Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 9078

PROJECT COMPLETION REPORT

MADAGASCAR

MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION

AND TRAINING PROJECT

CREDIT 1155-MAG

Africa Country Department IIIPopulation and Human Resources Division

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ABBREVIATIONS

CFC - Centre de Formation en Comptabilite

CIDA - Canadian International Development Agency

CSR - Supreme Revolutionary Council

DNEC - National Expert Accountant's Diploma

EC c Expert Comptable

INSCAE - Institut National des Sciences Comptables et del'Administration des Enterprises

MPFE - Ministry at the Presidency Responsible for Economicand Finance

NPC = National Code of Accounts

PCR = Project Completion Report

RINDRA - Public Sector Management Consultancy and Accountancy Firm

you omcizL US ONLYTHE WORLD BANKWashington. D.C. 20433

U.S.A.

office d Dnvcgvr.C.gaiOptatmt bvakaatnm

October 12, 1990

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Madagascar -Madagascar Accounting and Audit Organizationand Training Proiect (Credit 1155-MAG)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Madagascar - Madagascar Accounting and Audit Organizationand Training Project (Credit 1155-MAG)" prepared by the Africa Regional Officewith Part II of the report contributed by the Borrower. No audit of thisproject has been made by the Operations Evaluation Department at this time.

Attachment '

Thui document has a restricted distribution and may be used by recipients only in the performaneof their offlcal dutis Its contents may not otherwie be disclosed without Word ank authorintion.

FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

MADAGASCAR

MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATIONAND TRAINING PROJECT

(CREDIT 1155-MAG)

TABLE OF CONTENTS

Page No.

Preface ................. iEvaluation Summary ................. ii

PART I: OVERVIEW AND BANK'S PROJECT COMPLETION REPORT .... .... 1

1. Project Identity ..................................... 12. Background ........... ................................ 13. Project Objectives and Description ................... 24. Project Design and Organization ...................... 25. Project Implementation ............................... 36. Project Results ...................................... 57. Project Sustainability ............................... 68. Bank Performance ..................................... 69. Borrower Performance ................................. 710. Project Relationships. 711. Conclusions, Recommendations and Lessons Learned 7

ANNEX: GOVERNMENT COMMENTS ON BANK REPORT. 9

PART II: GOVERNMENT'S PROJECT COMPLETION REPORT .... ........... 13

PART III: STATISTICAL INFORMATION .............................. 60

1. Related Bank Loans and/or Credits ....... ............. 602. Project Timetable ................................... 613. Credit Disbursements ................................. 634. Project Implementation ............................... 645. Project Cost and Financing ............ ............... 666. Project Results ................................... 677. Status of Covenants .................................. 72

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

i

PROJECT COMPLETION REPORT

MADAGASCAR

MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT

CREDIT 1155 - HAG

PREFACE

This is the Project Completion Report (PCR) for the MadagascarAccounting and Audit Organization and Training Project, for which Credit inthe amount of SDR 9,400,000 was approved on June 11, 1981. The Credit wasclosed on November 10, 1989, one year and six months behind schedule. As ofthat date there was an outstanding balance of SDR 9261 i.e. less than 0.1%of the Credit, which was cancelled.

The PCR was prepared by AF3PH (Preface, Basic Data Sheet, EvaluationSummary, Part I Overview and Bank's Report, and Part III Statistical Annex)and the Borrower (Part II - Government's Project Completion Report).

Preparation of this PCR started during the Bank's last supervisionmission in 1989 and is based inter alia, on the Staff Appraisal Report; theDevelopment Credit Agreement; supervision reports; correspondence betweenthe Bank and the Borrower; internal Bank memoranda; and on an extensivecase study prepared by the Bank's Operations Evaluation Department 1/ aspart of a broader study of technical assistance projects in Africa.

The Borrower was provided a copy of the Bank's contribution to thePCR to comment on. The Government provided some comments which wereprimarily explanatory in nature. There was no significant difference ofopinion between the Government and the Bank. A translation of theGovernment's letter as well as the original letter in French is provided atthe end of the Part I.

1/ Madagascar: Evaluation du Prolet Organisation et Formation en Comptablit6 et Revision(Cr6dit 1156), Operations Evaluation Department, The World Bank

ii

PROJECT COMPLETION REYORT

MADAGASCAR

!4ADAGASCAR ACCOUNTING AND AUD:T ORGANIZATIOS AND TRAINING PROJECT

CRBDXT 1155 - MAG

EVALUATION SUOMYRY

Obiective

The objective of the project was to encourage the practice of modernaccounting and auditing by upgrading the professional skills of accountantsand auditors, and the *etablishment of a management consulting capabilityso as to help develop officient management, planning and financial control.The project had four componentst

(a) the enactment of modarn accountancy legislation;

(b) the establishment of an accounting school (Centre de Formation enComptabilit6 - CFC);

(c) the strengthening of the qualifications of the national auditing firmthrough training and other forms of assistance, and its expansionthrough the addition of a management consulting division; and

(d) the strengthening of the management services capability of selectedconsulting firms through technical assistance in the fields offinancial systems and procedures.

Implementation Experience

Implmentation of all components required the services of foreignconsulting firms. There were delays in the implementatLon of component Apartly because solecting the consultant for drafting the legislation tooklonger than expected. Use of a consulting firm for component B had notbeen planned but proved necessary to avoid excessive delays. This caused asignificant cost overrun for component B. Canadian and French consultantsmade important contributions to component C.

The government was so pleased by the success of the CFC that in 1984 itrequested that the Bank finance the addition to CFC of a graduate school ofmanagment. This was accepted (Credit MAO 1661) and the institutionrenamed Institut National des Sciences Comptables et de l'Administrationdes Entrepriess (INSCAE). Tho size of component n was significantlyreduced in the course of the project, but two firms were successfully aidedwith the help of two French consulting firms.

The borrcoer cooperated satisfactorily throughout the project.

Results

Overall the project should be viewed as a success. Modern accountinglegislation adapted to the country's needs is in place and in the progressof being made effective. Rules governing the accountancy profession arebeing updated and local accountancy qualifications established.

The accountancy school, formerly CFC, now INSCAE has produced more than 300graduates of good quality and been expanded - nclude a two-year MBAprogram.

iii

The national accounting firm RINDRA has greatly benefitee from thetechnical assistance received and is widely recognized for the quality ofits auditing and consulting services. RINDRh operations would beprofitable if it were not for the interest on the on-lending by thegovernment of the proceeds of the Credit on terms that proved to be tooonerous, and the amortization of the technical resistance received. RINDRAwas expected to buy expertise at world market prices and sell the acquiredexpertise at the depressed prices paid for such services in theunderdeveloped market of a poor country.

The unexpectedly higher cost of component B required a reallocation offunds among components resulting in a significant reduction of fundsavailable for component D. Two private consulting firms, however, didreceive specialized technical assistance that enhanced their competence.

Sustainability

The accountancy legislation is in place and effective as of Januar 1,1989. Some provisions concerning the accounting profession are still inthe process of being enacted.

INSCAE's (CFC) operating costs are still largely financed through Credit(MAG 1661) but government support will increase annually. When HAG 1661 isclosed, INSCAE is expected to be fully supported by government funds andits own revenues.

RINDRA's financial position is hopeless unless its debt to the governmentis drastically reduced. The debt may be converted to equity allowingRINDRA to become a private sector firm with a significant government stakein it if it is to continue as a financially viable accounting firm.

Findings and Lessons Learned

The political difficulties of introducing an accountancy law without thefull cooperation of the existing accounting profession had not beenforeseen. The profession, although very small, had significant politicalinfluence. The start up costs of the CFC far exceeded the originalestimates because the problems of procuring needed technical assistance hadbeen underestimated. The on lending arrangements for RINDRA proved toocostly; it was impossible for the firm to absorb the full costs of foreigntechnical assistance and remain competitive in local markets.

Both the Borrower and the Bank view the project as a success with somecaveats. The major unresolved problem was that while the accountancy codewas changed commercial law has not been changed tc conform to the new code.This issue has been taken up under Credit-1661 the follow on Credit to1155.

PART I

MADAGASCAR

ACCOUNTING AND AUDIT ORGANIZATION

AND TRAINING PROJECT

CREDIT NUMBER 1155 MAG

OVERVIEW AND BANK'S PROJECT COMPLETION REPORT

1. Project Identity

Name Accounting and Audit Organizationand Training Project

Credit Number 1155 MAG

RVP Unit AF3PH

Country Madagascar

Sector Education

2. Background

2.01 Immediately after independence in 1960, Madagascar's governmentencouraged investments in commerce and industry. As a result, value aidedin the industrial sector increased from 5% of GNP in 1960 to about 17% in1977.

2.02 The change in government in 1972 resulted in major policy changes,and many French managers and, technicians had left by 1975, when majorforeign-owned enterprises were nationalized. Top management and accountingpositions were then filled by people with inadequate experience. In theyears that followed, many public enterprises suffered from weak financialmanagement and were either unable to produce reliable financial statementsor prepared financial statements only after excessive delays.

2.03 Although an accounting profession had been established by law in1962, the profession had only 36 members, some with obviously inadequatequalifications, and no new admissions since 1971. Neither the universitynor any other institution offered any professional level of training inaccounting. Accounting at the University was not oriented to aprofessional qualification.

2.04 In the late '70s, the government took measures to ensure greatercontrol over the newly nationalized industries and established a nationalaudit company, RINDRA, in 1979. RINDRA was to provide audit servicesmainly to government owned and controlled companies.

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2.05 In 1976, the government requested Bank assistan-e to financetechnical assistance to RINDRA by the international accounting fir.n. Sincethis assistance was to be financed retroactively and the fees involvedviewed excessive, the Bank initially declined. The Bank did, however,approve a subsequently submitted comprehensive accountancy project which

aimed at reforming accounting related laws, establishing a professionalschool of accountancy, strengthening the effectiveness of RINDRA andupgjrading the expertise of Malagasy management consulting firms. Theproject was appraised on May 11, 1981.

3. Project Objectives and DGscription

3.01 The long run objective of the project was to assist in theimprovement of business management through more effective accounting inboth nationalized and private sectors. The project had the following fourcomponents?

(a) A review of the existing accounting requirements for varioustypes of enterprises and of the professional standards requiredfrom accountants and auditors, and the preparation andimplementation of appropriate requirements in this respect,including proposals for legislation which, inter alia, wouldrequire enterprises in Madagascar to prepare audited accounts inaccordance with specified standards and classification ofaccounts under a national accounting code.

(b) Establishment and operation of an accounting training center(Centre de Formation en Comptabilitd) in Antananarivo, staffingthereof and the provision of training books and other coursematerials, supplies, services and equipment required for itsoperation.

(c) Strengthening of RINDRA's audit activities through the provisionof training and other assistance to its staff. To finan-7e theseservices, the government was to on lend to RINDRA USS 3.7million of the loan proceeds at 12% p.a. to be repaid in tenyears. The borrower would bear the exchange risk.

(d) Strengthening of the management services capability of selectedmanagement consulting firms through the provision of trainingand other services in the fields of financial systems andprocedures under sub-projects to be approved by the Association,and a feasibility study for the establishment of a publicmanagement consulting firm.

4. Project DesiLgn and Organization

4.01 The project was well-designed and apparently well-understood by allparties concerned. It was innovative in trying to create the prerequisitesfor the effective use of accounting as a planning and control tool bybusiness management and the government. In this context, it addressedsimultaneously the legislative, educational and professional dimension ofthe accounting function. It was also innovative in the sense that the

3

Anglo-Saxon concept of an audit was to be introduced in a society thathitherto was not acquainted with modern accounting and auditing.

4.02 The original project design was sound but unrealistic with regard tothe technical assistance cost estimates of component B; staffing the CFCproved much costlier than anticipated. The assumption that the entireMalagasy teaching staff could be trained locally was wrong. Extensiveoverseas training was necessary to assure an adequately qualified teachingstaff. Originally, the CFC was to hire its foreign Director General andteaching staff individually. When this proved impossible, a consultingfirm was retained to recruit both the CFC's director and its foreignfaculty.

4.03 The recurrent cost per student originally estimated at USS 2000.00will be below that amount when the school no longer needs foreign teachers.Expectations with regard to RINDRA's ability to reimburse the loan advancedby the government to finance its technical assistance were totallyunrealistic. Project planners were also too optimistic with regard to thetime required to pass a comprehensive accountancy legislation (includingrequired changes in the commercial law code).

4.04 With the exception of the shortcomings mentioned, the project'sconception and design were sound and contributed to its success.

4.05 In 1983, the government requested and the Bank agreed to extend theassistance to RINDRA to include the creation of a management consulting armwhich was to be operated as a division of RINDRA. This expansion of RINDRAreplaced the originally planned feasibility study lor the establishment ofa public consulting firm (Omega).

4.06 In 1985, the Bank co-financed with the Canadian bilateral aid agency,CIDA (or ACDI to use its French acronym), at the government's request, afeasibility study concerning the expansion of CFC into a graduate school ofmanagement through the addition of a two-year MBA program. Thismodification of the project, which involved changing the name of the CFCinto INSCAE (Institut National des Sciences Comptables et del'Administration d'Entreprises) was approved. With some delay, thenecessary legislation was passed and the two-year MBA program started in1988. INSCAE will be financed mainly under Credit 1661-MAG; there will besignificant cc-financing by ACDI and France.

5. Project Implementation

5.01 Critical variances in project implementation

5.02 Component A (Accounting Legislation): the Bank rightfully consideredtimely implementation of the legislation as a prerequisite for the successof components B and C. Serious delays were experienced because it took twoyears to identify and hire the consulting firm which was to prepare theproposals for the accounting legislation. The local accounting profession,concerned that new laws may threaten its status, exerted considerableinfluence to modify and delay the legislation. Although most of therequired legislation was enacted at the project completion date, importantparts were still missing. These include provisions regulating accees to the

4

profession and the precise definition of the "cursus" leading to thequalification as Expert Comptable (EC). The performance of the Frenchconsulting firm was satisfactory. The Borrower submiitted a detailed PCR,which, makes, among others, the following statements: 'It is regrettablethat the credit did not provide any funds for the dissemination of the"Plan Compteble" '. It does mention the many efforts (not financed by thecredit) by INSCAE, RINDRA and other accounting firms to disseminate thelaw. It was because of those efforts that the Bank did not consider this tobe a priority.

5.03 Component 3 (CFC-INSCAE): the cost of operating the CFC during thefirst three years (S 3.3 rnillion; exceeded the original estimates of theCFC for six years ($ 1.6 million). It had been planned that the newlyappointed Director General of the CFC would hire individual accountingteachers without the help of an overseas coordinating institution. Thisproved to be impossible. To assure the timely start of the project, itbecame necessary to engage a Canadian consulting firm to recruit the CFC'sdirector and the foreign teaching staff. The firm also assisted inarranging overseas training for future Malagasy teaching staff. Theinitial "Canadian" orientation of CFC's program was criticized by somelocal accountants. It occasionally caused some friction between Frenchoriented and Anglo-Saxon (Quebecois) trained teachers. These problemspractically disappeared with the requirements of the new accountinglegislation were incorporated in the CFCs curriculum. None of the schoolsfirst graduates experienced any serious difficulties because of this socalled "Canadian' orientation. At the beginning, the consulting firm'sperformance was very good, but its refus-l to cooperate with potentialfuture co-financiers and a newly appointed, Bank approved, French Dean ofStudies, necessitated the termination of all ties with that firm.

5.04 Component C (RINDRA): RINDRA's foreign Director General, appointedunder the Credit, proved ineffective and controversial. He was replaced bya Malagasy director who turned out to be dynamic and efficient.Performance of the original consulting firm was satisfactory, while that ofthe second firm was generally appraised aa excellent. The expectation thatRINDRA would be able to reimburse the loan advanced by the governmentturned out to be unrealistic. To expect RINDRA to acquire its neededadditional skills at world market prices and then to sell them at similarprices on a market that, at least initially has little appreciation forsuch services, proved to be too optimistic. Although RINDRA is able togenerate positive operating cash flows, paying interest and reimbursingthis debt far exceeds its present and future capabilities. The decision tofina'.:e RINDRA's technical assistance through a loan was allegedly based ona f recast of RINDRA's earnings potential made around 1980. This forecastmisjudged the market for auditing and consulting services in a developingcountry. In the early phases of development such a market is minimal. Asit gradually develops it commands prices that are in tune with price levelof its undeveloped environment, hence far below the world market level.

5.05 The delay of component A could have been reduced somewhat had it beenmade clearer from the start that a firm %ith international experience wasneeded. As _.t was, the three firms, essentially making up the Malagasyaccounting profession, who wanted the contract for themselves, used theirsignificant political influence to get on the short list and to influence

5

the choice of firms. This led to protracted delays. It would have beendifficult to foresee these problems during project preparation.

5.06 The cost overrun for component B could have been reduced (but notavoided) if the absence of anyone to manage the initial establishment ofCFC, and the problems of availability and cost of accounting teachers hadbeer correctly assessed. Ideally, a contract with a university should havebeen sought for the organization and management of the school. TheassumptLon that RINDRA would be sufficiently profitable to repay the loanshould have never been made.

5.07 The appraisal report d'd not identify the risk of delaying theproject's completion by the delay of component A. The other risks, nameyLthe timely appointments of foreign directors for the CFC and RINDRA,mentioned in the appraisal report were of no consequence.

5.08 Under component D only two sub-projects were successfully completed.Originally, this component also provided for a feasibility study for theestabl.shment of a public consulting firm. The Borrower's Projectcompletion report states (p. 40) that the conditions for this assistancewere not stated clearly and never adequately publicized. This allegedlyexplains the delay in submitting projects for approval. Only two projectswere submitted. Both were approved. The first submiss!.on was on November17, 1983.

6. Project results

6.01 Component A: A modern accountancy law adapted to Madagascar's needswas passed in 1987 (Plan comptable). Still to be enacted are relatedchanges in the Commercial Law Code, important provisions regulating accessto the profession, and the "cursus" leading to the qualification" expertcomptable".

6.02 The project's most successful component was the establishment andstaffing of the CFC, latter renamed INSCAE. The school started operationsin 1983 and currently graduates approximately 50 to 60 students from itsthree-year accountancy program and another 20 from its four-yearprofessional accountancy program. Its fully tuition-financed eveningschool has an enrollment of approximately 400 per year. Graduates have nodifficulty in finding appropriate employment. The project also providedthat RINDRA prepare a study estimating Madagascar's demand for accountants.The study, started in 1983 but never completed, was to serve as a guidelinefor the future expansion of INSCAE's accounting programs. It will now becarried out by INSCAE.

6.03 component C: The technical assistance to RINDRA, despite some initialproblems with an expatriate director, must be judged successful. RINDRA isnow fully under Malagasy management. The auditing division presently has astaff of thirty-five qualified accountants who are organized along thelines of modern accounting firms with solid programs of internal trainingand quality control. RINDRA has as its clients some of Madagascar sbiggest companies and is well known for the quality of its audit work.

6

6.04 The consulting division of RINDRA now employs 20 professionals,enjoys a good reputation and is now apparently operating at a profit beforedebt service. Because of its debt to the government, RINDRA will befinancially viable only if this debt is drastically reduced or annulled.

6.05 The new accountancy law requires that accounting firms be fullyindependent. This precludes government ownership and control of anaccounting firm. If RINDRA is to continue to function as an auditing firm,it must be reorganized as a private firm. Present plans call for theprivatization of RINDRA and the reduction or annulment of its debt; thegovernment will retain cnly a small minority interest in RINDRA's equity.

6.06 Component D (Technical Assistance to Malagasy Management Consultingfirms): the two main private accounting and consulting firms, Fivoaranaand Ramaholimihaso, received some effective technical assistance fromFrench accounting and consulting firms that improved the quality of theirservices in the area of computerized systems.

7. Project Sustainability

7.01 A modern accounting legislation is in place, although some detailsconcerning the regulation of the accounting profession are yet to beenacted. Both INSCAE and RINDRA have been instrumental in disseminatingthe new law through courses and seminars. The legislation has beencarefully analyzed and modified to adequately meet the requirements of theMalagasy economy. It became effective on January 1st, 1989.

7.02 The accountancy training project should be viewed as a success.INSCAE turns out wwll-trained accounting graduates. All find employment atsalaries significantly higher than those of university graduates. Foreigntrained Malagasy teachers constitute about 80% of its teaching staff, andin the foreseeable future the program will no longer depend on expatriateteachers. Currently most of INSCAE operating costs are still financed bythe Bank (Credit 1661-MAG). It is planned that the Government ofMadagascar will finance an annually increasing share of these operatingexpenses. INSCAE is able to generate revenues from both the public and theprivate sector through its continuing education seminars and consulting.This revenue plus the tuition paid by students will never amount to morethan 30% percentage of its annual budget. A study in 1987 required underthe Credit agreement showed that many students would have difficulty inpaying more than they do and recommended against increasing tuition feesfor full-time students.

7.03 RINDRA's future success as an auditing and consulting firm dependsonly on its successful privatization and the reorganization of itsfinancial structure. There are indications that both problems will beresolved in the foreseeable future.

8. Bank Performance

8.01 Bank Performances The Bank's Performance was satisfactory. Itcontributed to the project's success by strongly insisting that deadlinesbe observed and covenants respected (not always successfully).Overestimating RINDRA's financial viability and underestimating the cost of

7

initially staffing the CFC were the only important planning errors.Supervision missions of the project were carried out about twice a year byEAPED staff, from 1985 on with the assistance of an accounting specialistconsultant. Supervision of the project was adequate.

8.02 There were three crises that had to be faced by the Bank: (1) when itturned out that the initial staffing of the CFC would require the servicesof a consulting firm, Bank staff decided quickly and correctly that theresulting higher cost outweighed the alternative of delaying the project;(2) when RINDRA's ineffective Director General was replaced by a Malagasynational, the Bank re'uctantly agreed to what turned out to be a sounddecision; and (3) when the initially excellent work of the CFC's firstcon'ulting firm deteriorated to the point where the continued success ofthe project was threatened, the government was correctly permttted to cutall ties with that firm.

9. Borrower Performance

9.01 The Government consistently showed a strong commitment to theproject. It fully supported the concept of creating the CFC as a "grande4cole", separate from the university; it provided adequate premises for theschool and gave full support to the politically difficult enactment of theaccounting legislation. It seems willing to restructure RINDRA as aprivate firm to assure its continued functioning as an effective accountingand consulting firm.

10. Pro4ect Relationships

10.01 Government-Bank relationships were satisfactory throughout theproject. Through the initial engagement of a Canadian consulting firm, itwas possible to interest Canada's foreign aid (ACDI) program in theproject. ACDI is now making a significant contribution to INSCAE'sprograms. The Bank was also successful in enlisting FAC assistance forfinancing of some highly qualified French teichers for INSCAE.

11. Conclusions, Recommendations and Lessons Learned

11.01 The Borrower's report makes the following recommendations:(a) Early creation of the "Conseil Supdrieur en Comptabilit4" todeal with some remaining legal problems, and new issues in accountingand auditing.(b) The early enact.,ient of the rules concerning the accountingprofession.(4) Implementation of #2 will enable INSCAE to fulfill its originalmission of training future "experts comptables".(d) The government should prepare a strategy to modify INSCAE'sobjectives and to assure its financial viability.(e) The financial reorganization of RINDRA by converting its de'-it toequity capital and changing its legal status into a partnership.(f) Another technical assistance contract to strengthen theconsulting division of RINDRA.

11.02Bank's comments on above recommendations:- Recommendations " a" and " b" are reportedly in the process ofbeing implemented.- Regarding recommendation " c", INSCAE is fully qualified and hasthe capacity to teach any preparatory "cursus" for the "expertisecomptable" once such "cursus" is defined.- As to recommendations "d" and "e", INSCAE is presently preparirng along range strategy which will be discussed and analyzed with thegovernment, the Bank and the co-financters. The reorganization ofRINDRA and the change of its legal status are currently beingnegotiated by RINDRA staff and the government. Final and successfulconclusion of these negotLations is expected by mid-1990.- With regard to "f", RINDRA is presently the beneficiary of an ACDIfinanced technical assIstance program for its management consultingdivision.

11.03The political difficulties of introducing an accountancy law withoutthe full cooperation of the existing accounting profession had not beenforeseen. The profession, although very small, had significant politicalinfluence. The start up costs of the CFC far exceeded the originalestimates because the problems of procuring needed technical assistance hadbeen underestimated. The on lending arrangements for RINDRA proved toocostly; it was impossible for the firm to absorb the full costs of foreigntechnical assistance and remain competitive in local markets.

11.04Both the Borrower and the Bank view the project as a success withsome caveats. The major unresolved problem was that while the accountancycode was changed commercial law has not been changed to conform to the newcode. This issue has been taken up under Credit-1661 the follow on Creditto 1155. There are no significant differences in the findings andconclusions of the Bank and those reported by the borrower.

9ANNEX

DEMOCRATIC REPUBLIC OF MADAGASCAR,Antananarivo, 7th September, 1990

Ministry of Finance and Budget

GOVERNMENT COMMENTS ON BANK REPORT

OFFICE OF THE MINISTER

The Resident Representative,The World Bank

RE: Government of R.D.M.'s commentaries about the report of Post evaluationof credit 1155-MAG.

Dear Sir,

Please find hereafter the Government of R.D.M.'s commentaries aboutthe report of Post evaluation of credit 1155-MAG:

a) General view

In general, the report is an accurate reflection ofthe project's history.

b) Political problems encountered in the introduction ofthe new 1987 Malagasy accounting plan

Three years passed between the time when the FrenchConsulting Firm started its activities and thepublication day of the new accounting plan. Webelieve that the difficulties met during .his periodof time were not due political reasons, but rather,the mair. reason for the publication delay of the newaccounting plan were technical problems.

The draft accounting plan prepared by the Consultantfirm was the subject of two seminars organized by thefirm at the Hilton Hotel, during which every detail of540-page draft report was analyzed. The seminarparticipants included accounting professionals,accounting teachers in addition to key representativesof the Public and private sectors concerned withaccounting issues. Other technical meetings followedthose seminars before the document was finalized.

For your information, the 1957 French plan revisionofficially started in 1971 and a waiting period ofmore than 11 years was necessary before the new Frenchaccounting plan was definitely established.

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c) Concern of the Accounting Profession Regarding itsStatus

The accounting profession did not have any reason tofear that its status would be Jeopardized by the newdispositions which concerned strictly technicalmatters. Indeed, such a change in the statusaccounting profession only happen in the context of anew law governing the profession which is currentlygoverned by regulation no.62.104.

d) Political problems in the new Accountinz Planpromulgation

The new Accounting Plan promulgation decree, wasconsidered in the Council of Ministers. The discussionwas fairly straightforward as all Ministers gave theiragreement.

e) RINDRA File

The miscellaneous points raised as well as therecommendations stated in the report are presentlybeing considered in the context of a global settlementof the RINDRA issue.

Yours sincerely,

Leon RAJAOBELINA

Minister

t11 ~ '-"-b '07 SEP IMMINISYtrk 090 PINANCES

JT aU SUDGEKT

Li MANINY Monsieur LE REPRESENTANT RESIDENT DELA BANQUE IlONDIALE

- ANTANANRIVO -

N- WBC /SG/DPC

0 B J t : Comntairts du ouvernhmnt de la R.O.M. sur la rapportde Post &valuation du cr6it 1155-MM.

Monsieur Lt Reprisentant.

Ja1 1 mhonmur da vous faire connaitre quo le rapportdu post Ivaluation du cridit 1155-NM applle do la part du Gouvernem_ntde la R.D.M. Its comentaires ci-apris

*) Vue globale.

Dans l'ansOle l rapport reflte correctawnt lavie du proJet.

b) Problus golitiq rencontrhes dans 1'introductIondu nouveau pian comptab a m lpace 1557.Entre Is ammut Io le consultant frgacis Audit etsysthms a commnei ses travoux et Io Jour de laparution du nouveau plan coptable 11 seat GcoulQenviron 3 ans.Nous esti* ns quo les difflcultAs rencontries aucours do cette pr1ode n'avalent *bsolumentu sa un carac-

Le principal facteur qul a reterd# la purtlion dunouveau plan ccsptable est essentiellmnt dtordretochnique.En effet, le projet de plan co qtabe pipar# parla cabinet framaips Audit et syst s a felt I obJetdo doux shinaires animis per leurs autaurs I PlHotelHilton et *u cours desquels ont At& examins chequepage d'un volum do 540 pages.

--.I ~ ~ -4o-,

Re~v~ lZ49+.

~~~~~~~~d

12 t1sif 3

Les participants l ces sb"inaires ftaient desprefessionnels de I& ceaptabilit#, des prefesseurs de l'Ense1-gnement Supiriour en gestien. des personnal1tds du secteurpublic concern6es per la co.ptabilitf (Pr6sident de la Chambredes Coptes, Directeur G6neral de l'inspection Gn#ra1ede l'Etat etc....) ainsi quo des op6ratours 6cononiques.

Ces siminaires ont 6t0 suivis d'autres rOunionstechniques avant de parmnir au docu ent final.

A titre dlinforsation. on notere que la rivisiondu plan frangals de 1957 a comnenc6 officieTlemnt en 1971et 11 a fallu une piriode de gestation de plus de 11 ansavant que le nouveau plan comptable franqais alt pris saforum dffinitive.

c) Inquiftude de la profession comptabe qjuant I son statut.La profession comptable n'avait aucune ruison

de votr son statut mnac6 p.r les nouvel;s Gispositlonsqu1 sont d'ordre puruumnt technique.

Un changsmut Iventuel du statut de la professioncomptable ne peut en effet intervenir que dans le cadred'une nouvelle 101 organisait la profession coWtable laquellemSt rZile actuell_emnt par l'ordonnace 62.104

d) Difficult# politi quo dans_la promulgation du nouveau Plam(mtab1 0.

La pramlgatlon de nouveau plan comptable quisest faite par d6cret pris en 'Conseil des Ministres i ttris facile pu1sque tous les Minist6res ont accordi lourvisa lors de la camunication tournante y afffirente.

0) Dossier RINDRAtis divers points soulev6s dans le rapport ainsi

quo los recoamandtions qul y sont foruulles sont actuell emntexainmis dans le cadre d'un rgli_nt global de la situationde RINDRA.

VeWuilez nsiour Le Reprisentant, l'assurancede ma haute consid

~~~~~~~~~~~~~~~~~~~~~~~~~~~I

13

PART II

GOVERNMENT'S PROJECT COMPLETION REPORT 5/

1. SUMMARY AND CONTEXT AND OBJECTIVE OF STUDY

CONTEXT AND OBJECTIVE OF MISSION

1.01 In accordance with the provisions of Section 3.05.b of DevelopmentCredit Agreement 1155-MAG, the Government of Madagascar is to provide theWorld Bank, by six months following the closing of the credit or at anylater date agreed with the World Bank, with a complete and detailed reportaddressing the following topics:

- execution of and initial operations under the Project;- costs of the Project and advantages deriving or expected to be

derived therefrom;- execution of obligations incumbent on the Government of

Madagascar and the World Bank, respectively;- achievement of the objectives of the credit.

1.02 The purpose of our mission is to draft the completion report for theAccountancy and Auditing Organization and Training Project financed byCredit 1155-MAG on behalf of the Government of Madagascar.

METHODOLOGY

1.03 The mission was carried out in the three following stages:

- Survey of documentation (appraisal report, contracts, variouscorrespondence, etc.);

3 Analysis of the documentation;- Discussions with various leaders who participated in project

development, execution and monitoring.

STRUCTURE OF REPORT

1.04 This report addresses in turn:- summary and background;- the description of the project;- conduct of the project;- results and problems;- conclusions and recommendations

HISTORICAL OVERVIEW

1.05 The chronological starting point for this project was the idea ofestablishing a National Auditing Corporation in June 1978. Taking intoaccount the suggestions of tht accounting profession and bearing in mind

5/ The borrower's report was prepared in French by Malogasy Consultants, Fiovarans andRINDRA, on behalf of the Government who submitted it to the Bonk. It was translated by theBank. The original French version is available from Africs Files. Copies of tho Frenchversion are being supplied to the Operations Evaluation Department. This report was preparedfor the Government and the World Bank Is not rosponsible for the opinions expressed ;n thereport.

14

that the interventions of the National Auditing CorporatLon would beeffective only if enterprises have the capacity and the legal obligation tosubmit their financial statements in a form which can be audited, in January1990 the World Bank defined a "national accountancy project" which not onlyincluded auditing, but also covered the organization of the profession, thedefinition of a national accounting framework, the training of accountants,and enhancement of the intervention capacity of private accountancy firms.

1.05 The accountancy and auditing organization and training project, aproject to assist the accounting profession, thus included the followingfour components:

- Component A: Study of accounting standards and legislation- Component B: Creation and operation of an Accountancy Training

Center- Component C: Strengthening of the activities of RINDRA

Socialist Enterprise- Component D: Support of private management consulting firms.

OVERVIEW OF THE CREDIT AGREEMENT

1.07 The project appraised by the World Bank in June 1980 was covered byCredit Agreement 1155-MAG signed June 11, 1981. In accordance with theterms of the agreement, the World Bank extended a credit of SDR 9,4CO,000 tothe Malagasy Government. The breakdown of this amount by category of creditin accordance with the credit agreement and as finally allocated followingadjustments is indicated in the following table:

Category of Credit According to Subsidiary Upward Downward AfterCredit Credit Adjustment Adjustment AdjustmentAgreement Agreement

Consultants for 260,000 50,000 200,00legislation

Consultants for CFC 1,630,000 1,810,000 3,440,000

Consultants for RINDRA 2,200,000 3,600,000 1,160,000 4,160,0MO

Consultants for private 820,000 426,000 396,000fIrms

Local CFC personnel 680,600 395,0ao 286,000

CFC procurement 900,0i0 900,000

Unallocated 2,940,000 2,140,060 2,090,000 s6,o00

TOTAL 9,400,606 2,980,000 2,986,006 9,400,000

PURPOSE OF THE COMPLETION REPORT

1.08 In accordance with the provisions of Section 3.05(b) of DevelopmentCredit Agreement 1155-MAG, the Malagasy Government is to provide the WorldBank, not later than six months following the closing date of the Credit orany later date agreed with the World Bank, with a complete and detailedreport on:

- project execution and initial operational experiences;

15

project costs and the gains derived from it or expected to bederived from It;

- performance by the Malagasy Government and the World Bank of theobligations incumbent on each of them, respectively;

- accomplishment of the objectives of the credit.Our mission iL to draw up the completion report for the Accountancy andFinancial Auditing Organization and Training Project under Credit 1155-MAGon behalf of the Malagasy Government.

2. GENERAL INTRODUCTION

2.01 Preparation of the project effectively waS spread over a three-yearperiod from June 1978 to June 1981. The first 20 months were devoted to thepre-identification phase. The project, exclusively for technical assistanceof a new kind for the World Bank, was not within the purview of any of itscustomary divisions, which produced a good deal of hesitancy.

2.02 The date on which the credit took effect, scheduled to be October 12,1981, subsequently was postponed until May 6, 1982. The process of hiringof the Directors-General of CFC (Accountancy Training Center] and RINDRA,who were intended to be expatriates and whose appointment constituted one ofthe Bank's conditions for the entry into force of the credit, took nearly ayear. The closing date for the credit, initially scheduled for March 30,1989, was thus moved back to June 30, 1989.

CONDUCT OF THE PROJECT

Component A: Accounting Standards and Legislation

2.03 The component devoted to "accounting standards and legislation" hadthe following aims:

examination of the regulations applicable to the various typesof enterprises as regards accounting and of the professionalstandards to which accountants and auditors must adhere.

- drafting and implementation of appropriate regulations,including draft laws which would require, inter alia, thatMalagasy enterprises establish accounts which are audited inaccordance with specific standards and with a national plan ofaccounts.

2.04 This component, considered to be a priority, was the one in which thegreatest delay was experienced. The Bank had scheduled the introduction ofnew legal provisions on accounting legislation for July 1982, while theconsulting firm which was to assist the Government in this work was notformally announced until January 29, 1985, i.e., two and a half years later.This delay is basically attributable to:

- rather long delays in:+ preparation of the short list of consultancies;+ final drafting of the terms of reference;+ international call for bids;+ fine-tuning of the contract between the Government and the

consultancy;

16

- problems of relationships between the Order, theGovernment and the Banks in effect, the Order argued foran expansion of the project as well as for its intensiveinvolvement in project execution. For this reason, thePresident of the Order participated in the negotiations inApril 1981.

2.05 These factors were compounded by the fact that the foreign expertsselected for the study were unfamiliar with prevailing conditions inMadagascar, which led to lengthy discussions and numerous revisions duringthe course of conducting the study, and even required members of the firmMalagasy accounting profession (order, INSCAE, RINDRA) to participateactively and decisively in completing the study for Component A: criticalanalysis, formulation of recommendations, final drafting of the regulatoryprovisions and the annotated guide.

2.06 The 1987 code of accounts (PCG 87) constitutes the most palpableachievement of the project, as company law has yet to be affected. Theproject, however, provided for no financing for dissemination of the newcode of accounts, and the request for World Bank financing made first by theConsultants and later by the Malagasy Government, has yet to be acted upon.Initial dissemination work has been begun anyway by local accountingconsultancies and the INSCAE; several enterprises have already submittedtheir latest financial statements (1988) in accordance with the new code ofaccounts, whose effective date has been postponed until January 1, 1990. Asregards the accounting profession, specific proposals have been submitted tothe authorities to bolster the Ordre des Experts Comptables et ComptablesAgr44s [Order of Expert Accountants and Authorized Accountants] under thetransitional provisions and to create structures that will be called upon todefine the training course to be routinely offered for purposes of obtainingthe National Diploma of Expertise in Accounting.

2.07 Our principal recommendations relate mainly to the following points:- Creation as soon as possible of the Supreme Accountancy Council

for resolving existing problems (sectoral codes of accounts,practical modalities for implementing certain accountingprinciples, etc.);

- Publication of the legal and regulatory provisions governing theaccounting profession: training using the course for expertaccountants and organization of access to the profession underthe transitional provisions;

- Evaluation of the training needs relating to the 1987 generalcode of accounts and its dissemination, so as to define thesteps to be taken.

Component B: Creation and operation of an Accountancy Training Center

2.08 This component concerns:- creation of the Accountancy Training Center (CFC) in

Antananarivo;- hiring of the staff needed by the Center;- furnishing of training manuals and other educational materials,

supplies, services, and equipment necessary for its operation.

17

2.09 The operation of the Accountancy Training Center (CFC) began inFebruary 1983, itself some 10 months behind schedule, owing in particular to

the delay in hiring the Director-General and to the considerable workinvolved in rehabilitating the three stories made available to the Center inthe "House of Products." Moreover, because of an inadequate projectappraisal, the credit planned to cover 6 years was exhausted in 3 years,

making necessary:- on the one hand, an adjustment in the initial credit by drawing

against the non-earmarked funds and against the funds intendedfor Component D; and

- on the other hand, the preparation of a second project in the

amount of $13.1 million to continue the teaching of accounting,but under a new name: The National Institute for AccountingSciences and Business Management (INSCAE), established inSeptember 1986 and now financed by the new Credit 1661-MAG.

2.10 This being so, CFC endeavored to maintain the category of "grande

4cole" and provide complete or partial training to nearly 300 high quality

accountants (number not including that of students in evening courses)before it was transformed into the INSCAE, which thus benefitted from itsrolling start.

2.11 However, this pertaxns to Credit 1155-MAG, and does not cover the

study on the current INSCAE (functioning and effectiveness of the ExecutiveBoard, degree of effectiveness of the Pedagogical Council, etc.), which is

part of Credit 1661-MAG. Such a study is, moreover, envisaged by the

management of the INSCAE.

2.12 Inter alia, it is necessary to study the ultimate coverage of

CFC-INSCAE costs under the General State Budget. In addition, themanagement of the INSCAE currently wish to know:

the status of the INSCAE as regards the other institutions fortraining accountants both in Madagascar and abroad;whether the structure and organization of the INSCAE are adaptedto its activities;

- whether its activities relate to the needs of the market both inqualitative and quantitative terms.

2.13 Accordingly, a study covering the three following components isenvisaged:

- pedagogical audit;- management audit; and- market study.

Component Cs Activities of RINDRA Socialist Enterprise

2.14 The reinforcement of RINDRA's activities involves training of its

supervisors and the supervision of its work by an outside consultancy.

After two or three years of indirection initially, RINDRA now has a soliemastery of the audit function (a staff of 35 in the division), initial

18

experience in management counselling (a staff of 14 in the division), asound internal organization, and a reputation for professionalism.

2.15 However, the long period of external technical assistance has provenextremely costly, making RINDRA's financial position unsustainable, all themore so as the terms for on-lending the credit ultimately proved to be tooharsh. Indeed, given the burden of its debt to the Treasury (SDR 4.15 mil-lion over 10 years at 12 percent), the company is virtually at the point ofceasing payments. During the course of our mission, It was not possible toproduce any document testifying to the anticipated capabilities of RINDRA tosupport financing on this large a scale. In addition, it bears noting thatRINDRA's status as a socialist enterprise is not such as to ensure thestability of its senior staff.

2.16 As regards the study on needs for accountants in Madagascar providedfor under the Credit Agreement, this was to be dealt with by the formerexpatriate Director-General of RINDRA, but ialtimately was not completed. Inthis connection, however, the INSCAE, at the request of its Board ofDirectors, intends to conduct a market study in order to determine bothquantitative and qualit"cive accounting requirements with a view toadjusting class sizes provide teacher training at the INSCAE.

2.17 It would be advisable to revise the status of RINDRA so as to make itlegally independent and to enable its higher ranking staff to have access topartnership. Moreover, a financial restructuring of RINDRA is mandatory soas to enable it to develop sufficient positive rolling capital and asufficient gross self-financing margin.

Comsonent Ds Support for Private Management Consultancies

2.18 This component enables the firms concerned to use the credit tofinance support in financial and accounting organization from an outsideconsultancy firm.

2.19 As regards the component on enhancing the capacity of the privateconsultancies, 52 percent of the small amount of credit provided for had tobe allocated to other needs, which made it possible to carry out on y twoexternal assistance operations. This external assistance, however, didstrengthen the capabilities of two private firms as regards managementconsulting services and bank auditing.

2.20 It must be acknowledged that project 1155-MAG is a success, thisbecause the project made it possible for:

- the country to have a more modern code of accounts that isadapted to its needs;

- the accounting profession to clarify the problems relatlng toaccounting regulations, ongoing training of accountants and theorganization of access to the profession, under the transitionalregulations;

- CFC to provide partial or complete training to almost 300acco ntants (excluding evening courses) before its activitieswere ta .an over by the INSCAE;

- RINDRA to become a highly capable accountancy firm; and

19

- two private firms to take advantage of external assistance tostrengthen their capacities in management consulting.

2.21 However, the project has the two following major weaknesses, which arestrictly financial in nature:

_ the initial loan allccation for a six-year period to CFC wasexhausted in only three years; and

- the financial structure of RINDRA is unsustainable owing to theterms for on-lending.

BASIC DATA ON THE PROJECT

PROJECT: Project for Accountancy and Auditing Organization and Training inMadagascar (1155-MAG)

Component A

Examination of the regulations applied to the various types ofenterprises as regards accountancy and of the professional standards towhich accountants and auditors must aspire; development and implementationof appropriate regulations, including draft laws which would require interalia that the Malagasy enterprises draw up accounts which would be auditedin accordance with specific standards and would establish a nationalaccounting code.

Component B

Creation of an accountancy training center in Antananarivo; hirirn ofthe necessary staff for said center; and provision of the training manualsand other educational tools, supplies, services and equipment necessary forits operation.

Component C

Enhancement of the activities of RINDRA.

Component D

Strengthening of the capacity of domestic management consultancyfirms.

Borrower

Government of Madagascar.

Executing Agencies

As originally planned:

- Ministry of Economy and Commerce, as regards the consultancyservices for purposes of helping develop accounting mechanismsand methods and preparing legislative measures.

20

Ministry of Higher Education as regards the establishment of anaccountancy training center.

RINDRA as regards technical assistance in auditing.

Since February 28, 1984, the coordination of the entire project hasbeen under the direct responsibility of the Ministry at the PresidencyResponsible for Finance and the Economy.

Execution of the Credit (Amounts in SDRs)

PROJECTED ACTUAL

Loan request to the IDA (initially 6/24/78for strengthening the effectiveness andof RINDRA socialist enterprise 6/18/79

Preparation, identificat4 .on Aug-Sep 79

Appraisal June 1980

Approval C/2/81

Signature 6/11/81

Effective date /l12/81 5/6/82First review J/12/82Second review 4/42/82

Concluding date .. 31/88 5/6/82First review S.:;.0/a8Second review 1.! 31/88

Terms of credit 9,400,000Amount 0.75 percent ofService charge amount of

credit drawnand not yetrepaid

Repayment perLod 50 years

Grace period 10 years

Subsidiary loan agreement between theTreasury and RINDRA

Date of signature 1/25/82Amount 3,000,000 3,000,000Service charge 12% per annumn 12% per annumRepayment period 10 years 10 yearsGrace period 3 years 3 years

21

Codicil to the subsidiary loanagreement between the Public Treasuryand RENDRADate of signature 7/18/86Additional amount 1,150,000Credit increased to: 4,150,000Service charge 12% per annumRepayment period 6 yearsGrace period 2 yearsPenalty interest (on all amounts 3.5% per annumdue and paid at a date afterthe due date)

Financial status of credit as atMarch 31, 1989Amount 9,400,000 9,400,000Amount released 9,359,809Balance 40,190.83

22

3. HISTORY OF PROJECT

ENTERPRISE MANAGEMENT ASSISTANCE PROJECT

3.01 In 1978, the Mlnistry of Economy and Commerce designed an enterprisemanagement assistance project in cooperation with two major internationalfirms. There were three components to this project:

- creation of a National Auditing Corporation;- creation of a Management Consulting Company;- creation of a National Center for Management Training.

3.02 The Commission of the European Communities had previously shown greatintereHt in the establishment of the National Center for ManagementTraininlg, an'd the Government of Madagaecar sought the cooperation of theWorld Bank for support of the first two project components. The requestwent unanswered.

TECHNICAL ASSISTANCE PROJECT FOR STRENGTHENING THE EFFECTIVENESS OFRINDRA

3.03 After the establishment of RINDRA socialist enterprise on April 7,1979, efforts were concentrated within this auditing firm. In June 1979, acredit of $2,300,000 was requested from the World Bank to finance technicalassistance from the consulting firm for purposes of enhancing RINDRA'seffectiveness, it being intended to provide retroactive coverage of fees,which were regarded as too high. This second request was not approved bythe World Bank, which did, however, consider the issue at length beforereaching its final decision.

NATIONAL ACCOUNTANCY PROJECT

3.04 Taking into account the suggestions of the profession and the factthat RINDRA's activities would be effective only if the enterprises wereboth able and legally required to provide their financial statements in anauditable form, in January 1980 the Bank defined a "national accountancyproject" including, to be sure, auditing, but also the organization of theprofession, the definition of a national accounting framework, the trainingof accountants, and the enhancement ef the intervention capacity uf privatefirms. This intearated project was appraised by the Bank in June 1980 andwas covered by Credit Agreement 1155-MAG signed on June 11, 1981.

3.05 A modest project entaillng assistance to a National AuditingCorporation thus led three years later to a project for assistance to theentire profession at a total cost of $14.2 million. Preparation of theproject was somewhat time consuming. This project, focused solely ontechnical assistance, was of a new type for the World Bank, and did not fallwithin the purview of any of its divisions. This resulted in a good dea.. ofhesitation. The World Bank finally took advantage of a number of missionsto Madagascar by an expert from the Energy and Water Division and entrustedhim with the project appraisal.

PRINCIPAL CHARACTERISTICS OF THE PROJECT

3.06 The objectives of the project were:

23

- to restructure Madagascar's economic and financial informationsystem so as to adapt it to the country's current needs;

- to improve the skill level of accountants and auditors so as toenhance effectiveness in enterprise management, planning andfinancial control.

3.07 Establishment of the integrated project included the followingcomponents:

- Component A: Study of Legislatlon and Accounting Regulations:This component is devoted to developing regulations whichrequire enterprises to maintain their accounts, and have themaudited, in accordance with specific regulations set forth in anational accounting code. Within this framework, the MalagasyGovernment will have the assistance of an outside consultancyfor a period of 20 man/months.

- Component B: Creation and Operation of an Accountancy TrainingCenter: In addition to actually establishing such a Center, thiscomponent also provides for hiring its staff, providing trainingmanuals and other materials necessary for its operation.Completion of this component will require 279 man/months ofexpert time.

- Component C: Enhancement of the Activities of RINDRA SocialistEnterprise: The enhancement of RINDRA's activities will be theoutgrowth of staff training and oversight of its activities byan outside consultant, which will entail 156/man/months of workover a period of 2 1/2 years.

- Component D: Support for Private Management Consulting Firms:Interested firms will draw against the credit to obtain thesupport of an outside firm as regards consulting on accountancyand financial organization. Total involvement of 65expert/months was provided for this component.

COSTS

3.08 The cost of the project, estimated by the Bank at $14.2 million,may be broken down by component as follows:

COMPONENT In domestic In foreigncurrency exchange Total

Study of accounting legislation A 0.1 0.3 0.4standardization

Creation and operation of an 2.3 2.2 4.6accountancy training center

Strengthening the activities of 0.3 2.8 3.1RINDRA socialist enterprise

Support to private management 0.2 1.0 1.2consulting firms

Base costs 2.9 f.3 9.2

24

Provisions for:Unforeseen supplies and 0.3 0.6 0.9

equipment 1.9 2.2 4.1Prico fluctuations

TOTAL 5.1 9.1 14.2

3.09 The Accounting Training Center and RINDRA socialist enterprise are thetwo most costly components, absorbing 49 percent and 34 percent of the basecosts, respectively. Provisions are also quite sizable, constituting 35percent of total project cost. It also bears noting that the foreignexchange costs of the project are relative sizable (64 percent of thetotal).

FINANCING ARRANGEMENTS

3.10 The financing arrangements for the project were established as follows(in millions of dollars):

COMPONENT Domestic ForeignCurrency Exchange Total

Study of accounting legislation and standardization 0.1 0.8 0.4

Creation and operation of an accountancy training 2.3 2.2 4.5center

Strengthening the activities of RINDRA socialist 0.8 2.8 3.1enterprise

Support for private management consulting firms 0.2 1.0 1.2

Basic costs 2.9 8.3 9.2

Allo 1nces for:Unforeseon equipment 0.3 0.6 0.9Price changes 1.9 2.2 4.1

TOTAL 6.1 9.1 14.2

The most expensive components are the Accountancy Training Center andRINDRA Socialist Enterprise, accounting for 49 percent and 34 percent ofbase costs, respectively; provisions were also sizable, constituting 35percent of the total project cost. It bears noting, moreover, that theforeign currency share of the costs was relatively high (64 percent).

2.4. FINANCING ARRANGEMENTS

The financing arrangements for the project are as follows (in millionsof dollars):

FrNANCING SOURCE Domestic ForeignCurrency Exchange Total

IDA Credit 2.4 9.1 11.6Central Government Budget 1.6 -- 1.6Self-financing by RINDRA and private firms

1.1 -- 1.1TOTAL 5.1 9.1 14.2

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3.11 The Bank thus provided financing for 81 percent of the total projectcost. Due to antlcipated contributLons from RINDRA and from private firms,the Central Government's participation is relatively small.

3.12 In a departure from its customary practices, the Bank agreed tofinance costs in local currency representing the equivalent of $2.4 million,corresponding to 95 percent of the costs payable ln local currency of thoconsultants and of the local purchases of CFC as well as 60 percent CFC'spersonnel costs.

3.13 The IDA credit torms were established in accordance with theConvontion of June 11, 1981 as follows

Amount SDR 9,400,000

Service charge 0.75 percent of the amount of the credit drawn andnot yet repaid

Repayment period 50 yearsGrace period 10 years.

3.14 The amount of the credLt may be broken down as follows (amounts inSDRs)

Consultants for legislation 250,000Consultants for CFC 1,630,000Consultants for RINDRA 2,200,000Consultants for prlvate firms 820,000Local personnel--CYC 660,000CFC purchases 900,000Unallocated 2,940,000

TOTAL 9,400,000

3.15 In accordance with Article 3 of the credlt agreement, the borrowerwill on-lend to RINDRA the equivalent of SDR 3 million within the frameworkof a subsidiary loan agreement. This agreement, signed between the PublicTreasury and RINDRA on January 25, 1982, sets the loan terms as follows:

Service charge 12 percent per annumRepayment perlod 10 yearsGrace perlod 3 years

The terms of the subsidiary loan agreement are thus "harsher" than the termsof the maln loant RINDRA wlll not, however, be responsLble for coverlngexchange rliks.

DISBURSEMENT SCHEDULE

3.16 The dLibursement schedule for the IDA credlt established in globalterms by the World Bank are lndlcated in the followLng table (Ln milllons ofdollars):

1982 198 1964 19s 1986 1967 1966

Per fIscal yer 1. 2 2.0 2.8 2.2 2.0 1.5 6.5

Cumulative 1.2 8.2 5.6 7.7 9.7 11.2 11.5

Use of the credit would opan a period of seven years.

26

3.17 Given the increasing need noted in moat enterprisee, particularly thepublic enterprises, for assistance in the areas of organization andmanagement, the Malagasy Government decided to setup up the management unitprovided for when negotiating the accountancy and auditing organization andtraining project within an existing enterprise, in this case RINDRAsociallst enterprlse. The creatLon of a Management Consulting Departmentwithin RINDRA in March 1985 resulted in a further need for technicalassitance, which was to result in an additional assistance contract withthe original Consulting fLrm in March 1985.

3.18 In order to enable RINDRA to extend its activities in the area ofcomputerized auditing and the auditing of banks and insurance companies, onthe one hand, and, on the other hand, to bolster its internal management, asecond assistance contract was signed in April 1985 with a French firm.

3.19 The credit allocated to the Accountancy Training Center, scheduled tobe spread over six years, was fully utilized in three years. It was used toflnanced unforeseen expenditure at the appraisal level (teacher trainingabroad, recourse to consultants for purposes of hirLng technicalassistants). The increase in the value of the dollar via-&-vie the SDR alsoreduced the dollar value of the credit.

3.20 In view of RINDRA's new requirements and those of the AccountancyTraining Center, an adjustment in the credit proved necessary. Thereallocation process, carried out in April 1986, was as follows (amounts InSDRs):

Category of Credit According to Subsidiary Upward Downward AfterCredit Credit Adjustment Adjustment AdjustmentAgreement Agreement

Consultants for 250,000 s6,0O0 200,060legislation

Consultants for CFC 1,680,000 1,8X0,00 ,440,000

Consultants for RINDRA 2,200,000 8,000,600 1,150,000 4,160,000

Consultante for privete 820,060 426,000 895,000f I rmo

Local CFC personnol 880,060 896,000 266,000

CFC procurement P00,0me 900,000

Unallocated 2,940,000 2,140,000 2,090,000 50,000

TOTAL 9,400,000 2,998,000 2,966,000 9,400,000

3.21 The new requirements of RINDRA and the Accountancy TrainLng Centerwere largely financed by drawing on the non-earmarked funds and on the fundsintended for Component D.

3.22 In order to ensure continuity for CFC activities, in 1985 theGovernment found it necessary to prepare a new project. CFC, whoseactivities had extended into the area of management training, assumed a newnames "Institut National des Sciences Comptables et d'Administrationd'Entreprises (National Institute for Accountancy and Business Management](INSCAE). For operational purposes, the INSCAE received a new credit fromthe World Bank (Credit 1661-MAG) in April 1986. This situation complicatesthe appraisal of Component B of Credit 1155-MAG, which concerns CFC only;

27

the World Bank (Credit 1661-MAG) in April 1986. This situation complicatesthe appraisal of Component B of Credit 1155-MAG, which concerns CFC only;the performance of CFC thus cannot be assessed except in light of what hasbeen accomplished by the INSCAE.

Successive Delays in Effective Dates and Closing Dates

3.23 The effective date of the credit, scheduled for October 12, 1981, waspostponed twice (January 12 and April 12, 1982) before finally coming intoforce on May 6, 1982. The Bank's conditions for the credit taking effectwere as follows:

- appointment of a Director of CFC and a Director of RINDRA, madeofficial by decree;

- the draft contract of the Director of RINDRA had to be submittedto him;

- the subsidiary loan agreement needed to be signed.

3.24 The hiring of the Directors-General of CFC and RINDRA, who accordingto plans were to be expatriates, took almost a year, which explains thesuccessive delays in the effective date.

3.25 The closing date for the credit was scheduled to be March 1988. Atthe request of the Government of Madagascar, the Wor'2d Bank agreed to rollthe date back, first to September 30, 1988, subsequently to December 31,1988, and finally to June 30, 1989.

Financial Status of the Credit

3.26 As yet, there has been no financial audit on the use of Credit 1155-MAG. The information provided to us by the Ministry of Finance indicatesthe following status as of March 31, 1989 (amounts in SDRs):

COMPONENT Domestic ForeignCurrency Exchange Total

Study of accounting legislation and standardization 0.1 0.3 0.4

Creation and operation of an accountancy training 2.3 2.2 4.6center

Strengthening the activities of RINDOA socialist 0.3 2.8 3.1enterpris-

Support for private management consulting firms 0.2 1.0 1.2

Basic costs 2.9 6.3 9.2

Allowances for:Unfor-seen *quipment 0.3 0.6 0.9Price changes 1.9 2.2 4.1

TOTAL 6.1 9.1 14.2

3.27 During June 1984, the Bank authorized RINDRA to finance $125,000 inequipment from Category 3. As of March 31, 1989, almost all of the credit(99.6 percent) had been exhausted.

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4. COMPONENT A: ACCOUNTING LEGISLATION AND STANDARDIZATION

CONTEXT AND OBJECTIVES

4.01 There are few accounting experts in Madagascar, and they are extremelyscarce in enterprises whose accounts are audited; financial information isunreliable and is presented in a different way by each iniividualenterprise. In 1981, when the project began, the overall status of theaccounting profession had scarcely changed from that of 1970, for lack ofany training in accountancy and owing to the fact that the prevailinglegislation set forth no standards for the format or auditing of financialstatements. The only official regulations applicable to financialstatements that were effectively adhered to were those of the TaxDirectorate, which required that companies with a turnover in excess ofFMG 30 million (or over $150,000) submit statements which documented theirtax returns in accordance with a given code of accounts; this accountingcode, however, was limited to providing a breakdown of the accountingheadings to be posted to the books, but did not govern the annual financialstatements themselves.

4.02 The decree of February 7, 1969 had, to be sure, introduced and adaptedthe French code of accounts of 1947 (revised in 1957) to Madagascar, but nodirectives could be enforced. Moreover, the 1867 law on corporationsstipulated only that financial statements had to be submitted toshareholders after review by an auditor, whose qualifications were notspecified. The law does not indicate the proper content of the financialstatements or the extend to which they had to be verified by the auditors,with the result that this auditing process is often rudimentary. The 1925law on limited liability companies is just as lacking in specificity.

4.03 The objectives of the "Accounting Legislation and Standardization"component are thus to:

- enable enterprises to obtain, in a timely manner, reliable andinformative financial statements which allow for effectivecontrol and planning of management;

- facilitate, through the uniform format of accountinginformation, the preparation of sectoral, regional, and nationalstatistics which are of value at the various planning levels;

- develop the accounting profession by creating a demand forindividuals with the skills required to draw up, analyze,interpret and audit the financial statements prepared inaccordance with the lawful professional standards.

AGREED REFORMS

4.04 The new legislative measures envisaged should require that:- organizations functioning as companies maintain books of

accounts, and prepare and publish in due time financialstatements that are consistent with a new and more restrictiveaccounting code;

- these financial statements be audited by authorized independentauditors, who shall certify that they correctly provide afaithful and honest image of the company's financial position,it being understood that this annual auditing requirement shall

29

be applied gradually, beginning with the major companies in thepublic sector;

- the persons authorized to act as auditors have the minimumqualifications required;

- the order of professional accountants and auditors defineaccounting and auditing standards, keep them up to date, proposeamendments to them as necessary, and investigate any violationsthereof.

The preparation of legislation measures should also entail review ofcommercial law provisions (company law, criminal law, taxation, etc.).

IMPLEMENTATION SCHEDULE

4.05 With the help of consultants, the Malagasy Government will carry outthis portion of the project in accordance with the following timetable:

- December 1, 1981: establishment of a committee entrusted withdrafting the proposed legislation on:

- existing laws;- organization of accountancy and auditing;- organization of the accounting profession;- April 30, 1982: submission of the new legislative proposals to

the Government and the Bank;- July 31, 1982: passage of the legislation.

4.06 This component of the project has always been considered to be highpriority. Its contents have an impact on a significant proportion of allthe other components.

IMPLEMENTATION

Hiring of a consulting firm to assist the Government

4.07 In June 1981, the Ministry of Economy and Commerce drew up a shortlist of consulting firms to be approached. At the end of this cycle, inAugust 1982, one firm was ranked first. However, no contract was signedafter the relevant negotiations. At the request of the Order ofAccountants and Authorized Accountants, which sought to be involved in theproject, the procedure was repeated. A new short list of consultants wasthen scheduled to be prepared by November 1982; as earlier, the list wascomposed solely of foreign firms. A request by the Malagasy Government toinclude local firms was submitted to the Bank in July 1983, but was refusedfor the following reasons:

- the call for bids had already been issued in April 1983, andfive of the six firms consulted had already replied;

- the Bank felt that the Order had neither the experience nor thenecessary skills to undertake by itself the study of therelevant legislation and the accounting code, and, as both judgeand defendant, would lack the required independence.

4.08 After reviewing the bids in February 1984, a firm was selected thoughit was not the one ranked first following the first round. The contractwas drawn up in May 1984 and signed in December of the same year. The

30

mission of the selected consulting firm was to cover a 12-month periodbeginning on the date of notification (January 28, 1985).

4.9 Thus, more than three years had passed between the drawing up of thefirst short list and the starting of work. Apart from the fact that theinternational call for bids took almost a year (their were two calls made),the delay in starting up the "Accounting Legislation and Standardization"component may also be explained by the problems of relations between theOrder, the Government, and the Bank. In particular, the Order wasextremely wary of the Government's "statist" options, which, in thesocialist-oriented spirit of the times, had created RINDRA, and of theBank, which was singing the praises of Anglo-Saxon styles of auditing andhad a tendency to resort exclusively to Canadian consultants and teachers.The atmosphere relaxed thanks to the selection of a French firm for thestudy of legislation.

4.10 The consultants contract provided for a workload of 15 man/months(less than initially projected) to deal with the following objectives:

- critical analysis of the situation as regards:- accounting standardization;- accounting legislation;- the teaching of accountancy;- proposals for new legal provisions regarding:- the new code of accounts;- the dissemination and teaching of the new accounting

system.

The contract provided for the involvement of a Malagasy legal specialistfor 2 man/months.

4.11 The consulting firm submitted its reports with their analyses andproposals on accounting legislation, accounting standardization, and theteaching of accountancy in June 1985; the reports setting forth formalrecommendations were submitted on January 15, 1986. The proposals,initially looked upon favorably by the parties concerned, were modifiedconsiderably, with the result that the consultants were unable to submitits final report until March 5, 1987. As of March 31, 1989, the"Accounting Legislation and Standardization" component cost SDR 195,902.

4.12 In its appraisal report of October 1981, the Bank provided for thecreation of a committee which would write the draft legislation; thiscommittee was never set up. In November 1981, the Order of AuthorizedAccountants suggested the establishment of a joint structure consisting ofprofessionals and representatives of the public authorities. Reaffirmed onmany occasions, this desire for concerted work was to bear fruit inDecember 1982, when the representatives of the Order and of the publicauthorities began to meet as an informal committee initially charged withdrawing up the terms of reference and specifications for the services ofthe consulting firm called upon to assist the Government in carrying outthe "Accounting Legislation and Standardization" component.

4.13 In February 1984, a monitoring committee was officially established;it was made up of 20 individuals representing the accounting profession and

31

the public authorities. The Committee, chaired by an Advisor to thePresident of the Republic, proceeded inter alia to:

- study and finalize the terms of reference and specificationsdrawn up by the informal committee;

- examine the reports prepared by the Consultants (guidance,control, approval).

4.14 A small, informal drafting committee for the new code of accounts aidthe annotated guide was subsequently set up in late 1986; the monitoringcommittee participated in the drafting and final approval of thesedocuments, which were published in September 1987 (Decree of September 17,1987).

4.15 Since 1982, the representatives of the accounting profession haveparticipated in a decisive manner in carrying out the work of Component A,and have done so at no charge. This participation made it possible toachieve results which reflected a broad consensus.

5. COMPONENT B: CREATION AND OPERATION OF CFC

THE BANK'S OBJECTIVES

5.01 Three major factors motivated the establishment of the AccountancyTraining Center (CFC):

- Tne departure of foreign supervisors and technicians followingthe events of May 1972: these persons had previously held themajority of management positions in the enterprises. Thesituation was accentuated after the nationalizations of 1975.In many cases, these foreign personnel were replaced byofficials who had no experience in commercial accounting or byaccountants from the private sector who lacked the necessaryqualifications.

- The absence of any high-level educational and traininginstitution in the area of accountancy: the only accountingcourses offered are supplementary courses as part of advancedstudies in management or economics, or the courses offered bythe Chamber of Commerce and a few private business schools onthe basic level. This lack did not make it possible to providequalified middle-range staff to compensate for the departure ofexpatriates.

5.02 Moreover, this situation contributed to the stagnation of theaccounting profession: no educational and training institution was awardingany diploma in accountancy. The membership of the Order (6 expertaccountants and 30 authorized accountants) had remained at the same levelsince 1971. The Central Governmented needed enterprises to provide it withup-to-date and reliable financial statements for purposes of legal controland for purposes of macroeconomic information. The level and qualificationsof Malagasy accounting supervisors as well as the use of an outdated code ofaccounts (1969) did not make it possible to meet these objectives.

32

AGREED ARRANGEMENTS

5.03 The fundamental role assigned to CFC is that of teaching accountancy.Several basic conditions were agreed for meeting this objective.

5.04 As regards teaching:- CFC was to provide courses during the day for graduates of

secondary school (or the equivalent), and evening courses forpersons already employed as accountants. These courses were tobegin in 1982 and 1983, respectively.

- The curriculum was to be established by CFC in consultation withthe officers of the Order of Accounting Experts and therepresentatives of the business community, on the basis of theproposal prepared by the appraisal mission.

- The full-time course was to include three cycles of studies:- a first cycle lasting 2 years for the accounting technician's

diploma;- a second 2-year cycle for a master's degree in accountancy;- a third 1-year cycle, with a 2- to 3-year training session in an

enterprise, for the expert accountant's diploma.- Entry into the first year was to be open to students holding the

baccalaur6at following a competitive examination. Admission tothe second cycle is open to graduates of the first cycle and tocertain university graduates.

- In order to plan its activities better, CFC was to carry out astudy on the future market demand for qualified accountants.

- For the first five years of the project, the first-year classeswere to be limited to 2, and no class was to have more than 50students.

- The number of expatriate teaching staff was to be reducedgradually, with full staffing by Malagasy nationals beginning In1989.

5.05 As regards financings- The cost of this 6-year project, including capital and operating

costs, was estimated at $7.4 million, including $3.6 million inforeign exchange.

- IDA financing was estimated at S6 million, with $1.4 million inCentral Government financing for local currency outlays.

- The average annual cost per student was estimated at $4,900 forthe first four years (1983-1986) and expected to decline to$2,000 by 1989.

5.06 As regards organizational aspects:- The Ministry of Economy and Commerce was to assume

administrative supervision of CFC.- CFC was to be managed by a Board of Directors made up of

representatives from the Ministries of Economy and Commerce,Finance, and Higher Education, the future Higher AccountancyCouncil, the Order of Accounting Experts, the businesscommunity, and the Director of the institution.

In addition to its teac.hing staff, the Center was to hire a DeputyDirector, a Dean of Students, an Administrative Assistant, an Accounting

33

Officer and two secretaries, for a total of 18 persons for the duration ofthe project.

?ROJECT EXECUTION

5.07 Execution timetable: Six major dates mark the history of CFC:

12/14/81 Creation of CFC by Decree No. 81290April 1982 Designation of the first Director of the

CenterOctober 1982 Opening of the CenterFebruary 1983 Admission of the first class of studentsMarch 1983 Initial night coursesSeptember 1987 Graduation of the first class (Master's

degrees in Accountancy

5.08 The full-time courses began 12 months behind schedule, but the eveningcourses started only one month later, without the one-year lag provided for.The extremely large number of applicat.ons from the enterprises promptedthis more rapid timing for the evening courses.

5.09 As regards teaching: The personnel hired and the number of studentsper class were maintained within prescribed levels. The figures are asfollows:

February 1983 1984 1985 1988 Cumulative

Group 1 s0 46 60 40

Group 2 s0 49 49 43

TOTAL 100 94 99 83 378

5.10 The number of students in continuing training (night courses) is asfollows:

1983 1984 l9i5 1988 Cumulative

February 298 236 222 349

September 170 206 253 48.'

TOTAL 468 440 476 813 2,198

5.11 The number of candidates for admission, ranging from 700 to 1,000,bears witness to the public's interest in training within CFC, and thelimited number of applicants selected highlights the severity of theprocess.

5.12 The broad outlines of the program prepared by the appraisal missionwere maintained in the various full-time training programs.

5.13 Initially, the contents of the materials taught were not always suitedto the Malagasy situation (Anglo-Saxon accounting systems). The students,however, managed to adapt rather easily, and the contents of the programwere successfully reoriented later (e.g., PCG 1987).

34

Officer and two secretaries, for a total of 18 persons for years onethrough five.

PROJECT EXECUTION

5.07 Execution timetable: Six major dates mark the history of CFC:

12/14/81 Creation of CFC by Decree No. 81290April 1982 Designation of the first Director of the CenterOctober 1982 Opening of the CenterFebruary 1983 Admission of the first class of studentsMarch 1983 Initial night coursesSeptember 1987 Graduation of the first class (Master's degrees

in Accountancy

5.08 The full-time courses beg&n 12 months behind schedule, but theevening courses started only one month later, without the one-year lagprovided for. The extremely large number of applications from theenterprises prompted this more rapid timing for the evening courses.

5.09 As regards teaching: The personnel hired and the number of studentsper class were maintained within prescribed levels. The figures are asfollows:

February 1988 1984 1986 1986 Cumulative

Group 1 s6 46 56 40

Group 2 S5 49 49 48

TOTAL 100 94 99 88 376

5.10 The number of students in continuing training (night courses) is asfollows:

1968 1984 1986 1986 Cumulative

February 298 235 222 349

September 170 206 263 484

TOTAL 4a8 440 476 818 2,196

5.11 The number of candidates for admission, ranging from 700 to 1,000,bears witness to the public's interest in training within CFC, and thelimited number of applicants selected highlights the severity of theprocess.

5.12 The broad outlines of the program prepared by the appraisal missionwere maintained in the various full-time training programs.

5.13 Initially, the contents of the materials taught were not alwayssuited to the Malagasy situation (Anglo.-Saxon accounting systems). Thestudents, however, managed to adapt rather easily, and the contents of theprogram were successfully reoriented later (e.g., PCG 1987).

35

5.14 The number of training hours through the fourth year (2 sessions peryear) are as follows:

1st year 675 hours2nd year 720 hours3rd year 585 hours4th year 338.5 hours

These hours are consistent with the programs provided.

5.15 The dropout rate is higher than the anticipated 20 percent, especiallyfor the first class. The main reason is that the majority of the studentsregistered in the first class have also taken ccurses at the university inorder to take advantage of scholarship opportunities. This situation hasbecome less pronounced after the large number of failures. Another reason isthe difficulty of the examinations, as the students are required to score atleast 12/20 on average. The level for disqualification is 12/20 for corecourses and 10/20 for ancillary courses.

5.16 Most of the students who have failed have been redirected toward thecontinuing (evening) program of training.

Initial Students Dropout Students Dropoutclass size receiving rate (X) receiving rate (X)

DSSC DESCANumber NumberPercent Percont

1st 100 51 61 49 18 so 10class

2nd 94 73 78 22 19 90 10class

3rd 99 72 73 27 17 85 15class

Admission for the 4th year (DESCA preparation) is limited to the top 20graduates among the holders of the DSSC.

5.17 The number of teaching staff is lower than projected, while theclasses themselves have been more crowded. CFC was able to provide thecourses in a proper manner because the number of teaching hours forpermanent staff are three times higher than those for part-timers, andthanks to the assistance of expatriate teachers on short-term missions(3 months on average).

5.18 The staffing situation for teaching personnel is as follows:

1983 1984 1986 1986 1987 1988 1989Expatriates 2 4 6 4 3 2 6Malagasy nationals 2 6 7 7 13 9 10SUBTOTAL 4 10 12 11 16 11 1iPart-time 7 a 6 12 17 11 23contractual aTOTAL 11 13 18 23 33 22 39Projected 18 36 43 54 83 63 63

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5.19 The teaching personnel are always hired by competitive examination(teaching simulation test). The minimum qualifications required are adiploma from the second cycle of university studies together with soundprofessional experience. The professional position held by the candidate isthus also taken into consideration.

5.20 Six trainees were sent to Canada's University of Quebec at TroisRiviares (UQTR) for second cycle training in accountancy from 1984 to 1987.Three returned to teach at CFC. One stayed in Canada and two have failedtheir courses. Sending students abroad for training was not provided for inthe initial costs of the project. The general level of the teaching staffappears to be meeting the needs for covering the teaching materials.

5.21 CFC has a separate office (Student Placement Office) in charge offinding positions for students in trainee stages or graduating. However,the office has confined itself to finding positions for trainees since 1987so as to make the students themselves more accountable for their futureprofessional path.

5.22 CFC also has adequate educational materials: its facilities are wellmaintained, Its library contains 30,000 items (3,000 titles),microcomputers, overhead projectors, etc.

5.23 Financial performance for the first 6 years is summarized below:

Projected Projected Reallocations Disbursements(appraisal (credit (April 1986) as at 12/16/88report) agreement) (SDR millions) (t millions)(l millions) (l millions)

(1) (2) (3) (4)

Consultants 1.9 1.630 3.440 8.462

Local staff 1.4 0.680 0.266 0.282

Supplies/equip. 1.2 0.900 0.900 0.826

TOTAL 4.6 8.190 4.606 4.670

5.24 The initial loan was fully utilized by 1984. Two particular pointsare salient in this regard:

- the "consultants" heading is significantly greater than theforecast amount (+ $1.562 million).

- sizable savings have been made with regard to local staff.

5.25 There are a number of reasons for this situation:- Some spending had to be redirected during the course of project

execution, including:- the choice of using a consulting firm for hiving the director of

the Center and 4 teachers, instead of individual hiring fromspecialized agencies (Louvain, HEC Lausanne, ESSEC Paris, etc.).This option was authorized by the Bank, which did not foreseethe financial consequences. The impact was a swelling of thecost per man/month ($10,000 for the director and $8,500 for the

37

teachers, instead of an average of $7,200), for an increase ofover 70 percent in projected costs.

- Malagasy teachers were sent to Canada for training: 6 teacherswere sent at a cost of $1,300 per man/month.

- The dollar appreciated, reducing the equivalent of the credit(awarded in SDRs) from $11.5 million in 1981 to $9.9 million in1985.

- The delay in starting courses led to additional consultantcosts: the contract with the first consulting firm Initiallysigned for $2 million over a 2-year period had to be extended by9 months on 4/8/84 and by an additional six months on 11/13/87,increasing its cost to $3.3 million.

5.26 In order to ensure continuity in CFC activities, additional financingproved necessary. This second IDA credit, for $13.5 million (No. 1661-MAG), encountered approval difficulties in 1986 within the NationalParliament. The new project added a management component to the initialtraining component for CFC, and the unit assumed the name of the INSCAE.

- The average cost per full-time student as of 12/31/88 isestimated at $1,864 (full cost, including technical assistance);however, according to the forecasts in the Staff AppraisalReport the level of $2,000 would not be reached until theexpatriate teaching staff was replaced in its entirety byMalagasy nationals (the conversion rate applied in the estimateis that of 12/31/88, namely $1 - FMG 1523.40). The exchange rateused in the report to the President of May 1981, was $1 - FMG200. If costs are re-estimated using that rate, the cost perstudent $14,197).

- Registration and tuition fees were not adjusted until 1988:

FullTimeTraining

Examination fee Tuition per Special examsubject field fee (tripled)

1983 1,000 21,000 5,000

1988 1,000 23,000 5,000

Evening courses

Registration fee Tuition per session

1983 5,000 __

1988 5,000 10,000

38

5.27 The average annual revenues per student (full-time) are estimated atFMG 337,000 in 1983 and FMG 369,000 in 1988, whereas the average cost perstudent was FMG 2,839,370 in 1988 (1,864 x 1523.4).

5.28 The former CFC (the present INSCAE) is supervised by the Ministry ofFinance and Economy. CFC had frequent changes in directors: threedifferent individuals served from 1982 to 1986. Disagteements have beennoted, moreover, between the first consulting firm and certain CenterDirectors. CFC has a relatively sound operational structure, but hesitationhas nonetheless been noted in the assignment of certain duties: job slotsare provided for but remain vacant (Deputy Director, Dean of Students), andothers not provided for have been filled (general coordinator, Director ofResearch), without significantly hampering the proper functioning of theinstitution.

6. COMPONENT C: STRENGTHENING THE ACTIVITIES OF RINDRA

CONTEXT AND AGREED ARRANGEMENTS

6.01 RINDRA, set up as a socialist enterprise in April 1979, had becomeoperational in October 1978. It was established in order to provideauditing services to the enterprises owned by the Central Government orcontrolled by it, in particular the socialist enterprises.

6.02 In 1980, the Director-General of RINDRA, whose training was limited togovernment accounting methodology, had acquired no working experience in aprofessional auditing office. The World Bank was of the opinion that towork effectively, the Director-General of RINDRA should be a competentauthorized accountant with the desired degree of experience. The MalagasyGovernment agreed to appoint a new Director-General with the necessaryexperience and qualifications.

6.03 After its founding, RINDRA signed a 27-month technical assistancecontract with an international accounting firm:

- hiring auditors;setting up training programs in auditing, accountancy andmanagement methods and mechanisms;

- supervising the work carried out by the auditors.

6.04 This approach was deemed insufficient by the Bank, which felt thatRINDRA needed international supervision for at least five years while thefirm's involvement was scheduled for only 2 years and 3 months. Accordingly,the Bank provided under agreement 1155-MAG for a credit of SDR 3 million tostrengthen, with technical assistance, the activities of RINDRA (operationalwork and internal management). The project included a training program withthe following characteristics:

- the organization of seminars in Madagascar;- the organization of training sessions abroad each year for one

manager, so as to enable him to freshen his knowledge of thechanging techniques for auditing and to bring himself up to dateon the working conditions for his counterparts in the firmselected;

39

- sending two senior staff on training sessions of 3 to 4 monthseach for purposes of receiving supplementary training inauditing and broadening their experience by participating inaudit missions conducted by the firm selected at its clients,offices.

6.05 Ultimately, RINDRA was to have the same full autonomy in technicalspheres as regarde auditing and management that is enjoyed by an auditingfirm, as well as autonomy on the level of -adling the internal training ofits own personnel.

6.06 The balance sheet of RINDRA as at June 30, 1980 showed a net negativeposition of $0.8 million as a result of the losses sustained during itsfirst 21 months of business ($1 million in cumulative losses). The Bankconsidered that if it could increase its business by reducing its fees, 1/RINDRA would be in a position to repay to the Government a loan of SDR 3million at 12 percent interest over 10 years and with 3 years, grace, andto pay it reasonable dividends. RINDRA was, moreover, to establish andmaintain a sound financial position and sufficient working capital.

EXECUTION TIMETABLE

6.07 Appointment of the Director-General of RINDRA was one of theconditions for activating the credit. As mentioned earlier, the plannedimplementation date of October 12, 1981 had to be postponed twice (January12, April 12, 1982) before finally taking effect on May 6, 1982.

6.08 In the absence of any precise indicators with regard to this issue inthe project appraisal report, the hiring was scheduled to take placesometime during 1981. The assistance contract was to be for 2 1/2 years.

6.09 The Director-General of RINDRA was not named until April 1982, anddid not take up his duties until October of the same year. The Director-General was supposed to be a competent, authorized accounting expert, forwhich reason he could not be found in Madagascar where accounting expertsall already have their own firms and, moreover, are in short supply.

6.10 This first, expatriate Director-General, who had vigorous disputeswith the audit staff of RINDRA, was to be replaced in March 1984, some 9months before his contract came to expiry, by a Malagasy Director-General.The mission of the expatriate Director-General was regarded as a failure byall concerned; he cost RINDRA two years of salary payments.

6.11 Following limited consultations, an auditing assistance contract wassigned in March 1982 with a firm. This contract, scheduled for 2 years,was to be extended to December 31, 1984. The result was scarcely moresatisfactory: little had been done in the area of computerized auditingand the auditing of banks and insurance companies; omissions in the

l/In the course of project appraisal, the Bank noted that the RINDRA's feeswere 40 percent higher than those of the other accounting firms.

40

assistance provided were also noted as regards making improvements in theinternal management of RINDRA. The Bank subsequently accepted a secondassistance contract signed in April 1985 with another firm, initially for29 months and subsequently extended to 44 months, or until December 31,1988. Except in the case of the computerized accounting system, which hadmany imperfections, RINDRA was satisfied with the services provided by thelatter firm.

6.12 As of December 31, 1988, the Malagasy expenditures under Credit 1155-MAG by the technical assistance firms are as follows:

FIRMS TrainingConsultants abroad Equipment Supplios Other

FIRM A(in US$) 1,641,276 69,841 67,772 36,135 146,460

FIRM 8(in F) 6,827,266 1,023,691 712,907.34 697,764 2,297,776

Firm A thus cost $1.8 million and Firm B F 11.5 million ($1.9 million atthe exchange rate of December 31, 1988).

6.13 As agreed during the appraisal and scheduled in the assistancecontract, training sessions were organized in Madagascar for RINDRApersonnel by both permanent and short-term missions, and, from 1983 to1988, the managoirs, senior staff and junior staff of RINDRA receivedtraining in Canada and in France.

6.14 The number of hours of consultant involvement at RINDRA is shown inthe following table:

FIRM Period of activity Permanent consultants Consultants on mission

FIRM A 1982-1985 6,912 hours 3,947 hours

FIRM B 1986-1988 3,216 hours 6,634 hours

The two firms thus intervened for 19,709 hours. These interventionspertained to the organization of RINDRA's internal management, thesupervision of missions, and staff training proper.

6.15 The number of operational personnel at RINDRA during the period ofinvolvement of the two firms was as follows:

GRADE 1981 1982 1983 1984 1986 1986 1987 1988

Manager 2 2 2 4 4 4 4 7

Senior 4 7 7 7 7 6 11 10

Junior 20 16 14 12 12 9 12 12

Assistant -- -- -- 9 8 16 6 6

TOTAL 28 26 24 32 31 34 33 a6

6.16 Over the same period, 23 persons, including 3 managers, 2 seniorstaff, 11 junior staff and 7 assistants, left RINDRA. One manager set uphis own firm; one of the two others took the position of Director-General

41

of a company; the senior staff, junior staff and assistants are for themost part working in private companies. It is nonetheless true that the 7managers and 10 senior staff employed in 1988 have been working with RINDRAsince 1981, and accordingly have fully benefitted from the technicalassistance. Moreover, the number of RINDRA staff has been maintainedthrough new hiring.

6.17 The number of operational personnel receiving training abroad overthe years is as follows:

GRADE 1983 1984 1986 1986 1987 1988 TOTAL

Managor 1 4 1 2 4 a 15

Senior 4 a 6 1 3 6 22

Junior -- -- 2 1 -- -- 3

TOTAL 6 7 8 4 7 9 40

These 40 auditors received 9,880 hours of training. On average, somewhatover 2 managers and 4 senior staff and junior staff received trainingabroad each year, well exceeding the forecasts.

6.18 The creation of a management consulting unit was one of the project'sobjectives in assistance to the management of enterprises initiated by theGovernment in 1978. The idea of creating this management unit withinRINDRA was not part of the appraisal of the accountancy and auditingorganization and training project; it was incorporated into the project ata later time following a March 1984 request by the Malagasy Government. Inthe view of the Government, it was easier and less costly to set up theunit in an existing company than to create a new one; audit and managementconsulting work tend to complement one another, with one generally leadinginto the other.

6.19 The Management Consulting Department created in 1985 was to receiveinternational technical assistance for:

- hiring and training staff;- supervising intervention missions.

A contract was subsequently signed in March 1985 with the consulting firmaiding the accounting division, initially for 18 months, then 24 months,and ultimately extended until June 30, 1988.

6.20 The costs of the technical assistance to the "Management Consulting"Department are shown by expenditure category in the following table:

Source oftechnical

casistanco Consultants Training Equipment Suppl ies Other

FIRM A (in 603,815.63 43,986.20 81,102.79 27,304.64 202,644.26USt)

All in all, the assistance will have cost $958,852.52.

6.21 From 1985 to 1988, Firm A was involved on a permanent or short-termbasis for a total of 9,068 hours; over the same period, the operationalstaff of the Management Consulting Department evolved as follows:

42

GRADE 1984 1986 1986 1987 1988

Manager -- -- 8 a 3

Senior -- -- 2 6 1

Juntor 16 10 6 18 10

TOTAL 16 1O 11 27 14

Three managers, 1 senior staff and 4 junior staff receLved training abroad.

6.22 The Management Consulting Department is highly unstable from thestaffing standpoint; in 1988 alone, 13 persons resigned. Two of themanagers, 1 senior staff member and 1 junior staff who received trainingabroad left the Department in 1986, 1987, and 1985, respectively.

6.23 To help RINDRA with execution of Component C of the project, it wasplanned for the Public Treasury to on-lend to it the equivalent of SDR 3million within the framework of a subsidiary loan agreement. The agreementwas signed in June 1981.

6.24 In order to finance the second contract for assistance to the AuditDepartment and the creation of the Management Consulting Department, acodicil to the subsidiary loan agreement, in the amount of SDR 1,150,000,was signed in July 1986. As of March 31, 1988, SDR 4,148,005.76 of the SDR4,150,000 allocated had been spent.

7. COMPONENT D: STRENGTHENING THE CAPACITY OF PRIVATE FIRMS

CONTEXT AND OBJECTIVES

7.01 The project for assistance to local firms in the area of accountingand financial organization is an integral aspect of the public authoritiesdesire to enhance the reliability of the Information provided byenterprises, this by improving the skills of the local accounting firmscalled upon to assist them. However, for these offices to improve theirtechnical skills, they must turn to foreign consulting firms or expatriatepersonnel, which entails foreign exchange problems.

7.02 To resolve these problems, the public authorities asked the IDA, aspart of the accounting organization program, to include a component onAssistance to Local Firms to be financed by the credit.

7.03 There were two objectives for the project:- assistance from and training by foreign consultants at private

local firms, focusing on new techniques in the area ofaccounting and financial organization;

- feasibility study for the creation of a public managementconsulting agency.

7.04 The first component of the assistance will consist in training thepersonnel of the local offices in new organization techniques so as toenable them to provide the appropriate technical offices of localenterprises which need to improve the way they prepare their accounts and

43

improve their control and planning of operations. This training shouldaddress the following issues:

- study of the accounting techniques used by companies for eachcycle of activity;

- evaluation of the quality of internal controls and the gatheringof the necessary operational and financial data;

- designing and providing assistance to enterprises for applyingthe most appropriate techniques.

7.05 The feasibility study on a public management consulting agency shouldconsist in identifying the current requirements of the Malagasy economy asregards consulting services, surveying the existing consulting activities,defining areas for activity by the unit, and proposing a structure andtimetable for introducing the new entity.

COST OF PROJECT

7.06 The cost of the project was initially estimated at $1.5 million,including some resources for the management consulting agency, before adownward revision to SDR 820,000 prior to project execution.

7.07 The final reallocation to Component D amounted to SDR 395,000, thisfollowing the incorporation of the feasibility study component intoComponent C of the project. Expenses from Component D were to be financed100 percent by the IDA.

EXECUTION

Assistance to Accountancy Firms

7.08 Four salient features have marked the life of this sub-component ofthe project during its execution phase, namely:

- delay in initiating the project;- reluctance of local accounting firms to make use of the credit;- actual uses;- the reallocation of April 1986.

7.09 The first effective use of the credit was in May 1984, i.e., 24months after it came into effect (May 1982), even though the creditagreement had bean ratified in June 1981. Among the reasons contributingto this delay are the plan on implementation modalities, the lack of anysuitable information policy both for the users (local accounting firms) andfor the final beneficiaries (enterprises), and the period of apprehensionabout the new accounting legislation and the standardization of theprofession.

7.10 The Order of Expert Accountants to which all the major privateaccounting and management firms belong was skittish about the use of thefunds which could be mobilized under Component D. This hesitation,demonstrated by the President of the Order in a memorandum of November1981, is explained on the one hand by the inability of the partiesconcerned (private firms, enterprises) to bear the high cost of anorganization mission from foreign accountancy firms and, on the other hand,by the fact that the procedure for granting credit was unclear.

44

7.11 The on-lending of these funds by the Government in the form ofsubsidies was requested by the Order, in accordance with clearly definedallocations and plans so that each Malagasy firm would receive propertraining. In addition, no Information meeting was held for enterprisessupervisors and economic managers with a view to developing initiatives foruse of the credit.

7.12 Ultimately, two operations were financed by the credit, these throughthe two major private firms in the country, FIVOARANA and RAMAHOLIMIHASO.

7.13 RAMAHOLIMIHASO submitted the first request for financing underComponent D of Credit 1155-MAG on November 7, l983. The aim of thefinancing was to develop suitable computerized solutions for problems ofadministrative, financial and accounting management, as well as formonitoring management and personnel management within the BFV. Therequest, supported by a technical assistance contract betweenRAMAHOLIMIHASO and a French firm, was approved by the IDA in December 1983.The contract amount was $320,000; the operation began in May 1984 and wascompleted in 1986.

7.14 FIVOARANA submitted its request in favor of another French firm inFebruary 1985. This request, for $64,500, followed an offer forInformation in associated offices for preparing the SNI's master plan forcomputerization and for defining the steps to be taken In the short andmedium terms within the framework of said master plan. The operation wasconcluded in September 1986.

7.15 The Malagasy authorities' request for reallocation of the credit infavor of Components B and C was accepted by the IDA (telex of April 1986),which may be interpreted as a decision by both sides to close Component Dof the credit before the initially scheduled concluding date. By reducingthe amount allocated to $395,000 while the total drawings already madeamounted to SDR 445,112.52, including the amount of SDR 31,111.88 paid toone of RINDRA's foreign consultants and charged incorrectly againstComponent D, virtually nothing remains for this component of the credit.FIVOARANA applied later to use the credit for personnel training, but wasturned down because the remaining balance was too small.

Creation of a public management consulting agency

7.16 In June 1983, i.e., two years after the credit agreement was signed,and at the request of the Malagasy authorities, the IDA submitted proposedterms of reference which defined the areas of future intervention of themanagement consulting company to be created (OMEGA).

7.17 In November 1983, the Malagasy Government, given the inherentcumbersomeness of creating a new company from scratch, had already optedfor setting up the advisory unit within an existing firm, RINDRA, SERDI, orPNI, with preference expressed for RINDRA.

7.18 In March 1984, after a reminder was received from the Bank, a requestfor financing the feasibility study was submitted to the Bank. In itsfinancing request, the Government expressed its desire to have the unit

45

incorporated within RINDRA, with a s'rict separation between that entity'saccounting and auditisg functions and management consulting functions.

7.19 In May 1984, Lhe list of fiLms consulted about providing assistanceto RINDRA management consulting uepartment was sent to the Bank. ACanadian firm was selected, and began work in May 1984. The assistancecontract was financed from Component C of the credit.

8. ASSFSSMENT OF OVERALL PROJECT MANAGEMENT AND FOLLOW-UP

THE BORROWER (GOVERNMENT OF MADAGASCAR)

8.01 The accountancy and auditing organization and training project took aconsiderable amount of time to get off the ground: it took a year to meetthe implemsnting conditions, and there was a three-year gap between theinit'al request and the signing of the credit.

8.02 The scheduled effective date of Octsber 12, 1981, which occurred inpractice on May 6, 1982, was delayed because of:

- the official appointment of the Director of CFC and of theDirector of RINDRA;

- the submission to the World Bank of the ptoposed contract forRINDRA Director;

- signing of the subsidiary loan agreement by RINDRA and thePublic Treasury.

8.03 The hiring of the Directors-General of CFC and RINDRA, who wereintended to be expatriates, took almost a year, which explains thesuccession of delays in the effective date of the project and the delay inthe initiation of Compcnents B and C.

8.04 While Components B and C actually entered the implementation phase inMay 1982, it was necessary to wait until May 1984 and January 1985,respectively, for the initial execution of Components D and A. This delayis largely attributable to the rather lengthy delays in the internationalbidding procedures and to problems with relations between the Order, theGovernment and the World Bank, in the case of Component A, and toinadequate data for Component D, the balance of which was ultimatelyallocated to Components B and C when further requests for funding weresubmitted by Malagasy firms.

8.05 In the appraisal and initiation phase, the supervision of the projectwas under the direct authority of the Ministry of Economy and Commerce,whose duties were taken over in 1983 by the Ministry of Industry andCommerce and, beginning in 1984, by the Ministry at the PresidencyResponsible for Economy and Finance (MPFE).

8.06 This series of changes resulted in a scattering of file materials andsome confusion during certain periods of project execution. The firstcoordinator had a relative active role in getting the project going:participation in negotiations, and interviewing and selecting theconsultants. The second coordinator within the MPFE principally had therole of general coordinator of the activities growing out of the project,assuming all the administrative functions: redistribution of telexes,

46

maintaining records on agreements and various documents, etc. He had theadvantage of having good ties wLth the Treasury as regards releasing funds.

8.07 Components B and C were under the responsibility of the Director-General of RINDRA and the Director of the Accountancy Training Center,respectively. Components A and D were under the direct supervision of theproject coordinator.

8.08 Management of the project overall was well designed for achieving theobjectives of eaclh component, despite the frequent changes in projectcoordinators.

FOR THE BANK

8.09 The World Bank's resident mission, opened after the project began,had no direct responsibility for project organization and very littleinvolvement in it. It was the Ministry, the project coordinator, whichkept it informed of progress with the project overall.

8.10 Several missions were carried out by the World Bank group during theexecution of the project. Originally, project monitoring was entrusted tothe Energy and Water Division , which was often on mission in Madagascar.Subsequently, monitoring of CFC would be turned over to the EducationDivision and, for a period of two years, the project was visited by twomissions each half-year, one from the Energy and Water Division and theother from the Energy Division.

8.11 This situation was to change as from the third year, when themonitoring of the entire project was concentrated in the EducationDivision, which had arranged for the cooperation of a professor ofaccounting. The timing of missions, initially half-yearly, slowedbeginning in 1984: April 1984, October 1985, July 1986, October 1987, andFebruary 1988.

9. RESULTS AND PROBLEMS

COMPONENT A: ACCOUNTING LEGISLATION AND STANDARDIZATION

9.01 The major contributions expected from this new Code of Accounts, asdescribed by the Decree of September 17, 1987, are as follows:

- the basic accounting principles are set forth explicitly;- the format of financial statements or accounting documents is

standardized;- the financing table designed to trace an enterprise's financial

flows during the fiscal year makes it possible to examinedevelopments as regards investment requirements and thefinancing thereof, as well as causes for cash flow changes;

- the table of standard magnitudes for the financial year or theprofit and loss account provides a better description of thevarious stages of performance and facilitates compliance withmanagement's requirements for the information needed for thenational accounts;

47

- an appendix describes the rules which had previously governedthe preparation of financial statements, and must make referenceto any significant factor;

- an annotated guide for the General Code of Accounts (PCG 87)formally stipulates the way the accounts function and the rulesfor appraisal which are allowed, which are such as to facilitatemaintaining accounts as well as preparing fiiiancial statementsin accordance with the fundamental accounting principlesadopted.

9.02 Thus, financial statements drawn up in accordance with the newprovisions of the General Code of Accounts should meet the needs of usersfor reliable, understandable, meaningful and comparable data, as wasexpected during the course of project appraisal.

9.03 It is regrettable, however, that the belated publication of theannotated guide on the accounting system and the absence of any policy ondisseminating information on the PCG 87 did not make it possible for theenterprises to prepare in time for the introduction of the National Code ofAccounts [NPC] in 1989 as scheduled. The obligation to implement it has,however, yet to be accompanied by any penalty, which should be incorporatedin the revision of the tax laws. The financing requests sent to the WorldBank by the consulting firm initially, and later by the Malagasyauthorities, for dissemination of the new accounting code have goneunanswered.

9.04 To date, no new law has been passed as regards mandatory auditing forenterprises. It bears notin- however, that the auditing of accounts iscarried out more and more, es. icially in the public enterprises, at therequest of Malagasy or international financial institutions and at therequest of the management bodies of the enterprises concerned. No newlegal provisions revising business law have been passed.

9.05 The Order of Expert Accountants and Authorized Accountants currentlyhas only 30 members (S expert accountants and 25 authorized accountants) ascompared to 36 members (36 expert accountants and 30 authorizedaccountants) in 1981. The legal provisions governing the accountingprofession should, however, be released shortly; the status of theprofession overall may thus be expected to change. However, the Order hasnot yet defined its "normal restrictions," i.e., its professional andethical code.

9.06 Since the establishment of the first informal commission, the desirefor regular cooperation between professionals and representatives of thepublic authorities has become more and more apparent. It is thereforeenvisaged to establish a Higher Accountancy Council in which professionals,users, trainers and the public authorities would be involved. Its rolewould be to further develop and update the gains made. This Council, onceunder way, will have 6 years of experience w_th concertation and will havea portfolio of problems to be resolved that was opened nearly a decade ago.

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COMPONENT B: ACCOUNTANCY TRAINING CENTER

9.07 CFC was able to maintain a solid training level thanks to its team ofqualified and competent teachers, on the one hand, and to adequate workingconditions, on the other hand. With the new INSCAE project, the 1989objective of replacing expatriat teaching staff appears premature, owingto the small number of Malagasy .eachers for certain highly specializedtopics and those receiving training abroad.

9.08 To date, CFC-INSCAE has trained some 600 students on a full-timebasis and 3,400 students in evening courses. Admission to the institutionis highly sought after among the student population (there were 1,300applicants at the last competitive ex mination). A system of "regional"admiss'on quotas is currently being applied. The system functions asfollows:

- 60 percent of the new student admissions are not subject toquotas;

- 40 percent are distributed in proportion to recorded populationby region.

9.09 Proposals for granting scholarships and creating an internship arealso under study (60 of them have been received). To date, some 160students have been placed in enterprises, most of them in the privatesector, generally in jobs that match their accounting training. One of themain reasons students are reluctant to work in the public sector is thelack of any equivalent for CFC diploma in the civil service. Thissituation is beginning to be resolved by the Government's ranking itequivalent to the specialized diploma in accounting (DSSC) obtainablethrough continuing education, in civil service category 6. Studentservices was initially very active in placing students: all the studentsfrom the first and second graduating classes are professionally employed.

9.10 Beginning with the third class, the placement rate has slowedconsiderably: 35/55 for the students with the DSSC and 5/17 for thestudents earning the DESCA. This slackening of f is surely independent ofthe quality of training received, and is attributable to:

- Abandonment of the system of placing in enterprises, so as tomake the students more responsible for their own futures;

- The economic problem of increasing unemployment among theeducated;

- Delay in introducing regulatory provisions regarding theaccounting profession.

9.11 As regards the use of funds, the most salient fact is the completeuse of the credit by the second year, followed by a reworking of theproject (creation of the INSCAE).

9.12 The final target of a cost of S2,000 per student has in large measurebeen met. This result must be regarded in relative terms, however, takinginto account the depreciation of the Malagasy franc in terms of the U.S.dollar (exchange rate of May 1981: $1 = FMG 200; rate of 12/31/88:$1 - FMG 1,523.40). The cost of the institution overall seems high (aboutFMG 1 billion per year). Revenues from tuition fees and other sources fallfar short of ensuring financial balance.

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9.13 As for any institution of higher education, it is obvious thatmaintaining adequate levels of finance will depend on the degree to whichCentral Government subsidies are made available.

9.14 This mission, devoted to Credit 1155-MAG, has not addressed itself toexamining the present INSCAE (operation and effectiveness of the Board ofDirectors, degree of effectiveness of the Pedagogical Council), which iscovered by Credit 1661-MAG.

COMPONENT C: STRENGTHENING OF RINDRA'S ACTIVITIES

9.15 The organization chart of RINDRA's auditing and management consultingoperations as of December 31, 1988 appeared as follows:

Management Com.?tt..I

I_Dlr.ctor-Con.rli;

_eneral Secretariat ManagerialControl *nd Internal

Audit | Itrl

I l ~~Logistics

DIRECTORATE-GENERAL

i tiongers l_"~~~~~~~~~~~~Mn gtrI-r-~~~~~~r~~~~~~~~I I IL@

Sonlor OMISSION CHIEFS* l j Senior MISSION CHIEFS]Juniors |Juniors ;

___ _, _ __ _ I .

1CONSULTING DIVISION jAUDIT DIVISIOIN

9.16 When the project was drawing to a close, RINDRA employed 95 persons,all of them Malagasy nationals. The staff could be broken down as follows:

DEPARTMENT SUPERVISORS NONSUPERVISORY TOTAL

AUDITING 35 12 47

MANAGEMENT 14CONSULTING 9 23

DIRECTORATEGENERAL 9 6 15

TOTAL 58 27 85

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9.17 The objective sought under Credit 1155-MAG as regards strengtheningthe activities of RINDRA is to see to it that the organization wouldultimately have complete autonomy as regards technical competence in thefields of auditing and management of an auditing office, as well as regardshandling the internal training of its staff itself.

9.18 After the second consulting firm left, the Audit Department,according to RINDRA, would no longer need technical assistance for internalmanagement or in its operational activities. The technical assistancereceived from 1979 to 1988, provided by three different firms, wasconsidered sufficient.

9.19 At end-1988, the operational personnel in the auditing area numbered35 persons, including 7 managers, 10 senior staff, 12 junior staff and 6assistants. There are 17 persons 2/ who have worked at RINDRA since theproject began, all of whom are in a position to train new peraonnel.

9.20 The technical assistance planned for originally proved to beinsufficient. At the end of the project, RINDRA considered that anadditional year of technical assistance in the form of a specialist inorganization and data processing was still necessary.At end-1988, theManagement Consulting Department had a staff of 14: 3 managers, 1 seniorstaff and 10 junior staff.

9.21 At the outset, and in particular during the first two fiscal years,RINDRA undertook audits only upon instructions from the SupremeRevolutionary Council (CSR), without regard to the client's solvency ordesiderata. Because of this procedure, the services rendered by RINDRAwere not only limited to a small number of enterprises, but losses of 2/3of invoiced value were posted. This situation would ultimately change, andsince 1982 RINDRA has been working in the area of seeking markets (it iscurrently active elsewhere in Africa) and has received better guaranteeswith respect to new clients. Efforts have also been made to diversify theways in which RINDRA may intervene: hiring, training, accountingorganization, etc.

9.22 The figures below indicate the number of assignments broken down bysector of activity:

1978 to19S1

SECTOR OF ACTIVITY 1982 1983 1984 1986 1986 1987 1988

Financial institutions -- -- -- 2 3 3 2 6

Ministries and otheragencics 4 4 8 8 8 1S 17 21

Agricultural and agro-industrial sector 7 8 1O 13 16 19 20 23

Agroalimentary andlIvestock sector 8 11 13 13 15 17 19 21

2/Seven managers and 10 senior staff.

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Trade and distributlonsector 1 3 6 4 6 8 6 9

Tourism and transporta-tion sector 6 8 11 8 18 14 18 16

Industrial sector 26 30 84 a8 41 46 62 s9

TOTAL 62 64 79 87 102 121 126 154

9.23 RINDRA thus is involved in all sectors of the economy. Even thoughthe number of assignments has increased, this has not been the case asregards its turnover, especially since 1985. In turnover terms, theactivities of the Audit Department have evolved as follows:

(In millions of Malagasy francs) (Average)

1980-81 181 )1981-82 119 ) 1611982-83 169 )1983-84 1751984-85 332 )1985-86 213 ) 3051986-87 2831987-88 393

9.24 There are two distinct periods as regards turnover. From 1981 to1984, average turnover was FMG 161 million per year, a figure which rose toFMG 305 million for the period from 1985 to 1988. In each period, turnoverat current prices was more or less stagnant, reflecting a stabilization ifnot some slippage in activity levels.

9.25 The number of assignments of the Management Consulting Department,classified by sector of activity, is shown in the following table:

SECTOR OF ACTIVITY 1984 1986 1986 1987 1988

Flnencial Institutions -- I 1 4 1

Ministries and other agencies 2 4 1 3 2

Agriculture and egroindustry 1 1 -- 2 2

Agroalimentary and iv-stock 2 1 1 -- --

Commerce and distribution 1 1 1 1 1

Tourism, transportation and othorservices 1 -- 7 6 6

Industry - 2 6 7 6

Construction and public works -- 2 -- -- --

SMEs -- -- 2 6 4

TOTAL 7 12 18 27 22

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9.26 There was a slight decline in the number of assignments in 1988 aftergrowth from 1984 to 1987. In terms of turnover at current prices, theactivities of the Management Consulting Department have developed asfollows:

(In millions of Malagasy francs)

1984-85 1121985-86 1841986-87 2091987-88 200

The activities of the Management Consulting Department have changed littlesince 1986.

9.27 The apparent growth In productivity of labor, defined as the ratio ofturnover to the number of operational staff, has developed favorably forboth departments of RINDRA, as shown below (in millions of Malagasyfrancs)t

Audit Management Consult-Department ing Department

1984-85 11 11

1985-86 6 17

1986-87 9 8

1987-88 11 14

9.28 It is thus not true that the Management Consulting Department hasbeen less successful than the Audit Department, even though RINDRA has thereputation of being more an "auditor" than a "management organizer andadvisor."

9.29 The intermediate operating balances corresponding to operations from1986 to 1988 as well as 1981 (the reference year) are shown in thefollowing table (in millions of Malagasy francs and percentage terms):

CATEGORY 1981 1986 1987 1988

- Foe. and miscellaneous 11 459 533 622

- Final stock -- -- 37 63

- Initial stock -- (23) -- (37)

PROOUCTION4 161 100X 438 1OOX 670 1103 649 1603

- TSFE (14) (89) (63) (94)

- Transportation and (46) (48) (58) (90)moving

- UMscel lan*oue overhoad* (22) (103) (98) (166)

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- Expenses chargeablo tothird parties 19 -- -- 68

VALUE ADDED 98 61X 194 46% 361 62X 376 68X

- Personnol cost. (94) (193) (239) (312)

- Taxee and levies (2) (4) (8) (6)

GROSS OPERATING SURPLUS 12 7X 7 2% 104 18X 59 9X

- Financing costs (15) (121) (448) (962)

- Financial proceeds -- -- 11 --

CROSS OPERATING RESULT (3) -- (114) (263) (332) (583) (892) (1373)

- SBS (1) -- (1) (1)

- Write-offt and (263) (671) (691) (692)provisions

- Windfall profits 365 132 s9 23

- Exceptional losses (90) (61) (81) (22)

NET RESULT 18 11X (714) (164X) (962) (1673) (1684) (2393)

GROSS SELF-FINANCING 271 168X (43) (103) (361) (63X) (972) (1373)MARGIN

9.30 In the latter years, RINDRA's operations were in the red, which isexplained by a relatively sizable increase in financing costs, and, exceptin 1987, the rate of the gross operating surplus is low.

9.31 RINDRA's balance sheets for 1986 to 1988 as well as 1981 aresummarized below (in millions of Malagasy francs):

1981 1986 1987 1988

ASSETS

- Establishment costs 332 554 553 530

- Net fixed assets 35 203 195 165

- Operating assets -- -- 37 63

- Liquid assets 97 378 339 365

- Cash balances 29 239 235 258

TOTAL 493 1364 1358 1383

LIABILITIES

- Capital 50 50 50 50

- Amounts carried forward -- (555) (555) (555)

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- Results from preceding (219) (501) (1218) (2170)year

- Results of current year 19 (714) (952) (1584)

- Provisions for losses and 18 18 18 18expenses

- NET POSITION (132) (1702) (2657) (4241)

- MedLum- and long-term 61 1495 1968 2060debt

- Short-term debt 292 628 812 1052

- Cash liabilities 272 953 1235 2512

TOTAL 493 1374 1358 1383

9.32 The financial position of RINDRA is unsustainable. The net position,which was already precarious in 1981, deteriorated to a negative FMG 4billion in 1988. This situation stems from the successive losses posted inthe preceding years, largely attributable to the amount of financing costsincurred under the credit. At the end of the project, RINDRA finds itselfheavily indebted and, in contrast to what was anticipated at the projectappraisal stage, its financial positLon is more and more out of balance.RINDRA Ls unable to repay the credit extended to it, and financialrestructuring Ls mandatory.

9.33 The cost of the technical assistance to RINDRA as at June 30, 1989may be summarized as follows (Ln millLons of Malagasy francs):

HEADING Cross Value Amortization Not Value

- Original Firem 19,517 619,517 0

- Fire A 1,431,747 1,431,747 0

- Firm B 1,452,296 1,253,048 199,237

- Local technical assistance 44,262 36,635 8,627

- Technical assistance from Firm A 33,690 11,230 22,460

TOTAL 3,481,601 3,261,177 230,324

9.34 As at June 30, 1989, technical assistance costs totaled almost FMG3.5 billlon, over 90 percent of which has been amortized. Judging from thefigures, RINDRA has obtained substantLal technical assistance. No otheraccountancy firm with the same standing or competence has received as much.

9.35 The amount, date of signature and terms of the loans contracted byRINDRA are indicated for each source of financing in the table whichfollows (in thousands of Malagasy francs):

55

Treasuryadvancos IDA onlonding IDA codicil

- Amount FMO 272,000,000 SDR 8,000,000 SDR 1,160,000

- Date of agroment 1 1/26/82 7/18/86

- Repayent period 10 years 6 years

- Crace period 3 years 2 years

- Service charge 12 X per year 12 percent

- Penalty Interest 2

9.36 The Treasury advances were all contracted before the June 1981signing of Credit 1155-MAG, which represents the bulk of RINDRA's borrowing(the equivalent of slightly more than FMG 2 billion at the exchange rateson the dates of the on-lending agreement and the codicil).

9.37 As of June 30, 1989, the status of RINDRA's long- and medium-termdebts was as follows:

Amount at more Amount at lessAmount released Equivalent (in than one year (in than one yoar (in

FINANCING SOURCE as at 12/31/88 Ialagasy francs) Ialagasy francs) Mslagasy francs

- Treasury FMG 272,000,000 -- -- 272,000,000

- IDA onlondingplus

- IDA codicil SDR 4,160,000 3,699,106,410 1,982,208,226 1,616,899,194

The share of the loans at less than one year thus amounts toFMG 1,888,898,184.

9.38 RINDRA must also pay accrued interest totaling FMG 3,091,099,545 asat June 30, 1989. It also bears noting that the Malagasy franc equivalentof the IDA loan has increased significantly owing to changes in theexchange rate, which are thus also a factor in RINDRA's financial position.

9.39 It should also be recalled that it the appraisal report, the Bankmaintained that if it increased its business by reducing its fees, RINDRAwould be able to repay to the Government a loan of SDR 3 million at 12percent interest in 10 years, with 3 years' grace, and to pay it reasonabledividends as well. In the course of our review, no one was able to provideus with any documentation that would justify such an assertion.

9.40 RINDRA's status as a socialist enterprises poses a number ofproblems:

- from the standpoint of clients, some of whom think there is alink making RINDRA dependent on the Central Government;

- from the standpoint of the staff, in that the company's statusprevents them from achieving partnership standing.

9.41 Moreover, RINDRA's staff currently includes no expert accountants.Thus the enterprises will not be able to certify any accounts until such

56

time as the transitional provisions regarding access to the Order of ExpertAccountants have been finalized and effectively implemented.

9.42 A study of needs for professionally trained accounts was provided forin the project's Credit Agreement. The World Bank recommended in its 1981appraisal report that a study be carried out at the request of qualifiedaccountants so as to enable CFC better to plan the level of its activities.The study, which was to cover a period of ten years, was to be completed byDecember 31, 1983.

9.43 The study, which was entrusted to RINDRA, was to be coordinateddirectly by the expatriate Director-General, but it ultimately was neverproduced. However, the INSCAE, at the request of its Board of Directors,has proposed to conduct a market survey to determine both the qualitativeand quantitative needs for accountants, with a view to making appropriateadjustments in the class sizes and the training provided by the INSCAE'steaching staff.

COMPONENT D: ENHANCING THE CAPABILITIES OF PRIVATE ACCOUNTING FIRMS

9.44 Despite the Bank's urging, vary few accounting firms have made use ofthis financing possibility; this, moreover, explains the decision toreallocate the remaining balance to other components of the project. Thecapabilities of private accounting firms have tended instead to be enhancedby means of more specific efforts The first such effort, by RAMAHO-LIMIHASO, involved the installation of the computerized management andpersonnel system of the BFV, and was regarded as quite advantageous by thecompany, at least as regards the personnel management side; the firm nowconsiders itself to be in a position to provide this service to otherenterprises without assistance from foreign consultants. The secondeffort, by FIVOARANA, dealt with the preparation of a computerized masterplan for the BWI. It, too, was quite beneficial to the firm, which can nowrender the same consulting services without outside assistance.

9.45 Assessed from the standpoint of the experiences of these two firms,the results of the first subcomponent of Component D "Assistance to PrivateFirms" may be regarded as positive. However, one of the initial objectivesof the project, to provide local enterprises with suitable techniques forimproving their management systems, is far from having been achieved, asenterprises have not come forward to take advantage of the facility open tothem because of their lack of information or insufficient borrowingcapacity.

9.46 The OMEGA project, which was quite ambitious at the outset,ultimately led to the creation of a management consulting department withinRINtRA. The activities of this subcomponent are discussed earlier. Theaccountancy and auditing organization and training project did not reallyget under way until four years after the initial request of June 1978. Itwas a project which dealt not with conventional areas of activity(planning, finance, agriculture, etc.) but with a profession whichheretofore has been accorded little priority and all aspects of whichneeded to be addressed: legislation, organization, initial training andcontinuing training, refresher courses). For Madagascar as for the World

57

Bank, this was thus a pilot project, which could explain the initial foot-dragging.

10. CONCLUSIONS AND RECOMMENDATIONS

RESULTS OBTAINED

10.01 The country now has a modern code of accounts on which thebroadest possible coneensus has been reached. Since 1982, representativesof the accounting profession have taken an active part in developing thiscode, and teachers and business groups have been involved as well. Thefinancial statements drawn up in accordance with the new provisions shouldbe able to meet the needs of the various users (enterprises, banks, CentralGovernment, etc.) for reliable, comprehensible, meaningful and comparabledata, and facilitate the preparation of sectoral, regional and nationalstatistics that are of value in the various stages of planning.

10.02 Efforts to disseminate the new code of accounts have beeninitiated by the local accounting firms and the INSCAE; a number ofenterprises have already submitted their latest financial statements (for1988) in accordance with the new code of accounts, the effective date ofwhich was postponed to January 1, 1990. At the request of national andinternational financial institutions and of the management bodies ofenterprises, accounts are audited more and more frequently.

10.03 As regards the accounting profession, a specific proposal wassubmitted to the authorities in May 1989 regarding:

- expanding the Order of Expert Accountants and AuthorizedAccountants, after finalizing the criteria for membership ofsuitably qualified persons in the Order;

- the structures to be set up for finalizing the courserequirements for the National Expert Accountant's Diploma(DNEC).

10.04 As result of the project, all aspects of the accountingprofession have been discussed widely, and the need for regularconsultation between the public authorities and the accounting professionis now regarded as a given.

10.05 CFC, which began operations in February 1983, provided completeor partial training to almost 300 accountants (not including its eveningcourses) before its activities were prematurely taken over by the INSCAE.

10.06 RINDRA has become a highly capable accounting firm with stafftrained in modern accountancy. It now has solid expertise in auditing (adivision of 35 staff), initial experience in management consulting (adivision of 14), a sound internal organization, and a reputation forprofessionalism. At present, RINDRA is working in Africa and isdiversifying its activities to include hiring, training, and accountingorganization.

58

10.07 The two major private firms were able to take advantage ofexternal assistance which enhanced their qualifications in the area ofmanagement consulting.

APPARENT WEAKNESSES

10.08 It is unfortunate that the belated publication of the annotatedguide to the accounting system and the lack of any national policy ondissemination of the PCG 87 did not make it possible for the enterprises toprepare themselves in time for introducing the NPC in 1989 as planned. Therequirement to introduce this new code of accounts is still not subject toany sanctions, which should be remedied in the course of the review of taxlaw. Requests for World Bank financing of the dissemination of the NewCode of Accounts, initially from the project Consultants and later from theMalagasy authorities themselves, were never acted upon.

10.09 The sectoral codes of accounts, inter alia for banks, insurance,public works, etc., have yet to be drawn up. The legislative framework hasyet to be revised, in particular as regards the obligations incumbent oncompanies. Now new law with respect to auditing has been passed. The Orderhas not yet defined its "standard proceedings," i.e., its professional andethical code.

10.10 While CFC's objective was to develop a financially viableinstitution in a period of 6 years, following the change in option by theBank, tne credit was exhausted in 3 years. With the new INSCAE project,inadequate training of the instructional staff remains a problem. Owing todelays and outside factors (economic conditions, legislation, etc.), it isbeginning to become more difficult to place graduates.

10.11 RINDRA's status as a socialist enterprise is not conducive topreventing staff turnover. Its financial structure is unsustainable,specifically because of the terms on which RINDRA was on-lent funds fromthe IDA credit; interest payments have added enormously to the firm'sfinancing costs. The earmarking of the credit to its various componentparts was probably not sufficiently detailed, which resulted in someexpenditures which might appear excessive: for example, $250,000 inmaterials and vehicles were purchased and subsequently resold to RINDRAstaff.

10.12 The credit allocated was under-utilized. As a result, theobjective of overall strengthening was not achieved.

RECOMMENDATIONS

10.13 The Higher Accountancy Council should be set up as soon aspossible with a view to:

- resolving individual problems in accordance with accountingprinciples;

- developing sectoral codes of accounts;- proposing new measures intended to adapt accounting standards to

changes in the economic climate in Madagascar;

59

- cooperate in the drafting of laws and regulations which affectthe accounting requirements of enterprises;

- company law;_ criminal law;- tax law, etc.;- addressing the queries of persons working with the accounting

system.

10.14 An effort should be made to speed the publication of legal andregulatory provisions governing the accounting profession. An appraisalshould be conducted of training in the PCG 87 and its dissemination so asto determine the steps to be taken.

10.15 The recommendations regarding CFC effectively pertain to thegeneral environment, namely:

- Establishment of the provisions on the accounting profession anddetermination of the course of study for expert accountants soas to break these roadblocks;

- Definition by the Central Government.of an INSCAE strategy so asto readjust the targets for financial viability in the mediumterm.

10.16 The financial situation of RINDRA must be restructured. Thisprocess, which could entail the capitalization of part or all of its loansby the Centrae Government, would enable RINDRA to develop positive workingcapital and to generate a sufficient gross self-financing margin. In orderto bolster the activities of the management consulting division, a secondtechnical assistance contract may be desirable. The financing of thiscontract should be assessed in the light of RINDRA's capacity to repay.

10.17 The legal status of RINDRA should be changed so that it can belegally autonomous. The change of status would also enable personnel tobecome partners in the firm. This would reduce staff turnover. Theobjectives of strengthening private auditing firms were not funded by thecredit. They can only be incorporated into the ongoing development of theprofession.

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PART III

STATISTICAL INFORMATION

1. Related Bank Loans and/or Credits

................................................. -Loan/CreditYear of

Title Purpose Approval Status........... ....................................................................................... .................. ________

Credit 1661 MAG Upgrade level of April 16, Plannedwith Accounting e x p e r t i s e o f 1986 Closureand Management accountants, auditors is Dec.T r a i n i n g and managers to 31, 1992Project improve management

and financial controlof enterprises and toimprove procurementprocedures (Acontinuation of 1155MAG)

..---......................... ....---.....----........-.......-..-....----......--------......-....--.......-----................-

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2. Proiect Timetable

ITEM Date Date DatePlanned Revised Actual

- Identification 1978-1979

* Preparatio. Aug-Sept'79

- Appraisal June 1980

- Loan Negotiations April 1981

B Board Approval Feb. 6 1981

* Loan Signature Junell '81

- Loan Effectiveness Oct. 12,'81 Jan. 12,'82 May 6,1982Apr. 12,'82

- Loan Closing March 31,'88 Sept.30,'88 Dec.31,1989Dec. 31,'88June 30,'89

Loan Completion'

' Component B was expanded by addition of a graduate businessschool (INSCAE) and is financed under 1661 MAC which has a plannedclosing date of December 1992.

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2. Project Timetable (r;ontinued)

MISSION DATA

Sent Month No. of No. of Staff Date ofItem by Year Weeks Persons weeks Report

---------------------------------------------------------------- __------

Identification EAPEG 1978-79 1/Preparation EAPEG 9/79Appraisal EAPEG 6/80 4 3 12 5/11/81

Supervision I-A EAPED 2/ 11/81 2 2 4 11/25/81Supervision I-B EAPEG 2/82 4 1 4 4/19/82Supervision II-A EAPED 11/82 3 2 6 12/17/82Supervision II-B EAPEG 12/82 3 1 3 1/31/83Supervision III-A EAPED 4/83 3 2 6 6/07/83Supervision III-B EAPEG 3/ 5/83 2 2 4 6/23/83Supervision IV EAPED/EAPEG 11/83 2 2 4 2/15/84Supervision V EAPED/EAPEG 4/84 3 2 6 6/12/84Supervision VI EAPED 10/85 3 2 6 12/17/85Supervision VII EAPED 6/86 2 4 8 8/14/86Supervision VIII AF3PH 10/87 2 2 4 10/25/87Supervision IX AF3PH 2/88 2 1 2 2/11/88Supervision X AF3PH 1/89 3 1 3 3/20/89

1/ The initial Identification and preparation was carried by soveral divisions. The work wasdone mostly as part of the on-going work of those divisions and apart from occasional Back-to-Office reports, no formal reports wero prepared until the appraisal by EAPEG.

2/ Project was prepared by EAPEC but the Accounting Training Center fell under thesupervision responsibility of EA F "Is the remaining components wore to be suporvised byEAPEG. This resulted in two sopa; . orvision misslons until the project was put solelyunder EAPED.

3/ This was the last independent supervision mission by EAPEO. The project came under fullcontrol of EAPED though EAPEG did assist on the next two supervision missions. Afterreorganization, the project foll undor the responsibility of AF3PH.

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3. Credit disbursements_________________________

DISBURSEMENT SCHEDULECREDIT IN 000 US $

FISCAL YEAR 1982 1983 1984 1985 1986 1987 1988 1989 1990------------------------------------------------------------------- __--

ACTUAL 680 1,340 1,364 2,076 2,572 1,297 572 352 39CUMULATIVE 2,025 3,389 5,456 8,037 9,334 9,906 10,258 10,297

PER APPRAIS 1,200 2,000 2,300 2,200 2,000 1,500 300CUMULATIVE 1,200 3,200 5,500 7,700 9,700 11,200 11,500

GOVERNMENT BUDGET (MFMG)CONTRIBUTIONS TO CFC/INSCAE

1982 1983 1984 1985 1986 1987 1988 1989

ACTUAL 79 70 34 172 172 170 100 50CUMULATIVE 149 183 355 527 697 797 847

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4. Project Implementation

IMPLEMENTATION

Component A, Accounting Legislation

Planned Actual

Drafting of Oct. 1981relevant legislation

Submission of legislation April 1982

Enactment of legislation July 31, 1982

Government prepares Dec. 1982short list of con-sulting firms;

Efforts by local Jan.-July 1983accountants to beincluded in shortlist rejected by theBank;

Consulting firm Nov. 1983selected;

Contract signed; Aug. 1984

Contractor submits June 1985drafts for legisla-tion;

Contractors final Jan. 1986report;

New accountancy law Law of Sept.17,1987Pub.lished. Law willbe in effect starting1989. Not yet includ-ed in the law areprovisions regula-ting the accountancyprofession.

65

Component B: Centre de Formation en Comptabllite

planned actual

Establishment of the CFC December 14, 1981through Decree No. 81290

Appointment of first Director Sept. 1, 1981 April 1982

Opening of the Center March 1, 1981 October 1982

First class of students started May 1, 1982 February 1983

Start of evening classes May 1, 1983 March 1983

First class graduates May 1, 1985 September 1987

Component C: RINDRA

planned actual

Appointment of foreign September 1, 1981 April 1982Director General

Foreign Director replaced March 1984

Consultants:Mahen Noiseux and Co. 1982-1985Eurosept 1985-1988

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5. Project Cost and Financing-----------------------------

Project Financing_________________

M. U. S. $

local Dis- Foreign Totalbursements Disrbursements

IDA credit:a. legisaltion 2.4 0.3 2,7b. CFC 3.6 3.6c. RINDRA 3.7 3.7d. Local consulting firms 1.5 1.5

2.4 9.1 11.5Government Budget:legislative review 0.2 0.2CFC 1.4 1.4

1.6 1.6Internally Generated Funds:RINDRA 0.8 0.8Local consulting firms 0.3 0.3

1.. 1.1

Total project 5.1 9.1 14.2

ReallocatiomApril 1986

AfterPer Credit April 1986 Disbursement

Disbursements Categories Agreement Reallocation to 3/31/80 BalanceDTS (000) DTS (000) DTS (000) DTS (000

1 Legislation review 250 200 196 42 Consultants for CFC 1,630 3,440 3,462 (22)3 National Audit Co. RINDRA 2,200 4,150 4,148 24 Malagasy management 820 395 445 (50)5 Consulting firms & 660 265 282 (17)

CFC local staff 06 Goods for CFC 900 900 827 737 Unallocated 2,940 50 0 50

TOTAL 9,400 9,400 9,360 40

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6. Project Results

INSCAENumber of Students Enrolled

in Accountancy Degree Programs

1983 1984 1985 1986 1987 1988 1989Semester I II I II I II I II I II I II I II

.______________________________________________________________________

1st year students 100 86 100 83 100 96 86 70 109 95 78 56 602nd year students 79 58 97 93 100 97 66 67 75 65 563rd year students 56 56 87 81 101 85 59 56 624th year students 20 18 20 20 20 20 20

---- __--------__---------------------------------__--------------------

totals 100 86 179 141 253 245 293 266 296 267 232 197 198

graduates 3yr. program 53 74 75 56graduates 4yr. program 18 19 19

Evening program-1) 234 220 237 406 364 392 400

year 1982 1983 1984 1985 1986

plannedenrollment-2) 100 164 214 260 300

1) average per year2) per appraisal for degree program

Teaching Staff

INSCAB/CFC1933 - 1989

1983 1984 1985 1986 1987 1988 1989

Foreign 2 4 5 4 3 2 61

Malgasy 2 6 7 7 13 9 10

4 10 12 11 16 11 16

Adjunct 7 3 6 12 17 11 '3

TOTAL 11 13 18 23 33 22 39

1.increase due to start cf new MBA program.

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RINDRA

Auditing Division

Auditing Engagements by Sector

1978 - 1988

1978

SECTOR & 1982: 1983 1984 1985 1986 1987 19881981 I _

- Financial Institutions - - - 2 3 3 , 5

- Ministries and Governmen

Agencies 4 4 6 8 8 15 17 21- Agriculture and

Agroindustry 7 8 10 13 16 19 20 23- Food and Animal Husbandr 8 11 13 13 15 17 19 21- Commerce 1 3 5 4 6 8 5 9- Tourism and Transport 6 8 11 9 13 14 13 16- Industry 26 30 34 38 41 45 52 59

TOTAL 52 64 79 87 102 121 128 154

RINDRA STAFF

June 30, 1989

DEPARTMENT PROFESSIONAL OTHER TOTAL

Audit 35 12 47

Consulting 14 9 23

Administration 9 6 15

TOTAL 58 27 85

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RINDRAManagement Consulting

Staff 1984 - '88

GRADE 1984 1985 1986 1987 1988

- Manager - - 3 3 3- Senior - - 2 6 1- Junior 10 .10 6 18 10

TOTAL 10 10 11 27 14

3 Managers, 1 Senior, and 4 Juniors have received training abroad

RINDRAConsulting Division

Consulting Engagements1984 - 1988

SECTOR 1984 1985 1986 1987 1988

- Financial Institutions - 1 1 4 1

- Ministries and Government

Agencies 2 4 1 3 2- Agriculture and

Agroindustry 1 1 - 2 2- Food and Animal Husbandry 2 1 1 _ _- Commerce 1 1 1 1 1- Tourism and Transport I _ 7 5 6- Industry 2 5 7 6- Construction and Public

Works 2 _ _ _- Small Business _ - 2 5 4

TOTAL 7 12 18 27 22

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RINDRATechnical Auditing Assistance

Received (in hours)

PERMANENT SHORT TERMFIRM PERIOD CONSULTANT CONSULTANCIES

MNE 1982 - 1985 5.912 H 3.947 H

EUROSEPT 1985 - 1988 3.216 H 6.634 H

RINDRA

Professional Audit Staf,!

1981 - 1989

GRADE 1981 1982 1983 1984 1985 1986 1987 1988

- Manager 2 2 2 4 4 4 4 7

- Senior 4 7 7 7 7 6 11 10

- Junior 20 16 14 12 12 9 12 12

- Assistant - - - 9 8 15 6 6

TOTAL 26 25 23 32 31 34 33 35

RINDRA

Auditing Staff

trained overseas

GRADE 1983 1984 1985 1986 1987 1988 TOTAL

- Manager 1 4 1 2 4 3 15

- Senior 4 3 5 1 3 6 22

- Junior - - 2 1 - - 3

TOTAL 5 7 8 4 7 40

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RINDRARevenues and -Orerating

ExpensesM. FMG

1981 1986 1987 1988

Revenues 161 435 570 649operating expenses (149) (428) (466) (590)

Operating Margin 12 7 104 59Interest (15) (121) (448) (952)Amortisationand Depreciation *) (253) (671) (591) (692)

*)Primarfly the amortization over five years of capitalizedtechnical assistance costs.

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7. Status of Covenants

COVENANTS

Credit Agreement Section

3.01 a - due diligence and efficiency. .. complied withb subsidiary loan agreement with RINDRA

3.02 a,b,c - procedures and conditions for complied withprojects under component D

3.03 selection of oualified contractors complied withfor component B and C

3.04 insurance of goods complied with

3.05 a - adequate records for CFC and RINDRA complied withb - project completion report complied with

3.06 premises for CFC complied with

3.07 a - review of existing accounting complied withstandards and practices

b - enactments of legislation with about 80%reference to component A complied with;

still missing finalenactment of rulesgoverning theaccountancy

profession.

4.02 adequate records and audits complied with

4.03 a - efficient administration complied withb - maintenance complied with

4.04 survey of demand for accountants not compliedand auditors in Madagascar by with;Dec. 1983 survey never

completed;now survey will be

done by INSCAE