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Document of The World Bank Public Disclosure Authorized Report No: 26256 IMPLEMENTATION COMPLETION REPORT (PPFI-P8000; PPFI-P8001; IDA-29560; PPFI-P8800; PPFI-P8801) ON A CREDIT Public Disclosure Authorized IN THE AMOUNT OF SDR17.2 MILLION (US$ 23.8 MILLION EQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR A PRIVATE SECTOR DEVELOPMENT AND CAPACITY BUILDING PROJECT Public Disclosure Authorized 02/27/2003 Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective April 30, 1997) Currency Unit = Malagasy Franc (FMG) FMG 1 = US$ 0.000201 US$ 1 = FMG 4,982.84 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CIP Independent Privatization Commission CRC Competitiveness Review Committee EPZ Export Processing Zone ESAF Enhanced Structural Adjustment Facility ESN Economic Strategy Note FASP Private Sector Support Fund FAC French Fonds d'Aide et de Coopération FDI Foreign Direct Investment FID Fonds d'lntervention pour le Développement IDA International Development Association ILO Industrial Labour Organization ITPAC Industry and Trade Policy Adjustment Credit MB Ministry of Decentralization and Budget MDSPPMinistry of Private Sector Development and Privatization MF Ministry of Finance and Economy MMF Match-Making Fund NGO Non-Governmental Organization OED (World Bank) Operations Evaluation Department PFP Policy Framework Paper PHRD Policy and Human Resources Development PSA Private Sector Assessment PSRDF Privatization Social and Regional Development Fund PSAC Public Sector Adjustment Credit PSSF Private Sector Seminars Fund PTF Privatization Trust Fund PVO Private Voluntary Organization SME Small and Medium Enterprise STA Technical Secretariat for Adjustment UNIDO United Nations Industrial Development Organization VAT Value Added Tax Vice President: Callisto Madavo Country Manager/Director: Hafez M. H. Ghanem Sector Manager/Director: Demba Ba Task Team Leader/Task Manager: Marie-Ange Saraka Yao MADAGASCAR PRIVATE SECTOR DEVELOPMENT AND CAPACITY BUILDING PROJECT CONTENTS Page No. 1. Project Data 2. Principal Performance Ratings 3. Assessment of Development Objective and Design, and of Quality at Entry 4. Achievement of Objective and Outputs 5. Major Factors Affecting Implementation and Outcome 6. Sustainability 7. Bank and Borrower Performance 8. Lessons Learned 9. Partner Comments 10. Additional Information Annex 1. Key Performance Indicators/Log Frame Matrix Annex 2. Project Costs and Financing Annex 3. Economic Costs and Benefits Annex 4. Bank Inputs Annex 5. Ratings for Achievement of Objectives/Outputs of Components Annex 6. Ratings of Bank and Borrower Performance Annex 7. List of Supporting Documents Project ID: P001555 Project Name: PRIV SECT DEV & C.B. Team Leader: Marie-Ange Saraka-Yao TL Unit: PFG ICR Type: Core ICR Report Date: June 30, 2003 1. Project Data Name: PRIV SECT DEV & C.B. L/C/TF Number: PPFI-P8000; PPFI-P8001; IDA-29560; PPFI-P8800; PPFI-P8801 Country/Department: MADAGASCAR Region: Africa Regional Office Sector/subsector: Central government administration (58%); General industry and trade sector (42%) Theme: Regulation and competition policy (P); State enterprise/bank restructuring and privatization (P); Tax policy and administration (P); Trade facilitation and market access (S); Export development and competitiveness (S) KEY DATES Original Revised/Actual PCD: 10/19/1995 Effective: 10/13/1997 02/06/1998 Appraisal: 10/08/1996 MTR: 08/01/1999 10/05/2000 Approval: 05/29/1997 Closing: 12/31/2002 12/31/2002 Borrower/Implementing Agency: GOVERNMENT/PRIME MINISTER'S OFFICE Other Partners: STAFF Current At Appraisal Vice President: Callisto E. Madavo Callisto E. Madavo Country Director: Hafez M. H. Ghanem Michael N. Sarris Sector Manager: Demba Ba Thomas Allen Team Leader at ICR: Marie Ange Saraka-Yao Paul Ballard ICR Primary Author: Amadou Dem 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S S Project at Risk at Any Time: Yes Borrower Performance is Marginally Satisfactory. Quality at Entry is rated Marginally Satisfactory by both QAG and the ICR.. 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: General Background 3.1.1 Reforms implemented in Madagascar during the 1980s, with keen support of the World Bank and the donor community, were brought to a halt between 1991 and 1994 due to a lack of consensus on the development strategy among the leaders, and the resulting absence of dialogue between the Bank and the Government. During this period Madagascar experienced political instability, and macroeconomic policy guided by economic nationalism and active state intervention. As a result, economic growth declined sharply with a stagnation of private investment, particularly foreign investment. Low economic growth rate resulted in aggravated poverty. To break away from the vicious circle of poverty and low growth, Madagascar was to adopt an ambitious program consisting in opening up the country and liberalizing key sectors. Original Objectives 3.1.2 As stated in the Memorandum of the President (MOP) of the International Development Association (IDA) to the Executive Directors, dated May 1997, the overall aim of the Private Sector Development and Capacity building Project (PATESP) was to support Madagascar's efforts to shift to a higher private sector led growth path, in line with the Bank's country assistance strategy (CAS) discussed by the Board in February 1997. The specific goals were to : (a) design and implement policy reforms in the areas of market deregulation, demonopolization and competition, public enterprise divestiture, and reform of the tax system to address major constraints to increase private investment, efficiency, exports and job creation; (b) foster an improved government-private sector dialogue on competitiveness issues to improve business confidence and government policy-making; and (c) strengthen capacities and skills in Malagasy private firms and associations, through support for upgrading firm-level productivity and business development services, through "opening up" of Madagascar's economy and private sector to new private investment opportunities and technologies existing in world markets, and by encouraging joint ventures between Malagasy and foreign private investors. 3.1.3 PATESP was one of the three pillars of Bank assistance in Madagascar: it focused on private sector development whereas PAIGEP provided institutional support to improve economic management. A third project, APEX, supported financial sector reforms. During a first phase of project preparation from 1994 to 1996, PATESP was the vehicle to attempt a PSD dialogue which was difficult to engage because of a lack of consensus among the leaders. Indeed, the regime of President Zafy hesitated to implement the right reforms which could have met resistance. Policy dialogue effectively started only after the appointment of a new Prime Minister in May 1996, following a motion of no confidence in the government. Dialogue further improved when President Ratsiraka won the elections in January 1997 and appointed a reformist team more committed to push forward the adjustment program adopted in 1996. In this context, in 1996, since the Bank reengaged with the government on a policy dialogue, the objectives of the PATESP became much clearer. It was designed to accompany a comprehensive structural adjustment program adopted in 1996 by the Government of Madagascar (GOM). The latter program focused on key reforms to address critical bottlenecks: (i) improved allocation of resources to economic priority items in the public expenditure program; (ii) privatization and/or liquidation of PEs; (iii) reform of private investment incentives and regulations, and domestic competition policies; (iv) tax reform; (v) banking sector reform, including divestiture of the state-owned banks; and (vi) liberalization of petroleum product prices and markets. The laws facilitating the implementation of the reforms were approved by the National Assembly in August 1996. A Policy Framework Paper (PFP) which spelled out the reforms was supported by two Bank's Structural Adjustment Credits (SAC I and II), and an IMF Enhanced Structural Adjustment Facility, approved in November 1996. The improved dialogue allowed a better identification of the structural adjustment measures to be specifically supported by PATESP. PATESP ended up providing technical assistance for these programs which were complementary. From preparation to project implementation, the focus of PATESP effectively improved and narrowed to the - 2 - privatization/liberalization of key sectors supported by SAC II. 3.1.4 SAC I, approved and disbursed in March 1997, successfully contributed to the improvement of the macroeconomic framework and supported measures aimed at: (i) putting in place a framework for transparent privatization, (ii) setting the stage for complete state withdrawal from the banking sector, and (iii) stimulating private investments through the removal of legal monopolies in key sectors. 3.1.5 The objective of SAC II was to stimulate a private sector led growth and to reduce poverty by supporting reforms in four areas: (i) macroeconomic stabilization, (ii) private