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

iii

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

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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

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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.