000 tonnes in 2012

2.2 Average paddy rice

yields increase from 2.5 in 1999 to 6 t/ha in 2008

Assumptions 2.1 The operation and

maintenance of the water supply structure and irrigation area are satisfactory

2.2 The current water

supply structure will be used until the new structure is built

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HIERARCHY OF

OBJECTIVES EXPECTED OUTCOMES REACH PERFORMANCE

INDICATORS INDICATIVE TARGETS

AND TIMEFRAMES ASSUMPTIONS/

RISKS 3. ACTIVITIES / COMPONENTS 3.1 Rehabilitate irrigation infrastructures

3.2 Support the development of the irrigation area

Outputs 3.1.1 The irrigation system

and protection dyke are rehabilitated

3.1.2 The water supply structure is rebuilt

3.1.3 The measures recommended by the ESIA, the Relocation and Community Development Plans (PDC) resulting from the construction of the water supply structure are implemented

3.2.1 Agricultural advisory

technical assistance is provided

3.2.2 Water levies

collected 3.2.3 Land ownership is

secured 3.2.4 Farmers’ access to

credit is ensured 3.2.5 Environmental and

social performance of the irrigation area

Beneficiaries 3.1.1 Project are

population of 28,000 inhabitants of whom 33% are female farm-heads

3.1.2 Creation of 120 direct jobs, including 20 local

Indicators (Source: Project Reports) 3.1.1 Number of ha and km of

dyke rehabilitated 3.1.2 State of the water supply

structure 3.1.3 ESIA measures,

Relocation and PDC Plan prepared for Bevoay village (e.g. improvement of living conditions, including the enrolment of girls, maternal and child health, small-scale irrigation)

3.2.1 Rate of adoption of rice

cultivation technical package

3.2.2 Rate of water levy

collection (ERR) 3.2.3 Number of farmers with a

land title 3.2.4 Number of farmers with

access to micro-credit (MC)

3.2.5 Feasibility study on the

use of rice hull for fuel and support for the fertilization of plots with animal manure

Target Indicators 3.1.1 5000 ha and 30 km of

dyke rehabilitated by end 2008

3.1.2 The water supply structure is rebuilt by end 2010

3.1.3 Mitigation measures

implemented during construction and operationalization of the water supply structure

3.2.1 Adoption rate

increases to 80% in 2010

3.2.2 The ERR increases from 75% in 2007 to 100% in 2010

3.2.3 Number of farmers with a land title increases from 1,084 in 2008 to 5,032 by end 2011

3.2.4 Number of farmers with access to MC increases from 1,200 in 2007 to 3,000 in 2012

3.2.5 Reduction of the incidence of malaria by 80% among the population of the area in 2010.

Assumptions 3.1 FERHA

mobilizes enough resources for the maintenance of the hydraulic structures

3.2 Integration of

hydraulic and geotechnical factors in the design of the structure, including underlying cyclone risks

3.3 Federation of

Lower Mangoky Associations (FAMA) has the capacity to manage the Scheme efficiently

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EXECUTIVE SUMMARY 1. The Lower Mangoky Irrigation Area Rehabilitation Project (PRPBM) was approved by the Bank on 20 October 1999, and became effective on 28 September 2000. It will be completed on 31 December 2008 (the disbursement rate for the ADF loan is 99.85% and the balance of the OPEC loan is entirely committed to ongoing contracts). The water for the Lower Mangoky Irrigation Area is provided by the Bevoay water supply structure. Built in 1961, the structure has undergone deteriorations that required periodic repairs (1998, 2000, 2004 and 2006). Gafilo Cyclone in 2004 caused permanent damage to the water point and weakened its structure. Following various supervision missions, the Bank and the Malagasy Government came to the conclusion that the only lasting solution to securing production on the area would be to build a new water supply structure. This activity was not provided for under the Project. The Government applied for a supplementary ADF loan under the Lower Mangoky Irrigation Area Rehabilitation Project to finance the construction works for a new water supply structure. 2. The initial project rehabilitated an area of about 5,000 ha. It provided substantial support to the farmers and their associations in terms of production and organization. Under the project, 5,032 land titles were issued, of which 1,804 were distributed to the farmers. The project put in place a credit scheme through a micro-finance institution, Vola Mahasoa (VM), which provides diverse credit services to farmers of the Area with fairly encouraging results (in 2007, 1,200 farmers benefitted from loans amounting to MGA 452 000 000 with a recovery rate of about 98%). All these achievements have significantly improved rice yields, which, in 2007, averaged 6 t/ha during the season, and 4.5 t/ha off-season, as against a target of 3.5 to 4 t/ha estimated at project appraisal. The average output for the past three years is 35 000 tonnes of rice. The surplus, estimated at 25 000 tonnes, is marketed in Tuléar town. 3. The reconstruction of this new water supply structure will help to sustain the above-mentioned gains. It will also enable the country to undertake further extensions of the irrigation area, which if developed will contribute to strengthening food security in Madagascar. If, on the other hand, the water supply structure is not replaced, the irrigation area will certainly be exposed to the following losses: a loss in production of 35 000 tonnes of rice per year, an immediate halt to all economic activities that have emerged from this production, and silting up of the Area, which will make it very costly to rehabilitate. 4. The total cost of the initial project, excluding taxes, is UA 16.98 million, financed by the ADF to the tune of UA 10 million, OPEC UA 5.91 million, and the Government UA 1.07 million. The cost of the additional activities, estimated at UA 16.432 million, will be financed by the ADF for an amount of UA 15 million, and the Malagasy Government for UA 1.432 million. 5. The works for the water supply structure will be procured through international competitive bidding with prequalification. The goods will be procured through local shopping. The consulting firm for works control and supervision, the auditor, NGOs and individual consultants will be recruited through competition on the basis of a shortlist. 6. In light of the foregoing, it is recommended that an ADF loan not exceeding UA 15 million be granted to the Republic of Madagascar, subject to fulfilment of the conditions specified in the loan agreement.

1. INTRODUCTION 1.1 Madagascar has a total cultivated area of about 3.7 million hectares, of which 3.5 million are under annual crops and 0.2 million under perennial crops. It is dominated by rice cultivation (1.2 million ha, representing 32% of the total area). Export crops, mainly vanilla, clove and coffee, occupy about 10% of the cultivated land and are located mostly in east Madagascar. Industrial crops such as sisal, cotton, sugar cane and groundnuts account for 3% of the cultivated area. 1.2 Madagascar is often hit by cyclones, which generally cause considerable damage to basic infrastructures and crops. Its agricultural performance has remained poor owing mainly to low yields, the bad state of basic infrastructures (including irrigation infrastructure) and inadequate rural credit. To address these constraints, the Government has prepared sector policies and strategies. One such policy is the consolidation of the role of the agricultural sector in ensuring food security and poverty reduction. It is within this context that the Government sought to implement the Lower Mangoky Irrigation Area Rehabilitation Project (PRPBM). The Project was approved by the Bank on 20 October 1999, and became effective on 28 September 2000. It will be completed on 31 December 2008. 1.3 The Lower Mangoky Irrigation Area is located in the delta of River Mangoky, south-west of Madagascar, in the Atsimo-Andrefana region, 200 km north of Tuléar. The water for the irrigation area is supplied by the Bevoay structure. Built in 1961, the first signs of major degradation of the structure appeared in 1970 with the breach of the upstream dyke. This damage was repaired immediately, and no other problem was subsequently reported for 24 years. As from 1994, the structure started to deteriorate, requiring periodic repairs (1998, 2000, 2004 and 2006). Gafilo Cyclone in 2004 caused permanent damage to the water supply structure and weakened its structure. Following various supervision missions, the Bank and the Malagasy Government came to the conclusion that the only lasting solution to securing production on the scheme would be to build a new water supply structure. This activity was not provided for under the project. It is within this context that the Government of Madagascar requested a supplementary ADF loan, under the Lower Mangoky Irrigation Area Rehabilitation Project to finance the construction works for a new water supply structure. The preliminary design (PD) for this structure has been prepared, and the final design (FD) is underway. 2. THE INITIAL PROJECT 2.1 Objective of the Initial Project and Description of Components The sector goal of the project is to strengthen food security. Its specific objective is to increase rice production and improve productivity. The project components are as follows: (i) Rehabilitation of Irrigation Infrastructure: this component comprises the final design and the renovation of the headrace structures and primary, secondary and tertiary canals and drains covering a total area of about 5,000 ha of irrigated crops; (ii) Support for irrigation area development: it comprises the following five sub-components: technical advice; support to farmers and their organization; land security; research and development, and rural credit; (iii) Improved Access, which comprises the construction of access infrastructures; and (iv) Support for Project Management: this component comprises the establishment of the Project Implementation Unit (staff, equipment and operating resources).

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2.2 Cost of Initial Project and Financing Arrangements The total cost of the initial project, excluding taxes, is estimated at MGA 26.321 million, or UA 16.98 million, including physical contingencies and provision for price escalation. The summary project cost and financing plan are shown in Tables 2.1 and 2.2 below:

Table 2.1 Summary of Estimated Project Cost by Component

(MGA Million) (UA million) COMPONENTS

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

Infrastructure rehabilitation 6,346 3,692 10,038 4.09 2.38 6.47 63.20 Support for development 2,811 1,319 4,130 1.81 0.85 2.66 68.10 Improved Access 2,907 1,788 4,695 1.88 1.15 3.03 61.90 Project Management 2,141 631 2,772 1.38 0.41 1.79 77.20 Base Cost 14,206 7,429 21,635 9.16 4.79 13.95 65.70 Physical Contingencies 1,162 621 1,783 0.75 0.40 1.15 65.20 Price Escalation 1,501 1,402 2,903 0.97 0.91 1.88 51.70 TOTAL PROJECT COST 16,869 9,452 26,321 10.88 6.10 16.98 64.10

Table 2.2

Sources of Finance

(in UA million) SOURCES Foreign Exchange Local Currency Total

% of Cost

ADF 7.10 2.90 10.00 58.89% OPEC 3.78 2.13 5.91 34.81% MALAGASY GOV. 0.00 1.07 1.07 6.30% TOTAL 10.88 6.10 16.98 100.00%

2.3 Loan Conditions The loan became effective on 28 September 2000 following the fulfilment by the Borrower of the conditions precedent to effectiveness. The other conditions, namely the setting up of the Steering and Monitoring Committee (COS) to consider and approve the work programme and budget, as well as the repeal of the Rural Development Area (AMVR) system of the Area and its upgrade to a land reserve, were also fulfilled. 2.4 Implementation Status of Initial Project 2.4.1 The main development works carried out by the Project are: (i) the removal of 150 000 m3 of sand from the fore canal (4 km) and the inlet canal (10 km); (ii) the reconstruction and raising of 17.5 km of the downstream dyke; (iii) the rehabilitation of 139.7 km of concrete and self-support canals; (iv) the replacement and rehabilitation of the hydraulic equipment and automatic gates, totalling 294 units; (v) the cleaning and improvement of 67 km of drainage networks; (vi) the rehabilitation of 6 km of earth roads; (vii) the repair and use of two dredging machines; (viii) the on-farm development of a total about 5,000 ha of new plots; (ix) the repair of several breaches around the water supply structure and rehabilitation of vulnerable sections of the scheme’s protection dyke; (x) the cleaning of the fore canal; and (xi) the rehabilitation of 227 km of the quaternary canals within the irrigation area.

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2.4.2 The project also provided support to farmers and their association with respect to production and organization. In this regard, technical information on rice production methods was widely disseminated to the farmers (nearly 70% of the rice farmers adopted the recommended techniques). As regards organization, the project contributed to the institutional capacity building and structuring of 21 Water Users’ Associations (WUA) and their federation (Federation of Mangoky Associations - FAMA). Lastly, as regards land tenure security, 5,032 land titles were issued, of which 3,500 were computerized and 1,804 distributed to the farmers. 2.4.3 The project established a branch of the Vola Mahasoa (VM) micro-finance institution, which provides credit to the farmers of the scheme (seasonal credit, inventory credit and marketing credit). The results obtained in this regard are rather encouraging. In 2007, 1,200 farmers benefitted from loans amounting to MGA 452 000 000, with a recovery rate of about 98%. The interest rate applied is 3.5% monthly. It has enabled the VM branch to operate autonomously, without any subsidy. 2.4.4 All these activities have significantly improve rice yields, which in 2007 averaged 6 t/ha, in-season, and 4.5 t/ha, off-season, as against a target of 3.5 to 4 t/ha estimated at project appraisal. The average output in the past three years is 35,000 tonnes of rice. It is processed locally with about 40 hullers belonging to the farmers and other private operators. The surplus, estimated at 25,000 tonnes, is taken to Tuléar town and marketed. 3. APPRAISAL OF THE SUPPLEMENTARY LOAN 3.1 Justification for the Supplementary Loan 3.1.1 The damage to the Bevoay water supply structure is significant. There is a real threat of the structure collapsing with the next floods, and the decision to adopt a radical solution to this problem has become necessary, especially as the structure has already undergone several repairs over the past three decades. The diagnostic study conducted on the state of the structure confirmed that the situation was serious, and recommended the complete replacement of the structure. Taking the risk of not replacing the structure exposes the scheme to the following substantial damage: (i) the drying up of the irrigation area for at least five consecutive years, leading to production losses (35,000 tonnes of rice annually); (ii) a halt to all economic activities that have been organized around the irrigation area (trading, rice processing, transport); (iii) the silting up of the entire irrigation system, which will render it very costly to rehabilitate. 3.1.2 The reconstruction of a new structure will, in addition to preventing the problems mentioned above, enable the country to undertake significant extension of the Lower Mangoky Irrigation Area, which is estimated at 15,000 ha. With this possibility of extension and the planned tarring of National Highway (RN) 9 (linking the project site to Tuléar), for which the study is underway with ADF funding, the Lower Mangoky Irrigation Area will become a very important rice production centre, which will play an increasingly important role in the country’s food security. 3.1.3 The development of the agricultural sector is Commitment 4 of the “Madagascar Action Plan» (MAP), which comprises 6 challenges. One of these challenges is “a sustainable Green Revolution” for which water control is an essential pillar. The development,

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rehabilitation and maintenance of irrigation systems are key actions of this programme. In addition, Madagascar has formulated short and medium-term action plans to address the problem of soaring food prices. These plans refer to the rehabilitation of irrigation schemes as a priority among the medium-term measures (2009-2012). Consequently, the proposed supplementary loan is one of the top priorities of the Government. 3.2 Objective and Description 3.2.1 The sector goal of the project, including the supplementary loan, is to strengthen food security. Its specific objective is to increase rice production and improve productivity. These objectives are the same as those of the initial project. 3.2.2 The components of the initial project remain the same. The resources of the supplementary loan will used mainly for the construction of the new water supply structure. The cost of the “Works Rehabilitation” component will therefore be higher. The additional works proposed for the construction of the new structure are described below: (i) reinforced concrete tubes; (ii) embankments for the concrete tubes and banks; (iii) major earthworks for the evacuation of the existing structure; (iv) reinforced concrete for the water supply structure; and (v) the provision and installation of 6 sluice gates for the structure. It should be noted that the study on the structure adopted the most robust solution to deal with future violent floods that may be caused cyclones. 3.3 Estimated Cost of Additional Activities 3.3.1 The cost of the additional activities, net of taxes and including provisions for physical contingencies and price escalation, is estimated at UA 16.432 million (MGA 43,617 million). Provisions for physical contingencies are 10% for works, 5% for goods, services and operating costs. Price escalation accounts for 7% of the cost. Foreign exchange costs are estimated at UA 12.649 million (MGA 33,577 million), representing 77% of the cost, while the local currency costs are estimated at UA 3.783 million (MGA 10,041 million), or 23% of the cost. Tables 3.1 and 3.2 below present the project costs by component and by category of expenditure.

Table 3.1 Summary Cost Estimates for Additional Activities by Component

(MGA Million) (UA million)

COMPONENTS L.C. F.E. Total L.C. F.E. Total %

F.E. %

Base Cost

1. Reconstruction of water supply structure 7,808 28,412 36,220 2.941 10.704 13.645 78 96 2. Support for scheme development 355 - 355 0.134 - 0.134 - 1 3. Project management 464 640 1,104 0.175 0.241 0.416 58 3 Base Cost 8,626 29,052 37,679 3.250 10.945 14.195 77 100 Physical Contingencies 714 2,735 3,449 0.269 1.030 1.299 79 9 Price Escalation 701 1,789 2,490 0.264 0.674 0.938 72 7 TOTAL PROJECT COST 10,041 33,577 43,617 3.783 12.649 16.432 77 116

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Table 3.2

Summary Cost Estimates of Additional Activities by Expenditure Category

(MGA million) (UA million) CATEGORY OF EXPENDITURE L.C. F.E. Total L.C. F.E. Total

% F.E. % Base Cost

INVESTMENT 8,162 28,412 36,574 3.075 10.704 13.779 78 97 A. Works 7,031 26,816 33,847 2.649 10.102 12.751 79 90 B. Goods 1 69 71 0.100 0.260 0.270 98 - C. Consultancy services 1,130 1,526 2,656 0.426 0.575 1.001 57 7 RECURRENT EXPENDITURE 464 640 1,104 0.175 0.241 0.416 58 3 A. Project Operating Costs 148 640 788 0.560 0.241 0.297 81 2 B. Staff Expenses 316 - 316 0.119 - 0.119 - 1 Base Cost 8,626 29,052 37,679 3.250 10.945 14.195 77 100 Physical Contingencies 714 2,735 3,449 0.269 1.030 1.299 79 9 Price Escalation 701 1,789 2,490 0.264 0.674 0.938 72 7 TOTAL PROJECT COST 10,041 33,577 43,617 3.783 12.649 16.432 77 116

3.3.2 The following reasons account for the higher cost than the initial estimates, based on the preliminary design of 2005 (UA 7.225 million): (i) general increase in the cost of materials, transport and fuel recorded in recent years, and (ii) the technical option adopted, which resulted in a significant increase in the reinforced concrete used for the tubes for the upstream protection of the structure. 3.4 Sources of Finance

The additional activities will be financed by the ADF loan for an amount of UA 15

million (91.3% of the cost) and the Malagasy Government for UA 1.432 million (8.7% of the cost). The tables below show the breakdown of financing by source and by expenditure category. The Government’s contribution will finance up to 8% of the construction works for the structure, 100% of costs for research and extension and support to the producers’ organizations, and 22% of the recurrent costs. The other costs, net of taxes, will be financed from the supplementary loan.

Table 3.3

Sources of Finance

(in UA million) (in MGA million) SOURCES F.E. L.C. Total F.E. L.C. Total

% Total

MALAGASY GOV. 0.050 1.381 1.432 134 3,667 3,801 8.7 ADF 12.599 2.401 15.000 33,443 6,374 39,816 91.3 TOTAL 12.649 3.783 16.432 33,577 10,041 43,617 100.0

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Table 3.4 Expenditure by Category and Source of Finance (in UA million)

Government ADF TOTAL

EXPENDITURE CATEGORY Amount % Amount

% Amount %

INVESTSMENT 1.333 8.3 14.650 91.7 15.983 97.3 A, Works 1.189 8.0 13.678 92.0 14.867 90.5 B. Goods 0.000 - 0.029 100.0 0.029 0.2 C. Consultancy Services 0.144 13.2 0.943 86.8 1.087 6.6 RECURRENT EXPENDITURE 0.099 22.0 0.350 78.0 0.449 2.7 A. Project Operating Costs 0.073 22.8 0.248 77.2 0.321 2.0 B. Staff Expenses 0.026 20.0 0.103 80.0 0.128 0.8 TOTAL PROJECT COST 1.432 8.7 15.000 91.3 16.432 100.0 3.5 Project Implementation Schedule Activities financed from the supplementary loan will be spread over 3 years. The expenditure schedule and summary implementation schedule are given in the tables below:

Table 3.5 Expenditure Schedule by Component (in UA million)

2009 2010 2011 TOTAL

1. Reconstruction of the supply structure 4.712 10.940 0.187 15.839 2. Support for scheme development 0.048 0.048 0.048 0.144 3. Project Management 0.105 0.171 0.173 0.449 TOTAL 4.865 11.159 0.408 16.432

Table 3.6

Summary Implementation Schedule

Activities Date Responsible Invitation to bid 15/12/2008 Borrower/ADF Selection of contractor and works supervision firm 15/04/2009 Borrower/ADF First season works 01/05/2009 Borrower Second season works 01/05/2010 Borrower Supervision Once every 6 months ADF Provisional acceptance of structure works 15/12/10 Borrower 3.6 Project Sustainability and Risks 3.6.1 The Federation of Mangoky Associations (FAMA), which is in charge of managing the water, will, at the end of each cropping season, collect water levies from the 21 WUAs, at the rate of MGA 100 000/ha/year, which is then spent on the maintenance of the primary irrigation canals and all the other infrastructures on the irrigation area. The expertise acquired by FAMA in the management of the irrigation system and its maintenance throughout project implementation is a favourable factor that would ensure the sustainability of the investments within the scheme.

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3.6.2 The complex nature and size of the structure are such that the management and financing of its maintenance are beyond the capacity of the beneficiaries. It forms part of the major works managed by the Government through the Ministry of Agriculture, Livestock and Fisheries (MAEP). The Government has set up the Irrigation System Maintenance Fund (FERHA), which is responsible for financing the maintenance of such works countrywide. Maintenance works will be on contract basis. 3.6.3 According to a report published by the Department of Meteorology in March 2008, climate change is a reality in Madagascar, and its manifestations that could pose a threat to the new structure, in particular: intensification of extremes (floods and droughts), changes in rainfall distribution and a rising number of strong hurricanes. The intensification of flooding is taken into account in the design of the new structure. The nature of the proposed structure and its dimensions were designed to resist strong floods. The construction of reinforced concrete tubing at a depth of over 20 metres and of a rock-filled protection upstream of the structure minimizes the risk of destabilization of the structure even in extreme weather conditions. The structure is wedged against a 48.50 slope, which forms the crest of the current structure and which has never been subjected to any overflows since the construction of the water supply structure (the flood height in 2004, during the Gafilo Cyclone, said to occur every 100 years, was 47.70 m), which completely eliminates the threat of an overflow. Similarly, the form of the bank will be corrected to obtain the required tangent to the right side of the structure, which will protect the upper part of the structure as it will be barely exposed to floods, and the scouring of the foot of the vertical wall will also be reduced. 3.6.4 Another risk would be the failure of FERHA to mobilize the necessary funds for maintenance of the facilities. This risk is mitigated by the Government’s commitment to raise from its own budget MGA 500 000 000 for FERHA in 2007, and MGA 3 billion this year. It should be noted that between 2007 and 2008 FERHA helped to finance maintenance and rehabilitation works on irrigation infrastructure (dykes, primary canals, dam…) in five regions of the country. 3.7 Environmental and Social Impacts 3.7.1 In conformity with Decree No. 99-954 of 15 December 1999, as amended in 2004, and the ADB Environmental and Social Assessment Procedures (ESAP), the supplementary loan is classified under category 1, and an Environmental and Social Impact Assessment (ESIA) was conducted for the construction of the new water structure on River Mangoky at Bevoay. The ESIA also included the conduct of an environmental inspection of the existing Lower Mangoky (management of phyto-sanitary products, epidemiological monitoring of farm workers, climatic vulnerability analysis) and a diagnosis of the River Mangoky catchment basin, with an in-depth analysis of the hydro-sedimentary system. The non-technical summary of the ESIA was published on 29 July 2008. 3.7.2 The main environmental and social impacts of the project identified in the ESIA are minor and can be easily controlled. They stem from: (i) the potential encroachment on dwelling (northern part of Bevoay village) as well as agricultural production and farming areas; (ii) the right-of-way of quarries and impacts on the local ecosystems (a few baobab trees will have to be felled); (iii) pursuing irrigation during the works; (iv) management of low water levels and hydrological impacts downstream; (v) the quantities of sand accumulated and trapped in the fore canal; (vi) the continuity of the RN9 and access to the banks downstream; (vii) impacts on biodiversity and fishing activities; (viii) the transportation and storage of cut-and-fill material; and, lastly, (ix) the impacts and nuisance caused by work site and camp activities (STDs/HIV, noise, dust, traffic, accidental

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hydrocarbon spills, public safety risks). The mitigation and/or improvement measures for this structure, as well as those derived from the environmental inspection of the existing scheme and the diagnosis of the catchment basin have been incorporated into the Environmental and Social Management Plan (ESMP) and budgeted for an amount of UA 529,000. 3.7.3 In short, the environmental and social specifications, annexed to the ESIA document, will be incorporated into the Bidding Document (BD), the financial costs and the contract documents with the contractor responsible for civil works. Prior to its mobilization, the Contractor will have to meet the requirements of the Environmental and Social Specifications (CCES), including the General Site Organization Plan, the Damage Compensation Plan, Machine and Vehicular Traffic Plan, Quarry Exploitation Plan, Accidental Spills Management Plan, Rubble Storage Plan, Plan to Maintain Water Supply, Construction Sites Rehabilitation Plan, etc. The implementation of these plans will be coordinated by the Hygiene, Safety and Environment (HS&E) Manager of the contracting firm and supervised by two experts (an environmental manager and local community liaison officer) within the Project Implementation Unit. The salaries of these experts have been earmarked in the budget for the implementation of the ESMP. Finally, ONE, by virtue of its legal powers, will conduct an annual inspection of the implementation of the CCES. A preferential recruitment policy will be promoted to allow the Bevoay villagers to benefit from the economic rewards of the projects, particularly in terms of jobs. 3.7.4 A Community Development Plan (CDP) was specifically developed for persons directly affected by the project in Bevoay village, and includes compensation for the reconstruction of houses damaged or destroyed in the course of the works, socio-organizational support interventions and supply of agricultural implements, the promotion of small-scale irrigation schemes in the plains and valleys and the construction of a public primary school and a health post. A feasibility study on the use of rice hull for energy purposes and support for the use of livestock manure will optimize the scheme’s environmental performance. Lastly, following the erosion diagnosis of the catchment basin, a project will be developed involving hydrological and hydro-sedimentary measures to cover the catchment basin, which will contribute to better understanding of the phenomena of sediment transport in the river and to formulate integrated strategies for the management of the catchment basin that are based on reliable data. This strategy could be implemented under phase II of the Lower Mangoky Irrigation Area Rehabilitation Project planned for 2011. 3.7.5 From a social standpoint, the project will help to improve and secure incomes, as well as improve the public health indicators for a population estimated at 28,000 inhabitants. Farm heads, 33% of whom are women, will also have permanent access to credit and have their land ownership fully secured with the issuance of title deeds. As regards achievement of the Millennium Development Goals, the mitigation and improvement measures outlined in the ESMP and the Community Development Plan (CDP) will significantly reduce the incidence of water-borne (diarrhoea) and vector-borne (malaria and bilharzia) diseases among the population living around the irrigation area. Furthermore, the technical procedures recommended by the project will allow for rational utilization and management of chemical fertilizers and pesticides. Lastly, in addition to the strengthening of the existing community infrastructure, the CDP makes provision for the construction of a health post and a school in Bevoay village, as well as public standpipes in Tanandava village, leading to improved school enrolment rate, particularly for girls, improved maternal and child health, and increased immunization coverage for children.

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3.8 Project Executing Agency The ongoing project is under the Ministry of Agriculture, Livestock and Fisheries. It is being implemented under the supervision of the Department of Rural Engineering. A Project Implementation Unit (PIU) is responsible for the implementation of activities in the field. These arrangements made at the time of appraisal of the initial project will not change. 3.9 Procurement of Works, Goods and Services 3.9.1 Arrangements for the procurement of goods, works and services are summarized in Table 3.7 below. All procurement of goods, services and works co-financed by ADF will be in accordance with the ADF Rules of Procedure for Procurement of Goods and Works or, as the case may be, the Fund’s Rules of Procedure for the Use of Consultants, using the relevant Bank Standard Bidding Documents.

Table 3.7 Procurement Arrangements for Works, Goods and Services (in UA thousand)

CATEGORIES ICB with Prequalification

Shortlist Others N.B.F TOTAL

A. Works Construction of water supply structure 14,867 (13,678) - - - 14,867 (13,678) B. GOODS Vehicle - - 29 (29) - 29 (29) Motorbike - - 4 (4) - 4 (4) ESMP (Materials) 50 (50) 50 (50) C. Services Research & Outreach - - - 78 78 Support to FAMA - - - 65 65 ESMP (Services) - 479 (479) - - 479 (479) Works Control and Sup. - 414 (414) - - 414 (414) Audits - 23 (23) - - 23 (23) D. OPERATING COSTS Office Supplies - - 33 (27) - 33 (27) Comm. Water – Electricity - - 15 (12) - 15 (12) Air Travel – mission expenses - - 77 (62) - 77 (62) Fuel – Lubricants - - 74 (56) - 74 (56) Maintenance and repair - - 99 (69) - 99 (69)

Staff Expenses - - 125

(100) - 125 (100)

TOTAL 14,867 (13,678) 916 (916) 505

(406) 144 16,432 (15,000) 3.9.2 Works, goods and services will be procured in accordance with the following procedures: (i) works for the construction of the water supply structure (UA 14.867 million) will be procured through international competitive bidding with prequalification; (ii) the goods, comprising a vehicle and a motorcycle for the supervision of works by the project team (UA 0.033 million) as well as the materials to be provided under the ESMP (UA 0.050 million) will be procured through local shopping; (iii) the services of the consulting firm for works control and supervision (UA 0.414 million), NGOs (UA 0.400 million) and individual consultants (UA 0.079 million) for the implementation of the ESMP, and auditing (UA 0.023 million) will be procured on the basis of a shortlist. The method of bid analysis based on the comparability of technical proposals and least cost consideration will be used for the recruitment of the consulting firm for works supervision, NGOs and the auditing firm; and (iv)

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procurement for operating purposes (UA 0.132 million) including office supplies and maintenance and repairs will be carried out through local shopping. Communication, water, electricity, air travel, fuel and lubricants, mission and staff expenses (UA 0.291 million) will be paid in accordance with the administrative procedures of the executing agency. 3.9.3 General Procurement Notice: The text of the General Procurement Notice will be discussed and adopted with the Malagasy Government during negotiations and issued for publication in the UN’s Development Business upon approval of the loan proposal by the ADF Board of Directors. 3.9.4 Review Procedures: The following documents will be subject to review and approval by the Bank: (i) specific procurement notices; (ii) prequalification documents, bidding documents and letters of invitation to consultants; (iii) evaluation reports for bids from companies and suppliers or proposals from consultants, including recommendations for contract award; (iv) draft contracts, if the latter have been amended in comparison to the drafts included in the bidding documents. 3.10 Disbursement Arrangements The disbursement methods to be used for the supplementary loan are as follows: (i) the direct payment method for payment of expenditures related to goods, works and consultancy services; (ii) the special account method will apply to all operating expenses. To that end, the Borrower will open an account exclusively for the loan resources in a bank acceptable to ADF. This account will receive an initial advance based on a projected expenditure schedule to cover 6 months of activity, prepared by the project and with the prior approval of the Bank. It will be replenished periodically upon presentation of a request prepared on the basis of another provisional schedule of activities for the following 6 months and vouchers to justify the use of at least 50% of the preceding deposit and 100% of previous disbursements.

4. JUSTIFICATION IN LIGHT OF THE SUPPLEMENTARY FINANCING POLICY

4.1 Justification in light of the General Conditions The proposed supplementary financing clearly meets the general conditions stipulated in the Bank Group Policy and Procedures for Supplementary Financing, in that: (i) the ongoing project cannot achieve its objectives without the construction of a new water supply structure, and therefore without supplementary financing; (ii) the cost overruns are due to extreme weather conditions beyond the Borrower’s control. The latter has done all within its power, in the last decade, to carry out consolidation works on the water supply structure but does not have financial resources to rebuild a new structure; (iii) the initial ADF loan is 99.85% disbursed. The balance of the OPEC loan is entirely committed to 8 ongoing works contracts which will be completed by the end of the year. The project is therefore at a very advanced stage of implementation, and (iv) the supplementary loan envisaged will be financed from the country’s ADF-XI allocation and the activities planned are consistent with CSP 2005-2009.

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4.2 Justification in light of the Specific Conditions The proposed supplementary financing for this project also meets the specific conditions of the Bank Group Policy and Procedures for Supplementary Financing, as explained below: (i) the overall supervision rating awarded the project during the last supervision mission in March 2008 was higher than 2, which is satisfactory; (ii) the country is making significant efforts towards national development, and its implementation of projects is satisfactory, particularly agricultural projects; (iii) the Borrower cannot meet the additional costs required for the reconstruction of the water supply structure; (iv) it is not possible to reduce the project cost in order to obtain funds to finance the reconstruction of the structure; (v) the project is viable technically, economically, financially, environmentally and socially, even with the cost overruns; (vi) there are no exogenous constraints – financial, technical or administrative – that would hamper completion of the project; and (vii) construction of the water supply structure will help to secure a production of 35,000 tonnes and make it possible to carry out an extension of 15,000 ha of irrigated land, which is very significant for the country, especially in view of the current context of food crisis. 5. ECONOMIC AND FINANCIAL ANALYSIS

5.1 Financial Analysis Four operating models were taken into consideration in the economic and financial analysis (Model 1 – holdings of over 5 ha; Model 2 – holdings of 1.5 ha; Model 3 - holdings of 0.66 ha; and finally Model 4 - holdings of 0.26 ha). The gross margins were estimated for each model in a “without project situation”» and a “with project situation”. The prices applied are those observed on the market (2008). Increases in gross margins in a “with project situation” compared to a “without project situation” are MGA 58 million, MGA 9 million, MGA 2.5 million and MGA 0.5 million for models 1, 2, 3 and 4 respectively. The gross margins improve significantly for all the operating models. 5.2 Economic Analysis 5.2.1 The economic analysis was made based on the reference price method and the comparison of “without project” and “with project” situations. The costs and benefits of the project were valued in terms of their economic prices. The project costs concern investments already made, including physical contingencies, maintenance costs of the irrigation area, production costs (inputs and farm work…) and the costs of the water supply structure. The economic benefits of the project stem from the significant improvement of rice yields and the improvement of crop intensity both made possible by the rehabilitation of the irrigation system and efforts in terms of outreach and supervision of farmers. The additional output thus generated is estimated at 43,000 tonnes of paddy rice and 1,700 tonnes of lima beans at full development of the project. 5.2.2 On this basis, the economic rate of return (ERR) of the project calculated using the economic cash flows table, over the investment’s useful life of 20 years, is estimated at 17.5%. The ERR is well above the opportunity cost, which is estimated at 12%. Despite the increase in cost, the project remains highly profitable owing to a yield and cropping intensity that are both high. The water supply structure has a capacity of 20,000 ha of which only 5,000 ha have been rehabilitated and developed under the project. A potential extension of the scheme by about 15,000 ha could therefore be envisaged after the reconstruction of the structure. This potential extension of the scheme is not factored into the economic analysis. Nonetheless, it represents an additional argument in favour of the current loan.

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5.3 Sensitivity Analysis Income generated from the project could vary depending on the variations in project cost and the price of paddy rice, which is the main product of the scheme. Taking all these factors into consideration, project sensitivity is analyzed in the following situations: (i) increase in project costs by 10% ; (ii) decrease in the price of paddy rice by 10%, albeit highly unlikely considering the current situation of high food prices; (iii) the cost of the structure increases by 10% and the price of paddy rice decreases by 10%. The rates of return resulting from the above-mentioned three scenarios are 16.6%, 14.5% and 13.6% respectively. The worst-case scenario would for the cost of the water supply structure to increase by 10% and the price of paddy rice to drop by 10%, thus generating an ERR of 13.6%, which is still higher than the capital opportunity cost of 12%. 6. CONCLUSIONS AND RECOMMENDATIONS 6.1 Conclusions The main justification for the supplementary loan lies in the need to sustain the investments already made by the country in the Lower Mangoky Irrigation Area, with the support of ADF, and to thus secure the current output of 35,000 tonnes, which will reach 60,000 tonnes of paddy rice at full development of the project (an additional output of 43,000 tonnes compared to the pre-project situation) for an estimated population of 28,000 inhabitants. Indeed, if a new water supply structure is not constructed, the current structure will definitely collapse, leading to the flooding of the area and the destruction of its facilities, thereby jeopardizing the above-mentioned output, which contributes crucially to food security in the Tuléar region. Lastly, the reconstruction of the new structure will enable the country to undertake significant extension of the Lower Mangoky scheme, estimated at 15,000 ha, and which, if developed, would contribute to strengthening food security in the country. 6.2 Recommendation It is recommended that an ADF loan not exceeding UA 15 million be granted to the Republic of Madagascar to contribute to the financing of the project described in this report, subject to fulfilment of the following conditions: Conditions precedent to loan effectiveness: Effectiveness of the Loan Agreement shall be subject to the Borrower’s compliance with the provisions of section 5.01 of the General Conditions Applicable to Loan Agreements and Guarantee Agreements.

ANNEX 1 Page 1 of 1

REPUBLIC OF MADAGASCAR SUPPLEMENTARY LOAN FOR THE LOWER MANGOKY IRRIGATION AREA REHABILITATION

PROJECT

Location of Project Area

This map has been provided by the staff of the African Development Bank exclusively for the use readers of the report to which it is attached. The names used and the boundaries shown on the map do not imply on the part of the Bank Group or its Members any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.

ANNEX 2 Page 1 of 2

REPUBLIC OF MADAGASCAR SUPPLEMENTARY LOAN FOR THE LOWER MANGOKY IRRIGATION AREA REHABILITATION PROJECT

SUMMARY ECONOMIC ANALYSIS (MGA)

Without Project With Project 1 to 20 years Year 1 Year 2 Year 3 Year 4 5 to 20 years Production Paddy rice 7,413 16,402 16,402 16,402 26,889 26,889 Lima beans 669 1,311 1,311 1,311 2,601 2,601 Sub-total Production 8,082 17,713 17,713 17,713 29,491 29,491 Sub-Products Rice bran 316 1,033 1,033 1,033 1,715 1,715 Production Value 8,398 18,746 18,746 18,746 31,206 31,206 Production Costs Selected paddy seeds - 65 65 65 86 86 Sorted paddy seeds 264 143 143 143 296 296 Manure - 189 189 189 250 250 Nursery fungicide - 20 20 20 26 26 Lima bean seeds 16 15 15 15 31 31 Urea - 707 707 707 1,090 1,090 Foliar rice fungicide - 164 164 164 218 218 Lima bean insecticide/fungicide - 7 7 7 13 13 Rice herbicides - 633 633 633 1,137 1,137 Water 132 329 329 329 586 586 Land clearing 64 74 74 74 148 148 Cleaning of bunds - 70 70 70 112 112 Ploughing of nursery 12 12 12 12 21 21 Ploughing of field 527 527 527 527 938 938 Harrowing 1 395 254 254 254 516 516 Harrowing 2 - 282 282 282 374 374 Puddling and smoothing of plots 1 - 265 265 265 426 426 Puddling and smoothing of plots 2 - 235 235 235 312 312 Making of furrows - 13 13 13 17 17 Transplanting 1 231 148 148 148 301 301 Transplanting 2 - 104 104 104 139 139 Transplanting 3 - 16 16 16 21 21 Chemical weeding - 25 25 25 45 45 Mechanical weeding 1 - 93 93 93 173 173 Mechanical weeding 2 - 167 167 167 222 222 Mechanical weeding 3 - 42 42 42 56 56 Manual weeding 329 117 117 117 216 216 Phyto-sanitary treatment of rice - 9 9 9 12 12 Puddling and smoothing of nursery 1 16 10 10 10 21 21 Puddling and smoothing of nursery 2 - 8 8 8 10 10 Puddling and smoothing of nursery 3 - 1 1 1 1 1 Sowing of lima beans 29 33 33 33 66 66 Foliar treatment of lima beans - 4 4 4 9 9 Weeding of lima beans 56 64 64 64 128 128 Cutting of paddy 329 329 329 329 586 586 Grinding 1 - 88 88 88 142 142 Grinding 2 - 8 8 8 10 10 Grinding " 231 67 67 67 150 150

ANNEX 2

Page 2 of 2

REPUBLIC OF MADAGASCAR SUPPLEMENTARY LOAN FOR THE LOWER MANGOKY IRRIGATION AREA REHABILITATION PROJECT

SUMMARY ECONOMIC ANALYSIS (MGA)

Threshing of paddy 1 264 76 76 76 171 171 Threshing of paddy 2 - 117 117 117 216 216 Threshing of paddy 3 - 141 141 141 187 187 Winnowing and bagging 1 99 29 29 29 64 64 Winnowing and bagging 3 - 56 56 56 75 75 Winnowing and bagging 4 - 8 8 8 10 10 Transport 115 359 359 359 602 602 Irrigation 1 264 253 253 253 455 455 Irrigation 2 - 13 13 13 17 17 Sub-Total of Production Costs 3,372 6,393 6,393 6,393 10,702 10,702 Other Costs 3,165 51,353 14,589 30,731 4,248 3,165

Total Costs 6,537 57,746 20,982 37,124 14,950 13,867 Cash Flow 1,862 -39,001 -2,237 -18,379 16,256 17,339 ERR = 17.5%

ANNEX 3 Page 1 of 1

REPUBLIC OF MADAGASCAR SUPPLEMENTARY LOAN FOR THE LOWER MANGOKY IRRIGATION AREA REHABILITATION PROJECT

LIST OF GOODS AND SERVICES

Units Quantities Unit Costs (UA) Total incl. Contingencies (UA

1000) GOV. (UA 1000) ADF (UA

1000) I. Rehabilitation Component A. Construction of water supply structure Lp. sum 14,867 1,189 13,678 B. Works Control and Supervision Month 16 22,603.723 414 0 414 C. Procurement of 4x4 Vehicle Unit 1 22,873.461 26 0 26 D. Procurement of all-purpose Motorcycle Unit 1 3,137.397 4 - 4 E. Environmental and Social Management Plan (ESMP) Lp. sum 529 0 529 II. Scheme Development Support Component A. Research and Agric. Extension Lp. sum 78 78 0 B. Institutional Support to APBM LP. SUM 65 65 0 III. Project Management Component A. Office Supplies and Computer Consumables LP. SUM 33 7 27 B. Communication, Water and Electricity LP. SUM 15 3 12 C. Air Travel and Mission Expenses LP. SUM 77 15 62 D. Fuel and Lubricants LP. SUM 74 19 56 E. Equipment Maintenance and Repairs LP. SUM 99 30 69 F. Director of PMU MONTH 24 994.564 28 6 22 G. Monitoring-Evaluation Officer MONTH 24 414.402 11 2 9 H. UGR Head MONTH 24 518.002 14 3 11 I. UDA Head MONTH 24 518.002 14 3 11 J. UAF Head MONTH 24 518.002 14 3 11 K. Finance and Accounts Officer MONTH 24 414.402 11 2 9 L. Stores Assistant MONTH 24 248.641 7 1 6 M. Executive Secretary MONTH 24 165.761 5 1 4 N. Driver MONTH 48 124.32 7 1 6 O. Machine Operator MONTH 24 124.32 3 1 3 P. Watchmen MONTH 120 66.304 9 2 7 Q. Cleaners MONTH 48 62.16 3 1 3 R. Audit 2008-2009-2010 LP. SUM 23 0 23