Document o f The World Bank

Report No: 25562-MW

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 24.10 MILLION (US% 32.80 MILLION EQUIVALENT)

AND GRANT

IN THE AMOUNT OF SDR 20.00 MILLION (US$27.20 MILLION EQUIVALENT)

TO THE

GOVERNMENT OF THE REPUBLIC OF MALAWI

FOR A

THIRD SOCIAL ACTION FUND

IN SUPPORT OF THE FIRST PHASE OF THE COMMUNITY EMPOWERMENT AND DEVELOPMENT PROGRAM

APRIL 2 1,2003

Human Development 1 Country Department 3 Africa Regional Office

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APL CAS CBOs CDD CDPs CEDP

CMPs COMSIC COMSIG COMSIP

DEC EPAs FIMTAP

FMRs GOM ICB I EC I FAC IPF KISS LA LAMP

CURRENCY EQUIVALENTS

(Exchange Rate Effective April 11,2003)

Currency Unit = Malawi Kwacha MWK 1:00 = US$O.O111

US$l:OO = MWK 90.0

FISCAL YEAR July 1 -- June 30

ABBREVIATIONS AND ACRONYMS

Adaptable Program Loan Country Assistance Strategy Community Based Organizations Community-Driven Development Community Development Projects Community Empowerment and Development Program Community Managed Projects Community Savings and Investment Club Community Savings and Investment Group Community Savings and Investment Promotion

District Executive Committee Extension Planning Areas Financial Management, Transparency and Accountability Project Financial Monitoring Reports Government of Malawi International Competitive Bidding Information, Education and Communication International Federation of Accountants Indicative Planning Figure Knowledge and Information Sharing System Local Authority Local Authority Managed Project

MASAF I MASAF II MDGs MFls MIS MOF

MPRSP MTEF MU NACCEA

NCB NGOs NTAC

OPC PER PMC PRA SSP TAP UNDP VAM zo

Malawi Social Action Fund Second Malawi Social Action Fund Millennium Development Goals Micro-Finance Institutions Management Information System Ministry of Finance

Malawi Poverty Reduction Strategy Paper Medium-Term Expenditure Framework Management Unit National Advocacy Committee for Community Empowerment and Accountability National Competitive Bidding Non Governmental Organizations National Technical Advisory Committee

Office of the President and Cabinet Public Expenditure Review Project Management Committee Participatory Rural Action Social Support Program Transparency and Accountability Promotion United Nations Development Program Vulnerability Assessment Mapping Zone Office

Vice President: Callisto E. Madavo Country Director: Hartwig Schafer Sector Manager: Dzingai B. Mutumbuka

Norbert 0. Mugwagwa Task Team Leader:

MALAWI THIRD SOCIAL ACTION FUND

CONTENTS

A. Program Purpose and Project Development Objective

1. Program purpose and program phasing 2. Project development objective 3. Key performance indicators

B. Strategic Context

1, Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Ma in sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices 4. Program description and performance triggers for subsequent loans

C. Program and Project Description Summary

1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower and recipient commitment and ownership 5. Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

Page

3 4 4

8 11 11 12

13 14 15 16 16

17 17 17 17 18 20 21

F. Sustainability and Risks

1. Sustainability 2. Critical r isks 3. Possible controversial aspects

G. Main Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6:

Annex 7: Annex 8: Annex 9:

Project Design Summary Detailed Project Description Estimated Project Costs Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Financial Summary for Revenue-Earning Project Entities, or Financial Summary (A) Procurement Arrangements (B) Financial Management and Disbursement Arrangements Project Processing Schedule Documents in the Project File Statement o f Loans and Credits

Annex 10: Country at a Glance Annex 1 1 : Letter o f Sector Policy Annex 12: APL Targets Annex 13 : Resource Allocation and Targeting

22 22 23

23 23

24

24

25 28 34 35 38 39 44 53 54 55 57 59 65 68

MAP( S) IBRD 31 130

MALAWI Third Social Action Fund

Project Appraisal Document Africa Regional Office

AFTHl

Date: April 2 1,2003 Sector Manager: Dzingai Mutumbuka Country Director: Hartwig Schafer Project ID: PO7591 1 Lending Instrument: Adaptable Program Loan (APL)

Team Leader: Norbert 0. Mugwagwa Sector(s): Other social services (1 00%) Theme(s): Other social protection and risk management (P), Civic engagement, participation and community driven development (PI, Social analysis and monitoring (S), Gender (S), Social risk coping (S)

BORRO WEWRECIPIENT IDA LOCAL COMMUNITIES IDA GRANT FOR DEBT VULNERABLE NON-GOVERNMENT ORGANIZATION (NGO) OF

7.68 0.00 7.68 32.80 0.00 32.80 5.60 0.00 5.60

27.20 0.00 27.20 4.80 0.00 4.80

Total: BorrowerlRecipient: GOVERNMENT OF THE REPUBLIC OF MALAWI Responsible agency: MALAWI SOCIAL ACTION FUND MANAGEMENT UNIT, OPC Malawi Social Action Fund Management Unit, Office o f the President and Cabinet Address: MASAF MU, Red Cross House, Lilongwe 3 Contact Person: Mr. Sam Kakhobwe Tel: 265 775-666 Fax: 265 771-676 Email: skakhobwe@masaf.org

78.08 I 0.00 I 78.08

I I I I I I Cumulative 1 15.00 I 40.00 I 60.00 I

Project implementation period: 3 years. Expected effectiveness date: 0910 112003 Expected closing date: 12/3 112006

W C S F L P I D l O m Pm Umn la0

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A. Program Purpose and Project Development Objective 1. Program purpose and program phasing:

The Government o f Malawi i s embarking on service delivery reforms driven by the Malawi Poverty Reduction Strategy Paper (MPRSP), Decentralization Policy, and in the context o f the Millennium Development Goals (MDGs) for Malawi. In a three-phased Adaptable Program Loan (APL), interventions w i l l be implemented aimed at assisting Malawi incrementally attain targets for 12 indicators under the MDGs - selected on the basis o f service packages designed by sector ministr ies taking into account capacities available within communities, non-governmental organizations (NGOs)/community based organizations (CBOs), and Local Authorities (LAs) in Malawi. The overall purpose o f the Program (2003-2015) i s to improve service delivery by communities supported by Local Governments and Sector Ministries through the Community-Driven Development (CDD) approach, and within the MPRSP framework so that Malawi can progressively move towards the attainment o f 12 MDG indicator targets.

The long-term goal i s for Government to achieve sustainable poverty reduction while building the capacity o f communities for self-reliance, and promote transparency and accountability among CBOsMGOs and LAs in the way they plan and implement development activities in the Districts. The program recognizes that a long-term strategy for poverty reduction wi l l need to be dynamic in responding to community demands (as the r isks they face change) by: (a) providing safety nets for the most vulnerable within communities; (b) deepening decentralization through capacity building for the demand-driven delivery o f effective and sustainable social services (health, education, water and sanitation) in the Districts; and (c) stimulating a community savings and investment culture. Under M A S A F 3, the distributed nodes o f social capital generated through MASAF I and I1 wil l be networked to both optimize the social capital generated as well as to facilitate i t s incremental conversion into economic capital. This will be achieved through a three-phase Community Empowerment and Development Program (CEDP), which w i l l strengthen the decentralization process by making community empowerment an integral part o f District service delivery processes over a 12 year period (see Government letter to the Bank in Annex 11). The CEDP leverages the comparative advantage o f social funds in empowering communities by addressing decentralization challenges between communities and LAs, but recognizes that it can be better aligned with the decentralization o f central government to LAs (an area best addressed by Local Government reform instruments).

Phase I o f the program (2003-2006) will integrate community empowerment processes into district planning and deliverv o f community service packagesIt wi l l use experiences from M A S A F I and 11, as well as sector-defined community service packages, to better align communities, CBOs/NGOs, and LAs with the District Development Planning Framework. Phase I1 (2006-201 1) w i l l continue with the delivery o f community service packages and promote accountability and measurement o f MDG outputs for 12 indicators bv LAs. NGOs/CBOs, and communities. Phase I11 (201 1-2015) wi l l build on activities from phase I1 and institutionalize outcome-based reuorting by communities, NGOs/CBOs, and LAs - with 60% o f districts expected to attain targets for 12 MDG indicator targets. Overall, the lessons learned from each phase will feed into the strategies and approaches in the successor phase, resulting in adjustments, refinements, and redesigns. To achieve integrated and sustainable project outcomes, this phasing o f the APL has been synchronized with the Medium-Term Expenditure Framework (MTEF) for implementing the MPRSP and the Country Assistance Strategy (CAS). LAs who fully take over M A S A F 3 resource management w i l l receive all MTEF resources needed to finance community service packages (once these are costed during APL I). The majority o f triggers for the APL are based on the ability o f Districts to take over this management of resources, deliver services, and report on outcomes within the framework o f the CAS, MPRSP, and MDGs.

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2. Project development objective: (see Annex 1)

To empower individuals, households, communities, and their development partners in the implementation o f measures which can assist them in better managing r isks associated with health, education, sanitation, water, transportation, energy, and food insecurity, and to provide support to the critically vulnerable through a variety o f sustainable interventions.

3. Key performance indicators: (see Annex 1)

Key performance indicators include (a) the number o f households with improved service access and status (health, water, sanitation, education, etc.); (b) number o f LAs and CBOs/NGOs implementing interventions compliant wi th the CDD approach; and (c) number o f households wi th measurable cash incomes from Local Authority Managed Projects (LAMPS), Social Support Program (SSP), and Community Savings and Investment Promotion (COMSIP); all towards meeting 12 MDG indicator targets.

A. Input Indicators 0 0

0 0

No. o f LAs responsible for planning and funding community sub-projects. No. o f communities managing assets to deliver specified service packages in education, health, water and sanitation, transport and communication, and food security. No. o f communities facilitated to form savings clubs and start investment projects. No. o f NGOs/CBOs facilitated to work wi th communities in response to vulnerability.

B. Output Indicators 0 0 0

0

At least 2,600 subprojects completed and in use. At least 150,000 persons reached wi th cash transfers and increased incomes. At least 26,000 persons participating in PMCs, CBOs, and Community Savings Clubs. Malawi Kwacha value o f goods produced by 2,000 SSP and savings groups.

C. Impact indicators 0

0

0

At least 28 LAs have produced baseline data and targets required to achieve the 12 selected MDG indicators. At least 28 LAs have costed social service packages aimed at enabling them to mobilize budgetary allocations required to achieve the 12 selected MDG indicators. At least 28 LAs have adopted institutional frameworks enabling CBOs to carry out their operations efficiently.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 18349-MA1 Date of latest CAS discussion: August 27, 1998; revised in 2000

The FY98-01 CAS was discussed by the Executive Directors on August 27, 1998; a Progress Report (IDNR2000-224) was discussed on December 21,2000. A new CAS, covering the period FY04-06, i s scheduled for Board discussion along with the proposed credit. The principle CAS goal supported by the proposed project i s a reduction o f poverty through widely-shared growth, that minimizes the exposure o f the majority o f the population to risk, and supports interventions targeted at the poor. These goals are stated in the final draft MPRSP o f April 2002 and the 2003 draft CAS. The draft CAS and MPRSP have re-stated the need to tackle poverty through a stimulation o f the economy combined with safety nets interventions which assist individuals, households, and communities cope with poverty and the growing

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impact o f HIV/AIDS. The principal instruments for achieving the MPRSP and the MDG goals in Malawi are decentralization and the MTEF using a CDD approach that uses the social action fund mechanisms. In i t s formulation o f a Program Concept Document to meet the MPRSP goals, in January 2002 the Government o f Malawi submitted to IDA a comprehensive program for co-financing and parallel funding under M A S A F that i s in line with Bank strategy to support multi-sectoral investments which can contribute to poverty reduction. This document outlines the use o f targeted investments in a participatory, equitable and sustainable manner to incrementally reduce poverty in the country.

Malawi i s listed in Annex A o f the IDA Grants Implementation Guidelines (IDAISecMZ.002-0460), dated August 8,2002, as a debt vulnerable country, eligible for Grant funding. The Grant funding under this Project represents the full amount available through the debt vulnerable window for Malawi for this fiscal year, US$27.2 mi l l ion (SDR20 million). As a result o f the momentum that could be created for NGOs and CBOs to support the vulnerable, as well as LAs to provide safety net programs for the able-bodied poor in their jurisdictions, a decision was taken to provide grant funding for the activities o f this nature being funded under MASAF. This decision i s reflected in the Malawi CAS currently being finalized. The Grant funding will be utilized to finance community responses to risk and vulnerability, which wi l l provide resources to vulnerable households through the SSP, and cash transfers through public works funded under the LAMP. These targeted poverty interventions are expected to have a downstream impact on both education and health outcomes. At the district level, the Financial Monitoring Reports (FMRs) adopted by MASAF w i l l provide information on the number o f sub-projects funded under SSP and LAMPs, their average costs, and the total number o f beneficiaries reached with assistance by these projects. Information from Districts will be aggregated at the national level to produce a picture o f total sub-projects funded, cost, and beneficiaries. This information w i l l be analyzed in terms o f the impact o f SSPs and LAMPs relative to national need as identified in the MPRSP. Furthermore, the total number o f beneficiaries w i l l be put in the context o f targets set for MDGs performance indicators and tracked over the l i f e o f this project, as part o f the overall 12 year program being funded to assist communities contribute to the attainment o f selected MDG indicator targets.

2. M a i n sector issues and Government strategy:

Malawi i s one o f the poorest countries in the world, ranked 170th out o f 174 countries in the 2000 United Nations Development Program Human Development Report, wi th a GNP per capita o f US$180. An estimated 65.3% o f the population i s below the poverty line, with poverty being endemic and widespread in the rural and peri-urban areas. It i s estimated that 66.5% o f the rural population i s below the poverty l ine with, 28.2% living in dire-poverty. The Malawi Integrated Household Survey o f 1998 reported that about 54.9% o f urban population l ive below the poverty line. Illiteracy levels are high, estimated at 40.8% (36.2% males and 54.7% females). L i f e expectancy i s estimated at 37 years while infant and child mortality rates are estimated at 104 and 189 per 1,000 respectively, and the maternal mortality rate has more than doubled between 1992 and 2000: from 620 to 1,200 per 100,000. According to the Malawi Demographic and Health Survey o f 2000, an estimated 43% o f the population do not have access to safe water supplies. Like many countries in Sub-Sahara Africa, Malawi's HIV/AIDS prevalence rate i s high: 15% nationwide, with urban rates running as high as 23%. The HIV/AIDS Annual Report produced by the National AIDS Commission in 2002 indicated that the pandemic has resulted in loss o f l i fe mainly o f those in the productive age groups o f 15 to 49 years. AIDS has contributed to the increase in orphans and severely strained the resources in the household and in the public health delivery system.

The Government Decentralization Policy of 1998 called for the establishment o f elected Authorities in district and urban centers, and devolution o f significant central Government functions in order to improve service delivery. The four broad objectives o f decentralization are to (a) create a democratic environment and institutions for development at the local level and facilitate the participation o f

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grassroots in decision-making; (b) eliminate dual administrations at the district level wi th the aim o f making the public service more efficient, economic and cost effective; (c) promote accountability and good governance at the local level in order to help Government reduce poverty, and (d) mobilize the population for socio-economic development at the local level. The strategy drawn up by the Ministry o f Local Government in 2000 recognized that "decentralization i s a long-term process, [and] the implementation process will cover a period o f ten years divided into crash, medium, and long-term programme", which the proposed APL phases w i l l complement by working with LAs in meeting benchmarks on delivering to communities within approved sectoral guidelines.

The final draft (April 2002) o f the MPRSP provides the guiding framework for development assistance from various development partners. The overall goal o f MPRSP i s to achieve sustainable poverty reduction through social, economic and political empowerment of the poor, who would be in control o f their own development wi th Government and the development partners' role being that o f creating a conducive environment for reducing poverty. The MPRSP has four pillars: (a) sustainable pro-poor economic growth to economically empower the poor by ensuring access to credit and markets, s k i l l s development and employment generation; (b) human capital development for ensuring that the poor have the health status and education to lift themselves out o f poverty; (c) improving the quality o f l i f e for the most vulnerable b y providing sustainable safety nets for those who are unable to benefit from the f i rs t two pillars; and (d) good governance, political w i l l and mindset which w i l l ensure that public and civ i l society institutions and systems protect and benefit the poor. These pillars are supported by four cross-cutting issues - HIVIAIDS, gender, environment and technology development. The Ministry o f Finance i s going to implement the MPRSP through three-year MTEF cycles, and the M A S A F APL phases are synchronized with the MTEF processes as a key strategy to assist the Government meet i t s MDGs within the MPRSP.

3. Sector issues to be addressed by the project and strategic choices:

M A S A F was established in 1995, before the decentralization policy was introduced, and as a result i t was working directly with communities and district teams o f c iv i l servants. Sector ministries at national level viewed the M A S A F Project as a parallel structure, wi th the consequence that there was inadequate support f rom sectors during project implementation, as well as support for recurrent costs after project completion. Until the Decentralization Framework was put in place in November 2000, the public works program collegial approach (staff in District Commissioner's Office, District Council and the Sector Ministries) pooled available management resources at District-level and distributed tasks according to institutional strengths. Although this consultative nature o f decision-making processes was meant to ensure that checks and balances were in place, it proved inadequate in delivering optimal services. It i s only after the November 2000 Assembly elections that the three institutions (District Commissioners Office, LAs, and Sector Ministries) were brought under one office where the checks and balances envisaged in the initial set-up could be realized through the direct supervision o f LAs. In order to improve sectoral linkages without losing M A S A F I and I1 gains in community empowerment, the project will adopt a phased approach to integrating i t s operations into the District Development Planning Framework adopted by LAs - helping each LA meet agreed delivery benchmarks defined by each sector.

The design o f M A S A F has in the past allowed communities to work with facilitators in those aspects o f the project cycle for which they need assistance, such as project identification, filling application forms and implementation. Local leaders (parliamentarians, headmen, and traditional chiefs), Government officials, teachedhead teachers, church leaders, NGOs/CBOs and individuals have al l been facilitators. The success o f projects depends on the quality and timeliness o f facilitation at the inception o f a proposal, transparent election o f the project management committee (PMC) and quality o f supervision. The role o f Local Government (LAs) and NGOs/CBOs in Participatory Rural Action (PRA) processes

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remains a major challenge for Local Government planning, and MASAF w i l l deliver intensive and timely capacity building to LAs so that the Authorities can actively participate in the C D D approach, and in turn M A S A F supported activities can be harmonized with the on-going decentralization efforts.

The Public Works Program in MASAF I experimented with two modes o f payment: cash and food. Where a combination o f food and cash was used, there were problems in the management o f food distribution because too many actors were involved to make it work. The result was that food was often delayed or even not delivered to the sites. In MASAF 11, al l payments were made in cash even though the Beneficiary Assessments indicated that benficiaries would s t i l l prefer a combination o f foodlcashlinputs depending on the time o f the year. M A S A F has not been able to respond because o f the difficulties in the logistics o f distributing food and the lack o f a national framework to address issues o f household food, nutrition, and economic insecurity. Under M A S A F 3-CEDP, communities wi l l be supported to implement household-level strategies to increase food production and consumption as well as improve access to off-farm incomes.

The strategy o f handing over M A S A F responsibility to LAs within the MTEF wil l ensure that sector reforms are in place to overcome the problem o f inadequate recurrent, operation, and maintenance resources. A number o f sectors have defined essential community service packages which communities can implement with support f rom LAs to meet the most basic needs. In health, a Community Essential Health Package w i l l ensure that alternative health interventions can be supported so that communities are not solely relying on construction o f health facilities. In education, the emphasis wi l l be on combining construction wi th improved education outcomes by making available to communities a comprehensive education package. The same wil l be done for water and sanitation so that improved water and sanitation are part o f a community service package. Implementation o f these packages, which constitute a minimum set o f affordable interventions for community-level management within national sector norms, w i l l assist communities in contributing to the achievement o f 12 MDG indicator targets for Malawi.

The challenge o f pervasive poverty in Malawi s t i l l remains, resulting in overwhelming demand for community development projects from MASAF. Communities have been unable to mobilize savings, and this has impacted negatively on government-community partnership in service delivery. M A S A F w i l l promote savings clubs, which are more community responsive than the current alternatives available in Malawi, as the basis o f a new rural investment culture to improve incomes among the poor, enabling communities to manage risk more effectively. This wil l be part o f a comprehensive community food and economic security package which supports vulnerable persons with grants, while giving their foster households opportunities to save and escape from chronic poverty and hunger. Within this package, cash transfers through LAMPS w i l l be a particularly important mechanisms for reaching the able-bodied poor.

4. Program description and performance triggers for subsequent loans:

This 12 year APL i s expected coincide with the target for attaining the MDGs (2015), by which time LAs w i l l have taken over the implementation o f community-managed investments with their own staff as MASAF reduces i t s staffing levels in l ine with increasing LA capacities. The implementation o f interventions w i l l continue throughout the 12 year period, with the Program goal being: MDGs for 12 indicators, within the MPRSP, met by 60% o f LAs.

APL I: Attainment of 70% in the following targets: LAs with baseline data and targets for 12 MDG indicators Five fully costed service packages by LAs.

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LAs with by-laws to register CBOs.

A P L 11: Attainment of 70% in the following targets: LAs implementing community service packages within the MTEF. Compliance with sub-project cycle delivery benchmarks by LAs. LAs with reporting mechanisms for 12 MDG indicator targets.

A P L 111: Attainment of 70% in the following targets: Traditional Authorities with a Community Savings Club. LAs graduated and Zones folded up. LAs with outcome-based monitoring and evaluation systems.

See Annex 12 for more details.

C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

MASAF 3 - CEDP w i l l have five components:

1. Managed Projects (CMPs), and (b) LAMPs. This component w i l l support demand-driven and community-based socio-economic infrastructure, with improved facilitation to allow communities to articulate their priority development concerns within the social fund criteria and the District Development Planning Framework. CMPs w i l l be single community sub-projects managed by the community, who are required to contribute a minimum o f 20% o f total project cost in cash or kind. LAMPs, which have a safety net element while creating assets, wi l l be multi-community and require labor-intensive technologies to implement; these w i l l be managed by the LAs. The component i s based on the five community service packages o f health, education, transport and communication, food security, and water and sanitation - as defined by the various sectors and implemented by LAs, CBOs, and communities. Eligible sub-projects are those that w i l l deliver a community good rather than provide individual benefit in the provision o f basic social services in health, education and water; afforestation, terracing, community roads and bridges, community centers, food processing technologies, energy efficiency interventions, training, and others. For CMPs, the average cost o f a subproject i s estimated at $20,000 from IDA contribution, and the timeframe for implementing subprojects i s 12 months. The average cost o f LAMPs i s estimated at US$40,000 from IDA contributions, where a minimum o f 40% o f funds paid by M A S A F i s for unskilled labor. All sub-projects within these averages shall be appraised and approved by the District Executive Committee (DEC) (as long as they are within the district plan approved by the LA) and endorsed by the LAs during their regular meetings. Any sub-projects outside the service norms and above the sub-project average cost shall be desk and f ie ld appraised by the respective sector supported by the M A S A F Zone Office (ZO) and Management Unit (MU). For these sub-projects the National Technical Advisory Committee (NTAC) shall review and approve for endorsement by the Board provided that the sub-projects are within the funding envelope o f the given district. In no event, unless otherwise agreed with IDA, shall IDA'S contribution to a CMP or a L A M P exceed an amount equivalent to US$60,000. Once a LA has developed the capacity (measured by pre-agreed benchmarks) to deliver sub-projects under the L A M P window, resources from the CMP window w i l l be transferred to the Authority for disbursement to PMCs - and al l such resources w i l l be monitored through agreed benchmarks and the results regularly published in the local press. The successful integration o f CDP into LA management w i l l be overseen by a Joint MASAF-Local

The Communitv Development Projects (CDPs) w i l l have financing windows for (a) Community

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Government Technical Team.

2. The Social Support Program (SSP) directly targets vulnerable groups (such as widows, widowers, the aged, orphans and foster parents, the destitute, the disabled, persons affected by HIV/AIDS and malnourished under-fives) through NGOs and CBOs with a history o f working with such groups. The component stimulates and supports traditional coping systems, which rely on the extended family, when foster households experience deepening poverty after taking in vulnerable individuals. Funding i s available for the development o f long-term capacity and technical assistance to NGOs/CBOs working directly with these vulnerable groups and foster households. Activities to be funded will depend on the specific needs o f the vulnerable group, and, based on previous experience, include initiatives that contribute to household food and nutrition security, support in s k i l l s provision, special training depending on needs, provision o f grants for tools and other productive assets for the sustainability o f community-level interventions, and stimulation o f productive activities for foster households. The menu o f sub-projects will expand as communities demand new and appropriate interventions in response to changes in the nature o f risks affecting foster households and vulnerable individuals. The sub-projects shall be appraised and approved by a District Technical Team, comprised o f the DEC and CSOINGOICBO members, as long as these sub-projects are within the district plan approved by the LA. The sub-projects wi l l be endorsed by N T A C for forwarding to the Board. Funding will be contingent upon NGOs/CBOs meeting eligibility criteria, which includes a cash, or in-kind contribution o f 20% (from the Project Implementing Agency, and the community if they are able to contribute), and the activity falls within the sub-project menu. The average cost o f IDA's contribution to SSP sub-projects i s US$lO,OOO. Any sub-project outside the service norms and above the sub-project average cost shall be desk and f ie ld appraised by the respective sector supported by the ZO and MU. In no event, unless otherwise agreed with IDA, shall IDA's contribution to an SSP exceed an amount equivalent to US$30,000.

3. The Community Savings and Investment Promotion (COMSIP) w i l l finance community mobilization for savings, training on improved business skil ls, and provision o f 80% costs towards the construction o f required infrastructure for a Savings Club; but it wi l l not provide funds for lending. The component builds on experiences from the SSP component o f M A S A F I1 where groups have increased their capacity to generate incomes and used it to provide assistance to orphans and other vulnerable persons living within households, or sometimes in community-owned facilities, and also saved in order to meet unexpected expenses (e.g. illness). The component wi l l promote the formation o f Community Savings and Investment Groups (COMSIGs) o f 10-15 members each; 10 COMSIGS can come together to form Community Savings and Investment Clubs (COMSICs). The participants w i l l receive training and business management skills, and be linked to legally-constituted micro-finance institutions (MFIs) to ensure that the poor operate in a viable and sustainable savings and credit environment. The promotion o f COMSIGs and COMSICs, and piloting community-MFI interfaces wil l be phased to ensure that a sustainable savings and investment framework for the poor i s in place. While COMSIGS wil l be free to lend to their own members in l ine with their rules, M A S A F will also provide them with information on private providers o f market-driven micro-finance services. The estimated average cost for the simple infrastructure required by a COMSIC i s US$lO,OOO from IDA contribution. A PMC will be democratically elected and responsible for applying for funds on behalf o f the COMSIC, as well as ensuring that the 20% required contribution i s provided. Appraisal w i l l be undertaken by the DEC, and, during Phase I o f the Project, approvals will be undertaken at MU level; proposed changes to the approval process will be reviewed during the migration from Phase I to 11. In no event, unless otherwise agreed with IDA, shall IDA's contribution to a COMSIC exceed an amount equivalent to US$lO,OOO.

4. Transparencv and Accountability Promotion (TAP) i s a cross-cutting component to capacitate

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implementing agencies to assist Malawi in achieving the MDG targets in a transparent and sustainable manner, I t will document and transform MASAF's experiences from working with communities into capacity enhancement interventions which can support various partners implementing decentralization (such as LAs), and the MPRSP (such as NGOs and CBOs). It will develop suitable technical guidelines, generate data f rom the work o f communities and partner institutions, process such data into useful information, disseminate, and package it into suitable materials for training. This component w i l l develop appropriate tools for promoting community-level transparency and accountability through a suitable development communication strategy and equip communities wi th s k i l l s to demand the same from LAs and other institutions, as well as developing a community-level monitoring system in the implementation o f community service packages. I t w i l l finance the training o f M A S A F staff, district agencies, NGOs/CBOs and PMCs in the use o f procedures, systems and criteria developed to improve implementation. A Technical Support Services Framework will be put in place by M A S A F in partnership with LAs and respective sector ministries to ensure that norms and standards are responsive to community capacities. Within MASAF, there w i l l be a Senior Engineer, 6 Zone Engineers, and LA level Technical Officers making up a Technical Support Service responsible for quality control in all M A S A F supported infrastructure investments. Appropriate Memoranda o f Understanding will be entered into with those sector ministries without an immediate devolution plan. The component w i l l finance secretariat support to the National Advocacy Committee for Community Empowerment and Accountability (NACCEA), chaired by the Department o f Economic Planning and Development, to review monitoring and evaluation reports, make recommendations to the MASAF Board, and disseminate results on community, LA, and sector ministry performance in the implementation o f community service packages and progress towards attaining the 12 MDG targets. All M A S A F activities wi l l strengthen technical standards for improved quality, and a system to collect, analyze, and disseminate information on progress and impacts. This component will also develop an effective management information system (MIS) which will feed into the overall monitoring and evaluation system where the outputs o f these sub-systems, along with the development communication initiative, wi l l form a Knowledge and Information Sharing System (KISS) and make M A S A F a learning organization as it transforms into a training and capacity building institution in the context o f the CDD approach.

Component

5. MASAF to deliver in a transparent and accountable way by financing the continued provision o f technically competent staff to work at the M A S A F MU, and strengthen LAs in implementing the community sub-project cycle wi th technical and financial expertise. Financial accountability and community procurement procedures already in place under MASAF I1 w i l l be extended to LAs implementing both LAMPS and CMPs. Once 80% (32) o f LAs have taken over the CDP component with their own staff, M A S A F will maintain a single national office, and continue to support the remaining LAs, CBOs, and COMSICs with implementation. In the transition period, LAs w i l l have the option o f either using their own staff, or obtain assistance from M A S A F ZO (Zones wil l initially be reduced from 12 to 3 with 9 Field Offices, and then abolished). As an exit strategy for the Bank, the project w i l l leave behind a legal framework for the C D D approach based on MASAF, PMCs, COMSICs, and NGOs/CBOs working with LAs, communities, and sector ministries.

The Institutional Development component w i l l address the internal capacity requirements o f

Indicative Bank- % of costs Yo of financing Bank-

(US$M) Total (US$M) financing

1. Project components (see Annex 2):

1. Community Development Projects (CDP) I 28.48 1 36.5 1 21.00 1 35.0 I - 10-

2. Social Support Projects (SSP)

3. Community Savings and Investment Promotion (COM SIP)

4. Transparency and Accountability Promotion (TAP)

5. Institutional Development (ID)

Total Project Costs Total Financing Required

24.00

11.87

6.67

7.06

78.08 100.0 60.00 78.08 100.0 60.00

30.7

15.2

8.5

9.0

18.00

9.00

6.00

6.00

30.0

15.0

10.0

10.0

100.0 100.0

2. Key policy and institutional reforms supported by the project:

Benchmarks and targets relating to macro-economic reform, fiscal performance and social sector resource allocation are provided in the Government MTEF for implementing the MPRSP, and are acceptable to the Bank. As the proposed project focuses on poverty reduction, basic social and economic infrastructure and service delivery, i t i s considered part o f the Bank’s core lending program in support o f the MPRSP, especially pillar 3 on the provision o f safety nets for the vulnerable. The project expects the Government o f Malawi to (a) implement the decentralization plan matched by specified essential community service packages from the key sectors; and (b) follow through with the privatization o f the Malawi Savings Bank which will support the emergence o f a strong and sustainable framework for community savings in Malawi. The legal framework in place w i l l be expected to facilitate the emergence o f MASAF, PMCs, COMSICs and NGOs/CBOs as instruments for the C D D approach.

3. Benefits and target population:

The project wi l l strengthen the capacity o f communities, community leadership, and CBOs to effectively implement activities that w i l l address development needs. The main beneficiaries will be (a) poor communities wi th inadequate access to social services such as schools, clinics, water, and effective transport; (b) poor households experiencing food insecurity; (c) vulnerable individuals unable to organize interventions for themselves and needing the mediation o f CBOs/NGOs; (d) communities, after participating in MASAF-funded activities, who are able to participate in group savings; and (e) implementing agencies such as PMCs, COMSICs, NGOsKBOs, micro-finance institutions, and LAs. This program i s targeted to the nearly two-thirds o f the population which i s poor in Malawi and whose work will contribute to the achievement o f 12 MDG targets for Malawi.

Resource Allocation and Targeting: Util izing the National Local Government Finance Committee’s guidelines for allocation o f development funds, MASAF 3 wil l allocate funds to LAs based on 50% for population and 50% for poverty and service indicators. The indicators used relate to the 12 MDG targets being tracked in M A S A F 3 as wel l as availability and reliability o f data. The indicators utilized for fund allocation for the sub-components o f the CDP and the SSP correlate to the activities supported under these components. The methodology and formula are summarized in Annex 13 and provide a f i rs t cut o f District level three-year indicative planning f igure (IPF) in l ine with the MTEF cycle. These IPFs wil l be revised annually for uncommitted M A S A F resources.

While for monitoring and planning purposes the allocation has been broken down by component, Districts will be given a single IPF which they w i l l use to undertake M A S A F 3 activities. These funds w i l l be used by LAs in response to community demand-driven development with the social fund

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principles (community participation, direct financing, transparency, accountability, partnership, capacity building, autonomy o f implementers, flexibility, and apolitical) without adhering to the component allocations (but MASAF MU wi l l monitor and report on resource use by components as a way o f identifying those areas where community demands are greatest). The LAs w i l l carry out open-ended P U S in those communities which have the furthest to go in attaining the 12 MDG targets being tracked under M A S A F 3; this w i l l generate a l i s t o f community priorities to be integrated into District plans. If the priorities include activities that qualify for MASAF support, then extended PRAs w i l l be carried out by the Districts to identify sub-projects to be funded using M A S A F resources. provide assistance to LAs from the open-ended PRA stage to completion o f sub-projects. Details o f the sub-project cycle are provided in the Operational Manual. In Phase I o f the APL, the IPF will be allocated to 27 Districts, consisting o f 40 LAs (Districts, Towns and Municipalities). During this phase, efforts w i l l be undertaken to collect and disaggregate data relating to the town and municipal assemblies so that during Phase I1 o f the APL, the IPF wil l be allocated to the 40 LAs.

MASAF Zones w i l l

4. Institutional and implementation arrangements:

A MASAF MU reporting to a Board o f Directors (with an Executive Director as Secretary) will continue to manage this project - the Board being responsible for overall policy and operational guidance. The M A S A F Board wil l oversee professional staff selected in a transparent and competitive manner. M A S A F will decentralize staff from ZOs to LA Planning Offices for those Authorities without the relevant staff (Program Officer and Technical Supervisor) to assist with building LA technical and management capacity to support communities. M A S A F wil l enter into Memoranda o f Understanding with all LAs to govern the role o f LA Offices, their staffing, and operations; to be reviewed annually to take into account changes in activities. The M A S A F Board wil l have two standing committees at the national level to review project requests and make recommendations (NTAC) and to oversee monitoring and accountability results (NACCEA). For HlV/AIDS activities to be supported in the SSP component, guidance on national norms w i l l be sought f rom the National AIDS Commission; the appraisal o f HIV/AIDS applications at the district will include representation from District AIDS Coordination Committees.

In order to strengthen the recently established LAs, M A S A F wil l work to address longer-term institutional and capacity concerns by facilitating the deepening o f decentralization in the country by leaving the management o f community projects to those LAs with demonstrated capacity. As a vehicle for the Government to meet service provision targets through the CDD approach, MASAF's work w i l l be within a legal framework defined by LA by-laws and MASAF's legal status. LAs w i l l receive limited support from M A S A F to ensure that PRA processes are integrated into district planning so that community priorities are at the centre o f district plans. In order to strengthen community empowerment within decentralization, new operational and procurement manuals have incorporated improved operational procedures. All sub-projects funded by M A S A F will follow specified sub-project cycles, with all implementers reporting their performance against agreed sub-project cycle benchmarks as specified in the Operational Manual.

All CDP requests f rom communities w i l l be appraised and approved by the LAs using i t s DEC, which will also receive resources for LAMPs. Funds for LAMPs wil l continue to f low into an account held by LAs for the creation o f community assets through labor-intensive methods while transferring incomes to vulnerable able-bodied individuals. Technical support wi l l be provided to address the lack o f sk i l ls within LAs in specific areas o f community service package provision. In the case o f CMPs, funding wil l continue to f low to the community elected PMC. Those LAs who record successful implementation o f LAMPs will take over the channeling o f resources to PMCs. Once 80% o f LAs are successful in implementing the CDPs using pre-agreed benchmarks, M A S A F wil l transform into a training and

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capacity building institution to support LAs overcome periodic difficulties, promote measures for transparency and accountability at the community and district levels, and channel resources to CBOs and COMSICs.

Under SSP, LA staff w i l l facilitate the generation o f community priorities to tackle vulnerability (orphans, elderly, disabled, chronically ill, malnourished, etc.). The appraisal and approval o f SSP requests within the agreed ceiling will be done by the DEC, through District Technical Committees with N G O representation, as well as relevant sector ministries, and LA staff.

Community Savings Groups and Clubs wil l be promoted by district-level staff and supported by MASAF with capacity building, training, and limited construction o f community infrastructure, including purchase o f safes. MASAF w i l l promote community savings, work to address specific community-related constraints in the operation o f the relevant MFIs, and ensure that appropriate mechanisms are developed with MFIs for the poor to have reliable and sustainable access to micro-finance. Members o f Community Savings Groups w i l l be able to borrow from the MFI holding their accounts (e.g. Malawi Savings Bank, existing MFI, etc.) for investing according to individual and group priorities within a framework o f increasing household food, nutrition, and economic security to manage risk and reduce vulnerability. Appraisal will be undertaken as in SSP, but approval w i l l be by the M A S A F Board.

LAs w i l l approve sub-projects within the specified thresholds for the CDP component, and receive copies o f a l l project requests by NGOs/CBOs under the SSP component. N T A C will be responsible for endorsing approved LA sub-proj ects, approving al l requests from NGOs/CBOs and approving sub-projects above the threshold set for LA approval. The N T A C wil l report to the M A S A F Board and wil l meet monthly with the M A S A F MU to review sub-project requests f rom LAs. After N T A C and Board meetings, MASAF MU w i l l publish a l i s t o f all projects approved, their value, districts and PMC members for increased transparency. To increase accountability, MASAF MU w i l l submit a quarterly progress report to the Board (copied to the NTAC), and a summary o f the report wi l l be published after the Board meeting (with performance details for each LA and CBO receiving funds from MASAF). Similarly, community-based monitoring reports will be reviewed by NACCEA before their submission to the Board and publication.

D. Project Rationale 1. Project alternatives considered and reasons for rejection:

The choice of alternatives was informed by the Government’s draft MPRSP and Bank’s response in the CAS, and the MDGs -whose attainment wi l l help address the problem o f deepening poverty in Malawi. The MPRSP recognized M A S A F as “one o f the key instruments that Government has put in place to promote community participation in national development and enhance and deepen the decentralization process“. The proposed project i s a follow-up operation to MASAF I and I1 which were implemented during the period 1996-2003. In recognition o f the effectiveness o f the social fund approach in responding to community-owned development, both the MPRSP and the Decentralization Policy Framework have recognized the centrality o f the CDD approach in alleviating poverty. L ike M A S A F I and 11, the new project will emphasize community participation, especially by vulnerable groups, in the design o f development activities within the framework o f re-enforcing community livelihood systems. M A S A F will continue to foster the development o f community leadership, accountability and local governance as cornerstones o f a process aimed at ensuring that poor communities can articulate their specific needs, prioritize them, demand quality services, and manage the processes and the outcomes. The main difference w i l l be that instead o f communities dealing directly with M A S A F structures, they will plan and implement activities in collaboration wi th NGOs/CBOs and the new LAs, with M A S A F

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playing a facilitating role. The option o f closing down MASAF and channeling funds to LAs was considered and rejected because the newly established LAs need time to build capacity for the effective integration o f community empowerment strategies into decentralized development. Furthermore, the option o f placing extra staff in LAs was rejected because the Department o f Local Government preferred that each LA be l e f t to find the necessary personnel. I t i s for these reasons that capacity building efforts will be targeted at both the LAs and central government departments at the District level while the decentralization program i s implemented.

Sector Issue

Instead o f making grants available for income generating projects, the design team o f MASAF 3-CEDP has included a Community Savings and Investment Promotion component, which w i l l allow individuals to save and borrow from an MFI. Through a well-developed information, education and communication (IEC) system, M A S A F w i l l ensure that communities are able to identify possible opportunities that w i l l promote increased economic development at the household level while ensuring accountability in the provision o f public services by LAs. Communities w i l l then gain increased access to economic development opportunities that are appropriate and responsive to their needs. The option o f channeling IDA resources into MFIs for lending to individuals and groups was considered and rejected because experience from Malawi and elsewhere in the world shows that this i s not a sustainable way o f providing credit to the poor; and it i s better to use grants for capacity building and supporting the vulnerable poor, and le t MFIs lend money collected from savers.

Project

Government and various representatives o f stakeholder institutions expressed concern over the state o f poor housing in the country (both rural and urban areas), and the desire to assist poor households improve their dwellings. Due to the difficulties o f targeting housing support to poor families, the inclusion o f housing in the CDP component was rejected in favor o f channeling limited support to vulnerable groups through NGOs/CBOs to improve incomes and household food security under the SSP component. M A S A F will instead collaborate with national-level institutions and LAs to ensure that an enabling environment i s created for households to improve their incomes and assets through savings and investments.

The option o f having a self-standing community lands component was rejected because MASAF would have decided "a priori" what communities would consider a priority need and this f l i es in the face o f demand-driven development and undermines MASAF's principles. It was also difficult to reach consensus on a transparent targeting mechanism for the distribution o f land among the poor. The same difficulties arose over the distribution o f agricultural inputs and i t was decided that such support should be left to the market for individuals participating in savings groups. The integration o f community agriculture and land development support into M A S A F w i l l fully utilize the micro-financing promotion component for the achievement o f household food security, while retaining the demand-driven development element.

2. Ma jor related projects financed by the Bank and/or other development agencies (completed,

Bank-financed Environment Infrastructure/roads

Mulanje Biodiversity Project Road Maintenance and Rehabilitation

Latest Si ( P W

(Bank-finance Implementation

Progress (IP)

S S

lervision atings projects only)

Development Objective (DO)

S S

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Infrastructure/water Human Development Environment

Rural Development Emergency Drought Relief

Human Development Human Development

Other development agencies

National Water Development Secondary Education Project Mulanje Mt. Biodiversity Conservation PopulatiodFamily Planning M A S A F Il

I European Union UNICEF AfDB DfID N O R A D GTZ SIDA C IDA

S S S

HS S S

Social sectors Social sectors Social sectors Social sectors Decentralization Social sectors Social sectors Social sectors

During M A S A F I and 11, communities requested funding for income generating projects during periods o f need, and, except in the component supporting the vulnerable, these have been ineligible for funding. Experience shows that a certain level o f social capital and capacity are needed before effective economic capital from community investment projects can be realized. I t i s for this reason that the COMSIP component has been introduced to build on experiences from M A S A F I and 11.

Although M A S A F I1 funds were fully committed by the Mid-Term Review (February 2002), there i s continuing and overwhelming demand by communities for resources to finance community sub-projects such as school classrooms and teachers' houses, health facilities, rural water supply, and community roads. There i s s t i l l a large un-met demand for classrooms to cope with the increased enrollment resulting from the Free Primary Education policy implemented after 1995. Failure to adequately respond to this demand w i l l result in the regression o f existing community capacity and social capital. M A S A F 3 will therefore continue to finance community investments so that under-served communities which did

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not receive support under M A S A F I and I1 can also be reached, while building economic capital as the second stage o f helping poor communities tackle poverty. Under M A S A F 3, the role o f PMCs, COMSICs, and NGOs/CBOs will be institutionalized as a foundation for the CDD approach in Malawi.

4. Indications o f borrower and recipient commitment and ownership

The Government, through the Office o f the President and Cabinet (OPC), has taken the initiative and full ownership o f project preparation by establishing a Project Preparation Team drawn from the OPC, Ministry o f Gender and Community Services, Ministry o f Finance and Economic Planning, National Economic Council, Ministry o f Justice, Department o f Local Government, and MASAF. This followed a letter o f request sent by the President o f Malawi to the President o f the World Bank seeking support for M A S A F 3 given the very high level o f demand exceeding available resources. Extensive consultations were held with stakeholders in districts, communities, and nationally with NGOs, the private sector, and with various development partners. A draft program concept paper was prepared that provided background information and project rationale for the Government’s request, followed by the preparation o f an Operational Manual backed by a number o f handbooks to guide implementation.

Logical l i nks have emerged between M A S A F 3, the MPRSP, and the decentralization framework. The four pillars o f MPRSP and the four objectives defining the decentralization framework are closely related to the operations o f M A S A F in promoting grassroots community-owned development aimed at overcoming poverty. Among senior government officials and political leadership, there i s a growing awareness o f the role M A S A F can play in the implementation o f both policy frameworks - decentralization and the MPRSP - so that Malawi can use the CDD approach to meet i t s targets set for the MDGs. The MASAF 3 APL has been firmly grounded in the MTEF to implement the MPRSP.

5. Value added of Bank support in this project:

Under the Comprehensive Development Framework, the Bank’s strategy i s to focus on activities in which it has a comparative advantage over other donors while supporting the PRSPs and other strategies aimed at assisting countries meet the MDGs. In the partnership matrix for the country, the Bank has significantly placed i t s focus on improving the quality o f l i f e and income o f the poor under the MPRSP and macro-economic stability. The Bank has experience in working successfully with social funds in Malawi and elsewhere in the world. In developing this project, the Government has taken into consideration documentation published by the Bank and other experiences from projects supported by the Bank, bilateral donors, and NGOs. The use o f Bank-developed Risk and Vulnerability Assessment tools in Malawi i s going to contribute to a broader and more relevant sub-project menu for community implementation within the MPRSP and CAS framework.

A social fund’s multi-sectoral nature raises cross-cutting issues requiring technical expertise in various sectors. M A S A F i s complementary to the Local Government reform as i t promotes a bottom-up demand driven approach to development, and facilitates capacity building for districts to implement demand-driven programs, and complements the supply side stimulated by Local Government reforms. The Bank’s technical expertise in general, i t s global knowledge base, as well as past IDA-financed operations in education, health, roads, water and sanitation sectors, put the Bank in a unique position to assist the Government address these cross-sectoral issues within a framework o f decentralization. MASAF f i ts into the Bank Country Team’s new strategy o f strengthening multi-sectoral operations in social adjustment, capacity building, infrastructure, and the CDD approach as a way o f achieving the MDGs in Malawi. The experience o f M A S A F I, I1 and now 3 i s expected to influence the design o f future operations in health, education, and other service sectors so that communities and LAs can remain at the center o f service delivery; these wil l support a re-alignment o f sector ministries wi th LAs and

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community structures.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4): 3 Cost benefit C Cost effectiveness

Other (specify) Economic Analysis, including least cost options

As M A S A F complements sectoral interventions in the improvement o f service delivery, patterns o f sectoral recurrent and capital expenditures w i l l be taken into consideration, particularly in the social sectors. There wil l be a strong linkage between MASAF and the Financial Management, Transparency and Accountability Project (FIMTAP) as well as the MTEF to ensure that communities and their organizations are participants in the promotion o f improved governance and use o f resources at district and national levels. There i s evidence that communities can construct assets that are cost-effective compared with costs incurred under private sector construction, with the added benefit o f local ownership which protects the assets f rom vandalism and deterioration. A resource allocatiodtargeting formula was developed following the National Local Government Finance Committee’s guidelines for development funds. MASAF 3’s allocation formula comprises 50% population and 50% poverty indicators relating to the 12 MDGs being tracked by MASAF 3; this reinforces the poverty reduction and targeting objectives o f the project.

NPV=US$ million; ERR = % (see Annex 4)

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) The budgetary impact o f the project has been taken into account, especially the recurrent cost implications o f the demand driven social sector investments and their potential for negative fiscal effects. Similarly, the financial analysis has taken into account the resources generated and savings created through community participation. Useful lessons have been gained from a detailed review o f MASAF I in the way sectors were able to respond to community efforts in providing necessary social infrastructure.

Fiscal Impact:

Recurrent expenses, taxes, and revenue from both SSP and COMSIP w i l l be covered.

3. Technical: The major technical issues are: (i) poverty analysis and (self-) targeting; (ii) absorptive capacity at district, ward, and community levels (which raises the issue o f availability o f district-level s k i l l s for facilitation, implementation, and supervision in the short-run); (iii) transparency, accountability and district financial management; and (iv) continuous monitoring and evaluation (including the establishment o f baseline data) by M A S A F and partner national institutions. This approach f i t s within the strategies outlined in the MPRSP to address rising poverty in the country.

4. Institutional:

4.1 Executing agencies:

The current M A S A F MU wil l continue to operate at the national level and be responsible for executing the project on behalf o f the government, represented by the OPC. I t w i l l be autonomous (answerable to Parliament), and staffed with skilled personnel with specific responsibilities. At the Zone level, qualified

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personnel wi l l be introduced to strengthen LA financial management and technical services. The Board wil l oversee policy issues and operational guidelines, supported by N T A C to provide technical guidance to M A S A F MU, and NACCEA to promote accountability. The LAs w i l l take over district-level management, wi th PMCs retaining their central role in the implementation o f community sub-projects. Community Savings Clubs will relate to an appropriate MFI with i t s own Board, although there will be consultations between the MFI and MASAF Boards to achieve synergy in their development strategies for sustainable household food, and economic security.

4.2 Project management:

M A S A F MU will manage the project on behalf o f the govemment with support from LAs, community facilitators, and NGOs/CBOs. LAs w i l l be strengthened with technical staff who w i l l work with a District Engineer to address problems o f quality and cost-effectiveness. As part o f project preparation activities, studies have been undertaken to strengthen development communication, MIS, financial management, and procurement. A KISS that facilitates the interface between MIS, monitoring and evaluation, and development communication initiatives will make information available within and outside M A S A F to enhance the quality o f operations. LAs, CBOs/NGOs, PMCs, and COMSICs w i l l manage their relevant sub-projects using the O M and various handbooks.

4.3 Procurement issues:

Experience under M A S A F I and MASAF I1 with respect to procurement has been positive. Prior to procurement being undertaken at community level, participants receive training, including procurement training. PMCs report back to their communities on activities undertaken, and have been able to justify their expenditures and receive funding to complete their activities. Staff at MU who are responsible for procurement have received training and wil l receive hrther training in IDA procurement procedures as necessary to perform their duties. MASAF 3 wi l l follow the procedures used under M A S A F I and M A S A F I1 for procurement, wi th the bulk o f the Credit supporting community level activities. For CMPs, procurement w i l l be undertaken by the PMCs; for LAMPS, procurement w i l l be undertaken by LAs. Procurement under the SSP component wi l l be undertaken by the Project Implementing Agency (NGOs/CBOs), in consultation with the elected Project Support Committee, and activities supported under COMSIP will be procured by PMCs. Procurement o f consultants, as well as vehicles, office equipment, and supplies w i l l be undertaken by M A S A F MU. See Annex 6 for further details.

4.4 Financial management issues:

See Annex 6 for detail.

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

Major: Poor communities in Malawi have already shown an improved perception o f environmental degradation when constructing infrastructure such as school buildings, health centers and other sub-projects eligible under M A S A F 11. Environmental screening, reviews and the assessment o f potential environmental impacts on investments have been an integral part o f the design, implementation, supervision and monitoring during M A S A F 11, and M A S A F 3 wil l continue this practice and improve on i t by working with LAs in environmental institutional capacity building to ensure awareness, enforcement and monitoring o f environmental standards and guidelines as well as promoting sub-projects aimed at improving communities’ management o f their natural resources. Trees are o f particular importance to communities as resources for construction, fuel, and for soil and water conservation; and al l M A S A F supported sub-projects w i l l have a tree-planting element. The District Development Planning Framework, M A S A F 3 Operational Manual, and various handbooks w i l l guide the integration o f environmental issues into a l l community sub-projects so that community environmental protection

Environmental Category: B (Partial Assessment)

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becomes institutionalized.

5.2 What are the main features o f the EMP and are they adequate?

The majority o f demand-driven and community-oriented sub-projects w i l l remain comparatively small in size, and the vast majority o f these sub-projects w i l l be in the social sectors, wi th resulting negligible negative impact on the environment. There i s reason to believe that sub-projects in the areas o f sanitation, public health, community investments, and environment will have a positive environmental impact. The final sub-project environmental assessment will continue to be made on a case-by-case basis.

5.3 For Category A and B projects, timeline and status o f EA:

Proposed Actions: LAs wil l receive technical assistance in the adoption o f current environmental screening and assessment guidelines in the form o f a comprehensive handbook for use by LA staff, NGOdCBOs, and communities; wi th dedicated communication strategy to raise environmental awareness. The in-country disclosure o f the Operational Manual occurred on December 20,2002.

f. Status o f any other environmental studies: None

g. Local groups and NGOs consulted: Preparation o f the various MASAF 3 handbooks included participation o f representatives from line ministries, Authorities, Departments, UNICEF, and Concern Universal. Participants at a workshop to review and mainstream environmental issues into MASAF activities included MASAF staff f rom the ZOs, Planners and Environmental District Officers from LAs, Department o f Local Government, Environmental Affairs Department, Lands, Physical Planning and Surveys, and UNICEF.

h. Resettlement

[ ] Summarize issues below (e.g., resettlement planning, compensation) [ ] To be defined (indicate how issues will be identified) [XI None Any proposed sub-project where local agreement i s not reached on such issues that might bring about involuntary resettlement, voluntary or involuntary physical dislocation, eviction o f squatters, loss o f land whether ownership i s recognized by customary land tenure or land tit les, impact on cultivations and property, loss of access to property, loss of access to natural and other economic resources, the sub-project will not be approved for funding.

Date o f receipt o f final draft:

i. Borrower permission to release EA: [ 3 Yes [ ] N o [XI N/A

j. Other remarks: None

5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

A workshop was held in Malawi wi th District Environmental Officers, District Planning Officers, the national level department dealing wi th the environment, and MASAF staff, facilitated by the World Bank environment specialist on the team. The result was procedures and guidelines for environmental screening at all stages o f the sub-project cycle for activities to be funded by MASAF. I t i s the community groups who propose a sub-project, and the local community discusses i t openly in meetings locally. When the sub-project i s appraised, i t i s wi th the participation o f members o f the community, and results are communicated back to the P M C which i s elected by and from the local community. In l ine with the new guidance note on C D D projects and safeguards, M A S A F 3 has mainstreamed the safeguard screening into the Operational Manual and the sub-project cycle o f each project component. This means

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that each subproject w i l l be screened for possible violations o f safeguards as well as i t s community involvement and ownership, i t s technical and financial feasibility, and i t s priority by the community as a whole. This appraisal w i l l be done by district officers together wi th M A S A F staff.

5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

MASAF 3 w i l l have a M I S which w i l l track the process o f approval and rejection o f applications. In MASAF II the tracking o f the environmental, social and other assessment o f the subproject prior to approval has been done manually, but w i l l be improved with the new computerized district-level M IS system.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.

Key social issues: At the community level, while there i s a clear sense o f ownership, i t has been inadequate in certain areas, particularly for road projects built through Districts. Communities have not been keen to maintain the roads without wage payments - a design and communication problem because sustainability has been diff icult given that communities in the targeted Extension Planning Areas (EPAs) are so poor that they cannot spare time on unpaid work and would rather look for wage employment. This challenge remains and wil l be addressed by LAs, wi th support f rom MASAF. The training received by communities, especially the PMCs, has improved their ability to (a) manage risk at household level, (b) manage their own finances better, and (c) plan their own household activities better. For orphans and the single headed households who have acquired skills, there i s also a higher level o f economic well-being. Thus, the second major challenge i s to consolidate the impact o f M A S A F on the poor and vulnerable, who have acquired a heightened sense o f their ability to tackle poverty - "let us do a MASAF" has become a phrase used when the poor want to pool resources and undertake self-help projects on their own. The substantial social capital built under M A S A F I and 11, followed by some limited economic capital, not only needs to be consolidated, but the the transformation process needs expansion and institutionalization.

Under the Public Works Program o f M A S A F 11, targeting o f geographical areas within districts i s based on the Vulnerability Assessment Mapping (VAM) results produced by the Famine and Early Warning Systems, using food production data from EPAs. The use o f VAM has been challenged because it i s not reliable and does not reflect the real food security situation. MASAF experience has been that the use o f VAM results has not always led to the neediest areas being targeted. Furthermore, the Program uses a wage below the minimum wage rate to promote self-targeting so that only the very poor individuals participate. Throughout the implementation period, beneficiaries perceived this wage rate to be too l ow - leading to l ow morale o f the labor force, l ow productivity and poor quality o f assets in some cases. The challenge remains o f setting a wage which does not attract people away from economic activities while at the same time offering an adequate level o f remuneration to tackle poverty. The introduction o f COMSICs i s one way o f responding by increasing the wage, but depositing the additional pay into a savings account, as has been done by several NGOs in Malawi and in other countries.

Gender issues will continue to receive special attention and a gender plan o f action with indicators will be prepared, wi th the assistance o f the Ministry o f Gender and Community Services. The gender plan will identify means through which the impact o f project activities on women and the children can be enhanced to promote a gender-sensitive monitoring and evaluation system. It wi l l also fit within the MPRSP and MDG targets for Malawi.

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Stakeholders: The successes o f MASAF I and I1 was due to the partnership which emerged between PMCs, traditional leadership, the private sector, officials o f Government working at the District level, and NGOs/CBOs working with vulnerable individuals. This partnership will be strengthened by (a) the involvement o f new LA structures in al l MASAF planning activities and the implementation o f CDP, (b) greater mobilization o f more NGOdCBOs within the SSP component with strategic linkages between NGOs/CBOs and LAs, and (c) increased involvement o f the private sector as COMSICs become active in the implementation o f income-generating activities. A partnership between sector ministries and agencies working with communities at the district level will be fostered to ensure sustainability, especially in the operation and maintenance o f assets created under the CDP component.

6.2 Participatory Approach: How are key stakeholders participating in the project?

Within the Local Government Planning Framework, PRA tools w i l l be used to assist in the identification o f community development needs, with an extended PRA used to help communities develop an appropriate sub-project proposal for funding using M A S A F resources

6.3 H o w does the project involve consultations or collaboration wi th NGOs or other c iv i l society organizations?

The vulnerable w i l l receive support from M A S A F 3 through NGOs/CBOs, who will be responsible for preparation o f the application, implementation o f the activitiy, and operation and maintenance o f the asset created. A Project Support Group, elected by the community, w i l l act as a liaison between the community and the Project Implementing Agency (e.g., NGOICBO). The SSP component w i l l also provide capacity building to NGOsKBOs, as well as community service organizations to improve their long-term sustainability.

6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

The PRAs wil l receive NGO inputs as a number o f NGOs have extensive experience with the tools and their use in local-level planning. The SSP component w i l l continue to be implemented through NGOs/CBOs, while the new COMSIP component w i l l strengthen NGOs/CBOs active in the micro-finance area. The monitoring o f project achievements will be undertaken nationally by the Ministry o f Finance (MOF) for compliance with the MPRSP and MTEF targets; and with the Department o f Economic Planning and Development in the context o f progress made towards the achievement o f MDG targets for Malawi.

6.5 H o w w i l l the project monitor performance in terms o f social development outcomes?

The existing M I S w i l l be strengthened and extended to the District-level; and appropriate linkages w i l l be developed between M A S A F and the proposed monitoring and evaluation system system for the MPRSP at community, district, and national levels. The M I S and monitoring and evaluation system w i l l enable M A S A F to regularly obtain information f rom LAs and CBOsINGOs on implementation progress, and analysis will be made available to MOF, Department of Economic Planning and Development, Parliament, sector ministries, and the general public. IDA w i l l continue to receive quarterly progress reports f rom MASAF, with an annual report on achievements.

7. Safeguard Policies:

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I Pest Management (OP 4.09) I 3 Yes 0 NO I Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12)

‘2 Yes N o ‘3 Yes NO

C Yes 0 NO

Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)*

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The Department o f Environmental Affairs and MASAF MU have both familiarized themselves with the safeguards. The existing internal environmental assessment procedures are such that potential environmental and social problems w i l l be identified at an early stage in the sub-project cycle, and the sub-project then redesigned or rejected. During field appraisal, the community decision w i l l be reviewed to ensure that there was complete consensus on choices involving, for example, siting o f wood lots or a surface water structure; if consensus i s not reached, the sub-project w i l l not be funded. Any sub-project where local agreement i s not reached on such issues that might bring about resettlement w i l l be rejected and communities advised accordingly.

C; Yes NO

b Yes 0 NO

0 Yes 0 NO

F. Sustainability and Risks

H

N

N

1. Sustainability:

Empirical evidence from M A S A F I and 11, and similar operations in several other regions, point to a positive correlation between community participation and the sustainability o f sub-projects. Sustainability i s tied to the complementary roles that other projects l ike FIMTAP w i l l play. Macro-economic stability and the MPRSP place greater importance on the Government’s role in supporting basic social and economic services. Systems and procedures have been revised in the Operational Manual, and training o f project and key LA staff w i l l be carried out to enhance project effectiveness. This w i l l ensure that sub-projects with a low probability o f sustainability are not undertaken. The COMSIP and TAP components have a particular focus on increased sustainability for project interventions and outcomes. M A S A F 3 i s designed based on the convergence between the needs o f the communities and that o f the government.

Ensure adherence by Department o f Local Government and National Local Government Finance Committee to the Memorandum o f Understanding LAs adhere to Memoranda o f Understanding, especially on roles o f CBOs

Support for community level activities will not be provided in the absence o f operation and maintenance plans; and NGOs and the private sector w i l l be contracted by Districts and communities to strengthen this capacity

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

From Outputs to Objective Risk I Risk Rating I Risk Mitigation Measure

Adequate funds will not be provided to develop LAs to meet recurrent costs

LAs w i l l not accept CBOs and Traditional Authorities as equal partners in development Sector ministries w i l l not develop suitable guidelines on operation and maintenance for use by LAs and communities

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Government interventions in the micro-finance sector will not support market-based interventions From Components to Outputs Inadequate provision o f timely counterpart funding Central Ministries fail to support hand-over o f responsibilities for service delivery to LAs

Overall Risk Rating

Sector min is t r ies do not mobilize and provide the relevant qualified technical staff to support LAs in the implementation o f community service packages Entrepreneurial spirit i s not stimulated to overcome the culture o f dependency among the poor Micro-Finance Institutions (MFIs) working wi th the poor do not exist

I M

N

M

M

H

M

M

[ntensification o f IEC on the operations of nicro-finance institutions in support o f :orrimunities using market-driven MFIs

Sovernment wi l l be required to make quarterly Seposits Delivery o f community service packages linked to MTEF, SAC support, and Government requirement for sectors to hand over by July 2003 MASAF w i l l employ Community Service Organizations and private sector; and Districts that do not meet delivery benchmarks w i l l not graduate to full responsibilities for M A S A F resources Appropriate IEC giving examples o f successes wi l l be undertaken

Demonstration that the poor, who constitute a large proportion o f the population, can save and could form a large client base, i s expected to entice existing MFIs into this heretofore untapped source o f clients

I I

The major risk associated wi th the option o f not undertaking the project i s the negative impact on Government’s stated goals o f poverty reduction and protection o f the vulnerable under Pillar 3 o f the MPRSP. This i s especially critical at a time when the Government i s looking for ways to generate the economic growth necessary for sustainable poverty reduction. Government therefore views MASAF 3-CEDP as a critical component o f i t s overall social and economic program based on transparency, accountability and improved governance that can only be abandoned at substantial risk to poverty eradication measures in the country.

3. Possible Controversial Aspects:

None

G. Main Loan Conditions 1. Effectiveness Condition

A Project Account has been opened and the init ial contribution has been deposited. A Project Operational Manual in form and substance satisfactory to the Association. Evidence, in form and substance satisfactory to the Association, that the LA M I S has been established and i s operational, and has been tested in at least three LAs.

2. Other [classify according to covenant types used in the Legal Agreements.]

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H. Readiness for Implementation 0 1. a) The engineering design documents for the f i rs t year's activities are complete and ready for the

[XI 1. b) No t applicable. start o f project implementation.

2. The procurement documents for the f i rs t year's activities are complete and ready for the start o f

[XI 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory

4. The following items are lacking and are discussed under loan conditions (Section G):

project implementation.

quality.

I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 2. The following exceptions to Bank policies are recommended for approval. The project complies

with al l other applicable Bank policies.

Hartwig Schafer / Country Director

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Annex 1: Project Design Summary MALAWI: Third Social Action Fund

jectorl country reports: Government and donors eports. Household surveys. Annual Govemment Budgets.

'rogram reports: Community monitoring and

:valuation reports. LA progress reports and

issessments o f annual reports. Audited LA reports. District-level sector

)erformance reports on : o m u n i t y service packages. National Poverty Assessment eports.

To use targeted investments in i participatory, equitable and ustainable manner to reduce ioverty in the country.

(from Goal to Bank Mission) - MPRS i s implemented. - N o reversal o f decentralization policies.

(from Purpose to Goal) Sector ministries w i l l work with LAs to refine and implement the community service packages needed to ensure that communities reach the 12 MDG targets.

- Improved HDI. - Increased district-level government spending in social sectors. - Improved changes in household expenditure indicators.

'rogram Purpose: End-of-Program Indicators: To achieve capacity building - Cash transfers to reduce 'or improved service delivery extreme poverty from 55% to )y communities, Local 28% by 20 15 3ovemments and Sector - Grade 1 children completing vlinistries within the MPRSP, Grade 5 increased from 20% with decentralization as a key to 90% in 20 15. itrategy, so that Malawi can - Enrollment rates for girls in ichieve i t s MDGs. primary schools increased

from 48% to 50% in 2015. - Under fives malnutrition rates reduced from 30% to Dropram vhases:-

3hale I fiOO3-2007): 'ntegrate community ?mpowerment processes into iistrict planning and deliver :ommunity sewice packages.

3hase II (2007-2011): )Yomote accountability and neasurement of MDG outputs br selected indicators.

15% in 2015 - At least double the number o f births supervised by traditional birth attendants by 2015 - At least double the number o f households in anti-malaria, home-based care, and orphans' care programs by 20 15. - Households with improved sanitation and access to wood

'hase III (2011-2015): nstitutionalize outcome-based 84% in 20*5.

lots increased from 77 % to

.eporting by communities, 7BOs. and LAs.

- At least double the number o f households participating in Drug Revolving Funds in 2015. - At least 60% (24) o f LAs with direct community funding mechanisms in 20 15.

'roject Development Outcome I Impact

Data Collection Strategy Critical Assumptions

'roject reports: --I-- (from Objective to Purpose)

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3bjective: To empower individuals, iouseholds, communities, and heir development partners in he implementation o f neasures which can assist hem better manage r isk and xovide support to the xit ically vulnerable through a rariety o f sustainable nterventions.

h t p u t from each 2omponent: I. Socio-economic nfrastructure are provided and ire efficient and effective in he under-served communities

2. Vulnerable groups receiving jocio-economic support.

zos, - -3 and community youps with improved :apacities

1. Community Savings Clubs Fully operational.

5. More efficient, effective

ndicators: ittainment o f 12 indicator argets from the MDGs set for vlalawi.

3utput Indicators:

At least 590 CMPs :ompleted, operating, and naintained. At least 230 LAMPs

:ompleted.

At least 18,000 households .cached with assistance. ,At least 72,000 vulnerable iersons (elderly, chronically 11, disabled, malnourished) .cached with assistance. ' At least 72,000 individuals :male and female) in receipt of wages under the LAMPs.

' At least 90% o f community sub-projects with operation ind maintenance irrangements . ' At least 95% o f communities :rained to maintain facilities within project life. ' At least 40% representation If women in PMCs, and they ire trained.

' At least 8,000 savings groups rormed and operational. ' At least 800 clubs formed ind implementing economic sub-proj ects.

' At least 2 M A S A F Field

ieneficiary assessments. nonitoring and evaluation nalysis from LA reports. hpervision mission reports, udits and minutestreports iocumenting decisions making irocess. 'roject progress reports.

'roject reports:

jurvey and PRA. 2uarterly Progress reports.

2uarterly progress reports.

-nnual performance issessments reports.

%ogress reports.

4nnual performance

hrrent District Development 'lanning Framework will not rustrate or impede direct ommunity funding.

From Outputs to Objective)

idequate levels o f recurrent imding will be provided for hose services managed by ,As in partnership with :ommunities.

,As will accept CBOs and rradtional Authorities as equal Iartners in development.

jector ministries will develop uitable guidelines on )peration and maintenance for ise by LAs and communities.

3ovemment will continue to support market-based nterventions in the nicro-finance sector.

3ecentralization Framework

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and responsive ZOs and LAs available to support :ommunities.

Project Components I Su b-components: 1. Community Development Projects (CDPs)

2. Social Support Projects W P )

3. Community Savings and Investment Promotion (COMSIP)

4. Transparency and Accountability Promotion (TAP)

5. Institutional Development (ID)

3ffices wound up in favor o f LA management. - At least 8 LAs meeting wb-project cycle benchmarks.

Inputs: (budget for each component) US$28.48 mil l ion Financing o f activities for increasing service coverage in :ducation, health, water supply, sanitation, and other community-level services.

US24 mil l ion Financing o f subprojects managed by CBOs/NGOs with participation o f care-givers and foster parents.

US$11.87 mil l ion Promotion o f savings by Groups, followed by support to Clubs (of savings groups) for increased access to support and investment opportunities.

U S 6 . 6 7 mil l ion Financing o f activities meant to increase transparency and accountability for service delivery at community, LA, and national levels.

US$7.06 mil l ion Strengthening the functioning o f the MU and three ZOs for technical back-stopping to LAs.

tssessment reports.

'roject reports:

'eriodic progress reports by >As. ;MRS.

'MRs and C B O M G O reports.

FMRs and progress reports From MFIs supporting the Savings Clubs.

Progress Reports to the Board via the NACCEA.

Progress reports by M A S A F MU.

vi11 receive the necessary esources to develop viable .As.

from Components to htputs) Timely provision o f

:ounterpart funding. Sector ministries will

nobilize and provide the ,elevant qualified technical ;taff to support LAs in the mplementation o f community iervice packages. Continued willingness o f the mlnerable to partner with 2BOs/NGOs in accessing iupport.

' Entrepreneurial spirit can be ;timulated to overcome the :ulture o f dependency among :he poor.

Appropriate staffing levels wil l be achieved by LAs in response to community demands for services.

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Annex 2: Detailed Project Description MALAWI: Third Social Action Fund

In April 2002, Government adopted the MPRS, whose overall goal i s to achieve sustainable poverty reduction through social, economic and political empowerment of the poor, as an overarching development framework, which i s now the basis for a l l future Government development activities and provides the guiding framework for development assistance to the country. The MPRS also recognizes the importance o f cross-cutting issues o f HIVIAIDS, gender, environment and technology and how these impact on poverty. The strategy focuses on the poor as influencing their own development, wi th Government and the development partners’ role being that o f creating an enabling environment for the reduction o f poverty. The MPRS has the following four pillars:

(a) Sustainable pro-poor economic growth - economically empowering the poor by ensuring access to credit and markets, sk i l ls development and employment generation;

(b) Human capital development - ensuring the poor have the health status and education to lift themselves out o f poverty;

(c) Improving the quality of life for the most vulnerable - providing sustainable safety nets for those who are unable to benefit from the f i rs t two pillars;

(d) Good governance, political will and mindset - ensuring that the public and civ i l society institutions and systems protect and benefit the poor.

The underlying principle o f MPRSP i s people’s empowerment so that sustainable development can come from people taking an active role in the management o f their developmental initiatives. In i t s poverty reduction program, Government i s faced by the challenges o f mobilizing internal and external resources for development; prioritizing developments at both national and community levels for optimum allocation o f resources; providing social protection to the vulnerable groups in society; and building human capacity at the national, district, and community level to address constraints to development. These challenges affect all the sectors with a responsibility for service delivery as well as those stimulating economic development and are complicated by the increasing levels o f HJY/AIDS infections and the attendant costs o f looking after both the infected and affected. This i s at a time o f declining economic performance by many o f Malawi’s trading partners in Southern Africa as wel l as poor international prices for agricultural commodities. M A S A F 3 seeks to empower communities so that they can participate in the implementation o f the MPRSP and support Malawi’s desire to attain the MDGs, hence M A S A F 3’s emphasis on mobilizing poor communities for increased economic production and not just for building public infrastructure.

Government has decided to build o n the experiences o f MASAF I and 11, with i t s focus on community empowerment and emphasis on participatory development processes, and use M A S A F as an instrument for realizing the objectives o f community empowerment and decentralized development management. In i t s design, the M A S A F embodies principles o f C D D in which (i) community empowerment; (ii) empowering local governments; (iii) re-aligning the center; (iv) improving accountability; and (v) building capacity are the major tenets. M A S A F i s therefore better placed to aid the effective realization o f these objectives while supporting local governments to be responsive and accountable in public service delivery.

Through a deliberate and comprehensive capacity enhancement program, M A S A F will continue to

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support the communities, LAs and national level sectors to improve service delivery and public accountability in line with the C D D principles. I t i s in this context that M A S A F will support, among other things, new initiatives related to economic productivity under agriculture, energy, community savings and investment promotion, the application o f indigenous knowledge practices and participatory community monitoring tools for enhanced public accountability.

The project also takes cognizance o f the MDGs, to which Malawi i s a signatory, which were agreed to at the Millennium Declaration and signed in September 2000 by 147 Heads o f States. The MDGs include:

1. 2. 3. 4. 5. 6. 7. 8.

Eradicating poverty and hunger Achieving universal primary education Promoting gender equality and empowering women Reducing child mortality Improving maternal health Combating HIV/AIDS, malaria and other diseases Ensuring environmental sustainability Developing a global partnership for development.

Financing o f the M A S A F Program i s open to any funding agency; current sources are expected to include Government funds appropriated by Parliament, donor resources in the form o f grants or loans, contributions by participating communities, CBOs and NGOs, and from any other source as directed by the MASAF Board. With respect to the MASAF 3-Community Empowerment and Development Project, the Government o f Malawi has agreed with the World Bank to finance this operation using the APL, for the following reasons:

1. The implementation plan for MASAF 3 w i l l need to take a long-term perspective in order to appropriately subscribe to the MPRS long-term goal o f sustainable poverty reduction through the social, economic and political empowerment o f the poor, thereby ultimately contributing to the realization o f the MDGs.

2. I t i s anticipated that around 10 years will be needed for the LAs to develop adequate capacity to take over implementation management o f most activities that M A S A F wil l have been supporting.

3. As this capacity i s built, M A S A F w i l l undergo a progressive institutional transformation, corresponding to attainment o f certain management capacities by the LAs to assume, and effectively discharge, the specific devolved sectoral functions and services to the communities in the district.

LAs will follow the MTEF in their planning and budgeting process, and projects submitted to MASAF for funding under the CDP w i l l come from the District Development Plans that clearly reflect the recurrent expenditure commitments with respect to the proposed annual investment plans. Allocation o f resources by M A S A F to districts will be based on annual investment plans to be guided by IPFs. The annual disbursements o f funds from M A S A F to LAs w i l l be based on fulfillment o f sub-proiect delivery benchmarks that will include effective completion o f previously funded projects.

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M A S A F will work with the LAs to enhance their development management capacities and thereby strengthen the phased implementation o f the Decentralization Program; M A S A F wil l aim at strengthening local governance and community participation in decision-making and management o f the development process, through the local level structures o f Village Development Committees and Area Development Committees.

By Component:

Project Component 1 - US$28.48 million Community Development Projects (CDPs) (IDA funding US$11.8 million; IDA grant o f U S 9 . 2 miilion) This component combines two o f the current components under M A S A F 11, Community Sub-projects and Public Works Program, for effective integration into the LA management framework. I t will continue to finance demand-driven community-based socio-economic activities, including infrastructure, which include inter alia: construction and/or rehabilitation related to the provision o f basic social services in health, education and water; afforestation, terracing, community roads and bridges, community centers, food processing technologies, energy efficiency interventions, training, and others. Improved facilitation will allow communities to articulate their priority development concerns within the social fund (SF) criteria and the District Planning Framework; priorities that emerge outside the SF menu wil l be linked to other relevant existing programs. Eligible sub-projects are derived from activities that deliver a community good rather than an individual benefit, and w i l l be within the approved District Development Framework built on Village Action Plans reflecting priority community needs. The CDP component i s based on the five community service packages o f health, education, food security, transport and communication, and water and sanitation. The packages have been defined by the various sectors, taking into consideration the capacities o f LAs, NGOs/CBOs, and communities who w i l l be implementing them. CMPs wil l be single community sub-projects implemented by the community's democratically elected PMCs; LAMPs w i l l be multi-community sub-projects and those requiring labor-intensive technologies to implement. The LAMPs have a safety net element while creating assets; at least 40% o f the funds paid by M A S A F w i l l be for unskilled labor. Costs associated with asset management after L A M P sub-projects completion w i l l be costed and provided for on a sliding scale o f 75%, 50%, and 25% o f the unskilled labor component; this funding w i l l come from the US$1 mi l l ion provided for under the Safety Ne ts Levy. Projects that fall within the agreed thresholds (IDA contribution o f US$20,000 for CMPs and US$40,000 for LAMPs) wi l l be appraised and approved by the DEC (as long as they are within the district plan approved by the LA), and endorsed by the LAs during their regular meetings. Any sub-projects outside the service norms and above the sub-project average cost shall be desk and field appraised by the respective sector supported by the ZO and MU. For these sub-projects, the N T A C shall review and approve for endorsement by the Board provided that the sub-projects are within the funding envelope o f the given district. The MU wil l prepare consolidated requests and submit them to NTAC, which w i l l meet before M A S A F Board meetings, review the requests, and make recommendations to Board. The Director o f Finance in M A S A F MU wil l be Secretary to the NTAC. In no event, unless otherwise agreed with IDA, shall IDA'S contribution to a CMP or a L A M P exceed an amount equivalent to US$60,000. Under M A S A F 3, funds for CMPs w i l l continue to be transferred by M A S A F MU directly to communities, while funds for LAMPs wil l be transferred to the Districts, who are responsible for their use, including the payments to the beneficiaries. As LAs develop capacity, measured by pre-agreed benchmarks, a l l CDP resources will be transferred to them for disbursement. The successful integration o f CDP into LA management will be overseen by a Joint MASAF-Local Government Technical Team. Outputs from the component will contribute to the attainment o f specified indicator targets under MDG 2, 3, 5, 7, and 8.

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Project Component 2 - US$24.00 million Social Support Projects (SSP) (IDA grant of US$18 million) The SSP component directly targets vulnerable groups through NGOs/CBOs who have a history o f working with such groups. The component stimulates and supports traditional coping systems which rely on the extended family to mitigate against foster households experiencing deepening poverty after taking in vulnerable individuals. The vulnerable include inter alia: widows and widowers, the aged, orphans and foster parents, the destitute, the disabled, persons affected by HIVIAIDS, and malnourished under-fives. The project w i l l finance initiatives identified by communities working with NGOs/CBOs, and these projects wi l l contribute to household food and nutrition security for the vulnerable individuals and foster households. The component w i l l assist in the development o f long-term capacity and provide technical assistance to NGOs/CBOs working directly with the vulnerable groups at the district, ward, and village levels. Activities to be funded under this component w i l l depend on the specific needs o f the vulnerable group, but, based on experience under M A S A F 11, w i l l include support in sk i l ls provision, special training needs, provision o f grants for tools and other productive assets for the sustainability o f community-level interventions, and stimulation o f productive activities for foster households. Through a participatory process, communities would identify vulnerable groups to be supported, and NGOsKBOs would be chosen by the beneficiaries to assist them develop interventions that contribute to improvements in the livelihoods o f the vulnerable. The sub-projects shall be appraised and approved by a District Technical Team (comprised o f the DEC and CSO/NGO/CBO members), as long as they are within the district plan approved by the LA; these w i l l be endorsed by N T A C for forwarding to the Board. Funding w i l l be contingent upon NGOs/CBOs meeting pre-defined eligibility criteria, which includes a cash, or in-kind contribution o f 20% (from the Project Implementing Agency, and the community if they are able to contribute), and the activity falls within the sub-project menu. The average cost o f IDA contribution for each o f these sub-projects i s US$lO,OOO. Any sub-projects outside the service norms and above the sub-project average cost shall be desk and field appraised by the respective sector supported by the ZO and MU. In no event, unless otherwise agreed wi th IDA, shall IDA's contribution to an SSP exceed an amount equivalent to US$30,000. This component w i l l contribute to the achievement o f specified indicator targets under MDG 4,6, and 8.

Project Component 3 - US$ 11.87 million Community Savings and Investment Promotion (COMSIP) (IDA contribution of US$9 million) Drawing on lessons from the SSP component o f M A S A F 11, wherein groups which increased their capacity to generate incomes have used this to provide assistance to the vulnerable, or saved income to meet unexpected expenses, this component wi l l assist in transforming the social capital built into economic capital. Community groups who participated in Community Sub-projects and the Public Works Program under M A S A F I1 have shown an interest to save and increase their access to credit. This component will, given the few formal opportunities for saving that exist, promote a savings and investment culture among the poor. Support under this component will not include the transfer o f monies for savings or credit purposes, but will include promotion o f COMSIGs o f 10-15 members each. COMSIGS, if desired, will be supported to come together wi th a minimum o f 10 required, to form COMSICs. Finance will be provided for capacity building activities for COMSICs, including training, simple infrastructure, and stationery, and a minimum of 20% community contribution in cash or kind w i l l be required. The sub-projects managed by COMSIC PMCs have an average cost o f US$lO,OOO from IDA contribution, and all proposals under this component will be appraised by the District Technical Team, comprised o f the DEC and CSO/NGO/CBO members, who will recommend to N T A C for approval. Any proposal outside o f this ceiling wi l l require an appraisal which includes the ZO and MU, and, in no event, unless otherwise agreed with IDA, shall IDA's contribution to a COMSIC exceed an amount equivalent to US$lO,OOO. T o ensure that the poor operate in a viable and sustainable savings and credit environment, COMSICs will be linked to legally-constituted MFIs, such as the Malawi Savings Bank, which currently provides an opportunity for communities to participate in i t s savings program.

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The promotion o f COMSIGs and COMSICs, and piloting community-MFI interfaces wil l be phased to ensure that a sustainable savings and investment program for the poor i s in place. The COMSIP component provides a mechanism for communities to attain food, nutrition, and economic security having taken advantage o f resources made available through other components o f MASAF. As noted above, while IDA resources w i l l be used for mobilizing communities to save, training on improved business skil ls, and provision o f simple infrastructure and safes in a suitable COMSIC clubhouse, only money saved by groups (including any funds deposited by the L A M P component on behalf o f a beneficiary) w i l l be available for borrowing by individuals and groups, and COMSIGs w i l l be free to lend to their own members in l ine with their rules. MASAF w i l l ensure that COMSICs are put in touch with private providers o f financial services who can extend market-driven services to these Clubs. Participation in savings clubs w i l l be an important indicator o f persons having graduated from poverty and therefore no longer in need o f support under the SSP and LAMP. The success o f this component w i l l contribute to the achievement o f specified indicator targets under MDG 1,4, and 8.

Project Component 4 - US$S.S7 million Transparency and Accountability Promotion (TAP) (IDA contribution US$6 million) M A S A F w i l l document and transform i t s experiences from working with communities into capacity enhancement interventions which can support various partners implementing decentralization (such as LAs), and the MPRSP (such as NGOs and CBOs). This component will develop suitable technical guidelines, generate data from the work o f communities and partner institutions, process such data into useful information, disseminate, and package it into suitable materials for training. Development partners are keen to promote community-level transparency and accountability through a suitable development communication strategy, and to equip communities with sk i l ls to demand the same from LAs and other institutions. This component will develop appropriate tools for these processes through a community-level monitoring system in the implementation o f community service packages. I t w i l l finance the training of M A S A F staff, district agencies, NGOs/CBOs, and PMCs in the use o f procedures, systems and criteria developed to improve implementation. All M A S A F activities wi l l strengthen technical standards for improved quality, and a system to collect, analyze, and disseminate information on progress and impacts. This component w i l l also focus on developing an effective M I S which w i l l feed into the overall monitoring and evaluation system. The Project w i l l work within the existing M&E framework as specified in the MPRSP. The outcome indicators o f M A S A F 3, 12 MDG indicator targets which can be delivered by communities, wi l l be tracked at LA-level against the LA’S baseline and reported nationally by M A S A F MU through NACCEA. Outputs and outcomes from M A S A F interventions wi l l complement the District Databank System, the Malawi Socio-Economic Database (MASEDA), the CWIQ, and others either planned or being tested in the districts. Until these are functional, M A S A F 3 w i l l use i t s own management information system and others l ike the Health Management Information System to track indicators. The outputs o f these various sub-systems will be brought together under a knowledge and information sharing system and make M A S A F a leaming organization as it transforms into a training and capacity building institution. The component wi l l provide secretariat support to the CDDAC chaired by the Department o f Economic Planning and Development to review monitoring and evaluation reports, make recommendations to the M A S A F Board, and disseminate results on community, LAs, and Sector Ministr ies performance in the implementation of community service packages and attainment o f MDG targets. The CDDAC w i l l bring together various stakeholders who advocate for a C D D approach, and make public i t s reports on participatory monitoring. This i s a cross-cutting component to capacitate implementing agencies in the achievement o f Malawi MDG targets.

Project Component 5 - US$7.06 million Institutional Development (IDA contribution of US$6 million) The Institutional Development component wi l l address the internal capacity requirements o f M A S A F to

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deliver in a transparent and accountable way. I t w i l l finance the continued provision o f technically competent staff to work at the M A S A F MU, and strengthen LA capacity to implement the community sub-project cycle with technical and financial expertise. Financial accountability procedures already in place under M A S A F I1 w i l l be extended to LAs implementing CMPs. In the long-term, Zones will be wound up as LAs provide their own staff to manage al l CDPs. In the transition period, LAs will, on an annual basis, be offered one o f three options: (a) use their own staff, with a M A S A F accounts staff, to coordinate CDPs, (b) place short-term MASAF technical assistance under the Planning Officer or within the Community Development Office, or (c) obtain technical assistance from MASAF Zone and Field Offices. M A S A F wil l reduce i t s current 12 Zones to 3 Zone Offices with 9 Field Offices before abolishing them as Districts take over the CDP component. Once 80% (32) o f LAs have taken over the CDP component with their own staff, MASAF will maintain a single national office; and continue to support the remaining 8 LAs, NGOs/CBOs, and COMSICs with implementation. As a training and capacity building institution for the CDD approach, M A S A F wil l continue to work with PMCs, COMSICs, and NGOs/CBOs as community structures to sustain the C D D approach in Malawi. As an exit strategy for the Bank, the project w i l l leave behind a legal framework for the CDD approach based on MASAF, PMCs, COMSICs, and NGOdCBOs working with LAs, communities, and sector ministries.

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Annex 3: Estimated Project Costs MALAWI: Third Social Action Fund

Project Cost By Component Local Foreign Total

US $million US $million US $million Community Development Projects Social Support Projects Community Savings and Investment Promotion Transparency and Accountability Promotion Institutional Development Total Baseline Cost

Physical Contingencies Price Contingencies

1 Total Project Costs

Total Financing Required

26.48 23.00 10.87 4.67 6.06

71.08 3.00 3.00

77.08 1 .oo 78.08 77.08 1 .oo 78.08

0.00 0.00 0.00 1 .oo 0.00 1 .oo 0.00 0.00

Local US $million Project Cost By Category

26.48 23.00 10.87 5.67 6.06

72.08 3.00 3.00

Foreign Total US $million US $million

Grants Equipment, vehicles and supplies Technical Assistance, studies, training, workshops Operating Costs

1 Total Project Costs

Total Financing Required

64.35 0.00 64.35 1.20 0.58 1.78 5.40 1 .oo 6.40 5.55 0.00 5.55

76.50 1.58 78.08 76.50 1.58 78.08

1 Identifiable taxes and duties are 0 (US$m) and the total project cost, net o f taxes, is 78.08 (US$m). Therefore, the project cost sharing ratio is 42.01%

o f total project cost net o f taxes.

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Annex 4: Economic Analysis MALAWI: Third Social Action Fund

Projects to improve social infrastructure (CMPs)

M A S A F finances the following three sets o f activities: (i) creating infrastructure for the delivery o f key services at the community level; (ii) creating cash incomes amongst the very poor through public works programs managed by LAs; and (iii) protecting the most vulnerable in the society through targeted income generating projects. The examples o f projects financed under each o f the three categories are listed below in Table 1.

LAMPS to generate cash transfers to the poor

Table 1: List of MASAF sub-projects menu

Construction o f health centers Construction o f classrooms for primary education Boreholes for village water

Construction and rehabilitation o f rural roads Energy efficiency improvements Community kiosks Training

supply

Afforestation Terracing Community roads Community bridges Valley tanks. Flood control structures Contour ridging Composting Drainage systems Gravity-fed water schemes Community water reservoirs

Social Support Projects (SSP) to generate gainful employment amongst the vulnerable Maize mill projects Poultry farming Vocational Skills Training Commodity Trading projects

Paraffin Pump Food security Dairy cattle farming Goat farming Bee keeping Mushroom growing Fish farming O i l extraction General training Special education Labor saving technology

Piggery

The economic rationale for M A S A F i s based on the following three principles:

0

M A S A F fknds are essentially public funds and the activities financed by M A S A F represent the highest priority use for public resources. MASAF i s the least cost platform to deliver the public services indicated above. MASAF also has a number o f externalities such as building community skills, laying the basis for decentralization o f service delivery in the long term, and build capacity to meet emergencies.

MASAF and Public Expenditure

The whole range o f M A S A F activities are in l ine with the role o f Government as envisaged in the MPRSP as well as in the jo int BanWGovemment public expenditure review (PER). Both the MPRSP and the PER have identified social/physical infrastructure for the delivery o f primary health care, education, roads as the main constraints for growth and generating incomes in the hands o f the very poor. Both the MPRSP and the PER indicate that in each o f these areas (primary schools, health centers, secondary roads) the demand i s far greater than the facilities available and have recommended that expenditure outlays be increased - an objective that i s achieved through the M A S A F projects for

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expanding social services.

The LAMPs and the SSPs are in line with the overall social safety net strategy adopted by the government (and elaborated in the MPRSP). As envisaged in the safety net strategy, the Government i s committed to spend almost $25 mi l l ion per annum on programs to create incomes for the very poor who are unable to benefit f rom economic growth (See: November 2000, The Government o f Malawi, “ The Letter o f Development Policy - FRDP III”, Memorandum o f the President, P7419 MAI). Within this concept, the LAMPs are programs that generate cash transfers for persons who suffer a temporary loss o f income on account o f economic emergencies whereas the SSPs are designed to create a sustainable income stream for the chronically poor and vulnerable in society.

MASAF - A Least Cost Instrument

0 M A S A F i s also a least cost instrument for delivering infrastructure and social support to the poor. An analysis carried out in a recent study (January 2003, “Review of Cost Effectiveness and Design Standards”, E M C Jatula Associates Malawi) indicates that the cost o f building a variety o f structures such as classrooms, boreholes, bridges and pit latrines through MASAF i s nearly 30-50% less than the cost o f similar structures constructed by other agencies such as other aid agencies, private contractors, Government departments and the National Road Authority. (See Table 2). Cost effectiveness o f MASAF approach w i l l be ensured by ensuring rigorous appraisal standards, providing the communities with project menus, costed design options and the encouraging local competition in procurement o f goods and services. M A S A F subprojects are also expected to be less costly and implemented quickly because the communities will share in the cost o f the projects.

0

0

Other benefits

In addition to providing key services efficiently, M A S A F activities w i l l confer a number o f additional benefits. These include:

0 Since M A S A F re l ies on communities to identify, appraise and implement subprojects, we believe this w i l l not only lead to better selection o f subprojects but also contribute to building capacity at the community level which w i l l be crucial to the success o f the decentralization policy adopted by the Government. The capacity developed in the context o f the M A S A F projects wi l l be crucial to meet emergencies such as the one resulting from poor weather in 2002. In these instances the public works programs could be rapidly expanded to augment incomes. The experience under the Bank’s Emergency Drought Recovery Credit shows that augmenting incomes and expanding food supplies are the two crucial elements o f the Government’s food security strategy.

0

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Table 2 - Comparison of Construction Cost of MASAF with that of other Organizations

Project Classroom Block

MASAF Percentage cost Cost Difference $ '000 $'OOO

DFID 15 9.5 36.7 Single Pit Latrine Borehole Classroom

DFID 1.4 0.4 71.4 DFID 4.4 3.2 27.3 G O M Building 15 9.5 36.7 DeDt.

Single Pit Latrine G O M Building 1.5 0.7 53.3 Dept.

Maternity Block

Water

IBorehole I DANIDA I 4.4 I 3.2 I 27.3

G O M Building 26.2 20.3 22.5 Dept. G O M Building 16.2 8 50.6

Source: January 2003, "Review o f cost Effectiveness and Design Standards." E M C Jatula Associates Malawi .

(Borehole/Tank) Admin. Block

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-

Dept. G O M Building 8.1 3.5 56.8

Bridge 9 M - Single Span Classroom Block

Dept. National Roads 47.8 36.3 24.1 Authority DANIDA 22.5 9.7 56.9

Annex 5: Financial Summary MALAWI: Third Social Action Fund

Years Ending September 30

I IMPLEMENTATION PERIOD 1 Year1 I Year2 I Year3 I Year4 I Year5 I Year6 I Year 7

I Total Financing Required Project Costs Investment Costs 23.0 25.0 24.0 0.0 0.0 0.0 0.0

Recurrent Costs 2.0 2.2 1.8 0.0 0.0 0.0 0.0 Total Project Costs 25.0 27.2 25.8 0.0 0.0 0.0 0.0 Total Financing 25.0 27.2 25.8 0.0 0.0 0.0 0.0

Financing IBRDllDA 19.0 21.2 19.8 0.0 0.0 0.0 0.0 Government 2.6 2.5 2.6 0.0 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 3.4 3.5 3.4 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 25.0 27.2 25.8 0.0 0.0 0.0 0.0

Main assumptions:

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Annex 6(A): Procurement Arrangements MALAWI: Third Social Action Fund

Procurement General: A Country Procurement Assessment Report has not been done for Malawi (it i s planned for FY03) but the procurement system was reviewed in 1996 with the assistance o f consultants under the aegis o f the Fiscal Restructuring and Deregulation Technical Assistance Credit. A number o f recommendations were made to reform the procurement system including: (a) revising the existing procurement regulations to make them more transparent, efficient and economic; (b) developing and implementing a procurement training program for government staff; (c) preparing standard bidding documents and manuals; and (d) promulgating a procurement law based on the UNCITRAL model. Except for the last one, al l the above recommendations are under implementation. A Procurement Bill has been drafted and presented to Cabinet.

Procurement Capacity: An agency procurement capacity assessment has not been carried out for M A S A F 111. However, the implementing agencies to be assessed are wel l known to the Bank through experience with them on M A S A F I and 11, and these should be retained to implement MASAF 3. Bank's experience through closely following up the implementing agencies under the last two MASAF projects has shown that no major procurement or contract administration issues that affected the successful implementation to the projects were encountered. PMCs, NGOs/CBOs, and staff at MASAF MU have a l l been trained in IDA procurement procedures. Based on the above, overall procurement risk to implement M A S A F 3 i s considered average.

Procurement Arrangements: Procurement arrangements under M A S A F 3 w i l l utilize the procedures established and the lessons learned under MASAF I and 11. As in the preceding credits, the exact m ix o f goods and services to be financed in the CDP and SSP components o f the credit wi l l depend on the results o f demand-driven subproject identification. PMCs, CBOs/NGOs wil l take primary responsibility for procuring goods, services and c iv i l works, but will receive support from the MU. The relationship and specific procurement responsibilities o f the MU, LAs, NGOs/CBOs, and PMCs w i l l be clearly spelled out during the orientation and training that precedes each subproject's implementation. Procurement monitoring and audit procedures w i l l also follow the guidelines established under MASAF 11, and are described in the Operational Manual, Accounting Manual and Community Development Projects Handbook. The LAs w i l l be responsible for procurement o f goods and services for the LAMPS under the CDP component. The MU w i l l be responsible for the procurement o f goods and services for the TAP and Institutional Development components.

Several documents will guide procurement arrangements. M A S A F wil l procure goods and services in accordance with the "Guidelines, Procurement under IBRD Loans and IDA Credits, 'I published in January 1995 and revised in January and August 1996, September 1997, and January 1999. Consultants providing services to the project would be hired in accordance with the Bank's "Selection and Employment o f Consultants by Wor ld Bank Borrowers" dated January 1997 and revised in September 1997, January 1999 and May 2002. Finally, the M A S A F 3 Operational Manual contains more detailed descriptions o f procurement procedures and their sequence within the project cycle; a draft Procurement Handbook, in line with the Operational Manual, i s being prepared. The procurement methods applicable to the various expenditure categories w i l l be summarized in Table 6 A below and described in the following paragraphs.

- 39 -

Advertising: A General Procurement Notice and Specific Procurement Notice wi l l be published in the United Nations Development Business and local newspapers for a l l ICB and QCBS. Notice i s required to be given in sufficient time to enable prospective bidders to obtain pre-qualification or bidding documents and prepare and submit their responses. The draft GPN w i l l be submitted to the Bank for prior review and approval. The GPN w i l l be updated annually, showing all outstanding ICB for goods and consultant contracts under QCBS, and submitted to the Bank.

International Competitive Bidding (ICB): It i s expected that approximately US$400,000 worth o f computers and vehicles wi l l be purchased using ICB.

National Competitive Bidding (NCB) shall be carried out for goods such as equipment, furniture and supplies estimated to cost more than US$30,000 equivalent, and up to and including US$lOO,OOO equivalent, per contract, up to an aggregate amount o f US$450,000. N C B bidding documents for goods, currently being used by IDA projects and previously cleared by IDA, w i l l be used.

Shopping (National and International): National and international shopping for contracts estimated to cost less than US$30,000 equivalent, up to an aggregated amount o f US$3 million, may be used for goods to include equipment, vehicles, furniture and supplies.

Community Participation: Under the CDP component, communities w i l l be contributing to, and involved in the CMPs. Communities w i l l manage subprojects, hiring skilled artisans and purchasing materials locally to ensure minimal delays and reduce inefficiencies due to loss during transport and storage. Standard price l i s t s for materials wi l l be maintained by the MU, updated every three to six months, and will be used by communities as price ceilings to guide their procurement. The CMPs, sub-projects whose average IDA contribution i s US$20,000 equivalent, would be implemented through self-help projects, which MASAF would contract out through PMCs to individuals, private contractors and community-based agencies following procedures detailed in the Operational Manual. Such implementing agencies, selected on criteria established in the Handbooks for CDP-CMP and w i l l use community labor and wil l purchase goods or materials through methods prescribed in their contract agreement signed with the community. Communities w i l l hire contractors o f the required skill level, which predetermines their wage rates, and procure materials by obtaining quotes f rom three suppliers, when available, and selecting the supplier with the lowest cost who f u l f i l l s their requirements. M A S A F w i l l disburse funds to the communities in tranches against certified completion. L A M P labor intensive works, which on average have an IDA contribution o f US$40,000 per sub-project, may be implemented through force account (see below), by public agencies through labor contracts with local communities and through contracts with qualified local village contractors selected, to the extent possible, on the basis o f at least three quotations (see procurement o f small works below). When insufficient qualified local contractors are available, public agencies may resort to direct contracting with a local village contractor on the basis o f prices periodically published by MASAF. The aggregate to be implemented through the CDP i s US$21 mi l l ion equivalent. In no event, unless otherwise agreed with IDA, shall IDA's contribution to a sub-project under the CDP exceed US$60,000 equivalent.

The SSP component and COMSICs wil l follow similar procurement arrangements as the CDP component. Sub-projects costing US$30,000 equivalent or less for SSPs (up to an aggregate o f US$18 mi l l ion equivalent), and sub-projects costing US$lO,OOO equivalent or less for COMSICs (with an aggregate o f US$9 mi l l ion equivalent), w i l l be implemented through self help projects uti l izing community participation procurement undertaken by NGOs/CBOs (e.g., the Project Implementing Agency, in consultation with Community Support Committees) for SSPs, and by PMCs for COMSICs. In no event, unless otherwise agreed with IDA, shall IDA's contribution to a sub-project under the SSP

- 4 0 -

exceed US$30,000 equivalent, or exceed US$ 10,000 equivalent for COMSICs.

Procurement o f Small Works: Works estimated to cost $25,000 equivalent or less per contract under the LAMPS may be procured under lump-sum fixed-price contracts awarded on the basis o f quotations obtained from three (3) qualified domestic contractors in response to a written invitation. The invitation shall include a detailed description o f the works, including basic specifications, the required completion date, a basic form o f agreement acceptable to the Association, and relevant drawings, where applicable. The award shall be made to the contractor who offers the lowest price quotation for the required work, and who has the experience and resources to complete the contract successfully.

Force Account: Works under the LAMPS which meet the requirements o f paragraph 3.8 o f the Guidelines, and costing US$9,000,000 equivalent or less in the aggregate, may, with IDA'S prior agreement, be carried out by force account in accordance with the provision o f paragraph 3.8 o f the Guidelines.

Consultant Services: The project wi l l finance consultant services, technical assistance, workshops, and training activities to a total amount o f US$6 mi l l ion equivalent. It i s expected that the contracts for undertaking beneficiary assessments and some technical studies wi l l attract international consultant services while the remainder will be mostly local. Contracts with f i r m s for assignments o f US$lOO,OOO and above w i l l be awarded through the Quality and Cost-Based method o f selection; the short l i s t o f consultants for services, estimated to cost less than US$ 100,000 equivalent per contract, may comprise entirely o f national consultants in accordance with paragraph 2.7 and footnote 8 o f the Consultant Guidelines. Contracts wi th f i r m s below US$50,000 may be awarded through the Consultant Qualification selection method, or least-cost selection when the assignment i s o f a routine nature (such as the printing o f newsletters). Single-Source Selection, which does not provide the benefits o f competition, may only be used in l ine with the conditions set forth in paragraphs 3.8 to 3.1 1 o f the Consultant Guidelines (e.g., hiring o f the Malawi Broadcasting Corporation to air advertisements for MASAF). Services o f individual technical consultants and contractual technical specialists w i l l be procured under individual contracts in accordance with the provisions o f paragraphs 5.1 - 5.3 o f the "Selection and Employment o f Consultants by World Bank Borrowers."

Procurement Plans: M A S A F has prepared a draft procurement plan which i s expected to be finalized prior to Board Approval. The procurement plan will be updated on an annual basis, three months prior to the start o f each fiscal year, and submitted to IDA for approval.

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Procurement methods (Table A)

Expenditure Category

Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

I Procurement Method

ICB NCB Othe: N.B.F. Total Cost 1. Works

2. Goods Equipment, vehicles 3. Services Technical Assistance, Studies, Training, Workshops 4. Grants

5. institutional Support/ Operating Costs

Total

0.00 0.00 9.00 0.90 9.90 (0.00) (0.00) (9.00) (0.00) (9.00) 0.40 0.45 0.00 1.05 1.90

(0.40) (0.45) (0.00) (0.00) (0.85) 0.00 0.00 6.00 0.30 6.30

(0.00) (0.00) (6.00) (0.00) (6.00)

0.00 0.00 39.00 15.45 54.45 (0.00) (0.00) (39.00) (0.00) (39.00) 0.00 0.00 5.15 0.38 5.53

(0.00) (0.00) (5.15) (0.00) (5.15) 0.40 0.45 59.15 18.08 78.08

(0.40) (0.45) (59.15) (0.00) (60.00)

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Prior review thresholds (Table B)

Expenditure Category I. Works

All ICB wi l l be subject to prior review. The f i rs t two packages o f goods procured through NCB, and the first three contracts under national or intemational shopping wi l l be submitted to IDA for prior review. Existing standard bidding documents for NCB wi l l be used. Any exceptional extensions to NCB contracts for equipment and goods raising the contract value to US$lOO,OOO or above wi l l be subject to prior review. Contracts for consultant services o f US$lOO,OOO or more for f i r m s and US$50,000 or more for individuals, and al l sole source contracts and Terms o f Reference regardless o f contract value, wil l be subject to prior review by IDA. Extensions to consulting contracts for f i rms and individuals not originally subject to prior review wil l be subject to prior review when such extensions wi l l raise the contract values above US$lOO,OOO for f i r m s and US$50,000 for individuals. All NCB and consultant contracts with a value below the thresholds established for prior review wi l l be subject to ex-post review by IDA on a sample basis. A l l contract documentation wi l l be retained by the MU and made available to IDA for ex-post review upon request.

Contract Value Contracts Subject to Threshold Procurement Prior Review

(US$ thousands) Method (US$ millions) <60 FNMW None

Table 6: Thresholds for Procurement Methods and Prior Review’

2. Goods

3. Services Firms

>loo ICB 30-100 NCB

<30 Shopping

>loo QCBS 50-100 QCB S/LC S/Other

ss

<50 CQ

4. Community Participation

Individuals

<50 Conform to procedures detailed in the Operational

Manual

IC

A l l 1st 2 contracts 1st 3 contracts

A l l A l l contracts>O.l for f i r m s

All contracts >0.05 for individuals

>0.05

Total value of contracts subject to prior review:

Frequency of procurement supervision missions proposed:

0.9 million

One every 6 months (includes special procurement supervision for post-review/audits)

Overall Procurement Risk Assessment: Average

I\ Thresholds generally differ by country and project. Consult “Assessment o f Agency’s Capacity to Implement Procurement” and contact the Regional Procurement Adviser for guidance.

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Annex 6(B): Financial Management and Disbursement Arrangements MALAWI: Third Social Action Fund

Financial Management

1. Summary of the Financial Management Assessment

The M A S A F 3 Program will be implemented over a period o f 12 years, wi th Phase I lasting 3 years, Phase I1 for 5 years, and Phase In for 4 years, utilizing the APL. Using Financial Management Guidelines for financial management capacity assessment in World Bank financed projects and the Community Driven Development Guidelines, i t was concluded that the program will be implemented in a medium risk environment. This conclusion i s derived from the fact that the program deals with communities which have limited capacity to manage funds o f the magnitude being envisaged by this program. Naturally, CDD projects are risky owing to the multiplicity o f actors and the fact that the sub projects being implemented by communities are scattered al l over the country, making control o f activities difficult. Further, an assessment o f audit reports received from the various LA through which the program will be implemented reveal limited capacity. The human capacity o f such Authorities and accounting systems used have been assessed as extremely weak except for a few.

As outlined in the recently completed draft CFAA report (Malawi CFAA draft report o f April 2002), Malawi Public Expenditure Review Report-Issues and Options (PER-Issues and Options September ZOOl), and Tracking Poverty-Reducing Spending in HIPCs: Country Assessment and Action Plan for Malawi (Tracking Poverty spending in HIPC-November 27,200 I), there are problems with Malawi national budget execution. There i s poor linkage between policies that govern budget formulation and outputs from the same, less transparent budget execution methods, inadequate assurance that allocated resources are used economically and efficiently for the intended purposes, and an absence o f private sector participation in the budget formulation and monitoring o f execution.

Specifically for this operation, the r isks arise from the following: the financial management capacity in the LAs which will be responsible for handling funds for disbursement to communities and demanding i t s accountability i s low. The volume o f funds the respective authorities wi l l be handling i s far larger than what they are used to. Once the funds have been disbursed to LAs, the National Local Government Finance Committee wil l be responsible for demanding accountability in liaison with the M A S A F MU. However, there are only three financial management specialists at the Committee to perform this function. These have 13 LAs each to look after in terms o f accountability. Adding the aspect o f demanding accountability o f funds for this operation places more burden on their workload. In addition to this risk, the office o f the Auditor General has very few staff to conduct audits o f LAs to handle the program funds.

The communities have experienced handling M A S A F disbursed funds over the last seven years during the implementation o f M A S A F I & 11. However, a heavier inf low o f resources to communities and the need to demand more accountability from the P M C places a big challenge on accountability. The risk here i s that some PMCs may be less accountable to their communities and the LAs.

While the Malawi Parliament approved a formula for allocating resources to LAs for development programs which w i l l complement resources flowing from this operation, the actual flows o f resources to the LAs have been quite problematic in the last fiscal year. Lesser resources than those approved in the budget have flowed to LAs, hence affecting progress o f development programs.

Government-wide, the Auditor General’s annual reports cite a number o f cases o f fraud, loss and poor

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accountability, and a failure to reconcile large balances in Government's accounts. Below the l ine expenditures are significant and have not been reconciled to their respective bank accounts for significant periods o f time. O f fundamental concern i s the inability o f the Ministry o f Finance and Economic Planning to control budget execution to i t s intended purpose.

Financial laws and regulations in Malawi are adequate and accounting standards generally meet international standards. In January 2001, Malawi adopted the international accounting standards promulgated by the International Federation o f Accountants (IFAC) without amendment as a basis o f disclosure and preparation o f accounts o f entities operating in Malawi; the public sector, however, does not yet utilize these standards. The only standard issued for public sector on cash accounting has not yet been adopted by Malawi. There i s a professional association o f accountants (The Society o f Accountants in Malawi) and Malawi i s a member o f both IFAC and the regional Eastern, Central and Southern Federation o f Accountants. The accounting profession i s well developed, especially in the private sector although the number o f qualified accountants i s s t i l l very small compared to demand for their services in the sector.

Malawi moved to program budget classification from fiscal year 2001/2002. The budgets are consolidated by the Ministry o f Finance and Economic Planning and approved by Parliament. Each Principal Secretary o f a ministry i s the controlling officer o f that ministry and i s responsible for executing the budget. External audit for a l l government institutions i s required by statute. Though very weak, each ministry has an internal audit function, which checks compliance with prescribed systems.

Action Plan to Increase Capacity for Financial Management: I t has been agreed that supervision o f fiduciary aspects will be increased from the standard two missions to four missions per annum. Each quarter, the fiduciary team wil l carry out a documentation review o f expenditures below the threshold at the MU and at certain selected LAs to monitor compliance with IDA rules, and ru les set up for running finances o f this program as articulated in the Memorandum o f Understanding. In addition, the following wil l be undertaken:

1.

2.

3.

4.

5.

6.

7.

8.

A comprehensive community training package for building capacity in communities and LAs in financial management based on the World Bank client training materials for CDD wil l be developed and delivered to communities and LA on a needs basis. A training plan for staff at the MU, staff at the zone and field offices and at LA level wi l l be developed to address the issues o f capacity. Each LA wil l be supplied wi th a computer to facilitate timely production o f financial information. The National Local Government Finance Committee will be strengthened through Government's employment o f nine assistants and the current staff preliminary basic financial management training needs will be incorporated in the M A S A F 3 training program during the period o f the APL. There will be a regular updating of the M A S A F 3 Accounting Manual, to be complemented by a comprehensive internal audit program to ensure compliance with prescribed systems. Each authority wi l l have an internal audit unit whose main function w i l l be ensuring compliance with prescribed systems and adherence to the Memorandum o f Understanding. Before a sub-project i s launched, the P M C will be trained for not more than five days by the DEC, supported by M A S A F ZO in proper financial management systems o f the program. Semi-annual audits o f sub projects and ensuring that communities and LAs are complying with the systems put in place wil l be conducted.

- 4 5 -

Institutional and Implementation Arrangements: The lead coordinating agent for implementation o f the program w i l l be MASAF. Various directorships w i l l be established in the institution for effective management o f the components o f the program. Efforts are under way to convert MASAF, which i s currently a project MU, into a fully-fledged independent organization through an Act o f Parliament. The MASAF MU w i l l report to a Board which wil l meet every quarter to provide policy guidance on MASAF operations. This Board w i l l have two sub-committees, namely N T A C and the NACCEA to support i t s work. The work o f the f i rs t committee w i l l be to review al l sub projects coming through each Local Authority in line wi th sectoral norms and pre-agreed performance. The second committee w i l l review monitoring and evaluation reports and advise on whether the program i s meeting i t s intended objectives and benchmarks as initially outlined. During Phase I, the MU wil l be responsible for the implementation o f the TAP and Institutional Development.

The LAMPS w i l l be implemented through LAs, as articulated in the Government’s Local Government Decentralization Policy o f 1998. For the CMPs and SSPs, these LAs w i l l each be responsible for receiving the various requests f rom communities, through the Village Development Committees who will forward such requests to an Area Development Committee before finally sending i t to the DEC. The DEC i s a multi-sectoral institution at the LA level acting as a technical advisory body to the LA. Amongst other things, the DEC wil l appraise these requests, ensure that they fit in with the LA approved District Development Plan, and send them to the MASAF Board for funding. Any sub-project outside the Plan must f i rs t be submitted to the LA for approval prior to forwarding to MASAF; i t i s projects included in the development plans o f each LA that MASAF w i l l fund. As such, M A S A F w i l l operate wi th three zones and nine field offices based on scaled down current zones, to support LAs with technical and management backstopping as LAs deliver according to agreed benchmarks.

The COMSIP component w i l l be implemented through three sub tiers-namely the community, LA and national level. At the community level, savings and investment promotion management committees w i l l be responsible for the successful management o f the COMSIG and COMSIC activities. At LA level the MASAF zone office and the DEC wil l be responsible for all monitoring and supervision o f operations and appraising COMSIC requests for infrastructure. Approval for COMSIC requests rests with the MU. The MASAF Board wil l be the supreme body responsible for policy guidance, approval, and ensuring consistency wi th program principles and objectives.

Each LA w i l l keep i t s own books o f account. A computer w i l l be given to each LA for recording MASAF funded accounting data. The communities themselves wil l keep their own books o f account and supporting documentation o f expenditures incurred. Since funds to communities wi l l be tranched, each community w i l l prepare a justification report which w i l l be channeled to the LA for justification. The new zones (3) will become technical centers, with administrative work being undertaken by the LAs, with support f rom Field Offices. Zone staff w i l l spend time in the LAs assisting wi th these processes so that capacity can be built there. Similarly, the Zone staff can go and work wi th Field Office staff in ensuring that the necessary capacity i s developed at the LA level; Zones w i l l not, however, undertake any administrative function, but will provide technical support.

Budgetary and Accounting System: Guidance for budgeting o f the Government o f Malawi (GOM) entit ies i s currently governed by the Finance and Audit Act Chapter 37:Ol assisted by Treasury circulars. The Act stipulates accounting and audit requirements from government entit ies and government managed projects in general. The instructions define responsibilities and level o f authority within each Ministry. The treasury instructions and circulars require al l government ministries to submit expenditure returns at the end o f each month outlining expenditures incurred during the month, commitments made and cash balances in their holding accounts at the Reserve Bank at the end o f such months.

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Budgeting at LA level follows the Local Government Act o f 1998 supplemented by the District Development Fund Financial Management and Accounting Procedures Manual. Once a community identifies a project, it w i l l prepare the project proposal and may seek assistance from the Village Development Committee or others in i t s preparation, including cost estimates. The cost o f community contribution to a project has to be estimated using a community contribution format. Such a proposal i s normally passed onto the Area Development Committee which appraises it, selects and prioritizes the proposals including cost estimates for submission to the DEC. For M A S A F sub-projects, appraisals will be undertaken by the DEC. The Development Committees wil l be responsible for promoting and monitoring progress o f implementing agencies (PMCs, NGOs/CBOs). The implementing agencies w i l l be required to give a simple one-page progress report to the Development Committees, and the LA on a quarterly basis. In terms o f this program, M A S A F w i l l at the beginning o f each planning year provide each LA with an IPF for resources available for funding o f CDPs and SSPs. The allocation wi l l be based on a formula f rom the National Local Government Finance Committee as approved by Parliament. The formula provides that 50 percent o f the funds wil l be allocated based on population while the other 50 percent wi l l be based on weighted poverty indicators. The M A S A F Board w i l l approve the annual allocations for each LA prior to the production o f annual budgets. MASAF w i l l then communicate to LAs their annual allocations for inclusion into the LA annual budget. N o intra-district allocation i s envisaged, as this might promote supply-driven development and introduce unnecessary rigidity. LAs should be encouraged to use similar criteria to target resources to areas with poor indicators within their geographic area, and remain flexible. Identified areas would be targeted by PRA teams.

An Accounting Manual has been written which clearly articulates the various accounting processes, procedures, controls, and reporting requirements at community, LA and M A S A F MU level. The Manual also shows the organizational structure o f the new M A S A F accounting department under the Director o f Finance whose staff have been assessed as appropriate though an additional management accountant has been deemed necessary to be engaged to run a new wing o f the accounting functions emanating from the design o f this program. The manual also contains an appendix to guide persons who would want to check on financial i-ecords o f communities and LAs as to what features they should look for. The manual i s yet to develop accounting codes for the program. The codes to be developed are supposed to develop a linkage between the cost elements o f the program to outputs and outcomes as defined as monitoring indicators o f the operation.

The program i s going to use an independent system at M A S A F MU and at LA level. This i s the system that has been used al l along during the implementation o f M A S A F I and 11; the only upgrade done for this program i s the software to enable it to produce FMRs. The upgraded accounting system i s aimed at tracking financial transactions for the program once funding has been approved. O n approval o f individual LAMPS, MASAF’s management accounts section w i l l analyze the approved budgets for correctness and open individual project accounts in the general ledger to which the approved amount w i l l be posted. The PMCs for the CMP and COMSIC, and the NGOiCBO under SSP will open a project bank account into which funds wil l be transferred from the M A S A F bank account. Payment o f funds to sub-project accounts wi l l be made in tranches o f 40%, 30% and 30% o f the total MASAF contribution for PMCs; payment to NGOs/CBOs w i l l be on a task basis. The last tranche o f 30% i s provisional and paid subject to an assessment o f the actual funds required to complete the sub-project. Prior to release o f the f i rs t tranche, the Director o f Finance must ensure that the pre-launch training has been conducted to ensure that the PMCs w i l l start to utilize the funds immediately upon receiving the first check.

Funds Flow

Funds granted to Malawi Government under the M A S A F program w i l l be maintained in a Credit and

- 4 7 -

Grant Account at the World Bank. They w i l l be maintained in Special Drawing Rights. Such funds will be accessed through a special account maintained at Ci t i Bank in New York. The size o f the programs special account wi l l be determined by the programs cash f low forecast for the period. The funds obtained from the Credit and Grant account through the special account wi l l f low into a holding account at the Reserve Bank o f Malawi where the foreign currency will be converted into local currency at a rate o f exchange ruling on the day o f the transfer. The holding account i s a transit account at the Reserve Bank o f Malawi established to regulate the f low o f funds into the operating account maintained by M A S A F at a commercial bank.

Funds from an operating account will be disbursed to five distinct units to service the operations at different levels as outlined below.

CMP Bank Accounts: Funds ($60,000-IDA maximum per sub-project) will be transferred directly from MASAF operational account into a project bank account maintained by the PMC. LAMP Bank Accounts: Funds ($60,000-IDA maximum per sub-project) w i l l be transferred from the MASAF operational account into a designated LA bank account maintained by the LA, which will be entrusted with the responsibility to manage funds and implement labor intensive public works programs. SSPs: Funds ($30,000-IDA maximum per sub-project) wi l l be transferred to bank accounts managed by NGOs/CBOs who are entrusted to work with vulnerable and marginalized persons in consultation with a Project Support Committee. There are clear guidelines and eligibility criteria for the participation o f NGOs/CBOs; the NGOsICBOs w i l l also be accountable to MASAF. COMSIP: Funds for capacity building o f communities wi l l be held by TAP and retained in the M A S A F operational account; funds for COMSICs to construct a small structure ($10,000-IDA maximum per sub-project) will be transferred from M A S A F operational account directly into a project bank account maintained by the PMC. TAP: Under this component activities wi l l be managed from the operational bank account o f M A S A F MU by funding activity-based interventions to strengthen transparency and accountability objectives o f the program.

Accountability of Funds disbursed: Disbursement o f funds to sub projects wi l l depend on specified criteria stipulated in the accounting procedures manual and on the type o f receiving account annotated above. Under CMPs, funds will be disbursed directly to the community project account while under LAMPS funds w i l l be disbursed to special project accounts maintained at LAs. Funding to projects will be released in tranches o f 40%, 30% and 30% of the project budget. A Justification Report o f expenditures incurred w i l l be submitted as a precondition for the release o f the second tranche once at least 70% o f the f i rs t tranche i s spent. The third tranche wil l be released when 100% o f the f i rs t tranche and 70% o f the second tranches are successfully justified, and on production o f mid term assessment report. These tranches wil l be followed up by formal communications to the DEC and zones that in turn will notify the respective PMCs. Disbursement under SSP and COMSIC will be activity based and funds related to NGOs/CBOs, and COMSIC PMCs. The NGOs/CBOs and LAs wil l be required to open a current bank account for a l l sub projects wi th a reputable bank within the project locality. The signatories to the bank account will be in l ine with the requirements o f specific components. M A S A F wil l ensure that PMCs, NGOdCBOs, and LAs are accountable for the resources given by M A S A F for the implementation o f the sub projects.

The PMCs, NGOs/CBOs and DECs w i l l be required to keep record o f all financial transactions. Financial records will include: Petty cash balance report, bank statements, paid checks, payment vouchers, original receipts and cash sales signed by suppliers; a bank reconciliation, quotations, pro

- 48 -

forma invoices, and delivery/good received notes. Key stakeholders l ike Councillors, Members o f Parliament, Area Development Committee and Village Development Committee and communities wi l l monitor and get regular reports on the f low o f funds and general financial processes.

PMCs, NGOs/CBOs, and DECs must prepare an Expenditure Justification Report and submit i t to the MU. The financial and physical report form should be dully completed and signed by an appropriate co"ittee/DEC members. Original receipts, vouchers, and labor payments should be included, completed and signedwitnessed as required, and there should be a recent bank statement and returned checks.

Internal Audit: MASAF has an internal audit function whose main objective i s to assist the Board and management accomplish the M A S A F mandate by ensuring that project delivery systems are functioning to expected standards. The capacity o f the MU was assessed and found adequate. However, it needs strengthening by employment o f more staff and developing a robust capacity building for the unit. The plan for covering the program was assessed to be adequate. The internal audit function for LAs which wil l audit LAs and operations on the ground was assessed as weak. This should be factored into an comprehensive capacity development program for government as wel l as in the TAP activities o f this program.

Management Information System: Efforts are underway to establish district based MIS. The MASAF MU has a computerized accounting system which uses Sun Accounting system. This system has been upgraded and can produce FMRs. The LAs w i l l initially use stand-alone computers to record information and generate requisite reports.

Agreed Financial Reporting Formats: The project w i l l prepare and produce quarterly FMRs. The FMRs w i l l comprise a financial, output monitoring and a procurement reports. These reports will provide information on the progress o f the program in terms o f financial activity, key output measures and procurement for the relevant quarter. As for the financial reports, they shall include a statement showing for the period and cumulatively cash receipts by sources and expenditures by main expenditure classification, beginning and ending cash balances o f the program; and supporting schedules comparing actual and planned expenditures. The reporting line items in the FMRs w i l l follow the projects chart o f accounts. The cumulative FMRs over the project year w i l l be consolidated and used as projects financial statement. This w i l l result in a more cost effective reporting.

As for output report, the project w i l l include a narrative write up and output indicators linking financial information wi th activity indicators and highlight issues that require attention. In procurement reports under the FMRs, such reports wi l l provide information on the procurement o f goods, work and methods. This report w i l l compare procurement performance against plan at the M A S A F level only because planning community procurement i s not possible for demand driven sub-projects; the report wi l l be updated and highlight key procurement issues such as staffing and building capacity.

The currency for the FMRs wil l be the Malawi Kwacha with the equivalent in dollars as a parallel column. This wil l become beneficial because while the books o f accounts for the program will be kept in Kwacha, those o f the special account w i l l be in dollars which will give rise to issues o f translation. The FMR preparation and submission will be done on a quarterly basis. The FMRs w i l l be used as a basis o f disbursements. The reports wi l l be submitted to the Task Team Leader within 45 days o f the reporting period. If such FMRs are not provided timely, the Task Team Leader w i l l fo l low this up with the MU to determine the reason for the delay and planned date for submission. Late submission may result in the application o f legal remedies for non-compliance.

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In case the M A S A F MU fails to meet the FMR requirements o f the program at any one point, disbursement o f funds to the program w i l l be made using traditional disbursement procedures. Full documentation wi l l be required for payments on al l contracts over the respective prior review thresholds for goods and consultancies. The Statement o f Expenditures procedure w i l l be used for (a) contracts for goods valued at less than $100,000, (b) contracts for services o f consulting f i r m s valued at less than $100,000, (c) contracts for services o f individual consultants valued at less than $50,000, (d) training, and (e) operating costs. When the Statement o f Expenditure procedure i s used, supporting documents wi l l not be submitted to the Bank with withdrawal applications, but w i l l be maintained by the M A S A F MU and made available for review by Bank supervision missions and the programs auditors.

For the traditional disbursement method, the Special Account size w i l l be $6,000,000, subject to increase based on the level o f anticipated activities.

Counterpart Contribution: Counterpart funds have been a problem in the Malawi portfolio in the past. With the recently concluded exercise on standard percentages for disbursement, it was agreed that the Government o f Malawi would each quarter release the budgeted amount o f counterpart funds as approved in the national budget. Foreign consultancy expenditures w i l l be financed at 100% and local expenditures at 80%.

2. Audit Arrangements Audit o f Public Enterprises which includes Government projects i s the responsibility o f the National Audit Office, which uses International Organization o f Supreme Audit Institutions standards when carrying out i t s audits. Annual audits o f the M A S A F program wil l be carried out by the National Audit Office or by an external auditor deemed acceptable to the Wor ld Bank. The terms o f reference for the external auditor were discussed and finalized during negotiations, and w i l l be included in the final version o f the Operational Manual; the audit wi l l assess whether (a) the information i s fairly presented for the specified period and cumulatively for the period with regard to project accounts and statement o f sources and applications o f funds and (b) reported disbursements were made in accordance with Development Financing Agreement and Project Appraisal Document.

Owing to the number o f components and the number o f players, it shall be a requirement that separate semi-annual audits be carried out for purposes o f checking on internal control, compliance with financial covenants, operation o f special account, efficiency and effectiveness o f management in achievement o f the objectives o f program, budgetary control systems and performance o f the management o f the finance, accounting. These semi-annual audits w i l l be carried out for respective six months periods as agreed with the Association and audit reports wi l l be furnished to the Association no later than two months after the end o f the relevant six month period, as agreed with the Association. The separate semi-annual audits may be carried out by National Audit Office, or if i t i s jo int ly determined, or shown, that it cannot carry out the separate semi-annual audits in a timely fashion, they may be carried out by private auditors.

3. Disbursement Arrangements Phase I o f the Project i s expected to be completed by June 30, 2006, and the closing date wi l l be December 3 1,2006. The proposed allocation o f the credit i s shown in Table 6C. Reimbursements for subprojects under the CMP and COMSIP w i l l be made on evidence o f disbursements from the MU to PMCs; SSP reimbursements w i l l be made on evidence o f disbursements f rom the MU to NGOKBOs, and LAMPS reimbursements w i l l be made on evidence o f direct transfers o f funds to the LA accounts.

IDA will not finance taxes. T o ensure this, IDA w i l l only finance 95 percent o f amounts paid by M A S A F

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under CDP, SSP, and COMSIP components; 100 percent foreign, and 80 percent o f local expenditures on goods, and services (including consultant services, audits and training) w i l l be at 100 percent o f foreign and 80 percent o f local, and incremental operating costs will be 85 percent for the f i rs t year, 80 percent for the second year, and 75 percent thereafter. Communities and G O M w i l l contribute nearly 23 percent o f total project costs; Government's indirect contribution, which includes salaries o f technical staff performing desk and field appraisal as well as technical supervision o f LAMP, i s estimated at U S $ l mi l l ion equivalent per year over the l i f e o f the project.

Expenditure Category Goods, equipment, vehicles and supplies

Technical Assistance, studies, training, and workshops Grants

CMPs

Allocation of creditlgrant proceeds (Table C)

Amount in US$million Financing Percentage 0.63 100% Foreign, 80% Local 5.40 100% Foreign, 80% Local

95% o f amounts financed by MASAF MU

10.62

Table C: Allocation of CrediUGrant Proceeds

Operating Costs 4.77 85% in 200312004,80% in 200412005, 75% thereafter

I COMSICs I 8.10 I I

Unallocated 3.28

Total Project Costs with Bank Financing

Total

32.80

32.80

Table C1: Allocation of Grant Proceeds

Expenditure Category Grants

LAMPS 1

SSPS

Unallocated

Total

Amount in US$million Financing Percentage 95% o f amounts financed by MASAF

8.28 MU 16.20

2.72

27.20

Use of statements of expenditures (SOEs):

Special account: The project will have one Special Account which wil l be opened through a commercial bank. This account w i l l be managed by the M A S A F MU. All supporting disbursement documentation whether relating to reimbursement, direct payments, special account replenishments, or special commitments

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documentation wi l l be initiated and kept by the MU. IDA w i l l be informed once the account opened in the commercial bank and wil l deposit funds with the account once the project i s effective. The size o f the Special Account will, at each time, be determined by the cash forecast for the program submitted by M A S A F MU.

Cash forecasts accompanied by FMRs w i l l originate from the M A S A F management unit and be endorsed by the Ministry o f Finance Claims Unit to the World Bank. Payment instructions direct to suppliers w i l l be sent through the same route through commercial banks as pursuant to Wor ld Bank instructions. Upon review and approval o f the FMRs, or payment instructions, the World Bank’s Treasury Department w i l l pay credit funds requested into the project’s Special Account at a commercial bank. Such funds will then be transferred from the Special Account to the Holding Account at the Reserve Bank o f Malawi before going into MASAF’s operational account at a commercial bank. The bank where the project account i s maintained shall submit a letter o f comfort on Bank funds from i t s headquarters to the World Bank.

Upon receipt o f such funds by the Reserve Bank from the World Bank through the Special Account, the bank shall immediately notify the Ministry o f Finance about the receipt. The Ministry o f Finance shall immediately issue a note called Credit Ceiling Authority to the project’s bank totaling the s u m received. The purpose o f the note i s to inform the local commercial bank that the project i s allowed for the period to issue out checks not exceeding the amount advised pending receipt o f some more funds which would necessitate issuance o f another credit limit increasing the limit for expenditure for the project.

Payments paid through the local account and al l related documentation w i l l be maintained by the M A S A F MU for review by auditors and World Bank implementation support missions. Upon receipt o f the commercial bank statements, the projects financial accountant shall reconcile the accounts before submitting the withdrawal application to the Ministry of Finance for onward transmission through the commercial bank to the World Bank.

The Special Account will be audited by an independent auditor acceptable to IDA which would be appointed prior to credit effectiveness based on audit scope as contained in terms o f reference acceptable to IDA. The audited accounts w i l l be submitted to the Bank six months after the end o f each fiscal year from review.

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Annex 7: Project Processing Schedule MALAWI: Third Social Action Fund

Project Schedule Planned Actual /Time taken to prepare the project (months) 1 12 I I First Bank mission (identification)

Appraisal mission departure

~ ~~

06/04/2002 06/04/2002 02/24/2003 02/24/2003

Negotiations

Planned Date of Effectiveness

Prepared by: Malawi Social Action Fund-Management Unit, Government o f the Republic o f Malawi

0313 112003 0313 112003 0910 112003

Preparation assistance: Japanese PHRD Grant No. TF050619 = approx. $386,680

3ank staff who worked on the project Name

Norbert Mugwagwa N. Mungai Lenneiye Prasad C. Mohan Hope C. Phillips Volker Michael N. Mambo Krishna Pidatala Yisgedullish Amde Stanley Hiwa Andrew Makokha Marilyn S. Manalo Helen Mbao-Chilupe Chiyo Kanda Johnstone Nyirenda Donald Mphande Slaheddine Ben-Halima Sudhir Chitale Jose Kastrup Ivonna Kratynski Parmesh Shah Will iam Steel Julia Van Domelen Sidney Mhishi Jonathan Nyamukapa Victoria Fofanah

ncluded:

Lead Operations OfficerITeam Leader Co-Task ManagerISr. Social Protection Specialist Sr. Communications Specialist Operations Officer Sr. Education Specialist Sr. Information Officer Sr. Operations Analyst Sr. Agriculture Economist Sr. Water and Sanitation Specialist Operations Officer Social Development Specialist Sr. Economist Procurement Specialist Sr. Financial Management Specialist Sr. Procurement Specialist Lead Economist Counsel Sr. Finance Officer Peer Reviewer Peer Reviewer Peer Reviewer Peer Reviewer (non-Bank staff) Financial Management Specialist Program Assistant

Speciality

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Annex 8: Documents in the Project File* MALAWI: Third Social Action Fund

A. Project Implementation Plan

The Operational Manual for MASAF 3 i s available electronically.

B. Bank Staff Assessments

Draft Financial Management Capacity Assessment Report.

C. Other

*Including electronic files

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Annex 9: Statement of Loans and Credits MALAWI: Third Social Action Fund

02-Jan-2003 Difference between expected

and actual disbursements' Original Amount in US$ Millions

Project ID FY Purpose iBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd 0.00 0.00 2003 EMERGENCY DROUGHT RECOVERY CREDIT 0.00 29.00 0.00 0.00 50.22 PO80368

PO70235 pa35917 PO73832 PO63095 PO49599 PO36038 PO01666 PO01670

2001 Regional Trade Fac. Proj.. Malawi 2001 Mulanje Mt. Biodiversity Conservation Pr 2001 TA. ADJUSTMENT (FRDP 111)

2000 Privatization and Utility Reform Project 1999 MASAFll 1999 POPULATlONiFP PROJEC 1999 ROAD MAIN. &REHAB 1998 SECONDARY ED PROJECT

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

15.00 0.00 3.00

28.90 66.00

5.00 30.00 48.20

0.00 6.75 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

11.40 6.78 2.31

25.23 12.91 2.37

13.65 27.22

1.88 2.73 0.96

13.71 14.24 2.34 9.1 1

26.36

0.00 0.00 0.00 0.00 0.00 0.80 0.00 0.00

PO01667 1995 NAT WATER DEV 0.00 79.20 0.00 0.00 8.91 17.88 0.00

Total: 0.00 304.30 6.75 0.00 161.01 89.21 0.80

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MALAWI STATEMENT OF IFC's

Held and Disbursed Portfolio Jun 30 - 2002

In Millions U S Dollars

FY Approval Company 1999 AEF Kabula Hotel 1997 AEF Maravi 1996 AEF Mwaiwathu 1998 AEF Ufulu Garden 1986190 LFCM 2000 NICO

Total Portfolio:

Committed Disbursed IFC IFC

Loan Equity Quasi Partic Loan Equity Quasi Partic 0.64 0.00 0.00 0.00 0.64 0.00 0.00 0.00 0.21 0.00 0.00 0.00 0.21 0.00 0.00 0.00 0.00 0.81 0.00 0.00 0.00 0.81 0.00 0.00 0.24 0.00 0.00 0.00 0.24 0.00 0.00 0.00 0.00 0.11 0.00 0.00 0.00 0.11 0.00 0.00 0.00 1.04 0.00 0.00 0.00 1.04 0.00 0.00

1.09 1.96 0.00 0.00 1.09 1.96 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic 1998 IDHM 0.00 0.00 0.50 0.00

Total Pending Commitment: 0.00 0.00 0.50 0.00

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Annex I O : Country at a Glance MALAWI: Third Social Action Fund

POVERTY and SOCIAL

2001 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1995-01

Population (“7) Labor force (%I Most recent estimate (latest year available, 1995-01) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% of populationl Illiteracy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981

GDP (US$ billions) Gross domestic investmentlGDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savingslGDP

Current account balancelGDP Interest paymentslGDP Total debtlGDP Total debt servicelexports Present value of debt/GDP Present value of debtlexports

1.3 19.6 25.0 14.0 4.5

4.0 65.7 38.4

1981-91 1991-01 (average annual growth) GDP 3.2 3.7 GDP per capita 0.0 1.6

Malawi

10.5 160 1.7

2.2 2.1

60 15

38.8 103 25 57 39

131 138 125

1991

2.2 20.2 23.3 14.2 10.6

-1 1.4 1.7

75.6 29.0

2000

1.7 -0.4

SU b- Saharan

Africa

674 470 31 7

2.5 2.6

32 47 91

55 37 78 85 72

2000

1.7 12.5 26.4 0.5

-1.3

-13.8 1.5

156.6 20.1 90.5

331.3

2001

-1.5 -3.5

Low- income

2,511 430

1,069

1.9 2.3

31 59 76

76 37 96

103 88

2001

1.7 10.9 26.0 -1 .o -1.9

-12.9 1.5

156.4 20.2 88.4

330.4

2001-05

4.3 2.3

1 Development diamond”

I Life expectancy

i T

I GNI per

I I capita

Access to improved water source

Malawi Low-income group

-

Economlc ratlor*

Trade

T

Indebtedness

Malawi Low-income arouD

- Expons of goods and services 3.8 3.7 -5.7 3.7 2.9 STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

Manufacturing

1981

39.8 21.7 14.0 38.5

68.6 17.4 30.7

1981 -91

2.6 3.8 4.0 3.9

2.7 6.4 0.3 1.9

1991

43.7 26.9 18.0 29.4

73.6 12.0 29.3

1991-01

7.6 1.9 0.4 2.4

5.8 -1.9 -8.8 -1 .o

2000

41.6 19.1 13.8 39.4

82.8 16.7 38.5

2000

5.7 -0.5 -2.5 0.7

-6.6 33.3

-20.4 -16.4

2001

37.1 16.3 11.5 46.7

83.4 17.6 38.0

2001

-8.5 1.1 0.5 2.6

-1 .o 9.1

-10.2 4.7

Growth of investment and GDP (%)

-GO1 *GDP

Growth of exports and imports (%) 30 -

Note: 2001 data are preliminary estimates. ‘The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

- 57 -

Malawi PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Tobacco Tea Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, /oca//US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IERD IDA

Total debt service IERD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Porifolio equity

Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

World Bank program 1/

1981

11.8 16.3

19.5 -4.2

.14.9

1981

1981

316 391 -75

-1 30 0

25

54 0.9

1981

822 52

151

122 2 2

80 4

48 1

47 3

44

1991

12.6 10.7

18.6 -1.2 -6.3

1991

476 250

37 23

645 11 54

280

118 93

127

1991

51 3 683

-1 70

-47 -33

-250

262 -1 1

285 2.8

1991

1,665 85

866

151 16 9

130 -1 0

100 11 88 13 75

2000

29.6 25.2

17.4 -2.8

-14.2

2000

406 247 37 56

563 30 75

223

86 93 92

2000

451 657

-206

-38 8

-237

225 11

243 59.5

2000

2,674 9

1,654

94 9

28

148 145

-1 27

0

29 112 22 91 13 78

2001

27.2 26.1

17.8 -5.7

-14.1

2001

44 1 236 36 60

566 34 68

217

85 91 93

2001

456 664

-209

-32 16

-225

193 32

202 72.2

2001

2,735 4

1,762

95 6

31

98 141

-1 28 0

74 107 24 83 13 70

Inflation (%) 100 7

96 97 98 99 00 01 I -GDP deflator +CPI

I Export and Import levels (US$ mill.)

,000 -

I 95 96 97 98 99 00 01

E Exports Imports

Current account balance to GDP (%)

20 1

I Composition of ZOO1 debt (US$ mill.)

G: 27 F: 17 & . A

A - IBRD B - IDA D -Other multilateral F . Private C ~ IMF

E - Bilateral

G . Short-term

ueveiopmenr economics I/ Fiscal year data.

YlLJlWL

- 58 -

Additional Annex 11 : Letter of Sector Policy MALAWI: Third Social Action Fund

Ref. No.C6/1/12 17th March 2003

The Vice President

Africa region

The World Bank

Washington DC.

Dear Mr. Vice President

Telegrams: Finance, Lilongwe Telephone: (265) 789 355 Telex: 4402 MI Fax: (265) 789 173 E-mail: finance@,finance.malawi.net

Ministry o f Finance P.O. Box 30049 Lilongwe 3 MALAWI

Policy Letter: Malawi Social Fund (MASAF) Phase I11

1. I would l ike to express my appreciation for your positive response for funding the Malawi Social Action Fund Phase 111, the appraisal o f which has just been finalized.

2. As the Government indicated in the M A S A F III Concept Document, the country continues -to face significant challenges in the delivery o f essential services to the poor. Poverty i s widespread, deep and severe in Malawi especially in the rural areas. According to the 1998 Integrated Household Survey, 65.3% (roughly 6.3 million) o f the population i s poor, and about 28.7% o f the population lives in abject poverty. The level o f inequality i s well illustrated by the fact that the richest 20% o f the population consume 46.3% while the poorest 20% utilize only 6.3% o f the total goods and services. Consumption i s unequally distributed between the rural and urban dwellers. People in urban areas consume 40 percent more than those in rural areas.

3. The major causes o f poverty include limited access to land, low education, poor health status, limited o f f farm employment and a lack o f access to credit. Sectoral analysis o f poverty shows that social, human capital and income indicators are very

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poor. In 1998, poverty indicators showed that about 52 percent o f the poor belonged to female-headed households thereby exerting more economic pressure to poor women. The literacy rate was as low as 58%, where female literacy was 44%. Education attainment, defined, as completion o f standard 8, was only 1 1.2% for adults aged 25 years and above, and only 6.2% for women. The national gross enrolment ratio was estimated at 132 and the pupil to qualified teacher ratio was 114, leading to over crowding in schools and subsequently lower quality o f education.

4. In terms o f health indicators, l i f e expectancy at birth has dropped from 43 years in 1996 to 39 years in 2000. In 2000, infant and under-five mortality rates were estimated to be 104 and 1 89.deaths per 1000 live births, respectively. The maternal mortality rate in 2000 was 1,120 deaths per 100,000 live births, a r ise f rom 620 in 1990.

5. The 1998 Integrated Household Survey demonstrated that subsistence agriculture remained the main source o f income for the rural poor. The major source o f cash income for Malawian households was wage income, which contributed about 13 .O% o f income for the rural poor. However, there was limited participation in the cash economy by the poor. As if this i s not enough, the high levels o f HIV/AIDs prevalence compounds the already worsening situation leading to increasing numbers o f dependants.

6. M A S A F I and 11, and other Government initiatives tried to address some o f the socio-economic problems through the framework o f the Poverty Alleviation Programme (PAP), launched in 1994, when Government, made poverty alleviation (now poverty reduction) i t s policy agenda for national development. The Policy Framework for Poverty Alleviation (PFPAP) was published in 1995 wi th a vision for every Malawian to have access to basic necessities and exploit hislher potential to lead a productive, dignified and creative l i fe through social, economic and political empowerment. Currently, the demand for social-economic services i s s t i l l overwhelming due to the increased levels o f poverty.

7. L e t me mention Mr. Vice President that the consultative process in designing MASA1" I11 Programme has been long and rigorous. The reasons are: (a) the design o f the new MASAF i s taking place at a time when there are fundamental changes in the policy and institutional frameworks for the poverty reduction strategy in Malawi and (b) there i s need to widen and deepen the MASAF scope as demanded by the key stakeholders. Key policy issues at the center o f Government planning at the moment are the Malawi Poverty Reduction Strategy, Medium Term Expenditure Framework, and the Decentralization policy implementation.

The Malawi Poverty Reduction Strategy 8. In 2002 the Government developed the Malawi Poverty Reduction Strategy which i s an overarching statement representing a consensus about how Malawi can achieve i t s core objective o f poverty reduction. The underlying philosophy o f the MPRS i s empowerment o f communities and individuals so that they are able to own the development process. "The MPRS wil l be implemented through the budget process known as the Medium Term Expenditure Framework (MTEF). MPRS as a national planning tool outlines an affordable strategy for reducing poverty to be

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implemented using the MTEF as a planning, budgeting and public expenditure monitoring tool.

9. The MPRS i s built around four pillars. These pillars are the main strategic components grouping the various activities and policies into coherent framework for poverty reduction. The f i rs t pillar promotes rapid sustainable pro-poor economic growth and structural transformation. The second pillar i s about enhancing human capital development. The third pillar improves the quality o f l i f e o f the most vulnerable. The fourth promotes good governance. The MPRS also mainstreams key cross cutting issues such as HIV/AIDS, gender, environment, and science and technology. M A S A F i s seen as a major tool for the realization o f the MPRS pillars.

Millennium Development Goals (MDGs) 10. Malawi also recognizes the Millennium Development Goals (MDGs) upon which the Malawi Poverty Reduction strategy i s hinged. The MDGs are centered on eradicating poverty and hunger; achieving universal primary education; promoting gender equality and empower women; reducing child mortality; improving maternal health; combating HIV/AIDs, malaria and other diseases; ensuring environmental sustainability; and developing a global partnership for development.

1 1. According to Malawi the six refined Millennium Development Goals are: income poverty (Pro-Poor Growth); access to potable water, completion o f a full course o f primary school; under-five mortality; maternal mortality, and HIV/AIDs incidence. A br ief review o f the current situation for some selected MDG targets shows that for poverty, the MDG target for 20 15 i s to have poverty incidence o f 32.7%; for access to safe water the target i s to increase access from 52 percent to 78 percent by 201 5; for universal primary, the target i s to have zero percent o f drop-outs; for Under-Five Mortality the target i s to reduce mortality by 50 percent by 2015 (reduce to 117 deaths per 1000 live births by the year 2015); for maternal mortality, the target i s reduce the rate by seventy five percent by 2015; and for HIV/AIDs incidence the target i s to halt any new infections and starting reducing the prevalence by 20 15.

12. O f the five MDGs, only two (increasing access to portable water and reducing under-five mortality) can be viewed as achievable wi th minimum changes in policy and increases in resource allocation. Reducing maternal mortality and income poverty are the most difficult MDGs for the country to achieve. The slow behaviour change i s also making the immediate reduction in HIV infection difficult to attain. In general, the six MDGs are achievable only with radical changes in policies, attitudes, mindsets, and political and technical commitment.

Decentralization 13. You may also note Mr. Vice President that Government adopted the Decentralization Policy in 1998 by adopting the new Local Government Act. The policy seeks to (a) devolve administration and political authority to the district level; (b) integrate Governmental agencies at the district and local level into one administrative unit, through the process o f institutional integration, manpower absorption, composite budgeting and provision o f funds for the decentralized services; (c) divert the center o f implementation responsibilities and transfers these to the districts; (d) assign, functions and responsibilities to the various levels o f

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Government; and (e) promote popular participation in the governance and development o f districts.

14. The objectives o f the policy are: (a) to create a democratic environment and institutions in Malawi for governance and development; at the local level which w i l l facilitate the participation o f the grassroots in decision making; (b) to eliminate dual administration, field administration and local Government at the district level with the aim o f making public service more efficient, more economical and cost effective; (c) to promote accountability and good governance to the local level in order to help Government reduce poverty; and (d) to mobilize the masses for socio-economic development at the local level. The rationale for Decentralization i s to abolish a dual system; Improvement o f Coordination; Promote popular participation; and ultimately reduce Poverty.

The Rationale for MASAF I11 15. Mr. Vice President, despite several Government initiatives in social investment, poverty i s s t i l l rampant. The state o f affairs as described in the MPRS calls for action to enable people over-come constraints to their development and to foster broad-based growth. It i s apparent that past reliance on top-down growth strategies, did not lay sufficient emphasis on strengthening the human resources capital and economic empowerment. M A S A F w i l l a im at strengthening local governance, foster accountability and enhance community participation in decision-making and management o f the development process.

16. A number o f development programmes are being implemented in the sectors o f education, health, water and sanitation, food security, and nutrition. However, the gap between the national requirements and what i s l ikely to be accomplished even if al l the programmes were successfully implemented would s t i l l be huge. This explains why the demand for project funding from the community under the M A S A F project far exceeds expectations and resources available. I t i s expected that the demand momentum under the new M A S A F programme w i l l continue until the communities prioritized needs are fully addressed. At the end o f June 2001, over 10,000 subproject applications had been received estimated at more than US$585 million. Due to financial constraints, M A S A F has not been able to meet this demand. The coming in o f the elected members o f the District Assemblies, who are also facilitating development activities, has further exacerbated the demand for financial assistance. In addition, there has been increased awareness o f M A S A F principles and eligibility requirements overtime due to effective communication strategies and visible results on the ground.

17. Government constituted the Programme Preparation Team comprising officials f rom Office o f the President and Cabinet, Local Government and District Administration, Ministry o f Finance, Depaitinent o f Economic Planning and Development, Ministry o f Justice and M A S A F to design another phase o f MASAF. The team through the consultative process that includes interaction with communities, Local Assemblies, c iv i l society organizations, the private sector, other Government institutions and departments and donors produced a Concept document in February 2002.

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Community Empowerment and Development Project (CEDP) within MASAF I11 18. Through the Proposed M A S A F I11 Programme, Government w i l l consolidate and entrench the development approach, which has been followed under the previous MASAF Project. The experiences gained in the past show that the communities are able to prepare and manage projects suitable for their needs. Further more, the pace o f implementation has demonstrated that community driven participatory approaches have tremendous advantage over the convention top-down approach in terms o f timeliness, cost effectiveness sustainability and ownership o f assets created.

19. Under M A S A F 111, the distributed nodes of social capital generated through MASAF I and I1 w i l l be networked to both optimize the social capital generated as well as to facilitate i t s incremental conversion into economic capital. This wil l be achieved through a three-phase Community Empowerment and Development Program (CEDP), which will strengthen the decentralization process by making community empowerment an integral part of district service delivery process over a twelve (1 2) year period. The CEDP leverages the comparative advantages o f social funds in empowering communities by addressing decentralization challenges between communities and District Assemblies, but recognizes that it can be better aligned with decentralization o f Central Government to Local Authorities.

20. MASAF I11 w i l l remain a funding organization for sub-projects through the operational components o f (a) Community Development Programme that wi l l combine community managed and district managed projects; (b) Sponsored Sub-projects; (c) Community Savings and Investment Promotion and (c) Development Accountability Programme. In addition there wi l l be an Institutional Development component to support the operational components with respect to financial and human resource management.

21. Under the Adjustable Program Loan (APL) arrangement M A S A F I11 wil l be implemented in three phases, the transition o f which w i l l be determined by pre-defined triggers. These will continuously be assessed to monitor their capacity in project management, and implementation. The lessons learned from each phase will feed into the strategies and approaches in the successor phase - resulting in adjustments, refinements and redesigns. To achieve integrated and sustainable project outcomes, this phasing o f the API, has been synchronized with the Medium-Term Expenditure Framework (MTEF) for implementing the MPRSP and the Country Assistance Strategy (CAS).

22. While the MTEF and CAS are in three-year cycles, M A S A F III APLs wil l be designed in a manner that ensures that resources are continuously available to communities, CBOs, and Local Authorities (LAs). Furthermore, LAs who fully take over M A S A F I11 resource management wi l l receive all MTEF resources needed to finance community service packages (once these are coasted during APL I). The majority o f triggers for the APL,s arc based on the ability o f the Districts to take over major M A S A F functions in the areas o f management o f resources, service delivery, and reporting on outcomes within the framework o f CAS, MPRSP, Decentralization and MDGs.

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23. You may note Mr. Vice President that through the consultative process o f designing M A S A F 111 stakeholders expressed a strong desire for M A S A F to have a legal status o f i t s own. This w i l l be considered during the later APL phases o f the Programme as it transform into a knowledge and learning institution for Community Driven Development.

24. The major challenge for the MASAF I11 i s the integration o f i t s functions into the District Planning System amidst uncertainties in district capacities at a time when devolution o f sectoral functions i s s t i l l underway. In addition, the District Assemblies wi l l be entrusted with a responsibility o f tracking the MDG indicators. This calls for more efforts in the areas o f capacity building hence the introduction o f a specific Development Accountability Component in MASAF. In addition, MASAF 111 wil l initiate the institutionalization o f Participatory Community Monitoring and Accountability, to allow communities realize their entitlements and demand accountability from those in authority and service providers.

25. I would also l ike to register Government's commitment in implementing pro-poor initiatives such as MASAF. In that regard, Government will provide the required counterpart funding for MASAF I11 upfront. The funds w i l l be released to the Office o f the President and Cabinet (OPC) and will be reflected in the development budget. The Government clearly demonstrates here that it fully owns the M A S A F Programme. Government wi l l also make available to MASAF some funds to support safety nets operations in the Community Development Programme Component. Once again, Government w i l l remain committed in implementing the M A S A F 111 programme.

Yours sincerely

Friday A. Jumbe Minister of Finance

Cc: The Country Manager, World Bank, MALA

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Additional Annex 12: APL Triggers MALAWI: Third Social Action Fund

Service packages for implementation under the project w i l l be explained to communities during the PRA stages (both open and extended) so that communities can (a) assess their service levels against the sector standards, and (b) set their priorities in the context o f what i s needed to bring their service levels to that set by the relevant sector. I t i s possible that a community w i l l have two or three plans to reach the target, and M A S A F wil l publicize Local Authority progress using results from annual performance audits. These service packages w i l l be used during desk and field appraisals to assess the feasibility o f sub-project requests in the context o f recurrent funding:

(a) communities requesting for a health sub-project w i l l work their way up the hierarchy o f services and wil l only get support for health infrastructure (rehabilitation or construction) if plans to train the relevant health personnel are included in the District plans and the District has attained agreed to minimum staffing levels. school sub-projects will only be considered if the school has a functioning School Committee and a Parent-Teacher Association as defined under the education package. water points w i l l only be funded if (i) a water point maintenance committee i s in place and can be trained before the water point i s created, (ii) households can dig pits for toilets, and (iii) the community i s under-served in terms o f distance and service levels.

(b)

(c)

The A P L wil l use the following triggers developed using 12 MDG indicator targets and service packages (Table 1) for implementation by communities, CBOs/NGOs, and Local Authorities to improve services and report on progress (Table 2). The triggers relating to the MDG targets are as follows:

Program goal: MDGs for 12 indicators, within the MPRSP, met by 60% o f LAs.

APL I: Attainment o f 70% in the following targets: LAs with baseline data and targets for 12 MDG indicators Five fully costed service packages by LAs. LAs with by-laws to register CBOs.

APL 11: Attainment of 70% in the following targets: LAs implementing community service packages within the MTEF. Compliance with sub-project cycle delivery benchmarks by LAs. LAs with reporting mechanisms for 12 MDG indicator targets.

APL 111: Attainment of 70% in the following targets: Traditional Authorities with a Community Savings Club. LAs graduated and Zones folded up. LAs with outcome-based monitoring and evaluation systems.

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Table 1. Community Service Package Approach Community Service Package

. Essential Health

Summary contents

Training o f traditional birth attendants and Seniormealth Surveillance Assistants. Drug Revolving Funds, anti-malaria program, and FP services. Rehabilitatiodconstructiodmaintenance o f dispensariesihealth centers, Training o f Medical Assistants and Enrolled Nurse Midwives.

Improvement in learning environments (classrooms, water points, and sanitation) Teachers attracted to school (teachers houses, water and sanitation) Community involvement in school governance (enrolments, pass rates, staffing norms, teacher absenteeism, learning materials, invigilation, etc.). Functioning School CommitteedParent-Teachers Associations.

MDG and

MPRSP pil lar 2

MPRSP pil lar 2

/Health ;enter statistics on Community Statistics Day. 2. Education IRehabilitatiodmaintenance o f new facilities. IMDG 2 and 3;

3. Water and Sanitation

4. Transport and Communication: - Access and accessibility - Communications

School statkics on Community Statistics Day. Community water points rehabilitation, new projects, and maintenance for MDG 7 ; wells, boreholes, piped schemes, earth dams, valley dams, water kiosks, etc. measured by access to service distance and service levels. Sanplats. Cash transfers through construction o f public assets:

- Community roads, bridges, and foot paths. - Post-offices.

MPRSP pil lar 2

MDG 1 and I ; MPRSP pil lar 3

- Environmental protection 5. Household Food Security

- Community afforestation (soil conservation and water management). Grant-funded projects to reach the vulnerable (orphans, disabled,

incomes. MPRSP pil lar 3 Community composting and crop diversification. Woodlots, savings groups and crop/produce marketing.

MDG 1,4 and 6; chronically ill, elderly, malnourished under fives) with increased

While the national baseline and targets for MDGs are summarized in the above table, every LA w i l l be supported with technical expertise to develop i t s own baseline and targets for MDGs, especially during the f i r s t APL. There w i l l be an annual review o f these MDGs and the results reported for national discussion and inputs into changes in strategies. In order to report on these MDG targets, MASAF wil l work with LAs to prepare an annual report using indicators in the table below.

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Table 3. Tracl i g the MDGs.

MDG Eradicate

ctreme poverty i d hunger

2. Achieve universal primary :ducation

3. Promote gendei equality and empower women 4. Reduce child mortality 5. Improve matemal health

6. Combat HIVIAIDS, malaria and other diseases

7. Ensure environmental sustainability

8. Develop a global partnership for development

MDG indicator ) Poor households receiving daily transfer or assistance o f US$0.30 or more.

!) Grade 1 children (%) reaching grade 5.

I) Girls in primary schools as % o f total.

I) Under-fives malnutrition (%) using weight for age method.

5 ) Births attended to by at least a trained traditional birth attendant

5) Orphans given training and tools

7) Chronically ill reached with

$) Households in an anti-malaria

3) Forest cover for non-agricultural

10) Households with sanplats for

11) Households with improved

12) Households participating in functioning Drug Revolving Funds (stocked with a specified minimum list o f drugs).

for production.

home based care.

program.

land (%).

sanitation.

water source.

Malawi 2000

Baseline 55%

20%

48%

3 0%

77%

3 7%

Malawi 2015

Target 28%

90%

50%

15%

84%

68%

M A S A F - L A indicators ousehold in receipt of: - PWP wages (ME) for two months. - SSP incomes (ME) over two years. 0. o f COMSICs formed and working. 'ouseholds in COMSICS and - Quantity o f produce by various projects. - Value o f produce from all projects. hildren in primary school, every term. rimary school facilities tracked by: - classroom block - toilets - office - water

- teacher house unctioning School Committees and PTAs. 'otal girls and boys in primary schools (with rbadrural split) every term.

- wood lot

touseholds participating in nutrition projects. . . Jnder-fives in nutritionprojects. [ouseholds with access to a trained TBA. 'otal TBAs trained under a CBO 'ersons reached with Family Planning ervices. Jumber o f births supervised by traditional irth attendants. io. o f orphans supported. 'roduction tools (by trade) distributed. io. o f chronically ill covered by Home-Based :are projects. io. o f households using impregnated bed ets. Iectares planted with seedlings io. o f seedlings planted. io. o f households given sanplats.

io. o f households with improved water ource. io. of Drug Revolving Funds fully stocked and in se. io. o f individuals served by DWs.

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Additional Annex 13: Resource Allocation and Targeting MALAWI: Third Social Action Fund

Resource Allocation: The resource allocation and targeting exercise for M A S A F 3 i s undertaken in order to:

0

0

ensure that a concerted effort i s made to reach those vulnerable and poor populations who have not, so far, been able to fully benefit from MASAF; and serve as a monitoring mechanism to assess whether LAs and specific geographic areas are able to meet their targets, and to provide capacity building where they are lagging behind.

Design o f the allocation i s in support o f the principles o f M A S A F 3, namely:

0 Autonomy and flexibility; Promoting accountability and transparency;

0

Fostering community empowerment; 0 Enhancing capacities; and

Leveraging the use o f public resources in favor o f the poor;

Promoting equitable distribution o f resources.

There are two levels o f resource allocation in the project.

0 A three year indicative planning figure (IPF) for CDP and SSP support w i l l be allocated to Districts (in Phase I) and LAs (in the following Phases) in line with the MTEF cycle. The IPF follows the guidelines for development funds promulgated by the National Local Government Finance Committee, comprising 50% population and 50% available poverty and service related indicators. The indicators selected relate to the 12 MDGs which are being monitored under M A S A F 3. Annual reviews w i l l be undertaken to assess utilization o f the funds, and the status o f the indicators, and adjustments will be made to the IPF annually. Targeted capacity building wil l be provided to LAs if deemed necessary to improve performance. The indicators used to arrive at the IPF by LA, including their respective weights are given in Table 1. LAs will undertake open-ended P U S in communities which have the furthest to go in attaining the 12 MDGs being tracked under MASAF 3; this will generate a l i s t o f community priorities which wil l feed into the LA plans. If the priorities include activities that qualify for M A S A F support then extended PRAs wil l be carried out by the LAs. M A S A F Zone wil l provide assistance to LAs from identification to completion o f M A S A F funded sub-projects. The process for each component and possible source o f information that the Districts can utilize, are provided in the Operational Manual.

0

Methodology: M A S A F has used a very simple methodology to allocate the IPFs, which can be easily revised and replicated. Districts are ranked for each o f the indicators (from worst to best) and are then weighted (by their respective weights) and summed up to produce a composite district rank, ranging from the most deprived (1) to the least deprived (27). The per capita resource allocation has been adjusted so that the worst-off districts get more than their share while the better-off ones get less than their share. The adjustment factor ranges from +20% to -20% for CMPs and SSPs, and from +40% to -40% for LAMPS. The first-cut allocation results are given in Table 2.

Table 1. Resource Allocation Formula for Community Development Program: Indicators (and Respective Weights) Used for District Indicative Planning Figures -Round 1

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.oca1 Assembly danaged Projects LAMP)

- Population (50%)

- Food insecurity, f rom Census 1998

VAM (25%) from Malawi National Vulnerability Assessment Committee

- Poverty rates (25%) from Poverty Maps in Malawi Atlas o f Social Statistics, National Statistics Office

zommunity Managed Projects (CMP)

- Population (50%) from Census 1998 - Number o f children per permanent

classroom (1 5%) from Ministry o f Education

- Access to safe water (1 5%) from UNDP Human Development Report

- % o f population over 5km from the nearest health center (1 0%) from Ministry o f Health National Health Facilities Dev. Plan 1999

- % o f deliveries attended by trained health personnel or traditional birth attendants (5%) from Health Management Information Quarterly Bulletin (Yr 1 : no.2, April-June

- Reported new cases o f clinical malaria per 2002)

1,000 population (5%) f rom Health Management Information Quarterly Bulletin (Yr 1 : no.2, April-June 2002)

iponsored Sub-projects SSP)

- Population (50%) from Census 1998

- % o f under-weights in the under-5s attending clinic (50%) from Health Management Information Quarterly Bulletin (Yr 1: no.2, April-June 2002)

The composite f igure for each LA i s used to allocate a global IPF under M A S A F 3 to support CDP, and SSP activities without breaking them down into components. LAs wil l finance in response to community demands, while M A S A F MU w i l l finance capacity building activities in response to demands from LAs and various implementing partners. The M I S at LA level will capture expenditures and identify them by categories according to the components so that M A S A F MU can prepare monitoring reports for use by ZOs, Field Offices, and LA staff to tackle problems o f mis-matches between community demands and service coverage status for the 12 MDG indicator targets. I t i s envisaged that this work will be revised and fine-tuned as more and better information becomes available, within the framework outlined above.

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Table 2. Resource Allocation (IDA resources only)

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