Malawi - Second Institutional Development Project

c-U/L- wXC-)h ' /t JJ / Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12668-MAI STAFF APPRAISAL REPORT THE REPUBLIC OF MALAWI INSTITUTIONAL DEVELOPMENT PROJECT II NAY 17, 1994 MICROGRAAPHICS Report No: 12668 MW Type: SAR Southern Africa Department Africa Region This document has a restdicted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be dislosed without Wodd Bank authozatioL  CURRENCY EQUIVALENTS Currency Unit: Malawi Kwacha (MK) US$1 = MK4.3 MKI = US$ 0.23 MK1 = 100 Tambalas ABBREVIATIONS AND ACRONYMS CSR Civil Service Reform CGM Consultative Group Meeting CEU Census Executing Unit CIR Country Implementation Review DPD Data Processing Department DPMT Department of Personnel Management and Training DSB Department of Statutory Bodies EC European Community EP&D Economic Planning and Development ESAMI Eastern and Southern Africa Management Institute FMIS Financial Management Information System GDP Gross Domestic Product GOM Government of Malawi HID Harvard Institute for International Development HRMU Human Resources Management Unit IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding lCID Inter-ministerial Committee on Institutional Development ID I Institutional Development Project I ID II Institutional Development Project II IDA International Development Association IMF International Monetary Fund LCB Limited Competitive Bidding MDC Management Development Consultant MIM Malawi Institute of Management MIS Management 1-Vormation System MOF Ministry of Finance MOL Ministry of Labor MPSR Malawi Public Service Regulations ODA Overseas Development Administration (United Kingdom) OPC Office of the President and Cabinet PMIS Personnel Management Information System PPF Project Preparation Facility PSM Public Sector Management PSMIU Public Sector Management Improvement Unit PSMR Public Sector Management Review RBM Reserve Bank of Malawi SAL Structural Adjustment Loan SDR Special Drawing Rights SFC. Secretary to the President and Cabinet SC es Sub-Saharan Africa TA Technical Assistance TOR Terms of Reference UNDM United Nations Development Program USAIL, United States Agency for International Development FISCAL YEAR  FOR OFFICIAL USE ONLY MALAWI INSTTUTIONAL DEVELOPMENT PROJECT II DRAFT STAFF APPRAISAL REPORT Table of Contents CREDIT AND PROJECT SUMMARY .i.... . "I..... . ...... CHAFTER 1. BACKGROUND ............. A. Introduction .................................. B. Macro-economic Setting .......... ................ 2 CHAEr 2. ISE Di PUBUC SECTOR MAAGEMENT ............ . 3 A. Management of Government Ministries and Departments. 3 B. Civil Service Pay and Employmen. 6 C. Management Information System. 9 D. Budgetary and Financial Management .11 E. Parstata Sector Magement .13 F. Management a-d Skals Development .16 G. Governance Situation and Management Improvement ..... - 17 CHA=R 3. TE PROtJ ........... . 19 A. Rationale and Objecives .19 B. Impro~;ng Civil Service Policy and Information Framework 19 C. Strengthening the Capacity of the Department of Personnel Management and Training .20 D. Strengthening Institutional Capacity of the Ministry of Finance . 22 E. Support to the Department of Statutory Bodies .. ......... 23. F. Strengthening the Malawi Institute of Management .24 CHAER 4. PRoWr COST AND FINANCING ....... .................... 25 A. Costs and Financing . ........................... 25 B. Procurement . ................................. 27 C. Disbursements ............. ................... 29 D. Accounts and Audits ......... ................... 30 CH1AER S. PROJET MANAGEMET AD IMLEMENTATION ....... .......... 30 A. ChnneUing rDA Funds to NHM ...... ............... 30 B. Overall Arrangements ........ ................... 30 C. MIM Implementation ......... ................... 32 D. Technical Assistance ......... ................... 32 * This report is based on the findings of a Bank appraisal mission which visited Malawi in October/November 1993, comprising Messrs Ladipo Adamolekm (Principal Public Sector Management Specialist and mission leader), Gerard Boulch (Public Sector Management Speciaist), Noel KAdemeka (Economist), Frank Molobi (Development Economist), and Marc Maleta (Conutant, Public Enterprise Management Specialist). Djordje Jovanovic (Senior Country Officer) and Malcolm Holmes (Public Financial Management Specialist) assisted in appraising some of the project components. Mike Stevens (Senior Economist) was the Lead Advisor and Katrina Sharkey (Public Sector Management Specialist) was Peer Reviewer. Ms Brigida Tuason helped to prepare the project cost tables and Ms Sylvie Lelibvre provided secretarial support in the preparation of the report. Messrs Praful Patel and Stephen Denning are managing Division Chief and Department Director respectively for the operation. This document has a restricted distibution and may be used by recipien only in the performc of their odical duties. Its contents may not otherwise be disclosed without World Bank authzation.  E. Implementation Schedule, Reporting and Monitoring ........ 33 F. Client Consultation ............................. 33 G. Environmental Impact .......... ................. 34 CHAER 6. PRO BENEFS, MPACT AND RISKS ...................... 34 A. Impact and Benefits . .............................. 34 B. Risks . ..................................... 34 CHAFPER 7. AGREEmEs To BE REACHED AND RECOMMENDATION .... ........ 35 Text Tables 4.1: Project Cost Summary 4.2: Summary Financing Plan 4.3: Summary of Proposed Procurement Arrangements 4.4: Disbursement Arrangements Annexes 1. Policy Statement on Civil Service Reform and Institutional Strengthening 2. Civil Service Census: Objectives, Methodology and Strategy 3. Detailed Cost Tables 4. Detailed Financing Tables 5. Detailed Procurement Arrangements 6. Detailea Disbursement Arrangements 7. Implementation Schedule 8. Training Plan 9. Matrix of Performance Indicators 10. IDA Supervision Plan 11. Terms of Reference for the Development of a Register of Local Management Consultants and Experts. 12. Terms of Reference of Project Manager 13. Evolution of the Endowment Fund of the Malawi Institute of Management. Addendum: Observations of MIM's Governing Board on the Endowment Fund, December 1993. 14. Technical Assistance Matrix 15. Outline Plan for Project Launch Workshop 16. Key Project Documents and Selected Reports and Publications Relating to the Project. 17. Organizational Charts of Beneficiary Ministries/Departments/Agencies lmplementation Manual (available on request) Map: IBRD NO. 24!f75 - Malawi  REPUBLIC OF MALAWI INSTITUMONAL DEVELOPIENT PROJECT II CREDIT AND PROJECT SUMMARY lorrower: Republic of Malawi Main Beneficiaries: Department of Personnel Mana-ement and Training Ministry of Finance Department of Statutory Bodies Malawi Institute of Management Amount: SDR 16 million (US$22.6 million equivalent) Ten: Standard IDA terms with 40 years maturity On-lending Ter: Not applicable Finaning Plan: IDA - US$22.6 million Government - US$3.0 million (equivalent) Tota. US$25.6 million Eoonomic Rate of Return: Not Applicable Povety Category: Not Applicable Project Description: The objectives of the project are to: (i) address specific systemic management issues that now constitute bottlenecks to efficiency and effectiveness in the civil service; (ii) assist the Department of Statutory Bodies to better manage the interface between the parastatal sector and the Government; and (iii) strengthen the Malawi Institute of Management. The project would be implemented over a five-year period (1994 -1999) and has five main components: (A) Improving Civil Service Policy and Information Framework (US$3.3 million): This component will be concerned with issues that cut across ministries and departments of the civil service, beginning with the policy and legislative framework. Government would take steps to promulgate a Public Service Act and adopt a Statement of Policy on Institutional Development and Civil Service Reform. The other main issue addressed is the design, installation and implementation of appropriate management inturmation systems for the personnel and finance functions. The project will finance a civil service census which is a critical first atep in the development of a personnel management information system. The project will also finance the design, development and implementation of a computerization plan for financial management. (B) Strengthening the Capacity of the  ii Department of Personnel Management and Training (US$4.0 million): The project will provide support to DPMT in the form of TA, equipment and training to enable it improve its performance with particular reference to key personnel management fumctions. Specifically, the project will finance: (V) review of the institutional arrangements for determining remuneration; (ii) re-design of the pay structure and rationalization of fringe benefits and allowances, linked to job evaluation; (iii) preparation of procedure manuals covering functions undertaken by personal common services staff; (iv) development and implementation of an open performance appraisal system; and (v) development and introduction of career paths. The project will also support the re-structuring of the Department and the enhancement of the skills of its staff. (C) Stengthening bstitutional Capacity of the Ministry of Flnance (US$5.5 million): The project will finance the installation and implementation of forward budgeting as well as the design and implementation of a new public accounting system. The project will also provide support to the tax policy analysis unit and promote skills development in both budgeting and accounting dtrough the provision of short-term TAs, training fellowships and the organization of workshops and study tours. (D) Support to the Department of Statutory Bodies (JS$1.9 million): The project will finance activities relating to (i) clarification of the role and functions of DSB and its relationship with other supervisory agencies; (ii) strengthening DSB's role in promoting improved financial and economic performance of parastatals; (iii) development of a government privatization policy; and (iv) enhancement of the sils of DSB staff. (E) Strengthening the Malawi Institute of Mnaement (US$8.1 million). MIM will be given further support to assist it in consolidating the solid achievements it has recorded under ID L ProJect funds will be used to finance: (i) a second phase of technical assistance (essentially on short-term arrangements) that would help to strengthen the Institute's capacity in training and consultancy; (ii) staff training; (iii) fellowship to MIM's courses; (iv) books and equipment for the Institute's Learning Resource Center; and (v) construction of management staff housing on the Institute's campus in Lilongwe. Benefits and Risks Benelits: Improved performance of personnel, budgetary and financial management would enhance efficiency and effectiveness throughout the entire civil service system. This will help to enhance macroeconomic stability. The conduct of government business would benefit from the predictability, transparency and accountability fostered by provisions in the Public Service Act. All this would favorably affect the implementation of development programs and projects, including those supported by the Bank. Better management of the government-enterprise relationship by the Department of Statutory Bodies would enable Government to derive more substantial benefits from its parastatals. And the development of a privatization policy would help to rationalize the parastatal sector and to prepare the  iii ground for a privatization program. Continued success of the Malawi Institute of Management in providing training and consultancy serices to government, parastatals and the private sector would eventally enhance the quality of national economic management. Rlsks: The evolving governance situation in the country would be marked by periodic problems that could hinder effective implementation of some management improvement measures. While this needs to be acknowledged, the gains from a distinct trend toward openness and transparency would limit its negative consequences. Furthermore, given the context of impending elections, the leaders of some of the opposition parties as well as representatives of the media were briefed on the main features of the project. Attention was drawn to its apolitical character: a project that will help enhance the quality of public management to the benefit of both the governors and the governed. A major problem encountered in implementing the component on the Ministry of Finance under ID I was rapid staff turnover. Although this persists, the existence or a core staff at the PSMIU together with designated coordinators for project components under ID II would limit the negative consequences. The weak Implementation capacity noted at the country implementation reviews held in 1991 and 1993 could slow project implementation at the initial stage. However the corrective measures already in place together with a robust government implementation plan for ID II would help to minimize the risk. Implementation of pay reform measures might be difficult because of the tight budgetary constraint which could continue for the foreseeable future. But increased revenue mobilization and prudent financial management could help provide the necessary resources.  iv Esimated Costs: PROJECT COST SUMMARY (Mal Kwacha'000) (US$'000) % Foreign % Total Local Foreign Total Local Foreign Total Exchange Base Coss 1. Civil Serv. Policy & Info. Framework 2,097.4 11,066.1 13,163.5 487.8 2,573.5 3,061.3 84 13 2. Department of Personnel Mgmt & Training 1,796.4 13,884.6 15,681.0 417.8 3,229.0 3,646.8 89 16 3. Mintry of Fmance 239.5 21,452.5 21,692.0 55.7 4,989.0 S,044.7 99 22 4. Dept of Sttory Bodies 150.1 7,720.7 7,870.7 34.9 1,795.5 1,8;0.4 98 8 S. MalawA Inst. of Mngt 13,917.8 16,409.7 30,327.5 3,236.7 3,816.2 7,052.9 54 30 6. PSM Improvement Unit 5,424.8 1,571.3 6,996.1 1,261.7 365.4 1,627.0 22 7 7. PPF - 4,300.0 4,300.0 - 1,000.0 1,000.0 100 4 Total Baseline Costs 23,626.0 76,404.7 100,030.7 5,494.4 17,768.5 23,263.0 76 100 Physical Contingencies 76.8 2,485.7 2,562.4 17.9 578.1 595.9 97 3 Price Contingencies 4,547.8 3,016.9 7,564.7 1,057.6 701.6 1,759.2 40 8 TotalProjectCosts 28,250.6 81,907.3 110,157.9 6,659.9 19,048.2 25,618.1 74 110 FINANCING PLAN (US$'000) LOCAL FOREIGN TOTAL IDA 3,509 19,048 22,557 Government 3,061 - 3,061 TOTAL 6,570 19,048 25,618 E[I[MATED IDA DISBURSEMENT (US$'000) Project Year Year I Year2 Year3 Year4 Year5 Year6 AnnWal 4,673 8,246 5,325 2,607 1,582 124 Cumulative 4,673 12,919 18,244 20,851 22,433 22,557  MALAWI INRSTIUTIONAL DEVEWLOPhMT PROJECT C}AWER 1. BACKGROUND A. Introduction 1.1 The c}vil service in Malawi provided reasonably adequate support for the successive structu adjustment programs implemented in the 1980s. It was one of the few civil service institutions in Sub-Saharan Africa whose staff were paid close to adequate salaries. But there were important weaknesses, first highlighted in the Civil Service Commission ITeport of 1985 (the Herbecq Commission) and documented in detail in the Pubfic Sector Ma nt Review (PSMR) undertaken by the Government and the Bank in 1991 and published in March 1993. The PSM issues examined in the PSMR were determined by the Secretary to the President and Cabinet (SPC) and the Principal Secretaries of the civil service. Their major concem was the need to focus on management issues that cut across ministries and iepartments in contrast to the growing trend of each ministry and department seeking to achieve management improvement within its own organization. Ihe preliminary findings of the PSMR were discussed with the Principal Secretaries at a workshop in July 1991, and the Green Cover was discussed in detail with relevant Government officials in June 1992. The PSMR found that the performance of the civil service was low base of poor definition of responsibilities, inadequate and poorly targeted training, failure to undertake program evaluation and poor financial management. On civil service pay and employment, the PSMR found that pay levels we-e inadequate to attract professional and technical staff, thereby creating vacancy rates of about 35 percent. In contrast, there was overstaing in the junior ranks where staff salaries were compacable to those in the other sectors. The PSMR examined the problems of the parastatal sector, including the unclear definition of the role of the Department of Statuory Bodies (DSB) which is charged with manging the interface between parastatals and the Government. 1.2 Government has requested IDA support to implement some of the PSMR rept's recommendations thirough a second Institutional Development project (ID 1): this would be a successor to the on-going IDA-supported Institutional Development project (ID 1), with UNDP co-fimancing. UNDP is assisting in the strengthening of accuting and auditing and the modernization of the tax system in the Ministry of Finance. The IDA credit is devoted to the establishment of the Malawi Institt of Management with some support for the tax modernization program. IThe project financed civil works, fumishings and equipment for MIM and technical assistance for the tax reform program. Implementation of ID I is scheduled for completion in December 1994. Although valuable progress has been recorded in implementing the Tax Modernizaton Program, Government is still experiencing difficulffes in revenue forecasting and would like assistance provided under ID II. Ihe scope of the UNDP-supported instutional strengtening actions in the Ministry of Fimance, recostituted as a "Government Financial Management Development" project in 1992 were stil being reviewed in November 1993 due, in part, to reduced funding available fiom UNDP. Accordingly, Government Las decided to transfer the design and installation of a forward budgeting system as well as the design and implementation of a new public accounting system to ID II.  2 1.& Although MIM has been firmly established as a training and consulting institution and its physical infrastructure is nearing completion, three main needs for further support have been identified: technical assistance and training, books and equipment for the Institute's Learning Resource Center, and campus management staff housing. Government would also like the problem of the Department of Statutory Bodies addressed under ID II. To help prepare iD IR and provide for start-up activities, an advance of US$600,000 was approved from the Project Preparation Facility in October 1992. The following fout studies, financed under the credit, were completed in July 1993: * salaries, wages and fringe benefits; o organizational audit of the Department of Personnel Management and Training; e use of information technology; and * status and tasks of the Department of Statutory Bodies. The findings and conclusions of these studies are reflected in this SAR. B. Macro-economic Setting 1.4 Following independence in 1964, Malawi's development strategy, by and large, emphasized inrastructure and estate agriculture as vehicles for increased production and growth. During the 1960s and 1970s, when Malawi's ewonomy was relatively open, reai GDP more than doubled and real per capita income grew by 3 percent per year. The peciod of strong growth came to a halt in the early 1980s with tle onset of a series of external shocks, including deterioration of terms-of-trade, oil crises, disruption along the external transport routes through Mozambique, and weather-related shocks. These shocks led to an economic crisis culminating in 1986/87 and to policies which reversed the openness of the economy and discouraged private sector investment and output. 1.5 The adoption of a strategy based on "Growth Through Poverty Reduction" was a significant step in firthering Malawi's development strategy. Since 1987, efforts have been made to develop structural policies with a focus on removing the binding constraints to sustainable growth, while simultaneously addressing the roots of pervasive poverty. The new attempt to liberalize the economy included reforms to redress the policy bias against smallholders, remove constraints on private sector participation in all sectors of the economy, and move toward a more liberal external sector policy. 1.6 Most recently, in 1992, economic management was challenged by additional internal and external developments. At the May 1992 Consultative Group Meeting, bilateral donors and the EC withheld new external assistance (except humanitarian aid) until there was tangible and irreversible evidence in the way Malawi approaches governance issues. The unprecedented drought throughout southern Africa put additional pressure on the fiscal balance and accelerated the decline of already low levels of foreign reserves. 1.7 Despite experiencing the worst economic setbacks since independence, Malawi has sustained its adjustment program, but at a much slower pace than origir .dy envisaged. At this time, the prospects for economic recovery from the 1992 drought lear are good. Following the June 1993 referendum that endorsed the move to multiparty democracy and the subsequent steps taken by the Government, donors have pledged new balance-of-payments  3 assistance as a first step to support the adjustment program add stabilization of the macroeconomic framework. A Bank/Fund mission visited Malawi in November 1993, and February 1994 to assess the macroeconomic situation, especially in view of the ongoing pclitical transition process. The mission successfully concluded the negotiations on the flith Policy Framework Paper (PFP) and mid-term review of the Fund's fourth arrangement under the Enhanced Structural Adjustment Facility. CHAPT 2. ISSUES IN PUBLIC SECTOR MANAGEMENT 2.1 Three main issues are examined in the Pubtfic Sector Management Review report (Report No. 9643-MAI): * management of Government ministries and departnents; * management of public sector employment and pay; and * management of the parastatal sector. The first two issues are focussed on tihe civil service: the analysis in the PSMR constitutes an update on the Civil Service Commission Report (1985). Normally a comprehensive review of management problems in the machinery of the Jalawi goverment would cover, in addition to the civil service and :he parastatals, the legislative and judicial institutions, the police and defense establishments and local governments. The overview of key issues in public sector management provided in the following paragraphs is focused only on those relating to the civil service and the parastatal sector on which diagnostic work has been undertaken. (A diagnostic study of local government management problems was carried out in 1991 by the Bank at the request of the Govermnent: this resulted in the Local Government Development Project, Report No. 1034-MA!). Here, the following issues will be examined: * Management of Government Ministries and Departments; e Civil Service Pay and Employment; * Management Information System; * Budgetary and Financial Management; * Parastatal Sector Management; and * Management and Skills Development. A final section will cover the governance situation and management improveme.f, which has emerged as a salient issue in the Malawian context since the Consultative Group Meeting of May 1992. A. Management of Government Ministries and Departments 2.2 Following the Herbecq Report, some ministries and departments of the cental government embarked on the study of management problems. These studies were supported by donors, including the World Bank. The ministries and departments included: Works (1987/88), Finance (1988), Education (1989) and Agriculture (1990, 1992). (Health, Agriculture and DPMT had been covered as part of the Herbecq Commission's work).  4 Drawing on the findings and conclusions of the reviews, the PSMR identified the following most common management problems: * Sector strategies, ministries' functions and managers' responsibilities are not clearly defined and understood by the ministries, resulting in uncertainty over who is accountable for management decisions. e Ministries' top managers are too often making decisions on matters that should be handled by managers at lower levels; ministries with regional operations are characterized by excessive centralized (headquarters') decision-making. * Inadequate program performance and cost data are generated and made available to assist with management decision-making. * Inadequate program evaluation is carried out at the ministry level: this impedes proper national program policy, planning and budgeting decision-making. * Ministry managers regularly overrun their budget allocations. * Ministries' training and staff development programs are not systematically developed and tend not to be based upon the identification of skills deficiencies or other specific training needs. * Ministry supervisors exercise limited control over the attendance and performance of their subordinates. * Vertical and horizontal management communications within the ministrias are poor. 2.3 The PSMR also found the following conditions generally associated with the less successfil management improvement efforts: * Top iiimagement did not fully understand the problems identified and did not commit to their resolution. * Action plans were perceived as imposed, rather than as the product of agreement between consultants and ministry management. * Recommendations exceeded a ministry's capability to implement. * Recommendations were outside a Ministry's jurisdiction or control. * Clear responsibility for implementation was not established. * The possible benefit of implementing a recommendation was not balanced against the consequences of failing in its undertaking. * No strucure or process was instituted for managing the overall implemenation of improvements. * Technicad assistance was not accessible.  2.4 The PSMR concluded that the converse of these conditions represent conditions that would enhance the prospects for a ministry's attempts at organization-wide management improvement. 2.5 Another category of problems in the management of ministries and departments examined in both the Herbecq report and the PSMR relate specifically to the common seices. Unlike most civil servants who are managed by the Principal Secretaries of their ministies, the 10,000-odd members of the common services are managed separately.]/ Each common service is expected to ensure uniform standards, provide professional backstopping for its members and provide opporunities for the development of expertise and professional growth. Three main problems were identified: excessive staff turnover, excessive vacancies, and insufficient understanding within the common services of their functions. The problem of excessive vacancies was investigated by MIM in 1991 (financed by the UNDP) and recommendations were made on the streamlining of the recruitment process and the reduction of the time for promotions. Some of these recommendations are being implemented. With regard to the difficulty in attracting and retaining qualified staff, it would be necessary to address the issues concerning the current recruitmuent process and career development. One solution would be the introduction of a merit-based recruitment system, especially in respect of entry level staff to the professional and managerial cadres. This could be introduced under the proposed Public Service Act (see para 3.2). 2.6 The following recommendations are made in the PSMR in respect of the two other problems: To reduce excessive staff turnover: * adopt guidelines on reporting and promotion to minimize inter-ministeria transfers (guidelines to require, among other things, advance consultation between responsible officer and controlling officer). * umprove personnel record keeping and information systems to better track stff rotations. 0 encourage guidance rather than transfer as the first reaction to difficulty. M h tam mmanged- refers to day-to-day control over the civil servant. Recruitmt intoe sevce, promotons and teminations are managed by the PubLic Sice no and DPMT. Rotations or Isteal movements are the responsibility of the head of the common service or dt Prncipa Secretary of a Ministry except m stations involving high ranking civil servants or inter- ministeria movemets of non-common service staff wiich are orchestated by OPC and DPMT. The common svices ae: Acounting, Administrave, Deat, Economic Planning, Meusi1a, Pemnnel, Secreaial, Statstal and Stores. (The M egrid Common Service which was at an incit stapg at the tih e of the PSMR was discontinued tly teeafter an the aeconmmdadon of he PSMR. Me_suus continue to be denitmental emvlovyes.)  6 To improve the understanding of the tasks and functions of the common services: * schemes of service be introduced that show duties of each cadre (ob descrptions) as well as entry, training and promotion requirements for all common services. * procedures manuals be prepared for various functions undertaken by common service personnel (such as, accounting, stores, budgetary), induction training be provided for new recruits, and professional seminars and other in-service training be organized to assist career development. * an open performance appraisal system be introduced. 2.7 The Herbecq Commission identified the absence of a Public Service Act as contributing to the poor management of the personnel fnction. It recommended that an appropriate Act be adopted with emphasis on the effective performance of the personnel function. Eight years after the acceptance of the recommendation, the Government had not implemented it. The recommendation re-surfaced in two of the studies commissioned as part of the preparation of ID I (July 93). According to the two studies, the Act would etend beyond initial concern with the personnel function to serve as the legislative framework withi which government business is conducted. It would enunciate the principles of civil service employment, notably merit-based recruitment and promotion and spell out the allocation of responsibilities and methods of enforcing accountability. The Act would ensure transparency and predictability. The Government has decided to prepare and adopt a Statement of Policy on Institutional Development and Civil Service Reform as a companion document to the Public Service Act. B. Cvii Service Pay and Employment 2.8 From one perspective, pay and employment conste the wage bill of the Governmenat of Malawi and, as such, are important components of the budget. More important is the fact that people constime the most important resource available to Government for meeting its development objectives and that pay (and other forms of remuneration) is a key element in creatng appropriate incentives for effective performance. On both counts Malawi has, (at least until recently) done better than most SSA countries sin independence. The share of wages In the budget averaged 16.8 percent over 1980-89 compared with 26.5 percent in a group of comparable countries. For the most part, remuneation levels were adequate - in contrast to many SSA countries - and the wage compression ratio of 32:1 compared favorably with the average of 13.5:1 in the same group of countries. Staff have generally been better qualified, better motivated and less corrupt than in other SSA countries. 2.9 But cracks have recndy appeared in this seemingly strong perfirmance. Ihe most obvious manifestation is the increase in the share of wages in the recurrent budget from 22 percent in 1991/92 to 32 percent in 1993/94. More significanly, fundamental instiutonal weaknes have been exposed. These now follow:  7 Employment 2.10 The number of employees in the public service (civil servants in established posts, tempomay employees, and industrial class) was of the order of 106,400 in March 1993. Reliable data are not available and there appears to be little relationship between employment data maintained by the pC sonnel agency and payroll data. There is also little evidence that establishment control has been effective. In March 1993, the number of established positions exceeded filled positions by some 13,000. The data that are available suggest the following numbers in the three categories as of March 1993: Civil servants (established positions): 65,200 Temporary employees: 6,100 Industrial class: 35,000 2.11 Over 1980/81 to 1989/90, established positions increased at an average annual rate of 4.8 percent. Tnis high rate of growth has not been matched by any improvement in performance. While there was little growth in positions in the following two years, there was an increase of 17 percent in the second half of 1992, reflecting a sharp increase in teaching positions. The difficult economic conditions of the past two years have led to the questioning of the effectiveness of establishment controls and of the appropriateness of current levels of employment. 2.12 The overall numbers of the different categories of civil servants indicated in the budget estimates differ from those on the payroll as well as those in DPMT records. The officials in the orgizations dealing with these issues hold the view that a dvil so-vice cenus would help to sort out the discrepancies. (Mhere was agreement on the need to conduct a civfl service census at the wrap-up meeting of the Pre-appraisal Follow-up Mission in July 1993). The census would help generate reliable benchmark personnel data that would be used to develop an effective personnel management and control system. The key instument here is the personnel management information system (PMIS) that would be developed under an umbrella management information system (MIS) and linked to the payroll (see para. 3.4). 2.13 Any fresh perspective on the employment problem needs to take into account the fndings from the reviews of ministerial organizations and staffing undertaken between 1985 and 1992, and the findings of the orgaization audit of the DPMT undertaken by the Easten and Southern Africa Management Instittte (ESAMI) in July 1993. The next step is to subject these findings to critical and rigorous analysis with a view to making credible proposals on organitional restuctuing and stfing levels. What is needed is a level and mix of stffing which reflects the prevailing budget constraints and the mission and objectives of each ministry. A review of the mission and objectives of ministries and departnents provides an importan opportunity to reinforce the service orientation of government. Pay 2.14 The institutional arrangements, including the information base, for dermining pay rates and associated fringe benefits in Malawi are inadequate. Ihis was highlighted in the 1992 wnd of pay increases (the first since 1989). Although the issue of affordability, in the budgetary context, was ment to constrain the pay incres, the result of the process was an increase in personal emoluments in the 1992/93 budget of 53 percent compared with the  8 ceiling of 13.6 percent. While the recent Price Waterhouse study 2/ identifies the rise in non-established personnel as a contributory factor, the overwhelming influences were under- calculation of projected pay costs and problems in converting old pay scales to new ones. 2.15 This largely reactive approach to pay determination was demonstrated in the approval of increases of between 5 and 25 percent for civil servants from the lowest grades (25 percent) to the rank of Deputy Principal Secretaries (9 percent) in September 1993. (No increase was approved for Principal Secretaries). Because the increases were approved in a crisis (it followed a four-day civil service strike, the first since independence), there was no time for a detailed calculation of pay costs. But the new salary and wage increases amount to a new burden on the budget and significant cutbacks would become imperative in the approved budget. (In June 1993, barely three months into the 1993-94 financial year, departments were instructed to cut back expenditure on emoluments for non-established staff by as much as 50 percent). 2.16 The experiences of wage and salary review in 1992 and 1993 underscore the urgent need for the Government to develop and implement policies on remuneration and remuneration review. This was a main recommendation on civil service pay in the PSMR and it was also highlighted in the Price Waterhouse Report. A major corrective action would revamp the existing institutional arrangement for managing remuneration reviews. This would include clarifying tasks and responsibilities among the main organizations concerned (Ministry of Finance, DPMT, EP&D, OPC, and Ministry of Labor) and to developing mechanisms for ensuring effective coordination. The institutional arrangements should allow for a more considered, proactive approach to determining remuneration levels and for a proper balancing of affordability, adequacy and staff motivation. 2.17 As in many countries, Malawi has a system of fringe benefits which represent a high proportion of total remuneration but is relatively arbitrary in its impact at the individual level. Housing benefits are particularly costly and no longer represent any incentive for performance. The Government is working on rationalizing housing and other fringe benefits. This review needs to be integrated with wider considerations of remuneration and should take full account of the motivational effects of any changes. 2.18 Two key issues in the management of remuneration are the desirability of some form of pay for performance and the differentials between pay levels in the public and private sectors. During discussion of the PSMR report, Government suggested implementing a bonus scheme for incumbents of middle and senior level management positions and critical professional posts. As an alternative, the Government advocated an employee performance evaluation scheme that would make it possible to withhold annual increments for "bad performers". According to the recent Price Waterhouse Study of Wages, Salaries and Fringe Benefits, it would not be appropriate to embark on either a pay for performance or a performance 'bonus' program at this time. Given the cursory treatment of the issue in the Price Waterhouse Study, a more thorough examination of the subject appears appropriate. Crucial issues would be the identification of performance indicators and the establishment of clear guidelines for their application. On pay differentials between the public and private 2/ Study on Civil Service Salaries, Wages and Fnnge Benefits, conducted by Price Waterhouse for the Govenmuent of Malawi, Lilongwe, July 1993.  9 sectors, the conclusion of the Price Waterhouse Study is that the differentials are not significant. Ihis contradicts the recommendation in the PSMR on the need to raise salaries at the managerial and professional levels to maintain an appropriate relationship between the public, parastatal and private remuneration. The findings of the Civil Service Pay and Employment Study (main mission was completed in November 1993) confims that pay differentials between the civil service and the private sector are indeed significant. However, the non-monetary benefits enjoyed by the most senior civil servants reduces the impact of the differentials. Regarding the professionals and other senior and middle-level managers, appropriate salary adjustments would be required within the context of the pay reform to be undertaken under ID R. C. Managem(ent Information System 2.19 Concern about the information management system in the civil service originated from the fragmentation, inconsistencies, incompatibility and inaccuracies of out-dated data pertaining to public service personnel. Several studies on pay and employment and other civil service-related subjects underlined the shortcomings of the data, in spite of some efforts under way to correct the situation (USAID project in DPMT). That project considered the problem as technical and localized. The proposed solution was purely technical and restricted to DPMT. The civil service information management system was conceived as a tool to bring about internal coherence to planning and monitoring and improve processing efficiency (speed up processing of "events", that is personnel actions). 2.20 An Information Technology study has extended that concern beyond personnel magement to financial management and broadened the scope from data processing to information management, underlying a new concern - the need of infbrmation for decision making. The study stresses the necessity of high level commitment to guarantee the success of computerization and the usefulness of a government-wide policy on the subject. This is expected to contribute to management improvement through linking of data used by the personnel department, the payroll unit and the budget divisions. 2.21 With regard to the payroll and civil service personnel data, the starting point would be clarification of the two sister terms, "civil service" and "public service". This clarification would help to determine who to include in the Personnel Management Information System (PMIS). In Malawi, teachers constitute an integral part of the civil service. Another important clarification to make relates to the categories of "non-established staff" and "temporary staff". The Malawi Public Service Regulations (MPSR) define three categories of government employees: "established staff", "temporary employees" and "industrial class employees". The "industrial class employees" that are not provided for in the budget estimates are normally paid by the ministries concerned (notably Works, Education, Health and Agriculture) from the two budget votes for "temporary staff" and "non-established staff"; there is no separate budgetary provision for "industrial class staff". The sub-heads used in budget estimates should correspond to the three categories identified in the MPSR: * established staff who receive salaries; * temporary staff who also receive salaries; and * industrial class staff who receive wages.  10 This would remove the confusing budget vote for "non-established staff' and make it easier to systematically exclude 'industrial class staff" from the civil service (they would not be included in the PMIS). A third clarification to make relates to employees of Treasury Funds whose pay is reflected in the wage bill in the annual budget. Some of these employees are civil servants (for example, those employed by the Post Office) while others are not but would qualify as public servants. It is necessary to confirm if this distinction is widely understood and whether both categories of employees should be included in the PMIS. 2.22 Another feature of the existing personnel information system is the virtual collapse of the control system for recruitment, promotions, transfers, secondments, and training. Rebuilding the control system should start without delay. One priority task is the replacement of the computer of the Department of Data Processing (DPD). This is already underway (with financing from the Government of Japan). This effort would be consistent with the MIS actions that '-OM officials would like ID II to support. The following problems were identified: * Lack of a functional link between DPMT and Payroll: Two computer systems are to be purchased and installed (one for DPD, one for DPMT). Agreement should be reached on procedures for the monthly transfer of payroll files, including allowances, to DPMT. * Fragmentation and lack of compatibility of information: The purpose of the transfer in above is to permit a merging of DPMT and Payroll files into one single central file (the personnel management information system, PMIS); and the analysis of the payroll/personnel files which will be the basis for a census of civil servants and the restructuring of personnel information. * Lack of compatibility of information systems: The problem is related to how decisions are made. One finds that PCs are used as data processors (spreadsheets, word processors) but not as information management tools. DPD is a data processing center and does nothing in information management. It runs 3 main applications for the Government (payroll, treasury accounts and pensions) which are more than 20 years old, obsolete (sequential indexing and Cobol) and cumbersome. DPMT's and Works' efforts, while using a more recent technology (data bases), are also geared to processing and reporting rather than management. No thought was given to information management and data administration (creation of data dictionaries, designation of data owners, and so on). Finally although the technology is available and running in Malawi, interconnected systems do not exist in the administration. This is more the consequence of how decisions are made rather than a necessity dictated by technical constraints. 2.23 Against the background of these problems, the following main features of the information system to be installed and implemented under ID II should cover both the personnel management system and the budgeting system. * The information system should be centered around a computerized public service data base which should contain a profile of each public servant, the history of his/her career, and include all elements affecting the budget. It should contain profiles of the administration and staffing requirements, (possibly in the form of job descriptions).  11 * Deconcentration or decentralization of this information system should be made only after a thorough appreciation of the individual departmentes capacity to manage the different elements. * Basic information about the public service will be collected through a census covering the counting of public servants and the administrative structure, geographical distribution and type of employment. Often numbers are known (at least at payroll) but the whereabouts, responsibilities and posting of the public servants are not. Post-census analysis is important to evaluate the effect of incentives in the pre-reform situation: career and remuneration profiles, share of fringe benefits in total remuneration, periodicity of promotion, male/female distributions, qualifications and skills, age profile, occurrences of disciplinary actions, and so on. * The information system must be linked to the payroll system (computerized), itself part of a budget and public accounting system. Deficiencies in the budget system and the accounting system or both must be remedied if public service is to be successful, as these represent the fundamental tool of management and control. The absence of that linkage in most civil service operations is the cause of ineffective control of the wage bill. (rhe needs in respect of budgetary and financial information are discussed in para 2.30). D. Budgetary and Financial Managenent 2.24 The shocks to the Malawian economy over the past two years highlighted inadequacies in the budget system, processes, as well as in the staffing of the Ministry of Finance. The combination of these weaknesses coupled with the rapid turnover of staff compounds the problems of budget making. Strengthening of the budget system and processes of the Ministry of Finance must support the budget in: * making its proper contribution to the macro-economic stability of Malawi; * facilitating decision-making on development priorities; O controlling within-year expenditure; and * encouraging more efficient and effective use of resources in the achievement of development objectives. 2.25 Forward Budgeting: The major weakness in budgeting lies in the linkages between in"estrn'~t pr!9.^sg,tie de tn!f b3g ?M.d e reuxrrent budget. While the most obvious symptom is insufficient resources for operations and maintenance, it is also reflected in poor within-year expenditure control and a host of other weaknesses. (Many of the details are being worked out in the Review of Budget Management being undertaken jointly by the Government and the World Bank -particularly the issue of improving aid management, which will be essential to the successful implementation of ID II). The single most important institutional reform needed is to implement a system of forward budgeting. This has been recommended in numerous reports over the past 10 years as a system that would zssist policy makers and MOF staff to develop and base budget allocations on realistic estimates. 2.25 Given the fact that implementing forward budgeting was at the core of MOF's component of ID I, its relevance is not in question. Indeed, the requirement under SALs II  12 and m that there be forward three-year revenue and expenditure budgets has led to them being prepared, but they have had no effect on resource allocation decisions. The calculation of the overall resources available for recurrent purposes was largely based on global forecasts. The recurrent costs associated with investment expenditure were not systematically reflected in the budgets. Malawi needs an understanding of the ramifications of forward budgeting and a commitment to its implementation. An effective system should, as a minimum, identify the full costs of current government policy for at least three years beyond the budget year. Such a system should link planning and budgeting and provide the discipline and framework for government decision-making, control and improved resource use. If the forward budget is to achieve this goal, the staff of the Ministry of Finance will need to interact with operating ministries as integrated entities. There will be implications for the way operating ministries organize themselves lanning and budgeting staff are currently separate) and for relations between MOF and the Department of Economic Planning and Development. 2.26 Recurrent Cost Implications of Development Expenditures: Malawi's budgetary situation is such that, when investment projects are completed and ready to operate, there are usually insufficient resources available for operations and maintenance expenditure. This problem has been exacerbated in recent years by difficult economic conditions and by the substantial increases in wages and salaries in 1992 and 1993. A system of forward estimates is essential to achieving a proper balance between investment (capital) and recurrent expenditure. Improving the balance between salaries and wages and operations and maintenance within recurrent expenditure will be an important concern of any forward estimates system. It is essential to develop the capacity for up-dating accurate estimates of the recurrent cost implications of capital expenditure. While a number of recurrent cost coefficients were re- estimated in the Public Expenditure Review of 1990, on a service-wide basis, the coefficients currently available were estimated in the 1970s. 2.27 Expenditure Control: Ihere has been significant deterioration in within-year expenditure control in recent years. This has been building since the payments system was decentralized in 1987. The acceleration in recent times reflects the tight budgetary situation and the breakdown of discipline at the level of the ministry and agency. Even when there are no funds in individual accounts (and the number of these has proliferated significantly), ministries and agencies continue to write cheques, and these continue to be honored by the Reserve Bank of Malawi (RBM). The lack of on-line systems which provide MOF with up- to-date information on actual expenditures compounds the problem. Over-spending is often not apparent until many months after the event. 2.28 The solutions to this problem will require short and long-term measures. For the short-term all possible stop gaps will be explored including the requirement that the RBM dishonor bad cheques. For the longer-term, other project components associated with the strengthening of MOF will be important elements in improving expenditure control. If the decentralized payments system is to continue in its present form, heads of ministries and agencies will have to be held accountable for living within their budgetary allocations. 2.29 Budgetary and Financial Management Information: Relevant, accurate and timely information is essential for decision-making, management and control. At present it does not exist. The proliferation of budgetary and financial management information systems is both a symptom and a major cause of the problems. The decentralized nature of the payments system places even greater demands on information systems. Furthermore, little has been done to upgrade central planning, budgeting and accounting systems. These problems are part  13 of a wider information system weakness throughout the public sector. Proper reform of budget and financial management processes will require a fundamental overhaul of information systems. 2.30 Revenue Estimating: Given that a key function of a system of forward-budgeting is to focus attention on affordability within a medium-term framework, there is a need to strengthen further the capacity of MOF to provide reliable forecasts of tax revenues. This will underpin the incorporation of more realistic revenue estimates into the formulation phase of the budget. This will contribute to more effective expenditure control during the execution phase of the budget. 2.31 Malawi has made impressive progress under the Tax Reform Implementation Project which began in 1989. The efficiency of the tax system has been substantially improved and the quality of tax administration has been raised. The Harvard Institute of International Development (HIUD) has provided support to the project since its inception. This support will end in March 1994. Reflecting the progress made in reforming both tax policy and tax administration, the Government has created a Tax Policy Analysis Unit within MOF to be based in Lilongwe. The Tax Unit will provide advice on tax policy issues, and coordinate policy implementation and efforts to raise the quality of revenue estimates. The skill base in this remains small in Malawi and, in the development of a disaggregated model of tax revenue, there is no local experience. The development of such a model is a natural evolution of Malawian capabilities in taxation. The crude approaches used to build revenue techniques are unsatisfactory. To deepen the pool of tax experts and to broaden and deepen the sklfls of the few existing experts will be a key and continuing challenge for Malawi. 2.32 Skills: The inadequacy of slills levels throughout the public service in budgeting and financial management remains a serious barrier to the cost effective implementation of the Government's development priorities. While the particular concern here is the general level of skills of the public service, another major concern is the inadequacy of matching existing skills with available positions. This concern needs to be addressed in the context of the common services. Attempts to increase the number of qualified accountas have been underway for some time: these efforts need to be strengthened. At the same time, there is a need to develop the management skills of those in senior accounting positions. MOF will be a major beneficiary of any effort in accounting. Within MOF there is also a clear need to raise the skills levels of budget analysts. These appear to be inadequate for their cument tasks and will certainly be inadequate for the effective management of the proposed changes in budgetary and financial management systems and processes. E. Parastatal Sector Mangement 2.33 Overview of the Parastatal Sector: This sector comprises 132 enterprises: 38 Government institutions created by statute (called rtatutory bodies), 4 state-owned registered companies, 54 independently-managed Treasury Funds, 3 trusts, and 33 companies wholly or partly owned by two statutory bodies - the Agricultural Development and Marketing Corporation (ADMARC) and the Malawi Development Corporation (MDC). By an administrative decision, twenty-six of the statutory bodies and three of the state-owned companies are supervised by the Department of Statutory Bodies (DSB). The sector accounts for more than 25 percent of GDP. It has a monopoly over many services (such as radio  14 broadcasting, electricity supply, airlines); virtually controls the marketing of all smallholder crops; encompasses many regulatory activities; and handles a number of developmental tasks. 2.34 In tandem with the objectives of the World Bank and IMF-supported structural adjustment programs (whose objectives towards the sector are improving efficiency of the commercial parastatals and reducing their financial burden on government) the Malawi, Government in its Statement of Development Policies 1987 - 1996, sets out government's policy towards the sector as continuing to provide a range of goods/services important because they are necessary for basic welfare of the community or because the sector provides for the socio-economic development of the country efficiently and equitably. In pursuing this policy, government's emphasis lies on improving efficiency and effectiveness of the sector, including government departments responsible for reviewing, monitoring and regulating the sector. 2.35 A number of institutions exercise varying degrees of control over the parastatal sector. The Board of Directors and management do not have authority to set policy and are required to seek approval from one or more government entities. These include the Department of Statutory Bodies (DSB) which supervises the operations of statutory bodies and acts as a catalyst to spur different government agencies to reach policy decisions on issues affecting the sector; the Ministry of Finance (MOF) which has paramount authority over budget approval and, hence, influence on parastatals that rely on government for either subventions and fixing tariffs or both; the Department of Economic Planning and Development (EP and D) which Is mainly concerned with policy and examines the feasibility of new investments; and parent technical ministries which clarify governmint policy as it relates to particular sectors and perform advocacy on behalf of parastatals with regard to other decision making entities. Of these entities, DSB is centrally important in the development of the sector. 2.36 Management of the parastatal sector has received attention from the Malawi Government and international and bilateral donors in the last decade, largely due to the impact of the sector on the economy. Bilateral and multilateral doncrs have financed programs to improve the efficiency of the sector through interventions in the parastatals themselves, the oversight agencies, and the policy and regulatory framework. These interventions have markedly improved financial performance of the sector. Only two of the commercial parastatals have recently reported operating losses and whereas total subventions to non- commercial parastatals have increased, there has been marked improvement in some which now show signs of attaining self-reliance and financial sustainability. Profitability is not a reliable indicator of efficiency given that many of these parastatals are monopolies which set tariffs based on cost: most of them perform social as well as commercial functions. The recent improvement in financial performance of the sector is a marked improvement from the last decade. Among factors credited for these improvements are the supervisory and monitoring functions of the Department of Statutory Bodies. 2.37 The Department of Statutory Bodies (DSB): DSB was created in 1981 to supervise and assist the statutory bodies. The current statement of Development Policy for the Malawi Government defines its task as "to monitor parastatal perforniance and assist parastatals in both policy analysis, planning and financial and personnel management". In the past decade, and in pursuance of its remit, DSB has developed functional systems for monitoring and evaluating financl performance of parastatals, proposed and implemented puiposive initiatives to improve parastatal management; assisted in the design of financial systems for some parastatals, and arranged training courses aimed at improving the managerial skills for  15 parastatals staff. It is to these interventions that most of the improvements in the sector are attributed. To strengthen its capacity to undertake these tasks, the department has received technical assistance from UNDP and the World Bank and is still receiving assistance from the Overseas Development Administration of the United Kingdom. 2.38 In its assessment of sector performance, the PSMR acknowledged the relative success of the sector but also recommended that DSB's task should be clarified by an Act of Parliament that can give it legal status and allow it to hire staff and pay salaries at levels commensurate with the private sectors. It also recommended that to meet its remit satisfactorily, DSB requires high quality staff and must institute and adopt procedures that improve the budget process for the parastatals and delegate more authority to managetL nt and the Boards of Directors. The review recommended that DSB continue with its plans for establishing panels to evaluate parastatal general managers and to eventually put them on performance-based contracts; develop innovative ways to meet shortages of skilled staff such as accountants; and develop housing schemes to promote home ownership among parastatal employees. 2.39 Some positive developments have taken place since the above recommendations. Through an ODA-supported project whose broad objective is to improve overall efficiency of resource use within the parastatal sector, DSB has now a "Roving Accountant" stationed in the southern part of Malawi where most of the parastatals are based. The purpose of this position is to enable DSB to develop sustainable financial management capacity through providing on-the-job training and developing up-to-date financial accounting and reporting systems and controls. It will also provide direct accounting and financial management support to a number of small parastatals which currenty cannot justify (or are unable to) recruit a full time accountant. The need for DSB to provide accounting support to parastatals has always been recognized and cannot be overstated. Given the size of the sector and the magnitude of accounting problems, this intervention is timely, and will remain necessary for some time. The department is still finding difficulties in filling the three auditor positions which have been vacant since the review. 2.40 Some effort has been made to ensure that the parastatal sector is operating at opfimum technical efficiency and effectiveness. DSB is carrying out eight technical reviews of selected parastatals. The reviews will examine whether the sector is operating at justifiable cost levels and that maximum returns are obtained from existing resources. The technical reviews are assessing whether operations of the selected parastatals can be provided more cost effectively through other means and by other operating practices. The products of these reviews are expected to provide useful inputs and scope for expanding the pilot performance contracting system embarked on in the past few years. However, DSB's capacity to manage and extend these interventions still remains heavily restricted. This is a result of lack of the requisite skills mix in the department and ambiguity in its task definition and relationships with other supervisory agencies. Achievements attained in this area to-date must be safeguarded. This can only be done by enhancing DSB's capacity to manage the existing scheme and extend it to other parastatals. This is unlikely to be achieved in the present institutional framework which cannot attract personnel w:th the skills needed to manage and extend the performance contracting scheme. 2.41 DSB is unable to attract and retain staff with the requisite skills mix partly because its senior administrative leaders are frequently redeployed Qike other civil servants), and partly because the civil service cannot match the remuneration packages in the parastatal and  16 private sectors. It is necessary that DSB be able to recruit, on contract terms, staff with core competencies in business planning and strategic management, accounting, financial management and analysis, economic and project analysis/management and organizational development. DSB must have continuity in leadership and professionalism and be able to offer services that the sector would find valuable and be willing to pay for even by way of levies. 2.42 Another problem is the lack of clarity in the tasks and relationships of DSB with other supervisory agencies. As wells as getting rid of duplication, this would define the core skills requirements of DSB. While legislation setting out DSB's role and functions as well as its authority and relationships with other entities would be desirable, this would not be appropriate at this time. This conclusion is based on the opinion of several parastatal Chief Executive Officers and the Ministry of Justice. In the interim, DSB's tasks should be clearly set out and communicated to all parties involved in the sector, as is provided for in the Statement of Development Policies. The Mission Statement needs to be reoriented and refocused towards those functions on which there is broad agreement. These relate to the stablishment of performance indicators; monitoring and evaluation of pviformance indicators; provision of assistance in accounting; appraisal of financial analysis and investment appraisal; assisting in management development; and articulation of a privatization policy together with an implementation strategy. 2.43 In recent yeas, DSB has embarked on a few privatization and commercialization programs and reviews of general issues and policies that cut across the whole sector (staff housing scheme, transport fleet management). Progress on these has been slow and unsatisfactory. Although government's espoused policy for the parastatal sector includes contnued review of organizations to determine suitability to continue operating as parastatals, this has not been done rigorously. A number of reasons account for this, among which is lack of a clearly stated government policy on privatization. At the moment, DSB undertakes semi-structural privatization programs which run parallel to MOF's program to privatize Treasury Funds. It is necessary that these efforts be properly coordinated by one government agency and that DSB should be equipped to assume this responsibility. 2.44 Many resources of the parastatal sector are tied up in such things as transport fleet and staff housing. DSB recognizes the negative impact this has on the finances of parastatals and has been trying to analyze these issues and develop economically efficient and sustainable policies. These issues should be resolved as soon as possible: until then, economic resources which could be put to more beneficial and productive use remain tied up on them. F. Management and Skils Development 2.45 By the early 1980s, inadequacy of trained manpower had emerged as a major constraint to Malawi's development. This was recognized as an issue of both availability of entry level staff for all sectors of the economy and the need for training to improve the professional and managerial skills of existing staff. Govermnent decided that the establishment of a local management training institution would be the most appropriate response and it turned to the World Bank for assistance. This was the background to the establishment of the Malawi Institute of Management (MIM) in 1989 as the major component of the on-going ID I. MIM mission was to provide tmining programs aimed at improving  17 maaagerial skldls in the public service, parastatals and the private sector and to provide consulting services to all three sectors of the economy. 2.46 At the establishment of MIM in 1990, the total number of middle level and upper management positions in the economy requiring management training was estimated at 7,600: civil service (3,900), parastatals (2,200) and private sector (1,500). These positions grew to about 8,000 in 1992, assuming a rate of 2.5 percent per annum. Using the same conservative rate of growth, the total would be close to 10,000 by 1999. To this number must be added senior and middle-level positions in local government and non-governmental organizations (currently about 150, rising to about 400 by 1999). MIM has made strenuous efforts to meet this management training need. A medium-term review of the Institute undertaken by UNDP and the Government in June 1992 concluded that it had made satisfactory progress and that it was responding fully to the needs of all three sectors In respect of management trainng and consulting. In training and consultancy, MIM exceeded the targets set for each of the three years, 1990 through 1992. More than 3,000 managers had taken part in its generic training program and its staff had performed over 200 consulting projects. Its services are reputed to be of very high quality. Its training programs are focused on key development management areas, notably human resources management, project analysis and management, computer applications in management, policy analysis and management, and information management. 2.47 Notwithstanding the positive impact of MIM and the strong Government commitment to its continued growth, the overall approach to management training in the public sector Jill leaves much to be desired. This is surprising because a national policy statement on training was produced in 1989. This sets out the objectives of training, establishes training priorties and provides an implementation strategy, which spells out the tasks of ministries and departments, the provision of training budgets and the institutional framework for training. What is needed is an update of the training policy with particular attention to implementation: DPMT's coordinating activities, the responsibilities of individual ministries and departments for the development and implementation of training plans, and the provision of annual training budgets. 2.48 The training activities to be undertaken would be determined after training needs assessments that would identify skill gaps, new competencies and techniques. A good starting point would be the preliminary training needs already identified in the management reviews of ministries and departments undertaken since 1985, as well as those identified in the four studies completed as part of the preparation work for ID II. Training should be related to career development (career path), linked to the overall incentive package. A special feature of training under ID II would be design and implementation of training programs that could help to enhance civil servants' commitment to changes in processes and systems, notably forward-budgeting and information management systems. G. Governance Situation and hanagement Improvement 2.49 At the Consultative Group Meeting for Malawi held in Paris in May 1992, the donor community decided to suspend non-humanitarian development aid to the country until improvement in the country's governance. Asserting good governance as a critical element for equitable economic development, the donors looked for improvement in basic freedoms and human rights. The Government responded by embarking on measures that have progressively enhanced these freedoms and rights, including the expansion of the space for  18 political freedom. The Minister of Finance in his March 1993 budget speech in Parliament aid that Government was committed to achieving improved go-r'nance in the sense of popular participation by the people in decisions that affect them, .countability of administration to the people, the absence of corruption, adherence to the rule of law, and respect for human rights. Government gave concrete proof of this new commitment when it sccessfully organized a referendum in which most of the population voted for multiparty democracy in June 1993. Following the improvement in the country's human rights record and the progress made toward political pluralism (including the formation of political r-rties and establishment of independent newspapers) with multi-party elections scheduled for May 1994, a successful Consultative Group meeting was held in December 1993. Donors agreed at that meeting to resume aid to Malawi; pledges in the amount of US$305 million were offered at the CGM. 2.50 Ihere are evident lirkages between some management issues and governance in the country. The linkage between governance and improved performance in the civil service is well documented in the regional technical paper on 'Governance Approach to Civil Service Reform.n."/ In the absence of openness, transparency, accountability and predictability, ndamenal change in respect of decentralized decision making and increased initiative on the part of middle and senior lvel managers cannot be achieved. Officials would continue to be afraid to embrace meaningl decentralization, and tend toward risk avoidance. Another llustration of the linkage between governance and management improvement is the recommendation in two of the studies commissioned under the preparation of ID II on the adoption of a Public Service Actl/. Both studies state that a major objective of the Act would be to ensure that public service is conducted with due regard to transparency and predictability. The elements of governance highlighted in the 1993 budget speech - participation, accountability, absence of corruption, rule of law and respect for human rights- are critical to the establishment of an institutional environment conducive to the achievement of improved management performance. I/ By Mamadou Dia, 1993. Technical Paper No. 225, Washington, D.C. A/ These are the Study on Wages, Salaries and Fnnge Benefits by Pnce Waterbouse and the Organizational Audit of the Department of Personnel Management and Training by ESAMI.  19 CHAPTER 3. THEPRojECr A. Rationale and Objectives 3.1 The consistent message in the management studies of line ministries undertaken since the late 1980s is that weak management capacity constitutes a major bottleneck to the implementation of development programs and projects. In 1989 Government obtained an IDA credit to support the first Institutional Development project (ID I) which was co-financed by the UNDP. Under this project, the Malawi Institute of Management (MIM) was established and a tax modernization program was implemented in the Ministry of Finance (MOF). ID I is scheduled to be completed by December 1994. MIM's achievements in the areas of training and consultancy are highly rated by both public and private sector organizations. The tax modernization program, too, enabled Government to carry out tax policy reform, especially the broadening of the tax base. However, the sub-component on government financial management reform (co-financed by UNDP) was not implemented. This was largely because of continuous project re-design arising from a piecemeal approach to the problem to be tackled and partly to progressive reduction in the funds made available by UNDP. To remedy the situation, a comprehensive budgeting and financial management reform (including the introduction of forward budgeting system and a new public accounting system) will be financed under ID II. Against this background, 11) has been designed to: o address specific systemic management issues that constitute bottlenecks to efficiency and effectiveness in the civil service; * assist the Department of Statutory Bodies to better manage the interface between the parastatal sector and the Government; and - strengthen the Malawi Institute of Management (MIM). B. Improving Civil Service Policy and Information Framework (US$3.3 million) 3.2 Policy and Legislative Framework (US$53,000): This component is concerned with issues that cut across all ministries and departments of the civil service, beginning with the policy and legislative framework. The other main issue is the design, installation and implementation of appropriate management information systems for the personnel and finance functions. Government has submitted a Policy Statement on Civil Service Reform and Institutional Strengthening acceptable to IDA in the form of a letter signed by the Minister of Finance (Annex 1). Regarding the Public Service Act, a draft concept paper was discussed during appraisal and IDA provided comments as well as samples of Civil Service and Public Service Acts. Cabinet approval of the concept of a Public Service Act was confirmed at negotiations and Government subsequently submitted to IDA the draft of the legislation. Promulgation of the Public Service Act by Parliament is a condition of effectiveness. 3.3 Information Management Framework (US$843,000): The project will finance a civil service census - a critical first step in the development of a personnel management information system (PMIS). Government is to issue a statement that will set out the objectives of the census and explain how it would be conducted. Next, Government would establish a Census Executing Unit (CEU), located in the National Statistics Office, responsible  20 for the conduct of the census. The Head of the CEU would be accountable through the Commissioner of the National Statistics Office to the Secretary to the President and Cabinet (SPC). Appointment of the Head of the unit as well as its Chief Technical Officer and Accountant is a condition of craedit effectiveness. Details on the objectives, methodology and strategy of the census are provided in Annex 2. 3.4 Personnel.Information (US$1.4 million): The project will support the design and implementation of a computerized personnel information system (PMIS). The ;ersonnel information system in DPMT would be linked to the payroll system in DPD. To this end, Government is purchasing equipment for both DPMT and DPD to be financed with PPF. The project u ill provide support (with PPF) to DPD to facilitate its move from Blantyre to Lilongwe, scheduled for the first semester of 1994. 3.5 FInancial Information (US$170,000): The first step in the development of a financial management information system (FMIS) is review of budgetary and financial management information needs. This is to be financed with PPF. It is focused on basic information and systems needs to support budgetary and financial management. The project will finance the design, development and implementation of a computerization plan for financl management. GOM would appoint a Data Administrator located in DPD. He or she will work closely with officials directly involved in data management in MOF, notably the Accountant General's Office and the Treasury as well as in EP&D, to ensure that these organizations' financial management information needs are met. 3.6 Training in Infonration Management (US$805,000): The project will finance taining in information management for officials in the main government organizations that would be involved in both the PMIS and the FMIS. The training activities would comprise fellowships, both long-term and short-term, workshops and seminars. Some training activities would be conducted in-country; others would be in the Region or overseas. C. Strengthening the Capacity of the Department of Personnel Management and Training (US $4.0 million) 3.7 The project will provide support to DPMT in the form of TA, equipment and training to improve its performance in key personnel management functions. The project will finance: e review of the institutional arrangements for determining remuneration; * re-design of the pay structure and rationalization of fringe benefits and allowances, linked to job evaluation; * preparation of procedure manuals covering functions undertaken by personnel common services staff; O development and launching of an open performance appraisal system; and * development and introduction of career paths. Ihe project will support the re-structuring of the Department and the enhancement of its staff skdlls.  21 3.8 Review of Institutional Arrangements for Determining Remuneration (US$322,000): The project will finance TA to undertake review of the institutional arrangements for determining remuneration (pay plus fringe benefits and allowances). The review will pay particular attention to clarifying the tasks and responsibilities of the main organizations (MOF, DPMT, EP&D, OPC and MOL) and propose approaches to coordination. The re-design of the pay structure would be undertaken simultaneously with a pilot test of job evaluation. DPMT staff would be involved in the job evaluation task through workshops. 3.9 Redesign of Pay Structure Linked to Job Evaluation (US$1.0 million): The project will finance TA, equipment and workshops needed to undertake a comprehensive job evaluation of the civil service. The result of the job evaluation exercise would be used to determine the new pay structure. 3.10 Procedure Manuals for the Personnel Function (US$75,000): The project will finance local TA to undertake the production of procedures manuals covering functions undertaken by DPMT and HRMU staff. 3.11 Open Performance Appraisal Systen (US$271,000): The project will finance local TA and workshops and training for launching an open appraisal system. The workshops will be for the middle and senior-level managers who would have to implement the system. 3.12 Career Paths (US$575,000): The project will fund TA, equipment, workshops and training to develop the necessary capacity within DPMT and to cover the operating expenses (materias, printing of career path brochures and supplies but excluding salaries and wages or any form of income supplementation) neoded to undertake the exercise. 3.13 Organizational Restructuring and Rationalization (US$884,000): The project wiUl assist in the establishment of a Personnel Policy Research Unit (PPRU). The Unit is expected to enable DPMT to develop capacity in personnel planning and in undertaking systematic review and improvement of personnel policies and to increase DPMT's internal coordination and its overall effectiveness. The project will provide TA, books, equipment and training. Through this Unit, the project will finance workshops to foster effective integration of personnel budgets in the budgetary process. The project will assist in rationalizing the Department's relationship with other ministries and departments by financing workshops that may result in the devolution of clerical, secretarial and copy typists to the ministries. Government has agreed to merge the Manpower Planning and Training Divisions of DPMT as part of the rationalization process. Implementation of this decision is a condition of credit disbursement for the training category under the DPMIT component. 3.14 Skills Development (US$830,000): The project will finance fellowships for training in specialized skills, short-term courses, and fellowships for tailored training programs to be provided locally. The target population for this training is the central staff of DPMT and personnel assigned to the Human Resources Management Units being implemented in line ministries under the project. The creation of the HRMUs on a pilot basis in five ministries (Agriculture, Education, Finance, Works and Health) is a condition of credit disbursement for the training category under the DPMT component.  22 D. Strengthening Institutional Capacity of the AMinistry of Finance (US$5.5 million) 3.15 'rhe proje,ct will finance the following elements to enhance capacity in MOF with a view to achieving increased operational efficiency and effectiveness. 3.16 Installation and Implementation of Forward Budgeting (US$734,000): As preparation for the launching of forward budgeting, Government will combine responsibility for revenue budget and development budget under a Senior Deputy Secretary for National Budget, effective from 1994/95 financial year. (Ibis was done before negotiations in April 1994). The project will finance a strategic review of the budget and financial management information needs of the Government as well as a review of the program budgeting experience. (See also para 3.5). One local expert and an expatriate TA would be hired for 24 months each to work with MOF staff to plan, design and introduce forward-budgeting. The project would finance workshops at the different stages as well as one study tour at the design stage. The workshops would cover all relevant MOF staff and selected staff from line ministries and departments. Forward-budgeting together with a tax-inclusive budgeting system would be formally introduced Government-wide after a trial phase in 1996/97. 3.17 Recurrent Cost Implications of Development E xpenditure: As part of the project, and building on the experience of ministries such as Works and on international experience, MOF will coordinate the development of up-to-date recurrent cost coefficients. To ensure that the perspectives of all stakeholders are encompassed, MOF will establish a working group for each major sector, with representatives from line ministries, EP & D and MOF. To ensure that the first cut of the forward budget is based on sound estimates, the coefficients. will be developed during the first 12 months of the project, under the guidance of the consultant assisting with the development of the forward budget system. Regular review of the coefficients will be institutionalized as part of the system for updating the forward budget. 3.18 Tax Policy Analysis Unit (US$1.1 million): The project will support the Tax Policy Analysis Unit by providing training, TA and equipment. Staff training will be a priority and -his would include long-term and short-term training in-country and overseas. One long-term TA would be recruited to assist the Unit during its first two years. The equipment to be provided would include computers and furniture. 3.19 Design and Implementation of New Public Accounting System (US$2.1 million): The project will finance the design and implementation of a new public accounting system for government, providing support through technical assistance for software design, installation, the purchase of hardware and ancillary equipment, and training for operators, users and maintenance staff. 3.20 Enhancement of Siklls in Budgeting and Accounting (US$1.6 million): The changes to budgetary processes and systems that would accompany the introduction of forward- budgeting demand the development of new skills in MOF. Following the budgetary and financial management information needs review, a training needs analysis will be undertaken with the support of local short-term technical assistance. In light of the needs analysis and the skill needs identified through the forward-budgeting workshops, training programs will be developed and implemented under the project. The project will assist the Accountant General's Office to identify training needs and in the formulation and implementation of a comprehensive training program for common service accounting staff. Funding support would be provided for an assessment of training facilities and training needs; for the  23 conversion program for non-accounting graduates recently approved by government; for upgrading the skills of serving accounting staff; for the development and implementation of induction courses for recruits at the level of Assistant Accountant and Accountant; and for the development and implementation on a pilot basis, in conjunction with MIM, of a management program for Chief Accountants. E. Support to the Department of Statutory Bodies (US$1.9 million) 3.21 The project will finance activities relating to: * clarification of the task and functions of DSB and its relationship with other supervisory agencies; * strengthening DSB in promoting improved financial and economic performance of parastatals; e development of a government privatization policy; and e enhancement of the skills of DSB staff. * strengthening DSB's operational efficiency 3.22 Clarification of the Task and Functions of DSB and its Relationship with other Supervisory Agencies (US$21,000): DSB has prepared and circulated its proposed mission statement which proposes clarification of its task in relation to those of other supervisory agencies. The project will finance a consultative workshop for participants drawn from representatives of the parastatal sector, line ministries, E.P&D, MOF and DSB itself to discuss the proposed mission and definition of responsibilities. The output of this workshop will be a well understood, accepted and publicized definition of tasks, responsibilities and relationships among the various entities involved in the parastatal sector. 3.23 Promoting Improved Financial and Economic Performance of Parastatals (US$1.1 million): The project will finance equivalent of 5h person years in long and short term consultancies to: * evaluate and advise on scope for extending the pilot performance contracting scheme and assist DSB determine performance indicators for parastatals as well as design a complementary reward/sanction scheme; * prepare guidelines for ensuring sound financial management in the parastatal sector; and * prepare guidelines related to employment, salaries and fringe benefits of staff in the parastatal sector. 3.24 Privatization Policy for Malawi Government (US$145,000): The project will finance a short-term consultancy to assist DSB to co-ordinate the development of privatization policy for the Malawi Government, covering statutory bodies and treasury funds. Funding support would also be provided for two workshops: the first to present and discuss case  24 studies on experiences in Malawi and other countries as well as obtain views on broad orientations and the second to discuss the draft privatization policy. 3.25 Skills Development (US$472,000): The project will finance fellowships in economics and accounting as well as short-term fellowships in public enterprise management and reform, financial management and performance contracting. The project will also finance local training for DSB staff in information technology, performance monitoring and evaluation. Seminars and workshops would also be organized for DSB staff and some staff from selected parastatals 3.26 Strengthening DSB's Operational Efficiency (US$193,000): To enhance DSB's operational efficiency, the project will finance the purchase of vehicles and of a limited number of computers. F. Strengthening the Malawi Institute of Management (US$8.1 million) 3.27 The MIM component represents about one-third of total project costs. The Institute will be a pivotal presence at all stages of the project, as both the agent for change and the vehicle of change. Special attention will be paid to securing its presence and credibility through a well directed movement to financial self-sustainability. Specifically, project funds would be used to finance: e a second phase of technical assistance that would help to strengthen the Institute's capacity in training and consultancy; X staff training; * fellowships to MIM's courses; * books and equipment for the Institute's Learning Resource Center; and * construction of management staff housing on the Institute's campus outside Lilongwe. 3.28 Technical Assistance (US$1.2 million): A total of 9-person years of TA (most of them short-term) would be provided under the project. TAs would intervene mostly in rare skill areas (Finance and Accounting, Management Information Systems, and Consulting, Training and Research Techniques). MIM would use lessons learned under ID I (through twinning with ARA consultants of Canada) to ensure that effective skills transfer takes place. The TA to be financed will be managed with support from consultants who have experience in the required areas of specialization. 3.29 Staff Training (US$837,000): In September 1993, Government directed three MIM's MDCs on secondment from the civil service to retn to the service. With their departure, MIM's staff strength was reduced to five. The Governing Board has approved the recruitment of six new MDCs and two trainee MDCs. The project will provide fellowships (ong-term and short-term) for upgrading the skills of new staff. The project will also finance training and refresher courses for existing MIM staff. Eight (8) long-term and sixteen (16) short-term fellowships would be financed under the project. 75 percent of the fellowships would be utilized during the first three years of the project. This will be monitored in the annual reviews of the MIM component.  25 3.30 Fellowships to MIM Courses (US$773,000): Under ID I, an in-country fellowship fund of US $1.4 million was established (with UNDP co-financing) to attract participants to MIM's courses. MIM has continued to rely on this fund instead of vigorously marketing its courses. To avoid an abrupt end to an arrangement that has enhanced managerial skills in the country, US $773,000 would be provided to replenish the fund. However monitorable targets would be set in MIM's implementation plan to ensure progressive phasing-out. At negotiations, the targets set for the progressive phasing-out of fellowships to MIM's courses require that project support for the fellowships be provided as follows: 25 in 1994, 150 in 1995, 100 in 1996, 75 in 1997 and 50 in 1998. Compliance with these targets will be monitored annually by IDA. 3.31 Support for MIM's Learning Resource Center (US$1.5 million) : The project will finance library books and audio-visual equipment to be used in the Institute's Learning Resource Center. The project will also finance computers and ancillaries to support traiing activities. The library and audio-visual center on MIM's campus have adequate space for the books, computers and audio-visual equipment. 3.32 Campus Management Staff Housing (US$688,000): The project will finance the construction of a total of five housing units near the MIM campus to accommodate campus management staf. Land for house construction has already been secured and lease documents are available. The cost estimates for the housing units were provided by the Ministry of Works and reviewed during appraisal. The house designs are ready and it is estimated that construction would be completed within the first two years of the project. 3.33 Support for MIM's Operational Pertormance (US$3.1 million): (The amount indicated is the total project cost for this item). The project will finance vehicles and some elements of operational expenses (excluding staff salary) to enhance the oterational efficiency of the Institute. The extent of operational support would be progressively phased out as MIM's self-financing capacity increases during the second half of project life. Specifically, MIM will be required to progressively cover its salaries and operating costs from its Endowment Fund: 20 percent in 1995/96, 40 percent in 1996/97, 60 percent in 1997/98, and 80 percent in 1998/99. CHAPTER 4. PRojECr COsr AND FINANCING A. Costs and Financing 4.1 Project Costs: Total project costs are estimated to be US$25.6 million, including physical and price contingencies. Donor-supported projects have tax-free status in Malawi; project costs are not subject to taxes and duties. The project cost summary is provided in Table 4.1.  26 Table 4.1: Project Cost Summary (Mal Kwacha'000) (US$'000) % Foreign % Total Local Foreign Total Local Foreign Total Exchange Base Costs 1. Civil Serv. Policy & Info. Framework 2,097.4 11,066.1 13,163.5 487.8 2,573.5 3,061.3 84 13 2. Department of Personnel Mgmt & Training 1,796.4 13,884.6 15,681.0 417-' 3,229.0 3,646.8 89 16 3. Ministry of Finance 239.5 21,452.5 21,692.0 55.7 4,989.0 5,044.7 99 22 4. Dept of Statutory Bodies 150.1 7,720.7 7,870.7 34.9 1,795.5 1,830.4 98 8 5. Malawi lust. of Mngt 13,917.8 16,409.7 30,327.5 3,236.7 3,816.2 7,052.9 54 30 6. PSM Improvement Unit 5,424.8 1,571.3 6,996.1 1,261.7 365.4 1,627.0 22 7 7. PPF - 4,300.0 4,300.0 - 1,000.0 1,000.0 100 4 Total Baseline Costs 23,626.0 76,404.7 100,030.7 5,494.4 17,768.5 23,263.0 76 100 raysical Contingencies 76.8 ?.485.7 2,562.4 17.9 578.1 595.9 97 3 Price Contingencies 4,547.8 3,016.9 7,564.7 1,057.6 701.6 1,75s.2 40 8 Total Project Costs 28,250.6 81,907.3 110,157.9 6,659.9 19,048.2 25,618.1 74 110 4.2 Base cost estimates are in November 1993 prices. Physical contingencies amounting to about 3 percent of base costs are included. Price contingencies have been estimated at about 7 percent of base costs. Annual rates of inflation are estimated at about 7 percent for international inflation in the costs of foreign goods and services, and about 22 percent for local inflation. 4.3 Flnancing: The proposed IDA credit of US$22.6 million equivalent would finance approximately 88 percent of total costs, net of taxes and duties. This would cover all foreign exchange costs (US$19.0 million) and 53 percent of local costs (US$3.6 million). The local costs comprise the cost of running the PSMIU and contributions to the incremental operational expenses for the different project components. A PPF in the amount of US$1.0 million was approved on October 14, 1992. The financing plan of the project is set out in Table 4.2. Table 4.2: Summary Financing Plan (US$'000) LOCAL FOREIGN TOTAL IDA 3,509 19,048 22,557 Government 3,061 - 3,061 TOTAL 6,570 19,048 25,618 4.4 Co-financing of the component on the Department of Statutory Bodies is under discussion with UK/ODA.  27 B. Procurement 4.5 Procurement arrangements are summarized in Table 4.3. Table 4.3: Summary of Proposed Procurement Arrangements (US$'000 equivalent) Project Element Procurement Method Total ICB LCB Other N.B.F. Cost 1. Civil Works 1.1 Buildings - 688.3 - - 688.3 (619.5) (619.5) 2. Goods 2.1 Equipment/Computer (3,838.3) (3,838.3) 2.2 Vehicles (282.4) (282.4) 2.3 Furniture - 22.7 - - 22.7 (20.4) (20.4) 2.4 Books Ref. Books - (515.8) \ (515.8) Manuals/Journals/Per. - - 347.2 - 347.2 (340.0) (340.0) 3. Consultancies 3.1 Technical Assistance (6,483.8) Project Prep. & Implem. Support (1,391.3) Capacity Building (5,092.5) 3.2 Training (6,619.3) (6,619.3) 4. Miscellaneous 4.1 Operating Costs - - 3,672.3 2,141.9 3,672.3 (2,831.6) (2,831.6) 4.2 Refinancing PPF - (1,006.0) (1,006.0) Total - 711.1 18,411.0 2,141.9 75,618.1 (4,354.2) (639.9) (17,563.1) (';.,i57.2) N.B.F.: Not Bank financed Figures in parenthb'-es are the amounts financed by the IDA credit.  28 4.6 Civil works e _mated to cost $688,000 will be proued thrOugh local competive bidding (LCB) since fte value is smal, mobilization cost for foreign conacto would be high and it may not be of interest to them. Local capacity exists. For LCB, agreemet was reached during negodations t there will be local adverdsing, public bid opening, clearly stated evaluadon criteria and award to the lowest evauated bidder. Foreign bidders will not be precluded from paicipation. 4.7 Goods are estmated to cost $5.0 milion. Of this reference books and text books estmated to cost $516,000 would be procured by ICB foowing the Bank's Guideis. Traing manuals, jouroals and periodicals in the amount of $347,000 would be purchased through LCB or through consolidation agents selected tirough competition. Computers and other equipment estmated to cost $3.8 million would be procured through ICB. Furniture estimated to cost $23,000 would be procured through LCB. Vehicles aggregafting to $282,000 required by five beneficiary agencies will be purchased in a phased manner through Intenauonal Shopping or through IAPSO. All purchases wil follow procedures acceptable to IDA. 4.8 Consultants and technical assistance personnel to be financed by IDA would be appointed in accordance wift Bank's Guidelines (1981) and would be employed on terms and conditions satisfactory to IDA. Consultancy services in the amount of $6.5 million will be selected on the basls of terms of reference and short-ists acceptable to IDA. Draft sample tems of reference (TORs) for all major consultancy services were confirmed during negotiations. Adoption by Government of a model consultancy contract acceptable to IDA, including a sample letter of iniaton, for the recruitment of consultants under the project will be a condition of credit effectvenes. For training ($6.6 mfllion), a comprehensive program, including a detailed program for the first year of project implemention was discussed and agreed to at negotiations. (See Annex 8 on TrIaing Plan). Clearance of MDA for trainees would be adhered to. Operaing costs estimated at $5.8 million will follow normal Government procedures and will be finaneed on a diminishing basis. 4.9 All consultancy conats above $100,000 for firms and $50,000 for individuals, and goods and civil works packages of over $100,000 equivalent, will be subject to prior review by IDA. Consultancy conats, with value below those levels for each contract and awarded on the basis of a short list, would be subject to post-review by IDA. Prior review wil apply to terms of reference and single source consultancy contrcts regardless of the value of the contract. All other procurements will be subject to post review. 4.10 Malawi has agreed to use the Bank's Standard Bidding Documents for ICB procurements. 4.11 Procurement performance in Malawi recorded some improvement during the past two years, largely because of the support provided by Bank staff through training and coaching. The national procurement system is being reviewed with support from IDA under an Agriculural Services Project credit approved in May 1993. An IDF grant of US$375,000 was approved in August 1993 to finance the services of an accountant and a procurement specialist who ar expected to assume duty shordty. Procurement tr -in is being localized at MIM. The IDstits staff were associated with the procurement truin;mg programs run by the Bank in 1992 and 1993. Procurement is expected to beneit from the substantial supervision responsibility that the Resident Mission would bear during project implementation.  29 C. Disbursements 4.12 The project is expected to be implemented over five years and to disburse over a six- year period, 1994-2000. Disbursements will be made against standard Bank documentation. All disbursements would be fully documented except for the following expenses which will be claimed on the basis of Statements of Expenditure: (a) contracts for goods and works and consultants' services, provided by firms, not exceeding $100,000 equivalent and (b) contracts for consultants' services, provided by individuals, not exceeding $50,000 equivalent, under such terms and conditions as the Association shall specify by notice to the Borrower. Disbursement documents shall be retained k y the project accountant and MIM's accountant for review by Bank supervision missions and independent auditors. The project is expected to be completed by December 31, 1999. The closing date is set for June 30, 2000. Disbursement arrangements are summarized in Table 4.4. Table 4.4: Disbursement Arrangements CATEGORY Amount of the Credit % of Expenditures to be Allocated (Expressed in Financed SDR Equivalent) l ____________________ (US$ million.) l (1) Civil Works (MIM) 0.6 90% (2) Equipment, Vehicles, 4.5 10G% of foreign Furniture & Books expenditures and 90% of (a) MIM 0.9 \local costs (b) Other 3.6 (3) Technical Assistance 5.8 100% (a) MIM 1.0 (b) Other 4.8 (4) Training 5.9 100% (a) DPMT 1.1 (b) MIM 1.4 (c) Other 3.4 (5) Incremental Operating 2.5 100% of foreign Costs expenditures and 70% of (a) MIM 0.7 local costs (b) Other 1.8 l (6) Refunding of Project 1.0 Amounts due pursuant to Preparation Advance Section 2.02 of this Agreement Uinallocated 2.3 l TOTAL 22.6 4.13 Specal Accounts: To facilitate disbursement, two Special Accounts will be opened in a commercial bank, acceptable to IDA, one by PSMIU and the other by MIM. The initial  30 deposits amount to US$200,000 and US$100,000 respectively and cover four months of eligible expenditures. Replenishment of the Special Accounts should be made monthly and will be fully documented except for contracts valued at less than $20,000 equivalent which will use Statements of Expenditures (SOEs), for which documentation shall be reviewed as part of the annual audit of the project. Replenishment will be supported by bank statements and reconciliation of statements. 4.14 Impact on Recurrent Budget: Agreement was reached during appraisal that adequate provision would be made for local costs and other recurrent costs associated with the different project components by the relevant ministries and departments in their annual budgets throughout the life of the project. Government agreed at negotiations to make provision in its annual budget for 17 percent of the recurrent costs of the PSMIU. D. Accounts and Audits 4.15 The project will maintain accounts, in accordance with International Accounting Standards, to record project receipts and expenditures and assets and liabilities. The project costs and financing plan include provision for the PSMIU and MIM to purchase computers and supporting equipment and accounting software to facilitate project accounting and financial management requirements. It has been agreed that MIM would appoint a qualified accountant on contract pending the incumbent senior accounting officer obtaining his professional qualification. The appointment of a qualified accountant will be a Condition of Credit Disbursement for the MIM component of the project. 4.16 Annual financial statements produced from the project accounts will be audited, in accordance with International Standards on Auditing. by an inder a.&d .ntaudiour acceptable to IDA. Project management will be required to ensure that project accounts and internal controls are sufficient to ensure that the auditor's report contains no material qualifications and to submit such report and the audited financial statements to IDA within nine months of the end of the accounting period audited. Terms of reference for the choice and installation of the accounting system and the audit were agreed at negotiation. Appointment of an auditor acceptable to IDA will be a condition of effectiveness. CHAPTER 5. PROJEC MANAGEMENT AND IMPLEMENTATION A. Channelling IDA Funds to MIM 5.1 Government shall pass on US$5.9 million out of the proceeds of this IDA credit of US$22.6 million to the Malawi Institute of Management (MIM) as a grant. B. Overall Arrangements 5.2 A Public Sector Management Improvement Unit (PSMIU) will be established in the Office of the President and Cabinet (OPC) reporting to the SPC through the Principal Secretary (Administration). The PSMIU will comprise a Project Manager, an Assistant  31 Project Manager (an Institutional Development and Project Management Specialist) who will concentrate on xhe coordination of project elements that cut across ministries and departments); an Information Technology Coordinator who will provide direction and coordination for the management information systems development and related elements of ID U; and a project accountant who would be responsible for all ID II financial management and accounting. All these PSMIU professional staff will be hired on a contract for three years initially, renewable for another two years, subject to performance. The unit will have a small number of support staff. The project manager and the project accountant shall be maintained for the duration of the project and their qualfications shall be satisfactory to IDA. TORs for the Project Manager are provided as Annex 12. Government will ensure effective functioning of the PSMIU throughout the life of the project through provision of adequate staffing and operational resources. Agreement on appropriate modalities were reached at negotiation. 5.3 The main responsibilities of the PSMIU will be to: ensure the successful and timely execution of ID n components; establish and administer effective ID II project execution and management structures and processes; ensure the timely and appropriate procurement of all technical assistance, equipment, training, and related services required for the successful execution of ID Tl; ensure the timely identification and resolution of project execution issues and the optimal application of successful improvement measures; and, evaluate the overall performance of ID Tl, its individual components and project elements, providing regular reports to the SPC and the Inter-ministerial Committee on Institutional Development on project issues and progress; and keep and maintain project accounts (excluding the MIM component). The PSMIU will coordinate the preparation and submission of annual reports, audit reports and work plans to IDA for all l) 11 components. 5.4 The PSMIU will be assisted by a Project Coordinator designated by Government in each of the major beneficiary organizations: MOF, DPMT and DSB. These organization- based Coordinators will work in close liaison with the PSMIU and will have primary responsibility for project implementation within their organization. This will build management capacity and promote project ownership. The qualifications of the officials designated to serve as Coordinators of the project shall be satisfactory to IDA. Their appointment will be a condition of effectiveness. As under ID I, MIM's management will continue to be directly responsible for implementation of the MIM component with the Principal serving as coordinator. An organizational chart depicting the project administrative arrangements is provided as Annex 17. 5.5 The Project will cover the salaries and expenses of the professional and support staff of the central PSMIU. The Project will support up to twelve months of TA to assist the PSMLU staff in the design, execution, and management of specialized elements of the ID II; and will cover the costs of necessary computer and office equipment to operationalize the PSMIU. It was agreed at appraisal that the Project Manager would be appointed before negotiations. The candidate who emerged first in the recruitment process cleared with IDA attended negotiations and formal offer of appointment would be made after his compensation package would have been finalized to the satisfaction of IDA. 5.6 As ID II involves a number of ministries and departments, overall coordination, direction and policy guidance for the project would be entrusted to an Inter-ministerial Committee on Institutional Development (ICID) chaired by the Principal Secretary, (Administration) in OPC. Members will be drawn from the main ministries and departments  32 involved in the project. The line ministries will be properly represented. This will deepen project ownership. The ICID will meet quarterly and present progress reports to the SPC. PSMIU will act as secretariat to the ICID. C. MIN Implementation 5.7 The existing implementation arrangement under ID I would be maintained for the MIM component under ID II. MIM's Board of Governors has functioned effectively as MIM's policy-making body with responsibility for approving the annual budget and training strategy, and for reviewing major personnel decisions and contract awards. MIM's Principal is Secretary to the Board. When the founding expatriate Principal left in March 1992, the Board promptly appointed the most senior Malawian on the staff as his successor. The Board acted with thoroughness and dispatch in probing the conflict opposing the Principal to MIM's Management Development Consultants during the first quarter of 1993. The Principal's appointment was terminated in September 1993: an Acting Principal has been appointed. Government has already consulted the Association on the procedures for appointing a new Principal. Although the leadership crisis had negative consequence for MIM's performance in 1993, the decisive resolution of the crisis should allow rapid recovery. 5.8 Endowment: The Endowment fund represents amounts set aside under ID I (July 1989 to June 1994) to enable the Institute to survive without donor finances after the project period. The amounts are principally derived from fees the Institute charges for courses and consulting and the UNDP's support, in the form of fellowships. The fund has grown to K5.4. million and is expected to increase to about K7.0 million by June 1994, (twice as much as the target of K3.0 million set at the beginning of the project). Even after allowing for the continued impact of inflation and the devaluation of the Kwacha, this is a remarkable achievement. However, 75 percent of the Fund is invested in fixed deposits of 5 years maturity with the Leasing and Finance Company (LFC) and this means that the interest earned might not be as significant as originally expected and the goal of self-financing in respect of operational costs would not be achieved at the en" of ID I as expected. A critical review of the evolution of the Endowment Fund together with projected revenues that would be available from 1995 through 1999 is provided as Annex 13. The recommendations of MIM's Governing Board on achieving better management of the Endowment Fund is provided as an Addendum to the Annex. MIM would be required to produce an annual report on the progress made toward self-financing through the Endowment Fund. The report will be sent to IDA by December 31 for information and comments. Assurance on this point was obtained from Government at negotiation. D. Technical Assistance 5.9 The Technical Assistance Matrix provided in Annex 14 summarizes the requirements under the project. L*ag-tewj8hort-tru Total long and short-term TAs would be 373 person- months for all the project components. The mix of long * long and short-term TAs and the breakdown between foreign and local are indicated in figures 1 and 2 respectively. 420A No policy support TA is involved in the project. Of the shor atwa total TA, 84 person-months (23 percent) will support tnn project implementation while the balance (77 percent) __ would be for capacity building. Long-term TAs would be  33 used mostly in the early years of the project with short term TAs (12 months or less) comprising about 75 percent of TA requirements in the last two years. Long-term TAs would also be recruited in rare skill areas for different project ForeXolLeeal C jb components such as a data administrator (Information Framework), job evaluation expert (DPMT) and forward budgeting (MOF). To _ Fomlon ensure that local resources are used as far as possible, a Register of Local Consultants and cow Local Experts in Management is being compiled, 78% financed under PPF. (See the terms of reference in Annex 1 1). E, Implementation Schedule, Reporting and Monitoring 5.10 The project will be implemented over 1994-1999. A draft Implementation Schedule to accompany the Implementation Plan is provided as Annex 7. Annual review of the project is envisaged with a comprehensive mid-term review during the third year. For every review, project coordinators will be expected to: prepare an annual report summarizing progress in all key project areas of activity and a work program for the following year. The annual report would be submitted to IDA within three months after the end of each calendar year. No later than December 31, 1996, Government would carry out, jointly with IDA, a mid-term review of the project. The review will cover the following: * overall project performance against established and agreed key performance indicators (see Annex 9); e evaluation of project achievements and problems; 0 an assessment of project sustainability; and * evaluation of consultants' performance. An Implementation Completion Report will be submitted to the Bank no later than six months after the closing date of the loan. 5.11 Implementation Manual. An Implementation Manual is under preparation and a draft was discussed during negotiations. The manual will be finalized for use at the project launch workshop. An outline plan for the launch workshop is provided as Annex 15. F. Client Consultation 5.12 The ESW on which this project is based - the Public Sector Management Review (PSMR) - was carried out by the Government and the Bank. The discussions of the PSMR report at both the completion and Green Cover stages involved a significant mumber of senior and middle-level civil servants. The Task Force set up by Government in October 1992 to work with the Bank on project preparation involved many civil servants drawn from ministries and departments. About 120 civil servants were involved in workshops organized in the  34 context of diagnostic studies on the Department of Personnel Management and Training and Salaries, Wages and Fringe Benefits between May and July 1993. A Government technical team of selected senior officials from the primary beneficiary organizations participated in the work of the appraisal mission in October/November 1993. The main features of the project were also discussed with some leaders of the emerging opposition groups during appraisal. Their .cactions were positive. In all, the preparation of the project was highly participatory and this has helped to deepen government ownership. Systematic client consultation will be maintained during project implementation through the monitoring and evaluation mechanisms discussed under the Implementation Schedule. This will include two surveys of staff of selected government ministries and departments: the first prior to the mid-term review and the second about 12 months before project completion. To enhance commitment to the achievement of project objectives across line ministries and departnents, the mid-term review could be combined with a country portfolio performance review. G. Environmental Impact 5.13 The environmental category of the credit is C because the civil works envisaged for MIM, (campus management staff housing in Lilongwe) would not have significant impact on the physical environment. As was the case under ID I, the architectural design to be used would be modest and would rely on maximum use of natural ventilation and local materials. CHAPTER 6. PROJEC BENEFTTS, IMPACT AND RISKS A. Impact and Benefits 6.1 Improved performance of personnel, budgetary and financial management would enhance efficiency and effectiveness throughout the entire civil service system. This will help to enhance macroeconomic stability. The conduct of government business would benefit from the predictability, transparency and accountability fostered by provisions in the Public Service Act. All this would favorably affect the implementation of development programs and projects, including those supported by the Bank. Better management of the government- enterprise relationship by the Department of Statutory Bodies would enable Government to derive more substantial benefits from its parastatals. And the development of a privatization policy would help to rationalize the parastatal sector and to prepare the ground for a privatization program. Continued success of the Malawi Institute of Management in providing training and consultancy services to government, parastatals and the private sector would eventually enhance the quality of national economic management. B. Risks 6.2 The evolving govemance situation in the country would be marked by periodic problems that could hinder effective implementation of some management improvement measures. While this needs to be acknowledged, the gains from a distinct trend toward openness and transparency would limit its negative consequences. Furthermore, given the context of impending elections, the leaders of the main opposition parties as well as  35 representatives of the media were briefed on the main features of the project. Attention was drawn to its apolitical character: a project that will help enhance the quality of public management to the benefit of both the governors and the governed. A major problem encountered in implementing the component on the Ministry of Finance under ID I was rapid staff turnover. Although this persists, the existence of a core staff at the PSMIU together with designated coordinators for project components under ID II would limit the negative consequences. The weak implementation capacity noted at the country implementation reviews held in 1991 and 1993 could slow project implementation at the initial stage. However the corrective measures already in place together with a robust Government implementation plan for ID II would help to minimize the risk. Implementation of pay reform measures might be difficult because of the tight budgetary constraint which could continue for the foreseeable future. But increased revenue mobilization and prudent financial management could help provide the necessary resources. CHAPTER 7. AGREEMENTS, ASSURANCES AND RECOMMENDATION 7.1 Government has submitted a Policy Statement on Civil Service Reform and Institutional Strengthening acceptable to IDA in the form of a letter signed by the Minister of Finance (Annex 1). The Government has also adopted the concept of a Public Service Act and has submitted to IDA the draft of the legislation (para 3.2). The Government's Implementation Plan was discussed at negotiations. It will be incorporated in the Implementation Manual that would be used at the project launch workshop (para 5.11). The various budget functions within MOF have been merged into a single division under a Senior Deputy Secretary. Further fine-tuning is to be completed by May 31, 1994 (para. 3.16). A candidate has been selected for the position of project manager and is expected to assume duty as soon as his compensation package is settled. 7.2 At negotiations, the Government gave assurances that it would: (i) Follow IDA Procurement Guidelines for procuring works and goods and IDA Guidelines for Selection of Consultants and use World Bank's Standard Bidding Documents (para 4.7, 4.8 & 4.10). (ii) Submit annual accounts and financial statements audited by independent auditors acceptable to IDA within nine (9) months of the end of its fiscal year to IDA (para 4.16). (iii) Make provision for a proportion of the recurrent cost of the PSMIU to be agreed with IDA in the annual budget of the OPC (4.14). (iv) Ensure that MIM meets the targets agreed with IDA regarding the progressive phasing out of fellowships to its courses (para 3.30). (v) Ensure that the MIM submits to IDA by December 31 of every year an annual report on the progress made toward self-financing through its Endowment Fund (para 5.8). (vi) Follow the project implementation plan agreed with IDA (para 5.14). (vii) Submit to IDA annual progress reports within three months after the end of each calendar year (para 5.10).  36 (viii) Conduct a joint Annual Review of project implementation not later than June 30th after the end of the year under review and carry out a comprehensive mid-term project review by December 31, 1996 (para 5.10). (ix) Ensure effective functioning of the Public Sector Management Improvement Unit through provision of adequate staffing and operational resources (para 5.2). (x) Install an accounting and audit system for the project (para 4.16). (xi) Implement the training program agreed with IDA, beginning with the detailed program for the first year of the program (para 4.8). 7.3 Effectiveness of the credit will be subject to the following conditions: (i) submission to IDA of a copy of the Public Service Act promulgated by Parliament (para 3.2). (ii) appointment of an independent auditor acceptable to IDA (para 4.16). (iii) appointment of Head, Census Executing Unit as well as Chief Technical Officer and Accountant of the Unit (para 3.3). (iv) appointment of project coordinators with qualifications satisfactory to IDA for the components on DPMT, DSB and MOF (para 5.4). (v) adoption of a model consultancy contract acceptable to IDA, including a sample letter of invitation, for the recruitment of technical assistance personnel under the project (para 4.8). 7.4 Disbursement of the credit will be subject to the following conditions: (i) The Training Category of the project credit for the component on the Deparunent of Personnel Management and Training will be subject to: (a) Merging the Manpower Planning and Training Divisions of DPMT (para 3.13) and (b) creation of Human Resources Management Units (HRMU) on a pilot basis in five ministries: Agriculture, Education, Finance, Works and Health (para 3.14). (ii) All categories of project credit for the component on the Malawi Institute of Management will be subject to the appointment of a professionally qualified accountant who would be responsible for the financial management of the MIM component (para 4.15). F. Recommendation 7.5 Subject to the stated actions, conditions and agreements, I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it.  Anuex I Page- IOf 10 Tdehiami U.oavw* 13 199 po o 04 Tdis4 W ~~~~~~~~~~~~~~~~P.O. BOX ioOl9 LILONOW 3 Ref. No. 20/02OIC 3rd May, 1994 .;Mr. E.V.K. Jaycox, Vice Preident, Africa Region, The World Bank Washington D.C. UNITED STATES OF AMERICA Dear Mr. Vice President, LETr OF POLICY ON CIVL SERVICE REFORM AND LNSTITUTIONAL STRENGTHENING I am writing to you in connection with the proposed credit for the Second Institutional Development Project, and especially to inform you about policy decisions and measures that the Govenment has aIready take, or is about to take in order to improve the performance of the Public Sector. The credit, amounting to US$2w.6 million, that we are seeKing from the International Development Association (IDA) in support of our Second Instittional Development Project (IDP 2) will enable us to further improve the performance of the Public Sector through institutional strengthening and management development. 2. As you are aware, the Malawi Government has aledy benefitted from assistance provided by IDA and the United Nations Development Programme (UNDP) under the First Insdtutional Development Project (IDPI) whose focus was on the establishment of the Malawi Institute of Mangement and implemctation of Tax Reform Policy in the Ministry of Finance. I am picased to report that good progress has been made by this project. However, we realise that there is more to be done inlorder to ensure that the performnance of the Public Service, contributes significandy to Malawi's economic asid social development; hence our request for additional assistance under the Second Institutional Development Project. 3. T'he Malawi Govemmcnt is committed to implementing civil service reforms and insttutional strengthening in the public Sevice. In addition, it is Government's policy to reduce dependency on foreign expertise and correspondingly to promote programmes that contnibute to Malawi's efforts of becoming self-sufficient in professional expertise and economic security. The Credit which we are now requestin in pursuant of this commitment will go a  Annex 1 Page 2 of 10 public services as well as other objectives as speled out in the Statement of Development Policies (DEVPOL) 1986-1997. 4. In DEVPOL, the Govermment has defined its economic and social objex.;tives for the neot decade as "the reduction of pove, ignorance and disease through the achievement of rapid and sustined economic growth; an impovement of income distrbution; and a reduction in he' instability of welfare for both the individual and the nation." The Govenment recognis the critical role at the Civil Service plays In its efforts to relise these national development objectives. As the operational arm of Govemment, the Civil Service is charged with the tuk of providing an enabling physical, economic and adminisrative environment that faciliates the achievement of the nation's social and economic objecdves. To this end, it is Government's policy to periodically subject public sector organisations, including the civil service, parastatal companies and local government institutions to extemnal reviews of their operations, responsibilities, functions, structures and establishment levels. This is done in order to ensure that their capacities match the demands that are being placed upon them; opportunities for increasing their overall efectiveness and efficiency in the delivery of public services are identified; and waste and duplication are curbed. The Herbecq Rcport (1985) and the Public Sector Management Revew Report (1993) (PSMR) are examples of such reviews, and it has been specificaly stated in the Statement of Development Policies that Government will continue with a programme of such reviews. GOVERNMENT'S COMMIMENT TO MANAGEMENT IMPROVEMENT 5. A number of problem areas in the organisation and operation of the civil service which impede effective delivery of government services to the nation have been highlighted in the above studies. Most of these management and institudional weaknesses remain common to all ministries and departments. The Government is committed to refonns in the organisadon and operation of the Civil Service and to strengthning its institutional and human resource capacities through: implementing recommendations to improve management and institudonal weakesses set out in the Herbeqc Report and the Public Sector Management Review and other reports, and through paying attention to govenance issues in the design and implementation of civil service reform and institutional strengtening measures. MANAGEMENT PROBLEM AREAS 6. The piece-meal approach to management improvement, after the Herbecq Report and the PSMR, whereby a number of miiustries and departments embarked on studies of management problems and initiat management improvement programmes, did not achieve much. Most of the management and organisational concerns idendfied in these reviews are still unresolved. Some of these institutional and management weaknesses are summarised below.  Annex I Page 3 of 10 PERSONNEL MANAGEMiENT 7. Thee is no clear legislative framework within which the Malawi Civil Service funcfions. Thert is need for a Public Service Act which would set out the roles and responsibiitdes of Ministries and Departments involved in pesonne management activities within the Civil Sevice. This Act should clarify the duties, responsibilities and rights of civil servants. 8. The Department of Personnel Management and Training (DPMT) does not possess adequate resources or capabilities for job evaluation and grading. Consequently, considerable omalies acist acros the Civil Seace in job elasifieation and wlay roationnhips. Curnt civl serts performance appraisal systm is also deficient. There is no direct connection between job performance and remunration. 9. Schemes of Service and Career Paths do not exist for most Civil Service occupational groups. Similarly, Ministries' training and staff development programmes. are not systematically formulated and are not based on identified skill-deficiencies or specific training needs. Overall, the Civil Service is characteised by high levels of staff tum-over and vacancies, as well as staff establishments that are based on precedence rather than on objective asessment of current and future workloads. CIVIL SERVICE PAY 10. There is no systematic process for reviewing and determining civil service salaries and benefits. Institutional arrangements, including information bases, for determining pay rates and benefits are inadequate. Government's efforts in this area have geeraely been reactive. Such efforts have not protected civil servants against inflation thereby contributing to poor morale and inability to attract and retain professional and specialised personnel. ESTABLISHfMENT CONTROL 11. It appears ftat thee is considerable over-staffimg in the junior ranks of the Civil Service. Government realises that uncontolled growth in the Civil Service establishment could undemine its future fiscal stability. However,currently, reliable employment data concerning the Government's workforce are not avaiable and there is a general lack of compatibility between the Government's vaious employment management information systems, such that it is not possible to reconcile the differences In establishment numbers presented in the Budget Estimates, in the records of the Department of Personnel Management and Training, and in the Government's Payroll system. To correct this, and to enable the Government to exert more control over the growth of the Civil Service, there is need for a fundamental overhauling and harnonising of the Government's current personnel and financial information systems.  Annex 1 Page 4 of 10 COMMON SERVICES 12. Three man problems have been identified in the maagemnent of common services. These are: excessive staff turnover, excessive vacancies, and insufficient understanding wiin the common services of their roles and functions, especially when assigned to line ministries. BUIDGETING 13. There are deficiencies in the Government's current Budgeting systen and staff skil leves. At present, budgedng does not always play a proper role in. contributing to Goverment's strategic decision-makdng nor to resource allocation. The absence of poper forward budgeting has resulted in significant weaknesses in the linkages betwen investmet planning, the Development Budget and the Recurrent Budget. 14. Crrent budgeting processes do not adequately identify the full costs of current policy and development expenditures beyond the budget year, and it is not possible to ensure that when investment projects are completed there will be sufficient funds for operations and maintence. The formulation of realistic budgets is further hampered by inadequate tax forecasting capabilities. 15. CoiWol of within-year expenditure has deteriorated in recent years. the absence of efficient and integrated budget systems, a significant shortage of adequately trained financinl manage in Government, a lack of up-to-date infomation on actual expenditures and increasing budget demand pressures have combined to result in significant ovending by individual ministries. LINE MINISTRIES AND DEPARTMENIS 16. Specific shortcomings in the management capabilities and practices in the line ministries and departnents include unclear sector strategies and managers' roles and responsibilities; excessive centralisation in decision-maldng; inadequate generation of programme performance and cost data; inacequate programme evaluation and therefore insufficient basis for proper programme planning and budgeting; inadequately structured and gencrally not needs-based training programmes; weak staff supervision at all levels; and, inadequate vertia and horizontal management communication systems. PARASTATAL SECTOR & THE DEPARTMENT OF STATUTORY BODIES 17. Ther are over 133 parastatarganisations in Malawi. These were created to provid* goods and services which neither the private sector nor the Civil Service could provide efficiently and equitably. By 1984 jarastatal oranisations were contributing approximately 25% of the GPP. This underscores the importance of this sector when it comes to evaluating de overal performance of the economy. Management and operational practices of stanttoty organisations are critical if they are to continue making a worthwhile contribution to National  Annex 1 Page 5 of 10 Development. To ensure this, the sector is cuentldy implementing reform activities which am aimed at improving the financial performance and operational efficiency of parastatal organisations. 18. The Department of Statutory Bodies (DSB) is charged with the supervision, performance monitoring and provision of assistance to parastatal bodies. However, a number of constraints have been highlghted which severely limit the ability of the DSB to carry out its rolc. The first problem is lack of clarity in the role and reationships the DSB has with other supervioy agencies. Secondly, the DSB needs to be able to attract and retain professional staff with ipeciflc sildUs and competencies in order to make effective interventions in the parastatal organisations. Lasdy, DSB's capaity and capability of promoting both improved financial performance of the parastals through accounting support and technical efficiency reviews, and developing a privatisation policy implementation plan (to include Treasury Funds) needs to be expanded. GOVERNANCE ISSUFS 19. The Government will give special attcntion to issues concerning good governance in conjunction with the design and implementaion of civil service reform and institutional development measures. Government is also committed to the process of evolutionary change involving a redefinition of the role of the state and progress towards the privatisation of functons dt are found to be no longer cost-effective or appropriate for the public sector to car out. Specifically, recent events have made it clear that the Govemment, in undertalcing its public sector improvement initiatives, must give special attention to ensuring that te character and capabilities of the Civil Service and its complementary public sector institutions are compatiblc with the evolving responsibilities of Government. 20. In the past two years, Malawi has experienced clirnatic and economic difficulties that have heightened public awareness of the importance for the nation to achieve a status of genaal self-sufficiency. Social and political events in the same pegod have made it clear that the ciiens of Malawi wish to see fundamental changes in the mode of national governance; and, have placed new importance on achieving additional progress in our efforts at nationwide social, economic, and political reform. The Govenment of Malawi has moved swiftly in response to these developments and mandates. It has placed a renewed emphasis on implementing initiatives that are diected toward achieving greater national sef-sufficiency through increased economic growth and the strengthening of domestic professional and productive capacities. 21. In addition, the Government recognises "good governance* as a prerequisite for susinable economic and aional development. In my 1993 Budge Speech to Parliament, J-. stated that the Govemment is committed to achieving improved governance throigh. *participation by the people in decisions that affect them; accountability of administration to t people; the absence of corruption; adherence to the rule of law; and, respect for human dgktS. These principles of good governance shall also provide the overall framework for the  Annex I Page 6 o^f 10 Government's initatives directed toward Civil Service Reform and Institutional Strengthening which are described in this Policy Statement ThE CEARACTER OF CHANGE 22. In adopting this Policy on Civil Service Reform and Institutional Strungening, fte .Govemment is committing iLtlf to on-goimg efforts of incrasing the capacides of the Civil Sevice and Statutory Bodies. The Government's over-riding goal in these endeavours is to develop a Civil Service and a parasl secor that opeate with maximum effeciveness and .cfficpc7y, adhere to the principles of good governace and operate in a tmhner that ensures: equal opportunity for all without regard to race, origin, sex, religious - belief, political affiltion, or physical disability; faimess and equitable adminston of plicies, rules and regulaions; transparency, consistency, and predictability in decisions and practices; merit as the primary criterion for selecdion and advancement; reward for innovation, initiative and exceptonal performance; responsiveness to the needs of the public; and attendon to excellence. THE OBJECTIVES OF CIVIL SERVICE REFORM 23. The Government's initiatives in Civil Service Reform shall be directed toward: (a) Implementing cost-effective and susainable solutions to the management problems and deficiencies of the Civil Seivice that were cited in the Herbecq Report, the Public Sector Management Review, and subsequent Government studies; (b) Improving Government's ability to attract and retain properly trained Malawias to meet the Govcrnmcnt's professional and specialist manpower needs; (c) Promoting consistency and continuity in the administration of Government prmgrammes by reducing the incidence of staff tum-over in the Civil Sece; (d) Improving the morale, motivation and work ethos of civil servants through proactive measures such as the regular revicw and tdonalisation of the pay and benefit schemes; (e) Promoting a constructive and positive reladonship between Govemment and te Civil Service through the inclusion of civil servants under the coverage of modem Labour laws and policies and, the fair and consistent administradon of those laws and policies which are predicated on the principles of collective bargaining; the Rights of Employees and Employers to Organise; and, mutuat Respect and Trust betwee the Pardes.  Annex 1 Page 7 of 10 (f) Improving the representation, conditions, and opportunities of Women in all sectors and at all levels of fte Malawi work force. THE OBJECrIE OF INSlUlTIONAL STRNGTHENNG 24. The Government's current and continuing initiadves In Insdtudonal Strengthening and ovetall Caacity Building shal be directed toward achieving the following pncipal oWcidves: (a) Implementfng cost-effectdve and sustainable solutions to the insdtudional weaknesses cited in the Herbacq Commission Report, the Public Sector Management Review, and subsequent Government studies; (b) Condnually increasing the effectiveness and efficiency with which Government services are provided to the public; (c) Improving national and sectoral planning capabilities; (d) Increasing capacity to idendfy nadonal developmcnt needs and to design and Implement national development programmes; (e) Ensuring that Govemment has an effective administration necessary for the provision of public seices. To that end, Government shall sock opportunides to reduce Govemment and streamline its opeations. (s) Supporting the systematic decentralisation and devolution of some public sector decision-making from the central Government to the Regions and the Districts; (g) Integrating investment planning, the development budget and its recurrent budget implications to ensure that the appropriate future allocation of funds for operations and maintenance of capital projects is provided for and sufficiendy. prioritised. GUIDING PRINCIPLES FOR CIVIL SERVICE REFORM AND INSTITUTIONAL STRENGTHENING ACTIVITIES 25. The Government's offorts in Civil Service Reform and Institutional Strengthening shall be guided by the following operating principles: (a) Maximnum use shall be made of local capacity in the formulation and execution of Malawi's development projects; (b) When donor and extemal assistance is utilised, the process for projec seleion, design, and management shall be collaborative, and not 'donoidriven';  Annex I Page 8 of 10 (c) When external technical assisaance is utLised, the requirement for successful sldlls transfer to local staff shall be incorporated as a contractual condition; (d) The planning and design of Malawi's development projet and progammes always give appropriate atntion to the nation's and the Governmment's absorptve capadcties; (e) A high priority shall be placed on manpower training and development activities. The benefits that are derved from hee experiences shall be increased by ensuring tht those advities are based upon clearly identified needs and, that attention is given to enabling and encouraging the applicadon of newly acquired slls and knowledge. (f) The incorporation of public input and paricipation in reviews of Government's performance shall be encouraged. 26. Management and institutional improvement efforts in Government Ministries and Departments will be characterised by the following conditions: (a) Management will fully understnd and be fully committed to the improvement objectives of each project; (b) Affocted managers shall participate in the preparation of improvement Action Plans; (c) Appropriate consideration will be given to the organisations' capabilities to implement and sustain any planned improvement; (d) Clear responsibility for implementadon actions will be established. rNSUITTIONAL DEVELOPMENT PROJECT 2 27. The formuladon of the IDP2 and the inital project preparation activities have been characterised by a high degree of participation of a large cross-section of Governtnent managers and staff. The efforts to dat represt a sucocssful collaborative effort betwecn the Govemment of Malawi and the World Bank. For these reasons, the Govemment is conridcnt that the IDP2 will result in a successful and significant initial contribution to the achievemcat of the civil see reform and institutional strengthening objecdves set out in this Policy Statement on Civil Service Reform and Instittional Strengthening. 28. The pincipal task of the IDP2 is to improve the effoctiveness and efficiency of the Civil Service by addressing managemcnt issues that constitute bottlenecks to improved perfonance Particulatteation will be fect od on correcting problens associated with the core functions of the civil service, namely, personnel management, budgedng, and financial management.  Annex 1 Page 9 of 10 29. Priority attendon will go to strengthening capacity in thc Deparment of Personiel Management and Training and the Ministry of Finance. Strengthening these orgaisations will include the clarification of management and staff tasks and responsibilities; development of opeational manuals; restructuring of programmes and organisational units; introduction and strengthening of planning and management coordination functions; and the training and development of staff. New programmes and systems will be initiated in these organiions. These include: development and implementation of Government-wide Personnel and Financial Management Information Systems; implementation of a Government-wide Forward-Budgeting programme; implementation of a servke-wide 'Open' Performance Appraisal System; implementation of improved Job Evaluation methods, and introduction of Career Paths and Schemes of Service. 30. The MDP2 will implement Government's institutional arrangements and operaions directed at: Improved Established Control; (an initial step will be the conduct a Civil Service Census); improved processes for reviewing and establishing policies and practices concerning Government Pay and Benefits; a comprehensive redesign of the Government Salary structure; improving the management and coordination of GoverTnent's Information Technology functions; and updating the National Training Policy. The project will also will also seek to implement: increased effectiveness and efficiency in Government functions performed by the Common Serces; cost-effective solutions to common management problems in Ministries and Departments across Government identified by the Public Sector Management Review. 31. The IDP2 will include components directed at strengthening the institutional capacity of the Department of Statutory Bodies and the Malawi Institute ef Management It is worth nothing that the Malawi Institute of Management has recorded solid achievements since its foundation in 1990 and it is intended ta these gains shall be consolidated and built upon to strengthen thfis in-country training and consultancy capacity. The growing arrangement and sidlls training needs for all sectors of the economy are provided for by this local insdtudQn. The capacity of MHM to provide relevant arangement development prgrammes and to assist in the public sector's training needs assessments, together with the design and implementaion of the necessary training programmes, will be supported while MIM becomes a self-financing institution. PBLIC SERVICE ACT 32. To facilitate the implementation of the IDP2 initiatives the Government of Malawi will putin place ough Parliament a Public Service Act (PSA). Thc PSA shall clarify the task of the Civil Senrice; place in statute the duties, responsibilities, and rights of members of the Civil Service; and ensure that the affairs of the Matawi Public Service are conducted with appropriate regard to transparency and predictability. This Act will provide the l4gal-basis and overall legal framework for the operations of the Civil Service, and for the on-going Civil Service improvement and Institutional Strengthening initiatives presented in this Policy Statement.  Annex 1 Page 10 of 10 ESTABLISEbNT OF THE PUBLIC SECTOR MANAGEMENT IMPROVEMENT UNIT WMN 3THE OMCE OF THE PRESIDENT AND CABUEF 33. Any suvcsful Government-wide Cil Service improvementand insdtution sengthing programme must be soundly planned, structured and manaed. Accordingly, the Govnment has established a Public Sector Management Imprvement Unit (PSMIU) within the Office of the Preident and Cabinet This cenltal unit is responsible for the overall dirion andt codintion of the distinct but related civil seice teform gnd instiutional strengthening activities that will be undertaken during the implementation of IDP 2. 34. The reonsibilities of the PSMIU shall include: establishing effective IDP2 Proj:et Execution and Management Structurs to ensure achievement of Project goals and objectives; estabUshing an achievable and cost-effective IDP2 programme of project activities that maximizes synergy and makes tie most cfficient use of government and technical assistane pernnel; providing effecdve direction in planning and implementing govemment-m de institutional and management imprvements; ensurnng -the timely identification and optimal application of successful management and institutional improvement measures, and evaluating the overal performance of the DDP2 and its individual components and project elements and providing regular reports on project progress. 35. I would like to take this opportunity to underscore the Malawi Government's commitment to the implementation of the policies, programmes and initiadves outlined in this Policy Statement. On behalf of the Malawi Government, I would like to thank the IDA for the asstance the organisation provided for the First Institutional Development Project and it Is my sincere hope that our request for additional assistance through the proposed IDP2 will receive favourable consideration. Yours sincerely, L. . Ch M.go, MP. MINISTER OF FINANCE  cnL fERVICE REFORM AND INSTIUONAL STRENGTHENING - DRAFT IMPLEMENTATION MATRIX ISSUE . CBJECTIVES STRATEGIES RESPONSIBLE TIMEFRAME REMARKS & & POLICIES & MEASURES PARTIES ASSUMPTIONS 1. Th need to bdabish To ea h a l bas and G w t to prr a OPC & MW By API 194 A draft PUbIC S* Ac wl be a lO basis&