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AFRICAN DEVELOPMENT FUND
REPUBLIC OF MALAWI
PUBLIC FINANCE MANAGEMENT INSTITUTIONAL SUPPORT
PROJECT - PHASE II (PFMISP II)
OSGE/MWFO/GECL
June 2015
TABLE OF CONTENTS
Acronyms and Abbreviations, Currency Equivalents-Fiscal Year-Weights and
Measurement, Client’s Information Project, Summary-Results-based Logical
Framework, Project Timeframe
I - STRATEGIC THRUST & RATIONALE 1.1 Project linkages with country strategy and objectives
1.2 Rationale for Bank’s involvement
1.3 Donors coordination
II – PROJECT DESCRIPTION
2.1 Project components
2.2 Technical solution retained and other alternatives explored
2.3 Project type
2.4 Project cost and financing arrangements
2.5 Project’s target area and population
2.6 Participatory process for project identification, design and implementation
2.7 Bank Group experience, lessons reflected in project design
2.8 Project’s performance indicators
III – PROJECT FEASIBILITY
3.1 Economic and financial performance
3.2 Environmental and Social impacts
IV – IMPLEMENTATION
4.1 Implementation arrangements
4.2 Financial management, disbursement and audit
4.3 Procurement arrangement
4.4 Monitoring and evaluation
4.5 Governance
4.6 Sustainability
4.7 Risk management
4.8 Knowledge building
V – LEGAL INSTRUMENTS AND AUTHORITY
5.1 Legal instrument
5.2. Conditions associated with Bank’s intervention
5.3. Under takings
5.4 Compliance with Bank Policies
VI – RECOMMENDATION
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LIST OF TABLES
Table 1 Donor coordination in Malawi
Table 2.1 Project components
Table 2.2 Comparison of funding modalities
Table 2.3a Project cost estimates by component and subcomponent
Table 2.3b Sources of financing
Table 2.3c Project cost by category of expenditure by component and subcomponent
Table 2.3d Expenditure schedule by year
Table 2.4 Lessons learned from previous operation and other analytical reports
Table 3 Implementation schedule
Appendices
Appendix I. Malawi Comparative Socio-Economic Indicators
Appendix II. Bank Group Operations in Malawi as at December 31, 2014
Appendix III. Main Related Projects Financed by the Bank and other Development Partners
in Malawi
Appendix IV. Summary of Public Expenditure and Financial Accountability
Appendix V. PFEMRP Analytical Underpinnings
Appendix VI. Malawi Fragility Note
Appendix VII. Map of the Republic of Malawi showing Project Sites
i
Acronyms and Abbreviations
AGD Accountant General’s Department
ADF African Development Fund
CPI Corruption Perception Index
DEAP Development Effectiveness and Accountability
DPs Development Partners
DfID Department for International Development
EPRCP Enhancing Procurement Reforms and Capacity Project EU European Union
FIMTAP Financial Management Transparency and Accountability Project
FROIP Financial Reporting and Oversight Improvement Project
GFEM Group on Financial and Economic Management
GDP Gross Domestic Product
FY Fiscal Year
GoM Government of Malawi
IFMIS Integrated Financial Management Information System
IMF International Monetary Fund
IPSAS International Public Sector Accounting Standards
ISP Institutional Support Project
JICA Japanese International Cooperation Agency
M&E Monitoring and Evaluation
MDAs Ministries, Departments and Agencies
MDTF Multi Donor Trust Fund
MGDS Malawi Growth and Development Strategy
MIPS Malawi Institute of Procurement and Supply
MoF(EPD) Ministry of Finance, Economic Planning and Development
MRA Malawi Revenue Authority
MWFO Malawi Field Office
MWK Malawi Kwacha
NAO National Audit office
NLGFC National Local Government Finance Committee
ODPP Office of the Director of Public Procurement
PBO Programme Based Operation
PCR Project Completion Report
PEFA Public Expenditure Financial Accountability
PFM Public Financial Management
PFMISP Public Financial Management Institutional Support Project
PFEM Public Financial and Economic Management
PFEMD Public Financial and Economic Management Division
PFEMRP Public Financial and Economic Management Reform Programme
PFMRP Public Financial Management Reform Programme
PIU Project Implementing Unit
PRSP Poverty Reduction Strategy Paper
PSRP Public Service Reform Programme
RFSSP Restoration of Fiscal Stability and Social Protection
UNDP United Nations Development Programme
UST United States of America Department of Treasury
ii
Currency Equivalents
As of March 2015
1 UA = MWK 619.22
1 USD = MWK 439.98
1 UA = USD 1.41
Fiscal Year
1st July – 30th June
Weights and Measurements
1 metric tonne = 2204 pounds (lbs)
1 kilogramme (kg) = 2.200 lbs
1 metre (m) = 3.28 feet (ft)
1 millimetre (mm) = 0.03937 inch (“)
1 kilometre (km) = 0.62 mile
1 hectare (ha) = 2.471 acres
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Grant Information
Client’s information
RECIPIENT: Republic of Malawi
EXECUTING AGENCY: Ministry of Finance, Economic Planning and
Development
Financing plan
Source Amount (UA) Instrument
ADF
1.86 Million
Grant
GoM 0.26 Million Counterpart Funds
TOTAL COST 2.12 Million
Timeframe - Main Milestones (expected)
Concept Note approval
April 2015
Appraisal May 2015
Project approval September 2015
Effectiveness October 2015
Mid-term Review April 2017
Completion September 2018
Last Disbursement March 2019
iv
Project Summary
Project Overview
Project Name : Public Finance Management Institutional Support Project-Phase II (PFMISP II)
Geographic Scope: Entire country; Implementation Timeframe: 2015-2018; Project Cost: UA 2.11
million
Expected Outcomes/Outputs: The project seeks to: (i) enhance transparency, compliance, and controls
in the use of public resources; and (ii) strengthen capacity in domestic taxes and revenue administrations.
These outcomes are expected to be achieved through: (a) development of procurement system, including
manuals for in-service training; blacklisting and suspension of suppliers; provision of IT
equipment/software and office furniture; review of the PFM Act, Treasury Instructions, and Treasury
Fund Accounting Guidelines; staff training; and performance audit; and (b) excise tax needs assessment
study, informal sector taxation study, and development of tax compliance strategy.
Project Direct Beneficiaries: The main beneficiary institutions are the Ministry of Finance, Economic
Planning and Development, the Malawi Revenue Authority (MRA), and Office of the Director of Public
Procurement (ODPP).
Needs Assessment: The Government of Malawi (GoM) has been reforming its PFM systems over the
past decade. The reforms have included enacting new laws (on PFM), reviewing policies and procedures
(e.g. budgetary processes) and designing new systems such as the Integrated Financial Management
Information System (IFMIS), and establishing new institutions like the MRA and the ODPP. The full
benefits of the reforms are yet to be felt in terms of aggregate fiscal discipline, strategic allocation of
resources and effective service delivery. The GoM hence designed a short-term Public Finance
Management Reform Programme Action Plan and a medium-term Public Finance and Economic
Management Reform Programme (PFEMRP) to address the challenges. The ADF has committed to
support implementation of the Action Plan and PFM Programme by strengthening capacity in public
accounting reporting including IFMIS, procurement and revenue administration components of the
PFEMRP. Human and capital resource investments at the Accountant General’s Department (AGD) and
National Local Government Finance Committee (NLGFC) are a necessity to avoid a repeat of the Cash-
gate Scandal at Central and Local Government levels. With a phased introduction of IFMIS at Local
Authority level since 2008/09, the hardware and software need to be replaced or upgraded in order to
strengthen integrity of the system and efficiency in service delivery. The PFM Act (2003) and related
policies have not been updated for some time, hence failure to address current emerging issues. In
Malawi, it is estimated that 50-60% of the budget is spent through procurement related services. However,
the 2014 Forensic Audit and the 2011 Procurement Audit Report identified a number of challenges
including collusion, which prevent public resources being efficiently used. With donor fatigue and
economic challenges, GoM has to rely more on its own domestically generated resources. As such,
supporting measures for broadening the tax base and strengthening tax compliance are critical. The
Project will thus strengthen transparency, compliance and control in management of public resources
and revenue administration.
Bank’s Added Value: The Project builds upon previous Bank supported PFM reforms in Malawi and
complements other Development Partners’ interventions. The Bank’s previous experience in the country,
e.g. through a range of previous interventions (including budget support) has generated lessons learned
which have been incorporated into the Project design. The presence of the Field Office has enabled a
strong understanding of the political context and technical issues and enriched the operational design. The
Bank enjoys support from authorities as an African institution that understands continental issues. The
Bank will use experience gained elsewhere to manage and monitor the project.
Knowledge Management: The Project will contribute to knowledge building through skills and
knowledge transfer from consultants and training providers to local counterparts, supplemented by study
visits. The Bank will capture and disseminate knowledge and experience through sharing the findings of
supervision missions, progress reports, and the Project Completion Report. Lessons learned and
experience gained will be available to inform future operations
v
Results-Based Logical Framework Country and Project Name: Malawi: Public Finance Management Institutional Support Project-Phase II (PFMISP II).
Purpose of the project: Improve transparency, compliance and control in management of public resources and revenue administration
RESULTS CHAIN
PERFORMANCE INDICATORS MEANS OF
VERIFICATION
RISKS/MITIGATION
MEASURES Indicator
(including CSI) Baseline Target
IMP
AC
T
Inclusive growth
through strengthened
economic governance
Mo Ibrahim Index 57.6 (2014) 59.3 (2019) GoM Annual
Economic Report;
IMF Reports; Mo
Ibrahim
Political risk #1. Political
compromises may divert
attention from PFM and
public sector reform
programs thereby
affecting the project
outcomes. Mitigation:
On-going dialogue with
GoM, DPs and CSO, to
mitigate risks and
potential of slippage. In
addition specific project
support has been targeted
to the MoF to oversee
management of the reform
process.
Macroeconomic Risk #2:
Malawi’s vulnerability to
external shocks.
Mitigation: Continued
implementation of fiscal
and monetary policy
supported budget support
operation and domestic
revenue reform.
Risk # 3:
Implementation
capacity: There are
capacity constraints which
could hamper or delay the
Implementation of the
PFM. Mitigation: The on-
going PFM reforms
provide a strong platform
to encourage and monitor
change. The proposed
capacity building project
would strengthen capacity
of the GoM.
Domestic revenue/GDP
ratio
22.1% (2012)
27.6% (2019)
OU
TC
OM
E
Outcome 1: Enhanced
transparency,
compliance, and
controls in use of
public resources
PEFA score (PI-20:
controls on non-salary exp)
C + in 2011
B in 2018
PEFA
PEFA score (PI-25:
financial statements
timeliness)
C+ in 2011 B (2018)
PEFA score (PI-19:
procurement)
D+ (2011) C (2018)
Outcome 2 :
strengthened capacity
in revenue
administration
PEFA score (PI-15 : tax
collection effectiveness)
NS (2011)
C (2018)
PEFA Reports
OU
TP
UT
Component 1: Enhancing transparency, compliance, and control in use of public resources
Output 1.1:
Strengthened
transparency &
competition in public
procurement
Training manuals for in-
service training developed
No manuals
1 Manual developed (by
2017)
Project monitoring
reports/supervision
missions/ ODPP
Website
Fixed Assets/IT
Inventory
Blacklist and suspension of
suppliers
No information
List of blacklisted suppliers
on website (2016)
Staff trained in
procurement
Limited training
provided.
15 ToTs; 60 officers from
MDAs; members; 15
Standing Review Committee
members; 20 suppliers; 1
MIPS study tour; tuition
fees for 30 officers (40%
being women).
IT equipment provided to
ODPP & MIPS
No backup servers;
No library ICT
equipment (MIPS)
File & exchange servers;
console switch; external
HD; 6 desktops; 3 laptops; 1
heavy printer; 1 scanner, 1
projector
Output 1.2 :
Strengthened financial
accountability,
compliance &
reporting
Staff trained in IPSAS No certified IPSAS
officers
15 certified IPSAS officers;
10 IPSAS ToTs; 264
accountants trained in
IPSAS (40% being women
(2017)
M&E Reports
PFM Bill,
TI Guidelines, TFA
Guidelines, Audit
Report,
Inventory Reports PFM Act reviewed PFM Act (2003) PFM Bill submitted to
Parliament (2017)
Treasury Instructions
updated
Outdated TI (2004) Updated TI (2017)
Treasury Fund Accounting
Guidelines updated
Outdated TFA
Guidelines (2004)
Updated TFA Guidelines
(2017)
TF performance audit No audit 1 performance audit (2018)
Staff trained in IFMIS
security, ICT management
and Treasury Funds
Accounting Guidelines
1 certified
information security
officer
8 officers in information
security, 10 ToTs in data
analytics, 60 in TF
Accounting Guidelines
(40% being women) (2017)
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IFMIS hardware and
software
No data analytics h/w
& s/w; 260 desktops
for LA IFMIS; 35 LA
IFMIS servers
2 ACL servers, 2 UPS, 2
ACL Data Full lincences, 10
ACL Data Intermediate
licences, 12 ACL Data Light
licences, CQS Essentials for
7 accounting modules, 50
desktop computers, 22
servers, 500 windows 12 R2
software, 50 windows server
2012, 50 windows SQL
server 2012 R2, 500
windows based anti-virus)
(2016)
Component 2: Strengthening capacity in revenue administration Assessment and
Study Report,
Manual
Output
1.1Strengthened
management of
domestic taxes and
revenue administration
Excise Tax Needs
Assessment and Manual
Customs & Domestic
Excise Act (1969);
No manual.
Needs Assessment Report;
Domestic Excise Tax
Manual (2018)
Informal sector taxation
study
Taxation (1964);
VAT Act (2005);
DRM Study (2014)
Informal Sector Study
Report ; Policy Review for
Informal Sector Taxation;
one gender stakeholders
review workshop (2018)
Output 2.2: Tax
Compliance Strategy
developed
Compliance Strategy
developed
No compliance
strategy in place
Compliance strategy in place
(Dec 2017)
Compliance
Strategy
Component 3: Project management
Output 3.1: Strengthen
capacity of PFEM
Division
ICT Equipment procured N/A 3 laptops; 2 desktops; 5
printers; 1 scanner (2016)
M&E Reports,
Inventory Reports
Staff trained N/A 5 staff trained, 40% being
women (2018)
KE
Y A
CT
IVIT
IES
ACTIVITIES INPUTS
1.Strenthening tax administration
2. Procurement capacity for ODPP, MDAs and training providers
3. Training and procurement of ICT equipment for ODPP and MIPS
4. Training in IPSAS and PFM
5.Review the Public Finance Management Act , Treasury Instructions, Treasury Fund Accounting Guidelines
6.Undertaking a Treasury Fund Performance Audit
7. Targeted capacity building for the PFED unit in the MoF to manage the reform process.
Financial resources
Financial resources
ADF: UA 1.86 mn
- Component 1: UA 1.40 mn
- Component 2: UA 0.34 mn
- Project Mngt: UA 0.12 mn
GOM: UA 0.26 mn
Total: UA 2.12 mn
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Table 1: Project Implementation Schedule for the Malawi Public Finance Management Institutional Support Project,
Phase II (PFMISP II)
2015 Action by
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Project Processing and Management
Grant approval AfDB
Signing Protocol of Grant Agreement AfDB & GoM
Project Effectiveness and Launching AfDB & GoM
Supervision and Monitoring AfDB
Mid-term Review AfDB
Project Completion Report AfDB & GoM
Component 1: Enhancing transparency, compliance and
controls in use of public resources
A. Procurement of Goods and Services GoM
B. Training GoM
C. Technical Assistance GoM
Component 2:Strengthening capacity in revenue
administrationGoM
A. Training GoM
B. Technical Assistance GoM
Component 3: Project Management GoM
2018Activities/Years
2016 2017
1
REPORT AND RECOMMENDATION OF THE MANAGEMENT TO THE BOARD
OF DIRECTORS ON A PROPOSED GRANT TO THE REPUBLIC OF MALAWI TO
FINANCE THE PUBLIC FINANCE MANAGEMENT INSTITUTIONAL SUPPORT
PROJECT, PHASE II (PFMISP II)
Management submits the following Report and Recommendation on a proposed ADF Grant
for UA 1.86 million to the Republic of Malawi to finance the PFMISP II.
I. STRATEGIC THRUST AND RATIONALE
1.1 Project Linkages with Country and Bank Strategies and Objectives
1.1.1 The operation is strongly linked with the second Malawi Growth and Development
Strategy (MGDS II, 2011-2016). The overarching objective of the Strategy is to create wealth
through sustainable economic growth and infrastructure development. To achieve this
objective, the MGDS II has identified six broad thematic areas1. The operation is designed
specifically to address the fifth priority area (improved governance) which is critical for the
successful implementation of the country’s medium term development strategy (Technical
Annex A).
1.1.2 The Project aims to support the implementation of the Government’s Public
Finance and Economic Management Reform Programme (PFEMRP, 2011-2016) and a
short-term PFM Reform Program Action Plan, Restoring Financial Control and Accountability
(PFMRP, 2015), and a Public Service Reforms Programme (PSRP, 2015), Making Malawi
Work, which are anchored on the MGDS II. The PFEMRP2 aims at improving Government of
Malawi’s (GoM’s) macro-fiscal
management, accountability and
transparency in PFM. The PFM Action
Plan focuses on remedying the basic
PFM weaknesses identified after the
revelation of massive plunder of public
resources in September 2013 (the
“Cash-gate Scandal”). The four Action
Plan Key Result Areas are accounting
and Reporting, Treasury and Cash Management, Scrutiny and Auditing, and Compliance and
Control. The Bank Group’s support complements and reinforces support from other
Development Partners (DPs). Under the PFM Multi-Donor Trust Fund (MDTF) administered
by the World Bank, US$ 19 million is being provided under the Financial Reporting and
Oversight Improvement Project (FROIP) whose implementation started in 2013. The objective
of FROIP is to improve internal controls, accounting, reporting and oversight of government
finances at the central and decentralized levels. Some DPs, such as GiZ (Germany) which has
set aside 10 million Euros for PFM capacity strengthening, are also providing support towards
implementation of the PFM Action Plan and PFEMRP (Table 1.2). As such, most of the Action
Plan Key Result Areas have been extensively funded with the exception of the central
Government IFMIS. The FROIP will thus be reallocating some of its support towards the
strengthening of central Government IFMIS which was abused during the Cash-gate Scandal.
1 The thematic areas include Sustainable Economic Growth; Social Development; Social Support and Disaster Risk
Management; Infrastructure Development; Improved Governance; and Gender and Capacity Development 2 Its key components include: resource mobilization; budgeting; procurement; accounting and financial management; cash and
debt management; and external auditing.
Box I: PFM Reform Programme Objective
The PFMRP “… envisages the restoration of financial
discipline by enforcing compliance of the (civil) service with
the laws, rules and regulations for governing the
management of financial resources in Government. It seeks
to train civil servants on what this framework is about and
why it is necessary, and will introduce an IFMIS that is
comprehensive and customised to the local conditions of
Malawi” (HE Prof AP Mutharika, President of Malawi, 10
April 2015 during launch of the PFMRP).
2
1.1.3 The operation will complement the on-going Bank-supported PFM Institutional
Support Project (PFMISP I) approved by the Board in October 2013, the Bank’s
Protection of Basic Services Sector Budget Support (PBS, approved in April 2015), and other
DP supported operations (Table 1.2). The PFMISP I supports the upgrade of customs
information management system and implementation of procurement reforms (Table 1.1). The
PFMISP II will address bottlenecks and shortcomings that contributed to the Cash-gate Scandal
by strengthening compliance and financial control in use of public resources. This will be done
by reinforcing capacity in application of and adherence to International Public Sector
Accounting Standards (IPSAS); enhancing transparency, competition and professional
standards in public procurement; strengthening GoM’s capacity to oversee IFMIS transactions;
and improving fiscal discipline, control, and reporting at the LA level through upgrading and
replacing of IFMIS ICT hardware and software. The Project will also support the development
of a Tax Compliance Strategy, and strengthen management of domestic excise tax and informal
sector taxation3. Improved oversight, compliance and controls will lead to improved PFM
environment which, in turn, will lead to increased mobilisation and effective use of resources.
Similarly, effective cash management and budgeting are dependent on predictable financing of
the national budget. With the Cash-gate Scandal incidence, GoM is currently constrained in
financing its budget and hence the need to support its quest for efficient management of tax
and non-tax revenue. The operation will provide the platform for the Bank Group’s continuous
dialogue with GoM beyond resource mobilisation and public procurement. Both PFEMRP and
PSRP provide a comprehensive framework on which to base further development assistance to
ensure that the interventions are coordinated and aligned with GoM’s priorities.
1.1.4 The Project is aligned with the Bank’s Country Strategy Paper (CSP, 2013 – 2017).
It is consistent with the second pillar of the CSP Pillar which, among others, aims to support
reform and capacity development in PFM to improve the macroeconomic and business
environment. The CSP underlines the Bank support to PFM reforms, with emphasis on
strengthening revenue administration, and promoting transparency in public procurement.
Through improved procurement systems, corruption will be reduced and competition will be
enhanced, hence improving the business environment. By focusing on PFM reform, the
proposed operation is aligned to the Bank’s Long Term Strategy and Operational Priorities
(good governance and inclusive growth) as well as Pillar I (Public Sector and Economic
Management) of the Governance Strategic Framework and Action Plan (GAP II, 2014-2018)
that seeks to build effective and capable institutions and promote transparency and
accountability to enhance the quality of growth. By ensuring that women are deliberately given
the opportunity to benefit from all the capacity building activities under the Project, the
operation is aligned to the Bank Group’s Strategy on Gender.
1.2 Rationale for Bank’s involvement
1.2.1 Following the 2014 tripartite (Presidential, Parliamentary and Local Government)
elections, Malawi is politically stable and peaceful. However, the socio-economic
challenges facing Malawi may lead to fragility (Appendix VI). The challenges require, inter
alia, consistent progress on PFEM reforms in order to strengthen fiscal discipline, improve
efficiency in resource allocation and domestic revenue generation. Malawi is a landlocked, low
income country with the lowest per capita incomes in the world of US$ 226 (2013). It has a
3 Within the context of PFEM reforms, donor harmonisation and division of labour, the Bank agreed with GoM
and other DPs in 2013 that it will focus on resource mobilisation and procurement reforms. The UA 2.98 million
under PFMISP I was not enough to cover all the revenue and procurement related reforms. In light of the Cash-
gate Scandal, a balance has thus been made between short-term and medium-to-long term reform measures for
improved service delivery. As such, more emphasis for the operation is on short-term measures (Cash-gate
Scandal) as opposed to medium term measures which are also vital for a credible and predictable PFM system.
3
low Human Development Index of 0.414 (2013), placing the country at 170 out of 187
countries. Results of the Africa Gender Equality Index 2015 ranked Malawi at 5th out of 52
countries with a score of 72.8 out of 100. Malawi’s economy is recovering following a period
of macroeconomic instability and slow growth since end of 2010. Real GDP is estimated to
have increased to 5.7 % in 2014 from 1.9 % in 2012 on the back of a rebound in agriculture
sector output and increases in industrial production. In 2015 and 2016, growth is projected at
5.5% and 5.7 %, respectively. Inflation has also been decreasing from the peak of 34.6% in
2012 to 24% in 2014 and is expected to reach a single digit of 8% in 2016 on assumption of
currency stabilisation and improved food production. A significant percentage (50.7%) of its
population currently lives under the US$ 1.25 a day income poverty line. The low income is
attributed largely to structural challenges in the economy, which need to be tackled through
sustained political commitment to reform. However, the risks associated with weaknesses in
implementing the reforms, policy reversals, external shocks such as the 2015 floods, and
prolonged suspension of general budget support as a result of the Cash-gate Scandal could
result in growing fiscal deficit, rising inflation and shortage of foreign exchange.
1.2.2 The proposed intervention will build capacity of selected institutions to deepen
reforms in PFM, in particular strengthening financial controls and compliance to existing
PFM systems in areas of accounting, IFMIS, procurement and revenue administration. The
GoM is currently undertaking policy and institutional reform measures to improve PFM;
however, developing and sustaining human capital as well as use of modern ICT in managing
public finances remain a great challenge. The PFM situation analysis (AfDB, 2012), the
Restoring Financial Control and Accountability (IMF, Nov 2014) and the PSR, Making
Malawi Work (Feb 2015) assessment reports highlight the need for capacity development both
in terms of human and organisational development. The 2014 Bank funded Domestic Resource
Mobilisation Study notes that even though Malawi’s revenue performance has improved, there
is scope to raise more revenues under current tax policy through capacity building and
addressing corruption in tax collection. The Study observes that “high reliance on external
resources will keep the country’s trajectory to economic transformation exposed to risk, as
envisaged in the MGDS II. These are compelling reasons for Malawi to pursue strategic as
well as operational initiatives geared to more rapid enhancement of domestic resource
mobilisation”. The GoM recognizes that weak capacity is hampering the pace of reforms, and
hence designed a medium term PFEMRP with a view to address the challenges. In short-term,
the PFM Action Plan focuses on basic financial control weaknesses that can help in restoring
and building trust in the country’s PFM systems. In the medium-to-long term, continued
revenue mobilisation reforms are critical to improved budget predictability and
implementation. Continued support to financial and economic governance reform priorities is
critical for effective implementation of the MGDS. Building institutions and Government
systems is key, and will require: (i) continued and deeper reforms to strengthen PFM systems
to enhance transparency and instil confidence; (ii) increased financial controls and use of
modern ICT tools to process and monitor financial transactions; (iii) reduced corruption and
greater accountability for the use of public funds; (iv) strengthened capacity across Ministries,
Departments and Agencies (MDAs) to increase competition, efficiency and control in use of
public uses; and (v) strengthened domestic resource mobilisation capacity to enable the budget
be more predictable and reduce fiscal slippages as a result of delayed disbursements or
suspension of donor pledged resources.
1.2.3 The Project adds value to Government and other development partners’ efforts to
address the PFM challenges faced by the country. It will contribute to: (i) addressing the
weaknesses in the PFM institutions, as a priority for the GoM and its partners; (ii) strengthen
the fiduciary systems in government institutions, by promoting transparency and tackle
4
corruption and leakage in public funds; (iii) strengthen revenue mobilisation efforts of
Government thereby reduce financing risks arising from delayed, reduced or suspended foreign
aid; and (iv) help consolidate and sustain the gains realised through the Bank’s previous and
the on-going operations and interventions by other DPs. Furthermore, the Project will directly
provide resources for strengthening financial controls and compliance in use of public
resources in response to the Cash-gate Scandal, thereby reinforcing the on-going PFM and PSR
reforms being undertaken by GoM and complement the support being provided by the Bank
Group and other Partners (Table 1.2, Appendix III).
1.2.4 The Project will contribute to intensifying and sustaining reform efforts in
Malawi. The GoM has been reforming its PFM systems over the past few years. While
improvements have been recorded in areas such as the legal environment and budgetary
processes, the full benefits of the reforms are yet to lead to improved controls, accountability,
aggregate fiscal discipline and improved service delivery. Several reforms and improvements
have been introduced and are being implemented albeit at a slow pace. While the on-going
PFMISP I is still under implementation (about 27% of resources has been disbursed with
procurement activities underway, Table 1.1), the Phase II operation has identified capacity gaps
in areas of procurement and revenue administration that require to be financed in order to
enhance the Phase I impact. Recent PFM and PSR assessments and analytical reports, including
the forensic audit and the DRM Study, identified a range of weaknesses in Malawi’s PFM
systems, which have formed the basis of interventions under the Phase II Project. The key
challenges are summarized in Box II. The operation is reinforcing implementation of the
Protection of Basic Services PBO by supporting capacity building and procurement reforms at
the ODPP and MIPS. The operation is complementing efforts of other DPs who are focussing
on areas such internal and external audit, central IFMIS, and cash and treasury management
(Table 1.2, Appendix III).
Table 1.1 : Focus Areas and Implementation Status for PFMISP I
Components Sub-component and activities Status
1. Strengthening
capacity in revenue
administration and
customs service
delivery (UA 1.42
million)
1.1 Customs management system upgrade to the
Automated System for Customs Data
(ASYCUDA) World from ASYCUDA
Contract with UNCTAD signed;
UNCTAD working on the
upgrade; some of the ICT
hardware procured and
delivered; software and laptops
being procured.
1.2 Development of a tax compliance
strategy aimed at enhancing taxpayer compliance
outcomes
Activity suspended. Resources
re-allocated to the ASYCUDA
upgrade. Activity to be part of
this Project.
2. Enhancing
competition, efficiency
and controls in public
procurement (UA 1.39
million)
2.1 Strengthening existing procurement
legislation: amendment of the procurement
regulations and guidelines to align with the new
Public Procurement and Asset Disposal Bill
(PPADB); publication and dissemination of the
new regulations/guidelines; and stakeholder
workshops on the principles of the PPADB.
The PPADB Bill to amend the
Public Procurement Act being
drafted. Planned to be tabled in
Parliament during the October
2015 sitting of Parliament
5
2.2 Building procurement capacity across
government institutions: Provision of specialized
training for ODPP staff to enable the organization
to fulfil its regulatory and oversight function;
development and rollout of an establishment of an
ODPP technical library; user friendly record
keeping system across 250 procuring entities;
Provision of training for MDAs in a number of
key areas; promotion of ethics in the procurement
process; develop and implement priority training
modules for building the capacity of local training
institutions to ensure sustainability of training
provision.
7 (58%) out of 12 ODPP staff
trained; 10 (100%) officers on
study tour; Procurement audit
done and report being drafted;
consultations with training
institutions underway.
2.3 Strengthening IT infrastructure to
support e-procurement reforms and upgrading
the windows operating system
ICT equipment and software
procured and some delivered.
ODPP is installing the
equipment which will lead to
development of e-procurement.
2.4 Support to the Malawi Institute of
Procurement and Supply (MIPS) with an aim to
build capacity and regulate the procurement
profession.
MIPS Bill submitted to
Parliament; Consultancy
services underway. ICT
hardware and software procured
and delivered.
3. Project
Management (UA 0.12
million)
3.1 Monitoring and evaluation, operational costs
and staff training and
On-going. Three officers
trained.
1.2.5 The design of this operation is guided by various analytical and diagnostic reports
as well as consultations during the Project preparation and appraisal missions. The main
analytical underpinning is provided by the 2014 Forensic Audit and IMF TA mission
assessments (see Box II for summary findings and Appendix V for more details); the 2014
Governance and Corruption Survey Report; the 2011 Public Expenditure and Financial
Accountability (PEFA) assessment; the 2011 PFEMRP and 2015 PFMRP Action Plan; the
2014 Bank’s Domestic Resource Mobilisation Study; and the 2013 OPEV Joint PFM
Evaluation Report. Discussions with other DPs on PFM have also provided a basis for the
Project design and identification of focus areas. Lessons have been drawn from the previous
operations and other Partner’s interventions. The lessons include the need to: (a) strengthen
implementation capacity in PFM institutions, thus supporting some of the key PFM institutions;
(b) limit the number of activities and conditions which tend to put excessive burden on GoM
leading to the risk of slippages in project execution; (c) strengthen Information Management
and filing systems; (d) the imperative need for Malawi to perform better in DRM; and (e)
support and work within the existing GoM and donor coordination structures (Technical Annex
B1).
Box II: The Cash-gate Scandal and PFM Assessments The Cash-gate Scandal refers to massive theft of public resources that was discovered in September 2013. A
forensic audit covering the period April-September 2013 was instituted to assess the magnitude of the fraud and
recommend how to mitigate against such an occurrence. The 2014 Baker Tilly Forensic Audit Report found that
the Cash-gate Scandal was done mainly through two ways:- (1) Through extraction of ‘cash’ using systematic
money laundering activities through commercial organisations. This was premeditated and was not
opportunistic; (2) By corruptly making payments that involved high value, overpriced transactions and/or
payments being made for goods not received, with funding transferred internationally to overseas jurisdictions
into foreign currencies. These transactions were relatively simple in nature including, inter alia: (a) the
overvaluing of goods whilst obtaining quotations from genuine suppliers; (b) excluding the ODPP from the
procurement process; and (c) making fraudulent payments on quotation with no evidence of delivery. The nature
of these transactions suggests a combination of possible causes ranging from incompetence and/or professional
6
negligence on the part of senior GoM officials, through to collusion between the various companies and/or
individuals.
The 2014 IMF Report found that the Cash-gate Scandal was a result, among others of the following factors:-
Internal controls and accountability: Breakdown of internal controls and weak accountability arrangements
caused by, among other things: (a) a lack of strategic oversight and management supervision at all levels; (b)
collusion and circumvention, possibly aided by management override of controls; (c) a lack of most fundamental
control procedures such as bank reconciliations; (d) a weak accountability system; and (f) a lack of
understanding of the overall PFM system and the inter-relationships.
Accounting and reporting systems: Inadequate accounting and reporting systems that do not provide a
complete view of cash transactions and balances- major government bank accounts (e.g. MG 1 account) are not
recorded and major transactions (e.g. revenues) are recorded in an inappropriate manner in the IFMIS.
Culture of impunity: Limited regard for the PFM legal framework; a culture of impunity and perception that
malpractices will not lead to sanctions and laws and regulations will not be enforced.
Overreliance on IFMIS: An unrealistic expectation that the IFMIS will do everything and a tendency to blame
IFMIS when errors occur or reconciliation issues arise, rather than address the problems in a proactive manner.
Government authorities are actively pursuing prosecutions arising from the cash-gate scandal. To date, at least
six cases have been concluded leading to a number of convictions and lengthy prison sentences for theft and
money laundering and some recovery of assets. In addition, two top-most heads of the Malawi Defence Force
have been arrested in connection with cash-gate related procurements that were identified in the final forensic
report. GoM is seeking convictions from the 53 case files derived from the final forensic report, with particular
focus on large sums. It also intends to pursue prosecutions based on contraventions of Section 88 of the PFM
Act governing offences and discipline.At the same time, GoM is continuing with PFM reforms with a view to
reduce the occurrence of similar incidences in future. A comprehensive forensic audit, aimed at understanding
better the extent and magnitude of financial mismanagement, is also underway covering the period 2008 to 2012.
Source: Forensic Audit Report (Baker Tilly, September 2014); Restoring Financial Control and Accountability (IMF,
2014); 5th & 6th Review of the ECT (IMF Country Report No. 15/83, 2015)
1.3 Donors’ Coordination
1.3.1 Donor support to Malawi is coordinated by the Debt and Aid Division (DAD) of
the Ministry of Finance, Economic Planning and Development (MoFEPD). Guided by the
Development Cooperation Strategy (DCS, 2014-18), the DAD is responsible for aid
mobilisation, coordination and reporting. Besides budget support, aid to Malawi is provided
through Sector Wide Approach (SWAP) or Pooled Funding, Trust Fund, and Project Support
with budget support being the most preferred aid instrument. The GoM is committed to
improving the effectiveness of aid, by moving from project financing to coordinated donor
financing through a much clearer institutional arrangement for aid coordination and integration
of donor funds into the national budget. The DCS thus aims to improve aid effectiveness in
Malawi, and the coherence of donors’ engagement with the Government.
1.3.2 The level of donor coordination in Malawi is strong. There are mechanisms for donor
coordination including the Group on Financial and Economic Management (GFEM), and the
DP Group on PFM, the Common Approach to Budgetary Support (CABS) Group, and Sector
Working Groups. PFM reform dialogue is conducted through the GFEM which is currently
chaired by the Minister of Finance. Since the opening of the Field Office in Malawi (MWFO),
the Bank has been active in PFM policy dialogue with the GoM through the CABS Group,
GFEM and bilateral discussions. It has been leading CABS Group discussions on procurement
and resource mobilisation and will continue to play a leading role. The joint evaluation of PFM
reform in Africa (OPEV 2011) recommended the need to move to coordinated donor support
to PFM reform. The Ministry of Finance developed a coordination framework by setting up a
7
PFEM Division in 2008. The establishment of the Division has improved the framework for
donor coordination in Malawi, and the Division acts as a secretariat to the GFEM and technical
working groups.
1.3.3 The Ministry of Finance requested donors to align and coordinate their support
to PFM reform. Donor contribution is summarised in Table 1.2 with detailed information in
Appendix III. With technical assistance from development partners, the Ministry has developed
a PFEM Reform Programme. The programme provides a framework for a coordinated donor
support. In this regard, some donors (DFID, EU, GiZ, IrishsAid and Norway) are contributing
to a Multi-Donor Trust Fund (MTDF) administered by the World Bank to support
implementation of the PFEMRP. The proposed Bank’s Project is expected to complement the
MDTF through targeted support to accounting, procurement and revenue components. Pledges
to the MDTF has since been scaled up from an initial amount of US$ 8 million to US$ 19
million and this will enable expansion of Fund’s scope to focus more on the emerging PFM
needs after the Cash-gate Scandal.
Table 1.2: Matrix of Donor Support, 2013-2017
Component of PFEM Institution/Project and Project Value Comment
Institution Unit of commitment Total
(UA Eq.)
1 Accounting and financial
management, IFMIS,
Payroll management)
FROIP4 ($7.95mn); GIZ (EUR 0.25
mn); EU (EUR 0.82 mn) ; IrishAid
(EUR 824,812)
7,334,671
2 Internal Audit FROIP ($1.79 mn); IrishAid (EUR
824,812) 1,815,688 Excl. GiZ5
3 External Auditing FROIP ($2.0 mn); GIZ; DfID (GBP0.42
mn); KfW (EUR 4.0 mn); USAID ($0.1
mn)
5,071,562 Excl. GiZ
4 Local government finance
(Incl LA IFMIS)
FROIP ($0.46 mn); EU (EUR 0.17 mn) 460,099
5 Procurement AfDB (UA 1.39 mn) 1, 390,000
6 Contract Management GIZ (EUR 0.5 mn) 400,000
7 Domestic Revenue AfDB (UA 1.42 mn) 1,420,000 Excl. GiZ &
UST6
8 ICT (inc Government Area
Network to facilitate IFMIS
connectivity)
FROIP (as above); USAID ($1.5 mn) 1,063,830 Excl. GiZ
9 Anti-Corruption and ethics DfID (GBP 0.1 mn); EU (EUR 0.39
mn); Norway ($ 0.4 mn); UNDP ($ 0.28
mn)
603,612 Excl.
Norway,
DfID, &
IrishAid.
10 PFEM Coordination,
Management and TA
FROIP ($1.42 mn); EU (EUR 0.22 mn);
AfDB (UA0.12 mn); UST ($1.4 mn) 2,120,406 Excl. UNDP
under DEAP7
4 Under Phase I of FROIP, US$ 6,081,673.96 out of US$ 8 million was used between April 2013 and December
2014 for strengthening financial controls, internal audit, external audit and Project Management. A balance of
US$ 1,981,326.04 will be used during Phase II. The total available resources for implementing Phase II work plan
is US$ 12,981,326.04 which will go towards accounting and financial management, internal audit, external audit
and project management components of the PFEMRP 5 GiZ is providing a total of 10 million Euros towards financial management, internal controls, external oversight,
revenue, and comprehensive forensic audit. 6 The US Treasury is providing some technical support towards tax reforms. 7 Except for FROIP and AfDB, much of the support is in form of Technical Support. Advisors are working in
various MDAs so support implementation of reforms.
8
II. PROJECT DESCRIPTION
2.1 Project Components
2.1.1 Project Objectives: The Project’s broad development objective is to support the GoM
in improving transparency, compliance and control in management of public resources and in
revenue administration. The specific objectives are to: (i) enhance transparency, compliance,
and control in use of public resources through adoption of standardised international
accounting standards, strengthening financial controls, and public procurement reform; and (ii)
strengthen capacity in revenue administration with a focus on improved capacity to collect
domestic taxes.
2.1.2 Project Components: The Project has three components: (i) enhancing compliance,
and control in use of public resources; (ii) strengthening capacity in revenue administration;
and (iii) project management. The major activities under each component are summarized in
Table 2.1 while the detailed description of Project components and costs are presented in
Technical Annex B2. Table 2.1: Project components
Components Component description Estimated
Cost (UA)
Component 1: Enhancing transparency, compliance and controls in use of public resources
Sub-component 1.1:
Strengthening transparency
and competition in public
procurement
The sub-component will undertake the following activities:- (i) Develop
training material and deliver trainings for in-service training with a view
enhancing procurement performance, management and record keeping;
(ii) Strengthen procurement capacity in Procuring Entities (MDAs)
through training; (iii) Strengthen ODPP ICT capacity and promotion of
e-procurement system; (iv) Promote fairness and discipline in public
procurement by enhancing bidder protest mechanism through debarment
of firms; and (v) Strengthen information sharing and capacity through
use of ICT and access to procurement books and journals by (a)
establishment of a Procurement Resource Centre; (b) undertake a study
tour to learn from other regional Procurement Professional Member
organisation; and (c) engagement of ICT Technical Assistants.
312,522
Sub-component 1.2:
Strengthening financial
accountability, compliance
and reporting
Through the sub-component, the Project will support implementation of the
following activities:- (i) Training of Accountants at the AGD and MDAs
in the International Public Sector Accounting Standards (IPSAS); (ii)
Review of the Public Finance Management Act and related pieces of
legislation; (iii) Updating of Treasury Instructions; (iv) Development of
Treasury Funds Accounting Guidelines; (v) Undertake a performance audit
of treasury funds management; (vi) Procurement of ICT hardware and
software for analysing IFMIS financial transactions including staff training;
and (vii) Strengthen financial management controls in Local Authorities
(LAs) through procurement of hardware and software for LA IFMIS.
1 085,836
Component 1 Sub-total 1 398,358
Component 2: Strengthening capacity in revenue administration
Sub-component
2.1: Strengthen management
of domestic taxes and non-tax
revenue administration
Under this sub-component, the Project will support:- (i) Enhancement of
Domestic Excise tax collection by: (a) undertaking a Needs Assessment to
review legal and policy environment and skills gaps that impinge on
Domestic Excise Tax collection; (b) develop a Manual to guide MRA in
collection of Domestic Excise Tax; and (c) train staff on use of the Manual
and Domestic Excise Tax collection; and (ii) Improvement of Taxation of
the Informal Sector by: (a) undertaking a study on informal sector taxation
to review legal and policy frameworks, and asses challenges and
opportunities; (b) undertake a study tour to inform the Study and learn from
other countries within the region; (c) stakeholder consultation including
258,095
9
Components Component description Estimated
Cost (UA)
with gender stakeholder groups, awareness raising and training; and (d)
Policy review for taxation of the informal sector and its impact on gender.
Sub-component 2.2:
Development of a Tax
Compliance Strategy
Under this subcomponent, the Project will develop a Tax Compliance
Strategy for the Malawi Revenue Authority.
79,194
Component 2 Sub-total 337,289
Component 3: Project management
Sub-component 3.1:
Facilitating Project
Operations and improve
capacity and skills for
PFEM Division
The project will :- (i) Procure ICT equipment for the Division; (ii) Train
staff in PFM and project management; (iii) Facilitate project management
and review workshops including supporting procurement operations, and
project monitoring and supervision; and (iv) Undertake Project Audit
123,605
Sub-component 3.2:
GoM Contribution
GoM will contribute resources for procuring financial management
software, salaries, utilities, equipment maintenance and office
rehabilitation
255,465
Component 3 Sub-total 379,070
Total Project Cost 2, 114,717
2.2 Technical solution retained and other alternatives explored
2.2.1 During Project preparation and appraisal, several options were explored
regarding the: areas of intervention; the number of institutions to support; the scale of
investments in each area; and the modality of the capacity building to be provided. Based on
these issues and the recommendations from various analytical works as well as the other PFM
capacity building donor planned interventions, it was agreed that in order to consolidate the
gains that have occurred, the ADF intervention would need to continue along similar lines,
through the provision of specialist technical assistance and other capacity building activities,
however, with a greater focus on ensuring sustainability and coordination with other partners.
2.2.2 In terms of the funding modality and in line with the PFMISP I, the appraisal
mission engaged in technical discussions with the World Bank and the Ministry of
Finance to assess options for undertaking a joint implementation arrangement to support
better donor coordination and reduce transaction costs. Consideration was given to disbursing
ADF funds through the MDTF (Table 2.2). In view of the proposed focal areas for the proposed
operation, two of which are complementary to the on-going PFMISP I, the proposed operation
was considered most viable option, targeting procurement, and domestic resource mobilization.
As part of addressing control and compliance weaknesses identified through the PFM Action
Plan, the Fund, GoM and other Partners further agreed that the Bank Group should provide
complementary support to FROIP as well as other DPs support by focusing on IPSAS and
IFMIS capacity building. Just like in the PFMISP I, the parties agreed to continue working
together in harmonizing aspects of procurement, financial management, monitoring and
evaluation, audit and reporting where possible to reduce transaction costs on the GoM.
10
Table 2.2: Project Alternatives Considered and Reasons for Rejection
Alternative Brief Description Reason for Rejection
Channel
resources
through the GoM
consolidated
account
Instead of having a specific ISP
intervention, use of General
Budget Support aid modality to
be used to support PFM capacity
building initiatives
Fungibility of resources and huge resource
constraints in the national budget make it difficult
for GoM to provide sufficient resources to address
specific PFM capacity needs (refer to (vi) in Table
2.7 on Lessons learned)
Pooling of
resources
through the
PFEMRP
MDTF
ADF resources to be channelled
through an MDTF Pool Account
to be managed by the MDTF
Administrator, the International
Development Fund (IDF) of the
World Bank. ADF resources to be
co-mingled with MDTF funds.
The ADF to sign an
Administrative Agreement (AA)
with IDF
The MDTF does have sufficient funding to finance
the other remaining components of the PFEMRP.
The arrangement reduces the amount of resources
to beneficiary institutions. The AA requires the
ADF to provide 8.37% of its resources (i.e.UA
155,682) to the IDF for management of the project-
thus UA155,682 going to IDF instead of directly
benefiting Project activities.
Co-Financing
with MDTF
using a Special
Account Method
The ADF to co-finance the
implementation of Project with
MDTF partners. ADF resources
to be disbursed to an ADF Special
Account to be managed by the
IDF. Resources to be used for
implementation of all PFEMRP
components.
Besides issues raised above, the arrangement could
not work since the PFEMRP is not fully financed
despite the scaling up of donor support-since
implementation of the Programme, budgeting,
parastatal financing, planning and policy, and cash
management components have either been
partially or not financed. Resources from ADF are
not enough to finance the components.
2.3 Project type
The proposed operation is an institutional support Project designed to
complement the PFMISP I, the Protection of Basic Services budget support operation
and other donor’s intervention including the MDTF for PFM reform and capacity building.
It aims at consolidating institutional reforms spearheaded and led by GoM through the
PFEMRP, PFM Action Plan and the PSRP. Through the PFM Action Plan, the PFMRP and the
PSRP, the GoM has clearly identified reform areas requiring redress. The Bank will thus
facilitate implementation of the program by focussing on increased transparency and controls
in utilisation of public resources and improved efficiency in revenue administration. Other
partners will further support Key Result Areas of the PFM Action Plan, and the PFEMRP which
include Accounting and Reporting, Treasury and Cash Management, Scrutiny and Auditing,
and Compliance and Control, including IFMIS strengthening. Both the MDTF and the
operation will be coordinated by the PFEMD under the MoFEPD with the PFEM Steering
Committee playing an oversight role.
2.4 Project Cost and Financing Arrangements
The estimated total cost of the Project, net of taxes and duties, is UA 2.12 million
(including 12% GoM’s contribution). A price contingency of 5% and a physical contingency
of 3% have been factored in the Project cost. Tables (2.3) and (2.4) present the estimated
Project cost by component and sources of finance, whereas Tables (2.5) and (2.6) present the
estimated Project costs by Category of Expenditure. Details of the project cost by component
and expenditure category are also presented in Technical Annex B2. The Bank will finance
UA 1.86 million while the GoM’s contribution is expected to be UA 0.26 million.
11
Table 2.3: Project Cost Estimates by Component
Table 2.4: Sources of Financing
Table 2.5: Project Cost by Category of Expenditure
Table 2.6: Expenditure Schedule by major Component
2.5 Project’s target area and population
The direct Project beneficiaries are: the Ministry of Finance, Economic Planning
and Development (the AGD, and PFEM Division), the National Local Government
Finance Committee, the Office of the Director of Public Procurement including the Malawi
Institute of Procurement and Supply (MIPS), and the Malawi Revenue Authority. The indirect
beneficiaries are the general population of Malawi through improved service delivery. The
private sector will also benefit from improved PFM (a competitive and transparent procurement
system), an efficient revenue administration, and improved payments systems.
Local Foreign Total Local Foreign Total % Foreign % of Total
1.1 Strengthening transparency and competition in public
procurement
142.429 51.090 193.520 0.230 0.083 0.313 26% 15%
1.2 Strengthening financial accountability, compliance and
reporting
139.777 532.595 672.372 0.226 0.860 1.086 79% 51%
Component 1 Total 282.206 583.685 865.891 0.456 0.943 1.398 67% 66%
2.1 Strengthen management of domestic taxes and revenue 77.466 82.351 159.817 0.125 0.133 0.258 52% 12%
2.2 Development of a Tax Compliance Strategy 7.165 41.874 49.039 0.012 0.068 0.079 85% 4%
Component 2 Total 84.631 124.225 208.856 0.137 0.201 0.337 59% 16%
3.1 Support to the MoF 47.776 28.762 76.539 0.077 0.046 0.124 38% 6%
3.2 GoM Contribution - Financial Management software,
Salaries, Utilities, equipment maintenance and office
rehabilitation
125.621 32.568 158.189 0.203 0.053 0.255 21% 12%
Component 3 Total 173.397 61.331 234.728 0.280 0.099 0.379 26% 18%
Grand Total 540.234 769.241 1,309.475 0.872 1.242 2.115 59% 100%
Component 1: Enhancing transparency, compliance and controls in use of public resources
Component 2: strengthening capacity in revenue administration
Component 3: Project management
(MWK Million) inc. Contingency (UAC Million) inc. Contingency
Source of Finance Local Foreign Total Percent Local Foreign Total % of Total
ADF Grant 414.613 736.673 1,151.286 0.879 0.670 1.190 1.859 88%
Malawian Government Contribution 125.621 32.568 158.189 0.121 0.203 0.053 0.255 12%
Total 540.234 769.241 1,309.475 1.000 0.872 1.242 2.115 100%
(UAC Million) inc. Contingency(MWK Million) inc. Contingency
(MWK Million)
Category of Expenditure Local Foreign Total Local Foreign Total % Foreign % of Total
A. Goods 6.688 442.290 448.979 0.011 0.714 0.725 99% 34%
B. Services 347.924 235.448 583.372 0.562 0.380 0.942 40% 45%
C. Operating Cost 26.832 - 26.832 0.043 - 0.043 0% 2%
Baseline Cost 381.444 677.739 1,059.183 0.616 1.095 1.711 64% 81%
GoM Contribution 115.571 29.963 145.534 0.187 0.048 0.235 21% 11%
Physical & Price Contingencies (8%) 43.941 60.796 104.737 0.071 0.098 0.169 58% 8%
Grand Total 540.956 768.497 1,309.454 0.874 1.241 2.115 59% 100%
(UAC Million)
2015 2016 2017 2018 Total 2015 2016 2017 2018 Total
1.1 Strengthening transparency and competition in public
procurement
19.352 77.408 77.408 19.352 193.520 0.031 0.125 0.125 0.031 0.313
1.2 Strengthening financial accountability, compliance and
reporting
67.237 268.949 268.949 67.237 672.372 0.109 0.434 0.434 0.109 1.086
Component 1 Total 86.589 346.357 346.357 86.589 865.891 0.140 0.559 0.559 0.140 1.398
2.1 Strengthen management of domestic taxes and revenue 15.982 63.927 63.927 15.982 159.817 0.026 0.103 0.103 0.026 0.258
2.2 Development of a Tax Compliance Strategy 4.904 19.615 19.615 4.904 49.039 0.008 0.032 0.032 0.008 0.079
Component 2 Total 20.886 83.542 83.542 20.886 208.856 0.034 0.135 0.135 0.034 0.337
3.1 Support to the MoF 7.654 30.615 30.615 7.654 76.539 0.012 0.049 0.049 0.012 0.124
3.2 GoM Contribution 15.819 63.276 63.276 15.819 158.189 0.026 0.102 0.102 0.026 0.255
Component 3 Total 23.473 93.891 93.891 23.473 234.728 0.038 0.152 0.152 0.038 0.379
Grand Total 130.947 523.790 523.790 130.947 1,309.475 0.211 0.846 0.846 0.211 2.115
(UAC Million)(MWK Million)
Component 1: Enhancing transparency, compliance and controls in use of public resources
Component 2: strengthening capacity in revenue administration
Component 3: Project management
12
2.6 Participatory Process for Project Identification, Design and Implementation
Wide stakeholder consultation was carried out with MDAs, Development
Partners, the private sector and civil society during Project identification, preparation,
and appraisal stages. The appraisal mission held discussions with the World Bank to
maximise synergies with the MDTF and promote donor harmonisation. This built upon the
extensive consultation undertaken by the Partners (including the Bank through the Country
Office) in the development of the wider PFEMRP, the PFMRP Action Plan, the PSRP, and the
IMF Reports on PFM in Malawi. The periodic meetings on PFM also provided useful
information for developing the project. The appraisal mission also met key PFEM stakeholders
to solicit their views on the scope and priorities of the proposed operation and ensure synergy
and complementarity with other interventions.
2.7 Bank Group Experience, and Lessons Reflected in Project Design
2.7.1 In designing the Project, a review was undertaken of: previous Bank interventions
in Malawi; the Bank’s Project Completion Reports (PCRs); the Country Strategy Paper;
the Country Portfolio Performance Review Report; the 2011 PEFA assessment, the 2011 Joint
Evaluation of Public Finance Management Reform; the 2014 DRM Study; the 2014 Forensic
Audit Report; the 2014 Restoring Financial Control and Accountability Report; the 2015 PSR
Making Malawi Work; and the 2015 PFMRP Action Plan. The Bank’s PCRs made a number
of recommendations which have influenced the design of this operation. These are captured in
the Table 2.7.
2.7.2 As of December 2014, the average age of the portfolio was 2.9 years, while the
average disbursement ratio was 28.9%. The average disbursement ratio including operations
approved and yet to be effective stands 22.6%. The 2013 Country Portfolio Improvement Plan
(CPIP) Review found the overall performance of the portfolio as Satisfactory, with
implementation objectives and development outcomes of 2.76 and 2.80 respectively, on a scale
of 0 to 4. None of the projects have been classified as ageing. Key challenges facing the
portfolio include persistence weaknesses in timely reporting on project results; delayed
justification of expenditure on special accounts; and delays in procurement and disbursement.
These are areas where the Bank and the Government are working together, as part of the
country portfolio improvement plan.
Table 2.7: Lessons learned from the previous Bank interventions in Malawi
Lessons learned Actions taken to integrate lessons into the PAR
i. The need to strengthen implementation
capacity in PFM institutions (2011 PEFA
Assessment 2012 OPEV Assessment and
2011-12 CABS Reviews,)
The project is focussed on capacity building and the development
of systems and processes to strengthen implementation capacity
in partner institutions. In the area of revenue management,
targeted training will be provided and a ‘training of trainers’
component will be implemented to enable MRA and border
officials to sustainably manage the implementation of customs
reform. The procurement component has a specific focus on
ensuring that the provisions of the Public Procurement Act are
implemented. The project therefore focuses on building the
implementation capacity of the ODPP, which oversees
implementation of procurement legislation; and MDAs, which
are responsible for implementation on the ground. In addition, the
project will also support the development of systems within
ODPP and MDAs to better manage information which will
contribute to building sustainable institutional capacity. Support
will also be provided to MIPS and training providers to ensure
that local procurement training is developed.
13
ii. Limiting the number of activities and
conditions which tend to put excessive burden
on Government leading to the risk of slippages
in project execution (Support for Good
Governance Loan)
The project has been carefully designed by limiting the number
of components and activities so that partner organizations are able
to focus on specific, implementable activities within the project
timeframe. By conducting a joint appraisal mission with the
World Bank, which is responsible for administering the MTDF,
AfDB has ensured that the project is closely aligned with the
work of other donors, thereby avoiding duplication of effort and
minimizing the burden on GoM, and where possible monitoring
and audit arrangements will be shared.
iii. Strengthening information management
and filing system as it was found that the
implementing Ministry (MoF) did not have
enough information to assist the Bank in
assessing the outcomes of the project (Support
for Good Governance Loan).
A specific project management component has been incorporated
into the project to build the capacity of the MoF to manage the
project effectively. All project components have an information
management aspect as it is recognized that addressing this is
critical to ensure that the reforms are sustainable.
iv. The need to support existing strategic
frameworks (Support for Good Governance
Loan)
The project is closely aligned with the Bank’s CSP and aligns
closely with the GoM’s strategic direction.
v. The importance of the Bank to become
part of the donor harmonization group which
would enhance donor co-ordination and allow
future operations to use the Performance
Assessment Framework as the principal
mechanism of goal setting, performance
monitoring and auditing (Structural
Adjustment Loan)
AfDB is the co-chair for the Group on Financial and Economic
Management, which includes Development Partners such as: the
German Development Cooperation (GIZ), Japan International
Cooperation Agency (JICA), Irish Aid; the European
Commission (EC); the UK Department for International
Development (DFID) and the United Nations Development
Program (UNDP) and the World Bank.
vi. The Bank’s general budget support
PCRs found that general budget support is not
sufficient in addressing capacity challenges.
This is because the GBS resource funds are
fungible. In some cases, the targeted reform
institutions do not sufficiently benefit from the
GBS resources due to conflicting government
priority needs vis-à-vis the resource envelope
(Poverty Reduction Support Loan)
The proposed project will thus complement GBS with a view to
directly intervene in areas of need.
2.7.3 Lessons learned, from other sources, which have influenced the design of the Project
include:
i. Considerable progress has been made in improving PFM systems and revenue administration.
However, the country needs to strengthen compliance mechanisms. The Project will therefore
address weaknesses in compliance and strengthen transparency, accountability, and service
delivery systems.
ii. Capacity weaknesses are evident almost throughout the public service and must be tackled
systematically. The 2011 PEFA assessment noted that a balance has to be struck between the
various forms of academic and practical training including the professionalization of GoM
financial management. Strong leadership and direction is required in undertaking PFM
reforms so that reforms are properly coordinated and their impact monitored. Weak
ownership of reforms or reforms which are externally driven leads to minimal impact. The
design of PFEMRP, from which the project is derived, has been led by GoM and is fully
aligned to MGDS II. In line with Paris Declaration Principles, implementation will use
existing government systems which are led by top GoM leadership. The PFEM Unit will be
focal point for coordinating all the identified project components.
iii. For efficient use of available resources in a country, project design should take account of
grant financing from donors, which however, requires more flexible design of capacity
14
building activities. This will minimize duplication of efforts, and encourage cost
effectiveness. The choice of the MDTF instrument by GoM and DPs, to which the project is
aligned, will ensure a harmonized approach with minimal duplication or overlaps.
2.8 Project’s performance indicators
The key performance indicators identified and the expected outcomes on Project
completion are set out in the Logical Framework, and Results Monitoring Framework (Technical Annex B7). The expected outcomes for the first component “Enhanced
transparency, compliance and controls in use of public resources” are: (i) Improved PEFA
score relating to improved effectiveness of internal controls for non-salary expenditure from
C+ in 2011 to B in 2018; (ii) Improved PEFA score relating to quality and timeliness of annual
financial statements from C+ in 2011 to B in 2018; (iii) improved transparency, controls and
accountability in procurement (PEFA score from D+ in 2011 to C in 2018. The expected
outcomes under the second component: “Strengthened capacity in revenue administration” is
the improved PI-15 PEFA score from NS in 2011 to C in 2018.
3. PROJECT FEASIBILITY
3.1 Economic and Financial performance
The economic and financial benefits from the Project will be much higher than
UA 2.12 million. Identifying and quantifying the direct and indirect economic and financial
benefits of capacity building interventions are not straightforward. It is difficult to carry out
credible and rigorous cost-benefit and financial analyses. On the other hand, the benefits of
such reforms are widely agreed to be large. While the costs are quantifiable (section 2.4), the
benefits are indirect, ultimately seen in improved capacity in public procurement and customs
administration, and better performance of the PFM institutions. The economic justification of
the proposed Project is its contribution to a better functioning government through improved
capacity. The benefits of the Project will derived from: - (a) improved predictability and
control in budget execution; (b) improved value-for-money from enhanced competition,
efficiency and controls in public procurement; (c) improved transparency in public
procurement; (d) improved timeliness and regularity of financial reporting; and (e)
effectiveness in tax collections. The Project will also support the development of sustainable
human resource capacity, thereby ensuring that the benefits will be sustained over time.
3.2 Environmental and Social impacts
3.2.1 Environment and Climate Change: The Project is environmentally classified as
Category 3 by ORQR. The Project will not have a negative impact on the environment as its
activities are limited to training, technical assistance, studies and procurement of logistic
resources, office automation and computer hardware. Project activities that are focused on
human and institutional capacity building have no negative impact on the on climate change.
3.2.2 Social: The Project is intended to contribute to economic growth and poverty reduction
through improved PFM systems. Improved governance is a prerequisite for growth and poverty
reduction. There is a general public discontent and loss of confidence in PFM following on the
occurrence of Cash gate scandal in September 2013. The PFM Action Plan adopted by GoM in
March 2015 will help to restore confidence. As such, the Project will contribute to
strengthening transparency, accountability and control in management of public resources, and
efficient resource mobilisation and use of public resources. Transparent and accountable
management of resources will lead to increased civic confidence in government. The
computerization of transactions and processes would lead to better and faster public services
delivery. The Project is expected to strengthen the GoM’s capacity to manage resources more
15
efficiently and effectively. Enhanced domestic resource mobilisation and efficient use of
resources will enable GoM generate sufficient resources for improved delivery of social
services. In turn, this will increase GoM’s potential to reduce poverty and sustain economic
growth. No negative social impacts are expected from the project implementation.
3.2.3 Gender: The GoM is committed to the promotion of gender equality to ensure that all
gender groups are able to fully contribute to the country’s development and benefit from it.
Gender equality is supported by the Constitution, and relevant Acts are in place to support it.
The National Policy on Gender is also in place and provides for the promotion of full and equal
participation of all gender groups. In line with the policy, the Project will ensure that at least
40% of women professionals are included in training activities. A Gender Equality and Women
Empowerment Programme and a Framework for accelerating progress towards the MDG Goal
of Gender Equality has been developed. The Bank is also supporting the development of the
Gender Equality and Women Empowerment Action Plan for Malawi whose main objective is
to develop a systematic plan of action for gender mainstreaming in the public sector activities,
programmes and projects. According to a 2015 World Bank Study on informal sector business
registration, 40% (1,195) out of 3,002 informal sector entrepreneurs in Malawi were females.
Male-owned enterprises were larger and more “formal”. Sales, profits and investments were
also larger for male-owned enterprises. Average monthly profits were US$ 243 per month for
male-owned firms, versus US$ 169 per month for female-owned firms. In terms of harassment,
women were significantly more likely to have been sexually harassed while on the job (11%
for women versus 3% for men). Through the informal sector Study, the Project will hence
support initiatives aimed at women economic empowerment. The Study will : (a) assess how
the taxation of the informal sector will affect economic empowerment of women who are
largely involved in informal sector businesses, and (b) develop strategy for improving
compliance in paying tax by the informal sector including how women businesses can be
promoted (Technical Annex B2). The Project has set aside resources for review and
dissemination of the Study Report findings to relevant gender related stakeholder groups.
Dialogue with the GoM will be pursued to ensure that the on-going gender mainstreaming
initiative across GoM institutions is inclusive to beneficiary institutions of the project. There
are no negative impacts on gender that are expected from the project implementation.
3.2.4 Involuntary Resettlement: The Project will not result in any population displacement.
4. IMPLEMENTATION
4.1 Implementation arrangements
The Project will be implemented over a period of three years, and the Ministry of
Finance, Economic Planning and Development is the lead executing agency responsible for
Project implementation and coordination in collaboration with the beneficiary institutions. Just
like the on-going PFMISP I, the Ministry, through the PFEM Division, will coordinate and
oversee the Project implementation, monitoring and result reporting, procurement, and
financial management. The PFEM Steering Committee will be the highest level GoM body
providing strategic policy guidance and oversight. The PFEM Technical Committee will
provide technical inputs on Project implementation. GFEM, a joint donor and Government
forum, will review and assess progress against set benchmarks. The AfDB, through the Malawi
Field Office, is an active member and co-chair of GFEM. Technical Annex B3 provides details
of the Project implementation arrangement.
16
4.2 Financial Management, Disbursement and Audit Arrangements
4.2.1 An assessment of the PFEM Division’s financial management capacity for the
implementation of the Project indicates that it is satisfactory to Bank requirements. The
Division is currently implementing two PFM reforms projects, one funded by a World Bank
managed MDTF and the other by the Bank. The Division’s performance in the financial
management of the two projects has been assessed as satisfactory; as such, the existing
arrangements will be retained for the proposed Project without any material modifications. To
this end, the PFEMD will be responsible for financial management including effectiveness of
internal controls, timely transaction recording, budget consolidation, periodic reporting
(quarterly and annual financial reports) and coordination of audits.
4.2.2 Disbursement under this Project shall be mainly through the Direct Payment
Method considering lessons learnt from past and on-going operations in Malawi, which
have faced challenges in satisfactorily complying with related aspects of the Bank’s financial
management and disbursement requirements. However, a Special Account method will be used
for smaller payments. For this purpose, a Designated Special Account will be opened with the
Reserve Bank of Malawi, linked to an operative account with a commercial Bank. Reporting
on project performance to Project management, the Bank and other relevant stakeholders will
be done using the agreed formats of the existing annual and quarterly financial reports being
used for the on-going Bank’s supported PFM Project that take into consideration needs of other
donors to the PFEMRP to minimize administrative burdens. In this regard, single reports will
be prepared clearly indicating the Bank’s sources and funding from other donors.
4.2.3 The National Audit Office (NAO) will be responsible for the external audit of the
Project, which will be conducted in accordance with Terms of References approved by
the Bank. The NAO may however outsource the audit to an external audit firm which shall be
contracted following procurement procedures acceptable to the Bank. Outsourced external
audit services shall be funded from Grant proceeds. The annual audited financial statements
together with the auditor’s report and management letter covering identified internal control
weaknesses will be submitted to the Bank no later than six months after the end of each fiscal
year. The auditors shall issue an audit opinion with respect to Project Financial Statements,
Statement of Expenditures (expenditure eligibility testing) and internal controls environment.
Technical Annex B4 provides details of the financial management and audit arrangement.
4.3 Procurement Arrangements
4.3.1 Given that the Bank and Government of Malawi in November 2014 signed a Letter
of Agreement on the application of national procurement procedures for National
Competitive Bidding (NCB) for projects financed by the African Development Bank Group
following positive results of AfDB’s NCB assessment for Malawi (2011), all Project contracts
procured under the NCB arrangement will make use of National Procurement Procedures
(NPP), provided that contracts are within the agreed threshold (LoA Annex 1 para 2). In
addition, procurement capacity concerns that were identified during the appraisal mission of
the current PFMISP I were addressed after recruitment of a dedicated procurement staff who
is managing all FROIP activities. Procurement therefore, will be carried out by the MoFEPD
(PFEM Division) procurement specialists, using their relevant Internal Procurement
Committee (IPC).
4.3.2 Procurement of goods and acquisition of consultancy services financed by the
Bank will be undertaken in accordance with the Bank’s Rules and Procedure for Procurement
of Goods and Works, May 2008 Edition, (as revised in July 2012) or the Rules and Procedures
17
for the Use of Consultants, May 2008 Edition, (as revised in July 2012), using relevant Bank
Standard Bidding Documents8 except for those under NCB method which will be procured
using NPPs and procurement methods stipulated in Technical Annex B5. A procurement plan,
detailing each contract to be financed by the grant, the procurement methods, as agreed with
GoM during the appraisal mission are stipulated in the Annex B5.
4.4 Monitoring and evaluation
The Project is scheduled for implementation over a 36-month period, from
October 2015 to September 2018. This schedule is reasonable, given the scope of activities
to be implemented and Project implementation capacity in Malawi. The PFEMD will be
responsible for Project monitoring and evaluation, using the PFEMRP Result Monitoring
Framework (Technical Annex B7) and the Project log frame. The PFEMRP (through FROIP,
PFMISP I and this project) is providing support to PFEMD to strengthen its monitoring and
evaluation capacity. The PFEMD has a dedicated M&E staff in place. The periodic
performance assessment and result reporting will be carried out by the PFEMD, in
collaboration with the Project component managers and/or beneficiary institutions. Quarterly
and annual activity reports will also be prepared and submitted to the Bank. The Bank will
monitor Project implementation and the use of Project resources through joint supervision
missions and mid-term review mission, to the extent possible with other Development Partners
in Malawi. The Malawi Field Office, which is leading the operation, will play an active role in
the coordination, country dialogue, and Project supervision and monitoring. A Project
Completion Report will be undertaken to evaluate progress against outputs and outcomes and
draw lessons for possible follow-up operation. Table 4.2 presents project implementation and
monitoring schedule.
Table 4.2: Project Implementation Schedule
Task Responsible Party Start Date
Grant Approval ADF September 2015
Grant Effectiveness ADF/GoM October 2015
Project Launching ADF/GoM November 2015
Procurement of goods and services GoM November 2015 – December 2017
Technical assistance and training program GoM November 2015 – July 2018
Annual Audit Report GoM March 2016, 2017, and 2018
Supervision Mission ADF April/October 2016, 2017 and 2018
Mid-term Review ADF April 2017
Project Completion Report ADF/GoM September 2018
4.5 Governance
4.5.1 Malawi’s performance across various governance indicators has been mixed since
2009. Ranked 16 out of 52 countries in Africa with a rating of 57.6 out of 100 on the 2014 Mo
Ibrahim Governance Index, Malawi’s score has been above the 51.5 average for Africa and
slightly below the Southern Africa’s average rating of 59.3. On the Corruption Perception
Index, Malawi moved from a score of 28 in 2005 to 37 in 2013 and slided backwards to 33 in
2014-the average for the Sub Saharan Africa (SSA) and ten steps below the global average of
43. In 2014, the country was ranked 21st out of 47 countries in the SSA. In order to sustain the
fight against corruption, the GoM is continuing implementing a National Anti-Corruption
Strategy which aims at bringing all stakeholders together to address graft. Besides the Public
Service Charter Program launched in 2013 that aims to improve public service delivery,
transparency and accountability, the Public Service Reform Program and on-going PFM
8 Both these documents are amended from time to time
18
reforms will also contribute to fighting the vice. Governance, at the level of Bank Group’s
funded projects, has been satisfactory.
4.5.2 Robust governance arrangements have been put in place to manage the
implementation, monitoring, review and audit of this Project, as outlined in sections 4.1,
4.2 and 4.2 above. The implementing entity has been assessed as having enough capacity to
implement the Project, utilizing the existing country systems. Controls and oversight will be
further strengthened by periodic internal audits to be conducted by the Central Internal Audit
Unit. Lastly, the implementation of the agreed action plan will further enhance the financial
management arrangements in place for the project implementation. The Project will contribute
towards strengthening the transparency, compliance and control practices in financial
management, public procurement and increasing efficiency in revenue administration which
are critical in improving governance and tackling corruption in Malawi.
4.6 Sustainability
An important contributing factor to the sustainability of the Project interventions is
the GoM’s commitment to policy and institutional reforms in the area of PFM and PSR.
The GoM led the design of the PFEMRP, PFM Action Plan, and Public Service Reform which
covers a wide range of areas (Par 1.1.2). The objective of these reforms is to holistically address
capacity constraints and enhance staff motivation thereby sustaining the reform agenda.
Significant attention has been paid to sustainability in the Project design. By strengthening
financial management (IFMIS) system and training of staff in IPSAS and information security
management, financial controls and compliance to policy and regulatory frameworks will be
enhanced and these will lead to efficiency, reduced waste and improved service delivery. On
the procurement reforms, the project employs a holistic approach, building capacity of the
ODPP, MDAs, MIPS and local training providers. The tax administration component aims to
ensure that the capacity of GoM to increase revenue collection is strengthened, thus
contributing to positive long term development outcomes. In addition, training of staff in
IPSAS, information security, informal sector taxation and domestic excise taxation will ensure
that knowledge and skills are transferred to relevant staff for them to manage the reform
process. This will enable interventions to be mutually reinforcing, whilst building sustainable
capacity at a local level. The Project will also strengthen institutional systems and processes
(e.g. through strengthening of LA IFMIS) so that reforms are embedded within the MDAs.
4.7 Risk Management
The potential risks and mitigation measures for the project are summarized Table 4.2.
Table 4.2 : Risks and mitigation measures
Risks Probability
/ Impact
Mitigation measures
Political risks: political
compromise with a view to
consolidate power following
the 2014 general elections may
affect the pace of reform
Probability
medium and
impact High
The Government’s commitment to, and ownership of,
reforms is high. Recent accomplishment indicates that the
Government has willingness to undertake ambitious
economic governance reform including PFM and PSR. The
Project will also directly contribute to building capacity to
implement and monitor the pace and sequence of a medium
term PFM reform program.
Macroeconomic risk:
continued suspension of budget
support and adverse weather
conditions could affect growth
through lower agricultural
Probability
medium and
impact
Medium
Continued implementation of fiscal and monetary policy
supported by an IMF program. Continued implementation
of budget support operations as well as policy dialogue with
partners including the Bank will help to monitor and
mitigate the macro-economic risks. Export diversification
19
output, given the size of
agriculture in GDP (30%) and
higher fiscal deficits and
inflation.
through effective implementation of the government’s
recently launched National Export Strategy
Implementation capacity
constraints: Weak institutional
and human resources capacity
could cause delays or hamper
implementation of reform.
Probability
medium and
impact
Medium
The on-going multi-donor supported PFM reform program,
and the proposed capacity building Project would
strengthen capacity of the PFEMD. Dedicated PFEMD
staff has been assigned for reform coordination and monitor
implementation. In addition, the use of existing Division
and sustained efforts of capacity building will mitigate this
risk in the medium to longer term. The Project is also
providing additional project management capacity
including training.
Fiduciary risks: While
Government has made notable
progress in improving PFM as
noted in the 2011 PEFA report,
there are still weaknesses in the
fiduciary control environment
as revealed by the Cash-gate
Scandal.
Medium
probability/
High Impact
Concurrent Internal Audit of the Project transactions to
trace and correct anomalies. The Project requires
submission of quarterly financial reports and audited
financial statements on an annual basis. Enhanced
transparency of the resource flow and the Bank’s regular
supervision mission (including PFM and procurement) will
help to mitigate the risk.
4.8 Knowledge Building
The PFEMRP is building knowledge and developing skills on specific areas related
to accounting and cash management, compliance and controls, public procurement, and
revenue administration. The implementation of the PFEMRP and the Action Plan will
strengthen PFM in Malawi in a number of ways including: (i) training of staff in IPSAS and
IFMIS information security management; (ii) review of the PFM Act to enhance regulatory
environment for internal control and staff discipline; (iii) procurement of IFMIS hardware and
software with a view to strengthen financial control and reporting; (iv) undertaking studies on
domestic excise tax and informal sector taxation, development of Treasury Funds accounting
Guidelines, and the Tax Compliance Strategy with an aim to broaden tax base and reduce cases
of non-compliance; (v) the development of training manuals for in-serving public procurement
training; (vi) the establishment of a MIPS Resource Centre; and (vii) training of procurement
staff in MDAs, MIPS and training institutions. The Project will equip the AGD to train
accounting personnel in various MDAs to follow standardised accounting reporting procedures
and manage Treasury Funds effectively. It will assist the ODPP, local training institutions and
MIPS develop public procurement training programs. Knowledge will also be acquired through
skill transfer using external experts and developing partnership with peer institutions in the
region (e.g. Tax Policy Authorities). In addition, training on informal sector taxation, domestic
excise, IPSAS, bank reconciliation, and public procurement matters will be developed to
improve knowledge and skills of public accountants, public procurement and revenue officers
and non-procurement professionals across MDAs. Sensitisation and public awareness raising
workshops will be undertaken to raise awareness on informal sector taxation, treasury fund
management guidelines, Internal Procurement Committees, PFM Act, and Treasury
Instructions thereby improving integrity, transparency and accountability in the management
of public resources. The joint supervision and result reporting and Project Completion Report
will contribute towards knowledge management and lessons learnt to inform future
interventions.
20
V – LEGAL INSTRUMENTS AND AUTHORITY
5.1 Legal instrument
The legal framework of the Project will be governed by a Protocol of Agreement between
the Republic of Malawi and the African Development Fund for an ADF Grant of UA 1.86
million.
5.2 Conditions associated with Bank’s intervention
5.2.1 Conditions Precedent to Entry into Force: The Protocol of Agreement shall enter
into force on the date of its signature by the Republic of Malawi and the African Development
Fund.
5.2.2 Conditions Precedent to First Disbursement: The first disbursement of the grant
shall be conditional upon the entry into force of the Protocol of Agreement, and the Recipient
providing evidence of the fulfilment of the following condition, in form and substance satisfactory
to the Fund:
(a) Evidence of having opened or existence of a Special Account in the Reserve Bank of Malawi
for the deposit of the proceeds of the grant.
5.3 Undertakings The Recipient shall maintain the existence and functioning of the PFEMD, the PFEM
Steering Committee and the PFEM Technical Committee, each in a form and with a
composition acceptable to the Fund.
5.4 Compliance with Bank Policies
This project complies with all applicable Bank policies.
VI. RECOMMENDATION
Management recommends that the Board of Directors approve the proposed Grant of
UA 1.86 million to the Government of the Republic of Malawi for the purposes and subject to
the conditions stipulated in this report.
Appendix I: Malawi Selected Macroeconomic Indicators
2010 2011 2012 2013 2014 2015 2016
Act. Act. Act. Act
Est .
Proj. Proj.
GDP at constant market prices 6.5 4.3 1.9 5.2 5.7 5.5 5.7
Nominal GDP (billions of kwacha) 812.4 880.9 1,056.3 1,415.0 1,809.0 2,224.0 2,556.0
Consumer prices (end of period) 6.3 9.8 34.6 23.51 24.2 12.0 8.0
Consumer prices (annual average) 7.4 7.6 21.3 28.3 23.8 17.3
10.0
National savings 24.7 9.4 12.5 14.2 18.6 20.3 13.0
Net official transfers 15.7 6.4 14.1 13.2 6.6 7.7 7.7
Domestic savings 6.3 0.6 -4.6 0.6 2.4 3.6 6.1
National investment 26.0 15.3 16.9 16.0. 15.4 15.6 15.7
Saving-investment balance -1.3 -5.9 -4.4 -1.8 -5.1 -3.4.1 -2.7
Revenue 33.8 32.1 26.5 39.1 32.4 33.0 32.6
Tax and nontax revenue 23.5 24.5 22.1 24.5 28.0 27.0 27.3
Grants 10.3 7.6 4.4 14.5 4.4 6.1 5.3
Expenditure and net lending 33.8 35.0 33.4 40.5 41.0 41.0 35.4
Overall balance (excluding grants) -10.3 -10.5 -11.3 -15.9 -13.1 -11.91 -14.1
Overall balance 0.1 -2.9 -6.9 -1.4 -8.6 -5.9 -3.4
Foreign financing 0.9 1.3 1.6 2.6 2.8 4.0 1.8
Domestic financing -0.9 1.7 6.7 -0.2 5.9 1.9 1.0
Privatization 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Usable gross official reserves 279.6 190.2 215.4 397 599.0 698.0 791.0
(months of imports) 1.5 1.0 1.1 2.0 2.9 3.0 3.3
Current account (% of GDP) -1.3 -5.9 -4.4 -1.8 -5.1 -3.4 -2.7
Current account, excl. official transfers (% of GDP) -17.0 -12.2 -18.6 -15.0 -11.7 -11.1 -10.3
Overall balance (% of GDP) 2.2 -1.9 0.9 4.4 4.3 1.5 1.7
External debt (public sector)2 16.0 16.9 37.4 44.0 47.3 35.3 34.1
NPV of debt (% of exports) 44.6 48.1 53.3 78.9 90.4 88.2 85.0
External debt service (%of exports) 1.3 1.6 2.4 4.6 4.7 8.0 1
3.28
Source: Ministry of Finance & IMF
II
Appendix II: Bank Group Operations in Malawi as at May 31, 2015
Division Long name Finance project Sector Name WindowApproval
dateAmount App. Amount Dis.
Disburse
ment
Ratio
last
supervisio
n Mission
Age
AWTF SHIRE VALLEY IRRIGATION PROJECT FEASIBILITY STUDY P-MW-AAC-008 Agriculture [OTHERS] 12/18/2013 1,434,423.0 0.0 0.0 1.5
OSAN1 AGRICULTURE DEVELOPMENT PROGRAMME - ISP P-MW-AAA-004 Agriculture [ ADF ] 9/9/2009 15,000,000.0 5,123,540.1 34.2 11/13/2014 5.7
OSAN3 SMALLHOLDER IRRIGATION AND VALUE ADDITION PROJECT (SIVAP/FUN P-MW-AA0-026 Agriculture [ ADF ] 3/13/2013 253,000.0 26,769.7 10.6 2.2
OSAN3 SMALLHOLDER IRRIGATION AND VALUE ADDITION PROJECT (SIVAP/FUN P-MW-AA0-026 Agriculture [OTHERS] 3/13/2013 27,966,496.7 4,342,880.3 15.5 2.2
Agriculture 44,653,919.7 9,493,190.1 21.3 2.9
OSAN3 GEF CARLA CLIMATE ADAPTATION FOR RURAL LIVELIHOODS AND AGRIC P-MW-C00-001 Environment [OTHERS] 11/10/2011 2,118,674.0 1,419,131.3 67.0 5/27/2013 3.6
Environment 2,118,674.0 1,419,131.3 67.0 3.6
OSGE2 PUBLIC FINANCE MANAGEMENT INSTITUTIONAL SUPPORT PROJECT P-MW-KF0-002 Multi-Sector [ ADF ] 10/8/2013 2,980,000.0 803,564.1 27.0 1.7
Multi-Sector 2,980,000.0 803,564.1 27.0 1.7
ONEC2 KOLOMBIDZO HYDRO POWER PROJECT FEASIBILITY STUDY P-MW-FA0-001 Power [ ADF ] 3/25/2013 2,000,000.0 25,344.4 1.3 2.2
Power 2,000,000.00 25,344.43 1.27 2.2
OSHD1 SUPPORT TO LOCAL ECONOMIC DEVELOPMENT P-MW-IE0-002 Social [ ADF ] 9/24/2008 14,000,000.0 11,495,737.4 82.1 11/6/2014 6.7
OSHD1 SUPPLEMENTARY LOAN LOCAL ECONOMIC DEVLOP P-MW-IE0-003 Social [ ADF ] 12/9/2010 3,162,000.0 2,608,508.2 82.5 11/4/2014 4.5
OSHD1 COMPETITIVENESS AND JOB CREATION SUPPORT PROJECT P-MW-IE0-004 Social [ ADF ] 12/16/2011 10,000,000.0 3,692,275.9 36.9 11/4/2014 3.5
OSHD1 PROTECTION OF BASIC SERVICES P-MW-IE0-005 Social [ ADF ] 4/29/2015 19,000,000.0 0.0 0.0 0.1
OSHD2 SUPPORT TO HIGHER EDUCATION SCIENCE & TECHNOLOGY & TECHNICAL P-MW-IAD-001 Social [ ADF ] 2/8/2012 9,050,000.0 2,050,339.8 22.7 8/11/2014 3.3
OSHD2 SUPPORT TO HIGHER EDUCATION SCIENCE & TECHNOLOGY & TECHNICAL P-MW-IAD-001 Social [ ADF ] 2/8/2012 10,950,000.0 761,203.1 7.0 8/11/2014 3.3
OSHD2 SUPPORT TO HIGHER EDUCATION SCIENCE & TECHNOLOGY & TECHNICAL P-MW-IAD-001 Social [ NTF ] 2/8/2012 6,500,000.0 1,133,503.3 17.4 8/11/2014 3.3
Social 72,662,000.0 21,741,567.7 29.9 3.5
OITC2 MALAWI TRUNK ROAD REHABILITATION: BLANTYRE-ZOMBA P-MW-DB0-011 Transport [ ADF ] 5/22/2009 22,980,000.0 16,226,652.2 70.6 2/23/2015 6.0
OITC2 MALAWI TRUNK ROAD REHABILITATION: BLANTYRE-ZOMBA P-MW-DB0-011 Transport [ ADF ] 5/22/2009 1,124,000.0 87,024.6 7.7 2/23/2015 6.0
OITC2 MALAWI: MZUZU-NKHATABAY ROAD REHABILITATION PROJECT P-MW-DB0-012 Transport [ ADF ] 3/13/2013 21,890,000.0 266,467.9 1.2 2/23/2015 2.2
OITC2 NACALA ROAD CORRIDOR PROJECT PHASE IV (LIWONDE-MANGOCHI) MA P-Z1-DB0-084 Transport [ ADF ] 12/3/2013 42,360,000.0 0.0 0.0 1.5
Transport 88,354,000.0 16,580,144.7 18.8 4.0
OWAS2 SUSTAINABLE RURAL WATER AND SANITATION INFRASTRUCTURE FOR IM P-MW-E00-006 Water Sup/Sanit [ ADF ] 4/30/2014 15,000,000.0 0.0 0.0 1.1
OWAS2 SUSTAINABLE RURAL WATER AND SANITATION INFRASTRUCTURE FOR IM P-MW-E00-006 Water Sup/Sanit [ NTF ] 4/30/2014 5,000,000.0 0.0 0.0 1.1
OWAS2 SUSTAINABLE RURAL WATER AND SANITATION INFRASTRUCTURE FOR IM P-MW-E00-006 Water Sup/Sanit [OTHERS] 4/30/2014 2,800,044.8 0.0 0.0 1.1
Water Sup/Sanit 22,800,044.8 0.0 0.0 1.1
Grand Total 235,568,638.4 50,062,942.3 21.3 3.1
III
Appendix III: Main Related Projects Financed by the Bank and other Development Partners
in Malawi
DONOR PROJECT TITLE AMOUNT INTERVENTION AREAS
AfDB Protection of Basic Services
Support Programme (2014-
15, SBS)
UA 19
million
The purpose of the operation is to contribute to the
protection of the delivery of basic services and the
improvement of value for money in the delivery of basic
services in Malawi by strengthening accountability in the
Social Sector. The expected outputs of the programme
include: improved access to quality health and education
services; increased active Service Level Agreements (SLA)
for hard to staff/serve areas; increased participation of poor
HHs in the Public Works Programme (PWP); increased
Health and Education Sector budget; approved Integrated
Rural Development Strategy; adopted Education Sector
Implementation Plan (ESIP-II); increased transparency in
basic service delivery; and improved oversight, efficiency
and value for money for improved services delivery.
Domestic Resource
Mobilisation ESW
UA 200,000 To gather, compile, analyse and synthesize available
information and data on different aspects of country’s
revenue/tax system with the view to distilling important
lessons and experiences that can help devise measures for
supporting sustainable revenue management; and identify
the characteristics of the different financing mixes (revenue
sources) and their respective components, particularly
exploring the aspects of sustainability, level of control by
the government, potential for growth, volatility, governance
and political economy implications.
Enhancing Transparency in
the Construction Sector
(2013-15)
US$ 125,150 To hire a consultant to undertake Construction Sector
Transparency Assurance Services and undertaken advocacy
on construction sector transparency
EU Technical Assistance
(2015)
€299,884
Technical input to improve oversight and capacity building
of AGD (Central Payments Office and Regional Treasury
Cashiers Offices
Technical Assistance
(2015)
€200,000
(max.) Support to the NLGFC - Business Process Review (BPR)
of Local Government IFMIS (Serenic Navigator)
Consultancy (2015) € 215,040 PFM oversight (monitoring and evaluation) in Budget
Support operations
World Bank
PFM MDTF
(GIZ, EU,
DfID,
Norway &
IrishAid)
Financing Reporting and
Oversight Improvement
Project (2013-17)
US$ 19
million
Covers the following components of the PFEM Reform
program: Accounting and reporting; internal audit; external
audit; and program management
UN
(UNDP)
Strengthening Institutional
Capacity for Development
Effectiveness and
Accountability (DEAP,
2013 – 2016)- (joint
funding from UNDP and
EU and parallel funding
from UNICEF, UNFPA &
UNAIDS).
US$7,570,122 To develop and strengthen Results Based Management
(RBM) systems for planning, monitoring and evaluation
with a view to enhance ownership and leadership for
achievement of development results; Strengthen GoM
capacity to effectively negotiate, manage and account for
development assistance; and strengthen GoM capacity to
align policies, programs and budgets with national
development strategies and MDGs for efficient
achievement of development results.
IV
Technical
Assistance/Capacity
Development (2014-15)
$278,791 Ethics, accountability, transparency and integrity training
for civil servants
GIZ Strengthening Public
Financial and Economic
Management (2014-17)
€ 10 million It has 5 components and respective technical advisors:
Support to IFMIS / Cash management: long-term Technical
Manager; Support to CIAU (database, risk-based audit
approach, performance audit, IT audit); Support to NAO
(forensic audit, strategic planning, financial and
performance audit, institutional and organisational
development); Support to Demand for Accountability –
MRA/MoF (tax legislation, ie. Tax incentives, rebranding,
integrity, TADAT, change management, LTO), CSOs and
ACB (on EITI, budget transparency, accountability
dialogue, OGP); Support to economic planning, forecasting
and M&E (EPND, NSO, OPC); and Contract management:
long-term commitment control and value for money
Technical Assistance
(2014-15)
IFMIS Technical Manager - Technical support and
managerial services to ensure the implementation of
strengthened public financial management practices
through IFMIS.
Germany
(KfW)
Support towards NAO and
other Governance and
Accountability institutions
(2014-17)
€ 4.0 million Improve public financial accountability and scrutiny
through strengthening of the NAO and other governance
and accountability institutions.
Ireland (part
funding
from GIZ)
Joint Capacity
Development Program for
Local Government (2011-
15)
€2,200,000 Strengthen Financial Management Capacity in Local
Authorities. Main areas of focus: recruitment, training and
equipment for Financial Analysts in the District Councils;
support roll out of IFMIS to 5 district councils; support and
Institutionalize both internal and external audit functions in
and for local authorities; and develop and implement local
revenue enhancement strategic plans
IrishAid Technical and institutional
support (September 2012 to
August 2015)
€1, 750,000 Strengthening financial Management systems of Local
Assemblies by building capacity of staff in district and town
councils. Recruitment of Financial analyst and including
salaries, recruitment of internal auditors, clearing audit
backlog of district audits from 2008 to 2010, roll out of
IFMIS to 5 district councils
U.S.
Government
(Dept. of
Treasury)
Technical assistance to
MRA (2013-15)
Technical assistance to modernize MRA tax
audit/investigation functions, internal affairs, and customs
Technical assistance to
Ministry of Finance (2015-
17)
$1.4m Budget Advisor to Ministry of Finance
U.S.
Government
(USAID)
Technical assistance to
Ministry of Finance (2013-
15)
$1.5m
(inclusive
of shipping
costs)
Government Wide Area Network (GWAN) infrastructure
and related IT hardware to support IFMIS
NAO Capacity building
(2015)
$0.1m Support 2 NAO staff to participate in 4-month GAO (U.S.
SAI) fellowship program
JICA Capacity Enhancement in
Public Sector Investment
Programing (Phase II)
(2013-16)
US$
4.2 million
To improve the Public Sector Investment Program (PSIP)
system and harmonise it with planning and budget processes
of relevant MDAs and the Budget Division of MoF
V
Appendix IV: Summary of Public Expenditure and Financial Accountability PEFA 2011 Summary Assessment (with comparison to 2008 and 2006)
PFM Performance Indicator Scoring
Method
Dimension Ratings Overall
Rating
i. ii. iii. iv. 2008 2006
A. PFM-OUT-TURNS: Credibility of the budget
PI-1 Aggregate expenditure out-turn compared to original
approved budget M1 B B A A
PI-2 Composition of expenditure out-turn compared to original approved budget
M1 C A C+ D D
PI-3 Aggregate revenue out-turn compared to original
approved budget M1 D D9 A A
PI-4 Stock and monitoring of expenditure payment arrears M1 NS D NS NS D+
B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency
PI-5 Classification of the budget M1 A A B B
PI-6 Comprehensiveness of information included in budget documentation
M1 A A B B
PI-7 Extent of unreported government operations M1 B NS NS NS B
PI-8 Transparency of inter-governmental fiscal relations M2 A C B B B+ C
PI-9 Oversight of aggregate fiscal risk from other public
sector entities M1 B B B C+ D+
PI-10 Public access to key fiscal information M1 C C C B
C. BUDGET CYCLE
C(i) Policy-Based Budgeting
PI-11 Orderliness and participation in the annual budget process
M2 C A C B C+ B
PI-12 Multi-year perspective in fiscal planning, expenditure
policy and budgeting M2 C A C D C+ B D+
C(ii) Predictability and Control in Budget Execution
PI-13 Transparency of taxpayer obligations and liabilities M2 C B B B B C
PI-14 Effectiveness of measures for taxpayer registration and tax assessment
M2 C C D D+ C+ C
PI-15 Effectiveness in collection of tax payments M1 NS A C NS D+ D
PI-16 Predictability in the availability of funds for commitment
of expenditures M1 B B B B B C+
PI-17 Recording and management of cash balances, debt and
guarantees M2 A A B A A C
PI-18 Effectiveness of payroll controls M1 A B A B B+ C+ C+
PI-19 Competition, value for money and controls in procurement
M2 C D D B D+ NS D
PI-20 Effectiveness of internal controls for non-salary
expenditure M1 B B C C+ C+ B
PI-21 Effectiveness of internal audit M1 C C D D+ C+ D+
C(iii) Accounting, Recording and Reporting
PI-22 Timeliness and regularity of accounts reconciliation M2 D D D B+ B
PI-23 Availability of information on resources received by
service delivery units M1 D D D D
PI-24 Quality and timeliness of in-year budget reports M1 C A B C+ C+ C+
PI-25 Quality and timeliness of annual financial statements M1 C A C C+ C+ D+
C(iv) External Scrutiny and Audit
PI-26 Scope, nature and follow-up of external audit M1 C B D D+ D+ D+
PI-27 Legislative scrutiny of the annual budget law M1 B C D C D+ B NS
PI-28 Legislative scrutiny of external audit reports M1 C B D D+ D+ D+
D. DONOR PRACTICES
D-1 Predictability of Direct Budget Support M1 A NS NS NS D
D-2 Financial information provided by donors for budgeting
and reporting on project and program aid M1 C C C C C
D-3 Proportion of aid that is managed by use of national procedures
M1 C C C D
9 Under the new PEFA methodology “favourable” revenue variances may now result in sub-optimal PEFA indicator scores
VI
Note: Each PEFA Indicator (PI) seeks to measure performance of a key PFM element against
a four point ordinal scale from A to D. The highest score (A) is warranted for an individual
indicator if the core PFM element meets the relevant objective in a complete, orderly, accurate,
timely and coordinated way. The set of high-level indicators is therefore focusing on the basic
qualities of a PFM system, based on existing good international practices, rather than setting a
standard based on the latest innovation in PFM. The ‘D’ score is considered the residual score,
applied if the requirements for any higher score are not met. If the indicator/dimension is not
applicable to the government systems being assessed, an ‘NA’ (Not Applicable) is entered
instead of a score.
VII
Appendix V: PFEMRP Analytical Underpinnings
Component/Reform
Areas
Analytical Work Institution
Strategy Second Malawi Growth and
Development Strategy (2011-2016)
MEPD
Malawi Country Strategy Paper (2013-
2017)
AfDB and GoM
Public Service
Management
Public Service Reform Management,
Making Malawi Work (2015)
GoM
Governance Governance and Corruption Survey
(2014)
GoM
Public Finance
Management
PFMRP and Action Plan (2015-16) MoF
5th & 6th Review of the Extended Credit
Facility (IMF Country Report No. 15/83,
2015)
IMF
Forensic Audit Report (Baker Tilly,
2014)
NAO
Restoring Financial Control and
Accountability (2014)
IMF
2014 Domestic Resource Mobilisation
Study
AfDB
Short-Term Impacts of Formalization
Assistance and a Bank Information
Session on Business Registration and
Access to Finance in Malawi (2015)
World Bank
PFEM Reform Program (2011-2016) MoF
PEFA Report 2011 MoF
OPEV Joint PFM Evaluation Public
Finance Management Reform (2011)
AfDB
Assessment of the Country National
Competitive Bidding Procedures for
Malawi (2011)
AfDB
PFM Situational Analysis Report (2010) MoF
PFM Reforms Technical Assessment
Report (2011)
IMF
VIII
Appendix VI: Malawi Fragility Note
Malawi brief context:
Malawi is a small and landlocked country, with 13 million people predominantly rural. Its
political environment has been generally stable since the country moved from a one-party
state to multiparty democracy in 1994. The country has had five Presidential and
Parliamentary Elections. The last elections (Presidential, Parliamentary and Local
Government) were held in May 2014, the President Arthur Peter Mutharika and the
Democratic Progressive Party (DPP) won despite some challenges that locked the polls.
Political climate in the country is gradually maturing, and overall, the average score for the
Country Policy and Institutional Assessment (CPIA) Governance score has been growing
slowly between 2004-2013 with intermittent low decrease.
Malawi’s economy is based primarily on rain-fed agriculture, from which more than 70
percent of the population derive livelihoods. The agricultural sector contributes 35 percent to
gross domestic product (GDP) and generates 90 percent of foreign exchange earnings, mainly
from export of tobacco. Most of its agricultural production is devoted to meeting the
subsistence needs of farming families. Since Malawi achieved independence in 1964, the
structure of its economy has not changed significantly.
The country has few resources and is highly dependent on external aid. It is rapidly urbanizing
and has high population growth and limited arable land. These challenges have manifested in
unfavourable socio-economic indicators, including a high incidence of poverty. Yet progress
has been made in some social areas where life expectancy has increased and maternal
mortality has declined.
Recently, Malawi has experienced mismanagement of public finance following revelation of
the plunder of more than $30 million of government resources between May and September
2013, popularly known in the country as Capital Hill “cash-gate,” which has had negative
consequences on governments’ ability to provide social services, and still remains source of
discontent. It has led to reduced donor support thereby increasing the potential for political
and economic fragility. The country’s economy is now recovering following a period of
macroeconomic instability and slow growth since the end of 2010.
Fragilities’ Drivers: The country faces a number of challenges, despite some progress made, especially on social
issues:
Sustainability of policy reforms. Macroeconomic stability is still fragile despite initiated
reforms, and would critically depend upon the continuance of the policy measures instituted.
Inefficiency of economic management. Following the ‘cash-gate’ scandal, there is urgency
of a comprehensive public finance and economic management reform. Malawi needs a sound
PFM system and spending that is growth-enhancing and poverty-reducing, which depends on
more credible budgets.
Weak Institutions and governance. Under-performance of government institutions and lack
of transparency and accountability underscore rampant corruption. Decentralized structures
in Malawi remain weak, with poorly defined roles and responsibilities and little to no capacity
to provide public services and meet local needs. Public service reforms aimed at improving
working conditions of service, performance management, and ethical conduct are thus vital.
However, such reforms require huge financial investments and are politically risks and hence
unpopular.
Investment climate constraints. The business environment in Malawi has deteriorated in
recent years resulting in a slowdown in foreign direct investment and reduced
IX
competitiveness. The Doing Business 2014 report ranks Malawi at 171 out of 189 countries.
Main obstacles to doing business in Malawi include poor support infrastructure and services
(e.g. electricity, water, transport), uncertain economic environment, poor legal and regulatory
framework, lack of access to long-term finance and limited skill base. Government has made
commendable efforts but needs to establish policy certainty and predictability.
Agriculture is central to reducing poverty. The country’s dependence on a single
agricultural export, tobacco, is a risk as it is now threatened by the enforcement of the
framework convention on tobacco and the EU directive on tobacco products. There is a need
of agricultural diversification and its success will depend on adequate infrastructures (road)
access and relaxation of remaining trade restrictions.
High population density and poverty on the environment and degradation of natural
resource. The growing population increases the land area under cultivation and exploits
forests and woodlands for firewood and charcoal production. Land degradation, deforestation,
inappropriate farming methods, and limited incentives to promote land and water
conservation techniques have increased the incidence of erosion, run-off and flash floods in
Malawi, carrying high loads of sediment that are deposited in reservoirs and flood-plains.
Together, these factors reduce agricultural productivity, fisheries, and hydropower
generation, damage infrastructure, and adversely affect human health and critical ecosystems.
Natural disasters and climate change. Improved resilience to climate risks is extremely
important for the majority of rural households who depend on the fragile natural resource
base for their livelihoods. Forest cover is reported to decrease at an alarming rate, and the
energy balance has not changed away from biomass at all. Rural roads and the rail network
are particularly vulnerable to the effects of climate change due to increased run-off rates.
High Levels of Disease Incidence: HIV/AIDS remains a major cause of death, HIV
prevalence, and Malaria accounts for 33% of all hospital visits with an estimated 6 million
cases occurring annually. Tuberculosis (TB) remains a major public health threat, and 68%
of TB cases are co-infected with HIV; Water related and water borne diseases are a major
cause of high morbidity and mortality among children, accounting for more than 50% of
illnesses in rural areas.
Weak financial sector development. Malawi has a small and lowly developed financial
sector. Some progress in financial sector development had been made but the challenges faced
are still high: 55 percent of the population is financially excluded and among those with some
financial access only 26 percent are formally banked. Also some key barriers to financial
access like limited accessibility of financial service points; lack of collateral, high transaction
costs; capacity constraints; crowding effect of the public sector, and the lack of market
coordination and harmonization between public and private initiatives seeking to promote
better access to financial services.
Gender Inequality: Challenges are compounded by gender inequalities that subordinate
women, limiting their access to agricultural inputs and their share in the benefits of
production, as well as access to education, health, and other social services.
Resiliencies:
Real GDP growth rebounded and is projected to continue rising, mainly on account of an
improved agricultural harvest and strong growth in the manufacturing sector due to increased
availability of foreign exchange for critical imports.
Significant efforts have been made by the Government to remedy the consequences of cash-
gate and steer Malawi’s macro adjustment efforts back on course and rebuild confidence in
the economy.
Abundant Water, Improved irrigation and water transportation system would lead to
improved access to irrigated land, water and sanitation, electricity and energy as well as
providing positive spill-over effects in the social sectors.
X
Regional Integration and Geographical location, The Africa Infrastructure Country
Diagnostic (AICD) country report 2010, states that by integrating its infrastructure with the
rest of the region, Malawi would be able to reduce its infrastructure funding gap by almost
USD$ 200 million a year.
Agricultural productivity and diversification: The strong agricultural base provides an
opportunity to exploit the growth potential of this sector for food security and poverty
reduction.
Malawi Perspectives
Malawi’s development challenges still substantial and expectations must be well managed as the
country is very much at cross-roads. The economic outlook is almost favourable, and downside
risks can be managed, if recent policy reforms are sustained and future policy choices are
consistent with MDGSs-II objectives. The reforms are already bearing fruit and the cost of policy
reversals could be irreparable.
Malawi’s political environment will continue its stability as the country continue reforms; recently
Reform legislation has been enacted, the Tripartite Election Act, passed in 2012, allowed holding
of simultaneous presidential, parliamentary and local council elections for the first time in May
2014.
Malawi must also re-establish a good track record—investors dread uncertainty and honouring
commitments is important for boosting investor confidence and maintaining development
partners’ trust and goodwill. The potential pool of Foreign Direct Investment (FDI) into Africa is
large (an estimated US$82billion in 2011 and potentially US$150 billion by 2015) and recent
policy reforms are designed to help Malawi attract some of these FDI flows. The authorities’
reform agenda is a comprehensive one, and is designed to transform Malawi’s economy and help
it attain the national goals outlined in the MGDS-II.
Recommendations for the Bank
Provide adequate and sufficient resources to support the ongoing reforms and avoid the
country to fall again in the fragile situation Group.
Increased investment in the transport, water and energy sectors to address infrastructure
bottlenecks to competitiveness and growth.
The Bank should continue to engage and Support actions to expand private sector
investment and trade.
Ensure sustained policy engagement and advisory support to help Malawi improve its
economy.
Use Bank’s new instruments, including credit risk/guarantee products for possible
financing from the ADB Sovereign Window.
XI
Appendix VII: Map of the Republic of Malawi showing Project Sites
Disclaimer
This map was provided by the African Development Bank exclusively for the use of the readers of the report
to which it is attached. The names used and the borders shown do not imply on the part of the Bank and its
members any judgment concerning the legal status of a territory nor any approval or acceptance of these
borders.