Report No. 26765-MAI Malawi Country Financial Accountability Assessment September 15, 2003 Operations Quality & Knowledge Services Financial Management Africa Region A COLLABORATIVE ASSESSMENT BY THE GOVERMENT OF MALAWI, THE WORLD BANK, AND A SELECT GROUP OF STRATEGIC PARTNERSHIP FOR AFRICA (SPA) DONORS Document of the World Bank Table af cantents Preface ......................................................................................................... ... lll Executive Summary ................................................................................................................ v DevelopmentAction Plan :Salient Recommendations ......................................................... xl~l ... 1 . Introduction .............................................................................................................. 1 2. Public Sector Central Government . ............................................................................ 3 2.1 Budget Preparation. Implementation and Monitoring ................................................................. 3 2.2 Accounting and Financial Reporting ................................................................................................ 13 2.3 Integrated Financial Management InformationSystem ................................................................ 19 2.4 Internal Controls and Record Management .................................................................................... 25 2.5 InternalAudit. ................................................................................................................................ 27 3. Public Sector .Oversight Arrangements .................................................................... 29 3.1 ExternalAudit .................................................................................................................................. 29 3.2 Parliamentary Oversight ..................................................................................................................... 33 3.3 Anti-CorruptionBureau..................................................................................................................... 35 4. Public Sector LocalGovernments - ............................................................................. 37 5. Public Sector .Parastatals ........................................................................................... 49 6. Public Sector .Procurement........................................................................................ 57 7. Private Sector ............................................................................................................. 61 7.1 Companies .................................................................................................................................. 61 7.2 Commercial Banks and Insurance Companies ............................................................................... 65 7.3 Non-Governmental Organisations ................................................................................................... 67 8 The Accountancy Profession ....................................................................................... 69 Annex I L i s t of Persons Met ......................................................................................... 73 Annex I1 Budgets Versus Actuals ................................................................................... 75 Annex 111 Bibliography .................................................................................................... 77 i .. 11 PREFACE The Country Financial Accountability Assessment (CFAA) for Malawi was undertaken between February and December 2001, culminating in the in-country mission carried out over a three week period in November and December 2001 by a joint team comprising of Government Counterparts, World Bank staff, and a number of donor funded consultants. The work was carried out through a combination of initial desk review of relevant and reliable current information, review of ongoing Government reforms, questionnaires and position papers, interviews, and lalogue with key stakeholders. At a Strategic Partnership for Africa (SPA) meeting held in Washington D.C. inJanuary 2001, strong interest was expressed in developing a common mechanism for assessing financial accountability arrangements and challenges in SPA countries. It was agreed that SPA donors, on a pilot exercise, would join with the World Bank in applying the CFAA in two African countries, one of which was Malawi the other being Burkina Faso. The pilot exercises were intended to enable SPA donors to learn the practical application of the CFAA methodology, and provide an opportunity for the World Bank and SPA donors to gain experience of working together in conducting CFAAs. Participation by the donors would involve one or more of the following proposed arrangements: (a) detailed involvement as part of the CFAA team; (b) oversight involvement as part of reviewers of the detailed work carried out; and (c) by observation through participation in key meetings. The Malawi CFAA was carried as a collaborative effort under the above arrangements. The Government's commitment to the CFAA exercise was displayed from the outset during the workshop organized to launch the formal beginning of the CFAA. Mr. Patrick Chllambe, Secretary to Treasury, welcomed the group. H e stated that the Malawi government was pleased to be undertaking this assessment, and was committed to implementing a strategy to deal with the gaps and address the weaknesses revealed by the CFAA. The Government Counterpart Team was lead by Mr. D.B. Kandoje, Accountant-General and consisted of Mr.F.N.Nkhoma, Chief Accountant, Mr.P. Matanda, C h e f Accountant, Mr.A.W. Mphande, Principal Accountant (Accountant-General's office); Mr. M. Makalande, Deputy Budget Director (hbnistry of Finance); Mr. C.R. Njala, Chief Audltor (National Ault Office); Mr. A.D. Kamanga, C h e f Parliamentary Draughtsman (hbnistry of Justice); Mr. H.C. Mazengera, Executive Director (SOCAM); Mr.N.B. Kumwenda, Deputy Secretary (Department of Statutory Corporation); Mr. H. Mphasa, Assistant Finance Manager (Local Government); Mr. F.F. Kasonda, Deputy Director (Directorate of Procurement); Mr.J.N.Kawonga, C h e f Systems Analyst (DHRMD);and Mr.S.F.K. Mataka, Executive Director (Malawi Accountants Board). The Government had also established a Steering Committee on Financial Management Reforms and CFAA as a peer review coordinating committee to assist in the CFAA process. T h i s was composed of Mr. P.E. Chlambe, Secretary to the Treasury, Mr. R.A. Kampanje, Budget Director (hbnistry of Finance); Mr. D.B.I's role as a regulatory bodyinthe development of capital markets, the enforcement of the principles of corporate governance, and compliance with accounting practices, was very limited. A number of weaknesses were identified in the Capital Markets Development Act and the Malawi Stock Exchange had prepared a new draft bill for presentation to Parliament. Meanwhile, reliance was being placed on SOCAM and the external audltors of the listed firms for information relating to compliance. Resources were required to strengthen the effectiveness in surveillance and enforcement of compliance with rules and the law. 51 Problems affecting the banking and financial sector were that the RBM had problems enforcing compliance due to the long process involved; and there were also increasing but unfunded mandates being delegated to the RBM. 52. The Insurance Act of 1958 continued to provide the legal framework governing the insurance business inMalawi. Ths piece of legislation was outdated and did not address the modern issues affecting the insurance industry.A draft Insurance bill had been prepared and submitted to the RBM as the regulatory body. With 10 insurance companies and a similar number of brokers, new legslation was urgently required to address the issues affecting this growingindustry. 53. The new NGO Act appeared to address the fiduciary requirements of this sector of the economy. A number of challenges, however, would have to be addressed and these included the capacity of the NGO Board and CONGOMA to carry out their mandate; and the capacity of NGOsto fulfilthe enhanced reportingrequirements under the Act. 54. The proposal in the accountancy profession to merge the Society of Accountants inMalawi and the Public Accountants Examination Council into a single Institute o f Accountants in Malawi (IAN was welcome news and shouldbe supported. 55. There had not been a manpower study of the number of accountants required in the country to determine the future demand as well as the sources of supply. 56. There were still a number of accountants in Malawi who were not regulated by SOCAM/MAB as they were not registered members. These needed to be registered to strengthen the regulation of the profession. xii Development Action Plan: Salient Recommendations Indicative Timeframe Section of the Action by Report tecommendations Short Medium Long Term Term Term 1.Legal and 1.Pursue the reform o f the Finance and Audit Act. Institutional 2. Incorporateinthe new Public Finance Management Act & ( 4 2 (1to 3 (>3 years) months) years) I( the creation of a strongInternal Audit Function, as well as M°F a legislative framework for parastatals. 3. Finalize implementation of Local Government Financial DLG/MOF Regulations 4. Draft and legislate Act for the roles and functions of the NLGFC/ J National Local Government Finance Committee. DLG I 2. Budget and 1.Integrate recurrent and development budgets for J J Expenditure meaningful analyses of overall public expenditures. Control 2. Prioritise development budgets based on sectors and not sector ministries. J J 3. Improve revenue forecasting MOF/RBM 4. Pursuitof completeness of the budget framework by MOF/ J J capturing all donor funds for programming under the DONORS MTEF 5. Increase the transparency of the budget process by J J increasing knowledge base of Parliamentarians and others. MOF/ Others I 3. Accounting 1.Pursue the development and implementation ofIFMIS MOF IJ J and Reporting 2. Reconciliation of revenue reports from Malawi Revenue MOF Authority with Government accountingand banking J J records. 3. Support and improvement to existing manual systems MOF J J duringthe IFMIS roll-out. 4. Surcharge or censure errant public officers charged with MOF J J responsibility of managing and controlling public funds. 5. Establish a special task force to regularize bank MOF J reconciliations. 6. Provide incentives to improve financial management MOF J 7. Establish strong internal audit function inthe Ministry of MOF J Finance. J J 8. Appoint a change management team to identify and MOF manage organizational changes arising from the J J implementation of IFMIS. xiii 4. Oversight 1.The Auditor General and senior staff shouldnot be on AG J J Arrangements boards of statutory bodies as this undermines their independence. 2. Reform of the Finance and Audit Act to address issues AG/MOF of financial independence; recruitment; tasks concerning J parastatals; certification and audit opinion on financial statements. 3. Stronger involvement of private-sector audit firms where AG J J appropriate. 4. Use computers effectively for preparingstandard audit AG J programs J 5. Mobilize technical and financial support to enable PAC J MOF/ J to discharge its mandate effectively. PAC 5. Local 1.Harmonizationof local government chart of accounts to MOF/DLG J J Governments facilitate consolidation with central government accounts. 2. Support to weaker District assemblies to bringthem to DLG/DS date on their accounts and reconciliations. J 3. Support the introductionof internal audit functions. DLG/MOF J 4. Recruitment of top managerial and other support staff. DLG/MOF J 5. Training needs assessment, followed by provisionof J DLG/MOF J training. J 6. Parastatals 1. Establish means to control expenditures as well as focus MOF J J on revenue generating activities. 2. Consideration should be given to the merging o f MOF PEkMUinto the DSC to strengthen the monitoringand J control capacity and reduce duplication of responsibilities. J 3. Corporate governance, based on the code developed for MOF J J Malawi should be put inpractice in the runningof parastatals. 7. T h e 1.Implementation of the proposed merger between MAB/ J Accountancy S O C A M and PAEC. S O C A M Profession 2. Undertake an accounting manpower study projecting S O C A M demand and supply inMalawi in both private and public J sectors. 3. Develop necessary training for accounting cadres for S O C A M J J new local assemblies, as well as members of PAC. 4. Financial support to the profession to foster good S O C A M J corporate governance, and the use of international J standards. 8. Private 1.Support to the Registrar of Companies to carry out its Justice J J Sector mandate. 2. N e w Act to establish the Securities and Exchange RBM Commission and compliance with I O S C O requirements J 3.Enact new Insurance A c t RBM J xiv SECTION 1. INTRODUCTION 1. Malawi remains a very poor country with difficult development challenges: limited natural resources, landlocked position, weak human capital base, poor social indcators, high incidence of HIV/Aids, environmental degradation, and heavy reliance on tobacco and maize. To promote growthand reduce poverty, the country has to move systematically on a broad front. Inrecent years, Malawi has made progress in consolidating i t s young democracy, improving macroeconomic performance, and implementing structural reforms. However, growth has been moderate (3% to 4% per annum) and annual inflation has remained high (30% in September 2000), partly as a result of slippages in fiscal and monetary policies and partly as a result of unanticipated external factors leadmg to sharp depreciations inthe exchange rate in 1998 and 20001. 2. On the macroeconomic side, there has been progress in reducing trade tariffs, prioritising expenditures, improving financial management, and establishmg a revenue authority, but expenditure controls remain weak. On the structural side, key cross-cutting sectors (transport and telecommunications) have been liberalized, but the electricity and water utilities continue to experience financial difficulties and many enterprises remain under public control. Within the social sectors, community-led development initiatives remain strong and primary school enrolment rates are hgh with near parity between boys and girls, but the quality of education remains a problem. The Government of Malawi now has a strategic plan for controlling HIV/AIDS, but the health sector i s in crisis. Progress towards sector-wide programs in the social sectors has also been slower than expected. The Needfor a CFAAin Malawi 3. A CFAA is considered by the Board of the World Bank to be an important buildingblock and, in many countries, a necessary prerequisite for preparing the World Bank Country Assistance Strategy (CAS)2. At the same time that the Bank plannedto take a new CAS for Malawi to the Board in2002, the Government ofMalawiwas finalizing the f dPovertyReduction Strategy Paper (PRSP). The development of the CAS was therefore being developed inparallel with the PRSP to ensure that it was fully compatible with and supportive of the PRSP. The CFAA would be an important input into both the CAS and the PRSPprocesses. Inelaborating their next CAS, the World Bank intended to be more strategic and selective in determining the level, type and sectoral composition of support to the Malawi Government's poverty reduction strategy. The World Bank would also examine the possibilities of shifting from discrete project-based lending to a more programmatic approach, financing credits w h c h supported reforms meeting performance benchmarks inkey sectors. 4. Changes in the donors and World Bank`s business over the years-the introduction of adjustment lending, debt relief, increased lending to social sectors, and the growth of sector programs-had reduced the relative importance of trachng indvidual borrower transactions as a source of fiduciary assurance and increased the importance of the performance of borrower institutions that managed these transactions. The donor community's development objective (better management of all public financial resources) and fiduciary objective (assurance on the use of funds) were thus increasingly aligned. There was a greater appreciation of the limitations o f "ring-fencing" donor funds as a source of fiduciary assurance in an otherwise weak financial accountability environment. ' World Bank,Country Assistance Strategy ProgressReport, November2000 T h e Country Assistance Strategy (CAS) i s the primary document by which the Board of the World Bank evaluates Bank Management'sassistance strategy towards a specific country. 1 5. For these reasons, it is important that the donors and the Government of Malawi has a sound understanding of the broader financial accountability environment within which their operations are implemented, are able to assess the risks that these arrangements may pose to their programs and funds, and work to strengthen accountability arrangements as part of the essential institutional infrastructure needed to support poverty reduction programs. A CFAA provides a mechanism for understanding how these systems operate, as designed and inpractice. 6. In recent times, the Government of Malawi has also undertaken various initiatives to strengthen the country's financial accountability framework. These include the review of financial management practices of the Integrated Financial Management Information System (IFMIS)3 architecture; early piloting of the IFMIS; and the reform of the Finance/Audit Act. A number of other issues have also been brought to the surface in the Bank's work in Malawi. One is decentralization and the discussions about the design of intergovernmental fiscal transfers. The design andimplementationof the IFMISwas funded under the World Bank'sInstitutionalDevelopment Project11. 2 SECTION 2: PUBLIC SECTOR CENTRAL GOVERNMENT - 2.1 BUDGET PREPARATION, IMPLEMENTATIONAND MONITORING The MediumTerm Expenditure Framework 1. The Medium Term Expenditure Framework (MTEF) has been introduced progressively since 1995 to develop a strategic approach to budgeting over the medium-term; to improve resource allocations in accordance with emerging poverty reduction priorities; and to integrate the investment and recurrent sides of the dual budget. I t also introduced logcal frameworks to assist line ministries in defining their mission, goals, and program objectives, and Activity-Based Budgets (ABB) to enhance program costing and classification inbudget presentationd. 2. The MTEFwas intended to correct some of the problems of the budget process inplace at the time. The first central problem was the failure to link policy m a h n g and planning to the recurrent budget. Although the development budget was generally well prepared by planners and based on overall Government policy and planning, the recurrent budget was not planned and was generally prepared o n an incremental basis. 3. The second central problem was that the budget system was focused on the short-term rather than the medium to long term. Not only were budgets prepared for one year, but in addition, the recurrent and development budgets were subject to separate analysis. Ths led to a strong upward bias in development expenditure and a shortfall in recurrent expenditure needed to maintain the development projects. 4. The MTEF has improved the definition of goals and objectives across government and the use of logical frameworks has facilitated the translation of these goals and objectives into strateges and actions. In addition, a macro-economic framework has been developed to project resources for three years, facilitating forward budgeting. 5. Nevertheless, there are serious flaws in the operation of MTEF, and it has not lived up to expectations. Inparticular, implementation of intra-sectoral prioritisation has been limited, largely as a result of the failure to integrate the MTEF fully into the budget system. Inaddition, progress has been slow in developing a system of forward budgeting, of integrating recurrent and development budgets, and of developing adequate costing exercises. 6. The Government of Malawi (GoM) has lacked the capacity to produce realistic costing of priority exercises and projections of resource flows. These are at the core of any MTEF-based analysis and are essential in moving from abstract policy priorities to concrete budget proposals - to bridge the gap between policy-making and implementation. The inaccuracy in forecasting resource availability (both in terms of annual levels and timing) and the costs of planned activities are key causes of the major disparities between budgeted and actual expenditure. 7. The first phase of MTEF failed to address the problem of costing of activities. Despite the success of recent attempts to introduce costing exercises in some line ministries (for example, in the Mnistry of Education, Sports and Culture's Policy Investment Framework), costing has not been integrated into the budget process. Ths lack of costing has meant that unfeasible policies have Malawi Public Expenditures: Issues and Options, World Bank September2001 persisted and hence too many activities have been attempted relative to the resources available, undermining the implementationof the budget and leaving many priorityactivities under-funded5. 8. At present, there are no behavioural macroeconomic models that, among other things, could be used for revenue forecasting. The Reserve Bank of Malawi (RBM) is developing a Financial Programming Model to assist in revenue forecasting. Reliable data for projecting revenue is not available, and the Malawian economy i s unstable and fragde. Under current macroeconomic conditions, accurate forecasting i s extremely difficult. 9. Adding to these problems, the timing of foreign inflows is very difficult to predict, largely due to conditionality. Sometimes, even after conditions have been met, there are delays in transferring funds. These delays adversely affect budget implementation and undermine the whole process of MTEF, as Treasury cannot fund ministries accorlng to their priority areas. 10. T h e failure of the MTEF i s also to a large extent the result of ownership and attitudinal problems. The lack of consultation with stakeholders and participants during the initial implementation of the MTEF, coupled with a lack of information and therefore understandtng of the MTEF process, have together created a perception of narrow ownership of the MTEF. It is perceived by many that the MTEF i s a process owned by the external donors and the Budget Divisionof the Ministry of Finance. This perception reinforces the separation of the budget process and the MTEF. 11. The relationships between MTEF and other reform initiatives such as the Public Expenditure Review (PER) and Vision 2020 are not well understood. Instead of these initiatives forming a united reform effort, they are often seen as conficting exercises forced upon the Government by rival donors. As a result, there i s little enthusiasm for them across Government. 12. This lack of ownership and understanding is particularly important at the senior level, where managers may be tempted to ask for information based on the old budget system. Thus, their subordinates will be forced to continue with old systems in parallel with the MTEF and the MTEF will continue to be a marginal activity de-linked from the budget process. Recurrent Budget Preparation 13. The recurrent budget preparation cycle formally begns when the Ministry of Finance issues a Treasury Circular advising ministries to start preparing their budgets. Overall themes and priorities for the budget are communicated in this and subsequent Treasury Circulars. Budgets are revised, aggregated and merged into one document, and final adjustments are made before presentation to Parliament. 14. The draft budget document is sent to Parliament for further review, approval and the passing o f the Appropriation Act authorizing Government to draw funds from the Consolidated Fund. Treasury consolidates and draws up the approved budget. The Wnister of Finance issues a General Warrant authorizing the Controlling Officers to incur expenlture on the approved budgets. The Secretary to the Treasury then issues a Treasury Circular Minute informing the l f f e r e n t l n i s t r i e s o f their approved budgets. If passing of the Appropriation Act i s delayed by Parliament, the Minister of Finance issues a Special Warrant authorizing Controhng Officers to incur limited expenlture on their budgets subject to the passing of the Appropriation Act. W h e n the Appropriation Act is passed, a General Warrant supersedes the Special Warrant. ImplementingMTEFinthe MalawiEducation Sector by Oxford Policy Management,May 1999 4 15. The preparation of individual ministry budgets is supposed to be done through Activity Based Budgeting (ABB). ABB was introduced as part of the MTEFreforms in order to facilitate the implementation of prioridsation by the MTEF process and to enable improved monitoring of expenditure. ABB is intended to reflect the new output focus of public expenditure management. In addition, ABB allows for a bottom-up approach to budgeting since individual activity based budgets are prepared by cost centre managers. Inpractice, this has been the mainbeneficial impact of ABB. 16. The conflict between ABBs and line item budgets is a central factor in the continued separation of the MTEF from practical budget preparation. The confhct i s largely caused by the failure to include the accounting staff both in sectoral ministries and at central level (the Accountant General's Office) in the introduction of the MTEF. For accounting purposes, the line item input based budgeting i s still necessary. Development Budget 17. The development budget is a summary of investment expenditures, comprising mostly of capital and supporting operating costs. It accounted for 37.3 percent of the overall budget in 1999/00 and this share has trended upward over the last five years. As in other developing countries, most of the development budget in Malawi is donor-funded. To achieve the country's goal of economic growth through poverty reduction, a large proportion of the development account i s allocated to health, education, community services, water and sanitation. 18. Between 1995/96 and 1998/99, donor contribution to the development budget ranged between 80 and 85 percentb. The heavy reliance on foreign resources to finance the development budget raises a number of concerns. These include uneven commitments of foreign resources, uncertainty of disbursements and the budgetary implications of debt servicing. 19. One of the activities to be undertaken in the implementation of the MTEF is the integration of the recurrent and the resource allocation budgets. So far, very little has been done by both the Government and donors to acheve t h s objective. BudgetCo-ordination 20. Coordination i s lacking at all levels. The absence of a clear relationshp between the Ministry of Finance and the National Economic Council creates a co-ordination gap between planning and implementation at the macro-level. The recent creation of the M i n i s t r y of Finance and Economic Planning has helped resolve these problems, as the planning and macroeconomic roles o f the National Economic Council are to s h f t to the Ministry of Finance and Economic Planning. However, the exact role of the National Economic Council and the timing of the transition remain unclear. 21. Inthe Ministry of Finance, the relative roles of the Economic Affairs,Budget, and Debt and Aid Management Divisions need to be defined. Currently there is some duplication of effort and more importantly, several functions that are not being performed. For example, economic and sectoral analysis o f aid flows is often not done, as it i s unclear where the responsibility lies between Debt and Aid Management Division and Economic Affairs Division. 22. The third level of co-orchation problem occurs between the M~nistryof Finance and the line ministries. A frequent complaint from those in the line ministries i s that the Budget Division of ~~~ ~ MalawiPublicExpenditures- Issues and Options, September 2001 5 the Wnistry of Finance does not give adequate and timely guidance, or incentives. For example, in recent years, the Ministry of Finance has been persistently late in providing sectoral ceilings for the Budget. In addition, the lack of communication between the Ministry of Finance and the line ministries has encouraged the perception that the MTEFand other institutional reforms are "owned" by the Ministry of Finance. Inorder to fully implement an MTEF-based budget, effective leadership from the centre of Government is needed. 23. Co-ordination between the Ministry of Finance and the line ministries depends to a large extent on the desk officers who form the day-to-day link between ministries. There have been recent attempts to build the capacity of the desk officers, for example through training in costing analysis. However, the shortage of officers remains a fundamental problem. Co-ordination problems also exist between planning and finance staff within the line ministries. 24. Finally, there has been a problem of co-ordination between Government and donors. Donors often press for their own projects and policies without taking into account the overall sector policy or budget. In addition, dfferent donors often demand separate sectoral reviews that take up the time of those in the ministries concerned. Strong Government leadership is essential for the donor co-ordmation issue. Such leadership requires that Government demonstrates its ability and wihngness to implement realistic policies and activities. K e y tools in achieving this objective are the Sector Investment Programs (SIPS) and Sector Wide Approaches (SWAPS). Budget Implementation 25. The Budget Implementation Committee composed of Treasury and the Accountant General oversees budget implementation. Despite this, however, the management of budget implementation has to some extent been complicated by the unclear relationshp between Treasury, the Accountant General, Office of the President and Cabinet (OPC) and the National Audit Office (NAO). 26. The persistence of considerable off-budget expendmre i s a key symptom of failure of budget implementation. This is partly due to the lack of realism of budgeted expenditures, but i s also the result of a failure to properly enforce the Budget. Extra-budgetary requests that were intended as contingency measures to cope with genuine crises have become a standard part of the budget process. Ths trend has a perverse effect on the budget process as some ministries propose secondary priorities during normal budget formulation exercise, while saving real priorities such as utilitybills for extra-budgetary requests (Annex 2). 27. Execution of the planned budget is further complicated by high inflation, exchange rate volatility, and fluctuations indonor assistance. Delays indonor disbursements have led to highintra- year domestic borrowingand hgher than forecast interest payments on domestic debt. In addition, exchange rate volatility affects programs that are heavily dependent o n imports. Cash Budget 28. In 1996 Government introduced the cash budget system as a temporary measure to increase fiscal dscipline. The system remains in place as the central tool for budget implementation. The central principle o f the cash budget system is that government spends only what it collects and that indlvidual ministries spend only those funds released by Treasury into the ministries' accounts in commercial banks. Suppliers have been repeatedly informed that they should not supply goods or services to government on credit. 6 29. Inorder to manage the cash budget system, Treasury has developed a cash flow system so that all expenditures are based on expected inflows. The cash flow indicates what government expects to have as inflows and t h s i s used as a basis in arriving at fundingto ministries. Inorder to come up with a government cash flow, Ministries are required to submit their own cash flows for the whole year. Treasury consolidates h s and matches it with government inflows. In order to refine the system, Treasury plans to advise ministries in advance if their cash flow will not be honoured. However, t h s can be hampered by unforeseen delays in disbursements of loans and grants from donors. 30. The cash budget system has had some success, as evidenced by the reduction in the accumulation of arrears. However, implementation of the cash budget has faced many problems as demonstrated by the fact that ministries continue to accumulate arrears regardless of various circulars to the effect that purchases should be made on a cash basis only. Firstly, this is due to technical problems associated with the unpredictability of donor inflows and departmental receipts. Secondly, the cash budget has so far failed to change the prevailing attitudes in government towards budgeting and expenditure. 31. Although the basic rationale of the cash budget system - to ensure that government spends only what it collects - is consistent with the MTEF, it nonetheless causes problems. Inparticular, ministries' planned activities may be delayed or cancelled because of unpredictable cash flows. While such problems may indicate a lack of realism in planned expenlture, they may also be a result of seasonality inrevenue collection and expenditure needs or of delays in donor assistance. 32. The cash budget system has also failed to create a shift inattitudes towards an understanding of the need to maintain hard budget constraints, as demonstrated by the persistence of arrears. In many line ministries, the impressionthat extra funds can always be obtained from the M m i s t r y of Finance continues. Thus, budget constraints are seen as soft and that budget allocations are not "locked in". This i s perpetuated b y the significant proportion of funds that is allocated to the Ministry of Finance in the budget, the willingness of the M l n i s t r y of Finance to fund extra-budgetary expenlture inthe past, and loopholes in the Finance and Audit Act. 33. The introduction inMay 2000 of the Credit Ceiling Allocation System (CCAS) was designed to improve the cash budget system, with all ministries being informed of their updated monthly spending ceilings on a quarterly basis so as to improve cash flow projections. These ceilings, rather than allocations in the Budget, will form the budget constraint. In addition, rather than paying this allocation into the individual ministries' accounts in the commercial banks, the commercial banks are informed of the credit ceiling for the month and are instructed not to clear any cheques issued in excess of t h s ceiling. Cheques'withm the ceiling are cleared on a ddy basis through the Reserve Bank of Malawi (RBM). T h i s corrects the anomaly whereby Government was borrowing its own funds, whle commercial banks were purchasing Treasury Bills using the large deposits put into individual ministries' accounts at the beginningof every month. 34. Under the CCAS, reports detailing commitments made for future expenditure are to be presented together with the existing expenditure returns on a monthly basis. The c r e l t ceiling allocation for the relevant ministry will then become the funlng level net of commitments, which wdl be paidfor separately at the appropriate time. It is hoped that this will eliminate the buildup in arrears that has undermined expenditure control efforts in the recent past, by ensuring that all expenditure commitments are honoured and accounted for. 35. The CCA represents the maximum amount of cash expenlture that a ministry can incur. These ceilings are issued by the Accountant General for each ministry, and then communicated to the RBM and commercial banks where ministries have accounts. According to the cash budget 7 system, the RBMis supposed to reimburse commercial banks for cheques presented for payment by ministries. Cheques in excess of CCAs are not supposed to be honoured by commercial banks, nor shouldthese banks be reimbursed by the RBMfor transactions inexcess of ceilings. 36. In practice, however, some commercial banks continue to honour cheques presented in excess of the ceilings. Inthe absence of sanctions such as requiring banks to meet interest payments for transactions in excess of the cedings, the practice is likely to continue. In addition, poor information flows to the central bank on CCAs and supplementary CCAs have at times led to inadvertent RBM reimbursement of commercial banks for overpayments. Differences between the RBM and Ministry of Finance in terms of supplementary CCA amounts are also undermining the system. 37. The continuing recurring claims from line ministries that exceed CCAs are indicative of deeper compliance and control problems, specifically, the relationship between Ministers and the Controlhng Officers of line ministries, Principal Secretaries (PSs). The extent to which mnisters should be entrusted with the executive role in line ministries continues to be a source of much debate, includmg competing interpretations of the Constitution. From the point of view of the Malawi's Public Service Act, PSs are the administrative heads of line ministries and therefore responsible for ensuring ministry-level compliance with financial and procurement regulations including the CCA and Commitment Control Systems. Budget Monitoring 38. The current monitoring system i s based on each ministry submitting monthly expendture returns to Treasury. Non-submission of these returns leads to withholding of any further fundmg. The returns are consolidated and presented to Cabinet on a monthly basis. 39. At the time of assessment, preparation of the annual financial statements has been completed and audited only up to 1998/99. This lag i s due to delays accumulated within line ministries, the Accountant General's Department and the Audtor General's Office. In addltion, coverage of the audited financial statements tends to fall short of recommended modern public sector accounting practices as promulgated by the International Federation of Accountants; specifically, they fail to dmlose commitments and arrears, selected assets and liabillties, as well as contingent liabilities. 40. Although it is fundamental to accurate in-year fiscal reporting, bank reconciliation' lacks consistency or comprehensiveness. Certain amounts in line ministries are not reconciled at all w h l e others, though reconciled, are replete with clerical and procedural errors. At times, certain items that are found to be irreconcilable are not investigated, rather they are simply carried forward. OngoingReforms 41. A number of significant improvements have been made to budget management inMalawi in recent years that are increasing the level of fiscal transparency. Notable examples include the development of a sophsticated classification system, the introduction o f MTEF budgeting process and the pending introduction of a new IFMIS. Through IFMIS and with the introduction of the MTEF it is expected that the budget process in government will be more transparent, enhancing accountability. IFMIS is intended to help address most of the problems faced in monitoring 7 Inh i s report for the year ended June 30, 1998, the Auditor General states that a number of minitries and departments experienced difficulties in maintenace and reconcdiadon of the Votes Ledgers, Commitment Ledgers, and very often bank accounts were left unreconiied for longperiods. 8 government expenditure. However, experience of installing similar systems in other countries has demonstrated the need to proceed with caution and to have adequate transitional arrangements in place. Assessment of the Current System 42. Considerable fiduciary risks still remain in the budgeting system in Malawi, particularly with regard to budget execution. There are obvious risks attributed to inadequate assurance that allocated resources are used economically and efficiently for the intended purposes and beneficiaries; there i s insufficient comfort that value for money is obtained and this positionhas been cited in the various reports of the Aultor General. Mechanisms to ensure that allocated budget resources are utilized efficiently to lead to the intended outcomes are substantially weak. Lack of compliance with established financial and procurement regulations have rendered ineffective many initiatives aimed at strengthening the control environment. Some of the major factors attributing to this situation are noted below: The existing reporting arrangements are inadequate, time consuming and focused on inputs rather than outputs. Monthly expenditure returns submitted by some ministries are late and/or unreliable. These problems are to a large extent the result of a lack of enforcement of the sanctions against late and inaccurate reporting such as withholding of funding. As a result of the late and inaccurate nature of many expenlture returns, there has been inadequate verification of the consistency of actual expenditures with the Budget. Although the potential gains of the MTEF concept are yet to be fully understood, appreciated and unlocked, it i s hoped that greater effort should be made to link budget inputs to outputs. This will require the use of reliable monitoring and evaluation instruments which can be complemented b y IFMISto provide management with information for timely decision making. The existence of poor linkage between policies and budget process has made it impossible to measure outputs from activities where resources have been used. MTEF based budgets are expected to ensure that policies are linked to budgets and that outputs can be determined and measured. With greater involvement of stakeholders, for example throughthe PRSP consultations, it is very probable that reality check mechanisms can help to install discipline and positive attitude in public service delivery. This should be complemented at the &strict level through the decentralization process. A lack of private sector participation inthe public budget management system is still a major area of concern. This weakens accountability and makes it difficult to justify any support from the sector. Transparency and accountability of the budget process i s adversely affected by lack of understanding of the planning and budget process among stakeholders, i n c l u l n g Members of Parliament, line ministries, about the basis of calculating funds released, and the sometimes late and less than the indcated releases inthe budget. Finally, domestic revenue shortfalls against projected forecasts is undermining the ability of government to sustain a reliable and dependable level of service delivery. Realistic costing of policies and budgets cannot therefore be overemphasized as an important element of public expenlture management. 9 43. The analysis of the prioritisation o f the development budget also reveals a number of issues that need to b e revisited. These are noted below: The manner in which the development budget is handled needs improvement. There are many projects that are beingimplemented outside of the recorded Government development budget. Thus the recommendations made o n the basis of this kind of analysis of the development budget may be questionable. The development budget contains a considerable proportionof expenditures that are operational innature while at the same time the recurrent budget also comprises a number of capital items. This situation raises issues on how both the development and recurrent budgets should be analysed. In addition, operating expenses in the development budget have tended to grow over time, covering items like personal emoluments and goods and services, whch are normally associated with the recurrent budget. Capacity to implement the development budget is also a critical area. The analysis of three major sectors hghlights the considerable number of separate project implementationunits handling the various donor-supported projects. This situation arises from the differing implementation arrangements pursued by donors. W h i l s t t h s may be convenient from the donor's point of view, it is cumbersome for Government. These processes should be synchronized so that there is minimal duplication of effort. The issue of prioritisingthe development budget seems to be quite complicated inpractice. Ths highlightsthe need to devise some basic guidelines for setting priorities that could be applicable both within and across sectors for ease of analysis. The Ministry of Finance, in close consultation with implementing agencies, is responsible for preparing the development budget and all activities in monitoring, funding and evaluation of projects. Ths arrangement, however, does not fully involve key players like the National Economic Council (NEC); the M l n i s t r y of Foreign Affairs and International Co-operation; the Department of Local Government and District Administration; the Office of the President and Cabinet, and others: 9 NEC is responsible for preparing the development policy of the Government and its participation should ensure that the projects being designed and implemented are consistent with nationalgoals; 9 The Department of Local Government and District Administration shouldbe involved in the preparation and implementationof the development budget so that it adequately assists the district assemblies inthe formulation and implementation of their programs; and k Given that donors fund around 80 percent of the development budget, it is important that the Department of International Co-operation of the M i n i s t r y of Foreign Affairs and International Co-operation participates in project financing arrangements so that foreign missions abroad can be intouch with foreign sources of financing. 10 Conclusions and Recommendations 44. The budgetingprocessis basedon a stronginstitutionalandlegalframework; however, there are still improvements needed to enhance this process. T h e following are some key recommendations for the medlumto longterm: e Improved and realistic cash revenue forecasting is imperative. Appropriate tools and relevant information should be used to help achieve this goal There is need to improve the quality and timely availability o f data. The Financial Programming Model initiated by the Reserve Bank o f Malawi should be improved and used as a tool for macroeconomic modelling. T h e timing o f resource projections should be improved further by increased donor co-ordination. e The Ministry o f Finance should put in place adequate incentives and penalties, for Activity-Based Budgeting to become a reality. This may involve, for example, reducing the budget allocations to ministries that do not provide an output based budget within a three-year horizon. e The completeness o f the budget framework would be achieved by ensuring that, as far as is feasible, all funds from development partners are planned and programmed as part o f the MTEF. T o this end, the MTEFshouldbepursued to ensure that itis the only fully adopted formal mechanism ofinstilling discipline at alllevels o f govemment. e The budget execution should b e enhanced by strengthening the MTEF process, linkinginputs to outputs, and effective implementation o f the output based budgets; improving fmancial accounting and reporting, including regular monitoring and evaluation o f the budget outputs. e The transparency o f the budget process should be further enhanced by improving the information and knowledge base (through education and training) o f Parliamentarians and other stakeholders in order to participate more meaningfully in the budget process; and facilitating the participation o f Parliamentary Committees in more detailed discussions with the Ministry o f Finance about policies, plans and performance at different stages o f the budget cycle. e Lack o f clear definition o f responsibilities for expenditure and the absence o f sanctions against those responsible for deviations from the budget are some o f the constraints affecting budget execution. There is, therefore, need for punitive measures to be introduced in the new Finance Act for the Controlling Officers who continue to receive goods and services o n credit leading to accumulation o f arrears. e For the Budget to be enforced and respected, the expenditure retums must be checked for consistency with the Budget, andwhere there are serious deviations, the necessary sanctions must be applied. e There is need to integrate the development and recurrent budgets to enable meaningful analysis to be carried out o n the overall public expenditures. This process would also remove problems inthe treatment o f operating expenditures and capital investments inboth the development and recurrent budgets. e There should be one machinery for implementing the whole development budget, and a deliberate strategy put inplace to integrate all extra-budgetary contributions to the Govemment's development budget booked by donors. This would enable Govemment to keep track of all expenditures incurred in the name o f development inthe country. e Sectors should be looked at intotality when prioritising the development budget, so that no critical areas are inadvertently omitted. This is important as in some instances, sectors are not necessarily synonymous with sector ministries and overlaps occur. For example, issues o f water sanitation, nutrition, irrigation, adult education, etc. tend to be sidelined as they are not in the mainstream sectors o f health, agriculture and education. Insuch cases allthe concemed institutions should be involved. 11 12 2.2 ACCOUNTING AND FINANCIAL REPORTING Legislative and Regulatory Environment 1. T h e Finance and Audit Act, CAP 37:01*, governs government accounting and financial reporting in Malawi. In addition, Chapter XVIII (Sections 171 to 184) of the Constitution of Malawi provides the broad legal framework for the management and control of public funds in Malawi. 2. T h e Constitution grants the Minister of Finance the mandate to manage and control government finances through the Consolidated Fund. Subsequent operational guidelines are issued by Treasury in the form of Treasury Instructions (Finance and Stores)9 and Treasury Circulars to guide Controlling Officers and Warrant Holders how funds and assets should be sourced, managed and controlled. The Accountant General's Department i s empowered to direct and guide the accounting function inthe government and to manage the cash resources. 3. Historically, the Ministry of Finance has been responsible for the process of planning, executing, accounting and reporting public resources in the government. There are elaborate and well-documented guidelines and procedures detailing how the process works, with clear separation of roles and functions between various government departments. Parliament through the Appropriation Act empowers the Minister of Finance to expend sanctioned budgeted allocations, on the basis of GeneralWarrants authorizing withdrawal of funds from the Consolidated Fund. Current Systems and Procedures 4. The Accountant General is responsible for maintainingthe official accounting records of the government and the preparation of the annual financial statements for audit by the Auditor General. These financial statements represent the formal accountability documents of the Executive, and are submitted to Parliament. The Accountant General i s also responsible for recording and reconciling the principal government bank accounts, and for cash management. 5. The Accountant General, based on advice from the M i n i s t r y of Finance, also formally issues the credit ceilings, which authorize ministries and departments to make payments from bank accounts and allow banks to honour such transactions. Where ministries and departments raise revenue and are allowed to use a part of that revenue to fund expenditures, the Accountant General examines the evidence of revenue collection and then issues supplementary c r e l t ceilings. 6. Each ministry also maintains i t s own accounting records of revenue and expendture. These records are used for day-to-day monitoringpurposes and for the generation of monitoring reports for submissionto the hlinistry of Finance. The Ministry of Finance aggregates all monitoringreports from various ministries and departments as well as other information to generate consolidated monitoringreports of expenditure. The consolidated report is then usedto prepare fiscal reports by the M i n i s t r y of Finance. 7. A Commitment Control System (CCS) has recently been introduced to control expenditure at the commitment level and to help identify the buildup of any arrears. Ministries and departments have bank accounts with commercial banks w h c h operate on a reimbursable basis under which they The Act i s currently being reviewed in order t o improve the legal and regulatory framweork for financial management in the public sector. 9 T h e Treasury Instructions were published in the early1970s and have not been comprehensively reviewed since then. 13 make payments as instructed by the ministries and departments and seek daily reimbursement from the Reserve Bank of Malawi (RBM). 8. The system i s fundamentally cash based accounting, and substantially manual and labour intensive. It is basically simple and easy to maintain. However, its simplicity has been overwhelmed by the numerous and sometimes complex transactions and demands of government and donors. As a result, the system i s no longer able to produce reliable and complete financial information and audited accounts ina timely manner. 9. The release of funds from Treasury i s based on the budgetary allocation, and dependent on the revenue mobilized from various sources. In practice, however, funds are usually released by rationing the available funds as determined by the Ministry of Finance, and not on the basis of proportionate dlstributionacross the ministries and departments. 10. Once the funds to be allocated to each vote are determined through the cash budgeting process, t h s information i s communicated to the Accountant General who records and formally issues the CCAs, which represent the maximum amount of cash expenditure which ministries can incur. The CCAs are meant to be the formal limits beyond which the commercial banks should not make payments on agencies' behalf, and the Reserve Bank of Malawi (RBM) should not reimburse commercial banks10. The CCAs are also meant to b e the formal ceilings for all payments plus outstandmg commitments. 11. The Accountant General is the official source of the government's accounting records and reports including the annual financial statements. These reports are subject to audit by the Audltor General and the audited financial statements are required to be submitted to the Public Accounts Committee of Parliament through the W s t e r of Finance. In addition to the annual financial statements, the principal forms of reportinginclude the fiscal reports and the monitoringreports. 12. The Ministry of Finance produces fiscal reports on a monthly basis, which show revenues, expendtures, and financing items. The salient features of these reports are then commented uponin the reports submitted to the Cabinet Committee. T h e fiscal reports are generated from a range of sources, as the government does not have any up-to-date data in one central source. Fiscal reports reveal substantial shortcomings epitomised by two main problems: significant discrepancies between above- and below-the-line data, and incomplete, and sometimes inconsistent coverage. 13. M u c h of the discrepancy arises because there are no comprehensive and up-to-date accounting records from w h c h fiscal reports could b e constructed. As a result, the fiscal reports are constructed from information obtained from a range of sources, and there appears to be some inadequacies in controls and systems to ensure that the data are subject to appropriate quality assurance processes. 14. Another factor that may contribute to the dfferences i s that certain externally financed development expenditure i s funded on a reimbursement basis. The government initially pays for the expenditure, and these payments affect the monetary data. However, t h s itemi s not recorded inthe fiscal data untilreimbursement claims are processed. 10While thls arrangement represents some additional administrative workload for commercial banks where ministries and departments have their accounts, this remains within reasonable boundaries. The number of bank accounts (one per ministry or department) and the nature of the task required from the commercial bank (equivalent to an overdraft ceiling) remain manageable even if frequent adjustments to the CCA may be burdensome. Also the arrangement includes a compensation for commercial banks (as percentage of the value of the operations). 14 15. Ministries are required to report their expenlture and receipts in specified formats to the M i n i s t r y of Finance. The reports are received at the Monitoring Section, which reviews the reports for reasonableness and consolidates the information. The consolidated reports are part of the information presented to the Cabinet Committee. They also feed into the fiscal reports. 16. The expenditure information in the consolidated reports shows all cash expenditure irrespective of whether they have been funded through the original cash allocation or the supplementary allocation. This means that the comparison of cash allocation and expenlture as shown in the consolidated reports is misleading and limits the effectiveness of these reports as a management tool. 17. The main objective of the consolidated reports, as implied by its name (linking cash funding with expendture), appears to be to show the extent to which cash allocations havebeen expended by ministries. As indicated above, the cash funding and the expenditure are computed on different bases and, as a result, the expenlture as a percentage of cash i s of limited usefulness and can be misleading. Thus, ministries show expenditures w h c h exceed the cash allocations. However, no conclusion can be drawn from this information as to whether there i s a case of genuine over- expenditure which shouldtrigger some follow-up action, or whether the excess expenditure has been funded by supplementary allocation. 18. Because the entire Government operates cash based budget and accounting system, there are no accruals, receivables (debtors), prepayments and payables (creltors). Inventory of all types of assets are often maintained, but at the ministry level which do not form part of the accounting system. Verification of these records is not a regular activity, except when a u l t o r s would include it intheir audit programs for testing. 19. Government financial reporting and accounting is primarily based on the mandated scope as stipulated in the Treasury Instructions legally backed by the Finance and Audit Act. The Government prepares appropriation accounts detailing the receipts and payments of public monies from the Treasury by each line ministryand department. OngoingReforms 20. A number of reform initiatives are ongoingwith a view to enhancing greater accountability and efficiency inthe Government accounting framework. One is the review of the Finance and Ault Act, which seeks to improve the legal and regulatory framework for financial management in the public sector. The review also seeks to provide for the independence of the Aultor General. Another is the project to put in place an IFMIS that will help link the different and fragmented operations to form a comprehensive framework for the accounting practice in Government (inclusive of lstricts) for better and more informed decision-making. Assessmentofthe CurrentSystem 21. The Auditor General's" annual reports have cited numerous instances where fraud, wastage and poor accountability and failure to reconcile relatively huge balances in Government accounts, have for many years not been attended to. In addition, suspected corruptions in transactions have not been broughtto conclusion. Others issues are notedbelow. "TheAultorGeneral's reportsusuallyshowsubstantialoverspendinginvariousministriesanddepartments, aswellasa large number o f irregulaties and acts against regulations. Auditor General's report for 1997/98. 15 22. There appears to be a lack of completeness, accuracy and reliability of Government accounting and reporting. Certain transactions are not fully captured in the accounts. In situations like these, the true and fair view concept in accounting may be uncertain, especially where the items are materially affecting the accounts, e.g. where state enterprises are so much indebted that they have negative working capital, leaving them technically insolvent, yet they continue to operate with financial support from both mululateral and bilateral donors through project funding. Furthermore, expenditures funded directly by donors (mostly project accounts) are either not included or are not fully reflected inthe annual financial statements that are presentedto Parliament. 23. There is little control at the Ministry of Finance or Accountant General's department to ensure that all revenues collected are in fact duly brought into account. The responsibility for tax revenue collection and accounting rests with the Malawi Revenue Authority (MRA). The MRA submits reports on revenue collected to Ministry of Finance. Ths information is used to generate the fiscal reports. Non-tax revenue i s collected and required to be accounted for by the collecting agencies. T h e main issue in the area of revenue accounting and recording i s the relative lack of central supervision, and monitoring and reporting at the consolidated level. The revenue reported by the MRA i s accepted by the Ministry of Finance and included in fiscal reports without comparing the information with the bankmg details. 24. The financial statements are so out of date that they cannot be used for fiscal management purposes. Under the Finance and Audlt Act, annual statements of accounts are required to be prepared and submitted to the Auditor General within six months after the close of the financial year. The audit i s required to be completed and the report of the Auditor General submitted, through the Mmister of Finance, to the Public Accounts Committee of Parliament withn five months of the receipt of the accounts by the Audtor General. Unfortunately, the financial statements are not produced within this timetable. The latest audited financial statements that were made available at the time of t h s assessment inDecember 2001, related to 1998/99. 25. The basic accounting transactions are also significantly out of date. The Accountant General's records do not appear to make any useful contribution to the day-to-day management or the macro fiscal management process. This is because, in addtion to the delay in the production of the financial statements, the basic accounting transactions are also significantly out of date. The main reason for this delay appears to be that the system i s neither decentralized nor effectively centralized. The Accountant General has the responsibility for recordng transactions but is dependent on ministries supplying the source documents. If errors are found in the source documents these are sent back to the ministries. Ths process can occur several times and i s very time consuming. 26. Bank reconciliation procedures have significant deficiencies. Bank reconciliation is a fundamental accounting control procedure that should be routinely performed in all organizations. Althoughthe Accountant General and the ministries perform bank reconciliation to some extent, for various reasons these are not comprehensive, timely, or properly prepared. It appears that commercial banks, in particular, have been slow in providng bank statements. In other cases, the Accountant General has requested more detailed information from the banks, w h c h has not been forthcoming. Although the RBM indcated that they could produce bank statements relating to a month by the lothof the followingmonth, these are not always available intime. 27. Reports used by management emanate from ministry records and are not reconciled to the Accountant General's records. The delay in recordmg transactions by the Accountant General means that reports, such as the fiscal and monitoring reports cannot be reconciled to these official records. There is, thus, a risk that the information presented in these reports may b e different from those o f the Accountant General. 16 28. All expendture may not be reflected in the budget. Donors may deposit money in project bank accounts that are outside the budget, and the subsequent dsbursements not recorded or reported in the main system. These transactions do not appear to be restricted to development projects but may also include certain recurrent expenditure, such as travel. Certain donors may also provide aid-in-kind and often these may not be captured in the system. These transactions, however, are of interest in assessing the effect of the budget on the economy and should be included in the fiscal reports as appropriate. 29. Assumptionand/or settlement of parastatals' debts may not be accurately reflected in the fiscal reports. The Government may, for various reasons, decide to assume the debts of parastatals or agree to settle such debts. For example, the Government recently settled some debts of parastatals to a third party as part of an arrangement to settle utility arrears. In cases where the Government actually settles a parastatal loan incash, the monetary data may include the cash outflow but it may not be included as a repayment of arrears in the fiscal reports. Where the Government assumes the liability for a parastatal loan, no cash transaction takes place and, therefore, no expenditure i s recorded inthe system. Conclusions and Recommendations 30. The Government has made efforts to review accounting systems but this work has been rather slow, due to capacity constraints in terms of human and financial. Government should consider the following short to medium term recommendations: Pursue the development and implementation o f I F M I S to introduce an accounting system based on principles o f best practice, and advance fmancial management reforms for improved financial accountability and transparency inthe public sector. T h e Accountant General should reconcile the revenue reports o f the Malawi Revenue Authority (MRA)with its accounting and banking records, as a standard control mechanism. The reports o n amounts collected and amounts deposited that are furnished by the MRA should be used for this exercise. Written confirmation should be obtained from the Reserve Bank o f Malawi that it has adequate controls to ensure that reimbursements to commercial banks do not exceed Credit CeilingAllocation. Improvements to the existing manual systems should be supported until I F M I S is fully operational and formally acceptedby the Government. Systems and processes should be overhauled to improve the timeliness o f official records and reports. Accounting and bookkeeping functions should be fully decentralized so that ministries are responsible for transaction recording and reporting. T h e Accountant General should receive reports from the ministries and consolidate this information to generate monthly financial statements. Clearing and/or regularizing material non-reconciled items. Inaddressing the backlog, it may be necessary to create a special task force, or alternatively, contract a private fm to assist the staff in the Accountant- General's office. 17 18 2.3. INTEGRATED FINANCIAL MANAGEMENT INFORMATION SYSTEM Introduction 1. The Integrated Financial Management Information System (IFMIS) project was initiated in 1996, with the objectives of providing timely and accurate financial information; providing a standardized integrated financial management reporting system for the Government of Malawi (GoM) managers at various operational levels; providingthe Accountant General with a GoM-wide upgraded computerized accounting system; and improvingand strengthening financial control. 2. A pilot phase that would deliver the core accounting system in the Ministries of Finance, Agriculture and Education was expected to be completed by end June 2002. Implementation of activities relating to this phase began in December 2001 and the system was being piloted in the Accountant General's Department (AGD), the Department of Information Systems and Technology Management Services (DISTMS) and the M i n i s t r y of Finance (MoF).The rollout phase would start at the beginning of 2002/2003 financial year for a period of about 3 years. 3. The project involves the implementation of CODA financials software supplied and maintained by International Computers Limited (ICL), and includes the installation of the following core accounting systems: Budgeting, Funding, Commitment Planning and Control, Payment, Receipting, General Ledger and Cash Management. ICL are also the suppliers of all the computer hardware. 4. The CODA financials would interface, electronically, with the following subsidiary systems: Payroll, Pensions and Gratuities, Staff Advances, and Imprest, Aid and Debt Management. It will also receive data from the following manual systems: Fleet Management, Investments, Stores Management, Fixed Assets Management and Losses Register. 5. The Personnel, Payroll, Pensions, and Advance Integrated (PPPAI) project, funded by the Malawi Government, was initiated in 1997/1998 to implement Personnel and Payroll systems. In 1999/2000 Pensions and Staff Advances modules were added and were still being implemented. The provider and implementer of the system was UNIPRO Software Enterprises based in England, with maintenance from UNIPROAfrica based inMalawi. 6. The payroll for the whole of the civil service was fully operational in eleven sites/hubs in Lilongwe. The development work inrespect of the other PPPAI modules is at an advanced stage. Present Position 7. Project Management. In a draft document for IFMIS project management structure for roll-out and pilot phases, the Government had proposed the establishment of a project team whose objectives were to provide adequate and skilled personnel, at all levels, for participating Ministries and Departments, and create awareness of IFMIS project throughout the Government. T h e overall direction of the project, both technical and advisory, would be provided by a Steering Committee (SC) composed of Principal Secretaries and supported by a Technical Committee VC) w h c h would initially receive policy recommendations from the project team for review and approval. At operational level, a project team, under the overall direction of the Accountant General would be established to ensure orderly implementation of the project. T h i s team would be the prime mover of implementation throughout Government. All consultants under IFMIS would report to the Project Manager who, in turn, would report to the Accountant General through the Deputy Accountant General (deputy Project Director). Roles like change management and quality assurance are not separated from the core project team responsibilities. 19 8. Project Plans. The mandates for the IFMISTechnical Committee and Steering Committee provide for monthly and quarterly meetings respectively; however the SC committee had not been meeting as planned. The IFMISproject I d not have strict procedures, such as regular status reports to the TC and SC, to enable management to monitor the progress of the projects. In addition, a review of the project plans revealed missing activities (for example, activities related to change management, system administration, and post Go-Live support), and lacked detailed cutover plans for the pilot phase. Consequently, it was difficult to determine whether the current IFMIS plans were realistic, complete and updated. 9. Technical Skills and Training. The IFMIS and PPPAI projects implementation teams were lacking adequately skilled personnel. For example, the roles of IFMIS system and database administrator, and functional consultant, appeared to be held by one staff member. There were no Information Technology (IT) developers for both PPPAI and IFMIS, and the supplier was performing all the development work. Adequate training had not been provided to both the IFMIS and PPPAIprojects team members. 10. Pilot Phase. The pilot phase of IFMIS had been launched in the Accountant General's Department, the D I S T M S and the Ministry of Finance. In addition, work on reconciling bank balances was behind plan and consequently no reconciled balances would be available in IFMIS duringthe rolloutphase. 11. Configuration. The current system configuration included one IFMIScentral server located within the Accountant General Department; separate Local Area Network (LAN) within each Ministry; a Local I F M I S server, in each Ministry, to w h c h several PC clients were connected via the LAN; and Local IFMIS server connection to Government Wide Area Network (GWAN) to facilitate the update of the IFMIS central server. The current design was that each Ministry would process and store, in its local server, an IFMIS database. A schedule would exist to facilitate the loading of data from each Ministry's server onto the central I F M I S server in the Accountant General's department, probably each night. 12. Recovery Procedures. The government document entitled "Systems Administrative Procedures" identifies the importance of performing regular back-ups of data files. However, it fell short of providingdetailed guidance on how the procedure should be carried out. At the time of this assessment, backup procedures for the Accountant-General's production server had not been performed for the previous 3 months. Any attempt to recover this server in case of failure would only occur with lengthy disruptionto the processing of current transactions. 13. ITArchitecture. The government IT architecture included the hardware, networks, and all facilitating services and software necessary to process applications, store data, and communicate with computer users. Network resources were only functional at Capital Hill. The network links between Capital Hilland satellite offices at district level had not been installed, while the network link between Capital Hilland City Centre were under installation. The PPPAIproject implementationwas fully supplier-driven with little involvement of government personnel. An IFMIS help desk had not been set up, while the CODA applications documentation had not been customized to fit into the government business processes. 14. Segregation of Duties. System duties had not been segregated to minimize opportunities for unauthorized modfication or misuse of data or services. One IFMISproject team member had unrestricted access to several system-related functions. Ths member can also log into production system, without being effectively monitored, with both a Level 8 capabhty (security and user master changes), and a Level 7 capability that also provides unrestricted access to everythmg, except Level 8. 20 15. B u d g e t Preparation and Execution. The plans being dxussed in Treasury/Budget to develop a n e w budget preparation and modelling tool were not being co-coordinated with the IFMIS project. T h e following IT systems were currently in use within the Ministry of Finance to support the budget preparation and control process: Budget Preparation System (E5PS); Expenditure Monitoring System (EMS); Commitment Control System (CCS); Debt and Aid Management System @&AMs); and Public Sector Investment Program (PSIP). There was need to ensure that the approved budget was transferred onto IFMIS which would be the core module to manage commitment accounting and ensure that ministries and other Government agencies &d not overspend. 16. Payroll. Government had implemented the payroll system ineleven sites inLilongwe. Ths was a s i p f i c a n t achievement in that all GoM employees were being paid using the new system, and certain basic statistics on its estimated workforce and wage bill could be generated from the new system. A phased implementation strategy for the PPPAI project implementation had resulted in payroll going live ahead of other modules. The project had collected and captured, in ten server sites, basic human resource data. 17. Amid these achevements, however, there were concerns that the payroll was not yet stable. Information disappeared from employee remuneration statements without explanations; there were double deductions for the same wage item, and basic salary payments were made without appropriate deductions being made. Authorization procedures had not been satisfactorily configured and as such security profiles in payroll &d not comply with good principles of internal control as regards segregation of duties. Payroll processing took too longand the `ghost' workers problem had not been eliminated. In addition, an employee master record may appear in more than one payroll site thus contributing to data redundancy, considerable increase in processing time and opportunities for double payment to an employee. 18. There was also no automated interface to IFMIS. At the moment the intention was to load payroll results onto IFMIS using Microsoft Excel based upload text files that would considerably undermine internal controls. It would appear that certain employees, particularly those on contract had not been linked to their correct salary grades thus leading to erroneous salary payments. There was no integration within the PPPAI modules. As a result, employee personnel numbers were generated in a system in the DHRMD and recreated inpayroll applications at several sites invarious ministries. Ths created opportunities for data inconsistencies; likelihood of errors; and duplication of effort as the same data was independently input into different systems. 19. The eleven sites in Lilongwe running payroll were not linked within the GWAN, contributing to the current shortcomings of lack of management information at corporate level. Assessment of Current Position 20. The existing IFMIS project management structure was not effective to provide oversight on project activities, as some responsibilities were not expressly defined in the structure, and senior management responsibilities were not maximized to provide the required leadershp. 21. The Government has not provided sufficient resources to change management activities within the IFMISimplementation. One of the major causes of failure of major projects like IFMISis attributed to lack of addressing change management issues that arise from the introduction of new ways of conducting business. 22. The project does not have effective procedures and mechanisms to monitor project plans, and escalate the resolution of issues that hinder progress. Plans are also incomplete and are not regularly reviewed by the Technical Committee. 21 23. With the assistance of donors, progress has been made in meeting a significant part of the training needs of the end users. However, training of the IT staff falls short of needs. Inadequate skilled staff may result in inefficient and ineffective services leading to a negative impact on the quality of systems and information produced. 24. Although the pilot phase has been launched in the Accountant General's Department, in DISTMS and in the Ministry of Finance, there were no clear guidelines formulated to measure the success of this phase, and no contingency plans had been developed should the results of the pilot phase prove unsuccessful. 25. The proposed sewer configuration appeared complicated. Firstly, it would be extremely difficult to maintain fifty or more servers; secondly, the massive task of loading data from each ministry onto the central server would be cumbersome, and would involve significant system administrator time. 26. The draft "Systems Administration Procedures" document does not cover all contingency related issues, and offers little guidance on the exact steps to take to remedy systems failure and ensure continuity of business with minimum disruptionof operations. Conclusions and Recommendations T o achieve the benefits that I F M I S is expected to deliver, Govemment needs to review the proposed project management structure and introduce those aspects that would add the greatest value. The roles o f the Steering and Technical Committees should be strengthened to include other key employees o f the Govemment. T h e govemment should appoint a change management team with relevant skills to identify and manage organizational change management issues. There should be quality assurance to provide an independent view o f the project at pie-determined scheduled dates, and document review findings and provide written communication and recommendations to both the Steering Committee and the Program Director. Both the Technical and Steering Committees should meet frequently to decide on technical and business issues, to approve project deliverables and review project costs against approved budgets. The current project plans should be revised as soon as possible to incorporate missing activities. Detailed cut-off plans should be prepared and implemented for each site before "Going Live". Project management should devise methods for continuously monitoring and reporting on the following aspects: scope o f the project; costs (budgets) and variances; schedules and variances; user satisfaction at all stages; project team productivity and satisfaction; and achievement o f management's expectations and user requirements. G o M should assess human resource requirements for I F M I S and PPPAI and institute a recruitment process to cover any gaps identified. Back-up staff should be identified. Training gaps appeared to be surfacing quickly because of staff changes. I F M I S and PPPAIstaff training requirements needed to be assessed, and a formal training program designed to meet emerging training requirements. Procedures should be developed and implemented to ensure IT staff were continuously trained on technologies adopted by Government. There were advantages o f having a pilot phase within I F M I S implementation especially because detailed acceptance testing o f the I F M I S applications has not been conducted yet. However Government should also be aware o f the risks involved and take measures to develop procedures, and criteria o n how the pilot phase would be judged. There should be adequate acceptance testing o f the system in case the pilot phase h a d to be abandoned and the new systems made operational earlier than planned. Bank reconciliation should be performed o n a current basis, and other data clean-up procedures put inplace to ensure that reliable and timely data was available for migration to the new applications during the rollout phase. The government should consider adopting a simpler configuration that minimizes maintenance and backup procedures, and provides up to date information. Various options should be explored and discussedwith the C O D A consultants to find a suitable solution. 22 0 There should be backup procedures, including off-line storage, for individual applications to minimize recovery time. The controls in place for security, fire, other natural hazards and general computer room physical access were inadequate, while the I F M I S and PPPAI servers at Accountant General's site were insecure. There should be restricted access to the computer centre through a digital entry system mounted o n a fire door. 0 Network links between Capital Hill and City Centre and other satellite offices at district level should be installed to support software rollouts to those locations. All computer equipment should be connected to clean and stable power supply. 0 Government should establish formal organization and supporting procedures for a help desk facility in DISTMS. Adequate and complete technical, operations and user-related documentation inEnglishlanguage should be in place before the consultants leave the project. There should be need to develop a long-term solution relating to IFMIS / PPPAI support. For example, an I F M I S / PPPAIcompetence centre should be established to take over the support functions after all sites have gone live. 0 The information systems organization structure should provide for the segregation o f activities. Information systems staff should not have access to transaction origination or correction, nor for changes to the application tables or master fies ina production system. 0 The government should evaluate the C O D A system budget module (as opposed to procuring an independent one) against the detailed requirements o f the Ministry o f Finance. Shortfalls should be identified andmeasures put inplace to enhance the CODA budget system or acquire additional budget tools or packages that automatically interface with IFMIS. 0 I F M I S needs to be developed further and additional functionality added to support Credit Ceiling Allocation (CCA) strategies. The CCA and commitment control functionalities are provided for in funding and commitment mechanisms o f IFMIS. This should be the responsibility o f the Budget department rather than the Accountant General department as is currently the case. 0 There should be a full assessment o f the PPPAI project's outstanding work. Some o f the outstanding work include implementation o f remaining modules; integrating all the modules enabling interchange o f data and utilization o f one database; development o f user documentation in all areas including printing o f reports; training o f the users; implementation o f an audit trail log, and implementing a workflow document management system. 23 24 2.4. INTERNALCONTROLSAND RECORDMANAGEMENT T h e L e g a l Framework 1. The legal basis of internal control in the public sector is the Finance and Audit Act, which describes the duties of the controlhng officers. In particular, Section 15 declares the respective officers to be subject to Treasury instructions among others, to keep records. Important records are required to be transferred to the National Archives, whose legal aspects are defined in the Laws of Malawi, Chapter 28:01, National Archives Act. Record management is governed by Treasury instructions (Finance), Chapter 25. Internal Control 2. A number ofinternal control procedures do exist ingovernment operations. These measures are, however, not adequate to ensure effective controls covering the control environment, effective information and communication, and risk assessment. 3. Internal controls are strong only on paper. The focus of control i s still on compliance with rules and regulations, and on integrity of the financial statements. The aspects of economy, efficiency and effectiveness of operation are not yet integrated inthe definition of internal controls. 4. Accounting systems in the ministries and departments are mainly manual and therefore prone to error. Supervision is often inadequate. Procedures are often not followed, resulting for example in the existence of a backlog of reconchation o f bank accounts with the Government's accounting records. 5. The government wide implementation of I F M I S i s expected to facilitate improvements with regard to these issues. For example, reconciliation of subsidiary ledgers with general ledger could become easier if properly applied. However, there i s no comprehensive involvement of controlhng and audit needs included inthe design and pilot-phase implementation of IFMIP. Record Management 6. Record management is generally weak. Document retrieval i s often difficult; storage facilities are generally not safe from fire and water; and only manual records are generally inplace. 7. The retention periods defined in the Treasury instructions (Finance), Chapter 25, appear appropriate, but are in fact often exceeded. For example one could find vouchers of the previous seven years in the accounting department of a ministry, even though the instructions require that these should have been sent to the National Archves much earlier. OngoingReforms 8. Several programs are now being implemented to improve financial management within the public sector. . N e w Treasury Instructions are aimed at the development and establishment of appropriate rules and effective controls for expenditures, procurement and revenue collection (e.g. complete implementation of computerised accounting system w h c h provides ex ante controls; review and ''HELM Corporation Ltd (2001). Government of Malawi Financial InformationSystems Strategy 2001/2003 25 revise financial rules, standards and procedures; IFMIS, interim improvements in timeliness of . accounts). The work on the new Treasury Instructions i s planned after the new Public Finance Act i s inplace. The European Union consultancy for the establishment of a records management system for the National Archives, the National Audit Office, and the M u i s t r y of Finance. Conclusions and Recommendations There should be clearly defined responsibilities and incentives for controlling officers necessary to improve financial management. Such arrangements should have legal backinginthe new Finance Act. Control schemes in the ministries should be undertaken. Internal control features after the implementation o f I F M I S should be analysed after the successful pilot-phase and implemented in the new Treasury Instructions. Record management should be defined as a special responsibility in each ministry and agency and the necessary training provided to staff to improve record management practices. 26 2.5. INTERNALAUDIT LegalFramework 1. Ingeneral, the statutory framework13 for the internal audit function inthe Government of Malawi i s the Finance and Audit Act which provides for the Minister of Finance to issue directives for the proper management of government resources. Therefore Internal audit exists as a result of directives from the Treasury. The central internal audit function of government rests with the Accountant General's Department. Assessment of Current Position 2. InJune 1999, the Board of Directors of the Institute of Internal Auditors approved the followingdefinition ofinternal ault: "Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes." 3. The above definition of the role of internal audit is missing from the set up in the Malawi government, and a narrow focus on financial and compliance a u l t is in place. T h i s initself i s not a major weakness so long as recommendations arising from internal audit reviews are acted upon. The internal audit function i s very rulmentary, and is mainly limited to pre-audit operations of approving payment vouchers. The housingof the function in the Accountant General's Department also makes t h s function unlstinguishable from the normal functions of the Department. 4. Guidelines for internal auditors were prepared in 1986l4, have not been updated, and are outdated as they do not embrace the current developments in this function. For example, there i s no provisionfor the audit of the internal controls related to electronic data processing (EDP). A number of personnel are also not aware of the contents of the guidelines, and in certain cases the actual existence of these guidelines. 5. Central agency support for the internal audit function is lacking. A comprehensive internal a u l t strategy for the Government i s under discussion with the aim of establishing internal a u l t as a central tool for defining and monitoringmanagement objectives. 6. The independence of the internal audit function to set i t s own program i s lacking; rather internal a u l t heads are reluctant to dwell in areas perceived as sensitive. More importantly, staff are being used inpre-audit operations of approvingpayment vouchers. 7. The internal audit departments suffered from lack of qualified personnel, and those with quahfications often leave for better paying jobs inthe private sector and parastatals. l3 Except section 54 of the Local Government Act, 1998, which requires all Assemblies to have an Internal a u d t department. But also here, role, responsibllities and powers of internal audx are not described. l4 M i n i s t r y o f Finance, Accountant` General's Department, Internal Audit Manuals 27 Conclusions and Recommendations There should be established a strong central Internal Audit unit to provide an objective assessment o f the adequacy and effectiveness o f the Government's systems o f internal controls. T h e unit must be separate and should not have any management responsibilities other than for intemal audit. The operations o f the unitshould closely follow the guidelines laiddownbythe Instituteof IntemalAuditors. T o be effective, the head o f the unit must have sufficient status and seen to have the respect and support o f senior management. There should also be legal backing for the establishment o f an intemal audit inthe new Finance act. The central unit should be in the Ministry o f Finance, with the head reporting t o the Secretary to the Treasury. For day-to-day administrative purposes, staff in line ministries may report to the controlling officers inthose ministries, as long as due regard for preserving the independence are made. A focus on pre-audit is not recommended as this is an extension of management responsibilities on which the intemal auditors would be expected to carry out their review. The work o f the intemal audit should be derived from a comprehensive audit needs assessment. A separate budget allocation should be considered. The head o f the internal audit should meet periodically with the Auditor General (AG) so that the AG's work program may take into account the internal audit work and the extent o f reliance that the AG may place o n this work. 28 SECTION3: PUBLIC SECTOR - OVERSIGHT ARRANGEMENTS 3.1 EXTERNALAUDIT LegalFramework 1. Authority, responsibilities, and the independence of the office of the Auditor General, the Supreme Ault Institution, are provided for in the Constitutionof Malawi, Chapter 18, Section 184. Appointment of the Auditor General is made by the President and confirmed b y the National Assembly by a majority of the members present and voting. The Finance and Audit Act of 1989 gives powers to the Auditor General to examine and certify several statements and accounts required under the Act. The method of certification i s however not defined. 2. The Auditor General does not have complete financial independence, as the estimates of this office, the National Audit Office (NAO), as well as the cash releases, are scrutinised and controlled by the Ministry of Finance. Staff of the NAO are civil servants, and subject to civil service pay scales, which are not attractive enough to retain qualified staff.15. 3. The Auditor General i s required to submit the report of his audit findings to the Mlnister of Finance, who inturn i s required to table the same to Parliament. The Finance and Audt Act requires the statements of accounts to be submitted to the Audtor General within six months after the close of the year, and the Auditor General is expected to submit his report not later than five months after receipt of these statements of accounts. The Minister i s required to submit the report at the next sitting of Parliament, failing which the Auditor General i s required to convey such a report to the President and the Speaker of the NationalAssembly. 4. Ingeneral the Auditor General does not audit the accounts of statutory bodes. However, the Finance and Audit Act does give powers to the Minister of Finance to direct that the accounts of any statutory body may be audited or investigated b y the Audtor General. 5. To address the legal weaknesses of the Auditor General under the current law, the Finance and Audit Act i s being amended and split into two separate acts. The new Audt Act will establish an independent Audit Boardwhich will have oversight over the office of the Auditor General. Mlnistries and Departments 18 Donor funded projects and Treasury Funds 9 Establishment Records and Pensions/Gratuities 4 Performance Audit 3 Investigations 1 4 ComDuter ODerations and Audit 1 3 7. The National Audit Office has branches inthe North (Mzuzu) and South-Region (Blantyre) to undertake audits of the dstrict and local government administration as well as some major cities. Some of the financial statements of cities are audited by private sector audit firms. l5 Concerningthe high staff exodus related to the hgher remuneration levels inthe private sector and the parastatals, the AG writes in the report 97/98 @. 5):"It is however, pleasing to note, that Government has recently approved hiring on contract qualified accountants. Inview o f these developments, it i s m y belief that measures will be taken to ensure that the few qualified accountants remaininginthe service are retained with proper consideration." 29 8. The National Audit Office performs its tasks according to the INTOSAI-Standards of Auditing, as amended by the INTOSAI-Congress 1995 in Cairo, and is a member of the South African Development Community Organisation of Supreme Audit Institutions (SADCOSAI). Assessment of Present Position 9. The National Audit Office has staffing problems. There are only six qualified accountants and salaries are not adequate to attract people with the necessary shlls. The budget (about MWK 29 Million) does not allow for sufficient training. In the past the office has only been able to attract unqualified candidates who are then provided with a six weeks training course. Other training opportunities are only available with donor funds. 10. Resources are also not enough to perform audits of all ministries and departments each year; often enough, the audit reports of certain ministries refer to more than one (financial) year. There are also delays in auditing local governments. In practice, attention is focused on performing audits of entities that receive donor funding. 11. The Auditor General and two other executive officers are non-voting members of the Board of Directors of seventeen of the fifty-four statutory bodies; the rationale being that through this arrangement, the respective bodes do receive competent supervision and advice. However, the performance of most o f these statutory bodies indicates that any advice and supervision provided by the Audtor General does not appear to have resulted in any significant improvement; in the meantime, the independence of the Auditor General i s under scrutiny by h i s performing executive functions on entities which may be subject to h i s audit and investigation. 12. At the time of this assessment, the only computer software inuse was Microsoft Office, and only for the preparation of reports etc. All the au&t procedures for planning, controlling and handling audits were sull manual. The programs for the audits were mainly hand-written although many of them were identical. Discussions were underway regarding the acquisition of audit application software for planning, controhng and recording of audits using standard documentation (including audit workingpapers), and that for applying computer assisted a u d t techniques (CUT). 13. It is doubtful whether the Auditor General's office would in the short-run have sufficient computer proficient capacity to undertake an overview of the new InformationTechnology structure in the Government of Malawi and to determine if the relevant tests and reconciliation were undertaken. The audt work currently commenced with outputs from these systems. The ongoing IFMISproject was being implemented with only limited au&t considerations. The National Audit Office i s not part of the government-wide area network being implemented under the I F M I S Project, although a connection i s planned. 14. The Audtor General submits h s report to the Minister of Finance. This routing appears inappropriate considering that the Ministry of Finance is one of the institutions au&ted by the Auditor General. Itwould appear that all the requirements under the Act could still be met were the report to be submitted directly to the President and the Speaker of the NationalAssembly. 15. The Audtor General 's report appears to be a solid document with a detailed review of budget anomalies. Weaknesses in the internal control systems and in the internal audit function, and low public service morale means that the Auditor General must operate in a difficult environment. In many cases no replies are received from the audited institutions to requests for explanations of audit findngs. A response would only be forthcoming after a case was referred to Parliament. Rarely are those responsibility for irregularities held accountable for their acts. 30 16. T h e Auditor General's report i s often late, due to delays in the receipt of the relevant accounting information. For example, the financial statements for the year 99/00, due for submission to the Auditor General by the end of December 2000, were not received untilOctober 2001. The reports usually show substantial overspending in ministries as well numerous instances of material irregularities. However, there is no audit certificate issued o n these financial statements as promulgated by the INTOSAI on Aulting Standards (Chapter IV, Rep.orting on Government Auditing). OngoingReforms 17. Under a World Bank funded project the Finance and Audit Act i s being reviewed, loohng at existing audit methodologies, preparing audit manuals, and developing and testing value for money audits. U S A I D is also providingtechnical assistance and equipment supply, while technical assistance to institutional changes of the National Audit Office will next be provided, with Swedish and Canadian support, after the analysis by the World Bank team is completed. Conclusions and Recommendations The involvement o f the Auditor General and other executive members in the Boards o f Directors o f statuary bodies has the effect o f undermining the independence o f the office o f the Auditor General and should be avoided. Effective use o f the existing computer equipment should be made, for example, in the preparation of standard audit programs/working papers with easy modifications to suit specific cases. There should be stronger involvement o f private-sector audit companies while the capacity o f the National Audit Office was strengthened, such as inthe audit of financial statements of donor financed projects. Reform of the Finance and Audit Act should address major shortcomings including: financial independence, recruitment, tasks concerning parastatals, certification and audit opinion o n the financial statements. The delays in the completion o f audit work should be addressed by earmarking o f funds, assignment o f a task force inthe NAO to specifically address this issue, or by the involvement o f private sector audit firms. Training should be provided inthe field o f accounting, systems and performance audits. 31 32 3.2 PARLIAMENTARYOVERSIGHT 1. T h e constitution provides Parliament with the authority to approve the budget and to oversee public sector financial management. Two committees of Parliament, the Budget and Financial Management Committee and the Public Accounts Committee have more specific oversight roles. Budget and FinancialManagement Committee 2. T h e Budget and Financial Management Committee was established in 1995, and has been workingsince 1999. The Chairman reports to Parliament twice a year, and provides a counterbalance to the executive branch. The committee is referred to inthe Constitution, but not indetail. There is nomention of it inthe Finance andAudit Act. Ithas met every two months duringthe first year and a half of existence, with donor support. 3. The 13 members (2 members also sit on PAC) of the committee work well together in a mostly non-partisan manner and there i s a shared vision of the priorities, with poverty reduction being the entry point. The Poverty Reduction Strategy Paper (PRSP) paper addresses poverty reduction as a key government strategy, and if the budget is monitored effectively h s can play a critical role in reducing poverty. The key question is whether or not the budget i s responding to this and other policy priorities both sector policies and broader Government policies areas such as those related to HighlyIndebted Poor Countries (HPIC). 4. The committee deals with the Budget Director in the M.tnistry of Finance to understand the budget and to get more information when it is needed. There are also consultations with the National Economic Council, the Reserve Bank of Malawi, the Economic Association of Malawi (ECONAM) and the Malawi EconomicJustice Network. Public Accounts Committee (PAC) 5. T h e Auditor General's reports flow through the Minister of Finance to PAC. There are two types of reports: The annual financial report, and a Management Letter, also called an Inspection Report to an individual client or ministry. Inspection Reports become public when the letter i s issued. PAC picks up the most pressing issues and the Principal Secretaries from the affected ministries are called to appear before the committee. They normally prepare oral and written responses. They must be prepared to explain the cause(s) of problems, and to identify remedies, particularly where there has been mismanagement or misappropriation. 6. There are Treasury instructions stating that in cases of overspending, controlling officers are to be surcharged (i.e., a percentage o f what is overspent will be withheld from the officer's salary). There i s no statutory mechanism for follow-up on PAC recommendations. However, a practice i s evolving where PAC recommendations are followed up by the Office of the President and Cabinet, and at meetings of all Principal Secretaries. 7. Parliament normally meets twice each year, inMay-June to debate the budget for the coming year, and inSeptember-November to conduct other parliamentary business. There appears to be little debate on political consequences on the report tabled to the parliament. In special meetings, w h c h last about one month, the Public Accounts Committee (at the moment 11 members) discusses the reports with advice of the Aultor General and requests for comments and clarification from the 33 respective ministries. In most cases, there seems be not responses16. On the other hand the debate of the PAC is often very much delayed. For example, The results of the 1997/98 au&t report, presented in September 1999, had not been discussed at the time of this assessment in November 2001 in the PAC because the fundmg had not been secured for the meetings from Ministry of Finance. 8. Financial reports are available to Parliament, the media and the general public for review. These can be found at the Legislative Library of Parliament and at the Audtor General's library. Copies of documents can also be purchased from the Government printingoffice inZomba. 9. Parliament has not been particularly scrupulous in its oversight of financial management. The budget allocation document is a Parliamentary document, and it i s voted on by Parliament over a two-day period, line by line. The speaker does not allow for debate, but simply for a "yea" or "nay." Budgets appear to be arbitrarily allocated. From an oversight perspective, P A C does not recommend to the Executive censure of controhngofficers who exceed their authority.17 10. The Budget & Finance Committee terms of reference are unclear. There are no extended powers noted in the Constitution. Controlling officers and Mmisters are aware of weaknesses in the system and take advantage. OngoingReforms 11. A consultant has been retained by the World Bank to examine the institutional framework of the Auditor General and the Public Accounts Committee, and to make recommendations. Conclusions and Recommendations As the "people's people," members of Parliament, and o f the Budget and Finance Committee and the Public Accounts Committee need a greater capacity to know and understand financial statements, the framework withinwhich they are presented, andthe issues or possibleredflags that may appear. The committees need back-up, staff know-how, and the capability to monitor activities and to pursue an agenda. They currently lack institutional capability to perform as effectively as they might. All Parliamentarians need to know the issues. The PAC should be provided with technical and financial resources to enable it discharge its mandate. Training inthe interpretation of accounts, study tours andtwining arrangements should also be considered. 16 Example: Fourth meeting o f the P A C in the 30" Session o f Parliament from 6th to 31s'January 1997:Conclusions did not show evidence o f any hard sanctions or recommendations. 17The Fourth meeting of the PAC in the 30th Session o f Parliament from January 6-31, 1997. About half of the conclusions ended with "Your committee noted the explantion given" OR "Your committee requires a further report on..''. There was no evidence of any recommendations for hard sanctions. 34 3.3 ANTI-CORRUPTION BUREAU (ACB) Legislative Scrutiny 1. There i s a good balance between the Executive, the Legislative, and the Judcial branches of government in scrutinizing financial management. There are three key Parliamentary committees providingan oversight function, and their respective roles are outlined inthe Constitution and inthe Anti-CorruptionBureauAct. These are the Public Appointments Committee; the Public Accounts Committee, and the Legal Affairs Committee. These committees play a role in what the ACB does, as demonstrated in the recent case involving the M i n i s t r y of Education, w h c h resulted in certain individuals being successfully prosecuted for criminal acts. The director appeared before the Legal Affairs Committee to explainwhy he shouldget consent to prosecute. 2. Whether or not this system of checks and balances holds together is a function of the capacity of the individual and collective parts of the system. Other, richer nations for example normallyhave secretariat support for committees. There is also the issue of committees and agencies remaining within the scope of their mandates as defined in their terms of reference. Proposals for change must be debated in a democracy and the framework i s there to do that. 3. ACB policy direction comes from the Ministry ofJustice. The Director reports annually to Parliament and he can be summoned to appear at any time before Public Accounts Committee. The ACB is sometimes the agency of last resort for individuals who do not have their concerns addressed elsewhere. 4. ACB staff is made up of officers with varied background including lawyers and recent graduates, and private firms are sometimes retained to carry out certain specialised work. The ACB i s considered an attractive place to work. Officers are all on contract, and their performance i s reviewed annually. Public Access to Information 5. The ACB conducts public information and education sessions and delivers anti-corruption workshops in addition to the primary focus on investigations. Under law, only the Director can authorize an investigation. There is a ComplaintsReview Committee (CRC) of officers that reviews complaints and recommends to the Director to either investigate; refer (to the Auditor General, Justice, Ombudsman, etc.); or reject (frivolous, vexatious or unfounded complaints). T h e CRC i s a transparent way of dealing with complaints, and about 30 percent of complaints are taken up following the review and recommendationto the Director. 6. The public is mainly interested ininformation about investigations, and not inthe other but equally important activities of the bureau. The Director has worked with the media to temper their attacks about "lack of action'' when an investigation i s under way. Procedures are in place to deal with complaints, and these need to be respected so that no individualis unfairly castigated simply because a complaint has been lodged. When complaints are founded, the judiciary has mechanisms to deal with them fairly and the Director of Public Prosecutions decides whether or not to proceed based o n the technical merits of the case. Conclusion and Recommendation A dignified public forum conducted according to strict parameters, and held a couple of times each year could increase transparency and public confidence inthe system. 35 36 SECTION 4: PUBLIC SECTOR -LOCAL GOVERNMENTS Legislation and Institutional Framework 1. T h e development o f the system of Local Government was guided by a comprehensive Decentralization Implementation Plan, which was jointly appraised by the Government of Malawi and the donors inAugust 2000. The decentralization plan estimated a 10 year phasing, and contained a number of specific activities to be undertaken within the period 2001-2004, including important initiatives inthe field of financial management. 2. T h e development of the basic legislative framework and financial management procedures . had proceeded well, and most of the key legislation was inplace. The legal framework started with: the Constitutionof 1994 w h c h contained a few relevant articles on Local Government financial management. Section 149 of the Constitution contained provision for the establishment of a National Local Government Finance Committee (NLGFC) and defined its key functions; The Finance and Audit Act of 1989 which empowered the Mnister of Finance to manage the Consolidated Fund, supervise and control all matters relating to the financial affairs of the Government, includmg Local Governments (Part V); The Local GovernmentA c t of 1938 which also contained the Consolidated Fund principle. Section 46 required each Local Government to establish and maintain a General Fund, and all moneys received by way of revenue or grants to be paid into such Fund, and all expenses incurred by the exercise of powers and duties conferred upon them to be defrayed out of such a Fund.The Act contained the overall statutory requirements on financial management, and stipulated that the system should be based on democratic principles, accountability, transparency and participation of the people indecision-making. It was a framework law, w h c h needed to be supplemented by various regulations. The Act did not contain any rules on the roles and functioning of the Local Government Finance Committees, e.g. concerning the budgeting and accounting procedures. 3. A number of institutions played a major role concerning Local Government accountability issues: The Depaement of Local Government under the Presidents Ofice whose key tasks were to support development of manuals and regulations o n budgeting (financial orders), supervision and financial management and deliver support to the NLGFC, especially on the budgeting and accounting matters; TheDecentralizationSecretariat (OS) under the mnister of Local Government had a key role in the development of guidelines, training and mentoring of Local Governments. The administration of the District Development Fund (DDF)was also under the DS; The Ministy of Finance @OF) ensured that the financial management regulations were in accordance with the Finance and Audit Act and participated in the control of the disbursements of funds to the Local Governments. MOFwas also represented on the NLGFCBoard; 37 The National Local GovernmentFinance Committee (NLGFC), a newly established institution, w h c h performed a number of important tasks, among them: approval and consolidation of budgets; work on regulations and guidelines on financial management; support to training of politicians and staff; follow-up on audit reports from the National Audlt Office; and sanctioning Local Governments and staff where necessary; L n e MiniJt~es.In the initial stages of the decentralization process, the budgets of the decentralized sector activities would be incorporated in the line ministries' budgets. There was an important challenge to design strategies for decentralization of functions and define the funding to Local Governments; National Audit Ofice (NAO). In accordance with Section 54 of the Local Government Act, the Auditor General was mandated to perform audits of Local Government accounts at least once a year. The NAO responsibility for audit of the LG accounts was taken over from the Minister of Local Government in 1999/2000. The audit reports from 2000/01 would be the first reports under the new system, although the NAO also had to deal with a severe backlogs in previous accounting years; Parliament approved the formulae of Local Government grants and received and noted performance reports. In the event of financial irregularities, the NLGFC would carry out the necessary follow-up and sanctioning. BudgetingandPlanning 4. A range of institutional deficiencies and poor capacity continued to weaken virtually all stages of the budget process'*. A number of formal rules were not enforced. Rules and guidelines were also lacking incertain areas, especially concerning the budgeting process. Numerous reports had documented poor capacity inplanning and budgeting19, although some of the cities seemed to have a stronger basis for budgeting20. In some cases the District Assemblies had to help each other with the budgeting and the support from NLGFC during the budgeting process for fiscal year 2001/02 had been considerable and time-consuming. The budget was a one-year dual budget, divided into recurrent and development budgets. 5. At the agrgate level, the budgets were not consolidated, and therefore expenditures were not included in the total public budget. Fiscal Year 2001/02 was the first year the budgets would be consolidated. Due to the use of different accounting (classification) systems, the consolidation would only capture the overall total revenue (and types of revenues) and overall expenditure (recurrent salary and non-salary and development), not the detailed budget expenditure dlvided into various sector areas. 6. Due to the weak capacity in budgeting, a number of checks and balances had been introduced. The budgets and supplementary budgets had to be approved by the NLGFC, and the FY 2001/02 was characterized by a lengthy dialogue between the LGs and the NLGFC on the final budget approval. The final budgets were only approved in November 2002, i.e. five months into the 18PublicExpenditures:Issues and Options,iMalawi, The World Bank, September 2001. 19Among them the PublicExpenditures-Issues and Options, Malawi, The World Bank, September 2001. 20The variety in the budgetingapproach was indicatedby the fact that Blantyre City started the budgeting process for FY 2002/03 in December 2001, Lilongwe D A in March 2002. Evenin Blantyre City, the budget did not contain a description of the conditions for the budgeting, the demography, the socio-economic development, the risks, the challenges, oppormnitiesand future prospects,and there were only very few and brief comments on the figures. 38 fiscal year.21 T h e visited LGs were still awaiting official budget approval from the NLGFC. The mainreasons for the delays were late communication to the LGs on the size of the grants, deadlines and procedures, late submission from the LGs to the NLGFC 22, and a lengthy approval process due to the poor quality of the budgets. 7. The budgets contained all expenditures and revenues, except donor funding23. The lack of donor funds in the budgets made it difficult to consolidate public budgets and accounts and introduce fair and poverty sensitive grant systems. The background for the budget estimates, i.e. data, which could provide appropriate indicators on the fiscal position of the LGs, the future risk and opportunities, etc, were not included in the budget documents. There was only a comparison with the previous accounts24. As the budgeting process was in i t s infancy, the MTEF instrument had not yet been applied at the LG level. The system was strictly divided in a development budget and a recurrent budget, seen inisolation without the necessary trade-offs and mutualrelations. 8. The budget process was also characterized by a lack of involvement of the public stakeholders in the preparation and follow-up, i.e. NGOs, community groups and individual stakeholders. The process relied heavily on administrative input and discussions among the directors, and later approval by the LG Finance Committee and the LG assembly25. Except for the DDF,there were no detailed regulations on how the budget process shouldbe conducted. Financial information, including budgets, accounts (financial statements/ reports etc.) and other documents on financial management and Local Government finance were not available to the citizens. Budget Execution 9. The findings showed a mixed picture on the relationship betweenbudgeting and accounting. The dialogue between the LGs and the N L G F C had improved estimates of revenue and was expected to make the budgets more realistic. Generally, adherence to the budgets had improved over the last year, supported by the introduction of a new accounting system for the District and Town Assemblies. 10. Supplementary fundlng and changes of appropriations were to be approved by the LG Finance Committee concerning smaller items, and by the full LG Assembly concerning larger changes. Inaddition, all changes of budget figures have to be approved by the NLGFC as well. Ths requirement seemed not to be internalised yet at the LGlevel. Internal Controls and RecordManagement 11. The system of internal control and record keeping was generally weak, although the picture was mixed from the cities to the rural LGs. The Local Government Act requires development of internal control procedures, but, except in larger cities, this had not been done. Management had informed the politicians about the key requirements, e.g. concerning rules on conflict of interests. 21As an example the Budget for Dedza D A was submitted to NLGFC for approvalon August 13, 2001 for FY 2001/02 (approx.4 monthslate). 22Accordingto the LGAct the LGs shall submit the budgetsnot later than 90 days before the FY. Some of the LGs have only submittedtheir budgetsinthe middle of May 2001 for FY2001/02. 23BlantyreCitywas the only of the visitedLGs,whichincludeddonor fundinginthe budget andaccounts. 24Basedon review of budgetsinthe four sample LGs. 25As mentioned by one of the visited DAs, they start the budgeting process in March by discussions with the various &rectors and present the budget for approval inthe FinanceCommitteeand later in the District Assembly inApril without involvementof anybody else. 39 12. There was generally a lack of internal regulations on record- and store keeping, although most of the finance directors were aware of the problem and attempted to improve the system. Except for Blantyre City, which has a rather elaborate system, all visited LGs had problems with the safety and control of financial and other records. Computerization 13. A stand-alone computerized financial management system was being introduced at the LG level and would be tested intwo pilot district assemblies soon. I t was expected that the system would cover all DAs from March 2002. In conjunction with the introduction of the system, trainingwould be provided to the core staff by the DS, supported by the Danish Trust Funds/UNDP. Accounting 14. The accounting system was gradually being developed. The new Financial Management and Accounting Procedures for DAs have been introduced. The present accounting classification system for LGs was different from the Central Government (CG) system. A working group would be established to streamline the classification to facilitate consolidated public accounts. The charts of accounts (classification/coding system) varies from District/Town Assemblies, Cities/Municipality, and CG. The system also varies from city to city. This makes it difficult to consolidate the LG accounts and the LGand CG accounts. 15. The accounting system i s constrained by the fact that there are huge backlogs dating back to the period prior to the merging of the district commissioners office and the district councils offices - a period where two different accounting systems were inplace simultaneously. Reporting 16. The CG (NLGFC/DLG} currently receives quarterly and monthly reports on the use o f financial resources, although compliance falls far short of perfect and the yearly accounts are far behind the statutory requirements. While Section 149 of the Constitution requires a consolidated report on LG budgets and accounts, t h s has not yet been produced. The N L G F C is workmg to improve reporting, linked to incentives to perform. Transfers from CG will not be released in cases of non-compliance with the reporting requirements. The NLGFChas already withheld monthly cash payments to DAs which have failed to comply reporting requirements - an initiative w h c h seems to be efficient. Internal and ExternalAudit 17. The status on internal and external audit varies greatly from the rural to urban Local Governments. Both the external audt and the internal a u d t are not up to international standards in most of the rural LGs, but are generally in place and up-to-date in the urban areas. The external control is extremely important in a situation with few other financial control mechanisms, i.e. no public account committees to deal with accounts, lack of citizen control, and lack of internal controls. But the external audit i s generally weak in all the Local Governments, except for the large cities. 40 18. Information received from the National Audit Office showed the following status as at April 20012`: ExternalAudit Status: 0 3 out of27 DistrictAssemblies (DAs) accounts are audited up to 1999/2000(ie. up to date) 0 10DAs havenotjnalixedtheiraccountsfar l997/98 and 1998/99 0 Onb 14 DAs have auditedaccountsforl99G/97 0 2 out of8 TownAssemblies PAS)have auditedaccountsup to 1999/2000 0 4 out of8 TAshave auditedaccounts up to 1997/98 0 3 out of8 TAshave notjnalixedtheir accountsfor1998/99 All3 CitiesandtheMunicipalAssembbhadauditedaccountsfar1999/2000@.e. upto date) 19. The audit of the District Development Fund accounts showed that financial management and accounting varies in quality, with a generally acceptable standard in the six original participants to the DDF program, while weaker performance was exhibited by the 21 D A s who joined later. Most of these had qualified audit reports and the Decentralization Secretariat followed-up on audit of the DDF accounts by issuing letters to all the LGs, which had received adverse audit reports with clear requests to respond to the comments and improve the accounting. It was made clear that the funds from the DDFwould be withdrawn, untilthe LGs have responded sufficiently to the requests from DS and improved their accounts. This threat to sanction against non-performance has had a positive impact, as all 21 DAs have now responded and reacted on the enquiries and are eligible for future DDF support. 20. External audit inthe larger cities i s provided by private companies, selected by and financed by the cities after approval of the NAO. Both the recurrent and development accounts are up-to- date. It is the impression of the NAO that the backlog of LG auditing could be cleared within limited time provided that sufficient funding was transferred to the NAO and the planned support from donorswas implemented. 21. Local Governments are required to establish internal audit27 though most of them have not yet done so. Internal audit procedures and regulations are not developed, and it i s sull not clear how the internal audit will be organized. The cities, e.g. Blantyre City, have both internal audit and internal regulations in place, although the internal audit focuses mostly on financial pre-audit, not on performance, organizational and system audit. 22. The backlog of audits has generally hmdered a follow-up on the LGirregularities in financial management. In the few cases where audit has been done, there has been a lack of follow-up on the audit opinion and enquiries, and the LGs haven't responded to the questions raised by the external aultors28. The a u l t reports are not published, but only communicated to the chief executives, who are supposed to send them to the LG assemblies. 23. Inthe new system, the follow-up on the au&t reports is supposed to be done by the newly established NLGFC. There are no public local accounts and au&t committee either in the LG or in the Parliament to scrutinize the audit reports and follow-up on these reports. 26The situation hadnot changedmuch since April 2001 27Cf. the Local Government Act. The Act doesn't stipulate the organisation or the content of the internal audit. 28An exemption was the NLGFCs actions to improve follow-up, linked to the transfer o f DDF. 41 FinancialManagement 24. One of the most urgent problems concerning accountability is the lack of financial administrative capacity at the Local Government level. Most of the present &rectors of finance require sigmficant training, and new directors have to be recruited in many of the Local Governments. This i s managed by the Local Authority Service Commission (LASCOM), and the process i s financially supported by UNDP and Central Government. 25. Another problem is the capacity available at the Central Government level to support the capacity buillng at the Local Government level, especially in the Department of Local Government, the Decentralization Secretariat and NLGFC29. The limited capacity of the DS and the NLGFC has constrained the LGs possibilities to comply with the budget deadlines and requirements and the reporting on transfers of both the new block grants and the DDF. LocalGovernment Revenue 26. The Local Government A c t devolves a number of revenue sources to the LGs, but some of the important ones - property tax and business licenses - still remain to b e introduced. A number of legal changes and capacity building initiatives have to be implemented before the revenues can be effectively tapped. A pilot study, funded by UNCDF, has been conducted in the Nkata Bay District Assembly. The Study contains a number of recommendations on how to improve the situation over the next 30 months, and a related Action Plan. Lack of implementation of the LGAct provisionfor the LGs to collect licenses and property rates and administrative bottlenecks have constrained the LGs'ownrevenue sources. Ifthis is not solved, it poses a significant risk for the future sustainability of the LG system. The interim phase, in w h c h neither the CG nor the rural LGs collect taxes in these areas, also impacts negatively on the total revenue collection effort in Malawi. Even in the strongest cities, e.g. Blantyre City, the realized revenue falls short of budgets by approximately 30 to 40 percent. 27. Most of the LGs have considerable arrears, but the visited LGs estimated that they would be able to settle these withm limited time provided that the funds from CG were transferred according to the planned announced amounts on a regularly basis. A rough estimate of the arrears in the visited LGs was that these constituted between 10 to 30 percent of yearly budgets. Transfers from Central to Local Governments 28. A recent Study of IntergovernmentalFiscalTransfers, aimed at defining the proper amount of transfers and an effective mechanism for the allocation of revenue from C G to LGs,was finalized inApril 200130. On an interim basis, K250 million was set aside for fiscal year 2001/2002. Out of these funds, K15 milhonwas supposed to fund the NLGFC, IC35 milhon for salaries inthe DAs, and K200 million to be distributed as unconditional grants to the LGs. Compared to the Kl milhon provided to each LG in fiscal year 2000/01, the K200 million is a large increase in transfers. Parliament had to approve a permanent formula for the transfers inits next sitting. 29. The funds set aside for the unconditional grants have nearly been equal to the amount recommended in the study (5 O/o of the total public revenues excluding grants for development 29 A recent report suggests that it i s necessary to bring a number of traininginstitutionson boardinorder to cover the great need for LG capacity building.D S does not have the capacity to conduct most of the trainingin-house, cf. "Review of the Decentralisation ProcessinMalawi", A Joint ReviewTeam, November2001. 30 FinalReport,MalawiIntergovernmental Fiscal Study-April 2001, supportedby UNDP/UNCDF. 42 purposes). T h e transfers, w h c h are unconditional, were transferred on a monthly basis from July 2001. The disbursements of the funds to LGs for FY2001/02 have been as follows31: July 2001 August 2001 September 2001 October 2001 November 2000 16 M 13.8 M 0 0 16 M (Est.) 30. The salary component had not yet been transferred to the LGs, pending recruitment of new staff in the DAs. The NLGFC was to evaluate whether the financial management environment was sufficient to ensure proper accountability. It has the power to withhold funds untilthese conditions are in place. There are no clear and specific performance criteria for this, although the reporting for previous funds is a minimumcondition for future transfers. 31. The unconditional grant i s not "ring-fenced" as a public priority area. Intimes of reductions inthe public expenlture due to cash flow problems and declining revenues, the grant might come under attack, and has happened in August and September 2001. Therefore, MOF is considering includmg some parts of the transfers under the protected expenditure areas when the PRSP i s in place. 32. The study recommended distributing funds between the dstricts using a formula based on 80 percent in proportionto the population figures and 20 percent above average poverty leveP2. In practice another formula has been used in the interim period. The funds have htherto been dlvided according to the following formula: 10 percent equally to each DA, and 90 percent based on a 33 percent weight for population, 33 percent for infant mortahty and 33 percent for illiteracy rate. I t i s expected the formula from the study will be applied fromJanuary 2002 uponapproval by Parliament. Local Governments' own sources of revenues have still not been included as a criterion in the formula as a tool to enhance the incentives to improve tax administration. Furthermore, the formula does not take into consideration the dfferences inrevenue capacities amongst the DAs. 33. The funds are transferred from MOF to NLGFC and then to the LGs on a monthly basis. The LGs are required to forward montbb reports on utilization of the disbursed funds. The disbursement of the monthly instalments i s dependent on the accountability in the previous months. The LGs are required to submit monthly financial statements to the NLGFCin addition to quarterly accounts. Reporting delays from some of the LGs meant that the instalments of September and October 2001 were withheld b y the MOF. T h i s sanction covered all LGs, includmg those that submitted their accountabilities on time. The delay intransfers for September and October has had a negative impact on the LGbudget execution. 34. The utilization of the unconditional grants i s in principle based on the discretionary power of the LGs, but the DS has attempted to guide the LGs on the proper utilization of funds and to provide guidelines on the amount of funds, which should be used on development projects. 35. Experiences from the six local impact areas have shown that the DDF has worked well in Malawi and that the management of funds generally has been appropriate33. Financial management was stronger in the originally enrolled LGs and weaker in some of the newly DDF eligible DAs34. The DDF now covers all DAs, and has i t s own transfer system, accounting, budgeting and reporting 31 T h e figures for transfers are receivedfrom DS and are as per December 5,2001. 32 Jamie Boex, RandsonMwadiwa, ReckfordKampanje: "Final Report -MalawiIntergovernmentalFiscalTransferStudy", April 2001. 33 Draft PreparatoryMission Report - Danida Support to the National Local Government Finance Committee, Malawi, March 2001. 34 Various reports confirm that the DDF, despite these (up-start) problems, i s a viable and sound programme for disbursementof funds to LGs inMalawi. 43 accountability system. A new up-dated DDF Financial Management Accounting Procedures Manual was issued inOctober 2001. The system will make it possible to consolidate the development and the recurrent accounts. The system contains a rather elaborate coding system with divisions on functions and types of expenltures as well as the potential to track donor funds. 36. T h e present DDF divides the funding between the DAs according to the following weighting: 70 percent on population and 30 percent on equalization. Apart from the threat to abolish grants in cases where accountability is lachng, there are no incentives to improve financial management in the program. 37. All sector disbursements are still transferred through the line ministries and not lrectly to the LGs.It i s planned that this will be changed over time and will pose a further challenge on the LG accountability. Assessment of Present Position 38. The planned devolution of functions from the Central Government to Local Governments entails transfers of a significant share of the total public budget. The present estimate of the LG share i s less than 4 percent, but it is expected that t h s share will increase to more than 10 percent of total public expenditures over the coming 2-4 years 35. This highlights the future importance of sound financial management, control and accountability at the LG level. In addition, the Decentralization Policy stipulates that the LG should have increased fiscal autonomy for local priorities, a noble and appropriate aim, which has to go hand in hand with a strong emphasize o n compliance with the regulatory framework, enhanced accountability and transparency in LG financial management, and efficient legal supervision by CG authorities. 39. The status on LG accountability should be evaluated in the light of the short duration of the present LG system. The first elections under the present District Assembly system was conducted in November 2000 and a common system of LG financial management and accounting was only introduced in 2001. A high level of commitment, momentum and activity i s apparent withm most areas of LG financial management. 40. The basic policy and legislative framework was in place, guided by the Constitution, the Local Government Act and a clear decentralization Policy with a phased Implementation Plan. 41. The DS with support from Treasury (MOF) have designed a new integrated financial management and accounting system, and introduced the system for the &strict and town assemblies. The system i s presently applied in the DAs/TAs, and training has been provided to the staff in the finance departments. N e w guidelines on Financial Management have been prepared and lstributed while initial training of accounting staff has been conducted. The new accounting system seemed generally to be sound and was observed inpractise at the LG level; however some weaknesses exist onthe recurrent side. 36 35The Final Report on Malawi Intergovernmental Fiscal Tranrfers Stuaj, April 2001 suggests that the LG share o f total public expenditure will be 12.6 Yo after 2-3 years. The present LG share i s not clearly defined as data i s n o t avdable, but studles indicates that the size i s approx. 2-4 %. According t o the Final Report on the Malawi Intergovernmental Fiscal Transfers Study, April 2001, the sector grants should constitute approx. 27 YOof the total Government of Malawi national revenues (excluding debt service, refunds andretentions and pensions, etc.). 36Cf. Draft Preparatory Mission Report -Danida Support to the National Local Government Finance Committee, Malawi, March 2001, by EigdCarner Nielsen, p.12. 44 42. A computerized IFMIS is under development. Terms of reference for the technical specifications have been made, and the tender has been announced for a company to develop the software, introduce the system in two pilot sites, develop a training manual and coordinate the trainingof the users of the system. 43. A new interim transfer CG system, based on objective criteria and reportingmechanisms has been launched. Although the system is still open to improvements (e.g. in terms of making the transfers more stable, more timely, more sensitive to differences in LG revenue capacity, and less subject to cash flow fluctuations), the system is a substantial improvement on the previous one. The DDFdevelopment grant supportprogramwas expanded, and newprocedures introduced to include all DAs. 44. Draft LG Financial Regulations have been completed. Recruitment of essential LG managerial staff (district commissioners, finance directors, etc.) is ongoing, w h l e trainingin financial management for finance &rectors was conducted in December 2000. In addition 116 accounting staff were trained in the new accounting system. Training of the politicians in the LG Finance Committees was also ongoing. 45. A study on possibihties for enhanced resource mobilization on property and business licenses has been conducted. This i s a first step in a strategy to improve LG own revenue sources. A draft action plan is a part of the study. 46. Trainingneeds assessment of the National Ault Office has been done and funds set aside for limited training of audt clerks and middle to senior officers. A program to enhance the capacity of NAO has been designed and will be supported byDanida. 47. In the meantime, the system is characterized by a significant level of fiduciary risk and severe weaknesses in all the key links in the financial management chain. The successful implementation of the ambitious decentrahzation program hinges to a great extent o n the development of effective tools to mitigate risk. Without a strong push to improve the LG financial management systems, there wdl continue to be significant risks to the effective implementation of the whole decentralization program. It i s therefore positive that the Government has taken a strong stand on these problems, and seriously addressed the key weaknesses over a broad front. T h ~ si s combined with the present low capacity in all sections of LG financial management including a severe lack of qualified accountants and administrative backlogs inherited from the previous weak administrations before the present structure was established. 48. The introduction of a computerized IFMIShas the potential to improve the quality of fiscal data, but the benefits will only be realized if the internal controls and formal recording systems are properly maintained, and the necessary training and administrative back up i s provided. 49. Analysis have shown that the training activities are greatly inadequate to address the urgent needs to up-grade the staff in the LGs's skill and that training providers other than the Decentrahzation Secretariat are needed. There i s a huge need for training, both in financial management and inthe new roles of staff and politicians when further tasks are decentralized37. 37A recent report - Review of the Decentrahsation Process inMalawi, November 2001, Joint Donor Review suggest that a number o f traininginstitutions have to be facilitated to support the training of the large number of staff. 45 Ongoingand Future Initiatives to Mitigate the Risks 50. OverallSapport: GOM recognizes that successful decentralization hinges on the full support and cooperation of all stakeholders, including the donor community. I t is anticipated that the total costs'of the decentrahzation process for the years 2001-2004 will be approximately US$50 million, and support to improve financial management capacity constitutes a significant share. The source of these funds has not yet been fully identified. 51. Additional work i s underway, or contemplated in the areas of: financial management, accounting systems and IT; legal framework; capacity building; and budget process and transfers. Furthermore, a number of donors are already and/or will be actively supportingthe process38. 52. A Danida Decentralization Program has supported the capacity buildmg of key Central Government institutions on decentralization and i s expected to last from 2002 to the end of June 2005. The Government of Malawi, in cooperation with UNDP/UNCDF through the Decentralization Secretariat, have ongoing and future initiatives in several areas, especially on development of guidelines, trainingof staff, recruitment of heads of departments etc. Other donors such as NORAD, the World Bank, DFID and others are also active or are planning future support to decentralization and capacity building. Better coordination of donor initiatives should be incorporated into the Program Implementation Plan. 53. Finally, in order to mitigate the risks of the devolution of sector areas (education, health, etc.) the transfer of functions and funds will take place gradually, and the budgets will be incorporated in the respective line ministry budgets for the first 2-3 years. This measure i s taken in order to reduce the risks in the period where LGs are building up their financial management capacity. Conclusions and Recommendations 54. Decentralization i s inits early stages. Local Government accountabhty inMalawi i s moving in a positive direction with gradually improved performance on financial management (especially budgeting and accounting), although at a modest speed. Financial management continues to be a highrisk area, and additional Government of Malawi and donor support is needed in the short and medium term. Generally, the planned initiatives on financial management are appropriate and fairly well coordtnated, but need a stronger sequencing and prioritisation in an environment with limited resources. Overall Strategy for Improving Financial Management A time-bound action planfor the future initiatives to improve LG accountability, includingclear sequencing, costing and overview of funding (short term). Institution responsible for implementation: DLG Legislation and Regulations Finalization and implementation of the Local Government Financial Regulations. These should cover all LGs -rural and urban (short term). DLG / MOF Draft and legislate an Act on the NLGFC. T h i s act should describe the role and functions of the NLGFC and clarify the role vis a vis the Minister of Local Government. The L a w should also contain regulations on NLGFC sanctions against LGs in cases with financial managements irregularities and fraud (short term/medium term). NLGFC/DLG 38T h e PS/Local Government estimated that approx. 30 YOo f the Decentralisation Implementation Plan i s catered for by present donor commitments. Danida, GTZ, Norad and UNDP are among the key donors in this area. 46 Up-date and improve financial guidelines to adjust them to international standards o n accounting regulations. (e.g. on advance payments, loans to staff, bank overdrafts, demands to planning andbudgeting). Second, provide guidance o n involvement and participation o f stakeholders in the budgeting process, publishing o f budgeting and accounting procedures, rules o n NLGFC's role, rules o n conflict resolution between the N L G F C and assemblies concerning follow-up o n auditing. Finally, the guidelines should specify requirements for internal audit and explicitly encourage involvement o f citizens (medium term). D S / D L G Planning and Budgeting Priority should be given to improve the LG accountability to the citizens, especially in order to make the budgeting and accounting process more transparent. Publishing o f budgets and accounts should be a fust important step (short term): DLG and LGs CG should inform the LG ingood time in advance on the estimates for the revenues prior to the LG budget approval deadlines, especially an early announcement o f the transfers is pertinent. (short term): MOF/NLGFC. Better linkage between budgeting and planning and recurrent and development budgeting (short/medium Term): DS/NLGFC Introductiono f MTEFat the LG level (medium/long term): MOF/LG Accounting The whole system o f charts o f accounts (classification/coding) has to be scrutinized in order to make it possible to consolidate the LG accounts and the LG accounts with the CG accounts. Necessary linkages and interfaces between LG and C G codes have to be established (short term): MOF/LGFC/DS Special support to weaker D A s to up-date their accounts and clean the backlogs -eventually by hiring of specialists from public and private sector (medium term): DLG/DS. I T / I F M S Ensure strong linkages between the I F M I S system at LG level and IFMIS system at the CG level, especially as the introduction o f both systems is pending. This is also linked to the accounting systems, noted above (medium term): D S Audit Support the development o f internal audit sections in the L G s including the internal audit procedures and guidelines (medium term): DLG/DS/MOF Transfers and Incentives There is a need for a clear C G policy and strategy framework o n CG-LG funding o f both the recurrent and the development expenditure. 39(short term). M O F / D L G / N L G F C Improve the reporting system on general grants, especially concerning the bank reconciliation, the requirements o n utilization etc. Furthermore, guidelines should be implemented which require publication of the transfer o f grants from C G to LG in the newspapers to enhance public accountability. (short term): N L G F C Clear rules o n sanctions in cases o f non-performance should be developed, especially incases when specific LGs need to have stronger supervision, control and support, e.g. the present case for Lilongwe DA (short term): N L G F C 39 The Team supports the detailed recommendations contained in the Review of the Decentralisation Process in Malawi, Draft November 2001 - A report prepared for the Government of Malawi and the Donor Community b y a joint Review Team, cf. especially p. 11. 47 0 Ensure that unfunded mandates are avoided. A specific costing exercise o f the senices to be decentralized (follow-up on the Study from April 2001 o n Transfers) should be initiated (currently/ medium term): DLG/DS. 0 Review the possibilities to improve the incentives for LG (both for the LGs as such as well as for individual staff inthe LGs) to strengthen financial management performance.40 (medium term): N L G F C Capacity Buildinginthe Field o f Financial Management Strong focus o n a speed up o f the recruitment o f the top managerial levels in LGs (short term): DLG/LASCOM There is a serious lack o f qualified staff in the LG finance departments. First Step: A comprehensive training need analysis. Second step: Development o f a Training Manual for the Financial Management Procedures, combined with training in utilization o f the accounting procedures and computer programs (short term/medium term): MOF/DLG. Support to training institutions, e.g. development o f curriculum for courses, and other kinds o f support to strengthen the training providers inLG financial management should be initiated (short term): DS/Donors Provision o f training courses for members o f Finance Committees inthe City Assemblies (short term): D S Strong priority to finalize the restructuring and strengthening of the DLG and the N L G F C (short term): Several stakeholders The present resources o f the NLGFC, even with the planned support from GOM and Danida, seems not to cover the full demands o f the future very demanding tasks on budgeting, data processing, accounting, follow-up on audit reports, etc. Further support should be identified (medium term). All stakeholders. Revenue Mobilisation 0 Further steps should be taken to improve the LG own revenue generation. First Steps: Review the recommendations from Study o n business licenses and property rates recently conducted, study experiences from other countries, agree o n a common strategy and action plan and issue legal framework for collection and guidelines to LGs. This is important in order to avoid the LGs become increasingly dependent o n C G transfers with related decrease in local accountability (short term/medium term): Coordinated efforts by DLG/DS/Ministry o f Commerce/Ministry o f L a n d Donor Support The donor community should seek to strengthen coordination by follow- up o n the recommendations in the Draft Report o n Review o f the Decentralization Process in Malawi, November 2001 and make coordinated efforts to support the implementation o f the revised timetable outlined in the Decentralization Report. The time-plan and outlined activities will, if supplemented by a few additional activities, be sufficient to mitigate most o f the risks identified during the CFAA (Currently): Donor Group in Malawi in cooperation with the GOM. Develop a more elaborate plan to show the exact timing o f each financialmanagemenractivity,the costs and the extent to which activities are funded (either by donors or by GOM). (short term): DLG The donors need to address the overall strengths and capacity o f LGs in order to establish more horizontal equity both in terms o f financial resources and o f financial management capacity (short/medium term): Donor Group 40T h e experiences in Uganda might be useful for the future development. InUganda, the LGs receive 20 YOmore or less development grants depending on improved performance on a number of administrative and fmancial management indicators from one year to another. 48 SECTION 5: PUBLICSECTOR PARASTATALS - 1. Parastatals in Malawi consist of state controlled enterprises and separate legal entities, established under their own Acts of Parliament. Their activities cover a broad field, and include education (e.g. University of Malawi), utilities (e.g. the Water Boards and Electricity Supply Corporation for Malawi {ESCOM}), regulatory activities (e.g. Malawi Bureau of Standards, Censorship Board), transport (e.g. Air Malawi), development investment (Malawi Development Corporation {MDC}), the agriculture sector (Agricultural Development and Marketing Corporation {ADMARC}) and many more. ADMARC and MDC are also holdingcorporations, owning several subsidlaries. T h e performance of these subsidiaries vary greatly. According to the privatisation program, these subsidiaries will be divested over a period of time.41 2. Thirty-eight parastatals are under supervision of the Department of Statutory Corporations (DSC), and include most of the major ones. Out of the total of fifty two, twenty are commercial enterprises which, inprinciple, should be self-sustained financial units. The remaining enterprises are sub vented parastatals, relying mainly ongovernment transfers as their mainsource ofincome. Some of these are also financed from their own revenue as well as donor funding. 3. All parastatals are fully owned by the government. A few are limited liability companies, amongst them Air Malawi and ESCOM. There are several other state-owned (public) enterprises in addltion, such as treasury funds with commercial and development motives. Public enterprises also include companies where the state owns shares. The Malawi Revenue Authority i s not regarded as a parastatal, but is a separate legal entity regulated under the Malawi Revenue Authority Act. 4. A Privatisation Commission (PC) was established in 1994, and in 1995, Cabinet approved the Privatisation Policy Statement, followed by the passage of the Public Enterprises (Privatisation) Act in 1996. The Divestiture Sequence Plan (DSP), approved by the Cabinet Committee on the Economy in august 1997, is a list of 100 enterprises to be privatised by 2004, including both parastatals and partly or wholly owned companies under the Companies Act. The list i s not limited to parastatals, but also covers other state enterprises. The P C is financed by sales revenues and government appropriations, and also receives assistance from USAID and the World Bank.42 5. About one-third of the items on the DSP has been completed, either by &vestment, liquidation of the enterprise, chstributionto the people or otherwise. Findmgbuyers for some of the enterprises has proven difficult, though, and some of the major privatisation projects like Malawi Telecom or E S C O M are pending government considerations of policy proposals. Legal and Regulatory Framework 6. There i s no common legal basis covering all aspects of parastatal activity as the establishment of each parastatal is provided for through a separate Act of Parliament. Some of these Acts were passed more than 40 years ago; there is no standardized format; and the provisions of these Acts vary from one to another. The Acts establish the authority of the relevant line Minister over the Boards, and also define the duties of the Board, as well as the purposes of the parastatals. In certain cases, however, these purposes have changed, and the Acts may therefore be outdated. 41Ref. e.g. The Privatisation Commision: AnnualReport2000. 42The Privatisation Commision: Annual Report 2000. 49 7. T h e Finance and Audit Act provides a limited common framework for the parastatals. It requires parastatals to submit a budget to the responsible Mnister for approval. Thirty-eight of the fifty-two have nowbeen transferred to the DSC from the relevant line ministries, and since the DSC reports to the Office of the President and Cabinet, the Minister responsible will therefore be the President. 8. T h e Finance and Audit Act also requires that annual financial statements from all parastatals to be submitted to Parliament within 6 months following the end of the financial year. The reports should include a balance sheet, an income and expenditure statement, and the annual report of the auditor. This time limit has proven difficult to comply with by most of the parastatals. The requirement to submit three hundred copies of the financial statements is a strain on the financial resources of some of the parastatals. 9. The Public Enterprises (Privatisation) Act requires that all public enterprises scheduled for privatisation should prepare accounts and financial statements for every financial year and cause the accounts to be a u l t e d no later than four months after each financial year. The Act also requires that such enterprises maintain fixed assets registers w h c h should be reconciled with the financial statements. Such provisions are also available in some of the specific Acts establishing parastatals, e.g., the ADMARC Act. 10. There i s no statutory requirements for the maintenance of a proper system of internal controls, internal audit or audit committee in the parastatals. Following on the recommendations of the World Bank funded Second Institutional Development Project (IDP 19,the DSC issued a circular to all parastatals, requiring each Board to establish an Audit Committee and an internal auditing team that reports to the Ault Committee. 11. T h e Acts do not lay out the procedures to be followed in the event of liquidation of a parastatal. If a statutory body i s to be lssolved, this will require a Repeal A c t of Parliament. All financial issues that will need to be sorted out in such case, will have to be addressed in the framing of such a RepealAct. The Financial Situation inParastatals 12. The Public Expenditure Review43 (PER) presents a partial analysis of the current financial situation in the major parastatals. Relevant information i s however hard to obtain. The poor financial results in the parastatals have an effect on government finances, as the Government in several instances has absorbed liabilities incurred by parastatals. For example, in 2001, there was a bailout of the National Food Reserve Agency (NRFA)'s debt by the Government. In adltion, NFRA's electricity bills have been paid by the Government44. In 1999, ESCOM's debt was converted into equity. 13. A Public Expenlture Reform and Monitoring Unit (PERMU) quarterly report45 covering the period April to end of December 2000 on financial performance in nine major commercial parastatals examined the key financial variables, to the extent that information was available. A number of parastatals failed to present the required information. Seven out of the nine parastatals reported losses in the period under review, and the financial statements generally revealed large increases in expenditure compared to budget, whle revenues remained in line with budget expectations. 43World Bank:Public Expenditure Issues and Options, September 2001. 44IMF:ImprovingFiscalData and Expenditure Control. 45PERMU (2001): Quartelyfinancial reporton parastatals for the period to 31~tdecember, 2000. 50 Air Mukzwi reported a net loss before tax of MK 27,3 million against the budgeted profit of MK 31,6 million for the nine month period. This was due to total expenditure increasingby 24 % (from the budgeted MK 884,9 to an actual MK 1,l billion)while revenue only grew 17% (from the budgetedMK917 million to an actualMK 1,07 billion). Makzwi Development Corporationin the same period reporteda loss after taxation of MK 84 d o n , compared to a budgeted profit of MK 79 million. The difference between the actual loss and budgeted profit was attributed to foreign exchange losses andunrealisedprofits from sale of investments. ESCOM,however, presenteda profit of MK 875,l million, thoughfalling short of the budgetedprofit of MK 985,5 million by 11percent. Revenuefell by 10percentcomparedto the budgetedfigure, probablybecause of ESCOMs debtors beingin arrears. In ESCOM, total receivables stood at MK 501 million at the end of the fmancial year 1999/2000, of which 36 percentwas overdue&. The govemment accountedfor 12percent of receivablesand 24 percentof over dues. 14. Ingeneral, the parastatals also do notperformwell interms ofdebt servicing, either onloans from government or those from other creditors. Loans from government to the parastatal sector was estimated at MK 4 billion, inlate 2000. 47 Of this, almost three quarters was owed by ESCOM alone. Arrears on government loans were also accumulating. From a sample of eleven parastatals in the period September to December 2000, ESCOM, Blantyre Water Board, Air Malawi, MDC and ADMARC had all faded to pay back dues to government. The ratio of actual payments made to the build-upof arrears for the periodwas 1:35. 15. The failure to service debts by parastatals had on several occasions forced government to assume those debts. It is roughly estimated that government services debts contracted by parastatals reachmg MK 1billion (around 1percent of GDP).48 16. Financial problems in the parastatals effects the national finances in dlfferent ways: government accepts debt obligations originated in parastatals; government covers operational expenses for parastatals; or government forgives i t s own dues from those parastatals. 17. The national budget does not encompass all economic activities in the parastatals. The detailed operations of sub vented organizations and commercial parastatals are omitted. However, regular transfers to the sub vented parastatals are included as lump sums in the national budget. Where the government agrees to take on responsibility for unsettled debts incurred by parastatals, there i s no actual cash transaction, and, in compliance with a cash accounting system, no expendture i s recorded in the system. But, as the obligations are met and/or payments on interest and principal are made, actual cash transactions occur. These should be included inthe national budget. 18. The Finance and Audlt Act requires that all borrowing should be approved by the responsible Mmister. This function i s performed by the DSC, and the Ministry of Finance is involved when the question of a guarantee i s raised. I t has been decided that government should not provide guarantee for new borrowing. Ths decision has been followed through, with one exception, as Parliament inone case have g v e n such a guarantee49. The Role of the DSC 19. The parastatal boards do not have the authority to set company policy, but must seek approval from supervisory bodies. The DSC i s central in the supervision of the parastatal sector. DSC was established in 1982 out of concerns for the mismanagement of resources inthe parastatals. 46 World Bank2001: Public ExpenditureReview. 47 PERMU2000: A report on borrowingandloan repayments by parastatals. 48 Schiller 2001. 49 Interviewwith PERMUandDSC. 51 Line ministries were left with mainly technical issues, as the DSC was given the tasks to: coordmate appointments of boards of directors; approve appointments of chief executives and their immediate senior managers; approve terms and conditions of service, includmg salary increases, other benefits as well as home owner schemes; approve budgets, financial plans and corporate plans, includmg changes in corporate strategy; approve contracts exceeding specified amounts; approve tariff or price increases; ensure that capital investment projects of parastatals are appraised and monitored; monitor and evaluate performance; and participate in board meetings.50 The parastatals in addtion have to submit annual audited financial statements and quarterly management reports to the DSC. 20. The Ministry of Finance has ultimate authority over budget approval, including capital budgets. This includes transfers to the sub vented, and loans to parastatals, debt refinancing and equity financing. In 2000, the Parastatal Reform and Monitoring Unit (PERMU) was established under the Ministry of Finance. PERMU is mandated to monitor financial data compiled by parastatals; represent Treasury on Finance and Au&t Committee meetings; analyse annual budgets and corporate plans and process for Treasury approval; monitor implementation of budgets and plans on an on-goingbasis; assess procurement codes, a u l t reports and borrowingprocedures; and analyse the role and structure of parastatals and recommend reforms for improving financial performance.51 Of these, the first two are the tasks that the PERMU i s able to fulfil. PERMU only covers ten of the parastatals, all being major commercial ones. The unit is experiencing staffing problems, but has recently been expanded from two to three employees. 21. Neither D S C nor PERMU reports any recent donor involvement in their activities. The D S C was given substantial support under the IDP 11, concerning clarifications of DSC functions compared to the functions o f the line ministries, developing systems of financial management, human resource management and performance contracting, development of the privatisation policy, staff training and strengthening of operational efficiency.52 22. Line ministries have supervisory functions on sectoral issues, like approval of development plans within the sector. Parastatals also consult with the line ministries on technical issues. Communication between the enterprise and the ministry wdl often be through the ex-officio representative on the board. Corporate Govemance 23. Recruitment of chief executives in the parastatals is often aided by professional management teams. These may do the interviews, in cooperation with representatives from the board, and from D S C or line ministries. A short list would be prepared, and approved by the DSC. The process of appointing board members starts with lists of candidates being produced inthe line ministries. These lists are then considered in the DSC, who will present a draft list of nominees to the Minister. The lists are often subject to substantial changes in the late stages of the process. Appointments are made by the President, and announced by a letter from the DSC. Board members do not receive remuneration, but are entitled to honoraria and sittingallowances., which can be substantial. 24. The performance of chairmen and board members have been of great concern53, Performance in some parastatals have been adversely affected by capital being tied up in houses and cars. Chairmen have also awarded themselves other material benefits such as offices, secretaries and cell phones; requests for increases in allowances are frequent. Board members are also not required 50 DSC: On the Departement of Statutory Corporations 51 h s t r y of Finance: Mandateof PERMU 52 DSC: Onthe Department of Statutory Corporations. 53 Ref. e.g. DSC: On the Department of Statutory Corporations 52 to be involved in the day-to-day management of the parastatals; however, some chairmen have stronglyinterfered effectively undermining the authority of management. 25. The DSC has responsibility for approval of contracts, salary increases and home ownership schemes of chief executives and their senior managers. As part o f following up on IDP 11, the possibility of introducing performance contracting was considered by an external consultant. It was, however, concluded that performance contracting would not work, as chief executives in many cases lacked sufficient control over their own organization to actually be held responsible for the financial results.54 The lack of control i s due partly to the behaviour of board members, especially chairpersons, as described above. 26. In1999 the DSC issued a Code of Conduct to guide directors of the boards. This describes the privileges applicable to members of the board, the roles and functions of government, board and management, and it contains quite strong admonitions to the boards. To quote the Code: ~"In some cases, Board Directors,particularly Chaiqersons,have askedfor bene@ andp?ivileges thy are not entitled to. [. ..IThelist is the nation as a whole. In most cases, those involved arepolitically injuentialpeople and have a sense of immuni&. endless. Needless to sa_y this is blatant abuse ofpower which is a total disgrace to government and Wheneverthis occurs, the appointing autho?i& will be askedto interueneas appropriate." 27. The Auditor General is a member of several boards, among them the board of the Malawi Development Corporation. This arrangement i s apparently meant to enable the Auditor General to have a better understandmg of the worhngs of the parastatal sector. The Finance and Audit Act empowers the mnister of Finance to direct that the accounts of any statutory body should be audited by the Auditor General. Assessment of Present Position 28. The legislative framework i s primarily the relevant Acts establishing such parastatals. Some of these are outdated, and do not contain comprehensive financial accountability requirements. Such requirements are to some degree present in the Finance and Audit Act and in the Privatisation Act, butprovisions for internal audit and au&t committee are lachng. 29. The legislation i s not standardned. Common financial accountability requirements should be introduced into legislation. Establishng an umbrella legislative framework for the parastatals would provide a common environment for better governance. However, the issue of a legislative framework may be addressed by the ongoing review of the Finance and Audit Act. 30. Financial performance i s poor, and varies widely both over time and between enterprises.55 The Public Expenditure Review points to low tariffs and prices as partly to blame for results. Proposals of changes in tariffs were considered by the DSC. As tariff changes are often followed by proposals of salary increases in parastatals, the DSC favours cutbacks in overhead rather than tariff increases. There is also the concern that tariff increases may adversely effect the poor. However, cost recovery pricing is a requisite to render new investment possible. 54 DSC: On the Departmentof Statutory Corporations. However, inassessing proposals for salary increases, the DSC will stress the affordabllityand sustainabilityof the raises. This way, a parastatalmakingprofit will have have a greater chance to haveapprovalof such a proposal. 55 World Bank:Public ExpenditureReview. 53 31. Arrears are accumulating due to the problems of collecting dues. A large part of these arrears i s attributed to government customers. The build-up of arrears makes it difficult for parastatals to manage debt and other obligations. In addition, a lack of reliable and sufficient income makes it impossible to generate funds for needed investments. 32. The holding corporations ADMARC and M D C own a variety of performing and non- performing subsidiaries. If the privatisation program succeeds in selling off the performing subsilaries, ADMARC and MDC will only be left with the non-performing and loss making subsidiaries. In such a situation, ADMARC and MDC would pose a potential drain on government finances. There is therefore a need to decide on the future for such subsidiaries. 33. The privatisation program is making progress, but at a slower pace than planned. Several divestitures are delayed. Some enterprises, including parastatals, have been liquidated. In some instances, the functions of the dissolved parastatals have been incorporated into the relevant line ministry.All commercial parastatals whch will remain under government control and ownership in the foreseeable future should be established as limited liability companies, thereby reducing contingent liabilities for government. 34. The government has decided not to provide guarantees for any new borrowing by parastatals. However, due to the social nature of the operations of some of the parastatals, there i s doubt as to whether the absence of formal guarantees inreality will relieve government from having to accept new bailouts in the future. The dependency of the services provided, the strong ties to government and the fact that the parastatals inmany cases are monopolies, creates the conltions for an implicit guarantee.56 35. The mandates of the DSC and PERMU show an overlap of responsibilities between the two institutions. W e the DSC has a larger array of approval activities than PERMU, both bodies monitor and control parastatals on financial matters; both collect and analyse quarterly management accounts; and both represent government on board meetings. The duplication of tasks is not conducive to an efficient use of scarce resources, and might even be counterproductive. In addition, bothunitshave vacant positionsand trouble filling them. 36. Quarterly management accounts are to be submitted to both DSC and PERMU, but information i s often late or severely lacking in detail. The PERMUis supposed to produce quarterly financial reports on performance in the parastatals, but processing of the reports in the Ministry of Finance is delayed. The financial and staffing situation in the parastatals does not point to introducing additional reporting requirements for the parastatals. However, it is important that the existing requirements are adhered to, and both DSC/PERMU should continue putting pressure on the parastatals inthis regard. 37. The framework for monitoringand control of the parastatals is very tight. Looking at the list of DSC responsibilities, almost any significant decision on a parastatal board will need approval from the DSC. On one hand, this is understandable, given the financial hstory of the parastatals. On the other hand, the framework leaves the parastatal boards with little authority over their enterprises, and government consideration of proposals might delay crucial decisions. Inbalancing ths, consideration should be given to the fact that most parastatals are not limited liability companies. As longas this is the situation, government control should not be eased, as the economic activity in the parastatals will continue to constitute potential financial risk for government. 56 IMF2001: Improvingfiscal data andExpenditure control. 54 38. DSC announced in August 2001 that most of the parastatal boards would be dissolved. By September 2001, all boards were dlssolved, and new ones appointed. These actions show that the government i s committed to improving board performance. However, identifying qualified board chairpersons and board members for all the parastatals is a difficult task. To some extent political considerations are still of importance with regard to some appointments. It remains to be seen whether the n e w boards will succeed. The Code of Conduct for chairpersons and board h e c t o r s issued by DSC i s a document with clearly defined guidelines. Conclusions and Recommendations Establishing an umbrella legislative framework for the parastatals would provide a common environment for better govemance o f the parastatals. However, the issue o f a legislative framework for the parastatals may very likely b e addressed by the ongoing review o f the Finance and Audit Act. Hence, the CFAA should not pre-empt the considerations and findings that will result from this review. There is a need to establish means to control expenditure in the parastatals, and to focus on revenue generating activities. Expenditure control is linked with good corporate govemance, and the decision to dissolve all the boards should be followed up by the dismissal o f any chairman, boardmember or member o f the chief management that are not living up to expectations. Focusing on appointing board members with experience in business matters and with proven professional skills is vital. A simple performance remuneration scheme for management, where any govemment approval o f salary increases i s dependent o n the parastatal inquestion making profit, should be introduced. (Short term) The PER recommends a review o f tariffs, as l o w tariffs reduces financial performance and consequently investment and maintenance expenditure levels. PER points to the need for a general policy o n parastatal tariffs, grounded in a solid analysis o f the determinants o f the access to goods and services by the poor. This recommendation should be acted upon. (Short term) The PER also recommends performing a comprehensive analysis o f the mutual arrears situation within the parastatal sector and between parastatals, govemment and other creditors. The analysis should result in a time-bound plan to eliminate the stock o f arrears, complemented by a plan to help prevent future build-upo f arrears. Puttingan end to the practise of guaranteeing for parastatal loans from other sources than govemment is an important step towards reducing govemment contingent liabilities. However, as the few o f the parastatals are limited liability enterprises, government will, irrespective o f any explicit guarantees, most likely be liable for any outstanding debts in the event o f a liquidation o f a parastatal. Both commercial and sub vented parastatals that are to remain under govemment ownership and control in the foreseeable future, should be established as limited liability entities. H o w to proceed with this will be dependent o n the outcome o f the review o f the Finance and Audit Act, i.e. o n what (eventual) recommendations for a new legislative framework that might arise from this review. (Medium term) The PERMU should be merged into the DSC, to strengthen the monitoring and control capacity, and to reduce duplication o f responsibilities. The merged unit should submit updated information on financial performance inthe parastatal sector to the Ministry o f Finance o n a regular basis. (Short term) 55 56 SECTION 6: PUBLIC SECTOR -PROCUREMENT 1. The Government of Malawi i s in the process of developing a Poverty Reduction Strategy (PRSP). Increasingly several donors are linkingtheir support to delivery of strategic priorities. One of these priorities has been identified as a revision of procurement procedures throughout the government. 2. The World Bank financed a Country Procurement Assessment Review (CPAR) in 1996. The recommendations of this review were in year 2000 translated into a draft Procurement Code (the Code). T h e General Contracting-Out Unit (GCU), who has the task of overseeing the changes to the Code, have endorsed the revisions. GCUis now awaiting a response from the World Bank on the final draft version of the Code. They will then proceed to put this version through to the Attorney General's office to commence the legislative procedure. It will then have to be approved by Parliament. 3. Inaddition, the GCUhas drafted Terms ofReference and Expressions ofInterest POI) for three advisors needed for the implementation of the Code. These are: Project Manager; Capacity Buildingand TrainingAdvisor; and Implementation of Institutional Reforms Advisor. The EO1had been sent to the World Bank for their approval and advertisement inthe Development News. 4. Interim Procurement Guidelines (IPG) have been produced from the draft Code and issued to all Muistries and Departments by the Office of the President and Cabinet (OPC). These have been in use since 1July 2000. The Finance and Audit Act is still the enforcing act for procurement, However, a circular (1/2000) has been sent out to the effect that the IPG have now to be used except where the IPG are inconflict with the Finance and Ault Act inwhich case the latter prevails. 5. There are no other interventions either donor or Government funded in existence or planned in the procurement area. However, it is necessary that the changes to the Finance and Audit Act currently being drafted meldwith the provisions of the Procurement Code. 6. Inoverall terms, planned initiatives are to strengthen macroeconomic planningand financial management as encompassed withn the proposed Medium Term Expenditure Framework (MTEF) I1and Financial Management and Transparent Accountabhty Project (FIMTAP).The Accountant General's Department (AGD) also plans to revise its outdated desk instructions. Government i s putting in place an initiative to enable the devolution of powers of expenlture to District Assemblies. There is a donor supported effort to raise financial management capability at District Assembly level. The initiative for Institutional Development for the National Audit Office funded by the World Bank and the joint DfID/UNDP program to fully fund the Ombudsman over the next 5 years will also have a sigmficant impact on the procurement area. 7. Crucially, there have not been any initiatives identified for the review and revision of internal controls and records management. Impact ofProcurement Practice 8. IPG have been issued to all ministries. Duringthe mission it was found that all ministries interviewed at Internal Procurement Committee (IPC) level are aware of the IPG and are implementing the system. Muistries are pleased that this has been decentralized and although some are not implementing the IPG in their entirety (see fiduciary risks section for further details) there i s a positive move towards procurement and a desire to "get it right". All ministries approached welcomed the suggestion of having 3 specialist members seconded from the National Procurement Authority (NPA) (as provided in the draft Code) onto their IPC for procurements over certain levels. 57 9. The IPG provides that each ministry/department has a procurement officer who should advise the IPC on the finer details of the IPG. Only the M n i s t r y of Agriculture currently has such a person inplace although the idea of this officer was welcomed by all other ministries approached. 10. Parastatals and District Assemblies have devised their own procurement guidelines and are following these. The current rules allow for tenders greater than MK100,OOO to be submitted to the GCUbut inthe case ofthe District Assemblies this is not happening. 11. The World Bank is the lead donor in the area of Procurement Reform and has initiated the draft Code by employing a legal drafting specialist to work on the reforms recommended by the World Bank specialists on procurement. As such, t h s Code has not been further reviewed as it is assumed that all risks will have been covered. 12. The period from July 2000, when the IPG were implemented and new directives for procurement were issued to Mnistries, has been reviewed for the fiduciary risks which may arise in the system before the implementation of the Code. After implementation of the Code it is assumed that all fiduciary risks in procurement will be covered by legslation. However, the problem lies not with the lack of controls inthe relevant legislation but inthe potential incorrect implementation of IPGllegislation, lack of monitoring of IPG/legislation compliance, and the consequent lack of Qsciplinary measures and actions for non-compliance. 13. Major risks identified are: IPC members are not procurement specialists and may not follow correctly the terms of the IPG. This is covered in the present system where all tenders for MK100,OOO (MK300,OOO if buillngs and works) are passed from the IPC to the GCU for review and then on to the OPC for final approval. The problem of lack of knowledge and understanding o f the IPG is being addressed by workshops currently being given by the GCU in conjunction with Central Government Stores o n the implementation o f the IPG. Once the Code is enacted specialist help will be available by the 3 team members placed on the IPC by the National Procurement Authority (NPA). Inaddition the IPG and legislation allows for a procurement specialist on each IPCwhich is presently only the case with the Ministry of Agriculture IPGat Capital Hill. The risk exists that I P C will not follow guidelines to the extent of suppressing procurements greater than MK100,OOO and not passing them through to GCU or, when the Code is enacted, not advising the NPA o f the need for specialist members on the team when t h s limit is exceeded. There i s also the risk of other loopholes being flouted, for instance the splittingup of procurement into parcels of less than MK100,OOO to avoid tender procedures. The risk of delay in the processing of tenders exists as the IPC members are not solely dedicated to this task and may have other field work duties which takes them out of the office. The perception i s that the IPC takes secondary place. The G C U has prepared a list of pre-qualified suppliers. There is concern within the ministries that these may not be the correct people for their particular projects and that certain suppliers may not be based inareas convenient for the ministries' projects. Purchases o f less than MK100,OOO generally do not go to the IPC but are normally countersigned by a senior official in the ministry/department. There is the risk that if these are not seen by a procurement officer or IPC member with knowledge of the IPGthen the payment may not meet IPG requirements. 58 At present tenders for the Army and Security are not reviewed by the GCUbut follow their own higher level reviews and checks within their own ministries. D u e to delays in the processing of tenders, some works tenders have been delayed to the extent that they have not been able to be started or, if started, completed before the commencement of the rainy season. T h ~ has meant that projects are not completed in time and necessitates the s incurrence of additional expense because of the effect of inflation on prices etc. Conclusions and Recommendations At present, as all tenders greater than MK100,OOO are being reviewed by the GCU there is a reduced risk o f tenders not following IPG. However, this does not prevent tenders not being passed to GCU or being split into smaller amounts. Capacity building is needed to secure a procurement officer on every IPC. In addition, it is essential that intemal and extemal audit departments are adequately staffed to be able to check procurement functions o n a regular basis. This needs to be initiated as part o f a long term capacity buildingprogram before the Code is enacted. Technical assistance or support funds for the training o f I P C members, supplementing that being done o n an overall basis by the GCU, would certainly assist. T h e importance o f the I P C meeting o n a regular basis and its priority within each ministry etc should be stressed. This can commence as soon as funds are made available and inany event should be completed down to DistrictAssembly and Parastatallevels. In the short term if donors and MG need comfort pending the strengthening of systems, local f m s o f accountants may be contracted ( in collaboration with the National Audit Office) to make spot check audits o n all I P C procurement functions particularly inrelation to those procurements less than MK100,OOO or those which have not gone to the GCU. (There is evidence that purchases greater than MK100,OOO do not always pass through the GCU). Although, MK100,OOO is considered to be a small amount in itself, a n accumulation o f these amounts over time and the possible flouting o f regulation for amounts greater than this may be material. IPG's and G C U should also be advised to give priority to works contracts to enable these to start at the beginning o f the dry season inMay each year. It is pertinent to note here that whilst checking of the procurement systems, weaknesses in normal intemal controls were noted. For example, inthe Ministry o f Finance there is provision for the payment o f cheques to suppliers before the goods have been delivered. T h e payment is correctly authorized but there is n o system inplace to ensure that all goods prepaid are actually delivered. This point has also been picked up by the National Audit Office in other ministries and in one case goods worth MK90,OOO h a d never been delivered. Therefore as part o f the CFAA a complete revision o f all internal control procedures i s recommended particularly inlight o f the recent decentralization moves, the cash payment basis and the I F M I S system. As part o f this initiative a disciplinary system needs to be devised and implemented for non-compliance o f all internal controls and procedures. Once the Code is enacted there is provision within for regular audits to enforce the Procurement Code and Regulations. The Code does not say whether this is to be a n internal audit unit within the NPA or from the National Audit Office. In either case training will need to be given to ensure the necessary skills t o conduct these audits and sufficient capacity to carry them out o n a regular basis over the financial year. 59 SECTION 7: PRIVATE SECTOR 7.1 COMPANIES LegalFramework 1. The Companies Act 1986 provides the main legal framework for the regulation of the private sector, especially in respect of companies incorporated as separate legal entities. Other laws governing accounting, auditing and reporting practices of the private sector include the Trustees Incorporation Act, and the Trust Act. Other complementary Acts include the Business Licensing Act, and the Business Names Registration Act. The Malawi Revenue Authority also administers a number of revenue related laws. 2. The Companies Act dstinguishes private from public companies and goes on to prescribe the form and content of the annual returns, includmg financial statements to be submitted to the Registrar of Companies. It also prescribes the accounting records to be kept, and makes provisions for the qualification, appointment, removal and duties of auditors. At the moment, there are only eight public companies listed on the Malawi Stock Exchange; most of the companies are private and are exempted from filing their financial statements. 3. The administration of the Act rests with the Registrar of Companies who should have a professional legal qualification. The Registrar is also responsible for registration of births, deaths, marriages, and political parties. The Registrar does not administer statutory corporations. 4. In recent years, the Government has made progress in establishng regulatory bodes in a number of specialized areas in the economy, most of which are already invarious levels of operation. Ina number of cases, these institutions are backed up with the necessary legislation setting out their mandate. Of particular importance are the following: The Public Accountants and Auditors Act 1982 which established the Malawi Accountants Board to regulate and maintain the standard of accountancy, and prescribe the conduct of accountants inMalawi; The BankingAct 1989 which empowers the Reserve Bank of Malawi as the Central Bank to regulate and control financial institutions in Malawi; 0 The Capital Market Development Act 1990 enacted to promote, facilitate, and regulate the development of a capital markets industry inMalawi. The Insurance Act of 1957, enacted before Malawi became independent is old and inneed of updating. Assessment of LegalFramework 5. Despite the above developments, there are still a number of major challenges facing the legal framework: 6. Ina number of cases, compliance with the law is notbeingadequately enforced. For example, about 80 to 90 percent of companies do not submit the annual returns with the Registrar of Companies; the penalties providedin the Act are not being enforced in any case as the fines are not sufficient punitive to act as a deterrent (charge for non submission of a return i s Kwacha 10 per day of default). 61 7. T h e &sclosure requirements for reports submitted by private companies is very limited. The law does not apply to statutory corporations which are often established using separate and specific legislation. 8. At the moment, there is no legal requirement for companies to establish systems of internal control, internal audit, or audit committees. Corporate Governance 9. In 1997, the Society of Accountants in Malawi (SOCW arranged a first public forum at which issues of corporate governance were discussed. A committee was formed to look at corporate governance issues inthe context of Malawi. 10. The draft recommendations of good corporate governance principles are ready and were to be launched in early 2002. These are required to be applied b y all enterprises, especially the companies listed on the Malawi Stock Exchange; banks, financial institutions, building societies and insurance companies; statutory corporations; public trusts; and large unlisted companies with a paid up capital of K50million and above. Compliance will bebased on persuasion. 11. Preparation of the draft codes involved consultation with various stakeholders, as well reference to the King Report on Corporate Governance, and the guidelines issued by the Commonwealth Association for Corporate Governance. S O C A M is currently the custodian of the code, but recommendation has been made to establish an Institute o f Directors inMalawi. 12. There are a number of challenges being faced in the practical implementation of the code. Firstly, there i s the issue of capacity in the relevant companies to put in place the necessary arrangements for good corporate governance. The second i s the political will to implement the codes in statutory corporationwhich form sixty percent of the economy. There is also the sustainability of the exercise given the resource requirements of the custodian (SOCAM, and later the Institute of Directors). Finally, there is the issue of compliance given the fact that this wdl b e based on persuasion. Capital Markets 13. The Capital Market Development Act, 1990 set the Reserve Bank of Malawi (RBruf)as the regulatory body charged with the responsibility of promoting and developing all aspects of capital markets. Under the Act and through various attendant Regulations, rules of licensing, prospectus requirements, establishment of "self-regulatory organizations" (stock exchanges), conduct of business b y licensees, advertisement, and accounting and financial requirements have been developed. The Act is one of the newly conceived laws aimed at eliminating restrictions to enhance financial inter-mediation in the market, and also to give assurance and protection mainly to the international investors. The RBM, as a capital market regulatory body, is not a member of the International Organization of Securities Commissions (IOSCO); however, the Malawi Stock Exchange57 has adopted IOSCO standards. 14. The RBM's role in the development of capital markets; the enforcement of the principles o f corporate governance and compliance with accounting practices, are very limited. Inpractical terms, 57The Malawi Stock Exchange was inaugurated in March 1995 as a self-regulating organization under the Act opened business inNovember 1996. I t has so far eight f m s listed on the exchange. 62 the Malawi Stock Exchange, working with the Society of Accountants in Malawi (SOCAM), is responsible for this enforcement. 15. The following issues need to be addressed to enhance financial accountability and the development of good corporate governance: A number o f weaknesses have been identified in the current Act and in addressing these the Malawi Stock Exchange has prepared a draft bill for presentation to Parliament. This covers the creation o f a Securities and Exchange Commission, and a number o f requirements to comply with IOSCO requirements; 0 Resources are required to strengthen the effectiveness in surveillance and enforcement o f compliance with the rules and the law. At the moment, the Malawi Stock Exchange relies heavily o n SOCAM and the external auditors o f the listed firms for information relating to compliance. 63 7.2 COMMERCIAL BANKSAND INSURANCE COMPANIES Commercial Banks 1. The two major laws providingthe legal framework in the financial sector are: (i) Reserve The Bank of Malawi Act, 1989 which entrusts the Reserve Bank of Malawi (RBM) with responsibility for the prudential supervision, control, regulation, and discipline of all commercial banks, financial institutions, insurance companies, buildmg societies, and capital markets; and (ii) Banking Act, the 1989 w h c h prescribes the conduct of banks and financial institutions. 2. The composition of the financial sector at the time of this assessment i s as noted below. The two laws are mainly in respect of commercial banks and financial institutions; however, under relevant but separate laws, the RBMi s also mandated with the supervision of the insurance industry, the buildingsocieties, as well as the capital markets. Micro-credit institutions are not currently under the purview of RBM. Number Commercial Banks Other Financial Institutions Insurance Brokers 3. Section 20 of the Banking Act requires banks and financial institutions to annually appoint audltors approved by the Reserve Bank to report on the balance sheet and accounts of the bank or financial institution concerned. Every bank and financial institution should submit to the Reserve Bank wihn six months following the end of the bank or financial institution's financial year, a copy of the balance sheet and profit and loss account, together with the report of the audtor. 4. Section 47 of the Reserve Bank of Malawi Act specifies the relationship between the Reserve Bank of Malawi with banks and financial institutions e.g. requiring high standards of conduct of management throughout the financial system, and furthering such policies which are in the national interest. 5. Problems affecting the banking and financial sector include: (i) RBM has had problems the enforcing compliance due to the long process involved; (ii) there are increasing but unfunded mandates being delegated to the Reserve Bank o f Malawi. Insurance Companies 6. The Insurance Act o f 1957 continues to provide the legal framework governing the insurance business in Malawi. T h i s piece o f legislation i s outdated and does not address the modern issues affecting the insurance industry. A draft Insurance bill has been prepared and submitted to the Reserve Bank o f Malawi as the regulatory body. With 10 insurance companies and a similar number for brokers, new legislation i s urgently required to address the issues affecting this growingindustry. 65 66 7.3 NON-GOVERNMENTALORGANISATIONS 1. In the last few years, non-governmental organisations (NGOs) have proliferated and developed, becoming a driving force in the lives of local communities, a shield for basic rights and freedom, and a vital counterweight to state activities. Despite their diversity, there can be little doubt about the role these organizations play as partners to government institutions in resolving social problems and providing social services. This process establishes new requirements on activities and management of NGOs. 2. There are more than 200 local and about 50 international NGOs registered with the Council for Non-Governmental Organisations in Malawi (CONGOMA), which is the designated NGO coordinating body in Malawi. There are, however, still a number of NGOs not registered with CONGOMA as this was not a mandatory requirement - this has now been remedied by the provisions in the Non-Governmental Organisations Act, 2000. The legal framework under which most of the existing NGOswere established was the Trustee Incorporation Act. 3. The Non-Governmental Organisations Act of 2000 provides a legal framework specifically to facilitate the formation and functioning of NGOS, and incorporates principles of fiduciary requirements, public accountability and code of conduct. It also sets out the requirements which should be fulfilled before an NGO could be registered in Malawi; for example an NGO should not be a political party, trade union, social club or religious organization purely evangelistic. 4. The Act has established a Non-Governmental Organisation (NGO) Board of Malawi as a body corporate with perpetual succession, made up of seven members appointed from NGOs and two ex-officials from the government. The duties of the NGO Board will be to register and regulate the operations of NGOs in Malawi. All the NGOs are now required to register with the Board, with those in existence at the time the Act came into force being given twelve monthsinw h c h to register. 5. The Act places a number of stringent requirements before an NGO can be registered b y the Board, and are mainly to ensure that only bona fide NGOs are allowed to operate. The new requirements include a plan of activities which the NGO intends to undertake; approval from the ministry responsible for the activities in the form of an agreement between the ministry and the NGO; proof of membershp of CONGOMA; source of funding; name and address of the NGO's auditors acceptable to the Board; and latest available audited financial statements. Every NGO i s also required to file with the Board i t s audted annual financial statements, and there i s provision for punitivemeasures for contravention of the provisionsof the Act. 6. The new Act appears to address the fiduciary requirements of this sector of the economy. A number of challenges, however, will have to be addressed and these include the capacity of the NGO Board and CONGOMA to carry out their mandates; and the capacity of NGOs to fulfil the enhanced reporting requirements under the Act. 67 8. THEACCOUNTANCY PROFESSION Structure of the Profession 1. The legislative framework governing the accountancy profession in Malawi is the Public Accountants and Auditors Act of 1998. The Act recogmzes three bodies that are part of the regulatory framework and training of the accountancy profession. 2. The Malawi Accountants Board (MAB), established under the Act, i s empowered with the conduct, management and registration of public accountants and auditors in Malawi. Part IV of the .... Act empowers the Board to: regulate condtions of service under registered trainingcontracts; prescribe fees for registration of certified public, or diplomate accountants; ensure adequate arrangements for trainingand examination of registered trainees; prescribe degrees, diplomas and other qualifications necessary for qualifymg accountants; take steps to maintain the integrity and enhance the status of the standards the profession; finance, print, circulate, administer and publisha journal relating to accounting and auditing. 3. The Public Accountants Examination Council (PAEC), also established under the Act, is .. responsible for the academic and professional training of accountants inMalawi. The Act empowers the Council to: determine the syllabus to be followed by academic institutions providing training for those . desirous to be registered as accountants under this Act; setting the examinations; ensuring, in conjunction with the Chartered Association of Certified Accountants (ACCA) inthe United Kingdom, that the marking standards applied are of highstandard. 4. The Society of Accountants in Malawi (SOCAM), registered in 1965 as a company limited by guarantee, is recognized under the Act as the professional society of accountants in Malawi. At operational level, SOCAM, together with PAEC, carries out most of the functions on behalf of MAB. SOCAM lacks wide powers under statutory authority and MAB has overriding powers over decisions of SOCAM. 5. The current membershp of registered accountants stands at 272 broken down as follows: Practicing Members 34 (12.5Yo) Non-practicing members 172 (63.2Yo) Diplomate 66 (24.3%) Of the above numbers, 76 members were inthe public sector and mainlyinparastatals. There were 25 female accountants. Training and ProfessionalDevelopment 6. PAEC has responsibilities under the Act for the administering of examinations. With the assistance of ACCA in the United Kingdom, PAEC has established local examination syllabuses Certificate and Foundation levels. P A E C also runs joint examination scheme with ACCA. T h e Certificate feeds into the A C C A Technician level, while the Foundation level provides exemption from the ACCA Technician level. There were 1,800 students studying for the Technician course; 1,000 for the Professional (ACCA) course, and 1,000 for the certificate course. 69 7. The major institution providing accountancy studies in Malawi i s the Malawi College of Accountancy, a statutory body set up by an Act of Parliament. It had a student body of 1,200 of which 75 percent were studying for accountancy courses. The other institution providingcourses was the University of Malawi. Compliance with Standards 8. SOCAM i s a member of the International Federation of Accountants (IFAC) and the International Accounting Standards Committee (IASC). SOCAM is also a founding member of the Eastern, Central and Southern African Federation of Accountants (ECSAFA). Through the above arrangements, SOCAM strives to promote the use of international accounting and a u l t i n g standards inMalawi. 9. SOCAM was also instrumental in facilitating the formation and drawing up the terms of reference for a task force to look at Corporate Governance issues in Malawi. Draft recommendations on good guidance were issued and SOCAM given the responsibilities of being the custodian untilan Institute of Directors was established. 10. SOCAM also works closely with the Malawi Stock Exchange in ensuring that listed companies complied with international standards. OngoingReforms 11. There i s a proposal to merge the Society of Accountants in Malawi and the Public Accountants Examination Council into a single Institute of Accountants in Malawi 0. Such a merger to be legally backed up by amending the current Act to reflect the changed institutional set up of the accountancy profession. The Institute would be organized along the lines of the Chartered Association of Certified Accountants (ACCA) in the United Kmgdomas a self-regulating body with wider powers under statutory authority. 12. The Malawi Accountants Board would provide independent public oversight to the profession. Ths would mean transferring the current powers vested in MAE5 under the Act to the Institute. The Government is committed to the proposed merger and has given the go ahead. This would not create a problem as at operational level, the functions are actually being carried out by S O C A M and PAEC. . Assessment of Present Position There has not been a manpower study of the number of accountants required in the country to determine the future demand as well as the sources of supply of such demand. At the moment, there i s an overwhelming interest in the accountancy profession as is evidenced by the number of aspiring students. Whether such students would find employment upon completion of their stules has not been determined. On the other hand, new challenges face the accountancy profession b y the new Government decentralization policy and the need to have financial . management capacity at local government level for service delivery; there is no data to determine whether the supply side would meet the expected demand for accountants at this level. There are still a number of accountants in Malawi who are not regulated by S O C A M / W as they are not registered members. The same applies to a number of students pursuing accountancy courses who are also not registered with MAB. 70 SOCAM w h c h relies on own generated sources of finance does not have its own office premises. Conclusions and Recommendations 8 An accounting manpower study projecting demand and supply of accountants in Malawi should be undertaken to determine the number, level and types of accountants and auditors required inthe country. 1 The proposed merger of SOCAM and PAEC is welcome and should b e supported as it would result in streamlining the institutional set up of organizations associatedwith the accountancy profession. 1 The profession and especially SOCAM needs financial support to discharge its obligations. It is on track in fostering good corporate governance, use of international standards, and has developed a Strategic Plan to advance the accountancy profession inMalawi. 1 The accountancy professionshould develop the necessary and relevant training requirements for accounting cadre for the newlocal governments. 1 As SOCAM and PAEC merge into an Institute and the relevant legislation amended to reflect this, consideration should also be given to require all accountants living and working in Malawi, who are members of accountancy bodies that are members of IFAC, to register as members of the Institute. This would strengthenthe regulation of the profession. 71 72 ANNEX I: LISTOFPERSONSMET Name Position Organization Dr.M.Mkwezalamba Principal Secretary (Economic Affairs) Ministry of Finance Mr.R.Kampanje Director of Budget M i n i s t r y of Finance Mr.A. Mzoma Deputy Director (Debt &Aid ) M i n i s t r y of Finance Mr.Makalande Counterpart Staff Ministry of Finance Mr.D.Kandoje Accountant General M i n i s t r y of Finance M s N.Mnthambala Assistant Accountant General Ministry of Finance Mr.G.Okado Consultant, I F M I S Ministry of Finance Mr.L.Kachikopa Deputy Director (Development) National Economic Council Mrs. P. Zimpita Deputy Director (M& E) National Economic Council Mr.P.Mwanza Principal Economist National Economic Council Dr.Kuthembamwale Director M i n i s t r y of Education Mr.B.E.K.Munthali Principal Secretary (Basic Education) M i n i s t r y of Education Mr.M.J. M.Phiri Commissioner General Malawi Revenue Authority Mr.Mononga Commissioner of Taxes Malawi Revenue Authority Mrs.C. Selemani Director of Finance and Administration Malawi Revenue Authority Mr.Kabango Director of International Operations Reserve Bank of Malawi Mr.R.Malamulo Director of Finance Reserve Bank of Malawi Mr.C H.Njala Chief Auditor National Audit Office Mr.H.B.Kalonganda, Auditor General, National Audit Office Mr.L.S. Gomani, Deputy Auditor General, National Audit Office Mr.J. Chisamba, Executive Officer, National Audit Office Mr.A.C.Banda, Principal Auditor, National Audit Office Mr.R.Masano, Chief InternalAuditor, Ministry of Education Mr.W. Chalaika, Internal Auditor, Ministry of Health Mr.Ch.Mvalo, Assistant Internal Auditor, Ministry of Health Mr.S.A.F. Mgomba, Principal Accountant, M i n i s t r y of Health Mr.B.T.Ng'anjo, Principal InternalAuditor, Ministry of Finance Mr.Matumda, Chief Accountant, Accountant General's office Mr.Mmbele, Principal Officer, Accountant General's office Mr.Banda, Principal Officer, Accountant General's office Mr.G.Mansayara, Store officer, Accountant General's office Mr.R.Mzonde, Assistant Chief Economist, PERMU, Ministry of Finance Mr.Chayamba, Principal Officer, PERMU, Ministry of Finance Mr.A.M.Juma, Comptroller, Department of Statutory Bodies Mr.H.M.Kumwenda, Principal Economist, Department of Statutory Bodies Mr.F.L.J.Musicha, General Manager, Lilongwe Water Board Mr.M.Sakaleche, Assistant Internal Auditor, Lilongwe Water Board Mr.G.P.Kabango, Director International Ops Reserve Bank of Malawi Mr.Chytsonga, InternalAuditor, Reserve Bank of Malawi Mr.M.Kayange, InternalAuditor, Reserve Bank of Malawi Mr.K.Livingston, Economic Advisor, DFID(Malawi) Mrs. B.H.Kjolis, NORAD (Malawi) Mr.K.M.Dye, Senior Vice President, COWATERInternational Inc. Mr.F.Knight, Project Manager, COWATERInternationalInc. Mr.G.Vaughan-Jones, Senior Partner, Change Consulting Mr.Mwinye Office of the President and Cabinet Mr.Kalisula D S C Mr.Mzonde PERiMU Mr.Chayamba Privatisation Commission Mr.Lipunga Privatisation Commission Mr.Makina Malawi Dev Corporation Mr.Mpinganjira Malawi D e v Corporation Mr.Kawelama ADMARC Mr.Chioni M i n i s t r y of Agriculture 73 Mr.Matola Ministry ofJustice Mr.Nyirenda M i n i s t r y ofJustice Fredrick Kasonda Deputy Director, Government Central Stores JimCraigie CABATproject DfID Sheelagh Stewart Senior Governance Advisor, DfID Mr Soko Head Economic Affairs, Ministry of Finance GrahamJones Consultant Finance and Audit A c t George Mhango Assistant Director, Contracting Out Unit Mr Chinva Procurement Specialist, Contracting Out Unit J o m y Somba Chairman, National Construction Industry I Mr Chilinga, General Manager, Malawi Finance Company Mr Shaba Procurement Officer, M i n i s t r y of Agriculture Harry Chayenda Director, Government Central Stores Mr Sakaike Lilongwe central stores controller Lilongwe City Council Mr Gama Lilongwe deputy central stores controller Lilongwe City Council Lars Christofferson DANIDA project M i n i s t r y of Education Hastings Chiudza Chief Quantity Surveyor Department of Buildings Wellington Gondwe Department of Buildings Mr Kalima Deputy Secretary, Ministry of Education Mr Gadi Chairman, RegionalWater Board Mr Kamenya Purchase Officer, Regional Water Board MrK. Nkoma Deputy Secretary, OPC Watch Chataeka InternalAuditor, Ministry of Health MrBanda Officer Superintendent Administration, Ministry of Finance PrincipalAccounting Officer, Ministry of Finance, AGD Stores Controller, M i n i s t r y of Finance, AGD MrMohango Director of Finance, Lilongwe District Assembly Mr Chinva Deputy Secretary Technical, Ministry of Works Mr.A. Kumwenda Principal Malawi College of Accountancy Mr.B.Chitsonga Principal Lecturer Malawi College of Accountancy Mr.Chioso President S O C A M Mr.Mazengera Executive Director S O C A M Mr. Perreira Committee Member S O C A M Mr.A. Osman Partner Ernst & Young Mr.T. Mpinganjira Chief Executive Malawi Stock Exchange Mr.J. Kamanga Operations Manager Malawi Stock Exchange Mr.Kanje President, Malawi Chapter Institute of Internal Auditors Mr.Njobvu Dean, Falcuty of Commerce Polytechnic Mr.Shaba Executive Director CURE Mr.T.Nandolo Executive Director CONGOMA Mr.Mr.Sonda, Deputy Minister, Minster of Finance Mr.Mwenelupembe, Chairman, Malawi Accountancy Board Mr.Mataka, Executive Director, Malawi Accountancy Board Mr.V.Mzumara, Registrar-General M i n i s t r y of justice Mr.Mlusu, General Manager, NICO Dr.Kandoole, Executive Director, Malawi Inst. of Management 74 2 E . c 0 4 . . P U r c r . r < r r rc \ L r E .-u (I y . 8 0 5 w 76 ANNEX 111: BIBLIOGRAPHY 1. Betrifftu.a. Auditor General! 2. Cammack, T. (2001). Integration of the CFAA with Existingand PlannedPublic Expenditure Initiatives 3. Chimango, L.et a1(2001). Budgetand Finance Committee Pre-BudgetReport to the National Assembly. 4. 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