eotN.331M aaacrPublic ExpenditureReview 2004 Madagascar Report No. 30331-MG Report No. 30331-MG Madagascar Public Expenditure Review 2004
Authorized Disclosure Public The Challenge of Poverty Reduction
February 25, 2005
Public Sector Reform and Capacity Building Unit (AFTPR) Africa Region Public Disclosure Authorized Disclosure Public Public Disclosure Authorized Disclosure Public
Document of the World Bank Public Disclosure Authorized Disclosure Public
HIPC Highly Indebted Poor Countries IDA Intemational Development Association IFMIS Integratedfinancial management system IGF General Inspectorate for Finances IMF Intemational Monetary Fund JSA Joint Staff Assessment LFI Initial budget law (loi de finances initiale) LFR Revised budget law (loi de finances rectificative) MDG Millennium Development Goal MECIE - Mise en ComptabilitC des Investissements a 1'Environnement MEFB Ministry of Economy, Finance and Budget MENRS - Ministry of National Education and Scientific Research MENSUP - Ministry of Higher Education METFP - Ministry of Vocational and Technical Education and Training M&E Monitoring and evaluation MINENVEF - Ministry of Environment and Forests MINESEB Ministry of Basic and Secondary Education MOH Ministry of Health MTEF Medium Term Expenditures Framework NEAP National Environment Action Plan NGO Non-Govemment Organization NNP National Nutrition Policy NPV Net Present Value ONE National Office of the Environment OSF Observatoire du Secteur Forestier PADR Rural Development Action Plan PER Public Expenditure Review PGDI Governance and Institutional Development Project PIP Public Investment Program PRDEAP Part des Recettes pour les Droits d'EntrCe dans les Aires ProtCgCes PRGF Poverty Reduction and Growth Facility PRS Poverty Reduction Strategy PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Support Paper PSIA Poverty and Social Impact Analysis RA Road Authority RMF Road Maintenance Fund RNCFM RCseau National des Chemins de Fer Malagasy SMTM SociCt6 Malgache de Transport Maritime SOLIMA Solitany Malagasy SSA Sub-Saharan Africa STA Technical Secretariat for Adjustment TSA Treasury Single Account UNDP United Nations Development Organization VAT Value Added Tax VPM Vice Prime Minister WB World Bank WBI World Bank Institute ZAP Administrative and Pedagogical Zones Vice President - Gobind Nankani Country Director - James Bond Sector Director - Paula Donovan Sector Manager - Helga Mueller Task Team Leaders - Guenter HeidenhofiChristos Kostopoulos
The PER Team included Guenter Heidenhof and Christos Kostopoulos (Task Team Leader), Odile Keller, Emile Louis Rene Finateu, D. Randriamanampisoa, Sylke von Thadden, Gervais Rakotoarimanana, Sylvain Rambeloson (Public expenditure management); Jacob H. Bregman, Maria Eugenia Bonilla-Chacin, Patrick Ramanantoanina (Education); Willem van Eeghen, Janet Dooley, Anna van der Wouden (Country Management Unit); Susanne Holste, Noroarisoa Rabefaniraka (Transport); Kirk Hamilton, Martien Van Nieuwkoop, Bienvenu Rajaonson, Jean-Christophe Carret (Environment); Robert Keyftz, Luc Razafimandimby, Adam Schwartzman, Aurelien Kruse, Benu Bidani (Macroeconomic); Laza Razafiarison (Macro/Public Finance); Madeleine Chungkong, Mavo Ranaivoarivelo, Lanto Ramanankasina (overall support); Sanjay Pradhan, Brendan Horton and Stefano Patemostro are the peer reviewers. MADAGASCAR PUBLIC EXPENDITURE REVIEW
TABLE OF CONTENTS
EXECUTIVE SUMMARY ...... i I. CREATING AN ENABLING MACROECONOMIC AND FISCAL FRAMEWORK...... 1 1) MACROECONOMICPERFORMANCE AND THE POLICY ENVIRONMENT ...... 1 2) POVERTY OUTCOMES AND CHALLENGES ...... 4 3) THE ROLE AND FINANCING OF THE STATE ...... 5 4) MADAGASCAR’SPOVERTY REDUCTION STRATEGY ...... 7 5) FINANCIAL SECTOR ...... 12 6) RECOMMENDATIONS...... 13 I1. THE CHALLENGE OF RESOURCE ALLOCATION AND BUDGET EXECUTION...... 14 1) ALLOCATING PUBLIC RESOURCES IN LINEWITH GOVERNMENTPRIORITIES ...... 15 (A) Past Allocations: Issues and Challenges ...... 15 (b) Comparative context ...... 22 (c) Introducing a medium-term perspective to link policy priorities with the budget ...... 23 (d) Coordination ofand Participation in The Budget Preparation Process ...... 25 (e) Planning for Recurrent and Investment Expenditures ...... 30 (f) Revenue and Extemal Assistance Forecasting ...... 33 (g) Comprehensiveness and Transparency ofthe Budget ...... 34 2) ENSURINGBUDGET IMPLEMENTATION IN LINE WITH GOVERNMENTPRIORITIES ...... 35 (a) Budget Execution remains a Challenge ...... 35 (b) Credibility ofthe Budget - sticking to Budgeted Priorities ...... 36 (c) Cash management And Commitment ofExpenditures ...... 38 (d) Expenditure Management process ...... 39 (e) Recommendations...... -40 (0 Improving Internal and External Controls ...... 40 (g) Strengthening Public Procurement ...... 41 (h) Improving Financial Reporting...... 42 (i) Transforming the Budget into a Management Instrument ...... 43 3) EFFICIENTUSE OF HUMAN RESOURCES ...... 46 I11. USE OF RESOURCES INTHE EDUCATION SECTOR ...... 52 1) KEYPOLICY ISSUES ...... 52 2) TRENDSIN EDUCATIONEXPENDITURES ...... 54 3) BUDGETMANAGEMENT ISSUES ...... 56 4) SECTOR ORGANIZATION ...... 65 5) COMMUNITY PARTICIPATION ...... 68 6) RECOMMENDATIONS ...... 68 IV. USE OF RESOURCES INTHE TRANSPORT SECTOR ...... 71 1) KEYPOLICY ISSUES ...... 71 2) IMPROVING SECTOR ORGANIZATION AND GOVERNANCE ...... 73 3) CRITICAL PUBLIC EXPENDITURE ISSUES ...... 76 4) PRINCIPLE ISSUES OF SUB-SECTORS ...... 80 (a) Roads ...... 80 (b) Air Transport ...... 82 (c) Rail Transport ...... 83 (d) Maritime Transport and Port Management ...... 84 5) RECOMMENDATIONS ...... 84 V . USE OF RESOURCES IN THE ENVIRONMENT SECTOR ...... 86 1) KEYPOLICY ISSUES...... 86 2) SECTOR STRATEGIES ...... 87 3) POLICY AND INST~TUT~ONAL FRAMEWORK...... 90 (a) The Legislative Framework ...... -90 (b) The Institutional Framework...... 90 4) CR1T1CAL PUBLIC EXPENDITUREISSUES ...... 91 5) EFFECTIVENESSOF ENVIRONMENTALINSTITUTIONS ...... 98 6) AN UNFUNDED MANDATE:ENVIRONMENTAL IMPACT ASSESSMENTSOF PUBLIC INVESTMENTS...... 100 7) REVENUESHARING WITH LOCALCOMM~ITIES ...... 100 8) RECOMMENDATIONS...... 101 List of Tables
Table 1-1: Madagascar’s macroeconomic indicators (1995-2003) ...... 3 Table 1-2: Madagascar’s poverty indicators (selected years 1993-2002) ...... 5 Table 1-3: Madagascar’s fiscal indicators ...... 6 Table 1-4: Fiscal performance, 1994-2003 ...... 7 Table 1-5: PRSP scenarios for poverty reduction...... 8 Table 1-6: The PRGF Macroeconomic Framework (percent ofGDP) ...... 9 Table 1-7: Comparison ofPRSP and PRGF Macroeconomic and Fiscal Frameworks ...... 10 Table 11-1 : Madagascar’s budget allocation trends selected years between 1997-2004 ...... 17 Table 11-2: Madagascar’s recurrent and investment allocation patterns selected years between 1997-2004 (Percent ofnon interest expenditure) ...... 18 Table 11-3: Distribution ofpublic allocations within the general administration...... -21 Table 11-4: Execution ofactual public expenditures across different administrative categories ...... 21 Table 11-5: Budgetary allocations 1997-2004...... 22 Table 11-6: Structure of the Malagasy Budget ...... 23 Table 11-7: The 2003 budget process and proposed calendar ...... 29 Table 11-8: Madagascar’s past execution trends (selected years between 1997-2003) ...... 35 Table 11-9: Madagascar’s recurrent and investment spending patterns selected years between 1997-2003 (actual expenditures as percent ofbudgetary allocations) ...... 36 Table 11-10: Civil servant rate for 100 inhabitants in some African countries ...... 46 Table 111-1 : Number ofnew entrants in primary school ...... 53 Table 111-2: Survival Rate and Gross Intake Rate in last grade ofprimary ...... 53 Table 111-3: Net enrollment across Faritany 200 1 ...... 54 Table 111-4: Madagascar- Education Sector: Central Government allocation and expenditure and private sector spending (selected years between 1997 and 2004) ...... 55 Table 111-5: Primary and secondary expenditures in 2000 and 2003 ...... 57 Table 111-6: Budget allocation to primary education (selected years between 1997-2004) ...... 59 Table 111-7: Allocation ofrecurrent budget expenditures to administration, primary and secondary schools and transfers selected years between 1997-2003 ...... -60 Table 111-8: Percentage of total public expenditure on primary and secondary school across income quintiles ...... 63 Table 111-9: Distribution ofprimary teachers across zones 2002103 and 20031041...... 64 Table 111- 10: Execution rates (in percent) ofnon salary recurrent expenditures by education level .....66 Table 111- 11 : Studentheacher ratio in primary school across years ...... 67 Table IV-1: Access ofpopulation by vehicle type (1999) and poverty rates (1999) ...... 72 Table IV-2: The Size ofthe Transport Sector ...... 73 Table IV-3: Governance features ofnew public agencies ...... 75 Table IV-4: Madagascar’s past allocations to the transport sector ...... 77 Table IV-5: Madagascar - execution rate ofthe transport budget ...... 78 Table IV-6: PRSP Expenditure Forecasts 2004-2006 ...... 79 Table IV-7: Public Enterprises in the Transport Sector ...... 80 Table IV-8: Road Network Quality in 2002 and Objectives for 2008 ...... 81 Table IV-9: Road Maintenance: Total requirements and sources offunding ...... 82 Table V-1 : NEAP and PRSP objectives ...... 89 Table V-2: Executing agencies for the NEAP ...... 91 Table V-3: Madagascar - Environment Sector: Central Government allocation and expenditure ...... 93 Table V-4: Madagascar’s recurrent and investment spending patterns in the environment sector over the years 1997-2003 ...... 95 Table V-5: Summary ofsome institutional issues and reform status ...... 99 List of Charts
Chart 1-1: Per capita GDP growth and level relative to SSA ...... 1 Chart 11- 1 a-c: Deconcentration ofpublic services ...... 19 Chart 11-2: Annual growth ofnon salary recurrent expenditures and investment 1998-2004 ...... 31 Chart 11-3 a-b: Comparison ofplanned and actual revenues and donor funds, ...... 33 Chart 11-4: Comparison ofpast budget allocation and execution between 1997 and 2003 ...... 37 Chart 11-5 : Trends in fiscal revenues and budget execution rate ...... 38 Chart 11-6: Distribution ofcivil servants by sector in 2004l ...... -47 Chart 11-7 a - b: a Evolution and distribution ofthe Malagasy civil service by functional level 1997-2004 b Qualification ofCivil servants by functional level ...... 48 Chart 11-8: Geographical distribution of civil service agents 1997-2004 ...... -49 Chart 111- 1: Net Enrollment across quintiles in rural areas .1999 -2001 ...... 54 Chart 111-2: Public expenditure in education as percentage of GDP 2000 ...... 56 Chart 111-3 : Repetition Rates for selected countries in Sub-Saharan Ahcain 200112002 ...... 58 Chart 111-4: Madagascar - Execution rate ofthe Education budget 1997-2003 ...... 61 Chart 111-5 : Execution rate ofinvestment expenditures per source offinding 1997-2003 ...... 62 Chart 111-6: Benefit incidence ofpublic expenditure in education 2001 ...... 63 Chart V-1: Distribution ofexpenditures by environmental theme (200 1) ...... 96
List of Boxes
BOX1-1 The 2002 crisis ...... 4 BOX1-2 HIPC Debt Relief...... 12 BOX11-1 2004 Priority Action Plan - A government-led reform process ...... 15 BOX11-2 Program budgeting ...... 24 BOX11-3 Developing a strategic decision making process ...... 27 BOX11-4 The Budget Framework Paper ...... 28 BOX11-5 Dual budget systems ...... 30 BOX11-6 The impact ofbudget support ...... 32 BOX11-7 Madagascar’s legal instruments to modify the national budget ...... 38 BOX11-8 Performance or results-based management ...... 44 BOX11-9 Common problems of monitoring & evaluation systems ...... 45 BOX11- 10 Citizens report cards - a tool to asses public sector performance ...... 51 BOXN-1 Critical ingredients for a road maintenance fund ...... 76 Annexes
ANNEX 1: SUMMARY OF PUBLIC FINANCE RECOMMENDATIONS ...... 107 ANNEX 2: MADAGASCAR’S POVERTY REDUCTION STRATEGY...... 117 ANNEX 3: ASSESSMENT OF MADAGASCAR’S BUDGET MANAGEMENT CAPACITY ... 120 ANNEX 4: REFORM OF THE PUBLIC FINANCE MANAGEMENT SYSTEM ...... 124 ANNEX 5: STATISTICAL TABLES (PUBLIC FINANCE) ...... 130 ANNEX 6: THE PHASES AND PROCEDURES OF THE BUDGET CYCLE...... 135 ANNEX 7: ORGANIZATION STRUCTURE AND REFORM PROGRAM OF INTERNAL AND EXTERNAL CONTROL INMADAGASCAR ...... 137 ANNEX 8: MODERNIZATION OF THE LEGAL PUBLIC FINANCE FRAMEWORK 2004 ...... 139 ANNEX 9: THE MALAGASY EDUCATION SYSTEM - STRUCTURE AND INDICATORS ...... 142 ANNEX 10: STATISTICAL TABLES (EDUCATION SECTOR) ...... 148 ANNEX 11: THE ENVIRONMENT SECTOR INMADAGASCAR ...... 150 ANNEX 12: STATISTICAL TABLES (ENVIRONMENT) ...... 154
i
EXECUTIVE SUMMARY
This Public Expenditure Review (PER) analyzes the Government ofMadagascar’s efforts to meet the challenge of poverty reduction. The report will first evaluate the macroeconomic and fiscal framework within which the Government is implementing its Poverty Reduction Strategy. Secondly, it will review the resource allocation and current budget management process in Madagascar and the extent to which the current budgeting and budget management process allows Government to effectively implement the PRSP. This section will also deal with overall budget execution in implementing Government policies and the use of human resources. The final sections will analyze the effective use ofpublic resources in three priority sectors which are crucial for the implementation ofthe PRSP (education, transport and environment), and absorb the largest sectoral allocations.’
It is envisaged to cover other sectors in subsequent PERs, on the basis of a multi year work program with Government and other development partners. For the next PER exercise, agriculture, nutrition and social protection would be strong candidate sectors.
Expectations vis-&vis the new Government are enormous - both in Madagascar and abroad. At the same time the Government is facing signijicant challenges to turn around many years of failed policies and mismanagement. This report analyses a small but essential part of these challenges, in particular in the areas of macro-economic management, public finance and sewice delivery in selected sectors. The number of “issues” ident8ed in these areas are substantial and would raise questions of reform focus, prioritization and sequencing for every Government, also in the developed world. The intention of the report is not to outline what does not work in Madagascar but to provide a holistic analysis that constructively contributes to refinement and implementation of the reform policy of the Government. It is also important to note that the Government has not had much time to implement its reform program - the analysis in this report should be seen against the background of only two years of change. It is evident that the implementation of substantial changes will take more time.
A. DEVELOPMENT CONTEXT
Madagascar is a large country which is sparselypopulated. It spans about 587,000 square km, or approximately the size of France and Belgium together, Kenya or Thailand. Population density in Madagascar is about 28 people per square km, close to Mozambique’s density of24 people per square km, but much less than Kenya (55) or Thailand (121). Madagascar is also mountainous and mostly rural. In 2004, eighty percent ofthe country’s 17 million people lived in rural areas.
Madagascar is one of the poorest countries in Africa. During the three decades until 2001, Madagascar’s per capita income declined by 40 percent. It fell from US$402 in 1970 to US$242 in 1999, and is expected at US$235 in 2004. This period stressed self-sufficiency and extensive state intervention in all sectors based on a socialist model of society. Initial reforms to overcome these years of economic mismanagement were launched in the mid-1980s. These reforms were aimed at liberalizing the economy and privatizing public enterprises. These changes, however, as well as similar reforms in the early 1990s were only piecemeal and not implemented decisively. Consequently, they had only marginal economic impact.
’ A companion report to the PER was prepared, a Development Policy Review (DPR), with the objective of examining development policy reforms that Madagascar will need to implement to achieve pro poor growth. The PER complements the DPR by assessing public sector resource availability and prioritization. 11
Structural reforms brought Madagascar’s economy to a turning point in 1997. The period 1997- 2001 is characterized by more substantial reforms focusing on creating a favorable environment for private investment and on ’ integrating Madagascar into the world economy. As a consequence economic growth picked up substantively - during this period the growth rate averaged 4.6 percent, representing the best economic performance in 40 years. Main sources of economic growth were the activities of the Export Processing Zones (“zones franches”), shrimp productiodexportation and tourism.
The impact of these reforms on national poverty reduction, however, was limited. Economic growth mainly benefited the urban population while poverty in the rural areas increased over the period 1997-2001. The perception that government services were flawed by corruption and serious governance problems contributed to a widespread dissatisfaction with the regime in power.
Poor Government performance contributed to the political crisis in 2002. After the general elections in December 2001, the incumbent President Ratsiraka contested the results and two parallel Governments were established, each with its own central bank, leading to a freezing of Madagascar’s assets abroad and a suspension offoreign exchange. During this period economic activity fell sharply and poverty increased significantly. The political crisis ended in July 2002 with the departure of President Didier Ratsiraka, and the inauguration of Marc Ravalomanana, a self-made business man, as President.
B. CREATING AN ENABLING MACROECONOMIC AND FISCAL FRAMEWORK
Since independence in 1960, Madagascar has suffered through a lengthy downward spiral and is today one of the world’s poorest countries, with per capita GDP estimated at US$235 in 2004. Over the course of three decades of interventionist policies and state control, real incomes fell by 40 percent and the headcount poverty rate rose above 70 percent of the population. Recently, structural reforms and improved macroeconomic management have started having a positive impact, giving rise to hopes that Madagascar has turned the corner. The period 1997-200 1 saw sustained positive growth, which represented the best outturn for more than three decades. GDP fell by 12.7 percent, however, in 2002 following a disputed election and political crisis. After a rebound in 2003, Madagascar was hit by a number of exogenous shocks, including two cyclones in early 2004, a sharp depreciation in the FMG and a collapse ofvanilla prices. The country continues to be vulnerable to risk.
Social indicators are poor. Access to medical services, education, electricity and safe water is low, and infant mortality is high. Moreover, in spite ofbetter macroeconomic performance, overall poverty impacts have been limited because growth has been concentrated in a few export sectors and urban areas and has not spread to rural areas three fourths of the population live. Indeed, while the nationwide poverty headcount fell from 73 percent to 70 percent in 1997-2001, rural poverty did not decrease and in 2002 jumped to an estimated 86 percent. Limited human capital and access to credit, and poor public services depress agricultural productivity and there are few opportunities for wage employment. A third ofthe rural population has no road access.
Government’s development plan is overly ambitious. In 2003, Madagascar finalized an ambitious Poverty Reduction Strategy Paper (PRSP) which proposes to reduce poverty by half in 10 years, from 70 percent in 2003 to 35 percent in 2013. The plan centers around three strategic axes: (i)restoration ofthe rule of law and strengthening of good governance, (ii)broad based economic growth, and (iii) human development and social protection. The PRSP envisaged that economic growth would be led by foreign investment in agriculture and in textiles, and strong public sector investment in infrastructure and social services. Yet Madagascar must overcome serious capacity constraints to ... 111 implement this agenda and public sector performance is weak even compared to other low income countries. Despite recent efforts on the revenue side, the tax base remains highly concentrated, and customs administration is hampered by slow processing and corruption. HIPC debt relief has significantly expanded the fiscal envelope, but poor budget execution remains a problem.
Economic targets require more realism. Halving poverty in a decade implies an average growth rate of 9.3 percent (compared to 4.6 percent in 1997-2001). The Joint Staff Assessment of the PRSP concluded that while the macroeconomic and fiscal framework was basically sound, such a growth target was unrealistic and should be lowered. Recent reviews by the Bank and the International Monetary Fund (IMF) recommended lowering growth projections in the medium to longer term scenarios to a more plausible 6 percent. The most recent PRGF review (September 2004) projects above trend growth of seven percent in 2005-06 during the recovery phase after the 2002 crisis, easing back to 6 percent in the longer term. In striking contrast, the PRSP anticipates growth accelerating from 6 percent in 2003 to 8 percent in 2006.
On the basis of an unexpectedly strong rebound of 9.8 percent in 2003 (outpacing the IMF’s program target of 6 percent), the PRSP appears on track in the near term. But the PRSP’s macroeconomic scenarios have a horizon of2006 and provide no details about performance beyond that point, making it difficult to evaluate longer term expectations. Nevertheless, the near term acceleration ofthe PRSP compared to the steady state trend in the PRGF suggests there is a significant divergence of views about the longer term. At the very least, the Government needs to prioritize its spending plans and be prepared to adjust the program to maintain fiscal sustainability.
Financial sector should be strengthened. The weakness of the financial sector poses an additional problem for Madagascar’s fiscal framework since it has precluded better financing of the private sector. Private sector borrowing averaged 9 percent ofGDP over the period 1998-2002, less than half of the average for African countries. To further stimulate private sector growth the financial sector needs to be strengthened, in addition to maintaining a stable macroeconomic environment an in particular controlling inflation.
C. THE CHALLENGE OF RESOURCE ALLOCATION AND BUDGET EXECUTION
To improve resource allocation and budget execution, the Government has launched a comprehensive reform program, which is in its early stages. The central instrument is an annual Priority Action Plan, which sequences intended reforms in line with the absorptive capacity of the public finance system. Recent achievements of the government’s action plan include a new Organic Finance Law which introduces a modern institutional and procedural public finance framework, a new procurement code to address deficiencies in public procurement, the establishment ofa new internal control cadre in the Ministry of Economy, Finance and Budget (MEFB), and improvements in the operational efficiency ofthe treasury department. Despite these efforts, Madagascar meets presently only four out of fifteen criteria which were developed to benchmark public finance systems in developing countries. Overall issues that the Government is facing in the public finance management process are listed below and specific challenges in budget allocation, execution and human resources are presented in more detail in sub-sections ofthe chapter. 1v
Budgetary allocations are only partially in line with PRSP priorities. Allocations for primary education increased by 39 percent and for primary health care by around 15 percent over the period 1997-2004. Allocations for productive sectors (in particular energy, agriculture and environment) fell substantively - from 33 percent of non-interest expenditures in 1997 to 26 percent in 2004. However, public resources allocated to the transport sector increased by annually 18 percent on average over the past five years. The share of budgetary allocations to “governance” (defined by the Government as the sum of allocations for general administration, defence and public security including the judiciary) has been reduced since 1999. General administration, however, continues to take the lion’s share of the budget (on average 36 percent over the observed period).
Bringing Government closer to the people. The distribution of budgetary allocations to sectors are not yet in line with the administration’s intention to “bring Government closer to the people”. It is unclear to what extent the allocations for the general administration (about 33 percent ofnon-interest expenditures in 2004) contribute to achieving the goals and objectives ofthe PRSP. At the same time, key PRSP sectors, in particular the agriculture and health sector, have been marginalized with only a share ofthe budget of 5.2 and 7.4 percent of the total budget in 2004. In terms ofdecentralization, the central Government maintains control over the bulk ofbudgetary resources; only 3 to 4 percent of the national budget is managed by the communes, the only operational level below the central Government.
The credibility of the budget continues to be low because of poor revenue forecasting and unbudgeted expenditures. The gap between revenue forecasts and revenue inflows is substantial: revenues had to be adjusted downwards by 22 percent in 2001 and 44 percent in 2002. Main problems include lack of a clear methodology and lack of capacity in the relevant departments to accurately project inflows. Due to a significant improvement of the budget execution rate in 2003 (92 percent) this gap could be narrowed down to 4 percent.
Budget execution rates need to be closely monitored. Budget execution rates have deteriorated since the end of the 1990s from 96 percent in 1998 to 75 percent in 2001, mainly because ofweak revenue collection and of budget implementation problems. Estimates for the 2003 budget execution show a 92 percent execution rate, which would indicate that Government’s efforts to streamline the execution process begins to bear fruit. The improvement in execution can be mainly attributed to recurrent expenditures (salary and non salary expenditures) while shortcomings continue to exist in the implementation of public investment projects. Over the period 1997-2003 average execution rate for recurrent expenditures was 89 percent but only 68 percent for capital expenditure. HIPC funds (representing 6 percent of the Government’s budget in 2003) which were executed based on simplified procedures reached an execution rate of 99 percent. Budget execution problems, notably of capital expenditures, are mainly caused by cumbersome and complex disbursement procedures. Government has begun to rationalize disbursement procedures and is putting in place an integrated financial management system, which will streamline the expenditure management process.
Budget preparation faces significant challenges. These are: (i)a lack of reliable macroeconomic and fiscal parameters guiding the preparation process; (ii)little involvement of sector ministries in the preparation process, (iii)no systematic mechanism to discuss budgetary disputes-inter-governmental consultation about the budget is limited to budgetary conferences; and (iv) strategic discussion and decision-making on fiscal and budgetary policies at the Cabinet level is limited and ad-hoc. In all, the allocation ofpublic resources in Madagascar needs to be based on a reliable expenditure management framework that clearly links policy priorities to the budget and prioritizes needs within a hard budget constraint. V
The problem of separating recurrent and capital budgets. Although a consolidated budget is presented to Parliament, the Government is still operating on a dual budget system with different procedures, timelines and institutional responsibilities for recurrent and investment expenditures. This dual budget system reinforces the inconsistencies between investment and (non-salary) recurrent expenditures. The Government should consider to filly integrate the preparation of recurrent and investment budgets. It should harmonize the preparation process and develop a uniform budget proposal, which addresses the cost implication ofinvestments within a medium-term envelope.
Possible solutions. To address these problems the Government can (i)introduce a Budget Framework Paper, which outlines - early in the budget preparation process - the macroeconomic framework under which the budget is being developed; (ii)enhance the role of Cabinet by systematically ensuring strategic decision-making at the different stages of the budget preparation process, (iii) strengthen the participation ofline ministries based on an effective planning and consultation process, and (iv) refocus budgetary conferences on policy objectives, prioritization of needs within the hard budget constraints and results achieved on the bases of resources allocated. To accommodate these changes, the calendar for the preparation of the annual budget would need to be adjusted; in particular, the submission ofthe full budget to Parliament could be delayed to ensure that Parliament can vote on a high-quality budget.
Efforts made by the Government to develop a medium-term macro-economic and flscal perspective and to introduce program budgeting (as ofbudget year 2005) are important steps to better link policy priorities to the budget and to provide a medium-term perspective about the affordability of Government policies. Experiences from other countries, however, indicate that the introduction of program budgeting will pose a significant challenge for the public administration; the reforms should be complemented by a systematic program of training and capacity building which aims at establishing or enhancing relevant capacities in line ministries.
Execution of the budget is hampered by administrative bottlenecks. As processing payments in Madagascar is complex with around 11 different stages that each requires a formal approval, “simplified procedures” to release funds are frequently applied. These procedures should, however, be reserved for exceptional cases. In addition, shortcomings in the procurement and control system increase the administration’s transaction cost and provide the ground for substantial inefficiencies.
A flawed system of financial monitoring. Key information is not available, in particular execution data on investment projects financed by donors. Budget reporting by line ministries is at an even more embryonic stage: since 2000 only the social sectors (education and health) produced regular budget execution reports. In 2003, additional reports were prepared by the ministries of agriculture, justice, water and forest, and public works to fulfill a Government commitment in the HIPC context. Finally, there is no systematic reconciliation process between the Treasury and the Central Bank. As a result ofthese deficiencies the Treasury faces difficulties in closing the annual accounts within the statutory timefiame and the Auditor General is not able to validate these accounts as required by the law. Over the past years, the treasury accounting system was strengthened to improve the closing of Government accounts in a timely manner. As a result the final accounts for the years 1997 to 2001 have been sent for review to the Auditor General. The accounts for the years 2001, 2003 and 2004 are expected to be submitted in 2005.
Government reforms are underway to address these problems. Reforms to date focus mainly on improving the operational efficiency of the Treasury. Government should also build on the joint budget allocation reports presented by key ministries in 2003 and develop an integrated reporting system that can serve different purposes (e.g. PRSP, business plan implementation, budget execution). v1
The need to transform the budget into a management instrument. The budget should be the main instrument to facilitate implementation of Government policies. In Madagascar, however, the budget is not seen as a reliable planning instrument because actual releases typically vary substantially from the allocated amount. As a consequence, the budget is not used as a management instrument that guides the implementation of policies and programs. There is also no effective monitoring & evaluation mechanism in place that systematically tracks implementation of Government policies and programs.
Introduction of basic performance management under way. To strengthen the results orientation of the administration Government introduced business plans for all line ministries which outline the work program for the respective year. Many business plans, however, lack realism and detailed costing; they also do not feed into the program budgets, which are prepared in a separate exercise. Government should integrate the different activities into a coherent results-based management framework. Under such a system policy-related information is systematically collected at all levels of Government, consolidated by a well-functioning mechanism at the centre of Government and scrutinized for potential follow-up. The system should generate regular reports about the status ofthe implementation of the Government program, which should be sent to Cabinet for discussion and strategic decision-making.
D. EFFICIENT USE OF HUMAN RESOURCES
Improvement of the efficiency of the civil service needed. The Malagasy civil service accounts for 146,000 agents in 2004, which represents 0.8 percent of the population. Education employs the largest share of civil servants (around 44 percent), after public security (15 percent) and administration (12 percent). Several previous attempts to reform the civil service failed because they were overly ambitious and did not address underlying systemic problems. As a consequence the public administration continues to be flawed by governance problems, in particular corruption, inefficiencies and mismanagement.
Government efforts to address these problems are under way. They concentrate on improving operational efficiency and performance orientation of the administration. Govemment is also considering a comprehensive administrative reform program to change the existing institutional and procedural set-up. Govemment should learn from experiences in other countries in designing and implementing its administrative reform program. These experiences overwhelmingly indicate that comprehensive reforms of the civil service are extremely difficult to implement and to sustain. A more promising approach would focus on interventions that target specific public services with large public-private interface (such as primary education, health centers, customs, land titling, and the lower courts). The objective would be to improve service delivery and produce visible results in the short term. While these reforms cannot substitute a long-term vision for the reform ofthe civil service they keep the reform program focused on tangible results and, thus establish much needed credibility.
The need to address structural issues.. . Potential reform should also look at the composition ofthe civil service. As in many other developing countries the Malagasy civil service is characterized by a relatively high number of support staff, around 60 percent ofthe civil service in 2004. At the same time, the intermediate level (in particular technical specialists) who typically form the backbone of a good civil service account for only 30 percent of the total staff. The management level is also rather small with less than 8 percent of civil servants. This composition in part explains existing bottlenecks in delivering public services - not enough qualified personnel is available to deal with the various administrative tasks. vii
.,.and staffing at the service delivery level. It will also be important to increase the number of civil servants allocated to the periphery to correspond to the vision of an administration which is close to the people. The number of civil servants is currently 2 per 100 inhabitants in urban centers while the ratio is only 0.75 for rural areas. This ratio constitutes another explanation for existing service delivery problems - not enough civil servants are allocated to front-line services.
Government should align human resources to budgetary priorities. During the budget preparation process no systematic review ofthe staffing allocations ofthe sector ministries takes place. Staff and payroll estimates are based on the staffing plans prepared by line ministries in collaboration with the Ministry of Civil Service. However, at the level ofthe sector ministries neither job descriptions nor a breakdown of staff against goals and objectives of the respective ministry or department exist. Line ministries should be required to prepare and regularly update recruitment and staffing plans as part of the budget preparation process. These plans should be reviewed to correspond to Govemment priorities in separate manpower hearings with the MEFB and the Ministry of Civil Service. The final plans should be submitted to Cabinet with a substantiation that the allocation ofhuman resources is in line with the goals and objectives ofthe Government.
E. USE OF PUBLIC RESOURCES IN THE EDUCATION SECTOR
The education sectors reforms yielded significant results, but more challenges are ahead. The Malagasy education system has many strengths; it can in particular build on a large network of 19,000 primary schools that serve more than 3 million children. Policy reforms, during and after the 2002 crisis, such as the elimination of school fees in primary schools and the distribution oftextbooks and school kits, resulted into a substantial increase in enrolment.
Among the key challenges are :
Low survival rates. Enrolment for primary education has significantly increased over the last two years. The key challenge for the Govemment is to sustain the enrolment increases and to ensure that the children who are enrolled complete the five years ofprimary education. Of all children in school age only 40 percent complete the five year cycle ofprimary education. Out of 100 children who start primary school less then half complete their five years ofprimary education in the year 2003/04. o Reduce drop-out and repetition rates. Repetition rates at the primary school level have been above 30 percent in the last years, the highest rate in Sub-Saharan Africa. Only 4 percent of the children do not repeat a class and 25 percent repeat two or more times during primary school. In this context, private primary schools have significantly lower repetition rates (16 percent compared to 33 percent ofpublic schools in 2003-2004), which indicates that the quality of education is better at the private school level. o Improve efficiency and cost-effectiveness. Efficiency remains a key problem of the education system. Of those who complete primary education, around 66 percent repeated at least a grade and only few ofthem will continue to junior secondary education (44 percent). Cost-effectiveness is low: To produce a 5th grader the Malagasy education system spends 2.7 times more than in a system without dropouts or repeaters.
Diminish disparities and inequities in the system. Enrolment shows strong regional disparities. Enrolment rates in urban areas were above 70 percent in all provinces, the rates in rural areas were less than 50 percent. As the majority of the poor live in rural areas this pattem indicates a regressive distribution of primary school benefits. There are also large income variations in enrolment. From ... Vlll
1999 to 2001 the enrolment rates of children belonging to the poorest income levels decreased while the ones belonging to the highest income levels increased. Moreover, the poorest districts are those with the largest studendpublic teacher ratios. Government faces difficulties to hire and maintain teacher in remote areas. Publicly paid teachers are much less allocated to villages where the average income level ofthe population is low.
Madagascar’s commitment to “Education for all ” provides a unique opportunity to tackle the challenges. To confront these challenges the Government has formulated a new strategy to reform the education system and has committed itself to achieving “Education For All” (EFA) with a 100 percent school completion rate by the year 2015. This new strategy is supported by the international community, which has pledged to help Government reach its education goals.
Per student allocation in primary education has hardly changed. Budgetary allocations for education have significantly increased in the last years. While in 1997 the budget allocation was about 2 percent of GDP the 2004 budget allocated 3.6 percent ofGDP, which is in line with the Sub- Saharan Africa average of 3 percent of GDP (in 2000). This increase mostly focused on basic education, especially the primary schools. Despite these increases the per student allocations in primary education remained almost unchanged with 15 percent of the per capita GDP in 2000 and 2003. This is due to significant increases in enrollment. At the same time GDP per capita allocations for secondary education reached 46 percent in 2003, from 28 percent in 2000 suggesting that students in secondary education benefited from the increase ofpublic resources, despite a drop in the share of resources allocated to secondary education.
Management information is limited. While the ministry collects standard information about the performance ofthe school system in the country this data is not produced in a timely manner to feed into policy decisions. Budget preparation is typically based on outdated information, which poses significant problems in adequately determining budgetary needs.
Decision-making remains highly centralized. The division of responsibilities between the policymaker and service provider functions in the education ministry should be krther improved. The school districts (CISCOs) are meant to be responsible for the provision ofprimary education services; the ministry for the design, supervision and regulation of policies for the sector. In the past, the ministry retained major delivery functions: it directly managed teachers and controlled all investment to the schools. Evidence were the relatively high administrative overheads at the central level. Since 2003, efforts are under way to progressively transfer service delivery functions from the central govemment to the service delivery levels.
District agencies should be strengthened. Budget execution rates of non-salary expenditures at the CISCO level (on average 86 percent between 1997 and 2001) are lower than the rates of the central ministry or of the provincial administration, on average 92 and 90 percent over the same period. Limited (public financial management) capacity, lack of equipment and the burdensome procurement and disbursement processes are key factors in this context. To address the low performance of CISCOs key measures were launched to improve capacity; as a consequence the execution rate of non salary expenditures improved to 91 percent in 2003. Expenditure tracking surveys have also found significant resource leakages at the CISCO level (55 percent of the schools report leakages of in-kind transfers). Budgetary performance of the CISCOs should be systematically strengthened. It will also be important to rethink the distribution of budgetary resources among the districts and the communes on the basis of needs, as determined by the number of students or the conditions of the school infrastructure. ix
Capitalizing on the existing system of community participation. In Madagascar, parental associations (FRAMs) play an important (and widely acknowledged) role in school issues. FRAMs provide in-kind support for the schools, in particular related to in school maintenance. In some communities these associations hire teachers and pay their salaries. The role of the FRAMs has been challenged by the creation of FAFs (community-government organization), which manage financial transfers to schools from the central Government (“caisse d’kcole” program). The creation of the FAFs raises questions about their relationship with the FRAMS; this relationship should be clarified to ensure effective coordination ofthe support to the schools provided by the various actors.
F. USE OF PUBLIC RESOURCES IN THE TRANSPORT SECTOR
Historically, Madagascar‘s transport sector has been dominated by direct state intervention with heavy reliance on Government agencies and parastatals to provide services. With the exception of road freight transport, Government had, directly or indirectly, managed and financed railways, aviation, airports, shipping, and ports. As a result, today’s service is poor, operating efficiency is low, safety standards are inappropriate, maintenance has been neglected, and funding for capital investments has been difficult to mobilize.
In April 2000, the Government adopted a comprehensive transport sector policy and strategy, which seeks to reverse past policies. It aims at (i)focusing Government’s role on strategic planning, sector oversight and coordination; (ii)creating jointly controlled public-private and user-financed agencies for sub-sector management and regulatory functions; (iii)divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing the local private sector for works design and execution; and (v) rehabilitating transport infrastructure to appropriate levels. In implementing its new vision the Government is facing important challenges which are summarized below:
o Poor service quality in the road sector. Over the past 30 years, road quality in Madagascar has deteriorated: the country has lost about 1000 kilometers of roads per year primarily due to poor maintenance. Today, 8 1 percent of roads are in poor condition. The share of paved roads is 11.6 percent, compared to an average of 13 percent for Sub-Saharan Africa, 16 percent for low income countries worldwide, and 53 percent for lower-middle income countries. On average, only about half ofthe population is accessible by motorized vehicle.
Air transport system in urgent need. Most airports require urgent rehabilitation to bring infrastructure to international safety and operations standards, in particular with regard to safety and security equipment, telecommunications, radio navigation, expansion of terminals and runways, and improvements in road access.
Port services inadequate. Of the country’s 17 ports, only 4 are deep enough to permit unloading from large vessels. Cargo handling technology in the country’s main port, Toamasina, is outdated: the port unloads containers at a rate of 8 per hour compared to a rate of 25 per hour in neighboring Reunion and 30 per hour in neighboring Mauritius.
o Investment needs enormous. The PRSP assumes for the 2003-2006 period investments of about MGF 7 trillion, or close to US$1 billion (with the exchange rate used in the PRSP). This represents about 45 percent ofthe total investment needs identified in the PRSP. X
Comprehensive reforms are under way to improve Operational efficiency of the sector: the Government merged three ministries and created a Ministry of Transport and Regional Planning. The key role ofthe ministry is to design transport policy as well as to coordinate all activities in the sector. Regulatory functions will be managed by autonomous agencies, which are spin-offs from old ministerial departments or existing agencies. These autonomous agencies include: the Road Management Fund (created 2003), the Civil Aviation Authority (created 1999), the Road Authority (planned for 2005) and the Port, Maritime and kver Agency (created 2000 but not yet operational due to lack of funding). Under the new administrative framework Government also plans to gradually devolve some road maintenance activities, management of smaller airports and ports to local authorities. In line with the new policy the Government has begun to increase the role of the private sector: Air Madagascar has been put under a private management contract; similar contracts are planned in other areas (railways, ports, airports).
Key issues include: o Affordability and realism. Madagascar expects to allocate on average 2.7 percent of GDP in the period 2004-2006 to the transport sector. Against the background of the past performance in the sector these allocations raise serious questions concerning affordability and implementation realism. In the 1997-2003 period, the Government budgeted transport expenditures of about 2.3 percent of GDP and executed only about 1.5 percent of GDP. o Contingent liabilities. The total amount of contingent liabilities and debt stemming from the transport sector is unknown. This poses a significant risk for the Government’s budget. These liabilities need to be clearly established and addressed by a debt management plan.
Low budget execution rates. Between 1997 and 2003, on average only 71 percent of the transport sector budgets were implemented. This is mainly due to low execution rates of the investment budget (the execution rate of investments deteriorated from 96 percent in 1997 to 89 percent in 2003). Some of the sub sectors (rail, maritime and ship) only achieved an average execution rate for the capital budget of 44 percent in 2004. Main reasons for the execution problems include inadequate procurement and management capacity in the Ministry of Transport and Regional Planning as well as complex management and disbursement procedures under the different donor projects. Another problem is the limited absorptive capacity of the sector - in particular the private sector faces difficulties in implementing the ambitious Government program. To tackle this problem, the Government intends to invite more foreign firms to build and rehabilitate transport infrastructure. o Improvement of the Road Maintenance Fund. The road maintenance fund has not been adequately funded because of inadequate allocations provided by the Government. Organizational and technical problems continue to hamper the efficiency of the fund. For the fund to be more effective it will be important to rethink the funding arrangements based on experiences in other countries. It will also be important to update and rigidly enforce accounting and procurement standards. The fund should be subjected to regular value-for-money audits. The problem of autonomous public agencies. Government intends to devolve responsibility for the regulation of the road, air transport, marine, and rail sectors to autonomous agencies. Experience in other countries, however, indicates that the devolution of authority to autonomous agencies is not a silver bullet. The track record of autonomous agencies is rather mixed; a particular danger is to replicate the inefficient administration autocracy at the central Government at the level of these agencies. International experience also indicates that these institutional changes will require significant implementation time. xi
R The issue of capacity of local authorities. Government intends to devolve some activities in the areas of road maintenance, airport management, port operation and management to local authorities. This devolution needs to be complemented by substantial investments in training and capacity building to enable the local communities to adequately fulfill their new responsibilities.
R Inconsistency of budgetary data. The inconsistency of allocation and execution data between the Ministry ofFinance and the sector ministry raises serious concems about the quality and usefulness of expenditure information. These inconsistencies should be addressed on a priority basis to enable a transparent review ofimplementation performance against policy targets as specified in the PRSP.
G. USE OF PUBLIC RESOURCES IN THE ENVIRONMENT SECTOR
Madagascar’s economy is in a vulnerable position due to the degradation of its key natural assets, The economy depends highly on the country’s natural resources. Agriculture, forestry and fishing account for 32 percent of GDP. Natural forests provide key environmental services while harboring Madagascar’s unique biological resources, a crucial factor in the growth of ecotourism on the island, However, the loss of natural forest, primarily to tavy (slash and bum agriculture) and the use of fuel wood and charcoal, has had a detrimental impact on Madagascar’s biodiversity and hurts the growth potential in ecotourism. In tackling these environmental problems policymakers are facing three major challenges:
Growing population and agricultural stagnation. The combination of an expanding population and static productivity has generated pressure for agricultural expansion through conversion of new land (mostly forests) to agricultural uses.
R Poor incentives for sustainable property management. Forested lands are the property of the State in Madagascar. Local communities typically have no claim on these resources and no formal right to use them. As communities do not own forested lands they have no incentives to provide better management.
Slash and burn agriculture. Communities in the headlands of water basins practice slash and bum agnculture without considering the negative effects on downstream users.
The Government adopted a comprehensive environment sector strategy, manifested in the National Environmental Action Plan (NEAP) and the PRSP. The NEAP was designed as a fifteen year investment program divided into three five-year phases (EP1 1991-96, EP2 97-02 and EP3 04-09). Since its publication in 1990, the action plan institutionalized several sector priorities such as the establishment of protected areas, rural resource management, and environmental education and training. However, several problem areas require further improvement, for example: (i)the non- application of policies and regulations, (ii)the reallocation of public resources in favor of local communities (at the moment around 70 percent of the resources are allocated in favor of the central level), and (iii)awareness building ofthe Malagasy population conceming environmental issues.
Budget allocations do not sufficiently respond to needs. The environment budget comprises mainly of capital expenditures, on average 91 percent oftotal expenditures over the period 1997-2004; at the same time recurrent expenditures are chronically under-funded. This poses a major problem since the conservation of natural resources is dependent on the availability of adequate resources for surveillance, control etc. xii
Budget execution requires improvement. Budget execution, for example of the executing agencies, is hampered by lack of standardized procurement processes, absence of a harmonized financial management framework and weak financial management capacity. Budgetary information about executing agencies is limited. As a consequence, the Ministry of Environment and Forests is not able to adequately monitor the implementation of its sector strategy.
Institutional reforms key priority. A key priority for the existing environmental program is the rationalization ofthe overly complex and bureaucratic institutional set-up. Under the new institutional framework, (i)the Ministry for Environment and Forest will be responsible for policy-making and coordination, (ii)the operational work will be carried out by three specialized executing agencies (ANGAP, ONE and ANGEF), and (iii)more responsibility for environment and natural resource management will be devolved to local communities. At the same time the transfer of funds to local communities will be made more effective. Experience in other countries indicate that the devolution of management responsibility to local authorities requires significant investments in training and capacity building.
Sustainable funding of protected areas needed. The long term funding of the protected areas is at risk as the relevant management agency is likely to face funding shortfalls during the implementation ofthe current environmental program. It will be important to generate additional revenue to close the funding gap, in particular fi-om ecotourism and hotel taxes. The protected area system should be further developed to improve environmental protection and tourism rents.
Environmental Impact Assessments also for public investments. While all large-scale investments, both public and private, might require Environmental Impact Assessments (EIAs), to date there has been little application of EIA for public sector investments. This situation presents a severe environmental risk, since large-scale public investment is expected to average more than three times the value of similar private investment until 2006. This also creates a negative image for the government because of the double standard applied to private and public investments. Even where public investments carried out EIAs, the required permit fee has not been paid. EIA administration in Madagascar could be placed on a sustainable footing if payments for permits of public investments are fully budgeted and paid for by all government services at the national and sub-national levels.
H. CONCLUSION AND OUTLOOK
The findings of this report expand and further deepen existing knowledge about the public finance system in Madagascar and its contribution to the delivery of services in specific sectors. While they acknowledge Government efforts to improve the system of public finance they confirm significant weaknesses in allocating and executing public resources at the sectoral and cross-sectoral levels. They also indicate that Government policies are not sufficiently reflected in the annual budget. In addition, the mechanisms to systematically monitor and evaluate implementation of Govemment policies are inadequate; it is therefore difficult to clearly establish status, impact and implementation problems of ongoing or intended activities. As a result political decision-making is based on insufficient information.
The findings and recommendations of the report call for the development of an integrated reform program, which prioritizes intended reforms in view of the absorptive capacity of the Government machinery. To facilitate the development of such a program the recommendations in this report are summarized in annex 1 in short, medium and long-term measures. At the cross-sectoral level it is anticipated to feed the recommendations into the development of the Priority Action Plan of the MEFB for the year 2005. At the sectoral levels the recommendations ofthis report will contribute to a ... Xlll refinement of government’s interventions aimed at improving implementation of sectoral policies and delivery ofservices.
The government is considering to conduct a public expenditure review on an annual basis. The review would focus on assessing budgetary implementation against policy objectives, and on determining strategic priorities for the subsequent budget year.
-1-
I, CREATING AN ENABLING MACROECONOMIC AND FISCAL FRAMEWORK
1) MACROECONOMICPERFORMANCE AND THE POLICY ENVIRONMENT
1. One of the poorest countries in the world, Madagascar has formulated a PRSP aimed at cutting poverty rapidly through faster growth and improved govemance. The public sector plays a key role in achieving the plan’s objectives, through appropriate policies and public investments in infrastructure, education and health. The results are underpinned by an ambitious macroeconomic and fiscal framework which, if achieved, will dramatically reverse the country’s long term decline. An unexpectedly buoyant recovery after the 2002 crisis has created some space for the poverty reduction program which for now is safely within the fiscal envelope. Nevertheless, it may be overly optimistic to project a continuation of recent growth because this reflects in part a cyclical rebound following the crisis. Moreover, Madagascar has limited public sector capacity and must overcome a legacy of poor implementation. Thus, Government should be prepared to reprioritize spending plans and make adjustments to ensure fiscal sustainability.
2. Madagascar has suffered through a lengthy decline. After independence, Madagascar achieved a decade of modest growth, but then inward looking, static policies and poor economic management put the economy on a prolonged, downward spiral. Though such a description could apply to many countries in Sub Saharan Africa, Madagascar’s decline was exceptionally steep. From 1965- 2004, real per capita GDP declined by over 40 percent from US$401 to an estimated US$235, or from 140 percent of the regional average to just 70 percent (chart 1.1).
Chart 1-1: Per capita GDP growth and level relative to SSA
......
.* 01...... ^.....^...... ^...... ‘I..I
1966 1971 1976 1981 1986 1991 1996 2001 O6 ~ 1 lGDPper capita (% growthf-relative to SSA x So. Afrida Source. Live Database and IMF
3. Attempts at structural reform began in the 1980s, but a stop-go approach limited their effectiveness. With support from the IMF and World Bank, Madagascar embarked on structural reforms in the mid 1980s, focusing on trade and exchange rate liberalization, market deregulation, parastatal, agricultural and financial sector reform, and private sector development. Sectors targeted by the reforms included fishing (through the introduction of a transparent license system), mining (through a cadastre update and mining permit legislation), and tourism (through a waiver of visa requirements). These initiatives briefly stabilized the economy in the late 1980s, but widespread civil unrest and demands for political liberalization in the early 1990s halted progress and in some cases even reversed it. Even after -2-
relative calm had been restored, political infighting and disagreements over policy continued to block substantive reform.
4. Macroeconomic management improved markedly. Since the mid 1990s, numerous measures have dramatically improved the quality of macroeconomic management. From 1994-97, broad money growth was brought under control, reducing inflation from 61 percent to 4.8 percent; the government deficit was reduced from over 8 percent of GDP to 2.4 percent and official reserves were built up from less than one month of imports to 3.5 months. In the external sector the maximum tariff rate was brought down to 30 percent and non-tariff barriers were eliminated. Regional links were strengthened in 2000 by joining COMESA (though so far there has been little trade apart from Mauritius). The financial sector has been strengthened through increased central bank independence, enhanced prudential supervision of commercial banks and restructuring of state-owned banks which had experienced financial difficulties.2
5. Together, structural reforms and improved macroeconomic management underpinned an impressive turnaround in economic performance in the late 1990s (Table 1.1). From 1995, the growth rate increased steadily to reach 6 percent in 200 1, the fastest pace in more than two decades, while CPI inflation largely remained in single digits during the 1995-2001 period. Investment and savings rates rose and current account and fiscal deficits narrowed.
6. ..although debt continued to place a heavy burden. Madagascar’s external debt was exerting substantial pressure on the public finances and on the balance ofpayments. With extemal debt at 101.2 percent of GDP at end-1999, Madagascar’s external debt stood at USD 4.4 billion; in Net Present Value terms the debt amounted to USD 2.1 billion, 56 percent of GDP, and 248 percent of exports of goods and services. Madagascar’s extemal debt was unsustainable even after the full application of traditional debt relief mechanisms (i.e. under Naples terms obtained in January 1999 from the Paris Club). Madagascar’s debt to GDP ratio would have stayed above 150 percent through 2008; while the debt to exports ratio would decline from 11.7 percent in 2000 to 8.7 in 2009, and the debt service to govemment revenue ratio would decline from 23.1 percent in 2000 to 13.3 percent in 2009. Despite the good economic performance through the late nineties, Madagascar, being among the poorest countries in the world, would not be able to pay for its imports and would still have to pay close to a quarter of its government revenues to meet interest payments on extemal debt. Madagascar qualified for the enhanced debt relief under the HIPC initiative in December 2000, which effectively reduced debt service payments by about 1 percent ofGDP from 2001 onward^.^
IMF 1999 See Decision Point Document for Enhanced Highly Indebted Poor Country Initiative - Madagascar, December 1, 2000, IMF and IDA for fiuther information on Madagascar’s debt situation. -3-
Table 1-1: Madagascar's macroeconomic indicators (1995-2003)
1995 1996 1997 1998 1999 2000 2001 2002 2003 GDP (% change) 1.7 2.1 3.7 3.9 4.7 4.8 6.0 -12.7 9.8 CPI Inflation (%) 49.0 19.8 4.5 6.2 9.9 11.9 7.4 15.8 0.2 Investment rate (% GDP) 10.9 11.6 12.8 14.8 14.9 15.0 18.5 14.3 16.0 Private investment rate (% GDP) 5.2 5.0 6.3 6.9 8.0 8.3 11.2 9.4 10.2 National savings rate (x GDP) -3.3 -0.1 0.8 -0.6 2.6 2.7 9.9 3.3 5.3 Real effective exchange rate (% GDP) 42.4 53.9 48.5 48.9 47.6 52.4 57.8 62.5 65.6
Fiscal bal., incl. Grants (YOGDP) -8.0 -11.6 -5.6 -9.0 -5.7 -5.7 -6.8 -6.8 -5.5 Current account balance (% GDP) -8.4 -5.0 -5.5 -7.4 -5.4 -5.6 -1.3 -6.2 -4.9 Domestic debt 11.0 9.7 9.6 12.0 11.7 .. .. 14.1 13.9 Source: Live Database and IMF, IIIPC' Prelina Documelit & Fifth Review of PRGF
7. A political crisis in 2002 severely disrupted the economy, though the impact was short lived and performance has remained strong. Once again, however, politics intervened when in December 2001 a disputed election brought the country to the brink of civil war (box I.l).3As a result, GDP fell by 12.7 percent in 2002, while inflation reached nearly 16 percent and the investment rate fell from 18.5 to 14.3 percent of GDP (see table 1.1). The external current account balance worsened from -1.3 to - 6.2 percent of GDP. On the fiscal side, revenues collapsed from 14 to 10 percent of GDP, as did expenditures, from 17.6 percent to 15.7 percent (see table 1.3). However, 2003 saw an unexpectedly strong rebound, with real growth reaching 9.8 percent and inflation virtually eliminated - eclipsing the IMF's program target of 6.0 percent growth and 6.8 percent inflation. Public expenditure recovered to 19.5 percent ofGDP while revenues (including grants) reached 15.4 percent ofGDP, exceeding the pre- crisis 2001 rates. Growth slowed in 2004, though remained resilient despite the dampening effects of two major cyclones, a collapse in world vanilla prices hnd severe exchange rate volatility.
Moreover, sporadic violence has continued to cast a shadow -- Several grenade attacks occurred as recently as mid 2004 - though their motivation and significance are unclear and so far the reform process has not been derailed. -4-
Box 1-1 The 2002 crisis
I A contested first round of elections in December 2001 plunged Madagascar into a political crisis. The election pitted the incumbent president, Didier Ratsiraka, against Antananarivo’s popular mayor, Marc Ravalomanana. The count indicated Mr. Ravalomanana in the lead but short of an absolute majority. Mr. Ratsiraka’s insistence on a second round of voting triggered mass protests and a general strike by Ravalomanana supporters. Mediation attempts failed and Mr. Ravalomanana remained in the capital while Mr. Ratsiraka withdrew to his home base in Tamatave. In the ensuing standoff bridges were destroyed and roads blocked, isolating large parts of the highlands from the coastal areas. A second Central Bank was established in Tamatave which resulted in the freezing of Madagascar’s assets abroad, a halt to foreign exchange trading and the closure of the treasury bond market for several months. Violent clashes, though rare, claimed several hundred lives. Domestic and foreign support for Mr. Ravalomanana grew steadily and in mid 2002 he was proclaimed president while Mr. Ratsiraka fled to France.
The economic impacts of the crisis were widespread, especially in the EPZ where many companies closed their doors and temporarily laid off an estimated 100,000 EPZ workers. Services were also affected as roadblocks, damaged bridges and fuel shortages virtually shut down the transport sector, and tourism fell by as much as 95 percent. Poverty rose sharply during the crisis, particularly in urban areas where both informal sector and low-income formal sector workers were affected by declines in production and plant closures. However, the effects were also felt in rural areas where agricultural prices fell and many farmers were unable to get their crops to market.
I Source :IMF 2003
8. Recent outturns in the face of such political and economic turbulence bolster optimism about the medium term.. . Especially encouraging is the resilience of private investment which remains at more than double the level of the mid 1990s as a share of GDP, while the fiscal deficit has narrowed and inflation remains tame. Nevertheless, it would be premature to disregard the 2002 downturn and extrapolate what appears otherwise to be a rising trend in growth. First, the surge in 2003 partly represents a cyclical recovery from the downturn rather than sustainable trend growth. Second, the political, weather and market related shocks of the past few years are indicative of risks which Madagascar will continue to face.
9. ...and the commitment to reform seemsflrm. On the whole, steady progress achieved under two successive governments over the last decade lends substantial credibility to the commitment to reform. A series of IMF ESAF and PRGF programs has been in place since the mid-1990s and successive reviews have awarded generally satisfactory marks. The government submitted an I-PRSP in 2000, a PRSP in 2003 and reached the HIPC completion point in October 2004.4
2) POVERTY OUTCOMES AND CHALLENGES
10. Madagascar’s long decline was accompanied by a dramatic increase in poverty, particularly during the 1980s (Table 1.2). In a sample of seventeen Sub-Saharan African countries with data available in 1995-2000, Madagascar had the highest head-count poverty rate at over 72 percent. Other poverty indicators tell the same story. Infant mortality, estimated at 86 deaths per 1000 births in 2001, is high and immunization rates are low with only 36 percent of children fully immunized. Access to safe drinking water, especially in rural areas, remains very low. Net primary school enrolment rates increased from 63 percent in 1997 to 70 percent in 2002.
A draft PRSP was completed in 2001, but was extensively revised by the new government, not least to reflect the impacts ofthe 2002 crisis. -5-
Table 1-2: Madagascar’s poverty indicators (selected years 1993-2002) 1993 1997 1999 2001 2002 Poverty Indicators Incidence ofpoverty (national) (%) 70 73 71 70 81 Rural (%) 74.5 76 77 77 86 Urban (%) 50 63 52 44 62 Service Delivery Indicators Net primary school enrolments’(%) 48 63 64 67 70 Re etition rate in rural primary school, n.a. n.a. 28 37 38 11P grade(%) Pre-natal consultation, % 78 77 69 63 Infant mortality (out of 1000) 97 99 86 86 Immunization rate6(%) 43 36 38 36 36 Electricity connections (% ofhouseholds) 9 12 14 15 19 Water connections’(% ofhouseholds) 17 19 22.5 21 27 Sanitation connections8(% ofhouseholds) 35 33 45 52 55 Source: EPM 1997, 1999, 2001. Poverty aggregates between 1999 and 2001 are not entirely identical and small variations with PRSP data exist. The 2002 poverty rates were simulated on the basis of the 2001 household survey, assuming household welfare changes in line with aggregate sector growth rates (for agriculture, industry, construction & services). These are updated based on numbers from INSTAT in the First Progress Report. Simulations for the poverty rate for 2003 show a decline to 74 percent.
11. Poverty in Madagascar is especially prevalent in rural areas where 77 percent of the population was poor in 2001 compared to 44 percent in urban areas. Moreover, though faster growth in the late 1990s made inroads into poverty and the nationwide headcount rate fell from 73 percent in 1997 to 70 percent in 2001, the gains were achieved almost entirely in urban areas while rural poverty, if anything, increased. Rural poverty is associated with lack of access to transportation (about 80 percent of rural households have no reliable transport services and a third have no road access at all) and limited credit, public services and human capital. As a result, agricultural productivity is low and there are few opportunities for wage employment to augment household incomes. This underscores the challenge ofextending the benefits of faster growth to more remote areas.
3) THEROLE AND FINANCING OF THE STATE
12. A weak public sector performance has contributed to the failure of Madagascar’s development strategy. Inefficient revenue generation, poor budget execution and a lack of strategic priorities which led to deteriorating infrastructure and erosion of human capital are partly responsible for Madagascar’s long term decline. Both current and capital expenditure are comparatively low, averaging around 11 percent and 7 percent of GDP respectively, and if anything these ratios have been declining since the early 1990s (Table 1.3). However, since 2001, HIPC debt relief and some efforts in tax administration have expanded the fiscal envelope, allowing a rise in spending averaging around 1 percent of GDP.
’ Net primary school enrolment rates include public and private schools. Net primary enrolment rate for 2001 refers to the school year September 2000-June 2001. The figures are based on administrative data and are different from those calculated from the National Household Survey. Complete vaccination cycle; 1997: DHS survey; 1999 and 2001: EPM. ’ Access to private or public pipe (individual or common). 8 See above. -6-
Table 1-3: Madagascar's fiscal indicators
(percent of GDP) 1990-95 1996-00 2001 2002 2003 Total revenue and grants 12.8 14.5 14.0 10.2 15.4 Total revenue 9.8 10.4 10.1 8.0 10.3 - Tax revenue 7.9 10.0 9.7 7.7 10.0 Grants 3.0 4.0 3.9 2.2 5.1
Total expenditure 19.6 17.2 17.6 15.7 19.5 - Current expenditure 12.8 10.1 10.3 10.3 11.4 - of which interest 4.0 3 .O 2.0 2.2 2.2 - Capital expenditure and net lending 6.8 7.1 7.3 5.3 8.3
Overall balance Including grants -6.9 -2.7 -3.6 -5.5 -4.1 Excluding grants -9.9 -6.8 -7.5 -7.7 -9.2
Primary balance 1.3 3.7 1.8 -0.2 1.1
Financing 6.9 4.0 4.4 6.2 4.8 Domestic 3.4 1.o 1.9 2.4 1.8 Foreign 3.5 2.9 2.1 3.6 2.8
Privatization receipts 0.0 0.1 0.3 0.2 0.2~ Source: World Bank, Live Data Base; IMF, Sth PRGF Review
13. Even compared to other low income countries, fiscal performance has been poor. Table 1.4 compares period averages in 1994-2003 for a sample of fiscal indicators for Madagascar (column 1) and for up to 55 low income countries with data available (column 2). The final column shows Madagascar's percentile in the sample. For both government consumption and current revenue excluding grants as shares of GDP, Madagascar is in the bottom fifth of the distribution, achieving barely half the average for all low income countries. The best performance is on public spending on education which is two-thirds the group average or the 26" percentile. Trade taxes represent over 50 percent of current revenue compared to an average of 26.7 for all low income counties, which is the 98th percentile. -7-
Table 1-4: Fiscal performance, 1994-2003
Madagascar Low income Percentile Government consumption (% of GDP) 7.9 14.1 15 Current revenue excluding grants (% ofGDP) 9.9 17.9 18 Public spending on education (% of GDP) 2.4 3.7 26 Trade taxes (% of current revenue) 50.2 26.7 98 Real per capita GDP at PPP rates 736.0 1244.0 17
Source: World Bank, WDI and Live Database. Notes: Column headed ‘Low income’ shows arithmetic average for up to 55 low income countries with at least one observation over the period 1994-2003. Each country’s value is the average of all available observations.
14. Expanding revenue collection is crucial, though in the near term the possibilities are limited. As in many other Sub Saharan countries, subsistence agriculture and a large informal sector hamper revenue mobilization. The tax base is small and highly concentrated, with 8 percent of customs taxes and 28 percent of inland revenue respectively deriving from the five largest contributors to each category of tax. VAT and import taxes account for 70 per cent of the country’s tax receipts and only 200 enterprises pay approximately 75 percent of company taxes. Thus, despite a low overall tax burden, rapidly increasing revenue collection runs the risk of imposing a significant burden on savings and the flow offunds to investment.
15. Nevertheless, there is considerable scope for increasing efficiency. LMF structural conditionalities through the years have consistently focused on tax administration and limiting evasion and the proliferation of exemptions and partial adjustments. In recent years a large taxpayer unit has been introduced, though its operational efficiency needs to be raised. Progress has been made in implementing the ASYCUDA++ customs system. But customs administration continues to be severely hampered by overly bureaucratic procedures, slow processing, administrative delays and pervasive corruption.’
16. Moreover, tax policy has been driven by political pressures or ad hoc responses to temporary shocks. Both before and after the 2001 election, various measures were introduced to stimulate private investment, including (i)creating a free tax regime (the zone franche) to benefit qualified foreign investors and domestic firms that export all their production, (ii)exempting domestic firms from company taxes, and (iii)temporarily lifting taxes and duties on investment goods. Though such measures may have contributed to the resilience of investment spending through the crisis, they also entail a cost in terms of foregone revenue, or ‘tax expenditures’. In 2001, the revenue loss associated with incentives to promote private investment is estimated at MGF 248 billion, or 1.5 percent of GDP. Of this cost, 0.6 percent ofGDP is associated with incentives enjoyed by firms in the zone franche, with the remainder accruing to the enterprises des droits commun.
4) MADAGASCAR’SPOVERTY REDUCTION STRATEGY
17. Madagascar’s PRSP mapped out a program to reduce poverty through rapid and sustained growth. The strategy entailed three strategic axes: (i)improving governance; (ii)promoting broad based growth; and (iii)providing human and material security. The macroeconomic and fiscal framework was ambitious. Noting that rapid growth was the “sine qua non” of poverty reduction, the PRSP sketched out three scenarios. The first, proposed as a base case, aimed at reducing poverty by half in ten years
’IMF (Mai 2003) “RChabilitation des Administrations Douanikres et Fiscales”. -8-
implying an average growth rate of 9.3 percent. The second scenario would achieve the millennium development goal of halving poverty by 2015 with average growth of 8.0 percent. Finally, the third scenario, the low case, would maintain growth at the 1997-2001 average of4.5 percent (Table 1.5). The poverty strategy is based on a combined growth pattern to be achieved across several economic sectors that would help to spread income growth to rural areas and thus would reduce extreme poverty.
Scenario Outcome Average Investment Headcount growth rate poverty rate in 2003-15 2015 Base Reduce poverty by half in 10 years 9.3 24.8 29.8 Intermediate Reduce poverty by half by 2015 (as 8.0 21.0 34.2 per MDGs) Low Sustained growth at 1997-2001 4.5 12.0 46.1 average rate
18. The Joint Staff Assessment found the overall strategic focus of the PRSP to be clear, with coherent sector development plans built on work program agreements with the ministries involved. Most importantly, a high degree of ownership and commitment was apparent. At the same time, the JSA noted that only limited costing had taken place, that in many cases the analytical underpinnings were weak and that there would be a need to prioritize and strengthen capacity to implement the program successfully. The JSA also proposed further structural measures to promote growth, including major investments in public transport infrastructure; a commitment to public-private partnerships to improve the management of public enterprises; reforms in tax and tariff policies and land laws; and better governance.
19. With regard to the macroeconomic framework, the JSA argued the growth outlook was too optimistic given limited government capacity, possible financing shortfalls, institutional constraints and a weak financial sector unable to support the demand for credit. Indeed, the high case calling for average growth of 9.3 percent for a decade - which the PRSP advanced as a baseline expectation - would be virtually unprecedented in any country in the world. Since the PRSP’s macroeconomic scenarios have a forecast horizon of only 2006 it is difficult to assess the feasibility of longer term projections. Nevertheless, while agreeing that the proposed macroeconomic framework was basically sound, the JSA proposed that the growth target be lowered.
20. Since the PRSP, macroeconomic performance in Madagascar has been robust. Though the JSA viewed the PRSP’s macroeconomic outlook as overly optimistic, the surge in growth in 2003 was not fully anticipated and growth in 2005-06 is also expected to remain strong. The outlook is premised on significantly higher investment, rising to nearly 25 percent of GDP from an average of around 15 percent in the recent past (Table 1.6). Both public and private investment are expected to register gains thanks to improvements in the business climate, including better infrastructure; use of public-private partnerships to raise efficiency in ports, airports, railways and telecommunications; more transparency in tax and customs administration; and improved governance. High potential sectors or “growth poles” have been identified and are being targeted with measures to accelerate growth, including export processing zones, tourism and mining.
21. Current expectations also anticipate a strong public sector performance, with revenue rising 10.3 percent of GDP in 2003 to over 12.7 percent by 2006, while the overall deficit (including -9-
grants) narrows from 4.2 percent to 3.8 percent (Table 1.6). Expenditure is also expected to rise, in particular capital spending which increases from 7.8 percent of GDP to 11.3 percent.
Table 1-6: The PRGF Macroeconomic Framework (percent of GDP) 2003a/ 2004b/ 2005b' 2006b/
GDP Growth (%) 9.8 5.3 7.0 7.0 Investment (% ofGDP) 17.9 23.7 25.3 24.8 Public 7.8 11.5 11.3 11.3 Private 10.1 12.2 14.0 13.5
Balance of Payments Current Account -6.0 -9.2 -7.8 -6.3 International Reserve (months of imports) 2.8 3.0 3.2 3.4
Central Government Accounts Total Revenue and Grants 15.4 19.8 18.3 18.5 Total Revenue 10.3 12.0 12.4 12.7 Grants 5.1 7.9 5.9 5.8
Total Expenditure 19.5 23.1 22.4 22.1 Interest expenditure 2.2 3.0 2.4 2.1 Current non-interest expenditure 9.2 8.5 8.7 8.7 Capital expenditure 7.8 11.5 11.3 11.3
Overall balance (commitment basis) Excluding grants -9.3 -11.3 -10.0 -9.5 Including grants -4.2 -3.4 -4.1 -3.8
Financing (cash basis) 4.8 4.3 4.4 3.8 Foreign (net) 2.8 5.1 4.4 3.9
Memo item: Non-interest expenditures in FMG bil. 5,872 7,928 8,765 10,325 Domestic debt/GDP 13.9 10.4 8.5 7.5 Interest payments (domest) /tax revenues 21.4 25.0 19.4 16.5 Source: IMF 2004 (51h PRGF) Notes: R/ estimate; b/projection
22. A comparison between the PRSP and the PRGF framework suggest that Government has ample leeway to finance planned expenditures. Since the PRSP is implemented through the Government's annual budget process, it is important to ensure consistency between the macroeconomic and fiscal framework with the consensus outlook of development partners, especially the IMF. In light of the strong outturn in 2003, the macroeconomic and fiscal outlook in the most recent PRGF review currently exceeds the projections of the PRSP (Table 1.7). For instance, total non-interest expenditures (recurrent and capital) for the period 2004-2006 under the PRSP are approximately FMG 24.6 trillion compared to FMG 27 trillion under the PRGF framework (in nominal terms). In real terms, the margin would be even greater since inflation has been lower than the PRSP's target." Both the PRSP and loThough the PRSP does not forecast public consumption or investment deflators. -10-
PRGF frameworks are designed around fiscal deficit paths that maintain Madagascar’s debt sustainable, and, together with the impact of the HIPC Initiative, result in eating up a much smaller share of government revenues than in the 1990s.
23. Madagascar’s revenue efforts in 2004 have paid ojJ Relative to the PRSP (which was drafted in 2003), table 1.7 suggests that Madagascar has made significant efforts to raise revenues from about 10 percent of GDP in 2001 (pre-crisis reference year) to about 12 percent of GDP in 2004. The strength of these revenues underlies Madagascar’s ability to meet PRSP spending objectives (for the period 2004-2006) while maintaining a more prudent deficit reduction path. For 2004, the improvement in revenues has been achieved through better customs administration, and a reduction in exemptions.
24. Critical role of revenues in the future. Earlier in this chapter, it was noted that Madagascar has lagged behind other low income countries in its tax efforts. Table 1.7 suggests that Madagascar can maintain spending levels in accordance with the PRSP plans only through significant increases in revenue effort, particularly since the fiscal space achieved through debt relief has already been incorporated into the expenditure envelope (see Box 1.2) and it would be imprudent to forecast higher external grant availability for a sustained period.
Table 1-7: Comparison of PRSP and PRGF Macroeconomic and Fiscal Frameworks
2001 2002 2003 2004 2005 2006 From PRSP (July 2003) Real GDP growth 6.0 -12.7 6.0 7.0 7.5 8.0 CPI inflation 7.4 15.8 8.0 6.0 4.9 4.4 Total Revenue & Grants (as % of GDP) 14.0 10.2 15.0 14.4 14.9 15.3 olw Revenue 10.1 8.0 10.6 11.5 12.0 12.5 Total Expenditure (as % of GDP) 17.6 15.7 18.2 20.2 20.2 19.9 olw Interest Due 2.0 2.2 1.8 1.3 1.2 1.1 olw Current (excl. interest) 8.1 7.1 8.4 8.6 8.5 8.3 olw Capital 7.3 4.8 7.3 10.2 10.4 10.5 Overall Balance (comm..) (as % of GDP) -4.3 -5.5 -3.3 -5.9 -5.3 -4.6 From 5th PRGFMIPC CP (October 2004) 2001 2002 2003 2004 2005 2006 Real GDP growth 6.0 -12.7 9.8 5.3 7.0 7.0 CPI inflation 7.0 16.3 -1.7 10.1 7.6 5.0 Total Revenue & Grants (as % of GDP) 14.0 10.2 15.4 19.8 18.3 18.5 olw Revenue 10.1 8.0 10.3 12.0 12.4 12.7 Total Expenditure (as % of GDP) 17.6 15.7 19.5 23.1 22.4 22.1 olw Interest Due 2.0 2.2 2.2 3.0 2.4 2.1 oiw Current (excl. interest) 8.3 8.1 9.2 8.5 8.7 8.7 olw Capital 7.3 4.8 7.8 11.5 11.3 11.3 Overall Balance (comm.) (as % of GDP) -4.3 -5.5 -4.2 -3.4 -4.1 -3.7 Source: Madamscar PRSP. IMF fhPRGF Review Note: Differenices between the PRSP and PRGF for 2002 likely reflect data revisions
25. The longer term outlook may be problematic. Though near term prospects are, “still consistent with PRSP objectives” (IMF, 5th PRGF Review) there is reason for concern about the consistency of longer term projections. The PRGF Review (September 2004) anticipates the cyclical rebound from the 2002 crisis will continue with growth of 7.0 percent in 2005-06, then slow to a more -1 1-
sustainable pace of 6.0 percent in the longer term. By contrast, the PRSP anticipates that growth will accelerate progressively from 6.0 percent in 2003 to 8.0 percent in 2006. The growing divergence in growth forecasts, in light ofthe PRSP's longer term poverty reduction goals, suggests that Government should monitor macroeconomic and fiscal performance carefully. In the event Government's PRSP expectations turn out to be too optimistic in the later years, spending plans may need to be adjusted to maintain PRSP priorities (if not the time table) without jeopardizing fiscal sustainability. Such close monitoring would also give government the opportunity to review the recurrent-capital expenditure mix which is necessary too support the new investment that are being made, and is an issue that comes up in subsequent chapters as historical spending on sectors is reviewed.
26. One potential threat which must be taken seriously is a build up ofpublic sector contingent liabilities. The full extent of contingent liabilities ofthe parastatal sector cannot be determined without regularizing accounting and management procedures - out of 126 public establishments (EPIC and EPA) only 50 produce financial statements. Despite the self-financing status ofthe EPIC many continue to receive transfers from the state, as do a number of EPA that are in fact no longer active. Out of 69 state-owned companies, 33 are in a critical condition; only 10 produce financial statements and 36 are no longer operational. As of 2001 repayment of loans granted by the government to public enterprises of MGF 309 billion remained unpaid. Debt of SOLIMA to the Central Bank amounts to MGF 360 billion, for which the government is assuming responsibility from 2004."
I' Obligations in respect of the state owned companies will be offset to some extent by receipts from the liquidation of a number of state-owned companies. The liquidation of 8 of these companies have generated MGF 365 billion. -12-
Box 1-2 HIPC Debt Relief
Madagascar reached the decision point under the HIPC initiative in 2000 and the completion point in 2004. Based on reconciled debt data, outstanding external debt stood at US$4,843 million at the end of 2003. At completion point, total debt relief from traditional mechanism, HIPC and bilateral relief, the NPV of external debt was lowered to US$1,467 million, equivalent to 137 percent ofexports. Under the DSA assumptions, the ratios of both debt and debt service to exports decline progressively in the medium to long term and are expected to remain easily manageable (Table 1.8)’
Debt relief frees up considerable resources for social and other spending. Interim HIPC relief from 2001-04 was equivalent to around 1 percent of GDP and was distributed across both current and capital budgets, more or less as envisaged by the decision point criteria. 62 percent of the total was allocated to current spending, approximately half to education where it funded teacher recruitment, incentives for rural teachers, development of cultural centers, and materials and supplies. Around 40 percent went to health for personnel recruitment, immunization and equipment purchases. In addition, funding was made available for various institutional reinforcement activities as well as environmental and social programs. The allocation to capital projects included road maintenance, water, safety net support, electrification and monitoring (including a household survey).
Madagascar’s debt indicators
2003 2004 2005 2010 2020 After traditional debt relief 3,429 3,158 3,268 3,605 3,837 After enhanced HIPC relief 3,371 2,248 2,388 2,862 3,334 After additional bilateral relief 3,345 1,618 1,776 2,328 2,927 Debt service after full implementation 50 55 104 217 Memo items: NPV debt-to-exports (%) 136.6 153.7 135.5 69.1 30.8 Debt service to exports (%) 4.8 4.2 5.0 5.5 Debt service to revenue (“h) 10.0 10.6 12.1 10.8
5) FINANCIAL SECTOR
27. An efflcientFnancia1 sector plays an important role in allocating risk and investment and stimulating growth. However, financial markets in Madagascar are in a rudimentary state. The Malagasy banking system is highly concentrated and uncompetitive, hampered by poor contract enforcement and lacking in modern risk management techniques. As a result, commercial lending is limited. Private sector credit extension averages 9 per cent of GDP over the period 1998 to 2002, less than half of the average for African countries for which data are available. Of the estimated 12,500 firms in the Malagasy economy, less than 200 make use of credit facilities from the banks. What credit is available can be accessed only at a very high price, with real long term (i.e. two years) interest rates averaging over 10 percent in the last five years.12 As a result, the private sector relies primarily on retained earnings and private savings to fund investment.
l2Longer term credit is largely unavailable. Borrowing is thus primarily undertaken to fund working capital -13-
28. Notably, the low level of credit extended to the private sector does not appear to result from the government’s monopolization of a limited savings pool - if anything, financial markets are characterized by excess liquidity. For instance, at the end of 2003 banks held MGF 305,9 billion in excess reserves with the monetary authorities, approximately 1 per cent of GDP. Such a result suggests either the financial sector is unwilling to take risks or private borrowers see few opportunities for productive investment.
6) RECOMMENDATIONS
29. This chapter has reviewed Madagascar’s recent development experience and the country’s PRSP as a strategy to reversing the decline in per capita incomes. In order to achieve the country’s PRSP objectives, Madagascar may wish to:
o Carry out a one-time review of the medium term projections of the PRSP to ensure realistic output and revenue forecasts. The aim should be to provide a sound medium term expenditure envelope and establish priorities consistent with fiscal sustainability. This will not only allow Government to sequence investments better and assure adequate recurrent financing, but facilitate the annual budget planning process. It would also help government manage the donor community more effectively, which is an issue discussed in subsequent chapters.
Annually review the macro framework under the PRSP at the time of budget preparation. This exercise would allow Government to align the PRSP implementation with its rolling medium term expenditure framework which underlies the annual exercise ofbudget preparation and the PRGF fkamework.
Maintain a steady and sustainable program of revenue enhancement so as to moderate any negative impacts on incentives for savings and investment, and private sector growth.
o Develop/enforce a simple system to monitor contingent liabilities more closely. A first step is to require public enterprises to present audits to Government, or to parliament, as part ofthe budget preparation process. This is critical as fiscal space gained through debt relief or higher revenues can easily be wiped out and PRSP implementation reversed, by adverse events that trigger unmonitored fiscal risks. A second step could be to develop a matrix of fiscal risks which includes an assessment of explicit and implicit contingent liabilities which can have a direct and indirect impact on public finances. The matrix should be monitored and updated at the time when the macroeconomic and fiscal frameworks are reviewed. -14-
11. THE CHALLENGE OF RESOURCE ALLOCATION AND BUDGET EXECUTION
30. This chapter intends to provide conceptual and technical guidance for the public finance reform agenda. It will look at the appropriateness ofthe resource allocation and the budget management processes. Furthermore, it will deal with the overall execution ofthe budget given its importance for the implementation ofGovernment policies and the country’s effective use ofhuman resources.
31. Recent public finance reforms have yielded some encouraging results: First, relatively good technical capacity in the Ministry of Finance has been developed, although this capacity has not yet been extended to the sector ministries. Second, Madagascar has a relatively modem institutional and legislative framework for its public finance system--the old basic public finance law (“loi 0rganique”)-- which was derived from the French system has been updated. Third, in 2000 Madagascar introduced a uniform and modem Chart of Accounts that facilitates classification as well as budget monitoring and evaluation. Fourth, Madagascar has developed, with its own resources, a computerized financial management system which integrates the different functions of the budget planning and execution process. This system has been piloted in Tamatave and will soon be deployed to other regional treasuries. The experiences, which were obtained during the development and implementation of this pilot system are valuable for the intended further modernization of the public finance system in Madagascar.
32. Additional work, however, remains to be done to bring the public. finance system up to international standards. Areas of concern are (i)weak capacity ofthe line ministries in public financial management, (ii)lack of transparency mainly caused by weaknesses in the financial reporting system, (iii)ineffective control of public expenditures, and (iv) cumbersome procedures regarding budget execution which in turn have adverse implications for service delivery. The weaknesses of the Malagasy system are documented in various reports and studies, in particular the Country Financial Accountability Assessment (CFAA)’3, the Country Public Procurement Assessment Report (CPAR)’4, both completed in 2003, an independent audit ofthe “chaines de dkpenses” ofthe year 2000J5, and the reviews ofthe Ministry ofFinance and ofthe Vice Prime Minister’s Office”. A joint Bank-Fund HIPC evaluation mission found that Madagascar meets only four out of 15 criteria which were developed to benchmark public finance systems in developing countries (see annex 3).” However, the mission pointed out that some reforms that are currently implemented , e.g. the draft public procurement code, and the strengthening of internal control institutions and procedures, would help correct existing weaknesses over the short term.
33. To address the shortcomings of the system of public finance the Government developed in collaboration with the donor community a “2004 Prioritized Action Plan” (see box 11.1 below and annex 4). Additionally, a coordination committee (Cellule de Suivi et de Coordination des RCformes
l3World Bank (Juin 2003), RCpublique de Madagascar - Etude de la Gestion des Finances Publiques (Country Financial Accountablity Assessment). l4 World Bank Report (December 2002), No. 26410, Vol. I& I1 - Country Public Procurement Assessment Report. l5 Group 2AC (Mai- Juin 2000) “Audit des Fonds de Contrepartie de l’Appui a 1’Ajustement Structure1 dans la Republique de Madagascar” l6 Bloch-Laink, B de la Biche JP Landau (Octobre 1999) “Audit du Ministere des Finances et du Ministbre du Budget, de la DCcentralisation et du Developpement des Provinces Autonomes” 17 World Bank (2004) “Memorandum and Recommendation of the President of the IDA to the Executive Directors on Assistance to the Republic of Madagascar under the Enhanced HIPC Debt Initiative”. -15-
des Finances Publiques) was established in the MEFB to coordinate, monitor and evaluate the reform agenda.
Box 11-1 2004 Priority Action Plan - A government-led reform process
In 2003, the government decided to develop an action plan for public finance management reforms based on assessments undertaken by the donor community (EU financial audit, CFAA, CPAR, IMF technical assistance reviews, etc.) and the Malagasy administration (CRROC report). The objective ofthe action plan was to review the recommendations made by the different assessments and to consolidate them into a sequenced and prioritized reform program for 2004. The short-term timeframe of one year was chosen to focus on a number ofselected activities and on early demonstration ofresults. The donor community agreed to provide technical support in line with the priorities determined by the government.
The main reforms activities ofthe Action Plan are the following: 1 Establish institutional arrangements to support reform implementation, including a Reform Committee at MEFB level and a coordination mechanism with the donors. a Address cross-cutting dimensions of reforms by developing a training strategy for the MEFB and continuing the extension ofthe Integrated Financial Management System; I Consolidate the budget preparation calendar and sequence the introduction ofprogram budgeting; 1 Streamline budget execution procedures, develop supporting guidelines and finalize the legal and regulatory framework for procurement. 1 Strengthen internal and external control institutions in terms ofstaffing, equipment and training. 1 Improve timeliness of reporting by addressing the backlog in the consolidation of national accounts and preparation ofthe budget execution law ( ‘Zoi de R2glement”). 1 Reinforce tax and custom administrations by finalizing regulations, formulating guidelines and increasing computerization.
A review of progress of the 2004 Action Plan took place in October 2004 and showed that the majority of the activities had already been implemented. The government is in the process of developing a Prioritized Action Plan for 2005.
1) ALLOCATING PUBLIC RESOURCES INLINE WITH GOVERNMENTPRIORITIES
34. This chapter seeks to shed light on how Government resources are allocated in Madagascar, both across sectors and across different levels of Government. It pays particular attention to the post- crisis period, 2003-2004 during which the PRSP has been implemented and looks at the degree of prioritization ofpublic expenditure which the Government has been able to achieve.
(a) Past Allocations: Issues and Challenges
35. As the PRSP is the key policy document for the Government the following budgetary analysis is based on the structure of the PRSP which has three strategic axes: governance, growth and social sectors. The intention is to review the budgetary allocations over time against the goals and objectives ofthe PRSP.
Sectoral Allocation
36. Past allocations show shifting priorities. Table 11.1 below classifies Government expenditures over the 1997-2004 period into four categories: governance, growth, social sectors, and other, non-classified expenditures. It shows that between 1997 and 2004 substantial variations in -16-
allocations are observed across all sectors suggesting shifting priorities of Government within the period, Some general trends include”:
General administration, the main sub-sector within the governance category, takes the lion’s share ofthe budget, on average 36 percent over the observed period. Since 1999, the year with the highest share of budgetary allocation to general administration (43 percent), efforts have been undertaken to cut down public spending in this area. Despite a slight increase in allocations to general administration in 2003 by 6 percent, the 2004 budget reflects a further downward trend in the share of the budget.
Government’s efforts to strengthen the social sectors are reflected in increasing allocations to primary education (average annual increase of 49 percent for the period 1997-2002) and to primary health care (average annual increase of 20 percent for the same period). Since the PRSP implementation began in 2003, the education sector benefited by a 41 percent growth rate in allocations, reaching the highest share of budgetary allocations (around 18 percent) in 2004. However, public resources to the health sector only rose by 2.3 percent over the 2003-2004 period.
P Allocations to the growth sectors (notably transportation, agriculture and environment) have not increased at the same rate. The overall substantial decrease of budget allocations to the agriculture sector until the year 2002 can be explained by Government’s decision to withdraw from the productive sectors and to refocus Government activities in agriculture on key policy issues.’’ In contrast, since 1999 the share of the transportation budget (8 percent) increased to 13 percent of total budget allocations in 2001. The 2003 budget shows a cut across nearly all growth sectors (in real terms and as a share of the national budget) while allocations to governance and social sectors were increased. In 2004 strong prioritization took place notably with a reinforcement ofthe transport budget and partially the agriculture sector.
o It is noteworthy that in the past defense allocations remained reasonable, averaging slightly above 3 percent of total expenditure between 1997 and 2002. It increased, though, after the 2002 crisis, following political unrest, to restore state authority throughout the country.
” See also annex 5, table 5.1 for reference regarding the real annual growth rates in sectoral budget allocations 1997-2004. ’’ Such measures included the termination of the extension (“vulgarization”) program in the agriculture sector since 1998. (This program aimed to provide technical assistance to farmers mainly in the highland. It was supported by many donors including the World Bank, IFAD and the European Union but was closed end of the 90’s.) -17-
Table 11-1 : Madagascar's budget allocation trends selected years between 1997-2004 (Percent of non interest expenditures)
1997 1999 2001 2002 2003 2004
Total 100 100 100 100 100 100
Governance 39.7 50.6 43.9 36.4 44.6 42.1 General Administration 32.1 43.2 37.9 30.1 35.5 32.8 olw budget, finance & eco. admin 19.7 31.3 25.1 19.0 26.0 24.5 Defense 3.4 3.1 2.4 2.6 3.9 4.1 Public security 4.1 4.2 3.5 3.7 5.2 5.2 olw Justice 0.5 0.9 0.7 0.7 0.9 0.9
Growth 32.8 23.5 28.2 34.7 25.3 26.4 Energy 3.2 2.1 1.7 1.4 1.5 1.3 Agriculture 10.4 7.0 5.8 6.1 4.9 5.2 Environment 3.1 2.0 2.5 3.3 2.4 2.3 Transport & Communication 11.9 7.8 13.3 13.4 11.2 12.9 olw Transport 10.9 7.5 13.0 13.2 10.8 12.6 Others' 4.4 4.5 4.9 10.6 5.3 4.8
Social 27.5 25.9 27.9 28.8 30.1 31.5 Education 10.5 11.7 12.5 14.4 15.2 18.4 olw Primary Education 2.1 3.2 2.3 5.1 6.4 6.1 Health 8.8 7.8 9.0 8.5 8.4 7.4 oiw Primary Health care 4.4 3.4 2.8 3.7 2.9 3.4 Others2 8.2 6.4-. . 6.5 6.0 6.5 5.7 Source: MEFB and World Bank estimates ' Includes programs related to industry and other economic affairs Includes programs related to social protection, urbanism and culture
Economic allocation
37. Government increased allocations for recurrent expenditures. Recurrent expenditures as a share of the total budget increased by 20 percent over the period 1997-2002, compared to investment expenditures, whose share increased by 17 percent of the total budget over the same period (see table 11.2). 2o Over the 2003-2004 period, the share of recurrent expenditures increased by 19 percent, while the share of investment expenditures increased by only 10 percent. Madagascar has also experienced significant variations of foreign assistance over the 1997-2004 period, as indicated in table 11.2. Externally financed investments amounted to about 34 percent of allocations in 1997 compared to only 24 percent in 2003. These fluctuations negatively impact budget planning and programming, Nearly 60 percent of capital expenditures were financed by donors over the period 1997-2004.
2o See also annex 5, table 5.2 for reference regarding the real annual growth rates of current and capital budget allocations 1997-2004. -18- Table 11-2: Madagascar’s recurrent and investment allocation patterns selected years between 1997-2004 (Percent of non interest expenditure)
1997 1999 2001 2002 2003 2004
Total 100 100 100 100 100 100
Current Expenditure 43.5 48.8 48.4 47.6 54.7 56.5 Salary 20.9 20.2 18.6 21.3 27.3 26.5 Goods & services 12.7 20.1 10.8 9.7 14.1 13.3 Transfer 10.0 8.5 19.0 16.6 13.3 16.7
Capital Expenditure 56.5 51.2 51.6 52.4 45.3 43.5 Internal resources 22.2 23.8 25.0 21.3 21.6 18.3 External resources 34.3 27.4 26.6 31.1 23.7 25.2
Memo External resources (as a % oftotal capital expend.) I 60.7 53.5 51.6 59.3 52.3 58.0 Source: MEFB and World Bank estimates
Resource Allocation to service delivery levels”
38. Budget allocations favor the central Government administration over service delivery. Madagascar’s public administration is highly centralized. Local Governments do not receive sufficient resources to effectively respond to local service needs. Communes, currently the only operational administrative level below the central Government, account for only a small portion of public expenditures. A recent report from the World Bank on decentralization found that only 3 to 4 percent of the national budget is managed by the communes.22
39. Madagascar currently allocates about 15 percent of budget resources to service delivery levels (see chart II.l.a).23 At the same time, only 40 percent of civil servants are located in outposts (see chart 1I.l.b). In contrast, in 2001, around 77 percent of the population and the poor lived in the rural areas.24
21 The service delivery level is defined as the services provided by central Government. It includes deconcentrated services provided at the regional and district level (e.g. the health service at the district (SSD), CISCO) or services directly provided to the population often by public outpost or other local Government facilities. 22 The communes have own revenues such as real estate taxes, market fees or fees for administrative work; see World Bank (March 2004), Madagascar Decentralization for Wher details. 23 This represents, however, a slight improvement compared to earlier years in which the total amount of public expenditures managed at the deconcentrated levels was as low as 9 percent (1997).
24 EPM2002 -19-
Chart 11-1 a-c: Deconcentration of public services - Allocation and management of funds and staffing - -
a: Percentage of budget allocated to outposts b: Percentage of civil servants who work in outposts 70
60
50
40
30
20
10
0 1997 1999 2001 2002 2004 1 1997 1999 2001 2002 2004 +SgxlR +AAGW
Source: World Bank
c: Percentage of budget managed by outposts
1997 1999 2001 2002 2004
Source: World Bank -20-
40. Level of deconcentration. The social sectors are the most advanced in terms of allocating resources to the service delivery level. In 2004, the Ministries ofEducation and Health had allocated 60 percent and 3 5 percent, respectively, of their total budgetary resources to deconcentrated line agencies. In 2004, both ministry employed 90 percent and 60 percent, respectively, of total staff in facilities and administration at the sub-national level. In contrast to the high degree of deconcentration of the Education and Health ministries, the Ministry of Agriculture allocated only 20 percent of its budget to local service agencies, which is rather modest given the importance of the agriculture sector for local development .25
41. Budgetary control of outposts concentrated at the central level. While deconcentrated line agencies are responsible for service delivery they lack the authority to manage their own budget (see chart 11.1.c.) With the exception of the social sectors, of the total central Government budget allocated for rural service delivery, only 10 percent is managed by deconcentrated agencies. They accounted in 2001 for more than 90 percent of the funds executed outside the central Government. The majority of the management decisions such as investment planning and execution or the hiring and firing of civil servants are handled by the center.
42. Conclusion - allocations to service delivery levels insufficient. This analysis suggests that the allocation ofresources to the service delivery levels is insufficient, and therefore not in line with the intention ofthe PRSP to bring Government “closer to the people”.
Sustainability of the PRSP
43. Government has recently prioritized expenditures towards education, transportation, and general administration. The new Government has placed a major emphasis on education, transportation and on general administration while maintaining fiscal restraint in the total expenditure envelope. Whereas total budgetary allocations increased by an average annual rate of 16 percent between 2003 and 2004, allocations to education and transportation increased by 40 and 34 percent respectively between 2003 and 2004 (see Annex 5 - table 5.3). Though budgetary allocations to general administration increased only slightly in 2004, it remains the major beneficiary of public resources in 2004 (general administration took up 33 percent oftotal budget in 2004).
44* Spending on general administration seems to be relatively high. Tables 11.3 and 11.4 illustrate the distribution ofbudgetary allocations and actual expenditures across different categories of the general administration. The MEFB takes the lion share oftotal administration expenditures with 75 percent, or 25 percent of the total non-interest expenditures of the budget in 2004.26These resources finance the preparation and management of the budget as well as transfers to the communes and collectivities (Autonomous Provinces and ex Fi~ondronana).~’Overall, it remains unclear how these resources contribute to the goals and objectives ofthe PRSP. In addition, implementation performance is weak (86 percent in 2003), in particular if compared to other spending lines within public administration (see table 2.4) which raises questions about administrative efficiency.
25 Staffing of outposts, however, seem to be fairly developed with 61 percent of staff working at the local facilities (see chart 11.1 b). 26 From 2003 onwards, the line “Budget, financial and economic administration” includes transfers to communities (under MEFB) which previously were under “Administration of the territory and the collectives”. However, the Budget, financial and economic administration expenditures are high even if we abstract from the tranfers to the communities. 27 The transfers to the communes are two-fold: i)general transfer ofrecurrent expenditures to communities (since 1996) and ii)specific transfers health and education transfers (since 2000). -21-
Table 11-3: Distribution of public allocations within the general administration (in percent) Annual Annual aver. aver. 1997 1999 2001 2002 199 7-02 2003 2004 1997-04 1997-04
Total 100 100 100 100 100 100 100 100
Common general service of public administration 0.8 0.5 0.9 1.6 0.9 1.2 2.4 1.8 1.2 Executive and legislative body 4.5 3.3 10.2 9.1 7.5 7.0 7.1 7.0 7.4 Budget, jinancial and economic administration 61.4 72.4 66.1 63.3 63.2 73.3 74.6 74.0 65.9 Administration of the territory and the collectives 21.6 14.0 13.3 14.3 17.6 6.9 3.5 5.2 14.5 Administration of foreign affairs 4.8 5.1 5.3 5.9 5.4 6.0 6.0 6.0 5.6 Inspection and others 0.8 0.8 1.0 1.2 1.0 1.1 1.0 1.0 1.0 Research 6.0 3.7 3.0 4.4 4.2 4.4 4.8 4.6 4.3 Other Administration CA 0.1 0.1 0.1 0.2 0. I 0.2 0.5 0.3 0.2
Memo Transfers to communes 5.8 0.8 3.7 8.7 4. I 7.1 6.7 6.9 4.8 Source: MFEB, World Bank
Table 11-4: Execution of actual public expenditures across different administrative categories (in percent) Annual Annual avg. 1997 1999 2001 9 7-01 2002 2003 I 97-03 Total 74.3 56.7 77.7 74.4 51.3 86.8 76.4
Common general service ofpublic administration 69.9 71.4 105.4 103.1 57.6 67.3 97.1 Executive and legislative body 94.7 83.1 61.0 87.1 52.8 93.1 88.I Budget, jinancial and economic administration 61.2 43.1 74.6 65.7 47.5 84.3 68.8 Administration ofthe territory and the collectives 97.9 95.9 88.1 96.0 42.5 94.7 95.8 Administration of foreign affairs 77.1 83.0 107.6 68.8 87.2 99.5 73.9 Inspection and others 95.0 87.5 82.1 85.3 54.5 100.6 87.8 Research 103.1 104.2 95.2 101.6 78.8 91.0 99.8 Other Administration CA 105.4 96.2 85.8 110.6 61.2 101.5 109.I
Memo Transfers to communes 99.4 94.6 93.9 96.9 13.2 100.0 I 97.4 Source: MFEB, World Bank
45. Facing significant trade ojJs in PRSP implementation. Previous analysis has shown that the country’s macro framework, as outlined in the PRSP, is on track (see chapter 1). As an implication, however, Madagascar has had to prioritize its expenditures especially over the past two years. Govemment reduced expenditures, in particular in the growth sector, and increased expenditures especially in primary education, general administration and defense in 2003. In 2004, additional resources for education, transport, and general administration were financed by reducing allocations to -22- other sectors (agriculture, health and environment). These expenditure trade offs demonstrate the constraints ofthe fiscal envelope in light ofthe PRSP agenda.
@) Comparative context
46. This section analyzes Madagascar’s allocation of public expenditures in the Sub-Saharan context. For comparative reasons it uses standard functional and economic classification. Additional (and more detailed) tables that further substantiate the findings of this section can be found in annex 5.
47. Total budgetary allocations in Madagascar amount to 19 percent of GDP in 2004; this means that the volume ofpublic expenditure is below average Sub-Saharan African (SSA) standards of about 26 percent ofGDP (see annex 5, table 5.5). Expenditure characteristics are similar to other countries in the region: the evolution of expenditures over the last seven years confirms that the most important elements ofthe budget are allocations to the general administration and to the social sectors; at the same time expenditures in the productive sectors declined (see table 11.5). In 2004, 10 percent of GDP was allocated to general administrative services; these allocations appear to be fairly high. They have seen an increase of more than 15 percent between 1997 and 2004, and represent nearly 50 percent of the budget. On the other hand defense spending is significantly below SSA average (3 percent of GDP) with only 0.6 percent of GDP in 2004. Social sector allocations have increased by 16 percent between 1997 and 2004: the education budget (3.1 percent of GDP in 2004) however, is below SSA standards (3.4 percent ofGDP in 2004), funding for the health sector reaches 1.2 percent ofGDP in 2004 which is below the SSA average of 2.6 percent of GDP. Allocations for the productive sectors have decreased from 5 percent of GDP in 1997 to 3.5 percent in 2004 in line with Government policy to increase the role ofthe private sector. Only 0.8 percent ofGDP is presently allocated to the agriculture sector which seems fairly low in view ofthe fact that poverty is prevalent particularly in rural areas.
Table 11-5: Budgetary allocations 1997-2004. (Percent ofGDP)
1997 1999 2001 2002 2003 2004
General Administration 7.3 10.6 10.3 9.6 8.8 10.1 Administration 6.0 9.1 8.9 8.0 7.1 8.4 Defence 0.6 0.6 0.5 0.6 0.7 0.6 Public Security 0.7 0.8 0.8 0.9 1.o 1.o
Economic services 5.0 4.2 5.8 6.9 4.2 3.3 Energy 0.4 0.5 0.6 0.5 0.4 0.2 Agriculture 1.7 1.4 1.2 1.1 0.8 0.8 Environment 0.5 0.4 0.5 0.7 0.4 0.0 Industry 0.4 0.4 1.1 2.6 1.1 1.o Transport 1.7 1.3 2.2 1.8 1.3 1.o Other economic services 1.2 1.5 1.4 1.3 0.8 0.62
Social Services 4.7 5.0 6.1 6.9 5.7 5.4 Education 1.8 2.4 2.8 3.4 2.9 3.1 Health 1.4 1.4 1.7 1.9 1.4 1.2 Other social services 1.4 1.1 1.6 1.5 1.3 0.9 Source: MFEB, World Bank -23- 48. Similar to other countries in Africa, Madagascar is under funding its non-salary recurrent budget. Although this part of the budget has seen an annual increase of 17 percent between 1997 and 2004 (see table 11.6) it represents only 7 percent oftotal expenditure which is equivalent to 1.6 percent of GDP. Salaries account for only 5 percent of GDP which is very low compared to 6-10 percent in many countries in SSA. Salaries constitute only 25 percent ofthe total budget (against an average of40 percent in SSA). The investment budget is financed to a large part by contributions from external sources (around 60 percent). Investments represent 8 percent of GDP in 2004 (a decline of more than 2 percent since 1997). Debt service stands at 2.2 percent of GDP in 2004 which is in line with SSA standards.
Table 11-6: Structure of the Malagasy Budget (Percent ofGDP)
1997 1999 2001 2002 2003 2004
Current Expenditure 7.8 10.2 11.2 11.6 10.6 10.9 Salary 3.7 4.2 4.3 5.2 5.3 5.1 Goods & services 1.1 1.5 1.9 1.9 1.8 1.5 Transfer 1.8 1.7 4.4 4.0 2.5 3.2
CapitalExpenditure 10.2 10.7 12.0 12.8 8.8 8.4 Internal resources 3.8 4.9 5.8 5.2 4.2 3.5 External resources 6.3 5.8 6.2 7.6 4.6 4.8
Debt service 2.0 1.8 1.1 1.9 1.7 2.1 Source: MFEB, World Bank
(c) Introducing a medium-term perspective to link policy priorities with the budget
Issues and Current Practices
49. Government’s efforts to align the budget with PRSP policy priorities have focused on the introduction of a medium-term perspective ofthe budget. These efforts are at an early stage, and could lay the foundation for the implementation of a medium term expenditure framework.
50. Government has recently introduced a medium term perspective to budget planning. Until 2003, macroeconomic and fiscal parameters were defined on an annual basis. While line ministries developed public expenditures programs - linking objectives, activities, resources and expected outputs over a three-year period - the absence of a medium-term sectoral resource envelope and a coherent expenditure framework as well as low capacity in line ministries limited the impact of these programs on budgetary outcomes. The absence of a medium-term perspective had a number of consequences, including (i)short-term allocation decisions, (ii)little information about the affordability ofexisting and planned policies over the medium term; and, (iii)misalignment of investment and recurrent expenditures (recurrent costs were not budgeted in the medium-term, but integrated into project investment costs).
51. In 2003, the Government introduced program budgeting. Three-year macroeconomic and fiscal parameters were developed for the first time by the Ministry of Economy, Finance and Budget (MEFB) and were used by line ministries to develop “program budgets” (see below). The process is at an initial stage - additional work will be needed to improve quality of fiscal forecasts, multi-year -24- planning for sectoral expenditures, and costing ofpolicy initiatives, as well as to enhance the coherence between investment and recurrent expenditures.
Box 11-2 Program budgeting
Program budgeting has been introduced into the public finance system with the new Organic Finance Law in 2004. Detailed line-item budget will be replaced by a budget classification system that divides expenditure into missions (cross-cutting broad objectives ) and programs. Each program consists of a clear set of objectives, related activities necessary to achieve those objectives and expected results. Expenditure are classified by interest on public debt, salaries, recurrent expenditure, structural recurrent expenditure, investment expenditure, exceptional recurrent expenditure, and financial operation. Increased flexibility is being given to program managers to shift expenditure across these broad categories, with the exception of salaries, as well as to carry over expenditure to the next budget year on the basis of a joint decree by MFEB and the concerned ministry (again with the exception of salaries).
Source: World Bank
52. The introduction of program budgeting will be phased. The budget for 2005 has been prepared on a line-item basis and includes a program classification for information. As of 2006, the annual budget will be exclusively structured along a program classification.
53. The budget preparation 2005 has shown that the introduction of program budgets poses significant challenges to the public administration; the submission ofthe 2005 budget to Parliament was delayed because ofproblems with the program budgets at the line ministry level. The complexity ofthe new budget methodology and the implementation problems put addition strain on the limited capacity, in particular in line ministries. The one-year transition period from a line-item to a program budget appears particularly risky, in view ofthe experiences in other countries.28
Recommendations
54. The efforts made by the Government to develop a medium-term macro-economic and fiscal perspective and to introduce program budgeting should be further refined. For program budgeting, the approach ofthe Government to use a broad rather than specific program classification is appropriate in light of the limited capacities of the line ministries to operationalize the new approach. The following recommendations take into account Government’s strategy ofintroducing program budgeting for all the ministries within a one-year transition period:
The Government should give high priority to strengthen the overall medium-term perspective in the budgeting process with the objective of developing more reliable sectoral and cross-sectoral resources envelopes. This would allow line ministries to plan and manage resources more effectively.
o The introduction of sectoral MTEF by line ministries should be discouraged. Sectoral MTEF are unlikely to contribute to a more effective overall budget allocation process in line with Government priorities. Such an initiative also bears the risk to divert scarce resources at the level of line ministries at a time where Government is implementing significant public finance reforms.
In order to facilitate the introduction of program budgeting the provisions of the Organic Financial Law concerning program budgeting should be specified as soon as
** see Le HouerodTaliercio, MTEF in Africa -25- possible by regulations and technical guidance, especially regarding (i)the definition of a program to ensure a consistent program classification across sectors and institutions, (ii)the content of the program, and (iii)the criteria to be used for the classification of various categories ofexpenditures within a program.
o The Government should concentrate on enhancing the capacity of line ministries in the area of public finance to enable the reforms to gain momentum. The decision of the Government to strengthen relevant capacity in key ministries (education, health, transport) on a pilot-basis points into the right direction but must be complemented by a systematic program of training and capacity building. MEFB should also organize a workshop with line ministries to draw lessons from the introduction of program budgeting for subsequent budget years.
o The introduction of program budgets should go hand-in-hand with an improvement of the performance orientation of the line ministries and spending agencies. To this end, Government should systematically define results and introduce service standards. The business plans that have recently been introduced are an important first step; it is, however, important to ensure that these plans are refined and fully costed as well as regularly monitored and evaluated.
(d) Coordination of and Participation in The Budget Preparation Process
55. Effective participation of relevant stakeholders and predictability of the budget process are key elements to ensure that fiscal and sectoral priorities are in line with overall Government objectives.
Issues and Current Practices
56. Reliable macroeconomic and fiscal benchmarks are lacking. Among the most important weaknesses of the budget process is the lack of reliable macroeconomic and fiscal parameters guiding the budget preparation process. Since 1996 the Government has tried to improve macroeconomic forecasting and the development of a macro framework that would serve as the basis for determining the budget envelope in any given fiscal year. An important organizational reform was the transformation ofthe Secretariat for Forecasting and Modeling (Secretariat Permanent pour la Prevision et la Modelisation), initially charged with the task of developing the macroeconomic framework, into the Macro-economic Directorate (Direction GCnCrale de 1’Economie) ofthe Ministry ofFinance. At the beginning of every budget year the framework is developed by this directorate with input from the Central Bank, the Statistics Office (INSTAT), the Customs Directorate (Direction GCnCrale des Douanes), the Tax Directorate (Direction GenQale des Impots), the Treasury (Direction GCnCrale du Tremor) and the Directorate for Commitments (Direction GCnCrale des DCpenses EngagCes). Despite these efforts the quality ofthe macro-economic framework continues to be low.
57. The budget calendar varies on a year to year basis. In Madagascar, the budget formulation process does not allow for adequate strategic decision-making over policy priorities. The calendar and the stages of the budget preparation process vary from year to year and are communicated to the relevant stakeholders on short notice. Table 11.7 below sets out the budget timetable that was followed in 2003, alongside with a proposed adjusted budget timetable.
58. The main shortcomings ofthe consultation process include:
0 Within government: Intergovernmental consultation concerning the budget proposal is mainly limited to budgetary conferences. There is no systematic mechanism to ensure that budgetary disputes are discussed at different hierarchical levels (Directors, Permanent Secretaries, Ministers) of the -26- administration prior to the submission of the final draft of the budget to the Cabinet. Open issues are resolved by the MEFB at the technical level or raised through ad-hoc intervention at the Cabinet level.
0 Line ministries: Although the MEFB has made some efforts to better associate line ministries in the budget preparation process, participation of line ministries is not yet effective, and interactions between the MEFB and the line ministries do not sufficiently focus on determining the budgetary impact ofpolicy priorities. Line ministries typically do not receive any information on their expenditure ceilings before the middle of the year. They have only limited time to submit their budget requests, once the budget circular is issued (in 2003, two weeks). Discussions between the MEFB and the line ministries remain largely focused on the baseline budget and the proposed modifications (“mesures acquises” versus “mesures nouvelles”), which does not encourage a focus on policy priorities and on the effectiveness ofexpenditures within a coherent fiscal framework.
0 Cabinet: Strategic discussions and decision-making on fiscal and budget policies at the Cabinet level is limited and ad-hoc. The Cabinet does not systematically discuss or agree upon the choices made by the MEFB at an early stage, especially in relation to macroeconomic and fiscal projections as well as sectoral and ministerial allocations. The Cabinet also does not seem to be systematically associated with the modifications of the budget, following budgetary conferences or negotiations with the IMF. -27-
Box 11-3 Developing a strategic decision making process The involvement of the Cabinet
Effective involvement of the Cabinet in the budget formulation process allows to: (i) build a government consensus on national policy priorities and allocation of related expenditures; (ii)enhance transparency through open and direct discussions, and; (iii) obtain strong commitment from the members of the Cabinet on the decisions made in view to increase the discipline in the budget formulation process.
Institutional arrangements to support involvement of Cabinet depend on country circumstances. In some countries, the Ministry of Finance plays a lead role in preparing Cabinet meeting, while in others preliminary discussions take place at ministry level to facilitate resolution of technical issues and allowing the Cabinet to focus on strategic issues. For example, in Sweden, discussions on the fiscal policy, expenditure envelope, and sector ceilings take place in a two-day Cabinet retreat, with all decisions being taken by the Cabinet as a collective body. In South Africa, a formal subcommittee of the Cabinet considers policy changes with budgetary implications before making collective recommendations to Cabinet. This is used by Cabinet to make all the final decisions on Government’s medium-term policies and spending priorities. In Uganda, the process starts with a Cabinet retreat to discuss strategic issues such as the initial resource framework and the key budget issues and priorities for the coming fiscal years.
The preparation of a strategic document (the Budget Framework Paper) also facilitates decision-making of the Cabinet while increasing transparency of debates. Good practice suggests that a Budget Framework Paper which should be updated as the budget preparation process precedes includes (i)a review of past performance and prospects in global and regional economies; (ii)budget out-turns (including revenues, expenditures, debt, deficit) and progress on policies implementations; (iii) medium-term budget prospects, (iv) overview about anticipated revenues (revenue targets, proposed changes in tax policies); debt; deficit financing and expenditure priorities (targets, evolution in sectoral allocations and key expenditures categories) with reference to the policy priority of the Government and its reform program.
Source: World BanWKorea Development Institute, Reforming the Public Expenditure Management System, March 2004; OD4 Implementing a Medium-term Perspective in Budgeting in the context of national PRS , undated.
0 Parliament: The National Assembly has only limited capacity to review the budget. According to the MEFB the National Assembly has not made any amendment to the proposed budget in recent years. In addition, transmission requirements to Parliament limit budget preparation time. The Constitution states that the annual budget must be presented to Parliament by the end of October. The October submission of the budget restricts the preparation process, taking away valuable weeks that could be used for consultation and the arbitration process between line ministries and the Ministry of Finance. The budget proposal is typically subject to substantial adjustments following the IMF mission in October. As a consequence, Parliament votes on an outdated budgetary framework, which draws into question the usefulness ofthe Parliamentary vote.
Recommendations
o Enhance role of Cabinet. The involvement ofthe Cabinet in the different stages of the budget preparation process should be reinforced to enhance policy discussions and strategic decision-making that links priorities and available resources. Discussions at the Cabinet level should be informed by a Budget Framework Paper developed by the MEFB at the beginning of the budget year (see box 11.4). This framework paper would be updated during the budget preparation process. Government should also negotiate with the IMF to better associate the IMF mission schedule with the budget preparation process. -28-
Box 11-4 The Budget Framework Paper
Good practice suggests that a Budget Framework Paper which should be regularly updated during budget preparation process, includes: (i)A review of past performance and prospects in global and regional economies; including the external sector, real sector and financial sector; (ii)Budget out-turns (including revenues, expenditures, debt, deficit) and progress on policies implementations. (iii)Medium-term budget prospects , (iv) Overview about anticipated revenues (revenue targets, proposed changes in tax policies); debt; deficit financing and expenditure priorities (targets, evolution in sectoral allocations and key expenditures categories) with reference to the policy priority ofthe Government and its reform program.
Source: World Bank
0 Strengthen participation of line ministries. Participation of line ministries in the budget preparation process should be significantly strengthened. This does not necessarily require two cycles of budgetary conferences, as envisaged by the MEFB; key to improved participation is timely information by MEFB to the line ministries. Early information concerning the budgetary envelope, using multi-year projections, would allow the line ministries to initiate a more effective planning and consultation process. Once the budget circular is issued, more time should also be given to line ministries to prepare and submit their budget requests. In addition, training needs of line ministries in the area ofbudget planning/costing should be identified and included in the planned training program of MEFB .
P Improve budget circular and introduce budget framework paper. The budget circular should include specific information that would allow line ministries to understand the strategic policy priorities ofthe Government within the hard budget constraint. The circular should be developed on the basis ofa Budget Framework Paper that should be presented to Cabinet.
a Refocus budgetary conferences. Budgetary conferences between the MEFB and the line ministries should move away from the discussion ofthe baseline budget and its proposed modifications to an interaction that is focused on policy objectives, prioritization of needs within the hard budget constraint and results achieved on the basis ofresources allocated.
LI Adjust budget preparation calendar. To improve the quality of the preparation of the annual budget the Government should adjust the calendar and the stages of the budget preparation process. Table 11.7 below outlines the proposed budget process based on good practices in other countries.
Delay submission of full budget to Parliament. In view of the statutory obligation to submit the budget to the National Assembly by the end of the month of October the Government could consider putting forward a budget framework paper instead of the completed budget, which in turn could be presented to the National Assembly in November. This approach would free up time for a more participatory preparation process, integrating in particular Cabinet and the line ministries into strategic decision making. It would also ensure that Parliament can vote on a high-quality budget.
LI Strengthen capacity of Parliament. The Government should continue to strengthen the capacity of the National Assembly in the area of public finance to professionalize interaction. In this context the Government could also organize an annual workshop with Parliament to discuss the draft annual budget or other selected issues. More fi-equent interactions with the MEFB on budget execution -29- issues, as envisaged by the new Organic Finance Law, would contribute to improving the capacity of Parliament over the medium term. Table 11-7: The 2003 budget process and proposed calendar
2003 BUDGETPROCESS PROPOSED CALENDAR
February-June February- April reparation of a Budget Framework aper by MEFB.
June Oral communication to First half ofMay Discussion ofthe Budget the Cabinet Framework Paper by an Interministerial Committee
July Budgetary Conferences Mid-May Approval of the Budget Framework Paper by Cabinet
Beginning ofAugust Notification of the Second half ofMay Issue ofthe Budget Circular which is budget envelopes derived from the Budget Framework Paper End ofAugust Submission by the line End ofJuly Budget submissions by line ministries ministries
September Preparation of the draft August-September Budgetary Conferences and revision Budget Law ofthe Budget Framework Paper; preparation ofthe draft budget by MEFB (based on update of macroeconomic and fiscal forecasting and on the results of budgetaly-conferences) October bodifications ofthe I October Discussion ofthe revised Budget acroeconomic and ramework Paper and the draft fiscal framework, udget by an Interministerial following negotiations Committee ith IMF. Subsequent adjustments to the i udget Law made by he MEFB, without consultation ofthe line nistries. I
End of October Submission of the draft End ofOctober Approval ofthe Budget Framework Budget Law to the Paper and the draft budget by INational Assembly Cabinet; submission ofthe Budget Framework Paper to Parliament November Submission ofthe draft Budget to Parliament -30-
(e) Planning for Recurrent and Investment Expenditures
Issues and Current Practices
59. Madagascar uses a dual budget system.. .. Although a consolidated budget is presented in the annual Budget Law, a dual budget system still governs the budgeting of recurrent and investment expenditures which are prepared according to different timelines, procedures and institutional responsibilities.
Box 11-5 Dual budget systems
Dual budgets - in which recurrent and investment expenditure are budgeted separately -emerged around the time ofindependence as a way to manage a growing volume ofaid financing and to outline the Government-led development strategy based on public capital investments. Development partners appreciated the dual budget system, as it facilitated the coordination of aid and the identification of hture projects. Today, it is recognized that the development effectiveness of public expenditures is hampered by the dual budget system, as the recurrent cost requirements of investments are not rigorously estimated and thus, the long-term affordability of policies is not properly considered. This leads to inadequate provisions for recurrent expenditures in subsequent budgets and unsustainable investment decisions. Moreover, as the investment budget is driven by donor preferences, projects are not necessarily integrated with the Government’s policies and priorities or linked to the current budget. Dual budgeting contributes to problems in linking planning, policy and budgeting which are the main cause for poor budgetary outcomes.
Source: World Bank
60. ...which hampers coordination of investment and recurrent budgets. At the level ofthe line ministries, budget preparation is made in parallel by the Directorate of Financial Administration (Direction Administrative et Financiers, DAF) for recurrent expenditures and by the Directorate of Planning (Direction des Etudes et de Planification, DEP) for investment expenditures. The consolidation between these two categories of expenditures is problematic: medium-term recurrent costs projections of existing and planned investments are not made in a systematic manner; there is also little information about the affordability ofexisting policies and the sustainability ofpresent investment decisions.
61. ...and results in inconsistency of investment and non salary recurrent expenditures. As a result of these separate processes investment and (non salary) recurrent expenditures are not fully aligned and consistent. Efforts have been made to better align the recurrent and investment budgets. Chart 11.2 below indicates that non salary recurrent and investment budgets have been increased by more or less the same ratio since 199ga2’Relative to 1998, non salary recurrent expenditures increased by about 230 percent while investment expenditures increased by about 180 percent until 2004. Subsequent analysis in the education and transport sectors (see chapters below) shows that the level of recurrent expenditures in 2003/2004 is not sufficient, despite Government’s commitment to improve the mix of recurrent and investment expenditures. Furthermore, in the year 2004 capital expenditures increased sharply, even outpacing non salary recurrent expenditure growth. This raises concerns about the adequacy ofallocations for operations and maintenance.
29 Nonsalary recurrent expenditures exclude transfers. -3 1-
Chart 11-2: Annual growth of non salary recurrent expenditures and investment 1998-2004 (in percent)
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
+Non salary recurrent -+-Investment
Source: World Bank
62. Misclassification results in data inconsistencies. An adequate analysis of public expenditures (which should serve as a basis for political decision making) is difficult because of problems with the classification of recurrent and investment expenditures. It is estimated that around 10-15 percent of capital expenditures (mainly those that benefit from external assistance) are in reality recurrent expenditures. This indicates difficulties in adequately applying the existing budgetary nomenclature (Plan Comptable des Opirations Publiques, PCOP) as well as the functional classification ofexpenditures (classification according to sector organization).
63. Aid delivery modalities reinforce the dual budgeting system. The modalities of aid delivery reinforce the dual budgeting system. The budgeting process of externally-financed investment expenditures takes place without reference to a budget ceiling; it is only constrained by the availability of external assistance and related counterpart funds. As a consequence, little consideration is given to the future cost implications of investment projects and the ability of the budget to sustain these costs. The shift towards budget support, as initiated by some key donors such as the World Bank, the African Development Bank and the European Union, facilitates the integration of foreign assistance into the budget and, thus the consistency ofrecurrent and investment expenditures. -32-
Box 11-6 The impact of budget support
A recent study on budget support describes how in Uganda the shfi towards program lending changed the incentive structure in the public administration: “Because line ministries and districts no longer have the option of seeking direct funding from donors, or have it within a strict ceiling agreed in the MTEF process, they have a much stronger incentive to comply with budget directives. These now call for a more structured approach to policy development, the lynchpin what are being called in Uganda sector-wide strategies. Sector- wide strategies become in-turn the basis of Budget Framework papers, which are the sector working groups’ submissions within the MTEF, and ultimately for resource allocation decisions in the budget .... ’I
The report also notes that budget support encourages donors to focus their attention on certain cross-cutting issues, such as strengthening of procurement. Improvements also seem to have been made in relation to domestic accountability: “Auditors General 3 reports are said to be improving. The Public Account Committee is becoming more active in following up cases of misappropriation .... The press, even though partly Government-owned, is increasingly open in criticizing public corruption and the insufliciency of action to curb it.” The report recognizes that these positive trends require additional elements or have independent origins, but stresses that program lending provides a general enabling environment.
Source: Oxford Policy Management and Overseas Development Institute, General Budget Support Evaluability Stud; Phase 1 - Final Synthesis Report, Report to the UK Department for International Development (DFID), 30 December 2002
Recommendations
Integrate capital and recurrent expenditures. Budgeting of recurrent and investment expenditures should be fully integrated. The Government could consider different options: One option would be to harmonize the preparation of the recurrent and investment budgets on the basis of a unified preparation process at the line ministries and MEFB levels. This would involve in particular requesting the DAF and the DEP in the line ministries to develop a uniform budget proposals which addresses the cost implications ofplanned investments within a medium-term envelope. A more radical option would be to integrate the divisions in charge of planning recurrent and investment expenditures, in particular the DAF and the DEP. Such an approach would be consistent with the introduction of program budgeting, but would require substantial organizational and procedural changes.
Educate sector ministries. The MFEB should provide guidance and training to line ministries how to adequately determine the recurrent costs of investments as well as to assess the medium-term implications of existing projects and planned investments. These costs should be systematically integrated in the medium-term projections of programs and into the annual budget. New investments should only be approved if medium-term projections confirm the financial sustainability (Le. availability of resources to finance day-to-day operation and maintenance costs).
Encourage donors to increase budget support. In view of the experiences in other countries (see box 11.6 above) the Government should consider to intensify the dialogue with the donor community about the advantages ofbudget support over project assistance. The shift to budget support reduces the incentive to maintain the dual budget system, facilitates strategic prioritization of resource allocation, and increases the flexibility to determine budgetary priorities and tradeoffs. -33-
(f) Revenue and External Assistance Forecasting
Issues and Current Practices
64. Revenue forecasting in Madagascar is weak both in relation to Government revenues and external assistance. Chart 11.3 a-b shows that revenues and external assistance are systematically over- estimated, resulting in lack of predictability and the build-up of arrears. The large variation in 2000 between planned and executed revenues are due to the delays in the privatization program. While the year 2002 indicates the low level of revenue collection during the political crisis, the following year 2003 illustrates the slow rebound of the economy, which recovered only in the beginning of the second half of the year. The tax and custom administrations prepare revenue projections at the beginning ofthe budget preparation process and communicate them to the Economic Directorate of MEFB, which is responsible for the final projections. Little capacity exists to accurately estimate the expected revenue level by taking into account the implications of the economic and fiscal policies of Government. Frequent and ad-hoc revisions of the tax policy further exacerbate the difficulty of providing accurate revenue forecasts.
Chart 11-3 a-b: Comparison of planned and actual revenues and donor funds, selected years between 1997-2003 (in percentage of non interest expenditures)
4500 0
4000 0
3500 0
3000 0
2500 0 I OP Dlnea re en.es < .I 2000 0 m onMGF
1500 0 mAc .a 10 cr.01 n m o-f$G' 1000 0
500 0 00__ 1997 1999 2001 2002 2003 1997 1999 2003 2002 2003 I
Source: IMF and World Bank estimates
65. Chart 11.3 .b also indicates problems to forecast foreign external assistance. The differences between planned and executed donor funds suggests not only difficulties in accounting and reporting of donors funds but also an overly optimistic assessment ofthe availability ofexternal financing and ofthe (absorptive) capacity of the administration to implement investment projects. No viable methodology and only limited capacity seem to exist to adequately project these inflows. The year 2003 is an exception with high convergence between projected and actual foreign aid. As donor support shifts to budget support, this gap will decrease.
66. Different disbursement procedures pose problems. The modalities of aid delivery, mostly project aid, also increase the difficulty in developing more accurate forecasts, especially as regulations of project disbursements vary from one donor to another. The shift of several donors to program lending acknowledges the limitations of project assistance and recognizes the need to support the Government in a consistent manner with full Government ownership. -34-
Recommendations
0 Further develop revenue forecasting capacity. The improvement ofrevenue forecasting should be given high priority by the Government. The relevant capacity in the MEFB in general as well as the tax and custom administrations in particular should be systematically strengthened. The Government should also develop a medium-term reform plan for the tax and custom administrations. This plan should be linked to specific revenue targets and performance standards.
0 Improve forecasting of donor aid. Reliable forecasting of donor assistance is required to improve the credibility and transparency ofthe budget. These forecasts should take as a reference point average disbursements in previous years, but taking into account the move to budget support. The Government should aim at strengthening coordination between the MEFB and the line ministries to improve reporting and monitoring of external assistance. Government should also urge development partners to provide timely information about the disbursement of their assistance; this should also include a medium-term perspective about the intended support to improve budget predictability.
(g) Comprehensiveness and Transparency of the Budget
Issues and Current Practices
67. Comprehensive coverage of all fiscal activities undertaken by the central Government is essential to ensure that the budget is transparent and can be used as an effective planning and co- ordination tool. Transparency of the budget preparation process is also key for ensuring a more participatory process within the Government. In addition, the presentation of the annual Budget Law strengthens public understanding ofpolicy priorities.
68. Although the budget in Madagascar is regarded as comprehensive it includes mainly aggregated categories of expenditures and lacks certain information. For example, transfers to municipalities which include administrative, health and education allocations are not specified in detail. Transfers to state-owned enterprises are indicated in the budget, but no information is reported on their gross expenditure and revenue, including revenue from earmarked taxes, user-charges and other sources of revenue. Moreover, little is known about the activities of some extra-budgetary institutions, in particular social security funds, and thus about the nature of any risk posed by the broader Government sector to the sustainability ofcentral Government finances.
Recommendation
Improve budget transparency. Further information should be provided in the Budget Law about the transfers to municipalities and state-owned enterprises. The Government should review if the existing classification provides a sufficient degree of transparency. The Government should also clearly establish the fiscal risks that may potentially arise from activities of extra-budgetary institutions. -35-
2) ENSURINGBUDGET IMPLEMENTATION IN LINEWITH GOVERNMENTPRIORITIES
69. Problems with the implementation of the budget are often at the root of a country’s fiscal failures. While it is a prerogative of Government to ensure that public monies are efficiently spent, in practice the administration faces many obstacles, which are discussed in detail in this chapter.
(a) Budget Execution remains a Challenge
70. Low budget execution rates. Over the past years budget execution in Madagascar has been relatively low - it notably deteriorated since the end of the 90’s from 96 percent in 1998 to 75 percent in 2001 (see table 11.8) - mainly because of weak revenue collection and of budget implementation problems (see following sections). Some early estimates of the 2003 budget execution show a 92 percent execution rate ofthe total budget. This improvement - if confirmed - is an encouraging sign of Government’s efforts towards more solid public financial management. It would also indicate that Government’s efforts in 2003 to streamline the execution process, e.g. by setting up one-stop shops “guichet unique” and by simplifying procurement procedures, has yielded positive results.
Table 11-8: Madagascar’s past execution trends (selected years between 1997-2003) (in percentage of total non interest expenditure^)^'
1997 1999 2001 2002 2003
Total 84.2 79.7 75.0 43.3 91.9
Governance 78.9 62.4 80.1 57.0 89.1 General Administration 74.3 56.7 77.7 51.3 86.8 olw budget, finance & eco. Admin 61.2 43.1 74.6 47.5 84.3 Defense 98.9 100.9 97.6 93.0 95.3 Public security 97.9 93 .O 93.3 78.1 99.7 olw Justice 93.3 99.8 94.2 57.6 103.3
Growth 89.7 97.4 72.5 22.7 98.2 Energy 33.7 73.4 69.9 8.2 63.0 Agriculture 78.7 79.9 72.7 23.5 84.6 Environment 124.0 205.3 144.0 41.7 85.2 Transport & Communication 94.8 92.0 51.1 21.5 89.3 01 w Transport 95.3 91.9 50.8 21.0 89.2 Others 118.3 96.5 94.2 19.9 144.9
Social 85.4 97.5 69.5 50.7 90.9 Education 103.9 112.4 78.2 63.5 97.0 olw Primary Education 92.5 134.0 85.3 60.7 78.8 Health 85.4 88.8 68.1 37.7 97.2 olw Primary Health care 71.6 100.0 82.0 33.0 81.3 Others 61.9 80.9 54.7 38.2 68.9 Source MEFB and World Bank estimates
30 See annex 5, table 5.7 for reference regarding the real annual growth rates of actual expenditures 1997-2004 -36-
71. Poor performance of public investment programs. The comparison of past performance of recurrent and investment expenditures points to severe problems with the implementation of public investment projects. While execution of salary expenditures is relatively satisfactory achieving an average spending rate of 96 percent over the observed period, the execution of non salary and capital expenditures is fairly low with an average execution rate of only 82 percent and 70 percent during 1997-2003 (see table 11.9).
Table 11-9: Madagascar’s recurrent and investment spending patterns selected years between 1997-2003 (actual expenditures as percent of budgetary allocations)
~~ Aver. 1997 1999 2001 2002 2003 1997-03
TOTAL 84.2 79.7 75.0 43.3 91.9 78.5
Current Expenditure 101.4 92.2 83.2 63.6 94.7 88.7 Salary 98.7 100.9 95.9 84.3 94.3 95.7 Goods & services 94.1 89.1 83.0 50.7 90.9 82.5 Transfer 114.0 89.2 69.4 42.3 97.3 86.0
Capital Expenditure 71.0 67.9 67.3 24.9 88.5 69.2 Internal resources 45.5 33.2 66.5 40.9 54.4 52.0 External resources 88.9 102.1 69.9 11.7 119.7 83.8
Memo External resources (as a % ofactual capital expend) 75.7 78.3 52.9 29.5 70.8 64.1 Source: MEFB and World Bank estimates
72. High execution rates for HIPC funds. At the same time, execution rates for HIPC-funds, implemented since 2001, are superior. These funds represent only 6 percent of Govemment’s budget in 2003; their execution rate reached 99 percent. HIPC funds were broadly earmarked at the decision point which simplified the yearly identification of expenditures. HIPC money (more than 60 percent) could also finance recurrent expenditures, which generally have a better execution performance. The application of special budgetary procedures3’ also contributed to a better performance of HIPC resources. These procedures allow for the management of funds outside the public finance control system. Additionally, they permit the disbursement of funds even after the closure of the budget year (2002 HIPC funds were executed until mid 2003).
@) Credibility of the Budget - sticking to Budgeted Priorities
73. The credibility of the budget is important for effective implementation of Govemment’s policies and programs. It is challenged when unplanned, commonly referred to as unbudgeted expenditures occur or when revenue shortfalls during the year require an adjustment ofthe budget.
74. The issue of unbudgeted expenditures. Unbudgeted expenditures occur when the treasury accepts payment orders under the “droit de requisition ” pr~cedure.~’This procedure was extensively used by the previous regime to execute expenditures under special accounts. In 2001, the President’s special fund was considerably overdrawn with a total spending of US$25 million compared to an
31 A special account was set up for the management of the HIPC funds to which all funds are directly transferred from the treasury. 32 Under the “droit de requisition ” procedure the Credit Manager with the authorization ofthe MEFB can ask for the release ofa payment that had initially been refused by the Treasury. -37- allocated budget of US$400,000. In the aftermath of the political crisis in 2002 the new Govemment introduced regulations to limit the use of this procedure. It also agreed to regularly audit the special accounts by the Auditor General. In the absence ofnational emergencies, unbudgeted expenditures are viewed as poor public management practice because they distort the original prioritization of the resource envelope as reflected in the budget and as approved by Parliament. Despite Govemment’s efforts to limit the use of this instrument, recent trends are not encouraging: the 2003 budget outtum of unbudgeted expenditure amount to more than MFG 200 billion (nearly 1 percent of GDP), drawing into question the credibility ofthe budget.
75. Substantial gap between the approved and executed budget. Two major findings stand out when allocation and expenditure data are analyzed: the gap between original budget and final allocation (initial budget allocations plus mid-year adjustments to the original allocations) has been closed in 200333. At the same time, the gap between final allocation and execution increased substantially since 1999 (see chart 11.4). The largest gaps occurred in 2001 (25 percent) and in 2002 (57 percent). The year 2003 is an exception with an execution rate of 92 percent. While this indicates progress, line ministries continue to be concerned about the budget as a reliable planning instrument, mainly because of past experiences with unpredictable actual releases. The uncertainty about the available resources envelope negatively impacts the ability ofline ministries to implement policies and programs.
Chart 11-4: Comparison of past budget allocation and execution between 1997 and 2003 (in billion MGF)
8,000.00
7,000.00 6,000.00
5,000.00 4,000.00
3,000.00 2,000.00
1,000.00
1997 1998 1999 2000 2001 2002 2003
ITotal annual allocation (in billion MGF) ITotal annual execution (in billion MGF)
Source: MEFB
76. Legal instruments to modify the budget. Govemment has two possibilities to legitimize unbudgeted expenditures or revenue losses: (i)the preparation of a revised finance law and (ii)the utilization of Article 46 of the Organic Finance Law (Article 20 ofthe new Organic Finance Law, see box 11.7). In the past, Government mainly used the stipulations of Article 46 to legitimize the gap between actual allocations and the allocations made by the original finance law. The application of Article 46, however, undermines the legitimacy of the budget as original priorities are altered without approval ofCabinet or Parliament.
33 Deviation from the initial finance law decreased from 12 percent in 1997 to 7 percent in 2001. For the year 2003 original credit allocations matched with final credit allocations. -38-
Box 11-7 Madagascar’s legal instruments to modify the national budget
The revised budget law: Following the francophone model, Madagascar could submit two budgets to the National Assembly every year: a) the initial budget (loi de finances initiale, LFI) and b) the revised budget (loi de finance rectificative, LFR). The latter aims to accommodate changes and modifications by the Government during the first semester ofbudget implementation and is submitted once again for approval to Parliament. Typically, these changes or modification do not substantially alter the initial budget. In recent years, no LFR has been prepared by the MFEB.
Article 46 of the Organic Law of Finance: The main reason for. neglecting the possibility to amend the budget on the basis of a LFR is the latitude provided by the provisions of Article 46 (Law Nr. 63-015) of the former organic law of finance. This law permits to integrate de facto modifications to the budget of the current year into the budget of the following year. In principle the stipulations of the law require an emergency situation; in reality the Government is using the law for all relevant budgetary modifications. Art 20 of new organic law of finance (Law No 2004-007) restricts the ability to modify the budget: the new law requires Government to seek Parliamentary approval of the
~ emergency situation; this approval will be provided by the Office ofParliament.
Source: World Bank
77. Strong correlation between revenue forecasting and low budget execution. An important factor for the gap between the allocated and finally executed budget is the adjustment of projected revenues due to lower revenue inflows during the fiscal year. Revenues have been systematically over- estimated since the year 2000 (see chart 11.5). They were revised downwards by 22 percent in 2001 and 44 percent in 2002. As a consequence, expenditures had to be significantly adjusted to minimize the impact of the revenue shortfall on the overall fiscal deficit. These adjustments, which are made on an irregular basis by the MEFB, reduce the resources envelope of line ministries and spending agencies.
Chart 11-5: Trends in fiscal revenues and budget execution rate (in percent)
100.0
80.0
60.0
40.0
20.0 forecasted revenue 0 .o --c Budget execution -20.0
-40.0
-60.0
Source: MEFB
(c) Cash management And Commitment of Expenditures
78. The current cash management system contributes to low execution rates of the budget as ministries are unable to spend their budget allocations on a timely basis. The Treasury Department has -39- developed a cash management plan with the assistance of the IMF. The plan is implemented at the central Treasury in Antananarivo. It aims to balance the outflows and inflows ofpublic resources34.The plan faces several shortcomings, in particular problems with data reconciliation between the Treasury and the Central Bank, and difficulties to supply cash to remote treasuries. In addition, unreliable cash flow forecasting by line ministries makes it difficult to accurately determine payment needs for the whole Government. Consequently, the Treasury is not able to meet payment obligations on a timely basis as well as any important demands or seasonal needs. Regional Treasury offices are short of cash, which leads to difficulties in the payment ofservices and salaries. It is expected that the implementation of a country-wide integrated financial management system (IFMIS) will improve problems of data reliability, completeness and consolidation.
79. Commitment procedures cumbersome. The ability ofline ministries to execute the budget is further constrained by existing procedures concerning the commitment of expenditures. When the budget is approved (typically in December or in January) line ministries need to appoint Credit Managers who are responsible for the commitment of expenditures. These nominations are often delayed (even for several months) because of bureaucratic bottlenecks. Many line ministries are therefore not able to make commitments against the budget at the beginning of the budget year. In addition, the commitment period is limited until the end of October (mainly to avoid over-commitment ofexpenditures).
(d) Expenditure Management process
80. Complex disbursement procedures. Processing public expenditures in Madagascar is complex and long: the CFAA identified 11 different steps with each stage requiring a formal approval (see Annex 6). As the transaction costs are high the use of “simplified procedures” to release funds is on the rise, which - according to public finance regulations - should only be used in exceptional circ~mstances.~~The CFAA estimates that such simplified procedures are used for up to 30 percent of the expenditures.
81. “Flexible” investment budgets. Line ministries have certain flexibility regarding the investment levels incorporated in the capital budget. On an occasional basis, they are allowed to spend more than the amount indicated in the Public Investment Program (PIE’); e.g. if (i)the rate of implementation of a particular project is better than expected at the time of the budget (and PIE’) preparation, or (ii)if domestic funds for the line ministry are unavailable. This “flexibility” carries substantial risk ofraising the fiscal deficit. It also raises concern with regard to the comprehensiveness ofthe budget.
82. Government has begun to address these problems: To rationalize administrative procedures it has merged the function of the “sous-ordonnateur” and of the Credit Manager. It is also preparing regulations for supporting documents (“nomenclature des pieces justijkatives ”j’ that are required for the disbursement process. Government also discourages the use of simplified procedures such as the “droit de requisition ” and intends to limit the application of these procedures to exceptional cases. A new computerized integrated financial management system is under preparation which will further streamline and rationalize expenditure management procedures.
34 The plan contains revenue forecasting (from taxes and customs duties) and expenditure forecasting for non- discretionary expenditures (salaries, pensions, and public debt). 35 This refers notably to the application of the “droit de requisition” (see section on the credibility of the budget) and the “regies d’avance”. The later enables the treasury to authorize the execution ofexpenditures by providing a cash advance to Credit manager. -40-
(e) Recommendations
0 Prepare 2005 Priority Action Plan. Government should develop the action plan for the year 2005 which should specify Government's priorities in the area of public finance. The MEFB should report to Cabinet about the implementation ofthe plan on a regular basis (e.g. every 3 months).
0 Restrict application of Art. 20. Government should limit the application of Art. 20 of the new Organic Finance Law to the exceptional cases stipulated in the law. In case of deviations from the original budget it should follow regularly procedures and submit a LFR.
0 Focus on budget execution rates. Government should systematically track budget execution rates, in particular in priority sectors. The MEFB should inform Cabinet on a regular basis (e.g. every 3 months) about the execution ofthe budget and potential bottlenecks to enable policy interventions at an early stage.
0 Strengthen cash management. Government should intensify efforts to consolidated accounts on a monthly basis. The line ministries, in close collaboration with the MEFB, should specify their cash requirements which should be consolidated in the cash management plan at the level of the MEFB. o Extend the commitment period. Government should ensure that the Credit Manager who are instrumental for the commitment ofexpenditures are nominated as of 1'' January of the fiscal year. The commitment period should be extended to the end ofNovember ofthe fiscal year. (0 Improving Internal and External Controls
Issues and current practices
83. Implementation of reforms ongoing. Government has begun to revise the legal framework for the control institutions and to implement capacity building measures (see Annexes 7 and 8 for more details): it has, in particular, strengthened the operational efficiency of the internal control of the Treasury (Brigade de TrCsor) and of the Auditor General. In 2004, the MEFB also established an internal control mechanism at the level of the Ministry of Finance (Inspection GCnCrale des Finances, IGF). The creation of the IGF, however, has left the competences of the General Internal Auditor (IGE)36unchanged - resulting in overlapping responsibilities of IGF and IGE. Government intends to address this issue in the context of the development ofthe annual work plans ofthe two institutions. It would, however, be useful to amend the legal instrument governing the operations ofthe IGE.
84. Since 200 1, tracking surveys, conducted by INSTAT and funded by HIPC resources, are used to trace expenditure and to assess satisfaction ofbeneficiaries ofpublic services. Though still limited to expenditure of the health and education sectors these surveys are important instrument to measure the impact ofpublic spending in two key PRSP sectors.
Recommendation
0 Clearly define the relationship between IGF and IGE. Government should clarify the roles and responsibilities of IGF and IGE. To this end, it should amend the legal instrument for the IGE. Government should also review the efficiency of the internal control system on a regular basis (e.g. yearly).
36 IGE is attached to the Presidency -41-
(g) Strengthening Public Procurement
Issues and Current Practices
85. Public procurement represents 9-1 Opercent of GDP. A Country Procurement Assessment3’ was finalized in June 2003. The CPAR report highlights that better procurement practices and institutional arrangements could save 20-35 percent of the procurement cost. In addition, the acceleration ofprocurement procedures could improve the absorptive capacity ofspending agencies.
86. Weaknesses of the Malagasy Procurement System. The main weaknesses of the Malagasy procurement system are documented in the CPAR, and include: (i)an outdated regular framework that requires modernization and clarification in a number of areas (i.e. coverage of the procurement code, thresholds), (ii)a lack of standardized bidding and contractual documents and related manuals to facilitate the procurement process, (iii)a weak institutional framework combined with low operational efficiency of tender boards and lack of service standards (iv) low transparency and inefficient control mechanisms; and (v) limited capacity in the area ofpublic procurement in the administration.
87. Government reforms under way. In the aftermath of the political crisis in 2002, the Government began to initiate transitory reforms targeting procurement procedures with the objective to accelerate budget execution during the implementation of Government’s reconstruction program. These regulations foresaw an increase of the threshold for certain goods and servicesJ8, a reduction of delays at the level of the tender board^.'^ In addition, “one-stop shops” (“guichet unique”) were set up to accelerate the clearance process. These reforms have been successful although they have not fully resolved the more fundamental weaknesses ofthe public procurement system.@
88. The main instrument to fundamentally reform the system is the new procurement code which has recently been approved by Parliament. The new code will pave the way for significant procedural and institutional changes by transforming the central tender board into a Procurement Oversight Institution, limiting its ex ante control and advancing its ex post auditing function. Additional work is ongoing to develop standardized bidding documents and procedural manuals, which should be available in early 2005. The key challenge in 2005 will be to institutionalize these new arrangements, in particular to ensure that the new regulations are consistently applied by the public administration.
Recommendation
A comprehensive training and capacity building program is needed. A comprehensive training and capacity building program should be prepared in close collaboration with relevant training institutions to ensure that line ministries adequately and consistently apply the new regulations. If necessary, local training institutions should be strengthened to address potential supply side problems. The Government’s budget should set aside sufficient resources for the demand and supply side of training and capacity building activities.
37 Madagascar, Country Procurement Assessment Review (CPAR), June 2003. 38 The threshold for consultations ofprices for furniture and services were raised from 20 to 30 million MGF and those for public work from 50 to 100 million MGF. 39 Issued by the (( circulaire D n0108/PM/SGG in October 2002. 40 Approved as a decree, the new regulations cannot overrule the existing procurement code. The administration and private operators seem to be not well informed about the new regulations and continue to apply the existing code procedures. Several ofthe measures conflict with other rules (e.g., the new regulations allow for the bidding process to start before line ministries are notified about their credits, while such practice is not permitted under other rules). -42-
(h) Improving Financial Reporting
Issues and Current Practices
89. Financial reporting dejkient. A key prerequisite for a modem budget execution system is reliable and timely financial reporting. Madagascar’s reporting system is, however, flawed by lack of coverage, timeliness and reliability of the execution data. Key information is not available, i.e. execution data on investment projects financed by donors, activities of local Governments and a number ofpublic institutions. Financial statements fiom the sub-national levels ofGovernment are sent with delays to the central Govemment level - as a result budget execution data is outdated and inconsistent. There is no systematic reconciliation process between the Treasury and the Central Bank. Many public entities have accounts in commercial banks; the account information is not known by the Treasury.
90. Budget reporting is not done by all line ministries. While budget execution reports are prepared by several key ministries (Education, Health, Agriculture, Justice, Water and Forest and Public Works), this has not been extended to all ministries. The education and health ministries have produced regular budget execution reports since 2000, which are available with a delay oftwo or three months on a tri-semester basis. In 2003, additional budget execution reports were prepared by four additional priority ministries (Agriculture, Justice, Water and Forest and Public Work) to fulfill a Government commitment in the HIPC context.
91. Treasury performance requires improvement. The Treasury also faces difficulties in closing the annual accounts in line with the provisions of the Organic Finance Law. Govemment reforms, however, have yielded some positive results.41 The final accounts for 2002 and 2003 have been submitted to the Auditor General. The Auditor General faces capacity problems in validating the Govemment accounts on time. As a result the audit report ((( Loi de Reglement D) for 1996 Law was presented to the Parliament only in 2000.42 The law for 1997 was adopted by Parliament in 2004.
92. Poverty related expenditure should be systematically tracked. The introduction of a new budget classification system as well as the Tableau de Bord (TDB) ofMEFB improved the capability to track expenditures from the commitment to the payment stage. However, the range of possibilities to define poverty-related expenditures has not yet been fully expl0ited.4~. Quarterly reports exist for certain priority spending ministries in the area of poverty reduction, but do not allow a functional analysis of poverty-reducing expenditure although the relevant classification exists since 2000.44 No code is provided in the budget and accounting nomenclature to specify poverty-reducing expenditure by budget line - only the tracking ofHIPC expenditure is clearly identified in the budget.
41 Starting in 2001, the centralization procedures and consolidation of all balances of the Principal Treasurers by the ACCT have been improved through the formation of a consolidation and audit unit, allowing for the establishment of general balance sheet statements and of reliable opening and closing accounting balances in a timely manner. 42 The regulations require that the draft budget review law for the prior year be submitted to Parliament no later than November 15 of each year. It has not been possible to meet these deadlines owing to human, physical, and organizational resource constraints. 43 World Bank (2003) “Madagascar Tracking Poverty-Related Spending Assessment and Action Plan”; IMF (2004) “ Madagascar Heavily Indebted Poor Countries Assessment and Action Plan” 44 A study by Cornel1 University and INSTAT found that only half of the poverty related expenditures in health and education sectors can be considered to be poverty reducing. Glick, Peter and Mamisoa Razakamanantsoa (2001), Services d’kducation et de santk a Madagascar: l’utilisation et les dktenninants de la demande. Antananarivo, INSTAT. -43-
93. Government reforms under way. To improve the overall efficiency of the reporting system Government has launched several reforms: First, a computerized financial management system was developed at a pilot site in Tamatave. The system, which has been operational since 2002, integrates the different stages of the budget cycle to improve availability and comprehensiveness of financial information as well as to enhance transparency and accountability of public finance operations. The Government intends to deploy the system to additional key treasuries. In the long run it is envisaged to implement an IFMIS which follows international standards. Second, Government commissioned an independent audit of the which aims to improve the operational efficiency and transparency of treasury operations. The implementation of the recommendations of the audit is ongoing. Third, MEFB intends to develop user manuals to clarify accounting and reporting procedures. This is particularly relevant for the line ministries which lack basic knowledge and capacity in this area.
Recommendations
0 Continue treasury reforms. The Government should continue to improve the operational effectiveness of the Treasury. While the modernization of the Treasury and the introduction of a comprehensive integrated financial management system may resolve existing problems in the long run, it will be important to identify concrete actions to be implemented in the short run. In this context, the independent audit of the Treasury has proposed important changes in the procedural and institutional set-up of the (central and provincial) treasuries - these recommendations should be implemented without delay. To ensure full accountability of the Treasury for the successful implementation of the reforms benchmarks should be introduced which - over time - aim at bringing treasury operations to the intended service standards (e.g. monthly accounts produced within two weeks after the closing of the previous month; deviation between treasury accounts and Central Bank accounts reduced by x percent).
0 Improve tracking of poverty related expenditure. Pro-poor expenditures should be clearly identified in the budget. To better target public expenditures it could be useful to classify budgetary expenditures according to their level of relevance in reducing poverty, e.g. “high poverty reduction relevance”, “medium poverty reduction relevance” and “low poverty reduction relevance”. These expenditures should be systematically tracked, relevant information should feed into the progress report for the implementation ofthe PRSP.
0 Establish an integrated reporting system. The preparation ofj oint budgetary execution reports by the six key ministries since 2003 presents an important achievement by the Government towards the establishment of an effective and comprehensive reporting system at the level of the line ministries. These reporting requirements should be reviewed and streamlined with the objective of establishing an integrated reporting system that can serve different purposes (e.g. PRSP, business plan implementation, budget execution). Such a system should also be capable of producing monthly status reports. These reports should be evaluated on a regular basis; a consolidated report should be sent to Cabinet on a quarterly basis to substantiate discussions about the implementation ofthe Government program.
(i) Transforming the Budget into a Management Instrument
Issues and Current Practices
94. Using the budget to monitor the implementation of policies and programs. The budget should serve multiple purposes - it outlines the strategic priorities of the Government, it aims at
45 This is the second audit of the treasury since 1997. The first one financed by a World Bank project failed because of disagreements about the recommendations ofthe consultants. -44- ensuring macro-economic stability, it serves as the legislative control over the executive, and it is a management instrument for the Government. Most modem administrations nowadays use the budget to monitor performance and to measure impact (see box 11.8). If Madagascar is to succeed with its ambitious plans to transform the country and its economy it will over time need to strengthen mechanisms to adequately assess and monitor the effectiveness ofpolicy implementation.
Box 11-8 Performance or results-based management
According to a recent Organization for Economic Cooperation and Development (OECD) review, “Zmproved performance of the public sector is a central factor in maintaining welfare of individuals and the competitiveness of the economy. Performance management is the key aspect ofpublic sector reforms of many OECD Member countries.” Results based management implies a management culture that is fact based, results oriented, transparent and accountable. A results based approach requires that the traditional administrative system focused on budget, human resources, and auditing be augmented by a feedback loop on the outcomes and consequences ofGovernment actions.
Over the last two-plus decades many OECD countries -- including Australia, New Zealand, Canada, the United Kingdom, and the United States - have made progress in implementing new practices to better manage and account for the results being acheved with public expenditures. Similar efforts have been started in many developing countries -- such as the Philippines, Andra Pradesh in India, Brazil, Tanzania, and others. These experiences provide useful lessons on how to strengthen or introduce a results orientation into Government.
95 * Need to look differently at budget. To transform the budget into a management instrument a change in the budget philosophy is necessary such as from line item budgeting towards program budgeting. The key reference point for program budgeting is a Government program like the PRSP (or a series of sector programs). The budget is classified in terms of programs and their objectives rather than organizational lines. The attainment of the objectives is measured on the basis of outputs and outcomes which are explicitly mentioned in the budget. There are various degrees of this model which reach from a sophisticated budget system that intends to measure efficiency at the output level to a more “simplistic” system that links expenditures to policy objectives. The key advantage of such a budget system is the focus on results which allows Government to better track policy implementation.
96. Focus on monitoring and evaluation. The discussion about the introduction of a more advanced budget system often goes hand-in-hand with the need to strengthen the existing monitoring and evaluation framework ofGovernment. Such a framework exists in principle in every administration but is often deficient (see box 11.9). This situation can also be observed in Madagascar. At the central Government level Government has begun to address these issues with the introduction of program budgets (“budget program”) and the preparation of work plan agreements (“business plans”) by the line ministries for the PRSP implementation. To monitor the implementation of policies and programs the Government has also developed a matrix, which defines specific results for all ministries and departments for the year 2005 (“la Politique Generale de 1’Etatpour 2005”). It is envisaged to track the implementation of this matrix on a regular basis as well as to discuss implementation progress and bottlenecks at the Cabinet level. -45-
Box 11-9 Common problems of monitoring & evaluation systems
The M&E system often deficient due to several factors : (i)the current planning processes do not or not sufficiently involve the definition ofresults information nor how this information will be used to inform policy, program or management decisions. (ii)There are no systematic feedback loops on effectiveness ofprograms and on the achievement of objectives. A wide range of data is collected in ministries and departments, however this information is not used in a systematic manner to inform managers and policy makes. (iii)Monitoring & evaluation mainly focuses on assessing the physical performance of (donor funded) projects. These mechanisms do not encourage a systematic analysis of common problems across Government. (iv) The public service culture is not performance and results focused; most institutions do not have service standards to measure the efficiency of the delivery of public services. (v) Implication of civil society in assessing the performance of the public sector is weak; users of public services have very little opportunity to provide feedback to the public administration.
Source: The World Bank
97. Developing a more consistent results-based framework. Further work needs to be done to integrate the different activities into a consistent results-based management framework. Though, in theory, the business plans should feed into the preparation of the program budgets but coordination of and methodology for the two exercises remain unclear. Many business plans lack detailed costing and fail to adequately prioritize policy objectives/actions. To date, only a few sectors (e.g. education and transport) have advanced fully-costed sectorial programs. In addition, capacity at the line ministry level to develop and execute program budgets is limited.
98. The need to better consolidate and use information. At the level of the sector ministries work programs and achievements have been subjected to regular reviews, mainly in the context of evaluating the progress ofPRSP implementation. Through the reporting system set up to monitor PRSP implementation a vast amount ofinformation is collected. However, line ministries report that they are overwhelmed with regular reporting requirements. This information is consolidated and submitted to decision-makers within Government. In essence, however, the information generated by the various reports is not systematically used by the technical and political levels to adjust policies and to link policy priorities with public resources. It is also unclear how findings of the evaluation impact the resource allocation process.
Recommendations
0 Strengthen the monitoring and evaluation system. The institutional and procedural arrangements of the coordination and consolidation of policy-related information should be reviewed. With technical assistance the Government should further refine the existing PRSP monitoring system. To ensure that the information generated at the different levels ofGovernment is effectively used it will be important to establish a well-functioning and well-equipped mechanism at the centre of Government that can serve as a link to Cabinet and is capable of scrutinizing existing information for potential follow-up. Sufficient resources for training and capacity building should be set aside to develop and institutionalise such a mechanism, also at the level ofline ministries.
0 Business plans developed by line ministries should be further refined. They should in particular define more realistic outcomes and the cost implications of proposed activities. A progress report, which should be presented to Cabinet (e.g. every three months), should systematically evaluate implementation against the proposed targets. -46-
3) EFFICIENTUSE OF HUMAN RESOURCES
99. Poorly functioning public sector institutions and weak governance are major constraints to growth and equitable development in numerous countries. Consequently, the Madagascar PRSP puts the modernization of the State and the promotion ofgood governance at the center ofthe Government’s policy agenda. While the PRSP stresses the need to comprehensively reform the public sector previous reform initiatives (at the beginning of the 90s and at the end of 1999) by-and-large failed to produce tangible results. Surveys46 and studies4’ confirm that the public sector is flawed by governance problems, in particular corruption, inefficiencies and mismanagement.
100. The Malagasy civil service accounts for about 146,000 agents in 2004 and represents 0.8 percent of the total population. Compared to other countries in the region this number is relatively low (see table 11.11). During the period 1997-2004, the civil service grew moderately by around 14 percent with an average annual growth rate of2.7 percent.
Table 11-10: Civil servant rate for 100 inhabitants in some African countries Civil servant/100 Country habitants Sub Saharan African 2.0 Zanzibar 2.7 Cameroun 1.8 Benin 1.4 Gambia 1.o Madagascar 0.8 Mali 0.8 Niger 0.5 Source: World Bank
101. Civil service composition requires change. Chart 11.6 below outlines the distribution ofcivil servants among different sectors. Education employs the largest share of civil servants (around 44 percent), after public security (15 percent) and administration (12 percent). Despite the high number of civil servants in the education sector, analysis of this sector suggests that the number of teachers is still not adequate (see education chapter for more details). Furthermore, the Malagasy military (including police and gendarmerie) accounts for over 20 percent of the total civil service. This percentage seems fairly excessive for a country without any major external or internal threat. It is unclear to what extend this distribution of civil servants across sectors contributes to achieving the goals and objectives of the PRSP.
46 For example the annual Anti-comption Perception Index issued by Transparency Intemational 47 See among other reports ((Etude sur 1’Etat des Lieux du Regime Actuel de RtmunCration du Personnel de 1’Etat))Vol I& I1 Cabinet R conseil Octobre 1998,and ((Etude sur 1’Etat des Lieux du RCgime Disciplinaire et de la Deontologie du Personnel de 1’Etat)) Novembre 1998 OSIPD. Both studies were financed by the World Bank -47-
Chart 11-6: Distribution of civil servants by sector in 2004' (in % of total civil servants)
Admin Defense Pub Sec Energy Agri Env GrOthr Educ Health SocOthr
Source: World Bank About 0.02percent of civil servants cannot be classified.
102. As in many other developing countries the Malagasy civil service is characterized by a relatively high number of support staff, around 60 percent of the civil service in 2004 (see chart II.7.b). At the same time, the intermediate level staff, including technical specialists who typically form the backbone ofa good civil service, account for only 30 percent of the total civil service. The management level is rather small with less than 8 percent ofcivil service agents. This structure has not changed over the past seven years 1997-2004 (see chart II.7.a). It in part explains existing bottlenecks in delivering public services - not enough qualified personnel is available to deal with the multiple tasks specified in the PRSP. -48-
Chart 11-7 a - b: a Evolution and distribution of the Malagasy civil service by functional level 1997-2004 b Qualification of Civil servants by functional level a Evolution and distribution of the Malagasy civil service by functional level 1997-2004 (in % of total civil servants)
IIntermate
1997 1998 1999 Zoo0 2001 2002 2w3 xx)4 I I Source: World Bank b Qualification of Civil servants by functional level (in % of total civil servants)
lnterm level Suppoct Staff
Source: World Bank
103. Civil service highly urbanized. While urban centers account for only 25 percent of population, they have in 2004 about 40 percent of public employees (see chart 11.8). The number of civil servants is 2 for 100 inhabitants in urban centers whereas this ratio is 0.75 for rural areas. This distortion undermines the vision of the PRSP of an administration which is close to the people -49-
(“administration de proximitk”). It constitutes another explanation for the existing service delivery problems - not enough civil servants are allocated to front-line services.
Chart 11-8: Geographical distribution of civil service agents 1997-2004 (in % oftotal civil servants)
180.0 160.0 140.0 120.0
100.0 Total Urban Centers 80.0 m Secondary Urban Centers 60.0 40.0 20.0 0.0 I 1997 1998 1999 2000 2001 2002 2003 2004 I Source: World Bank
104. Salary compression rate Jawed. Adequate remuneration, in particular for higher level staff, poses a serious problem: The civil service salary scale favors support staff whose salary appears to be competitive with the private sector. Despite efforts undertaken since 1997 to reform the salary scale the compression ratio between the lowest and the highest salary is only 6.7 in 2004, while it used to be 11.6 in the 1960s. A somewhat “adequate” compression rate would be in the range of Low remuneration of technical and management staff is one reason why Government is not able to attract enough qualified personnel in key positions.
105. Performance orientation low. There is little performance orientation in the public administration. Job descriptions that typically outline objectives and performance expectations are lacking or outdated. Service standards (i.e. time to deliver a service) do not exist for most parts of the public administration. Administrative decision-making is extremely hierarchical. Discretionary authority and informal behavior are high and key sources for mismanagement and corruption. General work ethics in the public sector are low; there is widespread absenteeism, which remains unsanctioned. The morale in the public sector is low, mainly because of low remuneration and lacking career prospects4’.
106. Government reforms under way. The Government is trying to address the low performance through a combination of measures: Since 2003 all ministries are required to develop and submit business plans on an annual basis. It is also envisaged to introduce performance contracts for the key managers in public institutions. In parallel, the Govemment is changing administrative structures and processes in important ministries (e.g. transport and education) to improve overall organizational effectiveness. These reforms have already yielded some positive results, in particular in the education and transport sectors. The Govemment is also evaluating the feasibility of a comprehensive administrative reform program that is aimed at changing the existing institutional and procedural set-up.
48 See findings of the following report: “Etude sur 1’Etat des Lieux du RCgime Actuel de R6munCration du Personnel de 1’Etat))Vol I& I1Cabinet R conseil Octobre 1998 49 Civil servants rapidly reach the promotion limit, on average after 22 years, whereas a civil service career may last in total 42 years until retirement. -50-
107. Payroll system modernized. A new payroll system has been operational since 2001. The system is managed by the Payroll Directorate of the Ministry of Finance (Direction de la Solde - DGS).” The system integrates the various components ofpayroll management, which were previously split between different institutions. It allows Government to monitor earnings of civil servants, to manage pension benefits, and to make projections of future payment obligations. The present system has, however, three major shortcomings: (i)the database is not comprehensive; neither military (representing 20 percent of the civil service agents) and nor contractual agents paid under the non salary recurrent budget are regi~tered.~~(ii)Regular updates ofthe payroll data, which are done manually, take a long time (about a year) and follow complex administrative proced~res.~~To address these problems, a more advanced version of the system is under preparation. This new system will also enable forecasting ofthe wage bill.
108. Prioritization of human resources needed. During the budget preparation process no systematic review of the staffing allocations of the sector ministries takes place. Staff and payroll estimates are based on the staffing plans prepared by the line ministries in collaboration with the Ministry for the Civil Service. It is unclear how these plans are developed since at the level ofthe sector ministries neither job descriptions nor a breakdown of staff against goals and objectives of the respective ministry or department exist. In a modem civil service ministries and departments would be requested to specify their goals and objectives for every organizational level and to allocate existing staff to identified tasks or objectives. The ministries and departments would also develop job descriptions for every “poste budgktaire”. This information can then serve as the basis for staff and payroll estimates that would be discussed with the MEFB and validated by Cabinet. If certain tasks become obsolete or selected objectives are considered low priority the budget discussions should lead to an adequate staff reduction and to a reallocation of existing staff to high-priority tasks. This would include the transfer to staff to other ministries and departments. Staff that cannot be removed immediately would be earmarked for future reallocation.
Recommendations
o Increasing the number of staff allocated to the periphery. As resources should be realigned with policy priorities Government should increase the number of civil servants allocated to deconcentrated line agencies and facilities. Government should consider introducing mandatory assignments outside the big urban centers over a period of one or two years for all civil servants as an important prerequisite for further career development.
0 Focus on reforming specific Government services. While substantial improvements of efficiency, quality and performance orientation of the public service are important for the successful implementation of Madagascar’s reform program the Government should learn from past failures and experiences in other countries in designing and implementing its reform strategy. These experiences overwhelmingly indicate that comprehensive reforms of the civil service are extremely difficult to implement and sustain - many of these reforms have proven ineffective in other countries. A more promising approach would focus on interventions with high impact. These interventions should ideally target specific public services with a large public-private interface (such as primary education, health centers, customs, land titling and the lower courts). Objective would be to improve service delivery and
j0This system replaced the previous one at INSTAT whose finction was limited to issuing the payroll statements. 51 An additional complication is that the 1999 census of civil servants found 7500 entries which could not be identified. These are not necessary ghost workers; in many cases the respective ministries engaged them without authorization and did not register them with the payroll system. 52 The recruitment of 4500 teachers in 2001, as part ofthe HIPC savings, is a good example - 73 teacher are still missing from the list. -51- produce visible results in the short term. While these reforms cannot substitute a long-term vision for the reform of the civil service they keep the reform program focused on tangible results and, thus establish much needed credibility.
Enforcing accountability. Absenteeism and informal behavior that is not in line with the rules and regulations of the public administration should be systematically sanctioned to improve overall work ethics. To assess public sector performance Government should consider the introduction of citizen report cards that have positively impacted public sector performance in other countries (see box 11.10). Box 11-10 Citizens report cards - a tool to asses public sector performance
To give voice to the recipients of public services and to improve public sector performance citizen report cards were developed by the Public Affairs Centre in Bangalore, India. Citizens are asked to rate service access and quality and to report on corruption and general grievances about public services. Citizens’ report cards have spread to cities in the Philippines, Ukraine, and on a pilot basis, Vietnam. The results have stimulated considerable media, bureaucratic, and political attention and acknowledgement of their contribution to service improvements. Report cards seem to have had a more direct influence on the heads and senior managers of the municipal and utility agencies responsible for services, as in Bangalore. The high visibility ofreport cards in the press and civic forums turns them into league tables of the efficacy of municipal agencies. The reputational competition arising from the report cards is enhanced by joint agency meetings discussing the report cards with attendance by prominent social and political leaders and citizens.
Source: The World Bank o Address civil service salary problems. To address difficulties in attracting qualified staff at technical and managerial levels the Government should consider the introduction of a special scheme for key positions in the administration. These positions would receive a comparatively higher salary than the rest of the civil service. In this context, Government can build on previous reforms which attempted to introduce the concept of “postes clCs” into the public administration. Alternatively, the Government could recruit much needed personnel on a contractual basis without integrating them into the civil service. Under this model positions would be filled on a term and not on a permanent basis. This would increase the flexibility ofGovemment to adjust staffing in accordance to policy priorities. It will be important to carefully evaluate these options and determine their macro-economic implications. As an interim step Government should begin to decompress the existing salary scale in favour ofhigher level technical and managerial positions in the civil service.
0 Strengthening estublishment control. Government should ensure that all public sector employees are integrated into the payroll system; the widespread practice of hiring of public sector employees without approval by the Ministry of Finance and registration under the payroll system should be discontinued. The payroll system should be subjected to regular reviews - to this end Govemment should randomly verify the payroll data in line ministries on a regular basis. Sufficient resources should be set aside for these controls.
0 Subject human resources to budgetary priorities. Line ministries should be required to prepare and regularly update recruitment and staffing plans as part of the budget preparation and execution process. These plans should be subjected to Govemment priorities in separate manpower hearings with the MEFB and the Ministry ofCivil Service. The final staffing plans should be submitted to Cabinet by MEFB with a substantiation that the allocation of human resources is in line with the goals and objectives ofthe Government. -52-
111. USE OF RESOURCES IN THE EDUCATION SECTOR
109. This chapter will analyze the use of public resources in the education sector. It will give an overview on key policy issues and assess Madagascar’s past expenditure performance in the education sector. Additionally, it will focus on budget management issues, the organization of the sector and community participation in service delivery.
1) KEY POLICY ISSUES
110. To assure that the entire population has access to quality education and to eliminate the negative effects of the political crisis of 2001-2002, the new Government committed itself to the “Education For All (EFA)” initiatives3and formulated a new strategy to reform the education system.54 This strategy is supported by the international community which has pledged to help Government reach its education goals. As a first step, the Government has put in place a set of policies such as the elimination of school fees in primary schools at the beginning of the school year 2002-2003. This change in policy, along side with the distribution of textbooks and school kits to students and teached5, resulted in a dramatic increase in enrollment.
111. This large increase in enrollment, however, does not assure that the country can attain the EFA goal of a 100 percent primary completion rate. The education authorities need to make sure that those children that are still out of school enroll, and that those already enrolled complete the five years ofprimary. This will present many challenges to policymakers which are summarized below:
0 Coverage, access for poor and in remote areas. Madagascar has a large network of schools. Today, there are about 19,000 primary schools, more than 80 percent of which are public. These schools serve a population of about 3 million children. In remote areas many communities have created (built and financed) their primary schools, and are paying for the community teacher (FRAM teachers). Most of the out-of-school primary-age children come from the poorest families, and live in rural isolated communities.
o Enrolment and survival. Enrolment in primary education and new intakes in first grade have significantly increased during the past two years (see table 111.1). Administrative data from the Ministry of Education and Scientific Research (MENRS) shows, however, that out of 100 children who start primary school less than half completed their five years of primary in 2003/2004. Assuming that only 82 percent56of children in school age enroll in school it can be concluded that only about 35 percent complete the five years cycle ofprimary in 2003/2004.
53 Principal focus of EFA is primary education. Goal is to attain a 100 percent primary school completion rate by the year 2015. 54 See Annex 9 for a description ofthe education sector. 5s Effort that received the financial support of the World Bank project CRESED 11. 56 Based on the EPM 2001. The proportion of 15 to 19 year olds that never went to school. -53-
Table 111-1: Number of new entrants in primary school
Number of new Gross Intake Rate* Net Enrollment Percentage of children of Year entrants (in %) Rate**@ %) 6 years old enrolled 0 0/2 0 0 1 422,752 102 67 61 01/2002 577,83 1 136 70 66 0212003 778,041 178 82 80 0312004 886,513 198 97 94 Source: MINESEB 2000.2001.2002.2003.,.,, 2004. Statistical vearbook *Total number of new entrants in first grade ofprimary education, regardless of age, expressed as a percentage of the population at the oficial primary school-entrance age (6 years) **Calculation is based on the demographic projection of the 1993 population census and the school data survey. a Efficiency and cost-effectiveness. Efficiency remains a key problem of the education system (see table 111.2). Of those who complete primary education, around 66 percent5’ repeated at least a grade and only few of them will continue to junior secondary education (44 percent). Cost-effectiveness is low: To produce a 5th grader the Malagasy education system spends 2.7 times more than in a system without dropouts or repeated8. Comparable African countries, with a similar public budget allocation to education (in terms ofpercent of GDP) perform better at all levels of education.
Table 111-2: Survival Rate and Gross Intake Rate in last grade of primary in selected Sub-Saharan African Countries PUBLIC SURVIVAL GROSS INTAKE RATE EXPENDITURE GDP RATETO IN LAST GRADE OF ON EDUCATION per Capita GRADE 5 PRIMARY AS PERCENTAGE OF GDP (US%) Year IN% Year in % Guinea 1.9 415 199912000 84 199912000 33 Zambia 1.9 361 200012001 77 200112002 60 Chad 2.0 240 20001200 1 45 200 112002 27 Niger 2.3 190 20001200 1 7 1 200 112002 21 Madagascar 2.6 268 2000/2001 34 2001/2002 36 Gambia 2.7 257 1998/1999 70 199912000 53 Rwanda 2.8 295 200012001 40 200112002 36 Mali 2.8 32 1 200012001 84 200112002 31 Cameroon 3.2 699 199811999 81 2001/2002 56 Senegal 3.2 629 200012001 68 200112002 48 Benin 3.3 443 199912000 84 200112002 46 Source : World Bank /SIMA - UNESCO/Education Database
a Regional disparities. Average enrollment and survival rates also vary significantly across regions and levels of income. In 2001, enrollment rates in primary education in Antananarivo were almost twice as high as enrollment rates in Toliara, where the rate was below 40 percent (see table 111.3) More striking was the difference between rural and urban areas5’. While enrollment rates in urban areas were above 70 percent in all provinces, enrollment rates in rural areas were lower than 50 percent.
*’MENRS 2004, Statistical yearbook 58 The Ministry of Education is in the process of finalizing a study on monitoring student learning achievements. The study will also provide information on how budgetary resources affect the learning level ofthe students. 59 EPM 2001 -54-
Given that the majority ofthe poor live in rural areas, this pattern shows an unequal distribution of the benefits of primary school.
Table 111-3: Net enrollment across Faritany 2001 [in %]
Antananarivo Fianarantsoa Toamasina Mahajanga Toliara Antsiranana Avg 2000-2001 Pre- 12 primary 28 6 10 7 12 4 Primary 77 63 62 51 38 64 60 CollBge 22 8 7 10 7 7 11 High 3 Sciool 10 2 2 1 1 1 Source: EPM 2001
0 Equity. There are also large income variations in primary and, in particular, secondary enrollment. Even in a period of economic growth, between the years 1999 and 200 1, the distribution of benefits from education became more unequal. During that period, the enrollment rates of children belonging to the poorest levels of the income distribution decreased while the rates of children belonging to the highest levels increased (see chart 111.1 below).
Chart 111-1: Net Enrollment across quintiles in rural areas - 1999 -2001
Rimary net enrollment: rural areas Secondary net enrollment: rurd areas
90.0 , 35.0 7 80.0 30.0 70.0 60.0 25.0 50.0 20.0 40.0 15.0 30.0 20.0 x1 .O 10.0 5.0 0.0 0.0
Source :Romani, 2003 - EPM 1999-2001
2) TRENDSIN EDUCATIONEXPENDITURES
112. Trends in public sector resource allocation. The Malagasy policymakers have increasingly focused on improving access to primary education. This new emphasis has been reflected in higher budget allocations to the education sector, which have significantly increased in the past years. Over the 1997-2004 period, allocations to the education sector improved by an average annual rate of 23 percent, compared to an average annual increase of 14 percent for the non-interest expenditure envelope. The negative growth in 2003 was due to a decrease in the budget allocated to tertiary education and research -55-
- the budget allocated to primary education increased by 12 percent in the same year. The temporary cut in allocation was more than compensated by a 40 percent allocation growth rate of the sector for 2004. While in 1997 the share of the budget allocated to education was about 2 percent of GDP, the allocation increased to nearly 4 percent of GDP in 2004 (see table 111.4).
Table 111-4: Madagascar- Education Sector: Central Government allocation and expenditure and private sector spending (selected years between 1997 and 2004)60
Per Avp (in %) 1997- 2003- 1997 1999 2001 2002 2003 2004 2002 2004
Central Government Budget Allocation Total budget allocation (MGF bill) 341.6 573.9 865.3 1060.8 1004.0 1407.0 679.7 1205.5 Total allocation (% of GDP) 1.9 2.5 2.9 3.5 3.0 3.6 2.7 3.3 Total allocation (% of total budget) 10.5 11.7 12.5 14.4 15.2 18.4 12.4 16.8 Annual growth in total allocation 20.2 14.0 22.6 -5.3 40.1 25.8 17.4 Allocation to Primary (% of total education budget) 20.3 27.5 18.6 35.5 42.0 33.3 25.4 37.7
Expenditure Total expenditures (MGF bill) 355.1 645.0 676.2 673.8 973.9 5 78.6 973.9 Total expenditures (% of GDP) 2.0 2.8 2.3 2.2 2.9 2.3 2.9 Total expenditures (% of total budget) 103.9 112.4 78.2 63.5 97.0 90.6 97.0
Private Sector Private spending (in billion FMG) 415.0 Private mending (% of GDP) 1.4 Memo Real Growth in total allocation 4.8 4.8 -7.5 15.6 12.9 2.9 14.3 Real allocation 341.6 504.3 656.6 708.6 68 1.4 545.4 681.4 Real expenditure 355.1 566.8 513.2 450.1 660.9 475.8 660.9 Source: MEFB, EPM 2001, IMF estimate
6o The total allocated budget and actual expenditures for education in this table differ from to those shown in the public finance chapter. Data in this table refers to education expenditures in the whole budget under the functional classification, and hence include education related expenditures made by ministries other than MINSEB and MESRES. Table 111.5 includes only budgetary allocation to MINESEB and MESRES. 56
113. This allocation is much closer to the Sub-Saharan Afixa average which was around 3 percent ofGDP in 2000. However, countries that have less GDP per capita than Madagascar were spending more on their education sector (see chart 111.2). The higher budget allocation to the education sector in Madagascar is mostly attributed to higher allocations for primary education. These allocations increased from 20 percent of the total education budget in 1997 to 33 percent in 2004. Overall, these figures underpin the increasing priority the Government has attached to the sector - notably to primary education.
Chart 111-2: Public expenditure in education as percentage of GDP 2000 - selected Sub-Saharan African Countries -
Ethiopia (123) Togo (320) Ghana (428) Malaw i ( 157) Comros (433)
h Burundi (143) +am .-P Benin (442) m 0 Mali (321) ij P FW anda (294) n Gambia 0 (256) E. Eritrea (149)
+aF Madagascar (267) E a Uganda (359) 0 0 Niger ( 189) Guinea-Bissau (140) Chad (240) Zambia (360) Central Phfrican Republic (273) Guinea (415)
0 1 2 3 4 5 6
Source: Madagascar MENRS; Statistical yearbook 2001/2002-2002/2003; UNESCO Note: For the selected countries, the GDPper capita is less than US$500.
114. Trends in private spending. Private expenditure in education is an important source of financing for the sector. In 2001, spending by private households represented about MGF 415 billion, or close to 1.4 percent of GDP.61Nearly half ofthese expenditures were spent on primary education.
3) BUDGETMANAGEMENT ISSUES
115. A larger education budget, however, does not necessarily improve access to primary education to the poor. Several problems negatively impact the increase of budgetary resources and the pro-poor distribution ofthe budget:
Calculation based on the EPM 200 1. -57-
116. Higher primary education budget absorbed by increase in student enrolment. Despite strong government efforts to allocate more resources to primary education (from MGF 159 billion to MGF 332 billion), expenditures per student (as a percentage of GDP per capita) remained at the 2000 level (see table III.S).This is due to the fact that student enrolments increased considerably as a result of the elimination of the school fees. Budget allocations to secondary education also increased by 74 percent for the same period to MGF 169 billion. Expenditure per student for secondary education augmented by 5 1 percent suggesting that students in secondary education benefited by the increase ofpublic resources, despite the drop in the share of resources allocated to secondary education.
Table 111-5: Primary and secondary expenditures in 2000 and 2003 Growth 2000 2003 2000/03 (in %) Expenditure to Primarv and Secondarv Primary (billions MGF) 159 332 109 Secondary (billions MGF) 97 169 74 Primary (in % oftotal budget to primary & secondary) 62 66 6 Secondary (in % of total budget to primary & secondary) 38 34 -10
Expenditure per Student to urimarv and Secondarv Total expenditure per primary (in MGF) 265,811 312,967 18 Total expenditure per secondary (in MGF) 316,422 478,430 51
Percentage of GDP per capita to primary and secondary Primary 15 15 Secondary 28 46 64
117. Poor performance at primary school level. Repetition rates at primary school level in Madagascar have been around 30 percent in the last years; one ofthe highest rates in Sub-Saharan Africa (see chart 111.3). On average children 8 to 15 years old repeat a year in primary 1.3 times - only 4 percent of children report no class repetition and 25 percent repeat two or more times during primary school. The Government has taken steps to address this problem. A new policy will automatically promote children inside the three primary school sub-cycles62. It will be important to closely monitor the impact ofthese changes.
Primary school is composed by three sub-cycles: the preparatory courses or first two years of primary, the elementary course or third year, and the middle courses or last two years ofprimary. -58-
Chart 111-3: Repetition Rates for selected countries in Sub-Saharan Africa in 2001/2002
(in %)
40 35 30 25 20 15 10 5 0
Source: Madagascar MENRS 2004, Statistical yearbook;. UNESCO Note: For the selected countries, the GDPper capita is less than US$400
118. Inadequate allocations for non salary recurrent expenditures. Over the period 1997- 2004 salaries represented the largest share, on average 67 percent, of the allocations for primary education (see table 111.6 below).63 The budget for utilities in the education sector over the same period is very low - it represented less than 1 percent of the total recurrent budget in 2004. The budget allocated for goods and services is equally small ranging from 5.4 to 13.3 percent of the total primary education budget between 1997 and 2004.64 The drop of spending on goods and services from 7.5 percent in 2003 to 5.4 percent in 2004 is due to the introduction of a special cash transfer to the schools in 2004. On the whole, the indicators suggest that resources for maintenance are not adequate, which explains the poor conditions in many schools.
63 This analysis is based on budgetary allocations after 2001. Only after this year it was possible to classify teaching expenditure as expenditure to the schools and not to the CISCOs. 64 Total resources for maintenance are higher as communes also finance these costs with own resources. In addition, the funds of the “caisses ecoles” can be used to cover maintenance costs. -59-
Table 111-6: Budget allocation to primary education (selected years between 1997-2004) (in % oftotal primary education budget)
TOTAL 100 100 100 100 100 100 100
Current Expenditures 71.4 73.2 67.0 67.8 83.9 71.5 76.0 Salary 59.7 59.8 47.8 52.2 68.3 52.2 66.8 Goods and Services 7.9 9.8 13.3 8.8 7.5 5.4 8.5 Utilities 0.7 1.1 0.6 0.4 0.5 0.0 0.2 Transfer 3.2 2.5 5.3 6.4 7.6 13.1 0.5
Capital expenditures 28.6 26.8 33.0 32.2 16.1 28.5 I 24.0 Source: MENRS
119. Inadequate mix of recurrent and capital expenditures. As shown in table 111.6, the average spending, over the 1997-2004 period, on capital investment for primary education is around 24 percent of the total primary education budget while recurrent expenditures amount to 76 percent of the total budget. Over the next years, an increase in recurrent spending will be necessary to (i)ensure adequate teacher training and recruitment for achieving EFA by 2015, (ii) finance and reinforce FRAM teacher salaries, and (iii)to improve district, ZAP and school service delivery. Given these needs, Government may wish to increase recurrent expenditures, either by allocating more funds to the sector or by prioritizing recurrent over capital expenditure.
120. Administrative overhead too high. The total administrative recurrent expenditures decreased significantly from 61 percent in 1997 to 35 percent in 2003. Government’s expenditure on administration, however, remain relatively high (see table 111.7). Key reason is the relatively high number of staff, in particular at the central level, that results in a ratio of about 1 administrative staff to 10 teachers (see annex 10 - table 10.1). In addition, the proportion of the salary budget allocated to administrative staff at the central level (20 percent in 2003, see table 111-7) compared to allocations for teachers (65 percent in 2003) seems to be disproportionately large. Allocations of non salary expenditures are also in favor of central administration (36 percent in 2003) compared to primary and secondary schools (29 percent in 2003). The share of non salary expenditures allocated to primary schools increased after Government’s decision to provide direct school grants. Transfers to others institutions (private and public institutions, teachers training institutions) are relatively important and represent more than one third of the non salary recurrent expenditures. The Govemment intends to address the problem of relatively high administrative overheads by developing a human resources reform plan. -60-
Table 111-7: Allocation of recurrent budget expenditures to administration, primary and secondary schools and transfers selected years between 1997-2003 ( in percent) 1997 2001 2003 Non salary ‘on salary Non salary recurrent ecurrent recurrent Salary expenditures Total Salary yenditures Total Salary expenditures Total
TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Administration 62.1 55.5 61.2 62.6 73.1 65.1 34.5 36.2 34.8 Central 12.2 33.5 15.3 13.0 24.2 15.6 20.4 21.4 20.5 DIRESEB 3.7 11.8 4.9 4.2 9.8 5.5 5.8 9.2 6.3 CISCO 46.1 10.2 41.0 45.5 39.1 44.0 8.4 5.6 7.9 Primary schools 25.1 9.2 22.8 24.8 14.7 22.4 44.0 25.2 40.9 Secondary school! 12.5 7.1 11.7 12.4 4.0 10.4 21.3 3.4 18.4 Transfers 0.3 28.2 4.3 0.2 8.3 2.1 0.2 35.1 5.9 Source: ME1‘B
121. Budget planning lacks realistic estimates. Until 2003 budget planning in the Education Ministry was based on the allocations for previous budget years. In 2004, the Government introduced program budgets for all ministries including education. For the education sector, budget preparation is based on cost estimates ofthe PRSP education business plan and the “EFA” plan. Although the Ministry of Education is the most advanced in terms of program costing compared to other ministries, both documents are not well harmonized and lack prioritisation of policy actions in line with realistic cost estimates. At the district level no clear guidelines exist to determine within-district allocations; qualitative evidence fiom the year 2003 PET study suggests that planning criteria (e.g. regarding the distribution of supplies to schools) are not consistent and differ quite strongly between district^.^^
122. Poor performance in investment expenditures. The chart 111.4 shows that during the 1997-1999 period the education budget was fully implemented reaching an average execution rate of more than 100 percent. Between 2000 and 2002 the execution rate declined significantly with an average annual rate of 60 percent. This is mainly attributed to the low performance of the investment expenditures which achieved only a 50 percent execution rate. The year 2003 saw a substantial improvement in the total execution rate for the budget of the education sector, which reached 97 percent execution rate, and was well above the execution rate for the national budget (88 percent).
65 See annex 10, table 10.2 -61-
Chart 111-4: Madagascar - Execution rate of the Education budget 1997-2003 (in percent)
160
140
120
100
80
60
40
20
0 I 1997 1998 1999 2000 2001 2002 2003 I --t Exec rate of total educ exp -c- Exec rate of current exp Exec rate of capital exp Source :MEFB
123. Madagascar’s investment budget in the education sector is financed by a variety of sources, including general revenues and external loans. External resources represents about 70 percent of the education investment budget. The chart 111.5 shows that execution of external and internal resources decreased during the 2000-2002 period. The decrease of the education investment budget execution was mainly due to poor external resources execution; internal resources execution depends mostly on external resources disbursement. While investments funded by own revenues attained a high execution rate, the execution rate of external assistance was low (7 percent in 2000 and 6 percent in 2001). Several factors contributed to the low execution of the externally funded investment budget: (i)poor procurement and management capacity in the ministry of education, (ii)poor capacity in planning the investment budget (iii) complicated management and disbursement procedures regarding donor funded projects, and (iv) weak coordination between MENRS and MEFB in preparing the investment budget. The situation improved significantly in 2003 with an increase of the execution rate of the externally funded investment budget by 152 percent 66
66 The execution rate is largely over 100% because disbursement was greater than the allocated amount. -62-
Chart 111-5: Execution rate of investment expenditures per source of funding 1997-2003 (in Dercent) I
+-Total investment -Internal resources External resources Source :MEFB
124. Regressive distribution of public resources. Public expenditure in primary education benefit the richer households proportionally more than the poorer ones. A 2001 benefit incidence analysis of public expenditures to primary, college, and high schools in the year 2001 confirms this trend, which constitutes a strong contradiction to Government’s objectives to improve access of the poor to primary education6’. As shown in chart 3.4 children belonging to the poorest 20 percent of households receive less than 20 percent of public expenditures. Similarly, children living in the poorest 40 percent of households also receive less than 40 percent of the expenditures (see table 111.8 and chart 111.6).
67 EPM 2001 63
Table 111-8: Percentage of total public expenditure on primary and secondary school across income quintiles
Income Quintiles
I I1 I11 IV V Elementary 14.0 17.8 22.1 30.6 18.5 College 2.6 7.1 14.2 29.8 48.3 High School 0.3 1.6 2.9 19.8 78.0 Source: MEFB. EPM 2001
Chart 111-6: Benefit incidence of public expenditure in education 2001
1 .oo
0.80
0.60
0.40
0.20
0.00 0.00 0.20 0.40 0.60 0.80 1.00
+EPP +CEG t-Lycee 45 degree line
Source: Calculations based on expenditure data from the MEFB and income quintile from the EPM 2001 - EPP: Primary Public School - CEG : Public lower secondary school - Lycke : Public upper secondary school
125. The regressive distribution is largely due to the unequal distribution of Government financed teachers (as opposed to those teachers financed directly by local communities) across the country. The table 111.9 below shows the distribution of primary teachers paid by Government across four zones for the school year 2002-03 and 2003-04. The zone classification is based on the accessibility and the remoteness ofthe areas. The data underlines Government’s difficulties to hire and maintain teacher in remote areas. Publicly paid teachers are much less allocated to zones 2 and 3 where access is difficult. To address this problem, Government recruited under the HIPC program 3,427 teachers on a contractual basis in 2001 for public primary schools. Most of them (82 percent) were assigned to remote areas. In addition, new financial incentives have been implemented for teachers to serve in rural public primary schools.68 Overall, the studentlpublic teacher ratio remained high with 57 and 59 in remote areas (zone 2 and 3) in 2003-2004. This is mainly due to strong increase in student enrollment in both zones between the school years 2002- 03 and 2003-04.
In early 2003, MENRS revised the rates of hardship allowances on the basis of4 zones. In addition, for the first year (2004) ofthe EFA plan implementation, the construction of 110 houses for teachers in remote areas is under way. -64-
Table 111-9: Distribution of primary teachers across zones 2002/03 and 2003/04l
2002-2003
Parents Ratio of Number Publicly Ratio of association pupils to of paid pupils to paid all ZONE’ students teachers teachers teachers teachers 0 140,760 3,360 42 164 39.9 1 628,737 11,013 57 1,838 48.9 2 228,287 9,570 24 2,015 19.7 3 876,559 14,567 60 3,090 49.6 TOTAL 2,274,443 38,509 59 7,107 49.9
2002-2003
Parents Ratio of Number Publicly Ratio of association pupils to of paid pupils to paid all ZONE’ students teachers teachers teachers teachers 0 128,909 2,612 49 137 46.9 1 588,455 11,291 52 2,519 42.6 2 707,569 12,500 57 3,338 44.7 3 1,143,778 19,476 59 6,191 44.6 TOTAL 2,568,711 45,879 56 12,185 44.2
126. Other distributional issues in education. Two additional distribution issues are on Government’s agenda:
First, Madagascar is seeking to arrive at an acceptable formula to channel budget allocations to education districts (CISCOs) throughout the country. At present allocations are based on the previous year’s budget only. It would be desirable to allocate on the basis ofneed, as determined by the number of students or the conditions of the school infrastructure. In addition, there are concerns about the distribution of resources to the various schools within a CISCO district. It seems that the poorest Fivondronanas in each Faritany receive fewer resources than the richer ones (see annex 10, table 10.3). The development of more objective criteria for the allocation of funds by the CISCOs would ensure that all Fivondronanas in each Faritany receive adequate funding.
0 Second, public and private schools in rural areas receive the same per student subsidy regardless of whether or not they offer services to the poor. The new policy to waive school fees was extended to all private schools in rural areas which now receive a direct subsidy from the Government to cover the cost of all student fees. The basic assumption was that many private schools offer services to poor people, and that some of these schools are in isolated areas where no other schools are present. At the moment, there is no data available to assess enrollment ofthe poor in these schools after the fees were waived. Government should verify the initial assumption to ensure that resources reach predominantly the poor. -65-
4) SECTOR ORGANIZATION
127. Even if policymakers are committed to make education services “work for the poor” their success will depend on how effective their commitment is “passed-on” to service providers. The Government has made significant efforts to strengthen the institutional framework for the delivery of services and to clarify the various roles and responsibilities. Following a series of institutional reforms that started in 1995, the education ministry is today the most deconcentrated Government service in Madagascar. More than 60 percent of the ministry’s resources are allocated to deconcentrated line agencies and facilities. There are three levels of deconcentration of the education ministry - the provincial administration (DIRESEBs), CISCOs at the district level, and Administrative and Pedagogical Zones (ZAPs) at the commune level (see annex 9 for more details).
128. No clear division of responsibilities between the policymaker and provider functions. According to the institutional framework set up by the Government, the CISCOs at the district level are mainly in charge of the provision of primary education services. The main functions of the central level - the ministry of Education including deconcentrated services at the provincial level (DIRESEBs) - is to regulate, supervise, and design policies for the sector. In the past, however, the central level retained major delivery hnctions: it directly managed teachers and controlled all investments for the schools. CISCOs had little leverage to influence school performance. Since 2003, the Ministry of Education has began to strengthen the roles and responsibilities of the CISCOs: 3,500 teacher positions were created and distributed by the CISCO according to school needs. A new statistical system was. put in place to improve the distribution of administrative positions among CICSOs and the development of teacher recruitment criteria for CISCOs. Finally, CISCOs have played an important role in the planning and construction of schools in the context ofthe EFA strategy implementation.
129. The division ofresponsibilities across levels in the ministry or between different public agencies outside the ministry, however, continues to be flawed. The division of responsibilities between CISCOs, FAFs (community-government organisations), and communes regarding non- recurrent expenditures at the school level remains unclear. While ZAPs carry out important functions on behalf of the CISCO their formal responsibilities are not clearly defined. The CISCOs are in charge of managing the non-recurrent schools budget, which includes resources for operations and maintenance; in parallel the communes are in charge of school maintenance. The FAFs add to the confusion as they also manage a small school budget for maintenance.
130. CISCO performance has improved. In the past budget execution rates of the CISCOs have been below the rates of the central ministry and of the DIRESEBs (see table 111.10). Between 1997 and 2001 the average execution rate of the CISCO’S was about 85 percent in comparison to the MENRS which reached an average execution rate of 92 percent over the same period. The low rates at the CISCO-level reflected capacity problems of the district administrations to adequately perform theirs functions. To address performance problems of the CISCOs the Government launched (in 2003) measures to improve capacity of the district level staff such as: (i)under-performing directors of CISCOs were replaced; (ii)new equipment (including computers, and transportation equipment) was distributed to the districts; and (iii) training in public finance and procurement aimed at strengthening efficiency and accountability at the CISCO level has been provided. As a consequence, the execution performance across all administrative levels improved significantly in 2003 reaching an overall execution rate of non salary recurrent expenditures ofnearly 100 percent. The slightly lower execution performance of -66- the CISCOs in 2003 (around 91 percent) is mainly due to (i)ongoing organisational changes, and (ii)complex budget execution procedures that challenge the existing capacity at the district level.
Table 111-10: Execution rates (in percent) of non salary recurrent expenditures by education level (selected years between 1997-2003) Avg 1997- 1997 1999 2001 2002 2003 2001
TOTAL 93 96 90 60 97 90
MENRS 93 96 76 53 98 92 DIRESEB 94 97 96 45 98 90
CISCO 78 94 95 52 91 85 High School (Lycee) 95 95 94 52 93 89 Middle School (CEG) 93 95 98 54 93 89 Primary School (EPP) 97 97 100 55 93 91 Pre-school (EN1) 92 79 90 60 87 83 Transfers* 98 99 94 84 100 97 Source :MEFB * Transfers are managed by Central Ministry
13 1. Direct resource leakages. Three expenditure tracking surveys confirmed that resources do not always arrive at the intended re~ipient.~’Almost 75 percent of the schools reported that they had not received equipment and funds that were allegedly sent to them by the CISCOs. The average gap between expenditures reported by the CISCO and those received by the schools amounts to 16 percent7’. The 2003 survey found leakages of in-kind transfers in 55 percent of the schools.71 These rates, however, differed largely between the provinces (up to 87 percent and 77 percent ofschools with leakages in Fianarantsoa and Toliara and no leakages at all in the province of Toamasina).
132. Theproblem of overpricing. There is evidence that the CISCOs pay more for supplies than the market price. The 2003 survey found that for school supplies such as pens, notebooks, and glue the CISCOs paid 20 percent, 37 percent, and 82 percent more than the market price. Similarly, another study72found large price gaps in the invoices paid by MINESEB for certain articles. The gap came on average to about 50 percent. In the case of technical material and equipment, which was mostly procured at the central level the gap increased to about 100 percent.
69 The first two were carried out in 1999 and 2001 by the National Statistics Institute INSTAThfADIO, with financial and technical support of the EU (INSTATProject Madio 2003). The third one was commissioned by the World Bank in May 2003. The INSTAT/MADIO survey covered 143 schools and 24 ofthe 11 1 school districts. The Bank’s tracking survey covered 185 schools and 24 districts 70 Five percent of the schools surveyed reported receiving only a quarter of the amounts reported by the CISCO. 71 These discrepancies included both differences in the number and type of supply reported, i.e. in 28 percent of the schools the amount reported by the school and the CISCO is different, in the rest of the schools the reported material was different. 72 INSTAThfADIO, 1999,2001 -67-
133. The problem of bureaucracy and oversight. CISCOs are subjected to complex and bureaucratic accounting and procurement proced~res.~~These requirements reduce the time available for the district’s core functions: technical supervision and planning. Downward financial accountability from the CISCO to the facility is almost non-existent. The head of the CISCO handles almost all procurement and financial management issues of the school’s non- salary recurrent expenditure. School facility staff have no oversight over appropriate prices and payment procedures used by the CISCO.
134. Management information not readily available. Every year MINESEB collects standard information on all primary schools (both public and private), teachers and students in the country. This information is vital to monitor the performance ofthe schools and ofthe education system in general. It allows policymakers to assess progress in reaching the education sector goals, and it provides necessary information to design or adjust education policies. Important data on schools and teachers, however, are not collected; in particular data on teacher absenteeism. In addition, data is not produced in a timely manner to feed into policy decisions The budget 2004, for instance, was based on data from the 2001-2002 school years - information about the large increase in enrolment was missing. This resulted in insufficient allocations ofbudgetary resources for teachers and classrooms that were needed to accommodate this new influx of students.
135. Private schools perform better than public schools. The public sector is the major provider of primary education in Madagascar. Around 77 percent ofthe schools were managed by the public sector with around 80 percent of the students in the school year 2002-2003. The majority ofthe private schools are run by religious group^.'^ Some indicators suggest that private primary schools are better managed than public ones. As shown in table 111.1 1 below, private schools have a lower studendteacher ratio (on average 34) than public ones (on average 55) during the last four school years 2000/01 to 2003/2004. Similarly, repetition rates in private schools are lower than in public schools. In the present school year 2003-2004, the percentage of repeaters in public primary schools was close to 33 percent while that ofprivate schools was only 16 percent.75 A household survey is currently under way to help identify the main factors of student performance in public and private schools.
Table 111-11: Studentkeacher ratio in primary school across years
2000101 2001102 2002103 200312004* Public Private Total Public Private Total Public Private Total Public Private Total 53 32 47 52 35 47 59 35 52 56 36 50 Source: MERS 2004. Report FER ‘These results are based on data from 106 CISCOs out of 11 1.
73 See for more information annex 9 74 See annex 10, table 10.4 75 Data from MINESEB. 2004. FER survey report. Performance differences between public and private schools could be explained by the different income levels of students - students from high income families mainly attend private schools. These schools could therefore benefit from private contributions and stronger involvement ofparents in the management ofthe schools. -68-
5) COMMUNITY PARTICIPATION
136. International experience indicates that effective involvement of communities or parental associations (FRAM) can improve the delivery of education services. The FRAMs have been operational for a number of years and have played an important role in the schools in Madagascar. One of their most important activities is the hiring of (non civil service) teachers. The FRAMs also pay the salary of these additional teachers (or supplement CISCOs’ payments), procure supplies to the schools, organize maintenance work, provide food to students and accommodation for teachers. All these activities are mostly financed through parental contributions to the FRAM.
137. In 2002, the Government decided to directly transfer school resources to newly created community-Government organization (FAFs). These organizations were supposed to bring together the parents, the headmaster ofthe school, teachers, students, and community authorities. It was assumed that the transfer of management responsibilities to the FAFs would improve the delivery of services. In practice, the majority of the FAFs lack community and student participation. A brief survey76also found that the quality of the FAF dialogue remains poor - in only 5 out of 20 schools which were interviewed the parents were well informed of the decisions taken by the FAFs. In contrast, the FRAMs’ decisions are taken in open meetings and thus are perceived to be more transparent.
138. In the last two years the number of teachers hired by the FRAMs increased rapidly, mainly because Government recruitment was not able to keep up with rising student enrolment ratesa7’Although these teachers made it possible for the schools to absorb the significant influx of new students their existence raises a number of questions concerning quality and relationship with the civil service teachers. The FRAM teachers have a different set of incentives than those paid by the line ministry. A recent budget tracking survey7* found that the salaries of FR4M teachers are below the minimum wage (US$ 22 per month for 7 months, compared to about US$60-70 for a public-budget paid teacher for 12 months). In addition, they do not receive benefits such as health insurance or any other social or pension scheme. FRAM teachers are often from the area where the school is located; consequently they are more likely to stay on the job. Experience indicates that one of the major advantages of FRAM teachers is less absenteeism. As they are hired and paid by the FRAMs they are also directly accountable to them.
6) RECOMMENDATIONS
139. Over the last years the Government has significantly invested in improving access to education services to the poor. The Government’s commitment is reflected in higher budget allocations to education (from 2 percent of GDP in 1997 to nearly 4 percent of GDP in 2004); these additional resources focused primarily on primary education. Positive results include the considerable increase of enrollment in primary schools over the past two years. To further improve the use ofpublic resources reforms should focus on the following key areas:
a Availability of management information should be improved. While the ministry collects standard information about the performance of the school system in the country this data is not produced in a timely manner to feed into policy decisions. Budget preparation is typically
76Lesrelations entre le FRAM, le FAF et l’kcole, Josiane Rarivoarivelomanana, Florence Miauton - 2004 77 See annex 10 - table 10.5 ’*Francken, 2003 -69- based on outdated information, which poses significant problems in adequately determining budgetary needs.
Review allocation of resources. Despite the increases in allocations to primary education, the per student allocations remained almost unchanged between 2000 and 2003, with 15 percent of the per capita GDP. This is due to the significant increase in enrolments over the same period. The per capita allocations will need to be improved to meet the targets ofthe EFA initiative. o Allocations for recurrent non wage related expenditures are insufficient. To improve the conditions ofthe schools a further increase ofallocations for maintenance and utilities should be considered. New investment projects should be only approved if they are financially sustainable (which implies that Government is able to finance medium to long-term cost implications).
Address implementation problems. To address execution problems of externally financed investment projects existing bottlenecks should be clearly established and addressed on the basis of a time-bound action plan. To improve the absorptive capacity of the education administration a comprehensive training and capacity building plan should be developed that focuses predominantly on public financial management. o Strengthen the role and capacity of the CISCOs. Budgetary performance ofthe CISCOs should continue to be systematically strengthened. To further improve efficiency of the CISCOs the remaining management and implementation problems (e.g. leakages of in-kind transfers) will need to be addressed. It will also be important to rethink the distribution of budgetary resources among the districts and communes on the basis ofneeds, as determined by the number of students or the conditions of the school infrastructure.
0 Redistribute the teacher to remote areas. The allocation ofteachers to remote and poor areas should be increased. The poorest districts are those with the largest student/public teacher ratios. While this unequal distribution is to some extent substituted by a significant increase in privately paid teachers the Government should develop a credible strategy to systematically deploy publicly paid teachers to remote and poor areas. First important steps have been taken to establish an incentive system in form of salary bonuses for teacher to work in remote rural areas. This approach should be further developed. Government should also consider to hire new teachers locally and to transfer control over these teachers to the communes or the FRAM system.
Improve management and organizational structure. A clear division of responsibilities across the management levels ofthe education sector is needed as well as a clear division oflabor between the ministry and other agencies involved in the sector. Delivery functions such as the management of teachers and the control of investments should be transferred fkom the central government to the service delivery levels. In this context, the relationship between CISCOs, ZAPS, FRAMs, FAFs and communes should be clarified to ensure an effective service delivery system without duplications, overlaps and inconsistencies.
0 Reinforce effectiveness of community organizations. Government should further capitalize on the existing system of community participation. In Madagascar, the FRAMs (parental associations) play an important (and widely acknowledged) role in school issues. They provide in-kind support for the schools, and are in particularly involved in school maintenance. In some communities these associations hire teachers and pay their salaries. The role ofthe FMs has been challenged by the creation of FAFs (community-Government organization), which manage financial transfers to schools from the central Government (“caisse d’kcole” program). -70-
The creation of the FAFs raises questions about their relationship with the FRAMS; this relationship should be clarified to ensure effective coordination of the support to the schools provided by the various actors. -71-
IV. USE OF RESOURCES IN THE TRANSPORT SECTOR
140. This chapter takes a closer look at the Government’s reform agenda in the transport sector and assesses the adequacy of finding in the sector. To this end, the chapter will provide an overview of the key policy issues and focus on the sector organization and governance. It will review public expenditures and discuss issues in several sub-sectors (road, air and rail transport, as well as maritime transport and port management).
1) KEY POLICY ISSUES
141. In the past, the transport sector was state run. Historically, Madagascar’s transport sector has been dominated by direct state intervention and heavy reliance on parastatals and/or Government agencies to provide services through the 1990s. With the exception of road freight transport, Government had, directly or indirectly, managed and financed railways, aviation, airports, shipping, and ports. As a result, today’s service is poor, operating efficiency is low, safety standards are inappropriate, maintenance has been neglected, and funding for capital investments has been difficult to mobilize”.
142. Government’s reform agenda. In April 2000, the Government adopted a comprehensive transport sector policy and strategy, which seeks to reverse past policies. It aims at: (i)focusing the Government’s role on strategic planning, sector oversight and coordination; (ii) creating jointly controlled public-private and user-financed agencies for sub-sector management and regulatory functions; (iii)divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing local private sector execution capacity; and (v) rehabilitating transport infrastructure to appropriate levels.
143. In implementing its new vision, the Government is facing important challenges which are summarized below:
0 Poor quality services in the road sector. In 2001, the road sector accounted for 90 percent of the domestic volume of traffic. Road density is low with only 0.05 km of roads per square km 8o Over the past 30 years, road quality in Madagascar has deteriorated: the country has lost about 1000 kilometers of roads per year primarily due to poor maintenance. Today, 81 percent of roads are in poor condition. The share ofpaved roads is 11.6 percent, compared to an average of 13 percent for Sub-Saharan Africa, 16 percent for low income countries worldwide, and 53 percent for lower-middle income countries.81The table N.1 below specifies the degree of accessibility of the population of Madagascar. It indicates that, although there are regional variations, on average, only about half ofthe population is accessible by motorized vehicle. Some of the highest poverty rates can be found in areas that have the lowest access to motorized vehicles.
’’ Security standards for air transport, for example, are not conform with intemational standards as recommended by the Intemational Civil Aviation Organisation. This is, however, more than the Sub-Saharan African average of 0.034 km, but far low the average of 0.138 Km for Mediterranean countries. World Bank (2004) World Development indicator. -72-
Table IV-1: Access of population by vehicle type (1999) and poverty rates (1999)
Province Poverty Access by Population. (approx. location) rate motorized vehicle’ Antsiranana (North) 72.6 30 9 Mahajanga (Northwest) 76.0 16 10 Toliara (West & South) 70.7 20 14 Antananarive (Center) 61.7 76 29 Fianarantsoa (Southeast) 81.1 45 20 Toamasina (East) 71.6 80 17 Total 71.3 52 100
Correlation Coefficient -0.47 between poverty rate and access Source: Government of Madagascar and World Bank estimates I Share of population that has access by motorized vehicle.
0 Air transport system in urgent need. Madagascar has 4 controlled airports, 18 airports with flight information services, and 34 simple airports. Domestic traffic came to 500,000 passengers in 2001. International air travel, long haul and regional, came to about 368,000 passengers in 2001, compared to 260,000 in 1997. The increase is largely owned to the development of the tourism sector, but also to foreign investors and took place despite the relatively high travel costs to Madagascar. Most airports require urgent rehabilitation to bring infrastructure to international standards, in particular with regard to safety and security equipment, telecommunications, radio navigation, expansion of terminals and runways, road access improvements.
0 Port services inadequate. Of the country’s 17 ports, only 4 are deep enough to permit unloading from large vessels, while the others require unloading offshore and transport by small boat. Cargo handling technology in the country’s main port, Toamasina, is outdated: the port unloads containers at a rate of 8 per hour compared to a rate of 25 per hour in neighboring Reunion and 30 per hour in neighboring Mauritius. On average, a vessel spends 3 days in Toamasina compared to 8 hours in Mauritius.
0 Mixed picture concerning transportation spending. The Malagasy economy spends relatively more than other poor countries on transportation: the transport sector absorbed 15 percent of GDP in 2001 in Madagascar compared to an average of 6.4 percent of GDP spent by low income countries over the years 1995-2002 (see table IV.2). At the same time, Government spending for the transportation sector in Madagascar is lower than comparative spending in other low income countries (on average, 1.5 percent of GDP in Madagascar during 1997-2003 compared to 5.7 percent of GDP for other low income countries during 1995-2002). This indicates that relative to other countries the private sector is spending more on transportation than the public sector. In Madagascar, since the 1990s, the private sector has owned and operated public transportation in the road and rail sectors, which account for the bulk of the country’s transportation services. -73-
Table IV-2: The Size of the Transport Sector
Public and private sector spending on Public Sector spending on transportation transportation (value added as % of GDP) (as YOof GDP) Madagascar Low Inc. Madagascar Low Inc.
14.7l 6.42 1.22 5.73
Source: MEFB, World Bank ’2001, ’1997-2003, ’1995-2002
Madagascar’s transportation goals ambitious. The PRSP sets transportation as a critical pillar of Government’s strategy to alleviate poverty for the 2003-2006 period. It aims to (i)restructure the Road Maintenance Fund, (ii)disengage Government from the operation of the country’s airports, (iii)turn over the rail system (two lines) to concessionaires, complete rehabilitation and reach full operation (iv) invest heavily in the four major ports. For the road sub-sector, it is envisaged to complete rehabilitation and/or construction of 16,900 km of primary and secondary roads and 8,000 km of rural access roads over the 2003-2006 year period. These objectives should be compared to the average rate of road construction and maintenance over in 2000 and 2001, which was about 500 km per year.
Investment needs enormous. The PRSP assumes for the 2003-2006 period investments of about MGF 7 trillion, or close to US$1 billion (with the exchange rate used in the PRSP). This represents about 45 percent of the total investment needs identified in the PRSP.
2) IMPROVING SECTOR ORGANIZATION AND GOVERNANCE
144. Poor sector organization until 2001. Until 2001 the transport sector had been managed by three separate ministries: Public Works (roads); Regional Planning (urban), and Transport & Meteorology (other infrastructures and services). Each ministry was responsible for the management and regulation of the transport sub-sectors it was governing. Public enterprises were in charge ofthe provision of services. Lack ofcoordination, outdated regulatory frameworks and operating standards as well as minimal involvement of the private sector and civil society resulted in a continuous degradation ofservices.
145. The road maintenance fund (MF). In 1999, Madagascar created a RMF as a response to the poor quality of maintenance of the country’s road network. This first generation RMF was managed by a secretariat and governed by a council (conseil d’orientation) composed of 4 members of road user groups, 3 staff of the ministries, and representatives of local Governments. The sources of funding of the RMF are a tax on oil products (Tuxes sur les Produits Pbroliers, TPP) and fees on petroleum product through road users fees (Redevances des Usagers de la Route, RUR). The budget of the RMF is negotiated annually. Funding has been a key problem, in particular Government transfers to the RMF. In addition, organizational and technical problems (i.e. mismanagement, corruption) continue to hamper the efficiency of the fund. -74-
146. Comprehensive reforms to adjust organizations and governance are under way. They consist of:
Revised roles and responsibilities for the center. To improve efficiency of the public administration, the Government merged the aforementioned three ministries in 2002. The role of the newly created Ministry of Transport and Regional Planning is to design transport sector policies, to plan and coordinate the activities of the transport sector, to make budget allocation and decisions according to national development and poverty alleviation priorities.
Autonomous agencies assume key functions. Under the revised administrative framework, regulatory functions will be managed by parastatal agencies, which are spin-offs from old ministerial departments or composed from existing agencies. Table IV.3 provides an overview about the new public agencies, including the various sources offunding. -75-
Table IV-3: Governance features of new public agencies Name (date of Governance Funding Hiring Descriptionlfeatures
operation) ~
Civil Aviation of Reports to the Aeronautical fees. Staff under private Created in 2000, in charge of Madagascar (ACM) VPM. sector status and implementing Govemment's air [created in 1999; salaries. transport policy, overseeing the Dperational since Board consists of 7 sector, as well as drafting and 2000) members, of which enforcing technical and 3 are from private economic regulations. sector. Recently restructured. Resp. for management of airports, regulation of air transport, and navigation safety. Ongoing functional audit; annual reports for 2001 and 2002 not approved Road Authority Autonomous To be determined Beginning year Used to manage all national (planned creation and agency; (studies in 2005 and provincial roads, local operation 2005) deconcentrated progress). roads at request of offices communities; Functions include planning of maintenance, procurement, management of construction projects. Surface Transport Board: transport To be determined Beginning year Responsibility for vehicle Agency (planned to operators and (studies in 2005 licensing and control, public be presented to the Govemment progress). transport regulations and road Parliament during its safety, oversight of railway present session) concessions. Vehicle control to be contracted out to private sector Port, Maritime and Reports to the Fees on imported To be determined Responsibility to manage ports, River Agency VPM. goods, and (studies in navigation. (AFMP) (created in Board consists of 8 concession fees, progress). 2000; not yet members, of which but not functional operational due to 4 are from the Yet funding problems) administration, and 4, from private sector Road Management User controlled. Road User Competitive Fund (RMF, Board is private Charge; budget process; private 199912003) sector and users' transfers sector salaries representatives Source : World Ba,
Devolution of responsibilities to local authorities. The Government plans to gradually devolve some activities in the areas of road maintenance, airport management, port operation and management to local authorities.
0 Disengaging from productive activities. The Government has already begun to withdraw from certain activities to increase the role of the private sector: Air Madagascar has been put under private sector management on the basis of a management contract; similar contracts are planned for Northern Railway, the main port (Tamatave) and the main airport (Ivato).
P Revising the RMF. Experience in Madagascar has shown that the existence ofa RMF did not solve existing road maintenance problems as the fund is dependent on the allocation of budgetary resources by the Government. The Government intends to set up a second generation RMF. It is envisaged to convert the RMF into an autonomous agency which will be funded -76- mainly by an increase of the road user fees, which are collected by oil companies and transferred directly to the RMF. Despite these intended changes, the sustainability of the RMF resources remains questionable in the long run: as the costs ofroad maintenance are increasing, especially due to inflation, the level ofuser fees will be insufficients2to cover the needs ofmaintenance. The key challenge for the Government will be to find extra resources, especially by collecting heavy vehicle fees. To this end, lessons could be drawn from the experiences in other countries (see below box IV.ly3
Box IV-1 Critical ingredients for a road maintenance fund
1 Road users, stakeholders, and the general public must be well-informed about proposed reforms, and must understand the need for a RMF and dedicated road user charges. 1 All RMF revenue should be derived from user charges related to the benefits gained from road use and access. The revenue will likely come from levies on consumables, mainly fuel; annual vehicles license fees; supplementary heavy vehicle fees; fines for overloading vehicles and international transit fees (where appropriate). 1 Road users and stakeholders should have a strong hand in the RMF and the administration of expenditure from road user charges. A clear separation should be maintained between purchaser and supplier functions, between finding and executing maintenance. The RMF provides finds for road maintenance on a sustained basis; it does not undertake implementation or procurement, although it does set rules for implementation and procurement to ensure that road user funds are efficiently and effectively spent by road agencies on implementation. 1 The RMF must be able to hold road agencies accountable for the funds provided to them. As a consequence, the RMF should have fill legal powers to set responsibilities, establish performance targets, and introduce sound business practices. 1 Full information on the planned and actual expenditure of RMF revenues should be openly and promptly available to the public.
Source: Asian Development Bank (2003) Road Funds and Road Maintenance - an Asian perspective
3) CRITICAL PUBLIC EXPENDITURE ISSUES
147. Higher allocations to the road sector are in line with PRSPpriorities. Table 4.4 below specifies expenditures for the period 1997-2004. It illustrates: (i)a drop in allocation to the transport sector after the 2002 crisis but an increase by 34 percent in 2004, (ii)the high share of transport sector expenditures absorbed by the road sector in 2004; and (iii)the importance of external assistance for the transport sector.
82 It is estimated that user fees ofat least lOUS cents per oil products liter are necessary, whereas the actual collected user fees are now 4 and 7 US cents per liter, respectively for petrol and fuel. 83 See for example: Gwilliam, Kenneth and Ajay Kumar (2002) Road Funds Revisited A Preliminary appraisal of the effectiveness of second generation road funds, World Bank; Heggie Isn G. (1 999) Commerically managed road funds: managing roads like a business, not like a bureaucracy, World Bank; De Richecour, Anne Balcerac and Ian G. Heggie (1 995) African Road Funds. What Works and Why, World Bank. -77-
Table IV-4: Madagascar’s past allocations to the transport sector (selected years between 1997-2004)
1997 1999 2001 2002 2003 2004
TOTAL ALLOCATIONS TO TRANSPORTATION Total VPM budget (MGF bill) 470.7 553.8 1124.0 1206.5 927.4 1126.1 o/w Transport budget allocation (MFG bill) 355.6 366.7 903.3 976.9 716.8 960.3
Total transport allocation (% of GDP) 2.0 1.6 3.0 3.3 2.1 2.4 Total transport allocation (% oftotal budget) 10.9 7.5 13.0 13.2 10.8 12.6
Roads budget allocation (MFG bill) 288.5 294.3 809.4 852.5 627.1 855.5 Roads budget allocation (% of total transport budget) 81.1 80.3 89.6 87.3 87.5 89.1 Real growth in total transport allocation
Recurrent (all sub sectors) as % of transport budget 2.6 2.9 1.1 1.6 3.4 3.3 Salaries 1.2 1.4 0.7 0.8 1.5 1.8 Other 1.4 1.5 0.4 0.8 1.9 1.5
Capital (all sub sectors) as YO of transport budget 97.4 97.1 98.9 97.7 96.6 96.7 Local fin. 20.6 27.7 45.0 37.3 34.2 24.0 Donor 61.5 53.6 45.1 50.5 55.9 67.2 Other 0.0 0.6 0.0 2.5 0.0 0.0
-Memo Total Transport allocation.(% of total to VPM) 75.5 66.2 80.4 81.0 77.3 85.3
Source: Government of Madagascar and World Bank
148. Low budget execution rates. Table IV.5 outlines the gap between budgetary allocations and actual expenditures for the transport sector during the 1997-2003 period. During this period, on average only 71 percent ofthe transport sector budgets were implemented. This is mainly due to low execution rates of the investment budget that deteriorated from an execution rate of96 percent in 1997 to 89 percent in 2003. Some ofthe sub sectors (rail, maritime and ship) only achieved a 44 percent execution rate of their capital budget over the 1997-2003 period. Execution performance ofthe road sub sector, which was very low between 2000 and 2001 with an average execution rate of 56 percent, increased significantly in the year 2003 with an execution rate of 93 percent. Over the period 1997-2001, domestically financed programs performed better than donor financed projects (85 percent versus 74 percent execution rate). In 2003, however, this trend changed: foreign aid programs achieved a higher execution rate (104 percent) than government financed programs (98 percent). -78-
Table IV-5: Madagascar - execution rate of the transport budget (selected years between 1997-2003) Avg. ’ 1997 1999 2001 2002 2003 97-03
TOTAL TRANSPORTATION BUDGET 95.3 91.9 50.8 21.0 89.2 71.4 Recurrent 86.5 102.6 94.3 100.0 94.0 97.8 Salaries 98.2 92.0 95.9 84.6 106.3 114.1 NonSalary 76.5 112.4 91.2 62.0 84.5 84.1 Investment 95.6 91.6 50.3 19.8 89.0 72.9 Domestics 105.1 100.7 55.4 21.8 97.9 78.0 Donors 98.8 96.6 33.3 4.6 104.3 68.2
Road Sub Sector 111.8 97.9 54.5 22.0 92.5 76.1 Recurrent 97.2 89.8 97.3 73.0 108.3 105.0 Salaries 98.4 92.7 97.5 84.6 111.9 129.2 Non Salary 95.4 84.0 96.3 21.9 98.4 83.1 Investment 112.1 98.1 54.2 21.7 92.4 75.9 Domestics 113.3 88.8 72.3 44.5 65.0 81.8 Donors 111.6 103.2 36.2 5.4 109.2 71.6
All other sub sectors (rail, air, ship) 24.3 67.2 19.3 13.7 65.8 48.2 Recurrent 77.5 111.5 92.0 112.9 91.9 94.5 Salaries 98.0 91.0 94.2 84.6 104.8 103.8 NonSalary 66.6 122.5 89.1 64.7 83.6 82.7 Investment 20.0 63 .O 14.7 4.6 57.7 43.8 Domestics 64.5 82.8 22.6 16.1 68.1 62.9 Donors 20.7 69.9 7.3 46.6 49.8
Memo
Total_. exDenditures (% ofGDP) 1.9 1.4 1.5 0.7 1.9 1.5 Source: MEFB. World Bank Average for the available year
149. Despite the improvement in 2003, the low execution rates in the sector are concerning. They point to difficulties in implementing the transport sector programs. Main reasons include poor procurement and management capacity in the Ministry of Transport and Regional Planning as well as complex management and disbursement procedures under the different donor projects. Another problem in this context is the limited absorptive capacity ofthe sector - in particular the private sector faces difficulties in implementing the ambitious Government program.
150. Transport budget information is inconsistent. Budget information derived fkom the official sources are inconsistent: transport expenditure data (allocations and execution, totals and subcomponents) in the official documents from MFEB and from the Auditor General (in particular “Loi de Reglement ”) differ significantly from the information made available by the sector.84.Data reconciliation is also problematic because the Ministry of Transport and Regional
84 An important reason for these discrepancies is that the data of the Ministry of Finance does not hlly capture all information about extemal financing In particular grants und other expenditures directly made available to the sector. -79-
Planning in its present form was created only in 2002. Under the new ministry three formerly independent departments were consolidated (public works, regional planning, transport & meteorology); each with its own data and reporting system. Since the merger, the new ministry has struggled (with assistance from the World Bank) to integrate and consolidate available information. Another problem is that reliable data (allocation and execution data, recurrent and capital, by financing source) for sub-sectors other than the road sub-sector are difficult to obtain.
15 1. Affordability and Realism. Table N.6below presents financing needs ofthe transport sector as a whole. Madagascar expects to allocate on average 2.7 percent of GDP in the period 2004-2006 to the transport sector, of which more than 90 percent will be allocated to the road sector. Against the background of the past performance in the sector these funding needs pose serious questions concerning affordability and implementation realism. For comparison, in the 1997-2003 period, the Government had budgeted transport expenditures of about 2.3. percent of GDP and executed about 1.5 percent of GDP. The current PRSP program proposes to spend nearly two times more ofwhat was implemented in the previous seven years.
Table IV-6: PRSP Expenditure Forecasts 2004-2006 (as a % of GDP) Budget PRSP PRSP 2004 2005 2006
Recurrent 0.10 0.04 0.03 Salary 0.09 0.03 0.03 Non-Salary 0.01 0.01 0.01
Investment 2.21 2.92 2.55 Roads 2.11 2.82 2.43 Ports &Air 0.16 0.10 0.12 Rail 0.00 0.05 0.02 Regulation 0.02 0.16 0.17
TOTAL 2.4 3.0 2.6 Source: PRSP
152. Contingent liabilities and debt. Contingent liabilities (i.e. pension contributions to the CNAPS from public enterprises in financial troubles such as RNCFM, SMTM or CMN) pose significant risk for the budget (see table N.7). In addition, the public enterprises in the transport sector have accumulated substantial debts (to banks, other creditors, and the Government). By October 2004, the total outstanding debt ofthe transport sector parastatals came to approximately MGF 384 billion or US$37 million equivalent in today’s exchange rates. Madagascar has taken several measures to address the issue of rising public enterprise debt, i.e. increased control of transfers ofpublic funds and spending, and financial audits. The Government has also taken over some public enterprise debts, such as for Air Madagascar and for RNCFM. It will, however, be important for the Government to clearly establish liabilities and debt with the objective to develop a strategy to deal with these risks (i.e. a debt management plan). -80-
Table IV-7: Public Enterprises in the Transport Sector
Date No. of Type Last Name of agency Established Employees of PE Audit Debt Outstanding Date
Air Madagascar 1961 1401 S.A. 2003 MGF 85.3 billion (US$8.3 million) Sept. 2004 Civil Aviation 1999 280 EPIC Feb. 2003 MGF 3.6 billion (US$347,037.5) Authority (ACM) + $79,750 Sept. 2004 Airport Management 1990 340 S.A. 2o04 MGF 62.2 million (US$6,017) (ADEMA) Oct. 2004 MADARAIL 2000 884 S.A. June20O4 WB, EBI: MGF 137.7 billion (US$ 13.4 million); Others: MGF 22.3 billion (US$2.2 million) Sept. 2004
Road Management 1998 30 EPIC MGF 30.5 billion (US$2.7 Fund (FER) million) June 2004
SEPT (Toamasina Port) 1976 1,732 SA July2004 MGF 42.2 billion (US$4.1 million) Oct. 2004 Source: respective agencies
4) PRINCIPLE ISSUESOF SUB-SECTORS
(a) Roads
153. Policy framework. The road sector is central to Madagascar’s PRSP as it is an important element to increase rural incomes, by facilitating access to markets of rural households. As such, expanding the national highways and regional roads, and maintaining them, is critical. Table IV.8 shows the road conditions of Madagascar in 2002. It indicates that 81 percent of the roads are in poor condition. Usually those roads are only seasonably practicable, and some not at all, causing very high costs to users, interrupting economic exchanges, and isolating towns and villages from the rest ofthe country for up to eight months a year. -81-
Table IV-8: Road Network Quality in 2002 and Objectives for 2008
Share of road categ. TOTAL Compo Goomair Poor (Km) -sition (b) (Km) GoodFair Poor Primaryroads 2,560 8 1,616 944 63 37 Secondary roads 4,753 15 1,319 3,434 28 72 Temporary roads 4,549 14 1,000 3,549 22 78 Provincial roads 12,250 39 1,070 11,180 9 91 Communal roads 7,500 24 850 6,650 11 89 Total 2002 31,612 100 5,855 25,757 19 81
Goal:: Total 2008 31,612 100 19,062 12,550 60 40 Source: Government of Madagascar and World Bank
154. Road maintenance - the heavy burden of past failure. Poor road maintenance, as discussed before, has been responsible for the gradual degradation ofthe road network throughout the country, and has left millions of Malagasy stranded in rural areas, without access to schools, hospital or markets. A World Bank performance audit from the 1980s and project implementation experience from the 1990s suggest that Madagascar consistently under-funded the transport sector.85 At the same time, recent performance has been impressive: from July 2003 to June 2004, the Government implemented routine maintenance of 8,077km, rehabilitation and periodic maintenance of586km ofnational roads, and rehabilitation of2,300 km ofrural roads.
155. Reorganization of the transport sector is ongoing. The consolidation of the three transport ministries into one was primarily to the benefit of the road sector, as it absorbs most of the sector funding and accounts for the largest volume oftransport. Under the new framework the central Government will maintain responsibility for policy malung while regulation and operations (maintenance and investment) will be devolved to autonomous agencies and to the private sector. The Government is creating two new institutions:
0 Central Road Authority (AutoritC Routikre Centrale) is expected to be operational in 2005. The Authority will be responsible for planning, construction and maintenance of the national road network. Responsibilities, funding, Board composition and relationships with the other institutiondstakeholders remain to be developed and specified.
Q Agency for Land Transport (Agence des Transports Terrestres) will also be operational in 2005. The agency will be responsible to regulate the transport ofindividuals and merchandise, the inspection of vehicles, the issuance of licenses; it will assure road security and regulate concessions for the rail road. Details about roles, responsibilities, funding and governance structure remain to be specified.
85 Sources are (i)Performance Audit - Madagascar - Ports Rehabilitation project (1752-MAG 1987), Third Railway project (1694-MAG 1986), Seventh Highway project (1905-MAG 1989) - May 27, 1998 Report No. 17915. -82-
156. To improve implementation of the road program the Government is reinforcing the RMF. A proposal has been submitted by the fund's Board of Directors (COHER) to the Government in 2004 to convert the RMF into an autonomous agency. The Board proposed to phase out Government funding of the RMF and to replace it with increased road user fees. A Government decision is outstanding; the budget for 2005 still maintains Government contributions to the fund. This presents a major concern as Government funding has been unreliable.
157. Risks are substantial. Two main risks could undermine the implementation of the Government's ambitious program: First, the capacity of the private sector to implement the program is significantly below expectations (domestic capacity of the industry is about half the PRSP target of US$150 million). Second, program implementation would imply spending on roads of about US$l50 million a year, or about 5 times the 1997-2001 average and double the 2003 expenditure levels in investment expenditures alone. In addition, maintenance costs on the existing and new road system are estimated to be around 0.6 percent of GDP per year through 2008 (see table IV.9 below). The table confims that the largest amount of funding is expected to come from the fuel levy.
Table IV-9: Road Maintenance: Total requirements and sources of funding (as percent of GDP)
2004 2005 2006 2007 2008
Funding needs 0.6 0.6 0.6 0.6 0.6
Sources of funds 0.6 0.6 0.6 0.6 0.6 Fuel levy 0.4 0.5 0.4 0.5 0.5 Heavy vehicle license fee 0.04 0.1 0.1 0.1 0.1 Local Governments 0.01 0.01 0.01 0.01 0.01 EU 0.02 0.0 0.0 0.0 0.0 HIPC 0.1 0.04 0.1 0.1 0.1 Source: Government of Madagascar and World Bank
@) Air Transport
158. Policy framework. Air transport in Madagascar has been dominated by the public sector throughout the 1980s and 1990s. In 1996, the Government initiated its policy to liberalize the air transport sector. Although progress was slow, due to this new policy the number oftourist quadrupled between 1997 and 2000, to about 178,000. Concurrently, the Government began its disengagement from directly managing the airport system. The Civil Aviation Authority (Aviation Civile de Madagascar, ACM) which was created in 2000 is in charge of implementing Government's air transport policy, overseeing the sector, as well as drafting and enforcing technical and economic regulations. ADEMA (a company owned mainly and jointly by the Government of Madagascar and Atroports de Paris, ADP) has a concession agreement with Government to manage the 12 principal airports (from 1991 to 2006). There are 43 other airports or landing strips in Madagascar (currently managed by ACM) which are particularly important for access to rural areas (21 serve exclusively for access to isolated villages). Air navigation systems are managed by ASECNA. Most airports require urgent rehabilitation to bring infrastructure to international standards, in particular with regard to safety and security -83- equipment, telecommunications, radio navigation, expansion of terminals and runways, road access improvements.
159. Key public expenditure management issues. The Government's decision to disengage from the air transportation sector poses significant challenges. The country is grappling with two issues: (i)the process and cost of disengagement from Air Madagascar, and (ii)the provision of air transport services to remote locations services. Both issues have significant budgetary implications:
160. As far as Air Madagascar is concerned, Government is committed to getting the airline profitable before it considers an outright privatization. To this end, a management consulting company was hired in April 2002. As a result, Air Madagascar returned to profitability in 2003. It achieved a surplus of MGF 69,944 billion compared to a deficit ofMGF 28,161 billion in 2002 and MGF 123,665 billion in 200 1. Government contributions were reportedly over and above the initial commitment to Air Madagascar in the amount of US$7 million for an increase in capitalization and US$lO million to meet creditor needs.
161. To improve access to remote (and unprofitable) locations the Government is paying Air Madagascar about US$900,000 for 2004 to serve these areas (about US$700,000/ MGF 5 billion were reportedly paid in 2003). Discussions are currently under way for local Govemments to take over the management of the 43 secondary airports. This strategy could, however, backfire and leave Government with contingent liabilities if the capacity at the local level to manage the airports remains inadequate.
(c) Rail Transport
162. Policy framework. In the 1990s railway services were an important factor for the transport infrastructure with close to 2.4 million passengers and almost 600,000 tons of merchandise (in 1990). Due to poor management, railway services nearly collapsed in 2001. The PRSP envisages a crucial role for the rail sector, not only for its economic but also for its social benefits because it can (potentially) grant access to remote locations (with no road access) which are inhabited by 1.5 million people. In accordance with the policy of the Govemment the development ofthe rail network will be driven by the private sector.
163. The rail network of Madagascar consists of the Northern and Southern Railways. The Northern Railway with a network of 732 km was concessioned to a private operator (MADARAIL) in July 2003. The Northern Railway connects the country's main port in Toamasina with the capital Antananarivo and Antsirabe. The line has substantial commercial potential but is in need of major infrastructure rehabilitation and renewal of rolling stock. The concessionaire plans a five-year US$35 million investment program to modernize the railway and provide a competitive transport alternative to roads. At the same time, the Govemment is required to invest EUR 4 million to reinforce environmental protection along the tracks, and also to guarantee a European Investment Bank loan ofEUR 11 million.
164. The Southem Railway with a track length of 163 km connects Fianarantsoa with the port of Manakara; it is planned to be concessioned jointly with the port ofManakara to a private operator. Due to the limited commercial viability but important social aspects of the Southern Railway substantial investment (US$ 17 million) is planned on the basis of Government and donor funding (including the World Bank) as soon as the concession agreement has been signed. -84-
165. Critical public expenditure management issues. Potential contingent liabilities pose a severe risk for the implementation of the Government strategy. These liabilities need to be clearly established to assess the (fiscal) implications for the Government. In addition, funding arrangements for the concessioning ofthe southern railway line are complex and non-transparent; these arrangements should be laid open and Government contribution should be fully integrated into the annual budget.
(d) Maritime Transport and Port Management
166. Policy framework. The main Government objectives for maritime transport and port management are to allow the private sector to run commercial ventures and to ensure that social needs are met. What is most critical in Madagascar’s maritime sector is port management and maritime signaling. Only 4 of Madagascar’s 17 ports are deep enough for direct loading and unloading from the port, while another 6 ports allow for loading and unloading through smaller vessels. As part ofthe sector restructuring, a new legal framework for the regulation of the ports and maritime transport was adopted by Parliament in July 2003. The Government created a Ports, Maritime and River Agency (Agence Portuaire, Maritime et Fluviale, APMF) to manage (not operate) the country’s ports and navigation systems.86The law allows individual concessioning of the 4 large ports (Ports a Gestion Autonome), and group concessions for the 6 medium-sized ports, while the 7 small commercially nonviable ports, as well as non-port related marine signaling, will be managed directly by APMF or fully transferred to local communities.
167. Critical public expenditure management issues. Similar to the air and rail transport services it will be important for the Government to clearly establish existing contingent liabilities which could undermine the implementation of its concessioning strategy. Adequate and reliable funding of APMF will be also be a critical public expenditure management issue, which should be addressed through the annual budget.
5) RECOMMENDATIONS
168. Over the past two years, Madagascar has made significant progress in reforming the management and organization of the transport sector, to reverse the twenty year policy of state management and operation. The recommendations below come more in the form of identification ofrisk areas to the success of the overall reform, and include suggestions for risk mitigation. As such, risks are identified in the following areas:
Affordability and realism. Over the medium term, the transport sector is poised to absorb more funding relative to GDP than in the 1997-200 1 period and a larger share ofpublic resources than the 1997-2001 period. It will be important to assess whether Madagascar can afford the necessary investments, in particular in view of foreseeable domestic revenues and donor contributions. In the short term, scarce public resources are likely to be claimed not only by the road sector, but by the contingent liabilities Government is set to face in divesting the state from productive activities. 87 . Additionally, administrative constraints will also need to be tackled while
86 The private sector, through the National Employers’ Association (GEM-Groupement d ‘Entreprises de Madagascar) and professional port and maritime associations, has been closely involved in the work leading to the new institutional and legal framework. The principle of representation at parity between the public and private sectors in the APMF board has been endorsed by both parties. This is consistent with the intention that most of the operating and development costs of the sector will be financed through port and maritime user fees. The Govemment will retain its role in discharging functions pertaining to planning and oversight, safety, environmental protection, and security. 87 Source: MFEB -85-
Government’s success in attracting foreign companies will be crucial to improve the implementation performance ofthe sector.
0 The problem of autonomous public agencies. Government is seeking to devolve the responsibility of regulation of the road, air transport, marine, and rail sectors to autonomous agencies. Experience in other countries, however, confirm that devolution to autonomous agencies is not a silver bullet. The track record of autonomous agencies is mixed at best. Often, their introduction poses significant risks to further complicate matters and to replicate the non- functional bureaucracy of the central Government at the level of these agencies. International experience also indicates that these institutional changes will require significant implementation time and capacity. At the beginning of this process, the devolution might even come with added upfront responsibility for the Government because - at the initiation phase - the Government is responsible for assuring that these agencies operate under a viable and effective framework (Le. advisory boards and councils are not weighted by bureaucrats and have substantial private sector and civil society participation; management and staff of the agencies are appropriately qualified and have respect of the private sector; and most importantly, that funding for the agencies is assured). Improvement of the Road Maintenance Fund. The effectiveness of the road maintenance fund should be reviewed - also by taking into account international experiences with such an instrument and considering the proposal ofthe COHER to transform the fund into a fully autonomous agency. For the road maintenance fund to be more effective it will also be important to update and rigidly enforce adequate accounting and procurement standards. The fund should (continue to) be subjected to regular (annual) value-for-money audits to ensure that the money is well spent.
0 The issue of capacity of local authorities The intended devolvement of some activities in the areas of road maintenance, airport management, port operation and management to local authorities should be complemented by substantial investments in training and capacity building to enable the local communities to adequately pursue their new responsibilities. Government should ensure upfront funding of these capacity building activities through the annual budget as part ofthe overall implementation ofthe transport sector strategy. -86-
V. USE OF RESOURCES IN THE ENVIRONMENT SECTOR
169. This chapter will evaluate service delivery ofthe environment sector by taking a closer look at policy issues, government priorities, the legislative framework and the effectiveness of public expenditures. 88 Furthermore, the assessment will also focus on the institutional setting and the environmental impact assessment.
1) KEYPOLICY ISSUES
170. Madagascar’s economy is highly dependent on natural resources. Agriculture, forestry and fishing account for 32 percent of GDP. Fish provide 40 percent of animal protein in the Malagasy diet. Around 85 percent of domestic energy comes from fuel wood and other biomass. In rural areas, 85 percent of households grow paddy rice. Furthermore, shrimp harvest (US$l55 million) and tourism (US$82 million) are two of the leading eamers of foreign exchange.
17 1. Natural forests are a key asset. Natural forests provide key environmental services, regulating water flow and reducing siltation, to the benefit of downstream paddy growers and towns with riverine fresh water supplies. Natural forests also harbor Madagascar’s unique biological resources, an important global public good - Madagascar is one of the single most important biodiversity conservation priorities for the This biodiversity has been a crucial factor in the growth ofecotourism on the island.
172. The country’s natural assets are at risk. Loss of natural forest, primarily due to tavy (slash and bum agriculture) and the use of fuel wood and charcoal to meet domestic energy needs, is the principal environmental problem facing the country. One third of the natural forest area has been destroyed by slash and burn agriculture since the 1950’s and the remaining forest area is now highly fragmented.” In addition to direct losses of biodiversity (such as tourism revenues, timber, fuel wood, and fodder) forest destruction also leads to soil degradation and erosion, flooding, and siltation of downstream infrastructure - including dams, irrigation systems and domestic water supply facilities. In tackling these environmental problems policymakers are facing three major challenges:
0 Growing population and agricultural stagnation. The combination of an expanding population and static productivity has generated pressure for agricultural expansion through conversion of new land to agricultural uses, which typically consists of the most accessible forests. Rice is by far the most important crop in Madagascar. In 1960, before the Green Revolution, the average paddy yield in Madagascar was slightly higher than in Indonesia and significantly higher than in Mali. However, average paddy yield per ha in Madagascar has been at the same level for the past fifty years, with yields of around two tons per ha, while more than tripling in Indonesia and Mali. Over the same period the Malagasy population has tripled, with growth rates over the last 20 years of 2.8 percent, slightly higher than the Sub-Saharan Africa average.
In this chapter environment refers to the following subsectors: forestry, water and protected areas. Work on commercial forestry, fisheries and minerals, while obviously germane, is left to future public expenditure reviews. 89 Mittermeir et al. 1998. 90 Facts and figures on deforestation and the physical geography ofMadagascar are given in Annex 11.1. -87-
0 Poor incentives stemming from lack of property rights. Forested lands are the property ofthe state in Madagascar, and local communities typically have no claim on these resources and no formal right to use them. In practice the state’s property rights have never been enforced. As a result, for local communities the surrounding forest is in effect an open access resource. With no property rights to this resource, communities have no incentives to provide better management.
Negative externalities associated with tavy in the uplands. Communities in the headlands of water basins practice slash and bum agriculture without considering the negative effects on downstream users.
173. Government’s policy actions. The primary response within the sector has been the creation of protected areas, which both conserve biodiversity and protect watershed environmental services. The sustainability of the country’s protected area system is linked to the incentives faced by surrounding communities to engage in tavy or more intensive agricultural technologies. Policies dealing with agricultural intensification, devolution of property rights, and energy supply are important to altering the incentives faced by households to engage in deforestation. Similarly, mining regulation (excluding mineral activity in certain zone) and transport policy have profound influences on the pressure on forests.” These policies are addressed in various sector strategies such as the Rural Development Action Plan (PADR)92of the Ministry ofAgriculture and Government’s PRSP.
2) SECTOR STRATEGIES
The Government has a well-elaborated set of priorities regarding the environment, as set out in the National Environmental Action Plan (NEAP) and the PRSP.
174. Madagascar’s NEAP. The NEAP was adopted by the Government in 1989, and given legal authority by the National Environment Charter and the National Environmental Policy in 1990.93 Implementation started in 1991 with the support of a broad coalition of bilateral donors, international agencies and NGOs. Focusing on linking environmental protection and economic development, the plan was designed as a fifteen year investment program divided into three five- year phases (see also annex 11.2). The first five year phase (EP1 1991-1996) sought to create a policy, regulatory and institutional framework. The second phase (EP2 1997-2002) aimed at reversing degradation and integrating environment into other sectoral policies. The third phase (EP3 2004-2009), focuses on consolidating past efforts and establishing sustainable financing mechanisms for the en~ironment.~~
175. Positive impact of the action plan... Fifteen years since its publication, Madagascar’s NEAP is still relevant today. It institutionalized a clear set of priorities - establishing protected areas, rural resource management, and environmental education and training - and was equally prescient in calling for a long term investment program. Major achievements of the NEAP include: (i)the enactment of enabling legislation for the protection of the country’s natural resources and the promotion of environmental management; (ii) the establishment of environmental institutions (such as the park service ANGAP) for the implementation of environmental activities and programs; (iii)the development and implementation of community-
91 Recent research suggests that each 12 km (one standard deviation) reduction in distance from forest to roads increases decadal deforestation rates by 2.6 percent. 92 The Action Plan for Rural Development (PADR) provides the strategic framework for the rural sector. 93 Law 90-033, December 21, 1990 94 The Madagascar Third Environmental Program was approved in May 2004. -88- based approaches for natural resources management; (iv) positive impacts on resource degradation as measured in the field; and (v) the establishment of a platform for sustained donor support and coordination for the environment in Madagascar.
176. ...but challenges remain. However, there are several areas where the NEAP could improve its track record. The application of policies and regulations remains a challenge because of weak institutional capacity in some agencies and serious governance problems in the forestry sector. Resources under the NEAP have been disproportionately invested in capacities at the central level (around 70 percent), while too little has focused on strengthening institutional capacity on the ground. At the same time, the operational programs of the NEAP at the central level have spread themselves thinly, with a proliferation of executing agencies”. Furthermore, lack of rigorous priority setting has also led to a situation in which NEAP overlaps both conservation and rural development, resulting in potential competition with the PADR. Environmental management, for example, is one potential area of overlap, particularly in the periphery ofprotected areas where communities have lost rights to use newly protected resources and alternative income-generating opportunities may be required to offset the loss. Finally, a particular challenge is the limited knowledge and awareness of the Malagasy population concerning environmental issues. This indicates that the NEAP’Sadvocacy and educational roles have not been as effective as necessary.
177. Political commitment in the PRSP...The PRSP effectively integrates the goals of the NEAP into the program for reducing poverty (see table V-1). It is centered around three main environmental objectives: i)preserving environmental quality; ii) meeting needs for forest, land and water resources; and iii)integrating environment priorities into sectoral development policies and plans. A key statement in the PRSP is the Government’s recognition that managing natural resources and the environment will be key to sustaining growth in rural areas.96The Government proposes to achieve protection of the environment partly by establishing financing mechanisms for the protected area system, but also by creating schemes to transfer property rights to local communities.
178. ...but success is determined by EP3 implementation. The successful implementation of the EP3 is an important contribution to the PRSPeg7Monitoring and evaluation of NEAP through EP3 is supposed to feed into the PRSP. However, the design and implementation progress of the EP3 has not yet been incorporated into the PRSP. Furthermore a full costing ofthe environmental strategy remains to be completed to address issues of sustainable financing. Finally, in view of the PRSP implementation progress, the JSA recommended an acceleration of ongoing institutional reforms such as the establishment of a new agency for forestry management (L’Agence National de la Gestion des Eaux et Forets - ANGEF) under EP3 and the need for measures that provide adequate incentives and improve institutional arrangements of the sector.98
95 See table V-2 below. EP3 aims to rationalize the executing agencies to increase efficiency and effectiveness. 96 It argues that at least 50 percent of income in the Malagasy economy is directly dependent on natural resources, making the linkages between environment and development particularly direct. 97 The policy matrix of the PRSC in support of PRSP implementation is a sub-set of agreed actions under NEAP and implemented through EP3. 98 Such measures include : i)enhancing compliance of public sector investments with existing MECIE legislation, ii)ensuring more sustainable financing of Madagascar’s protected areas system, iii)improving management of coastal and marine resources and iv) levying a tax that reflect the environmental and health cost. World Bank, Poverty Reduction Strategy Paper - Annual Progress Report Joint Staff Assessment, 2004 -89-
Table V-1: NEAP and PRSP objectives NEAP PRSP
(i) Protecting and managing the national (i)Maintaining the quality of natural resources to allow ieritage of biodiversity, with a special sustainable economic growth, :mphasis on parks, reserves and gazetted Developing the institutions and regulatory frameworks for iatural forests, in conjunction with the protection of the environment and nature (applying the ustainable development of their environmental code and legal instruments, implementation of urrounding areas; management systems, setting up governance and anti- corruption systems, developing environmental management ii)Improving the living conditions of the indicators) )opulation through the protection and nanagement of natural resources in rural Promoting the sustainable management of natural resources .reas with emphasis on watershed (simplified development and management plans, transferring rotection, reforestation and agro- property rights to local communities, forest zoning, and implementation of an auction system for forest harvest orestry; in urban areas this involves permits) mproving water supply and sanitation, vaste management and pollution control; Ensuring the sustainable management of coastal and marine resources (implementing integrated management regimes , iii) Promoting environmental education, transferring management rights to local communities) raining and communication; Ensuring permanent financing of the protected areas system iv) Developing mapping and remote through a conservation trust fund and the development of iensing tools to meet the demand for ‘green’ taxes iatural resources management; (ii)Meeting the population’s needs for forest, land and water v) Developing environmental research resources, ,n terrestrial, coastal and marine 0 Promoting a national program of reforestation and providing xosystems; and incentives for the development of tree crops. vi) Establishing mechanisms for 0 Combating bushfires. nanaging and monitoring the mvironment. 0 Restoring the ecological and economic functions of catchmeni basins.
0 Supporting alternatives to deforestation (improved wood fuel management and promotion of ecologically-friendly cultivation techniques)
(iii)Integrating the environmental dimension into sectoral development policies and actions, and into spatial planning. 0 Promoting environmentlfriendly public and private investments, (applying the Environmental Impact Assessments: and ensuring the adherence of sectoral activities tc environmental goals.
0 Promoting environmental education.
0 Supporting the inclusion of environmental considerations intc regional, municipal and local development plans.
0 Innovating on hazard management ( testing and adopting i pollution management policy)
Source: NEAP. PSRP -90-
3) POLICY AND INSTITUTIONAL FRAMEWORK
(a) The Legislative Framework
179. The legal framework remains deficient despite the fact that Madagascar is one ofthe countries in Afnca that has a fairly advanced legislative framework (for the protection of the environment and natural resource management) and participated actively in several intemational environmental agreementsg9. In particular EP2 supported the revision of various legal texts reflecting reformed management practices for natural resources and environment management. However, several problematic aspects ofthe framework remain: (i)an uneven implementation of the legislative framework - implementation decrees and administrative orders are laclung for years in some cases, or not kept up to date with legislation; (ii)a lack ofhorizontal consolidation oflaws and regulations, for example, water is subject to legislation regarding forestry, energy and the water code which leads to contradictions; and (iii)a variable range ofpenalties for infractions ofenvironmental laws and some current penalties that may be viewed as excessive.
180. Recent efforts have improved environmental management framework. In the past two years, the Government passed several laws and decrees related to environmental management. An important step forward has been the clarification of roles between the Ministry of Environment and Forests (MinEnvEF) and the National Office of the Environment (ONE) following a modification ofthe 1999 MECIE decree (Mise en Compatabiliti les Investissements a 1 'Environnement) concerning the Environmental Impact Assessment (EM). As a result, ONE now manages a one-stop-shop for the application of MECIE legislation which has reduced transaction costs for investors. Further legislative changes comprised of the classification of surface water, the regulation of emissions of liquid waste and water management, the creation of 22 administrative regions as well as the management and control of industrial pollution and environmental protection in the mining sector.
@) The Institutional Framework
181. Investments made under the NEAP from 199 1 to date have led to the establishment of a number of environmental institutions - executing agencies - aimed at conservation of the country's natural resources (see table V-2). looFollowing closure of EP2, some executing agencies have been put at arms length from the MinEnvEF and have started to offer their services to a wider range of clients."' The Ministry for Environment, responsible for the development of national environmental policy, was merged with the Ministry ofWater and Forests in 2003. The principal challenge of the merger is to balance conservation and exploitation as the guiding principle for natural resources management throughout the new Ministry.
99 These agreements are: the Framework Convention on Climate Change (1999), the Vienna Convention for the Protection of the Ozone Layer (1996), the Montreal Protocol on Substances that Deplete the Ozone Layer (1996), the Law of the Sea (2001), the Convention on Biological Diversity (1996) and the Kyoto Protocol (accession in 2003). looThe Charter for the Environment (law 90-033) provided for the creation of a national structure responsible for development of national environmental policy. lo'The National Association for Environmental Actions (ANAE), for example, specialized on specific organic and low extemal input technology which allows it to raise independently operating funds through the provision of its services. -91-
Table V-2: Executing agencies for the NEAP
Fonciers (DGDSF) system management Centre de Formation aux Sciences de 1’Information - charged with environmental training Gtographique et de 1’Environnement (CFSIGE)
182. Institutional reforms under way under EP3. The institutional structure is complex and reflects in many ways the needs of the funding agencies for counterparts during the implementation ofEP1 and EP2. Under EP3, a project implementation unit (CELCO) was created to coordinate all program activities and to monitor and evaluate implementation progress. A key priority for EP3 is to rationalize the institutional structure for environment and natural resource management (see annex 11.3). There are three guiding principles for the proposed institutional structure: (i)MinEnvEF should play a policy-making and coordinating role, (ii)ONE’S function as an executing agency has already changed to an agency with policy and oversight responsibility, (iii)operational work should be carried out by specialized executing agencies (ANGAP and ANGEF), and (iv) more responsibility for environment and natural resource management should be devolved to local communities. A core ministry dealing with policy- making and coordination, combined with executing agencies which generate revenues and deliver services to the ministry in return for financial transfers, has the potential to be an effective and capable institutional model. However, a comparison with other countries shows that such an institutional setting can be inefficient if incentive and local capacity problems emerge. Devolution of management responsibility in the environment sector needs to be accompanied by capacity building and adequate funding, either through central government transfers or by raising revenues locally.
4) CRITICAL PUBLIC EXPENDITUREISSUES
Sectoral and Economic Allocation
183, Mixed implementation record. Table V-3 shows budget allocation and execution ofthe environment sector over the period 1997-2004. Several observations can be made:
0 While environmental expenditures increased between 1997 and 200 1 with an annual average growth rate of 20 percent, public spending in the environment sector as a share of the -92- national budget dropped significantly since 2001 from 4.6 percent to 2 percent of the total budget. These cuts are mainly due to the phasing out of EP2 (2002/03). To compensate, Government increased slightly its domestic resources from 1.7 percent in 2001 to 2.3 percent of the total budget in 2003.
0 There is a significant variance between budget allocation and actual expenditures reflected in annual execution rates, which are far above 100 percent between 1997 and 2001. This can be partially explained by the availability of grants that are executed independently from counterpart funds and not budgeted. The weak implementation performance in 2003 is related to the closing ofEP2 in the middle of 2003.
o Donor funding is an important part of the environment budget which is indicated by the EP2 share of total grants, reaching a high of22 percent in 2001. EP2 grants accounted on average for 55 percent of environment expenditures over the period 1997-2001. The international community continues to provide support under EP3 (around $132 million) over the period (2004- 2009) compared to $124 million under EP2. -93-
Table V-3: Madagascar - Environment Sector: Central Government allocation and expenditure (selected years between 1997 and 2004)
1997 1999 2001 2002 2003 2004 EP2 implementation EP3 Budget Allocation Total budget allocation (MGF bill) 99.53 99.63 173.84 242.24 161.71 172.65 Total budget allocation (as a % of total budget) 3.05 2.03 2.50 3.28 2.44 2.26 Real allocation (1997prices) 99.53 87.54 131.92 161.82 109.74 108.16
Actual Expenditures Total expenditures (MGF) 123.44 204.54 250.30 101.12 137.76 Total spending (as a % of total budget execution) 4.50 5.23 4.81 3.16 2.27 Total spending (as a % of GDP) 0.68 0.87 0.84 0.34 0.41 Total real spending (1997 prices) 123.44 179.72 189.95 67.55 93.49 Real growth 16.60 12.86 (64.44) 38.40
Budget execution rates ' Budget execution 124.0 205.3 144.0 41.7 85.2 EP2 expenditure 136 305 114 28.2 0 Administration and non EP expenditures 93 108 216 69.5 84.1
Grants Actual EP2 grants (MGF bill) 63 113 170 5 3 EP2 grants (as a % of environment expenditure) 51.04 55.25 67.92 4.94 2.18 EP2 (as a % of total grants') 8.57 14.68 21.68 4.59 0.33
Memo Total grants2 (MGF bill) 735 770 784 109 920
Source: IMF, MEFB ' Actual exp./ allocated budget 'Total national grant budget
184. Limited utilization of HIPCfunds. Less than one percent (MGF 8 billion) ofthe HPC funds have been used for the environment sector over the period 2001-2004, compared with an initial commitment at the decision point of using up to 10 percent ofthe total debt relief for this purpose. As the country reached the completion point under the enhanced HPC initiative, the debt relief will amount to US$ 61.5 million annually for the period 2004-2013. This provides an opportunity to allocate a larger share of budgetary resources for the environment and biodiversity conservation based on an updated and fully costed environmental strategy for the 2006 revision of the PRSP.
185. Weaknesses in budget execution. The high budget execution rates (see table V-3) mask deficiencies in budget implementation as a significant share of the resources are not budgeted and not reflected in the data. Major problems include: i)non-standardized procurement processes among the executing agencies and low ceilings for the special accounts of these -94- agencies; ii)a lack of harmonization between accounting systems - chart ofaccounts, accounting software, and method of recording - used by the project coordination unit (ONE) and the various executing agencies; iii) an absence of an effective financial management system to track variances between actual and planned expenditures; iv) delays in the payment of contractors and suppliers because oflack ofcash forecasting and irregular submission ofwithdrawal applications to donors; v) weak financial management capacity of some executing agencies; and vi) a lack of authority as well as a clearly defined responsibility of the unit in charge of project management and control.
186. International comparison with OECD countries suggests no overspending of the sector. There are no low income country benchmarks to compare environment budget expenditures. However, OECD government expenditures on environment (excluding water and sanitation) average 2-3 percent of GDP. In Madagascar, total allocations to the environment sector (excluding grants) averages less than 0.4 percent ofGDP.
187. An allocation largely in favor of capital expenditures. The expenditure breakdown in table V-4 reveals several interesting findings: First, expenditures have been allocated in favor of capital spending, on average 91 percent of total expenditures over the period 1997-2003. Only in 1999 and 2003 expenditures amounted to 21 and 15 percent of total environment budget due to a frontloading of capital expenditures between 1997-1998 and the reduction of the overall budget envelope for the environment following the closure ofEP2 in 2003, Second, more than 50 percent of capital expenditures are financed by grants, reaching 69 percent in 2001 and 64 percent in 2003. The high reliance on foreign assistance raises the issue ofthe long-term sustainability ofthe environmental program. Third, operating costs, classified under goods and services, account to 2.4 percent of the total environment budget in 2003. This represents a significant improvement compared to previous allocations (on average 1.1 percent of the environment budget over 1997- 200 1). Environmental agencies, however, continue to underscore the insufficiency of operating costs, the need for skills upgrading and for the availability of qualified staff in particular as donors are reluctant to finance recurrent costs. This is a major problem since the conservation of natural resources to a large extent depends on the availability of adequate operating costs for surveillance, control etc. -95-
Table V-4: Madagascar’s recurrent and investment spending patterns in the environment sector over the years 1997-2003 (actual expenditures as percent of total environment budget)
Annual avg 1997 1999 2001 2002 2003 1997-2003
TOTAL 100 100 100 100 100 100
Current Expenditure 6.8 21.1 6.2 12.0 14.6 10.5 Salary 4.2 4.2 2.5 7.5 7.9 4.8 Goods & Services 1.5 0.8 1.0 2.1 2.4 1.4 Other’ 1.1 16.2 2.7 2.4 4.3 4.3
Capital Expenditure 93.2 78.9 93.8 88.0 85.4 89.5 Revenues 10.6 5.4 10.0 23.9 20.6 13.6 Borrowing 33.1 19.4 14.9 29.3 0.9 22.5 Grants 49.5 54.0 68.9 34.8 63.9 53.4
Memo Current expenditure (inMGF bill) 8.4 31.3 10.6 10.8 16.1 Capital expenditure (inMGF bill) 116.6 173.4 241.0 88.7 116.5 ‘Residual of current expenditures, salary and goods & services Source: MEFB
188. Distribution of expenditures across programs is not available. The identification of the thematic content ofenvironmental expenditures is hampered by data limitations. Environment expenditures (varying between 60 to 90 percent) are classified thematically as “common environmental services”. A small sample of the expenditures of the four principal executing agencies shows that the spending patterns are broadly in line with the objectives of the NEAP (see chart V-1 below). However, general conclusions cannot be drawn as these constituted only 32 percent of total environment expenditures in 200 1, with the remaining spending being carried out by the Ministry and smaller executing agencies. -96-
Chart V-1: Distribution of expenditures by environmental theme (2001)
Soil &water management aaf-
Water &forest re! 14%
Source: MEFB
189. Coverage and transparency need improvement. Whereas MinEnvEF is fully covered in the budget, budget information on other executing agencies are limited. Consequently, the Ministry is not able to adequately monitor the implementation of its sector strategy. Furthermore, donor financed projects fall under capital expenditures (though they - in reality - finance partially current expenditures), which leads to biases in assessing the composition of environmental expenditures. To ensure better transparency, it will be important to improve the presentation of the environment expenditures of the budget. The recently introduced program budget could be an opportunity to revise the classification of budget allocations among current and capital expenditures, and to bring them in line with reality.
Sustainable funding options of protected areas during and after EP31°2
190. The need for sustainable funding of Madagascar's protected area. As Madagascar entered the third and final phase ofthe implementation ofthe NEAP in 2004, the question ofthe sustainability of the protected area system emerges as a key issue. Under EP3 ANGAP is in charge of managing this system.'03 Although the donor community continues to provide significant financing during EP3 implementation, a similar level of foreign assistance by the donor community is not guaranteed after the closure ofEP3 and more than 15 years of supporting NEAP implementation.
lo2Madagascar's protected area system is a global public good, protecting unique biological resources, a local public good at the watershed level, providing reduced erosion, stream flow regulation, and water purification, and an important source of tourism income, both in terms of foreign exchange and fiscal revenues. IO3 In thls respect, the investment cost ofANGAP includes i)enhancing the coverage of protected areas (10 percent), ii)managing biodiversity (55 percent) , iii) developing eco-tourism infrastructure (3 1 percent), and iv) increasing public awareness (4 percent). -97-
191. Shortfall of EP3 funding. The long term sustainable funding of the protected areas is at risk as ANGAP could already experience financing shortfalls (based on budget projects from 2003) during EP3 implementation. The estimated capital and operating costs of ANGAP (around MGF 53.2 billion annually) reveal a significant shortfall of funding, averaging MGF 11 billion a year over the next five years (see annex 12.1). Without additional resources (either from donors or fiscal revenues) this shortfall will almost certainly entail reductions in investments, which may in turn hurt the growth potential for ecotourism.
192. Establishing a Madagascar protected area trust fund. A key proposal in EP3 is the creation ofa protected areas trust fund. This fund is expected to total US$50 million by the end of EP3. Assuming a 6 percent interest rate and 10 percent operating costs per year, this endowment fund would ensure sustainable financing of up to MGF 15.5 billion a year (US$ 2.5 million) after EP3 ~ompletion."~
193. Potential mobilization of revenues. Ecotourism provides an important potential in generating revenues. With an average annual 10 percent growth rate since the early 1990s, tourism is an increasingly important economic sector that has become the third foreign exchange earner with US$ 82 million in 2001, after fisheries and vanilla. In 2001, 170,000 tourists visited Madagascar and more than half of them (55 percent) considered themselves ecotourists. Madagascar's protected areas have established themselves among the main tourist attractions of the island. Ten protected areas currently contribute to the development oftourism in Madagascar, attracting a growing number of tourists. Five other protected areas have untapped ecotourism potential.
194. Studies suggest that foreign visitors are willing to pay (WTP) higher amounts than the fees currently charged for visits ofprotected areas.lo5 Conservative estimates ofpotential tax and fee revenues from ecotourism assume a doubling of park entrance fees and an increase of hotel taxes amount annually to MGF 61.8 billion (see annex 12.2). 106, 107 These revenues would exceed the annual capital and operating costs of the protected area system by MGF 8.6 billion.'0s However, Government's commitment to ensure the development of the protected area system is imperative to the success of generating higher tourism rents. These rents are closely linked to the quality of the resources that the tourists come to enjoy, as well as the facilities and services that support their tourist experience.
In annex 12.1 this is assumed to be half this amount, reflecting the time required to build up the full endowment for the trust. lo'In 2001 a contingent valuation study was carried out to evaluate the WTP of foreign tourists to visit the National Park of Andasibe, the most visited park of Madagascar. Results showed a WTP of MGF 80,000 per visit without any service upgrades and MGF 100,000 with upgrades of guide services. lo6The revenues estimates assume that hotel taxes could be raised from MGF 3000 (roughly $0.50) to MGF 30,000 (around $5) per night, still extremely modest by international standards. The hotel tax is generally the preferred way to capture tourism rents because it is proportional to the tourist's use ofthe natural asset. International experience has shown that demand for hotel rooms in quality tourist destinations is quite price-inelastic. lo'The estimates are based on a yearly constant 170,000 tourists inflow (instead of the projected 6-8 percent annual growth by the World Tourism Organization). They also include the sharing of 50 percent of entrance fees with local communities. lo*This also ignores the VAT and other fiscal revenues generated by tourists as they travel around the island and purchase goods and services - a rough estimate, based on the 20 percent VAT rate and US$ 82 million in current annual tourist expenditures, suggests VAT revenues from eco-tourists (55 percent of the total) ofMGF 56.9 billion a year. -98-
195. External beneflts fully offset local opportunity Beyond tax and fee revenues, the protected areas system is currently generating MGF 40.6 billion annually in external benefits to the rest of the economy. These benefits include payments to local communities (MGF 1.4 billion), reduced siltation and flooding of downstream rice terraces (MGF 17.6 billion), and cleaner and more regular water flows for potable water supplies to downstream towns and cities (MGF 21.6 billion).''03 "' This must be viewed against the lost opportunity cost of local communities due to the establishment of protected areas, amounting to MGF 37.2 billion annually. This includes revenue losses associated with natural forest conversion through tavy to produce rice (MGF 20.0 billion), non-sustainable fuelwood harvesting (MGF 7.1 billion), and non-timber forest product collection (MGF 10.1 billion)."' Overall, the external costs and benefits ofthe protected areas system are roughly in balance. However, gainers and losers are not the same households; there remains the problems ofhow can beneficiaries compensate losers. A system ofpayments for environmental services in these watersheds is worth exploring to address this issue. These systems have been successfully implemented in other countries (e.g.Costa Rica) but these countries are typically much richer than Madagascar.
5) EFFECTIVENESSOF ENVIRONMENTAL INSTITUTIONS
The institutional setting for environmental management in Madagascar is currently in flux, as the govemment began implementation of EP3 in 2004. As noted before, a principal aim of EP3 is to rationalize the institutional structure for environmental management. The reorganization of institutions will have (hopefully only) a short-run impact on their effectiveness.
196. Mixed effectiveness of the main environmental institution^."^ In 2004, the World Bank conducted an assessment of the institutional effectiveness of the main environmental institutions (DGEF, DGE, ANGAP and ONE), drawing in part on the planning documents for EP3 (BIODEV 2003)'14. This evaluation is subjective since reliable benchmarks against which to evaluate organizational effectiveness are missing. As a consequence, the findings are limited to two general observations: first, capacity and effectiveness of the two agencies (ANGAP and ONE) are considered to be stronger than that of the two general directorates within MinEnvEF. Second, strategic planning is a problem across the environmental domain.
109 Carret J.C., Loyer D. "Comment fiancer durablement les aires protCgBes de Madagascar D, Notes et Etudes No 3, Agence Franqaise de DCveloppement, Novembre 2003. 'loAnalysis of each watershed having a protected area in its headwaters shows obvious hydrological linkages between 20 PAS and at least 430,000 hectares of irrigated paddy rice fields and 17 towns with an annual 8.4 million m3potable water consumption situated downstream. Employment opportunities in PAS and income from handicraft sales are additional benefits not accounted here. '12 Note that this MGF 37.2 billion loss in income over 5 years is a worst-case scenario, because it assumes that slash and burn activities in forested areas are entirely additional to existing economic activities in local communities. 'I3The assessment is based on interviews with senior officials and the lessons learned in the design ofEP3, particularly with regard to institutional design (Biodev 2003). The evaluation does not necessarily reflect the view ofall relevant stake holders, the MinEnvEF is questioning its findings. This assessment (see annex 12.3 and 12.4 for details) evaluated institutional effectiveness on the basis of selected criteria (alignment with government priorities, whether objectives are reflected in organizational structures, and whether the building blocks for effective implementation are in place). Furthermore, the assessments took a closer look at the main organizational functions of each institution, including strategic planning, budget management, operational management, monitoring and evaluation. -99-
197. Protected area system effective. ANGAP manages 46 protected areas, covering 3 percent of land area and 15 percent of forested land. Protected areas include 87 percent of the major ecosystems ofMadagascar, which compares favorably with the intemational good practice benchmark of 75 percent. The key effectiveness indicator is the deforestation rate within protected areas - this has fallen essentially to 0, while remaining at 1 percent per year outside of protected areas. Recent statistics indicate that forestry fire and the practice of tavy have been reduced over the past years’15.
198. While Government has dealt with some problems, several issues of institutional effectiveness remain. Some of the key issues regarding the institutional effectiveness of the environmental institutions are listed below in table V-5:
Table V-5: Summary of some institutional issues and reform status
~~~~ ~ Issues Reform status DGEFI 4 particular challenge is the combination of the DGEF has not, to date, taken concrete steps DGE xganizational culture of a production sector for the implementation ofEP3 :forestry) with a mandate for a more integrated :nvironmental management (e.g. its Petty corruption and offenses against the :ffectiveness as a manager ofconservation forest forest code are still features of the sector. remains to be confirmed ) Legislation and regulation in the sector is overly complex and applied only unevenly and arbitrarily. However, fee collection from logging permits has increased recently.
Law 96-025 on Secured Local Management The government approved the Forest (GELOSE) aims to reduce deforestation by Management Contracts (GCF) decree, which providing for the transfer of management transfers the management of forests to local responsibilities for renewable natural resources communities in 2000. The GCF falls under to local communities. The operation ofGELOSE the GELOSE law but places specific emphasis requires the intervention of an official mediator on community-based forest management. to supervise the transfer and resolve conflicts There is, however, an overlap and lack of that may arise. The complexity of the GELOSE clarity between the GCF and GELOSE process is responsible for the low number of programs, hectares transferred to community management ONE Average time to process environmental impact The decree 2004-167 on MECIE has assessments has been extremely long due to: eliminated the institutional overlap and made 0 a significant learning process required ONE the ‘one-stop shop’ for EM. It also between 1997-1999 (e.g. each new sector to mandates a processing time of 60 days from be assessed had its particular features) and the date of eligibility assessment, or 120 days 0 a significant overlap in the responsibilities in the case of EIAs requiring public ofthe MINENVEF and ONE with respect to consultations (See also annex 12, table 12.5) EL4 since 2000-2003. ANGAP Effectiveness of transferring entrance fees to Reforms aimed at increasing community communities (this is an issue largely because empowerment are underway - see section on ANGAP’s core mandate is conservation, no1 revenue sharing with local communities. development). Source: h EnvEF, World Bank
1*5 Substantial reduction in the deforestation owing to tavy is evidenced by the most recent figures of Conservation International based on an anlysis ofNASA satellite imagery. -100-
6) AN UNFUNDEDMANDATE: ENVIRONMENTAL IMPACT ASSESSMENTS OF PUBLIC INVESTMENTS
199. Double standard for public investments? Environmental impact assessments (EIAs) in Madagascar are governed by the MECIE decree. While all large-scale investments, both public and private, are subject to the decree (at least to the point of determining whether an EIA is required), to date there has been little application ofEIA for public sector investments. Until mid- 2003, 72 EIAs were carried out under the decree; only two ofthem for public sector investments due to a lack of a uniform enforcement of environmental laws. This situation presents a severe environmental risk, since large-scale public investment is expected to average more than three times the value ofsimilar private investment until 2006. This also creates a negative image for the government because ofthe double standard applied to private and public investments.
200. Public sector does not systematically pay the permit fee. Environmental Impact Assessments are administered by ONE, which is financed by two types of revenues: (i)general fees for EIAs from potential investment projects ofthe public and private sectors, and (ii)permit fees (assessment and monitoring) for large investment projects. While the general fees for EIAs are used to cover the cost of conducting the impact assessments, the permit fees, which flow into an off-budget account of ONE, are used to fund the operating and management costs of ONE. Current practice suggests that all line ministries budget adequately for EIAs in their project costs. Nevertheless, ONE faces financing problems for two reasons related to the permit fees: first, not all line ministries budget for permit fees, and second, the permit fees that are budgeted are at times not adequate. The Government is in the process of exploring sustainable funding options for ONE. Prior analysis, under the EP3 project, had anticipated that (i)the general fees be set at cost recovery level for the EIAs, and (ii)that total potential revenues from permit fees broadly cover the costs ofEIA management by ONE - estimated at around MGF 4billion in the planning documents of EP3 (see annex 12.6)’16. Under these circumstances, EIA administration in Madagascar could be placed on sustainable footing if payments for permits ofpublic investments are budgeted and paid for by all corresponding line ministries as well as decentralized layers of Government. Altematively, ONE had suggested to create a budget line item at the MinEnvEF that would ensure funding for management of ONE; a Government decision on this proposal is still outstanding.
7) REVENUE SHARING WITH LOCALCOMMUNITIES
201. Inadequate transfer of funds to communities. Since the beginning of NEAP implementation in 1991, park entrance fees have been shared on a 50/50 basis between 27 protected areas managed by ANGAP and the neighboring communities. From 1992 to 2002, park fees generated MGF 6.3 billion of PRDEAP’” (local communities share of revenues from park entrance fees), 90 percent of that amount coming from 5 protected areas: Isalo, Andasibe, Ranomafana, Amber Mountain and Ankarana. To date, only MGF 2,3 billion or 37 percent of PRDEAP have been transferred to neighboring communities to finance 520 micro-projects: 175 social assets projects (rehabilitation of schools, bridges, markets, for example) during NEAP first stage (1991-1996) and 345 diversification of livelihood projects (income generation) during NEAP second stage (1997-2002).
‘16 Based on ONE experience, it is estimated that the total cost of EIAs amounts to 0.75 percent of a project’s investment costs. Permit fees are projected at 0.35 percent of total investment costs. Potential permit fees could rise to MGD 3.6 billion per year. Moreover, ONE estimates that additional MGF 1.2 billion will be raised annually from private sector investments. (Biodev 2003) 11’ Part des Recettes pour les Droits d’EntrCe dans Aires ProtCgkes (PRDEAP). -101-
202. Complex institutional arrangements. During the second stage of NEAP implementation, PRDEAP funds were remitted to the ANGAP head office in Antananarivo. Subsequently, representatives of members of grassroots communities and village-based associations (COGES118) proposed micro-projects and submitted them to the ANGAP regional office representative. Once approved by the ANGAP regional office representative, micro- projects were presented to ANGAP head office for clearance. Once approved, mini-projects were co-managed by COGES and the site representative. The complexity of this institutional arrangement partly explains the low transfer rate (37 percent) of PRDEAP funds that have actually been transferred to neighboring communities during the first two stages of NEAP implementation.
203, Reforms of community funding mechanism under EP3 During the preparation of the third stage of NEAP implementation (2004-2009), this institutional arrangement will be reformed. PDREAP funds will be placed in a special social fund. Mini projects will be elaborated by local communities with the technical assistance of the Regional Steering Committee (CRO) that will involve selection of representatives from all stakeholders present in the area, including representatives of members of grassroots communities, village-based associations, regional development committees, civil society/development operators, and private and public institutions. In addition, PDREAP funds will be managed under a contractual basis by beneficiary communities, CRO, communes and site representative. These decentralized management principles should bring greater benefits to communities neighboring protected areas. Protected areas do offer benefits to local communities, particularly the creation of employment. PDREAP funds are augmenting these benefits and helping to offset the opportunity costs borne by local communities. Until today, however, the overall implementation of this community funding mechanism appears to be slow.
8) RECOMMENDATIONS
204. After ten years ofinvestment by the Government, Madagascar has established the basis of a modem environmental management system. A legislative framework is in place. A functioning EL4 process has been developed. An effective system of protected areas, covering most biodiversity ‘hotspots,’ has been built. The analysis, however, also draws attention to several flaws in the area of public finance, institutional effectiveness and implementation of government sector priorities. The present resource envelope does not seem adequate for the investment and operating needs ofthe protected area system over the next five years, which will necessitate a focus on revenue generation, the functioning of environmental institutions and the implementation of government strategies to ensure an efficient use of public resources. Thus, Government’s action plan should focus upon:
0 Increase tourism revenues. Current tourism rent capture is extremely low in Madagascar. The government should (i)raise entrance fees for foreign tourists in protected areas (this can potentially double total revenues), and (ii)raise hotel accommodation taxes in line with other tourist destinations. o Ensure sustainablefunding of the protected area system. Government should close the projected funding gap for ANGAP over the next five years and secure sustainable funding for the protected area system by tapping into tourism revenues and HIPC resources, and by seeking additional external resources for the protected areas trust fund.
~ Comite de Gestion (COGES) -102-
0 Improve financial management. Government should address existing problems in budget planning, coverage and execution. This will require training and capacity building in the area of public financial management, as well as the development of a consistent financial management framework for the sector. The existing financial management fkamework should be revised to capture the distribution of expenditures across different elements of environmental management. o Ensure adequate funding of Environmental Impact Assessments. Payment of permit fees for public investment projects should be enforced or an alternative funding mechanism for the management ofONE should be developed.
Increase compensation of communities near protected areas. A social fund using PRDEAP park revenues should be created to improve the compensation of communities near protected areas. Participation of these communities in the management ofprotected areas should be enhanced by systematically implicating local committees and NGOs. o Streamline the devolution of local resource management rights to communities. As the devolution of resource management can potentially reduce deforestation, the existing processes for community-based forest management (GELOSE and GCF) should be harmonized and streamlined. -103-
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Annex 2: Madagascar’s Poverty Reduction Strategy
Madagascar submitted a full PRSP to the IMF and World Bank in July 2003, which mapped out an ambitious program to reduce poverty by half in ten years through rapid and sustained growth. Achieving this objective would entail three strategic axes: (i)improving governance; (ii)promoting broad based growth; and (iii)providing human and material security. The Joint Staff Assessment found the overall strategic focus to be clear, with coherent sector development plans built on work program agreements with the ministries involved. Most importantly, there was a high degree of ownership and commitment. At the same time, the JSA noted that only limited costing had taken place, that in many cases the analytical underpinnings were weak and that the government would need to prioritize strengthening capacity in order to implement the program successfully. In terms structural policies to promote growth, the JSA proposed major investments in public transport infi-astructure; commitment to public-private partnerships to improve the management of public enterprises; and reforms in tax and tariff policies, land laws and better governance.
The macroeconomic outlook in the PRSP anticipated sustained growth of 8-10 percent. However, the JSA viewed this as overly optimistic in light of limited government capacity, possible financing shortfalls, institutional constraints and a weak financial sector unable to support the demand for credit. Thus, while the proposed macroeconomic framework was basically sound, the JSA proposed growth targets be revised down119.
The preliminary investment costs of PRSP, as estimated by Government, came to about MGF 16 trillion, or approximately US$2.5 billion for the 2003-2006 period.”’ By comparison, the 2001 GDP came to MGF 30 trillion, or approximately US$4.7 billion, in 2001 exchange rates.’*l Planned investment costs for the 2003-2006 period amounted to about half of the 2001 GDP.
Government anticipated that the PRSP would be implemented in a high growth environment. GDP growth was estimated to reach 6 percent in 2003 (as the country exited the crisis) and 8 percent by 2006. Growth would come from all sectors ofthe economy, but would rely primarily on agriculture, the export processing zone (textiles), public works, transportation services, fishery, mining and tourism. Table 2.1 provides some details. The Development Policy Review provides an elaborate analysis.
To attain the anticipated growth rate, the PRSP anticipated that the investment rate for the economy would increase from 17.5 to 23.2 percent of GDP over the period 2003-2006; this comes to an average annual investment rate of 21.2 percent of GDP for the four year period. In contrast, gross national savings expected to average 16.9 percent of GDP for the 2003-2006 period; this implies that Madagascar would require average annual net imports, and external current account deficit, of about 4.3 percent of GDP for the 2003-2006 period, or net imports of MGF 6 trillion in 2002 prices. The external current account deficit would be financed, about half by Government borrowing and about half by capital grants to Government. The external accounts include inflows of about 1.3 percent of GDP a year in foreign direct investment, which is equivalent to the average annual external reserve accumulation. The PRSP
‘I9 IDA and IMF 2003, “Madagascar: Poverty Reduction Strategy Paper: Joint Staff Assessment (JSA)”. I2O The PRSP presents investment costs for the 2003-2006 period in nominal prices. In 2002 prices (time of drafting of the PRSP) , this comes to about MGF 14 trillion. 12’ The reader is advised that most comparisons for the PRSP expenditures (2003-2006) are not made against 2002 since that was the crisis year and the economy and the public sector came to a halt, but rather against 2001 which is considered a normal economic and budget year. -118- does not explicitly discuss monetary policy, but assumes an average annual inflation rate of about 5 percent ofthe 2003-2006 period.
The macroeconomic framework reserves a very significant role for the Government sector over 2003- 2006 period. Government is expected to spend on average about 18 percent of GDP a year in non- interest expenditures for the 2003-2006 period, compared to 15.4 percent of GDP in 2001. At the same time, Government's revenues are expected to increase to reach to 12.5 percent of GDP in 2006, up from 10.1 percent of GDP in 2001, while interest payments are expected to half to about 1 percent of GDP by 2006, in large part due to the HIPC debt relief program. The overall fiscal balance is expected to average -4.8 percent of GDP for the 2003-2006 period, up from -4.4 percent of GDP in 2001. The PRSP does not explicitly discuss the financing ofthe deficit.
It is important to place the admirable ambitions of the PRSP in the context of the previous accomplishments of the Malagasy economy. In the 1997-2001 period, GDP per capita growth amounted to about 6.1 percent on a cumulative basis; in that same period, the national headcount index fell from 73 to 68 percent. The implied poverty elasticity for the 1997-2001 period was close to close to 1.1; this means that for a one percent increase in per capita income, the head count index fell by 1.1 percent. For the 10 year growth period (2003-2013) the PRSP is seeking to initiate, the 9.3 percent GDP growth would amount to a cumulative increase in per capital income of about 84 percent. A concurrent reduction in the headcount index from 7 1.6 percent to 34.2 percent would imply a poverty elasticity of 62 percent.'22 This seems less ambitious than the 1997-20001 experience. However, one must look at the composition ofthe growth and the composition of poverty reduction between urban and rural areas. Over the 1997-1999 period rural poverty actually increased while urban poverty fell; in the 1999-2001 period rural poverty fell, but by much less than urban poverty.
Macroeconomic outcomes for 2002-2003. After the 6 month economic crisis in the first half of2002, the Malagasy economy contracted by 12.7 percent. Inflation reached almost 16 percent and investment fell from 18.5 to 14.3 percent of GDP. The external current account balance worsened from -1.3 to -5.7 percent ofGDP. On the fiscal side, revenues collapsed from 14 to 10 percent ofGDP, as did expenditures, from 17.6 percent the previous year, to 15.6 percent in 2002.
The year 2003 saw an unexpected recovery. GDP growth reached 9.8 percent compared the planned 6.0 percent growth that had been planned. Although the high grow rate was due to a catch-up effect (relative to the 2002 crisis), it raised significant expectations about the medium term. Public expenditure increased to 18.2 percent of GDP while revenues (and grants) reached 14.4 per percent of GDP, matching the pre- crisis 200 1 rates.
Although the political crisis of the year 2002 was a setback implementation of the PRSP is proceeding reasonably well. A first progress report on the PRSP was submitted in 2004; it indicates reasonable progress on all strategic axes ofthe PRSP.
122 This comparative analysis can best be done by looking at extreme poverty instead of the headcount indeed, but measures of extreme poverty are not available in the PRSP. -119-
Table 2.1: PRSP Macroeconomic and Fiscal Framework, Prepared July 2003
National Accounts and Prices Real GDPmp growth 6.0 6.0 4.0 4.5 5.0 Inflation, CPI (p.a.) 7.4 8.0 7.0 6.5 6.0
Primary Sector 4 -1.8 2.3 2.5 2.8 Secondary Sector 7.6 17 4.9 5.6 6.3 Zone (EPZ) 40 50 10 11 12 Tertiary Sector 6.1 9.4 4.6 5.2 5.7 Public Works 13.5 20 12.5 13 14 Goods Transportation 5.7 11.5 5 5.5 6.5
GDPpm (MGF bill, cur. Pri) 29,843 33,978 37,811 42,081 46,836 Per Capita GDP (cur USD) 302.0 307.0 316.9 326.6 338.7 National Accounts (YOGDP) Gross Domestic Investment 18.5 17.5 15.4 16.1 20.2 Public Sector 7.3 7.3 7.4 7.9 8.4 Private Sector 11.2 10.2 8.0 8.2 11.8 Gross National Savings 17.2 12.9 11.2 12.0 16.6
Fiscal WOGDP) Total Revenue & Grants 14.0 15.0 13.4 13.7 14.4 Total Revenue 10.1 10.6 10.3 10.6 11.3 oiw Taxes 9.7 10.3 10.0 10.2 10.9 Grants 3.9 4.4 3.1 3.1 3.1 Total Expenditure 17.6 18.2 17.5 17.8 18.0 oiw Interest Due 2.0 1.8 1.3 1.2 1.1 o/w Current (excl. interest) 8.1 8.4 8.6 8.5 8.3 oiw Capital 7.3 7.3 7.4 7.9 8.4 Structural Reforms (net) -0.7 -0.1 -0.1 0.0 0.0 Overall Balance (comm.) -4.3 -3.3 -4.2 -4.1 -3.6 Extemal CAB (% GDPj CAB excl. Official Transfers -2.0 -7.3 -5.2 -5.2 -4.6 CAB incl. Cur. Off. Transfers -1.3 -4.6 -4.2 -4.2 -3.6 ACB incl. Cur. & Cap. Transf. 3.7 -1.1 0.3 0.4 1.o Gross Off. Res. (mill of ..) 317.5 324.0 466.5 570.2 697.5 In weeks of G&S 14.4 15.2 20.8 22.9 25.6 Exchange Rate (p.a.) Malagasy FrancsiSDR 8,391 9,308 9,750 10,241 10,696
Source: Madagascar PRSP - 120-
Annex 3: Assessment of Madagascar's budget management capacity to track poverty-reducing spending'23
The four benchmarks that were met indicate that: (a) the state's activities are not financed significantly by improperly reported extrabudgetary sources; (b) budget expenditure is classified on a detailed administrative, economic, and functional basis in conformity with the Classifications of the Functions of Government (COFOG); (c) multi-annual forecasts are integrated into the budget formulation process; and (d) tracking surveys are being carried out.
Significant weaknesses, however, do exist, particularly in the areas of in-year budget tracking and execution. The main weaknesses are: (a) the substantial gap between budget outturn and the initial budget; (b) no clear identification of poverty-reducing spending in the budget law or in execution tracking (only HIPC Initiative expenditure is clearly identified); (c) domestic arrears remain substantial and are not fully reflected; (d) internal control procedures are still inefficient; (e) accounting and banking data are not reconciled; (f) fiscal reports are received with excessive lags; (g) the complementary period is still overly long; (h) the draft budget execution laws (lois de reglement) are not submitted to Parliament within 12 months after the end ofthe fiscal year.
A. BUDGETFORMULATION
Indicator 1. Coverage of the budget or fiscal reporting entity
Benchmark 1: Fiscal reporting covers the Government Finance Statistics definition of the general government sector, Le., including central, regional, and local governments, and all government operations, whether funded through the budget or not
Assessment: The benchmark is not being met. General budget coverage is limited to central government as defined in the 200 1 edition ofthe GFS Manual. Local government budgets and their execution are not consolidated with those ofthe central government
Indicator 2. Degree of spending being funded by inadequately reported extra budgetary sources
Benchmark 2. Government activities are not funded through inadequately reported extra budgetary sources to a significant degree (less than 3 percent oftotal expenditure)
Assessment: The benchmark is being met. Extra budgetary funds exist and information on execution is not consistently accurate or transparent. The overall amount, however, is considered insignificant in relation to total expenditure (less than 3 percent)
123 The assessment is based on a common framework comprising 16 indicators, that is applied to all beneficiary countries ofIMF and World Bank Heavily Indebted Poor Country (HIPC) Initiative. An assessment and action plan was completed in 2001 and an update was performed in 2003. A comprehensive re-assessment was conducted in 2004. The 2004 assessments use a new 16" indicator on public procurement. Accordingly, the rating for 2004 is higher for five benchmarks than in 2003. On the whole, a modest progress in the results ofthe 2004 assessment was observed as compared with the progress registered in 2003. -121-
Indicator 3. Reliability of budget as a guide to future
Benchmark 3. Budget outturn data are quite close to the original budget.
Assessment. The benchmark is not being met. The overall budget utilization rate is low, particularly where capital expenditure is concerned
Indicator 4. Inclusion of donor funds.
Benchmark 4. Budgets and/or fiscal reports at all levels of government include, without exception, grants projected to be provided by donors, and the capital and current expenditure of all multilateral and bilaterals on government activities.
Assessment. The benchmark is not being met. Meeting this benchmark requires that all activities financed by donors and lenders be fully reported ex ante, and in a timely manner, on an ex post basis: which is not the case.
Indicator 5. Classification.
Benchmark 5. Budget expenditures are classified on an administrative, economic, and detailed functional and programmatic basis.
Assessment. The benchmark is being met. The budget nomenclature meets international standards. It includes an administrative, economic, functional, and program classification.
Indicator 6. Identification of poverty-reducing spending.
Benchmark 6. Poverty-reducing expenditures are clearly identified.
Assessment. The benchmark is not being met. With the exception of HIPC Initiative spending, other poverty-reducing expenditures are not clearly identified in the existing budget classification, and the PRSP priorities are not generally reflected in the budget law.
Indicator 7. Integration of medium-term forecasts.
Benchmark 7. Multiyear expenditure projections are integrated into the budget formulation process.
Assessment. The benchmark is being met. Projected multiyear expenditure is integrated into the budget formulation process. -122-
B. BUDGETEXECUTION
Indicator 8. Evidence of budget execution problems-Arrears.
Benchmark 8. Small stock of expenditure arrears, with little accumulation of arrears over the previous year.
Assessment. The benchmark is not being met.
Indicator 9. Effectiveness ofthe internal control system.
Benchmark 9. Internal control is effective.
Assessment: the benchmark is not being met. Internal control on the conformity ofexpenditure to laws and regulations is relatively satisfactory, but remains insufficient to improve the quality of budget and financial reporting, as well as the efficiency and effectiveness ofexpenditure.
Indicator 10. Tracking surveys are in use.
Benchmark 10. Tracking surveys are used, where necessary, to supplement internal control, but may not yet be a regular feature ofthe PEM system.
Assessment: This benchmark has been met. Tracking surveys are conducted to supplement internal controls.
Indicator 11. Quality of fiscal information.
Benchmark 11. Satisfactory reconciliation offiscal and banking records is undertaken routinely.
Assessment. This criterion is not being met. Reconciliation statements are not being prepared.
C. FISCALREPORTING
Indicator 12. Regularity oftimely internal fiscal reporting.
Benchmark 12. Internal budget reports are received within four weeks of the end of the relevant period.
Assessment. This benchmark is not being met. Internal fiscal reports are filed with lags exceeding four weeks.
Indicator 13. Periodic fiscal reports track poverty-reducing spending.
Benchmark 13. Good-quality classification of poverty-reducing spending is reflected in the in-year budget reports.
Assessment. This benchmark is not being met. Poverty-reducing spending cannot be tracked as it is not identified. -123-
Indicator 14. Transactions are recorded in the accounts in a timely fashion.
Benchmark 14. Routine transactions are entered into the main accounting system(s) within two months after the end of the fiscal year.
Assessment. This criterion is not being met. The supplementary fiscal period exceeds the two- month lag provided by law, although it is in fact less than six months.
Indicator 15. Timeliness of audited financial information.
Benchmark 15. An audited record of the financial outtum should be presented to the legislature within twelve months from the end ofthe fiscal year.
Assessment. This benchmark is not being met. The latest budget review law passed by Parliament dates back to 1996.
D. PUBLIC PROCUREMENT
Indicator 16. Efficiency and effectiveness ofthe public procurement process.
Benchmark 16. The procurement system promotes efficiency and effectiveness in the expenditure of public funds through clear and enforceable rules that promote competition, transparency, and value for money.
Assessment. This benchmark is not being met. - 124-
Annex 4: Reform of the Public Finance Management System Government Action Plan
PLAN D’ACTIONS PFUORITAIRES 2004 15 octobre 2004
Indicateurs de Dates debut Lesponsables de Domaines Etat d’avancement fin Actions A mettre en aeuvre rksultats fin 2004 et fin la mise d’activites septembre 2004 en aeuvre
~~ luivi et Crier une cellule de .a cellule crkee, ses Fevrier G Cellule crCCe depuis Juin 2004 2oordination des suivi et de coordination des nembres recrutes - Coordonnateur des !Cformes rkformes au sein du MEFB RCformes nommi et dCja et definir son cahier de ?Cvrier opkrationnel : consultant charges ruin recrute au titre du PGDI ProcCder au Un cadre en cours de recrutement des membres recrutement. de la cellule
2oordination avec vlettre en place un mecanisme Iccord entre le FCvrier G Accord entre bailleurs de es bailleurs de fond )ennettant d’assurer le dialogue dEFB et les fonds et MEFB Ctabli pour echnique entre le MEFB et les )ailleurs de fonds une reunion trimestrielle. La )ailleurs de fonds sur les :ur le mecanisme premitre reunion a eu lieu le -iformes 21 septembre 2004 sur les problkmes de la Douane (voir compte rendu de reunion a ce sujet) tenforcement des - Definir les termes de rermes de rCfCrence Fevrier ;G En cours :apacitCs techniques refkrences determinant ipprouvks iu MEFB la strategie de formation du MEFB Zonsultant engage Avril - Recruter un consultant
3ystime integrk de - Faire receptionner le >es fonctionnalites Fevrier ;G Dtveloppement du logiciel de Sestion des volet A par le Comitk ncluses dans le ’resident du programmation effectuC dans Finances Publiques de pilotage y inclus la iolet B son1 :omit6 de le cadre de la preparation du :SY GFP) validation technique el itilisees dans le site FCvrier i ’ilotage budget programme 2005 I’evaluation de )h SYGFF AoQt XI l’environnement. mplante - Mettre en Ceuvre Avril A Juin immediatement le volet B du SYGFP Fevrier i - Finaliser lec Juin procedures en prenani en compte les progrkc de l’informatisation Septembre i - DCcider la plate forme DCcembre technologique er prenant en compte le: choix ou option: technologiques dL Gouvemement - Etendre le SYGFP dans quatre (4) Chefs lieux de Province -125-
Domaines Indicateurs de Dates debut Responsables de Actions mettre en ceuvre Etat d’avancement fin d’activitks rksultats fin 2004 et fin la mise en oeuvre septembre 2004
Preparation de la - Consolider le processus de La loi de Finances 4vril DGDP ,oi de Finances 2005 en cours Loi de Finances preparation budgktaire pour la 2005 est prCparCe le preparation presentee sous Loi de Finances 2005 (y compris selon cette brme de Budget Programmes le calendrier de preparation) reglementation Mars a DGDP - Etablir les phases et activitks Le processus de 3ctobre de mises en Oeuvre de budgets - mise en Oeuvre des programmes budgets programmes dibute
Chaine de la - Elaborer les textes pour i) la Les conditions pour Juin DGDP DCcret n”2004-571 du 4 Juin depense I fusion des fonctions de sous la fusion sont 2004 dkfinissant les Fusion des ordonnateur et de gestionnaire remplies ittributions et la responsabilite fonctions de sous de credit et ii) le statut de cette fie I’Ordonnateur dans les ordonnateur et de cattgorie de personnel Septembre phases d’exkcution de la gestionnaire de - DCfinir le plan e formation Plan de formation fiepense credits dans le cadre de la strategie Ctabli Septembre Statut des corps des globale du MEFB. Administrateurs Financiers - Identifier les Ministkres Pilotes Ministtres Pilotes dCsin6s
Chaine de la - Elaborer un arret6 fixant la Cette nomenclature FCvrier B DGDP Dkcret nO2004-282 fixant 15 depense I1 nomenclature des pikes entre en vigueur Juin nomenclature des pitce: Nomenclature des justificatives de la dipense dans les services justificatives des dossiers 5 pitces justificatives - Diffuser cette nomenclature au opkrationnels Juillet A soumettre au visa du CDE sein des services budgktaires concemks Novembre En cours de finalisation proje concemks (Ordonnateurs, de dCcret concemant toutes le! Comptables et ContrBleurs) chaines de la dkpense Nomenclature d6jB publie( dans le JORM
Chaine de Depense - Diffuser le manuel 1er semestre DGIGE Manuel deja diffuse depuis le 111 d’inspection aux inspections el 05/07/2004 a I’heure actuelle Manuels de ContrBles d’Etat le‘semestre DGT mise jour compte tenu des procedures - Diffuser le manuel de nouveaux textes ComptabilitC GCnCrale du Tresor Les services on1 1er semestre Diffusion et formation de mai - Diffuser le manuel directement accks 51 juillet 2004 d’inspection destine a la Brigade aux textes financiers ze semestre SG du TrCsor fondamentaux Diffusion et formation de mai - Amenager au sein du MEFB Les services 1 semestre DGDP 51 juillet 2004 un centre de documentation utilisent les manuels accessible a tous les Services - Diffuser le manuel d’exkcution du budget au niveau de contrBle Circulaire budgetaire financier no519lMEFB du 30/12/2003 -126-
Domaines Indicateurs de Dates debut Responsables de Etat d’avancement fin Actions imettre en oeuvre rbsultats fin 2004 et fin la mise d’activitbs septembre 2004 en oeuvre lIarchCs Publics - Finaliser et dCposer a -e cadre ICgal et Mai Juin DGDP ,oi no2004-009 du 26 juillet 1’Assemblke Nationale le projet nstitutionnel des ,004 portant code des de Code des Marches publics narchCs publics est darch6s publics - PrCparer et diffuser les .enford MUS a PrCsident ComitC documents types affirents B la iuillet de Pilotage ’dR des Consultants a regu un nouvelle rkglementation .vis favorable de la Banque- - Signer le programme de Avril ippel B Manifestation renforcement du cadre I’interh paru dans les Institutionnel Juin a luotidiens de la Capitale- - DCmarrer la formation du dCcembre )ate de clbture fix6e au 30 personnel par la mise en ceuvre eptembre 2004 du nouveau Code des march& avec priorit6 aux 6 Ministttres :ormation dCmarrCe dtts Pilotes inalisation des documents YPes reglementaires l’application du Code de$ vIarchCs Publics jestion de la Solde - DCfinir les TdRs pour Le MEFB Avril DGDP It des Pensions I’Cvaluation de la gestion de la :ntreprend une Solde et des Pensions dans rCflexion sur le I’objectif de sa dkconcentration jtratCgie de cette Juin a - Recruter un Consultant et iCconcentration octobre rCaliser cette Cvaluation
3estion de la dette Former le personnel concern6 Les donn6es de li Mars a DGT Formation de : )ublique extCrieure sur le logiciel Sygade dette publiquc octobre agents de la DDP B Genttvl extCrieure son (fin mars) mises fi jour Mise 9 jour el continu, au fur et a mesur des tirages f remboursements Attente r6conciliation ave l’ancien systkme -127-
Domaines Indicateurs de Dates debut tesponsables de ii Etat d’avancement fin Actions mettre en oeuvre resultats fin 2004 et fin la mise d’activitks septembre 2004 en oeuvre
Zomptes de 1’Etat . Finaliser la balance consolidee Clette balance est ruin )GT Balance provisoire 2003 deja 2003 des Comptes du Tresor :ransmise a la Cour ClaborCe les Comptes La balance definitive sera transmise a la Chambre des . Finaliser les comptes de Cles comptes de Septembre Comptes dans la loi de zestion 2002 ;estion sont deposks Reglement 2003 i la Chambre des Xcembre . Finaliser les lois de rkglement Clomptes 87 % Budget General transmis 2002 et 2003 a la Chambre des Comptes Comptes de gestion transmettre a fin septembre ruin la Chambre des Comptes centralises a 1’ACCT et en - Deposer les lois de rkglement cours d’examen 1997 et 1998 a I’Assemblee Loi de rkglement 2002 deja Nationale transmise a la Chambre des Comptes fin juin Loi de Reglement 2003 A transmettre 21 la Chambre fin octobre
Loi de Reglement 1997 dejf adoptee par I’AssemblCc Nationale Loi de Reglement 1998 dCposCe au Gouvemement (i verifier) _____
Documentation - Definir une strategie visant a Les textes financiers Mai DGDP financiere accroitre la disponibilite de la fondamentaux et le documentation financibre au manuels de sein des services du MEFB procedures son1 DCcembre - Implanter un centre de rendus la documentation disponible aux disposition des agents du MEFB agents du MEFB -128-
Domaines Indicateurs de Dates debut iesponsables de Actions h mettre en oeuvre Etat d’avancement fin d’activitks resultats fin 2004 et fin la mise septembre 2004 en oeuvre
Irgane de ContrGle - Eriger la Brigade du TrCsor en )es contrdles sont ruin >GT . Brigade du TrCsor deja Direction :xerces sur les :rigCe en Direction suivant le 3rigade du Tresor Iostes comptables FCvrier a iemier organigramme du - Recruter 8 vkrificateurs Iu Tresor Decembre MEFB dCcret no2004-570 du suppltmentaires Avril 9 le‘juin 2004 - Mettre des cellules DCcembre 5 VCrificateurs deja recrutbs - d’inspection dans chaque Mars 3 a recruter d’ici dCcembre TrCsorerie Principale DCcembre . Cellules deja mises en place - Former le personnel chargC des jans chaque TrCsorerie verifications Principale
- Formation terminCe en juillet 2004
3rgane de contrdle - PrCparer les decrets instituanl >es conditions Juin 3G Decret n”2004-573 du le‘Juir :IInspection et organisant I’IGF ikcessaires au 2004 portant creation 3CnCrale des Tonctionnement organisation e ?inances - Recruter 8 inspecteurs sur les :orrect de I’IGF Juillet $ 3G fonctionnement de I’IGF 15 postes prevus DCcembre - Former les inspecteurs recrutCs Septembre P Liste des inspecteurs dCji DBcembre pr&te Attente nomination en Consei des Ministres Une premikre formation des Inspecteurs d’Etat sera faite les 11 et 12 Octobre 2004 par les IGF franqaise et Marocaine
Formation sous 1’6gide du Organe de contrdle Entreprendre la formation de: Les connaissance: Avril i DGCDE CRROC en 2003. I11 : Contrdles Contrdleurs financiers dans 1c techniques de! octobre Actuellement : formation en Financiers Cadre de la Strategie dc Contrdleurs cours (CF) formation du MEFB financiers son amdioris -129-
Indicateurs de bates debut Lesponsables de Domaines Etat d’avancement fin Actions A mettre en oeuvre rbsultats fin 2004 et fin la mise d’activitb septembre 2004 en oeuvre lecettes I Rediger et diffuser les textes ,es services fiscaux 4ai A IGI Mise la disposition des mp6ts I’application du CGI rccroissement leur ICcembre usagers du Bulletin Accroitre la documentation naitrise de la 4ai a Fiscal officiel n02 et lisponible dans les Services 6gislation fiscale et ICcembre preparation de I’Cdition iscaux et a l’attention des LmCliorent leur ‘Cvrier a du BFO n”3 :ontribuables endement )Ccembre Distribution aux Etendre I’informatisation des 4ars a inspecteurs du PCG 2005 :entres fiscaux .ovembre et du CGI a tous les Editer et disskminer les personnels. Mise a la nanuels de procedures fiscales disposition des guides pratiques fiscaux a l’attention des contribuables ; L’objectif de 15 centres fiscaux A informatiser cette annte a et6 largement depasse, 12 realisation actuelle est de 20CF informatisks. Debut de la validatior auprts des centre: fiscaux: 15 Octobrc 2004
Zecettes I1 . Installer Sydonia++ dans 3 >a Douane amCliore Vovembre )GD L’installation dc Iouanes mreaux de Douanes a gestion des Sydonia++ dans le! . Elever le niveau de formation .ecettes douanitres Bureaux de Douane: iu personnel douanier dans le :t Cltve le niveau de d6butera en janvier 2005, :adre de la stratkgie globale du Zonnaissance du fait du retard enregistr6 MEFB .echnique de ses 9vril 5 dans I’exCcution du Projet . Etendre la mise en place de ?,gents Xcembre (mai 2004 au lieu de pichet unique dans 2 bureaux janvier 2004). Au titre de fie Douane l’annee 2004 les activitks porteront sur la construction et le test du prototype du logiciel a la DGD et au niveau du site pilote (Tamatave Port) La strategic de formation de personnel est en cours d’klaboration. Toutefois, 1’Ecole Nationale des Douanes B Tamatave reprendra ses activites avant la fin de I’AnnCe 2004, avec la formation de 45 Cltves inspecteurs des Douanes. Le guichet unique est install6 dans le Bureau des Douanes de Diego et de Tulear depuis le 2e trimestre 2004. -130-
Annex 5: Statistical Tables (Public Finance) Table 5.1.: Madagascar: Real annual growth rates in sectoral budget allocations 1997-2004 (percent change in share of budgetary allocations) Aver. 1998 1999 2000 2001 2002 2003 2004 97-04 97-02
Total allocation 18.2 24.3 21.9 12.3 9.3 (9.5) 17.7 13.5 17.2 NonInterest Expenditure 16.0 29.6 20.0 18.1 6.3 (10.4) 15.5 13.6 18.0
Gouvernance 26.8 51.2 10.2 11.5 (11.8) 9.7 9.0 15.2 17.6 General Administration 28.0 58.1 11.7 11.3 (15.8) 5.6 6.8 15.1 18.7 olw budget, finance & eco.adm 4.4 128.6 1.5 11.8 (19.3) 22.3 8.7 22.6 25.4 Defense 56.2 (12.6) (1.3) 11.7 15.4 34.6 19.9 17.7 13.9 Public security (7.0) 66.6 2.8 14.6 12.8 24.8 15.4 18.6 17.9 oiw Justice 97.5 30.2 (19.0) 43.0 4.7 7.9 15.4 25.7 31.3
Growth 0.3 7.3 26.5 34.6 30.8 (34.7) 20.6 12.2 19.9 Energy (59.4) 149.4 (12.7) 30.2 (15.7) (3.3) (0.7) 12.5 18.4 Agriculture (3.7) 5.1 10.4 6.5 12.1 (28.8) 22.2 3.4 6.1 Environnement (2.3) 2.4 7.4 62.5 39.4 (33.2) 6.8 11.8 21.9 Transport & Communication 10.0 (10.3) 46.5 65.0 7.1 (25.0) 33.4 18.1 23.7 olw Transport 15.5 (10.7) 48.0 66.5 8.2 (26.6) 34.0 19.2 25.5 Others 28.5 21.9 43.9 6.9 128.3 (54.9) 4.6 25.6 45.9
Social 19.0 19.1 33.2 14.6 9.9 (6.5) 21.0 15.7 19.1 Education 39.8 20.2 32.3 14.0 22.6 (5.3) 40.1 23.4 25.8 o/w Primary Education 91.5 18.7 10.0 (7.2) 134.1 12.1 11.2 38.6 49.4 Health 4.1 28.3 37.5 18.6 0.6 (11.7) 2.3 11.4 17.8 oiw Primary Health care (3.8) 19.2 77.6 (32.2) 38.0 (29.7) 33.5 14.7 19.8 Others 8.6 7.8 29.8 10.4 (1.8) (1.8) 0.3 7.6 10.9 Source: MFEB, World Bank -131-
Table 5.2.: Madagascar: Real annual growth rates of current and capital budget allocations (1997- 2004) (percent change in share of budgetary allocations)
1997 1998 1999 2000 2001 2002 2003
Total 84,2 96,2 79,7 79,4 75,O 43,3 91,9
Administration 74,3 83,6 56,6 793 77,7 51,2 86,8 National Defense 98,8 68,l 100,9 103,7 97,5 93,O 95,2 Public security 97,9 131,7 93,O 97,O 93,3 78,l 99,7
Education 103,9 101,3 112,3 83,9 78,l 63,5 97,O Health 85,4 101,3 88,8 65,6 68,l 37,7 97,l Social protection 56,6 91,7 84,O 81,7 72,6 68,9 82,O Urbanism 62,O 66,3 84,2 50,O 46,8 24,l 64,6 Culture 64,2 76,8 62,8 101,9 79,3 68,O 86,6
Energy 33,7 174,O 73,3 112,4 69,9 82 62,9 Agriculture 78,6 121,8 79,9 84,5 72,7 23,4 84,6 Environment 124,O 167,7 205,2 195,6 143,9 41,7 85,l Industry 100,9 70,2 78,8 92,5 74,l 21,5 83,l Transport 94,8 98,7 92,O 53,O 51,l 21,5 89,3 Other economic affairs 126,4 116,3 102,3 81,O 99,l 17,9 168,O
Not classified 101,8 38,7 99,0 733 92,3 19,5 96,7 Yource: MEFB, Banque Mondiale -132-
Table 5.3: Functional repartition of Budget allocation 1997-2004 (% of non interest expenditures)
1997 1998 1999 2000 2001 2002 2003 2004
Total 100 100 100 100 100 100 100 100
Administration 32.1 35.5 43.2 40.3 37.9 30.1 35.5 32.8 National Defense 3.4 4.6 3.1 2.6 2.4 2.6 3.9 4.1 Public Security 4.1 3.3 4.2 3.6 3.5 3.7 5.2 5.2
Education 10.5 12.6 11.7 12.9 12.5 14.4 15.2 18.4 Health 8.8 7.9 7.8 8.9 9.0 8.5 8.4 7.4 Social Protection 0.9 0.7 0.6 0.5 0.6 1.o 0.6 1.3 Urbanism 5.9 6.2 4.9 5.4 4.8 4.1 5.2 3.8 Culture 1.5 0.9 1.o 1.1 1.1 0.9 0.8 0.6
Energie 3.2 1.1 2.1 1.6 1.7 1.4 1.5 1.3 Agriculture 10.4 8.6 7.0 6.4 5.8 6.1 4.9 5.2 Environment 3.1 2.6 2.0 1.8 2.5 3.3 2.4 2.3 Industry 1.4 1.2 1.1 1.o 1.o 5.7 1.5 1.3 Transport 11.9 11.3 7.8 9.5 13.3 13.4 11.2 12.9 Other economic affairs 3.0 3.6 3.4 4.4 4.0 4.9 3.9 3.5
Not classified 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 'ource: MEFB, World Bank -133-
Table 5.4.: Madagascar’s budget execution rates 1997-2003 (actual expenditures as percent of budgetary allocations)
1997 1998 1999 2000 2001 2002 2003
Total 84.2 96.2 79.7 79.4 75.0 43.3 91.9
Administration 75.2 84.9 56.7 78.9 76.8 50.6 87.1 National Defense 98.9 68.1 100.9 103.7 97.6 93.0 95.3 Public Security 97.9 131.7 93.0 97.0 93.3 78.1 99.7
Education 104.0 101.2 112.2 84.5 79.9 65.2 97.3 Health 78.2 96.8 88.6 59.9 67.8 37.9 92.2 Social Protection 69.5 91.7 92.0 76.2 46.8 25.1 73.1 Urbanism 65.5 64.8 84.9 38.0 42.8 28.3 65.4 Culture 95.7 97.0 97.5 109.3 78.9 69.3 88.3
Energie 23 .O 137.0 72.9 106.5 66.4 11.1 62.1 Agriculture 75.7 118.7 81.6 86.2 73.1 25.2 82.1 Environment 123.1 171.7 205.5 203.9 146.5 41.7 84.9 Industry 62.7 57.7 66.3 45.3 34.4 15.9 74.5 Transport 104.6 108.6 94.2 59.0 60.4 25.0 100.2 Other economic affairs 98.8 99.3 92.7 85.8 96.7 21.1 166.4
Not classified 101.8 38.7 99.0 73.5 92.3 19.5 96.7 Source: MEFB, World Bank
Table 5.5: Public expenditures of selected Sub Saharan African Countries 2004 (as a % of GDP)
Countries Total gov. expend. Sub Saharan Africa 25.9 Gabon 30 Senegal 21.8 Tchad 21.5 Madagascar 19 CGte d’Ivoire 16.5 Cameroon 15.6 Source: World Development Indicator 2004
Table 5.6: Share of some sectoral allocations (% of GDP) Health Education Wage bill SSA Cameroon Mali Senegal Madagascar 192 Source: World Development Indicator 2004 -134-
Table 5.7: Madagascar: Real annual growth rates of actual expenditures 1997-2003 (percent change in share of actual expenditures)
Aver. 1998 1999 2000 2001 2002 2003 97-03 97-01
Executed Non Interest Expenditure 37.6 10.7 19.7 6.3 (36.8) 90.7 21.4 18.6
Gouvernance 37.7 10.2 45.1 8.6 (37.2) 71.3 22.6 25.4 General Administration 44.1 7.1 56.7 8.7 (44.4) 78.9 25.2 29.2 olw budget, finance & eco.adm 31.0 28.3 71.7 14.3 (48.6) 116.9 35.6 36.3 Defense 7.7 29.4 1.4 5.1 10.0 37.9 15.2 10.9 Public security 25.1 17.6 7.3 10.2 (5.5) 59.2 19.0 15.0 olw Justice 96.1 40.2 (13.6) 26.6 (36.0) 93.6 34.5 37.3
Growth 29.7 (9.9) 6.5 18.9 (59.0) 181.8 28.0 11.3 Energy 109.3 5.1 33.8 (19.1) (90.1) 642.4 113.6 32.3 Agriculture 49.1 (3 1.O) 16.8 (8.4) (63.9) 157.0 19.9 6.6 Environnement 32.2 25.3 2.4 19.6 (59.6) 36.2 9.3 19.9 Transport & Communication 14.5 (16.4) (15.6) 59.0 (55.0) 211.7 33.1 10.4 olw Transport 20.3 (17.4) (16.2) 62.6 (55.3) 211.8 34.3 12.3 Others 13.9 12.3 23.9 21.1 (5 1.8) 228.3 41.3 17.8
Social 29.2 25.2 (0.8) 9.7 (19.9) 67.8 18.5 15.8 Education 36.3 33.2 (1.2) 6.1 (0.4) 44.5 19.8 18.6 olw Primary Education 58.9 107.3 (24.4) (14.0) 66.6 45.6 40.0 32.0 Health 23.5 12.4 1.6 23.2 (44.3) 127.5 24.0 15.2 oiw Primary Health care 42.0 12.9 (12.0) 12.2 (44.5) 73.2 14.0 13.8 Others 22.3 25.1 (3.3) 0.2 (3 1.4) 76.8 15.0 11.1
Source: MFEB, World Bank -135-
Annex 6: The Phases and Procedures of the Budget Cycle
I.Phase administrative (ordonnateur) a) Engagement : c’est l’acte qui engage juridiquement et financikrement I’autoritC publique. Les cinq Ctapes de l’engagement de la dCpense
1. Expression du besoin par le gestionnaire de crkdit. Ce dernier organise une mise en concurrence ; selon le cas (i.e. en fonction du montant de la commande et conformkment aux seuils fixks par la rkglementation) : simple consultation de trois fournisseurs ou Appel d’offres.
2. Proposition des foumisseurs. Selon le cas (cf. ci-dessus) proposition par facture pro forma ou devis ou rkponse a Appel d’offres.
3. Le gestionnaire de crkdit effectue le choix du fournisseur. Selon le cas (cf. ci-dessus) : visa sur la facture pro forma ou mise en place d’un march6. A cette ktape, le gestionnaire de crkdit elabore un dossier d’engagement qui comporte : 0 une demande d’Engagement Financier, viske par le Gestionnaire, 0 un titre d’engagement financier, non encore vis6 par le Gestionnaire, 0 la pro forma du foumisseur choisi, viske par le gestionnaire, ou le marchk vis6 par l’autoritk compktente, 0 le Bon de commande, non encore date.
I1transmet ce dossier de projet d’engagement au Contrale des Dkpenses Engagkes (CDE).
4. Le CDE exerce ses contrdles de conformitk sur la forme et sur le fond. Notamment, a ce titre, il vkrifie : la correcte imputation budgktaire, la disponibilitk des crkdits, la cohkrence administrative des supports, le respect de la mise en concurrence, la moralitk des prix.
Le CDE vise : le TEF, la facture pro forma et le Bon de commande ; il conserve la DEF. Le visa sur le TEF peut comporter une rkserve : celle-ci devra &re levke lors de la certification de la facture. Le CDE retourne le dossier au Gestionnaire de crkdits.
5. Le Gestionnaire des crkdits vise le TEF et le Bon de commande (cachet, timbre et date) et procede a l’engagement de la dkpense en adressant au foumisseur un exemplaire du TEF et le Bon de commande ou 1’Ordre de service s’il s’agit d’un marchk. b) Liquidation : il s’agit de la vbrification du service fait et de la fixation du montant de la dCpense. Les deux Ctapes de la liquidation de la dCpense
1. Le foumisseur exkcute sa prestation et produit sa facture definitive.
2. La phase de liquidation fait intervenir le depositaire comptable et le gestionnaire des crkdits et, le cas kchkant, le CDE :
Le dkpositaire comptable procede a la rkception des fournitures ; en fonction de la nature des fournitures il les prend (ou non) en charge en comptabilitk matibre. Le gestionnaire des crkdits procede aux actes de liquidation : verification arithmktique et cohkrence des pieces ; certification de la facture. Le CDE, dans les cas ou son visa comportait une rkserve, peut participer a la rkception. -136- c) Ordonnancement : c'est l'acte par lequel le sous-ordonnateur donne l'ordre au comptable public de procCder au reglement de la dkpense. Les deux &apes de l'ordonnancement de la dCpense
1. Le gestionnaire de credits prepare le dossier d'ordonnancement ; ce dossier comprend : le bordereau des pikces, les pikces justificatives, le projet de mandat de paiement, le bordereau &emission et le (ou les) bon(s) de caisse ou le (ou les) avis de credits.
Si le visa du CDE sur le TEF Ctait avec reserve le gestionnaire de credit transmet le dossier au CDE pour validation definitive : le CDE appose la mention "Confirmation de validation" sur le bordereau des pikces. Le gestionnaire de credits transmet ce dossier au sous-ordonnateur.
2. Le sous-ordonnateur prockde au mandatement aprks verification du dossier d'ordonnancement : conformite des pikces avec le bordereau des pieces qualite (i.e. originaux) des pikes coherence du dossier (identite du benkficiaire sur toutes les pikces) contrble arithmktique des pikces (en chiffies et en lettres) conformite des signataires avec specimens.
I1 vise les mandats, les bons de caisse et/ou avis de credit, appose la mention "Vu" + cachet et sa signature sur le bordereau des pikces.
11. Phase comptable (comptable public)
Paiement : c'est l'acte par lequel1'Etat (ou la collectivitk locale) se libkre de sa dette. Les deux Ctapes de la phase comptable de la depense
1. Le comptable assignataire vkrifie la correcte mise en ceuvre des lois et rkglements relatifs 51. la dkpense publique ; il contrble notamment : l'existence des credits la regularit6 de l'engagement, de la liquidation et de l'ordonnancement la concordance entre les pikces justificatives et les titres de paiement, et entre ces titres et le bordereau d'emission la coherence arithmktique du dossier le caract6re liberatoire du paiement
Le comptable assignataire appose le cachet "Vu bon 51. payer" sur le titre de paiement.
2. Le comptable met la dkpense en paiement par caisse ou par virement. i s d a I I
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Annex 9: The Malagasy Education System - Structure and Indicators
I.Organisational and functional set-up
Structure of the Education system. The government restructured its education sector administration in 2003/04. The three separate education sector ministries (basic, vocational and higher education) were combined into one: the Ministry of National Education and Scientific Research (MENRS). Adult and Literacy education, which comprises over 80 percent of the population above 15 years of age, fall under the responsibility of the Ministry of Population (MINF'OP). In 2003 the government also updated its national Education For All (EFA) strategy, which now comprises the objectives of (a) universal primary education (of 5 years duration, defined as the first basic education cycle), and (b) a second basic education cycle ounior secondary education cycle with a duration of 4 years), with an adequate enrolment'24 and satisfactory quality. The tables below present the distinct levels and responsibilities in Madagascar's education system:
Level Organisation Center Ministry of Secondary and Basic Education (MENRS) Province Interregional Directorate ofSecondary and Basic Education (DIRESEB) (Faritany) District District Education Office-Circonscription Scolaire (CISCO) :Fivondronana)
~ Commune Zone administrative et pkdagogique (ZAP) (Firaisana) Public primary school (EPP) Lower secondary school-- Collbge d'enseignement genkral (CEG) Higher secondary school (Lycke) Vi11 age Public primary school (EPP) (Fokotany) Parents-school partnership association (FAF) Association ofparents ofstudents (FRAM)
lZ4EFA implementation depends on donor financing. The MENRS strategy includes a satisfactory enrolment for secondary levels, based on the needs for economic and social development as defined in its PRSP. Estimates are that this would require about 40-50 of the relevant age group to be enrolled and complete this junior secondary cycle. This would also secure a sufficient teacher supply for the primary level. -143-
Level Function MENRS Sets national policy and does country-wide planning for the sector. Prepares annual investment and operating budgets. Allocates resources to the provinces and school districts. Carries out financial and technical oversight, and quality control of public education institutions, and monitors private institutions. Manages personnel, including hiring, promotions, and firing. Manages the insurance fund for school-related accidents (PASCOMA Protection Accidents Scolaire de Madagascar). Sets curriculum content and pedagogical standards. Assures teacher training and slulls upgrading. Collects, analyzes, and reports on education data and statistics. DIRESEB Conducts province-level planning, and preparation ofthe annual plan. Tracks and reports on provincial education indicators. Does financial and technical oversight ofdistricts and their schools. Allocates staff within the province. Provides training and technical support for districts and schools. Serves as intermediary for CISCO reporting to MINESEB.
CISCO Supervises pedagogical activities, administration, and expenditures of thl primary and secondary schools in the district (EPPs, CEGs, and LycCes). Maintains student records and manages the annual examination for promotion and award of diplomas. Allocates civil service staff within the district. Manages teachers hired on a contract basis by communes and FRAMs. Prepares an annual district workplan. Manages the non-salary portion ofthe recurrent expenditure budget. Manages the collection and accounting procedures for school fee: PASCOMA premiums, and other Caisse Ecole activities. Handles distribution ofsupplies and equipment to schools through FAFs. Compiles and reports on educational statistics for the district.
ZAP e Serves as the administrative and technical interface for the CISCO with ab01 10-20 schools Provides oversight ofand support to school directors. Facilitates information transmission to and from schools. Assures monitoring at the school level. Assists with the distribution ofschool supplies and equipment. Interacts with members ofthe FAF and FRAM. -144-
EPP, CEG, Manages the instruction provided to students. Lycte Director Supervises teachers, both regular civil service employees and contract teachers (enseignants suppltants). Maintains school records. Transmits educational statistics for their schools to the CISCO via the ZAP. Oversees and accounts for supplies and equipment provided by the CISCO. Serves as a designated member of the FAF management committee. Interacts with the FRAM and individual parents.
Community organization (FRAMs and FAFs). At the local level, there are two community organizations in the education sector. The FRAM is the association ofparents of students. It is supported by voluntary contributions from its members; in communities whose schools do not have enough teachers, FRAMs have hired teachers on a contract basis, paying them with a combination ofmoney, bags ofrice, and donated agricultural labor. FRAM members also provide in-kmd support to school operations and rehabilitation, volunteering to carry materials and supplies from CISCO drop-off points to remote schools where vehicles cannot reach, and contributing labor to school projects as needed. FRAM leaders are elected by the community.
The FAF, a government-community partnership organization for school development (know by its Malagasy acronym), was created by MINESEB decree in September, 2002, largely in response to the need for a formal organization to receive HIPC funds.'25 Its partnership structure combines civil servants (school directors) with elected community members to manage resources devoted to support educational establishments through a Caisse Ecole, whose transactions are publicly posted to assure transparency.
Private sector role. Private providers in primary education play an important role in Madagascar, but the MENRS has not yet developed the capacity nor the legal and administrative framework to provide incentives and a basis for effective cooperation with the private schools. Many urban and rural-isolated communities contribute to the establishments ofprimary schools (private or public) and pay for a teachers (often uncertified). The so-called FRAM teachers are estimated to number about 16,000 in 20003-4, compared to a total of about 62,000 staff employed by the MENRS (of which about 38,000 are actually teaching).
11. Madagascar's education system
Education systems in Africa usually vary in structure and management. In the case of Madagascar the system is structured as follows (see chart below):
'25 Its predecessor, the FRAM or parents' association, does not have a formal legal status and thus cannot receive funds. -145-
Madagascar Basic Education Structure (January 2004)
Basic Education: First Cycle Preparatory (EF 1) Course (2 years) 5 years r------Elementary In Primary Public Schools (EPP) 1 Course
I Medium Course Basic Education (5+4 Years)
~~ Basic Education: Second (EF II) Courses
4 years Orientation in “Colleges d’Enseignement General” Courses ---- (CEG) -- (2,. vears) Certification Exam (B E P C) --_I- --~- ---- Entrance Examinations
Ist year: common classes Senior Secondary
--_^_I_ 2 nbT--year. Education Branches : (3 years) Literature One cycle - Science - Economics In “Lycees d’Enseignement General” - Social Secondary General High Schools --~.
Branches : Literature - Science - Economics - Social ~-~-- Certification Exame (BAC ;) Source: MENRS website: ww w. mitieseb.pov.ntphvebsitdstedi~eg. is0 -146-
General Education
- Pre-school or pre-primary school: This level is offered to children 5 years old and younger. Enrolment at this level is very low. The majority ofthe pre-schools in the country are private.
- Primary school orJirst cycle of basic education: This level is offered to children older than five. It is composed ofthree sub-cycles. The first, or preparatory cycle, includes the first two years of primary (grades ll*and lo*). The second or elementary cycle is only one year (grade 9”) and the final or medium cycle includes the last two years ofprimary (grades 8* and 7*).
- Basic or elementary education has been redefined by the government as consisting oftwo basic’26 cycles: the first basic education cycle (5 years of primary education), and the second basic education cycle (4 years ofjunior secondary or the “College”). About 85 percent of the primary age group was enrolled in 2003-04, but only 40% of the cohort is currently completing primary school (one of the lowest rates in the region). Transition to the junior secondary cycle requires a successful exam at the end ofprimary.
- Lower secondary or second cycle of basic education: To be able to continue to this level of education, students most pass a primary certification exam known as CEPE. This cycle, previously known as collkge, includes four years ofeducation.
- Upper secondary school or Lyce‘e: Students enter at this level of education if they pass an entrance exam and if they have also passed a lower secondary certification exam known as BEPC.
- Higher education: To enter in higher education institutions students most pass a high school certification exam known as BACC. This level is open to general high school graduates and some students from vocational and technical high schools. This level of education is offered by universities, almost all public, and lately by post-secondary professional and technical institutions.
Vocational and Technical Education
Besides general education, the Malagasy system includes vocational and technical branches, mostly at secondary school level. The education and training offered by these branches vary in duration ofthe courses, the pre-requisites ofentry, and the certification they offer. The two levels are: (a) Centers of Vocational Training (Centres de Formation Professionnelle); these centers offer training to primary school graduates (students do not need to pass the CEPE to enrol in some of these centers); and (b) Vocational and Technical High Schools (Lyce‘es Techniques et Professionnelles); these centers offer training to junior education (collkge) graduates.
126 Ths new structure comprises two “cycles fondamentals” or basic education cycles, defining basic education under the government’s EFA strategy as 9 years (5 years primary and 4 years junior secondary). The new Education Law was approved in late 2004. -147-
111. Administrative procedures to pay a supplier
At the beginning of the expenditure chain the credit administrator, in this case the Chef CISCO issues a spending request and sends it for approval to the Control des Dkpenses Engagks (CDE). The CDE carries out a form of ex ante control, i.e. verifying that funds are available and that procurements will be made fiom eligible budget lines. Once the service is rendered, the normal procedure of payment entails three administrative steps that need to be followed. First, the credit administrator, in this case the Chef CISCO, has to verify that the service was rendered. This step might involve long delays as CISCOs are usually located at long distances fiom some ofthe schools under their supervision. These long distances make it easier for the CISCOs to procure goods and services to those schools closer to the district center, leaving the ones further away under-provided. Second, the Chef CISCO has to send a file of the expenditure to the sous-ordonnateur for approval. Third, in case of approval, the sous- ordonnateur has to send the expenditure file to the local treasury which will then pay the supplier.
This payment procedure has three major drawbacks: (i)long delays to pay a provider; (ii)the obligation for district staff to frequently visit control organs that can be at some distance from the CISCO (these are only 18 CirconscriptionsJinanciers in the country, hence only few CISCOs have control organs close by); and (iii)the inability of the CISCO to track the status of a payment once a file has been sent to the sous- ordonnatuer, which can create difficulties with local providers when payments are delayed.
There is a special and faster procedure to pay suppliers called Ddldgation de Cridit where the approval of the sous-ordonnateur is not needed for the payment to be rendered. This procedure allows CISCOs to open accounts at the local treasury office (usually at the district level) rather than at the circonscription financier. This allows the CISCO to keep better track ofpayments and reduces the overall time needed to release the funds. For instance, in 2001 the MADIO/INSTAT survey found that on average it took 27 days between the assessment of the expenditure and the payment of the supplier, 13 days between the assessment, and the approval and 14 between the approval and actual payment. This delay was longer when the normal procedure was followed, 28 days vs. 10 days, and in case the payments was done through a deposit in a bank account rather than when paid in cash.
Nevertheless, neither procedure to pay suppliers (the normal or the Dildgation de Crddit) entail an efficient control of the “real” sources of leakage identified during the traclng survey studies. For example, CDEs and sous-ordonnateurs are not required to carry out any regular control of procurement procedures and prices (and in the cases where they do they usually do not have updated price lists at hand).’” Additionally, neither the CISCOs nor the control organs are required to keep inventories of delivered goods that would permit to track the use and distribution ofpurchased equipment over time.
The regular control organ for this issue (the Cellule Centrale des Marchies) is only consulted in the case of procurements above a certain threshold. These however, are rarely met by CISCOs 148
Annex 10: Statistical Tables (Education Sector)
Table 10.1: Distribution of staff in 2004
Source : MENRS
Table 10.2: CISCO criteria to distribute supplies to schools
Source: Budget Tracking Survey, World Bank, April/Mai 2003;limited sample of 24 CISCOs. PI= Priority 1 P2 = Priority 2 P3 = Priority 3 149
Table 10.3: Per primary student expenditure across Fivondronanas ranked by average per capita income 2001
Faritany
Quintile Antananarivo Fianarantsoa Toamasina Mahajanga Toliara Antsiranana I 13 1,762 205,799 145,077 186,715 I1 112,150 189,827 125,154 104,661 276,350 107,833 I11 144,313 161,085 127,043 162,991 348,680 IV 152,592 123,736 190,735 193,474 96,807 V 224,493 355,881 194,811 322,246 436,175 167,807 Total 163,032 191,302 149,568 226,363 297,886 145,365 Source: This table was constructed using actual exuenditure data from at and level and data from I 2001 CISCO EPP the poverty map exercise (Mistiaen, et. al. 2002)
Table 10.4: Students in rural areas across type of school ownership in 2001 (proportions)
Quintiles
School type I I1 I11 IV V Total Public Privately run 0.03 0.04 0.04 0.03 0.00 0.03 Public 0.84 0.89 0.79 0.79 0.49 0.79 Private 0.01 0.01 0.06 0.07 0.24 0.06 Private non lucrative 0.01 0.01 0.03 0.02 0.10 0.02 Confessionary 0.09 0.04 0.09 0.09 0.17 0.09 Community School 0.03 0.01 0.00 0.00 0.00 0.01 Total 1.oo 1.oo 1.oo 1.oo 1.oo 1.oo Source: EPM 2001
Table 10.5: Teachers paid by FRAMs across years
2001102 2002103 2003104 Number of FRAM teachers 5,849 7,107 12,323 Source: MERS 2004. Report FER 150
Annex 11: The Environment Sector in Madagascar
11.1. Biodiversity, deforestation and the protected area (PA) system
Madagascar is an island of 590,000 km2 that separated from Mainland Africa during the Jurassic. Madagascar’s long history ofisolation is reflected in the high level ofbiological endemism. Ofthe 12,000 plant species present, 9,700 are endemic, and more than 80 percent ofthose are forest or woodland plants. The island includes over 250 species ofbirds, over 40 percent ofwhich are endemic, and over 115 species of mammals, 90 percent of which are endemic. Of the 189 amphibian species 187 are endemic. In most cases the majority of those animal species live exclusively in either the humid forests of the eastern mountains and coastal zone, as well as the deciduous forests and woodlands ofthe southern and western coasts.
The loss of forest cover over the last few decades has been a cause of concern. The origin of forest conversion is mainly slash-and-bum agriculture (tavy) to produce rainfed rice in the Northern and Eastern regions, and unsustainable fuel wood collection practices for domestic energy in the Western and Southern regions of the country. These two destructive practices are, in addition, accompanied by extensive exotic flora and fauna (and marginally pharmaceutical plants) collection on the periphery of cleared areas. Farmers income generated by forest conversion is relatively low because it occurs on marginal agricultural lands (most of the remaining forests are situated in the highlands) and is not sustainable.
Several estimates ofnational forest cover have been made using remote sensing data collected during the past 50 years. An assessment based on aerial photography fi-om 1949 produced an estimate of 17 million hectares oftotal forest. In 1988, based on digitizing over LANDSAT image prints fi-om the middle 1970s, the cover ofall forest were estimated at 10 million hectares. Another recent estimate offorest cover based on classification of 1 km-resolution data from the SPOT satellite also near 10 millions hectares. These estimates suggest that over one-third ofthe forest area has been destroyed since 1950.
A first satellite-based estimates of forest and woodland clearance for the entire island was made with data for circa 1990 and circa 2000 ofLANDSAT images processed by NASA. Results show that deforestation continued but at slower pace than before NEAP implementation: “only” 1 million hectares ofremaining natural forests has been lost during the last ten years and deforestation rate is near zero in the protected area system.
There is no comprehensive inventory of the stock of biodiversity of 46 protected areas. An inventory of the endangered vertebrate animal species encountered is currently under way. Although middle altitude dense humid forests are currently over represented against dry and thomy forests, the representation ofthe island forest habitats is assumed to be satisfactory. Moreover, it is believed that the system shelter thousands ofplant species that are unique on earth and 38 ofthe 45 inventoried lemur species. -151-
11.2. Donor-Supported Environment Programs in Madagascar
Madagascar’s National Environmental Action Plan (NEAP) has provided the basis for a 20-year program of investment aimed at assisting the Malagasy population to protect and enhance the environment for more sustainable development. The sequence of three Environment Programs (EP) has been explicitly designed to tap both local and global conservation finance and, in the case ofEP2 and EP3, to learn from previous experience in program implementation. The key features ofeach program are described below.
First Environment Program 1990-1 99 7
EP1 assisted Madagascar in putting in place the legal and institutional framework and the skills and tools needed to manage its environmental heritage. Major goals included the conservation of sites of world renowned biodiversity, reductions in soil loss and the implementation ofenvironmentally sound programs ofrural development.
The project comprised 7 components : 1) protecting and managing unique ecological systems together with development of peripheral zones; 2) promoting soil conservation, agro-forestry, reforestation, and other rural development activities in priority zones, including several large watershed areas; 3) developing maps and geographic information; 4) improving land security through titling; 5) training environmental specialists and promoting environmental awareness and education at all levels of society; 6) launching environmental research programs on land, coastal and marine ecosystems; and 7) developing support activities, composed of institution building, adoption of environmental assessment procedures, strengthening the environmental database, monitoring and evaluation, and studies.
The $85.5 million dollar program was financed as follows:
EP1 Sources ofFinancin
Other Donors Government 17.2 Total 85.5
Second Environment Program 1997-2003
The objectives EP2 were to reverse current environmental degradation trends and to promote sustainable use ofnatural resources, including soil, water, forest cover and biodiversity. Another key objective was to create the conditions for environmental considerations to become an integral part of macroeconomic and sectoral management ofthe country. It aimed to continue and strengthen activities already launched under the first phase and initiate work in new areas where environment problems are important. The objective of the Global Environment Facility (GEF) support to the program was to curb the loss ofglobally significant biodiversity.
The program consisted of components dealing with field operations, strategic activities and support activities, as follows: 1) sustainable soil and water management; 2) multiple use forest ecosystem management; 3) development of national parks and ecotourism; 4) marine and coastal environment management; 5) urban environmental management; 6) support to local natural resource management; 7) support to regional development programs and spatial analysis; 8) creation of a regional fund for environmental management; 9) upgrading of the legal framework and formulation of environmental -152- policies; and 10) assisting sector ministries in implementing environmental policies and making environmental impact assessment (EIA) operational.
Major sources offunding included the following:
EP2 Sources of Financing $m IDA 30.0 GEF 20.8 IFAD 8.1 Other donors 49.6 On-going projects 15.5 Government 31.0 Total 155.0
Third Environment Program 2004-2009
The Third Environment Program Support Project (approved by the World Bank in May 2004) aims at improving the protection and sustainable management of critical biodiversity resources, mainstreaming conservation into macroeconomic management and sector programs, and establishing sustainable financing mechanisms. It seeks to assist the Government of Madagascar in implementing selective elements of the environment program, for which two subsidiary development objectives have been specified: conservation and sustainable management of eco-regions with active multi-stakeholder participation; and strengthening ofenvironmental management by incorporating environmental objectives in policy making and public investments.
The project comprises three main components: 1) Forest ecosystem management will support the formulation and implementation of forest zoning, forest control, and, the establishment of an information system. Activities will improve forest governance, and strengthen the allocation of concession rights, and the institutional framework for regulatory enforcement. Conservation sites will be created for the preservation of biodiversity, and watersheds; transfer of forest management rights to local communities will be fostered; reforestation practices shall create land reserves; and, household energy (charcoal and biomass) production will be improved. 2) Management of protected area systems, partially supported by the Global Environment Facility (GEF), will provide capacity building, increase public awareness, and enhance community participation, aligning resources to expand and manage ecosystems under the national protected area system. Conservation management programs will monitor activities, and critical infrastructure and services to stimulate ecotourism will be developed. Finally, financial resources will support biodiversity conservation over the long-term. 3) Establishment of an environmental information system, development oftraining materials targeting communities, and the mass media, and support to the Direction Generale de 1’Environnement (DGE) in environmental training and dissemination activities.
A key innovation ofEP3 is the creation ofthe Conservation Trust Fund, with IDA and donor resources, in order to increase the sustainability of funding for conservation in Madagascar. The principal sources of financing for EP3 are as follows:
EP3 Sources ofFinancing $m IDA 40.0 GEF NGO :::: 1 Other donors 65.7 1 Government 18.5 Tntal 150.0 -153-
11.3. New institutional framework of the environment sector
Level of the Ministry of Environment and Forestry
General Directorate for General Directorate for General Coordination of Environment (DGE) Water and Forests (DGEF) Projects (CGP) Policy-making and Policy-making and Coordination of donor coordination coordination projects
Level of the autonomous agency
ONE (Quasi-governmental organization) EIA and pollution management,
ONE would be largely self-financing out of environmental permits that it would issue, but could be funded by MinEnvEF to carry out specific functions, including (i)establishment of an environmental information center, (ii)preparation of environmental accounts, and (iii)establishment of sectoral ‘observatories,’ such as OSF, monitoring governance issues. ONE would continue to be the principal agency executing the MECIE (EIA) rlprrw
Level of the executing agencies
ANGAP ANGEF (Quasi-governmental organization) (executing agency) Establishment, operation and maintenance of Forest resources management the protected areas system ANGEF would enforce silvicultural obligations for commercial operations and engage in reforestation activities
Community level -154-
Annex 12: Statistical Tables (Environment)
Table 12.1.: ANGAP: Average annual costs and financing of protected areas during EP3 2004-2009 (in MGF billion)
costs Financing Capital investment 21.0 Government 2.4 - expansion of PAS 2.1 Entrance fees 1.7 - biodiversity management 11.6 ODA 30.0 - ecotourism infrastructure 6.5 PA trust fund 7.8 - public awareness 0.8
Current expenditure 32.2
Total costs 53.2 Total financing 41.9 Source: FFHM Finance - Biodev (2004), EP3 Task Force (2003)
Table 12.2.: A comparison of revenues in 2001 and potential ecotourism revenues (in MGF billion)
2001 Potential Total internal revenues 16.9 18.3 Entrance fees 1.4 2.8 PA trust fund 15.5 15.5
External revenues 21.2 43.5 Visa fees 18.7 18.7 Hotel tax 2.5 24.8
Total revenues 38.1 61.8 Source: World Bank -1.55-
Table 12.3.: Qualitative assessment of institutional culture in the environment sector
I DGEF I DGE I ANGAP I ONE Mission / strategic Dosition I Claritv with resnect to environment Dolicv I e. I e. I I I ~~~~ ...... Clarity with respect to EP3 e.. ..eo ...... Mission reflected in organization structure e. e...... eo Mission within EP3 accepted and shared e. ..eo ...... Objectives Clarity ofobjectives ..eo e.e.0 ...... Obiectives reflected in action plans ..eo ...... Acceptance of objectives within organization I? I? ......
Results orientation ..eo ...... Client orientation I? I? ...... Accountabilitv ..eo ...... Presence ‘on the ground’ ..... na Adeauate staffing and level of skills e. e...... eo Source: World Bank Notes: Scoring on a scale from 1 to 6; o indicates ?4 score.
Table 12.4.: Qualitative assessment of organizational functions in the environment sector
Source: World Bank Notes: Scoring on a scale from 1 to 3; o indicates % score. -156-
Table 12.5: Time to process Environmental Impact Assessments (average no. of days)
Year Eligibility Evaluation Permit issuance assessment 1997 154 196 8 1998 42 121 47 1999 26 185 20 2000 16 167 38 2001 22 230 133 2002 33 266 103 2003 47 192 76 2004 23 90 39 Source: ONE
Table 12.6.: Potential costs and permit fees for Environment Impact Assessments of public investments (MGF billion)
2004 2005 2006 Total Productive sector investments Agriculture, livestock, fisheries 65.9 39.3 38.1 143.3 Industry 0.0 4.1 0.0 4.1 Mines 0.0 0.0 0.0 0.0 Tourism 6.8 0.0 0.0 6.8 Environment 0.0 0.0 0.0 0.0
Infrastructure investments Public works 598.7 2905.8 2315.9 5820.4 Air transport 0.6 22.9 0.0 23.5 Urban and rural planning 26.1 145.9 205.6 377.6 Telecommunications 0.0 125.0 120.0 245.0 Energy 41.4 1.o 1.o 43.4 Water 0.0 0.0 0.0 0.0
Administration investments Public security 0.4 0.5 0.0 0.9
Public investments potentially subject to EIA 739.8 3244.5 2680.6 6664.9 less operational expenditures 148.0 648.9 536.1 1333.0 less foreign financed 0.0 1090.2 1136.6 2226.7 Total public investments subject to EIA 591.8 1505.5 1007.9 3105.2 Total cost of EIAs ( 0.75% average rate) 4.4 11.3 7.6 23.3 Total permit fees ( 0.35% average rate) 2.1 5.3 3.5 10.9 Source: World Bank Note: It is assumed that the foreign-financed investments have their own EIA process, which are not included in the data. For each sub-sector in the table, only those investments with a likely requirement for an EIA are included.