Malawi - Institutional Development Project

Docunent of The World Bank FOR OFFICIAL USE ONLY Repout No. 7642-MAI STAFF APPRAISAL REPORT TH2 REPUBLIC OF IALAWI INSTITUTIONAL DEVELOPMENT PROJECT MAY 5, 1989 Africa Region Southern Africa Department Country Operations Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Wo Id Bank authorization.  REPUBLIC OF MALAWI INSTITUTIONAL DEVELOPMENT PROJECT CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) US$1 - MK 2.70 MK 1 = USS 0.37 ABBREVIATIONS AND ACRONYMS AMTIESA Association of Management Training Institutions in Eastern and Southern Africa DEVPLAN Ministry of Finance's Development Plan DEVPOL Statement of Development Policies 1987-96 DPMT Department of Personnel Management and Training, OPC EPD Department of Economic Planning and Development, OPC HIID Harvard Institute for International Development MIM Malawi Institute of Management MOF Ministry of Finance OPC Office of the President and Cabinet PSIP Public Sector Investment Program UNDP United Nations Development Program FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY REPUBLIC OF MALAWI INSTITUTIONAL DEVELOPMENT PROJECT TABLE OF CONTENTS Page CREDIT AND PROJECT SUMMARY ........................................ i-iii I. INTRODUCTION ..2...................... A. Background ............................................... 1 B. Macro-economic Setting ................................... 1 II. MANAGEMENT OF THE PUBLIC SECTOR ............................. 3 A. Needs in Management Development .......................... 3 B. Needs in National Economic Management .................... 7 C. revious Bank Experience ................................. 9 II'. THE PROJECT ................................................. 10 A. Rationale and Objectives .. 10 B. Detailed Description by Component ........................ 11 C. Costs .......................................... ....... 15 D. Financing ..16 E. Procurement ..16 F. Disbursement ..17 G. Accounts and Audit.. 19 IV. PROJECT IMPLEMENTATION.. 19 A. MIM Implementation ..19 B. MOF Implementation .22 C. Reporting ................... ..... 22 D. Project Status ........................................... 22 E. Environmental Considerations .. 23 V. BENEFITS AND RISKS .......................................... 23 VI. AGREEMENTS AND RECOMMENDATIO ..24 This report was based on the findings of a World Bank mission comprising Messrs./Mmes. R. Sullivan (Mission Leader), G. Byam, C. Machado, N. Kulemeka (Bank) and S. Lister (consultant) which visited Malawi in November 1988 to appraise the project. Ms. M. Kalina provided secretarial support. I This document h&s a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEXES 3-1 Proposed Ministry of Finance Organizational Structure 3-2 Status of Tax Modernization Program 3-3 Project Cost Summary 3-4 UNDP Financing Arrangements 1-5 Consultant Service Requirements 3-6 Disbursement Schedule 4-1 Malawi Institute of Management Organization 4-2 HIM: Estimates of Participants, Fees, Endowment, Recurrent Costs 4-3 Government Expenditure on Training 4-4 Project Implementation Schedule Map: IBRD 21210  REPUBLIC OF MALAWI INSTITUTIONAL DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of the Republic of Malawi Implementing Malawi Institute of Management, Ministry Agencies: of Finance Credit Amount: SDR 8.8 million (US$ 11.3 million equivalent) Terms: Standard, with 40 years maturity Cofinancing: UNDP: US$ 6.0 million equivalent Proiect Description: The objective of the project is to strengthen national economic management. It would provide for the establishment and initial operation of the Malawi Institute of Management (MIM) which would offer in- service training courses in management related areas to middle and senior level officials in the public and private sectors. MIM would have a close association with the University of Malawi, sharing facilities and offering courses at several of the University's institutions. An endowment fund would be established which would help MIM cover its operating costs from internally generated revenues by the end of the project inivestment period. The project would fund MIM's civil works, furniture, equipment and operating costs. A Canadian consortium has been selected to provide initial technical services under a twinning arrangement. If its performance is satisfactory after one year, it would be offered a multi-year contract. The project would also assist the Ministry of Finance (MOF) with the implementation of its newly prepared Development Plan (DEVPLAN) and its ongoing tax modernization program. Under DEVPLAN, MOF would be reorganized to strengthen its forward budgeting capability, to improve monitoring of government expenditures and the turnaround time in the preparation of accounts, to upgrade government auditing and to strengthen claims processing and debt management. The project would also support MOF's tax modernization program which includes reforms in trade taxes, improved collection of corporate taxes and a new duty-drawback scheme. Tlhe project would provide the technical assistance, equipment and training required to help MOF carry out its programs.  - iL - Estimated Costs: S Foreign Local Foreign Total Exchange ---- (US$ Million) -__ A. Malawi Institute 5.3 7.8 13.1 60 of Management B. Ministry of Finance Budgeting, Fin. Mgmt., 0.4 1.2 1.6 74 Accounting\Audit Tax Modernization 0.1 1.8 1.9 98 Sub-total 0.5 3.0 3.5 87 Total Baseline Costs 5.8 10.8 16.6 65 Physical Contingencies 0.2 0.3 0.5 60 Price Contingencies 0.5 1.3 1.8 72 Total Project Cost 6.5 12.4 18.9 66 Financing sources: 2 of Local Foreign Total Total ---- CUSS Million) ---- Government 1.6 - 1.6 9 IDA 3.3 8.0 11.3 60 UNDP 1.6 4.4 6.0 31 Total 6.5 12.4 18.9 100 Estimated Disbursements: IDA FY 1990 1991 1992 1993 1994 1995 -__------- (us$ Million) ------------ Annual 1.5 2.5 2.5 2.5 1.5 0.8 Cumulative 1.5 4.0 6.5 9.0 10.5 11.3  - iii Project Benefits and Risks: The project would continue the process begun under previous adjustment operations of strengthening Malawi's capacity for national economic management. Establishing MIM would provide the country with an in- service management training capability for middle and senior officials in the civil service, parastatals and private sector. This would progressively remove the economy's dependence on external training sources and would enable a much larger group of managers to receive skill upgrading. MIM would be self-financing by the end of the project period, covering its costs from revenues generated by fees and income from its endowment. The proposed program for strengthening MOF would enable it to provide better economic management. Under MOF's DEVPLAN, sections of the Ministry involved in forward budgeting, expenditure monitoring and control, and financial management would be reorganized to operate more efficiently. Under MOF's tax modernization program, the tax structure and modes of collection would be modernized resulting in greater incentives for local production and increased public revenues. The risks are that MIM would be slow to develop into a credible training institute which was financially self-sufficient and that the strengthening program in MOF would not be sustained over the time required for reforms to be fully internalized. The programs for both components have been designed to minimize these risks. For MIM, the twinning arrangement with an external consortium and the close association with the University of Malawi would enable its initial operation at a high level and transfer to local control without sacrificing quality. Revenues from course fees and income from its endowment should permit MIM to operate without Government subsidy following the completion of the project investment period. For MOF, the programs have been designed against modest targets and would be introduced slowly with the full participation of Malawian staff. Economic Rate of Return: Not applicable Memorandum of the President: P-5005-MAI Map: IBRD 21210 AP6CO May 5, 19892  INSTITUTIONAL DEVELOPMENT PROJECT I. BACKGROUND A. Introduction 1. The Government has been examining ways to provide in-service training to middle level and senior officials in the civil service since the late 1970s. The Fourth Education Credit (Cr. 1123-MAI), which was appraised in 19CO and became effective in 1981, noted the Government's interest in establishing an Institute of Public Administration for this purpose. The Fourth Education Project endorsed the concept, but did not provide funding for construction because of the relatively higher priority at that time which the Government placed on secondary education. Instead, the project provided for preparatory studies and architectural design work up to the construction tender stage, and noted that the institute was justified for eventual financing. The study was not undertaken until 1ES6, at the end of the project, and, while it recommended proceeding with the institute, it left unat.swered questions about the long-term market and the relationship the institute would have with the University of Malawi which was also providing some in-service management training through the Polytechnic. The Bank and the Goveranment decided not to proceed with architectural designs until after the above issues could be resolved, and the credit for the Fourth Education Project was closed without this task being completed. At this point, the Government requested the Bank and UNDP to help fund the additional preparatory work (study and architectural designs), as well as the construction and the initial operation of the proposed management institute, now renamed the Malawi Institute of Management, as part of a larger project for institutional development, which also would include a program for improving the operations of the Ministry of Finance. To help prepare the project ard provide for start-up activities, an advance of US$1.5 million was approved from the Project Preparation Facility in February 1988. In addition, UNDP committed US$1.2 million in 1988, to support preparatiun and start-up activitieL for the proposed Institutional Development Project (para 43). B. Macro-Economic Setting 1/ 2. Malawi is a small, landlocked, and predominantly agricultural economy. Its per capita income of US$ 174 in 1987, was below the average for sub-saharan Africa. Agriculture is the major economic activity, accounting for over 35 percent of GDP, and the source of most of Malawi's export earnings. Malawi's landlocked position has made it particularly vulnerable to repeated and costly disruptions in its external transport routes through neighboring countries. The population is estimated to be 7.5 million in 1987, 1/ This section is taken substantially from the Malawi Policy Framework Paper, 1988/89-1990/91 which was discussed with the Bank's Executive Directors in June 1988.  with population growth, at 3.2 percent per annum, placing pressures on land use. 3. From independence until the late 1970s, Malawi maintained relatively stable financial conditions and liberal economic policies which enabled it to achieve real per capita growth of 3 percent per annum. However, after 1978, due to a combination of external developments and domestic policy- related factors, the pace of growth fell, the balance of payments position deteriorated, and inflationary pressures increased. To address these problems, the Government implemented adjustment programs in the context of successive arrangements from the Fund and three structural adjustment operations by the World Bank. A price liberalization program was completed, key relative prices and .ncentives realigned, and a number of measures taken to address structural problems, including a major restructuring of the parastatal sector. Domestic demand pressures were moderated, and domestic and external financial imbalances reduced. Economic growth recovered somewhat with real GDP growing by about 4 percent per annum during 1982-84, slightly above the rate of population growth. 4. From 1984 to 1987 a significant weakening in economic performance occurred, reflecting adverse external developments, in particular the closure of traditional routes through Mozambique, the influx of large numbers of refugees from Mozambique, and a further decline in the terms of trade. Despite import compressions and large adjustment-related inflows, official reserves fell to less than four weeks of imports by the end of 1986. 5. Contributing factors to economic weakening were rising public sector deficits. The central government budget deficit (before grants and debt relief) widened sharply, reaching 12.5 percent of GDP in 1986/87, compared to 8.7 percent in 1984/85. Fiscal imbalances were exacerbated by financial difficulties experienced by the parastatal sector. The food needs of increasing numbers of refugees and poor rains resulted in a sharp reduction in grain reserves and led to requests for emergency food assistance from the international community. On the external side, the Malawi kwacha was devalued by 20 percent in 1987, and 15 percent in 1988, which helped reduce the current account deficit to 4.1 percent of GDP. However, Malawi's external financial position remained extremely tight, prompting retention of controls on fo:eign exchange. The rate of inflation rose to 28 percent in 1987 and real output fell by 1.5 percent. 6. Faced with these continuing difficulties, the Government has adopted a medium term development strategy for the ten year period, beginning in 1987, which is designed to stabilize the economy and establish the foundation for renewed economic growth. To achieve these objectives, the Government is pursuing a two-pronged strategy of structural reform and financial stabilization. Reduction of the fiscal deficit, strict monetary and credit policies, and exchange rate adjustments are expected to bring aggregate demand in line with available resources. Complementary supply side measures, such as redirection of domestic credit toward the private sector, an increase in the volume of imports, trade liberalization and tax reform are designed to stimulate private sector production. In support of Malawi's efforts, a US$180  million multi-donor assisted Industrial and Trade Policy Adjustment program, which includes an IDA credit of US$70 million equivalent (Cr. 1920-MAI), was put in place in 1988. The Government is also pursuing a program of institutional strengthening, supported under this project, so that its reform efforts can be successfully sustained. 7. The economy has begun to respond to these measures. GDP growth in 1988 was estimated to be 3.6 percent. Although inflation remains at about 30 percent, the fiscal and external situation has improved. The fiscal deficit for 1988/89 is projected at 5.5 percent of GDP. Import levels have inicre sed 25 percent by volume and 58 percent by value, while the reserve level has improved to about 5 months of imports. Capacity utilization in the manufacturing sector has improved to over 70 percent, and agricultural output has increased due to trade liberalization and better weather. II. MANAGEMENT OF THE PUBLIC SECTOR A. Needs in Management Development S. An overriding constraint to Malawi's development has been the limited availability of trained manpower to meet the needs of a growing, modern economy. The issue is not so much the availability of entry level staff, whether it be in the civil service, parastatals or private sector, but the training they neid to improve their professional and managerial skills as they progress into the senior ranks. In-service training in economic planning and policy formulation, economic and financial analysis and management information systems, to name a few areas, is not available to the vast majority of officials in middle and upper management throughout the economy. The lack of a local capability to provide such training has forced Malawi to turn to external sources. While external training has been useful, by nature the material is not drawn from the Malawian context and the availability of such training is constrained by foreign exchange. The Government believes that establishing a self-sustaining, local management training institution specifically aimed at the needs of middle and senior managers is a crucial ingredient for future economic development, and that the demand-supply characteristics of the existing situation amply support their contention. 9. Demand for Management Training. The largest need for in-service management training is in the Malawi civil service. As of mid-1988, there were slightly more than 50,000 established positions, of which about 3,900 were in the mid and upper management ranges. The civil service was reviewed in 1985 by an external commission chaired by Sir John Herbecq and the size was generally viewed to be appropriate for Malawi. Of the middle and senior positions, 210 were senior management (deputy secretary and above), another 1,250 constitute the upper middle level of management (senior administrative and professional officers up to senior deputy secretary) and the remaining 2,440 were middle managers (administrative, professional and executive officers). The growth of the civil service over the past ten yetrs has averaged 2.5 percent per annum. This can be expected to slow to less than 2.0 percent over the next five years, resulting in a pool of some 4,200 officers in the middle and upper ranks of the civil service by 1992.  - 4 - 10. The parastatal sector in Malawi consists both of organizations created by statutes and those established under the Com;,iny Act. At present there are 36 parastatals with areas of operations ranging from commercial ventures to service activities. Parastatal employment at the end of 1987 exceeded 15,000 permanent employees of which 2,200 were senior and middle level management personnel. Of these about 100 were in positions of senior responsibility (managing director, general manager, directors, etc.), about 700 were in upper middle management, and the remaining 1,400, middle managers. There were about 130 expatriates holdii.g positions in upper rt.ddle and senior management, reflecting the shortage of qualified local personnel. The numbers of middle and upper managers in the parastatals is expected to remain constant ovrr the next five years as a result of ongoing reforms within the parastatals whsich will result in some privatizations and liquidations. There will be an increase in the number of Malawian managers in the parastatals as the number of expatriates gradually declines. 11. Data on management ranks in the private sector are limited. Recent studies indicate there were about 1,500 middle and upper level management positions at the end of 1987. About 50 of these positions were at the top level of management (chief executive office, chief financial officer, managing director, etc.) and most were filled by expatriates. About 200 were upper middle management positions and again most of these were held by expatriates. The remaining 1,250 middle level management positions were almost exclusively filled by Malawians. The number of expa;riates at the top levels of management reflects both the significant level of foreign investment in the private sector and the relative scarcity of experienced Malawian senior managers. A number of the expatriate positions are expected to be localized in the next five to ten years in addition to overall growth of management positions in the sector. The number of middle and upper level management positions is expected to increase by a total of 20 percent by 1992, bringing the total numtber to 1,800. 12. The total pool of middle level and upper management positions in 1987 was estimated to be 7,700. This number is expected to grow to 8,200 by 1992 as shown below: Upper Top Middle Middle Total Civil Service 220 1,350 2,630 4,200 Parastatals 100 700 1,400 2,200 Private Sector 65 500 1,235 1,800 TOTAL 385 2,550 5,265 8,200 The above positions can be conservatively estimated to increase at a rate of 2.5 percent per annum after 1992, .ith the total exceeding 10,000 by 1999.  - 5 - 13. Existing Sources of Management Training. At present, managerment training is offered on a limited basis tc either civil servants or parastatal/private sector officials by several different organizations in Malawi. The Department of Personnel Management and Training (DPMT) in the Office of the President and Cabinet (OPC) has responsibility for satisfying civil service training needs. DPMT at present offers a public sector administration program which runs once a year over an eiglt week period. The program has been offered since 1980. For the first five years the program was supported by the Royal Institute of Public Administration, but since then instruction has been provided by local staff. The program has two significant drawbacks: it takes only a small number of middle and senior level civil servants and parastatal officials (about 16-20 per annum) and It tries to squeeze too much material in one long period. In the most recent course, 38 different instructors and guest lecturers provided presentations on more than 50 subjects. In its review of existing civil service training, the Herbecq commission considered the above arrangements to be completely inadequate, and recommended the establishment of a self-standing management training institute. 14. A second source of management training, oriented to the private sector and parastatals, is provided by the Polytechnic, a division of the University of Halawi located in Blantyre. Besides offering formal training (bachelors degrees in accounting and business administration), the Polytechnic has a Management Center which offers a two year part-time (one day weekly) program leading to a diploma in management, as well as several one to three day seminars in management topics. The Polytechnic does not have hostel accommodations and its location makes it impossible for officials from the civil service, who are predominantly living in the capital, Lilongwe, 400 km north of Blantyre, to attend. In l157, the Polytechnic had less than 100 participants in its part-time diploma course and management seminars. Closely associated with the Polytechnic is the Malawi College Ef Accountancy, which is located next door and shares some facilities. The College offers accounting courses which prepare students to qualify as certified public accountants; however, it is not at present offering any in-service training related to financial management nor Is it equipped to do so. Altogether, the Public Sector Administration Course and the Polytechnic offered in 1987 in-service training opportunities to less than 2 percent of the total pool of middle and senior level managers. 15. Two other possibilities exist where in-service management training could be offered in Malawi, although none at present is. Chancellor College, the main academic arm of the University of Malawi, offers bachelors degrees, inter alia, in public administration and law. Graduatas from its management programs are frequently recruited into government service or the private sector. Its Faculty of Law and Administration consults on management issues. Its location in Zomba, 60 km outside Blantyre, presents the same problem to the Civil Service as the Polytechnic, namely its distance from Lilongwe. Chancellor also would need hostel acconmodations suitable for middle and upper managers, and additional staff resources to run in-service training programs. The second possibility is the Staff Training College at Mpemba, about 30 km outside Blantyre. The college provides all the induction training for newly  - 6 - appointed administrative and professional officers in the civil service. It also offers clerical and routine administrative training. It currently offers no in-service training and would require additional facilities and staff to do so. Its location outside Blantyre is another drawback. 16. The lack of a local in-service management training capability has to some extent been offset by external training. Malawians have attended training programs in Europe, North America and at regional institutes in Africa. In 1987, there were 168 Malawian civil servants on external training with an average duration of 7.5 months per course. About half of the external training was management related. While much of the cost of external training was borne by donors, the tovernment of Malawi spent about MK2.5 million of its own funds (about MK1S,000 per student) on such training in 198'188. The parastatals and private sector also took advantage of external training, although the exact numbers and costs are not known. Zxternal in-service training is useful when it is well-focused, but it is not a substitute for adequate local capacity. Not only does the cost of external training limit the numbers that can participate, but the training content of overseas courses does not reflect the specific conditions and problems existing in Malawi. Finally, the unpredictability of course offerings and acceptances make it virtually impossible tc plan a national training program around external institutes. 17. Creation of a Management Training Institute. The programs mentioned above permit less than 3 percent of Malawi's middle and senior managers to receive any form of in-service management training. In determi..,ng how to close the gap between supply and demand, the Government considered several alternatives in its search for the best way to provide sustainable, cost-efficient and quality-filled management training. The first was for the Government to expand its own in-house training program for civil servants; but this was rejected because the Government believed it wouldn't be cost-effective, given the size of the civil service, if it excluded the parastatal and private sector. Also, as a part of government, salaries would be constrained and this would affect the quality of staff it could attract to provide such training. The quality problem would not only affect the level of excellence being sought for the civil sernice but it would greatly impede any efforts to attract pa)ing customers from tne parastatals/private sector. The second option was to help the University of Malawi/Polytechnic to expand its existing programs for the parastatals/private sector and to develop additional capacity to meet the needs of the civil service. The Government, however, realized that the University of Malawi was not set-up to provide in-sezvice training, rather its main function was to provide degree-oriented education. The Government worried about the priority .he University would give to this endeavor with all the other claims made on its resources. Also, given that the main clientele would be the civil service, the Government was concerned about how much influence it would be able to exert over the curriculum and approach of in-service management training if it were part of the University. Finally, the Government believed that the small size of the economy called for a single center of excellence in management training rather than continuing with several sub-optimal and uncoordinated programs.  - 7 - 18. After weighing these considerations, the Government concluded that the best approach would be to establish a new management training institute with parastatal status. Though its general policy was not to create additional parastatals, an exception would be made in this case because of the unique opportunities presented. As a parastatal, the institute would expect to be self-financing after a reasonable start-up period. Fees would be based on market conditions and this reven.ue would be supplemented with income from an endowment (paras 54-56) and consulting assignments. As a parastatal, the institute could pay attractive wages and attract a high-quality staff. The institute would work closely with the University and the Polytechnic to build on its existing capacity without duplication. Finally, the institute's board would be chaired by a public official of the rank of Principal Secretary to ensure that the needs and concern of its primary constituency, the civil service, were reflected in the curriculum, research and consulting approaches of the institute. On this basis, the Government requested IDA assistance to help establish a new management training institute. B. Needs in National Economic Management 19. To meet its economic challenges, the Government is looking for ways to enhance its ability to manage the economy. Under the previous SALs and technical assistance projects, the Government adopted measures to strengthen the economic management process. While much has been accomplished, support is still required to revitalize and sustain initiatives started under previous adjustment operations. The Ministry of Finance (MOF). working with the Department of Economic Planning and Development (EPD) in OPC and the Reserve Bank of Malawi, coordinates the national economic management process. Four areas under MOF's responsibility have been identified for assistance: (i) forward budgeting, (ii) acounting and auditing, (iii) financial management, and (iv) tax modernization. 20. Forward Budgeting. The budgeting process plays the central role in determining how resources get allocated. The First SAL (Ln. 2026-MAI) supported institutional improvements in budgeting to ensure that adequate recurrent resources were made available to productive sectors. In the Second and Third SALs (Cr. 1427-MAI and 1644-MAI), the Government further enhanced the budget process by agreeing to establish a forward budgeting capability and improving the programmatic content of the budget. SAL conditionality required the preparation of forward three year revenue and expenditure budgets and these were prepared beginning with the budget years 1984/85-1986/87. The forward budgets, however, were of limited usefulness. The calculations of the overall resources available for recurrent and development purposes were based on global forecasts and did not reflect an analysis of trends in Malawi's economic performance. The recurrent costs associated with development expenditures were not systematically reflected in the forward budgets. Finally, the forward budgets did not embody criteria which could be used to provide guidance for selecting certain expenditures over others. 21. While enhancing the Government's forward budgeting capability rests largely in MOF, it is an interactive operation invoiving the spending ministries which have to respond to MOP's guidelines for preparing the forward  - 8 - budgets, and EPD which is responsible for preparing the five-year Public Sector Investment Program (PSIP). Preparation of the forward budgets will not substitute for carefully evaluated development projects being prepared by the sector ministries and compilation of a development plan that is demand driven (based on economic criteria) rather than supply driven (based on the availability of donor funds), and further work is needed in these areas. However sustained institutional improvements cannot be introduced on all fronts at once, and the emphasis on upgrading MOF's forward budgeting capability will yield important benefits in terms of improving resource allocation over the short and medium term. 22. Accounting and Audit. Government accounting, comprising expenditure monitoring and control, is critical for successful macroeconomic adjustment, yet this is an area where Malawi has experienced chronic problems. Over the last five years not only have actual expenditures consistently exceeded original budget estimates, but revised estimates as well. The Government has adopted a number of measures tc ddress the situation. Any expenditure overruns identified at the check cas.ing stage by the Reserve Bank of Malawi are communicated immediately to MOF. This timely feedback has enabled MOF to send stern and apparently effective warnings to the spending agencies involved. However, individual ministries and agencies submit their expenditure reports several months late and MOF's ability to evaluate them critically remains weak. In addition, MOF has no system of monitoring orders placed by spending agencies which could alert it to budgetary problems before they arise. MOF needs to ivorove its own ability to track expenditures and to see that individual spending agencies develop the capability to do likewise. 23. Inadequate training is a problem for the Accounting Common Service. The Accountant General, one of the senior officers in MOF reporting directly to the Principal Secretary, is one of the two professionally qualified accountants in the Accounting Common Service which comprises some 2000 staff assigned to work in accounting and auditing. Under the common service concept, accounting staff are assigned to min.4stries and agencies; however, promotions and career advancement come througa the common service. The theory of the common service is that it provides a common standard of accounting practice and a ready made channel for the dissemination of financial advice and policy from MOF. In practice, the performance of the government accountants falls short of what is needed. Improvements are needed in the existing in-service training program offered to staff in the Accounting Common Service to enable them to provide advice on the financial performance of ministries and on any corrective measures needed, on budgeting questions, and on the financial implications of policy proposals. 24. Auditing responsibilities are vested in the Auditor General. The largest ministries have their own internal audit staffs, other ministries and agencies are audited by the internal audit staff of MOF, while the parastatals are audited by commercial firms. The general criticism levelled at the audit system is that: (i) the coverage of internal audits is inadequate, (ii) the audit is restricted and mechanical, (iii) the outcome is generally fault- finding rather than an aid to management, and (iv) the staffing is inadequate  - 9 - in numbers, grading and quality. As with the accounting staff, specific training programs need to be developed for the auditing function. 25. Financial Management. While management of the budget in general terms can be regarded as financial management, the term in this context refers to management of donor funds/claims processing and debt management. The problems in each of these areas stem from personnel inadequacies, i.e. vacancies in authorized positions, inadequately trained staff, and staff away on extended training programs. With regard to management of donor funds, there have been instances where funds for various purposes have been committed, and although advances of 50 percent were made, claims processing and submission were delayed despite repeated enquiries from the donors. Malawi has lost grant money because claims were not submitted in the fiscal year in which the donor had obligated them. 26. Improvements in MOF's capability to monitor external debt and prepare a debt strategy were supported under the SALs. Technical assistance was provided to establish a computerized debt monitoring system and train local staff in its use. After much delay, a new debt management system was installed in 1986, which would permit MOF to monitor all government debt data and to prepare numerous management information reports on aspects of the debt givers various repayment scenarios, interest rate changes, etc. When a review teatn examined the system in 1988, it found that the key personnel operating it were sway on long-term training, their temporary replacements were inadequately trai.sed, and the computer hardware designated for debt management was being used by other divisions in MOF. 27. Tax Modernization. Tax collection/revenue generation proposals figured prominently in the first two SALs. During preparation of SAL III, it was recognized that the tax system needed rationalizing to improve efficiency and incentives. A comprehensive report, submitted to the Government in 1985, called for a substantial program of policy and administrative reform. The Government agreed with the report's recommendations and selected the Harvard Institute for International Development (HIID) to carry out the program. A three year, US$2.4 mi' ion contract was signed in September 1987, and the initial payments were made out of the technical assistance funds provided in the Third SAL. The Government requested that the remainder of the funding be provided under the proposed project. C. Previous Bank Experience 28. The Bank's three SALs and two associated technical ast,>..tance projects supported improvements in public sector management. However, a Program Performance Audit Report (No. 6833, June 12, 1987) on SALs I and II (Loan 2026-MAI and Cr. 1427-MAI) and TA I (Ln. 2027-MAI) noted that the institutional capacity to sustain reform in Malawi was fragile and required a longer time frame than that provided by the three operations. SAL III (Cr. 1644-MAI) and TA II (Cr. 1428-MAI) will be closed shortly, and although no evaluation has been undertaken, the observations of OED on the fragile nature of the institutional improvements introduced would apply to these operations as well. Neither the SALs nor the TA operations envisaged  - 10 - institutional support over the considerable time period needed to internalize reforms in economic management. 29. Nevertheless, since the adjustment process first got under way in 1981, a number of improvements have been introduced in economic management and some of these have been sustained as of this report. Public sector investment planning has been institutionalized, and a five-year plan is preparcd annually on a rolling basis. The annual revenue and development budgets are now done on a programmatic baais which makes it easier to examine the impact of revenue shifts on given programs. Tax reforms have been introduced to improve collection efficiency and provide the correct incentives for export growth and internal private sector development. Starts have been made on forward budgeting and improved debt management. 30. Previous Bank experiences with efforts to improve economic management have demonstrated the need to provide consistent and long-term support for the reforms that are to be made. In retrospect, it could be argued that earlier reforms were too all-encompassing, that too much was required at once rather than a proper focusing and sequencing. It can be observed that reforms introduced under the pressure of SALs and tied to tranche releases lacked the mechanism to ensure that they were carried on after the immediacy of the adjustment operation had passed and the tranche released. The lessons from previous adjustment and TA projeLts have influenced the design of the proposed project which would concentrate on a limited number of high priority reforms, would support them for a five-year period recognizing that additional support may be required after that, and would provide technical assistanice designed to support and not replace existing capacity. III. THE PROJECT A. Rationale and Objectives 31. Malawi has been in a process of adjustment for most of this decade. While progress has been made, external assistance is needed to continue the improvements in economic management initiated under earlier adjustment operatiors and to address the need to provide a local capability for enhancing the capacity of Malawian managers. Having learned from its previous attempts te assist institutional change under adjustment operations and TA projects, IDA is well-placed to coordinate a long-term program of institutional development that is focused on specific objectives and designed to reflect local absorptive capacity. 32. The project's objective is to strengthen national economic management through establishing a local management institute to enhance skills and by supporting reforms in key areas which affect resource allocation and generation. The proposed management institute would offer a wide range of training programs and seminars aimed at improving the skills of managers in the civil service, parastatals, and private sector. The assistance for strengthening economic systems would provide the consistent, long-term support needed to internalize institutional reforms in economic management.  - 11 - B. Detailed Description by Component i) Malawi Institute of Management (MIM) 33. HIM would be established as a self-governing institute with a new campus on the outskirts of Lilongwe. One of MIM's special features would be its endowment (paras 54-56) which would help MIM meet its operating costs in the post project period. MIM would be affiliated with the University of Malawi and would offer courses jointly with Chancellor College and the Polytechnic at their respective campuses. The project would provide for limited facilities, mainly participant accommodations, at Chancellor College and the Polytechnic to permit MIM to take advantage of existing staff and academic facilities at those locations. MIM's activities would cover three areas: training, consulting and research. 34. Training. Management training would be MIM's most important activity, accounting for about 702 of staff time. MIM's courses, which would run from 2 to 6 weeks in length, would cover four areas: policy analysis, general and human resource management, financial/ economic/projec:t analysis, and information management. Each can be described as follows: (a) Policy Analysis. In a time of adjustment, senior civil servarts need to keep abreast of all major policy issues facing the Malawi Government. They must understand the implications of alternative economic measures and be able to trace through their impact on the economy. They also must be sensitized to environmental issues and be able to analyze the impact of various policies on Malawi's natural resource base. MIM would organize workshops, seminars and conferences for top oificials where they can examine and discuss adjustment policies, environmental issues and other areas of concern. (b) General and Human Resource Management. MIM's courses would cover such areas as natural resource management, strategic planning, negotiating skills and organizational behavior. MIM's human resource module would offer training in personnel management and manpower planning. Some of the areas in which courses would be offered include personnel procedures and techniques, job analysis and evaluation, staff development, career planning, employee relations and personnel information systems. (c) Financial/Economic/Project Analysis. The need for in-service training in financial management, economic analysis and project evaluation for senior and middle level managers in both the public and private sectors has been repeatedly emphasized. MIM would offer courses in financial planning and control, budget preparation and analysis, and computer applications in financial management that would be appropriate for senior members of the accountant cadre as well as for non-accountant managers. HIM's courses in project preparation and evaluation would help managers  - 12 - in the sector ministries, EPD and MOF to improve the economic analysis of the projects in the PSIP. (d) Information Management. With the ever increasing use of micro- computers to handle and generate information, the training of managers in this area has become increasinEly important. MIM would offer two approaches, one aimed at managers who specialize iin information management, the other for other managers who need to have an awareness of what computers can do to provide them with organized information that can make them better decision makers and planners. MIM would have its own micro-computer training center in which it would offer courses covering topics from basic systems theory to knowledge and application of programs such as spreadsheets, data-base management packages, word processing systc;us, etc. HIM's efforts would not duplicate traJning being offered at the Government's Data Processing Center in Blantyre which concentrates on providing ertry level training in data processing and programming. 35. Consulting. Consulting would be an important part of MIM's activities and would enable MIM's trainers to obtain first hand knowledge of management problems in the civil service, parastatals and private sector. This experience, in turn, would help MIM staff develop teaching materials and case studies that reflect conditions in Malawi. To a limited extent it would also provide a source of revenue for MIlI. Some areas where MIM staff can be expected to offer expert assistance include assisting Malawian businesses in formulating personnel systems and procedures, advising parastatals in computerizing some aspects of their managerial records, or assisting Government Departments in improving financial management. 36. MIM would need to determine howr it should structure its charges for consulting and the rate of compensation for its staff. At present there are only a few local management consultants and their charges run about MK250 per day. International firms currently handle most major management consulting assignments and their charges range from US$500 a day and up. MIM expects to be able to compete with international firms for local assignments once its expertise has been established. Assurances were obtained at negotiations that MIM would prepare a plan for how it intends to organize its consulting program, including a schedule of fees to be charged and arrangements for fee-sharing with staff, and discuss this with the Association by December 31, 1989 (para 66). 37. Research. The third area of MIM's concentration would be research. This would involve independent activities undertaken by MIM staff which are in MIM's long-term interest such as establishing the training needs of client organizations and of people in specJ.fic job categories, or evaluating the effectiveness of MIM's training programs and continuing activities. Unlike training or consulting, MIM's research is not expected to generate revenues and for this reason it must necessarily account for a limited amount of staff time. Eowever, some independent research into management issues, and the publication of findings, is important if MIM is to  - 13 - establish itself as a premier management training institute. While not initially planned for, a national journal of management might be undertaken by MIM at some future date. ii) Ministry of Finance (MOF) 38. Development Plan. To sustain improvements in economic management started under previous adjustment programs, MOF has sought to develop a comprehensive development plan (DEVPLAN) and has asked the Bank and UNDP for assistance in this effort. To help prepare DEVPLAN, Price Waterhouse Consultants were engaged under a UNDP-financed project for which the Bank served as the executing agency. The draft DEVPLAN was completed by the consultants in February 1989, and is currently under review within MOF. The draft DEVPLAN calls for a reorganization of key areas of MOF's operations (Annex 3-1) in order improve forward budgeting, accounting and auditing and financial management as follows: (a) Forward Budgeting. To better manage the budget process, budget functions currently spread over several divisions in MOF would be merged into a new Budget and Revenue Division. Budgeting and expenditure monitoring would be jointly handled by teams organized according to operating ministry. These teams would work closely with counterpart teams in each ministry which would be responsible for all detailed budgeting and monitoring. The External Resources Division, now the Development Division, would provide inputs to the Budget and Revenue Division on availability of donor assistance. The Economic Affairs Division would analyze revenue forecasts derived from the tax modernization program and these would be fed to the Budget and Revenue Division for preparation of the forward budgets. (b) Accounting and Auditing. A two phase approach to strengthening government accounts would be adopted. The initial phase would be introduced immediately with the objective of cutting the turnaround time in the production of monthly accounts to one month. This can be done through short-term training of government accountants who are just becoming familiar with the new programmatic budgeting structure. Under the second phase, a comprehensive user needs study would be undertaken to design the next generation accounting system. The present mainframe computer, which handles governmental accounts, is estimated to have a useful life until 1995/96. The Government wishes to have a strategy in place, equipment procured and training undertaken before then. The audit function would be strengthened through the preparation of a Malawi-specific audit manual and provision of specialized in-service audit training. (c) Financial Management. Debt management would be improved by establishing a central point for the maintenance of all external debt data and providing adequate staff to process, validate and analyze the data and thoroughly test all system functions. A  - 14 - special task force would be established by the Ministry of Finance to include representatives from Treasury, the Accountant General's office, EPD and the Reserve Bank to determine the agencies responsible for providing the debt system with commitment and flow information for all types of external debt (direct, parastatal and private). To improve claims processing, new guidelines, procedures and controls would be designed to assist the prompt submission of claims; a computerized system would be introduced for improved reporting of amounts disbursed, claims due, and -account status; and in-service training would be given to desk officers and project controllers in the operating ministries on the new procedures and systems. 39. Assurances were obtained at negotiations on the overall timetable for DEVPLAN's implementation, including agreement that, by December 31, 1989, MOF would: (i) restructure its organization as agreed in the DEVPLAN and agree on technical assistance inputs to help implement the plan; (ii) prepare a plan for introducing a forward budget system, develop terms of reference for a user needs study of computerization requirements and prepare a plan for improving its audit services; and (iii) prepare a human resources development plan, including a timetable for how MOF will fill vacancies in professional positions in the reorganized ministry (para 67). 40. Tax Modernization. The project would support the tax modernization program begun in late 1987 and scheduled to run for three years. The program is being implemented with the assistance of HIID which is providing a resident advisor (24 months), short-term consultants (48 months), equipment and training. The reforms introduced to date have been significant (see Annex 3-2) and in large measure reflect the openness of the Government to reform. Some of the major reforms to date include: (a) introduction of a reformed system of indirect taxation which employs value-added taxation principles through the manufacturer's level; (b) changes in the tariff system of trade taxes to begin rationalization of the system and to reduce redundancy created by the use of multiple duties on the same imports; and (c) development and implementation of a unique tax payer identification number which is used by all corporations and businesses with respect to tax matters and introduction of a current payment system. 41. The tax modernization program has been designed to develop the basic tax and administrative framework and there is good reason to believe that this objective will be accomplished by the end oZ the current program. The Government, however, has expressed interest in continuing the program into a second phase, both to support the initial reforms and to expand into new areas. The UNDP has noted its willingness to support tax modernization as part of its proposed assistance for DEVPLAN.  - 15 - C. Costs 42. Total projects costs over the five year investment period are estimated at US$18.9 million (MK60 million), including taxes and duties of US$0.5 million (MR1.7 million). The estimated foreign exchange component is US$12.4 million, or 66 percent of total costs. Base cost estimates are in end-1988 prices. Physical contingencies amounting to 10 percent for civil works, vehicles, and furnishings and equipment are included. Local price contingencies have been calculated at 15 percent (1989), 10 percent (1990), 7.5 percent (1991), and 5 percent (1992-93); foreign price contingencies, at 5.3 percent (1989-90) and 4.1 percent (1991-93). A nominal exchange rate of MK2.70 to US$1 has been used for 1988, and this has been adjusted annually on the basis of inflation rates. Project costs are summarized below. Project costs by components are provided in Annex 3-3. MALAWI Insti tuti SFenove I opment Project Cost Summary 'SIC MilIion) (USS Million) X Total X Foreign Base Local Foreign Total Local Foreign Total Exchange Costs Malawi Institute 14.2 21.1 35.8 6.8 7.8 13.1 60 79 of Mnanesment Ministry ot Finance 1. Budgeting, 1.1 8.1 4.2 0.4 1.2 1.6 74 9 Fin. Mgmt., Auditing 2. Tax reform 0.1 5.1 6.2 0.1 1.9 1.9 98 12 Sub-total MOF 1.2 8.2 9.4 0.6 8.0 8.6 87 21 Totel Baselino Costs 15.4 29.8 44.7 6.8 10.8 16.6 e6 100 Physical contingencies 0.6 0.9 1.6 0.2 0.3 0.6 B8 3 Price contingencies 4.7 9.1 18.8 0.6 1.3 1.E 70 10 Total Project Costs 20.7 89.8 60.0 6.5 12.4 18.9 66 114 == =5= === = = = == =  - 16 - D. Financing Plan 43. The proposed IDA credit of US$11.3 million equivalent would finance approximately 60 percent of total project costs net of duties and taxes; this would cover approximately US$8.0 million of foreign costs and US$3.3 million of local costs. A PPF of US$1.5 million was provided to the Government in February 1988 to further project preparation, finance initial start-up activities, and continue implementation of the tax reform program. The Government's contribution of US$1.6 million equivalent would finance all duties and taxes and part of MIM's expenses. UNDP would provide US$6.0 million equivalent to fund- * MIM's technical assistance, training, and endowment requirements, and the costs of MOF's DEVPLAN. UNDP financing is described in Annex 3-4. Of the US$6.0 million UNDP is to provide, US$1.2 million has been obligated and the funds are being applied to initial project start-up activities. The financing plan is set out below: Proposed Project Financing (US$ Million) IDA UNDP GOVT TOTAL Civil Works 4.8 - 0.2 5.0 Vehicles 0.3 _ - 0.3 Furn. & Equipment 1.2 - - 1.2 Training 0.4 0.3 - 0.7 Technical Assistance 2.4 4.7 - 7.1 MIM Salaries - - 1.0 1.0 HIM Rentals 0.7 - 0.1 0.8 MIM Op. Costs/Endowment 1.5 1.0 0.3 2.8 Total 11.3 6.0 1.6 18.9 E. Procurement 44. Civil works, vehicles and furnishings and equipment procured with IDA funds would follow Bank guidelines. A margin of preference of seven and one-half percent for civil works and fifteen percent, or the applicable duty (whichever is lower), for goods will be avai'L:le to qualified domestic contractors/manufacturers. Packages valued at US$200,000 equivalent *r more would be procured through international competitive bidding (ICB). The total value of ICB is expected to be US$5.3 million and would cover the costs of most of the civil works, vehicles and furnishings required by MIM. For contracts estimated to cost above US$200,000, prior review of procurement decisions will be required. Civil works, furnishings and equipment valued at less than US$200,000 but above US$50,000 would be procured through local competitive bidding (LCB) following procedures acceptable to IDA, which would include local advertising, public bid opening and award to the lowest bidder on the basis of agreed criteria. The total amount of LCB, which would be used for supplemental  -17 - purchases of furniture and equipment for HIM, is estimated at US$900,000. Purchases of goods under US$50,000, in aggregate amount not to exceed US$300,000, would be made through international or direct shopping on the basis of at least three quotations. HIM would incur costs for staff salaries, rental facilities (while its campus is under construction), and general operating expenses in aggregate amounting to US$4.6 million of which IDA would finance an estimated U$2.2 million. Procurement of these services would be on the basis of negotiated contracts following procedures acceptable to IDA, and these contracts would be reviewed to determine reasonability of prices and to ensure adequate safeguaids are built-in to protect HIM. Technical assistance financed bv IDA would be for the ongoing tax reform program; the consultants (HID) were hired following the Bank's guidelines for the use of consultants. Total project consultant requirements (Annex 3-5) amount to 570 months for internationally recruited specialists and 60 months of local specialists. The average cost would be US$11,500 per month for international staff and US$7,000 per month for local staff. A procurement table is presented below: Amounts and Methods of Procurement a/ (US$ Million) ICB LCB OTHER TOTAL Civil Works 4.6 (4.4) 0.4 (0.4) - - 5.0 (4.8) Vehicles 0.2 (0.2) - - 0.1 (0.1) 0.3 (0.3) Furn. & Equipment 0.5 (0.5) 0.5 (0.5) 0.2 (0.2) 1.2 (1.2) Training - - - - 0.7 (0.4) 0.7 (0.4) Technical Assistance - - - - 7.1 (2.4) 7.1 (2.4) MIM Salaries - - - - 1.0 - 1.0 - HIM Rentals - - - - 0.8 (0.7) 0.8 (0.7) HIM Op. Costs - - - - 2.8 (1.5) 2.8 (1.5) Total 5.3 (5.1) 0.9 (0.9) 12.7 (5.3) 18.9 (11.3) a/ Contingencies and expenditures financed by the PPF are included in the amounts shown. IDA contribution is indicated in parentheses. F. Disbursements 45. The proceeds of the IDA credit would be disbursed over a five and one-half year period from July 1989 through December 1994. The disbursement profile for regional Technical Assistance projects is seven years; however, this project is designed for a shorter implementation period. Most of the IDA- financed technical assistance (tax reform program) would be disbursed in the project's first year and the MIM civil works should be completed by the end of the third year. A project disbursement schedule is provided in Annex 3-6. The  - 18 - proposed allocation of credit proceeds and the disbursement percentages are given below: Summary of Disbursement Schedule (US$ Million) Category Amount of Credit Z of Expenditure Allocated to be financed 1. Civil Works 4.0 1002 of foreign expenditures and 90? of local expenditures 2. Vehicles 0.5 1002 of foreign expenditures and 902 of local expenditures 3. Furnishing and 1.1 100? c.f foreign Equipment expenditures and 90Z of local expenditures 4. Operating Costs 2.4 70? 5. Technical Assistance 0.8 100? and Training (MOF) 6. Refunding of Project 1.5 Preparation Advance 7. Unallocated 1-0 Total 11.3 46. Reimbursements for approved expenditures for purchases less than US$20,000 would be made on the basis of statements of expenditure (SOEs). All supporting documents for SOEs would be held locally for review by Bank supervision missions. Wherever possible. withdrawal applications would be aggregated in amounts of at least US$5G,J0G prior to submission to the Bank for reimbursement. To facilitate payment of expenses eligible for reimbursement under the credit, a Special Account would be estab_ished with a commercial bank of the Government's choice on terms and conditions satisfactory to IDA. The initial deposit would be US$500,000 which represents three months of MIM's expected expenditures eligible for reimbursement. A Project Account has been established in the Reserve Bank of Malawi to receive the Government's  - 19 - contribution to MIM which amounts to US$320,000 a year equivalent. An initial deposit of MK140,000 has been made. G. Accounts and Audit 47. MIM would keep financial records in accordance with sound accounting practices to reflect its operations and financial position, and would have its accounts, including the Spacial and Project Accounts and its SOEs, audited annually by a firm of independent external auditors acceptable to the Associarion. The audited accounts and the auditor's repoet, iricltding a statement as to whether IDA funds had been drawn from the Special Account and used under SOE procedures for their intezided purpose, would be submitted to the Association within six months of the end of Malawi's fiscal year. IV. PROJECT IMPLEMENTATION A. MIM Implementation 48. MIM would be established as a parastatal body headed by a Board of Governors. This would be similar to the status of the University of Malawi, to which MIM would have a close association. Parastatal status would permit MIM to operate independently and enable it to attract and compensate the type of highly qualified Malawian staff needed to train middle/senior managers in the public and private sectors. Salaries for MIM's management trainers would be similar in range to those offered senior university lecturers and professors, and would be augmiented by fees earned from consulting. 49. MIM's Board would be chaired by a public official of the rank of Principal Secretary and would comprise senior civil servants and representatives from the private sector, parastatals and the University. The Board would meet at least three times a year. It would be responsible for providing policy guidance, for approving the annual budget and training strategy, and for reviewing major personnel decisions and contract awards. MIM's day-to-day operations would be in the hands of its Principal, who would also serve as Secretary to the Board. It was agreed at negotiations that MIM's Board would consult with the Association on the qualifications and experience of future candidates for Principal of MIM (para 68). MIM's organizational structure is presented in Annex 4-1. MIM will be officially established once a Bill has been approved by Parliament and signed by the Life President. The Bill, which the Association reviewed and commented on, was approved by Parliament in April. 1989, and will be signed by the Life President in the near future. It was agreed at negotiations that MIM's official establishment would be a condition of credit effectiveness (para 72). 50. MIM would collaborate closely with the University of Malawi to ensure the best use of existing staff and to build on facilities that already exist at the Polytechnic and Chancellor College. MIM and the University intend to explore possible ways the University could recognize successful attendance at MIM's courses.  - 20 - 51. MIM has entered into a "twinning" relationship with a consortium of Canadian institutions led by A.R.A. Consultants to provide MIM's initial management. Other members include the Human Resources Secretariat of Ontario Province, the Niagara Institute and the Ontario International Corporation. The consortium was selected in accordance with the Bank's guidelines for the use of consultants. The Government and A.R.A. signed a one year contract in November 1988, which is being financed by the UNDP. The consortium will provide the Principal, Consulting Manager and eight management trainers. In the first year, the A.R.A. team will organize and deliver four two-week courses as well as begin preparation for a full schedule of courses to begin late in 1989. The one year contract allows the Government to observe the consortium's performance before committing to a multi-year contract. It was agreed at negotiations that MIM's Board would revirw the consortium's performance and ad-.se the Association prior to the end of tLe contract on its decision whether or not to extend the consortium's contract for a three yiar period (para 69). If the consortium's performance is judged unsatisfactory, a new consortium would be sought in consultation with the Association. While it is most likely the A.R.A. consortium will continue to be the technical partner, the Government believes that the risk of interrupting M:MM's technical assistance is necessary to ensure that MIM is receiving the high level of technical expertise that is required. The C-overnment has appointed the Deputy Principal and most of the local mana%ement trainers, and their qualifications and experience have been reviewed by the Association. The consortium would tailor a two-year program of individual in-house and external training for the local staff to prepare them for assuming operational control of MIM. After two years, the local staff would begin replacing the external managers and trainers on a phased basis. MIM is expected to retain one or two highly skilled external trainers throughout the project period, though the main mode of technical assistance would shift to backstopping by the consortium through periodic visits and exchanges of starf. 52. MIM's training strategy would be to ensure that the Institute's programs are relevant and their impact maximized. The A.R.A consortium is currently undertaking a survey to define specific training needs and consulting requirements of potential local clients. Based on the data collected, MIM's first courses would be tailored to meet either wide-spread general needs or to fill specific skill gaps. Courses would be built around the participants' need to know and not solely around the instructor's own perceptions or interests. Local case materials would be used wherever possible, and these materials would be built up over time through MIM's research and consulting activities. Participants would be expected to bring their own cases to their courses, and the instructors and other participants would help them devise appropriate solutions which could be applied on the job. 53. MIM would join the Association of Management Training Institutions in Eastern and Southern Africa (AMTIESA) in order to benefit from their collective experience in operating training institutes in tl-e region. Many of AMTIESA's members are being assisted by a joint UNDP/EDI/ILO project designed to support these institutes in developing long-term strategies, financial management systems and business marketing opportunities. The joint project would involve the institutes in regional seminars and exchanges so that  - 21 - experiences can be shared and approaches that have worked for one institute extended to another. 54. Endowment. MIM would endeavor to have its revenues equal or exceed its costs by the end of the five year project investment period (July 1989 through June 1994). This does not include the cost of any continuing techrical assistance which would be donor financed. Realizing this would be difficult to accomplish if revenues were solely based on the fees MIM charges for courses and consulting, the Goverr,ient has agreed that MIM would establish an endowment which would be built up during the project inve.tment period. During this time the Government and the donors would cover all of MIM's operating costs (as provided in the project financing plan). The fees MIM receives from its courses and room/buiaid charges would be credited to its endowment fund. The UNDP has established a scholarship fund for MIM with an initial contribution of 'S$250,000. MIM would award the scholarships to cover part of the fees of participants selected to attend MIM's courses. 55. Based on conservative estimates of participants, fees charged, and interest earned during the project period, the endowment would amount to almost MK3 million by mid-1994. Interest earnings from the endowment in the first post-project year would amount to about MK300,000, assuming the endowment earns interest at 10 percent per annum. While this amount would more than cover the expected deficit in operating expenses (but not depreciation), this rate of interest would be negative unless current inflation rates come down sharply. Annex 4-2 provides estimates if the expected number of participants, fees for courses/room and board, growth of the endowment fund, and recurrent costs. It would be important for MIM to mar,age its endowment to ensure a real rate of return on its assets, including the possibility of investing abroad or acquiring real estate or other assets which would yield a positive return. Assurances were provided at negotiations that MIM would establish an endowmenxt fund by December 31, 1989, and would prepare a strategic plan for the use of endowment resources, including how it planned to manage these funds to ensure a positive return on its investments, for discussion with the Association by December 31, 1992 (para 70). 56. During the project investment period, MIM would use the UNDP scholarship fund to offset some of the costs that the public and private sector would incur in sending participants to MIM. The intention is to make scholarships available to cover a substantial percentage of MIM's fees in the early years of the project as HIM is becoming known and establishing its reputation. As MIM's expertise is established, ministries, parastatals and private corporations are expected to be willing to pay a higher percentage of MIM's fees from their own funds, until, by the end of the project, they are paying 100 percent. In the first year after the project period (1994/95), officials attending MIM from the public sector and parastatals would be required to pay about MX1.2 million in fees. This amount would not be out of line with resources expected to be available for training purposes. At present the Government spends about MK5.0 million on training (Annex 4-3), and this can be expected to grow to MK7-8 million by 1994/95. Given that one of MIM's objectives is to substitute for overseas training which takes up about half of the training budget (this is the Government's cost and is in addition to that  - 22 - provided by donors), there seems to be a good possibility the minisLries and parastatals would be able to fund the costs of sending officials to MIM from within the training budgets expected to be available at that time. However, it would be prudent for the Government to examine its training budgets as the project moves into the post-investment period to ensure that adequate funding is available to permit public sector participation at MIM at the levels envisaged. B. MOF DEVPLAN and Tax Modernization Implementation 57. MOF intends to establish a Steering Committee, chaired by the Secretary to the Treasury or his deputy, to be responsible for the overall implementation of the DEVPLAN. Separate task forces would be established to deal with the distinct elements of the plan. One task force would address planning, aid and budgetary issues; a second would be concerned with accounting services and related data processing improvements; and a third, with claims processing, cash control and debt management. The Auditor General's department would be addressed separately. The DEVPLAN would identify the external support that each task force requires. The Steering Committee would coordinate the work of the task forces to ensure proper sequencing and to minimize disruptions in MOF's daily operations. The Steering Committee would also oversee the tax modernization program being carried out with assistance from HIID. C. Reporting 58. MIM would submit annual reports beginning December 31, 1989, providing information on: (i) the previous year's academic and financial performance, including staff/student ratios and breakdowns of staff time allocated to teaching, research/course preparation, consulting, and staff training; (ii) the estimated effectiveness of its course offerings based on interviews with senior managers in the civil service, parastatals and private 3ector; (iii) the plans for the upcoming year including estimates of how trainers' time will be allocated to teaching, research/course preparation, consulting and staff training; (iv) the proposed budgets and training programs; and (v) the procurement program. MIM would also provide a brief semi-annual progress report on the status of operations compared with forecasts in the annual report. Assurances were provided at negotiations that in 1992, MIM would (i) review the performance of the external consortium which is providing technical assistance; (ii) examine future requirements; and (iii) prepare a report on its findings and recommendations for discussion with the Association by December 31, 1992 (para 71). Once MOF's DEVPLAN is agreed, MOF would prepare semi-annual reports on progress with implementation. HIID currently provides regular progress reports on the status of the tax modernization program. A project completion report would be prepared by MIM and MOF within six months of the credit closing date. D. Project Status 59. The MIM component is well advanced. A.R.A. Consultants have been selected as the external consortium, and MIM will begin offering courses in mid- 1989. A site for MIM's permanent campus has been selected outside Lilongwe and private architects hired to prepare drawings and oversee the construction  - 23 - process. Preliminary drawings bave been reviewed by the Association and detailed drawings and tender documents are being prepared. Construction is expected to start in 1990 and last two years. The MOF DEVPLAN is being reviewed within MOF, and specific action plans are expected to be ready for review during the last half of 1989. A project implementation schedule is provided in Annex 4-4. E. Environmental Considerations 60. The project's main impact on the physical environment would be the MIM civil works. The agreed architectural designs are modest, are in keeping with the local terrain, make the maximum use of natural ventilation and employ local materials extensively. Suggested finishes are to be as maintenance free as possible. Utility requirements would be provided by the local mun.cipalities. Project facilities are expected to enhance their surrounding environment. 61. The project would have an important role in raising the environmental consciousness of managers in the public and private sectors. MIM would incorporate courses on natural resource management in its curriculum and would include the importance of environmental considerations in courses on project analysis. MIM would also serve as a forum for policy deliberations where, among other things, the environmental implications of various strategies for economic growth would be discussed. V. BENEFITS AND RISKS 62. The project would continue the process begun under past SALs and TA projects of strengthening Malawi's economic management. By establishing MIM, the project would develop a local capacity to offer assistance to the MOF and other government ministries and departments, as well as in-service training courses to managers in the public and private sectors. MIM would be able to tailor courses to meet specific local needs and would provide a venue for policy analysis and discussions. Its courses would equip Malawian managers to analyze the implications of policy and investment decisions on the environment and low- income groups. MIM would become a self-sustaining, in-service management training institute capable of reaching a much larger group of managers than can be trained overseas. By the end of the project investment period, almost 1000 managers a year would be attending MIM's courses compared with 200 managers that received training in 1988. By collaborating with the University of Malawi, MIM would be cost effective, making the best use of existing staff and training capabilities at Chancellor College and the Polytechnic. 63. Strengthening MOF would enable it to better manage resource allocation and mobilization. Under MOF's DEVPLAN, key sections of the Ministry would be reorganized to operate more efficiently. The capacity to prepare and utilize forward expenditure and revenue budgets would be improved, introducing a much greater degree of realism in the budgeting process and ensuring that recurrent cost implications of investment plans were incorporated in the planning process. Enhanced systems for monitoring Government expenditures would enable greater management control over recurrent costs. Improved cash and debt  - 24 _ management would offer opportunities for increased revenue and better control over the debt structures. Improvements to statutory and internal auditing systems would improve Government's ability to monitor expenditures. Finally, the tax modernization program wotld streamline the tax structure and improve the modes of collection, resulting in greater incentives for local production and increased public revenues. 64. Two risks face MIM: one, the possibility it would not deliver meaningful, in-service training; the other, that it would not become financially independent of Government. The project has been designed to minimize these risks: the twinning arrangement with an external consortium, the links with other training institutes in the region through AMTIESA, and the close relationship with the University of Malawi are all measures adopted to ensure that MIM operates at a high level of excellence. The probability of MIM's financial independence would be increased through its proposed endowment, though the best assurance would be its recognition as a center of excellence in management training which would ensure demand for its courses and enable it to market its consulting services. 65. The risk inherent in strengthening MOF's management capability is whether or not these improvements can be sustained over a long enough period of time to become fully internalized. Previous efforts at forward budgeting and debt management, which have not been sustained, were attempted over relatively short periods and accomplished through intensive use of expatriate consultants. The proposed DEVPLAN would be driven by MOF's internal capabilities which would be augmented by external assistance. While substantial improvements are expected during the project period, continued assistance through subsequent operations may be required both to support existing reforms and to expand them into related areas. VI. AGREEMENTS AND RECOMMENDATION A. Assurances obtained at negotiations 66. MIM would prepare a plan for how it intends to organize its consulting program, including a schedule of fees to be charged and arrangements for fee-sharing with staff, and would discuss this with the Association by December 31, 1989 (para 36). 67. MOF would agree on an overall timetable for implementation of DEVPLAN and undertake the following by December 31, 1989: (i) the restructuring of its organization as provided in the DEVPLAN and agreement on technical inputs to help implement the plan; (ii) the preparation of a plan for introducing a forward budget system, development of terms of reference for a user needs study of computerizat-on requirements, and the preparation of a plan for improving its audit services; and (iii) the preparation a human resources development plan including a timetable for how MOF will fill vacancies in professional positions in the reorganized ministry (para 39). 68. MIM's Board would consult with the Association on the qualifications and experience of future candidates for Principal of MIM (para 49).  - 25 - 69. The Board of HIM would review the A.R.A. consortium's performance and advise the Association prior to the end of the contract on its decision whether or not to extend the contract for a three year period (para 51). 70. MIM would establish an endowment fund by December 31, 1989, and would prepare a strategic plan for the use of endowment resources for discussion with the Association by December 31, 1992 (para 55). 71. MIM's Board would undertake a review of MIM's futurt requirements for technical assistance in 1992 and prepare a report on its findings and recommendations for discussion with the Association by December 31, 1992 (para 58). B. Condition of Effectiveness 72. MIM would be duly established through an Act of Parliament (para 49). C. Recommendation 73. Subject to the above conditions, the proposed project is suitable for a credit of US$11.3 million equivalent to the Republic of Malawi on standard IDA terms with 40 years maturity.  10 l o MALAWI INSTITUTIONAL DEVELOPMENT PROJECT MINISTRY OF FINANCE Proposed Organogram, Overall Structure MINISTER | |SECRETARY| C',4 ADMIN & RESOU~~RCEASURY AIR GETNERAL AT BU6 ESSING DEPARTM RESOURCES REVENUERESOURCESAFFAIRSPROCESSIN DEAST l ~~~~~~~~ ~~K  I0 C,o EN P4 cpo MALAW0 INSTITUTIONAL DEVELOPMENT PROJECT MINISTRY OF FINANCE Admin and Human Reources DIvlsion IPornnel(S Aoouuunr(P7 ) Trairdng (AO) EKaW43847A  -44-4 I 0 cvn 04 ~~~~~~MALAWI INSTITUTIONAL DEVELOPMENT PROJECT MINISTRY OF FINANCE Budget and Revenue Division UrKW HeAcdc Other I Treasury I Ohe ire Hexf, Educ, Ministres IFund Mown RoV nu Works, SAS (S7) SA (Sn | PA IP (S5) l _ ~~~ ~ ~ ~~~~AGR, Other _Ecoonomist polAO (3) co For, & Fbh (PO) Min (AO) (i'O) _COter _Aocourftnt & Educ (AO) L Works Revenue & Transport (AO) (PO) EKW43S72b  | 0 MALAWI INSTITUTIONAL DEVELOPMENT PROJECT MINISTRY OF FINANCE External Resources Division I De"u (S,4) Urnder i sertaiy Under (ES;) 0'~ ~ ~ ~ ~ ~~~~~m1 (SS) suatraiBilter UN Wd Ban k Cmso Aid I Ald 2 Ao i EEC ACB & SAS (S7) SAS (87) SAS (S97) SAS(SJ) Debt (P7 e Po t Po P - PO t PO - PO i f (S8) a1 AO- AO AO- AO_ Aooountant I POICEO EIW43372c  44 I0 LA ~z0 ao l bo 04 NMALAWI INSTITUTIONAL DEVELOPMENT PROJECT MINISTRY OF FINANCE Economic Affairs Division DS (S4) I us ~~~Ecormom h I Iuc l Anatsl An (P7) 1 tn (P0) 8~~~~~~~~~~ud _ InsfiuwA _ Senior o ~~~~~~~ ~~Fofm (PS) (Pe) -SlaDs.(PS) ct _ Rb _~~~~~Fkic Parsta _senior Ana (PS) (PP) Sys Anal (P0) =(PO) ~ Ifon (PO) - PC P(3) - mwftn"sYfmAn*dt (PO) ~ LlboX2 KWS7  I0 , o X0 MALAWI INSTITUTIONAL DEVELOPMENT PROJECT MINISTRY OF FINANCE Data Processing Department | Contole dO | Dala Processng :o'Ns Eduato wwminsrat l -Slaim"e (PS) -Blanlyre (Ps) Sr. Personnel OflRcer (S8) n~~~~~~~~ -DeveXm - (P7) Loonowe (Pil -Acournant(POEO) - OPS and Main (P7) -Ubongwe (PS) Non MOF (PS) MOF (PO) EKW4S847B  - 32 - AhNEX 3-2 Page 1 of 2 MALAWI INSTITUTIONAL DEVELOPMENT PROJECT STATUS OF MALAWI TAX MODERNIZATION PROGRAM 1. A group of resident and expatriate advisors has be-en working with the Government of Malawi to develop and implement fundamental tax and administrative reform in Malawi since 1985. A major tax reform project began in September 1987 with assistance from the Harvard Institute for International Development. Since the project began, the following developments have occurred: (a) Introduction of a reformed system of indirect domestic taxation which employs value added taxation principles through the manufacturer's level; (b) Introduction of a branch profits and border withholding tax on non-residents; (c) Changes in the tariff system of trade taxes to begin rationalization of the system and to reduce redundancy created by the use of multiple duties on the same imports; (d) Conversion of the excise tax system to ad valorem taxes and removal of luxury elements from tariff system in favor of using the surtax for luxury goods taxation; (e) Development of a model international tax treaty and provision for assistance in negotiating the first international tax treaty since Malawi's independence; (f) Development and implementation of a unique tax pay identification number which is used by all corporations and businesses with respects to all tax matters; (g) Provision for international and in country training in both tax administration and policy; (h) An extensive review of auditing and other procedures in all tax departments; (i) Introduction of a current payment system for business income tax payers; (j) Introduction of expanded withholding for individual income tax payers;  - 33 - ANNEX 3-2 Page 2 of 2 (k) Revisions in the allowance system for capital investments; (1) Introduction of small computer systems with software and technical support; and (m) Development of initial master tax files and record keeping systems in botn tax departments. 2. The reforms and implementation to date have been significant. In large measure the success reflects the openness of the Government to reform. The work program was designed to develop the basic tax and administrative framework. Based on performance to date, this objective should be achieved.  NALANI INSTITUTIONAL DEVELOPENLT SUNIARY ACCOUNTS COST SUWIARY (NK '000) 9USS 'OOQ0 Z Total Z Total Z Foreign Base Z Foreign Base Local Foreign Total Exchense Costs Local Foreign Total Exchange Costs I. INVESTMENT COSTS A. CIVIL VMORS 5,528.6 5,438*5 10.967,1 50 24 29047.6 2,014.2 45061.9 50 24 o VEHICLES 132.1 1,166.2 1#29B.4 90 3 48.9 431.9 480,9 90 3 Co FWINISHINGS AND EGUIPINET 527.3 29076.6 2.603.8 80 6 195.3 769.1 964.4 80 6 P TMINING - 1,789.7 i,789B7 100 4 - M2,9 662.9 100 4 E. TECNNICAL ASSISTANCE 739.0 16461946 17.358.6 96 39 273.7 6.155.4 6.429.1 96 39 Total INVESTMENT COSTS 64927#1 2790,#5 34,017.6 80 76 2,565.6 10033.5 12.599.1 80 76 Phlsical Contingencies 618.8 868.1 1,486.9 58 3 229.2 321,5 550.7 58 3 Price Contingencies 2,015.3 8,128.2 109143.5 80 23 208.7 1,094.4 1.303.1 84 8 Total INCLUDING CONTINGENCIES 99561.2 369086.8 45i68.0 79 102 3,003.5 11449.5 14,452*9 79 87 II. RECURRENT COSTS A. INCREMENTAL STAFF 1,557.1 - 1,557.1 - 3 576,7 - 576.7 - 3 P. vWUSHOPS/Ivr,OJTRY SEKINARS 360.5 - 360.5 - 1 133.5 - 133.5 - 1 C. TRAVEL AND ALLOVANCES 283.3 - 283.3 - 1 104,9 - 104.9 - 1 D, OFFICE AND HOSTEL RENTALS 29073.4 - 2,073*4 - 5 767,9 - 767,9 - 5 E, MATERIALS AND SUPPLIES 832.5 818.1 1,650.6 50 4 308.3 303,0 611.3 50 4 F. UTILITIES/OTMER OPERATING COSTS 1,489.4 19462,0 2,951.4 50 7 551.6 541.5 19093.1 50 7 6. HIM FELLONSHIPS 1,957,0 - 19957.0 - 4 724.8 - 724.8 - 4 Totkl RECUlRT COSTS 8,553.1 2.280O1 10,833.2 21 24 3)167,8 844.5 4,012.3 21 24 Price Continencies 2,653.1 867.1 39520.1 25 8 306.9 125.3 432,1 29 3 'otal INCLUDING CONTINGENCIES 11,206,2 3,147,1 14.353,3 22 32 3,474.7 969.7 4,444.4 22 27 Total PASELINE COSTS 15.480.2 29'370.6 44.850.8 65 100 5,733.4 10,P78.O 169611.4 65 100 Physical Contingenies 618.8 868.1 1486.9 58 3 229.2 321.5 550.7 58 3 Price Contingencies 4,668.4 8,995.2 13,663.6 66 30 515.6 19219.7 1,735.3 70 10 Total PROJECT COSTS 20,767.3 399234.0 60P001.3 65 134 6,478.2 12,419.2 18,897.4 66 114 ====5S==== === =