Document of The World Bank and the MDTF Partners Report No: 73328-MW PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF US$19 MILLION TO THE REPUBLIC OF MALAWI FOR A FINANCIAL REPORTING AND OVERSIGHT IMPROVEMENT PROJECT (P130878) 28 FEBRUARY, 2013 Financial Management Core Operations Services Africa Region This document is being made publicly available prior to Bank approval. This does not imply a presumed outcome. This document may be updated following Bank consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective {February 25, 2013}) Currency Unit = Malawian Kwacha (MK) US$1 = 369 MK FISCAL YEAR July 1 – June 30 ABBREVIATIONS AND ACRONYMS AGD Accountant General Department AR Accounts Receivable CAATS Computer Assisted Audit Techniques CABS Common Approach to Budget Support CAS Country Assistance Strategy CIAU Central Internal Audit Unit CoA Chart of Accounts CPD Continuing Professional Development CSA Controls Self-Assessment DAD Department of Aid and Debt DHRMD Department of Human Resource Management and Development DISTMIS Department of Information, Systems and Technology Management Systems DR Disaster Recovery ERM Enterprise Risk Management FDI Foreign Direct Investment FIMTAP Financial Management Transparency and Accountability Project FROIP Financial Reporting and Oversight Improvement Project GFEM Group on Finance and Economic Management GFS Government Finance Statistics GoM Government of Malawi HIPC Heavily Indebted Poor Countries IDEA Integrated Data Extraction and Analysis IFMIS Integrated Financial Management Information System IPSAS International Public Sector Accounting Standard LG Local Government LG&RD Local Government and Rural Development MASAF Malawi Social Action Fund MDA Ministries, Departments and Agencies MDTF Multi Donor Trust Fund MGDS Malawi Growth and Development Strategy MoF Ministry of Finance MPRSP Malawi Poverty Reduction Strategy Program MRA Malawi Revenue Authority 2 NAO National Audit Office NLGFC National Local Government Finance Committee ODPP Office of the Director of Public Procurement OPC Office of the President and Cabinet ORAF Operational Risk Assessment Framework PA Performance Audit PAC Public Accounts Committee PAD Project Appraisal Document PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFEM Public Finance and Economic Management PFEMRP Public Finance and Economic Management Reform Program PFEMSC Public Finance and Economic Management Steering Committee PFEMTC Public Finance and Economic Management Technical Committee PFEMU Public Finance and Economic Management Unit PFM Public Financial Management PI Performance Indicator RBM Reserve Bank of Malawi RBPFA Results Based Process Focused Approach RCIP Regional Communications Infrastructure Project SAICA South African Institute of Chartered Accountants SN Serenic Navigator TNA Training Needs Assessment TTL Task Team Leader TWG Technical Working Group Regional Vice President: Makhtar Diop Country Director: Kundhavi Kadiresan Country Manager: Sandra Bloemenkamp Sector Director: Edward Olowo-Okere Sector Manager: Patricia McKenzie Task Team Leader: Pazhayannur K. Subramanian 3 MALAWI Financial Reporting and Oversight Improvement Project (P130878) TABLE OF CONTENTS Page I. STRATEGIC CONTEXT ...............................................................................................11 A. Country Context .......................................................................................................... 11 B. Sectoral and Institutional Context ............................................................................... 12 C. Higher Level Objectives to which the Project Contributes ........................................ 14 II. PROJECT DEVELOPMENT OBJECTIVES ..............................................................15 A. PDO............................................................................................................................. 15 Project Beneficiaries ......................................................................................................... 15 PDO Level Results Indicators ........................................................................................... 15 III. PROJECT DESCRIPTION ............................................................................................16 A. Project Components .................................................................................................... 16 B. Project Financing ........................................................................................................ 18 Lending Instrument ........................................................................................................... 18 Project Cost and Financing ............................................................................................... 18 C. Lessons Learned and Reflected in the Project Design ................................................ 19 IV. IMPLEMENTATION .....................................................................................................20 A. Institutional and Implementation Arrangements ........................................................ 20 B. Results Monitoring and Evaluation ............................................................................ 24 C. Sustainability............................................................................................................... 24 V. KEY RISKS AND MITIGATION MEASURES ..........................................................25 A. Risk Ratings Summary Table ..................................................................................... 25 B. Overall Risk Rating Explanation ................................................................................ 25 VI. APPRAISAL SUMMARY ..............................................................................................25 A. Economic and Financial Analyses .............................................................................. 25 B. Technical ..................................................................................................................... 26 C. Financial Management ................................................................................................ 26 D. Procurement ................................................................................................................ 26 4 E. Social (including Safeguards) ..................................................................................... 27 F. Environment (including Safeguards) .......................................................................... 27 G. Other Safeguards Policies Triggered (if required)...................................................... 27 Annex 1: Results Framework and Monitoring...............................................................................28 Annex 2: Detailed Project Description ..........................................................................................30 Annex 3: Implementation Arrangements .......................................................................................39 Annex 4: Operational Risk Assessment Framework ………………………………….….…….53 Annex 5: Implementation Support Plan ……………………………………….…………..…….56 Annex 6: Project Component Cost Table ………………………………………………….. …..58 Annex 7 Country at a Glance ……………………………………………………….....…… …..59 5 PAD DATA SHEET REPUBLIC OF MALAWI Financial Reporting and Oversight Improvement Project PROJECT APPRAISAL DOCUMENT . AFRICA AFTME . Basic Information Date: 28 February, 2013 Sectors: Central Government Administration (70%) and Local Government Administration (30%) Country Director: Kundhavi Kadiresan Themes: Public expenditure, financial management and procurement (50%), Other accountability/anti-corruption (50%) Sector Manager/Director: Patricia Mc Kenzie / EA C - Not Required Edward Olowo-Okere Category: Project ID: P130878 Lending Instrument: Technical Assistance Grant Team Leader(s): Pazhayannur K. Subramanian Joint IFC: . Borrower: Republic of Malawi Responsible Agency: Ministry of Finance Contact: Newby Henry Kumwembe Title: Principal Secretary Administration, Ministry of Finance Telephone No.: 265-1788-211 Email: nkumwembe@yahoo.com . Project Implementation Period: Start 11 March-2013 End 30-June-2016 Date: Date: Expected Effectiveness Date: March 11, 2013 Expected Closing Date: June 30, 2016 . 6 Project Financing Data(US$M) [ ] Loan [ Grant [ ] Other X ] [ ] Credit [ Guarantee ] For Loans/Credits/Others Total Project Cost : 19.00 Total Bank 8.00 (Phase I) Financing : Total Cofinancing : Financing Gap : 11.00 (Phase II) . Financing Source Amount(US$M) PFEMRP MDTF (Phase I) 8.00 Financing Gap (Phase II to be funded out of future 11.00 contributions to MDTF) Total 19.00 . Expected Disbursements (in US$ Million) Fiscal Year 2013 2014 2015 2016 Annual 4.37 6.68 5.10 2.85 Cumulative 4.37 11.05 16.15 19.00 . Project Development Objective(s) The objective of the project is to improve the internal controls, accounting, reporting and oversight of the Recipient’s finances at the central and decentralized levels in its ministries, departments and agencies (MDAs). . Components Component Name Cost (US$ Millions) Phase I Phase II Total Accounting and Financial Management 3.9 5.3 9.2 Internal Audit 1.4 1.4 2.8 External Audit 2.0 2.7 4.7 PFEMRP Management 0.7 0.9 1.6 Contingencies 0.7 0.7 TOTAL 8.0 11.0 19.0 . 7 Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [X] respects? . Does the project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy waiver sought from the Board? Yes [ ] No [ ] Does the project meet the Regional criteria for readiness for implementation? Yes [X ] No [ ] . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . 8 Legal Covenants Name Recurrent Due Date Frequency 1. Covenants applicable to project Yes 1 to 3 months after Ongoing implementation effectiveness Description of Covenant Clause B-4, Section II, Schedule 2 of the GA: The Recipient shall, by no later than three (3) months after the Effective Date, select, engage and thereafter maintain throughout the period of project implementation, an independent firm of professional auditors for purposes of auditing the project financial statements, with qualifications and experience acceptable to the Association, and under terms of reference satisfactory to the Association. 2. Effectiveness Condition No When condition N/A fulfilled Description of Covenant Section 4.01 of the GA: The project shall not become effective until satisfactory evidence has been furnished to the World Bank that GoM has adopted the Project Implementation Manual acceptable to the World Bank. 3. Disbursement Condition on Part 3 Yes When condition N/A (External Audit) of the Project fulfilled Description of Covenant Clause B-1 (b), Section IV, Schedule 2 of the GA: The Recipient shall appoint and maintain throughout the project implementation, the Auditor General, with qualifications, experience and terms of reference satisfactory to the World Bank. 4. Retroactive Financing No By effectiveness N/A Description of Covenant Section IV.B. 1(a) of GA: No withdrawal shall be made for payments made prior to the date of the Financing Agreement, except that withdrawals up to an aggregate amount not to exceed $800,000 may be made for payments made prior to this date but on or after April 1, 2012, for Eligible Expenditures under the Project. . 9 Team Composition Bank Staff Name Title Specialization Unit UPI Pazhayannur K. Lead Financial Team Lead AFTME 80879 Subramanian Management Specialist Michael John Jacobs Consultant Audit AFTME 237117 Annie Kaliati Jere Team Assistant Team Assistant AFMMW 290712 Steven Maclean Mhone Procurement Specialist Procurement AFTPE 318342 Khuram Farooq Consultant Accounting and AFTME 342060 IFMIS Trust Chamukuwa Financial Management Financial AFTME 382028 Chimaliro Specialist Management Nneoma Nwogu Counsel Legal LEGAM Luis Schwarz Senior Finance Officer Disbursement CTRLA 82804 Non Bank Staff Name Title Office Phone City Twaib Ali Deputy Director, PFEM +265-1-789337 Lilongwe Unit Patrick Liphava Principal Economist, +265-999006250 Lilongwe PFEM Unit Elliam Kadewele Economist, PFEM Unit +265-999332705 Lilongwe Andrew Tench PFM Advisor, MoF +265-1-788910 Lilongwe . Locations Country First Location Planned Actual Comments Administrative Division Malawi MoF Lilongwe . 10 I. STRATEGIC CONTEXT A. Country Context 1. Malawi is a landlocked low income country with an estimated Gross National Income per capita of US$340 (in 2011), registering an average real GDP growth rate of about 7% per annum for the last five years. It is also one of Southern Africa's most densely populated countries, with an estimated population of 14.9 million as of 2010 and a significant percentage (50.7%) of them currently live under the 1.25 dollar-a-day income poverty line. Income inequality also remains high reflecting profound inequities in the access to assets, services and opportunities across the population. 2. Until 2010, Malawi experienced solid growth through prudent macroeconomic policies and a supportive donor environment. This performance was built on strong stabilization policies since 2004, and the debt relief from the Heavily Indebted Poor Countries (HIPC) initiative which helped to improve public expenditure management and created the fiscal space needed to generate the momentum for growth. Growth was largely driven by high agricultural exports, and rising Foreign Direct Investment (FDI) inflows related to mining and Government spending. 3. In early 2012 it was estimated that 2011 real GDP had slowed to about 1.4 percent. The new Joyce Banda government has taken decisive policy measures to arrest the slowdown in the economy and is already implementing a comprehensive package of economic reforms. These reforms aim to address the current external imbalances with plans to cushion the vulnerable poor against the impact through social protection programs, and facilitate a growth rebound in the short term. In this regard, some decisive and credible measures have been taken by the authorities to strengthen economic governance, while at the same time signaling to development partners and the private sector of government's commitment to create a favorable environment for a return to positive growth. Early indications are that the policy reforms are bearing fruit, as many external credit lines have resumed and there is growing evidence of renewed confidence in the management of the economy by private investors. The authorities are also committed to a program of fiscal consolidation in their 2012/13 budget, while ensuring there is some room to promote a private sector rebound. 4. The swift movement of President Banda’s government to approve changes and to repair relations with donors and international financial institutions has put Malawi on a firm position to regain macro-economic balance and return to a positive growth path. The policy reform measures undertaken recently would now allow for a relatively quick return to a growth path that is in line with Malawi's recent historical trend. The government's efforts to restrain fiscal and monetary policy, in support of the recent devaluation of the Kwacha and adoption of a flexible exchange rate regime, will support the quick recovery if sustained. 5. The Second Malawi Growth and Development Strategy (MGDS II) 2011-2016, which is the country's second medium term plan, was approved by the Cabinet in April 2012. The MGDS II is a medium term strategy designed to attain Malawi's long term aspirations as spelt out in its Vision 2020 and strives to foster a more inclusive job creating growth to address the unemployment problem as well as reduce poverty. The strategy reflects a general consensus on 11 the country's broad goals for growth, social equity, and governance. The MGDS II was developed in an all-inclusive process. All levels of society, including women, the youth, private sector, civil society and development partners were all involved in the MGDS II consultation process. To respond to the need to accelerate the economic recovery process, the Government has reprioritized the interventions in the MGDS II and has come up with a short term Economic Recovery Plan, which was launched in late September 2012, focusing on short term measures to restore macroeconomic stability while mitigating the impact on the poor. B. Sectoral and Institutional Context 6. The Government of Malawi (GoM) has been reforming its public financial management systems over the last ten years. While this has yielded significant improvements in the legal framework, IT systems and budget procedures, the full benefits of these reforms have not yet been felt in terms of aggregate fiscal discipline, strategic allocation of resources and effective service delivery. The authorities and development partners recognize the need to move to a new phase of the reforms focused in greater implementation of the new rules and regulations, tighter internal controls, greater attention to the benefits of public financial management (PFM) reforms for Ministries, Departments and Agencies (MDA) and sectors and capacity development in the various PFM institutions. The management of the PFM system is mainly concentrated within the Ministry of Finance (MoF). Within the Ministry, the Secretary to the Treasury has a key responsibility for budget planning and execution, while the Accountant General has responsibility for producing timely and appropriate management and financial accounts. Within MDAs it is the Controlling Officers who have overall responsibility for effective PFM. 7. The PFM reforms were being supported previously by donors through the Common Approach to Budget Support (CABS) Group which has been providing assistance to the GoM since 1997. With support from CABS suspended until 2005, since then many development partners other than the CABS group are also providing support to the reforms and many more are expected to join in these efforts. The reform efforts are coordinated between the Government of Malawi and donors through Group on Finance and Economic Management (GFEM) meetings that are jointly chaired by the Secretary to the Treasury and a representative from the donors. Through the Financial Management Transparency and Accountability Project (FIMTAP) financed by the World Bank and the European Union, capacity development assistance was provided to Internal Audit, External Audit and the Office of the Director of Public Procurement. The project also supported the acquisition, installation and operationalization of the IFMIS, the Government Wide Area Network and general governance improvement among others. Through the Malawi Social Action Fund (MASAF), the Bank helped in building capacity including FM capacity at the District Level. There were also significant contributions to PFEM reform from DfID, Norway, GIZ, UNDP and the EU. The EU Capacity Building Project for Economic Management and Policy Coordination was instrumental in developing the Public Finance and Economic management (PFEM) reform program and strengthening capacity in both the MOF and the Ministry of Economic Development and Planning. 8. Though progress has been registered in several areas, there is much more to achieve. Progress has indeed been made on many of the activities in the PFEM Action Plan during the period 2006-2011 but many activities are well behind initial target dates and insufficient attention and resources have been given to identifying and resolving bottlenecks. Several reforms 12 and improvements have been introduced but were uncoordinated and implementation lags behind. It is evident that there needs to be a consolidation of what has been introduced and for a more thorough attention to implementation with an assured stream of resources. A more comprehensive approach has been established to provide strategic direction through a sector wide approach to PFEM reforms. The government therefore introduced a PFEM Reform Program (PFEMRP) and the support is being provided using a common basket funding mechanism through the PFEMRP Multi Donor Trust Fund (MDTF) administered by the World Bank (TF071796). PFEMRP is aimed at improving GoM’s macro-fiscal management, accountability and transparency in public financial management and public oversight. Interventions and support happening outside the MDTF are tracked using a PFM support matrix maintained by the PFEM Unit and updated from time to time through discussions during the GFEM meetings. PFEMRP covers ten reform areas (planning and policy analysis, resource mobilization, budgeting, procurement, accounting and financial management including internal audit, cash and debt management, parastatal financing, monitoring and reporting, external auditing, and program management). This project covers three main areas out of the PFEMRP namely accounting and financial reporting, internal and external audit and program management. This has been decided as the immediate focus areas by the government and the MDTF partners based on priority, available resources, and component readiness. 9. The GFEM, originally a donor grouping, was transformed in 2006 to a joint donor GOM forum. This provides a management steer of PFM reform through participation of both GoM and donors. It is now co-chaired by the Secretary to the Treasury and a head of a development agency on a rotating basis. The Ministry of Finance recognized the importance of developing a facilitating unit for PFEM reforms and acting as a secretariat, and thus set up a PFEM Unit in 2008. This was formally established through the Ministry of Finance functional review in 2010. With this establishment of a unit to deal with PFEM, it became possible to consider developing a more structured approach to PFEM reform. In addition to the GFEM there is a Government PFEM Steering Committee of senior management which approves PFEM programs which are developed and monitored by a PFEM Technical Committee. 10. Reform reviews have shown that PFM reform requires strong political commitment, implementation designs tailored to the country context and government led coordination arrangements. The FROIP Trust Fund will be managed by a high level unit in the Ministry of Finance and the project design is derived from the GoM’s comprehensive Public Finance and Economic Management Reform Program (PFEMRP) which has culminated from an increasing awareness within GoM for overall PFEM reforms and have been guided by the results of the Public Expenditure and Financial Accountability (PEFA) assessments. 11. Overall, four PEFA assessments have been conducted in Malawi in 2005, 2006, 2008 and 2011. The 2011 PEFA assessment was based on an analysis of performance for the years from 2007-08 to 2009-10. The main findings relating to budget execution, accounting and financial reporting and internal and external oversight are summarized next. 12. Predictability and control in budget execution:  Reforms are on-going in the Malawi Revenue Authority 13  The Ministry of Finance has improved the cash management process  Debt management and payroll system are being operated efficiently  The procurement system continues to be unable to provide statistics with regard to the implementation and comprehensiveness of competitiveness in public procurement  The Integrated Financial Management Information System (IFMIS) rollout process has been concluded to the central government and 34 local councils  Although awareness seems to be rising with regards to internal control, the evidence does not yet support the finding of improved control and internal audit procedures and processes being implementing and taking effect. 13. Accounting, recording and reporting: Progress in the period under review has featured the improved timeliness of the closure of the accounts and the production of the financial statement for audit. Also, in-year budget execution reports are produced on a timely basis and with some improvements is quality. However, management information at service delivery units still needs to improve. A serious control concern identified is the backlog in bank reconciliations since July 2010. Timely bank reconciliation is an essential discipline in the ongoing checking and verification of accounting practices across Government and it also provides assurance as to the integrity of data used for reporting. 14. External scrutiny and audit: The period covered by this assessment has seen a backlog of external audits and Public Accounts Committee (PAC) scrutiny cleared. However, there are still weaknesses in the actions and follow up based on the recommendations of the National Audit Office (NAO) and PAC. In summary, NAO and PAC scrutiny has been characterized by periods when there has been no public scrutiny followed by intense activity to clear backlogs. In respect of the Parliamentary Finance Committee, there is more opportunity for scrutiny of the draft budget than for budget execution. C. Higher Level Objectives to which the Project Contributes 15. The project objective is clear, relevant and important to Malawi as articulated in the MGDS II consistent with FY13/16 CAS and is fully aligned to the Africa Regional Strategy. It is also consistent with strategies of the various donors contributing to the MDTF and the framework for CABS. It is designed to help the Government achieve improved public service delivery through strengthened public sector management systems. In achieving these outcomes, the CAS provides for joint efforts with other development partners and has accommodated the multi donor approach to supporting PFM reforms. In terms of policy areas, the projects under PFEMRP will contribute towards restoring prudent fiscal policy and sound macroeconomic management. They are consistent with the ‘governance and public sector capacity’ cross cutting/foundational pillar of the Bank’s Africa Strategy. By strengthening human and institutional capacity in the public service, front line service delivery will improve, thereby indirectly addressing the cross cutting issue of capacity development in MGDS II. The renewed engagement with Malawi by development partners includes pilot use of national PFM systems and the project is important to assist to develop the necessary PFM assurance. 14 II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 16. The objective of the Project is to improve the internal controls, accounting, reporting and oversight of the Recipient’s finances at the central and decentralized levels in its ministries, departments and agencies (MDAs). Achievement of the objective will be assessed through impact on relevant PEFA performance indicators. Project Beneficiaries 17. The main stakeholders in this project are the ministries and budget users of the implementing departments, agencies and districts and the beneficiaries of the results of the internal and external audits since better oversight and management of funds means that more resources will be available for good use across government programs. Consultations were held with these stakeholders to understand the gaps with a view to tailor components to address the existing deficiencies. It is also expected that the citizens of Malawi will benefit from more effective service delivery facilitated by these reforms. PDO Level Results Indicators 18. PEFA assessments of central government which includes the many tasks decentralized to the districts in Malawi were carried out in 2005, 2006, 2008, and 2011. The PEFA assessments have made an important contribution to the shaping and implementing of reforms and improvements to the PFM system, and the GoM has expressed strong interest in using the results of the 2011 PEFA assessment to help shape its future reform agenda. The achievement of the project's overall development objectives will be measured by regular focused assessments of the following key outcome indicators using the PEFA framework: • Improved effectiveness of payroll controls and non-salary controls as measured by PEFA PI-18 and PI-20. • Improved compliance with rules as measured by PEFA PI-20 • Improved effectiveness of internal audit as measured by PEFA PI-21 • Improved information on resources received by service delivery units as measured by PEFA PI-23 • Improved quality and timeliness of annual financial statements as measured by PEFA PI- 25. • Improved scope, nature, and follow-up of external audit as measured by PEFA PI-26 • Improved scrutiny and response to external audit reports as measured by PEFA PI-28 • Improved service delivery resulting from PFM reform interventions to be defined during the first two quarters of project implementation 15 III. PROJECT DESCRIPTION A. Project Components 19. .This project is conceptualized to respond to the PFEMRP by focusing on improving the Integrated Financial Management System (IFMIS) and oversight functions of internal and external audit for better implementation of the rules and regulations, fuller utilization of IFMIS functionalities and improved service delivery. The components for this project have been chosen based on the joint priorities of the government and MDTF partners and readiness to implement. The project is scalable and Phase I covers some urgent technical assistance, training and goods procurement. The intention is to expand the reach of the project activities to Phase II with subsequent funds once they are received. 20. Accounting and Financial Management (Component 5 of PFEMRP) US$9.2 million (US$3.9 million in Phase I and US$5.3 million in Phase II) - This component is to improve the systems and controls for accounting and financial management. 21. Sub-component 1- Accounting and IFMIS (Component 5.1 and 5.2 of PFEMRP) - This sub-component would assist the Government to improve the efficiency and comprehensiveness of Government accounting and financial management systems in its MDAs, the compliance with the rules and regulations, and the comprehensiveness, transparency, and timeliness of fiscal reporting. Following a yet to be concluded review of business process and functional requirements (funded separately by EU with the consultants expected to be on board in November, 2012), this is expected to be achieved in phases. Though phasing of activities will be adjusted over the course of the project implementation to flexibly respond to the evolving ground realities, a broad sequencing of activities is planned around two phases.  Phase 1 will cover: (i) the automatic capture of all Government revenues, expenditures and financing transactions in IFMIS; (ii) ‘interfacing IFMIS with the Central Bank to foster automation and hence efficiency in reconciliations’; (iii) implementation of an electronic payments system (iv) implementation of Cash Basis International Public Sector Accounting Standards (IPSAS); (v) harmonization of integrated financial management systems at central and district levels; (vi) review of annual budgeting, accounting and reporting processes and associated controls to be implemented through subsequent upgrading of IFMIS to a web based version with comprehensive coverage of all relevant modules and interfaces; (vii) purchase of new licenses if EPICOR or Serenic Navigator (SN) softwares do not meet government requirements and ; and (viii) consulting services to analyze expenditure arrears and make recommendations;  Phase 2 will cover: (i) roll out of budgeting module to all the MDAs; (ii) devolution of financial management responsibility to MDAs; (iii) implementation of fixed assets register, (iv) roll-out of business intelligence and reporting tools to select users of all the MDAs and (v) decentralization support.  Activities that will stagger across both phases include: (i) getting government's core IFMIS team trained in relevant technical certificate courses, (ii) improving the competency of the accountancy service; (iii) developing the management skills to run IFMIS effectively; and (iv) hiring of technical support staff for sustainability of the IFMIS. 16 22. Sub-component 2 – Payroll Management (Component 5.1 of PFEMRP) - The Payroll Management subcomponent would cover: (i) Business processes re-engineering, including automated posting to IFMIS General Ledger through interface, follow up and cataloguing of all processes including descriptions of operations and controls; (ii) roll-out of payroll system to the regions; (iii) Improvement of quality of staff through specialized training for system administrators and managers, and user training for users from various MDAs; and (iv) Adequate audit coverage of payroll, (v) Development of payroll interface by Accountant General Department (AGD); (vi) hardware support for decentralization of payroll operations to three districts and (vii) support the establishment of Disaster Recovery (DR) center for payroll. This could best be achieved through the cooperation of Department of Human Resource Management and Development (DHRMD) staff and internal auditors in the various MDAs. 23. Sub-component 3 – IFMIS Roll out to districts (Component 5.1 of PFEMRP) – This component would cover activities not included in GIZ funding to National Local Government Financing Committee (NLGFC) associated with IFMIS roll-out to 8 remaining councils, including purchase of servers and other hardware for back-up and disaster recovery, procurement of generators, furniture, air-conditioners and networking, VPN Connectivity, laptops for technical support team, technical training for database administrators and networking specialists. 24. Component 2 - Internal Audit (Component 5.3 of PFEMRP) US$2.8 million (US$1.4 million in Phase I and US$1.4 million in Phase II) - This component would focus on supporting the Central Internal Audit Unit (CIAU) in further development of the Internal Audit Service within the PFEMRP through: (i) Improvement of the governance and legal framework to provide a wider range of internal audit services; (ii) Capacity building of the CIAU including the development of a human resource development plan, support for the recruitment, retention and training of CIAU staff; (iii) Establishment of quality assurance arrangements for high quality audits and reports; (iv) Development and implementation of a system for reporting internal audit performance to the CIAU and coordination with stakeholders. 25. Component 3 - External Audit (Component 9 of PFEMRP) US$4.7 million (US$2 million in Phase I and US$2.7 million in Phase II) - This component would focus on strengthening the operational capacity of the National Audit Office (NAO) through: i. Delivery of high quality and timely audit services by re-engineering audit procedures through revision of audit manuals and training staff in new procedures including conduct and reporting of regularity audit, performance audit, procurement audit and revenue audit; ii. Advising on appropriate conditions of service and training policies for competent and motivated staff, supported by IT software for audit management and conduct; iii. Provision of vehicles and computers for auditor operations; iv. Provision of effective communication facilities for improved audit management and audit reporting arrangements; and v. Increased independence and accountability for the NAO in line with the independence principles of ISSAI 10 of the International Standards for Supreme Audit Institutions, annual audit of NAO, and stronger dialogue with stakeholders including PAC and donors. 17 26. Component 4 - PFEMRP Management (Component 10 of PFEMRP) US$1.6 million (US$0.7 million in Phase I and US$0.9 million in Phase II) - The objective of the component is to manage the agreed development program, provide procurement and financial management support to the implementing departments and to monitor the objectives and performance against the indicators. The PFEM unit will also be responsible for the financial management of the overall trust fund program. Capacity building is required both in terms of staff training and also additional appointments to support the main functions of the Unit. Main activities will include; (i) procurement of full complement of professional staff required for the Unit either through transfer from other units or through contract appointment; (ii) purchase of any office equipment urgently required and incremental operating costs; (iii) training in program and project management and procurement and/or financial management as required; (iv) annual audit of the project by independent auditors; (v) supporting the development of ICT to enhance communication with the other PFEM Institutions; (vi) facilitating the undertaking of PFEM studies, reviews and assessments; and (vii) facilitating development and appraisal of remaining components of the PFEMRP. B. Project Financing Lending Instrument 27. The project is an estimated US$8 million operation which is scalable to US$19 million which will be financed by the PFEMRP Multi Donor Trust Fund administered by the World Bank. This will be a grant executed by the Government of Malawi. To accommodate for the currently available funds and the future pledges and funds flow to the MDTF, the project implementation will be carried out in two phases – the first phase for a total amount of US$8 million and the second phase for the remaining US$11 million. The initial Grant Agreement between the World Bank with the Government will be for US$8 million which will be amended based on future funds commitments to the MDTF. Project Cost and Financing 28. The project costs are as follow: Project Project Costs MDTF Financing (millions of US$) % Financing Components (millions of US$) Phase I Phase II 1. Accounting and 9.2 3.9 5.3 100 Financial Management 2. Internal Audit 2.8 1.4 1.4 100 3. External Audit 4.7 2.0 2.7 100 4. PFERMP 1.6 0.7 0.9 100 Management Contingencies 0.7 0.7 100 Total Project 19.0 8.0 11.0 100 Costs 18 C. Lessons Learned and Reflected in the Project Design 29. The project design should be simple and designed for easy implementation and should take into account the absorptive capacity of the country and the prevailing political context. The Financial Reporting and Oversight Improvement Project (FROIP) design has been a country product with limited guidance from the Bank. A long term in country Advisor has assisted the GoM. The design and investment in IT infrastructure should anticipate expansion needs. The consultant in IFMIS has long experience in this issue. FROIP includes substantial training aimed at improving implementation capacities of relevant counterpart and implementing government staff. 30. Capacity building should be centrally managed. FROIP has a project management unit in the MoF. Project design should take account of grant financing from donors, which requires more flexible design of capacity building activities. This will minimize duplication of efforts, and encourage cost effectiveness. FROIP is funded through a Multi Donor Trust Fund with a managing committee which will approve and monitor expenditure abased on agency request. This will provide flexibility and control. Previous expenditures have been judged ineligible because of differing perceptions on the provisions of allowances. The project will be clear on the criteria for providing allowances and expenses will be closely monitored by the committee. 31. Changes in political economy are not predictable, but could be better adapted to if project design allowed greater flexibility in implementation. It is pertinent therefore, to constantly evaluate and adapt to change in circumstances to better maneuver public management reform programs. The project management unit will adapt the project to such developments. 32. Recruiting specialists for M&E, IT, financial management, and procurement in the implementing agency at the beginning of the project is very important so that there will not be lack of skills in these matters, and implementation delays can be avoided. FROIP will address this. 33. Inter-ministerial and donor coordination is crucial to the success of project implementation. The MDTF management arrangement addresses this. 34. M&E technical committee meetings and annual and quarterly work plans are essential tools for monitoring the progress of project activities. Further, regular guidance from the steering and technical committees will facilitate smooth project implementation. 35. Based on the FIMTAP report, continuity of the team working on the project, especially the Task Team Leader (TTL), is very important both for the Bank and the Borrower. Task leadership of a complex project should be entrusted to senior and more experienced Bank staff, and not to a fresh or newly recruited staff who does not have any operational experience with the Bank projects. The FROIP is to be led by a very experienced Bank officer. 19 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 36. The individual components will be managed by senior officers responsible to the heads of the relevant agencies – Accountant General, Auditor General, Internal Audit Director and Head of PFEM Unit. The project is being implemented within the framework of the PFEMRP and will be overseen by the PFEM unit in the MoF which will also be responsible for centralized procurement, financial management and monitoring of the overall trust fund program. Special arrangement will be made to ensure that the independence of the National Audit Office is respected in consultation with the MDTF partners and the NAO. Capacity building will be given to this unit both in terms of staff training and also additional appointments to support its main functions. 37. Project implementation arrangements have been derived from the governance arrangements set up for the PFEMRP as a whole and will consist of: (i) PFEM Steering Committee; (ii) PFEM Technical Committee (PFEMTC); (iii) Technical Working Groups (TWGs) and (iv) PFEM Unit (PFEMU). In addition to this, there is also a Joint Government Donor Committee.  PFEM Steering Committee (PFEMSC): This is the highest level government body that provides strategic policy guidance and oversight of Malawi's overall PFEM program. The PSC is chaired by the Secretary to the Treasury with PFEM Unit providing secretariat services. The PFEMSC has representation from key PFEM institutions with the PS Economic planning and Development, Office of the President and Cabinet (OPC)-PS Finance, OPC-PS Public Sector Reform, PS DHRMD, PS Local Government and Rural Development (LG&RD), Auditor General, Accountant General, Director-Office of the Director of Public Procurement (ODPP), Executive Secretary NLGFC, Commissioner of Statistics, Commissioner General of Malawi Revenue Authority (MRA), Chairperson of the PFEM TC. The committee meets semiannually to review progress on the PFEM reform program outcomes and to adjust and amend the strategy and work program as necessary.  PFEM Technical Committee (PFEMTC): PFEM Technical Committee is presently chaired by the Director, Debt and Aid Division (DAD) and consists of directors of all divisions in MoF, senior officers of the other organizations represented at the PFEM Steering Committee (PFEMSC) as members; the PFEM Unit acts as secretariat to this committee. Apart from the above, membership of the PFEMTC would include Component Coordinators and representatives from line ministries and other relevant officials as the Chair considers necessary including representatives of the MDTF donors and the TF Administrator. PFEMTC meets every two months and its functions include oversight of PFEM activities and review of the implementation progress of projects under PFEM RP MDTF with inputs from the TWGs. They will report to the PFEMSC and will ensure that implementing units comply with the policy guidelines as directed by PFEMSC. PFEMTC can also call technical meetings with the participation of other project representatives and DP's technical teams to discuss issues of cross cutting nature and interface among the projects. 20  Technical Working Groups (TWGs): In the PFEM RP there are 10 proposed working groups which would pursue the technical work of the PFEM RP. There may be others as required for effective implementation of the PFEMRP. Currently, there are seven TWGs operating - those for Audit, IFMIS & Financial Reporting, Macroeconomic forecasting (also known as the National Accounts group), Cash Management, Procurement, Domestic Revenue and Public Expenditure Reviews. The TWGs relevant to this project (Audit and IFMIS) will provide technical input and participate in the preparation, appraisal and monitoring of the project. TWGs are chaired by the Directors heading the relevant technical department/unit. Membership of the TWGs will be expanded to include Directors, Component Coordinators and representatives from line ministries and other relevant officials as the Chair considers necessary and the representatives of the MDTF donors and the TF Administrator. They will report to the PFEMTC and will ensure that implementing units/departments comply with the policy guidelines as directed by the PFEMTC and PFEMSC. TWGs will hold monthly review meetings. Their specific responsibilities include: (a) preparation for relevant project appraisal and review of progress reports towards the project's objectives; (b) preparation and submission of annual work plans, budgets and procurement plans to PTC, PSC, and Donor Project Team; (c) review of agreed performance targets; (d) analysis of implementation issues for achieving key outputs; and (e) identification of critical risks that could hinder efficient implementation of project activities and draw risk mitigation measures.  PFEM Unit (PFEMU): The PFEM Unit will be the key unit which facilitates the PFEMRP. It also acts as secretariat to the various committees and it will provide support for managing the day to day financial management and procurement transactions of the projects. The PFEMU will be staffed with government officials and will include Deputy Director who will report to the Director and the PS Administration who has overall responsibility for PFEM RP and Specialists in Procurement, Financial Management and M&E. The main functions of the PFEMU will be to: (i) provide logistical support and guidance to the project teams and component coordinators; (ii) compile work programs from the various working groups, budgets and procurement plans for each project; (iii) monitor project implementation and prepare progress reports for the PFEMTC and PFEMSC; (iv) submit consolidated annual work programs, budget and procurement plans for review and endorsement by the PFEMTC and PFEMSC; (v) hold regular meetings with focus groups and component coordinators to ensure appropriate linkage in the activities under various components; (vi) maintain project accounts, manage designated accounts and prepare project financial statements; (vii) submit withdrawal applications to the World Bank for replenishment; (viii) make recommendation to the PFEMTC and PFEMSC on how to effectively implement the agreed work plan; and (ix) carry on periodic performance evaluation of all long term consultants (both expatriate and local).  Joint Government Donor Committee: This committee will be the main oversight body for the overall management of the trust fund. The committee will be co-chaired by the Secretary to the Treasury and the head of one of the contributing development partners to the MDTF on a rotating basis and will include representatives from MDTF donors, conveners of TWGs, or their representatives, Principal Accounting Officers or representatives of the implementing departments of relevant components and the Head of the PFEM Unit. The main functions of this Committee will be to: (a) review and monitor 21 the implementation of the MDTF in line with GoM’s overall PFEMRP; (b) review and approve sub-projects submitted for funding out of the MDTF; (c) monitor progress on the annual MDTF work program/plan, budgetary allocation/funding commitments and disbursements and any other adjustments that may be necessary. The committee will meet as needed but no less than semiannually. Summary of Project Implementation Arrangements Institution Members/Composition Tasks/Responsibilities Reporting Unit PFEM Steering Chaired by the Secretary to the  Provides strategic policy Committee Treasury. The PFEM Unit, guidance and oversight of (PFEMSC) Ministry of Finance will serve as Malawi’s overall PFEM reform the Program Secretariat. program  Review progress on the Members: PS Economic Planning PFEMRP outcomes & Development, OPC-PS Finance,  Recommend actions for OPC- PS Public Sector Reform, modifying work programs/plans PS DHRMD, PS LG&RD, Auditor regulations and policy or General, Director ODPP, implementation arrangements Executive Secretary NLGFC, Commissioner of Statistics, Commissioner General of MRA, Accountant General, and Chairperson of PFEMTC PFEM Technical Chaired by the Director, DADM.  Oversight of PFEM activities - Reports to the Committee  Review of project PFEMSC (PFEMTC) Members: Directors of all implementation progress under divisions in MFDP (including PFEM RP MDTF and provide - Prepares summary MRA and CIAU), senior officers necessary guidance report for PFEMSC of organizations represented at the  Review and approve annual meetings PFEMSC, Component work plans, budgets and Coordinators, representatives from procurement plans line ministries, MDTF  Review of agreed performance Administrator and representative targets from MDTF donors  Resolve critical risk including implementation issues  Submit funding proposals to MDTF Administrator and DPs  Technical There are ten TWGs to pursue the  Preparation for project - Reports to the Working Groups technical work of PFEM RP. appraisal and review of PFEMTC (TWG) TWGs are chaired by Directors progress reports heading the relevant technical  Preparation and submission of - Prepares summary department/unit. annual work plans, budgets and report for PFEMTC procurement plans to PFEMTC, meetings Members: Directors, component PFEMSC, and Donor Project coordinators, representatives from Team line ministries and other relevant  Review of agreed performance officials as the Chair considers targets necessary and representatives of  Analysis of implementation MDTF donors and the TF 22 Administrator. issues for achieving key outputs  Identification of critical risks that could hinder efficient implementation of project activities and draw risk mitigation measures. Public Finance Headed by a full time Head of the  Provide logistical support and - Reports to the and Economic Unit who is a serving government guidance to the project teams Principal Secretary, Management official and component coordinators Administration, Unit (PFEMMU)  Compile work programs from MoF Serves as Secretariat of the project the various working groups, comprising the following: (i) budgets and procurement plans - Prepares progress Project Director, Addl. PD, for each project reports including Procurement & Finance Specialist,  Monitor project implementation financial, M & E Specialist, and Technical and prepare progress reports procurement & component specialists and other for the PFEMTC and PFEMSC monitoring reports support staff  Submit consolidated annual work programs, budget and A team of Management/ procurement plans for review Implementation Support and endorsement by the Consultants including long and PFEMTC and PFEMSC short term consultants for  Hold regular meetings with providing TA support as required focus groups and component coordinators to ensure appropriate linkage in the activities under various components  Maintain project accounts, manage designated accounts and prepare project financial statements  Submit withdrawal applications to the World Bank for replenishment  Make recommendation to the PFEMTC and PFEMSC on how to effectively implement the agreed work plan  Carry on periodic performance evaluation of all long term consultants (both expatriate and local). Joint government Co-chaired by the Secretary,  Jointly review and assess Detailed report on DP Committee Treasury and head of one of the implementation progress of the overall progress of principal donor partners of MDTF MDTF program overall against project implementation program benchmarks and on performance of Members: PSC chairs, PDs and MDTF MDTF contributing donors  Review financing decisions  Review disbursements to date vis-à-vis project delivery status  Discuss and agree annual work plans, budgetary allocation and 23 any other adjustments that might be necessary B. Results Monitoring and Evaluation 38. The project’s Monitoring and Evaluation (M&E) framework will be a key instrument to monitor progress towards achieving the project development objectives and informing the PFEMTC on project performance including potential bottlenecks as they arise. The M&E framework presented in Annex 1 captures the high level results that are expected to be achieved during the life of the project. The periodic performance assessment of the project and the resulting outcomes will be carried out jointly by the World Bank and the MDTF donors with the support of the PFEM unit. Apart from this, the government in consultation with MDTF partners plans to develop lower results indicators to track results in service delivery or improved efficiency arising out of the proposed interventions. This is proposed to be done during the first six months of project implementation to come up with a baseline for future tracking. C. Sustainability 39. The MDTF is being locally managed within the MoF and project components are being managed by affected agencies. Substantial parts of the project are directed at building staff skills and capacity and the expansion of the IFMIS is to be undertaken in phases that will be adjusted over the course of the project implementation to flexibly respond to evolving ground realities. Although the project focuses on delivery though the use of external consultancies, the consultants will work closely with the staff and deliver training and transfer learning as needed. In addition to including this in consultants ToRs, the review mission teams would carry out periodic checks to ensure that this is being achieved during the period of the project so as to give room for taking necessary action where it is not being done. This should ensure that the increased capacity would be retained in the ministries impacted by the TA interventions. Where the activity is geared towards the building of information databases and the building of analytical models, the training will also ensure that the staff would be able to update and maintain these tools. In the area of Accounting and IFMIS, much of the proposed support centers on the development and implementation of systems to remedy shortcomings in the Government's existing framework, and to support the Government's strategic needs over the next few years. All of the activities proposed are structured so as to promote sustainability of the systems after the consultants have completed the design and implementation tasks. In each of these activities, sustainability will be promoted through the comprehensive documentation of functional and technical requirements, system design, system configuration and construction, system testing scripts and testing reports, system policy and procedure manuals, system user guides, system training plans, system training materials, documentation of historical data loading and migration documentation. In addition, each consultancy - whether they be system developments or other - will be structured to include a comprehensive capacity building element including the production of policy and procedure manuals, training materials and the planning and delivery of a comprehensive, detailed training program to guarantee the transfer of expert knowledge to GOM staff and a foundation for the training of future staff recruited into these areas. In addition, discussions are in progress for the South African Institute of Chartered Accountants (SAICA) to 24 partner with local Malawian universities or training institutions to develop competencies in accounting and public financial management. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Risk Category Rating Stakeholder Risk Substantial Implementing Agency Risk - Capacity Substantial - Governance Substantial Project Risk - Design Substantial - Social and Environmental Low - Program and Donor Moderate - Delivery Monitoring and Sustainability Moderate - Other (Optional) - Other (Optional) Overall Implementation Risk Substantial B. Overall Risk Rating Explanation 40. Financial management reforms involve changes in rules, processes and systems that affect the incentives of the decision makers in allocation and use of scarce public resources. This reform process therefore is a venture with substantial risk. However, these risks are not unique to the Malawi program and are faced in many countries implementing a similar reform program. In the case of Malawi, the risks which might affect the successful implementation and sustainability of this program are: (i) risks due to changing focal point for PFM reforms rated as substantial; (ii) weak implementation capacity rated as substantial; and (iii) risks due to poor governance/weak fiduciary environment rated as high. The overall program risk rating during preparation and implementation is assessed as substantial. The Operational Risk Assessment Framework (ORAF) in Annex 4 describes the risks and the mitigation measures completed or to be addressed during implementation. VI. APPRAISAL SUMMARY A. Economic and Financial Analyses 41. The project would contribute to the objective of better accounting, and reporting of public finances using a controlled, secure, and accountable system that is less prone to manipulation. 25 The quality of expenditure audit will be significantly enhanced as a result of the use of modern techniques in compliance, certification, and performance audits. The project will support better fiscal and financial management decision making in government; provide timely, comprehensive and reliable budget execution data to line ministries and other spending agencies; allow for the timely production of accurate and meaningful financial statements, based on international standards; raise the capacity and competencies of the manpower responsible for budget execution, internal auditing, accounting and financial and fiscal reporting, and external auditing. Although difficult to quantify, each of these factors has a positive economic impact. B. Technical 42. The program does not involve introduction of complex new technologies and the implementing agencies and contractors are familiar with these. All technical issues will be addressed during project appraisal and would include connectivity, capacity, and reliability of communications links and arrangement for quality control of works implemented by various contractors. C. Financial Management 43. The FM systems of the ministry are generally in place to process project transactions and produce reports as required. The PFEM unit which will be directly responsible for FM arrangements of the project has adequate number of qualified and experienced staff. The accounting system being currently used is the automated IFMIS. The same system will be used for the project. The current chart of accounts in IFMIS does not allow processing transactions in accordance with project activities or components. An excel spreadsheet will be used to further analyze information in IFMIS and allow quarterly reporting in compliance with legal agreements. It is expected that the chart of accounts in IFMIS will later (within one year) be reconfigured in a manner that will allow project transactions to be processed in line with activities and components. The mitigation measures that are planned in order to strengthen the FM arrangements are:(i) FM staff to undergo training in FM and disbursement for World Bank funded projects; (ii) reconfigure chart of accounts in IFMIS to allow transaction processing in line with project components; (iii) Strengthen control environment around operation of automated IFMIS by increasing risk awareness among users of the system; (iv) minimize frequency of staff transfers and ensure that where that happens replacement is done promptly with at least equally qualified staff. The details of the assessment are contained in annex. The Financial Management assessment concluded that the financial management arrangements meet the Bank’s minimum requirements under OP/BP 10.02. With the implementation of the financial management action plan, the financial management arrangements for the project will be further strengthened. The residual risk rating for the department is Substantial. D. Procurement 44. Procurement under the Financial Reporting and Oversight Improvement Project will be carried out in accordance with the “Guidelines: Procurement of Goods, Works and Non Consulting Services under IBRD Loans and IDA Credits& Grants by World Bank Borrowers � published by the Bank in January 2011; and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits& Grants by World Bank Borrowers� published 26 by the Bank in January 2011. National Competitive Bidding (NCB) will be in accordance with the Malawi Public Procurement Act of August 2003 which has been reviewed and found satisfactory to the Bank with a few exceptions. The overall risk of the Ministry of Finance to carry activities under the project is substantial as currently there is inadequate qualified staff that can undertake procurement activities under the project using World Bank guidelines and procedures. The Procurement Section needs to be strengthened by having Technical Assistance as an interim measure to ensure that procurement capacity is sufficient to meet procurement demands. Details of the technical assistance required are discussed in the procurement assessment given in Annex 3. “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants� dated October 15, 2006 and updated in January, 2011, shall apply to the project. E. Social (including Safeguards) 45. The project is expected to have positive social impacts through improved credibility on government financial management. Transparent and accountable management of public resources will lead to increased civic confidence in government. The computerization of transactions and processes would lead to better and faster public services delivery. F. Environment (including Safeguards) 46. As a Category C technical assistance program, the Bank’s environmental safeguard policies are not triggered. G. Other Safeguards Policies Triggered (if required) 47. None 27 Annex 1: Results Framework and Monitoring MALAWI: Financial Reporting and Oversight Improvement Project Unit of Targets Data Responsi- PDO Level Measure Description Core Baseline Source/ bility for Results (PEFA Frequency (indicator (2010/11) Dec. Dec. Dec. Dec. Methodo- Data Indicators* score) definition etc.) 2013 2014 2015 2016 logy Collection Indicator PI-18 B+ B+ B+ B+ A Annual PEFA Self- PFEM Predictability One: Assessment Unit and control in PEFA PI-18 budget execution: Effectiveness of payroll controls Indicator PI-20 C+ C+ C+ C+ B Annual PEFA Self- PFEM Predictability Three: Assessment Unit and control in PEFA PI-20 budget execution: Effectiveness of non-salary controls Indicator PI-21 D+ D+ D+ C C Annual PEFA Self- PFEM Effectiveness of Four: Assessment Unit internal audit PEFA PI-21 28 Indicator PI-23 D D D D+ D+ Annual PEFA Self- PFEM Accounting, Five: Assessment Unit recording and PEFA PI-23 reporting: Availability of information on resources received by service delivery units Indicator Six: PI-25 C+ C+ C+ C+ B Annual PEFA Self- PFEM Accounting, PEFA PI-25 Assessment Unit recording and reporting: Quality and timeliness of annual financial statements. Indicator PI-26 D+ D+ D+ C C Annual PEFA PFEM External audit Seven: PI-28 D+ D+ D+ C C Assessment Unit and legislative PEFA PI-26 & scrutiny: Scope, 28 nature and follow-up of external audit & Legislative scrutiny of annual audit reports Indicator Baseline To be defined Eight study Q 1 during Improved & 2 of implementation service project delivery period resulting from PFM reform interventions 29 Annex 2: Detailed Project Description Malawi: Financial Reporting and Oversight Improvement Project Component One: Accounting and Financial Management (Component 5 of PFEMRP) 1. The objectives of this component are to improve the systems and controls for accounting, reporting and financial management. It has three sub-components as explained below. Sub-component 1- Accounting and IFMIS (Component 5.1 and 5.2 of PFEMRP) 2. Objectives: This sub-component would assist the Government to improve the efficiency and comprehensiveness of Government accounting and financial management systems in its MDAs, the compliance with the rules and regulations, and the comprehensiveness, transparency, and timeliness of fiscal reporting. 3. Implementation status: The Malawi IFMIS was implemented in 2005 on EPICOR Public Sector Financials (version 7.2) platform for accounting and budgeting. Currently, EPICOR system, upgraded to version 7.3.5 in 2007/08, being used in Malawi has the following modules available: a) Active Planner: used for compilation of annual budget and MTEF by only the Budget Division users; ministries and agencies use spreadsheets to prepare budget requests; b) General Ledger/CoA: implemented: multi-dimensional Chart of Accounts (CoA), compliant with IMF’s Government Finance Statistics (GFS) implemented c) Accounts Payables: implemented: being used for supplier maintenance, invoice and payment processing d) Commitment control/purchase orders: partially implemented with control weaknesses e) Accounts Receivables (AR) and revenue management: Not implemented f) Bank reconciliation: Not implemented; interfaces with central bank planned g) Check printing: implemented; control weaknesses around handling of check books h) Fixed Asset Management System: not implemented i) Cash Management: partially implemented: only used for managing bank accounts, not cash planning, forecasting and reconciliation. 4. As of now, the system has been implemented at all 52 line ministry headquarters in Lilongwe and 3 regional treasury cashier offices. Most of the line ministries are connected to the central servers and process their transactions on line. The Accountant General Department (AGD) processes the transactions for a few off-line ministries. The system is primarily being used to record current expenditures, make payments and produce reports. Donor funded project payments are being processed outside the system. Interfaces with important external systems like central bank, payroll, debt and aid management and revenues have not been developed. 5. Through the productive use of IFMIS, the government has been able to institute TSA regime by centralizing the payments. The Government maintains a set of five accounts at Reserve Bank of Malawi (RBM) for Government funds. Most individual spending Unit bank accounts have been closed. Payments are centralized through the central payment office and are made from one of these accounts. Remaining separate, ‘ring-fenced’ accounts relating to 30 respective projects are held at the RBM, from which checks are drawn by the respective projects and payment information uploaded into IFMIS ex-post. Most expenditure transactions are subject to budget availability checks before they are authorized for payment. Extra budgetary funds are transacted outside the system. 6. The IFMIS system is not being leveraged to its full potential for a strengthened public financial management environment due to several control weaknesses and incomplete coverage. 7. Direct payment facility, allowing users to make payment without purchase order and commitment control, is being used without adequate access restrictions. Release of funds to individual payments transactions without linkage to cash forecasts and commitments increases the risk of rent seeking. There are control weaknesses in the system security involving access rights, mostly through password sharing, to multiple users to over-ride budget availability check. Non-tax receipts are collected by the respective field office or deposited in the designated local bank branches through the deposit slips, which are bundled on monthly basis to be sent to the Ministry, where they are entered in the IFMIS as monthly totals, losing voucher-wise break-up required for bank reconciliation. Vendor creation process is ad-hoc and un-regulated. A custom developed, home-grown system is being used to run the payroll, which is uploaded into the IFMIS through a series of manual interventions, compromising controls at several steps along the way. 8. The government is aware of these issues and is committed to improving the control environment and coverage of the IFMIS through a comprehensive strategy. Key aspects of this strategy involve urgent fixes, including strengthened system access controls, re-evaluation of EPICOR as suitable technology platform, business process re-engineering and subsequent revision of its accounting manual and IFMIS upgrade/re-implementation. This being supported by funding from GIZ. 9. In this regard, the government wants to make an informed evaluation, whether EPICOR system itself is suited to the needs of the governments or Serenic Navigator (SN), a Microsoft- based ERP system, in operational use at the local governments with much higher level of user satisfaction and technical support. Serenic Navigator offers a better opportunity to adopt uniform technology architecture for supporting government’s financial operations at both the central and local government level. On the other hand, an upgrade of EPICOR provides an opportunity to leverage existing investments in software licenses, implementation, training, and change management. Government also wants to consider a third option of looking at new software in case both EPICOR and SN do not meet the requirements. However, third option has inherent risks. It will not solve the underlying business process, implementation and compliance issues, which mark the current EPICOR platform. Procurement process will potentially delay the envisaged outcomes. The steep learning curve and change management issues involved in any new technology will further increase the current capacity challenges. Opportunity to leverage existing investments in software, hardware and training will remain unrealized. Due to these risks, the third option will be considered only as a last resort. A provisional amount has been allocated in the project costs to cater this eventuality that would involve purchase of new software licenses in addition to other associated costs. 10. Before that evaluation can be carried out, govt. wants to develop its own functional requirements, based on a comprehensive business process review, against which both the software packages could be evaluated and compared for an informed decision. The re-designed 31 processes will become the basis of revision of detailed rules and procedures of the accounting manual. 11. A firm to develop the functional requirements and carry out the technology evaluation has already been hired through bilateral arrangements with the donors (EU is supporting this though a framework contract). The outcome of this evaluation expected in the next 3 to 4 months will determine the roadmap of the government to either upgrade EPICOR to version 9.0 or adopt Serenic Navigator as central government’s IFMIS platform. This roadmap will help prepare the detailed plan of activities for EPICOR upgrade or SN implementation to be supported through this project immediately after project effectiveness. Similar implementations take 18-24 months to complete as experienced in some other countries. 12. As part of this implementation, harmonization and integration with district government financial management system will be further enhanced in areas of chart of accounts and consolidation of financial statements including district government reports. 13. The capacity challenges to support and sustain the improved processes and IT environment will be addressed through a combination of targeted trainings and technical incremental staffing. The trainings will involve both on-site consultant-led trainings and off-site short-term trainings at training institutes in the region for providing a combination of customized and standard trainings. Government will be encouraged to design special incentives to retain the trained staff as well as project-financed technical experts to be paid for through its own budget. 14. Currently, the capacity at the decentralized levels (district) looks better than at the national level, especially in running the IFMIS system on a day to day basis. There are also some parallel efforts through bilateral funding to strengthen capacity at these levels. 15. Govt. also plans to revise detailed procedures in the accounting manual after the business process re-engineering. 16. Governments plans to develop its own fibre optics network through the Regional Communications Infrastructure Project (RCIP) to connect these regions with Lilongwe. Planned completion date for this backbone is December 2013. This will provide opportunity to consolidate IFMIS technology architecture at one central data centre to strengthen standards, leverage central support resources and save maintenance costs. In addition to these five date centres, government has implemented a disaster recover (DR) site in 2007/08 within the premises of the Department of Information, Systems and Technology Management Systems (DISTMIS) at Old Town, Lilongwe. 17. Activities to be financed under this component: Key activities planned under this sub- component will be carried out in phases. Though phasing of activities will be adjusted over the course of the project implementation to flexibly respond to the evolving ground realities, a broad sequencing of activities is planned around two phases - Phase 1 will cover: (i) the automatic capture of all Government revenues, expenditures and financing transactions in IFMIS; (ii) ‘interfacing IFMIS with the Central Bank to foster automation and hence efficiency in reconciliations’; (iii) implementation of an electronic payments system (iv) implementation of Cash Basis International Public Sector Accounting Standards (IPSAS); (v) integration of financial management systems at central and district government levels; (vi) review of annual budgeting, accounting and reporting processes and associated controls to be implemented through subsequent upgrading of IFMIS to a web based version with comprehensive coverage of 32 all relevant modules and interfaces (vii) purchase of new licenses if EPICOR or SN do not meet government requirements and (vii) consulting services to analyze expenditure arrears and make recommendations. Phase 2: (i) roll out of budgeting module to all the MDAs; (ii) devolution of financial management responsibility to MDAs; (iii) implementation of fixed assets register, (iv) roll-out of business intelligence and reporting tools to select users of all the MDAs and (v) decentralization support. Activities that will stagger across all three phases include: (i) getting government's core IFMIS team trained in relevant technical certificate courses, (ii) improving the competency of the accountancy service and (iii) developing the management skills to run IFMIS effectively and (iv) hiring of technical staff to support the project. Sub-component 2 – Payroll Management (Component 5.1 of PFEMRP) 18. Objectives: This sub-component aims to strengthen payroll controls and decentralize federal payroll operations to three regions. 19. Implementation Status: The Department of Human Resource Management And development (DHRMD) under OPC is responsible for running the payroll. The custom- developed system, called Global HRMIS, has 9 modules: a. Payroll b. Establishment management c. Employee data management d. Training e. Recruitment f. Industrial Relations g. Performance Management h. Benefits Management i. Advances and Loan Management 20. The bespoke system (Visual Basic programming language using SQL database) was operationalized in 2006. Currently, about 170, 000 employees’ payroll of 47 Votes is being supported by the system. The system has full position management (establishment register) features operational – there are about 183, 000 positions created in the system, giving a fair idea of vacancies within the government’s establishment. Each position is created in the system by the central staff responsible for running the payroll, after ensuring required approval documentation for the position is available. 21. After the payroll has been calculated, DHRMD informs the Ministry/SU (via a form GB32), summarizing the payroll against the relevant GL accounts- pay and allowances etc. The Ministry/SU transfers this information into a payment voucher and manually enters the totals into the IFMIS system. The summaries are checked for budget availability and the system produces checks for each Bank etc. Payroll payments are directly deposited in to employee bank accounts on the basis of the pay lists prepared by the Payroll system. At present, no automated interface exists between the payroll system and the IFMIS, or between the payroll system and the budget system to check for position/ establishment control. 33 22. The design of the interface has been completed and agreed between DHRMD and AGD. DHRMD has completed the development of the first part of the interface and has been sending the automated electronic payroll file to the IFMIS server since February 2012. AGD is working with SoftTech to develop the second part of the interface that pushes this file information into IFMIS. DHRMD also plans to establish disaster recovery (DR) center for payroll system through government’s own financing. Provisions have been made in this project to cover financing gap for the establishment of the DR site. Government also plans to decentralize the payroll operations to three districts. 23. Activities to be financed under this component: The Payroll Management subcomponent would cover: (i) Business processes re-engineering, including automated posting to IFMIS accounts payable through interface, follow up and cataloguing of all processes including descriptions of operations and controls; (ii) roll-out of payroll system to the districts; (iii) Improvement of quality of staff through specialized training for system administrators and managers, and user training for users from various MDAs; and (iv) Adequate audit coverage of payroll, (v) Development of payroll interface by AGD; (vi) hardware support for decentralization of payroll operations to three regions and (vii) support the establishment of DR center for payroll. This could best be achieved through the cooperation of DHRMD staff and internal auditors in the various MDAs. 24. Sub-component 3 – IFMIS Roll out to Local Assemblies (Component 5.1 of PFEMRP) – This component would cover left-over activities from GIZ funding to NLGFC associated with IFMIS roll-out to 8 remaining Local Assemblies, including purchase of servers and other hardware for back-up and disaster recovery, procurement of generators, furniture, air- conditioners and networking, VPN Connectivity, laptops for technical support team, technical training for database administrators and networking specialists. Component 2 Internal Audit (Component 5.3 of PFEMRP) 25. The component will strengthen the Central Internal Audit Unit (CIAU) so that it can manage the Internal Audit Service to improve internal controls and resource utilization generally across the budget sector. Previous projects have helped to establish Internal Audit Committees in each agency but improvement in audit effectiveness has been hampered by insufficient trained internal auditors and a program generally limited to the main urban centres. The CIAU will operate a quality control and assurance system that will ensure that the internal audit function performs its work in accordance with its charter. 26. Activities that will be supported are: (i) Improvement of the governance and legal framework to provide a wider range of internal audit services and improve quality and coverage.  Re-orientate and re-balance the work of the Internal Audit Service increasing the emphasis upon risks and controls; strengthen its risk-based audit planning and pilot a Risk Based Process Focused Approach (RBPFA) to auditing in 4 ministries before rolling RBPFA out to all IAUs; develop standardized documentation for 34 implementation of the new approach; and hold workshops and training events to support auditors applying the revised audit methods.  Promote awareness of risk management; develop and circulate Enterprise Risk Management (ERM) guidelines for managers; publish guidelines and conduct management awareness events about ERM and the revised audit focus; develop and implement a degree of Controls Self Assessment (CSA) enabling managers to play a part in identifying and rectifying possible control failures.  Implement IT audit services; introduce IT auditing techniques by piloting control reviews of the IFMIS, Payroll, MALTIS and other government information systems; and conduct testing using the Integrated Data Extraction and Analysis (IDEA) software package that has already been procured.  Extend internal audit coverage to other areas for which assurance and consulting services are required; and carry out pilot audits to finalize standard methodologies for additional audit services introduced.  Provide overall entity-level assurance; hold workshops with NAO to agree on proper Terms of References for the audit Technical Working Group; and refine and accelerate improvements in the internal audit legal and policy framework.  Discuss with management the most appropriate arrangement for refining the legal framework and implementing the internal audit Charter; publicize (printing and packaging) the legal framework; undertake a series of sensitization workshops for internal audit and management for the internal audit charter and legal framework once approved; and seek management’s understanding and approval of the internal audit manual and implement its contents through a sensitization workshop. (ii) Provision of a competent staff through a range of basic, specialist and professional level skills training.  Stabilize internal audit staffing resources; formulate and implement a human resources development plan for the internal audit function to address internal audit staff vacancy issues, the difficulty of retaining trained staff and any staffing needs arising from the re-orientation of internal audit services; And recruit an experienced external consultant in project management, and local IT audit and capacity building coordinators to provide overall internal audit reform guidance and manage all the aspects of the Project.  Ensure that all internal audit staffs are appropriately and adequately trained; conduct internal audit staff training in ‘soft’ skills such as audit interviewing, partnering with management etc.; conduct a series of courses leading to certification in Internal Audit such as basic skills training, core modules, specialist modules and degree courses to ensure staff have adequate training, knowledge and skills; update training needs analysis regularly, and develop and implement a low cost policy of 35 continuing professional development (CPD); carry out study visits to identify successful practices operating in other internal audit services; and develop and implement a low cost policy of CPD. (iii) Establishment of quality assurance arrangements for high quality audits and reports.  Strengthen the quality control of audit services and products; refine existing continuous quality checks over audit outputs and strengthen compliance with them; regularly survey audit clients to identify areas of potential improvement; and develop working papers for appropriate methodologies and approaches that will embody these quality control aspects.  Maintain periodic quality assessments; conduct an internal quality assessment of each internal audit unit at least once every two years; conduct an external quality assessment of the internal audit function at least once every five years; and conduct IT control surveys in selected MDAs with the assistance and under supervision of a consultant. (iv) Development and implementation of a system for reporting internal audit performance and management response.  Improve processes for collecting and analyzing data on the performance of internal audit units; develop and implement improved guidelines for the collection and analysis of primary audit performance measures, automated wherever possible; and conduct a workshop to develop improved guidelines for the collection and analysis of primary audit performance measures.  Improve processes for reporting audit performance and issues; conduct a short study in order to develop procedures aimed at strengthening existing processes for reporting internal audit performance; and develop a balanced scorecard approach to measuring internal audit performance that should include information relevant and holistic to a wide range of stakeholders.  Raise the profile of the internal audit function; develop and design an internal audit website and newsletter for the dissemination of information about internal audit and common control issues and solutions; carry out coordination and cooperation meetings at agreed intervals with key stakeholders in areas including control work, audit scheduling, exchange of audit reports and follow up by Internal Audit Departments (IADs) on selected external audit reports. Component 3 External Audit (Component 9 of PFEMRP) 27. The National Audit Office is reforming to become an independent Supreme Audit Institution following an Institutional Review approved in January 2011 by Government. The External Auditing component will strengthen the operational capacity of the National Audit Office. 36 28. Activities to be supported will include the following:  Improvement of overall quality of work by improving the quality of audit manuals as well as providing training in key areas of need. Review and further develop the manuals for regularity audit, revenue audit, procurement audit, IT audit, and use of Computer Assisted Audit Techniques (CAATS). Align the audit manuals and audit training guides to meet international standards of auditing and to identify the use of CAATs. Arrange appropriate training in the use of these manuals to conduct the audits. Train the NAO accounting staff to prepare the NAO financial statements and broaden the auditors’ knowledge base by training NAO staff in how the performance of public sector organizations is managed.  Improving internal career planning and training capacity. Develop effective conditions of service to provide incentives. Conduct regular Training Needs Assessment (TNA) for NAO staff to support the development and implementation of a training policy and plan to deliver required audit and management competencies. The plan would include training NAO managers in strategic human resource management.  Developing more competent and motivated auditors by providing software for greater efficiency. Procure and install appropriate audit management software and CAATS software. Arrange training in the use of this software.  Promoting more effective communication by reviewing network, hardware and communication needs. The current ICT configuration would be assessed to identify the further needs for network development and computers.  Acquiring necessary infrastructure including include goods acquisition of the ICT network and hardware required. Tasks would include acquiring laptops and desktop computers for staff, an effective intranet and extranet system including ICT hardware and service contracts, LAN extension at Head Office and Regional Offices, short term consultancies on LAN and server service, and providing website updates.  Improving the independence of the NAO by providing high level institutional building support. This would include: study visits on comparative SAI communication, accountability, independence, and parliamentary reporting practices within the region; developing a communication strategy covering the main stakeholders including development partners; short term consultancy for the realignment of the Public Audit Act (PAA) in line with the Institutional Review Report and facilitating the process of developing draft amendments of the PAA by Ministry of Justice; developing procedures for Budget presentation to Parliament and the processes to be followed.  Improving NAO support for the related parliamentary committees – Public Accounts, Budget and Finance. This would include informing parliamentary committees on appropriate arrangements for the consideration of the NAO budget. 37 Component 4 PFEMRP Management (Component 10 of PFEMRP) 29. The objective of the component is to manage the agreed development program, provide procurement and financial management support to the implementing departments and to monitor the objectives and performance against the indicators. The PFEM unit will also be responsible for the procurement and financial management activities of the overall trust fund program and the projects funded under the same. Capacity building is required both in terms of staff training and support to the main functions of the Unit. Main activities will include; (i) procurement of full complement of professional staff required for the Unit either through transfer from other units or through contract appointment; (ii) purchase of any office equipment urgently required and incremental operating costs; (iii) training in program and project management and procurement and/or financial management as required; and (iv) annual audit of the project by independent auditors (v) supporting the development of ICT to enhance communication with the other PFEM Institutions; (vi) facilitating the undertaking of PFEM studies, reviews and assessments; and (vii) facilitating development and appraisal of remaining components of PFEMRP. In order to support the development of PFEM RP management component within the PFEM RP, the following key sub-components / activities are proposed: improving capacity for the management of the PFEM RP; monitoring and evaluation of the PFEM RP; facilitation of and participation in meetings; and improving IT systems and record keeping for PFEM. Organizationally, the Head of the PFEM Unit will report to the Principal Secretary Administration in the Ministry of Finance who will oversee the PFEMRP supported by the PFEM Unit. Given below is the proposed organizational structure for the day to day management of the PFEMR Program and the projects funded under the MDTF. 38 Annex 3: Implementation Arrangements MALAWI: Financial Reporting and Oversight Improvement Project Project Institutional and Implementation Arrangements 1. The project will be funded under the PFEMRP multi donor trust fund administered by the World Bank and to be executed by the Government of Malawi managed by the Public Finance and Economic Management Unit (PFEMU) in MoF. Project administration mechanisms 2. Prevailing Trust Fund arrangements will be applied. Individual component chiefs in the agencies will be responsible for project activities and all project related procurement and financial transactions will be centralized at the PFEM Unit in MoF. Centralizing project management at the PFEM Unit will provide for frequent monitoring of project progress and flexibility in responding to any implementation difficulties that arise. The PFEM Unit will manage the project and will be supported through: (i) procurement of the full complement of professional staff required for the Unit either through transfer from other units or through contract appointment; (ii) funding for the purchase of any office equipment urgently required and any incremental operating costs; and (iii) training in program and project management and procurement and financial management as required. As a Bank administered MDTF there will be regular review missions to assist the PFEM Unit. It will be important to encourage and monitor political buy in during the project reviews. PFEM Steering Committee (PFEMSC) 1. This is the highest level government body that provides strategic policy guidance and oversight of Malawi's overall PFEM reform program. The PSC is chaired by the Secretary to the Treasury with PFEM Unit providing secretariat services. The PFEMSC has representation from key PFEM institutions with the PS Planning, PS Finance, OPC, PS Public Sector Review, PS DPSM, PS MLG&RD, Auditor General, Accountant General, Director ODPP, Executive Secretary NLGFC, Commissioner of Statistics, Chairperson of the PFEM TC. The committee meets semiannually to review progress on the PFM reform program outcomes and to adjust and amend the strategy and work program as necessary. Project Implementation Arrangements 4. Project implementation arrangements consist of: (i) PFEM Technical Committee (PFEMTC); (ii) Technical Working Groups (TWGs) and (iii) PFEM Unit (PFEMU).  PFEM Technical Committee (PFEMTC): PFEM technical Committee is chaired by the Director, DAD and consists of directors of all divisions in MoF (including MRA), CIAU, senior officers of the other organizations represented at the PFEMSC as members; the PFEM Unit acts as secretariat to this committee. Apart from the above, membership of the PFEMTC would include Component Coordinators and representatives from line ministries and other relevant officials as the Chair considers necessary and the 39 representatives of the MDTF donors and the TF Administrator. PFEMTC meets every two months and their functions include oversight of PFEM activities, proposing and reviewing PFEM activities. The PFEMTC will review the implementation progress of various projects under PFEM RP MDTF with inputs from the TWGs. They will report to the PFEMSC and will ensure that implementing units comply with the policy guidelines as directed by PFEMSC. PFEMTC can also call technical meetings with the participation of other project representatives and DP's technical teams to discuss issues of cross cutting nature and interface among the projects.  Technical Working Groups (TWGs): In the PFEM RP there are 10 working groups mentioned which would pursue the technical work of the PFEM RP. Currently, there are seven TWGs operating those for Audit, IFMIS & Financial Reporting, Macroeconomic forecasting (also known as the National Accounts group), Cash Management Domestic Revenue, Procurement and Public Expenditure Reviews. The TWG relevant to this project (Audit and IFMIS) will provide the technical input and participate in the preparation, appraisal and monitoring of the project. TWGs are chaired by the Directors heading the relevant technical department/unit. Membership of the TWGs will be expanded to include Directors, Component Coordinators and representatives from line ministries and other relevant officials as the Chair considers necessary and the representatives of the MDTF donors and the TF Administrator. They will report to the PFEMTC and will ensure that implementing units/departments comply with the policy guidelines as directed by the PFEMTC and PFEMSC. TWGs will hold monthly review meetings. Their specific responsibilities include: (a) preparation for relevant project appraisal and review of progress reports towards the project's objectives; (b) preparation and submission of annual work plans, budgets and procurement plans to PTC, PSC, and Donor Project Team; (c) review of agreed performance targets; (d) analysis of implementation issues for achieving key outputs; and (e) identification of critical risks that could hinder efficient implementation of project activities and draw risk mitigation measures.  PFEM Unit (PFEMU): The PFEM Unit will be the key unit which facilitates the PFEM RP. It also acts as secretariat to the various committees and it will provide support for managing the day to day financial management and procurement transactions of the projects. The PFEMU will be staffed with government officials and will include a Head of the PFEM Unit who will report to the Principal Secretary Administration in the Ministry of Finance. There will be dedicated sspecialists including those for Procurement, Financial Management and M&E for the project. The main functions of the PFEMU will be to: (i) provide logistical support and guidance to the project teams and component coordinators; (ii) compile work programs from the various working groups, budgets and procurement plans for each project; (iii) monitor project implementation and prepare progress reports for the PFEMTC and PFEMSC; (iv) submit consolidated annual work programs, budget and procurement plans for review and endorsement by the PFEMTC and PFEMSC; (v) hold regular meetings with focus groups and component coordinators to ensure appropriate linkage in the activities under various components; (vi) maintain project accounts, manage designated accounts and prepare project financial statements; (vii) submit withdrawal applications to the World Bank for replenishment; (viii) make recommendation to the PFEMTC and PFEMSC on how to 40 effectively implement the agreed work plan; and (ix) carry on periodic performance evaluation of all long term consultants (both expatriate and local). PFEM Unit Organization Structure Financial Management, Disbursements and Procurement Financial Management 5. FROI is part of PFM RP which is being coordinated by Division of Debt and Aid in the Ministry of Finance. In particular the PFEM unit in the division of Debt and Aid will be responsible for coordinating the PFM RP including financial management. The MDAs affected by the program are Ministry of Finance, National Audit Office, Accountant General, Central Internal Audit Unit, Office of Director of Public Procurement and Malawi Revenue Authority. 41 However FROI will cover IFMIS (Accountant General), Internal Audit (Central Internal Audit Unit) and External Audit (National Audit Office). The PFM RP will be funded by a Multi Donor Trust Fund which will be managed by the Bank. Financial management of the whole program will be centralized at the department. However other beneficiary ministries and departments may be involved in contract management. A financial management assessment of the department was carried out with the aim of determining: (a) whether the department has adequate FM arrangements in place to ensure the funds will be used for the purposes intended in an efficient and economical manner and that it will be capable of correctly and completely recording all transactions and balances related to the Project; (b) the Project’s financial reports will be prepared in an accurate, reliable and timely manner; and (c) the acquired assets will be safely guarded; and (d) the Project will be subjected to auditing arrangements acceptable to the Bank. The assessment complied with the Financial Management Manual for World Bank-Financed Investment Operations that became effective on March 1, 2010 and AFTFM Financial Management Assessment and Risk Rating Principles. Country Issues 6. The most recent piece of diagnostic work that provides up to date information on the country’s public financial management (PFM) system is the Public Expenditure and Financial Accountability Assessment (PEFA) of 2011. The PEFA 2011 assessment rated the credibility of the Government budget at B down from A during the previous PEFA done in 2008. Aggregate revenue outturn compared to budget scored D while stock monitoring of expenditure payment arrears was NS due to unavailability of data for monitoring of the expenditure. The assessment identified key risks related to project implementation in the areas of procurement, effectiveness of internal audit especially in regard to the extent of management response to internal audit findings, timeliness and regularity of accounts(bank accounts, suspense accounts and advances) reconciliations, availability of information on resources received by service delivery units, scope, nature and follow up of external audit issues and legislative scrutiny of external audit reports and budget law. 7. Other country-level FM risks arise from the country’s overall governance environment and corruption concerns. This is being addressed by strengthening of management oversight (the focus of this project) through ministerial audit committees, enhancement of social accountability mechanisms and capacity enhancement of integrity assurance agencies particularly Anti- Corruption Bureau (ACB), National Audit Office (NAO), and Central Internal Audit Unit (CIAU). 8. Through its Public Financial Management Reform Strategy, the Government remains committed to strengthening fiduciary safeguards with a view to achieving economy, efficiency and effectiveness in the use of public funds. The declared vision of the latest PFEM reform program is to enable PFEM institutions to be effective and efficient in applying economic and financial management to public financial resources and to be fully transparent and accountable for such resources in line with government overall strategy and policies. Some of the issues covered in the reform program that have a direct impact on financial management are (i)harmonizing planning through use of Sector Working Groups; (ii) expanding use of IFMIS to ensure fuller use for transaction processing and bank reconciliations; (iii)ensure good cash management; (iv) develop the capacity for procurement procedures; (v) fully implement procedures for use of internal audit; (vi) improve reporting on expenditure; (vii) building on 42 improved external auditing to improve coverage and quality; and(viii) improving follow up procedures for reports and audits. The reforms will be implemented by the Government with funding from the donors using the vehicle of a Multi Donor Trust Fund to be managed by the World Bank. If the proposed reforms are successfully executed, the FM arrangements of the government will be significantly strengthened. 9. The FM risk rating summary from the assessment done is represented in the table below: Table.1: Malawi FM Risk Ratings Risk Risk Risk Mitigating Measures Residual Rating Incorporated into Project Design risk rating Country Level H The Accountant General is working on using the existing S (i) Weak accounting chart of accounts to allow for creation of project sub system which affects programs that will enable posting of transactions in line the quality of financial with project activities and components. The internal audit statements produced by function is being revamped. The PFM RP will help improve ministries IFMIS functionality including timeliness and regularity of implementing projects; various reconciliations. (ii) weak audit committees in government ministries that do not follow up on the issues raised in the audit reports to ensure they are addressed by the project; (iii) Weak legislative scrutiny of external audit reports; (iv) problem of timeliness and regularity of various accounts reconciliations. Entity Level H The project will be implemented by Department of Debt S and Aid which is familiar with Donor arrangements but The internal audit does not have experience in directly managing a project of function in the Ministry the size being developed. Internal audit function will be of Finance is very weak strengthened under the PFM RP. 43 Risk Risk Risk Mitigating Measures Residual Rating Incorporated into Project Design risk rating Project Level H FM work will be centralized under PFEM unit in the S Department of Debt and Aid The project is complex with four components and multiple sub components with activities taking place in much dispersed MDAs. Weak FM capacity in most of the MDAs, e.g. NAO where independent audit reports have revealed serious FM capacity problems. Budgeting FM staff work on debt S The project has fully outlined the activities to be carried out M and aid management as to accomplish the objectives and these activities will inform Weaknesses opposed to normal the budgeting process. highlighted in 2011 accounting functions PEFA include over spending and unreliable prediction of resource envelope Accounting H While the project activities will be processed in IFMIS S showing expense types without relating them to project The IFMIS is not components, a separate report will be done in excel configured in a manner showing expenses classified under various project that allows project components. Once the chart of accounts is able to activities to be incorporate project activities, the excel model will be separately identifiable dropped. Internal H There are ongoing reforms to strengthen controls around S Control IFMIS and other accounting functions. The internal audit function is also being strengthened. Weak control environment The roll out of LPO module will compel online surrounding automated authorization of transactions by senior managers. IFMIS(eg weak password control) exacerbated by weak internal audit function 44 Risk Risk Risk Mitigating Measures Residual Rating Incorporated into Project Design risk rating Funds Flow S Project funding will be advanced through a US$ Designated M Account held at the Reserve Bank or a commercial bank Foreign currency has and an operating account at a commercial bank as agreed been susceptible to by Bank. Quarterly monitoring of this arrangement will be diversion to other done via IFRs. government priority areas starving the Since change of government, there has been significant projects of required improvement in availability of foreign currency largely due funds to resumption of budgetary support by donors. If this continues there will be less pressure by government to Financial S divert funds. format will be agreed with the Bank and The reporting M Reporting project FM staff will be trained in reporting for the Bank funded projects. This will include production of audited The unit not financial statements and un-audited interim financial experienced in reports preparing reports for the Bank funded projects Auditing S A private independent auditor will be recruited to audit the M project financial statements. Audit terms of reference will being one of the be agreed with the Bank and NAO. beneficiaries, the Auditor General may not be independent and currently the NAO does not fully use International Auditing Standards Overall FM Risk S The overall FM risk is considered Substantial; Even though S Rating the project risks are considered moderate, the inherent risk will weigh in heavily on the project given that it is mainstreamed in the ministry of finance and therefore susceptible to the overall ministry risks. With time the risk could improve to Moderate. H-High S-Substantial M-Moderate L-Low Financial Management Arrangements for the Project 10. Budgeting arrangements: From the ten components of PFEMRP, four are in the PAD that will have necessary activities spelt out and costed. This will be the basis of developing annual work plans and budgets. The budgeted amounts will be incorporated in the IFMIS and monitored as implementation progresses. 11. Accounting arrangements: The project accounting will be done in IFMIS where in the current chart of accounts configuration components and project activities will not be highlighted 45 and as a result an excel spreadsheet will be used to classify expenses according to activities and components. Once the reconfiguration of the chart of accounts that will allow reflecting expenses under components is completed, the excel arrangement will be dropped and the project will be able to produce reports direct from IFMIS. Internal control and internal auditing arrangements 12. Internal Auditing. The Ministry has an internal audit department but the Audit Committee is not functioning properly rendering the internal audit function non effective. The Central Internal Audit Unit will be responsible for the internal audit function of the project, despite them being beneficiaries of the project. 13. Internal Control Systems: The accounting and related transactions are guided by the Public Finance Management Act and desk instructions that specify policies and procedures when carrying out accounting and financial transactions. Based on PEFA 2011 report, there are problems involving reconciliation of bank accounts and other controls. The report summarises that despite the signals of increased awareness of measures and procedures for internal control the PAC reports, internal audit reports and reports from the Auditor General point towards the continued existence of errors and with a continued use of unjustified procedures. The internal audit function will need to be strengthened in order to ascertain compliance with PFM Act and desk instructions. Funds flow and disbursement arrangements 14. Banking and Funds flow arrangements: The Ministry of Finance will be required to open a Designated Account denominated in United States Dollars at the National Bank of Malawi where funds from the Multi Donor Trust Fund will be transferred. From this account funds will be transferred to the government consolidated account. The funds will be transferred to the consolidated account as and when required. The corresponding beneficiary activities will be updated with the funds transferred in IFMIS to ensure that expenditure is in accordance with approved forecasts. . 15. Financial reporting arrangements: The department will prepare quarterly un-audited IFRs for the project in form and content satisfactory to the Bank, which will be submitted to the Bank within 45 days after the end of the calendar quarter to which they relate. The format and content of the IFRs will be agreed with the bank before negotiation. The Project’s annual financial statements will be prepared using International Public Sector Accounting Standards. 16. Auditing arrangements: The audited financial statements will be submitted to the Bank within 6 months after the end of the fiscal year along with the management letter. Audit terms of reference for the project will be agreed with between the government and the Bank before negotiation. Financial Management Action Plan 17. The following actions need to be taken in order to enhance the financial management arrangements for the Project: 46 Action Date due by Responsible 1 Agree the format of Interim Financial Done IDA, Debt and Aid Report with the Bank 2 Agree audit ToRs March 15, 2013 IDA, Debt and Aid and NAO 3 Train accounting staff in FM and June 30, 2013 IDA, Accountant disbursement procedures General 4 Improve awareness of control risks June 30, 2013 Accountant General around IFMIS Enable chart of accounts in IFMIS to 5 ensure project reports are extracted from December 31, 2013 Accountant General the system Ensure a less disruptive project FM staff Throughout project Accountant General 6 tenure period Conclusion of the assessment 18. The conclusion of the assessment is that the financial management arrangements meet the Bank’s minimum requirements under OP/BP10.02. The overall residual risk rating for Department is Substantial. The financial management action plan outlines the mitigating measures, which, if implemented, would strengthen the financial management arrangements. Disbursements 19. SOE based disbursement will be used. The project will submit the first withdrawal application to the Bank after effectiveness based on the agreed float for the Designated Account. The Bank will process the withdrawal application and deposit funds into the Designated Account. Funds will then be transferred from the Designated Account to the government consolidated account. The Designated Account will be replenished based on SOEs that will be prepared and submitted to the bank on a monthly basis. Other methods of disbursement will include direct payments, special commitments and reimbursements. Details concerning disbursements will be spelt out in the project’s Disbursement Letter. The project shall have a single disbursement category as defined below: 47 Disbursement Summary MDTF (US$m) Total % Category Phase I Phase II (US$m) Financing (1) Goods, non-consulting services, consultants’ services, Training and Operating Costs under 6.7 10.3 17.0 100 the Project, except Part 3 of the Project (External Audit component) (2) Goods, non-consulting services, consultants’ services Training and Operating Costs under 1.3 0.7 2.0 Part 3 of the Project (External Audit Component) Total 8.0 11.0 19.0 100 Procurement 20. An assessment of Ministry of Finance on its capacity to carry out the procurement for the project was undertaken to identify the gaps that could impede the execution of the project. Procurement under the Project will be carried out in accordance with the Guidelines: Procurement of Goods, Works and Non Consulting Services under IBRD Loans and IDA Credits& Grants by World Bank Borrowers; January 2011; and "Guidelines: Selection and Employment of Consultants IBRD Loans and IDA Credits& Grants by World Bank Borrowers, January 2011. National Competitive Bidding (NCB) will be in accordance with the Malawi Public Procurement Act of August 2003 which has been reviewed and found satisfactory to the Bank with a few exceptions. Legal Aspects and Procurement Practices 21. Public Procurement in Malawi is governed by the Public Procurement Act of August 2003. The Act requires procurement Regulations to provide, inter alia, threshold for use of various procurement methods, bidding and bid evaluation procedures and contract management. The Law further established the Office of Director of Public Procurement (ODPP) with oversight for public procurement. The Office became operational in 2005 with the appointment of the Director and other substantive officers. The Government also established Internal Procurement Committees (IPC) and Specialized Procurement Units (SPU) in all Ministries and Departments as the responsible bodies for procurement in the Ministries and Departments. Procurement Regulations and Desk Instructions have been distributed to all procuring entities. The Office of 48 Director of Public Procurement has also established a dedicated website for sharing of information, placing of adverts and notification of awards to the general public. 22. The Office of Director of Public Procurement issued a number of standard bidding documents (SBD), the use of which is mandatory, covering works, goods, and services. The Office further issued desk instructions, RFP and form of contract for Consulting Services as well as request for quotations for goods, works and services. The Bank had reviewed the documents and was found to be generally consistent with Bank Guidelines and may be used under NCB procedures. However due attention to some issues should be given. These are related to clarity of the evaluation criteria, award to the lowest evaluated responsive and qualified bidder, participation of foreign bidders, domestic preference and advocacy for artificial division of lots to promote participation of small enterprises in National Competitive Bidding and the Registration or Classification that should not be used as criteria for bidding. Organization, Functions and Staffing 23. Procurement under the Ministry of Finance is governed by the Public Procurement Law, its Regulations and Desk Instructions. The Office’s annual budget and Procurement Plan provides a framework for checks and balances for the smooth running of procurement, disbursement and disposal system in accordance with Section (3) of the Public Procurement Act. Procurement is triggered by requisition from user sections for the required kind of goods or services. 24. The Ministry of Finance has an Internal Procurement Committee which is chaired by an appointee of the Secretary to the Treasury. The current arrangements are that the Director of Finance and Administration is the Chairperson of the IPC which has the responsibility for award of contracts. Other members of the IPC include the Directors of Budget, Economic Affairs, Debt and Aid, Pensions, Human Resources, and the Chief Accountant. The Procurement section is the secretariat to the IPC. 25. The Procurement Section has an establishment of four posts, comprising one Procurement Officer, one Assistant Procurement Officer, one Assistant Supplies Officer and one Supplies Assistant Office all of which are filled. The Procurement Officer serves as Head of the Section and reports to the Director of Finance and Administration. The assessment of the current staff in terms of procurement requirements for the Financial Reporting and Oversight Improvement Project is that the current staffs do not have adequate knowledge of World Bank procurement procedures. The Procurement Section needs to be strengthened by having Technical Assistance as an interim measure to ensure that procurement capacity is sufficient to meet procurement demands. The TOR for the proposed TA should include provision for on-the-job training. The alternative to a TA in procurement is to embark on training of the current staff in World Bank procedures given that getting a Procurement Specialist on the local market may be difficult due to shortage of qualified staff in Malawi. 26. Furthermore, existing procurement staff should have their skills improved through attending short courses on procurement organised by ESAMI and other reputable international training institutions. There is also need to include in the training program staff from other key departments who will be closely associated with the Financial Reporting and Oversight Improvement Project to support procurement in terms of preparation of the required documents, such as bid specifications and Terms of Reference. It has also been noted positions for procurement staff are at very junior positions and such that they do not attend Ministry of 49 Finance Management Meetings where critical decisions are made. In this regard it is recommended that positions for Chief Procurement Officer, Principal Procurement Officer and Senior Procurement Officer be created. The Chief Procurement Officer would be part of the Ministry’s senior management and would attend management meetings. 27. Procurement staff is currently responsible for all procurements under the Ministry and they would therefore be overwhelmed with more work once the project is fully functional. However, proper planning by having procurement plans at the beginning of the financial year would help ease pressure on the team. During the assessment it was noted that the Ministry of Finance has in the past implemented IDA financed projects but these were not undertaken by procurement section as it has recently been established by the Government. Record Keeping 28. The assessment findings are that the procurement filing in the procurement section is overall not done in a satisfactory manner. Documents are all filed in one file and not segregated according to procurements undertaken. Improvements are needed to ensure that records should be sorted following the chronology of the procurement processing and a check list should be added at the beginning of the folder; financial information or rather copies thereof on contract execution should be included in records. It will be important that the project should have its own files once the project commences. There are 10 dedicated staff in charge of keeping records in the open registry and most files are in good order. Facilities and Support Capacity 29. The procurement section has one single office where the Procurement Officer and the Assistant Procurement Officer sit and one computer. Documents could be seen on the floor. There is need for two computers, and more storage facilities for its proper functioning. However, the open registry on the other has 3 computers for 10 officers. 30. The overall risk of the Ministry of Finance to carry activities under the project is medium and overall risk is substantial as currently there is inadequate qualified staff that can undertake procurement activities under the project using World Bank guidelines and procedures. Issues to be addressed Technical Assistance 31. Due to the limited knowledge that the current procurement staff have in World Bank procedures, there is need for Technical Assistance in the form of a Procurement Specialist who should initially support the project for a period of twelve months as the staff are being mentored. Procurement Planning 32. There is need to have a provision mandating the preparation of a Procurement Plan along the Annual Work Plan. The procurement plan should include as many contracts as possible that are planned to be processed within the following 18 months period. The 18-month procurement plan will include relevant information on all goods and consulting services expected to be procured, and their estimated cost; procurement or selection method as well as timing in the procurement/selection process. The overall procurement plan will be updated on an annual basis 50 in conjunction with the preparation of the Annual Work Program and Budget in accordance with the Regulations. Prior Review by the Bank 33. The Bank will review the Procurement Plan together with Ministry of Finance. Post Procurement Reviews will be undertaken by the Bank on annual basis during project implementation and will be governed by the procedures set forth in paragraph 4 of Appendix I to the relevant Guidelines. All documentation used for the procedures of contracting, recruitment of consulting services, evaluation and award shall be retained for subsequent examination by auditors and IDA supervision missions. 34. The purpose of annual procurement post review will be to : (i) verify that the procurement and contracting procedures and processes followed by the project were in accordance with the agreed grant; (ii) verify technical compliance, physical completion and price competitiveness of each contract in the selected representative sample; (iii) review and comment on contract administration and management issues as dealt with by executing agencies; (iv) identify improvements in the procurement process in the light of any identified deficiencies. Use of National Standard Bidding Documents 35. All contracts will be undertaken under post review as there are no contracts above prior review of US$ 500,000 for goods and non-consulting services and US$ 200,000 for consultant services and therefore they will be no prior review thresholds but the following additional procedures shall apply to National Competitive Bidding:  No bidder or potential bidder shall be declared ineligible to bid for reasons other than those provided in Section I of the Procurement Guidelines;  Bidding documents acceptable to the Association shall be used;  The bidding documents and contract shall include provisions reflecting the Bank’s policy relating to firms or individuals found to have engaged in fraud and corruption as defined in the Procurement Guidelines;  Each bidding document and contract shall provide that bidders, suppliers and contractors, and their subcontractors, agents, personnel, consultants, service providers, or suppliers, shall permit the Association to inspect all accounts, records, and other documents relating to the submission of bids and contract performance, and to have them audited by auditors appointed by the Association. Acts intended to materially impede the exercise of the Association’s inspection and audit rights provided for in the Procurement Guidelines constitute an obstructive practice as defined in the Procurement Guidelines;  Unquantifiable criteria, such as local content, technology transfer, and managerial, scientific, and operational skills development, shall not be used in the evaluation of bids; and  Contracts may not be split into small lots, and their award may not be restricted to small enterprises for purposes of promotion of the participation of small enterprises. 51 Environmental and Social (including safeguards) 36. As a Category C technical assistance program, the Bank's environmental safeguard policies are not triggered. The program is expected to have positive social impacts through improved credibility on government financial management. Transparent and accountable management of public resources will lead to increased civic confidence in government. The computerization of transactions and processes would lead to better and faster public services delivery. Monitoring & Evaluation 37. An M&E framework has been designed for this program (Annex 1) which defines the high level results to be monitored during program implementation. In addition, a detailed M&E framework will be designed for each project to monitor project level results. During each year, detailed quantitative and qualitative reviews of progress will be undertaken to identify and discuss issues and bottlenecks that may arise and impede achievement of targeted outcomes. This work will be initiated by the project management in consultation with key stakeholders who will all be part of the project technical team. Role of Partners (if applicable) 38. As part of the joint donor collaboration in response to GoM’s PFEM reform program, the project will be co-financed by EU, DFID and other partners interested in joining the PFM reform agenda. The commitment of the development partners to maximize the overall project outcome and impact while strengthening donor harmonization remains a characteristic phenomenon of this program. The agreement of the donors and GoM to establish a single pooled fund mechanism whereby respective donor contributions are not earmarked to individual components or activities strengthens the comprehensive development approach to this reform program. Implementing the harmonized framework among all the development partners, also in support of reduction of transaction costs would require one set of monitoring and evaluation reporting, FM and disbursement and procurement arrangements. The overall coordination of the reform program and projects, from the development partner’s side will be carried out by the World Bank (as Administrator) but in partnership with MDTF contributing partners and other partners, if any, involved in overall PFM reforms. 52 Annex 4-Operational Risk Assessment Framework (ORAF) Malawi: Financial Reporting and Oversight Improvement Project (P130878) Stage: Appraisal 1. Project Stakeholder Risks 1.1. Stakeholder Risk Rating Substantial Description: Risk Management: There may be resistances for selected (i) Phased implementation of the activities and components providing sufficient opportunities for detailed agencies/ departments to give up consultations and testing of new concepts and (ii) through an effective change management strategy by some of the functions they have been involving the stakeholders at every step. So far, all preparations have been done in a consultative manner performing for a long time or to take with inputs being provided by the respective component teams in the government. on new activities. Resp: Stage: Recurrent: Due Date: Frequency: Status: Both Implementation Yearly Ongoing 2. Implementing Agency Risks (including fiduciary) 2.1. Capacity Rating Substantial Description: Risk Management: Weak program management and Dedicated program staffs have been assigned for coordinating and monitoring the program and sub- change management capacities projects. Components include activities to improve the competence of relevant staff. Resp: Stage: Recurrent: Due Date: Frequency: Status: MoF Preparation and Quarterly Ongoing Implementation 2.2. Governance Rating Substantial Description: Risk Management: Poor governance/weak fiduciary Concurrent Internal Audit of the program and project transactions to trace and correct anomalies environment appearing in many Resp: Stage: Recurrent: Due Date: Frequency: Status: externally funded projects could also affect this program Both Implementation Quarterly Not Yet Due 53 3. Project Risks 3.1. Design Rating Substantial Description: Risk Management: The Project has 3 main components Proper governance arrangements have been designed for periodic monitoring and coordination. FM and with different implementing procurement are centralized at the PFEM unit level. departments. So, coordination is Resp: Stage: Recurrent: Due Date: Frequency: Status: likely to be a challenge. MoF Implementation Quarterly Not Yet Due 3.2. Social and Environmental Rating Low Description: Risk Management: Being a technical assistance Preparation of specific safeguard studies for proposed works prior to appraisal of sub-projects as advised by program, there will be only minor Bank’s Safeguards Specialist. works in IFMIS computer network Resp: Stage: Recurrent: Due Date: Frequency: Status: sites and these are not expected to entail major safeguard issues. Both Implementation Quarterly Not Yet Due 3.3. Program and Donor Rating Moderate Description: Risk Management: While the program has been broadly Funds commitments and timing of flows have improved and it is expected that full funding will be accepted by the donors, the multi- available for this project as per current donor commitments. Detailed discussions to be arranged at the year fund commitments are not yet corporate levels to agree on scope of individual donor audits after project closure. clear from some donors. Lack of Resp: Stage: Recurrent: Due Date: Frequency: Status: clarity on donor audits after project closure. Both Preparation and Ongoing implementation 3.4. Delivery Monitoring and Rating Moderate Sustainability Description: Risk Management: Inadequate capacity and resources to TA support will be provided to augment capacity and transfer knowledge and expertise to civil servants. support follow on activities may The recurrent cost implications of the program beyond closing date will be minimized through using and 54 impact the sustainability of PFM strengthening the country's existing systems. reforms. Resp: Stage: Recurrent: Due Date: Frequency: Status: Both Implementation Yearly Not Yet Due 4. Overall Risk Implementation Risk Rating: Substantial Comments: Financial management reforms involve changes in rules, processes and systems that affect the incentives of the decision makers in allocation and use of scarce public resources. This reform process therefore is a venture with substantial risk. However, these risks are not unique to the Malawi program and are faced in many countries implementing a similar reform program. In the case of Malawi, the risks which might affect the successful implementation and sustainability of this program are: (i) risks due to changing focal point for PFM reforms rated as substantial; (ii) weak implementation capacity rated as substantial; and (iii) risks due to poor governance/weak fiduciary environment rated as high. The overall program risk rating during preparation and implementation is assessed as substantial. 55 Annex 5: Implementation Support Plan MALAWI: Financial Reporting and Oversight Improvement Project 1. The Implementation Support Plan (ISP) describes how the Bank and other development partners will support the implementation of the risk mitigation measures (identified in the ORAF) and provide the technical advice necessary to facilitate achieving the Project Development Objectives. The ISP also identifies the minimum requirements to meet the Bank’s fiduciary obligations. Its content is as follows. 2. The main focus in terms of support to implementation during different stages of the project is highlighted in the table below: Time Focus Skills Needed Resource Partner Role Estimate  Staffing and building basic capacity Participation in  Initiating critical procurements meetings for  Sensitization and awareness- A variety of technical improved building (Importance of PFM skills such as project development partner First reforms; interacting with the management, technical coordination on PFM twelve media; linkage to results on the US$150,000 specialists, procurement, interventions; support months ground etc.) FM, and M&E for enhancing M&E  Establishing M&E using lower systems related to level results for activities and linking results to reporting systems activities.  FM, Procurement Participation in meetings for  Component implementation improved A variety of technical  Knowledge transfer development partner skills such as IFMIS, 12-49  Improved systems coordination on PFM Internal and External US$600,000 months  Change management Audit, procurement, FM, interventions; support  Technical supervision and M&E for enhancing M&E systems related to linking results to activities. Skills Mix Required Skills Needed Number of Staff Number Comments Weeks of Trips Overall implementation Team lead 12 per year 4/yr support Internal and External Audit Expertise in internal and 4/yr 3/yr external oversight Support on technical and IFMIS 4/yr 3/yr functional aspects M&E indicator tracking, M&E Specialist 2/yr 1/yr refinement, use Procurement Specialist 6/yr 2/yr Procurement aspects, 56 procurement plan revision and implementation monitoring, procurement audits FM aspects, fund flow, FM Financial Management Specialist 5/yr 2/yr audits Team Assistance 4/yr 1 Team support 3. A mission based approach will not suffice in being able to adequately and timely respond to coordination and implementation issues. Currently, a significant part of the task team including the Team Leader is decentralized and this will continue to enhance implementation support. Fiduciary support is also provided at the country office. In addition to missions and on-call support the task team proposes pro-active bi-monthly or monthly implementation support meetings, including with team members/experts based outside of Malawi connected by audio/video connection. This approach has proven to be effective in other investment programs in Malawi and ensures efficient use of resources and responsiveness to the demands of the Government. Lastly, program design places strong emphasis on monitoring and evaluation and a focus on tracking results. This emphasis on information gathering and management will complement implementation support by the World Bank Task Team. 57 Annex 6: Detailed Project Component Costs MALAWI: FINANCIAL REPORTING AND OVERSIGHT IMPROVEMENT PROJECT PFEM RP No Component Link Phased Allocation ($'000) Total USD Equivalent MK PHASE ONE PHASE TWO PHASE 1 PHASE 2 2012/13 2013/14 TOTALS 2013/14 2014/15 2015/16 TOTALS $'000 MK'000 1 Accounting and Financial Management 5.1 1,843.00 2,020.00 3,863.00 1,041.00 3,212.00 1,035.00 5,288.00 9,151.00 2,882,565.00 1.1 Accounting and IFMIS 878.00 2,000.00 2,878.00 587.00 2,062.00 935.00 3,584.00 6,462.00 2,035,530.00 1.2 Pay roll & Human Resource Management 5.3 400.00 20.00 420.00 200.00 300.00 - 500.00 920.00 289,800.00 1.3 IFMIS Roll Out to Local Assembly 5.2 565.00 - 565.00 254.00 850.00 100.00 1,204.00 1,769.00 557,235.00 Sub-Total 1 1,843.00 2,020.00 3,863.00 1,041.00 3,212.00 1,035.00 5,288.00 9,151.00 2,882,565.00 2 Internal Audit 5.4 870.58 521.42 1,392.00 263.02 1,166.45 - 1,429.47 2,821.47 888,763.05 2.1 Improved Institutional Setup 216.64 77.39 294.03 76.18 300.00 - 376.18 670.21 211,116.15 2.2 Availability of adequate and skilled staff 416.21 297.69 713.90 121.40 710.00 - 831.40 1,545.30 486,769.50 2.3 Establishment of Quality Assurance 5.39 10.79 16.18 34.70 60.00 - 94.70 110.88 34,927.20 2.4 Improve performance reporting and coordination 13.54 111.50 125.04 19.00 - - 19.00 144.04 45,372.60 2.5 Component Project Management 218.80 24.05 242.85 11.74 96.45 - 108.19 351.04 110,577.60 Sub-Total 2 870.58 521.42 1,392.00 263.02 1,166.45 - 1,429.47 2,821.47 888,763.05 3 External Audit 9 1,272.00 735.00 2,007.00 1,318.00 423.00 985.0 2,726.00 4,733.00 1,490,895.00 3.1 Deliver high Quality and Timely Audit Service 240.00 266.00 506.00 106.00 324.00 300.0 730.00 1,236.00 389,340.00 3.2 Availability of competent and motivated staff 520.00 235.00 755.00 758.00 50.00 445.0 1,253.00 2,008.00 632,520.00 3.3 Acquire, maintain equipment for effective implementation of operational plans 200.00 100.00 300.00 208.00 13.00 100.0 321.00 621.00 195,615.00 3.4 Promote effective communication 233.00 120.00 353.00 222.00 36.00 140.0 398.00 751.00 236,565.00 3.5 Be a more independent institution 79.00 14.00 93.00 24.00 - - 24.00 117.00 36,855.00 Sub-Total 3 1,272.00 735.00 2,007.00 1,318.00 423.00 985.0 2,726.00 4,733.00 1,490,895.00 4 PFEM RP Management 10 382.00 356.00 738.00 433.00 331.00 124.00 888.00 1,626.00 405,090.00 4.1 Capacity building for PFEM RP Managenent 110.00 130.00 240.00 130.00 90.00 30.00 250.00 490.00 182,700.00 4.2 Improve PFEM record keeping , image building & ICT 130.00 73.00 203.00 105.00 53.00 22.00 180.00 383.00 120,645.00 4.3 Operation and Investment costs 142.00 153.00 295.00 198.00 188.00 72.00 458.00 753.00 101,745.00 Sub-Total 4 382.00 356.00 738.00 433.00 331.00 124.00 888.00 1,626.00 405,090.00 FROIP TOTAL 4,367.58 3,632.42 8,000.00 3,055.02 5,132.45 2,144.00 10,331.47 18,331.47 5,774,413.05 Contingency 668.53 210,586.95 GRAND TOTAL 4,367.58 3,632.42 3,055.02 5,132.45 2,144.00 19,000.00 5,985,000.00 58 Annex 7: Country at a Glance Malawi: Financial Reporting and Oversight Improvement Project 59