Document of The World Bank Group

FOR OFFICIAL USE ONLY

Report No. 95178-MW

Public Disclosure Authorized

INTERNATIONAL DEVELOPMENT ASSOCIATION

INTERNATIONAL FINANCE CORPORATION

MULTILATERAL INVESTMENT GUARANTEE AGENCY

PERFORMANCE AND LEARNING REVIEW

Public Disclosure Authorized OF THE COUNTRY ASSISTANCE STRATEGY

FOR

THE REPUBLIC OF MALAWI

FOR THE PERIOD FY13-FY16

March 25, 2015

Public Disclosure Authorized

International Development Association Malawi Country Management Unit Africa Region

International Finance Corporation Sub Saharan Africa Department

Multilateral Investment Guarantee Agency Sub-Saharan Africa Department

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

The date of the last Country Assistance Strategy (Report No. 74159-MW) was December 12, 2012

FISCAL YEAR July 1 – June 30

CURRENCY EQUIVALENTS (Exchange rate effective as of February 22, 2015) Currency Unit = Malawi Kwacha (MWK) US$1 = 454.5 MWK

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities ETG Export Trading Group AfDB African Development Bank EU European Union AgPER Agriculture Public Expenditure FDH First Discount House Review FISP Farm Input Subsidy Program AIDS Acquired Immune Deficiency FM Financial Management Syndrome FMB First Merchant Bank APEI Accelerated Program for Economic FROIP Financial Reporting and Oversight Integration Improvement Project ASWAp Agriculture Sector Wide Approach FSTAP Financial Sector Technical ATS Automatic Transfer System Assistance Project BESTAP Business Environment GDP Gross Domestic Product Strengthening Technical Assistance GEF Global Environment Fund Project GFDRR Global Fund for Disaster Risk BTOR Back to Office Report Reduction CAADP Comprehensive Africa Agriculture GMDP Global Media Development Development Program Program CABS Common Approach to Budget GP Global Practice Support GPE Global Partnership for Education CAS Country Assistance Strategy GPSA Global Partnership for Social CBN Community Based Nutrition Accountability CDS City Development Strategy HIV Human Immunodeficiency Virus CMST Central Medical Supply Trust IC Investment Climate COMSIP Community Savings and IFA Inputs for Assets Investment Promotion ICR Implementation Completion CPF Country Partnership Framework Review CPPR Country Portfolio and Performance IDA International Development Review Association CRW Crisis Response Window IFC International Finance Corporation CSO Civil Society Organization IFMIS Integrated Financial Management DB Doing Business Information System DLI Disbursement-Linked Indicator IHPS Integrated Household Panel Survey DPO Development Policy Operation IHS Integrated Household Survey DPP Democratic Progressive Party IHPS Integrated Household Panel Survey DTIS Diagnostic Trade Integration Study IMF International Monetary Fund EIB European Investment Bank IRLADP Irrigation, Rural Livelihoods, and E-PAF Extraordinary Performance Agricultural Development Project Assessment Framework IP Implementation Progress ESCOM Electricity Supply Commission of ISR Implementation Status and Results Malawi Report ESIA Environmental and Social Impact JICA Japan International Cooperation Assessment Agency ESMP Environmental and Social LUANAR Lilongwe University of Agriculture Management Plan and Natural Resources ESW Economic and Sector Work M&E Monitoring and Evaluation

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MAP Multi-sectoral AIDS Project PPIAF Public-Private Infrastructure MASAF Malawi Social Action Fund Advisory Facility MDA Ministries, Departments and PPF Project Preparation Facility Agencies PPP Public-Private Partnership MDG Millennium Development Goal PSR Public Sector Reform MDTF Multi-donor Trust Fund PWSP Public Works Support Program MGDS II Second Malawi Growth and RBM Reserve Bank of Malawi Development Strategy RF Results Framework MIGA Multilateral Investment Guarantee SATTFP Southern Africa Trade and Agency Transport Facilitation Project MIS Management Information System SCD Systematic Country Diagnostic MP Member of Parliament SCT Social Cash Transfer NBS New Building Society SME Small and Medium Enterprise NHL Nico Holdings Limited SRBMP Shire River Basin Management NSP National Strategic Plan Project OAP Open Aid Partnership SVTP Shire Valley Transformation ODA Official Development Assistance Project OSBP One Stop Border Post TA Technical Assistance PAD Project Appraisal Document TF Trust Fund PET-QSDS Public Expenditure Tracking and TSA Treasury Single Account Quality of Service Delivery Study USAID United States Agency of PFM Public Financial Management International Development PFEMRP Public Finance and Economic WTP Willingness to Pay Management Reform Program WBG World Bank Group PIU Project Implementation Unit WBI World Bank Institute PLR Performance and Learning Review

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Acknowledgements

The PLR was prepared under the guidance of Kundhavi Kadiresan, the Country Director. The core team was led by Laura Kullenberg, Country Manager and included Zafar Ahmed, Esther Lozo and Zione Kansinde. World Bank Group Country Team members based in Lilongwe, Washington D.C., and Zambia made significant contributions including Zeria Banda, Efrem Chilima, Trust Chimaliro, Mercy Chimpokosera, Stephen Davenport, Alejandro De la Fuente, Daniel Domelevo, Olivier Durand, Khurram Farooq, Douglas Graham, Malcolm Ehrenpreis, Craig Hammer, Ziauddin Hyder, Chrissie Kamwendo, Priscilla Kandoole, Praveen Kumar, Julita Manda, Keith McLean, Robin Mearns, Steven Mhone, Zachary Mills, John Makumba, Sandra Moscoro, Brian Mtonya, Menno Mulder-Sibanda, Francis Nkoka, Vijay Pillai, Peter Pojarski, Richard Record, Tijan Sallah, Deepa Sankar, Greshom Sichinga, Grace Soko, Pazhayannur Subramanian, Jeff Thindwa, Pieter Waalewijn, and Michael Webster. The IFC team was led by Saleem Karimjee and Aimilios Chatzinikolaou, and by Stephan Dreyhaupt from MIGA. The PLR benefited from discussions with parliamentarians, civil society and private sector representatives. Special thanks are extended to the Government of Malawi, for their contributions.

IDA IFC Vice President: Makhtar Diop Karin Finkelston Country Director: Kundhavi Kadiresan Oumar Seydi Task Team Leaders: Laura Kullenberg Saleem Karimjee iv

Table of Contents

I. INTRODUCTION ...... 1

II. MAIN CHANGES IN COUNTRY CONTEXT ...... 1 A. The Country Context: “Cashgate”, a New Government and the Floods ...... 1 B. Key Macroeconomic Developments ...... 2 C. Poverty and Shared Prosperity ...... 3

III. SUMMARY OF PROGRAM IMPLEMENTATION ...... 4 A. Portfolio Performance and Implementation Issues ...... 4 B. Overview of Progress towards Achieving CAS Objectives ...... 6 Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth ...... 7 Theme 2: Enhancing Human Capital and Reducing Vulnerabilities ...... 8 Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness ...... 9 C. Analytical and Advisory Activities ...... 10

IV. EMERGING LESSONS ...... 11

V. ADJUSTMENTS TO THE COUNTRY ASSISTANCE STRATEGY ...... 12 A. Proposed PLR Program ……………………………………………………………….….. 12 B. Modifications of the Results Framework ...... 16 C. Indicative WBG Program ...... 16

VI. RISKS TO CPF PROGRAM ...... 19

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ANNEXES

Annex 1: Updated CAS Results Matrix Annex 2: Matrix of Changes made to Original CAS Results Matrix Annex 3: Matrix Summarizing Progress towards FY13-FY16 CAS Objectives Annex 4: Detailed Review of Progress Annex 5: Planned and Actual Lending and Non-Lending FY13-17 Annex 6: Poverty Reduction and Shared Prosperity in Malawi Annex 7: IFC Country Program Annex 8 Financial Management Review Annex 9: List of Active Trust Funds Annex 10: Summary of CPPR Findings Annex 11: Review of Gender-informedness of the WBG’s Portfolio in Malawi Annex 12: Stakeholder Consultations and Client Survey

List of Tables and Boxes

Table 1: IFC Investments and Advisory Services during the CAS Period

Table 2: Progress in Restoring PFM systems

Table 3: Indicative Financing Program

Table 4: Indicative Non-Lending Program

Table 5: Revised Systematic Operations Risk-Rating Tool

Box 1: Cross-sector Collaboration for Agricultural Transformation in Malawi

CAS Standard Annex Tables

Annex B2: Selected Indicators of Bank Portfolio Performance and Management

Annex B8: Operations Portfolio (IBRD/IDA and Grants)

MAP

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I. INTRODUCTION

1. The current Country Assistance Strategy (CAS) for the period FY13-FY16 was discussed by the Board in January 2013 (Report No: 74159-MW). It has three strategic pillars which focus on inclusive growth, enhancing human capital and resilience and improved governance outcomes and is aligned with the Second Malawi Growth and Development Strategy (MGDS-II, 2011-16).

2. The two years since the CAS was prepared have been marked by unforeseen setbacks, in particular a serious governance and public financial management crisis, popularly known as “cashgate” that engulfed the country in September 2013. This led to suspension of donor budget support and consequent severe macro-fiscal problems. A new government was elected in May 2014, but January 2015 brought further problems in the form of catastrophic floods affecting half the country. The World Bank Group (WBG) has responded to these serious challenges with new operations, as well as with timely analytical and advisory work.

3. This Performance and Learning Review (PLR) finds that the CAS remains relevant to Malawi’s needs and development challenges. However, there has been a fundamental shift in the landscape since the CAS was approved. Progress on macroeconomic and governance indicators is off track, and “cashgate” has eroded confidence in Malawi’s financial governance (both within the country and internationally). It has also become clear that efforts to alleviate poverty are not delivering adequate results. These factors require adjustments to the WBG’s approach--including a sharper focus on public financial management (PFM) and public sector reform (PSR), a more cautious approach to budget support, and a deeper policy-based engagement on poverty alleviation. A more systematic and intensive approach to fiduciary oversight will be taken in the wake of “cashgate”, including increased financial ring-fencing of existing and new projects, systematic audits and transaction reviews, and retrofitting of risky operations. Opportunities for transformational investments arising in the country and the sub-region will continue to be pursued throughout the remainder of the CAS period.

4. It is proposed that the CAS period be extended by one year from FY13-FY16 to FY13- FY17. The elections and fallout from “cashgate” caused major disruptions to government functionality in 2013/2014 creating an environment of policy uncertainty which reversed or delayed progress toward several CAS objectives. Extending the CAS by a year would allow time for the implementation of the adjusted CAS agenda as well as more thoughtful preparation of a new CPF fully incorporating the lessons learned in the post-“cashgate” period. The Results Framework is being modified to accommodate the implementation experience and emerging priorities described in this PLR.

II. MAIN CHANGES IN COUNTRY CONTEXT A. The Country Context: “Cashgate”, a New Government and the Floods

5. “Cashgate.” In September 2013, a massive theft of public resources by a group of government and non-government individuals was exposed following the attempted assassination of a Ministry of Finance official. It was revealed that a high-level syndicate had gained illegal

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access to the national payment system and stolen public funds worth over US$50 million. The incident exposed deeply entrenched corruption and fundamental weaknesses in the country’s PFM systems. The repercussions of this scandal included a huge public outcry in the country, the arrest of government officials, the dissolution of the Cabinet, the suspension of donor budget support and sharp reductions in disbursements of aid funds through government systems. In consequence, Malawi’s fiscal situation deteriorated rapidly, as did private sector confidence and the country’s global reputation. This in turn led to a significantly enlarged budget deficit, high-cost domestic borrowing and resurgent inflation, stalling earlier macroeconomic gains and their beneficial contributions to poverty reduction.

6. The suspension of budget support has dominated donor dialogue with the Government for the past year and a half. The WBG’s Second Economic Recovery Development Policy Operation (DPO-2) was initially put on hold and then dropped while the WBG and other donors worked closely with the previous and current governments to repair the financial control environment. The new Government has launched reforms to restore PFM controls and to address the dysfunctionality of the public service. These PFM and PSR reforms are “home-grown”, have high level political support, and offer a possibility of real change if they gain broader commitment and are well implemented.

7. Elections. Malawi held relatively peaceful tripartite elections in May 2014, though they were marred by some logistical problems. The new Government has been gradually outlining plans for stabilizing and reviving the economy, and addressing governance challenges--as well as tackling persistent rural poverty, and redesigning long-standing and costly agricultural input subsidies. Its policies remain aligned with Malawi’s current Growth and Development Strategy (MGDS-II), a successor to which will be launched in June 2016.

8. Flood Emergency. In early 2015 Malawi was hit by an extreme and unprecedented (one in 500 years) flood, which affected an estimated 638,000 people and displaced more than 174,000. President Mutharika declared a state of disaster in 15 of the country’s 28 districts. The cost of responding to emergency relief needs alone is estimated at around US$81 million, or approximately two percent of Malawi’s GDP. The full extent of disaster effects and reconstruction costs is currently being assessed but is expected to be in the range of US$350-500 million.

B. Key Macroeconomic Developments

9. The FY13-FY16 Malawi CAS was prepared during a period of renewed optimism about the country’s development prospects. After a destabilizing governance crisis and a period of sustained macroeconomic imbalances, incoming President Joyce Banda inspired hope that Malawi was entering an era of improved public sector management and stronger economic performance. Initial reforms included liberalization of the exchange rate and fuel price regime and stronger planning and budgeting performance. These actions helped build confidence and contributed to real GDP growth of over 5 percent in 2013 (as compared to 1.9 percent in 2012).

10. “Cashgate” has once again placed Malawi’s economy in a vulnerable position. Disbursements of Official Development Assistance (ODA) grants declined steeply in 2014, with only US$60.3 million of a projected US$175.8 million disbursed. The fiscal deficit consequently

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increased from 1.4 percent of GDP in 2013 to 8.6 percent in 2014, requiring increased (and higher- cost) domestic borrowing than budgeted (equivalent to 5.9 percent of GDP, as against the 0.4 percent forecast). Domestic payment arrears built up (peaking at the equivalent of 8 percent of GDP). Annual average headline inflation soared between 2011 and 2013 (from 7.6 to 27.3 percent), and has remained high at 23.8 percent in 2014, further eroding the purchasing power of the poor. The depreciation of the Malawian Kwacha in the latter part of 2014 largely offset the impact of lower global oil prices on inflation.

11. The new Government has committed itself to prudent macroeconomic policies, including the continuation of market-based exchange rate and fuel pricing mechanisms. Revenue performance has generally been strong. Re-emerging confidence in Government macroeconomic management is reflected in the country’s improving foreign exchange situation, with reserves reaching US$599 million (equivalent to 2.9 months of import cover) by the end of 2014--up from US$397 million (2 months of import cover) in 2013. With the anticipated stabilization of the Kwacha in 2015, the fuller benefits of the oil price plunge are expected with an estimated fall in the country’s oil import bill of about 20 percent, or some US$33 million. Estimated real GDP growth for 2014 is 5.7 percent, reflecting cautious optimism that Malawi can maintain growth closer to the country’s potential as long as macroeconomic imbalances are avoided.

12. However, Malawi's macroeconomic position remains fragile. The Government’s room for policy maneuver is limited. The loss of donor budget support cost the equivalent of 10 percent of GDP, and its restoration to previous levels cannot be expected until the integrity of public financial management systems improves significantly. A continuing tight monetary policy stance is required to drive down inflation, and this will further dampen investment by a private sector whose confidence has been dented. Public expenditure must be contained if macroeconomic balances are to be strengthened, and this will require unpopular reductions in public subsidies and the public sector wage bill. Monetary tightening and fiscal consolidation carry short-term growth consequences, but there is no viable alternative to this course of action. Although Malawi faces macro-economic and fiscal scenarios unforeseen at the time of CAS preparation, the broad economic policy objectives set out in the CAS remain relevant. Improved macroeconomic management is essential if the country is to increase average income levels and eradicate extreme poverty.

C. Poverty and Shared Prosperity

13. Poverty and inequality remain stubbornly high in Malawi.1 New official poverty estimates will only become available in 2017, but the expectation is that the trends will not differ dramatically from the findings of the Third Integrated Household Survey of 2010/11 which showed that over half of the population was monetarily poor and one quarter lived in extreme poverty. Between 2004/05 and 2010/11, national poverty levels declined only marginally (from 52.4 to 50.7 percent of the population), and although poverty fell significantly in urban areas (from 25 to 17 percent) it increased slightly (from 56.2 to 56.7 percent) in rural areas, where 85 percent of the population and 95 percent of the country’s poor live. Rural income inequality also increased from

1 See Annex 6 for a more detailed note on poverty in Malawi.

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2004/05 to 2010/11, with the Gini coefficient worsening from 0.34 to 0.38. Despite real GDP growth rates averaging 7 percent and household per capita consumption expenditure increasing by about 12 percent between 2006 and 2010, real consumption in some two-thirds of rural households actually declined. The 2013 Integrated Household Panel Survey shows that about a third of the population have either exited or entered poverty and in roughly equal proportions -- but the reasons for these movements, as well as for the persistence of rural poverty, are imperfectly understood. Recognizing this, the new Government has asked for WBG help to better understand the drivers and dynamics of rural poverty, and to reframe its anti-poverty strategy.

14. A key obstacle to reducing poverty is low agricultural productivity. The majority of the poor remain locked in low productivity subsistence farming. Access to infrastructure, services, land, working capital, and market opportunities are all limited, but Malawi’s current strategy for increasing agricultural productivity centers disproportionately on fertilizer and seed subsidies, particularly for maize (through the Farm Input Subsidy Program, FISP). FISP, however, is not poverty targeted and is inefficiently managed. It consumes 51 percent of total public spending in agriculture, crowding out expenditure in other important areas. While FISP reform is necessary, public spending must also be rebalanced and other productivity-enhancing measures, including irrigation, deserve greater attention. So too does diversification into off-farm activities and scaled- up social safety net programs: these help temper the price and weather shocks that can otherwise drive households into poverty, or prevent them from escaping it.

III. SUMMARY OF PROGRAM IMPLEMENTATION A. Portfolio Performance and Implementation Issues

15. The Bank portfolio is performing well and will see further consolidation. As of end- FY14, the disbursement rate in the Malawi portfolio was a healthy 25%, much above the Africa region average of the Bank. The portfolio currently consists of 11 active projects, with only one problem project. During the remaining CAS period, 5 entrants and 10 exits are expected, leaving a portfolio of 7 operations at the beginning of the next CPF (excluding regional projects).2 Net commitments total US$811.3 million, of which US$339.2 million (43 percent) are currently undisbursed.

16. Currently there are 36 Trust Funds (TFs) in the Bank portfolio. These include large Bank-managed Multi-Donor Trust Funds (MDTFs) as well as smaller catalytic activities spread across the portfolio. Larger MDTFs have permitted a sector-wide pooled approach in key strategic areas and have provided effective platforms for coordinated donor policy dialogue (e.g. on PFM and FISP reform). The Global Fund for Disaster Risk Reduction (GFDRR) support for disaster risk management has proven highly relevant in light of January’s floods. However, further selectivity is needed for the remainder of the CAS period to ensure that the TF portfolio is consolidated and directly supports core strategic objectives and operations. Detailed information on Trust Funds is provided in Annex 9 and 10.

2 Project exits are based on current completion dates. See Annexes 5, 8, 9, 10 and Annex Tables B2 and B8 for more detailed portfolio data.

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17. World Bank Group Collaboration. There has been strong World Bank Group collaboration in delivering CAS outcomes, particularly relating to the ease of doing business, private sector development and agriculture. IFC’s portfolio in Malawi as of the end of December 2014 had a committed balance of US$22.4 million, of which US$17.4 million had been disbursed. MIGA currently does not have an active portfolio in Malawi, but it remains open for business across all lines of its political risk insurance products, including transfer restrictions, expropriation, breach of contract, and war and civil disturbance.

Table 1: IFC Investments and Advisory Services (Details in Annex 7)

Investments Advisory Services

Malawi Mangoes. US$5m participation in a US$15m Malawi Warehouse Receipts Program. Support investment package to support expansion of tropical for the development of a regulated Warehouse fruit production and processing operations. Receipt System. ETC Group. US$70m, (US$10m assigned to Malawi) Biotrade Africa. Partnership with Phytotrade to support ETC Group’s expansion in Africa. Africa and the Union for Ethical BioTrade to promote ethical sourcing of products by the private sector. Gateway Shopping Mall investment. Investment Climate/Doing Business and PPPs. Work underway in water, grain, education and power. Global Trade Finance Program. Existing GTFP Secured Transactions & Collateral Registries lines with First Merchant Bank and NBS Bank Malawi. Working with the Ministry of Trade and remain in place, while a third line with FDH was Industry, the Reserve Bank and the Registrar added recently. General to create a collateral registry for security interests in moveable property.

18. A Country Portfolio and Performance Review (CPPR) was conducted in November 2014. Many of its findings are consistent with past reviews, with key challenges deriving from the weak operating environment in which Bank-financed projects are implemented. These challenges can only be addressed in a sustainable way if meaningful public sector reform takes place. A review of the gender-informedness of the portfolio conducted for this PLR concluded that every operation approved under this CAS received the highest possible rating on gender- responsiveness.

19. In the aftermath of “cashgate”, an in-depth Financial Management (FM) review of the entire Bank portfolio in Malawi was also undertaken. This review identified some control and accountability weaknesses, mainly in projects mainstreamed in Ministries, Departments and Agencies (MDAs). The WBG is working with the Government to address these issues; measures being taken to protect the portfolio from fiduciary risk include increased financial ring-fencing of existing and new projects (with separate accounting packages and exclusive bank accounts), enforcement of follow-up sanctions for ineligible expenses, enhancing audit TORs to address issues identified in the FM Review, systematic transaction reviews conducted in partnership with the Government’s Central Internal Audit Unit, systematic follow up of audit findings and recommendations to ensure issues are resolved in a timely manner, greater use of independent consultants to audit procurement, increased use of direct payment modality for high-value items,

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enhanced proactive FM reviews of risky operations and provision of more intensive FM inputs and oversight during supervision. A second comprehensive FM portfolio review will be done in FY16. Details of the CPPR and FM reviews are found in Annexes 10 and 8 respectively.

20. Multi-sectoral and GP collaboration has become a vital aspect of effective poverty alleviation, and has increased during CAS implementation. Several examples are given in Box 1 below.

Box 1. Cross-sector Collaboration for Agricultural Transformation in Malawi

Agriculture is the backbone of the Malawi economy and its transformation involves coordinating agronomy, water management, land development, infrastructure and transport, disaster risk management and private sector development interventions:

- At the policy level the Bank carried out an Agricultural Public Expenditure Review (AgPER). This has provided the analytic underpinnings to reduce the cost and improve the efficiency of the Farm Input Subsidy Program (FISP). The Bank and IFC have also sponsored studies that focus on reducing excessive Government intervention in agro-business, particularly in maize marketing, and have sponsored analysis and study tours to raise awareness of the Warehouse Receipt System and explore its legal ramifications. The regional DPO-- the Accelerated Program for Economic Integration (APEI)--aims to remove regulatory restrictions to cross- border trade, and to improve border infrastructure. The Shire Valley Transformation and Nacala Corridor projects are expected to improve Malawi’s export opportunities; they are being complemented by advice to entrepreneurs on building value chains and accessing emerging markets in Mozambique and Zambia. - At the level of implementation, combining the construction of irrigation works with the delivery of agricultural services is at the core of the Bank’s approach to increasing smallholder agricultural productivity and resilience. When developing small-scale irrigation schemes, the Bank has ensured that farmers receive technical advice on new rice varieties, as well as on new resource-conserving techniques. Investments in irrigation and agriculture have been further strengthened by supporting integrated water resources management at national, basin and micro-catchment level. Access of smallholder farmers to markets has been increased by Bank financing of some 400km of rural roads, planned jointly by the Ministries of Transport and Agriculture. IFC proposes to strengthen grain storage and logistics via PPPs; while its Malawi Mangoes investment demonstrates the efficacy of the industrial outgrower business model which can be replicated and provides a valuable demonstration effect that agricultural diversification can succeed. - The WBG has addressed risk management and financing from a number of sectoral perspectives. In the Shire River Basin, the WBG has supported flood risk management, alongside training in loss/damage assessment and investments in disaster risk finance, safer housing, and community mapping for resilience. A number of sovereign, market and household level disaster risk financing and insurance options have been piloted in order to hedge farmers against weather shocks. The Bank’s Treasury and Finance and Markets Departments are providing technical assistance to help determine suitable weather insurance instruments (drawing on the multi-country Africa Risk Capacity initiative led by the African Union).

B. Overview of Progress towards Achieving CAS Objectives

21. Progress towards meeting CAS objectives has been mixed, with the principle retardant being the impact of “cashgate” on donor and WBG operations, and on macro- economic stability and growth. Three of the seven CAS outcomes are considered to be on track for achievement by the end of the CAS period, two are on watch and two are off track. Most indicators and milestones are also on track. Progress is summarized below, and detailed in Annexes 3 and 4.

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Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth

22. Under this theme two of the three outcomes are off track, and 13 of the 14 milestones are on-track.

23. Improved Macroeconomic Management. In FY13, the WBG delivered the Rapid Response Development Policy Grant and the First Economic Recovery Development Policy Operation (DPO-1). Early achievements included liberalization of the exchange rate and fuel price regimes, enhanced protection of vulnerable groups and stronger planning and budgeting. The program led to visible improvements in macroeconomic management, and helped reverse the precipitous decline in the economy. Progress was, unfortunately, arrested by “cashgate” and this outcome must now be considered off-track.

24. Improving the Ease of Doing Business (DB). IFC and the Bank’s Trade and Competitiveness team have been working together to address Malawi’s continuing slide in DB performance. They have jointly supported implementation of an updated DB memorandum, which is emerging somewhat more slowly than foreseen. IFC has helped the Government achieve several Investment Climate reforms, including revisions in 2013 of the Company Act, the Personal Property Security Act and the Insolvency Act. In collaboration with IFC, the Bank-managed Multi- donor Trust Fund Agriculture Sector-Wide Approach Support Project (ASWAp-SP) is supporting studies and reforms aimed at improving the agribusiness environment. However, Malawi’s DB ranking has slipped for the second year in a row, evidence that policy changes are not being felt by private sector operators on the ground. Thus the Ease of Doing Business outcome is considered off-track.

25. Progress is now on track, for milestones related to the development of an investment strategy, strengthening the financial sector, improving energy infrastructure, and on the preparation of potential PPPs. IFC’s work under the Secured Transactions Advisory Project is supporting development and adoption of an effective legal framework for secured lending, the development of a web-based collateral registry and capacity building around the new secured transactions system. The Bank’s Financial Sector Technical Assistance Project has led to more people using formal banking services and has helped address some of the financial sector vulnerabilities that arose from macroeconomic instability in 2012. IFC has provided market and financial analysis for the proposed Lilongwe Water Supply Project, which is envisioned as a PPP. IFC’s Global Trade Finance Program supports investments in the First Merchant Bank, NBS Bank and FDH Bank. IFC is also investing in construction and real estate, including in the new Gateway Mall in Lilongwe. The Bank-convened Forum for Public-Private Dialogue now includes quarterly updates on PFM and PSR reforms to help rebuild private sector confidence.

26. Increased Productivity and Commercialization of Agriculture and Sustainable Water Management. Outcome areas under this theme are progressing well, including milestones relating to improving economic infrastructure, regional integration, agricultural productivity, and the management of water resources. Recent bilateral agreements with neighboring countries are laying the foundations for strengthened cross-border trade, the benefits of which could be significant with the construction of regional infrastructure such as the new rail line between Tete and Nacala Port initiated under a PPP arrangement. In energy, over 100 distribution transformers have been

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installed each year. Under the Irrigation, Rural Livelihoods and Agricultural Development Project, some 45,000 farmers now benefit from 10,000 ha of rehabilitated/new irrigation works and from recent increases in maize and rice yields. More than 650,000 people have participated in an inputs- for-assets initiative under this program. In the agribusiness sector, IFC is helping Malawi commercialize and diversify its export base away from tobacco: recent IFC investments include Malawi Mangoes, a brownfield investment in mango and banana processing, and improve access to capital for farmers through advisory services (Warehouse Receipt System project). The development of the APEI regional DPO will help spur trade and regional integration by removing current burdensome policies and procedures. This Outcome is considered on-track.

Theme 2: Enhancing Human Capital and Reducing Vulnerabilities

27. Under this theme, both outcomes are on track, and 15 of the 16 milestones are on-track.

28. Improving Access and Delivery of Public Services. Despite a sustained decline in public service provision in Malawi, a number of achievements have been realized under this theme. The IDA/GPE-financed Project to Improve Education Quality has led to better Standard 5 graduation rates, the construction of 2,380 classrooms and the provision of grants to 5,359 schools to improve access and quality. The Multisectoral HIV/AIDs and Nutrition Project has contributed to national HIV response targets (Malawi is on track to meet the MDG goal for combatting HIV prevalence) and nutrition access. In late 2014, this project was restructured to create a new Ebola Preparedness Support component in anticipation of a threat for which Malawi was seriously underprepared. The National Water Development Program has provided clean water to over 1.3 million people.

29. Lowering Vulnerability and Enhancing Resilience. Good progress has been made in addressing economic vulnerability and building resilience. Under the Malawi Third Social Action Fund (MASAF III), public works targets were exceeded–the program reached 1.6 million beneficiaries (50 percent of whom were female), creating 19 million person-days of work and improving family security, savings and the ability to pay for school fees, medicines and agricultural inputs. This program also provides the poor--particularly female headed households - -with an important hedge against disaster risk. The fourth generation MASAF-IV will help the Government establish a national safety net platform and increases the oversight role of newly elected local authorities in planning local infrastructure supported through public works.

30. Progress has also been made in improving natural resource management as well as climate and disaster resilience--and the Bank has responded promptly to the current flood emergency. Protected area management has been enhanced in four national parks and reserves, and an Integrated Flood Risk Management Action Plan was adopted in 2012. Though risk management efforts were not sufficiently institutionalized in time to prevent the worst consequences of the recent flooding, their importance was underscored by these events and lessons are now being incorporated into ongoing work. In the immediate aftermath of the floods, the WBG rapidly mobilized US$600,000 for emergency access and shelter by reallocating existing IDA commitments, while simultaneously initiating preparation of a Crisis Response Window (CRW) emergency operation of US$50-80 million. This project will emphasize short-run recovery and reconstruction while complementing existing IDA support for longer-term resilience building.

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31. IDA17 commitment for Malawi to “support and implement multi-sector planning for managing climate and disaster risks” is already being addressed under this theme through multi-sector flood and drought-risk management approaches underway in the Shire River Basin Management Program (SRBMP); the Agriculture SWAp Support Project, MASAF IV and the new CRW operation. In addition, the WBG helping the Government mobilize other sources of funding for this IDA17 commitment, such as the Pilot Program for Climate Resilience (PPCR) under the Climate Investment Funds (CIF).

Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness

32. Both outcomes are on watch and two of the three milestones are on-track.

33. Improving Public Sector Performance. The depth of the challenges associated with Malawi’s public sector governance, particularly those related to public financial management, has proven far greater than originally anticipated. Some progress has been achieved in the wake of the “cashgate” scandal. The Financial Reporting and Oversight Improvement MDTF (FROIP) was the main vehicle for responding to “cash gate”. The focus of these efforts has been on reducing individual discretion and plugging security gaps, increasing mandatory reporting, and ensuring transparency. The Bank helped fix problems in the Integrated Financial Management Information System (IFMIS) and was a key partner to Government in creating the PFM Emergency Plan that was subsequently monitored in weekly meetings of development partners and Cabinet officials. Advances have been made in key areas as detailed in Table 2 below. The Ministry of Finance has recently launched a comprehensive PFM Reform Plan, prepared with assistance from the IMF.

34. Today’s PFM deficits are clearly linked to deteriorating public sector performance, a phenomenon which long predates “cashgate”. Encouragingly, President Mutharika has appointed a professional Public Service Reform Commission under the chairmanship of Vice President Saulos Chilima. The Commission’s Action Plan was launched in February 2015, and includes a broad range of initiatives, including for example cancelling unfilled vacancies, the introduction of performance contracts from the President down to department directors, and the establishment of a strong oversight body to monitor implementation. Despite all of these important remedial initiatives, “cashgate” has been a major setback--and this outcome is on watch until further substantial results are achieved.

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Table 2: Progress in Restoring PFM systems

PFM Interventions Post “Cashgate” Additional Medium-Term Actions Recommended

The main security gaps identified during “cashgate” have Enforce clear managerial accountability – take been fixed. administrative actions against officials involved in fraudulent and irregular activities and against The predictability of cash releases to MDAs has those who neglected their duties. improved from ad-hoc daily releases to monthly releases.

Virements into travel budgets have been strictly controlled. Improve financial controls through reconciling all bank accounts; completion of the Information The Reserve Bank of Malawi is now making payments Security Assessment of the IFMIS systems; fully based only on IFMIS generated advice/lists. enforcing commitment and cash management controls; improving in-year/annual financial An Information Security Officer has been hired and an reporting. ICT policy is being developed.

Piloting of Electronic Fund Transfers, to reduce the risk Strengthen the Internal Audit and Auditor General of unauthorized payments, is underway. functions.

A new Government “Wide Area Network” IT Platform is Revise the Public Financial Management Act to almost completed. embody the various structural changes underway.

Skills upgrading for Auditors, IT staff and end users has been completed.

35. Enhanced Transparency on Resources Flows and Service Delivery. The World Bank Institute (WBI) has actively engaged with several partners to build country demand for open data. As envisaged in the CAS, social accountability tools are being piloted in several WBG-financed projects3 and there has been a concentrated effort in the education sector where two GPSA grants have been dedicated exclusively to piloting innovative accountability tools. A multi-sector PER, and an Education Sector Expenditure Tracking Study have provided the tools for public debate on budget priorities and execution.

C. Analytical and Advisory Activities

36. The CAS knowledge program is successfully underpinning lending activities and policy dialogue with focused, timely and demand-driven products. Most planned ESW and TA is ongoing or has already been delivered and several additional activities have been undertaken, including a series of Policy Notes for 2014 presidential candidates.4 The new Government has demonstrated a strong demand for WBG advice, as evidenced in its early request for technical assistance for PFM and PSR reform, and for help in re-energizing the national poverty agenda. The Bank has also been heavily engaged in helping streamline the country’s agricultural subsidy program; this will continue to be a priority going forward, in light of the impact of the FISP subsidy on the budget and its potential for improved poverty alleviation if redesigned. WBG non-lending

3 See Annex 4 4 See Annex 5

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TA activities (including IFC advisory services) are also registering positive impacts in areas such as the structuring of infrastructure transactions, PPPs and energy efficiency options. Cross-country learning is an essential part of the development agenda, and Malawi is an active participant in various South-South learning exchanges.5

IV. EMERGING LESSONS

37. The “cashgate” scandal triggered domestic outrage, claimed considerable political space and has preoccupied the donor community over much of the CAS period. It has also damaged Malawi’s macro-fiscal position and confidence in Malawi’s institutions of governance. “Cashgate” prompted the Bank Country Team to engage in a period of reflection during which Malawian scholars and international experts helped the CT delve into the deeper political economy issues that have hampered the country’s development and which underpin episodes of periodic breakdown such as “cashgate”. These internal discussions, also informed by historical trends, yielded a number of lessons, as discussed below.

38. While unprecedented in its scale and implications, “cashgate” also conforms to a familiar pattern of relations between the Government and donors in Malawi. This pattern features the vesting of hope in new national leaders, a wave of structural reforms influenced and funded by donors, the dilution or eventual derailment of these reforms by entrenched interests or political exigencies, the suspension of donor budget support and the consequent destabilization of the Malawian economy. This “expectations” cycle has been repeated several times in various ways over the last 20 years.

39. Breaking such patterns is not easy, given the resilience of informal systems and rules in resource-poor emerging states. Reform opportunities need to be approached with a better sense of history. Donors, including the Bank, need to invest more in understanding the political economy of reform and the informal rules, interests and incentives that inhibit progress in both policy and project implementation. There is a need to seek out genuine internal reform initiatives- -rather than rely on generic imported solutions that have little to do with the internal political dialogue, and are eventually abandoned. This cycle of optimism, disillusion and withdrawal only reinforces the “partial reform” syndrome which has characterized many of Malawi’s development interventions in the past--producing high quality policies and reforms which are not implemented in a sustained way.

40. Adapting in this way poses strong analytical and leadership challenges for the WBG. So too do the understandable donor impulses to ring-fence their projects in the wake of “cashgate” and to avoid using government systems. It is important that the Bank both introduce smarter accountability into its own projects and enhance country ownership – the absence of which can only reinforce the indifference to national interests that underlay “cashgate”.

5 The proposed Lilongwe Water Supply Project for example, benefited from experience with water sector PPPs across the Africa region. Study tours to India and Ethiopia have enriched the design of the Shire River Basin Management Project, as have lessons from Botswana on tourism/wetland management. Under the Irrigation, Rural Livelihoods, and Agricultural Development Project (IRLADP) there have been exchanges on improved systems of rice intensification with farmers, program managers and academics from India and Kenya.

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41. Budget Support. The Bank has become more aware of historical patterns and more careful to ensure that reforms have the domestic political ownership needed for implementation and sustainability. For future policy-based lending, this means the Bank will measure commitment by results and evidence of change rather than by plans or process indicators. However, the periodic withdrawal of budget support in response to governance crises accentuates aid volatility and can cause unintended damage to growth and to poverty alleviation efforts. More thought must be given to ways of minimizing aid volatility without abandoning critical governance goals--including through a strategic mix of aid instruments. This discussion has begun within the context of the recently-constituted Development Cooperation Structure, the Government’s aid architecture framework for Malawi.

42. Effective cross-sector cooperation is a strong feature of the WBG program in Malawi, and is feasible largely because the Bank has a solid technical presence in country. The WBG's multi-sectoral team is at the heart of Bank comparative advantage, and enables the institution to sustain high quality policy dialogue, respond rapidly to emerging challenges, and build partnerships with other donors. With the Government and development partners looking to the WBG to play a leading role in PFM, PSR, and FISP reform as well as in rural poverty alleviation- -all of which are multi-sectoral in character--the success of the WBG’s future program is strongly linked to its ability to maintain a strong field presence.

V. ADJUSTMENTS TO THE COUNTRY ASSISTANCE STRATEGY

A. The Proposed PLR Program

Overview

43. While the objectives and emphases of the CAS program remain fundamentally valid, the program needs to take full account of major setbacks and emerging opportunities. Although the credibility of Malawi’s governance institutions has been dented, the priorities articulated in MGDS-II (and reaffirmed by the new Government) remain appropriate, and most of these are supported by the CAS program. The 2013 Client Survey endorses WBG priority areas of engagement, as did stakeholder consultations conducted for this PLR (the results of both are summarized in Annex 12). The CAS goals and results achieved thus far are also linked strongly to the WBG’s twin goals. However, the way in which Malawi’s governance institutions were subverted and the patterns of collusion this revealed, demand significant adjustments by the Bank and other donor partners.

44. For the remainder of the CAS period, “doing business differently” will include a number of important adjustments. These include a sharper focus on public financial management and public sector governance, and a more nuanced approach to identifying and supporting structural reform to ensure that these have domestic commitment and are likely to sustain traction. Greater attention will be given to fiduciary oversight and protecting the WBG portfolio from risks. This will include increased financial ring-fencing of existing and new projects (separate accounting packages and bank accounts for all non-PIU operations), enhancing audit TORs, systematic transaction reviews conducted in partnership with the Government’s Central Internal Audit Unit, systematic follow up of audit findings and enforcement of sanctions, greater use of independent consultants to audit procurement, enhanced proactive FM reviews of risky

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operations. The new Government’s concern about rural poverty provides an opening for a deeper policy-based engagement in line with the WBG twin goals and IDA17 commitments on poverty alleviation. At the same time, new investment opportunities have arisen in the country and the sub- region which the WBG will take advantage of in order to boost Malawi’s trading links with dynamic regional growth centers.

45. It is proposed that the CAS period be extended by one year. The elections and fallout from “cashgate” caused major disruptions to government functionality in 2013/2014 and created an environment of policy uncertainty which set back progress toward several CAS objectives. Extending the CAS by a year would allow time for the implementation of the full CAS agenda as well as more thoughtful preparation of a new CPF fully incorporating the lessons learned in the post-“cashgate” period.

Economic Governance

46. The Bank will increase its engagement on structural governance issues, particularly systemic financial management and public sector reform. Although “cashgate” was a serious setback, it created a demand for reform that was previously lacking. As detailed in III. B, Theme 3, the Bank has already acted substantively in response to the PFM weaknesses exposed by the “cashgate” scandal. Actions include the suspension of the Economic Recovery DPO series and the various remedial efforts supported through FROIP.

47. Going forward, this direct engagement in governance issues will be pursued on two tracks. The objective of the first track is to continue addressing urgent PFM weaknesses through a restructured FROIP MDTF. FROIP would hone in on weaknesses in budgeting, cash management, financial reporting, regular supervision, and internal and external audit, and would promote better IFMIS functionality. It would look at PFM-related service delivery problems in specific sectors, and would elaborate clear PFM performance benchmarks that can serve as preconditions for budget support. It would also support the newly-launched Public Service Reform Action Plan, which has the potential to rebuild public confidence in the civil service and revive the country’s moribund service delivery effort. The second track will support broader and more systemic PFM and PSR reform (possibly including FISP re-design) through the DPOs programmed for FY16-17.

48. The objective of this two-pronged approach is to sustain the momentum generated by a year of fire-fighting and transform it into true systemic reform. Greater donor coordination and more cohesive messaging around PFM and PSR reform is helping focus dialogue with Government, and reform progress will continue to be reviewed monthly in high-level meetings between the Government and donors. The interventions in both PSR and PFM will also emphasize management accountability and increasing the demand side of good governance (including, for example by making procurement and budget data available to the public).

49. Budget Support. The Bank has not disbursed through a DPO for two years and a return to budget support will not be unconditional. There are still many post-“cashgate” risks in play, and any resumption of policy lending will be contingent on measurable progress on PFM reform and economic governance. The new Government’s commitments to restore prudent macroeconomic management and its efforts to rebuild PFM controls and accountability, though,

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mark an important start. The newly launched Public Service Reforms, championed by the Vice President, provide the framework for an ambitious restoration of public service delivery, while for the first time in a decade there is an opportunity to revisit the costly FISP agricultural subsidy program. The Bank will initially support these reform efforts with technical assistance/investment project financing and, if reform momentum is sustained, there will be scope to resume development policy financing via a new DPO series as part of a mix of instruments. The DPO series, while risky, could make a powerful contribution both to macroeconomic stability and to the fundamental institutional reform needed if Malawi is to progress in its fight against poverty.

Poverty

50. The PLR now places greater emphasis on understanding the drivers of rural poverty and developing a more effective strategy for addressing them. Poverty reduction is the core objective underlying this CAS and the WBG’s corporate objectives. The country’s evident lack of progress in reducing rural poverty and the new Government’s recognition of this call for a sharper response by the WBG. The remainder of the CAS period will feature a stepped-up engagement with the Government and other stakeholders in Malawi to help develop a more coherent strategy for reducing poverty, identifying effective entry points and reprioritizing public spending. This work responds to a direct request from the new Government, and will be informed by ongoing poverty assessments and supplemented by deeper analysis of poverty drivers and urban-rural linkages. This cross-GP effort was launched with a series of informal sessions with Cabinet members and a presentation to the Malawi delegation at the Annual Meetings, and will continue through a series of workshops bringing in technicians and policy makers from the region (Uganda, Ethiopia, Rwanda) to discuss ways in which they have managed to reduce poverty. This will culminate in a Cabinet retreat.

51. The lending program will continue to focus on cross-sectoral interventions that attack poverty from different, complementary angles. Upcoming initiatives include support for regional development in the Shire Valley centering on irrigation and the commercialization of smallholder agriculture--buttressed by ongoing IFC work on improving poor farmers’ access to capital, and Bank efforts to develop smallholder value-chains. The resilience agenda includes scaling up the successful MASAF social protection program, which provides sustained employment in public works as well as community savings; and a CRW post-flood emergency operation that will complement work already underway on disaster risk-management. Both of these programs will directly support IDA17 commitments on gender and climate change. All of these efforts are underpinned by support for a stable macro-economic framework, without which poverty gains can quickly evaporate.

Regional Integration

52. The WBG will strengthen its focus on regional integration and will continue to seek opportunities to support transformational investments. As a land-locked country, close collaboration with neighboring countries is the most effective (and often the only) way to compensate for Malawi’s large infrastructure and connectivity gaps. The Bank is attuned to opportunities arising from growth in neighboring countries and has for some time been engaged

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in promoting closer integration--both through analytical work and regional projects.6 Physical connectivity will be improved by the Regional Trade and Transport Facilitation and Malawi- Mozambique Power Interconnector operations. In addition, the proximity of planned investments in the Shire Valley to the Nacala Corridor and deep water port in Mozambique could be transformational for land-locked Malawi. Investments in Shire Valley would also position Malawi to benefit from Mozambique's economic dynamism, potentially placing Blantyre as a manufacturing and financial center to provide agricultural products and services to the fast- developing Tete region.

PLR Program Adjustments

53. The PLR includes support for new operations requested by the Government; these can be accommodated without major shifts in the CAS strategy or program. They include:

• Lilongwe’s water supply. Lilongwe is one of the fastest growing cities in the world, and has virtually exhausted its existing water sources; a quarter of its inhabitants lack access to any water supply. These are primarily the poor, who must buy water at kiosks at three times the price paid by those who have piped water. The Government has placed a high priority on this project, and has asked IFC and the Bank to support the development of the nearby Diamphwe dam. This will be done using a PPP arrangement, and the project will focus on improving water access for the poor. IFC would also provide transaction advice on the basis of PPP experience in the water sector elsewhere in Africa. Co-financing is expected from the European Investment Bank. The project would contribute to CAS Theme II, Enhancing Human Capital and Reducing Vulnerabilities, and is the only new operation in the portfolio that specifically targets the urban poor.

• Combining the Agricultural Commercialization and Shire Valley Irrigation projects. At the Government’s request the Shire Valley Irrigation and Agricultural Commercialization pipeline Projects will be combined into the Shire Valley Transformation Project, to provide greater strategic focus and impact. This single operation would put over 42,000 hectares under irrigation in one of the poorest and most risk-prone areas of the country and would link the area to the Nacala corridor and port in Mozambique. It would also strengthen linkages between producer groups and commercial agribusiness, and would foster growth-pole development and trading links between Malawi, Zambia and Mozambique. IFC participation is envisaged to support the engagement of larger-scale private sector tenants, while MIGA involvement could further increase private participation (drawing on MIGA’s experiences in agricultural commercialization projects elsewhere in Africa). The Bank will also begin preparing a US$100 million Agriculture and Rural Poverty program for FY18 delivery as a follow-up operation. This could be brought forward to FY17 should the DPOs or other operations be delayed.

• Flood and Ebola responses. The Bank's initial reallocation of US$600,000 led quickly to the preparation of a CRW flood emergency response operation of US$50-80 million from IDA. These emergency operations and the ongoing resilience work on which they are based, were

6 For example through the Diagnostic Trade Integration Study, Malawi Policy Note Series, the Southern Africa Trade and Transport Facilitation Project and Malawi-Mozambique Power Interconnector.

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prepared in line with the IDA17 commitment for Malawi to support multi-sector planning to manage climate and disaster risks. The Bank also moved rapidly in November 2014 to restructure the Nutrition and HIV/AIDS Project by creating a US$7 million Ebola Preparedness component from reallocated IDA funds.

• A power sector operation. The new Government has identified power shortages as an important constraint to growth, and has approached the Bank for additional assistance to help augment the national power supply. Several hydropower feasibility studies are underway under the existing Energy Sector Support Project, and IFC will build upon the feasibility studies by proposing PPP approaches to project implementation. Should one of these schemes prove viable, it could feature in the first year of the new CPF, or could be brought forward to FY17 should one or more operations in the existing pipeline be delayed.

• A regional integration DPO series. Many of the constraints to greater integration are of a political and policy-oriented nature, and a regional DPO--the Accelerated Program for Economic Integration (APEI)--has been created to help Malawi, Mozambique, Zambia, Mauritius and Seychelles collaborate in removing policy barriers to greater integration. Two APEI operations have been added to the PLR to permit Malawi’s participation.

• Decentralization. Following the local elections, the new Government requested advice on decentralization and local governance with a view to exploring greater devolution of resources and decision making to sub-national levels. AAA has accordingly been added to the PLR program, for final delivery in FY17.

B. Modifications of the Results Framework

54. The adjustments to the Results Framework accommodate the implementation experience and emerging priorities described in this PLR. Proposed new indicators include a measured reduction in the number of items requiring export permits, the number of agencies operating at the borders, number of audit issues resolved, and the number of independent complaints, redress and investigative journalism mechanisms introduced. Some demand-side governance indicators have been merged into one to provide more clarity. Milestones have been added to track Ebola Preparedness, the Flood Response components. In addition, several new IFC indicators and milestones have been added with particular focus on improving the ease of doing business as well as the productivity and commercialization of agriculture and sustainable management of water resources. Existing Indicators have also been updated to account for the extension of the CAS through FY17 where relevant. All adjustments are detailed in Annex 2.

C. The Indicative WBG Program FY13-FY17 7

55. New commitments for the CAS period total US$ 283.7 million to date. At the beginning of the CAS period, the indicative program was US$625 million. All five projects planned for FY13 were delivered. For FY14, the Malawi/Mozambique Interconnector Project has slipped to

7 This covers the extension of the original CAS by one year to FY17.

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FY16 while the planned DPO-2 was suspended but the MASAF-IV and Skills Development Project were approved. The notional allocation for FY15-17 (IDA-17) is US$521 million.8

56. The WBG will further consolidate its portfolio in preparation for the new CPF. At the end of the extended CAS period in FY17, 7 projects are expected to remain in the portfolio, down from 12 at the beginning.9 The proposed lending program contains a smaller number of large projects with the potential for a significant impact on poverty, and with increased cross-GP as well as IFC and MIGA cooperation. Regional projects will be given significant prominence.

57. IFC will focus for the remainder of the CAS period on ensuring efficient implementation of ongoing programs, and will closely coordinate with the Bank to ensure successful implementation of joint initiatives. IFC will continue to pursue new investment opportunities in agribusiness, telecoms and banking, and advisory opportunities in infrastructure PPPs, including potential PPP involvement in the Lilongwe Water Supply project, and the Shire Valley Transformation operation. IFC will also continue to ramp up its Global Trade Finance Program, despite today’s challenging macroeconomic environment.

58. MIGA will seek to catalyze private sector investment into Malawi through use of its political risk mitigation instruments. Close WBG coordination will help MIGA identify specific areas of engagement, for example in projects such as Shire Valley Transformation and Lilongwe Water Supply.

8 Allocations are made in SDR terms, and thus the US$ amounts will vary based on exchange rates. The amounts shown in outer years are only indicative. Actual allocations will depend on (i) total IDA resources available; (ii) the country’s performance rating, per capita GNI, and population; (iii) the terms of IDA assistance (grants/credits); (iv) the allocation deductions associated with MDRI annual debt service foregone, if applicable; (v) performance and other allocation parameters, and IDA assistance terms for other IDA borrowers; and (vi) the number of IDA-eligible countries. 9 This excludes regional projects.

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Malawi – Proposed Pipeline and AAA Tables

Table 3: Indicative Financing Program (US$ million)

Themes FY15 FY16 FY17 Original CAS Pipeline Development Policy Operation DPO I & II 1,3 50 50 Public Sector Reforms/TA 1,3 5 Shire Valley Transformation Project 1,2 160 New PLR Program10 Strengthening Safety Net Systems-MASAF-IV Additional Financing 2 75 Lilongwe Water Supply Project 1,2 71 Malawi Flood Emergency Recovery Project 1,2 50 Regional (Original CAS Pipeline, New PLR Program) Southern Africa Trade and Transport Facilitation 1 20 Malawi-Mozambique Power Interconnector 1,2 20 Accelerated Program for Economic Integration I& II 1 10 10 TOTAL 145 156 220

Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth Theme 2: Enhancing Human Capital and Reducing Vulnerabilities Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness

Table 4: Indicative Non-lending Program

FY15 FY16 FY17

Policy Note Series Economic Monitor 2014-15 Decentralization and Local Growth and Competiveness I Country Economic Memorandum Governance Reducing Poverty, Inequality Financial Sector Advisory Public Expenditure Review and Vulnerability Growth & Competiveness II FSAP Malawi Gender Policy Note Programmatic Poverty Analysis Fiduciary Risk Assessment Malawi Urbanization Review Higher Education Study Dissemination Primary Education PET-QSD Study Programmatic Poverty Analysis Impact Evaluations

10 Two pipeline operations envisaged for FY18 could be brought forward to FY17 should other operations be delayed; these include an Agriculture and Rural Poverty operation and a potential Hydropower Generation Project.

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VI. RISKS TO CPF PROGRAM

Table 5: Revised Systematic Operations Risk-Rating Tool

Risk Categories Rating (H,S,M,L) 1. Political and governance S 2. Macroeconomic S 3. Sector strategies and policies S 4. Technical design of project or program M 5. Institutional capacity for implementation and sustainability S 6. Fiduciary H 7. Environment and social S 8. Stakeholders L 9. Other L Overall S 1/ High, Substantial, Moderate, Low

59. The CAS identified several risks to the achievement of envisaged results. These included political risks impacting on macroeconomic stabilization, shortfalls in donor support that could lead to unsustainable borrowing, mounting social tensions that could bring with them severe fiscal pressures, internal or external trade shocks, and -- most presciently -- persistent concerns about poor public sector management and governance and climate variability/natural disasters. The SORT analysis reaffirms the prevalence of these risks and delivers an overall risk rating of Substantial.

60. Political Risks. Rating: S. The persistence of entrenched political interests may impede the passage or implementation of the Government's bolder governance and PFM/PSR reforms, as has happened many times in Malawi’s history. It would be unwise to underestimate the resilience of vested interests and the risks inherent in reforms that necessarily cut against those with influence. This risk can to some extent be mitigated by building broad public support for policy reforms, given that public pressure to restore the credibility of government institutions is high, and there is much greater public scrutiny of Government performance after “cashgate.”

61. Macroeconomic Stability. Rating: S. Although encouraging steps have been taken towards restoring macroeconomic balance, the path ahead will be difficult. The Government’s ability to contain public spending and increase domestic revenues is unproven, and an early restoration of full donor budget support is improbable until substantial improvements are made to the control environment. If budget support is withheld for much longer, though, it will be very difficult for the Government to manage the fiscal gap and maintain macroeconomic stability; service delivery will also deteriorate further, and counterpart Government support for important new projects will be very hard to mobilize.

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62. Sector Strategies and Policies. Rating: S. Still inadequate sector strategies, and more importantly, weak commitment and/or slow implementation in key thematic areas, may pose risks for the successful achievement of the CAS objectives. These include, in particular, the ease of doing business and implementation of the DB agenda, and PSR and PFM reforms which are in early stages of implementation. Policies for the redesign of the national anti-poverty agenda and the FISP subsidy program have yet to be agreed and it could be difficult to achieve a timely consensus on the way forward.

63. Institutional Capacity for Implementation and Sustainability. Rating: S. The likelihood that weak institutional capacity for implementing and sustaining the CAS program may jeopardize results is substantial. Both the CPPR and FM reviews have pointed out deficiencies in MDAs and PIUs in delivering timely and well-coordinated programs, as well as fully adhering to Bank guidelines. While rules and regulations reflect WBG requirements, implementing agencies often require close technical assistance and guidance from the Bank and external experts.

64. Fiduciary. Rating: H. The WBGs assessments point to a climate of high fiduciary risk, even if the specific loopholes associated with “cashgate” have been closed. Efforts are underway, through the PFM reform program, to address the fundamental weaknesses in the control environment revealed by the “cashgate” episode. However, substantial evidence of improvements will need to accumulate to restore full confidence in government systems. Continued close collaboration with development partners on the PFM agenda will strengthen collective efforts, while the Government’s own commitment and need for a resumption of budget support should help maintain some internal pressure for reform. Increased FM oversight and financial ring-fencing of WBG projects will help mitigate risks to the existing portfolio.

65. Environmental and Social. Rating: S. With its reliance on a few primary exports and with its relatively undiversified economy, Malawi remains vulnerable to external demand and price shocks. The country also remains highly susceptible to risks emanating from environmental degradation and weather-related disasters, as recently demonstrated by the catastrophic floods. The WBG’s longer-impact efforts to improve physical and social resilience form a prominent part of the CAS program, and additional risk mitigation measures need to be explored jointly by donors and Government.

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Annex 1: Updated CAS Results Matrix11 CAS OUTCOMES MILESTONES WBG PROGRAM Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth Results Area 1.1: Conducive structural and macroeconomic policies to restore internal and external balance Country Development Goals (MGDS II Goals): Sustain and accelerate positive economic growth within a stable macroeconomic environment Issues and Obstacles: • Vulnerability to macroeconomic imbalances and shocks • Persistent trade and external imbalances • Low efficiency and poor targeting of public spending Outcome 1.1: Improved macroeconomic Milestone 1.1.a. Budget Policy PROJECTS management Framework Paper approved by Cabinet Indicative Projects: and Parliament by 2013/14 FY • Development Policy Operation DPO I (P 153753, FY16) Indicator 1.1.1: Variance in primary expenditure • Development Policy Operation DPO II (FY17) between approved and actual outturn • Public Sector Reforms/TA (FY16) Baseline: 9.2% (2012) Progress: 13% (2014) TRUST FUNDS Target: 6% (2016) • Public Finance and Economic Management Reform Program (MDTF, P129055, Revised target: 5% (FY17) FY12)

NONLENDING Ongoing: • Economic Monitor (P153806, FY 15) • Policy Notes Series (P147757, FY15) • Reducing Poverty, Inequality and Vulnerability (P124004, FY15) • Malawi Gender Policy Note (P143054, FY15) • Growth and Competitiveness I (P151674, FY15)

Indicative: • Programmatic Poverty Analysis (P148050, FY15 & FY16) • Country Economic Memorandum (P154607, FY16) • Growth and Competitiveness II (P151674, FY16) • Public Expenditure Review (FY17)

OTHER PARTNERS IMF; CABS development partners Results Area 1.2: Improving ease of doing business through improved economic infrastructure, regional integration, and better access to demand-responsive skills development Country Development Goals (MGDS II Goals): Develop and promote a supportive environment that will enhance inclusive private sector growth and competitiveness; Develop a productive and efficient workforce with necessary supporting equipment and infrastructure Issues and Obstacles: • Investment climate remains challenging and overall Doing Business ranking fell by one place

11 Fiscal Years (FY) for projects and Trust Funds refer to FY of actual or expected approval (unless otherwise noted). FYs for AAA refer to FY of actual or expected delivery. 21

CAS OUTCOMES MILESTONES WBG PROGRAM • Weak investment climate • Low productivity • Lack of critical mass in the banking industry (both services and customers) • Critical infrastructure investment gaps and inadequate supply of electricity, water and sanitation, and high transport costs Outcome 1.2: Improved ease of doing business Milestone 1.2.a. Reforms on ease of PROJECTS through better economic infrastructure, regional doing business fully implemented Ongoing Projects: integration, and access to demand-responsive • Regional Communication Infrastructure Project Phase 3 (P111432, FY09) vocational training Milestone 1.2.b. Investment Strategy • Energy Sector Support Project (P099626, FY11) adopted (2012) • Mining Governance and Growth Support Project (P120825, FY11) Indicator 1.2.1: Cost to formally start a business • Financial Sector Technical Assistance Project (FSTAP) (P122616, FY11) Baseline: 83.7% of income per capita (DB 2012) Milestone 1.2.c. Installation of 100 new • Skills Development Project (P131660, FY14) Progress: 94.1% of income per capita (07/2014; distribution transformers in low-voltage DB2015) network Indicative Projects: Target: 70% (2016) • Regional: Southern Africa Trade and Transport Facilitation Program (North-South Revised target: 75% (FY17) Milestone 1.2.d. Regional transmission to Corridor) SOP2 (P145566, FY15) Southern African Power Pool operational • Regional: Malawi-Mozambique Power Interconnector (FY16) Indicator 1.2.2: Number of days taken to formally • Development Policy Operation DPO I (P153753, FY16) start a business Milestone 1.2.e. Design studies for • Development Policy Operation DPO II (FY17) Baseline: 39 days (DB 2012) potential PPP-financed infrastructure • Accelerated Program for Economic Integration I (APEI I) (P146512, FY16) Progress: 38 days (07/2014; DB2015) projects prepared • Accelerated Program for Economic Integration II (APEI II) (FY17) Target: 25 days (2016) • Lilongwe Water Supply Project (P153205, FY16) Revised target: 30 days (FY17) Milestone 1.2.f. Bilateral agreements to

introduce OSBP signed between Malawi IFC Indicator 1.2.3: % of the adult population that is and Mozambique, Tanzania, and Zambia • IFC portfolio to improve SME access to finance (IFC Equity stake in NBS Bank (# formally banked 29536)) Baseline: 19% (2011, Finscope Survey) Milestone 1.2.g. Position paper on skilled • Progress: 33% (2014 Finscope Survey) labor force prepared and implemented IFC investment climate advisory services (Malawi IC Prog (# 599814)) • Target: 25% (2013); 40% (2016) Development of legal framework and capacity for Warehouse Receipt Systems Revised target: 40% (FY17) New Milestone 1.2.h. Drafts of legislative (GWFP II # 31404) texts revision by 2017. • Setting up of Collateral Registry (Malawi STCR (#599868)) Indicator 1.2.4: Proportion of women within the adult population that is formally banked New Milestone 1.2.i. Review of key TRUST FUNDS Baseline: 17% (2011) institutions (Companies Registry, Malawi • Lilongwe CDS Phase 3 (P123926, FY11-FY14) Progress: 28% (2014 Finscope Survey) Revenue Authority, High Court of Malawi) • Financial Reporting and Oversight Improvement TA (MDTF, P130878, FY13) Target : 25% (2013); 40% (2016) that impact the business environment by • Mining Governance and Growth Support Project (P120825) Revised target: 30% (FY17) 2017 • Urbanization Review (P146675) • Increased Access to Finance through Biometric Technology (P115688) Indicator 1.2.5: Annual electricity losses per year in New Milestone 1.2.j. Introduction or • Fingerprinting to Reduce Risky Borrowing (P151121) the project areas improvement of Warehouse Receipts • Renewable Energy Resource Mapping and Geospatial Planning (P151289) Baseline:17.4% (2012) legislation (2 to 3 years after • Support for Extractive Industries Transparency Initiative (EITI) (P125450) Progress: 15.2% (2014) disbursement) Target: 14.4% (2015) NONLENDING Revised target: 14% (FY17) Ongoing: • TA Energy Efficiency and Addressing the Peak Power Deficit (P149980) Indicator 1.2.6: Power capacity deficit (gap between • TA Financial Sector Advisory (P152436, FY16) system capacity and peak-load) reduced • EW Urbanization Review (P146675, FY15/FY16) Baseline: Capacity 283 MW (2012) 22

CAS OUTCOMES MILESTONES WBG PROGRAM Progress: 354 MW (2014) Completed. (Capacity has Indicative: already increased beyond 2016 target but peak • FSAP (FY17) demand has also increased to about 400 MW. Thus • Higher Education Study Dissemination (FY15) the indicator is met but the gap increasing Target: Capacity 347 MW (2016) OTHER PARTNERS Revised target: 354 MW (FY17) AfDB, USAID, DFID, EU, EIB, JICA, France

Indicator 1.2.7: Increased use of public-private partnerships (PPP) in infrastructure Baseline:5 PPP schemes in place (2012) (rail, lake, immigration, road traffic, cargo handling) Progress: Rail, lake, immigration and road traffic PPPs (4) are operational (2014) Target: 9 PPP schemes in place (2016) Revised target: 9 PPP schemes (FY17)

Indicator 1.2.8: One-stop border post (OSBP) at Songwe and other locations Baseline: Not implemented (2012) Progress: Not implemented (2014) Target: Implemented (2016) Revised target: Implemented (FY17)

New Indicator 1.2.9. Number of export products requiring an export permit (reduce to strengthen policy certainty) Baseline: 25 items (2013) Progress: 10 (6/2013) Target: 8 (FY17)

New Indicator 1.2.10. Number of agencies operating at border (Mwanza and Songwe, reduced to shorten delays) Baseline: 14 (2013) Progress: 13 (2014) Target: At most 10 (FY17)

Indicator 1.2.11: Student intake in tertiary education Baseline: 117 per 100,000 inhabitants (2012) Progress: 143 per 100,000 inhabitants (2013) Target: 130 per 100,000 inhabitants (2016) Revised target: 166 per 100,000 inhabitants (FY17)

New Indicator 1.2.12: Number of recommended laws/regulations/amendments/codes enacted or government policies adopted Baseline: 0 (2015) Target: 2 (2016)

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CAS OUTCOMES MILESTONES WBG PROGRAM Results Area 1.3: Strengthening productivity in a diversified economy Country Development Goals (MGDS II Goals): Increase agricultural productivity and diversification; Ensure sustained availability of food to all Malawians at all times at affordable prices; Increase agricultural production and productivity through intensified irrigation; Move up the value chain in key crops, and increase agro-processed products for both domestic and export markets; Improve access to water through an integrated water management system • Issues and Obstacles: • Low agricultural productivity • Agricultural production remains predominantly subsistence and rain-fed, rendering it vulnerable to drought and other weather shocks • Growth base narrow and undiversified with reliance on only a few primary exports (e.g., tobacco) • Wastage of harvest due to lack of or high cost of road access • Growing and increasingly conflicting economic demands on the country’s water resources, especially in the Shire river system • Lack of collaborative planning for management and development of the Shire Basin, leading to disjointed and incompatible investments and resource demands Outcome 1.3: Increased productivity and Milestone 1.3.a. Number of smallholder PROJECTS commercialization of agriculture and sustainable households receiving technical advice management of water resources for multiple uses increases by 10% (2015) Ongoing Projects: • Irrigation, Rural Livelihoods, and Agricultural Development Project Indicator 1.3.1: Average national maize yield (mt/ha) Milestone 1.3.b. Irrigation Investment (P084148, FY06, AF FY10, AF II FY13) Baseline: 1.9 mt/ha (2012) Framework adopted (2014) • Second National Water Development Project (P096336, FY07, AF FY11) Progress: 2.0 mt/ha (06/2014) • Agricultural Development Program Support Project (P105256, FY08, AF Target: 2.1 mt/ha (2016) Milestone 1.3.c. Additional tonnage of FY12, II AF P148964, FY14) Revised target: 2.1 mt/ha (FY17) high- quality legume seeds available • Shire River Basin Management Program (Phase I) Project (P117617, GEF P127886, Baseline: 2,800 (2012) FY12) Indicator 1.3.2: Average national irrigated rice yield Progress: 9,150 (06/2014) • Regional Agricultural Productivity Program for Southern Africa (P094183, FY13) (mt/ha) Target: 3,500 (2015) Baseline: 1.5 mt/ha (2012) Indicative Projects: Progress: 3.6 mt/ha (2014) Milestone 1.3.d. 400 km of rural roads • Shire Valley Transformation Project (P125473, FY17) (Data are for IRLADP irrigated rice schemes, rehabilitated (2015) representing most of formal irrigated rice in Malawi. IFC National data not currently available.) Milestone 1.3.e. National/basin water • Malawi Mangoes (FY14, ongoing) Target: 2.0 mt/ha (2016) management institution established • IFC integrated capital and advisory services for medium-sized farmers through Revised target: 3.6 mt/ha (FY17) (2015) commercial banks (NBS Bank (# 29536))

• Potential IFC investments in agriculture sector (Meridian (#35248)) Indicator 1.3.3: Legume production as share of total Milestone 1.3.f. Kamuzu Barrage Phase I • IFC advisory services on PPPs (e.g., Malawi Water PPP (# 599358) agricultural production construction completed (2016)

Baseline: 5% (2012) TRUST FUNDS: Progress: >200% (06/2014) (Figure needs to be New Milestone 1.3.g. Detailed due • ASWAp-SP MDTF Project Execution (P148964,FY14) checked.) diligence (Diamphwe Dam) and • Agriculture Development Program - GEF (P106671,FY08) Target: 15% (2016) submission of a Transaction Structuring

Revised target: 15% (FY17) Report (TSR) with recommendations on NONLENDING the PPP transaction structure to the GoM • Growth and Competitiveness I (P151674, FY15) Indicator 1.3.4: Enhanced planning and control of (2015) • water flows on Shire River Barrage enables Malawi Urbanization Review (P146675, FY15/FY16) improvements in generation and irrigation capacity, New Milestone 1.3.h. PPP agreement and water supply (Diamphwe Dam), assistance to the OTHER PARTNERS Baseline: No agreed planning framework or decision government with the bidders’ conference, EU, Norway, DFID, Irish Aid, USAID, AfDB, UNDP, JICA, FICA, FAO, MCC, IFAD support (2012) a transparent bid evaluation process and Progress: Kamuzu Barrage upgrading works the signing of PPP agreements with the commenced in November 2014 and are scheduled for private operator (2016) 24

CAS OUTCOMES MILESTONES WBG PROGRAM completion in October 2017; work on Shire Basin decision support is underway. Target: Multisector integrated Shire Basin Plan and decision support system operational (2016) Revised target: Unchanged (FY17)

New Indicator 1.3.5: New loans and outstanding portfolio/SME (#) Baseline: 5,000 (2010) Target: 25,000 (2015)

New Indicator 1.3.6: New loans and outstanding portfolio/SME ($) Baseline: 10,400,000 (2010) Target: 52,000,000 (2015)

New Indicator 1.3.7: New loans and outstanding portfolio/Agribusiness loans (#) Baseline: 0 (2010) Target: 15,000 (2015)

New Indicator 1.3.8: New loans and outstanding portfolio/Agribusiness loans ($) Baseline: 0 (2010) Target: 20,000,000 (2015)12

Theme 2: Enhancing Human Capital and Reducing Vulnerabilities Results Area 2.1: Improving delivery of public services Country Development Goals (MGDS II Goals): Improve access to relevant quality education; Prevent spread of HIV infection and mitigate the health, socio-economic, and psychosocial impact of HIV and AIDS; Improve access to and quality of water supply and sanitation services Issues and Obstacles: • Low completion rates in primary education (35%) • Low secondary GER (17%) • Inadequate education infrastructure and pedagogic aids • Level of stunting (47.1%; DHS 2010) among the highest in sub-Saharan Africa • Lack of a coherent and integrated approach to nutrition • High HIV prevalence rates (10.6%) • Maternal mortality rates still high (675 per 100,000 live births) • MDG target (71% in 2015) for access to adequate sanitation likely to be missed • Impact of wider fiduciary concerns and withdrawal of donor funding likely to affect some of the pooled funding arrangements Outcome 2.1: Improved access to quality education, Milestone 2.1.a. Improved education PROJECTS reliable nutrition, HIV/AIDS services, and infrastructure through new or Ongoing Projects: sustainable water supply and sanitation services rehabilitated classrooms • Project to Improve Education Quality in Malawi (P114847, FY10) • Malawi Skills Development Project (P131660, FY14)

12 Indicators 1.3.5 to 1.3.7 were based on IFC financing to NBS Bank in 2010. However, following the economic woes in Malawi in 2011 – 2012, the Bank almost failed and is now in recovery. Once the Bank is back in normal operations, the indicators should be reset. 25

CAS OUTCOMES MILESTONES WBG PROGRAM Education: Milestone 2.1.b. Decentralization of • Nutrition & HIV/AIDS Project (P125237, FY12) [Plus an added component to Indicator 2.1.1: Standard 5 survival rates education resources through grants to support Ebola preparedness] Baseline: boys: 60% (2010) primary schools • Strengthening Safety Nets Systems – MASAF IV (P133620, FY14) Progress: 66% (03/2014) Target: boys: 65% (2016) Milestone 2.1.c. Community-based Indicative Projects: Revised target: boys: 68% (FY17) communication program complete with • Lilongwe Water Supply Project (FY16) Baseline: girls: 57% (2010) tools and materials in place • Strengthening Safety Net Systems-MASAF IV Additional Financing (FY15) Progress: 62% (03/2014) Target: girls: 64% (2016) Milestone 2.1.d. Improved local and TRUST FUNDS Revised target: girls: 66% (FY17): central coordination for nutrition • Support to Disadvantaged Children (P114847) • Promoting Inclusion of Children with Disabilities (P126025) Nutrition security: Milestone 2.1.e. Improved access to • Strengthening Social Accountability in the Education Sector (P147837) Indicator 2.1.2: Community nutrition program community nutrition services • Support to Lilongwe Water Board for Tariff Review and Willingness-to-Pay Study coverage of under-two year old children (P148272) Baseline: 0% (2010) Milestone 2.1.f. Effective HIV/AIDS • Support for Nutrition Activities and Policies (P125237) Progress: 6% (10/2014) prevention program rolled out • Malawi GPE II (P154185) Target: 14% (2016)

Revised target: 25% (FY17): Milestone 2.1.g. Socially marketed and NONLENDING free condoms distributed to outlets and Ongoing: HIV/AIDS Services: end users • TA Reducing Poverty, Inequality and Vulnerability (P124004) Indicator 2.1.3: Men and women 15-49 who have • Malawi Primary Education PET-QSD Study (P148735, FY15) had more than one sexual partner in the last 12 Milestone 2.1.h. Young people access • Education Sector Review (P153202, FY15) months reporting use of a condom in last youth- friendly health service • intercourse (%) Higher Education Study Dissemination (P153416, Y15) • Baseline: Women: 27.3% (2010); Men: 23.6% (2010) Milestone 2.1.i. Improved management Developing Safer School Programs (under P125171, FY16) Progress: Women:27.3% (11/2014); Men:24.6% and reduced incidence of STIs other than (11/2014) HIV infection Indicative: Target: Women: 31% (2015); Men: 28% (2015) • Public Expenditure Review (FY17) Revised target: 33% (men and women) (FY17) New Milestone 2.1.j. Ebola preparedness plan enhanced and put in place to address OTHER PARTNERS Indicator 2.1.4: % of infants born to HIV+ women a potential outbreak of the disease. FTI CF, GDC, UNICEF, DFID, Norway, USAID, CIDA, Global Fund enrolled in PMTCT services in target districts who receive a DNA PCR test for HIV within 2 months of birth Baseline: 25% (2010) Progress: 53% (06/2013) Target: 40% (2015) Revised target: 45% (FY17)

Water & Sanitation: Indicator 2.1.5: Number of people provided with new or improved water supply through the project Baseline: 0 (3/2012) Progress: 1.3 million (12/2014) Target: 1 million (2014) Revised target: 1.7 million (FY17)

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CAS OUTCOMES MILESTONES WBG PROGRAM Indicator 2.1.6: Number of people provided with improved sanitation facilities through the project Baseline: 0 (3/2012) Progress: 64,000 (12/2014) Target: 37,000 (2014) Revised target: 70,000 (FY17)

Results Area 2.2: Lowering vulnerability and enhancing resilience Country Development Goals (MGDS II Goals): Improve resilience and quality of life so the poor can move out of poverty and vulnerability; Improve social protection; Improve resilience and quality of life for the poor to move out of poverty and vulnerability; Ensure sustainable management and utilization of the environment and natural resources; Reduce the social, economic, and environmental impact of disasters and enhance resilience to climate change risks and impact Issues and Obstacles: • Large numbers of poor and vulnerable require more social protection • High population density and poverty put pressure on the environment and degrade natural resource base and critical ecosystems • Little adoption of sustainable land and water management practices • High rates of deforestation, erosion, flash floods, and loss on soil fertility and productivity • Increasing incidence of flood events with increasing human and material impacts and limited preparedness for disasters • Limited practical mainstreaming of climate and disaster risk reduction in sectors • Little mainstreaming of Disaster Risk Reduction (DRR) in sectors and limited preparedness for disaster (floods, droughts, earthquakes)

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Outcome 2.2: Improved resilience for poor Milestone 2.2.a. Social protection PROJECTS communities through adequate social safety nets, investments better coordinated Ongoing Projects: improved climate resilience, and enhanced capacity • Irrigation, Rural Livelihoods, and Agricultural Development Project to respond to disaster risk Milestone 2.2.b. National guidelines for (P084148, FY06, AF FY10, AF II FY13) integrated catchment management • Second National Water Development Project (P096336, FY07, AF FY11) Social Safety Net System: (2014) • Agricultural Development Program Support Project (P105256, FY08, AF Indicator 2.2.1: Social safety net (SSN) established P128576, FY12, II AF P148964, FY14) Baseline: Public Works Programs (2012) Milestone 2.2.c. Improved management • Shire River Basin Management Program (Phase I) Project (P117617, GEF P127866, Progress: MASAF IV effective (09/2014) of natural habitat in selected protected FY12) Target: Consolidated social safety nets (2015) areas • Strengthening Safety Nets Systems-MASAF IV (P133620, FY14) Revised target: Unified Beneficiary Registry (UBR) • Regional: Agricultural Productivity Program for Southern Africa (P094183, established in 20 districts (FY17) Milestone 2.2.d. Integrated Flood Risk FY13) Management Action Plan for Shire Basin Indicator 2.2.2:Beneficiaries with savings of at least adopted (2012) Indicative Projects: 50% of public works wage one year after • Strengthening Safety Net Systems-MASAF IV Additional Financing (FY15) participation Milestone 2.2.e. Improved Shire Basin • Malawi Flood Emergency Recovery Project (FY15) Baseline: 13,500 (2012) Flood Forecasting and Early Warning Progress: 99,153, of which 66% female (09/2014) system operational (2015) TRUST FUNDS Target: 34,000, of which 62% female (2016) • Effective Management of the Nkhotakota Wildlife Reserve Project (GEF, Revised target: 100,000 (of which, 62% female) Milestone 2.2.f. Sector diagnostics on P110112, FY12) (FY17) climate and disaster impacts completed • Nyika Trans-Frontier Conservation Area Project (GEF, P108879, FY11) (2014) • Disaster Risk Management in Malawi Country Plan II (GFDRR, P125171) Climate Change Resilience and Capacity to Respond • Environmental and Social Challenges in MIGA-Guaranteed Projects (P108082) to Disaster Risk: Milestone 2.2.g. At least two sectors • Shire River Basin Management Program (P127866) Indicator 2.2.3: Vegetation cover change as feature gender, climate, and disaster risk percentage of baseline in selected catchments (= considerations in their investment NONLENDING approx. 100,000 ha) programs (2015) Ongoing: Baseline 0% (2012) • Progress: Too soon for measurable change to be New Milestone 2.2.h. Disaster Recovery Malawi Gender Policy Note (P143054, FY15) • detected (11/2014) and Reconstruction Framework prepared TA Reducing Poverty, Inequality and Vulnerability (P124004, FY15) Target: 8% (2016) for early, medium and long term needs • TA Energy Efficiency and Addressing the Peak Power Deficit (P149980) Revised target: 8% (FY17) New Milestone 2.2.i. Disaster Risk Indicative: Indicator 2.2.4: People served by improved flood Financing Strategy prepared for flood risk • Programmatic Poverty Analysis (P148050, FY15 &FY16) management, including mitigation and adaptation management (early warning) OTHER PARTNERS Baseline: 0 (2012) KfW, UNICEF, UNDP, DFID, GEF, FAO, Norway, Ireland Aid, TerrAfrica Partnership, Progress: Too soon for measurable change to be MCC, GFDRR detected (11/2014) Target: 200,000 (2016) Revised target : 200,000 (FY17)

Indicator 2.2.5: Improved mainstreaming of gender- aware climate and disaster risk reduction issues with focus on vulnerable communities within sector investment planning (especially in Bank and IFC- supported sectors and programs) Progress: Mainstreaming evident in at least three sectors (11/2014) 28

CAS OUTCOMES MILESTONES WBG PROGRAM Revised target: Mainstreaming evident in at least four sectors (FY17)

Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness Results Area 3.1: Improving public sector management Country Development Goals (MGDS II Goals): Improve government effectiveness and quality of public administration and credibility of public financial management (PFM), procurement, and internal and external oversight processes Issues and Obstacles: • Poor public expenditure and human resource management, with little monitoring and evaluation (M&E) and suboptimal statistics • Inadequate fiscal and institutional foundation for decentralization, leading to suboptimal service delivery • Suboptimal transparency and accountability and use of demand-side governance instruments, especially below the national level Outcome 3.1: Improved public sector performance Milestone 3.1.a.Increased number of PROJECTS because of better PFM, procurement, M&E national and district financial Indicative Projects: systems, and enhanced statistics transactions using IFMIS • Development Policy Operation DPO I (P153753, FY16) • Development Policy Operation DPO II (FY17) Indicator 3.1.1: Number of sub-national Milestone 3.1.b. Implementing audit • Public Sector Reforms/TA (FY16) governments covered by the IFMIS rollout Baseline: observations submitted to the 5 Audit 22 (2012) Committees set up by the Government TRUST FUNDS: Progress: 34 (12/2014) • Public Finance and Economic Management Reform Program - MDTF (P129055, Target: 34 (2016) Milestone 3.1.c. Complete bank FY12) Revised target: 34 (FY17) reconciliation statements with no • Financial Reporting and Oversight Improvement Project (MDTF, P130878, FY13) discrepancies and unreconciled items • Procurement Capacity Building Project (P126649, FY12) Indicator 3.1.2 Number of audit observations resolved Milestone 3.1.d. M&E system designed NONLENDING Progress: 21 (02/2015) and operational in key sectors Indicative: Target: 50 (2016) • Malawi Urbanization Review (P146675, FY15) Revised target: 70 (FY17) • FSAP (FY17)

• Fiduciary Risk Assessment (P152992, FY15/FY16) Indicator 3.1.3: Status of MG1 and the sub-MG • TA Public Sector Governance Reform (P152085) (SMG) accounts at the Reserve Bank of Malawi

Progress: 0 (03/2015) OTHER PARTNERS Target: 100% of MG1 and SMGs within 2 months Norway Statistical Capacity Building Project, EU, UN, DFID after the end of each month (2016) Revised target: 100% of MG1 and SMGs within 1 month after the end of each month (FY17)

Indicator 3.1.4: Strengthened transparency, accountability, and capacity of public procurement, focusing on the eight top-spending ministries and parastatals Baseline: 0 (2012) Progress: 13 Agriculture, Health, Education, Transport and Public Works, Roads Authority, Irrigation and Water, ESCOM, Malawi Housing, Local Government, Finance, Lands, Industry & Trade, Natural Resources and Mining (2014)

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CAS OUTCOMES MILESTONES WBG PROGRAM Target: 10; Agriculture, Health, Education, Transport and Public Works, Roads Authority, Irrigation and Water, ESCOM, Malawi Housing (2014) Revised target: 18 including National Statistical Office, Foreign Affairs, Internal Security, Labor, Water Boards (2017)

Results Area 3.2: Strengthening social accountability for service provision Country Development Goals (MGDS II Goals): Improve governance Issues and Obstacles: • Poor public sector management performance, systems and capacities, particularly in human resource (HR), PFM, and M&E • Lack of transparency in natural resource management Outcome 3.2: Enhanced transparency on resource Milestone 3.2.a. System for tracking PROJECTS flows and service delivery government performance in place and Ongoing Projects: functional • Mining Governance and Growth Support Project (P120825, FY11) Indicator 3.2.1: Number of good governance tools • Shire River Basin Management Project (P117617, FY12) used and scaled up including citizen feedback and • Strengthening Safety Net Systems-MASAF IV (P133620, FY14) redress mechanisms, transparency in the use of resource flows (e.g., expenditure tracking, Indicative Projects: independent budget analysis, PETS, citizens charters), • Development Policy Operation DPO I (P153753, FY16) user participation/feedback • Development Policy Operation DPO II (FY17) Baseline: 2 (2011) • Public Sector Reforms/TA (FY16) Progress: 4 Target: 5 (2015) Revised target: 6 (FY17) TRUST FUNDS: • Public Finance and Economic Management Reform Program - MDTF (P129055, Indicator 3.2.2: Geodata management center FY12) providing online access • Financial Reporting and Oversight Improvement Project (MDTF, P130878, FY13) Baseline: No (2012) • Strengthening Social Accountability in the Education Sector (P147837) Progress: Refurbishment of the building for Geo data • Social Accountability Strengthening Project (P147819) center is in progress; officers have attended both short term and long term training in readiness. NONLENDING Recruitment of a consultant to design and Install the Ongoing: Geodata MIS is in progress. • WBI: Capacity strengthening activities in support of investigative journalism and Target: Yes (2016) civil society participation and engagement: Revised target: Yes (FY17) Global Media Development Program o Leadership, Learning and Innovation’s Open Aid Partnership (OAP) Indicator 3.2.3: Modern computerized mining o Global Partnership for Social Accountability (GPSA) cadaster in use o Code for Africa (a mass-media and impact investment-funded organization Baseline: No (2012) o focused on building civic technology capacity within civil society and the Progress: Recruitment of a Consultant to install GIS- watchdog media) based Cadastre system is in progress. Officers have • been trained, Procurement of field equipment is Malawi Primary Education PET-QSD Study (P148735, FY15) advanced as bidding documents have been received.

Procurement of office equipment will be done after consultant has been recruited. Target: Yes (2016) Revised target: Yes (FY17) 30

Annex 2: Matrix of Changes made to Original CAS Results Matrix

Results area in the original CAS Changes Remarks All indicators Added updated targets for FY17 To update/revise target values for indicators given the extension of the CAS to FY17 Results Area 1.2 Added: To reflect evolving country development challenges Issues and Obstacles • Investment climate remains challenging and overall Doing Business ranking fell by one place • Critical infrastructure investment gaps and inadequate supply of electricity, water and sanitation, and high transport costs

Outcome 1.2 Indicator 1.2.3: % of the adult population that is formally banked To improve clarity of the indicator and allow better Indicator 1.2.3: % of the adult measurement population that use formal financial institutions Outcome 1.2 Added: To reflect available and updated information as well as Indicators New Indicator 1.2.9. Number of export products requiring an export new recommendations from the Malawi Diagnostic permit (reduce to strengthen policy certainty) Integrated Trade Study (DITS) and to sharpen the Baseline: 25 items (2013) measurement of the outcome. Progress: 10 (6/2013) Target: 8 (FY17)

New Indicator 1.2.10. Number of agencies operating at border (Mwanza and Songwe, reduced to shorten delays) Baseline: 14 (2013) Progress: 13 (2014) Target: At most 10 (FY17)

Outcome 1.2 Added: New indicators and milestones from IFC New Indicator 1.2.12: Number of recommended laws/regulations/amendments/codes enacted or government policies adopted Baseline: 0 (2015) Target: 2 (2016)

New Milestone 1.2.h. Drafts of legislative texts revision by 2017.

New Milestone 1.2.i. Review of key institutions (Companies Registry, Malawi Revenue Authority, High Court of Malawi) that impact the business environment by 2017

New Milestone 1.2.j. Introduction or improvement of Warehouse Receipts legislation (2 to 3 years after disbursement)

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Outcome 1.3 Added: New IFC indicators New Indicator 1.3.5: New loans and outstanding portfolio/SME (#) Baseline: 5,000 (2010) Target: 25,000 (2015)

New Indicator 1.3.6: New loans and outstanding portfolio/SME ($) Baseline: 10,400,000 (2010) Target: 52,000,000 (2015)

New Indicator 1.3.7: New loans and outstanding portfolio/Agribusiness loans (#) Baseline: 0 (2010) Target: 15,000 (2015)

New Indicator 1.3.8: New loans and outstanding portfolio/Agribusiness loans ($) Baseline: 0 (2010) Target: 20,000,000 (2015)

New Milestone 1.3.g. Detailed due diligence (Diamphwe Dam) and submission of a Transaction Structuring Report (TSR) with recommendations on the PPP transaction structure to the GoM (2015)

New Milestone 1.3.h. PPP agreement (Diamphwe Dam), assistance to the government with the bidders’ conference, a transparent bid evaluation process and the signing of PPP agreements with the private operator (2016)

Results Area 2.1 Added: To reflect evolving country development challenges. Issues and Obstacles Impact of wider fiduciary concerns and withdrawal of donor funding likely to affect some of the pooled funding arrangements Outcome 2.1 Added: Nutrition and HIV/AIDS Project was restructured to Milestone New Milestone 2.1.j. Ebola preparedness plan enhanced and put in place create a new “Ebola Preparedness Support” component to address a potential outbreak of the disease. to respond to this newly emerging threat. Outcome 2.2 Added: To reflect the newly added response to the flood Milestones New Milestone 2.2.h. Disaster Recovery and Reconstruction Framework emergency. prepared for early, medium and long term needs

New Milestone 2.2.i. Disaster Risk Financing Strategy prepared for flood risk management Outcome 3.1 Dropped: The indicator is dropped as the related project was Indicator Indicator 3.1.3: Number of ministries covered by the new M&E system, dropped. developed under the Public Sector and Statistics Strengthening Project Baseline: 0 (2012) Target: 10 (2015)

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Outcome 3.1 Added: To help improve the control environment in Indicators and milestones New Indicator 3.1.2 Number of audit observations resolved Government. Progress: 21 (02/2015) Target: 50 (2016) Revised target (FY17): 70

New Milestone 3.1.b. Implementing audit observations submitted to the 5 Audit Committees set up by the Government

New Indicator 3.1.3: Status of MG1 and the sub-MG (SMG) accounts at the Reserve Bank of Malawi Progress: 0 (03/2015) Target: 100% of MG1 and SMGs within 2 months after the end of each month (2016) Revised target: 100% of MG1 and SMGs within 1 month after the end of each month

New Milestone 3.1.c. Complete bank reconciliation statements with no discrepancies and unreconciled items

Outcome 3.2 Merged: To improve clarity of the indicator and allow better Indicators Indicator 3.2.2: Number of independent complaint and redress measurement. mechanisms and investigative journalism mechanisms introduced Baseline: 0 (2011) Progress: >2 [WBI partnership/Shire River) ] Target: 5 (2015) Revised target (FY17): 5; and Indicator 3.2.3: Enhanced civil society organizations (CSOs) and user participation providing feedback on service delivery and independent evaluations of services, and strengthening of social accountability mechanisms for parliament. Baseline: 0 (2011) Progress: pending Target: At least 2 CSOs providing feedback annually (2015) Revised target (FY17): Has been merged with indicator 3.2.1. Thus Indicator 3.2.4 and Indicator 3.2.5 become Indicator 3.2.2 and Indicator 3.2.3 respectively.

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Annex 3: Matrix Summarizing Progress towards FY13-FY16 CAS Objectives13 CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth Results Area 1.1: Conducive structural and macroeconomic policies to restore internal and external balance Country Development Goals (MGDS II Goals): Sustain and accelerate positive economic growth within a stable macroeconomic environment Issues and Obstacles: • Vulnerability to macroeconomic imbalances and shocks • Persistent trade and external imbalances • Low efficiency and poor targeting of public spending Outcome 1.1: Improved Outcome 1.1: Off Track PROJECTS macroeconomic management Earlier efforts to reduce the variance between the approved and actual Projects Closed during CAS Period to Date: outturn went seriously off-track as development partners withdrew budget • Rapid Response Development Policy Grant Indicator 1.1.1: Variance in primary support in the wake of the “cashgate” PFM scandal that exposed fundamental (P126155, FY13) expenditure between approved and weaknesses in the integrity of government financial accounts, allowing for • Economic Recovery DPO (P133663, FY14) actual outturn large-scale theft of public resources. This resulted in a sharply higher than Baseline: 9.2% (2012) anticipated budget deficit, in turn triggering increased domestic borrowing TRUST FUNDS: Progress: 13% (2014) and the build-up of substantial payment arrears. • Public Finance and Economic Management Reform Target: 6% (2016) Program - MDTF (P129055, FY12) Milestone 1.1.a. Budget Policy Framework Paper approved by Cabinet and • Financial Reporting and Oversight Improvement Parliament by 2013/14 FY Project (MDTF, P130878, FY13) Achieved. Key macroeconomic reforms enacted by the Joyce Banda NONLENDING government helped avoid a policy-induced recession and saw improvements Delivered during CAS Period to Date: in budget execution following the 2011 governance crisis. However, • TA Debt Management Reform Plan (P130093, FY14) momentum was later lost and, in particular, the PFM weaknesses, large-scale • theft of public resources in FY13, and the resultant loss of budget support all Public Expenditure Review PER (P133262, FY15) • did significant damage to the planning and budgeting framework reversing Policy Note on Rural Poverty, Gender and earlier gains. Household Food and Nutrition Security (FY13) • Policy Analysis IHS3 (FY15) • Growth without Borders (FY14)

Ongoing: • Malawi Economic Monitor 2014-15 • Policy Notes Series (P147757) (FY15) • Reducing Poverty, Inequality and Vulnerability (P121004, FY15) • Malawi Gender Policy Note (P143054, FY15) • Growth and Competitiveness (P151674, FY16)

OTHER PARTNERS IMF; CABS development partners

13 Fiscal Years (FY) for projects and Trust Funds refer to FY of actual or expected approval (unless otherwise noted). FYs for AAA refer to FY of actual or expected delivery. 34

CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM Results Area 1.2: Improving ease of doing business through improved economic infrastructure, regional integration, and better access to demand-responsive skills development Country Development Goals (MGDS II Goals): Develop and promote a supportive environment that will enhance inclusive private sector growth and competitiveness; Develop a productive and efficient workforce with necessary supporting equipment and infrastructure Issues and Obstacles: • Weak investment climate • Low productivity • Lack of critical mass in the banking industry (both services and customers) Outcome 1.2: Improved ease of Outcome 1.2: Off Track. PROJECTS doing business through better The overall outcome is currently considered off track mainly due to the ease Projects Closed during CAS Period to Date: economic infrastructure, regional of doing business objective being off track (mostly on account of failure to • Regional Trade Facilitation Project (P070235, FY01- integration, and access to demand- implement reforms). While key indicators and milestones relating to the FY13) responsive vocational training financial sector, PPPs and energy are on track, indicators on skills are off track. • Infrastructure Services Project (P057761, FY06-FY13) • Business Environment Strengthening Project Indicator 1.2.1: Cost to formally Milestone 1.2.a. Reforms on ease of doing business fully implemented (P103773, FY07-FY13) start a business Off Track. While the Government must be commended for initiating a number Baseline: 83.7% of income per of reforms, the continued poor performance of Malawi in the Doing Business Ongoing Projects: capita (DB 2012) Report is attributable to the failure to fully implement agreed reforms. • Regional Communication Infrastructure Project Progress: 94.1% of income per Although two reforms (in Starting a Business and Getting Electricity) were Phase 3 (P111432, FY09) capita (07/2014; DB2015) recorded by the DB 2015 Report, the country’s overall ranking fell by one • Energy Sector Support Project (P099626, FY11) Target: 70% (2016) place in terms of the new methodology. Per the new methodology, Malawi • Mining Governance and Growth Support Project ranks 164/189 and Malawi’s 2014 ranking would have been 163/189 (actual (P120825, FY11) Indicator 1.2.2: Number of days ranking in terms of the old methodology was 171 out of 189). Renewed focus • Financial Sector Technical Assistance Project (FSTAP) taken to formally start a business to see through the implementation of reforms and to communicate such (P122616, FY11) Baseline: 39 days (DB 2012) reforms to stakeholders is necessary. • Skills Development Project (P131660, FY14) Progress: 38 days (07/2014; DB2015) Milestone 1.2.b. Investment Strategy adopted (2012) IFC Target: 25 days (2016) On Track. 2010 Draft Investment Policy being updated and a Strategy will be • Gateway Mall (FY11, ongoing) developed out of this. • Malawi Mangoes (FY14) Indicator 1.2.3: % of the adult • ETC Group population that is formally banked Milestone 1.2.c. Installation of 100 new distribution transformers in low- • NHL Baseline: 19% (2011, Finscope voltage network • IFC portfolio to improve SME access to finance (IFC Survey) On Track: 137 transformers were installed in 2012, 226 in 2013 and 129 in Equity stake in NBS Bank) Progress: 33% (2014 Finscope 2014. • Survey) IFC Banking TA to NBS Bank • Target: 25% (2013); 40% (2016) Milestone 1.2.d. Regional transmission to Southern African Power Pool IFC advisory services on PPPs (e.g. Agriculture operational storage) Indicator 1.2.4: Proportion of Watch. Preparation of the Mozambique-Malawi Power Interconnector is back • Development of legal framework and capacity for women within the adult population on track with the countries having signed a Memorandum of Understanding Warehouse Receipt Systems that is formally banked (MoU) to restart project activities, for which Norwegian financing has been • Setting up of Collateral Registry Baseline: 17% (2011) secured, but the line will not be operational within this CAS period. Progress: 28% (2014 Finscope Milestone 1.2.e. Design studies for potential PPP-financed infrastructure TRUST FUNDS Survey) projects prepared • Lilongwe CDS Phase 3 (P123926, FY11-FY14) Target : 25% (2013); 40% (2016) On Track. Studies are ongoing for Liwonde and Nkhotakota National Park • Financial Reporting and Oversight Improvement TA concessions, Cape Maclear Hotel and Resort, Blantyre and Mzuzu bus (MDTF, P130878, FY13) 35

CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM Indicator 1.2.5: Annual electricity terminals, Parkage in Blantyre, Students University accommodation, solid • Increased Access to Finance through Biometric losses per year in the project areas waste disposal in Lilongwe, Blantyre and Mzuzu, and energy. A PPIAF funded Technology (P115688) Baseline:17.4% (2012) PPP scoping pipeline study was carried out in 2012/13. • Fingerprinting to Reduce Risky Borrowing (P151121) Progress: 15.2% (2014) • Renewable Energy Resource Mapping and Target: 14.4% (2015) Milestone 1.2.f. Bilateral agreements to introduce OSBP signed between Geospatial Planning (P151289) Malawi and Mozambique, Tanzania, and Zambia • Support for Extractive Industries Transparency Indicator 1.2.6: Power capacity On Track. A bilateral agreement with Tanzania has been signed in March 2014, Initiative (EITI) (P125450) deficit (gap between system and a copy provided to the Bank. In the latter, a draft MoU with Mozambique capacity and peak-load) reduced was prepared several months ago but is not yet signed. The Bank team was NONLENDING Baseline: Capacity 283 MW (2012) informed that there was a Memorandum of Intent on the Dedza OSBP signed Delivered during CAS Period to Date: Progress: 354 MW (2014) with Mozambique in 2008. MRA will pursue signing similar agreements for the • Diagnostic Trade Integration Study (DTIS) Update Completed. (Capacity has already other two crossings. (P133601, FY14) increased beyond 2016 target but • Multimodal Transport Development Study MTDS peak demand has also increased to Milestone 1.2.g. Position paper on skilled labor force prepared and (P144768, FY14) about 400 MW. Thus the indicator is implemented • Growth without Borders (FY14) met but the gap increasing Watch. A Higher Education Report (including a paper on TEVET) was • TA Transaction Advisory on Concession Target: Capacity 347 MW (2016) prepared. Renegotiation of Railways (P127524, FY14)

• TA Rural Roads Project Component Preparation Indicator 1.2.7: Increased use of Support (P129249, FY14) public-private partnerships (PPP) in • FINSCOPE Surveys (FY14) infrastructure • TA Infrastructure PPPs (P131741, FY14) Baseline:5 PPP schemes in place • PPP Pipeline Screening and Follow-up Support for (2012) (rail, lake, immigration, Feasibility Studies (P131167, FY14) road traffic, cargo handling) • TA Lilongwe Water Supply Policy Dialogue (P148272, Progress: Rail, lake, immigration and FY15) road traffic PPPs (4) are operational

(2014) Ongoing: Target: 9 PPP schemes in place • (2016) TA Energy Efficiency and Addressing the Peak Power Deficit (P149980) • Indicator 1.2.8: One-stop border TA Financial Sector Advisory (P152436, FY16) post (OSBP) at Songwe and other • Malawi Urbanization Review (P146675, FY15) locations Baseline: Not implemented (2012) OTHER PARTNERS Progress: Not implemented (2014) AfDB, USAID, DFID, EU, EIB, JICA, France Target: Implemented (2016)

Indicator 1.2.9: Student intake in tertiary education Baseline: 117 per 100,000 inhabitants (2012) Progress: 143 per 100,000 inhabitants (2013) Target: 130 per 100,000 inhabitants (2016) 36

CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM Results Area 1.3: Strengthening productivity in a diversified economy Country Development Goals (MGDS II Goals): Increase agricultural productivity and diversification; Ensure sustained availability of food to all Malawians at all times at affordable prices; Increase agricultural production and productivity through intensified irrigation; Move up the value chain in key crops, and increase agro-processed products for both domestic and export markets; Improve access to water through an integrated water management system Issues and Obstacles: • Low agricultural productivity • Agricultural production remains predominantly subsistence and rain-fed, rendering it vulnerable to drought and other weather shocks • Growth base narrow and undiversified with reliance on only a few primary exports (e.g., tobacco) • Wastage of harvest due to lack of or high cost of road access • Growing and increasingly conflicting economic demands on the country’s water resources, especially in the Lake Shire system • Lack of collaborative planning for management and development of the Shire Basin, leading to disjointed and incompatible investments and resource demands Outcome 1.3: Increased Outcome 1.3: On Track PROJECTS productivity and commercialization Overall, agricultural productivity is increasing as measured by maize and rice Projects Closed during CAS Period to Date: of agriculture and sustainable yields. The area under irrigation is expanding, contributing to enhanced • Infrastructure Services Project (P057761, FY06-FY13) management of water resources resilience of smallholder agriculture and increased cropping intensity and for multiple uses productivity. Despite good progress on improved legume seed multiplication, Ongoing Projects: progress on diversification and agricultural commercialization remains slow. • Irrigation, Rural Livelihoods, and Agricultural Indicator 1.3.1: Average national A strong foundation is being laid for the sustainable management of water Development Project (P084148, FY06, AF maize yield (mt/ha) resources for multiple uses through solid progress on legal and institutional FY10, AF II FY13) Baseline: 1.9 mt/ha (2012) reforms, and on the development of infrastructure for water supply and water • Second National Water Development Project Progress: 2.0 mt/ha (06/2014) resources management. (P096336, FY07, AF FY11) Target: 2.1 mt/ha (2016) • Agricultural Development Program Support Milestone 1.3.a. Number of smallholder households receiving technical advice Project (P105256, FY08, AF FY12, II AF Indicator 1.3.2: Average national increases by 10% (2015) P148964, FY14) irrigated rice yield (mt/ha) • Shire River Basin Management Program (Phase I) Baseline: 1.5 mt/ha (2012) On Track. The number of smallholder farm households receiving technical Project (P117617, GEF P127886, FY12) Progress: 3.6 mt/ha (2014) advice is expanding through diversification of the channels for delivering • Regional Agricultural Productivity Program for (Data are for IRLADP irrigated rice agricultural extension services approaches beyond Ministry of Agriculture Southern Africa (P094183, FY13) schemes, representing most of extension officers alone. Such innovations include the training of more lead formal irrigated rice in Malawi. farmers to disseminate technical messages, the expansion of farmer business IFC schools to train groups of farmers, and the engagement of NGOs to deliver National data not currently • Malawi Mangoes (FY14, ongoing) extension programs on behalf of the Ministry of Agriculture. NGOs and other available). • IFC integrated capital and advisory services for service providers are helping expand coverage in districts where there are Target: 2.0 mt/ha (2016) medium-sized farmers through commercial banks gaps in coverage of the public extension system. • IFC investment climate advisory services Indicator 1.3.3: Legume production • IFC support for private storage and warehouse as share of total agricultural Milestone 1.3.b. Irrigation Investment Framework adopted (2014) receipt programs: Joint IDA/IFC study on warehouse production On Track. An Irrigation Master Plan and Investment Framework have been receipt system to improve the legal framework Baseline: 5% (2012) drafted and consultations are being held with water and irrigation sector (ongoing). Progress: >200% (06/2014) (Figure stakeholders including private investors. Final validation and approval are needs to be checked.) expected by the end of 2015. TRUST FUNDS: Target: 15% (2016) • ASWAp-SP MDTF Project Execution (P148964, FY14) Milestone 1.3.c. Additional tonnage of high- quality legume seeds available • Agriculture Development Program - GEF (P106671, Indicator 1.3.4: Enhanced planning Baseline: 2,800 (2012) FY08) and control of water flows in Shire Progress: 9,150 (06/2014) Target: 3,500 (2015) 37

CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM River Barrage enables On Track. Production of high-quality legume seeds is progressing steadily. NONLENDING improvements in generation and Stimulated by demand from the Farm Input Subsidy Program (FISP), the Delivered during CAS Period to Date: irrigation capacity, and water supply market for improved legume seeds is expanding and private seed producing • Agriculture Public Expenditure Review (FY14) Baseline: No agreed planning companies are increasing their production in collaboration with agricultural • Growth without Borders (FY14) framework or decision support research centers and donor-funded projects to develop new varieties and (2012) ensure seed multiplication. OTHER PARTNERS Progress: Kamuzu Barrage EU, Norway, DFID, Irish Aid, USAID, AfDB, UNDP, JICA, upgrading works commenced in Milestone 1.3.d. 400 km of rural roads rehabilitated (2015) FICA, FAO, MCC, IFAD November 2014 and are scheduled On Track. Preparatory work for the rehabilitation of 400 km of roads in 10 for completion in October 2017; districts has been completed, including the selection of district and work on Shire Basin decision community roads for rehabilitation, technical screening and design of support is underway. rehabilitation works, social and environmental screening, and selection of civil Target: Multi-sector integrated works contractors. Rehabilitation work is expected to be completed after the Shire Basin Plan and decision current (2014/15) rainy season in at least two districts. However, the funding support system operational (2016) of rehabilitation works is facing a short fall of around US$14 million following the decision by DFID to suspend its contribution to the ASWAp-SP MDTF in view of last year’s public financial management issues. Options to cover the gap are being explored with the other MDTF donors. In addition to these 400 km classified roads, over 5,000 km of unclassified rural roads have been rehabilitated or newly constructed with support from public works programs.

Milestone 1.3.e. National/basin water management institution established (2015) On Track. The national water resources authority was established by the Water Resources Act in December 2013 and is being institutionalized with technical support and equipment and staffing. The Shire Basin Organization is operating in practice and its formal establishment is expected by mid-2015.

Milestone 1.3.f. Kamuzu Barrage Phase I construction completed (2016) On Track. Phase I of construction is scheduled to be finalized by 2016 and full completion of the works (both phases) is scheduled for October 2017. Contractors mobilized in October 2014 and arrangements are in place for third-party technical supervision and the dam safety review panel of experts to support construction completion.

Theme 2: Enhancing Human Capital and Reducing Vulnerabilities Results Area 2.1: Improving delivery of public services Country Development Goals (MGDS II Goals): Improve access to relevant quality education; Prevent spread of HIV infection and mitigate the health, socio-economic, and psychosocial impact of HIV and AIDS; Improve access to and quality of water supply and sanitation services Issues and Obstacles: • Low completion rates in primary education (35%) • Low secondary GER (17%) • Inadequate education infrastructure and pedagogic aids • Level of stunting (48%; SNIC baseline 41.8%) among the highest in sub-Saharan Africa

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CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM • Lack of a coherent and integrated approach to nutrition • High HIV prevalence rates (10.3%) • Maternal mortality rates still high • MDG target (71% in 2015) for access to adequate sanitation likely to be missed Outcome 2.1: Improved access to Outcome 2.1: On Track. PROJECTS quality education, reliable The outcome is mostly on track, but there is need to secure progress during Projects Closed during CAS Period to Date: nutrition, HIV/AIDS services, and the coming years. Continued progress in these sectors is critically dependent • Multi-Sectoral AIDS Project (MAP) (P073821, FY04- sustainable water supply and on ensuring adequate funding of key programs and effective implementation. FY13) sanitation services • Third Malawi Social Action Fund – APL II Project Milestone 2.1.a. Improved education infrastructure through new or (P110446, FY08-FY14) Education: rehabilitated classrooms Indicator 2.1.1: Standard 5 survival On Track. 2,380 classrooms have been constructed since 2011. Target is to Ongoing Projects: rates build cumulatively 3,000 classrooms by June 2015. Currently 622 classrooms • Project to Improve Education Quality in Malawi Baseline: boys: 60% (2010) are under construction by LDF. (P114847, FY10) Progress: 66% (03/2014) • Malawi Skills Development Project (P131660, FY14) Target: boys: 65% (2016) Milestone 2.1.b. Decentralization of education resources through grants to • Nutrition & HIV/AIDS Project (P125237, FY12) Baseline: girls: 57% (2010) primary schools • Strengthening Safety Net Systems–MASAF IV Progress: 62% (03/2014) On track. In the last academic year, all 5,359 (government and aided) schools (P133620, FY14) Target: girls: 64% (2016) were provided with school grants for activities related to improving access and quality. TRUST FUNDS Nutrition security: • Support to Disadvantaged Children (P114847) Indicator 2.1.2: Community Milestone 2.1.c. Community-based communication program complete with • Promoting Inclusion of Children with Disabilities nutrition program coverage of tools and materials in place (P126025) under-two year old children On Track. Community communication strategy and training manuals have • Strengthening Social Accountability in the Education Baseline: 0% (2010) been developed. Development of communication tools and materials is Sector (P147837) Progress: 6% (10/2014) underway. • Support to Lilongwe Water Board for Tariff Review Target: 14% (2016) and Willingness-to-Pay Study (P148272) Milestone 2.1.d. Improved local and central coordination for nutrition • Support for Nutrition Activities and Policies HIV/AIDS Services: Watch. With the political and institutional uncertainties of recent months, (P125237) Indicator 2.1.3: Men and women 15- progress on the coordination for nutrition has been stalled. Drafted Nutrition

49 who have had more than one Policy: 2013-2017; Nutrition Act; Monitoring and Evaluation Strategy and NONLENDING sexual partner in the last 12 months developed Nutrition Database. Delivered during CAS Period to Date: reporting use of a condom in last • Public Expenditure Review PER (P133262, FY15) intercourse (%) Milestone 2.1.e. Improved access to community nutrition services • Higher Education Study Dissemination (P123408, Baseline: Women: 27.3% (2010); On Track. Community nutrition services have been rolled out in FY14) Men: 23.6% (2010) approximately 20 Districts. All Districts will have community nutrition services • Progress: Women:27.3% (11/2014); by 2016. Baseline report drafted. Recruited five NGOs working and mobilizing Policy Notes on Rural Poverty, Gender, and Men:24.6% (11/2014) communities in seven Districts. Household Food and Nutrition Security (FY14) Target: Women: 31% (2015); Men: 28% (2015) Milestone 2.1.f. Effective HIV/AIDS prevention program rolled out Ongoing: • On track. The Government has completed the development of a VMMC TA Reducing Poverty, Inequality and Vulnerability Indicator 2.1.4: % of infants born to (Voluntary Medical Male Circumcision) Rollout Plan under World Bank Grant (P124004) HIV+ women enrolled in PMTCT on Nutrition and HIV and AIDS Project (NHP). The project will be implemented • Malawi Primary Education PET-QSD Study (P148735, services in target districts who in 20 out of the 28 districts of the country (PEPFAR is currently supporting FY15) • implanting in 8 districts). Developing Safer School Program (FY15) 39

CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM receive a DNA PCR test for HIV • Higher Education Study Dissemination (FY15) within 2 months of birth Milestone 2.1.g. Socially marketed and free condoms distributed to outlets • Malawi Education Sector Review (P153202, FY15) Baseline: 25% (2010) and end users Progress: 53% (06/2013) On track. Socially marketed condoms distributed to outlets: OTHER PARTNERS Target: 40% (2015) Annual target: Male: 9,800,000; Female: 200,000 FTI CF, GDC, UNICEF, DFID, Norway, USAID, CIDA, Global Cumulative: Male: 8,690,282; Female: 40,876 Fund Water & Sanitation: Free condoms procured and distributed to end users: Indicator 2.1.5: Number of people Annual target: 30,240,000; Cumulative: 28,871,921 provided with new or improved water supply through the project Milestone 2.1.h. Young people access youth- friendly health service Baseline: 0 (3/2012) Off track. 12.6% (06/2014) Progress: 1.3 million (12/2014) Target: 1 million (2014) Milestone 2.1.i. Improved management and reduced incidence of STIs other than HIV infection Indicator 2.1.6: Number of people On track. Cases of sexually transmitted infections treated according to the provided with improved sanitation national guidelines: Annual target: 51%; Cumulative: 63% facilities through the project Baseline: 0 (3/2012) Progress: 64,000 (12/2014) Target: 37,000 (2014) Results Area 2.2: Lowering vulnerability and enhancing resilience Country Development Goals (MGDS II Goals): Improve resilience and quality of life so the poor can move out of poverty and vulnerability; Improve social protection; Improve resilience and quality of life for the poor to move out of poverty and vulnerability; Ensure sustainable management and utilization of the environment and natural resources; Reduce the social, economic, and environmental impact of disasters and enhance resilience to climate change risks and impact Issues and Obstacles: • Large numbers of poor and vulnerable require more social protection • High population density and poverty put pressure on the environment and degrade natural resource base and critical ecosystems • Little adoption of sustainable land and water management practices • High rates of deforestation, erosion, flash floods, and loss on soil fertility and productivity • Increasing incidence of flood events with increasing human and material impacts and limited preparedness for disasters • Limited practical mainstreaming of Climate and Disaster Risk Reduction in sectors • Little mainstreaming of Disaster Risk Reduction (DRR) in sectors and limited preparedness for disaster (floods, droughts, earthquakes) Outcome 2.2: Improved resilience Overall Outcome 2.2: On Track. PROJECTS for poor communities through Substantial progress has been made in recent years in developing and Projects Closed during CAS Period to Date: adequate social safety nets, strengthening institutional arrangements for integrated natural resource • Third Malawi Social Action Fund – APL II Project improved climate resilience, and management, climate and disaster resilience. While this is a long-term agenda (P110446, FY08-FY14) enhanced capacity to respond to that will take years to fully materialize, its positive implications for the disaster risk livelihoods of the poorest are already taking shape. Consolidation of social Ongoing Projects: safety nets is also emerging, albeit with some delays. • Irrigation, Rural Livelihoods, and Agricultural Social Safety Net System: Development Project (P084148, FY06, AF Indicator 2.2.1: Social safety net Milestone 2.2.a. Social protection investments better coordinated FY10, AF II FY13) (SSN) established Watch. The MASAF IV project, which contributes to the better coordination • Second National Water Development Project Baseline: Public Works Programs of the investments, became effective in September 2014, with a delay of (P096336, FY07, AF FY11) (2012) about six months. Work is picking up, and the processes would be watched.

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CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM Progress: MASAF IV effective • Agricultural Development Program Support (09/2014) Milestone 2.2.b. National guidelines for integrated catchment management Project (P105256, FY08, AF P128576, FY12, II Target: Consolidated social safety (2014) AF P148964, FY14) nets (2015) On Track. First generation of national integrated catchment management • Shire River Basin Management Program (Phase I) guidelines discussed by stakeholders in November 2014. Over the coming two Project (P117617, GEF P127866, FY12) Indicator 2.2.2:Beneficiaries with years the manuals will be tested and improved for a final version in 2016. • Strengthening Safety Nets Systems MASAF4 savings of at least 50% of public (P133620, FY14) works wage one year after Milestone 2.2.c. Improved management of natural habitat in selected • Regional: Agricultural Productivity Program participation protected areas for Southern Africa (P094183, FY13) Baseline: 13,500 (2012) On Track. Protected area management has been improved in four national Progress: 99,153, of which 66% parks and four forest reserves through technical, equipment, planning and TRUST FUNDS female (09/2014) financial assistance. • Effective Management of the Nkhotakota Target: 34,000, of which 62% female Wildlife Reserve Project (GEF, P110112, (2016) Milestone 2.2.d. Integrated Flood Risk Management Action Plan for Shire FY12) Basin adopted (2012) • Nyika Trans-Frontier Conservation Area Climate Change Resilience and On Track. Integrated Flood Risk Management Action Plan was adopted in Project (GEF, P108879, FY11) Capacity to Respond to Disaster 2012 and implementation is ongoing in terms of investments, flood early • Disaster Risk Management in Malawi Country Plan II Risk: warning, and improved community resilience. (GFDRR, P125171) Indicator 2.2.3: Vegetation cover • Environmental and Social Challenges in MIGA- change as percentage of baseline in Milestone 2.2.e. Improved Shire Basin Flood Forecasting and Early Warning Guaranteed Projects (P108082) selected catchments (= approx. system operational (2015) • Shire River Basin Management Program Phases I & II 100,000 ha) On Track. Shire Basin Flood Forecasting and improved hydromet systems are (P127866) Baseline 0% (2012) operational. Steps towards improved flood early warning system are expected Progress: Too soon for measurable to be made in 2015. NONLENDING change to be detected (11/2014) Delivered during CAS Period to Date: Target: 8% (2016) Milestone 2.2.f. Sector diagnostics on climate and disaster impacts completed • TA Effective and Inclusive Targeting Mechanisms in (2014) Africa – Malawi (P123372, FY14) Indicator 2.2.4: People served by On Track. National Climate Change Diagnostic Program completed, including • TA Disaster Risk Management (P122473, FY14) improved flood management, a national land use options assessment, a national and sectoral climate atlas, including mitigation and adaptation including work on the Malawi atlas app that later evolved into a Bank-wide Ongoing: (early warning) spatial app, work on climate financing options and a climate information • Malawi Gender Policy Note (P143054, FY15) Baseline: 0 (2012) database. • TA Reducing Poverty, Inequality and Vulnerability Progress: Too soon for measurable (P124004, FY15) change to be detected (11/2014) Milestone 2.2.g. At least two sectors feature gender, climate, and disaster risk • Target: 200,000 (2016) considerations in their investment programs (2015) TA Energy Efficiency and Addressing the Peak Power On Track. The multi-sectoral Shire River Basin Management Program is Deficit (P149980) Indicator 2.2.5: Improved supporting the mainstreaming of climate and disaster risk considerations in mainstreaming of gender-aware the water, agriculture and environment sectors. For example, climate analysis OTHER PARTNERS climate and disaster risk reduction and land use options informed the selection of intervention areas for the KfW, UNICEF, UNDP, DFID, GEF, FAO, Norway, Ireland issues with focus on vulnerable catchment management activities, and studies carried out under the GFDRR Aid, TerrAfrica Partnership, MCC, GFDRR communities within sector TF on flood risk management in the Lower Shire valley also informed program investment planning (especially in design and interventions. Agriculture and irrigation planning increasingly Bank and IFC-supported sectors and takes account of weather shocks. Further early work is ongoing on programs) incorporating DRM in design of specific other WBG portfolio programs. ASWAP SP is rolling out a number of sovereign, market, and farmer/household 41

CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM Progress: Mainstreaming evident in disaster risk financing options considering analytical piece funded by GFDRR at least three sectors (11/2014) TF on Disaster Risk Financing and Insurance. Contingency financing is considered under IRLAD project to enable quick financial support in case of declared disaster. Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness Results Area 3.1: Improving public sector management Country Development Goals (MGDS II Goals): Improve government effectiveness and quality of public administration and credibility of public financial management (PFM), procurement, and internal and external oversight processes Issues and Obstacles: • Poor public expenditure and human resource management, with little monitoring and evaluation (M&E) and suboptimal statistics • Inadequate fiscal and institutional foundation for decentralization, leading to suboptimal service delivery • Suboptimal transparency and accountability and use of demand-side governance instruments, especially below the national level Outcome 3.1: Improved public Outcome 3.1: Watch PROJECTS sector performance because of Systematic weaknesses in PFM systems resulted in the large-scale theft of Projects Closed during CAS Period to Date: better PFM, procurement, M&E public resources in FY13. The Government is making efforts to recover stolen • Third Malawi Social Action Fund – APL II Project systems, and enhanced statistics funds through arrest and prosecution of suspects and is also about to finalize (P110446, FY08-FY14) a PFM action plan to guide the implementation of PFM reforms and Indicator 3.1.1: Number of districts strengthen control mechanisms; however, so far, progress has been slow. The TRUST FUNDS covered by the IFMIS rollout to Treasury is introducing electronic fund transfer (EFT) to reduce or eliminate • Public Finance and Economic Management Reform subnational governments the risk of checks issued from outside the IFMIS being honored by the banks. Program - MDTF (P129055, FY12) Baseline: 22 (2012) Salaries and Pensions have been used as pilots and other recurrent • Financial Reporting and Oversight Improvement Progress: 34 (12/2014) expenditures will be paid using EFT starting early 2015. Pending the rollout of Project (MDTF, P130878, FY13) Target: 34 (2016) the EFT to cover all payments, the Accountant General submits to the banks • Procurement Capacity Building Project (P126649, lists of checks emanating from the IFMIS against which the banks validate any FY12) checks issued by government accounts. The payroll has been decentralized in Indicator 3.1.2: Strengthened two districts (the remaining four pilot districts will be operational in January NONLENDING transparency, accountability, and 2015). Plans are in place to conduct payroll and personnel audits in early 2015 Delivered during CAS Period to Date: capacity of public procurement, to identify and eliminate weaknesses in the payroll system and also remove • Public Expenditure Review (P133262, FY15) focusing on the eight top-spending all “ghost” employees from the payroll. There are marginal improvements in • Decentralization Note (P123238, FY13) ministries and parastatals: bank reconciliation, cash management, commitment controls and IT security. • FINSCOPE Surveys (FY13) Baseline: 0 (2012) Notwithstanding the improvements in IT security, constant monitoring will be Progress: 13 Agriculture, Health, needed to ensure that controls are working as designed. The Finance Minister OTHER PARTNERS Education, Transport and Public has approved the recommendations of the committee he appointed to come Norway Statistical Capacity Building Project, EU, UN, Works, Roads Authority, Irrigation up with options on replacement or upgrading of IFMIS software. The DFID and Water, ESCOM, Malawi recommendation and the decision of the Minister is to replace the IFMIS Housing, Local Government, software using comparative tendering method. Strategies are being Finance, Lands, Industry & Trade, developed to mitigate the risks of system collapse and abuse while Natural Resources and Mining implementing the replacement of the existing IFMIS. If promulgated, the draft (2014) Internal Audit Act and the draft amendments to the National Audit Act will Target: 10: Agriculture, Health, improve the legal framework for auditing in the public sector. These draft acts Education, Transport and Public seek to enhance the independence of audits and also introduce Works, Roads Authority, Irrigation professionalism in line with international standards. In addition, there has and Water, ESCOM, Malawi Housing been an improvement in the capacity of both internal and external audits to (2014) deliver on their mandate. These two institutions have benefited from new or

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CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM additional staff and skills training provided by international auditing firms. Indicator 3.1.3: Number of AFROSAI –E has been part of the capacity building for the National Audit Office ministries covered by the new M&E for the purpose of quality assurance. Independent audit committees (with system, developed under the Public membership from outside the public service) have been put in place to ensure Sector and Statistics Strengthening implementation of audit recommendations. The committee members have Project been trained on their roles and each of the five committees have submitted Baseline: 0 (2012) their first reports to the Chief Secretary. The fiduciary risk for the use of Target: 10 (2015) government PFM systems remains high. Apart from the PFM actions Dropped as the related project was mentioned above, several others are going on in parallel but not under the not delivered FROIP. For instance, the forensic audit into the “cashgate scandal was funded by DFID; GIZ is providing technical assistance in the form of IFMIS Specialist and ICT Security Officer; the AfDB is providing support aimed at enhancing competition, efficiency and controls in public procurement.

Milestone 3.1.a.Increased number of national and district financial transactions using IFMIS Watch. The Local Government IFMIS which runs on serenic Navigator has been deployed to all the districts in the country to facilitate online electronic financial management and reporting. Due to poor network connectivity, data is extracted from these systems at the district level and sent on a regular basis to the Local Government Finance Committee Office in Lilongwe for consolidation. However, the decentralization of the payroll to the districts provides an opportunity for the Local Government IFMIS to provide data using the network connecting the districts to the head office in Lilongwe.

Milestone 3.1.b.M&E system designed and operational in key sectors Watch. The M&E is in place but does not seem to be effective and at times findings are through missions fielded by the World Bank, IMF or others. There is no continuous reporting of progress and progress reported at one stage gets challenged at a later stage. FROIP restructuring will ensure that M&E is done regularly.

Results Area 3.2: Strengthening social accountability for service provision Country Development Goals (MGDS II Goals): Improve governance Issues and Obstacles: • Poor public sector management performance, systems and capacities, particularly in human resource (HR), PFM, and M&E • Lack of transparency in natural resource management Outcome 3.2: Enhanced Overall Outcome 3.2: Watch PROJECTS transparency on resource flows and While FROIP supports improved transparency of resource flows, there are Projects Closed during CAS Period to Date: service delivery limited WBG activities focused on enhanced transparency of service delivery. • Rapid Response Development Policy Grant Indicator 3.2.1: Number of good Apart from the WBI engagements to enhance the demand side of governance (P126155, FY13) governance tools used and scaled and civil society capacity and participation, several WBG-supported projects • Economic Recovery DPO (P133663, FY14) up to track transparency in the use include social accountability tools. Under the Shire River Basin Management • Shire River Basin Management Program (FY12), of resource flows (e.g., independent Program, third party M&E has been hired, including for input-output and process monitoring. This also includes the roll out of a grievance redress 43

CAS OUTCOMES PROGRESS TO DATE WBG PROGRAM budget analysis, PETS, citizens mechanism under the project. Efforts to seek citizen input on planning and • Strengthening Safety Net Systems-MASAF IV charters) policy issues include close consultation with sector stakeholders and (P133620, FY15) Baseline: 2 (2011) appropriate central and decentralized coordination forums in the drafting of • Progress: 4 the national integrated catchment guidelines. The design of MASAF IV

Target: 5 (2015) includes the use of Social Accountability Tools such as Citizen Report Cards, TRUST FUNDS: Community Score Cards, Social Audit, and Participatory Planning to track • Public Finance and Economic Management Reform Indicator 3.2.2: Number of MASAF IV performance indicators from the perspective of beneficiary Program - MDTF (P129055, FY12) independent complaint and redress satisfaction levels related to targeting, graduation, implementation and • Financial Reporting and Oversight Improvement mechanisms and investigative quality of public works, planning process, and transfers. Project (P130878, FY13) journalism mechanisms introduced • Strengthening Social Accountability in the Education Baseline: 0 (2011) Refurbishment of the building for Geo data center is in progress; officers have Sector (P147837) Progress: >2 [WBI partnership], attended both short term and long term training in readiness. Recruitment of • Shire grievance redress mechanism a consultant to design and Install the Geodata MIS is in progress. Social Accountability Strengthening Project Target: 5 (2015) (P147819)

Recruitment of a Consultant to install GIS-based Cadastre system is in Indicator 3.2.3: Enhanced civil NONLENDING progress. Officers have been trained, Procurement of field equipment is society participation organizations Delivered during CAS Period to Date: advanced as bidding documents have been received. Procurement of office (CSOs) providing feedback on • EW Public Expenditure Review (P133262, FY15) equipment will be done after consultant has been recruited. service delivery and independent • EW Decentralization Note (P123238, FY13) evaluations of services, and Milestone 3.2.a. System for tracking government performance in place and Ongoing: strengthening of social functional. Off Track. • WBI: Capacity strengthening activities in support of accountability mechanisms for investigative journalism and civil society parliament. participation and engagement: Baseline: 0 (2011) Global Media Development Program Progress: Several tools piloted o Leadership, Learning and Innovation’s under GPSA and other operations o Open Aid Partnership (OAP) Target: At least 2 CSOs providing Global Partnership for Social feedback annually (2015) o

Accountability (GPSA) Indicator 3.2.4: Geodata o Code for Africa (a mass-media and impact management center providing investment-funded organization focused online access on building civic technology capacity Baseline: No (2012) within civil society and the watchdog Progress: Yes media) Target: Yes (2016) • TF: Global Partnership for Social Accountability in Education (P147837, FY14; P147819, FY14) Indicator 3.2.5: Modern • Malawi Primary Education PET-QSD Study (P148735, computerized mining cadaster in . FY15) use Baseline: No (2012) OTHER PARTNERS Progress: OAP, GPSA Target: Yes (2016)

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Summary

Outcome On Track Off Track Watch Total Theme 1: Outcomes 1 2 3 Theme 1: Milestones 11 1 2 14 Theme 2: Outcomes 2 2 Theme 2: Milestones 13 1 2 16 Theme 3: Outcomes 2 2 Theme 3: Milestones 1 2 3 Total: Outcomes 3 2 2 7 Total: Milestones 24 3 6 33 Percentage Outcomes 42.9% 28.6% 28.6% 100.0% Milestones 72.7% 9.1% 18.2% 100.0%

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Annex 4: Detailed Review of Progress

Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth

Results Area 1.1: Conducive structural and macroeconomic policies to restore internal and external balance

Outcome 1.1: Improved macroeconomic management. This outcome is considered to be off track.

1. The FY13-16 Malawi CAS was prepared in the aftermath of a destabilizing governance crisis and a period of sustained macroeconomic imbalances which came close to triggering a policy-induced recession. In the CAS, the Bank aimed to support a series of structural and macroeconomic reforms intended to restore internal and external balances, and put the country back onto a stable economic pathway. Earlier reforms, including liberalization of the exchange rate and fuel price regimes, as well as stronger planning and budgeting, had helped to restore confidence and had contributed to positive rates of economic growth. However, the large-scale theft of public resources by a group of individuals working both inside and outside the Government exploited weaknesses in the public financial management (PFM) systems and derailed the reform process. The “cashgate” scandal has resulted in a substantial reduction in Official Development Assistance (ODA), and has brought about the suspension of critical external budget support. This in turn led to an enlarged budget deficit, high-cost domestic borrowing, and resurgent inflation that have erased earlier gains in macroeconomic management. Inflation remains stubbornly high, undermining investor confidence and eroding the purchasing power of the poor. The CAS outcome of improved macroeconomic management is considered to be off-track at this time.

2. Despite significant pressures, the Government has indicated its commitment to prudent macroeconomic policies, including a market-based exchange rate and fuel price policies. The FY15 budget is being implemented during a period of significant uncertainty with key risks related to the containment of public spending, government’s domestic revenue performance, and the likelihood of budget support being resumed. Malawi is unlikely to see the return of substantial budget support until stronger efforts have been made to improve the integrity of public financial management systems, and have shown demonstrable results; the Bank's CAS plans for a DPO-2 in FY14 were suspended, and while a new DPO series is included for FY16 and FY17, significant progress will be required to activate them.

3. The broad objectives set out in the CAS, however, remain highly relevant and the need for improved macroeconomic policies and the maintenance of internal and external balances is of continued importance. Malawi continues to suffer from persistent volatility in macroeconomic policy and performance, with a stop-go cycle that has damaged private sector investment and job creation and hampered efforts to diversify the economy. In the short-term, negative growth consequences can be anticipated from fiscal consolidation and/or monetary tightening as the Government is forced to undertake adjustments to accommodate a tight fiscal framework.

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Results Area 1.2: Improving ease of doing business through improved economic infrastructure, regional integration, and better access to demand-responsive skills development

Outcome 1.2: Improved ease of doing business through better economic infrastructure, regional integration, and access to demand-responsive vocational training. This outcome is considered to be off track.

4. Under outcome 1.2, the CAS set out to support Government efforts to improve the business climate through facilitating business start-ups and job creation, further developing economic infrastructure, strengthening regional integration and connectivity, and increasing the supply of skilled workers. Malawi’s investment climate remains challenging, with continued poor performance of Malawi in the Doing Business (DB) report attributable to a failure to fully implement agreed reforms. Although the WBG has supported the updating of a Doing Business Memorandum which is being discussed with the Government for implementation, this outcome remains off track.

5. A Bilateral Agreement with Tanzania was signed in March 2014 on border cooperation, and a Memorandum of Intent on the Dedza one stop border post (OSBP) was signed with Mozambique in 2008. The Malawi Revenue Authority (MRA) will pursue similar agreements for the other two crossings in Mwanza and Mchinji. Construction has begun on the new rail line between Tete and Nacala port under the Public Private Partnership (PPP) agreement between the Governments of Malawi and Mozambique and the Brazilian mining company Vale (part of a US$2 billion investment in a railway line from the north-western province of Tete, through Malawi to a new coal terminal at Nacala-a-Velha port in Mozambique). In the energy sector, more than 100 distribution transformers have been installed per year.

6. The Financial Sector Technical Assistance Project (FSTAP) continues to help Malawi meet its financial inclusion targets by upgrading the national payments financial infrastructure, including the Automatic Transfer System (ATS) and National Switch (both of which went live in January 2015), and thereby lowering transaction costs to lower income groups. International Finance Corporation (IFC) support includes help with several Investment Climate (IC) reforms (e.g. drafting and revision of the Company Act 2013, the Personal Property Security Act 2013 and the Insolvency Act). Recent IFC investments include transactions in agribusiness (e.g. Malawi Mangoes, Export Trading Group (ETG), promotion of ethical sourcing), the financial sector (e.g. Global Trade Finance Program lines with First Merchant Bank, New Building Society (NBS) Bank, Nico Holdings Limited (NHL), Secured Transactions Advisory project jointly with the Bank), and construction and real estate (the Gateway Mall).

7. The Government has again expressed interest in bringing the country’s Doing Business ranking below 100. The need for Malawi to generate sufficient foreign exchange from exports has increased focus on trade-related issues. The MRA has requested WBG support to develop OSBPs at Songwe/Kasumulu on the border with Tanzania, as well as at Mwanza/Zobué, Dedza and Muloza with Mozambique. These improvements will be financed under the regional Southern Africa Trade and Transport Facilitation Program (SATTFP) (FY15), with implementation expected to commence in 2016. Amendments in the CAS to align with new priorities include support for the development of a legal framework and capacity to support the introduction of Warehouse Receipt Systems, as well as implementation of the updated Doing Business Memorandum. New proposed indicators include (i) a reduced number of export permits (to strengthen policy certainty) and (ii) reducing the number of agencies operating at the borders in order to minimize delays. These indicators have emerged from the recommendations of the Malawi Diagnostic Trade Integration Study (DTIS).

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8. Many of the challenges to closer integration are associated with policy constraints such as complex border regulations, and a regional DPO (the Accelerated Program for Economic Integration) has been created to help five countries (Malawi, Mozambique, Zambia, Mauritius and Seychelles) carry out appropriate reforms. The PLR provides for two Accelerated Growth and Economic Integration DPOs as regional projects. In addition, the PLR includes two regional physical connectivity projects - - SSTTFP and the Malawi-Mozambique Power Interconnector. Inter alia, these operations should enable Malawi to take advantage of Mozambique's economic advances and to provide cross-border agricultural products and services to the Tete region.

9. Two new indicators have been added to capture IFC engagements under this outcome and they include the number of financial institutions and NBFIs participating in collateral registry and number of laws/ regulations/ codes or government policies adopted. Milestones have also been added to monitor progress on the revisions of drafts of legislative texts, review of key institutions that impact the business environment, Warehouse Receipts legislation, and capacity building for collateral management.

Results Area 1.3: Strengthening productivity in a diversified economy

Outcome 1.3: Increased productivity and commercialization of agriculture and sustainable management of water resources for multiple uses. This outcome is considered to be on track.

10. The CAS proposed to support this objective by promoting inclusive smallholder-based growth, with the objective of modernizing and transforming smallholder subsistence farming system into commercial and market-oriented agriculture, and supporting a multi-sectoral approach to integrated water resources management at national, basin as well as micro-catchment level. Agricultural productivity is increasing in Malawi, at least when measured by maize and rice yields. In spite of operational inefficiencies and poor targeting, the Farm Input Subsidy Program (FISP) has contributed substantially to this result and has helped the country achieve food self-sufficiency. The area under irrigation is expanding, thereby contributing to improved resilience in smallholder agriculture and increased cropping intensity and productivity. The management and maintenance of irrigation schemes is being progressively transferred to water user associations to ensure greater efficiency and sustainability. Despite substantial improvements in legume seed multiplication, however, progress on diversification and agricultural commercialization remains slow. This outcome, all things considered, is on track.

11. Malawi has made solid progress in improving sustainable access to water through integrated water resources management and collaborative planning that addresses the rapidly increasing competition for water for economic and social needs. The new Water Resources Act was passed in 2013 and provides for greater devolution and more stakeholder engagement in water management. Institutional reform is underway both at the national level and in the Shire River Basin – the country’s largest and most important river basin. Reforms include the establishment of the National Water Resources Authority and the basin-level Shire Basin Institution; the development of a joint basin plan; a national licensing reform campaign; an improved knowledge base for collaborative water resources management; and improvements in hydromet services, including improved collection, analysis and dissemination and sharing of data, warnings and other analysis. The preparation of priority infrastructure investments is also well advanced, with the upgrading of Kamuzu Barrage (regulating Lake Malawi levels and Shire flows) under way, and technical studies and financing options analysis completed for critical water supply investments including the Diamphwe Dam for Lilongwe and the new Shire pumping scheme for Blantyre. Vital work on catchment protection and flood risk

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management is also being undertaken within this overall framework. Malawi’s engagement on trans- boundary water issues with neighboring countries remains weak, but is being strengthened through the establishment of a trans-boundary water management office.

12. The WBG’s role in the agricultural and water sectors has been visible and is well-recognized by the Government and by development partners. The Agricultural Sector Wide Approach Support Program (ASWAp-SP) has been instrumental in helping the Ministry of Agriculture elaborate an Agricultural Sector Wide Approach (ASWAp), under the auspices of the Comprehensive Africa Agriculture Development Programme (CAADP), as the reference investment framework followed by all stakeholders in the agricultural sector. The WBG conducted an Agriculture Public Expenditure Review (AgPER) in 2013 to guide resource allocation and improve the effectiveness of investments aimed at enhancing food security and agricultural growth. The AgPER provides an authoritative reference document to guide the Ministry of Agriculture in the redesign of FISP, and to rebalance agriculture spending beyond FISP. Such a reform process should improve sector planning and budgeting and strengthen the monitoring and evaluation of sector performance. In partnership with USAID and IFPRI, the WBG-supported policy notes on FISP impact and efficiency played an important role in initiating policy dialogue on FISP reforms in July 2014. The WBG is also supporting a core functional analysis of the Ministry of Agriculture to help better align its core services to ASWAp objectives, priority needs and investments. The role of the WBG in leading sector harmonization and alignment is reflected in the pooling of a total of US$120 million in an MDTF to support the ASWAp- SP.

13. WBG-supported operations in agriculture and irrigation have directly helped farmers increase productivity and resilience. They have contributed to revitalizing extension services to deliver improved technical advice on rain-fed maize production and irrigated rice and 17,000 lead farmers have been trained under ASWAp-SP to disseminate technical messages, reaching a total of 350,000 farmers. With support under the Irrigation, Rural Livelihoods, and Agricultural Development Project (IRLADP), over 45,000 farmers are benefiting from the development of 10,720 hectares of newly irrigated land, with the rehabilitation of a further 1,820 hectares. At the same time, the most vulnerable farming households have received Inputs for Assets (IFA) as a form of cash for work. IFA has benefited over 672,000 households and contributed to the rehabilitation of irrigation schemes and over 12,000 kilometers of minor community roads. IRLADP has also helped farmers develop their own production of improved rice seeds and has provided grants to 134 farmer-based organizations to develop income generating activities. Improved agronomic practices have led to increases in rice yields in targeted areas to an average of 3.6 mt/ha/season, up from 1.5 mt/ha in 2012. ASWAp-SP is now starting the rehabilitation of 400 kilometers of classified rural roads in areas with high production potential in order to facilitate farmers’ access to markets. In collaboration with IFC, ASWAp-SP is also supporting various studies and reforms to improve the agri-business environment, including activities on promoting warehouse receipt systems to give greater access to credit to farmers.

14. Despite some tangible successes, public investment and donor-supported projects remain too focused on food security and maize production, while agricultural exports rely too heavily on tobacco and to a lesser extent on tea and sugar. Transforming smallholder farming system is needed if farmers are to move out of subsistence and become more commercially and market oriented. Based on experience from other countries, Malawi would like to promote the development of new agricultural supply chains and to facilitate the integration of smallholder farmers with markets through approaches such as contract farming and strengthened networks of farmer organizations and cooperatives. A framework for the collaborative management of water resources across sectors is evolving, and participating sector agencies are generally enthusiastic, yet a disconnect remains between this joint

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vision and the actions by some sector managers. In order to make progress, the Government needs to ensure that basin-wide planning is given the authority to impact decisions within individual sectors.

15. The new Government has expressed commitment to reforming FISP and reducing its current fiscal imprint while improving efficiency, and promoting increased agricultural productivity and diversification. The government also indicated its commitment to move past food security and begin rebalancing public investment in favor of other subsectors and activities. Pillar 2 of the ASWAp framework, which aims to promote agricultural diversification and commercialization, has remained underfunded. The Ministry of Agriculture is willing to invest more in transforming smallholder farming, and to promote diversification and commercialization through supply-chain development, rural infrastructure provision (including small- and large-scale irrigation, rural roads and storage) and agro-processing. Support in these areas was envisaged under the CAS, and some investments have been initiated. With WBG support, the Government has embarked on development of an irrigation master plan and investment framework. The preparation of the flagship Shire Valley Irrigation Project has continued, albeit more slowly than anticipated. The new Government has confirmed its interest in the scheme, the objectives of which are to increase agricultural productivity and incomes for households in Chikwawa and Nsanje Districts by establishing market-linked smallholder farming ventures and professionally operated irrigation services. Preparation is proceeding in close collaboration with IFC, MIGA and the African Development Bank (AfDB), and the project will be merged with the proposed Agriculture Commercialization Project into the Shire Valley Transformation Project (SVTP), now planned for FY17. Reducing inequality in land holdings could contribute significantly to smallholder livelihoods, and land distribution was piloted in the WBG-funded Community-Based Rural Land Development Project which closed in 2012.

16. The WBG has played a leading role in the water resources sector through two major related investment programs (National Water Development Program-II (NWDP II) and the Shire River Basin Management Program (SRMBP)). NWDP-II identified national issues and priority investments, most of which are located in the Shire Basin, the area of Malawi with the highest agricultural and irrigation potential. Many single-sector interventions (in irrigation, energy, water supply, transport) are tied to this water system but have been planned separately. The Government recognizes the need to adopt an integrated approach, and SRBMP is an attempt to do so. The Government has expressed interest in scaling up the work that is underway, and building on the reforms in information, infrastructure and institutional changes that have been initiated under the program. Early results are appearing. The challenge now is to maintain commitment to an institutional framework that requires sustained knowledge acquisition and cross-sectoral planning.

17. IFC activities are reflected through additional indicators to track new loans and outstanding portfolio, as well as loans to farmers and for agri-business (amounts and number of recipients, gender disaggregated), and volume of product processing. Milestones on the submission of a Transaction Structuring Report with recommendations for the PPP structuring, support for the bidders’ conference and evaluation process for the private operator for Diamphwe Dam have also been added.

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Theme 2: Enhancing Human Capital and Reducing Vulnerabilities

Results Area 2.1: Improving delivery of public services

Outcome 2.1: Improved access to quality education, reliable nutrition, HIV/AIDS services, and sustainable water supply and sanitation services. This outcome is considered to be on track.

18. Under this comprehensive outcome, the CAS aimed to partner with the Government and other stakeholders to address low learning outcomes, continue supporting the objectives of the health and HIV/AIDS national strategic plan (NSP) 2011-2016, strengthen capacity to scale up nutrition programs, and join other development partners to finance improvements in water supply. Access to Standard 1 in primary education is almost universal, but the grade repetition and dropout rates are still very high, leading to only a 31 percent survival rate at grade 8. Standard 5 survival rates have improved (for boys, from 60 percent in 2010 to 66 percent in 2014; and for girls, from 57 percent in 2010 to 62 percent in 2014). Since 2011, 2,380 classrooms have been constructed. In the last academic year, all 5,359 schools (government and aided) were provided with school grants for activities related to improving access and quality. In the health sector, there has been progress towards achieving national HIV response targets, particularly in relation to biomedical interventions (e.g. the proportion of adults tested for HIV, adults and children receiving treatment, and children of HIV positive mothers being tested). Progress is weaker for indicators related to monitoring and reporting, and the empowerment of People Living with HIV. The CAS aims to enhance access to community nutrition services as a contribution to the national effort to reduce stunting and anemia. District Nutrition Coordination Committees have been set up in partnership with civil society organizations in 28 Districts in order to oversee and support community nutrition service delivery. The national water program is now firmly institutionalized and moving towards a full SWAp. This outcome is considered to be on track.

19. WBG support to the Malawi education sector includes the Project to Improve Quality of Education in Malawi (IDA and Global Partnership for Education (GPE)-funded), which is being implemented within the framework of a Sector Wide Approach (SWAp). Until 2013, other development partners (DfID and KfW) were pooling their funds through the SWAp in a coordinated and harmonized fashion. Following the “cashgate” scandal, however, these DPs pulled out of the SWAp. The Skills Development Project (FY14) aims to increase access, market relevance, and results orientation in skills development institutions in priority areas. The piloting of interventions to support school-based assistance for children with disabilities has been supported by a JSDF grant. With funding from the Global Partnership for Social Accountability (GPSA), the WBG is supporting two NGOs to work with schools to improve accountability and service delivery. AAA include a Public Expenditure Tracking and Quality of Service Delivery Study (PET-QSDS), which is expected to provide a deeper understanding of funds leakages in education as well as of the quality and effectiveness of service delivery. Currently, the WBG is carrying out an education sector review in preparation for a new GPE project to be delivered in FY16.

20. In the health sector, key WBG actions include supporting nutrition and HIV/AIDS control programs through the ongoing Nutrition and HIV/AIDS Project. The community-based nutrition (CBN) program, which aims to reduce stunting in under-fives, is being rolled out in 14 of a total of 28 districts. A Nutrition Monitoring and Evaluation plan has been rolled out nationwide, a web-based reporting system is in place, and a nutrition baseline survey is near completion. In spite of the generally good progress, there have been implementation delays, fiduciary management problems, and shortfalls in counterpart funding for HIV/AIDS – this has resulted in a downgrading of the PDO and IP indicators to Moderately Satisfactory, while project FM risk has been increased from Moderate to Substantial.

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The Government’s commitment to addressing these issues is strong and implementation of remedial actions is underway; this augurs well for bringing these activities back on track. The WBG’s contribution to nutrition focuses on capacity development at all levels and on the expansion of community service delivery. This scaling up process is progressing well; a national M&E system for nutrition has been introduced, and national capacity for coordination, management and policy development is growing. A key reason for success is the extent of cooperation between District Councils, service delivery organizations and CSOs.

21. WBG support has anchored the Government’s National Water Program. This program provides a comprehensive framework for sector reforms and investments covering all sub-sectors (including urban and rural water supply and sanitation, and overall water resources management). The WBG- supported National Water Development Project Phase 2 has led to increased access to water for over 1.3 million people, against a final target of 2 million, and to the development of a pipeline of water resources projects. It has supported the creation of a Sanitation Department, and has strengthened sector capacity within the Ministry of Agriculture, Irrigation and Water Development as well as in the five Water Boards. The decision to support a comprehensive government program has been validated, and a further US$300 million in external financing has been provided by development partners.

22. Under MASAF-III’s Public Works Support Program (PWSP), 1.6 million beneficiaries (50 percent of whom were female) were reached, exceeding targets, with results including increased earnings and savings, improved ability to buy agricultural inputs, creation of 19 million person-days of paid labor, improved food security and an improved ability to pay for school fees and medicines. The project also constructed improved rural housing for teachers.

23. Emerging government priorities include the urgent need to enhancing Ebola preparedness. As a result of the Ebola outbreak in West Africa, and considering the potential risks to Malawi, the Ministry of Health developed an Ebola Preparedness Plan and Budget and presented it to the WBG and other donors in November 2014. The objectives of the Plan and Budget are to strengthen Ebola surveillance; provide health workers with the necessary knowledge and skills to handle cases of Ebola and prevent the spread of infection; and the creation of awareness of the disease among the general population to reduce the fear and panic that can arise from inaccurate information. The WBG reviewed the plan and budget, helped identify critical technical and financial gaps, and took urgent measures to provide support by restructuring the Nutrition and HIV/AIDS project and creating a new Ebola Preparedness Support component. US$7 million was reallocated to this component. A related milestone has been added in the results framework.

24. The Government is prioritizing medical supply chain management. While the Central Medical Supply Trust (CMST) is mandated to procure, store and distribute health sector supplies up to the health facility level, it has not been able to fulfill its mandate for some time. Due to the inherent weakness of the CMST, parallel warehousing and distribution mechanisms have increased with the support of donors. The WBG has been talking to stakeholders within the Government and donor community to further understand the supply chain landscape and to explore the scope for WBG help in enhancing the national capacity so as to avoid multiple parallel systems.

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25. In nutrition, the Government wants to build on successful experience and will need support to develop the sector further to strengthen measures intended to build resilience against food and nutrition insecurity shocks at household and community level. The Nutrition & HIV/AIDS Project is expected to achieve its objectives, and provide to valuable lessons on building systems that are replicable in other sub-sectors.

26. The Government has requested WBG support for a new water source for Lilongwe. The investment is the highest priority water project for the Government, and has PPP potential. The dialogue on this project has been supported through TA, with a view to filling knowledge gaps in the following areas: experience with PPPs in the water sector in Africa; willingness-to-pay and tariffs; detailed technical designs and ESIA; and identification of potential public sector financiers (these could include EIB, AfDB, and Gulf agencies). Analytical work on rural-urban linkages is currently under way, in part to help the Ministry of Lands, Housing and Urban Development to develop an Urban Policy. Its focus in the first phase is on deepening understanding of rural-urban linkages as a contribution to a better overall understanding of poverty dynamics in Malawi and opportunities for increased off-farm employment.

Results Area 2.2: Lowering vulnerability and enhancing resilience

Outcome 2.2: Improved resilience for poor communities through adequate social safety nets, improved climate resilience, and enhanced capacity to respond to disaster risk. This outcome is considered to be on track.

27. CAS results area 2.2 aimed to achieve its objective of lowering vulnerability and enhancing resilience by complementing single-sector investments with a more integrated approach that would consolidate the economic, social and environmental dimensions of sustainability. Progress is being made towards realizing results in this area through targeting basin-level and regional development planning in priority catchment areas, and though improved knowledge sharing (e.g. through the Malawi Spatial Data Platform, an open data portal covering all spatial data in Malawi). A strong focus is being maintained on monitoring and evaluation of impacts at the aggregate level, linking micro, and macro- level interventions. A harmonized approach to catchment management and flood risk management is emerging, and manuals are being prepared to guide action in both of these areas. Implementation of the Action Plan for Integrated Flood Risk Management in the Shire Valley has begun, complemented by capacity building support for loss and damage assessments, disaster risk finance, safer housing, community mapping for resilience, and seismic risk management. A number of sovereign, market and household/farm level disaster risk financing and insurance options are being rolled out under ASWAp- SP to build the resilience of citizens and farmers to different weather shocks which affect agriculture production and impact food security status at national and household levels. Concrete results in reducing vulnerability have been experienced by the 670,000 households that benefited from the IFA Program under IRLADP, and in the four priority catchments and two most flood-prone Districts in the Lower Shire that are currently being supported with investments to increase their resilience. However, the insatiable demand for charcoal to meet urban household energy needs is contributing to deforestation and forest and catchment degradation, reduced flow in rivers and increased sedimentation/heightened flood risk. There is a growing realization that energy alternatives need to be part of the solution for rural resilience. Most activities are, however, largely on track to reach their objectives.

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28. The Strengthening Safety Nets Systems (MASAF-IV) Project became effective in September, 2014. MASAF-IV aims to cover 752,960 poor households (4.14 million people) through cash transfers for productive, community-driven public works, social cash transfers and livelihood support. Women are expected to comprise 50 percent of those working on public works, 61 percent of Community Savings and Investment Promotion (COMSIP) program members, and over 70 percent of those benefiting from the Social Cash Transfer (SCT) program. The majority of the target households are rural and dependent on agriculture for their livelihood. The program’s approach to productive public works and to livelihoods support will reflect the context and needs of the clients. The SCT program is projected to reach approximately 319,000 households when fully operational in all 28 Districts by the end of 2015. Of these, approximately 21,000 households would be covered with MASAF-IV-supported cash transfers in the two districts of Dedza and Nkhata Bay. However, the entire SCT target group of 319,000 households will benefit from the establishment of a well-functioning system based on a unified registry, a Management Information System (MIS) and a timely payments system. This brings the total target number of beneficiaries of MASAF-IV to 1.05 million households (5.7 million people) over a period of four years if the systems strengthening, cash transfers, public works and livelihood support components are all included. Additional Financing for MASAF-IV is programmed for FY15

29. The level of rural poverty has remained high and virtually constant for almost fifty years in Malawi, but convincing analysis of the reasons for its persistence and of remedies that will work in the local context is in short supply. After the recent elections, the President and Minister of Finance, Economic Planning and Development asked the Bank to help develop more powerful analytical tools to address the problem. The GPs are working together to draw on the experience of other countries which have successfully reversed rural poverty. These cross-GP efforts began with a presentation to the Malawi delegation at the Annual Meetings, and will continue through a series of workshops before culminating in a Cabinet retreat.

Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness

Results Area 3.1: Improving public sector management

Outcome 3.1: Improved public sector performance because of better PFM, procurement, M&E systems, and enhanced statistics. This outcome is considered to be on watch.

30. The WBG, in coordination with development partners, aims to support the Government in improving the country’s PFM system through the Financial Reporting and Oversight Improvement Project (FROIP) funded under the Public Finance and Economic Management Reform Program (PFEMRP) multi donor trust fund (MDTF). This project covers planning and policy analysis, resource mobilization, budgeting, procurement, accounting and financial management, cash and debt management, parastatal financing, reporting, and auditing. Though its objectives have not been completely accomplished, progress has been made in key areas, including the decentralization of payroll in six pilot districts improvements in bank reconciliation (even though there are still some unreconciled), strengthening of controls (primarily through cash rationing and introduction of a cash ceiling authority system for the Ministries, Departments and Agencies (MDAs), capacity building (to enable the National Audit Office and the Central Internal Audit to carry out audits in line with their mandates, and independent audit committees to follow up on audit findings and recommendations). Due to "cashgate" and its major ramifications, however, this outcome is on watch.

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31. The WBG team boosted its technical support to the Government immediately after “cashgate”. Work was based on a sound technical analysis in a Preliminary Security Audit Report and Database Analysis Report carried out by consultants under Bank supervision and funded through FROIP. This report was later used extensively by the forensic auditors, who reached similar conclusions. The security gaps identified in this report were fixed to restore IFMIS operations, again under FROIP. The WBG team also supervised the preparation of the IFMIS restoration strategy after the IFMIS was shut down in the wake of "cashgate". In parallel, the WBG team partnered with a Government team to prepare an action plan to restore systems and stakeholder confidence. This action plan was adopted by the Government and incorporated into the Extraordinary Performance Assessment Framework (E- PAF), a separate framework prepared under the Common Approach to Budget Support (CABS) forum in which Heads of Missions sit. Most of the actions in the E-PAF required urgent assistance to hire expertise in identified areas, including forensic audit, third party oversight at the Accountant General’s Department, a new information security officer (ISO), and IFMIS technical and functional support. The WBG team helped the Government and the donors draft ToRs for these assignments, on the basis of which procurement actions were initiated by donors.

32. The Bank-supported FROIP was the key donor vehicle through which much of this work was carried out. In addition, FROIP support included support for fixing urgent control issues and enhancing IFMIS reports, providing international experience in IFMIS evaluations and selection, carrying out a payroll audit, improving network connectivity, and preparing detailed revised PFM procedures to address process control issues. The WBG team is deeply engaged with the Government in finalizing the revised PFM Action Plan, in close coordination with the IMF. The WBG team also provided in- time policy advice to the Government on issues needing urgent attention. Based on this advice, the Government published a series of policy instructions, including instructions to the Reserve Bank of Malawi (RBM) to tighten payment controls, accelerate bank reconciliation, ban virements (transfers of funds from one part of the budget to another) in relation to travel budget by MDAs (and resort to more predictable monthly cash releases to MDAs instead of ad-hoc, transaction-based cash releases). The Government has reacted more slowly to other WBG recommendations, including those relating to upgrading the IFMIS, commitment controls, bank reconciliation, and the Treasury Single Account (TSA).

33. Key lessons are that to be sustainable, PFM reforms must be owned and led by the Government, and that management accountability needs to be clearly identified, and enforced. While “cashgate” involved massive collusion, which is difficult to remedy even with sophisticated IT systems, fraud of this type will be harder to execute if assertions have to be supported by evidence, and substantiated by periodic cross checks by independent bodies. In addition, PFM reforms cannot be fully successful in themselves unless complemented by civil service reforms. New indicator and milestones gave been added to capture the enhanced WBG engagements in PFM.

34. The Government has asked for early Bank support for its new PSR reform effort. This country- driven program includes a series of reforms that have the potential for rebuilding public confidence in the civil service, and restoring the quality of the country's moribund service delivery efforts.

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Results Area 3.2: Strengthening social accountability for service provision

Outcome 3.2: Enhanced transparency on resource flows and service delivery. This outcome is considered to be on watch.

35. The CAS aims to support initiatives to enhance transparency across current and new WBG- financed operations, using demand-side governance tools to the extent feasible, and evaluating new social accountability mechanisms. While FROIP is supporting improved transparency around PFM in general, support thus far for enhancing the transparency of service delivery has been limited. The World Bank Institute (WBI) has been partnering with several organizations to support capacity building activities to strengthen investigative journalism and civil society participation and engagement. Partners include the Governance Global Practice’s Global Media Development Program (GMDP); Leadership, Learning and Innovation’s Open Aid Partnership (OAP); the Global Partnership for Social Accountability (GPSA); and the Code for Africa.

36. As envisaged in the CAS, there are ongoing efforts to include social accountability elements in WBG-financed projects. Under the Shire River Basin Management Program, third party M&E has been hired, including for input-output and process monitoring. This also includes the roll-out of a grievance redress mechanism under the project. Efforts to seek citizen input on planning and policy issues include close consultation with sector stakeholders and the involvement of central and decentralized coordination fora in the drafting of national integrated catchment guidelines. The design of MASAF- IV includes the use of Social Accountability Tools such as Citizen Report Cards, Community Score Cards, social audits, and participatory planning to track MASAF-IV performance indicators from the perspective of beneficiary satisfaction over targeting, graduation, implementation and quality of PWs, planning processes, and the probity of transfers. While the use of social accountability tools has not been tested or mainstreamed across the entire portfolio as envisaged, there has been a more systematic attention to demand side governance in the education sector where two GPSA grants have been dedicated to piloting innovative social accountability tools. In addition to a multi-sector PER, ESW on expenditures, service delivery quality and outcomes in primary education has just been completed, providing the tools for public debate on budget priorities and execution. Some indicators have been merged to provide more clarity. This outcome is on watch.

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Annex 5: Planned and Actual Lending and Non-Lending FY13 – FY17

Malawi: CAS Performance and Learning Review Original CAS Financing Plans and Actual FY13-FY17 Deliveries CAS Indicative Plan (December 2012) CAS Performance and Learning Review (February 2015) Indicative Amount IDA Project Title Themes US $ M Status US $ M Planned FY13 Delivery 210.0 Rapid Response Program (RRP) Policy Grant 1,2,3 50.0 Delivered as Rapid Response Development Policy Grant (P126155, closed FY13) 50.0 RRP Irrigation, Rural Livelihoods, Agricultural Development Project AF 1,2 50.0 Delivered as Irrigation, Rural Livelihoods, Agricultural Development Project AF (P131760) 50.0 RRP Third Malawi Social Action Fund AF 1,2,3 50.0 Delivered as Second AF for Third Social Action Fund Project (P131648, closed FY14) 50.0 Development Policy Operation (DPO) 1 1,3 50.0 Delivered as Economic Recovery DPO (P133663, closed FY14) 50.0 Regional: Agricultural Productivity for Southern Africa 1,2,3 10.0 Delivered as Agricultural Productivity Program for Southern Africa (APPSA) (P094183) 29.8

Planned FY14 Delivery 140.0 Development Policy Operation Operation (DPO) 2 1,3 50.0 Suspended. New DPO I (FY16) included in indicative financing 50.0 Malawi Social Action Fund 4 2 50.0 Delivered as Strengthening Safety Nets System - MASAF IV (P133620) 32.8 Higher Education and Skills Development 1,2,3 40.0 Delivered as Skills Development Project (P131660) 50.9 Regional Energy Connectivity Interconnector to SAPP 1,2 Deferred to FY16 as MW-MZ Power Interconnector Project (Regional) 20.0

Planned FY15 Delivery 175.0 Development Policy Operation (DPO) 3 1,3 50.0 Suspended. New DPO II (FY17) included in indicative financing 50.0 Public Sector Strengthening/Statistics Project 2 25.0 Reduced and Deferred to FY16 as Public Sector Reforms/TA 5.0 ASWAp Phase 2 (Agricultural Commercialization and Rural Growth) 1,2,3 100.0 Combined with Shire Valley Irrigation Project as Shire Valley Transformation Project (P125473) Regional: North-South Corridor 1 Regional: Pipeline (FY15) as Southern Africa Trade and Transport Facilitation 20.0 Additional Deliveries: Malawi Flood Emergency Recovery Project 50.0 Strengthening Safety Net Systems -MASAF IV AF (P148617) 75.0 Planned FY16 Delivery 231.0 Growth Pole/Shire Valley Irrigation Project 1,2 100.0 Deferred to FY17 as Shire Valley Transformation Project (P125473) 160.0 Additional Deliveries: Lilongwe Water Supply Project 71.0 APEI I 10.0 Planned FY17 Delivery Additional Deliveries: APEI II 10.0 TOTAL FY13-FY17 756.0 834.5 Notes: Amounts for projects not yet delivered are in italics Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth Theme 2: Enhancing Human Capital and Reducing Vulnerabilities Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness AF: Additional Financing 57

Malawi: CAS Performance and Learning Review FY13-FY17 Planned Non-Lending Program and Actual Deliveries CAS Plan (December 2012) CAS Performance and Learning Review (February 2015) Activities Themes Status Planned FY13 Delivery Policy Note on Rural Poverty, Gender and Household Food and Nutrition 1,2 Delivered Security Policy Note Series (P147757) - to be delivered in FY15 Malawi Gender Policy Note (P143054) - to be delivered in FY15 Growth Pole Study: Focus on SVIP and Opportunities from Tete 1 Delivered in FY14 as Growth without Borders PER, including Regional Agriculture Public Expenditure Review (TF) 1,3 Delivered in FY15 as Public Expenditure Review (P133262) PEFA 3 Deferred to FY15 as part of Financial Reporting and Oversight Improvement Project (P130878) Skills and Technology Development (TF)/Youth Unemployment, Labor 1,2,3 Delivered in FY14 as Higher Education Study (P123408) Markets, Migration Policy Note on Commercialization 1 Deferred to FY15/FY16 (under Growth Series), partially being delivered under ASWAP SP Integrated Trade Study 1 Delivered in FY14 as DTIS Update (P133601) PPP Pipeline Screening 1,3 Delivered in FY14 as TA Infrastructure PPPs (P131741) Transport Note 1,3 Deferred to FY15/16 as Southern Africa Trade and Transport Facilitation Program APL2 (P145566) Policy Analysis IHS3 2 Delivered (P124004) FINSCOPE Surveys 1 Delivered as MSME survey Agriculture/Land Issues Deferred to FY15/FY16, partially being delivered under ASWAP SP Additional Deliveries: Decentralization Note (P123238) Planned FY14 Delivery Progress on Selected MDGs 2,3 Ongoing under HIV/AIDS Project (P125237) Poverty Note - Synthesis Note on Food Security, Rural Poverty and 1,2 Ongoing as TA Reducing Poverty, Inequality and Vulnerability (P124004, FY15) Employment Energy Efficiency 1,2,3 Ongoing under Energy Sector Support Project (P099626) Study of Agriculture Commercialization 1 Deferred to FY15/16 (under Growth Series), partially being delivered under ASWAP SP Public Sector Strengthening Review 1,2 Public Sector Analysis included in Policy Notes (147757) for FY15 delivery

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Additional Deliveries: Effective and Inclusive Targeting Mechanisms in Africa: Malawi (P123372) TA Debt Management Reform Plan (P130093) TA Disaster Risk Management (P122473) TA Transaction Advisory on Concession Renegotiation of Railways (P127524) TA Rural Roads Project Component Preparation Support (P129249) Malawi MTDS (P144768) Tentative FY15 Delivery Impact Evaluations 2,3 Several evaluations are ongoing: Protecting Early Child Development - PECD (P143085, FY16); MASAF (FY16); Technology Adoption Study (ASWAp-SP, FY15); Endline Survey and Impact Assessment of the IRLAD Project (FY15) Social Safety Net Review 2,3 Deferred Water/Urban Development/Municipal Services 2,3 Planned for FY15 delivery as Urbanization Review (P146675) CEM including Assessment of Malawi Growth Models 1,2,3 Planned for FY16 delivery (P154607) FSAP Follow Up 1,3 Ongoing as TA Financial Sector Advisory (P152436, FY16)

Additional Deliveries: Policy Note Series (P147757, FY15) Reducing Poverty/Inequality and Vulnerability (P124004, FY15) Malawi Gender Policy Notes (P143054, FY15) Higher Education Dissemination Study (P153416, FY15) Primary Education PET-QSD Study (P148735, FY15) Fiduciary Risk Assessment (P152992, FY15) Growth and Competitiveness I (P151674) Programmatic Poverty Analysis (P148050)

Tentative FY16 Delivery Economic Monitor (P153806) Programmatic Poverty Analysis Growth and Competitiveness II

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Tentative FY17 Delivery Decentralization and Local Governance Public Expenditure Review Financial Sector Advisory Program Notes: Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth Theme 2: Enhancing Human Capital and Reducing Vulnerabilities Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness

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Annex 6: Poverty Reduction and Shared Prosperity in Malawi

I. A Snapshot

1. Poverty remains high and stagnant in Malawi. According to the Third Integrated Household Survey (IHS3 2010/11), over half of the population was poor and one quarter was estimated to live in ultra (extreme) poverty, with total expenditure below the food poverty line level (an income of 10,029 MK or below per person per year). Between 2004/05 and 2010/11, poverty in the country as a whole declined only marginally from 52.4 percent to 50.7 percent; poverty fell significantly in urban areas from 25 to 17 percent, as did ultra-poverty from 7.5 to 4.4 percent. The depth and severity of poverty also improved in urban areas during the same period. Poverty however remained stagnant in rural areas, slightly moving up from 56.2 to 56.7 percent. The depth and severity of poverty also worsened in rural areas (table 1). Therefore, urban-rural poverty disparity grew during 2004/05 and 2010/11.

Table 1. Welfare, Monetary Poverty and Inequality in Malawi, 2004/05-2010/11 Malawi Urban Areas Rural Areas Selected Indicators 2004/05 2010/11 Diff 2004/05 2010/11 Diff 2004/05 2010/11 Diff Welfare Per capita Expenditure (103 MK) 48.6 54.6 6.0** 94.4 118.8 24.4+ 42.2 43.1 0.9 Share of food in total consumption 59.4 63.0 3.6** 53.6 53.7 0.1 60.3 64.8 4.5** Share of food in cash expenditure 38.3 43.5 5.2* 56.4 49.7 - 6.7** 35.6 42.4 6.8* Monetary Poverty Indicators (%) Moderate Poverty Poverty headcount 52.4 50.7 -1.7 25.4 17.3 -8.1* 55.9 56.6 0.7 Poverty gap 17.8 18.9 1.1 7.1 4.8 -2.3+ 19.2 21.4 2.2** Poverty gap squared 8.0 9.3 1.3** 2.8 2.0 -0.8 8.6 10.6 2.0** Extreme Poverty Ultra-poverty headcount 22.3 24.5 2.2+ 7.5 4.3 -3.2+ 24.2 28.1 3.9** Poverty gap 5.3 7.0 1.7** 1.5 1.3 -0.2 5.8 8.0 2.2** Poverty gap squared 1.9 2.9 1.0** 0.5 0.5 0.0 2.1 3.3 1.2** Note: Significance level of the difference: 1% (**), 5% (*), and 10% (+). Source: Malawi IHS2 and IHS3.

2. While new official poverty estimates in Malawi will only become available with the IHS4, a more recent household survey -- Integrated Household Panel Survey, IHPS 2013 – suggests that poverty in Malawi between 2010 and 2013 during the non-lean months remained stagnant.14 According to the IHPS 2013, the overall incidence of poverty in Malawi fell slightly from 40.2 percent of the population in 2010 to 38.7 percent in 2013. Urban areas displayed an increase in poverty over this period, while rural areas experienced a slight decline in the share of those who are poor. Nevertheless, despite some of these changes in the incidence of poverty across rounds appear to be fairly large, none of them is statistically significant so stagnation prevails.

14 The poverty numbers between 2004/05 and 2010/11 coming from the IHS covered a full calendar year and are not directly comparable to the poverty numbers coming from the IHPS, which was conducted only over half of the calendar period that is typically covered by an IHS, and during what happen to be the non-lean months for Malawi. The overall poverty rates in 2010 and 2013 based on IHPS should be understood as the lower-bound for the actual poverty in Malawi. The IHPS was designed to be complementary to the official poverty analyses based on the IHS that is typically conducted every 5 years, rather than serving as a substitute in the interim years.

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Table 2: Incidence of poverty in non-lean months, 2010 and 2013 (% of population) 2010 2013 Estimate Standard Estimate Standard error error Malawi 40.2 1.8 38.7 1.8

Urban 17.9 4.9 26.2 5.3 Rural 44.0 2.0 40.9 1.9

North 50.2 3.8 43.3 3.9 Centre 33.5 2.8 39.0 2.7 South 45.0 2.8 37.3 2.7

Source: NSO and World Bank IHPS

3. Substantial mobility into or out of poverty was experienced by around a third of the population over 2010-13. The IHPS allowed for the first time the analysis of poverty transitions experienced by the population across time and suggests some interesting trends. Some two-thirds of Malawi’s population did not see much mobility over 2010-13 either into or out of poverty: 44 percent remained non-poor while 23 percent remained poor over this period. But substantial mobility was experienced by the remaining third of the population: around 17 percent managed to escape poverty during this period while 15 percent became poor (table 3). People living in urban areas experienced less mobility into or out of poverty than the rural population. Keeping the distinction between transient and chronic poverty is crucial from a policy perspective as the reasons driving each (and thus the measures to address them) are different.

Table 3: Poverty transitions between 2010 and 2013 (% of population, categories are based on 2010 original status) Stay Become Become Stay Total non- non-poor poor poor poor Malawi 44 17 15 23 100

Urban 67 6 15 12 100 Rural 41 19 15 25 100

North 36 21 14 29 100 Centre 48 13 19 20 100 South 43 20 12 25 100 Source: NSO and World Bank IHPS

II. Why Has (Rural) Poverty Endured?

High and persistent inequality

4. Malawi experienced significant growth in most of the past decade, averaging 7 percent between 2005 and 2011, and this raised household per capita consumption expenditure by about 12 percent over the same period. However, such strong growth performance has not been shared equally across population groups. Growth was positive and stronger among those with higher incomes and relatively weak for those with lower incomes thus not increasing the incomes of the poor rapidly enough or at all to lift them out of poverty. Consumption in urban areas grew for everyone, with the poorest enjoying relatively lower, but still positive growth rates. But in rural areas about two-

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thirds of the households experienced negative real consumption growth and only the top 5-10 percent experienced some growth (figure 1).

5. In addition, recent economic growth has been driven largely by urban-oriented sectors like services while agriculture did not grow much. Malawi enjoyed cumulative overall growth of 53.8 percent between 2004 and 2012. The most dynamic sectors were mining and quarrying, construction and the service sub-sectors (retail and wholesale trade, real estate, information and communications, transport and storage, and professional and other services). These sectors explain about two-thirds of overall economic growth. At the same time, the rate of growth of agriculture was below the national average (table 4). As a result, the service sector increased its share to about one third of GDP, driven largely by telecommunications, retail and wholesale trade, and financial services. Industry, mining and construction also begun to account for a larger share. By contrast, the agriculture sector which was the main driver of growth in the late 1990s with a contribution of over 50 per cent, saw its contribution shrink to an average of 28 per cent of GDP during 2005-10.

Figure 1. Growth Incidence Curves, 2004/5 – 2010/11 Table 4. Sectorial Growth of GDP, 2004-12 Sector GDP 2004 GDP 2012 Percentage Growth (2007 MK) (2007 MK) growth*100 points explained

Agriculture 144671 184582 27.6 9.2 Mining and quarrying 2002 17690 783.6 3.6 Manufacturing 40249 63442 57.6 5.4 Electricity, gas and water 8485 10422 22.8 0.5 Construction 11129 22694 103.9 2.7 Wholesale and Retail Trade 71239 144848 103.3 16.9 Transport and Storage 15605 26492 69.8 2.5 Accommodation, and food service 17111 13668 -20.1 -0.8 Information & Communications 11969 31989 167.3 4.7 Education 11973 12044 0.6 0.02 Health 21640 26030 20.3 1.0 GDP 444246 683068 53.8

6. Income inequality has increased as a result of diverging growth performances by sector and income level in urban and rural areas. Nationally, Malawi’s Gini Coefficient for consumption increased from 0.39 in 2004/05 to 0.45 in 2010/1. The national increase in the concentration of income was largely driven by rural inequality which increased from 0.34 to 0.38. Urban inequality is much higher than in rural areas, but stayed roughly constant during this period at about 0.49. Another way to show evidence of the increasing levels of inequality, especially in rural areas, is comparing the share of total expenditure earned by the bottom 40 percent and the top 10 percent of the population between 2005 and 2011: Nationally, the share of the bottom 40 percent shrank from 19 to 17 percent while the share earned by the top 10 percent increased from 30 to 32 percent.

7. Low average growth rates in rural areas coupled with the worsening in the income distribution between 2004/05-2010/11 did not favor poverty reduction in rural settings and thus nationwide15. Economic growth explains all the poverty reduction observed between 2004/05 and

15 Following Datt and Ravallion (1992), poverty reduction can be decomposed into a part which comes from an average increase in consumption across the population (i.e. the consumption levels of all households increasing in the absence of changes in inequality (growth), and a part which comes from a change in the distribution of consumption (i.e. consumption of the poorest growing faster than consumption of the richest in the absence of economic growth (redistribution).

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2010/11, while changes in the distribution of income contributed negatively to reducing poverty (figure 2). The fact that income remains unevenly distributed, probably reflects inequalities in the access to assets, services and opportunities across the population, which in turn influence poverty levels.

Figure 2. Poverty decomposition in terms of growth and redistribution, 2004/5 – 2010/11

Low agricultural productivity

8. A second key obstacle Malawi faces today to reduce poverty is the fact that a large share of its population remains locked into low productivity subsistence agriculture. Agriculture employs almost 90 percent of the population in Malawi (According to the IHPS data just under 87 percent of Malawian households were estimated to have been involved in agriculture in both 2010 and 2013), but accounts for only about 28 percent of GDP. This low share of agriculture in GDP relative to the large population and labor force employed in the sector proves that most people remain locked into low productivity subsistence agriculture.

9. Although the productivity of maize, the main staple crop of the country, has shown moderate increases from 2010 to 2013 (10 percent in average), the average yield of 1.4 tons/ha remains very low (figure 3). These yield estimates are quite close to the average yield levels found in neighboring countries like Zambia and Mozambique, but below the levels achieved by South Africa (around 4.3 tons/ha). Plots belonging to poor households presented on average the same increase in productivity as their non-poor counterparts, but yet again poor households tend to have lower yields than non-poor households systematically.

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Figure 3. Average Maize Yield in 2013 (kg/ha)

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0 Inorganic Inorganic No No Total Fertilizer/Improved Fertilizer/Traditional Fertilizer/Improved Fertilizer/Traditional Seeds Seeds Seeds Seeds Non-Poor Poor

10. Low productivity is partly explained by the lack of access to services, key productive assets and market opportunities across the population. All this can influence household decisions on technology adoption and their activity portfolio, with implications to income generation and poverty levels. Maize yields are higher when at least one modern input – inorganic fertilizer or improved seed varieties - is used. The highest yields are achieved when both inorganic fertilizer and improved seeds are used together. In fact the average yields almost double in plots where inorganic fertilizer and improved seeds are both used compared to plots that did not apply inorganic fertilizer and used traditional seeds (figure 4). Unfortunately, the incidence on the combined use of these two inputs tends to be lower among poor households than non-poor households: Only 12 percent of poor households as a share of total population (and a third of poor households in total) use both inorganic fertilizer and improved seed varieties, while the incidence of use of these inputs is 25 percent among non-poor households as a share of total population (44 percent of non-poor households in total) (figure 4). It is therefore no coincidence that the poor whose income is largely dependent on agriculture are overrepresented in rural areas and display the lowest levels of productivity within the population. Rural dwellers in Malawi account for 85 percent of the population but for 94 percent of the poor in 2010 and for 90 percent of the poor in 2013. Agricultural households had levels of consumption expenditure per capita of about 12 percent and 22 percent lower than non-agricultural households in 2004/05 and 2010/11 as well.

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Figure 4. Incidence of use of inputs in 2013 (over total population)

30

25

20

15

10

5

0 Inorganic Fertilizer/Improved Inorganic No Fertilizer/Traditional No Fertilizer/Improved Seeds Seeds Fertilizer/Traditional Seeds Seeds

Non-Poor Poor

11. Malawi’s current strategy for increasing productivity amongst the rural population (and implicitly for reducing poverty) centers on heavy subsidization of fertilizers and improved seeds (Farm Input Subsidy Program - FISP. FISP however is not poverty targeted. The program does not exclusively target the poor or the rich at any level of the program administration and it reaches all socioeconomic strata of rural Malawi (figure 5).16 The Ministry of Agriculture and Food Security, the districts and the communities are nearly uniform in their failure to target the poor. These findings cast doubt on accurate beneficiary identification under the current FISP approach to decentralized targeting that relies heavily on community-based targeting. Furthermore, the relatively well off in terms of wealth and land holdings, rather than the poor or the wealthiest, and those that are connected to community leadership, residing in locations with favorable soil quality, have a higher likelihood of FISP participation and receive a greater number of coupons.

16 Kilic, T., Whitney, E., and Winters, P. (2014). “Decentralized beneficiary targeting in large-scale development programs: insights from the Malawi farm input subsidy program.” Journal of African Economies, 24.1, pp. 26-56.

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Figure 5. FISP coupon recipients by wealth and poverty status, 2011, % 70 60 60 55 57 52 54 48 50 46

40 % 30

20

10

0 Poorest Q2 Q3 Q4 Richest Poor Non- Poor

Source: World Bank PER 2013.

12. Ongoing work to estimate the impact of FISP participation on consumption between 2010- 2013 indicates no overall improvements in total, food or non-food per capita consumption due to household participation. The heterogeneity of impact using the baseline poverty status of households in 2010 is still under research.

High degree of economic insecurity

13. Risk is pervasive in Malawi. The majority of producers are rain fed farmers with high exposure to weather shocks: Between 2012- 2013, almost a third of the population poverty self- reported suffering a drought. The ongoing floods due to heavy rainfall have already resulted in more than 400,000 people affected as a result of the high water and damaged infrastructure. The country has also a narrow export base of agriculture produce, mainly tobacco, which makes the agricultural sector highly volatile at the macro level due to tobacco price fluctuations. Similarly, 3 out of every 5 families in rural areas are net buyers hence becoming highly exposed to local food price fluctuations, which in 2013 affected more than 80 percent of households.

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Figure 6. Proportion of households affected by shocks between 2012- 2013

14. Shocks can force households into poverty when risk mitigation mechanisms are limited. Based on the IHS3-IHPS panel, one can explore the magnitude of the relative contribution of (at least) the lack of risk mitigating mechanisms (including non-farm activities) and the occurrence of the abovementioned shocks to the probability of falling into poverty. Droughts and high food prices experienced between 2012- 2013 increased the chances of falling into poverty for those who were non-poor in 2010 while having a non-farm enterprise reduces dramatically the probability of falling into poverty due to shocks. When the baseline household faces the same shocks, with the difference of not having access to non-farm income sources, then its probability of being poor increases.

15. Well-targeted transfers and social safety nets can also play an important role in reaching those among the poor who are net buyers of food/ net sellers of labor, and can result in significant reductions in poverty since an effective social protection floor allows the poor to better manage risk (e.g., health or weather shocks leading to asset depletion). However, Malawi’s current plethora of SSNs (cash transfers, school feeding programs, etc.) has been highly fragmented and funded at too low a level to have a meaningful impact on poverty reduction, while their target groups have too often overlapped with FISP. Social safety net programs, including the Public Works Program under MASAF, have limited reach to hedge rural households against risk.

16. Ensuring a more persistent and well-remunerated participation in self-employment activities appears to be a feasible option to get households out of poverty as well (not just to avoid falling into poverty). Non-farm labor income was in fact the driving force behind poverty reductions in urban areas between 2004/05 and 2010/11. In rural areas, households that earn income from non-farm self- employment in 2005 had welfare levels that are 11.7 percent higher than those that did not, with the difference increasing to about 23.1 percent in 2011. And in 2005, households engaging in non-farm wage labor markets had welfare levels 6 percent higher than those that did not in 2005, and 16 percent higher in 2011. Unfortunately agricultural wage labor makes up a substantial share of rural incomes in Malawi, while the share of rural off-farm work is much smaller (figures 7 & 8). And while the proportion of non-farm enterprises widened significantly between 2010- 2013 in rural areas, the number of households engaged in these activities each year remains low.

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Figures 7 & 8. Incidence of non-farm labor income and enterprises in Malawi

III. Conclusions and Way Forward to Reduce Poverty

17. The following conclusions can be drawn from the analysis: (i) recent economic growth has not been poverty reducing in rural areas; (ii) poverty in Malawi remains high and stagnant; (iii) high vulnerability levels exist in the population as shown by the large movements of people in and out of poverty.

18. What are the policy implications of these findings? Sustained and balanced growth across sectors and population groups remains essential to reduce poverty and ensure shared prosperity in Malawi. Fostering productivity growth in agriculture is key to reduce poverty given that most households in the country are rural and engaged in this activity. If FISP aims at increasing productivity, resource poor farmers are perhaps not the best target as they usually face greater socio-economic and agronomic constraints. If the objective aims at supporting resource poor farmers, FISP as a subsidized fertilizer and seeds delivery program is probably not the right instrument. Access to savings and financial instruments as well as diversification into non-farm activities can hedge households against risk and thus help to avoid falling into poverty when external conditions deteriorate. Larger and more effective redistributive transfers through safety net programs can also reduce poverty substantially if well-targeted. Short-term casual labor “ganyu" in Malawi is low yielding and has high opportunity costs, so engaging only in this activity prevents the poorest from getting out of poverty. The presence of highly unsettled and low-paid employments (casual worker) remains a protracted source of stress while weather shocks are often short-lived and unpredictable. Keeping this distinction between quasi- permanent factors and shocks is all the most relevant as the measures that would need to be taken to address each problem differ.

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Annex 7: IFC Country Program

IFC’s Country Program

1. To support the Government of Malawi’s priorities, IFC will remain focused in identifying investment opportunities in agribusiness and banking (SMEs and Trade finance), advisory opportunities in infrastructure through PPPs (mainly water and energy), and in the improvement of the business climate by streamlining business processes.

IFC’s Committed Investment Portfolio in Malawi

Committed Portfolio Client Sector Balance (US$m) ETC Group Agriculture and Forestry 10.0 Gateway Mall Construction and Real Estate 5.7 Malawi Mangoes Food & Beverages 5.0 FMB Malawi Finance & Insurance 1.2 NHL Finance & Insurance 0.5 Total 22.4

Agribusiness

2. IFC's FY14 work in the agribusiness sector includes US$5m participation to a US$15 million investment package in Malawi Mangoes to support expansion of the company's tropical fruit production and processing operations. The company is the first ever banana plantation in Africa to receive Rainforest Alliance (RA) certification and the first mango plantation in the world to receive such certification. It is worthwhile to underline that proactive inclusion of RA requirements within the scope and performance-based requirements of the ESIA/ESMP preparation process, in addition to national legal and regulatory requirements, has greatly facilitated the certification process. The company has also expressed interest in taking part in the World Bank's Shire Valley Transformation Project. The IFC and the World Bank teams are exchanging initial ideas.

3. Also in FY14, IFC’s advisory program on Warehouse Receipt Financing was launched to help fill the gap in financial markets in Malawi by supporting the development of a regulated Warehouse Receipt System. Study tours to South Africa and India were organized in August 2014 to expose Malawian stakeholders to best practices and a draft law is due to be validated soon, after which it will be presented to Cabinet for approval and then forwarded to Parliament for enactment.

4. In FY13, IFC extended a loan (US$70m) to support ETC Group’s expansion in Africa to help the Group source products from smallholder farmers while providing them with access to its regional and global markets. The Company used the funding to set up processing plants and to build commodity warehouses in Tanzania, Kenya, Mozambique and Malawi. An amount of US$10 million was specifically assigned to the Group’s expansion in Malawi.

5. In FY13, IFC through its Biotrade Africa Advisory project partnered with Phytotrade Africa and the Union for Ethical BioTrade to promote ethical sourcing of products by the private sector in

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Tanzania, Mozambique and Malawi. In Malawi and Mozambique, IFC and PhytoTrade will work with the Baobab and Mafura supply chains to increase market access and create linkages between local producers and large international organizations. The number of international buyers for baobab and mafura products in the two countries has been rising rapidly, leading to new investment opportunities. In the first half of FY13, a scoping study was completed. This will provide the platform for further dialogue with the Government of Malawi and development partners such as DFID.

Financial Sector

6. IFC’s Global Trade Finance Program: IFC continued to ramp up its trade program in Malawi despite a challenging (but improving) macroeconomic environment. Existing GTFP lines with First Merchant Bank (FMB) and NBS Bank remain in place, while a third line with FDH Bank was added recently. More info below:

7. FDH Bank: In November 2014, IFC and FDH Bank signed a US$4 million GTFP line to support the bank’s growing trade financing business. The line is now open and the bank is already utilizing it to support its trade transactions. IFC and FDH Bank are now in the process of discussing a targeted IFC Advisory Services package to help strengthen the bank's trade business structures. FDH Bank is a local and growing commercial bank established in 2008 by a local Malawian entrepreneur.

8. First Merchant Bank: The US$10 million GTFP line for FMB Malawi remains active and while there is no intention to cancel it, there is currently no plan to increase it.

9. NBS Bank: The US$7 million GTFP line for NBS Bank remains open up to a maximum limit of US$3 million. The portfolio team continues to closely monitor NBS Bank’s performance and recovery following a turbulent market environment in 2012, in order to determine whether to authorize the opening of the full US$7m line. IFC, jointly with the WB, has in place a Financial Infrastructure Program. IFC is also engaged with the Ministry of Trade and Industry, the Reserve Bank and the Department of the Registrar General (part of the Ministry of Justice and Constitutional Affairs) on the creation of a collateral registry for security interests in moveable property.

Infrastructure: PPPs

10. Water: IFC’s PPP team has completed the market sounding exercise and the financial analysis for the provision of new water sources for Lilongwe and Blantyre. The team summarized the results of both the financial analysis and the market sounding report in a proposal that was presented to the Ministry of Irrigation and Water Development. The C3P team recommended that a new source for Lilongwe should be the priority for the GoM at this point in time. The C3P team is waiting for the completion of the Willingness to Pay (WTP) study.

11. Power: IFC has had discussions with the Government and the Millennium Challenge Corporation (MCC) on options for the introduction of a management contract and possible PPPs in the sector. As there was strong motivation to implement the MCC Compact quickly, the Government decided to strengthen the existing management structure of ESCOM (power utility) in the short term. The WB, Public-Private Infrastructure Advisory Facility (PPIAF) and IFC are discussing with the MCC the possibility of assisting in this exercise. Separately, the Government’s new PPP Commission

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undertook a PPP pipeline study which identified a number of possible PPP projects, including power projects outside of the ambit of the MCC Compact. IFC is pursuing discussions with the Commission about providing transaction advice on these projects. The WB is funding feasibility studies on three hydroelectric power projects. IFC is monitoring progress with a view to providing transaction advice on developing these projects as PPPs in the future.

12. Grain sector: The Ministry of Agriculture requested the IFC to carry out a scoping study to determine the feasibility of development grain storage silos on the PPP model. The IFC completed the scoping mission and submitted the report to the Government and is awaiting for the Government’s response.

13. Education sector: The Ministry of Education requested the IFC to carry out a scoping study for the LUANAR University student accommodation project. The IFC is currently undertaking to pre- feasibility study that will determine if the project is viable as a PPP.

Investment Climate

14. IFC has been working with the Government to address Malawi’s continuing slide in the Doing Business (DB) performance through targeted technical assistance. In March 2013 the IC team participated in the Government’s High Level meeting on DB. The team delivered a DB presentation outlining areas of possible DB reform in Malawi. Following this, an action plan outlining short- and medium-term reform recommendations was shared with the GoM in December 2013. The team has also updated the Doing Business Reform Memorandum since then but has failed to secure the Government's commitment to organize a workshop dedicated to validating its recommendations. Over the past few years, the IC team has assisted the Government to achieve several IC reforms including drafting and revision of the Company Act 2013, the Personal Property Security Act 2013 and the Insolvency Act. Although Malawi's posted disappointing performance in last year's Doing Business 2014 Report, in DB 15, two positive reforms were recorded (in the areas of Getting Electricity and Starting a Business).

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Annex 8: Financial Management Portfolio Review

1. An in depth review of the Malawi portfolio was undertaken for the period ended June 30, 2013. The review involved checking expenditure incurred during the period and ensuring that the payments were made in respect of activities agreed in the annual work plan and budgets. The review also focused on ensuring that all payments were properly authorized, supported by adequate documentation and prima facie properly procured. The review observed a number of control and accountability issues that point to serious weaknesses in FM arrangements especially for projects mainstreamed in MDAs. Most of the weaknesses are not the result of incompetence but a weak control environment that encourages noncompliance and a culture of impunity. Consequently, while training and other forms of capacity building will improve FM arrangements, the more critical measure will be improving the control environment by, among other things, providing incentives and disincentives for good and poor performance respectively. The findings and recommendations from review are summarized below:

2. Payments made without proper supporting documentation. The expected supporting documents include supplier invoice, quotations or contracts, delivery notes acknowledging receipts of goods or equivalent proof of successful delivery of services, supplier receipts acknowledging receipts of cheques. A number of expenditures reviewed were lacking support by one or more of these documents.

3. Payments made without a minimum of at least three comparable quotations. A number of payments were made on single sourcing which requires a no objection from the Bank but such no objection was not in place.

4. Duplicate payments. There was an instance of a duplicate payment and the entity involved did not request for a refund from the beneficiary of the duplication.

5. Payments documentation not cancelled. The recommended practice is to cancel payments documentation by stamping them with a paid stamp in order to avoid erroneous or fraudulent duplication using the same documents. A number of payments documentations in a number of implementing entities were not being stamped. The government has been urged to ensure that once payment is done payment vouchers and related documentation should be marked/stamped paid in order to prevent erroneous or fraudulent duplication.

6. Unauthorized payments. All processing of payments must be preceded by proper authorization. This is usually by means of a loose minute to the authorizing staff as described in the project implementation manual. A number of payments did not have authorization. The government has been advised to ensure that all payments are properly authorized in line with procedures agreed in the project implementation manuals.

7. Unauthorized activities. Some of the payments were for activities not found in the agreed annual work plan and budget. All credit and grant agreements specify that funds can be applied only in respect of activities detailed in the agreed annual work plan and budget. The government was advised to restrict carrying out activities to those agreed in annual work plans in order to avoid ineligible expenses.

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8. Non-acquittal of advances. There were a number of instances where advances for allowances, workshops and other activities were not liquidated or not properly liquidated. The government was urged to comply with its own circular requiring acquittal of advances within one week of the expenses being incurred.

9. Back to office reports (BTOR). It is a requirement by the government that officers should submit a report on work done in respect of activities for which funds were advanced to them. In most of the cases BTORs were not made available for review by the Bank team.

10. Differences between amounts on cheque and supporting documentation. There must be agreement between amounts written on cheques and those on supporting documentation. However there were a number of observations where this was not the case. In the observed cases the amount on cheques was more than the supporting documentation. Checking and counter approvals should have ensured that this malpractice was not widespread. The government should ensure that payment transactions are properly checked and authorized to ensure accuracy and also avoid fraudulent manipulation by individuals.

11. Misapplication of funds or use of wrong codes. Each Expenditure or a group of several expenditure types is allocated a code in the accounting system. There were a number of observations where expenses were being charged to wrong codes. In some instances this was done in lieu of virement. The government should ensure that payment transactions are properly checked and authorized to ensure accuracy and also avoid fraudulent manipulation by individuals.

12. Non implementation of audit recommendations. A number of issues listed above have been reported in the past by both external and internal auditors. Lack of action when staff do not comply creates a culture of continued noncompliance and impunity. The government must ensure that audit recommendations are implemented and recurrence of control and accountability lapses must be seriously dealt with in order to give credibility to FM arrangements.

13. Ineligible expenditure. As a result of the observations above potential ineligible expenses of about MK1.5 billion (US$3 million) have been identified and followed up with government. Final draft reports have been prepared and the implementing entities have been given the last chance to review the reports and confirm ineligible expenses.

14. The WBG is working with the Government to address these issues. Measures being taken to protect the portfolio from fiduciary risk include increased financial ring-fencing of existing and new projects (separate accounting packages and exclusive bank accounts), enforcement of follow-up sanctions for ineligible expenses, enhancing audit TORs to address issues identified in the FM Review, systematic transaction reviews conducted in partnership with the Government’s Central Internal Audit Unit, systematic follow up of audit findings and recommendations to ensure issues are resolved in a timely manner, greater use of independent consultants to audit procurement, use of direct payment modality for high-value items, enhanced proactive FM reviews of risky operations and provision of more intensive FM inputs and oversight during supervision. A second comprehensive FM portfolio review will be done in FY16.

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Annex 9: List of Active Trust Funds as of 2/16/15

Grant Available Trust Disbursements Trust Fund Name Amount Balance Fund # ($ million) ($ million) ($ million) TF010015 Cities Alliance - Grant for Lilongwe City 0.25 0.01 0.24 Development Strategy TF012309 Malawi PFEMRP MDTF Administration Costs 0.85 0.45 0.40 TF012487 Malawi Procurement Capacity Building Project 0.49 0.08 0.41 TF012631 Support for Nutrition Activities and Policies in 12.35 8.46 3.89 Malawi TF012632 Support for Nutrition Activities and Policies in 0.52 0.41 0.11 Malawi - Supervision TF012633 Support for Nutrition Activities and Policies in 0.12 0.12 0.00 Malawi – TF Management TF012920 Shire River Basin Management Program (Phase-I) 5.08 3.56 1.52 Project TF012921 Shire River Basin Management Program (Phase-I) 1.50 1.01 0.51 Project TF012935 Malawi Mining Technical Assistance Project 2.51 0.46 2.04 TF013394 Support to Disadvantaged Children 0.12 0.00 0.12 TF013608 Effective Management of the Nkhotakota Wildlife 0.85 0.00 0.85 Reserve (EMNWR) TF013825 Financial Reporting and Oversight Improvement 8.00 1.11 6.89 Project TF014006 Disaster Risk Management in Malawi Country Plan 1.00 0.44 0.56 II (GFDRR Track II) TF014429 Round 31 Malawi: Promoting Inclusion of 0.09 0.05 0.03 Children with Disabilities in EFA Programs TF015841 Strengthening Social Accountability in the 0.95 0.75 0.20 Education Sector TF015842 Malawi Social Accountability Strengthening 0.71 0.46 0.25 Project TF015920 ASWAp-SP MDTF Enhanced Supervision 4.00 0.98 0.32 TF016046 ASWAp-SP MDTF Administration and 0.48 0.25 0.23 Management TF016172 Malawi Urbanization Review 0.15 0.06 0.09 TF016322 PHRD Staff Grant Support for Nobuyuki Tanaka 0.19 0.01 0.18 TF016364 ASWAp-SP MDTF Project Execution 100.00 70.50 29.50 TF016685 Malawi Primary Education Quality studies 0.25 0.25 0.00 TF017483 MALAWI: Support to Lilongwe Water Board for 0.21 0.03 0.18 a Tariff Review and Willingness to Pay Study TF017857 SRP - Increased Access to Finance through 0.15 0.05 0.10 Biometric Technology TF018061 Malawi - Evaluating Effective Support to 0.10 0.09 0.01 Disadvantaged Secondary School Students TF018169 Active GEF Full Sized Projects for Water GP 0.22 0.12 0.10 TF018261 Renewable Energy Resource Mapping and 0.70 0.68 0.02 Geospatial Planning TF018340 MW-Effective Management Nkhotakota - BETF 0.04 0.03 0.01 for Support costs TF018687 Fingerprinting to Reduce Risky Borrowing 0.05 0.05 0.00 TF057187 Environmental and Social Challenges in MIGA- 1.45 0.17 1.28 Guaranteed Projects

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TF090446 Bank Ex. Support for EITI in Country 12.50 1.10 11.40 Implementation TF092100 GEF FSP : Agricultural Development Program 5.80 0.15 5.65 TF096288 LSMS-ISA Malawi National Panel Survey 1.22 0.02 1.20 TF097559 Project to Improve Education Quality in Malawi 90.00 2.06 81.94 TF098618 Malawi - EFA FTI Catalytic Fund Supervision 0.46 0.10 0.36 Grant TF099386 Round 31 Malawi: Promoting Inclusion of 1.83 0.98 0.85 Children with Disability into Basic Education for All Program Grand Total 256.87 95.77 152.32

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Annex 10: Summary of CPPR Findings

1. The Bank portfolio is progressively being consolidated. It currently consists of 12 active projects, with 5 entrants and 10 exits expected in the CAS period to leave a consolidated portfolio of 7 operations for the next CPF (excluding regional projects). Net commitments total US$811.3 million, of which US$346.2 million (43 percent) are undisbursed. Disbursement rates improved significantly in FY13 and FY14, but the average implementation period increased from 3.8 years in FY12 to 4.4 years in FY15. Recent ISRs for ongoing projects rate Implementation Progress (IP) for three projects as satisfactory (S), two as moderately unsatisfactory (MU), and the remaining six as moderately satisfactory (MS). ICRs available for four of the six projects that have closed during this CAS period rate overall outcomes as S for the Rapid Response Development Policy Grant, and MS for the Business Environment Strengthening Technical Assistance Project (BESTAP), the Infrastructure Services Project and the Multi-sectoral AIDS Project. The portfolio also includes two regional projects and two projects financed by the Global Partnership for Social Accountability.

2. Trust Funds. Currently there are 36 Trust Funds (TFs) in the Bank portfolio with a total value of US$257 million, 32 of which were approved during this CAS period. These include large Bank- managed Multi-Donor Trust Funds (MDTFs) as well as smaller catalytic activities spread across the portfolio. Larger MDTFs have permitted a sector-wide pooled approach in various strategic areas (Agriculture, Education, HIV/AIDS, and the Financial Reporting and Oversight Improvement Project, FROIP), and have provided effective platforms for coordinated donor policy dialogue on PFM and FISP reform. Global Fund for Disaster Risk Reduction (GFDRR) support for strengthened disaster risk management has proven highly relevant in light of January’s floods. Managing large MDTFs has proven demanding, however, and requires intellectual leadership, significant staff resources and field presence. With Malawi a popular destination for global programs and pilot initiatives, discipline and selectivity are needed to resist a proliferation of supply-driven initiatives that are only loosely tied to core strategic objectives.

3. A Country Portfolio and Performance Review (CPPR) was conducted in November 2014. Many of its findings are consistent with past reviews: poor government oversight, staff attrition, fiduciary deficiencies and lack of compliance with covenants. The main challenges derive from the weak operating environment in which WBG-financed projects are implemented, and the systemic nature of many challenges that can only be addressed as part of an overall program of public sector reform. Specific issues include the following: • The abandonment of Project Implementation Units. In 2013 the Government issued a circular banning the use of Project Implementation Units (PIUs). While this was consistent with a move towards greater country ownership, it meant that a number of Bank projects faced delays and a loss of quality in implementation. Ultimately this policy was modified in favor of hybrid implementation arrangements which have retained some of the benefits of PIUs while restoring a degree of government ownership.

• High turn-over/low skills among 'common service staff'. Recruiting and retaining suitably qualified procurement and financial management staff remains a challenge, and many positions stay vacant for long periods of time, slowing implementation considerably.

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• The ineffective use of technical assistance. Consultants are rarely well-used; capacity-building opportunities are often missed, and in some cases consultants resort to shadow implementation, thereby reducing government project ownership.

• Long delays between effectiveness and disbursement. The first one to two years of WBG projects are often spent on preparatory and start-up activities, delaying real project effectiveness and diluting the value of Mid-Term Reviews (which tend to be conducted too early in the project cycle to embody meaningful implementation lessons).

• Weak internal controls. Project fiduciary reviews have for some time identified weak internal controls in financial management (FM), and to a lesser degree in procurement. Several WBG- financed projects involve large contracts; these have in the past led to misprocurement, cost over- runs and significant delays.

• Implementation modalities. WBG projects have used a number of implementation approaches, including (i) core government systems, (ii) hybrid PIUs and quasi-government agencies, (iii) full PIUs, and (iv) NGOs. PIU-implemented projects tend to post the quickest and best implementation record, while projects which are fully Government-implemented suffer the worst delays and greatest administrative problems. Quasi-government agencies have performed relatively well, while NGOs have not: they face problems of attracting and retaining qualified staff similar to Government, and compete for the same small reservoir of qualified staff. The hybrid model has had mixed results, but has generally been positive once early start-up issues have been overcome. The CPPR recommended a better matching of implementation models to project complexity and results desired.

4. Going forward, the WBG will give greater attention to ensuring that projects are ready for implementation by Board approval (making more use of PPAs), and give careful attention to matching implementation modalities to the complexity and capacity requirements of the operation. Greater use of DLIs and result-based approaches will be explored for new operations. The new operating model with Global Practices brings potential benefits in terms of exploiting opportunities for multi-practice engagement in implementation support. Meanwhile the Government is preparing a TA Policy to improve effectiveness of technical assistance and is adapting its PIU policy in favor of a more pragmatic approach which emphasizes moving towards government ownership through phased transitions.

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Annex 11: Review of Gender-informedness of the World Bank Group’s Operational Portfolio in Malawi (FY10-FY13)

1. The 2012 Country Assistance Strategy for Malawi sets out targets for strengthening gender mainstreaming in Malawi’s country portfolio, looking to achieve an FY13 interim target of having 60 percent of all current operations “gender-responsive” in design and 65 percent of all operations with at least one sex-disaggregated RF indicator. It also sets out corresponding targets at 70 percent for the FY15 portfolio. Based on the corporate-wide review of the gender-informedness of projects that is regularly carried out by the Gender CCSA, this annex reviews progress towards the FY13 interim targets, while including results from FY14 as a further indication of progress towards the FY15 targets.

Gender-informedness of the aggregate portfolio, operations approved from FY10 to FY14 (inclusive)

2. The WBG’s Gender CCSA has rated the 19 operations in the Malawi portfolio that went for Board approval in the FY10 – FY14 period. The team rated 12 of them gender-informed in all three dimensions (i.e., in analysis, design and M&E), the highest possible score in the current monitoring system. They rated two operations gender-informed in two dimensions, and two in one dimension, with the remaining three judged not gender-informed. These include one energy sector project, the third tranche of the PRSC as well as the Second National Water Development Project. On this measure, 84 percent of the PADs approved in the FY10 – FY14 period were gender-informed in at least one dimension.

Gender-informedness of the Malawi portfolio by FY

3. Broken down by fiscal year Board approval date, the CCSA rated the gender-informedness of the portfolio as follows:

FY10: Four of five operations were rated gender-informed (two operations in all three dimensions, one in two dimensions and one in one dimension) (80 percent) FY11: Three of five operations were rated gender-informed (one project in all three dimensions, one in two dimensions and one in one dimension) (60 percent) FY12: All three operations were gender-informed in all three dimensions, the highest score possible (100 percent) FY13: All four operations were gender-informed in all three dimensions, the highest score possible (100 percent) FY14: Both operations were gender-informed in all three dimensions, the highest score possible (100 percent)

The CAS Results Framework: “gender-responsiveness” of the Malawi portfolio, by FY

4. The 2012 Malawi CAS Results Framework uses a slightly different indicator, however, in using “gender-responsive” instead of the defined standard term used in the corporate monitoring systems “gender-informed.” By “gender-responsive, the CAS RF intends a PAD that draws on gender- relevant analysis and follows up, either in a specific policy or activity, or through at least one gender-

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specific target or indicator. Using the CAS RF definition of “gender-responsive,” the FY breakdown looks as follows:

FY10: Three of five operations are “gender-responsive” (two with a perfect score and one with analysis and action, but no M&E) (60 percent) FY11: One of five operations is “gender-responsive” (with a perfect score) (20 percent) FY12: All three are “gender-responsive” (with perfect scores) (100 percent) FY13: All four are “gender-responsive” (with perfect scores) (100 percent) FY14: Both operations are “gender-responsive” (with perfect scores) (100 percent)

5. Looking only at the monitoring and evaluation dimension, which the CAS RF defines as “at least one sex-disaggregated indicator in their RF,” and assuming that this corresponds to the corporate monitoring’s third dimension, the FY breakdown looks as follows:

FY10: Three of five operations have at least one sex-disaggregated indicator (60 percent) FY11: Three of five operations have at least one sex-disaggregated indicator (60 percent) FY12: Three of three have at least one sex-disaggregated indicator (100 percent) FY13: All four have at least one sex-disaggregated indicator (100 percent) FY14: Both operations have at least one sex-disaggregated indicator (100 percent)

Conclusions

6. In the FY10 – FY13 (inclusive) window, seven of 13 operations are rated “gender-responsive”, tantamount to 54 percent of the portfolio, and nine of 13 operations are rated as having at least one sex-disaggregated indicator in the RF, tantamount to 69 percent. The combined FY10 – FY13 portfolio therefore falls short of the 60 percent target using the “gender-responsive” definition, but exceeds the M&E target of 65 percent.

7. At the same time, as this review makes clear, every operation that was approved for Malawi since the December 2012 adoption of this CAS results framework has received the highest possible rating on gender, exceeding the definition of “gender-responsive” and indicating that the FY13 interim target was either set higher than possible to meet, or that the team expected a larger number of operations to be launched.

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Annex 12: Stakeholder Consultations and Client Survey

1. In the 2013 Client Survey of 600 respondents, high priority areas for Bank involvement included public sector governance, education, agriculture, and energy. Areas for improvement were the WBG’s general speed of response, flexibility, and M&E. Perceptions were positive about the degree of WBG collaboration with the Government and donors, but respondents felt that more WBG staff should be stationed in Malawi. Financing was viewed as the WBG’s greatest contribution, though the value of policy dialogue and technical assistance work was also recognized.

2. 2015 Consultations with Civil Society and Parliamentarians. In February 2015 the Bank had opportunity to hear from leaders of civil society and Members of Parliament their views on the work of the Bank in Malawi. Discussions centered on sectors that the Bank is engaged in as reflected in the CAS, namely agriculture, education, health and nutrition, natural resources, and macro- economic issues.

3. The participants raised concerns with current Bank engagement in some areas, and proposed what they would like to see the Bank do more or differently. The Health sector was picked as the main area where they urged the Bank to return to and support the public service reforms in the health sector, and also help build capacity in terms of infrastructure and trained personnel.

4. Infrastructure was raised as a major cross cutting issue in agriculture, health and education. The Bank was asked to stay engaged in infrastructure development as it affects overall development progress, with one MP saying, “we have schools that should not be called schools,” with others calling for more involvement of the Bank in irrigation.

5. Governance was another cross cutting issue with MPs and CSO leaders bemoaning the lack of policy coherence across the board, and holistic systems of getting things done. They acknowledged how failure to properly coordinate and implement systems such as decentralization is retrogressive to development. They also expressed concern at how the country has adopted expensive systems and policies for political gains, citing the agriculture input subsidy as a case of something the country cannot afford yet politicians still tout it as affordable.

6. The macro-economic situation in the country was a major issue in the consultations. Integration of planning and budgeting processes was still seen as a problem area where the country needs help with concerns over uncertainty of revenue and donor support which affects predictability and credibility of the budget. This results in a substantially large fiscal deficit and increases domestic borrowing. The private sector is consequently crowded out with the situation exacerbated by high interest and inflation rates prevailing in the economy. A mismatch between fiscal policy and monetary policy was also noted as a key problem area.

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CAS Annex B2: Selected Indicators* of Bank Portfolio Performance and Management As Of Date 2/10/2015

Indicator 2012 2013 2014 2015 Portfolio Assessment Number of Projects Under Implementation a 13 10 11 11 Average Implementation Period (years) b 3.8 4.2 3.8 4.5 Percent of Problem Projects by Number a, c 0.0 0.0 18.2 9.1 Percent of Problem Projects by Amount a, c 0.0 0.0 16.5 10.4 Percent of Projects at Risk by Number a, d 0.0 10.0 27.3 18.2 Percent of Projects at Risk by Amount a, d 0.0 19.8 26.3 16.5 Disbursement Ratio (%) e 20.5 28.2 30.5 17.3 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project)

Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 85 7 Proj Eval by OED by Amt (US$ millions) 2,567.7 294.2 % of OED Projects Rated U or HU by Number 37.3 28.6 % of OED Projects Rated U or HU by Amt 35.1 16.5

a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

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CAS Annex B8 - Malawi

Operations Portfolio (IBRD/IDA and Grants) As Of Date 2/10/2015 Closed Projects 103

IBRD/IDA * Total Disbursed (Active) 442.40 of w hich has been repaid 0.00 Total Disbursed (Closed) 868.97 of w hich has been repaid 146.04 Total Disbursed (Active + Closed) 1,311.37 of w hich has been repaid 146.04 Total Undisbursed (Active) 339.18 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + Closed) 339.18

Active Projects Difference Between Last PSR Expected and Actual

Supervision Rating Original Amount in US$ Millions Disbursements a/

Development Implementation Project ID Project Name Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd Objectives Progress P122616 Financial Sector Technical MS MS 2011 28.2 13.32833 9.191951 P105256 MW - Agric Dev Prog SupS MS 2008 62 21.8421 -4.679419 63.76667 P131660 MW Skills Development ProS S 2014 50.9 50.21412 P099626 MW-Energy Sector Project MU MU 2011 84.7 65.04841 33.337625 P084148 MW-Irrig, Rural Lvlihds & AS S 2006 102.7 1.077161 -65.5364 -2.8364 P125237 MW-Nutrition & HIV/AIDS PMS MS 2012 80 47.68281 -2.233694 P114847 MW-Proj to Improve EducatMS MS 2010 50 10.98591 8.9183373 P096336 MW-Sec Natl Water Dev PrMS S 2007 170 0.82820595 9.922166 -104.7375 -35.8025 P120825 MW: Mining Technical AssMS MS 2011 25 12.68288 13.661765 -10.7815 P127866 MW: Shire River Basin MgmMS MS 2012 6.578 4.558125 2.2467913 P117617 Shire River Basin ManagemMS MS 2012 125 79.54638 17.180556 P133620 Strengthening Safety Nets S MS 2014 32.8 26.84534 Overall Result 811.3 6.578 0.82820595 343.7337 -97.65002 14.34618

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