Documentof The World Bank FOROFFICIAL USEONLY ReportNo: 39633-MW PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDGRANT INTHEAMOUNT OF SDR 10MILLION (US$15 MILLIONEQUIVALENT) TO THE REPUBLIC OF MALAWI FORA BUSINESSENVIRONMENT STRENGTHENINGTECHNICAL ASSISTANCE PROJECT(BESTAP) April 27,2007 FinanceandPrivate SectorDevelopment PrivateSector Unit Africa Region This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS US$l = MK MK1=US$ FISCAL YEAR: January 1-December 31 ABBREVIATIONS AND ACRONYMS AIDS Acquired ImmuneDeficiency Syndrome MOF Ministry of Finance BDS BusinessDevelopmentServices MOJ Ministry o f Justice BESTAP BusinessEnvironment Strengthening MSB Malawi Savings Bank TechnicalAssistance BUGS Business Growth Scheme MPRS Malawi PovertyReductionStrategy CAE Country Assistance Evaluation MRFC Malawi Rural Finance Company CAS Country Assistance Strategy MSME Micro Small MediumEnterprises CMU Country ManagementUnit MW Malawi DPL DevelopmentPolicy Lending NAG NationalAction Group DTIS DiagnosticTrade Integration Study NICO NationalInsuranceCompany EC EuropeanCommission ODPP Office of the Director ofPublic Procurement GAC Governanceand Anticorruption Report OPC Office of the Presidentand Cabinet GDP Gross DomesticProduct PIC ProjectInformationCentre GoM Government o f Malawi PID ProjectInformationDocument GNI GrossNational Income PCN ProjectConcept Note GTZ GermanTechnical Cooperation PIP Portfolio ImprovementPlan HIPC Highly IndebtedPoor Countries PIU ProjectImplementationUnit HIV HumanImmunodeficiencyVirus PIM ProjectOperationalManual IBRD InternationalBank for Reconstruction and PPPS Public PrivatePartnerships Development ICA Investment ClimateAssessment PSD Private Sector Development ICB InternationalCompetitiveBidding QAG Quality Assurance Group IDA InternationalDevelopment Association RBM ReserveBank of Malawi IF IntegratedFramework RGD Registrar General's Department IFC InternationalFinanceCorporation RVP RegionalVice President IMF InternationalMonetaryFund SBD StandardBidding Documents ISDS IntegratedSafeguards DataSheet SME Small and MediumEnterprise JCPR Joint Country ProgramReview TFP Total Factor Productivity JITAP Joint IntegrationTechnical Assistance UNDP United Nations Development Program Program MAP Multi-sectoral Aids Project UNIDO United Nations IndustrialDevelopment Organization MASAF Malawi SocialAction Fund USAID United States Agency for International Development MCA Millennium ChallengeAccount WB World Bank M&E Monitoring and Evaluation WTO World Trade Organization MCCCI Malawi Confederation of Chambers of PEP Africa PrivateEnterprise Partnership - Africa Commerce and Industry MEPD Ministry of EconomicPlanningand PPIAF Public PrivateInfrastructureAdvisory Facility Development MEGS Malawi Economic Growth Strategy PRC Project Review Committee MGDS Malawi Growth and Development PSD Private Sector Development Strategy MGS MatchingGrant Scheme PIU ProjectImplementationUnit MITC Malawi InvestmentandTrade Centre PC Privatization Commission MITPSD Ministry of Industry,Trade and Private Sector Development Acting Vice President: HartwigSchafer Director: Michael Baxter Country Manager: Timothy R.Gilbo Sector Director: Marilou J. D.Uy Sector Manager: Demba Ba Task Team Leader: Constantine Chikosi i FOR OFFICIAL USE ONLY MALAWI BUSINESSENVIRONMENT STRENGTHENING TECHNICAL ASSISTANCE (BESTAP) CONTENTS A .STRATEGIC CONTEXT AND RATIONALE .................................................................Page1 1 . Country and Sector Issues ............................................................................................... 1 2 . Rationale for Bank Involvement...................................................................................... 5 3. Higher Level Objectives to which the Project Contributes ............................................. 7 B . PROJECT DESCRIPTION .............................................................................................. 8 1. Lendinginstrument.......................................................................................................... 8 2. Project Development Objective and Key Indicators ....................................................... 8 3. Project Components........................................................................................................ -9 4. Lessons LearnedandReflected inthe Project Design .................................................. 13 5. Alternatives Consideredand Reasons for Rejection ..................................................... 15 C . IMPLEMENTATION ..................................................................................................... 16 1. PartnershipArrangements ............................................................................................. 16 2. Institutional and Implementation arrangements............................................................ 16 3. Monitoringand Evaluation OutcomesResults ............................................................. -19 4. Sustainability ................................................................................................................ -20 5. Critical Risksand Possible Controversial Aspects........................................................ 21 6. Grant Conditions and Covenants .................................................................................. -21 D . APPRAISAL SUMMARY .............................................................................................. 22 1. Economic and Financial Analyses................................................................................. 22 2. Technical ....................................................................................................................... 22 3. Fiduciary ........................................................................................................................ 22 4. Social ............................................................................................................................. 23 5. Environment .................................................................................................................. 23 6. Safeguardpolicies......................................................................................................... . . -24 7. Policy Exceptions and Readiness.................................................................................. 24 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. Annex 1: Country and Sector or Program Background ......................................................... 25 Annex 2: Major Related Projects Financedby the Bank and/or other Agencies ..................33 Annex 3:Results Framework and Monitoring..................................................................... -34 Annex 4: Detailed Project Description.................................................................................. 37 Annex 5: Indicative Project Costs by Component................................................................. 46 Annex 6: Implementation Arrangements .............................................................................. 47 Annex 7: Financial Management and DisbursementArrangements ..................................... 51 Annex 8: ProcurementArrangements ................................................................................... 64 Annex 9: Economic and Financial Analysis.......................................................................... 78 Annex 10: Project Preparationand Supervision .................................................................... 85 Annex 11: Documents inthe Project File............................................................................. 86 Annex 12: Statementof Loans and Credits ........................................................................... 87 Annex 13: Country at a Glance ............................................................................................. 89 List of Figures: 1 Figure 2: Exports. Imports and Trade Balance. 1999 .2006 ......................................................... Figure 1: GDP Growthand Changes.............................................................................................. 2 Figure 3: Investment Climate Reforms andPoverty Reduction..................................................... 7 Figure 4: Lending and Real Interest Rates, Selected Countries, 2004 ......................................... 27 Figure 5: Percentageof MalawianFirmsPerceiving Obstaclesto be "major" or "very severe" to operations and growth ...................................................................................... 28 Figure 6: Percentageof MalawianFirmsPerceiving Obstaclesto be "major" or .informal Figure 7: Labor Costs Lower inMalawi ...................................................................................... "very severe" to operations and growth, formal vs sector........................................... 29 Figure 8: Implementation Structure.............................................................................................. 30 50 Table 1: SelectedNational Indicators . and Surrounding Countries. 2004 .................... List of Tables: Table 2: Monthly median compensation. Malawi and Regional Competitors ............................. Malawi 26 30 Table 3: Selected Indicators from Investment Climate Assessments ........................................... 76 Table 5: Thresholds for Consultants Selection Methods and Prior Review................................. Table 4: Thresholds for ProcurementMethods and Prior Review Works and Goods .................31 76 Table A9.2: Economic Impact of Project Subcomponents........................................................... Table A9.1: Economic and Financial Analysis ............................................................................ 78 81 Table A9.3: Detailed Economic Cost-Benefits Analysis ............................................................. 83 Map: 33440 ... 111 A. STRATEGICCONTEXT AND RATIONALE 1. Country and Sector Issues 1. Malawi is a small, landlocked country in the south-eastem comer o f Africa with a population o f approximately 12 million. GDP per capita was just US$167 in 2004, or approximately US$640 in terms o f purchasing power parity. Based on this figure, Malawi remains one o f the ten poorest countries in the world. There i s a clear need for rapid and sustainable economic growth, and although 2004 saw an improved performance with economic growth reaching 4.6 percent, recurrent drought and food insecurity in 2005 pushed back growth to just 2.1 ercent'. Forecast growth o f 8.4 percent in 2006 represents a strong recovery element from 2005 . It i s estimated that 5 to 6 percent real economic growth would be required to have 4 any impact on poverty given current population growth rates3. Such rates have only rarely been achieved, and never ina consistent manner. - Figure1:GDP growthand changesinGDP per capitainMalawi, 1980-2005 -- 50 180 45 4I 1 GDPgrow th (annual%) I ,I 40 170 8 35 160 8 3 E 30 0 25 150 2 2& v 20 C m 15 140 10 130 2 5 Q 5 0 0 120 2 -5 a -10 110 8 -15 100 Source: InvestmentClimate Assessment, 2006 2. The underlying causes of Malawi's low economic growth are well known: both investment and productivity growth are very weak. Net fixed investment at just 8.1 percent o f GDP4is half the average for Sub-Saharan Africa and less than a quarter of that recorded in neighboring Mozambique. Net fixed investment in the private sector i s close to zero according to International Monetary Fund(IMF) estimates. Growth inlabor force productivity i s also virtually zero. Malawi currently invests double the Dollar value o f capital to yield an equivalent increase in output compared to the average in Sub-SaharanAfricas. It is no surprise that as activity in Malawi's private sector has stagnated and wider economic performance has faltered, so have efforts to reduce poverty on a meaningful scale. IMF (2006) WorldEconomic Outlook, September, Washington, DC: InternationalMonetaryFund. ibid World Bank (2004) Malawi Country Economic Memorandum - Policies for Accelerating Growth, Poverty Reductionand Economic Management 1, Afiica RegionReportNo.25293-MAI, Washington, DC: The World Bank. 4 'WorldBank(2004) (2005) WorldDevelopment Indicators, Washington, DC: The World Bank. UNIDO Industrial Development Report 2004 -Industrialization, Environment and the Millennium Development Goals in Sub-SaharanAfrica, Vienna: UnitedNations IndustrialDevelopment Organization, 1 3. Giventhe small size o f the economy and with only limiteddomestic demand, it is essential that local firms are able to export in order to gain critical mass and grow. However, over recent years, Malawi's trade performance has consistently fallen below expectations with large Dollar deficits essentially being financed by aid inflows. Export performance has remained essentially flat over the last seven years. Sustained export growth in real terms has not been achieved as when the performance o f one sector has improved, the performance in other sectors has worsened. Large current account deficits mean that the Malawi Kwacha i s under constant threat o f devaluation. Figure 2 shows Malawi's negative trade balance which has been steadily increasing inrecent years. Figure 2: Exports, imports and trade balance, 1999-2006 I Trade performance (in USD) fn of Gods,fob Inports of Gwds, fob 0 Trade balance ~ Source: Ministry o f Industry, Trade andPrivateSector Development,2006 The structure of the private sector inMalawi 4. Malawi's trade structure is also unbalanced with the country continuing to maintain a dangerous dependence on tobacco exports for foreign exchange. In2006, the share o f tobacco in exports was 55.5 percent, down marginally from 61.4 percent in 1999.On the other hand, textiles and garments have increased their share o f exports form 3.8 to 7.6 percent, sugar from 5.2 to 9.6 percent and tea from 8.8 to 9.9 percent, over the same period. Thus, while there appears to be an encouraging, iffragile, trend towards export diversification, tobacco continues to dominate. 5. This dependency makes Malawi uniquely vulnerable to shocks inthe tobacco industry. Tea and sugar grown on estates make up the number two and three positions in order o f export performance. While tea and sugar have grown inrelative importance this has largely been at the expense o f more minor cash crops such as coffee, pulses and cotton. Textiles and garmentshave become increasingly important as a source o f non-agricultural exports and as a source o f urban employment. However, the future of the sector i s injeopardy with the expiry o f the World Trade Organization (WTO) Agreement on Textiles and Clothing and doubts surrounding the future o f the other main market, South Africa given uncertainty over the lifespan o f the MMTZ-SACU - arrangement6. ~~ ~~ 6 An asymmetric trade agreement betweenthe Malawi,Mozambique,TanzaniaandZambia onthe one hand, andthe countries o fthe SouthernAfrica Customs Union-ofwhich South Africais the maindestinationmarket. 2 6. Malawi's private sector i s characterized by a "missing middle", with too few businesses in- between the large multinationals, and the many micro enterprises. The manufacturing sector i s small and accounts for just 11 percent o f GDP, down from a high o f 32 percent in 1992. The private sector i s also inward looking as only 14percent o f manufacturedoutput i s exported'. 7. While there are constraints and distortions limiting demand internationally (notably agricultural subsidies, technical barriers to trade and sanitary and phytosanitary requirements in developed country markets), the evidence would suggest, given Malawi's relatively poor trade performance compared to other commodity dependent developing countries, that it i s supply-side constraints rather than a lack o f demand in the markets in which Malawi participates which are the primary constraint to export expansion. In fact Malawi enjoys moderate current account surpluses with the United States and European Union, but has massive deficits with neighboring countries, most notably South Africa, Zimbabwe and Mozambique'. 8. As a landlocked country, Malawi faces additional challenges that need to be overcome in sending its products to international markets. This is an additional, but not insurmountable obstacle. Malawi's comparatively high domestic transportation costs imply that the high cost o f transport frequently cited by exporting firms i s not entirely due to the distance to its major ports. Key constraints to private sector development 9. The constraints to private sector development in Malawi are well-known, due inpart to the large amount o f analytical and diagnostic work that has been carried out in recent years. In particular the Investment Climate Assessment o f 2006 based on a detailed survey o f 300 enterprises, and the annual publication o f Doing Business survey indicators has helped to focus the reformefforts ofthe Malawi Government. 10. Thepoor regulatory environmentfor business impedes investment and constrainsprivate sector development. Firms in Malawi face numerous hurdles in terms o f red tape, regulations and requirements in carrying out every-day business activities. Many o f the key laws which govern private sector activity are out o f date and in need o f wholesale revision. Limited legislative capacity and the low priority attached to reforming the business environment in the past mean that there i s a large backlog o f legislative change that has yet to be implemented. In addition, gaps have been revealed in the legal framework - for example, the absence o f an enabling law for creating credit reference bureaus reduces the scope for private sector initiatives inimproving accessto finance. 11. Overall Malawi i s ranked 110 out o f 175 countries on the Doing Business indicators. While such qualitative surveys only give an indication o f the overall enabling environment for business, it is clear that the private sector in Malawi suffers from a heavy regulatory burden. Malawi's performance compared to neighboring countries in Sub-Saharan Africa i s actually quite good; however the country needs to be well above regional averages in order to offset the disadvantages o f beinglandlocked. 7WED (2006) Malawi InvestmentClimateAssessment,Afiica PrivateSectorGroup, Washington, DC: The World Bank. Malawi Government (2005) TheNational Export Strategv: Key Issues and Possible Response, Lilongwe: Ministry o f Trade andPrivateSector Development. 3 12. The economy is characterized by weak contract enforcement and limited access to commercialjustice. Criminal and political cases tend to absorb most o f the capacity and receive higher priority in Malawi's judicial system, resulting in a large backlog o f commercial cases. In addition, the judiciary i s ill-equippedto deal with the more complex cases, particularly involving liquidation. According to the Doing Business indicators, the average recovery rate after insolvency i s just 13.2 cents on the Dollar. Similarly it takes an average o f 377 days to enforce a contract and costs an average 136.5 percent o f the debt to claim paymentg. With an average enforcement cost greater than 100 percent o f the debt, it i s not surprising that few enterprises resort to the courts. The net effect i s a general reluctance within the private sector to extend credit facilities or enter into contract arrangements to all but the most trusted o f clients. Although arbitration and mediation o f commercial disputes are provided for in law, the institutional framework for accessing these services does not exist. If these alternative dispute settlement mechanisms were working well, contract enforcement and access to commercial justice would be much improved inMalawi. 13. Low capacity in property rights institutions prevents the private sector from unlocking the value of fied capital. The process for registering the ownership o f land in Malawi is based on two parallel systems: deeds and titles. Entirely centralized and manual systems, together with excessively bureaucratic procedures make the transfer o f private property a slow process. According to the Doing Business indicators, it takes an average o f 118 days to fully secure rights to property". This acts as a deterrent to foreign investment where land i s required, and makes it difficult for businesses to use private property as security for borrowing. This also limits the scope for securing land-based assets and their use as collateral to improve access to finance. 14. Similarly, the process o f registering a company or business name i s subject to a single centralized and manual system that i s based in one location and is both slow and costly for the private sector. The Doing Business indicators show that it takes an average o f 135 percent o f GDP to start a business" This contributes to barriers to entry and to costs of formalization that impede the growth o f a vibrant SME sector. 15. A cumbersome business licensing regime imposes unnecessary costs on theprivate sector. A complex web of overlapping licenses and permits, many of which serve only a very marginal regulatory function, govern the environment inwhich enterprises operate. This creates obstacles to the process o f market development by raising the costs o f business entry and growth and creates barriers to transition from the subsistence and very small scale economy to the modern more productive sector. Excessive licensing requirements also create opportunities for rent seeking behavior among bureaucrats, to the obvious cost o f the private sector. Many entrepreneurs in Malawi remain trapped in the informal private sector due to the high costs o f formalization, partially associated with licensing requirements. Such firms, therefore, are unable to grow and benefit from economies o f scale or access the additional benefits o f formalization such as bank finance and business development services. 16. Inadequate infrastructure services undermine the competitiveness of goods and services produced in Malawi. Years o f underinvestment and poor state management o f the key power, 9 Doing Business database(2006) lo ibid ibid 4 water and telecommunications utilities has resulted in high costs, unreliability o f service and poor outreach. This i s a major contributing factor to low firm level competitiveness inMalawi's private sector andhence, to the country's inability to take full advantage of available export trade opportunities. 17. The poor state o f transport infrastructure, not least in transit countries en route to major ports, contributes to the highcosts of production. A more adequate infrastructure platform would make Malawi's economy more competitive. Yet, the public resources available (even when donor resources are taken into account) are not enough to close this "infrastructure deficit." 18. Weakpolicy analysis,formulation and implementation create uncertainty in the private sector. Dialogue between the public and private sectors in Malawi has historically been very weak and characterized by distrust, and occasional hostility. Limited consultation and partnership with the private sector has tended to result inpoorly informed public sector decision- making that often fails to foresee the impact o f decisions on the private sector. A general lack o f mutual accountability between the public and private sectors has also resulted in very weak policy implementation and, therefore, disappointing results. 19. Low cost advantages are eroded by the limited availability of skilled workers and the low productivity of labor. Evidence from the recently completed Investment Climate Assessment suggests that Malawi possessesa comparative advantage inthe region interms o f low-cost labor. However when considering total factor productivity, that i s taking into account the relative costs andreturns to both labor and capital together, Malawi's cost advantage evaporates. 20. Limited access to finance is the leading constraint to private sector investment. The Reserve Bank o f Malawi's base rate was reduced from 25 to 20 percent inNovember 2006. This i s a welcome step in terms o f reducing the cost o f finance to the private sector, especially given that base rates were as high as 45 percent in 2004. Previous Government budget overspending and a reliance on domestic borrowing resulted insevere crowding out o f private sector lending in the bankingsystem. More recently, year on year inflation dropped to single digits (9.2 percent) in February, 2007 for the first time infour years. 21. The lack o f a national identification system makes it difficult for credit providers to assess client credit-worthiness and identify whether loans have already been secured against assets, thus resulting inan excessively cautious approach to small business lending. 2. Rationale for Bank Involvement 22. The Investment Climate Assessment and Doing Business reports have identified a wide range o f constraints on the growth o f the private sector in Malawi. In response, the Government's Private Sector Development (PSD) program seeks to address most o f these constraints through a combination o f different projects and programs. BESTAP is only one such project and represents a "bite size" chunk o f Malawi's broader and longer-term PSD program. Within the International Development Association (IDA) portfolio for Malawi and the Country Assistance Strategy (CAS) other projects are addressing infrastructure, health, education and skills development. Other donor-funded projects (Annex 2) as well as the Government's own Public Sector Investment Program (PSIP) are also contributing to the broader PSD program (see ,Annex 2). This project will contribute to reducing the cost o f doing business, improving service 5 delivery to the private sector and providing targeted support to small and medium enterprises. This goal will be achieved by reducing the regulatory burden and costs of doing business; improving access to finance for Small and MediumEnterprises (SMEs); strengthening support for technical and business management skills thereby improving productivity and competitiveness at the firm level. This project does not seek to address all the constraints on private sector growth in Malawi. BESTAP is already seeking the positive leveraging effects of the Development Policy Lending (DPL) instrument to get more traction in some key policy reforms such as business licensing and strengtheningcontract enforcement inMalawi. 23. The Government of Malawi has finalized a new national development strategy, the Malawi Growth and Development Strategy (MGDS) which was discussed by the World Bank and International Monetary Fund(IMF) in September, 2006. The MGDS merges the previous social sectors focus of the Malawi Poverty Reduction Strategy MPRS)'* with the productive sectors focus of the Malawi Economic Growth Strategy (MEGS)' . The MGDS recognizes that poverty I reduction is achieved through economic growth. Fundamentally, the MGDS is a private sector ledgrowth strategy which recognizesthe private sector as the "engine of economic growth." The strategy aims to achieve the Presidential vision of transforming Malawi from being a predominantly consuming and importingcountry, to one whichproduces and exports. 24. Malawi's recent attainment of irrevocable debt relief under the Highly Indebted Poor Countries (HIPC) initiative signifies the return to macro-economic stability that has been championed by the current administration. Despite poor rains and a major food security crisis in 2005-2006, Malawi has managed to maintain budgetary and fiscal discipline, and see improved exchange rate stability and relative reductions in inflation and interest rates. Such macro management has regained the confidence of the international community, demonstrated by the resumption of budget support by bilateral donors; a new IMF Poverty Reduction and Growth Facility (PRGF); andthrough debt relief. A stable macroeconomic environment is a pre-requisite for sustainable private sector development, and Malawi's strong progress in regaining macro stability means that the Government i s increasingly looking to a "second generation" of reforms inthe domestic businessenvironment which will seek to stimulate private sector investment and employment creation. 25. The 2006 Malawi Investment Climate Assessment (ICA) provides an up-to-date picture of Malawi's private sector and an effective base line assessment prior to the launch of private sector reforms. Resultsfrom the ICA show that Malawi's manufacturing sector i s small (accounting for just 11 percent of GDP) and inward oriented (only 14 percent of manufacturing output is exported). Malawi's low cost labor advantages are eroded by poor productivity resulting from poor infrastructure, unreliable utilities and difficulties inaccessing affordable finance. 26. The ICA findings confirm the results of previous studies including the 2004 Diagnostic Trade Integration Study (DTIS), which found that many firms are constrained by the small domestic market. The evidence is increasingly showing that the binding constraints to improved trade performance in Malawi lie on the supply side of the economy. Expansion by Malawi's domestic private sector into regional markets is essential for the country to diversify away from its vulnerable reliance on exports of tobacco, sugar and tea. With the structure of the private sector being a few large firms at the top, many small ones at the bottom and a "missing" middle, l2Launchedin2001, the MPRSnotionallyexpiredin2005, hence the needfor anew nationaldevelopmentplan. l3Developedin 2004 inorder to strengthenPillar One (SustainableEconomicGrowth) ofthe MPRS. 6 a key policy challenge inMalawi is therefore to encourage the large number of small enterprises (many in the informal sector) to grow into the middle space by reducing the costs of formalization and of doing business. 27. Inresponseto the challengesfacing the economy outlined above, the Government -through the Ministry of Industry, Trade and Private Sector Development (MITPSD) - i s leading a PSD reform program that will seek to put private sector development at the heart of Government service delivery. The Government's PSD program draws upon the Bank's ICA and Doing Business surveys as its analytical foundations and as the basis for monitoring the progress of reforms inkey areas affecting Malawi's business environment. 3. HigherLevelObjectivesto whichthe ProjectContributes 28. Poverty in Malawi is both widespread and severe with results from the most recent household living standards survey completed in 2005 estimating that 52.4 percent of households are considered poor, and of these 22.4 percent of households are considered ultra poorI4.The principal goal of the MGDS is to achieve 6 percent economic growth the minimumnecessary to - have a meaningful impact on poverty levels in Malawi. For this growth to be achieved, it is essential that the private sector invests and createsjobs (see Figure 3). Figure3: InvestmentClimateReformsandPovertyReduction .... `1 Economic growth ........................................................................................... 29. The Bank program under the new CAS, is fully aligned with the country's MGDS and focuses its support infour key strategic areas: (i) improving smallholder agricultural productivity and integration into agro-processing; (ii) inplace a foundation for longer term economic putting growth through improved infrastructure and investment climate; (iii) reducing vulnerability at the household level, especially from HIV/AIDS and malnutrition; and (iv) sustaining improvements infiscal discipline, budget execution, and accountability of the civil service. Each of the CAS outcomes is explicitly linkedto MGDS goals. - employment and income generation; fighting HIV/AIDS; improving human development; decentralization and strengthened public service delivery, and improved Monitoring and Evaluation (M&E). Improvements inthese areas are to be pursuedagainst a backdrop of continued macroeconomic stability and the promotion of good governance. In the area of employment and income generation the Bank's assistance i s comprised of mutually-supportive actions intended to create a minimum infrastructure platform for private sector-led growth: (i) creation of an enabling environment for PSD; (ii) alleviationof infrastructure bottlenecks for growth; (iii) exploitation of growth potential inthe rural economy; l4Malawi Government (2005) Integrated HouseholdSurvey,Zomba: National StatisticalOffice. 7 (iv) provision o f appropriate education and training for economic growth; and (v) ensuring the improvement and sustainable use o f natural resources. 30. The BESTAP project is an integral part o f the CAS and contributes to achieving Malawi's development strategy by addressing the constraints to PSD related to the business environment, inadequate enterprise skills and institutional support to PSD. The project complements the ongoing efforts led by the Bank and other donors (see Annex 2). The International Finance Corporation (IFC) has had minimal activity in Malawi in recent years due to the uncertain macroeconomic environment. However, following recent improvements in the investment climate, the IFC i s now actively looking for new opportunities inMalawi, and is working closely with the Bank on technical assistance opportunities that are complementary to their investment operations. 31. Other donors welcome the Bank's involvement and assistance inaddressing important gaps in PSD. Because of the Bank's expertise in areas such as improving business environment and increasing access to finance they view the World Bank's participation as crucial for the program's success. Bank support will focus on areas where: a) the Bank has a comparative advantage; b) it leverages private sector as well as other donors' participation; c) it supports the emergence o f a broad-based entrepreneurship culture; and d) public sector institutions can be transformed to enhance private sector and SME growth. 32. World Bank participation in the project will enable the Government to draw from best practices developed in other regions in a wide variety o f fields. For instance, the project will support the introduction o f innovative approaches to enhance enterprise creation and competitiveness through support to private-public partnerships, dialogue, and enhancement o f firm level competitiveness through a matching grant scheme that will support enterprise skills development. An added advantage o f the World Bank's involvement i s the cross sector and agency experience it can draw upon, bothwithin Southern Africa and from other regions. B. PROJECTDESCRIPTION 1. Lendinginstrument 33. The project will be supported by a grant in the amount o f US$15 million equivalent from International Development Association (IDA) resources and a grant o f $3.7 million equivalent in co-financing from the European Commission for a total of $18.7 million equivalent. The US$15 million IDA funding will be all on grant terms. The project will provide the necessary financing for change management in key public sector institutions that already have an established source o f recurrent funding. The activities have been identified through extensive economic sector work, policy dialogue with the Government, as well as through consultations with a wide range o f stakeholders (including the private sector, civil society and donors). They are aimed at achieving higher levels o f competitiveness and growth. The project will be implemented over five years. 2. ProjectDevelopmentObjectiveand Key Indicators 34. The objective o f the Project is to support capacity development and investment climate reforms in order to accelerate economic growth. One o f the medium term outcomes inMalawi's 8 CAS i s an improved climate for private business. This project i s one instrument by which the Bank seeks to achieve this outcome. This will be done by reducing the regulatory burden and costs o f doing business; improving service delivery to the private sector; access to finance for SMEs; and by strengthening support for technical and business management skills, thereby improving productivity and competitiveness at the firm level. 35. The key performance indicators which will measure the project outcomes and the intermediate outcome indicators are in Annex 3. These indicators have been developed jointly with the beneficiaryhmplementing agencies and have been integrated into the project's monitoring and evaluation system. They will be reviewed at mid-term, and revised ifnecessary. 3. ProjectComponents 36. The project supports the achievement o f the Government's strategy o f facilitating private sector led economic growth through four mutually reinforcing components (A detailed project description i s given inAnnex 4): a) Component One: Strengthening private property rights institutions and business facilitation; b) Component Two: Strengthening private sector development support institutions and services; c) Component Three: Promoting access to finance and productivity enhancement d) Component Four: Capacity buildingand implementationsupport Component One: StrengtheningPrivate Property Rights Institutions and BusinessFacilitation (Total: US4.3 million, of which IDA 80%; EC 20%). 37. This component will support activities which aim to improve the regulatory environment in which the private sector operates, to strengthenthe institutions that protect private property rights and allow speedy and low cost business facilitation. Ithas the following three sub-components: Sub-component A: Streamlining the Regulatory Environment for Business (Total: US$l.1million). The sub-component will address the large legislative backlog o f economic laws, many o f which require wholesale revision, that inhibit private sector development in Malawi. This sub-component will also support the introduction of key new legislation. Activities to be funded will include: (i) of a short term consultant to prioritize the economic laws inneed hiring o f revision based on a cost-benefit analysis o f the impact o f revising any given Act; (ii) hiring two legal draftspersons in the Ministry o f Justice who will be dedicated to working on the drafting o f legislation that has a demonstrable impact on the costs o f doing business; (iii) short term training courses in legal drafting for the staff o f the legal drafting section and IT systems development to strengthen the legislative drafting capacity o f the Ministry o f Justice; and (iv) sensitization workshops to engage key stakeholders in the legislative reform program including parliamentary committees, civil society and the private sector. Sub-component B: Improving Access to Commercial Justice (Total: US$l.3 million). This sub- component will provide support for strengthening and expanding the capacity o f the newly established Commercial Division o f the High Court to relieve the current large backlog o f 9 commercial cases inMalawi's court system and to strengthen contract enforcement. Delays o f up to 24 months in the resolution o f commercial disputes have been highlighted as a major impediment to doing business in Malawi. This sub-component will fund: (i)a short term consultant to carry out a diagnostic o f the IT systems requirements and specification; (ii) procurement and installation o f information systems for efficient court management and Alternative Dispute Resolution services (ADR); (iii) hiring of a short term consultant to conduct a systematic capacity assessment for training o f Judges, Registrars and Staff; (iv) short term courses and attachments for Malawian commercial court judges, registrars and ADR administrators in other countries with similar legal systems; and (v) advisory services provided by foreign commercial court judges/ ADR administrators on court management systems, transference o f skills and international best practices. The World Bank Institute (WBI), i s already involved in training activities under this sub-component, and will continue to be involved through project implementation. 38. Sub-component C: Improving Business (US$O.85 million) and Land Registration Services - (Total US$1.85 million). This sub-component will enable the business and land registries to improve their effectiveness in establishing businesses and facilitating the registration and securitization o f land-based assets. Institutional assessments for these agencies were undertaken as part o f the Doing Business Survey. The following activities will be supported by the project: (i)systems diagnosis and specification; and (ii)information technology investment inthe Registrar General's department (for registering a company and business name) and inthe Lands Registry (for registering and transferring immovable property titles) (iii)computerization o f procedures and data processing and archiving, and streamlining o f documentation and procedures; (iv) restructuring o f the registries' operations and procedures and (v) staff training and workshops. Computerization o f the current manual business registry systems will significantly reduce the time taken to start a business and will encourage the migration o f informal firms to the formal private sector. Similarly, computerization o f the Lahds Registry will reduce the time taken to register and transfer land titles, and simplifying procedures for using land as collateral. The project will also support installationof a facility for remote on-line access, registration o f companies and property titles, using streamlined procedures. Component Two: Strengthening Private Sector Development Support Institutions and Services (Total: US$4.6.million, of which IDA 80%; EC 20%). 39. This component will build capacity in institutions.that provide essential services to the private sector inorder to improve the quality and volume o f services delivered, and to strengthen institutions that provide policy direction on private sector development issues. Sub-component A: Establishing a One-Stop-Shop Investment and Trade Centre. (Total: US$O.9 million). The sub-component will provide support to the newly established Malawi Investment andTrade Centre. Activities to be supported underthis sub-component include: (i) upthe setting legal and regulatory framework for a one-stop business licensing, investment and exporting promotion centre through effective devolution o f licensing authority; (ii) short-term consultant to assist with business process re-engineering and restructuring o f its internal operations to achieve gains in operational efficiencies; (iii)hiring a consultant to conduct an IT systems needs assessment for this new agency; (iv) support procurement o f IT systems with capability for investor tracking, on-line license applications and M&E for tracking improvements in operational efficiencies; and (v) staff training in relevant short term courses, use of the new IT 10 system and sensitizatiodpolicy dialogue workshops. This sub-component will involve Private Enterprise Partnership for Africa (PEP) and Foreign Investment Advisory Services (FIAS), who will undertake the necessary institutional assessment and continue to be involved during project implementation. Sub-component B: Establishing an Institutional Framework for Public Private Partnerships: (Total: US1.8million). Activities to be fundedunder this sub-component include: (i) workshops and consultants i s support o f establishing the legal and institutional framework for facilitating private investmentininfrastructure and services, through Public Private Partnerships (PPPs); and (ii) consultant fees for the consultants providing technical assistance to a small PPP Unit in the Ministry of Finance. Given that only limited resources are available in the public sector and from donors for infrastructure development; this activity will seek to maximize the flow o f private investment into the infrastructure sectors. A Public Private Infrastructure Advisory Facility (PPIAF) funded consultancy, which included an institutional assessment, has conducted extensive stakeholder consultations on the design o f an appropriate legal and institutional framework for PPPs in Malawi. This sub-component will support implementation o f the agreed recommendations. Sub-component C: Strengthening the Department of Private Sector Development (Total: US$l.0 million). This sub-component will aim to build capacity in the Department o f Private Sector Development, within the Ministry o f Industry, Trade and Private Sector Development. This sub- component will fund: (i) o f two private sector development specialists in the Department hiring o f Private Sector Development who will be dedicated to working on Doing Business reforms; (ii) IT systems development to strengthen the capacity of the Department; (iii) training courses and attachments for staff o f the Department to strengthen their policy analysis capabilities; and (iv) sensitization workshops to engage key stakeholders in the private sector development reform program including parliamentary committees, civil society and the private sector. The Bank's I C A and Doing Business surveys have been the analytical foundations for the Government's medium-to-long term PSD reform program and at the same time confirmed the Government's serious capacity inadequacies to anchor and oversee the reform program. This sub-component responds to the Government's request for support in building its capacity to maintain these reforms over the medium-to-long term. Sub-component D: Supporting a Sustainable Framework for Public-Private Dialogue (Total: US$09million). This sub-component will support the following activities: (i) `establishment o f a public-private dialogue (PPD) secretariat in the Malawi Confederation o f Chambers o f Commerce and Industry (MCCCI) by funding two full time positions for five years; (ii)a number o f short term consultancies to support restructuring and business process re-engineering for MCCCI's operations and procedures; (iii) a diagnostic o f IT needs and specification, and the procurement and installation o f this system; and (iv) staff training and workshops. Effective PPD i s essential in Malawi to ensure shared ownership and understanding on the respective roles and responsibilities o f the public and private sectors. It i s accepted that implementation o f the previous MPRSP and MEGS was not as strong as it could have been. Deeper Government engagement with the private sector on policy formulation and implementation, with mutual accountability on agreed actions would lead to more effective implementation and better results. This component will be implemented with support from the IFC and drawing from the Bank's experience with Presidential Investor Councils. 11 Component Three: Promoting Access to Finance and Productivity Enhancement (Total: US$4.6million, ofwhich IDA 80%; EC 20%). 40. Malawi's private sector is characterized by a "missing middle", with comparatively few enterprises located in between the many micro and informal sector businesses, and the larger multinationals and conglomerates. The objective o f this component i s to support the growth and development o f micro and small enterprises, into this middle market. 41. Sub-component A: Establishment of a Sustainable SME Investment Fund (Total: US$O.6 million). This sub-component will support the following activities: (i)technical and advisory services in support o f an existing Ministry o f Finance initiative to establish either an SME investment fund or loan guarantee fund, in support o f better access to finance for small-scale businesses. To ensure effective governance, the fund will be managed by the private sector and Government's contribution will be capped with the majority o f funding coming from the domestic and external private sector. 42. Sub-component B: Establishment and Operation of a Business Growth Scheme (Total: US$3.2 million). This sub-component will strengthen capacity o f private firms, mostly indigenous owned SMEs, as well as their representative organizations through provision o f financial and technical assistance to build the capacity and international competitiveness o f private business and professional/ business associations. The Business Growth Scheme (BUGS) will be independently managed in order to ensure effective provision o f direct assistance to individual private firms, covering 50 percent o f the cost o f service fees and o f invoiced travel costs on a reimbursement basis. It will also provide cost-sharing grant assistance to representative business and professional associations to build their capacity to better serve their members. The firm itself will cover the remaining 50 percent o f the cost. BUGS HIV/AIDS grants will support expenditures by firms in contracting outside specialist to conduct on-site voluntary HIV counseling and/or testing at the firm's premises. These grants are intended to complement support being provided to firm-level HIV/AIDS activities under other existing schemes. Specifically, this sub-component will fund (i) fees for three professional staff of the BUGS Unit (the BUGS Program Manager and two Advisors); (ii)office equipment and a vehicle; (iii) 50 percent share o f eligible training and other business development services; and (iv) a launch workshop and operating costs for the BUGS Unit. Purchases o f any specialized service considered by the BUGS Unit likely to make a significant contribution to addressing the key weaknesses or gaps identified in the firm diagnostic will be eligible for grant support. Examples o f services likely to be used include market research, product design, product quality improvement, selection o f production machinery, factory layout, training o f production and other staff, design o f advertising materials, selection o f advertising media, selection o f local and foreign distributors or agents. 43. Sub-component C: Merger of Malawi Rural Finance Company (MRFC) and the Malawi Savings Bank (MSB) into a viable Financial Institution (Total: US$0.8million). Access to credit i s one o f the top constraints to private sector led growth in Malawi, especially in rural areas. Currently the two state-owned banks - the Malawi Rural Finance Company (MRFC) and the Malawi Savings Bank (MSB) - are not meeting performance targets, particularly financial sustainability and service standards targets. Working with the Reserve Bank o f Malawi, the project will fund: (i)consultancies to update a feasibility/option study on how the merger can 12 best be achieved; and (ii)technical assistance and advisory services to implement agreed mergerhestructuring o f MRFC and MSB. ComponentFour: Capacity Building and Implementation Support (Total: US$2.9 million, of which IDA 80%; EC 20%). 44. This component will fund the following activities: (i) provision o f a procurement specialist, financial management specialist, M&E specialist, project manager and support staff; and (ii) operational costs and goods necessary for project implementation support. The Project Implementation Unit (PIU) for the Privatization Commission (PC), which has been managing the Privatization and Utility Reform Project, will assume the above functions - while MITPSD builds its capacity. There will be a review o f MITPSD's capacity after two years o f implementation to determine whether such project management functions can be mainstreamed into MITPSD. 4. Lessons Learned and Reflected inthe Project Design 45. This project has been designed drawing upon the World Bank Group's experience in Sub- Saharan Africa and other regions and has benefited from the inputs o f various World Bank Group specialized teams, and from the utilization o f a strong in-country design team. Specifically the project draws upon the large amount o f analytical work carried out by the World Bank Group and the Government o f Malawi inrecent years, including the 2004 DTIS, the 2006 ICA, the annual Doing Business surveys, the 2006 Malawi Country Assistance Evaluation (CAE), the 2006 Governance and Anticorruption Report (GAC), and the Portfolio Improvement Plan (PIP) prepared by the Country Management Unitjointly with the Quality Assurance Group (QAG). Lessons have also been learned from the experiences o f other donor projects supporting the sector and from the experiences o f MCCCI and National Action Group (NAG) infacilitating public-private dialogue inMalawi. 46. The project designreflects the following key lessons learned: (I, Building strongpublic-private dialogue and buy-in. The importance of building an effective private-public dialogue is a key area inthe Africa Region's private sector strategy as experience has demonstrated the difficulties in implementingchange without ownership by the public and private sector. The project design draws on this lesson and makes the private-public interface a central feature o f the project. To ensure that there i s ownership and a buy-in o f the project and its measures by the Government and the private sector, the project team has carried out extensive consultations during project preparation, including the establishment o f six working groups comprised o f public and private sector members, as well as workshops and seminars on capacity building, commercial courts, SME development and licensing reforms. To continue this partnership the project provides support to institutionalize public-private sector dialogue. Also, the team coordinated with the donor community during project preparation to minimize overlapping and duplication, and to benefit from synergies where possible. The team will continue these close relationships during project implementation. An important element to successful private public dialogue i s the ability o f the private sector to debate, research and present issues to the public sector. The private sector's ability to articulate clear positions supports the Government in developing a focused growth strategy. The project has included 13 capacity building for the private sector representative organizations to enable them to develop clear policy positions and solutions. (ii) Simplicity of design. Given the limited implementation capacity in Malawi, ensuring that the design o f the project i s simple and with clear actions, objectives and expected results i s essential. A significant recent trend in the Malawi portfolio has been the need to restructure a number of projects in order to simplify their design and to retrofit stronger M&E frameworks. The need to simplify projects is prompted by the pervasive weak capacity to implement projects in the country. In relation to this project, the project team has attempted to incorporate simple designs and implementation arrangements, and adequate M&E systems. The project team has selected priority interventions (from a large number o f potential interventions) based on a careful assessment o f the likelihood o f successful implementation and achieving demonstrable improvements inMalawi's business enabling environment. (iii) Ownership. The objectives o f the project will include implementation of a series o f policy, legal and administrative reforms. Such reforms can only be achieved ifthere is significant commitment to the objectives o f the project, and most importantly a belief in, and appreciationo f the importance o f this project that i s both broad and deep across Malawi's public sector. The fact that this project was conceived as a technical and financial support measure to an existing Government o f Malawi reform program on private sector development helps to ensure that national ownership remains strong. While appetite for reform across Government is not even, the project has strong champions at the political and technical levels in key Government agencies. Experience shows that institutional reforms can succeed when there i s committed leadership and where Bank programs work closely with champions o f reform in Government, and in collaboration with a broad range o f stakeholders. (iv) ImplementationArrangements. A major challenge with regard to this project has beenchoosing an implementation structure which balances the need to get results with the need to build capacity in the public sector. The well known low capacity in the Ministry o f Industry, Trade and Private Sector Development has led the Government to rule out the Ministry itself from leading the implementation o f project activities. Instead, such implementation has been devolved to beneficiary agencies themselves inthe majority o f cases, and to the private sector in some instances. The PIU's role will be limited to core functions such as financial management, procurement and M&E. which will be undertaken in consultation with counterparts in the beneficiary agencies. The PIU, which has been managing the Privatization and Utility Reform Project, will assume these core functions -while MITPSD builds its capacity. There will be a review o f MITPSD's capacity after two years o f implementation to determine whether such functions can be transferred to MITPSD. 47. A related question was the implementation period for the project. Four projects in the Malawi portfolio have requested, and have been granted, extensions o f closing date. This suggests some underestimation o f implementation challenges at the project design stage. The BESTAP project team has opted to go for a five year (rather than four year) project. This i s to recognize that the significant reforms expected under the project, together with the low implementing capacity in Malawi, mean that more rather than less time will be required to complete the program. 14 (v) Cost sharing/matching grant. Experience suggests that Matching Grant Schemes (MGS) are most effective when they are demand driven, with cost sharing to ensure adequate ownership and willingness to pay; based on a realistic business development plan, reimbursement basis, no productive activity i s excluded and first-come, first-serve. Grants will be provided in tandem with pro-active promotion, and with free hand-holding "technical assistance" to firms. It i s important to note that while these matching grants will go to private firms, the products developed and the demonstration effects o f success will help to facilitate sustainability (Le., private firms willing to fully pay 100 percent o f the cost for business development services (BDS)). (vi) Private management of matching grant scheme. Experience indicates that what works best is a combination o f local professionals together with international specialists. The local professionals bring to the task knowledge and appreciation o f local culture and languages, market realities, and business practices. The international specialist(s) bring to the task international best practice in operating these programs, plus appreciation o f the market realities facing exporters when selling to distant industrialized countries. 5. AlternativesConsideredand Reasons for Rejection 48. Several alternatives were considered duringproject design. First, consideration was given to focusing the project on specific sectors such as agri-business, tourism or manufacturing, but this approach was rejectedbecause o f the limitedsuccess o f narrowly-defined projects inMalawi and other countries, and because a broader focus gives greater flexibility in responding to market opportunities. Focusing on one specific area o f intervention, and making interventions more sequential, was also considered. However, it was decided that a combined set o f interventions would generate greater impact. The distinct and complementary nature o f the interventions included in the project generates important benefits that are mutually reinforcing. Consideration was also given to providing technical assistance through the budget support program. The Development Policy Lending (DPL) will leverage and complement the highly specialized nature o f assistance being provided by this project. There i s a need in Malawi to build private sector capacity and enhance learning experiences, which demands a flexible program focused on opportunities, independento f the budget cycle, and o f public sector management. Inaddition, the limited success o f programs which are funded and managed by the public sector led the team to adopt an approach where the private sector manages the program as much as possible, ensuring greater private sector participation and ownership. 49. The project team also considered leaving support o fthe PSD program to other donors. This was rejected because there are only a limited number o f other donors operating in Malawi, and none has a significant PSD program or a dedicated PSD advisor/department. While all donor country programs should now be aligned with the MGDS, it i s not yet clear whether any other donors have the willingness or capacity to implement anything more than ad hoc support to private sector development activities. 50. The World Bank has significant comparative advantage in private sector development interventions and this i s widely accepted and recognized by the Government and by other donors. With an in-country PSD team, and with a strong technical and diagnostic background based on successful implementation of the I C A and Doing Business surveys, the most appropriate intervention was the design o f a new project in support o f the Government's own 15 PSD program. The European Commission has agreed to enter a co-financing arrangement with the World Bank insupport o fthisproject. C. IMPLEMENTATION 1. PartnershipArrangements 51, Private sector development activities are under-funded in Malawi and have historically suffered from changing priorities and "focal areas" among donors. However, recent improvements in macro-economic management, together with Government-led efforts to prioritize growth as the best means o f achieving sustainable poverty reduction, mean that supporting private sector development is being seen as increasingly important within the donor community. The first Malawi Joint Country Program Review (DFID, EC, GTZ, Norway, World Bank) carried out in February 2006 found that donor support to private sector development has tended to be erratic and unfocused, with significant overlaps and gaps. Poor Government leadership inthe past, and a limited focus on the role o f the private sector indriving growth, have compounded this problem. The MGDS - a private sector-led growth strategy - provides a new opportunity to rationalize donor support around a clear nationally-owned development plan. 52. Key donors participated in the design process o f this project, including the European Commission (EC), UK Department o f International Development (DFID) and United States Agency for International Development (USAID). The EC has agreed to co-finance the project. The EC has asked the Bank to manage their financial contribution to the project on their behalf under a trust fund arrangement. As a preparatory step during the diagnosis o f a private sector reform agenda, MITPSD coordinated the work o f public-private technical working groups on reducing the costs o f doing business in five area^'^. Strong private sector representation in these groups, which were each chaired by the private sector, ensuredthat a business facilitation reform agenda, which this project will build upon, was agreed upon with strong public-private partnership. The process o f preparing this project also benefitedform the active participation o f the National Action Group Secretariat, MCCCI, and from members ofthe IntegratedFramework Steering Committee. 2. Institutionaland Implementationarrangements 53. The project will be overseen by a Private Sector Development Steering Committee (PSC) which i s already in existence and has guided the conceptualization and development o f the project from the beginning. This committee i s currently chaired by the Minister o f Industry, Trade and Private Sector Development, and has significant private sector representation as well as representation from other government departments. Membership o f the PSC will be restructured to include all the project beneficiaries and will be as follows; MITPSD, MoJ, Commercial Division o f the High Court, Registrar General's Department, Ministry o f Lands, Malawi Investmentand Trade Centre, MoF, MCCCI, Reserve Bank o f Malawi and Ministry o f Economic Planning and Development. Furthermore, the PSC will now be chaired by the . Principal Secretary for Industry, Trade and Private Sector Development, reflecting the PSCs more technical role. The PSC will meet every six months. l5Gettingcredit, trading across borders,payingtaxes, dealing with licences, andclosingabusiness. 16 54. In addition, there will be a Project Review Committee (PRC) which will; (i)provide technical and operational guidance for the project; (ii)review and approve quarterly progress reports prepared by the Project Manager; and (iii)proactively address any technical and implementation problems affecting project progress. The PRC will comprise o f Project Manager, BUGS Program Manager, and Director o f Private Sector Development. The PRC will be meeting on a quarterly basis or when the needarises. 55. An existing PIU will provide core functions - financial management, procurement and monitoring and evaluation for the project. While the PIU will be responsible for these core project management functions, the actual implementation responsibility for the various components will be with designated persons within the beneficiary agencies. These designated persons will then be working closely with the PIU on a day-to-day basis, and be submitting regular reports to the PIU, who will consolidate these reports for reporting to the Project Steering Committee and to IDA. Details o f the specific institutions involved in implementation are contained inAnnex 6. 56. The implementation arrangements were selected based on the need to ensure effective execution o f the core project management functions, balanced with ensuring ownership by and capacity building for the beneficiaries o f the various project components. The option o f usingthe existing PIU was chosen after consultations with Operations Advisers and the Government. By having implementation responsibility in the hands o f designated persons in the beneficiary agencies, it i s expected that this will result in more ownership o f the project at the local level, and insustainable results at the end o fthe project. 57. The major capacity constraints that need to be addressed are project management skills, particularly knowledge o f World Bank financial, procurement and monitoring and evaluation procedures. These are necessary to ensure effective project implementation. This constraint will be addressed by use o f the existing PIU where such skills already exist, and by building the capacity o f staff inMITPSD at the same time. 58. The PIU staff has experience in managing Bank-funded projects. Systems have been established and a dedicated Financial Management Specialist in the PIU will support the implementation and maintenance o f centralized financial management, internal controls, disbursements and financial reporting procedures for the project as a whole. This arrangement i s further strengthened by devolving implementation authority to the component executing agencies. The existing PIU comprises five professional and five support staff. The professional staff includes: (a) Project Manager (b) Financial Management Specialist (c) Accountant (d) Assistant Procurement Specialist (who also does M&E) (e) Procurement Specialist (PS). Support staff includes: (a) Secretary (b) Program assistant (c) Registry / Procurement Clerk (d) Driver and (e) Office Assistant. ComponentExecutingAgencies 59. Management and implementation o f individual project subcomponents will be entrusted to the following agencies which havebeen agreed withthe Governmento fMalawi: a. MITPSD and MoJ for reducingthe regulatory burden on private business; b. MITPSDIMoF for streamlining business licensingreforms; 17 c. Registrar General's Department for streamlining registration reforms; d. Lands Commissioner for improving landtitle transfer and registration; e. Registrar o f the High Court for the Commercial Courts; f. MCCCIfor Public-PrivateDialogue; g. MoF for Public Private Partnerships; h. Reserve Bank ofMalawiandMoFfor restructuringMRFC andMSBandimproving access to finance; and i.MITPSDandacompetitivelyrecruitedBUGSProgramManager. 60. Focal points from the executing agencies (see paragraph 162) will be formally designated by responsible Principal Secretaries, Registrar General and CEO o f MCCCI, and will be responsible to the Project Manager for the effective implementation o f project activities in their agency/ Ministry. Focal points will be responsible for day-to-day implementationo fthe activities under respective subcomponents; programming o f annual plans and budgets; monitoring, public relations and reporting. They will manage all the technical aspects (with assistance from long term advisors where applicable); they will prepare all terms o f reference and manage the supervision o f consultants. They will be responsible for preparing all reports required under the project for the respective project components. 61. The Project Implementation Manual i s ready. A mid-term review will take place in November 2009 with the objective o f assessingprogress to date, and ifnecessary re-directing the project by integrating additional lessons learned and realities on the ground. InstitutionalArrangements and Capacity Building 62. The capacity o f implementingagencies will be enhanced through provision o f information management systems and online services delivery. The design o f the systems will be based on a participatory approach using up-to-date and user-friendly application technology allowing each technical implementing agency as well the PC to participate interactively in the production, analysis and exchange o f data and information, both generated within the project cycle and from the day-to-day operation of the executing agencies. This will foster a greater ownership and accountability for project implementation results and outcomes. 63. The system will improve data harmonization and minimize duplication, as well as strengthen the capacity o f the company registry, business licensing authorities and MITC. The system will enable these agencies to respond to the Government's need for information and data; improve management o f these agencies; compare its business environment with international standards; and attract potential investors. The capacity o f the implementing agencies will be strengthened by the provision o f technology equipment; and o f training on data collection, content management, information updates and basic system troubleshooting and maintenance. The M&E specialist within the PC will provide technical support to implementing agencies designated focal points, as well as coaching and mentoring on data collection, management and reporting. SupervisionMissions 64. The Bank's supervision missions will include representatives o f the EU(co-financiers) and will be as regular as possible considering the nature o f the project. The supervision mission's 18 objectives will include ensuring that strong financial management systems are maintained for the project throughout its life. A review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. A mid-term review will be conducted with the objective of assessing progress to date and if necessary to re-direct the project by integrating additional lessons learned and realities on the ground. Frequency o f supervision missions proposed i s one every six months (includes special procurement supervision for post- reviewlaudits). 3. MonitoringandEvaluationOutcomes/Results 65. The M&E system will be based on the agreed Results Framework and monitoring arrangements (see Annex 3). The PIU will be responsible for conducting M&E activities. Baseline data collection for all the agreed indicators will be initiated by the PIU in partnership and collaboration with the designated focal point in each implementing agencies during the project start up phase for each agreed performance indicator, where applicable. The designated focal points o f the implementing agencies will be responsible for the data collection and reporting o f their respective component and subcomponent. 66. Data collection and reporting on the regulatory environment for business subcomponent will be the responsibility of the MITPSD focal point. This will enable the MITPSD to develop sound policy analysis. For the Commercial Courts subcomponent, the designated focal point will be responsible for collecting data and reporting on improving access to commercial justice, the enforcement o f contracts and insolvency with respect to time and procedures for settling commercial disputes. The project will support the provision of an information technology platform, computer equipment and network installation for an efficient and effective court and case management. 67. For the business and land registration subcomponent, the Registrar General and Lands Commissioners' Offices will be responsible for collecting data and reporting that focuses on time, procedures and costs o f registering a company, business name and the time, procedures and costs o f registering and transferring immovable property titles. The project will support the provision of an information systems platform to computerize both business registration and licensing, and land registration processes through online registration. The project will also support computer equipment and network installation for the Registrar General's Department and the Lands Registry. 68. The Malawi Investment and Trade Center (MITC) will be responsible for data collection under the one-stop shop subcomponent for investment, exporting and business licensing. Data collection, management and reporting will initially focus on permits and license issuance to assess the quality o f service delivery. The MITC will work in collaboration with the business licensing and registration department, and Lands Registry for data harmonization and consistency. The project will support establishment o f an online business licensing platform and capacity building to improve service delivery to the private sector. The MITC also will work closely with the Doing Business Unitresponsible for collecting, managing and reporting data and information on Doing Business indicators. 69. For promoting access to finance and enhancing productivity of SMEs, the Manager of SME finance subcomponent will be responsible for data collection and reporting on small-scale business start-ups and services to beneficiary SMEs on financial products such as loans, equity, 19 quasi equity and guarantees. The BUGS Program Manager will be responsible for data collection, management and reporting on the number o f SMEs accessing the scheme and the impact on their productivity level. Overall, the PC will be responsible for consolidating and preparing all periodic fiduciary and M&E reporting including impact and output indicators to IDA as well as the annual project audit. In addition the PC will submit to the IDA an ImplementationProgress Status Report quarterly. 4. Sustainability 70. The project is supporting the Government's vision o f that Malawi should become a "producing rather than consuming country, one which exports rather than imports." This vision i s enshrined inthe MGDS, around which all development assistance is now being aligned. Trade and private sector development issues have not generally been accorded a high priority in previous Government policy under the MPRS, and recent donor support to Malawi has tended to focus more on social sector development and the improvement o f social outcomes, rather than tackling the underlying causes o f poverty inMalawi namely economic under-performance. - 71. The MGDS places clear responsibility for achievement o f social outcomes and poverty reduction on raising the rate o f economic growth. The PSD Reform Program was launched as a Government initiative, with full national ownership. The program was initially conceived without donor assistance, and the Bank was invited to provide technical and financial support to implementthe strategy andreform program. As PSD is cross-cutting and reaches across all areas o f national policy, a prerequisite to achieving the MGDS goals o f economic growth and private sector development has to be the effective mainstreaming o f PSD issues across the public sector inMalawiandthis is also a key issue for ensuring the sustained impact o fthis project. 72. Many o f the constraints to PSD do not require large expenditures, merely the diagnosis o f policy, legal and administrative reforms, and technical support in implementing such changes. Therefore the cost o f such actions i s quite low, while the impact can be high.The Government o f Malawi i s committed itselfto improving Malawi's performance as assessing by the annual Doing Business surveys. Similarly, while many aspects o f reducing the cost o f doing business can be tackled with low-cost actions, others require resources well beyond the scope o f this project. As a landlocked country Malawi's private sector suffers from very high transport costs for both exports and imports. Critical to the sustainability o f the project i s further investment in infrastructure, not just in transportation but also in power, telecommunications and the water supply. The ongoing privatization program, and the facilitation o f public-private partnerships as envisaged under this project will play an important role in addressing these infrastructure constraints, but additional public and private investment will be requiredto achieve real change. 73. Another critical factor to sustainability is achieving a change in attitude o f key public service agencies and their staff, which are now being increasingly viewed as service providers rather than civil service gatekeepers. While the project can support Government in the diagnosis and implementation o f economic and policy reforms, in the end it is on-the-ground implementation o f such policies that has the greatest impact on the private sector. Equally, while the project can channel supplemental resources to key institutions `that serve the private sector, attitudes will remaina critical factor indetermining how effectively such additional resources are deployed. Inlight o f the above, a major cross-cutting emphasis o f the project will be on changing the mindsetand attitudes o fthe public sector. 20 5. CriticalRisks andPossibleControversialAspects 74. The overall risk rating o f this project has been assessed as medium. Improvements in macroeconomic management and public sector governance are the foundation o f an improved private sector enabling environment, but a number o f institutional risks remain. Risk Riskmitigationmeasures Riskrating with mitigation SustainabilityRisk. A change inGovernmentwouldbe a risk This risk is mitigatedby ensuringthat M ifitresultedinadeparturefromcurrent ownershipandunderstandingofthe program thinking onthe role ofthe privatesector i s bothbroadanddeep throughout the civil in drivingeconomic growth. service, andtherefore ableto withstand changes inpoliticalleadership. Macro-economic/loss of Fiscal DisciplineRisk. Macro stability i s a pre-requisitefor Credibility ofthe current Government is M sustainableprivatesector development. closely linkedto the maintenanceof macro Henceensuringthat Malawi's stability andan importantelement ofthe achievements inthis regardare programwill bemainstreamingPSD issues maintained is essentialto the success of acrossGovernmentand society, especially the program. the importanceof low and stable interest rates and inflationfor private sector investment. Staff turn-over in Government. Staffattritionin Government,not least as Inorder to addressthis challenge, staff at all M a resultofMalawi's HIV/AIDS epidemic, levels, across departmentswithin MITPSD i s a constant challenge for buildingand andother key institutionswere involved maintainingcapacity. early duringprojectdesign, appraisaland implementation. Governance/ Financial Management Risk. Fundsmay not beusedefficiently, or for The useoffinancial managementand M the exclusive purposesintended. Internal procurement staff fromthe terminating audit functionsandprocurement PrivatizationandUtility ReformProjectand proceduresmay beweak, thus regularsupervision missionwill ensure jeopardizingprojectexpectedoutcomes. efficient financialmanagementfromthe outset. M Overall riskrating 6. Grant ConditionsandCovenants 75. Disbursement Condition: No disbursement will be made in respect o f the BUGS Program until the Government has recruited under terms of reference, and with qualifications and experience that are satisfactory to the Association, a manager and one business adviser for the BUGSUnit.There are no outstanding conditionsfor effectiveness. 21 76. Legal covenants: Covenants included in the financing agreement are the following: (i) submission o f audited financial statements within six months after the year end; (ii) submission o f un-audited interim financial statements within 45 days after each calendar quarter, to cover such calendar quarter; (iii) submission o f a quarterly project report and any other information as requiredby IDA; (iv) publication of the bill relating to the establishment of MITC by December 31, 2007; (v) publication o f the bill relating to the legal and institutional framework for public- private partnerships by March 31, 2008; and (vi) establishment o f the public-private sector dialogue secretariat by October 31,2007. D. APPRAISAL SUMMARY 1. Economicand FinancialAnalyses 77. The project cost-benefit analysis o f the BESTAP indicates that the project will generate a net present value estimated at about US$20.33 million corresponding to an economic rate o f return o f 49.44 percent. The project i s expected to have a positive impact on employment as a result o f acceleration o f output growth inthe supported sectors where a minimum o f 2,500 jobs are expected to be created by supported SMEs. 78. The project will also have a positive impact on the Government's fiscal position. It i s estimated that the activities associated with the project will generate more than US$3.5 million during the project cycle from incremental taxes paid by employees and corporate income taxes. The informal sector will also benefit from the project to an extent which cannot be quantified. 2. Technical 79. The project draws heavily on the results o f the I C A that demonstrated the need to integrate policy reforms initiatives and improve the business environment with technical and financial support to nurture the private sector and assist in its repositioning to a market-led economy. The project aims to improve business environment through reducing the costs o f doing business, improving the legal framework for firms' entry, exit and operations. The project aims to bring new technology and management know-how to private firms. The matching grant component i s expected to provide an important impetus for skills and technological upgrading within private firms. Finally, modernization of the legal framework for private business and Technical Assistance (TA) to develop a Credit Guarantee Scheme aims at increasing the availability o f and access to finance for SMEs. 3. Fiduciary 80. The PIU established under the Privatization and Utility Reform Project (PURP) will implement and coordinate the BESTAP. This PIU has been coordinating the multi component P U W and supports activities in various entities of the Government across various ministries. The PIU has beenincharge o f preparingthe consolidated procurement plan, providing advice on implementation and coordinating the reporting on procurement implementation and carrying out internal quality assurance systems for procurement in all the project component implementing agencies. The project component implementing agencies for the proposed BESTAP include the 22 following: (i)The Ministry o f Justice, (ii)The Commercial Division o f the High Court (iii) Registrar General's Department (v) Lands Registry (vi) MITC (vii) MoF/ PC (vii) MITPSD (viii) MCCI (ix) Secretary to the Treasury (x) Directorate o f Private Sector Development (xi) Reserve Bank o f Malawi. 81. The PIU comprises five professional and five support staff, It has acquired sufficient experience in implementingthe Bank-funded PURP and would have a comparative advantage to implement the proposed BESTAP. It has also supported the preparation o f the BESTAP as funds from the PURP have been used to carry out the BESTAP preparation activities. The staff o f the PIU includes a Procurement Specialist who will support the implementation and maintenance o f the procurement planfor the project. 82. The PIU financial management staff has experience in managing Bank-funded projects. Systems have been established and a dedicated Financial Management Specialist inthe PIU will support the implementation and maintenance o f centralized financial management, internal controls, disbursements and financial reporting procedures for the project as a whole. This arrangement i s further strengthened by separating and devolving implementation authority and budgetsto the component executing agencies. 4. Social 83. There are no social issues triggered by this project. A number o f project components are expected to lead to favorable social outcomes, including employment generation and poverty reduction. Key stakeholders from both the public and private sector have been consulted throughout project design and involved in the project design through participation in several workshops and other consultative mechanisms such as technical working groups. Project implementation arrangements builds on a public private partnership which has begun to be developed. 5. Environment 84. The project i s a category C and no environmental assessment i s required. However, since the project intends to strengthen the private sector, including SMEs, the capacity building support will include environmental training at appropriate institutional levels, with a focus on environmental and social screening o f projects which will be implemented at some point in the future. The aim would be to build this capacity now. BESTAP will draw on the Infrastructure Services Project inMalawi, inthis regard. 23 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [I [XI Natural Habitats (OP/BP 4.04) [I [x 1 PestManagement (OP 4.09) [I [x 1 Physical Cultural Resources(OP/BP 4.11) [I [x 1 Involuntary Resettlement (OP/BP 4.12) [I [x 1 Indigenous Peoples (OP/BP 4.10) [I [x 1 Forests(OP/BP 4.36) [I [x 1 Safety o f Dams(OP/BP 4.37) [I [X I Projects inDisputedAreas (OP/BP 7.60)* [I [X Projects on International Waterways (OP/BP 7.50) [I [x 1I 7. Policy Exceptions and Readiness 85. The project does not require any exception from Bank policies. Assessments and preparation of fiduciary arrangements, staff and consultant selection, monitoring and evaluation systems and implementation and procurement plans meet the regional criteria for readiness of implementation. The PIU staff are already in place and will provide core functions such as financial management, procurement and monitoring and evaluation for the project. Terms of reference and job descriptions for other staff/ consultants to be recruited under the project are ready. An M&E system has been agreed for every subcomponent and put in place, with established baseline data, agreed performance indicators and an agreed data collection methodology. A manual of procedures for financial management, procurement and safeguards has beenprepared in addition to an organizational assessment and a procurement plan. A work program, reflecting realistic financing and implementation capacity has beenfinalized inaddition to a Letter of Sector Policy. An approved Integrated Safeguards Data Sheet (ISDS) and safeguard documents were disclosed prior to appraisal. Co-financing arrangements with the co- financing partner, the EU, have beenmade. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determinationofthe parties' claims on the disputedareas 24 Annex 1: Countryand Sector or ProgramBackground16 MALAWI: Business EnvironmentStrengtheningTechnicalAssistance Project(BESTAP) Background 86. Malawi has a small economy, with a GDP of US$1.8 billion. It has a population of 11 million, making it one of the poorest African countries with an income per capita of US$160. While the last decade was characterizedby highgrowth volatility, the current decade started with a modest growth rate of 1.2 percent on average. Although it has since increasedto some extent, the current and projected rate or growth over the 2004-2008 periodremains below the 6 percent neededto seriously tackle poverty inMalawi. 87. With its highly fertile land, Malawi's economy is based largely on agriculture, which accounts for more than 80 percent of its export earnings, contributes 38 percent of gross domestic product (GDP), and supports 85 percent of the population. Manufacturing is small, accounting for only 11 percent of GDP, and inward-oriented as only 14 percent of manufacturing i s exported. The manufacturing sector comprises mainly agro-processing of tobacco, tea, and sugar. The industrial sector has been declining for over a decade, with its contribution to GDP falling from 32 percent in 1992 to 15 percent in 2003. Industry is oligopolistic, dominated by a few large companies engaged in production of tea, tobacco marketing, sugar, and consumer products. The private sector is also characterisedby a "missing middle" with comparatively few enterprises in between the larger multinationals, and the many micro and informal sector enterprises. 88. Recently, the Government of Malawi has demonstrated a strong political commitment to improve growth prospectsby tacking the basic determinants of the investmentclimate. The new president elected in May 2004 quickly re-established relations with the IMF and has committed the Government to financial discipline while satisfying social demands, especially with regard to agriculture and food security. At the same time the current administration has put forward the development of the private sector as the centre of its planfor economic growth. 89. Although the Government of Malawi has initiated an economic reform agenda, it faces challenges on several fronts: a rapidly growing population, a high HIV/AIDS infection rate (approximately 15 percent), limited natural resources, high levels of inequality caused by years of an elitist development strategy, and the corrosive effects of recurring droughts, poor resource management, and environmental degradation. l6 This sections draws uponthe 2006 InvestmentClimate Assessment of Malawi, as well as other recent analytical studies on private sector developmentinMalawi. 25 Table 1: Selected NationalIndicators -Malawi and Surrounding Countries, 2004 GNIper capita, (current US%) 160 480 270 320 3,630 400 620 GNIper capita, PPP(current international S) 631 1,130 1,168 671 10,964 890 2,041 Aid per capita (current US$) 37.8 19 63.2 46.4 13.6 94.2 14.4 Foreign direct investment, net inflows (%of GDP) 0.9 0.3 4 2.3 0.3 6.2 1.3 Lending interest rate (%) 36.8 12.5 22.1 13.9 11.3 30.7 278.9 Real interest rate (%) 22.7 5.2 8.4 9.5 5.1 8 . 7 - 1 5 . 8 Gross savings (%of GDP) -7.7 13.6 6.2 8.5 14.4 12.5 3.1 Exports of goods and services(%of GDP) 26.5 26.2 30 18.6 26.6 19.8 36.1 Manufactures exports (%ofmerchandiseexports) 16.4 21.1 ... 20.2 57.6 I O 28.5 Manufacturing, value added(%of GDP) 11.4 11.1 13.3 7.4 20 12.1 13.6 Mobile phone subscribers(per 1,000 people) 17.6 76.1 36.4 43.6 428.5 26.1 30.7 Personalcomputers (per 1,000 people) 1.6 13.2 5.8 7.4 82.2 9.8 77.3 Price basket for Internet (US$per month) 62 45.7 50.8 117 33.3 32.6 23.3 Urban population (%of total) 16.7 40.5 36.8 36.5 57.4 36.2 35.4 Source: World DevelopmentIndicators2006 Overview of Malawi's InvestmentClimate Constraints 90. The 2006 I C A presents evidence that Malawi has a lower cost o f labor than other comparator countries in the region. However, despite this low wage competitive advantage, Malawi's manufacturing sector remains small and inward oriented. This i s due to the fact that although labor costs are low, Malawian firm show a low Total Factor Productivity (an indicator that takes into account both labor and capital). 91. Malawi's low competitiveness translates into its weak exporting sector. Most Malawian exporters continue to export primary products, with tea, sugar, and semi-processed tobacco remaining the biggest exports. Tobacco accounts for 55 percent o f total exports. This makes Malawi's economy particularly vulnerable to sector specific shocks. 92. Characteristics o f the business environment inMalawi could explain the low productivity o f Malawi's firms. The design o f the BESTAP draws upon an I C A that evaluates constraints to investment climate growth based on entrepreneurs' perceptions, objective data, and impact on productivity. The survey o f 306 Malawian firms pointed out to the following four top constraints: macro-instability, finance (access to and cost of), electricity, and availability o f skilled workers. 93. Mucro-Instability: Over 70 percent o f managers indicated that macro-economic instability i s a primary constraint to doing business. Inflation, exchange rate instability, and high interest rates have improved somewhat over the last few years, but persist as significant obstacles for entrepreneurs. Real interest rates at 23 percent in 2004 constitute not only a high cost for firms that want to expand, but also an obstacle to obtain finance inthe first place. 94. Finance: Over 60 percent o f managers perceive access to and cost of finance as a major obstacle for their firm. The objective data confirms this perception by showing that although 70 percent o f firms have some form o f access to banking only 30 percent o f firms have access to long-term financing. 26 95. Electricity: Over 50 percent of managers surveyed perceive electricity as a major business constraint. Around 10 percent o f sales are lost by Malawian firms due to power outages, a much higher percentage than in comparator countries. Firms without a generator lose as much as 20 percent of sales to power outages. Generators cost on average 0.5 percent o f firm sales, a cost only half of firms can afford. Firms with a generator are 60 percent more productive than those without. Figure 4: Lending and real interest rates, selected countries, 2004 30 s 20 x) 0 MalsWi Kenya Mozambique Tanzania SouthAfrica Zambia Lending interest rate (sg0 Realinterest rate (Sg Source: World Development Indicators 2006 96. Availability of Skilled Workers:Another key constraint for Malawian firms is lack o f skilled labor. Unlike many other comparator countries, the main limitation in labor is not regulations but the availability o f skills. The objective data shows that only 50 percent o f firms can afford to offer training, and that firms who do offer formal training are 60 percent more productive and increase worker remunerationby 20-30 percent. 97. Two additional problems also appear as sizable constraints inMalawi, although not as much as the above mentionedbottlenecks: 98. Crime: The Malawian firms lose 4 percent o f sales to crime. This loss is double the average value in Sub-Saharan Africa. Half of the loss i s used for security measures, and the other half is lost to the theft itself. 99. Corruption; Malawian firms pay about 2 percent o f sales to public officials to "get things done". They also pay 4-5 percent o f the value o f a contract when dealing with public procurement. 100. Blockingentry to new and more efficient firms can also hamper productivity improvements. According to the ICA, not only finance but also regulation presents barriers to entry in Malawi. Although the Doing Business indicators show that the processes to start a business inMalawi are relatively easy, the cost and the time remain much more cumbersome. The cost to register a new business in Malawi is 139.6 percent o f income per capita, creating a significant barrier to entrepreneurship for a great portion of the population. Similarly the average time to start a business i s 35 days in Malawi. This is the same time as in Zambia and Tanzania, but still much 27 higherthan top performers. At the same time, the DoingBusiness indicators confirm that Malawi performs worse than other Sub-Saharan African countries inaccess to credit. 101, The Malawi ICA began with an analysis o f the major obstacles to the operations and growth o f business as perceived by Malawian entrepreneurs. Figure 5 ranks 20 potential business obstacles as identifiedby 306 establishments surveyed inMalawi. Figure 5: Percentageof Malawian firms perceivingobstaclesto be "major" or "very severe" to operationsand growth Macroeconomc hstabiity Access to financ ng Cost of fnancing Eectricity Tax rates Crims, theft and disorder Transportation Sklls and Educationof Available Workers Corruption Tax admnistration Access lo Land Antkconpetdive or informal practices Politicalstability Regulatory Policy Lhcertainty Telecomnicatlons Customs and Trade Regulations Business Licensing and Operating Permts Legalframw ork / Conflict resolution Labor Regulations Environmentalragulatlons 0% 20% 40% BO+ 80% Source: Malawi InvestmentClimateAssessment 2006 102. At least one-third o f the managers surveyed identified the following constraints as "major" or "severe" obstacles to their businesses: macroeconomic stability, finance (both access and cost), physical infrastructure (electricity more than transportation), taxes (rates more than administration), crime/corruption, and humancapital. Formalv. Informal Firms 103. The perception o f binding obstacles is not always the same between formal and informal enterprises. Figure 6 compares the ranking o f the investment climate bottlenecks for 160 formal and 146 informal entrepreneurs surveyed inMalawi. Both formal and informal firms rank macro economic instability, finance, and electricity among the top impedimentsto their businesses. 28 Figure 6: Percentageof Malawian firms perceiving obstacles to be "major" or "very severe" to operations and growth, formal vs. informalsector Macroeconomc instao ty Cost off nanc n(l Elecuicity r 1 Tax rates 1 1 SR Is ana Ea-cauon of Ava lao e Wormers 1 1 Crime tnef! and a sorder 1 1 Corr-pton 1 1 Tax aam nlsuatm 1 1 Access to f nanc ng I Transponation 1 Anbcompetitive or informal practices Political stability CustomsandTrade Regulations RegulatoryPolicyUncertainty Telecommunications Access to Land Labor Regulations ElInformal Legalframework/ Conflict resolution Business LicensingandOperating Permits Environmentalregulations 0% 20% 40% 60% 80% 100% Source: Malawi InvestmentClimateAssessment 2006 104. Informal managers, however, are more likely than formal managers to regard access to finance and access to land as constraints on their businesses. Eighty-five percent o f informal firms, in fact, rate access to finance as a top impediment, while 43 percent o f informal businesses consider access to land to be a binding constraint. Lack o f collateral are the principal reasons why access to finance is considered the biggest obstacle by informal entrepreneurs. Limited access to land, cost o f land, as well as the length o f time required to buy land are the main reasons why informal managers also view access to landas a top impediment. 105.Not surprisingly, formal enterprises are more likely than informal ones to complain about tax rates and tax administration. Formal firms tend to contribute more to the tax base and bear most o f the burden that the fiscal administration imposes upon enterprises. According to the survey, formal enterprises report to the tax authorities on average 70 percent o f their sales, while informal firms report only 16 percent o f their sales. The lower likelihood o f complaint o f informal enterprises, therefore, might also reflect a lower level o f compliance by those firms with the tax system. Finally, skills and education of the workforce, as well as crime and corruption, are more likely to affect formal enterprises than informal ones. 29 Productivity 106. The results o f the Malawi I C A indicate that the poor investment climate has a significant impact on enterprise performance. Inparticular, the electricity problem and crime issues have a severe impact on enterprise productivity, for those firms that cannot afford their own generators or those that have to spend a high percentage o f their budgets on security. It also shows the Government's attempts to diversify the export base through past policies that attempted to steer firms out o f primary product exports have had limited success. Most exporters in the sample continue to export primary products, mainly tea, sugar, and semi-processed tobacco. Few firms in the sample export standardized garments. Their productivity is no higher than that of enterprises catering to the local market. Cross-country comparisons indicate that Malawi's advantages lie inits very low labor costs, relative to its labor productivity. 107. However, these advantages are offset by a very low capital base, aged capital stock, and its poor performance. Total factor productivity (TFP) o f firms inMalawi i s higher thanthat o f firms in Madagascar, similar to that of firms in Tanzania and Zambia, but much lower than that of firms in South Africa. Table2: Monthlymediancompensation,Malawi and regionalcompetitors Professionals 257.1 360.0 186.2 1,670.9 138.4 78.3 109.9 Skilled 78.1 83.1 82.8 554.7 87.2 43.1 53.3 Unskilled.. _ _ - _ - _ _-32.1__ - - _ _ 42.5 - __ ____- 57.0 --- .--- _.--.-- -- 292.5 -114.9 44.5--- 33.6 Source: Various Investment Climate Surveys I_ . ----- Figure7: Labour costs lowerinMalawi(% ofvalue-added)than countries in Sub-Saharan Africa. 60% 1 50% 40% 30% 20% 10% 0% South Africa Tanzania Zambia Malawi Madagascar 0LaborCost (as % of Value Added) 0LaborCost as a % of value added ingarments Source: InvestmentClimate Assessments, 2002-2005 108. All values inFigure 7 above are medians for enterprises with available data. Value added i s calculated by subtracting intermediate inputs and energy costs from manufacturing sales. Values are converted to US$using average exchange rates from World Development Indicators. Labor cost is the total cost o f wages and salaries and allowances, bonuses, and other benefits for both production and administrative staff. 30 109. On a TFP basis, enterprises in Malawi perform only better than enterprises in Madagascar, with 25 percent higher efficiency; productivity is similar to enterprises in Tanzania and Zambia and much lower than enterprises in South Africa. Enterprises in South Africa have 95 percent higher efficiency compared to those in Malawi, after holding other enterprise characteristics constant. Table 3: Selected indicatorsfrom Investment Climate Assessments Bureaucracy Malawi Region All countries - Senior management time spent indealing with requirements o f government regulation (YO) 5.8 9 6.3 Consistency/predictabilityo f officials' interpretations o f regulations affecting the firm ' 60.3 54.0 49.7 Corruption Malawi Region All countries Unofficial payments for typical firm to get things done (% o f sales) 1.2 1.3 1.1 Firmsexpected to give gifts inmeetings with tax inspectors (%) 15.3 15.8 31.0 Value o f gift expected to secure government contract (% of contract) 0.7 3.3 2.1 I courts Malawi Region All countries Confidence level inthejudiciary system (%) 69.8 60.3 59.1 I Crime Malawi Region All countries Security costs (% o f sales) 1.7 1.2 1.4 Losses due to theft, robbery, vandalism, and arson against the firm (% o f sales) 1.5 1.2 0.8 Finance Malawi Region All countries Internal finance for investment (%) 60.8 66.1 61.9 Bank finance for investment(%) 22.8 20.0 17.7 Informal finance for investment (%) 4.0 2.6 4.4 Supplier credit financing (%) 5.9 6.7 7.3 Value o f collateral needed for a loan (% o f the loan amount) 90.3 138.1 141.4 Loans requiringcollateral (%) 73.9 81.9 80.6 Informality Malawi Region All countries Sales amount reportedby a typical firm for tax purposes (%) 69.7 78.6 83.2 IInfrastructure Malawi Region All countries Delay inobtaining an electrical connection (days) 84.4 52.6 26.6 I 31 Number o f electrical outages (days) 63.2 50.5 21.7 Value lost due to electrical outages ('XI of sales) 55.5 8.8 4.3 Number o f water supply failures (days) 21.3 30.1 12.0 Delay inobtaining a mainline telephone connection (days) 74.6 70.1 35.9 Firmsusingthe Web ininteractionwith clientshppliers (%) 23.3 29.3 46.4 Jobs Malawi Region All countries Firmsoffering formal training (%) 51.6 39.9 41.8 Permanent skilled workers receiving training ('YO) 19.3 21.9 26.9 Employment growth over the last 3 years (%) 21.2 16.7 15.0 Trade Malawi Region All countries Average time to clear direct exports through customs (days) 3.46 4.33 4.08 Longest time to clear direct exports through customs (days) 7.77 8.38 7.52 Average time to claim imports from customs (days) 5.35 7.98 6.38 Longest time to claim imports from customs (days) 15.75 16.4 12.76 Source: Various InvestmentClimateAssessments 32 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistance Project(BESTAP) 110.A few donors are involved inPSD activities inMalawi. The majority o f these are trade and agriculture related or they focus on a few specific areas such as economic governance, microfinance and public private dialogue. The World Bank i s regardedas the lead agency inthe area o f private sector development. BESTAP will be complimentary to the support currently being provided by the other donors and will be co-financed by IDA and the EC. Below i s a summary o frelated donor supportedprojects inMalawi: No. Project Rating Status ProjectPurpose BANKFINANCED 1. Privatization and S Closing To support Government efforts to enhance Utilities Reform December 31, efficiency of utility infrastructure sectors and Project (PURP) 2007 improve the business environment 2. Regional Trade S Closing June To promote trade by providing export credit Facilitation 30,2007 guarantee inMalawi 3. Irrigation and S Closing June To increase income and food security for about Rural Livelihoods 30,2012 196,550 poor rural households using small- Agricultural scale irrigation development as a mechanism Project for drought mitigation To enhance farmers' access markets. 4. Development Closing June To provide budget support to Government for Policy Lending 12,2009 policy and institutional reforms requiredto implementthe MGDS (underpreparation). OTHERDONORS 1. EC 2004-2009 To improve the institutional capacity intrade policy To enhancedFood Security through Trade To promote and support the participation ofthe Non State Actors inthe Economic Partnership process 2. UNDP 2003-2007 To buildcapacity for MITPSD and other National Stakeholders for trade integration To integrate African countries into the Multilateral Trading System 3. USAID 2004-2008 To provide support for Agriculturally Linked Enterprises To enhance household revenue from participation incommunity-based natural resource management (CBNRM) To expand accessto capital by SMEs 33 Annex 3: ResultsFramework and Monitoring MALAWI: BusinessEnvironment Strengthening Technical AssistanceProject (BESTAP) PDO ProjectOutcomeIndicators Use ofProjectOutcome Information The objective o f the Project 1. Cost to formally start a business is Evaluateproject success; is to support capacity reduced from 134.7% to 70 % o f GNI assess relative development and investment per capita by end o f project. effectiveness o fvarious climate reforms in order to 2. Turnover in firms accessing BUGS components to inform accelerate economic growth. grows 20% faster than control group. future Government policy formulation and Dromams IntermediateOutcomes IntermediateOutcomeIndicators Use of Intermediate OutcomeInformation ComponentOne: Property rights institutionsand businessfacilitation I.Businessenvironment 1.1. Legislative backlog o f laws impacting Measurethe efficiency o f regulatory procedures cost o f doing business reduced from 40 the regulatory reform streamlined to 22 bills by midterm review and enforcement and determine cleared by end o f project ifchanges are necessary; feed lessons into the 2. Commercialcourt 1.2.Time to settle commercialdisputes remaining o f the program; division of HC established reduced from 337 to less than 180 trigger additional funding and operational calendar days by end o f project. from other donors, if required for adequate 3. Registrar general 1.3. Time to formally start a business capacity to implement the procedures streamlined reduced from 37 to 10 calendar days by business environment and simpliJied. end o f project. reforms. 4.Land registryprocedures 1.4. Time to register property title reduced streamlinedand simplijled from 118 to less than 60 calendar days by end o f project. Component2: Private sector development agencies Measure the efficiency o f 1. One-stop-shopbusiness 2.1. Time to obtain necessary licenses and the capacity o f the licensing establishedand permits reduced from 185 calendar days agencies to deliver on time operational at the MITC. to 30 by end o f project. quality services to the private sector Component3: Access to finance and productivity of SMEs 1.SMEfund establishedand 3.1. Number o f SME business start-ups The results will measure operational accessing the fund increased from 0 to the viability o f rural micro 200 by end o f project finance institution and scheme to improved SMEs 2. SME Matching Grant 3.2. Turnover in firms accessing BUGS access to finance Scheme operational grows 20% faster than control group. 34 2 L (3 Q .I -0 .I c, c) .I &0a d cd a .I i dc a sa 51 Q El a 0 El 0 00 0 l 5 .I E c, c, 1 .I c, 2 .I ;EJ a M .I -F L & ea d u C e Q Q) BM 2V f; 8a3 M .I e*El Y 3.. 3 2 c) 0 - s z 2 a 0 W 'Eu8 E 0 0 r- 2ep W 3 .Is I 0 g 0 00 m I c 3 a z 0 0 I a, rn5 0 m L c 0 u 8 .-*ep P) c) v1 (d h L a a M 0 00 e 3 .I 3 c,M8 El ;; zI t-4 c) sf 0 Annex 4: DetailedProjectDescription MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistanceProject(BESTAP) 111. The project supports the achievement o f the Government's strategy o f facilitating private sector led economic growth through four mutually reinforcing components: (a) strengthening private property rights institutions and business facilitation; (b) strengthening private sector development support institutions and services; (c) promoting access to finance and productivity; and (d) capacity building and implementation support. The expected outcomes for the project include a reduction in the costs o f doing business (measured by the annual Doing Business surveys), productivity growth among targeted SMEs, and increased private sector investment as a share o f GDP. A detailed description o f outcomes, results indicators and targets i s included in Annex 3. Component One: Strengthening Private Property Rights Institutions and Business Facilitation(Total US4.3 million of which IDA 80%; EC 20%) 112. This component aims to improve the regulatory environment in which the private sector operates, to strengthen the institutions that protect property rights and allow speedy and low cost business facilitation inMalawi. 113. The prioritization o f issues under this component draws from diagnostic work carried out by the Government o f Malawi in2006-2007 linkedto the annual Doing Business surveys produced by the World Bank and IFC. In May 2006, the Government launched a series o f technical working groups with publidprivate participation to diagnose and prioritize interventions that would have a demonstrable impact on the cost o f doing business. The five initial technical working groups were focused on the Doing Business indicators where Malawi's performance was considered to comparatively weak, and therefore offering the greatest scope for improvement". Government i s already makingprogress implementing a number o f "quick wins" where administrative and procedural changes can ease the cost of doing business, without need for additional resources. Other priority actions do have resource requirements and the BESTAP Project aims to support these areas under this component o f the project. 114. Streamlining the Regulatory Environment for Business. The private sector enabling environment inMalawi i s characterized by a large legislative backlog o f economic laws, many o f which require wholesale revision. This activity will aim to address this backlog. An initial diagnostic study will be carried out to prioritize economic laws for revision based on a cost- benefit analysis o f the direct impact on the private sector o f revising any given Act. Laws which .. have beenhighlighted as inneed o f revision include the following: Industrial development laws: Investment Promotion Act, Export Processing Zones Act, Business Licensing Act. Commercial and trade related laws: Export Incentives Act, Companies Act, Taxation Act, Customs and Excise Act, Protected Flag, Emblems and Names Act, Private Security Companies Bill, Anti-Counterfeit and Misrepresentation Bill, Merchandise Marks Act, Malawi Bureau o f Standards Act. 17Gettingcredit, trading across borders, dealingwith licences,payingtaxes andclosinga business. 37 . Employment related laws: Labor Relations Act, Employment Act, and ImmigrationAct. ...Ownership related laws: Land Act, Land Acquisition Act, Registered Land Act, Conveyancing Act, Stamp DutiesAct. Agricultural commodities laws: Cotton Bill, Maize Act, Tobacco Act. Financial services related laws: Insurance Act, Pension Funds Bill, Pensions Bill, Microfinance Bill, Securities and PaymentsBills. Security related laws: Police Bill, National Identity Cards Bill, Road Traffic Act, 115. The project will support the Ministry of Justice through the provision of two draftspersons dedicatedto working on the drafting of legislation that has a demonstrableimpact on the costs of doing business. These draftspersons will work within the structure of the Ministry of Justice, but with the understanding that they will work exclusively on laws that have an impact on private sector development. Recognizing the need for longer term sustainability beyond the lifetime of the project, capacity building on legislative drafting and staff attachments for regular draftspersonswithinthe Ministry of Justice will also be provided. 116.A large backlog of Bills has built up in recent years in Malawi due to the lack of a Government majority in parliament, thus making it difficult for the executive branch of Government to see new legislation passed. Similarly parliamenthas also struggled with aspects of the more technical and specialized Bills, particularly those related to financial services. In order to mitigate the risk that parliamentwill be unable to pass laws that have beendrafted under the project, the project will support a stakeholder outreach program that will include civil society, private sector and parliamentary committees to promote dialogue on the proposed reforms. 117.Improving Access to Commercial Justice. The lack of dedicated commercial courts has been highlighted as a major impediment to doing business inMalawi. Inthe current system, the hearing of commercial cases is given low priority compared to the higher profile criminal and political cases. This has a direct impact on the private sector by limiting access to speedy and cost-effective commercial justice. In addition, the effective lack of legal redress available to business means that banks are more cautious in lending to the private sector, given concerns that collateral cannot be enforced inthe event of default. Similarly firms are reluctant to extend trade credit given the risk that contacts cannot be enforced. The net effect is to discourage longer term investment inthe private sector. 118. This activity will support existing Government of Malawi efforts to establish a Commercial Division in the High Court. Specializedjudges have already been appointed to the Commercial Division and the Judiciary is poised to begin operations. This will have a major impact interms of improving access to commercial justice, and improve mechanisms for the protection. of property rights, the enforcement of contracts andthe procedures for insolvency. 119.Project support will include the provision of information systems and soft infrastructure to provide for an efficient and effective court and case management system. The project will also deliver an institutional capacity building and linkages program including study tours and attachments of judges and registrars to commercial courts in the region with a similar legal system. 38 120.The project will also support the Commercial Division o f the High Court in its efforts to raise awareness within the private sector on the procedures for bringing an action in the commercial courts. 121. Improving Business Registration and Land Registration Services. Currently Malawi's business environment scores poorly on the Doing Business indicators which measure the time and cost o f starting a business and registering real property. The Registrar General's Department (RGD) plays an essential role in the establishment o f corporate businesses and as a source of information to support business development. However, the RGD could be much more effective in discharging its responsibilities with improvements in the legislative framework, its internal procedures and documentation. The major shortcomings identified include: (i)the lengthy (relative to good international practice) period for completion of company registration; (ii) the inaccurate manually-maintained register; (iii) inaccessibility o f registry data to the private sector and other public sector authorities; (iv) inefficient rules and procedures, which do not reflect best international practice; and (v) lack o f integration o f business-related registries, which are held separately by different Government institutions. 122. Inthe area o f company registration reform, the objective o f this subcomponent would be to enable the Company Registry to improve the effectiveness o f its role in the establishment o f businesses and as an information resource for the public and private sectors. The expected outcome o f the project i s to introduce a modern and efficient Company Registry which will consolidate all business-related registration in one institution, to significantly reduce the time required for registration and lower the costs to businesses below that o f its regional competitors, and to enable businesses and the public to obtain company information in an efficient manner. The subcomponent will support the consolidation o f business registration processes, which are currently shared by the Registry located in the Ministry o f Justice, MITPSD's Registry and the Registryo f Deedsinthe Ministryo f Lands, within a single Business Registry. 123. The project will provide for systems diagnosis, specification and information technology investment and user training in the Registrar General's department (for registering a company and business name) and in the Lands Registry (for registering and transferring immovable property titles). Computerization o f the current manual business registry systems will significantly reduce the time taken to start a business and will encourage the migration o f informal firms to' the formal private sector. Similarly, computerization o f the Lands Registry will reduce the time taken to register and transfer landtitles, as well as simplifying the procedures for usingland as loan collateral. The project will provide for the development o f an on-line business registration system to widenaccess to business registration with streamlinedprocedures. Component Two: Strengthening Private Sector Development Support Institutions and Services (Total US$4.6million of which IDA 80%; EC 20%). 124. The objective o f this component is to build capacity in institutions that provide essential services to the private sector in order to improve the level o f service delivered, and to strengthen institutions that provide policy direction on private sector development issues. 39 125.Establishing a One-Stop Shop Investment and Trade Centre. The 2007 Investment and Export Promotion Billprovides for the merger o f the Malawi Investment Promotion Agency and the Malawi Export Promotion Council to create the Malawi Investment and Trade Center. This merger provides an excellent opportunity for a fundamental review o f how best to promote new private investment within Malawi, both by locals and by outsiders. The review o f virtually all laws o f relevance to new private investment, being carried out within another sub-component o f this project, also provide an excellent opportunity to establish a new basis for regulating both new and existing investments, based on international best practice. 126. At the same time, the Government o f Malawi has made it clear that it wishes to undertake a major overhaul o f the present complex system o f business permits, trade licenses, industrial licenses and industrial incentives, which face potential new investors into Malawi. The government i s anxious to improve the poor ranking o f Malawi, within the Doing Business survey, when it comes to setting up a new investment. The Government has made an important start by commissioning a major study on reforming business licensing. This study18proposes an important first step in the reform process, namely collapsing eight existing trade licenses into one. 127. This sub-component will support this fundamental review o f the system o f licenses, permits, etc. facing potential new investments. The aim will be for Malawi to be, within the next five years, one o f the top ten nations in Sub-Saharan Africa, with respect to the Doing Business league-table on setting up a new investment. In order to achieve that aim, the following steps will be required, all of which will be supported by this sub-component: Advice as to what Malawi should be aiming for, as a five-year longer-term vision, with respect to implementing international best practice in the treatment o f would-be new investments; followed by consensus building and an eventual agreement on this vision. Formulation o f one or more draft national policy statements on the treatment o f new investments, to include all aspects o f permits, licenses, investment incentives, etc. Then, consensus-building, and an eventual agreement on, and adoption o f publishednational policy statements. Drafting o f new laws, or revisions of existing laws, in order to put into practice the specifics o f the agreed national policy statements. Seeking comments, followed by adoption o f these revisions and/or new laws. Advice on the institutional arrangements required for both positive promotion o f new investments, and for whatever controls on new investments are retained under the new legislative framework adopted. 128. Given that positive promotion o f new investments will certainly continue, whatever changes are made in the legislative framework, assistance will be made available immediately to MITC, so that it may adopt international best practice with respect to its investmentpromotion activities. 18D.B. Mawindo, Lilongwe, "Reforming the Business LicensingRegimeinMalawi," February2007, for MITPSD. 40 129.Establishing an Institutional Framework for Public Private Partnerships (PPPs)).As a landlocked, least developed country, inadequate economic infrastructure is a major constraint to private sector investment in Malawi. The high cost and unreliability o f power, water and telecommunications utility services was a major impediment highlighted in the ICA. Similarly hightransport costs undermine the competitiveness o f Malawian exports. 130. Given that only limited resources are available in the public sector and from donors, the project will establish the legal and institutional framework for facilitating private investment in public infrastructure, through PPPs. The project will provide technical support to establish an appropriate legal framework for managing PPPs inMalawi. Inaddition the project will establish and staff a PPP unit under the Ministry o f Finance, as well as providing full technical support and advisory services for PPP transactions duringthe lifetime o f the project. 131. Strengthening the Department of Private Sector Development. The Government o f Malawi i s committed to continuously improving Malawi's business environment, as measured by the Doing Business indicators. Recognizing that this is an ongoing process, the project will support the strengthening o f capacity within the Department o f Private Sector Development, MITPSD. Support will include the provision o f long-term residential technical assistance, systems investment and capacity building to ensure that the diagnosis, prioritization and implementation o f reforms to reduce the costs o f doing business are a continuous and sustained process. 132. The Department o f Private Sector Development will be responsible, among other things, Department o f Private Sector Development for forming additional technical working groups on Doing Business indicators to prioritize reforms. The project will also provide for the recruitment o f short term specialists to carry out additional in-depth diagnostic analysis, and to prepare reform recommendations. 133. Recognizing the need for sustaining reforms beyond the lifetime o f the project, the project will provide a capacity building package for the regular civil service staff of the Department o f Private Sector Development, including short term specialized training, and staff attachments. The project will also provide systems investment for the department .and two private sector development specialists. 134. Supporting a Sustainable Framework for Public-Private Dialogue. Effective public- private dialogue i s essential in Malawi, in order to ensure that there i s shared ownership and understandingon the respective roles and responsibilities of the public and private sectors. It is generally accepted that the implementation of the MPRSP and the MEGS was not as strong as it could have been. Deeper Government engagement with the private sector on policy formulation and implementation, with mutual accountability on agreed actions would lead to more effective implementation and better results. 135. In response to a joint statement by the Government o f Malawi and the private sector in January, 2007 on the need for a new framework for public private dialogue, the project will support the establishment o f a public-private dialogue secretariat to be housed in the MCCCI. Project activities will include long term technical assistance to the secretariat, to provide for effective management o f the dialogue process, as well as providing for research and analysis on private sector development issues insupport o fpublic-private dialogue. 41 136. The MCCCI was established in 1892 and aims to act as the "voice o f the private sector". Recognizing that an effective chamber is in the wider interests o f supporting private sector development, an additional project objective will be to improve the level o f services delivered by the chamber to the private sector. The project will provide technical assistance to review the governance structure o f the chamber, and develop a long term business sustainability plan. A systems investment and capacity building package will also be provided. Component Three: Promoting Access to Finance and Productivity Enhancement (Total: US$4.6million, of which IDA 80%; EC 20%) 137. Malawi's private sector i s characterized by a "missing middle", with comparatively few enterprises located in between the many micro and informal sector businesses, and the larger multinationals and conglomerates. The objective o f this component i s to support the growth and development o f micro and small enterprises, into this middle market. 138. Establishment of a sustainable SME Investment Fund. Lack o f access to cost-effective finance was identified by the I C A as the number one constraint among to private sector development in Malawi. Banks are generally hesitant to provide long term financing to small enterprises, even ifthey do have appropriate collateral. 139. The project will provide technical support and advisory services in support o f an existing MinistryofFinance initiative to establish a new SMEinvestment fund, whichwill aimto provide commercial venture finance to small-scale business start-ups. The investment fund would operate along the lines o f a venture capital facility and provide business support services to beneficiary SMEs. Financialproducts offered will include loans, equity, quasi equity and guarantees. 140. Given that larger industrial establishments already have access to both domestic and foreign credit facilities, and that there are numerous microfinance institutions serving micro enterprises, the target market would be the "missing middle". This is defined generally as constituting enterprises employing from around 10 to 200 people, with financial support per investment anticipated to be inthe US$50,000 to US$500,000 range. 141. The fund will be managed independently by the private sector and Government's contribution will be capped at a minority level with the majority o f funding coming from the local and foreign private sector. 142. Establishment and Operation of the Business Growth Scheme. The BUGS scheme is in direct support o f the project objective o f supporting SMEs and private-sector led economic growth. The specific objective o f BUGS i s to facilitate the maximum possible growth inprivate sector economic activity. The scheme will run for the five years o f the project, and will be operated by a small unit, established for the purpose, consisting o f three experienced professionals recruited from the private sector. The intention i s that BUGS-supported firms will, as a direct result o f this support, increase their annual turnover at a rate at least one-fifth faster than the rate that non-supported firms manage, over the same period. BUGS will achieve this objective by the use of a mix o ftwo specific forms of assistance to individual private firms: (a) Direct technical assistance will be provided to firms by the BUGS Unit.This will start with a detailed standard diagnostic. The unit will then provide direct mentoring & consulting help 42 on how to implement an agreed business growth planwithineach supported firm (Le. general business consulting); (b) Where more specialized help is required, to support a plan for growth by a particular firm, then the unit will provide matching grants, to part-fundthe use of outside expert specialist help (e.g. choosing the right machines; quality control; product design; advertising planning; market research; setting up appropriate book-keeping & accounting systems; management information systems; etc.). 143. The scheme will be open to any private business entity, providing work to Malawi nationals within Malawi. The scheme will recognize that the vast majority o f such firms are not yet officially registered. These are the taxpayers o f the future. They, too, will be helped to grow by BUGS, but will be encouraged to re ister, once they reach the level where income tax (individual or corporate) becomes payable.F9 144. The BUGS Unit will be staffed by three professionals, individually recruited on annual renewable contracts. The BUGS Manager will be recruited internationally, and i s expected to bringto the task experience of running similar schemes elsewhere. The two BUGS Advisors will be expected to bring to the task both detailed local knowledge o f the Malawi private sector, and experience inbusiness consulting. The unit will be located inBlantyre, the clear focus o f current private-sector activity within the country.2o 145. Each firm applying for help to the unit will receive an initial visit on a first-come, first- served basis. Thereafter, the unit will be free to allocate its resources as the BUGS Scheme Manager determines, in order to achieve the specific objective o f the scheme. The team will be expected to achieve demanding annual targets, initially focused on work inputs, and then later focused on results, specifically the level o f firm-level growth facilitated, measured by sample surveys. If team members are not performing, on this basis, then they will be quickly replaced. BUGS is to be a target-driven operation. 146. Assistance will begin with a detailed diagnostic o f the firm, carried out by the unit or by consultants, and typically taking one to two man-days to complete. This will identify the weaknesses and gaps to be addressed, for the firm to achieve the maximum possible growth within a reasonable planning time horizon. The BUGS professional, or mentor, assigned to the firm will then agree with the firm a planof action, to be undertaken by the firm, assisted by the unit. Actions will be broken down into stages. The firm's mentor will then visit the firm at regular intervals, typically quarterly, to monitor progress on this plano f action. 147. Where this plan o f action reveals the need for more specialized outside help, then the unit will provide matching grants, to part-fund the costs. These grants will cover 50 percent o f the direct costs o f such help, in the form o f fees and directly-attributable expenses. Grants will not cover the costs o f hardware, nor o f salaries. Only the direct incremental costs o f buying 19 Since each firmreceiving grants fi-omBUGS will be requiredto enter into a formal contractual agreement with the BUGS Unit,then this contract mustthereforebe made either with an individual or agroup ofindividuals *'operatingaconfirmed fmorbusiness,ormustbemadewithalegally-constitutedbusinessentity,suchasalimitedcompany. The ICA that ofthe 185 formal production unitsthenoperational, 110 were located inBlantyre. More recent data confirms that, of Malawi's three official regions, the southernregion, centeredon Blantyre, accountsfor no less than 63% of all non-farm economic activity within Malawi. 43 specialized services will be covered.21 No individual firm, or group o f firms under common control, may receive a cumulative total o f grants from BUGS inexcess o f US$50,000. This i s to prevent a small number o f larger firms from absorbing the lion's share o f the available matching grants. 148. Grants will be paid strictly on a reimbursement basis only. Each firm being offered grant assistance will be required to sign a letter o f agreement with the BUGS Unit, specifying the activities being supported, the supplier(s), and the costs. Once proof i s provided that the activities have been satisfactorily completed, then the grant will be paid. Experience with several similar schemes within World Bank projects elsewhere has demonstrated that ayment on a reimbursementbasis is essential, inorder to guardagainst misuse of grant funding. pz 149. It i s expected that most grants will be under US$lO,OOO. Most services required will be accessed within southern Africa, if not available within Malawi itself. Any grant that takes a cumulative total over US$25,000 received by any one firm, or group o f firms under common control, will require a "no objection" from the BUGS Approvals Committee. Grants lower than US$25,000 will be approved by the BUGS Program Manager. The members o f this committee will be selected by the Project Steering Committee, and will consist of two Government members and one private-sector member. Meetings o f this committee will be called by the BUGS Scheme Manager, as needed. No firm or group o f firms under common control may receive more than US$50,000 ingrants incumulative total. 150. Within the BUGS grant, there will be a small allocation o f US$200,000 to support expenditures by BUGS-eligiblefirms on the use o f outside service providers, to provide on-site voluntary HIV/AIDS counseling and/ or testing at these firms' premises. 151. Sample surveys o f firms, covering both those assisted and a control group o f those not assisted by BUGS, will be carried out, firstly just ahead o f the Mid-termReview, and then just ahead o f the Completion Report. These surveys will form the basis for determiningwhether or not the BUGS scheme i s achieving its stated objective.23 The project will cover operating costs and goods for the BUGS Unit. *'Internationally,subsidies covering these "indirect costs," are generally accepted. However, subsidies for the purchase of hardware, or for other direct costs ofproduction, are not generally accepted.Also, subsidies on hardwarehavethe effect of distorting financial markets, by providing implicit interest-rate subsidies on substantial expenditures. 22This paymentbasis can cause problemsto firms sufferingcashflow constraints.Experienceindicatesthat such f m s can often get short-termbank help on the basis of the letter of agreement from the BUGS Unit, which provides a form of quasi-collateral.Also, servicesuppliers may be willing to structure payments so that most i s payableon completion, thus reducing the negative impact on cashflow. 23The designofthe BUGS schemebuilds on the lessons learnedfiom aprevious cost-sharing grant scheme, funded by the EuropeanUnion, and locatedat the MalawiChamber of Commerce [MCCCI]. This was under the EUISPS Project, 2002-2004. 44 152.Merger of M R F C and MSB into a viable Finance Institution. Access to credit is an especially large constraint to private sector development in Malawi's rural areas. Currently the two 100 percent state-owned banks (the Malawi Rural Finance Company and the Malawi Savings Bank) are not meeting performance targets, are unable to effectively serve clients, and are a drain on limitedgovernment resources. 153. MSB was originally carved out o f the defunct Post Office Savings Bank, with a primary purpose o f promoting savings among the poor and the rural communities o f Malawi. MSB has excess funds, which, as i s typical in a savings institution, have been invested in short term Government securities. Although MSB was granted a banking license in 1994, its banking products have been restricted, due to its inability to achieve the required minimum share capital. The bank has thus had limitedsuccess inpenetrating the credit products market. 154. MRFC was originally set up by Government with the assistance o f the World Bank and other donors, with the primary purpose o f providing credit to the rural agricultural communities o f Malawi. MRFC i s not licensed as a bank and i s prohibited from applying customer deposits for lending purposes. The company has few, mainly collateral deposits, and relies on loan financing from the Reserve Bank. 155. Working with the Reserve Bank o f Malawi, the project will provide technical assistance and advisory services for the merger of MRFC and MSB. ComponentFour: CapacityBuildingandProjectImplementationSupport (Total: US2.9 million, of which IDA 80%; EC 20%) 156. This Component will find the following capacity building and project implementation activities: (i) provision o f procurement, financial management, M&E and coordination services, (ii)operational costs and goods necessary for project implementation support. The Privatization Commission PIU, which has been managing the Privatization and Utility Reform Project, will assume the above functions - while MITPSD builds its capacity. There will be a review o f MITPSD's capacity after two years o f implementation to determine whether such project management functions can be transferred to MITPSD. 45 Annex 5: IndicativeProject Costs by ~ ~ n i ~ ~ ~ ~ ~ t Annex 6: ImplementationArrangements MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistance (BESTAP) (2.1 Partnershiparrangements 157. The main principle followed in guiding the institutional and implementation arrangements of the BESTAP Project is to ensure that operational implementation responsibility of the project i s with the beneficiaries identified, who are already implementing the policy agenda to be addressed by the project. Thus project will adopt a decentralized approach with the sub- component institutions and identified contacts actually implementing the project, while the Project Implementation Unit will provide core project management support such as financial, procurement and monitoring and evaluation. Thus the project will seek to strengthen and use existing implementation skills to ensure capacity building and sustainability. 158. The project will be overseen by a Private Sector Development Steering Committee (PSC), which already exists andhas been guiding the preparation of this project from the beginning. It is chaired by MITPSD with representativesfrom MoF, MEPD, MoJ, OPC, MITC and MCCCI. The PSC previously had the responsibilities of; (i) providing strategic guidance and oversight of the overall PSD Strategy and Reform Program of the Government; (ii) review and approving the work of the Doing Business Technical Working Groups which were established on Paying Taxes, Getting Credit, Trading Across Borders, Closing a Business and Dealing with Licenses; and (iii)guiding the work ofthe Project Preparation Team. 159. The responsibilities of the PSC will be changed as follows; (i) provide strategic guidance and oversight of the overall Doing Business reformProcess being undertakenby the Government of Malawi, (ii) provide strategic guidance and oversight for the project; (iii) approve annual work programs and budgets; (iv) review progress reports prepared by the Project Manager, clear the forwarding of the reports to IDA with comments; (iv) proactively address any major problems affecting project implementation; and (iv) review reports including the audit, mid-term review and implementation completion report. The committee will meet every six months. 160.A Project Review Committee (PRC) will: (i) provide technical and operational guidance for the project; (ii) and approve quarterly progress reports preparedby the Project Manager review for submission to the PSC; and (iii) proactively address technical and implementation problems affecting project progress and comprise the Director of PSD, the Project Manager and the BUGS Program Manager. The PRC will be meeting on a quarterly basis. 161. The PIU will have a project manager, financial management specialist, procurement specialist, monitoring and evaluation specialist, accounts and support staff. There will be a review of MITPSD's capacity after two years of implementation to determine whether these core functions canbe transferred to MITPSD. Subcomponent ExecutingAgencies 162. Actual implementation responsibility of the various components will be with designated focal points within the beneficiary institutions as follows: 47 Component 1 DesignatedSub-ComponentFocalPoints Streamlining the regulatory environment for Chief Parliamentary Draftsperson (Head of business (Ministry of Justice) legislative Drafting Division of Ministry of Justice) Improving access to commercial justice The program manager, Malawi Judiciary (High Court) Development Program (PIU of the High Court that implements donor funded projects inthe HighCourt) Improving services at the business and lands Registrar General's sub-component - registry (RG's Dept.and Lands Registry) Registrar General Ministry of Lands Sub-component- Commissioner of Lands Component2 DesignatedSub-ComponentManager Establishing a one-stop-shop at the Malawi Chief Executive, Malawi Investment Investment and Trade Centre Promotion Agency/Malawi Investment and (MITPSD/MoF) Trade Center Establishing an institutional framework for Secretaryto the Treasury/designated Public Private Partnerships (MoF) representative Strengthening the Department of Private Director of Private Sector Development Sector Development (MITPSD) Supporting a sustainable framework for Chief Executive, Malawi Confederated public-private dialogue (MCCCI) Chambers of Commerce and Industry (MCCCI) Component3 DesignatedSub-componentManager Establishment of a sustainable SME Secretary to the Treasury/designated investment fund (MoF/ RBM) representative Establishment and operation of a business BUGS Scheme Manager growth scheme (MITPSD) Merger of MRFC and MSB into a viable Governor, Reserve Bank of Malawi/ financial institution(MoF/ RBM) designatedrepresentative 163. These Sub-component managers from the executing agencies will be formally designated by responsible heads of beneficiary organizations, e.g. Principal Secretaries, CEO, etc., and be responsibleto the Project Manager. Sub-component managers will be responsible for day-to-day implementation of the activities under respective subcomponents in line with the annual work 48 plans and budgets approved by the PSC; programming o f annual plans and budgets; monitoring, public relations and reporting. They will manage all the technical aspects (with assistance from long term advisors where applicable); they will prepare all terms o f reference and manage the supervision o f consultants. They will be responsible for preparing all reports required under the credit for the respective project components. Inaddition to overseeing the implementation o f the individual subcomponents, they will also ensure the necessary cooperation across Government. 164. Further, for the BUGS sub-component, a dedicated Approvals Committee will be established. The BUGS Scheme Manager will report to the Project Manager. A Project Manual including the Project Implementation Plan, Financial Management Procedures Manual and Procurement Plan will be finalized by Board date. Any private business entity, providing work to Malawi nationals within Malawi, will be eligible for BUGS capacity-building assistance. The scheme will recognize that the vast majority o f such firms are not yet officially registered with the appropriate business registration authorities. These are the taxpayers o f the future. They too will be helpedby BUGSto grow, but will be encouraged to register, once they reachthe level of turnover where income tax, either individual or corporate, becomes payable. Detailed eligibility criteria are in Annex 1 o f the Project Manual. The Project Manual will include all periodic reporting, monitoring and evaluation arrangements throughout the life o f the project and will include independent operational audits annually, which will provide impact assessment o f the various project components. A mid-term review will take place in November 2009 with the objective o f assessing progress to date and if necessary to re-direct the project by integrating additional lessons learned and realities on the ground. 165. A selection panel has been established for the purposes o f selecting the BUGS Scheme Manager and Business Advisors. This panel will comprise the Principal Secretaries o f MITPSD, MoF, MoJ, and CEO o f MCCCI. For other positions, specific to other sub-components, special selection panels will be set up ineach case by the Project Manager. 166. Key positions (the BUGS Scheme Manager and the BUGS Business Advisors) will be widely advertised. A General Procurement Notice (GPN) will be placed on the dgMarket database (the online version o f "UN Development Business). Advertisements will be placed inat least two local newspapers; inat least one regional newspaper, either online or hard copy; and in a magazine/paper that specializes in international development appointments. It i s expected that the selection for the key positionswill be completedby October 2007. 49 .-- I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I II I I I I I I I I I I O I I C , II I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I II I I I I I I I I I I I I I I T T I I I I I I I I I I Annex 7: FinancialManagementandDisbursementArrangements MALAWI: Business EnvironmentStrengtheningTechnicalAssistance (BESTAP) Introduction 167. The financial management assessment was done in line with the Financial Management Practice Manual (November 2005) of the FM Board. The objective of the assessment is to determine whether the project implementing entity has acceptable financial management arrangements, which will ensure - (i) that funds are used only for the intendedpurposesinan efficient and economical way; (ii) preparation of accurate, the reliable andtimely periodic financial reports; and (iii) safeguardingof the entities' assets. ProjectFinancialManagementSystemIssues 168. The Malawi Growth and Development Strategy captures the Government's comprehensive strategy for growth. This strategy has as its main objective "to generate high and sustainable broad based growth of at least 6 percent per annum in the long- term." The MGDS recognizes that, amongst other critical preconditions, macroeconomic stability underpinned by sound fiscal control and budget management is of key importance. 169.There are several ongoing initiatives24 contributing to the improvement of the Project Financial Management(PFM) system: International Monetary Fund (IMF) Staff Monitored Program (SMP) and the WorldBank Structural Adjustment Credit (SAC): Both of these have performance criteria tied to fiscal discipline. They both refer to the need for an effective public expenditure management system, includingthrough adoption of the MTEF. FIMTAP (Financial Management, Transparency and Accountability Project): This is a World Bank funded project aimed at strengthening financial accountability and reporting. A key component is support for the development of IFMIS(Integrated Financial ManagementinformationSystem). MFAAP (Malawi Financial Accountability Action Plan): This is designedto be an umbrella framework for addressing fundamental weaknesses in the budget management and accounting system. Some key legislation under the MFAAP has already beenenacted inthe reform of the Public Finance Management, the Public Audit andthe Public ProcurementActs. The PEG (Project on Economic Governance): This is a Canadian International Development Agency (CIDA) supported initiative aimed at building the capacity of external stakeholdersto engage ineconomic issues andthe budget process. 24 CAPACITY BUILDING PROGRAMMEFOR ECONOMICMANAGEMENT AND POLICY COORDINATION: TECHNICAL REPORTNO. 32, GOVERNMENT OF MALAWI AND EUROPEANUNION, FEBRUARY 2005 51 MTEF Phase 11Program: Designedto improve budget credibility and make better linkages between the Malawi Poverty Reduction Strategy and the budget. The program i s financed by DFID and other donors. Macro-economic Advisory Services Project: A German Agency for Technical Cooperation (GTZ) supported project, to strengthen macroeconomic planning and budgeting. Tikumbirane -Support for Voice, Accountability and Rights: A DFID funded project, to enhance the voice and influence o f Malawi citizens within accountable and responsive systems o f governance. Institutional Support Project for Aid-Debt Management and Governance: A project supported by the African Development Bank, to build capacity o f all ministries and agencies engaged inaid and debt management. Institutional Cooperation with the Swedish National Audit Ofice (SNAO): A project supported by Norway and Sweden to produce high quality audits and increase the efficiency o f the National Audit Office (NAO). Support to the Anti Corruption Bureau: Supported by the DFID, to enable the ACB strengthen its competence and credibility as an effective anti corruption agency. 170. Clear commitment and action by the Government i s visible. The restoration o f fiscal control i s the cornerstone o f its economic reform program and good progress has been made with the implementation o f the principles o f transparency and accountability enshrined in the new Public Finance Management Act (PFMA). The implementation o f the new Integrated Financial Management Information Systems (IFMIS) has shown commendable progress since August 2006. 171. However, the problem2' identified i s that these individual components are yet to be sufficiently integrated into a functioning whole. The systems are therefore still somewhat dysfunctional and operating sub-optimally because o f missing or weak linkages between the component parts. Stakeholders have assessed this to have serious negative consequences for the Government's ability to implement its plans. 172. For the project, the implication at this time i s that full utilization o f the Malawi PFM systemis not yet possible. Components that will be reliedupon are the following: (i)TheCentralInternalAuditUnitintheMinistryofFinancewillprovideoroversee the internal audit service as explained inmore detail below; and (ii) NationalAuditOfficewillprovideoroverseetheexternalauditservice as The explained inmore detail below. 25 CAPACITY BUILDING PROGRAMME FOR ECONOMICMANAGEMENT AND POLICY COORDINATION: TECHNICAL REPORTNO.32, GOVERNMENT OF MALAWI AND EUROPEANUNION, FEBRUARY 2005 52 RiskAssessmentandMitigation 173. The project will be overseen by a Private Sector Development Steering Committee (PSC) and Project Review Committee (PRC), that already exist and whose constitution and roles are explained in Annex 6. The PC PIU will coordinate, control, account and monitor the utilization of project funds by the component implementing agencies. The PIU will be composed of a Project Manager, financial management specialist, procurement specialist, monitoringand evaluation specialist, accounts and support staff. 174. Duringthe development of BESTAP, a Project Preparation Team (PPT) was formed to guide the project preparation process and ensure that all relevant stakeholders are adequately consulted and involved. The PPT considered options available to establish the PIU in the most effective way to support project effectiveness: (i)complete mainstreaming of all PIU functions into the MITPSD; (ii)outsourcing of all the PIU functions; (iii)outsourcing of certain PIU functions, such as financial management and procurement; and (iv) utilization of the Privatization and Utility Reform Project (PURP) PIU (closing inDecember 2007) to establishthe BESTAP PIU, with a determination after two years whether the PIU functions canbe mainstreamed inMITPSD. 175. Considering the current lack of capacity in MITPSD and the following reasons, the most feasible option at this stage appears to be the latter (i) PURP PIU already exists - the as a GoM organ inthe PC and will not duplicate existing functions; (ii) it has the required capacity for financial management, procurement and project coordination (M & E expertise would have to be brought in); (iii)has been involved inBESTAP preparations it as part of the PPT; and (iv) it has the independence, profile and proven capacity to work across boundaries with the different implementing entities. 176. The PURP PIU staff has experience in managing Bank-fundedprojects. Systems have been established and a dedicated Financial Management Specialist in the PIU will support the implementation and maintenance of centralized financial management, internal controls, disbursements and financial reporting procedures for the project as a whole. This arrangement is further strengthened by separating and devolving implementation authority and budgets to the implementing agencies. 177. In summary, after assessment it is concluded that PIU arrangement will meet the basic financial managementrequirementsofthe project. 53 178. The FMrisk assessment is summarizedinthe tablebelow: Risk Risk Risk Mitigating Measures Rating Incorporatedinto Project Design herent Risks Country S Key F Moversight elements of the project are entrustedto the Government- Level Internal Audit and External Audit. Capacity for internal and or external audit i s enhancedby the use ofprivate sector audit f m s . Entity Level M ExistingPublic Sector Agencies will implementthe components, and implementation will further come under-scrutinyofprivate sector and civil society, who will participate through their membership inthese bodies and through specializedconsultationsand workshops. ProjectLevel M F Mfunctions are to be centralized inthe PIU, who has the basic capability to provide the requiredfmancial management. This arrangementis further strengthened by separatingand devolving implementation authority and budgets to the implementing agencies. introl Risks Budgeting M The PIUwill determine the overall framework and system for budget development inaF M Procedures Manual. Annual budgetswill be submitted to the ProgramReview Committee for approval and monitoring and evaluation. Accounting M Accounting will be centrally done for the project as awhole, by staff experiencedinWB fiduciary requirements andprevious WB funded projects. A computerizedaccounting system (FINPRO), similar that usedfor PURP, will be deployedand supportedby a F MProcedures Manual. Internal M Internal control is strengthenedby proper segregationof functions, use of Control trained staff, proper F Mproceduremanuals, processes and systems and also by deployment of independentinternal audit services to test the effectiveness ofthe control system. FundsFlow M Project funding will be disbursedthrough one US$ Account openedat a commercial bank ofthe GoM's choice, under terms and conditions acceptable to the Association. Project expenditureswill be paid from two local currency accounts, andall transactionson all bank accounts will be centrally accountedfor inthe project fmancial statements. Quarterly monitoringofthis arrangement will be done via IFRs. Financial M Monthly, quarterly and annual fmancial statements reports will be prepared Reporting to support monitoringofproject implementation. In-year and annualreports will be submittedto Project Review Committee, with annualreports also submittedto the Private Sector Development Steering Committee (PSC) Accountant-GeneralandAuditor-General. Auditing M The Central Internal Audit unit ofthe Governmentof Malawihas the mandate and capacityto perform or overseethe internal audit for the projects.An external auditor will be engagedby the Auditor-general to carry out an annual independentaudit of the project fmancial statements. Overall FM M The overall F Mrisk is consideredmoderate; inherent risks are offset by (a) RiskRating centralizing key aspects ofthe F Msystem using experiencedF Mstaff inthe PIU, (b) an internal control system, which allows for segregationof functions and other basic internal control elements: indeDendentinternal and external audit; and (c) soundfinancial proceduresand systems. I 1 54 Strengths 179.The provision o f project FM management and control functions by qualified FM staff that has worked on Bank projects before i s a significant FM strength inthe project. Furthermore, the independent nature o f internal and external audit arrangements strengthens the management o f fiduciary risks. FMAction Plan 180. The planbelow indicates the key FMactions to be taken: Key Actions Responsible party Actions to be completed by negotiations a. Draft PIMand F MProcedures Manual available PIU b. A template InterimFinancial Report format that is acceptableto IDA Actions to be completed prior to effectiveness c. Bank accounts for IDA funding havebeen openedand signatories confirmed and MITPSD / MOF authorizedby Government d. FM, procurement and M&Esupport services are ready for operations PIU Actions to be supported by the project e. Internaland externalaudit arrangements confirmed with Governmentand auditors MITPSD / PIU appointed f. Overseebuilding ofprojectFMcapacityinthe MITPSD PIU 181. Standard financial covenants included inthe financing agreement are the following: (i)submissionofauditedfinancialstatementswithinsixmonthsafter theyearend; (ii) submission o f un-audited interim financial statements within 45 days after each calendar quarter, to cover such calendar quarter; and (iii) submission o f any other information as required by IDA. ImplementationArrangements 182. Annex 6 deals with the implementation arrangement in detail. Financial management and control will be centralized inthe PIU and the FM system established as discussed later. The overall FMframework is depicted onthe next page. 55 tlt, " d irl S ": PlanningandBudgeting 183. Cash budget preparation will be detailed inthe FPM. At a minimum an annual cash budget for the life o f the project at each level o f implementation will be prepared, by the responsible implementing agency. The annual cash budget will be broken down quarterly and monthly, in support o f project activities as reflected inthe approvedwork plan andprocurementplan. InternalControlandInternalAuditing 184. Internal control comprises the whole systems o f control, financial or otherwise, established by the PIU and implementing agencies in order to - (i)carry out the project activities in an orderly and efficient manner; (ii) ensures adherence to policies and procedures; (iii) safeguard to the assets of the project; and (iv) secure as far as possible the completeness and accuracy of the financial and other records. 185. The key elements to ensure a sound internal control system will include: (i) segregation o f functions to authorize, execute and record; (ii)physical control over fixed assets; (iii)clear delegations and channels o f command; (iv) monthly reconciliation and clearance o f advances for expenditures; (v) integrity and performance o f staff at all levels; and (vi) supervision. 186. Project activities will also be periodically audited by the Central Internal Audit unit o f the Government o f Malawi. The internal auditor managers in this unit are qualified, an audit approach has been established and they will prepare at least an annual audit report to the National Audit Office and the Project Review Committee. The scope o f internal audit will include at least periodic reviews o f project activities, assets, systems, records and accounts; ensure effectiveness o f financial and accounting policies and procedures, as well as compliance with internal control mechanisms; review SOEs; verify material procurements and contract management; and carry out other hnctions as stated in their approved mandate. At the component level the project activities will also come under the scope o fthe internal audit units o f the implementing entities, under the normal governance arrangements applicable to each implementingentity. Accounting 187. Project accounts will be maintained on a cash basis, augmented with appropriate records and procedures to track commitments and to safeguard assets. Accounting records will be maintained in Kwacha. The opening and closing balances o f the US$ Designated Account ("DA"), and o f any other bank accounts relating to the project that are held in a currency different from the books o f account, should be translated at the rate ruling on the opening and closing dates, respectively. Expenditures made out of the DA (and other bank accounts as mentioned above) should be stated at the rate ruling on the transaction dates. The actual exchange rates usedshould be disclosed ina note to the financial reports. 188. The Chart o f Accounts will facilitate the preparation o f relevant monthly, quarterly and annual financial statements, including information on the following: (i)total project expenditures; (ii) total financial contribution from each financier; (iii) expenditure on each total project component/activity; and (iv) analysis o f that total expenditure into the disbursement categories o f the project, which would include goods, works, consultants' services and operating 58 costs. All accounting and control procedures will be documented ina FPM and regularly updated by the FinancialManagement Specialist. FinancialReporting 189. Minimum requirements for Interim Financial Reports (quarterly) and Annual Financial Statements are outlined below. Statement of Sources and Uses of Funds, showing by funding source for the period and cumulatively (project life or year to date) inflows and outflows by project component and disbursement category, as well as opening and closing cash balances o f the project; Bank Reconciliation Statement for each bank account, including copies o f the respective bank statements Statement of Expenditure, an itemized statement summarizing eligible expenditures incurred during a stated period based on individual transactions. The expenditures are normally grouped by project components and disbursement categories, comparing actual and budgeted expenditures. The report will also include a cash flow forecast for the following two quarters. Payments made during the reportingperiod against contracts subject to the Bank s prior review, summarizing contract payments Designated Account Reconciliation, showing deposits and replenishments received, payments supported by withdrawal applications, interest earned on the account and the balance at the endo fthe reportingperiod. Procurement Reports, which provide information on the procurement o f goods, works, and consultants and on compliance with agreed procurement methods. The reports will compare procurement performance against the plan agreed at negotiations or subsequently updated, and highlight key procurement issues such as staffing andbuildingRecipient capacity. Physical Progress Reports, which include narrative information and output indicators (agreed during project preparation), linking financial information with physical progress and highlightingissues that require attention. 190. Specific formats for the reports have been agreed based on Bank Guidelines on General formats o f FMRs contained in: "Financial Monitoring Reports for World Bank Financed projects: Guidelines for Borrowers"26. In addition Annual Financial Statements would need to comply with relevant International Public Sector Accounting Standards (IPSAS). 191. Quarterly and annual reports are to be submitted respectively to at least - (i)the Accountant-General; (ii) Auditor-General; (iii) - for the purpose o f monitoring project the IDA implementation; and (iv) the Project Review Committee in order to ensure transparency in project activities and implementation to all stakeholders. 26http://siteresources.worldbank.or~INTRANETFINANCIALMGMT/Resources/TOPICS/FMRs/FMR-Borrowers- English-Nov-2002,udf 59 ExternalAuditing 192. The IDA Financing Agreement will require the submission o f audited Annual Financial Statements for the project, within six months after year-end. Relevantly qualified, experienced and independent external auditors will be appointed by the Auditor-general, based on TORS acceptable to IDA. The TORSwere reviewed duringnegotiations. 193. Besides expressing an opinion on the Annual Financial Statements in compliance with International Standards on Auditing (ISAs), the auditors will be required to form an opinion on the degree o f compliance with IDA procedures for the Designated Account and the balance therein at the year-end. 194. In addition to the audit report, the external auditors will be expected to prepare a Management Letter giving observations and comments, and providing recommendations for improvements in accounting records, systems, controls and compliance with financial covenants inthe IDAagreement. FMSupervisionPlan 195. The first FM review will be carried out after six months o f project implementation. This detailed review will cover all aspects o f FM, internal control systems, reviewing the overall fiduciary control environment andtracing transactions from the biddingprocess to disbursements as well as SOE review. Thereafter, given that the FM risk rating for the project i s moderate, subsequent reviews will be as follows: review o f quarterly FMRs; annual SOE review as part o f the TOR of the external auditors; review of audited Annual Financial Statements and management letter as well as timely follow up o f issues arising; participation in project supervision missions as appropriate; and updating the financial management rating in the Implementation Status and Results Report (ISR). The FM staff at the Pretoria Country Office will play a key role inmonitoring the timely implementationo fany actionplans. FUNDSFLOWSAND DISBURSEMENTARRANGEMENTS BankAccounts 196. The Government o f Malawi (GoM) will open the following bank accounts: (i) US$ One Designated Account (DA) at a commercial bank under terms and conditions acceptable to the Association, into which IDA will advance project funds in terms o f its normal disbursement guideline^^^. Any interest on DA balances will be transferred to a separate bank account operated by GoM. (ii) One "BESTAP IDA General Operating Bank Account" inKwacha, opened at any commercial bank at the choice o f the GoM, under terms and conditions acceptable to the Association, into which draw-downs from the DA will be credited to fwnd eligible expenditures. This account will be funded strictly inadvance for 30 days on the basis of realistic cash forecast derived from the approved work plan. Five authorized bank account signatories, two o f whom 27http://web.worldbank.org/W13 SITE/EXTERNAL/PROJECTS/O,,contentMDK:20 120763-menuPK:276 159-pageP K:41367-piPK:5 1533-theSitePK:40941,OO.html 60 need to authorize any payment, will be designated - either the FM Specialist or Project Manager and one o f either the Director PSD, the PS o f MITPSD, or the Procurement Specialist. (iii) One"BESTAP BUGSSchemeOperatingBankAccount" inKwacha, openedat any commercial bank at the choice o f the GoM, under terms and conditions acceptable to the Association.. Payments from this account will be authorized by the designated sub component manager and one additional person inthat component. This account i s neededto: (a) facilitate the payment of large batches o f small expenditures inthe local currency; (b) allow more control over the timing o f payments by the Matching Grant sub-component; (c) avoid implementation bottlenecks caused by cumbersome procedures between the sub-component and the PIU who manages the DA. This account will be funded from the PIU local currency operating account, strictly in advance for 30 days on the basis o f realistic cash forecast derived from the approved work plan. All transactions on these accounts will be reported monthly and substantiated with original source documents to the Project Financial Management Specialist, who will see to the accounting and reconciliation of these accounts before advancing any further amounts to these accounts. 197. The Project Financial Management Specialist will reconcile all bank accounts and advances on a monthly basis and submit such reconciliations to the Project Manager for review and approval. Detailed banking arrangements, including control procedures over all bank transactions (e.g., payment signatories, transfers, etc.); will be documented in the Financial Procedures Manual (FPM). If, in the opinion o f the Project Manager, there i s a need for additional local currency bank accounts, IDA approval for the opening o f such bank accounts will be obtained. PettyCash Systems 198. As needed, implementing agencies will be given petty cash advances for cash payment o f small administrative expenses and such petty cash records will be centrally recorded, controlled and reconciled by the PIU. The Designated Account facility will only be available under this project once the Government meets its lapsed loan obligations. DisbursementArrangements 199. By effectiveness, the Project will use the Transaction-based disbursement procedures, i.e., direct payment, reimbursement, and special commitments as described in the World Bank Disbursement Handbook. As project implementation proceeds, the quarterly Interim Financial Reports (IFRs) produced by the Project will be reviewed. Where the reports are adequate and producedon a timely basis, andthe Recipient requests conversion to report-based disbursements, a review will be undertaken by the project team to determine ifthe Project i s eligible for Report- based disbursement. The adoption o f report-based disbursements by the Project will enable it to move away from time-consuming voucher-by-voucher (transaction-based) disbursement methods to quarterly advances to the Project's Designated Account based on IFRs. Detailed disbursementprocedures will be documented inthe FPM. MinimumValue of Applications 200. The Minimum Value o f Applications for reimbursement, direct payment and special commitment i s $400,000. 61 Use of Statementof Expenditure(SOE) 201. IDA would require withdrawals from the grant accounts to be made on the basis of Statementsof Expenditure for: (a) services of individual consultants costing less thanUS$50,000 equivalent per contract; (b) services of consulting firms costing less than US$lOO,OOO per contract; (c) all training and workshops; (d) BUGS Scheme matching grants; (e) works; (0 goods costing less than US$250,000; and (g) operating costs. All requests for withdrawal of expenditures under contracts subject to IDA'Sprior review would be fully documented. All supporting documentation will be retained by the PIU and must be made available for review by periodic World Bank reviewmissions, internal and external auditors. DesignatedAccount 202. The Designated Account Facility will only be available under this project once the Government meets its lapsedloan obligations. Withdrawalof grant proceeds 203. Withdrawal of grant proceeds to the Designated Account (see paragraph 202) will be in accordance with the World Bank Disbursement Guidelines and any disbursement letter that the Bank may issue from time-to-time. Taxes 204. The project will pay for all reasonable taxes in terms of GoM legislation. The project will deduct on behalf of the GoM "Withholding Taxes" from payments to foreign consultants, but provisionwill be made during the procurement processto notify consultantsofthis arrangement. Category Grant inUSD YOFinancedwith taxes 1. Goods (Excluding Part C.2 of the 100% Project) 870,000 2. Works 50,000 100% 3. Consultants' Services (including 100% financial audits, Training and Workshops 9,070,000 ~ 4. a) Matching Grants under Part C.2 of 1,600,000 50% the Project 960,000 100% 4. b) Operating Costs and goods under Part C.2 of the Project 5. Operating Costs under Part D of the 100% Project 530,000 16. Unallocated 1,920,000 TOTAL AMOUNT 15,000,000 62 Note: Operating Costs eligible for funding under this Grant are the incremental operating costs arising under the Project on account o f Project coordination, implementation, and monitoring activities undertaken by the PIU and BUGS Unit including office supplies, vehicles and vehicle operating and maintenance costs, but excluding salaries o f the Recipient's civil servants. 63 Annex 8: ProcurementArrangements MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistanceProject(BESTAP) A. General 206. Procurement would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits'' dated May 2004, revised October 2006; and "Guidelines: Selection and Employment o f Consultants by World Bank Recipients" dated May 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. Procurement for non-ICB procurement and selection o f consultants that does not involve international consultants will be carried out in accordance with the Malawi Public Procurement Act (No. 8 o f 2003) and its accompanying regulations and desk instructions. The various items under different expenditure categories are described in general below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and timeframe are agreed betweenthe Recipient and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 207. Procurement o f Goods: The total cost o f goods under the BESTAP i s estimated at US$ 1.0 million. Goods procured under this project would include Motor Vehicles, information technology equipment, and office furniture. The procurement will be done using the Bank's SBD for all ICB andNational SBD satisfactory to the Bank.Under the project, Goods estimated to cost US$250,000 or more per contract will be procured under ICB procurement method. Goods estimated to cost less than US$250,000 will be procured on the basis o f National Competitive Bidding (NCB). Where practical, the goods to be purchased will be grouped and be procured under ICB contracts. Goods that are estimated to cost less than US$50,000 equivalent per contract may be procured through Shopping procedures in accordance with the procedures set forth inthe Bank's Procurement Guidelines. 208, Direct contracting: Direct contracting for goods without competition may be allowed, upon prior clearance o f the bank under the conditions specified in paragraphs 3.6 and 3.7 o f the guidelines. 209. Procurement of small works: Minor may be carried out such as refurbishment o f offices and will be included in the procurement plan as these are defined. Given the anticipated low value o f such works, the procurement will be undertaken through shopping. 210.Procurement of non-consulting services: Non-consulting services under this project will include: workshops, transport, cleaning services, equipment and motor vehicle services, ICT maintenance services and training. As appropriate, the procurement o f non consulting services will be done usingNational SBDs acceptable to the Bank. 211. Training: The total cost o f training under the BESTAP i s estimated at US$ 4.5 million. When appropriate, training may be procured on the basis o f Single Source subject to review and approval by the Bank. The BESTAP will, based on the approved budgets and Annual work plans, prepare and submit to the Bank, for its prior review and approval, an annual training plan, 64 as part o f the approval process for the procurement plan. The training will, inter alia, identify: (i) the training envisaged; (ii)the justification for the training, how it will lead to effective performance and implementation o f the project and or sector (iii) the personnel to betrained; (iv) the selection methods o f institutions or individuals conducting such training; (v) the institutions which will conduct training, if already selected; (vi) the duration o f proposed training; and (vii) the cost estimate of the training. Report by the trainee upon completion o f training would be mandatory. 212. Selection of Consultants: The total cost o f consultant's assignments under the BESTAP i s estimated at US$2.0 million. Consulting services under the project include: Steam lining o f the regulatory environment for business, improving access to commercialjustice, improving services at the business and lands registry, establishing a one stop shop at the MITC, Establishing an institutional framework for public private partnerships, improving private sector development policy, analysis and delivery, Support a sustainable framework for public private dialogue, establishment o f a sustainable SME venture finance institution / investment fund. Other consulting contracts include matching grant fund for enterprise development to support SME productivity enhancement, major and transformation o f MRFC and MSB into a viable rural finance institution. Except as detailed below, consulting services will be selected through competition among qualified short-listed firms based on Quality- and Cost-Based Selection (QCBS). Consultants for financial audits and other repetitive services estimated to cost less than US$50,000 equivalent per contract will be selected through Least Cost Selection (LCS) method. As appropriate, other selection methods such as Selectionunder a FixedBudget (FBS), Selection Based on Consultants' Qualifications (CQS), Single-Source selection (SSS) and Quality-Based Selection (QBS) may be used for selection o f consultants. 213. Inexceptional cases, and under circumstances described under Paragraphs 3.9 through 3.13 o f the Guidelines, the Recipient may, upon prior clearance with the Bank, hire consultants through the single-source selection method. Consultants for services meeting the requirements o f Section V o f the Consultant Guidelines will be selected under the provisions for the Selection o f Individual Consultants (ICj method. The procurement o f consultants will be done using the Bank's SRFP and Standard Bid Evaluation and Recommendation for Award forms agreed with (or satisfactory to) the Bank. 214. Short lists of consultants: Short-list o f consultants for services estimated to cost less than US$l00,000 equivalent per contract, may be comprised entirely o f national consultants in accordance with the provisions o fparagraph 2.7 o f the Consultant Guidelines. 215. Prior Review of Consultants: All consultant assignments for contracts with individuals estimated to cost US$50,000 and above and all consultants assignments for contracts with firms estimated to cost US$lOO,OOO and above and all single source selection o f consultants for individual consultants and firms will be subject to prior reviewby the Bank. 216. Operating Costs: Operating costs will be procured using the Government o f Malawi's administrative procedures and or the administrative procedures o f the component implementing agency's, which were reviewed and found acceptable to the Bank. 65 217. Commercial Practices: As the BESTAP will include a component (Component 3 - Promoting Access to Finance and Productivity Enhancement) which will include the use o f financial intermediary (the BUGS Unitto be established by the Government for this purpose) to administer Matching Grants to the private sector enterprises for technical advisory services related to specialized business development services and/or HIV/AIDS on-site voluntary counseling and testing services, the "Commercial Practices" procurement method under paragraph 3.14 o f the Consultant Guidelines will be utilized. The specific details on the "Commercial Practices" that are acceptable to the Association for this purpose i s set out in the Project ImplementationManual. B. Assessment of the agency's capacityto implementprocurement 218. A formal procurement capacity assessment has been undertaken o f the PURP PIU as the implementing agency that will implement and coordinate the BESTAP. The procurement capacity assessment was finalized on 22"d February 2007 by Wedex Ilunga, Procurement Specialist. The capacity assessment noted that procurement activities will be carried out by the BESTAP PIU for several beneficiary implementingagencies: (i) Ministry o f Justice; (ii) The The Commercial Division o f the High Court; (iii)Registrar General's Department; (iv) Lands Registry; (v) MoF (vi) MITPSD; (vii) MCCI; (viii) Secretary to the Treasury; (ix) Director o f Private Sector Investment; and (x) Reserve Bank o f Malawi. 219.The PIU comprises five professional and five support staff. The professional staff includes: (a) Project Manager (b) FM Specialist (c) Accountant (d) Assistant Procurement Specialist (who also does M&E) (e) Procurement Specialist and Support staff includes: (a) Secretary (b) Program assistant (c) Registry/ Procurement Clerk (d) Driver and (e) Office Assistant. 220. The Procurement Specialist prepares the procurement bid or RFP documents, these are submitted to the Project Manager who reviews it and submits to IDA for No Objection. After the approval o f bidding documents, advertising, then receive bids and open and evaluate. For evaluation the PIU gets experts from the focal points to do the evaluation with the participation o f the Procurement Specialist. The Procurement Specialist, as Secretary guides the evaluation process and report writing. The report i s submitted to the focal point IPC for approval. After approval by the IPC, the report i s sent to IDA for approval, following which it i s submitted to the DoPP. After DoPP approval contract i s awarded. During implementation, the head o f the focal point will take charge to supervise the contract. The contract i s signed between the PIU and the bidder.The thresholds for procurementrequiring DoPP approval is US$2,400 and above. 221. The IPC reviews and approves procurement above or equal to MK380 000 (approximately equivalent to US$2,200) for goods and MK800 000 for works. Above this needs DoPP approval. Inthe case of consultants, all values require DoPP approval. It takes about 10 working days to get DoPP approvals. The existing thresholds have been sent a blanket threshold. The DoPP i s yet to review and assess the capacity o f the PURP PIU to provide realistic limits. The regulations require that the DoPP review the thresholds based on assessed capacity. The InspectionUnit (IU) o f the DoPP has not carried out any capacity and performance assessment since the inception o f DoPP in2004. The PS has carried out 2 training courses February 2006 and January 2007. 222. "To facilitate the procurement o f goods, works, and services for Component Three - Promoting Access to Finance and Productivity Enhancement whose objective is to "support the growth and development o f micro and small enterprises into the middle market in Malawi", 66 the BESTAP Project Implementation Manual includes relevant information on procurement procedures and implementation guidelines, including details on appropriate private sector commercial practices for the Business Growth Scheme sub-component. Appropriate procurement or selection methods have been recommended for activities under each sub component below. @ Sub-component A: Establishment of a Sustainable SME Investment Fund This sub- component will support the (i) technical and advisory services in support o f an existing MoF initiative to establish either an SME investment fund or loan guarantee fund, in support o f better access to finance for small-scale businesses. The fund will be managed by the private sector and Government's contribution will be capped with the majority o f funding coming from the private sector (both domestic and foreign). The contracting o f technical and advisory services to establish an SME investment fund or loan guarantee fund will be undertaken through appropriate selection methods o f the Banks Guidelines for selection o f Consultants revised October 2006. The modalities for accessing funds by the private sector from the SME investment fund or loan guarantee fund will be articulated in a manual to be developed for this purpose which will also outline the eligibility and qualification criteria for accessing the funds. This manual will be prepared by the Recipient and submitted for the banks review for acceptability. Sub-component B: Establishment and operation of a Business Growth Scheme. This sub- component will strengthen the capacity and international competitiveness o f private firms (mostly indigenous owned SMEs), through provision o f direct technical advisory services by the BUGS Unit or Matching Grants to finance technical advisory services for specialized business development activities and/or on-site HIV counseling and testing services. BUGS will be independently managed by the BUGS Unit. The detailed operations o f the Business Growth Scheme are set out in the PIM, including eligibility criteria for accessing the funds and procurement procedures. For the specialized technical advisory services beingfinanced from the Matching Grants, the "Commercial Practices" procurement method under paragraph 3.14 o f the Consultant Guidelines will be utilized, with details on the acceptable "Commercial Practices" set out inthe PIM. Examples o f specialized business development services that may be considered by the BUGS Unit for Matching Grant support after carrying out a business firm's diagnostic include market research, product design, product quality improvement, selection o f production machinery, factory layouts, training o f production and other staff, design o f advertising materials, selection o f advertising media, and selection o f local and foreign distributors or agents. Sub-component C: Merger of Malawi Rural Finance Company and the Malawi Savings Bank. Working with the Reserve Bank o f Malawi, the BESTAP project will update the feasibility/ option study and provide technical assistance/ advisory services to implement the merger o f MRFC and MSB to achieve efficiency gains and improved access to finance by SMEs in Malawi. Activities under this subcomponent will use procurement and selection methods defined inthe Banks Procurement and Consultants Guidelines RevisedOctober 2006. 223. The procurement capacity o f the PIU was assessed and found to be generally satisfactory. The procurement staff o f the PIU has over the years o f participating in a previous World Bank supported project the Privatization and Utility Reform Project estimated at approximately US$3lmilion, acquired experience to undertake procurement and are thus familiar with the Bank's procurement policies and procedures. However some minor deficiencies and concerns were noted as tabulated below including the suggested remedial actions: 67 IssueNo Descriptionof Issue Proposedremedialaction 1 Provisions o fthe Shopping / (e.g. payment terms need to be included and quotation solicitation form needs use o f delivery terms needto be improvement 2 Record keeping- completeness o f (i) andtrackfinancialinstruments(ii) Record information. maintainrecord and cross reference documents which are not placed on files 3 Improvement incontract use o f standard bid/proposal evaluation forms management including related training inthe use o f the same 4 Internal Procurement Guidelines Internal procurement guidelines have been lacking developed and are set out inthe PIM, due to be finalized by Board Date 5 Weak contract management. Improve mechanisms for improving performance 6 Capacity development (i) procurement workshopforall Holda procurement staff and (ii)Finalize by Board Date the BESTAP PIM. The PIMincludes procurementguidelinesfor the BUGS components MatchingGrants to the private sector enterprises for technical advisory services and/or HIV/AIDS on-site voluntary counseling and testing services based on "Commercial Practices" procurement method under paragraph 3.14 o fthe Consultant Guidelines. Details for the Commercial Practices Procurement method, satisfactory to the Bank will beprovidedinthe PIM. 7 Publishing o f awards andtracking Register and learn how to reviewand place and information on Dg marketand monitor information on Bank client Connection Client Connection Not withstanding the areas for improvement noted above, the overall project risk for procurement is Average. C. ProcurementPlan 224. The Recipient at appraisal developed a procurement planfor project implementation, which provides the basis for the procurement and selection methods. This planwas agreed between the Recipient and the Bank at negotiations and i s available at PIU Office in Livingstone Towers, Blantyre. It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with IDA annually or as required to reflect the actual project implementationneeds andimprovements ininstitutional capacity. D. Frequencyof ProcurementSupervision 225. Inaddition to the prior review supervisionto be carried out from Bank offices, the capacity assessment o f the Implementing Agencies has recommended supervision missions to visit the field every six months in the first year and thereafter once a year to carry out post review o f procurement actions. 68 226. Annual Procurement Post Reviews and or independent procurement audits may also be carried out and would aim to: (i)verify that the procurement and contracting procedures and processes followed for the projects were in accordance with the Financing Agreement (FA); (ii) verify technical compliance, physical completion and price competitiveness o f each contract in the selected representative sample; (iii)review and comment on contract administration and management issues as dealt with by participating agencies; (iv) review capacity o f participating agencies inhandling procurement efficiently; and (v) Identify improvements inthe procurement process inthe light o f any identified deficiencies. E. ContractAwardDisclosureRequirements 227. Contract awards done through ICB procurement method shall be consistent with Paragraph 2.60 o f the Guidelines: Procurement under IBRD Loans and IDA Credits, May 2004 revised October 2006. Within two weeks o f receiving the World Bank's "no objection" (acting on behalf o fthe cooperating partners) to the recommendationo f contract award, the Recipient shall publish in UNDB online and in dgMarket the results identifying the bid and lot numbers and the following information: (i) o f each bidder who submitteda bid; (ii) prices as read out at name bid bid opening; (iii) and evaluated prices of each bidthat was evaluated; (iv) name o f bidders name whose bids were rejected and the reasons for their rejection; and (v) name o f the winning bidder, andthe price it offered, as well as the duration and summary scope ofthe contract awarded. F. ContractAwards done throughDirectContractingProcurement 228. Contract awards done through Direct Contracting Procurement Method shall be consistent will Paragraph 3.7 o f the Guidelines: Procurement under IBRD Loans and IDA Credits, May 2004. After the contract signature, the Recipient shall publish in UNDB online and in dgMarket the: (i)name of the contractor; (ii)price; (iii)duration; and (iv) scope o f the contract. This publication may be done quarterly and inthe format o f a summarized table covering the previous period. G. ContractAwards for Consultancies 229. Contract Awards for Consultancies shall be consistent with Paragraph 2.28 o f the Guidelines: Selection and Employment of Consultants by World Bank Recipients, May 2004 revised October 2006. After the award o f contract, the Recipient shall publishin UNDB online and in dgMarket the following information: (i)names o f all consultants who submitted proposals; (ii)technical points assigned to each consultant; (iii)evaluated prices o f each consultant; (iv) final point ranking o f the consultants; and (v) name o f the winning consultant and the price, duration, and summary scope o f the contract. The same information shall be sent to all consultants who have submitted proposals. H. ContractAwards for SelectionBased onthe Consultants'Qualifications(CQS) 230. Contract Awards for Selection Based on the Consultants' Qualifications (CQS) shall be consistent with Paragraph 3.8 o f the Guidelines: Selection and Employment o f Consultants by World Bank Borrowers, May 2004. The Recipient shall publish in UNDB online and in dgMarket the: (i) o f the consultant to which the contract was awarded; (ii) price; (iii) name the duration; and (iv) scope o f the contract. This publication may be done quarterly and inthe format o f a summarized table covering the previous period. 69 Detailsof procurement a) Works and goods Lot Estimated Prior Expected Expected Description Package Amount Proc Domestic or Bid Contract Number Comments Number usins Metbod Pref Post Opening Signature Review Date Date Vehicles (4 I 4x4 vehicles To be bidfor I and 2 salon 1 1 414,000 ICB Prior 8107 12/07 in lot 1 vehicles) Vehicles(2 1 4x4 vehicles) 2 1 100,000 NCB Post 8107 12107 Ofice To be bid for furniture 3 L 51,400 NCB Post 8107 12107 IT equipment (Desktop computer, laptops, To be bid for scanner, 299,260 ICB Prior in lot printer, photocopier, software) IT equipment (Desktop I computer, laptop, To be bid for scanner, 40,000 Shopping No No Post in lot printer, photocopier, software) Land survey equipments 115,000 NCB No No Post 12/07 To be bid for and software inlot I Local Area I 1 1 Network 55.400 NCB Post 12107 installation No No Printingof reports 8 5 30,000 Shopping No No Post d a 8107 b. Procurementof consultantservices I Lot Estimated Prior Expected Exoected Description Package Amount Proc Preq Domestic Contract Number +-IT-.+ Comments Number in Method (yes I no) us Pref Post Opening Signature Review Date Date Vehicles(4 4x4 vehicles To be bidfor I and 2 salon 1 414,000 Prior 12107 in lot vehicles) Vehicles(2 4x4 vehicles) 2 100,000 12107 Office 12107 To be bid for furniture 3 inlot IT equipment (Desktop computer, laptops, To be bid for scanner, 4 12107 inlot printer, photocopier, software) 70 IT equipment (Desktop computer, laptop, To be bid for scanner, 5 3 40,000 Shopping N o N o Post d a 8107 inlot printer, photocopier, software) Land survey equipments 115,000 NCB N o N o Post 8107 12/07 To be bid for and software inlot Local Area Network 55.400 NCB N o N o Post 8107 12/07 installation Printing of reports 8 5 30,000 Shopping N o N o Post d a 8107 Lot Estimated Prior Expected Expected Description Package Amount Proc Preq Domestic or Bid Contract Number Comments Number usin$ Method (yes I no) Pref Post 0pening Signature Review Date Date Vehicles(4 4x4 vehicles To be bid for and 2 salon I 1 414,000 ICB No No Prior 8107 12107 in lot vehicles) Vehicles (2 4x4 vehicles) 2 100,000 NCB No No Post 8107 12107 Office To be bid for furniture 3 51.400 NCB No No Post 8107 12107 in lot IT equipment (Desktop computer, laptops, To be bid for scanner, 299,260 ICB No No Prior 8/07 12/07 inlot printer, photocopier, software) IT equipment (Desktop computer, laptop, To be bid for scanner, 40,000 Shopping N o No Post d a 8107 in lot printer, photocopier, software) Land survey equipments 6 115,000 NCB No N o Post 8107 12107 To bebid for and software inlot Local Area Network 7 55,400 NCB No No Post 8107 12/07 installation Printing of =I reports 8 5 30,000 Shopping No No Post d a 8107 - 1 2 I 5 6 I Expected Ref. Selection Estimated Prior / proposal No. Description Method Cost in US% Post Comments Review submission /opening Date Firms A. Streamliningthe regulatory environmentfor business 71 1.Review and update xonomic laws 1.1,Diagnostic short list may study of economic laws CQS 100,000 Prior 1114/08 comprise of national cons 1.2.Draftingof short list may economic laws QCBS 300,000 Prior 1/14/08 comprise of national cons 2. Designanddrafting short list may of short term legislative CQS 95,000 Post 1/22/09 compriseof national training courses cons B. ImprovingAccess to 1.Casemanagement andtracking QCBS 162,400 Prior 2/4/08 InformationSystem There will bevarious 2: Productionof contractsto be defined material, radio andTV IC/CQS/SS 63,200 12/25/08 during implementation programs andprocured differently C. Improving Business 1. Review and simplification of the registration and licensingprocedures CQS 50,000 Post 2/26/08 and processes for the registrar dept. 2. Review and simplification of the CQS 1 50,000 Post 1 2/26/08 registrationprocedures I 1,Design and development of an integratedbusiness QCBS 300,000 Prior 10/27/08 licensingand registration system 2. Developmentof national database for short list may businessregistration QCBS 100,000 Prior 10/27/08 compriseof national and licensing cons 3. Comouterization of currentmanualsof short list may businessregistryand QCBS 100,000 Prior 10/27/08 compriseof national landtitling cons Comp Two - Strengthei A. Establishinga one-stop-shop Investment and Trade Centre 1. Developmentof a I I I I I short list mav legal and regulatory QCBS 135,000 Prior 1/29/08 comprise of national framework cons 2. Investment short list may incentives review QCBS 101,200 Prior 12/25/07 compriseof national cons B. Strengthening the Department o fPrivate Sector Development 1. Economist IC 100,000 Prior 5/29/08 2. LegalSpecialist IC 100,000 Prior 5/29/08 3. Information system and website for MITPSD CQS 100,000 Prior 4/15/08 C. Supporting a sustainableframework for Public-Privatedialogue 1.Establishmentand operationof a sustainablePP dialogue QCBS 240,000 Prior 2/26/08 mechanism 15-f 3. Developmentof a longterm business plan QCBS 100,000 Prior 5/29/08 72 2. Reviewof the 16-f governancestructure of IC 50.000 Prior 2/26/08 MRFC and MSB QCBS I 500.000 Prior 7/21/08 Comp 4. Capacitybuildingand implementationsupport 20-f 1. External auditor CQS/SS 20,000 Post 3 4/08 2. Designof Monitoring 21-f and evaluation system CQS 100,000 Prior 1/2908 for BESTAP Individual 9-c 1. Researchand analysis on PSDissues IC 100,000 Prior 2/26/08 73 1 7. Administration 16-c and humanresources ;24 months) IC 27,600 Post 4/2/08 8. Financeand administrationassistant (24months) IC 19,800 Post 4/2/08 1 A. Establishinga sustainableSME investmentfund 1 TAforFund Potentially manager IC 160,000 Prior 7/8/08 internationally recruited I I 20-c Manager IC 126,100 Prior 7/8/08 2 BUGS Business Advisor IC 10,000 Prior 7/22/08 3 BUGS Business Advisor (i) IC 70,000 Prior 7/22/08 3 Surveyyear 1- baselinedata collection CQS 50,000 Post 8112/08 4 Surveyyear2- datacollectionfor M&E 50,000 Post 8/12/09 Recruitedon asole source basis from existing PURP-PIU 2. Financial Recruitedon asole 11 I 11 1 1 1 managementspecialist 60,000 Prior I 6/8/07 source basis from (24 months) 1 IC existing PURP-PIU Recruitedon asole months) 3' IC 50,000 Prior 6/8/07 source basis from existingPURP-PIU 4. Procurement Recruitedon asole 1 1 specialist (24,months) IC 60,000 Prior 6/8/07 source basis from existingPURP-PIU 5. Monitoringand Recruitedon asole evaluationspecialist(24 60,000 Prior 6/8/07 source basis from months) 1 IC 1 existing PURP-PIU II 6. Administrative Recruited on asole 1 1 assistant (24 months) IC 18,000 Post 6/8/07 source basis from 29-c existingPURP-PIU I 7. Ofice Recruitedon asole assistantlmessenger(24 12,000 Post 6/8/07 source basis from 30-c months) existing PURP-PIU 8. Annual survey year 1 IC 8,000 Post 5/27/08 9. Annual survey I year 2 IC 8,000 Post 5/27/09 10.Implementation 33-c support-shortterm CQS 50,000 Prior 4/15/08 II consultant year 1 11. Implementation 34-c support-shortterm CQS 50,000 Prior 4115/09 consultant year 2 74 c, Non consultantsenices I 75 Note: All t ~ ~ iwill he~based on agreed ~ r ~ i plan~that~will he p r ~ ~byathe GOM and n i ~ n i i r ~ ~ approved by the Bank and \\illinclude at the ltlast the j ~ ~ tofttie training iden~i~ed ~ ~ ~ ~ a ~ and ~ ~ i the capacity gap, the intendedtrainees, tfiz name of the trainingprostidcr, the d ~ ~ rand costi of ~ a ~ ~ ~ ~ ~ ~Afteri thentraining, the bene~ciariesvi11 be requested to submita brief report i n ~ i ~ ~ ~ i n ~ i t ~ ~ . what skill have been acquired arid kuw theses skills uill~ ~ ~ i t toienhance hise ~ c r f ~ ~ ~ ~ ~ ~ n c e r ~ ~ ~ t and ~oi~tribu~e a ~ t ~ ~ csi"ithe iproject~objectise, The train~~eplan!\illbe preparedand to the" ~ n ~ n ~ ~ i b ~onceiatyear~and updated as required. ~ i ~ d None .A11 Contracts NCB None 76 Contractssubjectto prior review: Goods: US$713,260; Works: US$00,000; (None envisaged) ConsultingAssignments: US$4,245,900 Total all contractsfor Prior Review:US$4,959,160 Overall ProcurementRiskAssessment: {Average} 77 Annex 9: Economicand FinancialAnalysis MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistanceProject(BESTAP) 23 1. The cost-benefit analysis o f the project presents some difficulties not only because o f the scarcity o f data on SME sector, the principal project beneficiaries, but also because o f the indirect relationship between the technical assistance provided under the project and the stream of benefits, and from the lagged effects o f the project. However, a simple cost-benefit analysis model has been built to calculate the net present value (NPV) and the economic rate o f return (ERR) ina "with" and "without" project framework on a 12-year forecast timeframe. 232. Benefits have been estimated on the basis o f market assessments and experience from the implementation o f similar projects in other developing countries. The benefits o f the project are expected from: (i) reducing the regulatory burden and costs o f doing business; (ii)improving service delivery to the private sector and access to finance for SMEs; (iii) and by strengthening support for technical and business management skills at the firm level. 233. The analysis suggests that a positive NPV o f US$20.33 million at a discount rate o f 12 percent and an ERR o f 49.44 percent can be anticipated from this project Table A9.1 below displays the aggregate estimates o f the economic cost-benefit analysis o f the project. TableA9.1: EconomicandFinancialAnalysis PresentValue of Flows Net Financial-Economic FiscalImpactTaxes Benefits(US$000) 20.33 cost (US$ 000) 10.28 NetBenefits(US$ 000) 10.05 3;5 1 ERR (Yo) 49.44 Notes: The discount rate usedfor the economic analysis i s 12 percent. The result above i s basedon a 12-year forecast horizon. 234. The main challenges o f the economic analysis o f this type of private sector development project arise from the fact that the linkage between the effort and activities o f the project and the targeted stream ofbenefitsis very loose. As a result, there is no guarantee that project efforts will not leak and dissipate, failing to achieve the desired impact. Also, observed results cannot always be unambiguouslyattributedto the project. 78 235. Inkeepingwithcommonpracticesinthe appraisalo fproject o fthis type, itis assumedthat technical assistance efforts do yield tangible economic benefits. A distinction is made between project activities whose effects permeatethroughoutthe entire economy from those with effects limitedto a sector, as well as betweenproject activities supposedto generate a sustainedexpansiono fthe economic base from those yielding increasedproductivity. 236. Benefits from project subcomponentswithpresumedeconomywide effectswillbe assumedto affect the Gross Domestic Product (GDP) directly, whereas those from sector limited effects are supposed to affect the GDP indirectly, after proper adjustmentto account for the elasticity of the GDP with respectto the sector. Benefits fiom sustained economic base expansion project subcomponents are supposed to constitute apersistentincreaseineconomic growth as suchsubcomponentscreate a dynamic ofeconomic expansion. Productivity enhancement project subcomponents benefits are seen as eliciting transitory growth (one-time growth). 237. Table A9.2 shows the assumed reach o f each subcomponent of the projects. Improving services at the business and landregistry andEstablishinga one-stop-shop at the Malawitrade and investment center subcomponentsare supposed to yieldeconomy wide and economic base expansioneffect because it will result inincreasingthe rate o f net business creationdue to lessenedbarrier and obstructionto entry. They also supposed to have an economy wide effect following anincreasedincentive for foreign investorsand guest workers to settleinthe country andanimprovement inthe business environment. 238. The Establishing o f a sustainable SME venture finance institution/ investment fund (MoF/Private Sector), Support to SME productivity enhancement and establishing a viable rural finance institution is seen to yield benefits that have an economy wide reach in boosting the productivity o f the existing base o f MSME and improved servicing o f firms. The subcomponents Establishing an institutional framework for Public Private Partnership, Improving private sector development policy analysis and delivery and Supporting a sustainable framework for public- private dialogue are presumed to carry an economy wide reach in both the economic base expansion andthe productivity dimensions. 239. A conventional methodology is used for carrying out the economic analysis o f the project by estimating future stream o f costs and benefitsandderiving netbenefitsto calculatethe netpresent value (NPV) andthe economicrateofreturn(ERR)basedon 12-yearforecast horizon. NPV ispositive when ERR is greaterthanthe assumeddiscountrate. TheNPVisthe decisioncriteria. Cost-benefitanalysiswas carried out for all the subcomponents of each of the following components o f the project: (i) business environment improvement, (ii) and economic diversification. The project impact is expected to start materializing during the first year o f project implementation, except for three subcomponents assumedto yield their effects gradually, reaching fill effect by the fifth year. 240. A dynamic econometric model describing Malawi's constant price GDP growth rate is developed, using IMFWorld Outlook annual data (and StanbicBank,Researcheconomics, Malawi 2007). To capture Malawi's interdependencywith Southf i c a ' s economy andthe rest ofthe World, Malawi's growth rate is assumed to depend on South Afiica growth rate which inturn is supposed to depend on the Advanced Economiesgrowthrate. 79 241.Measurement o f economic benefits in the institutional development support and business and regulatory reforms i s difficult because the project services provided to firms are indirect. Therefore, following common practices, the simple assumption that financial costs and benefits can be equated with the economic costs and benefits o f the project i s adopted. 242. Also adopted is the commonly accepted assumption in similar economic analyses that the support the project provides would increase efficiency o f the supported recipients to the point o f yielding an increase in economic outputs that is twice the amount o f the disbursement. In each year, for most project subcomponents, project results are estimated to be two times the amount disbursed. 80 I-r 0 U 3 00 Y 3 243. If the project subcomponent i s assumed to have an economic base expansion reach, its economic benefits are interpreted as a direct contribution to the GDP. The share of this contribution to the GDP is used as the increase in the growth rate o f the GDP. The dynamic model o f the GDP i s used to derive the sequence o f GDP growth rates associated with the implementation o f the project. If the project subcomponent i s deemed to yield a rise in productivity, this effect i s captured as a one time multiplier shift to the GDP levels. 244. To derive the benefits o f the subcomponent, baseline GDP growth rates forecasts i s first obtained, using the dynamic GDP growth model and the corresponding GDP estimates are calculated. These would correspond to the `without' subcomponent growth forecasts. Next, the GDP growth rates corresponding to the `with' the subcomponent are estimated using the growth rate model, after accommodation o f the shift in growth rates resulting from the project subcomponent's contribution to GDP growth. Calculation o f the GDP levels using the revised growth rates and adjustments for the productivity multipliers as appropriate then yield the final `with' project subcomponent GDP levels. The project subcomponent benefits cash flows are estimated as the difference betweenthe `with' and `without' project subcomponent GDP. BaseCaseResults 245. Table A.9.3 below shows that the Net Present Value o f the net benefits o f the components o f the project at the discountrateof 12percentare estimatedat $3.89 millionfor component 1, $2.29 millionfor component 2 and $3.86 million for component 3. The ERR for the three components are estimated at 54.04 percent, 42.88 percent, and49.69 percent respectively. Substantial fiscal benefits o f $1.36, $0.80 millions and $1.35 are expected to accrue out o f components 1, 2 and 3 o f the project, respectively, owing to the rather large share o ftax revenuesonthe GDP. 246. The project is expected to have positive impact on direct employment creation due to the increasedproduction. SupportedSMEsare expectedto createaminimumo f2500 directjobs bythe end o f the project. Through the matching grants components for BDS, Seed Capital Fund, and financial institutions, there is a straightforward and direct relationship between investment and job creation comparedwithotherproject components,where employment generationiseasilyquantified. Mainassumptions 247. Based on the information from field visits and experience from similar projects inother Aliican countries, the following assumptionswere made: a. It is assumed that financial costs and benefits can be equated with the economic costs and benefits o f the project are assumed. b. Most project subcomponents are supposed to yield increased efficiency o f the supported recipients to the point o f generating an initial increase ineconomic output; such an initial output i s interpretedas an impulsefrom the project subcomponent; c. So the ratio between the initial impulse and the GDP i s interpreted as the initial contribution o f the project subcomponent to the GDP growth in case o f a subcomponent acknowledged to have an economic base expansion reach. The share o f this contribution to the GDP i s used as the increase inthe growth rate o f the GDP. The dynamic model o f the GDP is used to derive the sequence of GDP growth rates associated with the implementationo fthe subcomponent; 82 I +- Y : a -I- `3 2 Lw w m od b - 4 oe r r r , c? s? sw9 m 0 N 0 N w 9 2 : W d W w m t- I T 4`1 a d. With the output estimate established, its share o f the GDP is treated as a permanent jump inthe GDP growth rate; e. For project subcomponents such as the Support to SMEs productivity enhancement, it i s assumed that they will elicit a one-time lift o f the productivity from the current level to the targeted level. In this case, the target productivity level i s assumed to be the lower bound o fthe current productivity.; f. Correlations between GDP growth rates and those of specific sectors of interest (e.g. agriculture, tourism) are exploited to distribute the loose effects o f the project on different sectors whenever necessary; g. Project subcomponents are assumed to accrue their benefits according to phase-in schedules ranging from immediate effects (Le. effects happening in the second to third year o f project subcomponent implementation). Sensitivity Analysis 248. Sensitivity analyses were effectuated through adoption o f more conservative scenarios. The first conservative scenario consists inassuming a shorter forecasting horizon o f only 8 years as opposed to the baselineo f 12years. ExpectedBene@ 249. Economic benefits expected from the project include job creation, increased productivity and diversification ofthe economy. 84 Annex 10: ProjectPreparationand Supervision Malawi: BusinessEnvironmentStrengtheningTechnicalAssistance Project(BESTAP) Planned Actual PCN review January 8th, 2007 January 8th, 2007 Initial PID to PIC February 5th, 2007 February lSt,2007 Initial ISDS to PIC February gth, 2007 February 12th,2007 Appraisal April 2"d-6*, 2007 March 19th- 23'd, 2007 Negotiations April 9th- 13*, 2007 April lo* - 13*, 2007 BoardRVP approval May 24th, 2007 Planneddate of effectiveness August lSt, 2007 Planned date of mid-termreview November 2009 Plannedclosing date December 31 2012 Key institutions responsiblefor preparation of the project: (i) Ministryof Industry,Trade and Private Sector Development, (ii)MinistryofJustice and(iii) Ministryof Finance. Bank staff and consultants who worked onthe project included: Name Title Unit Mr.ConstantineChikosi Task Team Leader AFTPS Mr.GertVanDerLinde LeadFM Specialist AFTFM Mr.Wedex Ilunga Procurement Spec AFTPC Ms.MuthoniW. Kaniaru Senior Counsel LEGAF Ms.Modupe Adebowale Senior Finance LOAG2 Officer Mr.DileepWagle Lead PSD Specialist AFTPS Ms.IngridChikazaza PSD Consultant AFTPS Ms.Irene F.Chacon Operations Analyst AFTPS Mr.KhwimaNthara Economist AFTP1 Ms.YesharegDagne ProgramAssistant AFTPS Ms.Grace Soko ProgramAssistant AFMMW Ms.EstherLozo Program Assistant AFMMW Bankfunds expendedto date onproject preparation: (ii) resources: $110,000.00 (ii) Bank Trust funds: 0 EstimatedApproval and Supervision costs: (i) Remaining costs to approval: $20,000.00 (ii) Estimated annual supervision cost: $110,000.00 85 Annex 11: Documentsinthe ProjectFile MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistance Project(BESTAP) 1. Project ConceptNote 2. Minutes of Concept Note ReviewMeeting 3. Financial Management Capacity Assessment 4. ProcurementAssessment 5. Doing Business Report 2007: Malawi Profile 6. Investment Climate Assessment 2006 7. Diagnostic Trade Integrated Survey 2004 8. Power Point Presentationon Economic Laws (to be revised) 9. Motivation Essay- Commercial Courts 10. Power Point Presentation-Registrar General's Office 11. Draft Malawi InvestmentPolicy 12. Draft Malawi Investment& Trade Center Bill 13. Executive Summary -Public Private Partnerships 14. Final Report -Public Private Partnerships 15. Power Point Presentation-Public-Private Dialogue 16. ConceptNote- SME InvestmentFund 17. Report on Matching Grant Scheme 18. Merger Analysis Paper - MRFC & MSB Merger 19. MRFC Restructuring Report 20. MSB Restructuring Report 21. Summary on Short Term restructuring options -MRFC & MSB Merger 22. Executive Summary -MRFC & MSB Merger 23. Aide Memoir -Joint WB/ IFC Mission(22 -26 January, 2007) 24. Aide Memoir -BESTAP Preparation Mission(4 - 15 February, 2007) 86 Annex 12: Statementof LoansandCredits MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistance Project(BESTAP) Difference between expected and actual Original Amount inUS$Millions disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. ID Rev'd PO84148 2006 MW-Irrig, Rural 0.00 0.00 0.00 0.00 0.00 38.03 7.13 0.00 Lvlihds & Agr SIL (FY06) PO57761 2006 MW-Infrastr 0.00 0.00 0.00 0.00 0.00 41.20 0.33 0.00 Srvcs SIM PO83401 2005 MW-Health Sec 0.00 0.00 0.00 0.00 0.00 8.65 1.14 0.00 Supt SIM(FY05) PO70823 2005 MW-Edu Sec 0.00 0.00 0.00 0.00 0.00 24.89 -6.33 0.00 Supt SIL 1 (FY05) PO75247 2004 MW-Corn Based 0.00 0.00 0.00 0.00 0.00 17.16 4.68 0.00 Rural LandDev (FY04) PO73821 2004 MW-Multi- 0.00 sectoral AIDS - 0.00 0.00 0.00 0.00 0.00 13.59 -10.03 MAP (FY04) PO78408 2003 MW-Fin Mgmt, 0.00 23.70 0.00 0.00 0.00 14.70 9.37 0.00 Transpar & Account (FY03) PO75911 2003 MW-MASAF 0.00 32.80 0.00 0.00 0.00 0.09 -4.78 0.00 APL 3 (FY03) PO70235 2001 Regional Trade 0.00 0.00 0.00 12.60 11.08 0.00 Fac. Proj. - 0.00 15-00 Malawi PO63095 2000 MW-Priv & 0.00 28.90 0.00 0.00 0.00 6.78 4.01 1.21 UtilityReform (FYOO) Total: 0.00 100.40 0.00 0.00 0.00 177.69 16.60 1.21 87 MALAWI STATEMENTOF IFC's Held andDisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval 2000 NICO 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.00 Total portfolio: 0.52 0.00 0.00 0.00 0.52 0.00 0.00 0.00 Approvals Pending;Commitment FY Company Loan Equity Quasi Partic. Approval Total pending 0.00 0.00 0.00 0.00 commitment: 88 Annex 13: Country at a Glance MALAWI: BusinessEnvironmentStrengtheningTechnicalAssistanceProject(BESTAP) Sub- POVERTY and SOCIAL Saharan Low. M alawl Africa Income Development dlamond. 2005 Population, mid-year(millions) 12.9 741 2,353 GNIper capita (Atlas method, US$) 6 0 745 580 Lifeexpectancy GNI(Atlas method, US$ billions) 2.1 552 1364 T Average annual growth, 1999.06 Population(Yd 2.3 2.3 19 Lab0rforce (%) 2.0 2.3 2.3 GNI Gross per primary M o s t recent estlmate (latest year available, l999.06) capita enrollment Poverty(%of populationbelownationalpoverlyline) Urbanpopulation(%of totalpopulation) n 35 30 Lifeeqectancyatbirth(pars) 40 46 59 Infant mortality(per 1000live births) 1x1 00 60 Childmahutlition (%ofchildren under5) 22 29 39 Access to improved water source Access to an improvedwatersource(%ofpopulation) 73 56 75 Literacy(%ofpopulation age 159 64 62 Gross primaryenrollment (%of school-agepopulation) 125 93 114 -Malam Male 123 99 1x1 Female Low-incomegroup 126 67 99 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 1995 2004 2006 Economic ratios. GDP (US$ billions) 1.1 14 19 2.1 Gross capital fonationIGDP 6.6 8.4 15.3 14.5 Exports of goods and serviceslGDP 24.2 30.4 26.8 26.6 Trade Gross domestic savingslGDP 12.9 -0.3 4 1 -116 Gross national savingslGDP .. -4.0 -5.3 -7.4 Current account balance1GDP -8.5 -12.2 -8.1 -8.2 Interest payments1GDP 2.7 2.8 12 Domestic CapitaI Total debt1GDP 90.2 60.2 89.6 savings formation Total debt sewiceleqorts 39.0 26.5 9.3 Presentvalue of debtlGDP 57.1 1 Present value of debtlexports 69.8 Indebtedness 1985-96 1995.06 2004 2006 2006-09 (averageannualgrowth) GDP 2.4 2.7 7.1 2.6 6.8 -Malawi GDP percapita -0.9 0.1 4.8 0.4 6.2 Low-income o m u ~ Exports of goods andservicas 17 19 -3.0 20.2 3.0 STRUCTURE o f the ECONOMY I II (%ofGDP) 1g95 2005 /Growth of capital and GDP (Oh) I Agriculture 429 304 369 347 40 Industry 219 8 6 8 2 8 4 20 Manufacturing 145 158 114 125 Services 352 500 440 459 -20 0 Householdfinal consumption eqenditure 69.4 79.4 92.2 94.9 Generalgov't final consumption expenditure 7.7 210 6.9 6.7 , Imports of goods and services 29.9 48.1 512 53.0 -0CF &GDP 1986-95 1995-05 (averageannualgrowth) Agriculture 19 4.0 Industry 3.4 Manufacturing 3.1 -0.7 Services 2.4 13 I Householdfinal consumption expenditure 4.8 , 3.2 Generalgov't final consumption expenditure 16 3.7 12.1 Gross capital formation -14 -12 33.2 hPOrt6 of goods and services 2 6 2.3 -0.7 110 -Exports -Inports Note 2005data are praliminaryestimates This tablewas producedfrom the Development Economics LDB database 'Thediamonds showfourkey indicators inthe country(inbold) Cornparedwithits income-groupaverage ifdataaremissing, thediamondwll beincomplete 89 BALANCE o f PAYMENTS 1985 1995 2004 2005 (US$ millions) Current account balance to GDP (Oh) ' E q o r t s of goods and services 276 429 511 578 0 Imports of goods and services 331 548 947 1066 Resource balance -54 -18 -436 -488 5 Net income -53 -47 -45 -41 -10 Net current transfers -4 118 0 1 -15 Current account balance -97 -71 -363 -398 Financing items (net) 54 258 379 445 -20 Changes in net reserves 42 -87 -6 -47 -25 Memo: Reserves includinggold (US$ miliionsj 49 15 0 4 6 5 Conversionrate (DEC,locai/US$J 17 25.3 D8.9 118.4 EXTERNAL DEBT and RESOURCE FLOWS 1986 1995 2004 2005 (US$ miliionsj ICompositlon o f 2004 debt (US$ mill.) Total debt outstanding anddisbursed 1021 2,239 3.418 IBRD 69 55 0 0 IDA 322 1,251 2,075 1940 Total debt service 1D 118 60 IBRD 7 B 1 0 IDA 3 6 25 50 Composition of net resourceflows Official grants 38 262 348 Official creditors 52 73 62 Pnvate creditors -29 -23 -2 Foreigndirect investment (net inflows) 1 6 b Portfolio equity (net inflows) 0 0 0 World Bank program Commitments 0 5 DO 54 Disbursements 34 73 62 45 A . IBRD E- Bilaterd B.IDA D. Other mllilzderd F. Private Pnncipalrepayments 2 8 t? 35 C-IMF 0 -Short-ter' Net flows 32 55 50 0 Interest payments 8 6 14 6 Net transfers 24 39 37 -5 Note,This table was producedfrom the Development Economics LDB database 810106 90 MAP SECTION IBRD 33440 32°E 34°E 36°E To To Songwe Mbeya TANZANIANZANIA Tunduma ChitipaChitipa MALAWI Karonga 10°S ChisengaChisenga 10°S KARONGA KARONGA To CHITIPA CHITIP Muyombe Nykia Nykia (2,606 m) (2,606 m) Chilumba Chelinda Chelinda Mkondowe To Muyombe Livingstonia Katumbe Katumbe RUMPHIRUMPHI Rumphi Rumphi Ruarwe MZIMBA MZIMBA Kafukule Kafukule tns. Mzuzu Mzuzu Euthini Euthini M NORTHERNNORTHERN Nkhata Z A M B I A NKHATA NKHA BA BAY Mzimba Mzimba Chinteche Chinteche (MALAWI) 12°S Viphya Bay 12°S Luwawa Luwawa Lake M To Lundazi Nkhunga Nkhunga Kaluluma Kaluluma alawi K A S U N G U Nkhotakota Kasungu Kasungu NKHOTAKOT NKHOTAKOTA M O Z A M B I Q U E NTCHISI NTCHISI Ntchisi Ntchisi C E N T R A L MCHINJI MCHINJI DOW DOWA DowaDowa SALIMA SALIMA Makanjila To Mchinji Mchinji Bua Chipata SalimaSalima 14°S LILONGWELILONGWE 14°S Namitete Namitete Monkey LILONGWE LILONGWE Bay To To DEDZADEDZA Cuamba Furancungo DedzaDedza M A N G O C H I MangochiMangochi To Ulongwe NTCHEUNTCHEU S O U T H E R N 0 20 40 60 80 100 Kilometers To M O Z A M B I Q U E NtcheuNtcheu BalakaMACHINGAMACHINGA Cuamba Balaka 0 20 40 60 Miles Shire MachingaMachinga 32°E Lake ZOMBA ZOMBA Chilwa MWANZAMWANZA ZombaZomba MALAWI To LirangweLirangwe Tete MwanzaMwanzaBLANTYRE ChiradzuluPHALOMBEPHALOMBE BLANTYRE Chiradzulu Blantyre Blantyre CHIRADZULU CHIRADZULU Phalombe Phalombe MULANJE MULANJEMULANJE SELECTED CITIES AND TOWNS 16°S ChikwawaChikwawa MulanjeMulanje SapitwaSapitwa THYOLO THYOLO 16°S (3,002 m) (3,002 m) DISTRICT CAPITALS ThyoloThyolo CHIKWAWACHIKWAWA To REGION CAPITALS Liciro NATIONAL CAPITAL N'gabuN'gabu To RIVERS Morire NSANJENSANJE MAIN ROADS NsanjeNsanje RAILROADS DISTRICT BOUNDARIES This map was produced by the Map Design Unit of The World Bank. REGION BOUNDARIES The boundaries, colors, denominations and any other information To shown on this map do not imply, on the part of The World Bank Vila de Sena INTERNATIONAL BOUNDARIES Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 36°E NOVEMBER 2004