Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 26151

IMPLEMENTATION COMPLETION REPORT(IDA-34520; IDA-34521)

ON A

CREDIT

IN THE AMOUNT OF SDR 43.5 MILLION (US$ 55.6 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MALAWI

FOR THE

THIRD FISCAL RESTRUCTURING AND DEREGULATION PROGRAM (FRDP III)

06/12/2003

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective October 1, 2002)

Currency Unit = Malawi Kwacha (MKW) MKW 80.3185 = US$ 1

US$ 0.012450 = MKW 1

FISCAL YEARJuly 1 June 30

ABBREVIATIONS AND ACRONYMSADMARC Agricultural Development and Marketing CorporationBHA Better Health for AfricaBOP Balance of PaymentsCAS Country Assistance StrategyCBM Commercial Bank of MalawiCMS Central Medical StoresESCOM Electricity Supply Corporation of MalawiFRDP Fiscal Restructuring and Deregulation ProgramGDP Gross Domestic ProductGOM Government of MalawiHIPC Highly Indebted Poor CountriesIBRD International Bank for Reconstruction and DevelopmentIDA International Development AgencyIFMIS Integrated Financial Management Information SystemIMF International Monetary FundI-PRSP Interim Poverty Reduction Strategy PaperLDP Letter of Development PolicyMASAF Malawi Social Action FundMDC Malawi Development CorporationMHC Malawi Housing CorporationMKW Malawi KwachaMOF Ministry of FinanceMPC Malawi Posts CorporationMPTC Malawi Posts and Telecommunications CorporationMRA Malawi Revenue AuthorityMTs Metric TonsMTEF Medium-Term Expenditure FrameworkMTL Malawi Telecommunications LimitedNEC National Economic CouncilNFRA National Food Reserve AgencyNSNS National Safety Net StrategyOED Operations Evaluation DepartmentORT Other Recurrent TransactionsPCC Petroleum Control CommissionPER Public Expenditure ReviewPERMU Parastatal Enterprise Reform and Monitoring Unit PRGF Poverty Reduction and Growth Facility

PRSP Poverty Reduction Strategy PaperPSD Private Sector DevelopmentPURP Public Utilities Reform ProjectRBM Reserve Bank of MalawiROC Regional Operations CommitteeSDR Special Drawing RightsTA Technical AssistanceTIP Targeted Input ProgramTOR Terms of ReferenceVAT Value Added Tax

Vice President: Mr. Callisto MadavoCountry Director:Country Manager:

Mr. Hartwig SchaferMr. Dunstan Wai

Sector Manager: Mr. Philippe Le Houerou Task Manager: Mr. Antonio Nucifora

MALAWIFRDP III

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 96. Sustainability 107. Bank and Borrower Performance 118. Lessons Learned 129. Partner Comments 1310. Additional Information 16Annex 1. Key Performance Indicators/Log Frame Matrix 17Annex 2. Project Costs and Financing 21Annex 3. Economic Costs and Benefits 22Annex 4. Bank Inputs 23Annex 5. Ratings for Achievement of Objectives/Outputs of Components 24Annex 6. Ratings of Bank and Borrower Performance 25Annex 7. List of Supporting Documents 26Annex 8. Variation between budgeted and actual expenditures, 1998/99 - 2001/02 38

Project ID: P050294 Project Name: FRDP IIITeam Leader: Sudhir Chitale TL Unit: AFTP1ICR Type: Core ICR Report Date: June 17, 2003

1. Project Data

Name: FRDP III L/C/TF Number: IDA-34520; IDA-34521Country/Department: MALAWI Region: Africa Regional Office

Sector/subsector: Central government administration (47%); General education sector (20%); Health (15%); Crops (12%); Telecommunications (6%)

Theme: Public expenditure, financial management and procurement (P); Standards and financial reporting (S); State enterprise/bank restructuring and privatization (S); Education for all (S); Rural markets (S)

KEY DATESOriginal Revised/Actual

PCD: 10/14/1999 Effective: 01/23/2001Appraisal: 10/19/2000 MTR:Approval: 12/21/2000 Closing: 06/30/2002

Borrower/Implementing Agency: GOVERNMENT OF MALAWI/MINISTRY OF FINANCEOther Partners:

STAFF Current At AppraisalVice President: Callisto E. Madavo Callisto E. MadavoCountry Director: Hartwig Schafer Darius MansSector Manager: Philippe H. Le Houerou Philippe H. Le HouerouTeam Leader at ICR: Sudhir Chitale Sudhir ChitaleICR Primary Author(s): Basil Kavalsky; Antonio

Nucifora

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: U

Sustainability: UN

Institutional Development Impact: M

Bank Performance: S

Borrower Performance: U

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time:

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:The operation was intended to build on two earlier adjustment credits (FRDP I and II) which were

provided in 1996 and 1998 respectively to the newly democratic Government of Malawi which had taken office in 1994. These earlier credits had supported wide-ranging structural reforms which substantially liberalized Malawi's economy. The outcomes of these credits was assessed as satisfactory, with the opening of the tobacco market leading to higher growth rates as smallholders responded to the production incentives, while a new textile export sector developed to take advantage of favorable access to foreign markets. There were significant shortcomings in public sector management however, in particular with regard to macro-economic stabilization. Inefficient state enterprises required periodic injections of resources which were funded through public borrowing. As a consequence deficits and inflation remained high and both nominal and real interest rates were at levels which were too high for most potential private investors.

In addition to the broad economic liberalization, the earlier credits had three core objectives. The first was a substantial increase in pro-poor public expenditures, and specifically the shares of education and health in total expenditures. A social safety net was introduced, but was relatively untargeted and was not regarded as fiscally sustainable. A second area was privatization of the large state-owned enterprise sector in Malawi, where a privatization plan was implemented and a satisfactory start made on selling off enterprises. The third area related to the management of public expenditure. A medium-term expenditure framework was introduced, and a start made on improvements in financial management and procurement.

Although the conditions of FRDP I and II were met in substance, the outcomes were not as favorable as expected when those credits were designed. Growth rates were no higher than the historical averages, reflecting the weaknesses in macro-economic management and their impact on both domestic and foreign private investment. Uncertainties in agricultural input and output prices also impacted the production of foodcrops in particular. Finally the AIDS epidemic began to have an increasing impact on output in both the service sector and in agriculture.

Against this background, work on FRDP III started in 1998 with a view to consolidating the achievements of the earlier credits and getting to grips with the critical issues of macro-economic stabilization. The objective of substantially lowering the deficit, required a complex set of interventions to improve public sector expenditure management, to privatize or increase the efficiency of key parastatals, to target the social safety net so as to reduce its overall cost, and to increase revenue collections. These were arguably changes which would take time to introduce and have an impact. The original design for FRDP III consisted of a first tranche with up-front actions and four floating tranches with conditionality in specific areas. At the Regional Operations Committee (ROC) this design was rejected because of its complexity and the difficulty of proceeding if any one of the floating tranches was undisbursed. The team was asked to come back with a more traditional two-tranche operation. At around this time, the HIPC initiative was being expanded and the Bank and Fund were under pressure from the international community to work with countries to establish their eligibility for debt reduction. A new team leader took over preparation in April 2000 and reached the conclusion that there were too many question marks about the program as designed, with regard to Government commitment to undertake a set of measures to be included in a second tranche. The likelihood was that even if we succeeded in getting to the approval stage of such a credit, there would be serious problems down the road. If the Bank wanted quick forward movement on the operation to release HIPC support and donor funding, the most sensible way to proceed was a single tranche operation. Another difficulty was the need for consistency between a second tranche and the policies to be included in the PRSP which was under preparation by the Government.

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A choice was made to go ahead with a single tranche operation which would maintain the momentum of reforms where the Government was committed to further progress and would set in motion the process of reforms in the important areas of financial management, audit and procurement. The original amount suggested for a single tranche operation was US$35 million (as against the US$80 million for the two-tranche operation), but at the request of the Malawians this was raised to US$55 million which was the amount needed to capitalize the emergency food agency (NFRA), and came close to closing the projected financing gap for the year (which was larger than originally projected because of a 20 percent decline in international tobacco prices). FRDP III was approved by the Bank's Board in December 2000, in parallel with the Fund's PRGF which went to their Board in the same month and supported an analogous program of conditionalities. A parallel Technical Assistance credit to support capacity enhancement in a number of key areas of conditionality was presented and approved by the Board at the same time as the FRDP III. This credit is expected to close in December 2003 and will be subject to a separate ICR.

FRDP III had three broad objectives. The first was the improvement of public sector management with the major focus being on limprovements in the allocation, transparency and monitoring of public expenditures. The second was the promotion of private sector development essentially through the continuation lof the privatization of some key parastatals - telecoms, petroleum imports and distribution, and the commercial banks.The third was to create a targeted safety net through the development of a strategy combined with a ltargeted program of subsidized agricultural inputs and a strategic food reserve.

Each of these objectives was based on existing analytical work. The preparation of a Public Expenditure Review with Malawian collaboration provided the basis for designing a program of public expenditure reforms which would have substantial Government commitment. The previous adjustment credit and the Privatization and Utility Reforms Project laid the basis for the Government's program of privatization of major public assets in telecommunications, commercial banking and the liberalization of petroleum imports and marketing. A study of options for a Safety Net Strategy for Malawi had been recently completed and provided a basis to inform the preparation of the Government's own Safety Net Strategy.

There was no implication that by themselves the measures which supported each of these objectives would be sufficient to keep the adjustment program on track. It was recognized that in addition to the up-front actions included in FRDP III there would need to be a set of subsequent actions which were defined in the program which would need to form the basis for any new adjustment lending in the future. This formula had the advantage however, of making the requirements for follow up less rigid than they would be in a two-tranche operation and capable of being changed or fine-tuned to adapt to prevailing circumstances and the PRSP.

3.2 Revised Objective:n.a.

3.3 Original Components:n.a.

3.4 Revised Components:n.a.

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3.5 Quality at Entry:Quality at entry for a single tranche operation is difficult to assess. The primary criterion is

presumably whether the policy measures included created or maintained the momentum of the reform program. Although the measures included in the program were mainly fairly modest steps, they did deepen the reform in a number of key areas, particularly on advancing the privatization program and improving revenue collections. These measures constituted a reasonable package of actions which kept up the forward momentum achieved under FRDP I and II. They only represented a modest step, however, towards the achievement of the critical objective of supporting the structural reforms needed to underpin macro-economic stability. A more substantial step would have required that the credit tackle the issues related to ADMARC, the agricultural marketing parastatal which had been one of the primary sources of unanticipated calls on Government resources in the period (with the cost of ADMARC's operations amounting to 1.6 percent of GDP in 1998/99 and 1.9 percent of GDP in 2000/01). This issue had been highlighted in the Public Expenditure Review. The earlier FRDP credits had secured the divesting of some of the more profitable activities of ADMARC which had been used in the past to cross-subsidize some of its other undertakings and obscured its operational inefficiencies. Without these, the real underlying problems became apparent. The solutions however, were not short term nor were they supported by the same degree of analytical depth as the rest of the program. The multi-tranche operation had proposed to close down a number of ADMARC's local depots in the first tranche. The new team leader took the view that there were too many question marks about whether this was the right course of action. Given the uncertainties and the practical difficulties of getting up front agreement and action on further reforms of ADMARC in the time available the decision not to deal with these in the single tranche of FRDP III was defensible. The recent food crisis points to the failure of agricultural policies and with hindsight this raises questions whether the objective of HIPC eligibility, important though that was, should have been permitted to dominate the timing, design and content of the operation.

A second criterion to judge quality at entry is the strategic role of the operation. In general, single tranche adjustment operations are justified where the Government is committed to the program and is willing to continue with it. There were questions whether this was the case in Malawi, given the mixed achievements of the previous structural adjustment operations and the slowing down of the reforms process. At the same time, determining the appropriate size of a credit when Government commitment is uncertain constitutes another difficult judgment. The extent to which the usual financing gap considerations should dictate the size of the credit once the decision to lend has been made (both the Fund and the Bank agreed to lend in this case) is unclear. At the time of the FRDP III, Bank management attached the highest importance to moving in tandem with the Fund to unlock access to HIPC and create the financial basis for an acceleration of reform and growth. A small single tranche operation was well judged as a means of achieving this objective and the initial amount of US$35 million communicated by the preparation mission to the Government was appropriately scaled in the circumstances, even though it represented a reduction relative to the first tranches of FRDP I and FRDP II. However, by subsequently increasing the size of the credit to US$55 the Bank gave an unfortunate signal as to the weight it attached to a longer term commitment to the reform process. In view of these considerations quality at entry is rated only marginally satisfactory.

In view of these considerations quality at entry is rated only marginally satisfactory.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:The appropriate parameters to evaluate a single tranche operation are not fully clear. Obviously,

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any structural operation has to be viewed in the context of the process of reforms it helps to sustain. This raises the important question of what the appropriate time frame is to evaluate the impact. In the case of the FRDP III, the ICR was performed two years after the release of funds, so the perspective it takes is different from if it had been undertaken immediately. As will be discussed below, the two-year follow-up period to the credit has brought very limited changes in two of the three focus areas of the credit (public sector management and social safety nets) and some successes in the third one (privatization):

i. Improved public sector management through enhanced expenditure allocation, transparency and monitoring.

The attempt to build the medium term expenditure framework is continuing and was supported under the project. The links between the framework and the annual budget are still not well understood however. The framework has not been used as a rolling three year plan, instead each year the exercise begins anew. This said, the process has contributed to a greater awareness of the need for pro-poor expenditures and increased allocations for these purposes in line with the PRSP (e.g. share of health sector in discretionary recurrent expenditures from 12 percent in 2000/01 to 18 percent in 2002/03; share of education sector in discretionary recurrent expenditures from 21 percent to 29 percent; additional details in Annex 1). The allocations for operations and maintenance in the budget have also been stepped up in line with Bank recommendations (e.g. health sector from 16 percent to 24 percent in total ORT; education sector from 15 percent to 21 percent).

There is a need however, for determining overall expenditures more realistically and making some provision for contingencies such as the food emergency. At present, actual expenditures at the end of the year differ significantly from the original budget estimates (by 2-3 percent of GDP on average; see details in Annex 8). The aggregate variation is the result of regular under-spending of the development budget (mainly due to delays in project implementation) and overshooting of the recurrent budget. Most of the discrepancy in the recurrent budget is associated with higher than anticipated interest payments on debt (mainly as a result of consistent under-budgeting of the interest bill). Variations in discretionary recurrent expenditures are also quite large, both in the aggregate (plus or minus 10 percent on average) and in terms of changes to the allocations made to individual agencies (more than half of public institutions regularly receive either 10 percent more or 10 percent less than originally programmed, and it is not uncommon for institutions to receive 30 percent more or less than originally anticipated; see details in Fozzard et al. (2002), ODI Working Paper N.166). The main net beneficiaries have been the Office of the President, the State residences, the Police, and the Ministry of Foreign Affairs. In addition, almost every year there is an unexpected crisis, either because of unanticipated parastatal debt or arrears, or because of a natural disaster such as drought or floods. However, only a small allowance is made for such contingencies (the current budget line for disaster management amounts to about 0.5 percent of GDP).

Inevitably, wide variance on recurrent expenditures renders the budget irrelevant as a guide to resource availability during budget execution, thereby weakening the rationale for detailed budgeting, undermining operational planning and subverting parliamentary oversight. Consequently, most line ministries make little effort to prepare realistic budgets, and the Ministry of Finance does not verify the feasibility of the proposed expenditure reductions. For instance, the 2002/03 wage bill for education was budgeted at around MWK300 million per month in spite of the fact that the average payroll for education between January and June 2001/02 was approximately MWK380 million. It was therefore no surprise to find that in July education expenditure was MWK80 million over budget. Similarly, the 2002/03 budget for utilities by individual line ministries were only about 70 percent to 80 percent of actual expenditures during the previous year (although no actions were planned to enforce the budgeted reductions in these expenditures).

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The problem is not only budget formulation but perhaps even more importantly in its execution. The sector ministries have not yet shown themselves willing or able to provide a regular flow of meaningful data on expenditures and commitments. By the same token the Finance Ministry has not been willing to take the initiative in delaying non-salary budget transfers until such data is provided. The weak monitoring of public expenditures results in regular overspending by some ministries, without sanctions ever being enforced. Major reallocations are undertaken both within and across ministries without parliamentary approval and with very limited transparency.

Another important element of the FRDP III operation was an overall improvement in the timeliness and transparency of expenditure data both for the Government and for the parastatals. The one-off collection of data and publication on the web which was carried out before Board presentation has not been sustained. In recent weeks a commitment was made to publish this data and then immediately withdrawn, suggesting a lack of consensus within the Government on whether it is willing to take this step. On a positive note, the government is currently publishing Pro-Poor-Expenditure reports on the Ministry of Finance website and in the newspapers.

The performance with regard to monitoring the parastatals has been significantly better. The Parastatal Enterprise Reform and Monitoring Unit (PERMU) is now operational and produces regular reports on a quarterly basis of the 10 largest parastatals. This information has not been published on the web however.

The overall arrears situation has not improved since FRDP II. Government estimates put the stock of arrears at between 0.5 to 1 percent of GDP, although no precise estimate has been calculated. A comprehensive audit of arrears is planned with donor funding during 2003 and should provide an accurate assessment of the existing stock. In recent months the Government has moved to centralize the payments for water and electricity bills of those ministries and budget entities (e.g. defense, hospitals, schools etc.) which have disregarded their payment obligations for these services in the past. The ministries in turn responded by systematically underestimating the level of their utility payments so that the centralized amounts have only covered about 60 percent of the new bills and the stock of utilities arrears continues to rise at a rate of 0.2 percent of GDP per annum. This is arguably still a somewhat better outcome than might have resulted without the centralization of payments.

Revenue collections have improved dramatically. In fact, the new Malawi Revenue Authority (MRA) constitutes one of the most notable success stories of FRDP III. Revenue collection has increased by over 3 percent of GDP since the establishment of the MRA in early 2000, although this is in part attributable to changes in tax policy.

An important element of the program was the establishment of an independent Auditor-General's office which would not be beholden to the Ministry of Finance for its annual budget. This has not yet been realized. FRDP III underestimated the depth of debate this would cause inside the Government, with strong proponents of the 'New Zealand model' and the 'South African model' ranged on either side. The Government deserves credit for the depth and care with which it has addressed this issue. By now, however, the facts are widely understood. Substantial progress has been made with drafting the relevant legislation and it is expected to be submitted to Parliament shortly.

The reforms on procurement have not progressed since Board presentation. To some degree this represents genuine uncertainties in the Government as to whether the approach which the Bank outlined in FRDP III is the right one. There is a great deal of concern about the potential impact of decentralization

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on corruption and the current approach is a hybrid in which contracts are placed by individual ministries and agencies, but reviewed by a central unit.

Other minor reforms have also not progressed significantly since Board presentation. The rationalization and prioritization of aid-financed projects within the context of the Government budget has not taken place and the project database which was established at the time of Board presentation has not been maintained or updated. Cost recovery fees have been introduced for various services (passports, visas, motor vehicle licenses, police reports), but no progress has been made in ensuring that the fees collected are remitted to the Treasury. Little progress has been made in introducing partial cost recovery fees for secondary and tertiary education. Secondary school fees have been increased, but the substantial funding for boarding in secondary schools has not been reduced due to concerns about the lack of alternative affordable lodgings for students. In tertiary education, a significant increase in university fees has been accompanied by the introduction of a universal loan scheme which is widely regarded as a grant.

ii. Private Sector Development through parastatal reform and privatization.

Three parastatals were selected for FRDP III. The first was the divestiture of part of the substantial government holdings in the financial sector and in particular privatizing a majority stake in one of them, the Commercial Bank of Malawi. This has been achieved, although at the ‘price’ of allowing Press Trust, a major local conglomerate with close political ties, to exercise the option of increasing its stake in the other major commercial Bank, the National Bank of Malawi, from 48% to 51%. Allowing a local conglomerate to be in charge of a major commercial bank raises the need for tighter prudential controls. On the other hand, the arrival of the new owner of the Commercial Bank of Malawi, Stanbic South Africa, has laid the basis for competitive banking sector development in the future. This constitutes a positive step in a context where there were little or no alternative options.

The second parastatal was Malawi Telecoms. Slow progress on this resulted in a hold up in disbursement on FRDP III until the information memorandum was made available to potential bidders. This reflected some dissent within the Government on proceeding. Since then the privatization has run into significant problems. After delays in the early stages (the whole privatization program was temporarily put on hold during 2001 due to concerns on the Government side), the Government made a subsequent good faith effort to privatize MTL. By then, however, the downturn in the global telecommunications market rendered the privatization process substantially more difficult. An initial attempt to privatize MTL collapsed as one member of the consortia which had been identified as the preferred bidder pulled out at the last minute. The process is now being repeated from scratch.

The third parastatal was the petroleum import and distribution agency. In this case, the privatization appears to have shifted the structure of the sector from a public monopoly to a regulated private monopoly. While this is far from ideal, given the small size of the Malawian market it appears likely to be the outcome of privatization in many sectors and the evidence suggests a positive result with much greater availability of retail outlets and a fairly stable supply price. This is a very good achievement and puts Malawi well ahead of many other African countries in this area.

Perhaps the most notable issue here was what was not included. Although the preparation of new conditionality on ADMARC would have taken time, it would have been appropriate to indicate that this should be part of 'subsequent actions' and that any future adjustment lending to Malawi could not go forward without some improvement of the financial and management situation of ADMARC.

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iii. Safety net strategy through targeting subsidized inputs and creating a strategic food reserve.

The issue of whether and how to intervene effectively in the maize market remains one of the most complex and difficult issues for public policy in Malawi. The two separate issues of promoting more efficient maize production and distribution on the one hand, and using subsidized inputs or food distribution as a social safety net, have become so inter-twined that it is difficult to achieve one except at the expense of the other and inevitably the pendulum swings backwards and forwards between the two objectives, depending largely on the outcome of the harvest in any given year. The focus in FRDP III was to try to define a sphere of public intervention on the social safety net which was clear and well established. This would rationalize the overall package of intervention, quantify the amount of resources needed from the budget and, by removing the uncertainties surrounding public interventions, restore private incentives both to increase outputs and to import and distribute maize in the face of shortages. Three instruments were defined to achieve this: i) designing a National Safety Nets Strategy (NSNS), ii) targeting the formerly universal free input distribution program (commonly referred to as the 'starter pack' program), and iii) reforming the National Food Reserve Agency (NFRA) into a financially independent institution, with a clear mandate as a strategic grain reserve exclusively involved in disaster and relief activities and clear rules of intervention. However, the evaluation of the achievements of FRDP III in this area is made more complex by the severe drought which affected Malawi during 2000/01 and 2001/02.

In early 2001 the Government had been advised by the donors (including under the Bank's FRDP III) to reduce the existing maize stocks from 180000 tons to around 60000 tons, which had been estimated by the Government and the donors as the optimum level of strategic maize reserves. The Government, however, disposed of its entire grain reserves. At the same time, inaccurate crop forecasts for 2001 from the famine Early Warning System led to the failure to anticipate what later turned out to be a very serious shortage of maize. As a result of these events, by early 2002 it became clear that the country faced a famine situation, while the level of Government's maize stocks had been run down to zero. The Government and the donors have since focused on responding to the food emergency, introducing a combination of free food distribution for the most needy, a general maize price subsidy, and the continued operation of the 'starter pack' as an untargeted program.

The achievements of FRDP III need to be evaluated in this context. A National Safety Net Strategy has been prepared and has been adopted by the Government, building on a 1999 study prepared in collaboration with the Bank. However, the implementation of this strategy has not yet started and existing safety net programs continue to be funded and administered independently of each other depending on donor support. The recommended targeting of the 'starter pack' program was implemented during 2000/01 and 2001/02, but a decision was made to revert to a universal 'starter pack' in 2002/03 (which is largely funded by donors, however). The Government has stated its intention to reduce the number of starter pack beneficiaries over time, but no clear plan has been decided. The role and size of the starter pack program remains an area which is still unresolved from a technical perspective and is an object of disagreement both within Government and within the donor community. The general maize price subsidy raises more difficult questions, but was indeed endorsed by Fund and Bank missions at the time it was introduced. This policy ensures that affordable food is available to the poor, but is inefficient and perpetuates the uncertainties surrounding the extent of public intervention in the maize market, thus discouraging private sector involvement. On the other hand, given the seriousness of the crisis, these drawbacks constituted a reasonable cost to pay to ensure that cheaper food became rapidly available and without the risk of delays likely to occur from the administration of more complex schemes. On balance, therefore, while the FRDP proposals were sensible and reflected the priorities at the time, it is difficult to fault the Government for the decision not to target input support to farmers during years of drought and to provide substantial food and cash transfers to the poorest groups. While the Government is likely to scale back the subsidized food and

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inputs distribution programs in future years, the dilemma remains that uncertainties as to its level will reduce incentives to private production and trade.

The issues surrounding the reform of the NFRA deserve separate mention. As agreed, the Government amended the trust deed of the NFRA to narrow its mandate from one of being engaged in the stabilization of prices to being exclusively engaged in disaster and relief operations. However, the Government did not use part of the FRDP III credit to capitalize NFRA, and authorized new borrowing by NFRA at non-concessional rates, which led to a subsequent bailout of NFRA in 2001/02 (amounting to 0.6 percent of GDP).

Overall assessment:On balance, during the last two years, there has been only very limited progress with the

reforms initiated by the FRDP III, and therefore the outcome has been rated unsatisfactory. However, this unsatisfactory rating is arrived at solely on the basis of the mixed record of implementation of ‘follow-up’ reforms by the Government. Since these reforms were not strictly part of the credit, the rating is arguably somewhat unfair. However, these ‘follow-up’ reforms provided the ‘strategic context’ for the agreed program of reforms under the FRDP III, which make little sense without these subsequent steps.

4.2 Outputs by components:n.a.

4.3 Net Present Value/Economic rate of return:n.a.

4.4 Financial rate of return:n.a.

4.5 Institutional development impact:In addition to the Technical Assistance credit associated with FRDP III to support capacity

enhancement in preparing the Financial Management and Audit Laws and improving the procurement system, a number of steps were taken under FRDP III to establish the basic legal framework for certain key institutions. These included the setting up of an independent Auditor General's office, the decentralization of procurement, the establishment of a Parastatal Monitoring Unit and the creation of a Malawi Revenue Agency. Only the last two of these has been achieved so far. On the first two, the cabinet has not yet approved the proposed changes and though it may do so in the near future, this has delayed the provision of technical assistance for this purpose.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:The implementation of the measures supported under FRDP III was impacted by two major events.

First the expanding AIDS crisis severely diminished Government capacity in a number of areas, particularly with regard to the provision of education and health services. Second, the poor rainfalls of 2000 and 2001 led to widespread food shortages and consequent Government intervention to provide maize at subsidized prices.

5.2 Factors generally subject to government control:In a number of areas the key constraint appears to be Government commitment. This is most

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notably the case with regard to public expenditure management. Budgets have not been established at realistic levels. Once they have been approved there is inadequate effort to ensure that even the budgeted levels are adhered to, much less to relate outflows to available resources. The President's Office is a notable offender in terms of exceeding budget ceilings. Similarly, the failure to impose hard-budget constraints on parastatals, notably the financing of ADMARC's maize operations, has been a primary cause of large deficits and is at the root of macroeconomic instability. In light of this it was difficult to meet many of the undertakings which were contained in the Government's Letter of Development Policy and the list of subsequent actions for the program. In the areas where there was genuine commitment - moving ahead with privatization and implementing the social safety net - the progress was much greater.

5.3 Factors generally subject to implementing agency control:Public expenditure management is the primary responsibility of the Ministry of Finance and the

inability to carry out this function effectively represents a major failure of the overall operation. This said, the inability of the Finance Ministry to secure the accountability of the various Government agencies and ministries for preparing realistic budgets and managing them effectively, must be seen in the broader context of the lack of commitment cited above.

5.4 Costs and financing:n.a.

6. Sustainability

6.1 Rationale for sustainability rating:There are a number of considerations in evaluating the sustainability of this project. The

assumption was that there would be follow-up lending to Malawi which could be used to ensure that the measures taken by the Government under FRDP III would be sustained. In and of itself the record of FRDP III in the absence of such follow up lending is a mixed one. It has not led to an improvement in public expenditure management, to the expected transparency in Government expenditures, to the decentralization of the procurement function, to the establishment of an independent budget for the Auditor-General's office, or to the privatization of Malawi telecoms. On the other hand, it has led to the sustained increase in the share of pro-poor expenditures, the improved operations of the Revenue Authority, and the satisfactory privatization of the banking and petroleum sectors. Further, it has helped to sustain the broader program of privatizations including major parastatals such as Air Malawi, ESCOM, MPC, and others not explicitly mentioned in the FRDP III credit. The pressures of the food emergency have resulted in the delay of progress with regards to the implementation of the safety net strategy, but there is a genuine understanding of the importance of this and the trend is likely to resume in the near future. However, the questions surrounding the scope and extent of public intervention in the maize market do not appear to have been sorted out, perpetuating the risk of incurring high future budgetary costs and creating important disincentives for maize production and trading.

The Government of Malawi makes the point in discussion that the Bank may be unrealistic in its assumption on possible timing of actions and particularly on the idea that reform is a linear forward progression. It is true that in the areas of privatization and safety nets reform the reform process is broadly on track and there is commitment to moving in a general direction. On the other hand, no significant progress in the area of public expenditure management has been made. The problem is that the lack of progress in this important area and the general delays in the areas of privatization and safety nets implementation translate into slower growth and this in turns puts the viability of the overall program at risk. The Government of Malawi needs to balance carefully the political risks associated with more rapid reform on the one hand and the political implications of continued slow growth on the other.

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6.2 Transition arrangement to regular operations:The associated Technical Assistance project is designed to put in place capacity in key areas. As

indicated above, new Structural Adjustment Lending would need to follow up the measures introduced under FRDP III.

7. Bank and Borrower Performance

Bank7.1 Lending:

The Bank's primary objective in this operation was to unlock the door to HIPC. In addition, it was a key component of the overall financing plan and supported the program of structural reforms. The hope was that the enhanced dialogue and availability of donor funding would result in a renewed Government effort to implement the needed macro and structural reforms. In practice this has not happened. To the Bank's credit, large parts of the operation are rooted in good quality, collaborative analytic work such as the PER and work on the social safety net and privatization program. (The weakness on the analytic side appears to be on agriculture development and the role of ADMARC, which contributed to the decision to leave this important area out of the operation. In recent months the Bank has moved to correct this in part, by carrying out a Poverty and Social Impact Assessment - PSIA of ADMARC.) The pressure to produce a loan in a short period of time, however, shows in the inclusion of items which the Bank or the Government had 'on the shelf' rather than always reflecting a coherent set of measures needed to achieve a given objective. In addition, with the evolving situation of HIPC and the PRSP, FRDP III does not seem to have been rooted in a Country Strategy which could have underpinned the progress made in the short term as the Government moved to assemble the package of up-front measures. This said, the operation made the best of a difficult situation in which not going forward was virtually out of the question once the Fund had determined that the macro situation was acceptable. In the circumstances the Task Team Leader positioned the operation effectively. A firmer line should have been drawn on the size of the credit however.

7.2 Supervision:There was no formal supervision carried out given the nature of the operation. The Bank

remained closely engaged of course through its involvement with the reviews of Funds programs and preparatory missions on potential follow-up operations, as well as the preparation of a Country Economic Memorandum covering many of the issues of FRDP III. More formal supervision with periodic reporting should have been carried out, however, and might have helped to provide a clearer indication to the Government as to where the programs subsequent actions were lagging and provided a basis for internal decisions and action.

7.3 Overall Bank performance:Overall Bank performance is rated marginally satisfactory.

Borrower7.4 Preparation:

The Government demonstrated its capacity to move quickly to meet the needs of the program for up-front actions for release of the single-tranche. The studies and analytic work was largely in place and the needs for technical assistance were broadly identified.

7.5 Government implementation performance:Government implementation performance was unsatisfactory. There was little follow up once the

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pressure to meet the original one-tranche disbursement conditions was off. There is still a fundamental failure to prepare budgets within realistic resource envelopes and then manage them so as to deliver the approved expenditure levels. The privatization program did not move as quickly as planned. Government concerns about the potential political impact of retrenchment lead to a temporary suspension of the entire program during mid-2001. Following this initial delay, however, the privatization program has been resumed and the Government has shown some genuine commitment. The delay in the implementation of the social safety net strategy can be attributed only partly to the recent food emergency. More generally, the Government's intervention in the maize sector both in the surplus and deficit years has had very serious consequences for the budget, for macro-economic stabilization and for efficient production and trade.

7.6 Implementing Agency:The Ministry of Finance did not monitor or follow up on the program effectively.

7.7 Overall Borrower performance: With a single tranche operation the judgment must be equally shared between the quality of the

up-front actions and the degree of follow-up of the operation. As indicated earlier the overall design of the package, while the measures themselves were modest, helped to maintain the momentum of the reform program. The follow up in the subsequent two years has been disappointing. Many of the 'subsequent actions' do not seem to have been treated as an agenda for action. The overall borrower performance is therefore rated unsatisfactory.

8. Lessons Learned

1. The Bank should be more up-front in its documents about the difficulty of waiting for the Government to establish a track record in the various areas covered by the operation, given the pressures to meet the Government and the donor community's need for rapid action in the light of the HIPC program. While the risks of significant lack of follow-through were described in the risks section of the document, this is really not a sufficient indication of the nature of operations of this type where the window of opportunity is a small one and the benefits lie in maintaining the general direction of reform rather than taking quantum steps.

2. This said, it is important that credit amounts be maintained at levels which are commensurate with the measures being undertaken. The originally proposed two tranche operation would have been put at $80 million and the amounts might even have been back-loaded given the weight attached to conditions for second tranche release. The increase in the size of the first tranche relative to the amount agreed with the government by the preparation mission sends the wrong signals to the borrower and reduces the credibility of our follow-up operations. In addition, as mentioned above, the funds were not used to capitalize the NFRA which had been the motivation for topping-up.

3. When a single tranche operation such as this goes forward, the focus of the preparation and review needs to be not on measures already taken, but on the list of so-called 'subsequent actions'. In general these should be expressed in specific terms with timing associated with them. Ideally a set of actions should be defined for one year into the future and a second set for two years into the future. This then provides the Government with a very clear indication of the kind of conditionality likely to be associated with future lending. For critical areas (such as ADMARC) where conditionality is not included in the current operation, but it will be a critical element of follow up adjustment credit, it is important that this be noted in the text and also reflected in the matrix so that subsequent proposals for conditionality in these areas do not come as a surprise to the Government.

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4. Two areas of the credit represent major successes where the Malawian experience may be replicable for other countries. The approach of setting up an independent revenue authority with a fixed percentage of collections allocation to it for its operations seems to have worked extremely well in providing the motivation which the agency needed. Initially this percentage was set at 1.65% but it has subsequently been raised to 2.25%. Secondly Malawi's success in privatizing both the commercial banks and petroleum import sector in a small market where there is only room for a limited number of enterprises, suggests that with setting appropriate rules of the game, these can still result in significant efficiency gains.

5. This operation underlines yet again the importance of having good analytic work as a basis for World Bank lending and support to governments. The program of analytic work needs to be designed strategically, however, to avoid the risk of designing conditionality in the areas where solid analytical underpinnings already exist, instead of focusing on areas which are critical to the overall success of the Government's reform program.

9. Partner Comments

(a) Borrower/implementing agency:

The Government has prepared its own evaluation report of the FRDP III. The report is attached unedited in Annex 7. In addition, the Government has provided comments on the Bank's report. These are presented below. The Government comments highlight the fact that since completion of this report the Public Finance Management Bill, the Public Audit Bill and the Procurement Bill have been approved by Parliament in May 2003.

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(b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

FRDP III Policy Matrix and Actual Performance

Diagnosis Actions before Board Subsequent Actions/Medium Term Objectives

Actual performance in 2001/02 and 2002/03

A. Public Sector ManagementExpenditure rationalizationShortage of outlays for operation and maintenance in key sectors.

Increased allocations in the 2000/2001 Budget for other recurrent transactions (ORT) in education, health, agriculture, road maintenance, community development and gender development.

The share of education sector expenditure in discretionary recurrent budget will be maintained at, at least 23%.

The share of health sector expenditure in discretionary recurrent budget will be maintained at, at least 13%.

Revised est. Revised est. Budget 2000/01 2001/02 2002/03 Education sector expenditure in discretionary recurrent expenditure 21.0% 29.1% 29.1%

Health sector expenditure in discretionary recurrent expenditure 12.1% 15.2% 18.5%

Agriculture sector expenditure in discretionary recurrent expenditure 13.9% 6.6% 7.7%

Gender / Youth / Community development expenditure in discretionary recurrent expenditure 0.5% 1.0% 1.6%

Primary education: Allocation inadequate and shortage of personnel in key areas.

The share of primary education in ORT increased from 4.8% of the total ORT in 1999/2000 to 5.4% of total ORT in 2000/2001.

Achieve yearly enrollment of 6000 students for teacher training and institute in service training for all primary school teachers at least once a year.

Prepackage donor supplied primary textbooks for each school to be delivered directly from supplier to the school.

Revised est. Revised est. Budget 2000/01 2001/02 2002/03 Share of primary education in ORT 2.7% 7.3% 6.5%

2001/02 2002/03Number of students enrolled for teacher training: 2489 3156

The Ministry has introduced a Textbook Revolving Fund system where books are bought through a book fare. Schools choose their appropriate books from a book fare and the suppliers of the chosen books pack and deliver them straight to the schools.

For donor-supplied books the donors themselves deliver the books directly from the port to the schools.

Secondary education: Disparity in quality between conventional (boarding) secondary schools and the community secondary day schools due to disparity in Government funding.

Reduced budgetary allocation for boarding in Conventional Secondary Schools (CSS) from 16% of recurrent expenditures in 1999/2000 to 8.7% of recurrent expenditures in 2000/2001 and re-allocated saved money to qualitative inputs.

Eliminate the subsidy for boarding in secondary schools.

Revised est. Revised est. Budget 2000/01 2001/02 2002/03 Share of CSS boarding in ORT Budget data not available, but amount of funding to boarding has not been reduced. Secondary school annual fees increased from MWK 200 to 6000 p.a.

Tertiary education: High Government subsidy.

Announced cost recovery policy in tertiary education by increasing fees.

Further expand the cost recovery through increasing fees. In parallel develop a bursary fund to ensure that poor students are not adversely affected.

Contract out catering at tertiary institutions.

University of Malawi fees increased from MWK 1500 to 25000 p.a.(But a universal loan scheme was introduced in 2002/03 which is being administered as a grant, i.e. no repayments are anticipated)University of Malawi new full cost programs for MWK 210000 p.a. University of Mzuzu fees remained MWK 50000 p.a. and scholarship system continues as before.

Catering has not been contracted out.

Health sector: Allocation inadequate and shortage of personnel in key areas.

Increased the share of health sector ORT expenditure in total ORT expenditure from 13% in 1999/2000 to 14.5% in 2000/2001.

Annually recruit, train and deploy at least two hundred nurse technicians, fifty new medical assistants, and twenty new radiography technicians.

Revised est. Revised est. Budget 2000/01 2001/02 2002/03 Share of health sector in ORT 15.8% 17.5% 24.2%

2001/02 2002/03Number of students enrolled for nurse training: 435 435Number of students enrolled medical assistant training: 100 175Number of students enrolled radiography technician: 20 20

1. Includes Ministry of Education, Universities, MANEB, MIE, Scholarship fund, and Polytechnic Board of Governors. 2. Discretionary recurrent spending is defined as ‘Total Recurrent Expenditures’ minus ‘Statutory Expenditures’ (i.e. interest on debt, pensions and gratuities, and the Office of the President).

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Diagnosis Actions before Board Subsequent Actions/Medium Term Objectives

Actual performance in 2001/02 and 2002/03

Medicinal drugs allocation and distribution: Allocation inadequate and distribution inefficient.

Increased allocation of medicinal drugs in 2000/2001 Budget to $ 1.17 per capita to approximate better health in Africa (BHA) targets.

Implement the reform of the Central Medical Stores (CMS)

Revised est. Revised est. Budget 2000/01 2001/02 2002/03 Allocation of medicinal drugs (USD per capita): $1.48 $1.44 $1.23

The implementation of the CMS reform has not yet started.Cost recovery: Subsidy for goods and services which do not have a strong public good element.

Announced a cost recovery policy including a schedule of prices to be charged for passports, visas, motor vehicle licenses and police reports.

Use partial or full cost recovery where the case for public provision of goods or services is weak.

Cost recovery policy introduced for passports, visas, motor vehicle licenses and police reports, but collections are not remitted to MOF.

Rationalization of development projects: Development budget coverage incomplete for aid financed projects and project prioritization weak.

Established a detailed project database within Ministry of Finance expanding the coverage to aid financed projects.

Restricted entry of new projects in the 2000/2001 Budget to only high priority sectors on the basis of the PER.

Restricted, suspended or dropped specific low-priority projects in the 2000/2001 Budget.

Establish a mechanism by which all proposed new projects are screened by a specifically created committee chaired by a senior official of the Ministry of Finance.

Continue the process of rationalization of the development budget.

The rationalization of development projects has not occurred. The database at the MOF is neither used nor updated.

Expenditure Management Fiscal transparency: Expenditure outcomes are not publicly available until after the end of the fiscal year.

Announced a "Ten Point Plan" to improve financial management.

Posted on a Government web site expenditure on core programs in the 2000/2001 Budget, and actual outturn as of September 2000.

Budgetary outturns for core programs will be posted on the web with a delay of no more than six months.

Information on Budget expenditures has not been posted on web since Board approval date.

Expenditure arrears: Arrears by Government to the domestic private sector had a tendency to build up since early 1998.

Issued circular (March 2000) requiring controlling officers to maintain an up-to-date commitment register. Ministries which do not submit the commitment and expenditure returns timely would not be funded.

Strengthened the monthly cash budget system by introducing quarterly credit ceiling authority system to allow ministries to plan expenditures in advance as well as avoid accumulation of arrears.

By end 2000, an Integrated Management Financial Information System (IFMIS) will be introduced in four key ministries to inhibit over-spending and provide timely information on over commitments. This will be expanded to all ministries over three years.

Commitment register is maintained pro-forma and data are not reliable (i.e. do not coincide with actual commitments). Data submitted are not verified and Ministries continue to be funded irrespectively. Cash budget system with credit ceiling authority is not enforced and arrears are persistently accumulated. Sanctions are never enforced.

IFMIS pilot in four ministries only begun in late 2002 (and should be completed shortly) in the context of the proposed FIMTAP project.

Parastatal finances: Monitoring is weak.

Created a new parastatal monitoring unit in the MOF.

Balance sheets and profit and loss accounts of 5 largest parastatals, as of

Finances of 5 largest parastatals posted on the web will be updated with a delay of no more than six months.

A new system for authorizing parastatal borrowing will be

Parastatal Monitoring Unit (PERMU) is operational and produces quarterly reports on parastatal finances. Information in not posted on the web however (not even the end of year accounts).

System for authorizing parastatal borrowing still being discussed. Part of Financial Management Act to be submitted in Parliament in April 2003. Government has not authorized parastatal borrowing in 2001/02 and 2002/03

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June 2000, have been posted on the web.

designed and implemented. however (except for NFRA –- see below).

Auditing reform:The capacity and the authority of the Auditor-General are weak.

Cabinet has taken the decision to separate the financial management and auditing functions by enacting new legislation.

Initiated the contracting of TA for the Accountant General and Auditor General’s office.

Draft and pass legislation to create new legislation to separate the financial management and auditing functions.

Create a fully independent Auditor-General's office, with adequate staffing, budgetary provision.

Raise the audit coverage of ministries from 45% in 1999 to 75% in 2002.

Financial Management Bill and Audit Bill to be submitted to Parliament in April 2003.

Auditor-General Office is not independent and funding is determined by MOF.

Audit coverage of ministries from 45% in 1999 to approx 60% in 2002.

Procurement reform Procurement is centralized, straining capacity and leading to delays and mis-procurement.

Cabinet has approved the results of the phase I of the study which decentralizes the procurement process, and has directed the Ministry of Finance to proceed with the implementation.

By 2002, using the TA operation, put in place a new legal framework for the procurement authority and create a well staffed authority and a transparent procurement process.

Implementation of procurement reforms has not yet started.

Tax administration There is scope for improvement in revenue collection as evasion is commonplace.

Created a fully functional, self financing Malawi Revenue Authority (MRA). The budget makes a provision for MRA to retain 1.65% of the tax revenue to finance its operations.

Further improve the MRA operations by staff training.

Malawi Revenue Authority (MRA) is fully operational and has been performing extremely well, as reflected by an increase in tax revenues of approx 3.5% of GDP (in part to be attributed to changes in tax policy). Provision for MRA retention increased to 2.25% of tax revenue.

B. Private Sector DevelopmentFinancial sector ReformsThe financial sector is publicly owned and oligopolistic. Efficiency, as measured by interest rate spreads and the limited range of financial instruments, is low.

Commercial Bank of Malawi (CBM) brought to the point of sale by issuing an information memorandum.

Complete by early 2001 a new comprehensive regulatory framework. Conclude the sale of the CBM

CBM has been privatized. Other banking and financial institutions have also entered the market.

Comprehensive regulatory framework has not been prepared.

Privatization of infrastructure (transactions)Infrastructure services are among the top constraints to private sector development.

The Malawi Posts and Telecommunications Corporation (MPTC) legally separated into two corporate entities.

Registration for internet service providers (ISPs) fully liberalized (15 ISPs registered to date).

Communicated policy decision for a limited liberalization of basic telephony services.

Published a request for expression of interest for the purchase and subscription of shares in the MTL.

Will issue an information memorandum (IM) for the sale of Malawi Telecommunications Limited shares before the credit is effective.

Full liberalization of cellular services by 2003.

Full liberalization of all telecom services (gateways, VSATs for voice linking networks) by 2005.

MTL has not yet been privatized. Previous attempt failed in mid-2002 as one member of consortium identified as preferred bidder pulled out. A new process has been started.

Cellular services have been liberalized (currently 2 licences and a third is being considered).

Liberalization of Petroleum Marketing:

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Up to 1999 imports were carried out by the Petroleum Control Commission (PCC), a parastatal. There were problems of account-abi-lity and transparency in the PCC.Prices of petroleum products were unnecessarily high due to the lack of competition.

Private imports of petroleum legalized.

Private sector imports of petroleum began May 1, 2000.

PCC split into a regulatory agency (also called PCC) and a supplier of storage services (called ORTEX).

ORTEX has so far not engaged in any market operations.

A petroleum supply study will be carried out to examine further liberalization of the petroleum markets.

Privatize ORTEX by May 2002.

Petroleum importing and marketing has been privatized.

ORTEX has been liquidated in May 2002.

Diagnosis Actions before Board Subsequent Actions/Medium Term Objectives

Actual performance in 2001/02 and 2002/03

C. Safety netsSafety net strategyThere is no coordinated safety net strategy, leading to waste, duplication of efforts and gaps in coverage.

Approved a national safety nets strategy (NSNS). Created an institutional structure to implement the strategy.

Ensure that all old and new safety net programs are designed and prioritized in line with the medium term objectives of the NSNS.

Implementation of the NSNS has not yet started.

Starter Pack ProgramRestructuring the Starter Pack Program, which is currently untargeted and therefore fiscally unsustainable and cost ineffective.

Converted the Starter Pack Program to a Targeted Input Program (TIP) covering only 1.5 million households for the 2000/01 planting season compared to a coverage of 2.89 million households in the last season.

Reduced budgetary allocation to the TIP from $27 million in 1999/2000 to $2 million equivalent in the 2000/2001 Budget.

Gradually reduce the TIP coverage and improve the targeting mechanisms and integrate it within the NSNS.

TIP introduced in 2000/01 and 2001/02. Decision to revert to universal TIP (donor funded) in 2002/03, as a result of recent food crisis. The intention is to reduce number of TIP beneficiaries over time, but no clear plan has been decided.

Restructuring National Food Reserve AgencyThe National Food Reserve Agency (NFRA) lacks a rationally defined mandate, clear rules of intervention, and financial ceilings.

Amended the NFRA deed to restrict it to being a strategic grain reserve exclusively involved in disaster and relief activities. This brings the NFRA under the National Safety Net strategy as one of the poverty relief instruments for emergency situations.

Taken the decision to limit the maize stocks to be held by the NFRA to 60,000 tones. No new funds programmed in the 2000/01 budget, or new borrowing was authorized.

Tenders have been invited from private traders to sell excess stocks. So far 72,000 tones have been contracted to be sold.

Develop NFRA into a well functioning strategic grain reserve as per the new deed.

Unauthorized sales of NFRA maize stocks by ADMARC led to the absence of maize reserves at the time of food crisis. Reserves have since been restocked.

The government did not use part of the FRDP III credit to capitalize NFRA, as had been agreed. In addition, the government authorized new borrowing by NFRA at non-concessional rates, which led to a subsequent bailout of NFRA in 2001/02.

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)AppraisalEstimate

Actual/Latest Estimate

Percentage of Appraisal

Component US$ million US$ millionBalance of Payment support (credit 34520) - single tranche, January 29, 2001Of which: credit 55.10 55.52 IDA reflows 0.50 0.50

Total Baseline Cost 55.60 56.02Total Project Costs 55.60 56.02

Total Financing Required 55.60 56.02

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Annex 3. Economic Costs and Benefits

n.a.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation10/14/1999 to 10/19/2000

23 1 Sector Manager9 Economists2 FMS1 Health Specialist1 Agriculture Specialist4 Consultants2 RAs2 ACS

Appraisal/Negotiation08/28/2000 to 12/21/2000

14 7 Economists2 Agricultural Specialists1 Procurement Specialist1 Financial Specialist1 RA1 Consultant1 ACS

SupervisionNo supervision (single tranche operation)

ICR11/01/2002 to 03/31/2003

5 2 Economists1 Consultant1 RA1 ACS

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 61.9 237.4Appraisal/Negotiation 34.3 117.4SupervisionICR 8 25.0Total 104.3 379.8

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

MINISTRY OF FINANCEEVALUATION REPORT

ON A LOAN/CREDIT

IN THE AMOUNT OF SDR 43.5 MILLION (US$ 55.6 MILLION) AND SDR 2.4 MILLION (US$ 3 MILLION) AS TECHNICAL ASSISTANCE

TOTHE MALAWI GOVERNMENT

FOR THETHIRD FISCAL RESTRUCTURING AND DEREGULATION PROGRAM (FRDP III)

DECEMBER 2002

1. The Third Fiscal Restructuring and Deregulation Program (FRDP III)

1.1. Overview

Soon after 1994, the democratically elected Government embarked on a large and complex agenda of policy reforms and institutional change to uplift the economy from deterioration due to external shocks and poor economic management. One such policy reform was the Third Fiscal Restructuring and Deregulation Program (FRDP III) supported by the World Bank (see Table 1). The Government got a credit of SDR43.5 million (US$55.6 million equivalent) from the International Development Association (IDA) in support of the continuation of structural reform program. The project document was signed on December 21, 2000 and application number 1 amounting to SDR43.1 million was paid on January 30, 2001. The credit helped to meet balance of payment financing requirements.

FRDP III was designed to consolidate gains arising from structural reforms undertaken under the First and Second Fiscal Restructuring and Deregulation Program (FRDP I and II). FRDP III’s aim was to further deepen the reform process with a view to ensuring macroeconomic stability and promoting sustainable economic growth with poverty reduction. The credit included Technical Assistance (TA) amounting to SDR 2.4 million (US$3.0 million equivalent) (see Table 2). This report been done in the context of the evaluation of the FRDP III structural adjustment credit which closed on June 30, 2002. Some of the comments raised, however, may pertain to the FRDP III technical assistance credit as well. The technical assistance credit is still ongoing and is expected to close in December 2003.

1.2. Objectives of FRDP III

The FRDP III continued the adjustment agenda, which was set to: • Improve the management of the public sector through increased transparency and rationalization of expenditure in line with defined priorities,• Strengthen the Government’s procurement and auditing services,• Encourage private sector development through liberalization of key sectors, and• Introduce a national safety net strategy.

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The FRDP III credit included Technical Assistance (TA) funds to assist in the following areas:• Evaluation of the impact of the FRDP III program, and • Development of the agenda for the next macro-economic and sectoral policy reforms.

2. Structural Components

The project consisted of the following three major components: public sector management, private sector development and safety net.

2.1. Public Sector Management

This component was aimed at the following:• Improving the allocation of public expenditure in line with the recommendations of the public expenditure review (Joint World Bank and Malawi Government Public Expenditure Review 2001),• Improving the transparency and monitoring of public expenditure, and• Improving efficiency by operationalizing the Malawi Revenue Authority (MRA).

2.2. Private Sector Development

This component was aimed at the following: • Liberalizing Telecommunications,• Liberalizing petroleum import/retail marketing, and• Liberalizing the financial sector.

2.3. Safety Net

This component sought to do the following: • Designing and creating an institutional structure for implementation of a National Safety Net Strategy (NSNS),• Transforming the starter pack program into a targeted input program (TIP) and incorporating it into the NSNS, and• Reforming the National Food Reserve Agency (NFRA) and limiting its role to that of a strategic grain reserve engaged in disaster and relief operations.

3. Achievement of Development Objective

The main objective of FRDP III was to support policy reforms designed to accelerate economic growth and reduce poverty. However, the economic prospects show that the country had little potential to achieve high economic growth. The macroeconomic situation remains tenuous as private sector activity is being strained by an extended period of expansionary fiscal policies (see Table 3). Real gross domestic product (GDP) growth slowed down from 8.2 percent in 1996 to 2.0 percent in 2000 and the economy grew by –4.5 percent in 2001 compared to a projection of 2.3 percent for the year. The situation was compounded with the problem of food shortage in 2001/02. According to the latest information, the economy grew by 1.8 percent in 2002. The economic stagnation reflected the contraction in the small-scale agriculture and manufacturing sectors.

Despite failing to achieve the targeted economic growth, money growth of 17 percent was recorded and fiscal deficit (after grant) decreased from 4 percent of GDP in 1999/2000 to 2.8 percent of GDP in

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2000/2001. In addition, inflation and interest rates continued to decline. On a good note, inflation in 2002 decelerated to 14.8 percent compared to 27.5 percent in 2001. The slow down of inflation was due to tight monetary policy and improved availability of imported food, which dampened pressure on food inflation. As of November 2002 interest rate (bank rate) stood at 40 percent (See economic report 2002, NEC, Government of Malawi). However, the development objective of supporting the Malawi Government to implement the FRDP III has been achieved to some varied degree. More specifically, the reforms have improved the poverty focus of public expenditures and created a more favorable environment for the operation of the private sector. The share of expenditures going to health, education, gender, youth and community services has increased over the entire period. The country has experienced a marked increase in gross primary education enrollment rates due to increased resources combined with the policy of universal free primary education.

In the private sector, much progress has been observed in privatizing the major commercial banks, namely, the Commercial Bank of Malawi and the National Bank of Malawi. Following the liberalization of the telecommunications sector, there are now several players participating in the sector. In the safety net part, the Government has instituted the targeted input programme (TIP), which targets the most vulnerable and poor Malawi.

4. Assessment of Outcome

4.1 Public Sector Management

4.1.1 Public Expenditure Rationalization

The reforms have improved the poverty focus of public expenditures and created a more favorable environment for the operation of the private sector. Since 1998, the Government has made an effort to prioritise expenditures. As indicated in Table 4, the share of expenditures going to health, education and community services has increased over the period under review. In the 2002/03 budget, the allocations to pro-poor expenditure (PPE) programs increased by 4.4 percent of GDP, building upon the already higher allocation for Pro-Poor Expenditures (PPEs) in the 2001/02 budget, which increased by over 2 percent of GDP. More specifically, the observed outcomes are as follows:

Education

In the education sector, free primary education has greatly improved access to primary education. Enrolment is estimated to be about 3.3 million. However, the quality and internal efficiency of the system has been compromised. To respond to this issue, the Government increased resource allocations to teaching and learning materials from K146 million in 2000/01 to K600 million in 2001/02 whereas allocation for teacher training increased from K81.1 million in 2000/01 to K350 million in 2001/02. The resources have been used to train 2849 and 3156 teachers who were enrolled in 2001 and 2002, respectively.

Complemented by the Canadian International Development Agency (CIDA), 11.4 million textbooks, worth 15 million Canadian Dollars, have been delivered to all the primary schools. This ensured textbook for every primary school pupil. The United Kingdom’s Department for International Development (DFID) has also included an allocation for teaching and learning materials for 1,936 schools in its seven-year Support to Education Sector Programme (SESP). The Government has also introduced a Textbook Revolving Fund (TRF) and students are contributing K250.00 per year for the replacement of torn and lost books.

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In a bid to achieve full contribution towards some goods and services, Government revised secondary school boarding fees from K30 per term to K1, 500 per term. This was intended to shift resources previously earmarked for secondary schools to primary education. In addition, students at the University of Malawi are now required to contribute K25, 000.00 per year as opposed to K1, 500.00 per year, which was the case before. At the University of Mzuzu, students are paying a financial contribution of K45,000.00 per year. Furthermore, parallel programmes have been introduced whereby students are paying full cost of the programmes. For those students who cannot afford to pay, the Government provides loans. At the moment, the criteria are being developed which will consider needy students and those who are eligible for loans. A proposal is under consideration to administer loans in districts.

Health

Since 2000/01 fiscal year, Other Recurrent Transaction (ORT) expenditure allocations to the health sector have been budgeted above the program target of 13 percent of total recurrent expenditure ORT (See Table 4). Much effort has been made in the area of human development. Hence, in 2001/02, a total of 54 health worker tutors were enrolled for an upgrading course at Mzuzu University. In other health worker training institutions, as many as 1,086 health workers are earmarked for training annually. Cadres being trained are nurses, clinical officers, medical assistants, laboratory technicians, pharmacy technicians and radiography technicians. Further to this, the Government will recruit more auxiliary nurses to cater for the shortage of nurses in the country.

Government has drastically increased allocations for essential drugs and pharmaceuticals to more than US$1.25 per capita, World Health Organisation (WHO) recommended standard for Sub-Sahara Africa. To enhance efficiency and effectiveness in procurement and distribution of drugs and pharmaceuticals, Government is in the process of reviewing organizational structure and functions of the Central Medical Stores (CMS).

Cost Recovery

Government has managed to implement cost recovery policies including the scheduling of fees. The cost of applying for passports has been raised from K250.00 to K4,000.00 and the Government is intending to increase further to fully cover the whole cost of processing a passport. In addition, the general public is now required to meet costs of police reports, passports, licenses, some health services, and tuition and boarding fees in secondary schools.

4.1.1 Expenditure Management

In the expenditure management area, the Government is working hard in making the pro poor expenditure outcomes publicly made available by posting them on Ministry of Finance website. Since December 2002, the Government started publishing the pro-poor expenditures returns in the local media. The Government is also straining its efforts in reducing the accumulation of arrears, especially to the domestic private sector. Further to this, there is some considerable work in improving the monitoring of parastatal finances, improving the capacity and authority of the Auditor General and improving procurement processes in Malawi. More specifically, the following are being undertaken:

• The Government has set conditions to improve fiscal transparency whereby budgetary outturns for core programs are posted on the Ministry of Finance website. Effort is being made to improve existing reporting systems to capture the transactions on a weekly basis. The Government is enhancing the computerization of the Credit Ceiling Allocation (CCA) system through a project in the Reserve Bank of

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Malawi. Monitoring reports are being produced on a regular basis and being reviewed by the Cabinet Committee on the Economy to crosscheck diversions in the budget. • The Government is also monitoring and preventing expenditure arrears by undertaking a comprehensive inventory of all payment arrears as of June 2002. Ministries and/or Departments are also able to produce and maintain an up-to-date expenditure commitment register. The actual commitments, however, are restricted to a monthly CCA. To facilitate this further, the Government has extended the agency payment system to a number of line ministries experiencing a large accumulation of utility arrears. The question is quality of financial statements and information in the commitment registers. • The Government has also established the Public Enterprise Reform and Monitoring Unit (PERMU) in the Ministry of Finance to monitor the financial performance of the ten largest public enterprises, including the Agricultural Development and Marketing Corporation (ADMARC), the Electricity Supply Corporation of Malawi (ESCOM), the Malawi Telecommunications Limited (MTL), the Malawi Housing Corporation, Blantyre Water Board, and Southern Region Water Board. Guidelines have been developed for borrowing by parastatals and are awaiting Cabinet approval. Some key parastatals have already started declaring dividends to the government for the first time in history (For examples of parastatals, which have declared dividends to the government, see the Budget Statement 2002/03).• Under the FRDP III TA component, the Government is in the process of separating the current Finance and Audit Act into the Public Finance Management and the Public Audit legislations. Change Consulting from New Zealand have already finalized the preparation of the drafts of Public Finance Management Bill and Public Audit Bill and stakeholders meetings have been completed. The Task Force working on the review has already visited South Africa and New Zealand to learn from the experiences of these countries. It is expected that the bills will be presented to Cabinet and Parliament in early 2003. The Government is also facilitating the institutional reform program for National Audit Office. Cowater International Consultant from Canada has done the institutional reform of National Audit Office. All deliverables (manuals) except the Public Accounts Committee of Parliament report have been produced. This aims at strengthening the capacity and authority of technical advisory services (See Table 5). The office of the Auditor-General has recruited 15 graduates and 22 other personnel with ACCA to improve capacity.

• With procurement reform, the program proposed the development of the new Procurement Act and supporting regulation, the creation of National Procurement Authority and Procurement Code, the implementation of capacity building program for procurement cadre, the rationalization of stores, and introduction of computerized stores. Currently, Cabinet has approved the new Procurement Bill. In addition, recruitment of consultants on capacity building program for procurement cadre is underway. Equipments such as vehicles have already been purchased. Other outputs have not been achieved and a schedule to these activities has been changed and was discussed with the World Bank (See Table 5, Table 6 and Table 7).

Despite these achievements, public expenditure management has not been satisfactory. Although the Government has managed to contain aggregate expenditure in line with the total budget, the actual allocation fall short of the desired cash flow funding due to low revenue collections and donor withdraw. Much of the little that is collected is allocated to statutory expenditures, especially public debt.

4.1.2 Resource Mobilization

FRDP III was designed to improve tax administration in order to foster the increase in revenue collection through proper operationalisation of the Malawi Revenue Authority (MRA). So far, the Government has implemented several tax measures such as the extension of surtax to the wholesale and retail stages, and the

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increase of the excise and duty rates on motor vehicles and alcohol. The Government has also temporarily suspended discretionary duty exemptions other than on donations or imports by diplomatic missions.

There is also on going capacity building in MRA to strengthen tax administration and enforcement. MRA is further computerizing its operations, recruiting and training staff to monitor tax receipts and ensuring a reduction in delays for the refund of surtax to small businesses. The Government has now improved the collection of tax from 15 percent of GDP to 17 percent of GDP. With the extension of surtax to the wholesale and retail stages, the Government envisages a further increase in tax collection. However, between March 2000 and February 2001, MRA collected on average MK64.59 for every MK1.00 they spent from the 1.65 percent retention fee whereas the Customs and Income Tax Department collected MK104.55 for every MK1.00 they spent from budgetary allocations (see “Revenue Collection…Which Way”, Quarterly Tax Bulletin, August 2001). It seems that MRA operations are more costly than was the case when Government departments collected the revenues. This is a result of high overheads being incurred by the MRA. Hence, there is further need to improve the restructuring of MRA and building capacity to strengthen tax administration and enforcement.

4.2 Private Sector Development

Under the FRDP, the Government embarked on a privatization program that started with the manufacturing sector but is now being extended to utilities and infrastructure sectors. Assessing the outcome of this program, the following are observed: • Solid progress has been made on telecommunications, which has currently seen an increase in the number of cellular operators (there are 2 registered operators and the third operator is on the verge of being registered) and the number of cell phones. The number of cell phones has increased from 5,000 in 1995 to 24,000 in 1999. In addition, telephone penetration rate has greatly improved. • In the financial sector, Commercial Bank of Malawi has been privatized (December 2001). Indebank was made a commercial bank in 2002 and Cabinet has approved a comprehensive review of the financial sector regulatory framework. • Similarly, liberalization of petroleum marketing has been most successful. At the moment, private companies are importing petroleum without restrictions. There has been mushrooming of filling stations all over the country, both by individuals and companies.• The Government is commercializing ADMARC in preparation for its privatization. Much progress has been made to privatize or liquidate ADMARC’s non-core assets as David Whitehead and Sons, Shire Bus Lines, Grain and Milling, and Cold Storage. Similarly the Government has instructed the Preivatization Commission to divest ADMARC’s minority shareholdings (in Sugar Corporation of Malawi and the National Bank of Malawi Limited). • However, the performance of the private sector has not been satisfactory owing to a number of obstacles. Key obstacles include macroeconomic instability (high interest and inflation rates and unstable exchange rate), high transport and infrastructure costs, management constraints and considerable involvement in the economy by Government through statutory corporations.

4.3 Create a Safety Net• A National Safety Nets Programme (NSNP) forms main features of the Malawi Poverty Reduction Strategy Paper (MPRSP). The NSNP has four components, namely, Safety Nets Inputs Sub-Programme (SNIP), Public Works Sub-Programme (PWP), Targeted Nutrition Sub-Programme (TNP), and Direct Transfers Scheme (DTS). The four components are not exclusive as have areas of overlap between them, which can be utilized to improve targeting, and the delivery of transfers.• Government approved the NSNP Programme Concept Document in February 2002. According to

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the programme, the policy design and review shall remain the responsibility of the Department of Economic Planning and Development (DEPD). The Ministry of Poverty Alleviation Programmes, Disaster Preparedness and Rehabilitation shall coordinate the implementation of the programme with districts directly involved in the actual implementation. DEPD will also coordinate the monitoring and evaluation of the programme and indicators have been developed for monitoring progress and impact of the programme.• Many donors have been supporting different types of safety net activities and DFID has provided significant levels of funding in recent years. The Department is providing institutional support to the DEPD, involved in pilot safety net projects, supporting expanded public works programme through the Malawi Social Action Fund (MASAF). It is also supporting the targeted inputs programme (TIP).• The Government implemented the targeted inputs programme in the 2001/02 agricultural season. The intervention involved free distribution of inputs (cereals seeds, legumes seeds and fertilizer) to resource poor Malawians. Apart from the Government and DFID, the European Union (EU) also funded the programme. The programme targeted 2 million beneficiaries in 2001/02 and it is proposed that 3 million people will benefit from TIP in 2002/03. Nevertheless, Malawi is food insecure due to drought and over-flooding in some areas. As such, the number of beneficiaries was increased in 2002/03 to service most vulnerable groups. • Under the new arrangement supported by the World Bank, the National Food Reserve Agency (NFRA) was designed purely for emergency relief operations in times of drought and ADMARC has been restricted to commercial operations. However, with the experience of a severe food crisis in early 2002, NRFA, on behalf of the Government, imported maize for sale to ADMARC. Hence, the Government needs to revisit the NFRA operational policy, concentrating on level of stocks, self-financing of NFRA and storage facilities.

5 Other Reforms under FRDP III TA

5.1. Wage Policy Review

The government is developing a medium-term wage policy linked to civil service reform to improve wage competitiveness, lower attrition rates and strengthen public sector performance. A consultant has been contracted to work on this and work is currently in progress. An inception report has been prepared and discussed with Government and it is expected that the work will be finalized by end February 2003.

5.2. Other Studies

The TA component has also assisted in carrying out further studies to improve public sector management through the provision of technical advisory services. On macro and sectoral reforms, the project has catered for the following studies: Quantitative Model for Macroeconomic and Poverty Scenarios; Costing for Poverty Reduction Strategy; Food Availability and Accessibility Assessment; Tax Reform Study; and Energy Policy Study. The last two were under FRDP II but were completed with some funds from FRDP III (See table 8 for studies done under FRDP).

6. Major Factors Affecting Implementation and Outcome

The project has been significantly affected by factors within and outside the control of Government as follows:• The TA credit was supposed to be implemented by the Ministry of Finance under the supervision of the Secretary to the Treasury where a Task force was supposed to guide each aspect of the TA program. However, there was lack of coordination in the implementation of various activities with respect to

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proposed components.• All procurements were carried out in accordance with the Bank’s Guidelines for Procurement under IBRD Loans and IDA Credits. Procurement of local equipments under the project followed Government procedures through approval by Internal Procurement Committee (IPC) in the Government Contracting- Out Unit. • The hiring of all consultants was done after the approval of the World Bank but the procedure was long and tended to be delayed, especially with small consultancies.• Lack of capacity in the implementation of the projects, especially the accounting personnel.• The delay in the follow up of financial inflows after the first tranche, especially with the TA component, which has so far received a disbursement amounting to SDR400,000. Disbursement has been low due to delays in the procurement reform process. • Under FRDP II, there was a Task Force, which monitored all the progress done under the program. Under FRDP III, the TA component has a Task Force that is monitoring the progress of the review of the current Public Finance and Audit Act but not the whole FRDP III TA Component. This makes it difficult to follow on the progress being made in the implementation of the Project.

7. Cost and Financing

The Project has performed well within the activities it has executed but has yet to spend funds on consultancy, workshops and conferences in the review of Public Finance and Audit Act. Under FRDP III TA Component, the Government raised concern regarding the disbursement categories listed in schedule 1 of the DCA that are inconsistent with the expenditure categories agreed at negotiations for procurement reform. In that, no provision was made for operating costs (refer to letter dated 31st July 2002 to the World Bank entitled ‘Malawi-FRDP III TA (Cr. 3451-MAI), Proposed Amendments of Schedule 1 and Schedule 6 to the DCA’). In view of this, Government requested the Bank in early August 2002 to amend Schedule 1 to the DCA to allow operating costs to be eligible for financing under the credit. A reply is being awaited from the Bank.

Disbursements and withdraw of funds were subject to the conditions of the Credit Agreement. Payments for local purchases of office equipment has been settled both by foreign and local contributions as stipulated in the DCA. As indicated in table 9, the whole tranche of FRDP III was disbursed but the reflow of the TA Component was done once on January 11, 2002. As pointed out earlier, the delay is due to some unresolved issues in the procurement reform. The same picture is depicted in table 10 under FRDP III TA project cost allocation and expenditures.

8. Bank’s Performance

The Bank was very much instrumental in supporting implementation of the FRDP III TA Credit. The Bank has assisted in drawing the logical framework of the Project and has also facilitated the monitoring and implementation of the Project. The Bank has established the Project Monitoring and Evaluation Task Force from various projects. The Task Force has been reviewing the progress of various projects, FRDP III TA project inclusive.

Within this short period the Bank has mounted supervision missions to monitor the technical assistance part of the FRDP III credit and several meetings with the Bank’s staff have been held. In these meetings, the Bank has provided guidance on the preparation of progress reports and draft Aid- Memoires have been submitted to Government. It is observed that these draft Aid Memoires should be submitted to Government earlier before wrap-up meetings for maximum consultations in Government. Overall, therefore, Bank

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performance has been satisfactory during preparation, appraisal and implementation.

9. Recommendations

Based on the project design, organization and implementation, the following conclusions and recommendations are made: • The Bank is requested to resume disbursement of FRDP III TA credit fund because some progress has been made in procurement reform. The proposed procurement code is ready for Cabinet approval and is expected in the next seating of Parliament in May, 2003. • There is need to improve capacity in project planning and management, specifically with officers responsible for coordinating the project in the ministry. The World Bank should continue to offer training in this area with full funding.• Mechanisms should be put in place to ensure adequate and timely communication between line ministries, departments and lending institution for the smooth implementation of activities.• Oversight ministerial responsibility on the project with a clear mandate and authority, incentive packages, transport and communication and budget from the project funds ought to be in place as lack of these has contributed heavily to the delay in the implementation of some project activities.• A Steering Committee of Principal Secretaries chaired by the Secretary to the Treasury including Principal Secretary of DEPD and the General Manager (Economic Services) of Reserve Bank of Malawi should be formed to monitor the implementation and progress as agreed in the project agreement.• Administratively, under the TA, an accountant responsible for maintaining project accounts should be employed for easy tracking of expenditure returns. Whenever procurements are being made they should always be backed by an appropriate authorized minute from the Project Coordinator or Project Officer.

Table 1: Bank Credit on FRDPLoan Purpose Year of

ApprovalStatus

First Fiscal Restructuring and Deregulation Program (FRDP I)

-Structural adjustment-Macroeconomic stabilization-Medium Term Expenditure Framework (MTEF)-Agricultural Marketing Liberalization-Comprehensive civil service reform

1996

Fully disbursed, except TA component

Second Fiscal Restructuring and Deregulation Program (FRDP II)

FRDP II Technical Assistance Project (FRDP II TA)

-Structural adjustment-Expenditure prioritization-Labor market reform-Civil service reform-Continuation of privatization program-Tariff and surtax reforms

-Providing funding for technical assistance-Consultancies-Studies-Training to support the FRDP II

1998

Fully disbursed

Third Fiscal Restructuring and Deregulation Program (FRDPIII)

FRDP III Technical Assistance Project (FRDP III TA)

-Structural adjustment-Auditing and procurement reform-Telecom privatization-Banking and agricultural marketing Privatization

-Providing funding for technical assistance-Consultancies-Studies-Training to support the FRDP III

2000

Fully disbursed

Still in progress

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Table 2: The FRDP III TA Project Costs by Components (Credit No. 3451-MAI) Components Inputs (US$ million)Public Sector Procurement US$ 2.40

Public Sector Financial Management US$ 0.40Preparing next phase of structural and sectoral reform program US$ 0.20

Total US$ 3.00Source: Project Document

Table 3: Some Basic Macroeconomic Indicators

Variable 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002GDP growth rate (%) 10.3 -11.6 14.3 10.4 7.0 2.2 3.6 2.0 -4.1 1.8Fiscal Deficit (inc. grants)/GDP 5.4 15.0 5.7 4.4 5.2 3.4 5.6 5.7 7.7 3.1Inflation rate (%) 22.8 34.7 83.1 37.7 9.1 29.7 44.9 29.5 27.2 14.8Domestic savings/GDP 0.2 1.7 6.7 2.2 -0.7 8.0 -0.6 3.4 4.8 -3.5Investment over GDP 14.0 29.1 17.2 12.2 11.9 13.5 14.5 13.6 13.9 10.5Interest lending rates percent 31.0 47.3 45.3 28.3 37.7 53.6 53.6 52.0Current account deficit/GDP 11.9 16.9 5.2 7.6 11.0 1.4 12.5 5.5 10.4 15.1Exchange rate (MK/US$1) 4.4 8.7 15.3 15.3 16.4 31.1 44.1 59.5 72.2 80.0Money growth (broad %) 41.8 39.9 43.7 60.3 -1.7 41.1 33.6 42.4 21.2Official reserves (months import) 5.7 3.1 5.4 5.0 4.7 4.4External debt/GDP 83 150 140 97.6 95.9 138 144 156 149 176

Source: Various Economic Reports, RBM financial statements

Table 4: Key Indicators for Project Operation: StructuralStructural Indicators 2000/01

Actual2001/02Revised

2002/03Estimate

Public Sector ManagementOutput based budgetRec Allocated as % of Total Voted Recurrent Exp: Education Health Agriculture Gender, Youth and Community services

Per Capita Drug

15.8312.304.080.43

US$1.16

26.4215.196.611.00

US$1.33

25.8218.457.701.60

US$1.32

Source: Financial Statements

Table 5: FRDP III TA Project OutputsOutput Progress

1. New Procurement Act approved by Parliament and supporting regulations introduced2. National Procurement Authority and Procurement cadre created

3. Capacity building program for procurement cadre implemented

4. Stores department rationalized and computerized

1. Draft procurement code is under cabinet review

2. Still under away and awaits enactment of relevant legislation.3. Recruitment of consultants on capacity building program for procurement cadre is underway4. Awaits enactment of legislation

1. Finance Act approved by Parliament

2. Audit Act approved by Parliament

3. Institutional reform program for National Audit Office

1. Draft Public Finance Management Bill is under stakeholders consideration2. Draft Public Audit Bill is under stakeholders consideration

3. Draft reports have been produced 1. Selective analysis of structural adjustment completed 1. A draft concept paper has already been discussed with IMF

mission.1. Training

2. Workshops

3. Study tour

1. 4 officers gone for long-term training2. 4 series of stakeholders’ consultative meeting held3. Study tour conducted to South Africa and New Zealand

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Table 6: Revised milestone of the Project Financial ManagementTASK ORIGINAL TIMING REVISED TIMINGHiring of consultants for legal separation and institutional development April 300, 2001 Nov. 15, 2001

Preparation of draft report outlining legal legislation for the two Acts to be drafted by Law Commissioner /Parliamentary Draftsmen. July 15, 2001 April 15, 2002Study tour June 30, 2001 August, 2002Stakeholders Conference Sept. 15, 2001 August, 2002Institutional Development Analysis July 15, 2001 May 31, 2002Report outlining programs that will increase capacity of Public Accounts Committee of the National Assembly (PAC) and other supporting organs July 15, 2001 Sept. 30, 2002Management Information Systems report outlining its design and computer equipment needed, specifications, advertisement for tender, receipt of equipment, installation.

March 31, 2002 May 31, 2002

Development of training programs for PAC and staff of the Auditor General’s Department Sept. 30, 2002 Sept. 30, 2002

Table 7: Revised milestone of the Project Procurement ReformTASK ORIGINAL TIMING REVISED TIMINGEnact new Public Procurement Act August 2001 November 30, 2002

Set up Procurement Authority October 2001 February 28, 2002Launch first training program after finalization of Plan for Capacity Building June 2001 April 30, 2002

Begin Implementation of Stores Reform

December 2001 August 31, 2002

Table 8: Studies and Consultancies included in the projectStudy Purpose Status Impact of studyPower sector policy Background for privatization of

the power sector Completed2001

Recommendation that initial stages of reform focus on distribution sector and maximizing private investment in new generation and distribution

Financial sector regulatory review

Background for revision of financial sector regulatory framework

Issue paper submitted Provided overview of sector, outlined key issues and recommendations for restructuring and privatizing financial institutions

Government of Malawi consultancy on contracting out

Update progress of contracting out Being implemented

Budgeting program for activity costing and prioritization

Assistance including software and training for activity costing related to MTEF

Employment permit policy Review recent revisions in TEP policies and recommends improvements

Recommends improvements and clarification of key “key posts” and simplification of approval process

Quantitative model for macroeconomic and poverty scenario

Establish scenarios as an input to PRSP

Completed

Costing for poverty reduction strategy

Same as above Completed

Food availability and accessibility accessTax reform study Completed The procurement reform and enacting new Public Procurement Act

Improving public procurement In progress

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Finance and Audit Act Improving financial management by reforming the auditing and accounting systems

In progress

Institutional reform of the National Audit Office

Same as above In progress

Medium Term Wage Policy

In progress

Note: Some of the studies were proposed under the first and second FRDP

Table 9: The BOP Component of FRDP III (Credit Number 3450-MAI)TRANCHE SDR AMOUNT MK’000 DATE

DISBURSEDCREDITED TO A/C NO

REMARKS

First 43,100,000.00 4,450,375 30/01/2001 300616-mwk-2011-01

Govt. A/C No.1

Reflow 400,000.00 33,745 11/01/2002 001081-mwk-2208-04

FRDP BOP Govt. A/C

Total 43,500,000.00 3,484,120Source: Reserve Bank of Malawi

Table 10: The FRDP III TA Project Cost Allocation and Expenditures in US$Category Category Description Allocation Amount Utilized1 Office Equipment 437,500.00 73,049.11

2 Consultants’ Services 1,000.000.00 333,301.993 Training, Workshops, Study Tours,

Conferences.875,000.00 167,651.83

4 Unallocated 687,500.00 -Total 3,000,000.00 574,002.93

Source: Reserve Bank of Malawi.

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Annex 8. Difference in Budgeted and Actual Expenditures (percentage of GDP), 1999/00-2001/02

Approved Actual Difference Approved Actual Difference Approved Estimate Difference

RECURRENT EXPENDITURES

General Administration 6.0 4.1 -1.9 9.6 11.3 1.7 7.2 7.4 0.2

Social Services 6.3 6.3 0.0 5.8 6.2 0.4 8.6 6.1 -2.5

Of which:

Education 2.6 2.8 0.2 2.6 2.8 0.2 3.0 3.6 0.6

Health 1.6 1.6 -0.1 1.6 2.0 0.4 2.3 2.1 -0.2

Social Security and Welfare Services 1.8 1.7 -0.1 1.5 1.3 -0.2 3.0 0.2 -2.8

Community and Social Development* 0.3 0.2 -0.1 0.2 0.2 0.0 0.3 0.2 -0.1

Economic Services 1.8 1.2 -0.6 1.3 1.3 0.0 1.8 2.0 0.2

Total Discretionary Expenditures 14.1 11.7 -2.4 16.7 18.8 2.1 17.6 15.5 -2.1

Unallocable Services** 3.5 5.2 1.7 1.0 3.8 2.8 4.7 7.0 2.3

Total Recurrent expenditure 17.6 17.8 0.3 17.7 22.6 4.9 22.3 22.5 0.2

DEVELOPMENT EXPENDITURES

Total Development Expenditure 9.3 10.5 1.2 11.2 10.3 -0.9 9.5 7.3 -2.2

TOTAL EXPENDITURES (as % of GDP) 26.9 28.3 1.4 28.9 32.8 3.9 31.7 29.8 -1.9

GDP at current market prices (million MWK) 91639 91639 109060 109060 144515 144515

* Includes Housing and Community Ammenity Services; Recreational, Cultural and Other Social Services; and Broadcasting and Publishing Services

** Public debt service, pensions and gratuities, and other statutory expenditures

1999/00 2000/01 2001/02

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