## IMF Fiscal Affairs Department mission report (PIMA), April 25-May 8, 2018 (cr18259) ## Source details **Canonical URL:** [IMF Fiscal Affairs Department mission report (PIMA), April 25-May 8, 2018 (cr18259)](https://www.imf.org/-/media/files/publications/cr/2018/cr18259.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18259.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18259.pdf.json) --- ### Mission and purpose - Mission: Fiscal Affairs Department (FAD) conducted a Public Investment Management Assessment (PIMA) and advised the Government of Malawi on improving management practices for public investment. - Timing: April 25-May 8, 2018. - Team leaders and participants: Richard Allen (FAD, mission leader); Racheeda Boukezia (FAD); Lewis Murara (FAD); Amitabh Tripathi (PFM Advisor, East AFRITAC); Graham Smith (FAD expert). - Principal engagements: Meetings with Minister of Finance Hon. Goodall Gondwe; Secretary to the Treasury Mr. Ben Botolo; Acting Chief Director EP&D Mr. Peter Simbani; Accountant General Mr. Chrighton Chimombo; Budget Director Mr. Peterson Ponderani; Director of PEFM Mr. Hetherwick Njati; Deputy Director of Debt and Aid Mr. Dave Wilima; Auditor General; Acting Director PPDA; Chief Director Performance Enforcement (OPC); Permanent Secretary Ministry of Information; Commissioner National Planning Commission; sector ministries and entities (Roads Fund Administration, Roads Authority, Lilongwe City Council, Lilongwe Water Board, MERA, MACRA); development partners (World Bank, EU, JICA, UK DFID, GIZ). - Purpose: Conduct PIMA and advise Government of Malawi on improving public investment management. ### Executive summary — context and broad facts - Infrastructure is a key element of the Malawi Growth and Development Strategy (MGDS); government has acknowledged associated fiscal risks. - Public investment highlighted in the government’s Extended Credit Facility (ECF) program with the IMF. - Historical levels and financing: - Public investment averaged about 5.5 percent of GDP in the period 1990–2015. - In recent years more than 85 percent of this investment has been externally financed. - Spending by local authorities represents only between 1.0 and 1.5 percent of the domestically-financed component of public investment. - PPPs and fiscal risk: - Several PPPs and other contracts are in the pipeline; limited public disclosure creates potential fiscal risks for debt management and fiscal stabilization. ### Public investment levels, composition, and outcomes - Comparative and outcome points: - Since the 1990s, public investment in Malawi generally lower than LIDCs in SSA and elsewhere. - Investment volatility higher relative to neighboring countries. - Nominal public capital stock is in line with the average for LIDCs and SSA countries. - Number of PPPs small historically; several large projects in education, energy and water are in the pipeline. - Perceived infrastructure quality relatively low; weak access and service delivery in education, roads, and electricity. - Stronger performance on health and access to treated water. ### PIM institutional strength and effectiveness - Overall assessment: - Institutional strength: Malawi performs broadly in line with other LIDCs and SSA countries, but less well than better-performing emerging markets. - Effectiveness: Malawi performs relatively poorly on implementation and enforcement of PIM laws/regulations. - Coverage caveat: - PIMA focuses primarily on domestically-financed investment projects (a small share of total public investment). - Externally-financed projects are generally subject to higher management standards; inclusion of these would raise Malawi’s overall rating. ### Key strengths (selected) - Comprehensive national planning system with measurable targets in national and sector strategies. - Coordination between central and local government on capital spending supported by rule-based capital transfers. - Comprehensive Public-Sector Investment Program (PSIP) as a platform for portfolio management and monitoring. - Well-enforced restrictions on moving budget funds from capital to recurrent spending. - Accountant General initiative to create a comprehensive register of non-financial assets. ### Key weaknesses and risks (selected) - Failure to apply cost-benefit analysis systematically to large projects. - Significant gaps in data published in budget documents on capital investment costs and multiyear contracts. - Unpredictability in funding of capital projects and vulnerability to in-year budget cuts. - Weaknesses in cash management contributing to a large build-up of arrears for recurrent spending and capital projects. - Lack of effectiveness and transparency in procurement. - Weaknesses in project management and implementation, including monitoring and evaluation. - Weak oversight of large projects and contingent liabilities related to domestically-financed projects outside PSIP and PPP frameworks not comprehensively assessed. - No comprehensive disclosure in the budget of SOEs' capital investment nor of PPPs. ### Expected impact of reforms - Estimates suggest that implementation of suggested reforms could substantially increase Malawi’s overall PIMA rating by 2022, potentially exceeding levels achieved by many emerging markets in Africa and other regions. ### Summary diagnostics and referenced tables - Table 1: Summary Assessment — phase-level scores of Institutional Strength and Effectiveness across Planning, Allocation, Implementation; key recommendations numbered. - Table 2: Summary of Recommendations — prioritized list highlighting quick wins and enabling reforms. ### Implementation prerequisites - Revisions to the Public Finance Management Act (PFMA) and other legislation (specific legal-change suggestions provided). - Sustained capacity building. - Technical assistance already provided by FAD and AFRITAC-East in commitment controls, cash management, and arrears management expected to yield PIM benefits. - Continued development partner support for PSIP functionalities, procurement, project appraisal, monitoring and evaluation. --- ### Planning and appraisal (detailed findings) - Project appraisal (Institutional Strength – Low; Effectiveness – Low): - No legal requirement for MDAs to conduct rigorous technical, economic and financial analyses for major projects. - PSIP Unit guidelines provide process steps but insufficient guidance on project preparation; limited central support for MDAs. - Definition: major projects defined as those costing not less than US$ 100 million; pre-feasibility study required before Cabinet Committee on Projects can consider approval. - In practice, major project proposals often submitted without pre-feasibility studies. - PSIP Unit proposed amending PFMA (2003) to make feasibility studies mandatory for major projects; threshold noted as high by international standards. - Consequences: appraisals focus on costs rather than benefits; lack of independent review leads to inadequate risk analysis (e.g., land acquisition/resettlement) and delays; government-funded projects more prone due to limited technical skills and funds for preparation. - Development partner-financed projects: - Major projects financed by development partners typically require feasibility studies as a prior condition of loan/grant agreements. - SOEs undertaking large capital projects (EGENCO, ESCOM, Roads Authority, Water Boards) always conduct feasibility studies submitted to boards and managed with ministerial oversight. - Exceptions cited: - Salima-Lilongwe Water Pipeline (approximately US$ 450 million): feasibility studies reportedly conducted outside responsible departments’ framework; limited public information; unclear value-for-money oversight. - Kam’mwamba Coal-Fired Power Project (nearly US$ 600 million): same concerns. - Proposed Infrastructure Project Development Fund (IPDF): - Purpose: finance project preparation activities (engineering, economic, financial, social, environmental studies) and consultants for project implementation plans prior to contracting investors. - Design options: development partner seed financing; two windows (traditionally-financed projects and PPPs); central management or budget allocations to MDAs with lapsing unused allocations. - Alternative: budget appropriations to MDAs and PPPC to avoid extrabudgetary fund misuse. ### National and sectoral planning (Institutional Strength – Medium; Effectiveness – Low) - Strategic framework: - MoFEPD provides strategic guidance under Malawi Vision 2020; Vision 2050 under development. - National Planning Commission legally constituted but operational establishment ongoing. - MGDS III covers 2017-2022; completed in November 2017. - Costing realism: - MGDS and sector strategies provide five-year costs but bear little resemblance to fiscal constraints. - Recommendation: sector strategies should provide comprehensive priority project descriptions, indicative life-cycle cost estimates, annual breakdowns, and expected outputs and outcomes. ### Coordination and subnational finance (Institutional Strength – Medium; Effectiveness – Medium) - Local Government Finance: - Legal mandate: Local Government Act (1998) requires 5 percent of general government discretionary spending via local councils; in practice allocation about 1–2 percent in 2016/17 and mainly used for recurrent expenditure. - LDF transfers transparent and rule-based; LDF funding represented about 10 percent of total development spending in 2016/17. - LDF disbursed MK 36 billion (US$ 50 million) in 2016/17; 95 per cent of funding provided by development partners. - Allocation formula uses population and poverty; community projects < US$100,000 devolved to district assemblies; urban projects > US$200,000 centrally managed. - Institutional transition: - LGFC and LDF consolidating into National Local Government Finance Commission; transition creates uncertainty about coordination of fiscal transfers. - Borrowing restrictions: - Local governments prohibited from borrowing without MoFEPD approval (Local Government Act, 1998); Section 48 allows loans within Malawi subject to endorsements and approval; overdrafts allowed under conditions. - PFMA Sections 72–74 (2003) prohibit statutory bodies from borrowing, raising overdrafts and extending guarantees unless approved by MoFEPD. - PPP Act (2011) Sections 57–59 allow PPPC to raise funds for PPPs subject to PFMA and require disclosure of post-transaction costs including contingent liabilities. ### Multi-year budgeting and linkages to PSIP (Institutional Strength – Medium; Effectiveness – Low) - Features: - Medium-term projections of total expenditures, revenue and financing included in annual budget documents. - AER presented to National Assembly no later than June 30th each year; EFPS presented no later than April 1st each year. - Annual budget includes projections for budget year and two outer years; development expenditure projections aligned with approved projects in PSIP. - Shortcomings: - MTEF core procedures not in place as reliable anchor. - Ceilings provided late and vary significantly; indicative ceilings in AER are only indicative with extensive revisions. - Budget documents do not publish total project costs nor breakdown over medium term; multi-year projections of development expenditures by MDAs absent. - Recommendation: provide timely ceilings, publish multi-year projections by MDAs in the budget, and strengthen link between PSIP and MTEF. --- ### Budget comprehensiveness, maintenance and project selection (Institutional Strength – Medium; Effectiveness – Medium/Low) - Budget comprehensiveness and unity — key data: - For 2016/17, over 10 percent of total expenditures were realized off-budget. - Annex 11 records off-budget expenditures and beneficiaries. - Development expenditure in PSIP and budget includes spending that is recurrent in nature, distorting capital investment composition. - Information on development budget for SOEs is not provided. - Capital spending by SOEs substantial in energy and water; published information limited. - Maintenance funding: - No standardized methodology for estimating routine/capital maintenance; Budget Manual (2009) provides no guidance. - Between 2014 and 2017, spending on maintenance was in the range 0.68 – 0.91 percent of total budgeted expenditure, excluding road maintenance financed through the fuel levy. - Maintenance budget execution (MK billions): - Routine Maintenance (2014/15, 2015/16, 2016/17) - Approved: 6.5, 6.1, 6.1 - Revised: 6.4, 5.6, 6.9 - Actual: 4.0, 5.2, 5.5 - Capital Maintenance (2014/15, 2015/16, 2016/17) - Approved: 3.6, 3.8, 8.5 - Revised: 3.5, 4.0, 9.3 - Actual: 1.2, 2.0, 3.2 - Sector exceptions: Roads Authority and Roads Fund Administration have ring-fenced fuel levy for routine/periodic maintenance; EGENCO and ESCOM target 40 percent of annual budget for operations and maintenance. - Project selection: - PSIP Unit uses eligibility criteria: strategic alignment with MGDS, capital classification, project size thresholds (over US$ 1 million for infrastructure, US$ 0.5 million for service projects), and sector mandate. - PSIP Unit generally accepts MDA-submitted information due to limited resources; donor-funded and technically capable entities submit higher-quality appraisals. - Examples of selection shortcomings: projects funded without CBA (example: project 1808 appropriated MK 200M in 2016/17 without CBA); some ongoing projects approved in PSIP not appropriated in the budget. --- ### Procurement, availability of funding, and arrears (Institutional Strength – Low; Effectiveness – Low) - Procurement: - New PPDA Act effective December 2017 prescribes open tendering default; supporting regulations/instructions not yet developed. - Compliance variable and deteriorated: overall compliance “has fallen from 65 to 15 percent.” - World Bank MAPS II: FY 2016/17 only 15 percent of procurement went through open tender for reviewed cases. - Donor-funded projects (around 85 percent of public investment) follow donor procurement rules. - Publication and transparency weak; PPDA website has very little procurement information. - Planned reforms: implement e-Procurement system and revamp PPDA website. - Monitoring, audit and complaints: - No comprehensive procurement database; PPDA does not systematically collect/publish procurement data. - Systematic procurement audits not regular; last review for FY 2014/15 limited to 20 entities. - Complaints/review process not implemented comprehensively; private sector survey indicates three-quarter of respondents did not consider complaints process fair. - Cash forecasting, budget releases and arrears: - Cash forecasts prepared annually by MDAs and not updated regularly; forecasts tend to be front-loaded and unreliable. - Cash management unit (established 2016) consolidates cash forecasts monthly but only for proposed inflows. - Monthly fund releases constrain MDAs’ ability to plan; MoFEPD exercises commitment controls monthly. - Suspended PSIP projects: increased from 17 in 2015/16 to 95 in 2016/17 due to inadequate funding. - Central government arrears at end-June 2017: MK 316.5 billion, about 6.8 percent of GDP. - NAO verified and certified MK 197.6 billion for payment; 37 percent relates to civil works. - About 35 percent of certified arrears relate to capital investment projects by the Road Fund Administration. - Donor project accounts mostly held at Reserve Bank of Malawi (RBM) and linked to main government accounts; some donor accounts at commercial banks lack corresponding RBM holding accounts. - Accountant General’s Department completed survey of government bank accounts as part of account rationalization. --- ### Portfolio management, monitoring, asset management, and audits (Institutional Strength – Medium; Effectiveness – Low) - PSIP database and project monitoring: - Centralized PSIP database developed and managed by PSIP Unit, EP&D, and Budget Division; contains pipeline and on-going projects. - Data quality variable and incomplete; excludes projects implemented by SOEs and some donor/off-budget projects. - Quarterly reporting compliance improved but inconsistent; database not systematically used by decision makers. - Recommended PSIP actions (next two years): - Develop inventory of all public investment projects and improve coverage. - Enforce quarterly reporting for all projects. - Improve reporting functionality to track progress against total project costs and lifecycle budgets. - Allocate resources for maintenance, development, and capacity building to ensure sustainability. - Reconcile and streamline parallel reporting systems and formats (OPC and MoFEPD Budget). - Publish consolidated annual report on major capital projects on MoFEPD website. - Ensure new IFMIS provides interface with PSIP database and aid management platform. - Management of project implementation: - Donor-funded projects usually have PIUs; domestically-funded projects often lack consistent project management arrangements. - Roads sector has more robust arrangements; other sectors lack consistent systems and minimum standards. - Project adjustments: - Variations allowed for civil works: up to 10 percent by implementing units; up to 15 percent with MoFEPD approval; beyond 15 percent with PPDA approval. - Ministry of Health contingency: 10 percent for major capital investments and typically tolerates a 15 percent overrun threshold. - No systematic recording of reasons for contract variations; no formal process to re-examine project rationale when costs change significantly. - Ex-post audits and asset monitoring: - Ex-post audits not routinely conducted except for donor-funded projects with audit requirements. - NAO focused on clearing backlog in annual financial audits; resource/capacity constraints limit systematic capital project audits. - NAO performance audit on LDF Projects (May 2017) covered fiscal years 2010/11 to 2013/14 and provided feedback for implementation improvements. - Asset registers required by financial regulations but not systematically maintained; Malawi uses cash-basis accounting so nonfinancial assets not recorded in balance sheet and depreciation not reflected. - Reform steps: - Accountant General circulated asset reporting template for 2017/18 financial statements consolidation. - Plan to activate asset module in IFMIS. - Intention to move towards accrual accounting in coming years; recommended phased approach beginning with inventory and valuation of existing assets. --- ### Fiscal framework, debt, and oversight of SOEs and PPPs - Fiscal rules and debt: - PFMA principles broad and lack numerical rule; EFPS required no later than April 1st each year; AER no later than June 30th each year. - Treasury-bill issuance cap: 25 percent of total budgeted revenues for current fiscal year (Article 7.8.2) — applies only to central government debt, not to other domestic instruments. - In practice, restriction not currently applied as government converts ways and means advances into T-bills when limit reached. - Public debt evolution: rose from 26.7 percent of GDP after debt relief in 2007 to 54.3 percent of GDP in 2017. - SSA average close to 45 percent of GDP in 2016. - EFPS contains no medium-term fiscal targets; fiscal policy constrained by Treasury-bill issuance target and ECF performance criteria (temporary, not embedded in law). - PFMA revision options: cap on total net domestic debt; limit on central bank financing; anchor fiscal policy on a primary fiscal balance and debt-to-GDP ratio target below 50 percent. - Successor program aims to reduce public debt from 55 percent of GDP in 2018 to 45 percent over the medium term. - SOE oversight and PPPs: - PPPC established under PPP Act 2011 to oversee/coordinate PPP policy, approve PPP projects and divestures; PPPC Secretariat advises contracting agencies, checks value-for-money and budget affordability, provides opinions including fiscal risks. - PPPC activity: since 2010 worked on/completed or partially completed six PPP transactions and three divestures; identified 24 candidate PPP projects in various preparation stages. - Key constraint: resources for feasibility and preparatory work; potential funding from IPDF or budget appropriation to PPPC. - SOE oversight fragmentation: - PERMU in MoFEPD responsible for financial oversight but limited resources. - Department of Statutory Corporations (OPC) responsible for administrative oversight. - 67 statutory bodies; about half operate commercially. - PERMU reviews SOE investment plans and financial performance but reporting is infrequent and irregular. - No consolidated report summarizing SOE investment activities, financial performance, or government support (subsidies, capital injections, on-lending, loan guarantees). - Overlapping roles among MoFEPD, parent ministries, OPC, and SOE boards — contrary to international good practice. --- ### Prioritized recommendations and timelines (selected) - Recommendation: Develop standard guidelines on project appraisal to support the PSIP process. - Update PSIP manual with guidance on project appraisal (EP&D, December 2019). - MDAs to update sector strategies with lifecycle costs, outputs and outcomes of priority projects (MDAs, December 2019). - Reference number in table: 4. Status indicator: ✔. - Recommendation: Establish an Infrastructure Project Development Fund (IPDF) or comparable financing for MDAs and PPPC. - Develop operating procedures and practices for IPDF (PSIP Unit and PPPC Secretariat, December 2018). - Recommendation: Update the PFMA to support project appraisal and PSIP Unit functions. - Mandate all capital projects be recorded in PSIP database (EP&D, PFM Reform Coordination Unit, November 2018). - Mandate CBA for all major capital projects above a defined threshold (+/- S$ 100 million) (EP&D, PFM Reform Coordination Unit, November 2018). - Recommendation: Improve SOE governance and reporting. - Strengthen and clarify financial oversight roles in revised PFMA (PERMU, November 2018). - Prepare consolidated report on SOE investment activities, financial performance and fiscal risks (PERMU, December 2019). - Procurement recommendations: - Publish procurement information and analytical reports to comply with PPDA (PPDA, October 2018). - Ensure independence and transparency of complaint review mechanisms; publish outcomes (PPDA, December 2018). - Conduct regular procurement reviews/audits with NAO (PPDA, June 2019). - Cash management and funding: - Improve cash flow forecasting to include committed expenditures for current and future years (BD, October 2018). - Move from monthly to quarterly cash releases for selected capital expenditure categories (BD, July 2018). - Inform MDAs in advance of upcoming/anticipated spending cuts (BD, July 2018). - PSIP and oversight enhancements: - Independent audit of PSIP to expand coverage, increase timeliness and functionality, reconcile with budget (EP&D, June 2019). - Ensure IFMIS technical specifications interface with PSIP and aid management platform (EP&D, October 2018). - Pilot ex-post reviews/audits of major capital projects with NAO (EP&D, June 2019). - Publish consolidated annual financial report on major capital projects (EP&D, June 2019). - Asset reporting and accounting reforms: - Require MDAs to maintain/update register of non-financial assets progressively (Accountant General with MDAs; June 2021). - Publish information on non-financial assets in the annual financial statements based on register data (Accountant General; ongoing). ### Implementation sequencing and capacity building - Legal framework: - PFM Act review underway; expected to be completed and presented to Parliament by November 2018 — opportunity to require feasibility studies for large budget-financed projects; include provisions for ex-post reviews/audits; develop supporting regulations/guidelines for project preparation, costing, PPP evaluation and risk assessment, appraisal and monitoring. - Incorporate provisions for a rule-based fiscal framework in PFMA; amend PFMA or PPP law to require systematic fiscal risk analyses and PPP disclosure. - Define institutional roles for SOE fiscal oversight to reduce fragmentation. - Capacity building: - Near-term: selective use of external consultants with emphasis on building capacity in PSIP, project appraisal, PPPs. - Medium- to long-term: develop PIM staff development strategy based on skills assessment; focus on project preparation, appraisal, land valuation/acquisition, procurement, project and contract management. - Strengthen coordination within MoFEPD and with MDAs to reconcile PSIP and aid database data and reduce duplication. --- *Source: cr18259 — IMF Fiscal Affairs Department mission report (PIMA), April 25-May 8, 2018.* ### PREFACE __________________________________________________________________________________________ 6 ### PREFACE (cr18259) ### Mission, timing, and participants - A mission from the Fiscal Affairs Department (FAD) of the International Monetary Fund visited Lilongwe during the period April 25-May 8, 2018 to conduct a Public Investment Management Assessment (PIMA) and advise the government on improving management practices for public investment. - The mission was led by Richard Allen (FAD) and included Racheeda Boukezia and Lewis Murara (both FAD), Amitabh Tripathi (PFM Advisor, East AFRITAC), and Graham Smith (FAD expert). - The mission met senior officials including: - Minister of Finance Hon. Goodall Gondwe - Secretary to the Treasury, Mr. Ben Botolo - Acting Chief Director of Economic Planning and Development (EPD), Mr. Peter Simbani - Accountant General, Mr. Chrighton Chimombo - Budget Director, Mr. Peterson Ponderani - Director of PEFM, Mr. Hetherwick Njati - Deputy Director of Debt and Aid, Mr. Dave Wilima - Other engagements included meetings with the Auditor General, Acting Director of the Public Procurement and Disposal Authority, Chief Director of the Performance Enforcement Department (Office of the President and Cabinet), Permanent Secretary of the Ministry of Information, Commissioner of the National Planning Commission, senior officials from sector ministries, entities such as the Roads Fund Administration, the Roads Authority, Lilongwe City Council, Lilongwe Water Board, Malawi Energy Regulatory Authority, Malawi Communications Regulatory Authority, and representatives of development partners. - In Blantyre the mission met with CEOs of EGENCO (Mr. William Liabunya) and ESCOM (Dr. Allexon Chiwaya), CEO of the Public Private Partnership Commission (Mr. Jimmy Lipunga), CEO of the Blantyre City Council (Dr. Alfred Chanza), and Parliamentary Budget Finance Committee leadership (Chairperson Mr. Rhyino Chiphiko and members). - Development partners consulted included the World Bank, the European Union, the Japanese International Cooperation Agency (JICA), the UK Department for International Development, and Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ). The World Bank provided drafting suggestions on the mission’s report. - The mission thanks Ms. Chikondi Phiri (Economist) and Mr. Jollam Banda (Deputy Director EPD) for logistical support, and acknowledges guidance from Mr. Jack Ree (Resident Representative) and Mrs. Audrey Kumwenda and Mrs. Susan Zimba of the IMF office in Lilongwe. ### Purpose - Conduct a Public Investment Management Assessment (PIMA) and advise the Government of Malawi on improving management practices for public investment. --- ### EXECUTIVE SUMMARY ### Context and broad facts - The government has highlighted infrastructure development as a key element of the Malawi Growth and Development Strategy (the MGDS) and has acknowledged associated fiscal risks. - Increasing public investment has been highlighted in the government’s new Extended Credit Facility (ECF) program with the IMF. - In the period 1990–2015 public investment averaged about 5.5 percent of GDP. - In recent years more than 85 percent of this investment has been externally financed. - Spending by local authorities represents only between 1.0 and 1.5 percent of the domestically-financed component of public investment. - Several public-private partnerships (PPPs) and other contracts are in the pipeline; limited public disclosure of these arrangements creates potential fiscal risks that may negatively impact the government’s debt management strategy and fiscal stabilization policy. ### Public investment levels, composition, and outcomes - Since the 1990s, public investment in Malawi has generally been lower than in low-income developing countries (LIDCs) in the sub-Saharan African (SSA) region and elsewhere. - Investment has tended to be volatile compared to neighboring countries. - The nominal public capital stock is in line with the average for LIDCs and SSA countries. - The number of PPPs has been very small in recent years, but several large projects, mainly in the education, energy and water sectors, are in the pipeline. - Perceived quality of infrastructure is relatively low, and measures of infrastructure access and service delivery are relatively weak in education, roads, and electricity. - Malawi performs quite well on indicators for health and access to treated water. ### PIM institutional strength and effectiveness - Measured against the overall strength of its public investment management (PIM) institutions, Malawi performs broadly in line with other LIDCs and SSA countries, but less well than better-performing emerging markets. - Institutional strength measures how well Malawi’s existing laws and regulations and formal guidelines support PIM. - The PIMA diagnostic also measures effectiveness—how well laws and regulations are implemented and enforced in practice. On effectiveness, Malawi performs relatively poorly. ### Key strengths (selected) - A comprehensive national planning system with measurable targets in national and sector strategies. - Coordination between central and local government on capital spending, supported by a rule-based system for capital transfers. - A comprehensive Public-Sector Investment Program (PSIP) that is a well-designed platform for portfolio management and monitoring. - Well-enforced restrictions on moving budget funds from capital to recurrent spending. - An Accountant General initiative aimed at creating a comprehensive register of the government’s non-financial assets. ### Key weaknesses and risks (selected) - Failure to apply cost-benefit analysis systematically to large projects. - Significant gaps in the data published in budget documents on capital investment costs and multiyear contracts. - Unpredictability in the funding of capital projects and vulnerability to in-year budget cuts. - Weaknesses in cash management contributing to a large build-up of arrears for both recurrent spending and capital projects. - Lack of effectiveness and transparency in the procurement process. - Weaknesses in the management and implementation of projects, including project monitoring and evaluation. - Lack of effective monitoring, evaluation and oversight of large projects. - Contingent liabilities related to domestically-financed capital projects developed outside the PSIP and PPP frameworks are not comprehensively assessed. - No comprehensive disclosure in the budget of SOEs' capital investment nor of PPPs. ### Coverage caveat - The PIMA focuses primarily on domestically-financed investment projects, which represent only a small share of total public investment. - Externally-financed projects are generally subject to higher management standards imposed by development partners (e.g., rigorous feasibility studies, cost-benefit analysis, detailed implementation plans, dedicated project units). If externally-financed projects were fully reflected in the PIMA assessment, Malawi’s overall rating would be higher. ### Recommendations and implementation needs - Improvements in PIM institutions will require: - Revisions to the Public Finance Management Act (PFMA) and other legislation (the report makes specific legal-change suggestions). - A sustained capacity building effort. - Technical assistance already provided by FAD and AFRITAC-East in commitment controls, cash management, and arrears management will yield benefits for PIM planning and predictable financing. - Development partners (EU, JICA, World Bank) have contributed to systems and capacity building (e.g., PSIP, procurement); further support is required for PSIP functionalities, procurement, project appraisal, and monitoring and evaluation. - Many recommended changes are "quick wins" and relatively easy to implement. Examples include: - Improvements in budget documentation on capital projects where data already exist. - Bringing forward the date of issuance of budget ceilings for line ministries. ### Expected impact of reforms - Estimates in the report suggest that, if the government implements the suggested reforms, Malawi’s overall PIMA rating would increase substantially by 2022, and could exceed the level achieved by many emerging markets in Africa and other regions. ### Summarized diagnostic and recommendations (reference to tables) - Table 1 (Malawi: Summary Assessment) presents detailed PIMA phase-level scores of Institutional Strength and Effectiveness across Planning, Allocation, and Implementation dimensions and highlights key recommendations by numbered items. - Table 2 (Malawi: Summary of Recommendations) provides a prioritized list of recommendations, highlighting those that generate quick wins and enable broad-based improvements in PIM practices and performance. *IMF Fiscal Affairs Department mission report (PIMA), April 25-May 8, 2018.* ### 1. Develop standard guidelines on project appraisal to support the PSIP process ### 1. Develop standard guidelines on project appraisal to support the PSIP process ### Recommended actions - Update the current PSIP manual with an additional guidance on project appraisal (EP&D, December 2019) - In coordination with the PSIP Unit, MDAs should update their sector strategies with information on the lifecycle costs, outputs and outcomes of priority projects (MDAs, December 2019) ### Implementation metadata - Reference number in table: 4 - Status indicator: ✔ *Source: cr18259 - 1. Develop standard guidelines on project appraisal to support the PSIP process* ### 16. Malawi has an opportunity to perform better than its comparators on key PIM ### 16. Malawi has an opportunity to perform better than its comparators on key PIM ### Executive summary and priority reforms - Malawi’s overall PIMA rating could be considerably enhanced by implementing the recommendations in this report; projected institutional strength shown in Figure 24 could be achieved before 2022 if key reforms are implemented. - Priority, largely "low-hanging fruit", reforms: - Strengthen the PFMA by incorporating provisions for a rule-based fiscal framework, requiring CBAs for major projects, and reinforcing fiscal oversight of SOEs and other statutory bodies. - Update procedures for costing the national and sectoral strategies within an approved resource envelope, and enhance procedures for budgeting of capital investment, including early communication of budget ceilings to allow better prioritization of investment projects. - Develop standard methodologies for project appraisal, estimation of maintenance costs, and project adjustment. - Enhance the usefulness of the PSIP database by carrying out an audit aimed at improving its coverage, reporting functionality, links with the budget, and interfaces with other systems. ### Fiscal targets and rules (Institutional Strength – Medium; Effectiveness – Medium) - PFMA principles are broad and lack a numerical rule; PFMA requires MoFEPD to present an Economic and Fiscal Policy Statement (EFPS) to the National Assembly ahead of the budget. - EFPS: Presented no later than April 1st each year. - Annual Economic Report (AER): Presented to the National Assembly no later than June 30th each year. - Domestic debt restriction: - Treasury-bill issuances are capped at 25 percent of total budgeted revenues for the current fiscal year (Article 7.8.2). - The cap concerns only central government debt and does not apply to other domestic debt instruments (promissory notes, ways and means advances by the Reserve Bank of Malawi). - In practice, the restriction does not currently apply because the government converts outstanding ways and means advances into T-bills whenever the ways and means limit is reached. - Evolution of public debt: - Public debt rose from 26.7 percent of GDP after debt relief in 2007 to 54.3 percent of GDP in 2017. - Sub-Saharan Africa (SSA) average was close to 45 percent of GDP in 2016. - EFPS contains no medium-term fiscal targets; fiscal policy is de facto constrained by the Treasury-bill issuance target and by performance criteria under the ECF arrangement, which is temporary and not embedded in law. - PFMA revision options under consideration: - Cap on total net domestic debt. - Limit on central bank financing of government debt. - Last ECF review suggested anchoring fiscal policy on a primary fiscal balance and a debt-to-GDP ratio target below 50 percent. - Successor program aims to reduce public debt from 55 percent of GDP in 2018 to 45 percent over the medium term. ### Fiscal Responsibility Laws (Box summary) - FRLs can include procedural rules (e.g., MTFF with three-year macro-fiscal forecasts) and numerical rules. - Criteria for numerical rules: Sustainability, Stabilization, Simplicity, Operational guidance, Resilience, Ease of monitoring and enforcement. - FRLs may require publication and explanation of deviations, defined escape clauses for exceptional shocks, and provisions for accountability and transparency (including data on public investment and reporting frequency). ### National and sectoral planning (Institutional Strength – Medium; Effectiveness – Low) - Strategic framework: - MoFEPD provides strategic guidance under the Malawi Vision 2020 Strategic Plan; Vision 2050 is under development to replace Vision 2020. - National Planning Commission (NPC) legally constituted but still being established operationally. - Medium-term national development plans (MGDS) include broad estimates of costs covering five years. - MGDS III covers the period 2017-2022; completed in November 2017. - Sector Working Groups (SWGs) and PSIP: - SWGs develop medium-term investment plans and annual work-plans integrated into the national planning, budgeting and monitoring system through the PSIP process. - PSIP is a five-year rolling plan for new, ongoing and proposed development projects with estimated financial resource requirements; reviewed annually to inform the development budget. - Quality of targets and indicators in sector strategies are not always SMART; some development partners fund capital projects outside the PSIP (examples cited). - Costing and realism: - MGDS and sector strategies provide aggregate and detailed costs, but these bear little resemblance to fiscal constraints or the budget envelope. - Sector strategies and sub-national plans are typically broadly defined and aspirational; actual investment is ultimately driven by resource availability and political priorities. - Recommendation: sector strategies should provide comprehensive descriptions of priority projects, indicative life-cycle cost estimates and annual breakdowns, and expected outputs and outcomes. ### Coordination between entities (Institutional Strength – Medium; Effectiveness – Medium) - Local Government Finance Committee (LGFC) and Local Development Fund (LDF): - Legal mandate: Article 149 of the Constitution; Local Government Act (1998) requires 5 percent of general government discretionary spending be directed through local councils, but in practice allocation was about 1–2 percent of their budget in 2016/17, mainly used for recurrent expenditure. - LDF transfers are transparent and rule-based; funding for the LDF represented about 10 percent of total development spending in 2016/17. - In 2016/17 LDF disbursed MK 36 billion (US$ 50 million), of which 95 per cent of funding was provided by development partners. - LDF allocation formula includes population and poverty as main criteria; community projects < US$100,000 devolved to district assemblies; urban projects > US$200,000 centrally managed by the LDF secretariat. - Institutional transition: - LGFC and LDF consolidated into a single operational entity transitioning to a National Local Government Finance Commission with two main functions: infrastructure development (priority: integrated rural development strategy) and financial management. - Transition creates uncertainty about coordination of fiscal transfers from national to local level. - Borrowing restrictions: - Local governments prohibited from borrowing without MoFEPD approval (Local Government Act, 1998); Section 48 allows local governments to raise loans within Malawi subject to endorsement of the Ministry of Local Government and Rural Development and approval from MoFEPD; bank overdrafts allowed subject to defined conditions. - PFMA Sections 72–74 (2003) prohibit statutory bodies from borrowing, raising overdrafts and extending guarantees unless approved by MoFEPD. - Public Private Partnerships Act (PPA, 2011) Sections 57–59 allow PPPC to raise funds for PPPs subject to PFMA conditions and require disclosure of post-transaction costs, including contingent liabilities. ### Project appraisal (Institutional Strength – Low; Effectiveness – Low) - Major projects lack systematic rigorous technical, economic and financial analysis; no legal requirement for MDAs to conduct such analyses. - PSIP Unit guidelines: - Provide process management steps but insufficient guidance on project preparation and limited central support for MDAs on project appraisal. - Major projects defined as those costing not less than US$ 100 million, requiring a pre-feasibility study before Cabinet Committee on Projects can consider approval. - In practice, proposals for major projects are often submitted without a pre-feasibility study. - PSIP Unit has proposed amending PFMA (2003) to make feasibility studies mandatory for major projects; threshold for major projects is high by international standards and could be reconsidered or lowered. - Consequences of weak appraisal: - Project appraisals tend to focus on costs rather than benefits. - Absence of centralized independent review leads to inadequate analysis of risks (e.g., land availability and compensation for resettlement), causing significant delays. - Government-funded projects are more prone to these problems due to lack of technical skills and funding for proper project preparation. *Source: cr18259 - 16. Malawi has an opportunity to perform better than its comparators on key PIM* ### 30. Major projects financed by development partners typically require feasibility ### Major projects financed by development partners typically require feasibility studies to be conducted as a prior condition of the loan or grant agreement ### Feasibility studies, project appraisal, and project preparation - Major projects financed by development partners typically require feasibility studies as a prior condition of the loan or grant agreement. - SOEs that undertake large capital projects (EGENCO, ESCOM, the Roads Authority and the Water Boards) always conduct feasibility studies as part of their project development cycle; such studies are submitted to the corporation’s board and implemented by management with oversight from the relevant ministry. - Some major projects escape the standard feasibility requirement: - Salima-Lilongwe Water Pipeline (approximately US$ 450 million) — feasibility studies reportedly conducted outside responsible departments’ framework; little information publicly available; unclear value-for-money oversight. - Kam’mwamba Coal-Fired Power Project (nearly US$ 600 million) — same concerns as above. - PSIP appraisal process: - Two-stage appraisal required by PSIP guidelines: first phase enables MDAs to complete pre-feasibility studies; second phase is an independent review by the PSIP Unit based on OECD criteria (relevance, effectiveness, efficiency, impact, sustainability). - Appraisals should be completed before the start of the budget preparation process. - In practice, MDAs often cannot undertake pre-feasibility studies due to lack of funding and skills, preventing objective evaluation by PSIP Unit. ### Proposed Infrastructure Project Development Fund (IPDF) - Purpose: - Support project development through PSIP and PPP frameworks by financing project preparation activities (engineering, economic, financial, public awareness, social and environmental studies) and, if necessary, consultants for studies and preparation of project implementation plans prior to signing contracts with investors. - Design options discussed: - International development partners could assist in initial financing. - Two windows could be designed: one for traditionally-financed projects, the other for PPPs. - Fund could be centrally-managed, or provided as a budget allocation to MDAs to enhance project readiness, allowing unused allocations to lapse. - Alternative to extrabudgetary fund: provide financing directly through the budget to MDAs and the PPPC, earmarked for capacity development and feasibility studies to avoid risk of misuse. ### Institutional framework, market liberalization, and sector deregulation - Deregulation status by sector: - Telecommunications and road transport markets: fully deregulated and liberalized. - Water transport and rail services: provided through concessions with private sector under long-term PPP contracts. - Air transport: partially privatized — government retains a 51 percent stake in Malawian Airlines. - Energy market: allows Independent Power Producers (IPPs). - Water: provided by government-controlled water boards. - Regulators: - Malawi has two independent infrastructure regulators: Malawi Energy Regulatory Authority (MERA) and Malawi Communications Regulatory Authority (MACRA). - Regulation of transport markets is embedded within government; parent ministry provides oversight for policy, standards, compliance; MoFEPD enforces financial reporting standards. - Water sector regulation shared between Water Resources Board (WRB), Ministry of Irrigation, Agriculture and Water Development, and MoFEPD. - Energy sector reforms and tariffs: - Electricity Act (Amendment) 2016 liberalized the power market; Malawi adopted a Single Buyer model. - Market structure (roles): MoNREM — policy oversight; MERA — regulation; Single Buyer procures from EGENCO, IPPs, and SAPP; ESCOM Transmission under ESCOM’s Single Market Operator (SMO) acquires from Single Buyer and supplies large customers or small customers via ESCOM Distribution. - Interviews confirm the energy sector is operating with a non-cost reflective power tariff. - A cost-reflective tariff is key to enabling EGENCO and ESCOM to make appropriate power infrastructure investments and for ESCOM to perform its role as Single Buyer and SMO. - In November 2017, a 25 percent increase in electricity tariffs was approved, but a gap remains to reach cost-reflective tariffs; until cost-reflective tariffs are in place, attracting significant private sector investment will be difficult. ### PPP framework, PPPC, and project pipeline - PPP Act 2011: - Guides government policy and engagement of PPPs and divesture of SOEs. - Establishes Public Private Partnership Commission (PPPC) responsible for overseeing/coordinating policies, approving PPP projects and divesture of SOEs. - PPPC supported by Secretariat which advises contracting agencies, checks value-for-money and budget affordability, and provides opinions on proposed PPP projects or divestures including associated fiscal risks. - PPPC performance and pipeline: - Since inception, PPPC has made good progress; market liberalization creates conducive environment for larger and complex PPPs, particularly in energy. - Prior to 2011, PPPC mainly concerned with divesture of SOEs. - Since 2010, PPPC has worked on/completed or partially completed six PPP transactions and three divesture transactions. - PPPC has identified 24 candidate projects for assessment as PPPs; these are in various stages of preparation. - Key constraint: securing resources to undertake required feasibility studies and preparatory work; resources could come from an IPDF window or budget appropriation to PPPC as envisaged in PPP policy framework. ### Oversight and governance of SOEs - Oversight fragmentation: - Public Enterprise Monitoring Unit (PERMU) in MoFEPD responsible for financial oversight of SOEs but has limited financial and human resources. - Department of Statutory Corporations in Office of the President and Cabinet responsible for administrative oversight of SOEs and other statutory bodies. - There are 67 statutory bodies, about half operate on a commercial basis. - PERMU reviews SOEs’ investment plans and financial performance, but reporting by individual SOEs is infrequent and irregular. - No consolidated report summarizing overall SOE investment activities and financial performance exists. - No data on government financial support to SOEs (subsidies, capital injections, on-lending, loan guarantees). - Oversight blurred by fragmented and overlapping roles among MoFEPD, parent line ministry, Department of Statutory Corporations, and SOE boards — contrary to international good practice. ### Recommendations (summary with dates and responsible entities) - Issue: National and sectoral strategies do not adequately guide public investment planning and budgeting; many appraisals lack cost-benefit analysis or full risk assessment (e.g., land acquisition or resettlement). - Recommendation 1: Develop standard guidelines on project appraisal to support the PSIP process. - Update the current PSIP manual with additional guidance on project appraisal (EP&D, December 2019). - In coordination with PSIP Unit, MDAs should update sector strategies with lifecycle costs, outputs and outcomes of priority projects (MDAs, December 2019). - Recommendation 2: Establish an Infrastructure Project Development Fund (IPDF), or comparable financing for MDAs and the PPPC through specific budget appropriations, to provide resources needed to improve quality of project appraisals for major capital projects under PSIP and PPP frameworks. - Develop operating procedures and practices for the IPDF (PSIP Unit and PPPC Secretariat, December 2018). - Issue: The PFM Act does not provide adequate legal basis to support project appraisal and selection functions of PSIP Unit within MoFEPD. - Recommendation 3: Update the PFMA specifically with respect to project appraisal and selection. - Include provision that mandates all capital projects be recorded in the PSIP database (EP&D, PFM Reform Coordination Unit, November 2018). - Include provision that mandates all major capital projects above a defined threshold (+/- S$ 100 million) to be subject to CBA (EP&D PFM Reform Coordination Unit, November 2018). - Issue: Institutional arrangements for oversight of SOE investment activities fragmented. - Recommendation 4: Improve governance of statutory bodies by providing clearer roles and responsibilities for financial oversight of SOEs’ investment activities and financial performance. - Include provisions in revised PFMA to strengthen and clarify financial oversight of SOEs, including role of PERMU, President’s Office, MDAs, and SOE boards (Public Enterprise Monitoring Unit, November 2018). - Prepare a consolidated report of investment activities and financial performance of SOEs, and associated fiscal risks (Public Enterprise Monitoring Unit, December 2019). ### Multi-year budgeting and linkages to PSIP (Institutional Strength – Medium; Effectiveness – Low) - Progress and features: - Medium-term projections of total expenditures, revenue and financing included in annual budget documents and other reports. - AER provides projections of the two following years for revenues, recurrent and development expenditures (by function) and financing. - Annual budget includes projections of recurrent spending by MDAs for upcoming fiscal year and two outer years; development expenditure projections aligned with approved projects included in PSIP. - Implementation of program-based budgeting with expenditures allocated by program for three outer years. - Shortcomings: - Core procedures not in place for MTEF to serve as reliable anchor for medium-term investment planning. - Ceilings provided late in top-down/bottom-up process and vary significantly over budget process; indicative ceilings in AER are only indicative and extensive revisions occur year-to-year, partly due to volatility of external financing. - Budget provides estimates only for the budget year; multi-year projections of development expenditures by MDAs are absent in the budget, undermining full-cost comparison and realistic budgeting. - Budget documentation does not publish total cost estimates of projects nor breakdown over medium term; insufficient information on project priorities (including ongoing “flagship” projects identified in MGDS III). - Needed actions: - Reinforce core mechanisms of multi-year budgeting: provide timely ceilings, publish multi-year projections of development expenditures by MDAs in the budget, and strengthen link between PSIP and MTEF to identify trends in capital spending and provide information on full project costs to facilitate reliable forecasts. *Source: cr18259 - 30. Major projects financed by development partners typically require feasibility studies to be conducted as a prior condition of the loan or grant agreement* ### 7. Budget Comprehensiveness and Unity (Institutional Strength – Medium; ### 7. Budget Comprehensiveness and Unity (Institutional Strength – Medium; Effectiveness – Medium) ### Budget comprehensiveness and unity — key findings - Recurrent and development budgets, including for externally-financed projects, are prepared by the MDAs and consolidated by the MoFEPD’s Budget Department. - Budget documentation includes the development expenditures of statutory bodies and information on recurrent and development budgets by ministry. - A programmatic classification of the budget is presented but does not distinguish between development and recurrent expenditures. - A large amount of expenditure, including development expenditures, is financed by NGOs and bilateral donors whose procedures are undertaken outside the budget. - For the 2016/17 budget, over 10 percent of total expenditures were realized off-budget. The budget documentation does not provide the segregation between current and development expenditures. - Annex 11 of the budget documentation records the amount of these “off-budget” expenditures and their beneficiaries. - Clarity and transparency for capital projects could be improved: development expenditure as shown in the PSIP and the budget includes spending which is recurrent in nature (for example training and capacity development), distorting the view of capital investment and its composition. - An annex provides information on donor-financed capital projects, but these data are not broken down between capital and recurrent spending. - Information on the development budget for SOEs is not provided in the budget documentation. - Capital spending by SOEs is substantial, especially in the energy and water sectors, and is likely to grow; published information on these investments and associated fiscal risks is limited. - Budget documentation should be upgraded to include information on PPPs, which are expected to increase and may impose potential fiscal risks. ### Budgeting for investment — institutional framework and practical challenges - The PFMA and its regulations provide protection for capital investment through the budget: Section 25 allows transfers between line items within an MDA with MoFEPD approval provided transfers do not increase the line item appropriation by more than 20 percent. - Treasury instructions, article 4.16.5, stipulate that “virement on the Development Account shall apply only to the re-allocation of funds between program/items within the same vote, and every Controlling Officer shall obtain prior approval from the Secretary to the Treasury for a virement,” preventing reallocations from development to recurrent. - Mid-year reviews are carried out each year and are subject to approval of the National Assembly. - In principle, changes in capital expenditures are only possible when financing resources decrease or increase; the government gives priority to completion of ongoing projects (Budget Guidelines for 2017/2018, section 3.6.1: “The backlog of current projects is to be cleared before new projects are contracted”). - Practical challenges: - The PSIP database provides whole-of-project costs, but this information is not referred to in the budget documentation, impairing multi-year budgeting and creating significant risks for arrears accumulation. - The practice of including multi-year commitments in the budget documentation was abandoned in 2015/16. - Prioritization of ongoing projects is not systematic; strategically-important new projects can be funded at the expense of ongoing projects often without proper cost-benefit analysis (example: project 1808 appropriated for MK 200M in the 2016/17 budget without any cost-benefit analysis). - Some ongoing projects are not appropriated in the budget even when not suspended or terminated (example: project 1319 approved in the 2016/17 PSIP but not appropriated in the FY2016/17 budget). - Suspended ongoing projects are numerous, often because of large cost overruns, increasing the risk of arrears accumulation (example: project 1236, Green Belt Initiative: total costs in PSIP MK 14.2 billion; in 2014/2015 approved budget MK 2 billion, disbursed MK 432 million; outstanding arrears with the contractor amounting to over MK 1.2 billion in 2014/2015; over MK 300 million from the amount disbursed was used to pay arrears; at end of year 2015/16 outstanding costs 12.6 billion MK out of 14.2). - Some projects are included in the budget without being part of the PSIP. - Virements are not permitted between recurrent and development expenditures but there is no report available on the level of transfers, making it difficult to assess compliance. - Overoptimistic budgets and weaknesses in cash flow forecasting lead to under-execution of capital expenditure. ### Maintenance funding — findings and sector practices - Maintenance expenditure can be identified in the budget (chart of accounts and budget documents identify routine and capital maintenance) but cannot be easily tracked because of inconsistencies in fiscal reports and discrepancies in annual financial statements related to IFMIS integrity and coverage issues. - The Budget Manual (2009) provides no guidance on maintenance funding. Annual Budget Guidelines only require that future maintenance costs of completed development projects be established and included in subsequent budgets but do not provide estimating or scheduling guidance. - No standardized methodology or minimum standards issued by the government or individual MDAs for estimating routine or capital maintenance requirements and costs. - Consequences: - Project owners invest too little in maintenance, creating potential for significant future repair or rebuild costs. - Low maintenance investment driven by budget constraints, limited planning, and lack of incentives. - Routine maintenance costs are budgeted incrementally and subject to pressures from other needs. - Building maintenance consultations occur after the budget is approved and are subject to funding availability, often resulting in reduced quality or postponement. - Major building rehabilitation works treated as capital projects are more planned but vulnerable to funding constraints. - Sectoral exceptions and practices: - Roads Authority has guidelines on estimating road maintenance costs; Roads Fund Administration Act, 2006 created a fund financed by a levy on petroleum fuels for routine and periodic road maintenance (ring-fenced). - Ministry of Agriculture, Irrigation and Water Development has standard processes for estimating rehabilitation of irrigation structures. - EGENCO and ESCOM apply rigorous methods to estimate maintenance costs; both set a target of 40 percent of their annual budget for operations and maintenance for routine maintenance and have norms for capital maintenance of transmission and distribution lines. - Resources allocated to maintenance are inadequate and volatile: - Between 2014 and 2017 spending on maintenance was in the range 0.68 – 0.91 percent of total budgeted expenditure, excluding road maintenance financed through the fuel levy. - Budget allocations for maintenance have been almost stagnant over the last three years and vulnerable to in-year cuts. - Budget execution for maintenance (figures from Budget documents and Annual Financial Statements 2014/15 – 2016/17; figures exclude road maintenance financed through the fuel levy): - Routine Maintenance (in MK billions) — by year 2014/15, 2015/16, 2016/17: - Approved: 6.5, 6.1, 6.1 - Revised: 6.4, 5.6, 6.9 - Actual: 4.0, 5.2, 5.5 - Capital Maintenance (in MK billions) — by year 2014/15, 2015/16, 2016/17: - Approved: 3.6, 3.8, 8.5 - Revised: 3.5, 4.0, 9.3 - Actual: 1.2, 2.0, 3.2 - Performance contracts for controlling officers from fiscal year 2013/14 include specific maintenance-related performance criteria (reporting on maintenance schedule and percentage of assets maintained), but these need to be complemented by standardized methodologies and budgeting approaches. ### Project selection — process and limitations - MDAs have developed selection criteria and a prioritization process linked to MGDS III and multi-year investment plans; short-lists of priority projects are packaged into PSIP submissions. - Project selection criteria include service delivery standards, geographic and service-type matrices, filtering by development partner support (off-budget) vs government funding (on-budget), and prioritization of ongoing over new projects. - New projects require preparatory work (cost-benefit analysis, land acquisition) before proposal. - Quality of selection and prioritization varies across MDAs; projects can be included due to national disasters or political influence even if not selected through the standard process. - PSIP Unit has a final say in project selection and refines short-lists into the annual development budget in consultation with the Budget Division, but central-level appraisal is limited to screening rather than full appraisal. - PSIP Unit uses eligibility criteria: strategic alignment with MGDS, verification that it is a capital project, project size (more than US$ 1 million for infrastructure and US$ 0.5 million for service projects), and project source (falls within sector mandate). - In practice, the PSIP Unit generally accepts the integrity of MDA-submitted information due to limited resources and time; donor-funded investments and public sector entities with technical capacity typically submit higher-quality appraisals. - The PSIP is a five-year rolling plan and maintains a pipeline of appraised projects; parachuted political projects do occur but are reported to be more an exception than a rule. ### Recommendations (issued in the text) - Issue: Ceilings are provided to MDAs too late in the budget process, allowing insufficient time to prioritize projects. - Recommendation 1: Provide MDAs with their spending ceilings earlier in the budget cycle, so that that can better prioritize the projects to be included in the budget. - MDAs’ expenditure ceilings should be set at the time of the strategic budget hearings in November to allow them to prioritize capital projects which are not externally financed. Ceilings could be adjusted in line with the MTEF prepared later (BD/EPD, November 2018). - Issue: Budget documentation is extensive but much information regarding capital projects is not included. - Recommendation 2: Expand the budget documentation to capture all public investment projects: - Improve the information on “off-budget” expenditures in consultation with the NGOs/bilateral donors who implement these projects; and break down expenditure between development and recurrent spending (BD/EPD; June 2019). - Develop reporting mechanisms for PPP projects by MDA, including data on guarantees and other contingent liabilities (BD with the assistance of the PPPC; December 2019). - Include financial reports on SOEs, covering their financial status and investment activities (see Recommendation 4) in the budget documentation (BD/Accountant General/ Department of Statutory Corporations, OPC, June 2020). - Issue: Information on total project costs and multi-year commitments is not included in the budget documentation. - Recommendation 3: Include information on total project costs and multi-year commitments in the budget. - Publish in the budget information on (i) total estimated project costs; (ii) previous budget years’ actual spending; (iii) estimated spending in the current budget year; (iv) committed expenditures for the next budget year; (v) estimated spending and contractual commitments for the MTEF outer-years; and (vi) the balance of funding required to complete each project (BD/EPD-PSIP unit; March 2019). - Issue: No standardized methodology or guidelines have been issued to estimate routine and capital maintenance needs. Spending on maintenance is inadequate, vulnerable to in-year cuts, and outturns cannot be easily tracked in fiscal reports. - Recommendation 4: Revise existing processes for estimating and disclosing information on maintenance requirements and costs. - Develop standard guidelines on the estimation of maintenance requirements and their cost, and prevent their reallocation during budget execution (BD, December 2019). - Provide more consistent information in budget execution reports and the annual financial statements on maintenance spending (BD and AGD, June 2020). *Source: cr18259 — 7. Budget Comprehensiveness and Unity.* ### 11. Procurement (Institutional Strength – Low; Effectiveness – Low) ### 11. Procurement (Institutional Strength – Low; Effectiveness – Low) ### Procurement framework and practice - The new Public Procurement and Disposal of Assets Authority (PPDA) Act became effective in December 2017 and prescribes open tendering as a default method, with exceptions provided for other methods based on financial thresholds and conditions that justify the use of less competitive methods. - The PPDA Act enhances provisions on the institutional and regulatory status of the Authority, and for the publication and transparency of information; the supporting regulations and instructions for the new Act have yet to be developed. - In practice: - Overall compliance with the legal framework across entities “has been variable has fallen from 65 to 15 percent.” - The World Bank MAPS II assessment indicates that for FY 2016/17 only 15 percent of procurement went through open tender for cases reviewed by the PPDA. - Procurement of donor-funded projects, which account for around 85 percent of the share of public investment, typically follow donor-based procurement rules requiring competitive methods. - Publication and transparency: - Publication of information on procurement opportunities and awards is required by law, but compliance has been generally poor. - The PPDA website has very little information on procurement activities. - The MAPS II assessment noted the absence of reliable and comprehensive data on procurement. - The PPDA, with support from development partners, plans to implement an e-Procurement system and revamp the agency’s website to enable greater disclosure and transparency (mandatory under the PPDA Act). ### Monitoring, audit, and complaints - Monitoring and data: - Public procurement is not adequately monitored and a comprehensive procurement database does not exist. - PPDA does not systematically collect, maintain and publish information on public procurement for monitoring procuring entities’ efficiency and compliance. - Systematic procurement audits/reviews are not carried on a regular basis; the last review was for fiscal year 2014/15 and limited to a sample of 20 entities. - Occasional special audits have been carried out in response to requests (City Councils and Central Hospitals, Malawi Revenue Authority, Blantyre Water Board), but these are not systematic. - The NAO includes cases of non-compliance in its annual audit report, but no comprehensive procurement audit or evaluation of major capital projects has been undertaken in the recent past. - Complaints and review: - The procurement complaints and review process in the legal framework is not implemented in a comprehensive or transparent manner. - The 2003 Public Procurement Act provided for a formal complaint/appeal process and judicial review with procedures and timelines, but information on reviews and outcomes is not publicly available. - A private sector survey in MAPS II suggests three-quarter of respondents did not consider the complaints process to be fair and trustworthy. - The PPDA Act contains similar provisions and more stringent publication requirements but does not address the independence of the review body, which is to be appointed by the Procurement Authority; this is expected to be clarified in the supporting regulations yet to be developed. *Source: cr18259 - 11. Procurement (Institutional Strength – Low; Effectiveness – Low)* ### 12. Availability of Funding (Institutional Strength – Low; Effectiveness – Low) ### Cash forecasting and budget releases - Budget releases are based on cash-flow forecasts prepared annually by MDAs and not updated regularly during the year; these forecasts tend to be front-loaded and are not reliable. - The cash management unit (established in 2016) has started consolidating cash forecasts and updating them monthly but only for proposed inflows—revenues and financing. - Cash forecasting practices in the MoFEPD and the MDAs are at a basic level; East AFRITAC has been providing support to reforms in cash forecasting and management. - Monthly fund releases: - The practice of monthly fund releases is inconsistent with efficient expenditure planning. - MoFEPD exercises commitment controls centrally through monthly budget releases, defining ceilings for commitments and cash available for payments for a specific month; the monthly time horizon severely constrains MDAs’ ability to plan and commit expenditures in advance. - MoFEPD resorts to cash rationing in view of revenue underperformance and/or financing difficulties; total monthly budget releases do not prioritize development expenditure and are typically lower than annual budget appropriations. - The PSIP monitoring report for 2015 shows misalignment of funding levels and planned cash flows for most projects. - Although overall release of funding is closer to the approved budget for FY 2016/17, MDAs responsible for the largest share of development expenditure were more severely affected. - Suspended PSIP projects due to lack of adequate funding increased from 17 in 2015/16 to 95 in 2016/17. ### Arrears and bank account arrangements - Stock of arrears: - End-June 2017 central government arrears stood at MK 316.5 billion, or about 6.8 percent of GDP. - The NAO verified and certified MK 197.6 billion for payment, 37 percent of which relates to civil works. - About 35 percent of the certified arrears relate to capital investment projects undertaken by the Road Fund Administration. - External financing and accounts: - Most external financing is held at the Reserve Bank of Malawi (RBM) and is part of the main government bank account structure. - Donor project accounts held at the RBM are included in the daily government position determined by the RBM and are linked to specific operating accounts in commercial banks operating on a credit ceiling authority (CCA) basis. - Some donor-funded accounts at commercial banks do not have corresponding holding accounts at the RBM. - The Accountant General’s Department completed a survey of the government’s bank accounts as part of account rationalization; implementation of survey results should significantly improve oversight and control over government funds. *Source: cr18259 - 12. Availability of Funding (Institutional Strength – Low; Effectiveness – Low)* ### 13. Portfolio Management and Oversight (Institutional Strength – Medium; Effectiveness – Low) ### Project monitoring and PSIP database - Project monitoring: - Most major projects are subject to central monitoring by the EP&D Department of the MoFEPD, requiring quarterly reporting on financial and physical progress. - A centralized PSIP database has been developed and is managed by the PSIP Unit, EP&D, and the MoFEPD’s budget division; it contains information on on-going projects and the pipeline of proposed projects. - The information in the PSIP database is currently of variable quality and incomplete; improvements are expected as the database is still in development. - Compliance with quarterly reporting has improved, but data quality and regularity of updates by MDAs are inconsistent. - The database excludes projects implemented by SOEs and some donor-funded and off-budget projects; as a result comprehensive reports on financial and operational performance of the public investment portfolio are not available. - Monitoring methodology and use: - In the absence of a robust monitoring and evaluation methodology, management and oversight tend to be unreliable and reactive. - Monitoring focuses on the approved annual budget rather than tracking projects against total costs and anticipated completion time. - Little evidence exists that PSIP database information is used systematically by decision makers to take action on delayed or off-track projects. - Expertise in conducting reviews and systematic assessments is low; EP&D guidance focuses more on preparation and appraisal than monitoring. ### Reallocations, ex-post reviews, and recommendations - Reallocations: - Reallocations between budget-executed projects are infrequent and limited by the PFM legal framework; they are based on MDA requests and require MoFEPD (and donor) approval, typically occurring during mid-year budget reviews. - Reallocations do not arise from systematic monitoring and are often not based on transparent procedures; there is no established process to weed out non-performing projects. - Ex-post reviews: - Ex-post reviews and evaluations of completed investment projects are generally not conducted, except for some donor-funded projects. - Project completion reports prepared by some MDAs include little evaluation of project costs, deliverables, and outputs. - The legal framework does not require ex-post review of projects. - The Construction Sector Transparency Initiative (COST) conducted an independent review of 28 projects in roads, housing, water, and energy; it is too early to assess impact. - PSIP Database (Box 5) — issues and recommended actions the MoFEPD should implement over the next two years: - Identified issues: - Coverage of project portfolio is limited and quarterly updates are not provided regularly. - Reporting functionalities do not cover the entire project cycle and do not adequately support monitoring. - Sustainability risks as JICA support has ended. - Limited usage among stakeholders within and outside the MoF. - Recommended actions: - Develop an inventory of all public investment projects and progressively improve coverage. - Enforce quarterly reporting for all projects. - Improve reporting functionality to track progress against total project costs and lifecycle budgets. - Allocate resources for maintenance, development, and capacity building to ensure sustainability. - Check against development of parallel systems and streamline reporting formats used by OPC and the MoFEPD’s Budget department. - Assess system design for workflow integration between sectoral planning and budget so MTEF project selection comes from PSIP. - Start publishing a consolidated annual report on financial and non-financial information for major capital projects on the MoFEPD website. - Continue training and familiarization programs for end-users in MDAs. - Ensure technical specifications for the proposed new IFMIS provide an interface with the PSIP database and consider an interface with the aid management platform. *Source: cr18259 - 13. Portfolio Management and Oversight (Institutional Strength – Medium; Effectiveness – Low)* ### 14. Management of Project Implementation (Institutional Strength – Low; Effectiveness – Low) ### Project management arrangements and accountability - Project management practices vary across sectors and by financing source: - Donor-funded projects commonly require project implementation units (PIUs) as part of disbursement preconditions. - Domestically-funded projects have varied arrangements; in some MDAs a senior official (often the Director of Planning) may manage several projects. - The roads sector has more robust arrangements; other sectors lack consistent systems or minimum standards for project management. - For civil works, the Director of Buildings in the Ministry of Transport and Public Works supervises contractors. - Ministries such as Education and Health have dedicated infrastructure management units for construction coordination. - Overlapping reporting lines and unclear accountability limit effective project monitoring and management. - Detailed implementation plans are usually not prepared until after budget approval. ### Project adjustments, cost overruns, and recording - Project adjustment rules: - No consolidated and consistent rules and procedures for project adjustments applied across government. - Donor-funded project adjustments follow development partner rules and procedures. - Frequent time and cost overruns require project adjustments, largely to accommodate funding shortfalls from the budget or donors or changes in procurement contracts. - For civil works: - Implementing units can allow variations up to 10 percent of contract value. - Up to 15 percent with MoFEPD approval. - Beyond 15 percent with PPDA approval. - The Ministry of Health provides a contingency of 10 percent for major capital investments and typically tolerates a 15 percent overrun threshold for such projects. - Recording and rationale: - There is no systematic recording of the reasons for contract variations (e.g., price adjustments, scope changes, extension of construction period). - Project adjustments are considered in the context of procurement or budget adherence rather than project needs. - No formal process exists for re-examining the economic and social rationale of a project in the face of significant cost changes or altered demand for project services. *Source: cr18259 - 14. Management of Project Implementation (Institutional Strength – Low; Effectiveness – Low)* ### 71. Ex-post audits of major projects are not routinely conducted except for donor- ### cr18259 - 71. Ex-post audits of major projects are not routinely conducted except for donor- ### Ex-post audits and oversight - Ex-post audits of major projects are not routinely conducted except for donor-funded projects that are required to be audited as part of the project conditions. - The NAO in recent years has concentrated on clearing the backlog in annual financial audits. - The NAO has resource and capacity constraints that restrict its ability to systematically audit capital projects. - As a result, only some projects are subjected to ex-post audit, and these reports are not published consistently. - For Local Development Fund Projects, audits provide feedback on the effectiveness of the project cycle and opportunities for improving implementation practices (NAO Performance Audit report on the Management and Implementation of Local Development Fund Projects, May 2017, covering fiscal years 2010/11 to 2013/14). - There have been delays in reviewing NAO reports by the Public Accounts Committee (PAC) of Parliament, and delays in preparation of Treasury Minutes by MoFEPD based on PAC recommendations, undermining legislative oversight. ### Monitoring of public assets (Institutional Strength – Medium; Effectiveness – Low) Findings - Current financial regulations require asset registers to be maintained and updated; Treasury Instructions require registers for all types of fixed assets, consolidated by MDAs, and updated quarterly for inclusion in financial statements prepared by the Accountant General and submitted to the Office of the President and Cabinet. - Instructions require assets to be properly recorded, accounted for, and safeguarded; annual financial statements should include information on assets, liabilities, and net financial position. - Despite regulations, asset management remains weak: asset registers are not systematically maintained or updated and practices vary across MDAs. - NAO reports have systematically pointed to unsatisfactory asset management and failure of MDAs to maintain required asset registers. - Malawi uses cash-basis accounting; nonfinancial assets are not recorded in the balance sheet, and depreciation expenses are not reflected in the operating statement — the cash-flow oriented system overlooks the true value of public assets. - Examples: asset registers are maintained and updated in the Ministry of Works by relevant departments and in some departments of the Ministry of Transport, while none exists in the Ministry of Health. Reform steps under way - The Accountant General circulated a template to MDAs for reporting on assets for consolidation of the 2017/18 financial statements. - Authorities plan to activate an asset module in the IFMIS to enable systematic registration of non-financial assets. - Authorities have expressed intention to move towards accrual accounting in the coming years. - Implementation of accrual accounting is likely to be protracted and should be phased, starting with a complete inventory and valuation of existing assets. - Enforcing current regulations on asset registers and valuation is critical for pursuing accrual reform. ### Recommendations (organized by identified issues) Issue: The legal framework for procurement is not implemented effectively, and the process is insufficiently transparent. - Recommendation 1: Prepare a detailed implementation plan for improving transparency in the procurement process. - Publish information on procurement activities and analytical reports to comply with the new law (PPDA, October 2018) - Ensure independence and transparency of complaint review mechanisms, and regularly publish information on outcomes of specific cases (PPDA, December 2018) - Conduct regular procurement reviews/audits in close collaboration with the National Audit Office (PPDA, June 2019) Issue: Cash forecasts are short-term, and budget allotments are made in an unpredictable manner, leading to significant uncertainty surrounding the funding of capital projects. - Recommendation 2: Ensure that funding for capital spending is made available in a consistent and timely manner. - Improve cash flow forecasting to include committed expenditures for the current and future years (BD, October 2018) - Move from monthly to quarterly cash releases for selected capital expenditure categories (BD, July 2018) - Inform MDAs sufficiently in advance of upcoming and anticipated spending cuts (BD, July 2018) Issue: Management oversight and monitoring of the public investment portfolio has gaps in coverage, reporting functionalities, and linkages with budgeting and financial reporting systems. - Recommendation 3: Increase the usefulness of the PSIP database as a platform for oversight and monitoring of investment projects. - Undertake an independent audit of the existing PSIP, focusing on expanding coverage and effectiveness, increasing regularity and timeliness of MDAs’ quarterly reports on capital projects, enhancing PSIP functionality by tracking progress against total project outcomes and costs, and reconciling database information with projects selected in the budget (EP&D, June 2019) - Ensure technical specifications for the new IFMIS provide interfaces with the PSIP and the aid management platform (EP&D, October 2018) - Pilot ex-post reviews/audits of major capital projects in collaboration with the NAO (EP&D, June 2019) - Publish a consolidated annual financial report on major capital projects (EP&D, June 2019) Issue: Practice of maintaining and updating asset registries differs across ministries; no consolidated information on asset value or depreciation. - Recommendation 4: Improve reporting on non-financial assets - Require MDAs to maintain and update a register of the stock and value of non-financial assets, with information built up step-by-step (Accountant General, with support of MDAs; June 2021) - Publish information on non-financial assets in the government’s annual financial statements, based on data available in the register (Accountant General; ongoing) ### Legal framework and capacity building highlights Legal framework priorities - The PFM Act review is underway and expected to be completed and presented to Parliament by November 2018; this provides an opportunity to address identified gaps. - Suggested additions: require a feasibility study for all large budget-financed projects; include provisions on ex-post reviews and audits of completed capital projects; develop supporting regulations, guidelines and procedures on project preparation, costing, PPP evaluation and risk assessment, project appraisal and selection, and project monitoring and evaluation. - Incorporate provisions for a rule-based fiscal framework in the PFMA, leaving operational details to secondary legislation. - Amend PFMA or PPP law to require systematic fiscal risk analyses and disclosure of PPP transactions. - Define institutional roles and responsibilities for SOE fiscal oversight, assigning clear roles among SOE Boards, line ministries, OPC, and other entities to allow MoFEPD to focus on fiscal oversight of SOEs. - Develop supporting regulations and instructions to implement the new PPDA Act to increase open and competitive public tenders. Capacity building priorities - Malawi’s public investment has averaged about 5.5 percent of GDP for almost three decades. - The MGDS plans to spend US$ 1.2 billion on capital projects over the next five years, over 19 percent of GDP. - The MGDS envisages using PPPs, creating systemic pressures that require disciplined, risk-based approaches, improved information systems, and strengthened functions. - Near-term: selective use of external consultants and experts, with emphasis on building capacity to reinforce PSIP usefulness for budgeting, rigorous project appraisal, and PPPs. - Medium- to long-term: develop a PIM staff development strategy based on skills assessment for PSIP implementation; focus on project preparation, appraisal, land valuation and acquisition, procurement, project and contract management. - Strengthen coordination within MoFEPD and with MDAs to reconcile PSIP and aid database data and reduce duplication, including multiple M&E systems. *International Monetary Fund — Fiscal Affairs Department* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18259.pdf_