Malawi

Malawi - Privatization and Utility Reform Project (Vol.1), 2000/06/02, PID7404, Project Information Document

The project will consist of four components. PPI policy component. The country framework for utility reform would be developed. It would identify cross-sectoral issues and institutional arrangements and assist in the implementation process. Telecommunications and Postal reform. The component would support (a) elaboration of key policy considerations (including tariffs and interconnection, exclusivity periods, labor issues); (b) establishing a plan to strengthen the postal service following its split from telecommunications, on which it is currently dependent through cross-subsidies; (c) together with DANIDA, establishing appropriate regulatory arrangements for the sector; (d) establishing a plan to improve rural communications (posts and telecommunications), including possible IDA assistance in support of a private-led solution to the provision of services in rural areas. Air transport - The component would assist Government in developing a strategic framework within which the redevelopment or privatization of airports would take place. Subsequently, the component would support management contracts for Chileka airport in Blantyre (and other airports as deemed appropriate) which would, inter alia, improve performance and prepare the airport for privatization. Assistance would also be provided to determine the best method of divesting Air Malawi.

Support to the privatization program - The component would provide consultancy and related support for divestiture activities in the sectors to be reformed under other components of the project (i.e. telecom, airports, Air Malawi). In addition, other large transactions where the Government's current financing would be insufficient to fund either the sector studies or the privatization transactions would be funded.

Malawi - Privatization and Utility Reform Project (Vol.1), 2000/06/01, 20485, Project Appraisal Document

PEs (which accounted for around 20 percent of GDP at the start of the privatization program) have a significant influence in the formal economy because of the oligopolistic market structure and inter-locking relationships between them. The reform process commenced in 1994 with the establishment of the Privatisation Commission (PC). Extensive consultations followed and in late 1995, cabinet approved the Privatisation Policy Statement. This was followed by the passage of the Public Enterprises (Privatisation) Act in April 1996. The Secretariat for the PC, which manages the technical aspects of the privatization work program, was established thereafter. Divestiture Sequence Plan (DSP) consisting of a list of 100 PEs was approved by the Cabinet Committee on the Economy in August 1997, and this is the document from which PC derives its authority to privatize a particular enterprise. GOM has also been funding the operating expenditures of the privatization program from its own budget and from sale proceeds. Implementation of the reform agenda has been an ongoing process, and as of December 1999, 35 out of 100 PEs on the DSP were privatized. The remaining balance of PEs will be privatized in a phased manner by 2004. The remaining agenda is for the divestiture of the balance of enterprises in the DSP. PEs in the three utility sectors discussed earlier (telecommunications, power and water) are part of DSP. Therefore, the Privatisation Commission has been closely involved in the sector reform agenda, which will ensure integration of the sector reform and privatization processes.

The second strategic choice made with regard to the non-utility transactions, was to accept the DSP as the document defining the universe of transactions for the privatization component and to allocate funds for twelve transactions slated to occur over the next four years. The entities to be privatized were identified during appraisal and are: Agriculture Development and Marketing Corporation (ADMARC); Commercial Bank of Malawi, Air Malawi, Malawi Telecom, Malawi Rural Finance Corporation, ESCOM Distribution; ESCOM Generation; Blantyre Water Board; Lilongwe Water Board; Tourism Development and Investment Corporation; Malawi Housing Corporation; and Malawi Savings Bank. Five additional transactions, which are currently not scheduled were identified (National Bank of Malawi, David Whitehead and Sons, Shire Bus Line, airports privatization and Indebank/Fund); it is was agreed that these enterprises could be substituted if any of the twelve identified transactions should not be achievable. The first year's work program for the entire privatization program (July 2000 - June 2001) was appraised and this process is expected to continue throughout the project with an annual review of the work program at which time, the replacement of the identified transactions with unscheduled transactions would also be agreed between PC and IDA.

Additional identified and unscheduled transactions. As noted earlier, there is an ongoing privatization program with a government approved Divestiture Sequence Plan consisting of at least sixty five PEs (out of the original list of hundred), which still need to be completed. Some of the divestitures will require fairly significant resources for transaction advisory services. Seven entities to be privatized were identified during appraisal. In addition to telecommunications, water and power distribution and generation, these are: Agriculture Development and Marketing Corporation (ADMARC); Commercial Bank of Malawi, Air Malawi; Malawi Rural Finance Corporation; Tourism Development and Investment Corporation; Malawi Housing Corporation; and Malawi Savings Bank. Five additional transactions, which are currently not scheduled, were identified (National Bank of Malawi, David Whitehead and Sons, Shire Bus Line, airports privatization and Indebank/Fund) and it is expected that a minimum of two of these would be funded through the project. The first year's work program for the entire privatization program (July 2000 - June 2001) was appraised and this process is expected to continue throughout the project with an annual review of the work program at which time, the unscheduled transactions to be funded would also be agreed between PC and IDA.

Preliminary Document (HIPC: July 2000)

Public sector reform. These reforms, undertaken both in the context of projects and of two IDA adjustment operations, have been aimed at streamlining the role and functions of the Government and restructuring the civil service to improve efficiency. The Government has accelerated the retirement and retrenchment of employees in low priority functions; undertaken functional reviews of 16 ministries; performed a job grading exercise; and contracted out some 18 functions (including some large cross-Ministerial functions such as security and cleaning services). Important tasks that the Government plans to undertake are the decompression of civil service salaries, a concomitant rationalization of staff, and the implementation of ministerial restructuring, taking into account the planned decentralization.

Malawi's privatization program is being implemented on a sound legal basis under the Privatization Act approved in December 1996. The program envisaged the sale, over the following five years, of some 100 government-owned firms, most of them purely commercial enterprises. As of the end of 1999, 40 of these commercial enterprises had been brought to the point of sale, involving over 9,000 employees, or some 4 percent of Malawi's total nonagricultural employment. Malawi Railways was successfully concessioned in 1999. Plans for the divestiture of the assets held by MDC and ADMARC have been initiated. Finally, significant progress has been made towards increasing private sector participation in the power and telecommunications sectors (see more detail below).

Starting in 1993, a number of policy reforms have been initiated to deepen financial markets and improve the efficiency of financial intermediation and resource mobilization. Controls on interest rates were abolished in 1993, and the foreign exchange system was partially liberalized in 1994. The entry of two new foreign banks and one discount house was approved in order to increase competition and deepen financial markets. There is now an active secondary market in treasury bills, and there are interbank markets in domestic and foreign currency. The stock exchange, opened in 1995, now lists six companies with a capitalization of US$154 million. The Government has decided to reduce the size of public sector holdings in the two largest banks. So far the Commercial Bank of Malawi has been brought to the point of sale, though as of early 2000 a qualified investor had yet to be located.

Private sector development. As noted above, the formal sector is still dominated by a handful of large enterprises/parastatals, even though their influence has weakened owing to new entry and market liberalization. In order to widen the structure of ownership in the formal sector and subject the sector to competition, the Government plans to continue the privatization process. Among the large firms to be brought to the point of sale during 2000 is Air Malawi.

The split of telecommunications and posts is underway, as part of reforms that would bring Malawi Telecoms to the point of sale in 2000. Concerning the restructuring of the power sector, the Government is still deliberating the form of "unbundling" of the sector. Meanwhile, the managerial structure is being reorganized and tariff-setting is being placed on a non-discretionary basis. Achieving progress in improving electricity access and in the quality of service is a crucially important factor in attracting investment to the country, and hence in the facilitation of export diversification and job creation. This, in turn, has implications for poverty reduction.

Reform of the petroleum sector is continuing, so as to create more competition and greater transparency in arrangements for importation. The state-owned Petroleum Control Commission (PCC) has been split into a regulatory agency (which retains the name PCC), and an owner-operator of petroleum storage depots (ORTEX), which is to provide storage services and will be privatized by 2002.

Key Structural Reforms in the 1990s

The civil service structure has undergone significant changes as 22,500 new teachers were appointed in place of 20,000 other temporary employees who were laid off.

As of 1999, detailed functional reviews of 16 ministries had been completed. Implementation of the recommendations-which covered reallocations of staff, out-sourcing, downsizing and in some cases elimination of functions-had started in 1998.

Based on the functional reviews, and in the context of an adjustment program (the Second Fiscal Restructuring and Deregulation Program, 1998 -1999), 18 Government functions were rationalized through outsourcing, privatization, merging or elimination.

The Malawi Railways parastatal, previously a big drain on Government finances, was restructured. A new company was formed, and in 1999 it was transferred to private management as a concession.

A Privatization Law was passed (1996) laying the legal foundations and the institutional framework for privatization. As of 1999, some 40 companies had been brought to the point of sale.

In preparation for privatization, Telecoms and Posts were split physically (1999) and legally (July 2000).

Decision Point Document (HIPC: December 2000)

As has been noted in Malawi's preliminary HIPC document and IPRSP, wide-ranging liberalization measures will be needed to complement the macroeconomic stabilization actions outlined above and to stimulate private sector growth. In particular, over the medium term, it will be imperative to: (i) maintain competitive conditions in the marketing of key commodities such as grain, fertilizers, and petroleum; (ii) accelerate the privatization of enterprises that continue to operate under public ownership; and (iii) reduce oligopolistic structures in the financial system so as to raise the efficiency of financial intermediation. A number of these structural issues are being addressed as part of IDA's adjustment credit and the IMF's PRGF arrangement.

Policy Framework Paper, 1998/99-2000/01 , December 3, 1998

In 1997, the pace of structural reform slowed markedly. In regard to the civil service, there was a notable delay in completing the functional reviews, streamlining government functions, and reorganizing staff positions. However, four ministries4 were eliminated in 1997, and the number of principal secretaries reduced by 12. Furthermore, the government retrenched only 3,194 nonestablished workers, well below the 7,000 envisaged under the program. Privatization of public enterprises was impeded by the exclusion, for the most part, of the divestiture of major entities and strategically important enterprises, such as the utilities and financial institutions, from the privatization program.

Significant efforts have been made since early 1998 to accelerate the process of structural reform. The government undertook a major reform of budgeting procedures through an extension of the medium-term expenditure framework (MTEF) to all ministries. Moreover, an additional three ministries were eliminated in 1998,6 a detailed functional review of seven ministries was completed in October 1998,7 and a timetable for the implementation of the recommendations resulting from this exercise was prepared. In addition, the privatization program is being deepened with the preparation of a list of 20 enterprises for privatization, of which at least 15 will be brought to the point of sale by end-March 1999. Furthermore, plans for the divestiture of the assets held by the Malawi Development Corporation (MDC), the Agricultural Development and Marketing Corporation (ADMARC), and ADMARC Investment Holdings are being readied, and determined efforts are being made to complete the preparations necessary to increase private sector participation in the power and telecommunications sectors, and to finalize the concessioning of Malawi Railways. Moreover, the government has simplified considerably the processing of employment permit applications from non residents; decisions on such applications are now taken within 40 working days.

Accordingly, the government's strategy to further enhance the role of the private sector in agriculture rests crucially on the accelerated divestiture of its assets. To this end, the government will prepare a time-bound program for the commercialization and privatization of ADMARC by end-March 1999, and begin implementing the process shortly thereafter. Beginning with the 1999/2000 crop season, the government will no longer be involved in direct procurement, import, or sale of maize, and ADMARC will operate on purely commercial terms. In addition, to encourage private trade in agriculture, the government has decided to replace the Strategic Grain Reserve (SGR) with an autonomous National Food Reserve Agency (NFRA), which will operate under clearly defined rules. In particular, the government will ensure that the disposal of maize by the NFRA will be guided by the maize price band;8 sales of maize through tenders will take place only when the market price rises above the import parity level. In other areas, the government will privatize or otherwise restructure the ownership and management of the Malawi Rural Finance Company (MRFC) in 1999, and privatize or close several smallholder crop authorities. In addition, the Fertilizer Buffer Stock will be drawn down in stages to 20,000 tons by October 1999. In this context, the government is concerned about the need to stimulate fertilizer use among farmers, and to this end it has established a task force, with the participation of private traders, transport companies, and the railways, to study possible options to lower the price of fertilizer imports.

The government's medium-term strategy also calls for rapid growth of the private sector in nonagricultural activities, which will have to supplement agriculture as the engine of growth in the economy. This approach will require dismantling the existing structure of ownership in the formal sector so as to subject it to the discipline of competition. At present, the formal sector is dominated by a handful of large enterprises, both financial and nonfinancial, with interlocked interests resulting from a significant ownership of these enterprises by large parastatals, such as ADMARC Holdings and the MDC, as well as by the government itself. The authorities intend to address this problem by divesting of the government's and the parastatals' assets in the formal sector of the economy. By 2003, all the assets of the MDC and ADMARC Holdings, as well as all of the government's holdings will be privatized. At the same time, an ongoing study is investigating the merits of various options for the future operations of Press Holdings, including its partial or complete restructuring and divestiture.

The government owns about 70 percent of the assets in the financial sector directly or indirectly, through its ownership of public holding companies such as ADMARC Holdings and the MDC. The two dominant banks control 90 percent of all banking assets. The level of efficiency in the sector is low, and interest rate spreads are large, partly because of the limited degree of competition. The privatization of these two banks is expected to remove a major impediment to attracting foreign banks, and thus also to improving the quality of financial services in Malawi. To ensure a uniform regulatory framework before undertaking the major privatization initiatives in the financial sector, the prudential regulatory framework will be reviewed by the end of June 1999; in addition, the government will determine the mode of privatization (sale of shares versus strategic partner) by the end of March 1999. To this end, consultants will be appointed by December 1998 and will complete their report by end-March 1999. Furthermore, as mentioned in paragraph 21, the MRFC is scheduled to be privatized in 1999. The Malawi Savings Bank (MSB) has been registered under the Companies Act. When the MSB's accounts are fully separated from those of the Malawi Post and Telecommunications Corporation (MPTC), its tax-exempt status will be reviewed.

To lower transport costs, the government will direct its attention to improving the quality of roads and railway services in the country. In the roads sector, the central element of the government's strategy is a significant increase in the budgetary resources devoted to the sector, supplemented by the imposition of user charges. To ensure efficient utilization of the resources, which will be channeled through the Road Fund, a National Roads Authority has been established to administer this fund and advise the government on policies and programs in this area. In addition, efforts in this direction will be supplemented by a major donor-funded investment program over the period 1998/99-2002/03 to address the acute maintenance and rehabilitation backlog in the sector. The government also intends to increase private sector participation in the roads sector. As regards railway and lake services, the government's strategy is essentially to improve efficiency through the privatization of Malawi Railways and Malawi Lake Services. Accordingly, these entities have been restructured, and their concessioning is expected to be completed by December 1998 and June 1999, respectively.

Fulfilling the government's wide macroeconomic and sectoral agenda will require an efficient and well-motivated civil service to implement the required policies; hence, an increase in civil service salaries and a decompression of the wage structure are called for. Accommodating these requirements within tight expenditure ceilings will necessitate a comprehensive rationalization of the civil service, in line with the established priorities. To achieve this objective, the government carried out a strategic review and is carrying out a detailed functional review of all ministries; the recommendations of the reviews are being implemented in the four large ministries where the reviews have been completed. In this regard, the government has eliminated seven ministries, and will complete the rationalization of the civil service establishment by December 1999. The first part of this rationalization will entail, by end-March 1999, the elimination, privatization, or outsourcing of 30 functions that were identified during the functional reviews.

Prepare program of commercialization and privatization for ADMARC April 1999
Implement the program of privatization and commercialization of ADMARC 1999-2003

Bring to the point of sale agreed list of government shares in 15-20 firms Oct. 1998-March 1999

Privatize all assets of Malawi Development Corporation (MDC) and ADMARC Holdings 1998-2003

Issue guidelines for the privatization of the Commercial Bank of Malawi and the National Bank of Malawi March 1999

Commercialize, or part privatize, the PVHO, (the program supporting emergent contractors) 1998-2001

Complete the concessioning of Malawi Railways March 1999

Select the privatization option for Malawi Lake Services Done
Complete the privatization of Malawi Lake Services June 1999

Letter of Intent, October 6, 1999

The privatization program has remained on track: so far 14 enterprises (out of a target list of 30 entities) have been privatized or brought to the point of sale. Of the 14 enterprises, sales have been completed for 9 entities, and transactions of 3 other enterprises are expected to be completed before end-September 1999. The government has already approved a plan for the divestiture of some assets held by the Malawi Development Corporation (MDC) and ADMARC Holdings, and has also approved guidelines for the divestiture of its remaining public shares in the Commercial Bank of Malawi Ltd. (CBM). Specifically, the government has decided to secure a strategic partner for the CBM, and an investment advisor will be contracted by end-September to assist in the identification of the partner. Regarding the National Bank of Malawi (NBM), the government intends to reach a decision as to whether to associate a strategic partner by end-September 1999.

In the area of civil service reform, the audit of the civil service and the job grading exercise have been completed. The outsourcing, privatization, or liquidation of specific services and agencies of the four largest ministries (Health and Population, Education, Transport and Public Works, and Agriculture and Irrigation) have started, and feasibility studies and other needed steps will be accelerated in the period ahead with a view to ensuring, at least, that all these services and agencies are brought to the point of sale during FY1999/2000.

The wage bill will increase by about ½ of 1 percentage point to 5¼ percent of GDP in 1999/2000 as a result of salary adjustments and the hiring of 1,500 persons in education, health, security, and other priority areas. Following a general wage increase of 25 percent that was awarded effective July 1, 1999, another merit-based salary adjustment of 30-40 percent is envisaged for a select group of key administrative and technical staff, effective January 1, 2000. The latter wage adjustment will be limited to 5 percent of the wage bill for 1999/2000. The selection of the eligible employees-not more than 10 percent of the civil service-will be based on the job grading exercise (supported by the World Bank) that was completed in July, as well as rational and transparent guidelines that will be used to develop a revised pay scale (to be introduced on July 1, 2000) for all civil servants. Concomitantly, the government will retrench at least 1,300 employees, starting in the second half of 1999, implying an unchanged number of civil servants in the course of the fiscal year. Some MK 150 million has been allocated for separation benefits during 1999/2000, and donor support will be sought to help cover costs relating to the retrenchment exercise, including the retraining of some workers, and the settlement of carried-over obligations of MK 100 million relating to the last days of the recent parliamentary and presidential elections.

Interim Poverty Reduction and Growth Strategy Paper -- A Road Map, August 30, 2000

The Civil Service Reform Programme has included a census of civil service and the retrenchment of 20,000 temporary employees. In addition, strategic and functional reviews of Ministries form the basis of rationalisation of Government through contracting out certain functions and removal of operational overlaps. The Job Evaluation Study and Personnel Audit will allow for Civil Service Reforms to start from July 1 st , 2000. The overall objective is to improve the efficiency and delivery of public services, especially those benefiting the poor - by allowing the Government to focus its efforts on the highest priority functions, and by increasing effectiveness with which expenditures are converted into services delivered.

The Privatisation Programme is intended to improve efficiency, foster competition and establish a wider base of share ownership. So far, about 25 public owned enterprises have either been privatised or brought to the point of sale. The intention is to open up opportunities to create employment generation by the private sector and to limit the burden on the Government, allowing it to focus more specifically on pro-poor public services.

Increase efficiency and broaden the ownership base by privatizing public enterprises; Privatize non-core operations of ADMARC and Malawi Development Corporation (MDC); May 2000

Consolidate reforms to deregulate the air transport industry and privatize Air Malawi -- 1999-2002
Initiate work on the commercialization/privatization of some airports -- 1999-2002

Promote the leasing of plantation areas for tree planting and management by the private sector

Civil Service Reform: Complete the rationalization process (outsourcing, privatization, elimination, and redeployment) based on recommendations arising from the completed strategic reviews -- On-going

Introduced performance-related contracts for senior civil servants -- July 2000
Rationalized remuneration structure by monetising housing allowance for all civil servants -- November 2000

Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding, December 8, 2000

Total spending on wages and salaries will increase by 41 percent in fiscal year 2000/01 including a general wage increase, the implementation of a new housing allowance scheme, the increased travel allowances for members of parliament (MPs), and the introduction of contractual employment for top civil servants. While these measures will decompress the wage scale, most civil servants will receive an increase in total remuneration, including housing allowances, of at least 25 percent. MPs and ministers will receive the same average increase in their salary and housing allowances as those civil servants not on contract or currently in government houses.

Following the liberalization of trade in agricultural products, the private sector has been expanding into retailing in agricultural products, an area that used to be an exclusive preserve of ADMARC, the public distribution and marketing agency. As a continuation of this policy, the government is considering a detailed, time-bound plan for the commercialization and subsequent privatization of all of ADMARC's activities. It is expected that preparation for full privatization will be completed by end-2002.

Although a new company, ORTEX, was formed to take over the nonregulatory functions of the PCC, including oil storage, it is now clear that oil distribution and marketing are not appropriate activities for the public sector. Accordingly, ORTEX will be privatized by May 2002.