Malawi - Local Government Development Project

Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 10342-MAI Type: (SAR) ReportNo. 10342-MAI ZEIJLON, A/ X34392 / J11127/ AF6IN STAFF APPRAISAL REPORT MALAWI LOCAL GOVERNMENT DEVELOPMENT PROJECT MAY 12, 1992 Infrastructure Operations Division Southern Africa Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Malawi Kwacha (MK) US$1.00 - MK 2.96 (July 1991) MK 1.00 - 100 Tambala SDR 1.00 - MK 3.53 FISCAL YEAR (PY) April 1 to March 31 WEIGHTS AND MEASURES 1 millimeter (mm) - 0.039 inch (in) 1 meter (m) - 3.28 feet (ft) 1 kilometer (ki) - 0.62 mile (mi) 1 square kilometer (km2) - 0.386 square mile (sq mi) - 247 acres (ac) 1 imperial gallon (Ig) - 1.2 U.S. gallons - 4.55 liters 1 cubic meter (m3) - 220 I8 - 264.2 U.S. gallons ABBREVIATIONS AND ACRONYMS BCC - Blantyre City Council BMLP - Building Materials Loan Programme CDP - Council Development Plans CSP - Country Strategy Paper CTA - Chief Technical Advisor DEVPOL - Statement of Development Policies DFLA - Development Fund for Local Authorities DLV - Department of Lands and Valuation DTCP - Department of Town and Country Planning ECMAC - Entrepreneurship and Capital Market Adjustment Program ESAF - Enhanced Structural Adjustment Facility GDP - Gross Domestic Product GOM - Government of Malavi HRID - Human Resource and Institutional Development Project ICB - Internationat Competitive Bidding IDA - International Development Association LAs - Local Authorities LASC - Local Authorities Service Cozmmssion LCC - Lilongwe City Council LGDP - Local Government Development Project LGSC - Local Government Service Commission LCB - Local Competitive Bidding MHC - Malawi Housing Corporation MIM - Malawi Institute of Management MLG - Ministry of Local Government MOF - Ministry of Finance MOW - Ministry of Works NDF - Nordic Development Fund ODA - Overseas Development Administration OPC - Office of the President and Cabinet PPF - Project Preparation Facility PSIP - Public Sector Investment Program SCDP - Secondary Centers Development Program SRP - Special Rating Procedure STC - Staff Training College (Mpemba) TA - Technical Assistance THAs - Traditional Housing Areas USAID - United States Agency for International Developmeuit WTP - Willingness to Pay ZMC - Zomba Municipal Council  FOR OMCIAL USE ONLY MALAWI LOCAL GOVERNMENT DEVELOPMENT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No CREDIT AND PROJECT SUMHARY. . . . . . . . . . . . . . . . . . . . . . .(.) 1. THE LOCAL GOVERNMENT SECTOR A. Country Background ..... . B. The Local Governmnt System . . . . . . . . . . . 2 C. The Challenge of Urbanization. . . . .. . . .5 D. Local Government Structure ..............7 S. Deficiencies and Constraints . 8 . . . . . . . . 8 Constraints Impeding Sector Performance . . . . 10 Luman Resource Constraints . . . . . . . . . 10 Legislative Constraints . . . . . . . . . .11 Definition of Responsibility and Functions Between Central and Local Government ... 11 Fiscal Constraints . . . . . . . . . . . . . . 13 Insufficient Revenues . . . . . . . * . . . . 13 Inappropriate Accounting & Budgeting . . . . 14 Lack of Credit..... . . . . . . . . . 16 F. Lessons Learnt from Previous Bank Group Projects . 16 G. Rationale for Bank Group Involvement . . . . . . 16 H. Other Donor Agencies' Past Involvement.... 18 ,'. THE PROJECT A. Project Origin and Formulation . . . . . ..18 B. Project Objectives . ...... 19 C. Project Description ....... .... 20 Detailed Project Description . . . . . . . . 20 Policy Reform . . . . . . . . . . . . . . 20 Institutional Strengthening Component . . . 22 Infrastructure and Services Component . . . 24 D. Project Cost andFinancingPlan . . . . . . . . 25 Financing Plan. . . . . . . . . . ... . 26 Flow of Funds and On-Leding Terms . .. . . 26 This report is based on the findings of an IDA mission which visited Malawi in December, 1991, comprising Mr. Anders Zeijlon (Economii,t and Mission Leader), Mr. George Gattoni (Principal Urban Planner), Mo. Gibwa Kajubi (Urban Planner), Mr. Eugene Clark (Municipal Engineer), Karl-Erlk Lindberg (Financial Analyst) and Mr. Hannu Hartikainen (GIS Expert). Peer reviewers for this report were Messrs. fank Boldrick (ASS5N) and Bras Menezes (LAlIN). Ms. Terry Gean provided secretarial support in the preparatLon of this report. Mr. Stephen Denning and Mr. Isaac Sam are the managing Department Director and Divlsion Chief, respectively, for the operation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  E. Implementation Arrangements . . . . . . . . . . . . . 27 F. Status of Project Implementation . . . . . . . . . . 28 G. Procurement Arrangements ... . .... . . . . . 30 H. Environmental Impact . . . . . . . . . . . . . . . . 32 I. Disbursement. . . . . . . . . . . . . . . . . . . . . 34 J. Accounting and Auddting . . . . . . . . . . . . . . . 35 III. FINANCIAL IMPACT A. Ministry of Local Government ... . . . . . . .. 35 B. The Local Authorities . . . . . . . . . . . . . . . . 36 IV. PROJECT JUSTIFICATION AND RISKS A. Economic Justification . . . . . . . . . . . . . . . 39 B. Project Impact on Poverty . . . . . . . . . . . . . . 40 C. Project Risks. . . . . . . . . . . . . . . . . . . . 41 V. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS A. Agreements and Conditions . . . . . . . . . . . . . . 42 B. Recoammendations. . . . . . . . . . . . . . . . . . . 44 TABLES 11.1t Su ary Cost Table II.2: Summary financing plan II.3s Procurement arrangements III.1: Budget allocation and needs for MLG FIGURES 1: Urban and rural population distribution 2: Urban population distribution 3: Serviced plots - numbers developed and required 4: Funding sources for urban councils 5: Interest rates and inflation levels 6s Income distribution in Lilongwe and Blantyre  ANNEXES Annex 1 - Urban population data Annex 2 - Detailed description of the policy reform component Annex 3 - Detailed description of the institutional strengthening component a. Ministry of Local Government b. Participating Councils c. Training Program Annex 4 - Infrastructure and services component Annex 5 - Detailed Project costs Annez 6 - Financing plan Annez 7 - Project implementation schedule Annez 8 - Financial Analysis Annex 9 - Environmental Assessment Annex 10 - Economic justification Annex 11 - Supervision plan Annez 12 - Selected Documenit on Project File MAPS Maps 1BRD No. 23560 - Malawit Local Government Development Project  MALAWT LOCAL GOVERNMENT DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrowers Government of Malawi Beneficiariess Ministry of Local Government Amount: SDR 17.6 million (US$24.0 million equivalent). Terms: Standard IDA terms with a maturity of 40 years. On-lending Terms: An amount of US$18.5 million equivalent from the proceeds of the credit will be onlent to selected local authorit.es by the Government of Malawi (GOM) to finance infrastructure investments, vehicles and equipment. GOM will on-lend to the local authorities at 13-15 percent p.a. over 5-20 years depending on the component being financed. GOM will bear the foreign exchange risk. Proiect Obiectives and Benefitst The objective is to enhance the financial and administrative capacity of the local government system to a) provide and maintain municipal services and infrastructure at a level consistent with the affordability and with the size and growth rate of the populition, and b) finance such activities mainly with locally generated funds, and improve the financial management of such funds. Particular emphasis is on strengthening local authorities' (LAs) ability to provide serviced land for the growing urban population, sanitation, road maintenance and certain commercial services, i.e. markets. Accomplishing this objective will contribute to Government's macroeconomic objective of reducing the central government budget deficit through less pressure on central government support for funding local authority activities. Improved management of local infrastructure and services will increase the efficiency in the use of funds spent in the sector. In particular, costly future upgrading and ad-hoc investments will be avoided by ensuring that the rapidly growing urban population is settled in an orderly fashion. Finally, the investments and equipment funded under the project will generate a flow of benefits.  - ii - Proiect Descriptions The project consists of three componentss (a) Policy reform of the local government sector financial management, legLslation, institutional set-up and its role in economic development. Each area includes a study, workshop and action program, the implementation of which will be supported by a team of key staff and four technical assistance positions in the Ministry of Local Government (MLG). Total costs for this component are US$3.2 million; (b) Institutional strengthening including modifications in MLG's organization, training for MLG and local authority staff, equipment, funding for incremental recurrent costs, and technical assistance to MLG and local authorities. Total costs for this component are US$11.7 million; and (0) Provision of infrastructure investments in three urban areas and provision of equipment to enhance maintenance and operational capacity of existing investments in six other areas. Funding for this component will be onlent to councils at positive real interest rates, and repayments will be deposited into a revolving fund where they will finance similar investments in the future. Total costs for this component are US*21.3 million. The estimated total project cost is US$36.3 million. Proiect risks: The risks involve (i) the central government's willingness to implement the action plans to be produced under the policy component in a timely manner, (Ii) the ability of the institutionally weak MLG and local authorities to implement such actions, and (iii) the pace at which the entrenched control behavior of the central gove-nment can be modified to create an environment of self reliance and independent decision-making in the LAs. A significant part of the project will be oriented towards institution building to mitigate these risks. In addition, annual reviews will be carried out where progress in the project's policy and institution strengthening components will be a prerequisite for continued implementation of the physical investment components.  - iii - Summary of Proiect Costs: Local Foreign Total ---------