Report No. 9643-MAI

MalawiPublic Sector Management ReviewSelected Issues(In Two Volumes) Volume l: Main Report

March 31, 1993

Country Operations DivisionSouthern Africa DepartmentAfrica Region

FOR OFFICIAL USE ONLY

Documnwt of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Malawi Kwacha (MK)US$ 1.00 = MK 4.0MK 1.00 = US$ 0.25

MK 1.00 = 100 tambalas

FISCAL YEAR

April 1 - March 31

FOR OFFICIAL USE ONLY

ABBREVIATIONS

ADMARC Agricultural Development and Marketing CorporationAM Air Malawi LimitedASAC Agricultural Structural Adjustment CreditBWB Blantyre Water BoardCBM Commercial Bank of MalawiCCU Coordinating Change Unit, OPCDEMATT Development of Malawian Traders TrustDEVPOL Statement of Development Policies, 1987-1996DPMT Department of Personnel Management and TrainingDSB Department of Statutory Bodies, OPCECOF Export Credit Guarantee FacilityEP&D Department of Economic Planning and Development, OPCESCOM Electricity Supply Conmmission of MalawiINDEBANK Investment and Development Bank of MalawiINDEFUND Investment and Development Fund of MalawiINDETRUST Investment and Development Trust of MalawiKF'CTA Kasungu Flue-Cured Tobacco AuthorityLWB Lilongwe Water BoardMDC Malawi Development CorporationMDI Malawi Dairy IndustriesMEDI Malawian Entrepreneurs Development InstituteMEPC Malawi Export Promotion CouncilMHC Malawi Housing CorporationMIDCOR Mining Investment and Development Corporation LimitedMIM Malawi Institute of ManagementMR Malawi Railways LimitedMfl Ministry of Trade and IndustryMUSCCO Malawi Union of Savings and Credit Cooperatives LimitedNBM National Bank of MalawiNBS New Building SocietyNICO National Insurance Company LimitedNSO National Statistical OfficeOPC Office of the President and CabinetPER Public Expenditure ReviewPFP Policy Framework PaperPOSB Post Office Savings BankPSMR Public Sector Management ReviewRBM Reserve Bank of MalawiSACA Smallholder Agricultural Credit AssociationSCA Smallholder Coffee AuthoritySEDOM Small Enterprise Development Organization of MalawiSME Small and Medium EnterprisesSPC Secretary to the President and CabinetSSA Smallholder Sugar i2ithoritySSE Small Scale EnterprisesSTA Smallholder Tea AuthorityTF Treasury FundsUNDP United Nations Development ProgramUSAID United States Agency for International DevelopmentWICO Wood Industries Corporation Limited

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

This report is based on the findings of a mission which visited Malawi in January1991. The mission comprised Roger Sullivan (Senior Public Sector Management Specialist andTeam Leader), Susan Goldmark (Public Enterprise Specialist), Noel Kulemeka (Program Officer)and Stephen Lister (Development Economist/Consultant) of the World Bank; Cuthbert C.M.Mkandawire and John Mataya (Management Development Consultants at the Malawi Institute ofManagement), Roger Ganse and Norman Kelley (Management Specialists, DevelopmentManagement Associates); and Michael Kauka of the Department of Personiel Management andTraining, Malawi Government. Ladipo Adamolekun (Principal Management Specialist) led theBank Team that discussed the report with Government in June 1992. (Messrs. Kulemeka,Mkandawire, Mataya and Ganse, who were in the study mission, also participated in thediscussion). Government broadly accepted both the analysis and recommendations in the report.A few modifications have been made to reflect Government's comments and observations. Itemerged from the discussions that Government would like to implement the recommendations inthe report through a Bank-supported institutional development project. The salient features ofthe proposed project are summarized in a Postscript. Awatif Abuzeid and Roselyne Leroyprovided support in compiling and processing the report.

TABLE OF CONTENTS

EXECUTIVE SUMMARY

CHAPTER 1: BACKGROUND AND INTRODUCTION

A. OVERVIEW . ........................................ 1

B. APPROACH .......................................... 2

C. RECENT ECONOMIC PERFORMANCE ....................... 3

CHAPTER 2: MANAGEMENT ISSUES IN THE CENTRAL GOVERNMENT

MANAGEMENT OF CIVIL SERVICE EMPLOYMENT AND WAGES ... 4

(i) Employment ............ .......................... 4(ii) Wages ........................................... 6

B. MANAGEMENT OF COMMON SERVICES ........ .. ........... 16

(i) Excessive Staff Turnover ........ ...................... 19(ii) Excessive Vacancies .......... ....................... 21(iii) Insufficient Understanding Within the Common Services of

their Roles and Functions ........ ...................... 22

C. MANAGEMENT OF GOVERNMENT MINISTRIES AND DEPARTMENTS 23

(i) Background and Approach .23(ii) Identification of Common Management Problems .24(iii) Factors that Contributed to the Success or Failure of

Previous Efforts to Improve Management Practices .25(iv) Potential Solutions for Improving Management Practices .26

CHAPTER 3: MANAGEMENT OF THE PARASTATAL SECTOR

A. BACKGROUND ....................................... 28

(i) Definition ........................................ 28(ii) Impact on the Economy ............................... 29(iii) Financial Overview of Parastatals and Treasury Funds .... ........ 30

B. INSTITUTIONAL FRAMEWORK OF PARASTATALS .... .......... 31

(i) Department of Statutory Bodies .......................... 32(ii) Ministry of Finance, Parent Ministries and the Department

of ESconomic Planning and Development .37

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C. OPERATIONAL EFFECTIVENESS OF STATUTORY BODIES ..... ... 38

(i) Corporate Planning and Budgeting ........................ 39(ii) Boards of Directors .................................. 40(iii) The Management of Parastatals .......................... 42(iv) Wages and Salaries .................................. 44(v) Housing Benefit .................................... 45(vi) Other Benefits ..................................... 47(vii) Training ......................................... 47

D. TREASURY FUNDS ORGANIZATION AND PERFORMANCE ........ 49

(i) Ministry of Finance Supervision .......................... 49(ii) Operational Effectiveness of Treasury Funds .................. 51

CHAPTER 4: CONCLUSIONS AND STRATEGY FOR MANAGINGTHE CHANGE PROCESS

A. CONCLUSIONS .53B. STRATEGY FOR MANAGING THE CHANGE PROCESS .. 54

PO SCRIPT ................................................... 56

TABLES

2.1 Number.and Increase in Civil Service, Established Positions, 1980/81-1987/88 .... 4

2.2 Malawi - Civil Service Establishment 1985/86-1989/90 .................. 5

2.3 Public Expenditure on Wages and Salaries .......................... 8

2.4 Selected Government Salaries .................................. 9

2.5 Ratio of Government Salaries to Urban Minimum Wage .................. 10

2.6 Malawi - Civil Service Salaries by Category 1974/75-1990/91 (Index) .... ..... 11

2.7a Mean Basic Monthly Earnings of Skilled Employees by Sector, and Major OccupationalGroup and Citizenship (1987) .13

2.7b Mean Basic Monthly Earnings of Skilled Employees by Education Qualifications . . 14

2.8 Numbers of Civil Servants Belonging to Common Services in 1990/91 .17

2.9 Rate of Postings 1/1/90 - 21/12/90 .19

2.10 Vacancy Situations as of December 31, 1990 .21

2.11 Potential Solutions for Ministry/Department Management Problems .26

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ANNEXES

Annex 1 Summary of PSMR's Recommendations

Annex 2-1 Malawi - Economic Classification of Central Government Recurrent Expenditures

Annex 2-2 Malawi - Targets for Total Government Wage/Salary Bill

Annex 2-3 Malawi - Common Service Cadres

Annex 2-4 Recommnendations on Individual Common Services

Annex 2-5 Methodology Overview for Reviewing Management Issues in Government Ministriesand Departments

Annex 2-6 Examples of Dysfunctional Management Practices in Ministries and Departments

Annex 3-1 Public Enterprises as of January 1991

Annex 3-2 Consolidated Financial Summary of Parastatals

Annex 3-3 Net Financial Flows Between Government and Parastatals

Annex 3-4 Profit and Loss Data on Parastatals - 1984/85-1989/90

Annex 3-5 Financial Summary of Non-Commercial Parastatals

Annex 3-6 Profit and Loss Data on Commercial Treasury Funds

Annex 3-7 Selected Financial Indicators, Non-Commercial Treasury Funds

Annex 3-8 Wages Scales in Parastatals at 31/03/90

Annex 3-9 Employment of Commercial Parastatals

Annex 3-10 Parastatals Costs for Employee Housing in 1989/90

Annex 3-11 Training of Parastatal Employees 1989/90

EXECTIVE IMMAR

1. The Public Sector Management Review (PSMR) was undertaken jointly by the World Bank andthe Government of Malawi. It is not a comprehensive and encyclopedic review of all public sectormanagement issues facing the Government, nor does it reflect necessarily the priorities for public sectorreform that a non-Malawian may have for the country. What it does reflect are the issues that theGovernment has selected - in this case "the Government" refers to the Secretary to the President andCabinet (SPC) and his Principal Secretaries - as the ones that are to be initially examined as part of aprocess, which, if it proves useful to the Malawi Government, may be extended to cover additional areas.The Government also specifically noted that it was not interested in another "management study" whichresulted in little or no change. Thus PSMR was designed with an emphasis on process and actionplanning; all the answers are not presented herein, instead problems are identified and processes arerecommended that could result in improved public sector management.

2. PSMR covers two areas of the public sector. It examines selected management issues affectingthe Central Government (i.e., the core and sector ministries, exluding the legislative and judicialbranches, the police and defense establishments and the local government structures) and it reviewsmanagement of the parastatal sector. The report concludes with recommendations on creating localcapability for introducing management improvements on an ongoing basis.

A. MANAGEMENT I-SSUES AFFECTING E CENTRAL GOVERN-ME

3. PSMR examines issues in three areas: (i) management of public sector employment andremuneration; (ii) management of Common Services; and (iii) management of Government Ministries andDepartments.

4. Public Sectr Emloyment. PSMR found that public sector employment, in terms of establishedpositions, had increased by 12 percent over the period 1989-91. While this did not reflect an increasein actual employment of that magnitude, given the high level of vacancies (A0 to 40 percent of middleand senior positions in some Ministries anti Departments) and the lack of statistical information on actualnumber of employees at a given time, ,c was still a figure to be concerned about as it representedpositions that could be filled once the recruitment/promotion process improved; it also represented apotential claim on the Government budget. The growth had taken place largely in positions outside thepriority areas of health, agriculture and education.

5. PSMR concludes that continued high growth in the number of Central Government positions couldundermine Government's future fiscal stability, particularly if these positions were filled. Governmentneeds to exert more control over the growth of established positions and be aware of the fiscalimplications of such growth. PSMR recommends that Government strengthen establishment andemployment controls by (i) making the Establishment Register an authoritative document, publishedannually along with the Budget; (ii) ensuring that recruitment procedures include a check that posts areestablished and vacant before recruitment proceeds; (iii) using forward projections (ceilings) ofEstablishment posts as a device for manpower planning in Ministries and Departments; and (iv) improvingmonitoring of numbers of Established posts that are filled as well as of non-Established posts.

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6. Public Sector Remuneration.1' PSMR documented the trends in public sector remuneration andnoted the growing divergence between salaries paid to senior civil servants and those received by seniorofficials iP the parastatal and private sectors. The gap at the bottom of these structures was muchnarrowf:r, in part the result of the 1989 Government pay increase, which substantially favored the lowerranks of civil servants and significantly reduced the compression ratio, One of the reasons for thegrowing divergence between public sector salaries and those in the parastatal and private sectors is thefrequent adjustment in public sector salaries. While the parastatal and private sectors adjust salariesannually to account for inflation and profitability, the Government has a tradition of infrequentadjustments, once every few years. Often these are large and make up much of the lost ground, butoverall this system does not promote efficiency nor protect civil servants' ineome levels in times of highinflation.

7. Non-cash benefits, particularly housing, provide a substantial benefit to employees in the civilservice, as well as those in the parastatal and private sectors. Housing, however, is not available to allcivil servants, only about one-third benefit from it and they are usually the ones that have been in servicethe longest. Parastatal and private sector companies also have housing programs, but the benefits areusually available to all staff at a given grade level. PSMR notes that Government has announced itsintention to get out of the ownership of housing. Government ;s working wiih the Bank, UNDP andother donors to devise purchase schemes and other mechanisms to achieve this objective.

8. PSMR recommends that Government should adjust salaries regularly, preferably on an annualbasis. Government should consider increasing salaries at the middh. and higher levels at a moresignificant rate than at the other levels in order to improve the attractiveness of working in the publicsector, particularly for the key people who are needed in management positions. Government also needsto strengthen its capacity for the timely analysis of remuneration issues.

9. Management of the Common Services. PSMR looked at how the Common Services, whichaccount for about 20-25 percent of all civil servants, were being managed. The Common Servicesinclude such specialties as the accounting and administrative cadres and their members work acrossMinistries and Departments. Of the nine common services. PSMR recommends that eight be retained,but that the incipient messengerial common service be disbanded as there are no strong reasons for itsretention.

10. PSMR identified three major problems with the operations of the Common Services: excessivestaff turnover, excessive vacancies, and insufficient understanding within the Common Services of theirroles and functions. The first two extend beyond the Common Services and apply to the civil service asa whole. To reduce turnover rates, PSMR recommends that Government adopt guidelines on re-postingand improve personnel record keeping, that it encourage guidance instead of transfer, and that it developbetter training plans. For vacancies, PSMR recommends that Government adopt the specific measures

Significant pay increases were granted to all civil servants in April and May 1992. Besides thehuge increase in the overall wage bill with negative consequences for the budget, the increasesdid not change the existing compression ratio nor did they redress the imbalance between civilservice pay levels and those in the parastatal and private sectors. The proposed SecondInstitutional Development is expected to address these pay issues. (See Postscript).

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recently put forth by a team from the Malawi Institute of Management that would streamline therecruitment process, reducing average tecruitment time from 32 to I weeks, and improve on the currenttime It takes for promotions. Finally, on improving the understanding of the roles and functions in theCommon Services, PSMR recommends introducing Schemes of Service, procedure manuals, trainingprograms, and appropriate evaluation systems for each.

11. Management of Government Ministries and Departments. In tackling this piece of work, the SPCspecifically wanted PSMR to look at a number of previous management studies - many of which had notresulted in any change in management performance - to determine if there were a set of commonproblems that kept reappearing and whether there appeared to be any successful approaches at resolvingthem that could be extended throughout Government. The SPC specifically did not want another set ofconsultant-formulated prescriptive measures based upon inappropriate management models.

12. PSMR reviewed management studies of several Ministries (Agriculture, Education, Finance andWorks) and tested the resulting hypotheses about common management problems on the staff of theMinistries of Transport and Education and the Department of Economic Planning and Development. Theanalysis identified eight common problems: (i) sector strategies, Ministry functions and structures, andmanagers' roles and responsibilities are not properly developed and synchronized; (ii) Ministries withregional operations are overly centralized; (iii) inadequate program performance and cost data aregenerated; (iv) inadequate program evaluation is carried out; (v) Ministries regularly overrun their budgetallocations; (vi) Ministries suffer from inappropriate training program3; (vii) staff supervision is weak;and (viii) vertical and horizontal management communications are poor.

13. PSMR identified a number of potential solutions to each of the eight management problems andassessed them in terms of their expected benefits in addressing the problem, their risks in terms of howhard they will be to introduce given the perceived management culture in Malawi, and their requirementsfor technical assistance. The potential solutions will need to be tailored for each Ministry andDepartment. PSMR did not attempt to design specific management programs as this will require aconsultative process with each client Ministry and Department over a reasonable period of time.

14. PSMR recommends that Government undertake a program to improve management performanceby committing to a process involving client Ministries and Management Improvement Teams comprisinglocal and external management experts. PSMR contains a number of possible solutions for the genericproblems identified.

B. MANAGEMENT OF THE PARASTATAL SECTOR

15. PSMR examined parastatal performance since the last World Bank review of the sector in 1987,noting the significant improvements in the performance of those parastatals that are under the supervisionof the Department of Statutory Bodies (DSB), a Government oversight agency. Included in this groupare the country's largest commercial parastatals. Several of these have benefitted from improvedmanagement performance, notably the Electricity Supply Commission and the Agricultural Developmentand Marketing Corporation, the latter having gone through a restructuring and privatization program.However, other zommercial parastatals, notably Malawi Railways, suffer from continued r roblems.

16. PSMR also looked at the management of Treasury Funds - Government-owned commercial orquasi-commercial operations under the supervision of the Ministry of Finance - and noted that oversight

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being provided was not sufficient for some of the larger funds, such as the Post Office. PSMRrecommends that some of these funds, Including the Post Office, be considered for transformation Intoparastatals and placed minder DSB's supervision. Other Treasury Funds should be privatized or reviewedto determine if it would be more appropriate to place them under the oversight of their parent Ministry.

17. PSMR recommends a number of management improvements for DSB and managers of individualparastatals. DSB's legal status needs to be clarified. While DSB needs to remain part of Government,it should be able to hire staff and pay salaries at levels commensurate with the parastatal and privatesectors. DSB also requires high quality staff and some will need to be recruited externally. Proceduresneed to be adopted that will improve the budget process for the parastatals, delegating more authority toDSB and the Boards of Directors. DSB needs to continue its plans for establishing panels to evaluateparastatal general managers and to eventually put them on perfomance-based contracts. DSB needs tothink of innovative ways to meet shortages of skilled staff, such as accountants, and to develop housingschemes to promote home ownership among parastatal employees.

C. STRATEGY FOR MANAGING THE CHANGE PROCESS

18. PSMR concludes with recommendations for introducing the management improvements identifiedin the report. The key event is for Government, particularly the SPC, to endorse the concept for changeintroduced herein, and to establish the capacity to continue the process that has begun. PSMRrecommends that a Coordinating Change Unit (CCU) be set up in the Office of the President and Cabinetto oversee this work. It would be appropriately staffed and would report to the SPC. CCU would workwith a mix of local and external consultants (to be financed by interested donors) to carry out theproposed program of management improvements for the Central Government and parastatal sector.

D. PRIORITES AND ACTION PLANS

19. As can be seen in Annex 1, PSMR suggests numerous problem-solving recommendations foraddressing management issues in the public sector. Of these, the main priorities suggested ire as follows:

(a) Employment Controls - The recent high growth of establishment positions is alarming,especially as the growth has occurred in the non-priority sectors. Government shouldconsider a one-year freeze on increases in established positions and concentrate on fillingvacancies. Government should allow for establishment growth in the priority socialsectors by reducing establishment positions in the non-priority sectors. Future growthshould be limited and tied to Government's ability to increase salaries to more attractivelevels.

(b) Salary Increases - The Government will not be able to motivate and retain staff,especially at the middle and upper levels, unless it moves the salary structure closer tolevels in the parastatal and private sectors. Government needs to consider a process anda mechanism that will permit continual evaluation of the civil service salary structure inrelation to movements in the public and private sectors and provide for annual adjustmentof salaries to reflect inflation and the need to compete for certain skills and professions.Particular attention should be paid to adjusting salaries at the top end of the service.

(c) Fill Vacancies and Streamline Recruitment and Promotion Processes - A prerequisite toany substantive program of management improvement is filling a substantial number ofexisting vacancies at middle levels and above. Vacant positions which cannot be filledwithin one year should be removed f;om the Establishment Register.

(d) Create a Strong Capability in the Central Government to Oversee the Process oflmproving Management of the Public Sector - The Central Government needs to mimnicDSB's role in the parastatal sector and create capacity in the Office of the President andCabinet to oversee management changes. Office needs to have ability to reward goodperformers and penalize bad ones.

(e) Enforce DSB's role in Parastatal Sector by Clarifying its Legal Status - DSB's role hasbeen useful in exercising oversight, though at times it suffers from excessive interferencein the affairs of the parastatals. DSB's legal status needs to be defined and its ability topay competitive salaries assured. The role of Comptroller of DSB is crucial and needsto be filled by an appropriately qualified individual. DSB's future role should be limitedto establishing performance indicators, monitoring and evaluating parastatal performance,providing assistance in accounting, financial analysis and investment appraisal, helpingto Implement policies that affect the sector (e.g. housing, terms and conditions ofservice), assisting in management development and designing and supervising aprivatization policy for Government.

(f) Begin Implementation of the Performance Monitoring System for Commercial Parastatals- DSB needs to recruit outside consultants to identify performance indicators for selectedstatutory bodies and to design carefully the contracts with General Managers that areselected by panels.

(g) Transform Selected Treasury Funds into Statutory Bodies and Delegate Monitoring tDSB - Potential candidates include the Malawi Post Office.

20. PSMR's findings and recommendations have also been summarized in the following Action Planswhich suggest the Department and Ministries who should be responsible or involved in carrying u.roughon the recommendations.

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A. Management Issues in the Public Sector

1. Management of Public Sector Employment, Wages and Salaries

Problems to be Addressed Recomnended Strategy Action Already Being Further Action Required By Whom Time Scale**Taken

1. Improve controls a. Maintain and Goverr,ment is comitted Strengthen Establishment DPMT, Treasury, OPC. Continual, aim toover nurber of staff strengthen controls to constraining the and employment control produce firstemployed in the on civil service overall growth of the by: authoritativecivil service. established and non Establishment and limit Establishment Register

-established posts. increases to key sectors (i) making the for 1992/93 budget.(Education, Health, EstablishmentAgrikulture) and Register anreducing the number of authoritativenon-established posts. document,

published arnuallyalong with theBudget;

(ii) ensuring thatrecruitmentprocedureincludes a checkthat posts are (a)established and(b) vacant beforerecruitmentproceeds;

(iii) making forwardprojections(ceilings) ofEstablishmentposts as amarpower plamningframework for eachMinistry.

(iv) inprovingmonitoring ofnon-Establishedposts.

** The "Time Scale" Indicated here and in the subsequent sections was on the assumption that Government would act quickly on this report. Virtually all the deadlines and/ortime scale indicated have become unrealistic. No attempt is made to revise the original time scale.

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2. Maintain appropriate (a) Monitor trends in Existing labor force and Review data requirements NSO, EPBD, DPNT Imwediate.relationship between private sector employment statistics and scope for producing (manpower Plamingpublic, parastatal remuneration. are of doubtful quality relevant information Division), Ministry ofand private and appear with a 2-3 more rapidly. Labor. Treasury.remuneration. year lag.

(b) Make adjustments Goverment has review PFP is predicated onannually, so as to committee for salary maintenance of reallimit fluctuations issues, but is 1987/88 salary levels;in real earnings. constrained by fiscal steps towards this

targets agreed under the should not beadjustment program. inconsistent with

overall financialframework. Need:

( a) to determine Treasury, EP&D. Immediate.appropriateaggregate targetfor wages andsalaries in1991192.

(ii) to determine Treasury, EP&D, DPNT, Ismediate.allocation of Ministry of Labor.increase tomaintainappropriatedifferentials andincentives, etc.

3. Maintain an (a) Keep compression DPMT, EP&D. Continual.efficient and ratios andequitable Government incentives forsalary structure. scarce skills under

regular review.

(b) Move from Government has accepted Adopt detailed OPC, OPxT. Immediatesubsidized policy in principle. implementation strategy,Government housing Recent Housing Sector including timetable fortowards study will help in introduction of housingincorporating devising a phased allowance, etc.housing factor in program ofbasic pay, with implementation.housing allowanceas Interimmechanism.

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Problem to be Addressed Recofmended Strategy Action Already Being Further Action Required By Whom Time ScaleTaken _

4. Strengthen capacity (a) Prepare a detailed DEVPOL includes Assign professional OPC, involving EP&D. 12-18 moniths.for timely analysis Government policy appropriate but limited staff from relevant DPNT, OSB, Ministry ofof remuneration statement on pay and policy statements. ministries to do staff Labor, Treasury.issues. related issues to High-level Government work for the paycover: cormittee on pay issues comuittee In drafting

exists. policy statement,(i) affordability beginning with a series

and balance of position papers onbetween personal the main subsidiaryemoluments and Issues.other charges;

(ii) minimun wage andcost of livingcriteria;

(iii) appropriaterelationshipbetween pubtic,parartatal andprivate sectors;

(Iv) scarce skillsand the economicefficiency ofthe paystructure;

(v) balance betweenwages/salariesand otherbenefits.

(b) Haintain capacity EP&D1s existing modet Recreate an appropriate EP&D, In consultation As soon as possible.for rapid analysis accidentally destroyed. model. with DPMT and Treasury.of budgetaryimplications ofdifferentiated payadlustmwnts.

(c) Incltnde review of Economic Report Is well Draft sultable EPMD. Start wlth 1991/92pay and cost of established as* additional section. Economic Report.living trends in commentary on economicannual Economic developments in relationReport and Budget to Gove'rnent policy,Speech. foltowing a standard

format from year toI year.

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2. Management of Comnon Services

Problems to be addressed RecoTmnded Strategy Action atready being Further Action Taken By Whom Time Scale

1. Excessive Staff Adopt guidelines on re- Draft Schemes of Service (a) Issue gereral SPC/DPNT By end 1991Turnover posting and promotion to (Career Paths) should guidelines on

minimize inter- spell out entry and tenure andministerial transfers promotion requirements. promotion,(guidelines to require, consistent withinter alia, advance those incorporatedconsultation between in the Schemes ofresponsible officer and Service.

|_______________________ controlling officer)

(b) Ensure that Schemes DPNT Ongoing (set targets forof Service spell comptetion of all Cormonout minimum Service Career Paths)expected tenurein a given post andthe expectationthat, as far aspossible, promotionshould occur withinthe same Ministry.

Improve personnel record DPHT has project under (a) Review progress of DPH1, in consultation Immediate review.keeping and information way to computerize this effort, with other Ministries Complete computerizationsystems central personnel reinforce if by mid-1992

records necessary

(b) Review and improve DPHT, Heads of Commn 1991-92records kept by ServiceCommon Service, andseek consistencywith centralcomputerized

________________________ _ -system..

Encourage guidance DPMT to issue guidelines DPMT ImmediateJcontinuingrather than transfer as and arrange trainingfirst reaction to programs on this aspectdifficulties of management

For each Comnon Service Heads of each Common Heads of Common Services All Common Services toreview balance of senior Service to consider this and DPMT in consultation haveposts (promotion aspect in drafting with user Ministries development/trainingopportunities) between medium term development plans within 2 yearscore Ministry and program for the Servicesatellites (as part of the same

exercise to preparetraining plans - seebelow). Consultationbetween Heads of CommonServices in consideringEstablishment requestsannualt_

Minimize disruptive Various-initiatives to Prepare a long term DPHT, Heads of Common All Common Services toeffects of training by improve manpower training plan for each Services have long term traininglonger horizon for planning capacity have Common Service plans within 2 yearstraining plans been undertaken (e.g.

____ ___ ___ ___ ___ ___ _ __ ___ ___ ___ ___ ___ ___ NATCAP) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

2. Excessive Vacancies Streamline recruitment HIH and Management (a) Review OPC, DPMT, PSC Immediateprocess by eliminating Services Division of recormendationsurwecessary steps and DPMT have madeallowing parallel rather recommendations along (b) Implement as many OPC, DPHT, PSC By end-1991than serial procedures these lines, which as foundwhere possible envisage suibstantial appropriate

reduction in averagerecruitment period (c) monitor effects on PSC, DPMT (NSD) Thereafter

_______________________ recruitment times l

Investigate measures to HIM team has made Review and act upon HIM OPC, OPMT, etc. 1991reduce time for recomnendations that recommendationspromotion would reduce

considerably the timerequired for thepromotion process

Revive use of DPHIT System exists in Identify training Heads of Common Budget for training pooltraining pool to allow principle, but pool is vacancies at least two Services, DPMT, Treasury in 1992/93 and annuallytraining vacancies to be not funded in practice years ahead (as outcome and line Ministries thereaftercovered because of inability to of training plans with

anticipate "training longer horizon)vacancies" soon enough

Review bonding Review to consider OPMT, MOEC, Ministry of As soon as possible.regulations and either options. Justice.enforce or abandonbonding.

Investigate measures to HIM team has made Review and act upon HIM OPC, DPHT, etc. 1991.reduce time for recommendations that recommendations.promotion would reduce

considerably the timerequired for thepromotion process.

3. Role and functions Schemes of Service Preparation of Career Continue, and give DPMT, Heads of Common Ongoing/immediate.of Common services (Career Paths) to show Paths is under way, with priority to Common Services.are insufficiently overall duties of each TA from ODA in DPMT. Service career paths,understood. cadre as well as entry, check that all draft

training and promotion Common Service careerrequirements for (inter paths include explicitalia) all Common section spelling out theServices. respective roles of

responsible officer andcontrolling officer. .

Better Job descriptions New Job description form Continue improvement of OPHT, PSC all Ongoing.related to Schemes of has been introduced and job descriptions. Ministries.Service. is required in support

of all applications fornew posts, recr.itments,training, etc.

Induction training for Occurs only Each Common Service to Heads of Comron As soon as possible.new recruits. sporadically. work out appropriate services, DPMT.

induction program.

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Procedures manials. Some exist, but few are Review status, update Heads of Comon As soon as possible.up-to-date. and add as necessary. Services, DPMT.

Preparation of a manualis a good opportunity toreview and improve thesystems and procedures

l _______________________ ________________________ it describes. __________________td s r b s

Professional seminars, Varies among Common Review status, consult Heads of Comm-n As soon as possible.etc. within the cadre. Services. within the cadres, adopt Services.

and maintain appropriate___ ___ ___ ___ ___ __ __ ___ ___ ____ _ _ programs. _

Inprove performance The principle of an open Progressive Introduction DPMT etc. ongoing.appraisal system. appraisal system has of the new system,

been accepted by begirming with seniorGovernment, forms staff. Carefuldesigned and a training monitoring of progress.programs (by MIM)prepared.

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3. Management of Ministries and Departments

Problems to be Addressed Recommended Strategy Action ATready Being Further Action Required By Whom Time scale

Government Ministries and - Establish a capacity Several Ministries and - Review findings and - Government (SPC and Following receipt ofDepartments have been found to coordinate Departments have management recomnendations in PSs). PSHR Report.to share a conmon set of ministerial action improvement programs In PSMR Report;problems that affect the plans and to place or under study. establish prioritiesefficiency and effectiveness disseminate Examples: and action plans;of their operations. These experience to other agree onproblems can be grouped into parts of Government. The Ministry of Vorks implemeitationfour areas: is undergoing an mechanism and need- Treat problems as intensive multi-year for external(i) decision-making - too Interrelated and not management assistance.many decisions taken independent. Improvement program.at the top and lack of

clarity over - Develop individual - The Ministry ofresponsibility for ministerial action Finance isdecisions; plans with full formulating a

participation of development plan to(if) evaluation, ministeri6l staff; strengthen its majorplanning and ensure that plans are operations.budgeting - lack based on realiiticof ability to assessment of what The Ministry of Healthdeliver programs ministry can is Implementing anwithin allocated accomplish based on action plan to improveresources; present capacity and management comnnica-

existing obligations. tions and implement(iiI) human resource decentralizationdevelopment - - Make maximum use of activities.weak training and local resources suchpersonnel as the Management - EP&D is developing amanagement Services Division in program to strengthensystems; and DPltT and locally its internal

based management communications.(iv) comnmmications - consultants.poor vertical and - DPHT has programs inhorizontal place to developcommunications. schemes of service

and undertake jobinspections.

The Governnent hasestablished anImplementation Committee tofollow up on the HerbacqReport and to addresscontinuing Issues affectingmanagement of the civilservice.

Government established thelatlai Institute ofManagement to provide in-service management trainingand consulting advice toGovernment and the privatesector. MIM is providingmanagement consultancies ofMOD, DSB, DPHT and otherGovernment bodies.

- xiii -

B. _anagement of Parastatals

Problems to be addressed Recommended Strategy Action already being Further Action Required By Uhom Time Scaletaken

1. Need to clarify Defines its legal Discussions under way Urite memo which - OPC staff or Process to be coopletedDSB's mandate and status, objectives, within Goverrment. presents various consultant by end 1991strengthen the authority and legal options andcapacity. responsibilities. clearly defires DSB's

role

- Choose most - OPCappropriateoption

- Urite draft legal - OPC, Ministry ofstatute Justice, consultant

- Discuss and adopt - Goverrvnent

Recruit capable manager Search for comptroller - Delegate - OPC Immediateunder way responsibility

for finding suitablecandidate to anindividual or searchcommittee

- Seek donor funding, - OPCpart,cularly ifexpatriate

- Interview and setect - SPCI _______________________ candidate

Recruit additional None Identify funding sources OPC and DSB management Effort to begin as soontechnical staff and recruit, preferably as possible

Malawian, experts (shortand long term) inaccounting, financialsystems, housing schemedevelopment, transportfleet management.management development,economic projectappraisal. computerizedMIS systems design and

________________________ I_______________________ maintenance I

Increase Incentives to Discussion on legal Adopt legal status which Goverrnent As soon as legal statusretain highly qualified status affect this issue allows market-retated adopted

______________________ _ Istaff pay

- xiv -

2. Need to improve Board members should Some parastata(s Issue directive which - OPC Before begimfng of nextefficiency of receive budget documents managers do need describes the various year's budget processbudgetary process from each parastatat's relevant budget stages of thefor Statutory Bodies management no later than documents sufficiently budgetary10 days before the Board In advance of meeting process, providemeeting. guidelines on role of

members and setsdeadlines.

- Delegate DSB to - OPCmonitor comptiance

l _____________________ with the directiveEP&D and Finance A few parastatals - Ask ministries to OPC By mid 1991Ministries to designate already have high designate specificspecific officers and ranking ministry senior level officersalternates (minimum P7 representatives on the and alternates tolevel) to serve as their Board and Budget follow eachrepresentatives in Committee who attend parastatal'sBoards of Directors and meetings regularly activities andBudget Conmittees attend Board and

Budget meetings.

- Send tist to DSB

3. Effectiveness of Choose Board members who Improvement in quality - Review attendance andBoards of Directors can contribute technical of parastatal Boards of participation ofexpertise, assess Directors since July Board members.financial plans and 1990performance, represent . Appoint replacementscomiunity interests, if necossaryetc. .

Authorize Board of Improvement in Board - Write memo that OPCDirectors to take quality is necessary delineates whichdecisions on clearly step before enhancing specific decisionsdefined issues its authority remain with

government anddelegate rest toBoard of Directors

- Issue directive _Designate three years Board members are - Issue directive (and OPC -Begin staffing byterms for Board members currently appointed for modify statutes if reptacing non-and stagger terms to two years terms which necessary) participating Boardensure continuity are not staggered members in July 1991

-xv-

Problems to be addressed Recommended Strategy Action already being Further Act. n Required By Whom Time Scaletaken

4. Quality and Panel to interview Panel selected and Schedule interviews of OSB After training has beenauthority of general managers and training to begin general managers cocpletedmanagers vary evaluate their February 1991considerably among management skillsparastatals

Extend strategy to next Strategy adopted Train panel members to HIM subsequent to GMlevel of management evaluate next level of interviewsmanagement

Adopt performance Select general managers - Hire short-term DSB Performance contractscontract system which and refine performance experts to design should be completed bylinks compensation more irdicators so that enterprise-specific the time GMs areclosely to performance performance is fairly performance selectedend sets a three year judged and correct indicationsrenewable term incentives are givenwrite contracts andmonitor theachievement oftargets

5. Personnel Management

Difficulty Extend concept of System to be introduced Choose pilot project OPC/DSB Design system at sameattracting and linking bonuses to at GM level parastatals and hire time as performanceretaining highly achievement of targets short-term consuttant to criteria scheme for GMskilled staff to selected staff. propose systems foreach. Implementdecision taken

Shortage of Smaller commercial Tax-free allowance Investigate concept DSB Within six monthsqualified parastatals share introduced for further as well asaccountants in accountants engaged by accountants potential fundingMalawi DSB source. Take decisionand hire accountant

Lengthy process Authorize General Quality of General issue directive which OPC By end 1991required to fire managers to immediately Managers and Board streamline procedures,employees guilty suspend employees members is being in accordance with laborof theft or fraud beneath them; authorize improved prior to regulationsBoard to fire these increasing theirindividuals after proper authorityprocedures have beenfollowed and inquiries

I Wade

- xvi -

Difficulty coTpeting - Introduce staff home DSB has produced a studywith private sector's ownship program on a of a proposed homecompensation packages pilot project basis ownership schememid and higherlevels, significant - Trarnsfer the functiontime and resources of providing loansbeing spent to manage for rajor assethousing and loans, purchases - car,and sizeable amount furniture, etc. - toof assets held up commercial banksin housing and loans.

6. Treasury Funds - Transform selected Transformation of Malawi - Decision to be taken - Government - As soon as possiblecommercial Treasury P&T into a statutory on Malawi P&T. Donor

Treasury Fund funds into statutory body is under discussion assistance to beframework is not bodies and delegate identified forsufficiently monitoring to DSB. rehabilitation planrigorous for largecommercial - Examine the case for - Memo to be written - DSB - vithin monthsoperations transforming Central analyzing

Goverrunent Stores and advantage/dis-Central Medical advantage ofStores into statutory convertingbodies. rent of commercial

_ Treasury Funds listed l

- xvii -

Problems to be addressed Reccomended Strategy Action already being Further Action Required By lhom Time Scaletaken

Poor management/ Sell to farmers who Under discussion for Egg Decision to be taken Goverrnent Not urgentprofitability of Egg apply products or other Marketing Fund inMarketing Funds in private sector BlantyreBlantyre, Lilongwe interested partiesand Mzuzu and theSmaliholder Project.Not of strategicimqportance to thecountry

Inadequate Smaliholder Agricultural Decision taken Implementation to beginsupervision of Credit Authority toagricultural credit assute responsibilityTreasury Funds for agricultural credit

Treasury Funds

Work capacity of Govermnent to review None Government to analyze OPC Before next budgetunit in Treasury to whether remaining institutional framework process beginssupervise Treasury Treasury Funds should be for remaining TreasuryFunds internally supervised by Funds

their parent ministriesor remain within thepurview of the Treasury

|- ___________________ Fund Unit

Government capital Sell Nalawi Book Service None - Take decision - Goverrnent Multi-year processis directlyi and Malawi Dairyindirectly tied up Industries (wholly or - Devise scheme whereby - DSB/consultants toIn commercial enter- partially) Government retains investigate methodprises no longer of regulatory authority, and present optionsstrategic importance when appropriatethat would be more (e.g. milk prices)efficiently managed even after saleif sold

- Present options tol _ _ _ __ _ _ __ _ _ __ _ __ _ _ __ _ _ __ _ _ __ _ __ _ _ __ _ _ __ _ _ __ G vrn et__ _ _ __ _ _ __ _ _ __ _ _ __ _ _ __ _ _ __ _ __Goverm ent

- xviii -

Completion of ADIARC - Sell ADOARC'S None - Retain consultant, if OPC Not urgent. Within nextprivatization holdings in necessary to specify two yearsprogram to enable it Cold Storage Company; options and actionto focus on its cede Ualaui Tea planprimary objectives Factor, to Small-

holder Tea Authority;

Investigate potential Discussions under way Take decisionoptions for holdingcompany of ADNARCshares (e.g.debt/equity swap)

HDC is not - Strengthen management None Decision to be taken - Government - Imnediatefulfilling its and project appraisalmanrate of staff capacityinvestigatingin new comipanies HDC to sell its - Decision to be taken - Sovernment - After _magement and

shares in mature staff are reinforcedI companies _ _

CHAPTER 1

RAK002ANDINIBQTlR

A. OVERVIEW

1.1 The Public Sector Management Review (PSMR) arose out of the Government of Malawi'scontinuing interest in improving performance of the public sector. The Government has experiencedmany previous management studies and two of the most recent ones -- the 1985 Report of the MalawiCivil Service Commission and the 1987 World Bank Report on Parastatal Restructuring -- haveresulted in significant changes. Other studies, however, particularly several managementimprovement studies of individual ministries, did not lead to any meaningful improvements.

1.2 With this background, the Secretary to the President and Cabinet - SPC, (head of the civilservice and coordinator of the Government's daily operations), expressed interest in a review thatfocused on selected issues rather than attempted encyclopedic coverage, and involved governmentofficials along with external experts. The objective was twofold: first, to identify a manageablenumber of issues that could be tackleJ within a reasonable time frame; and second, to evolve aprocess that could move easily from analysis to implementation and which could serve as a prototypefor addressing subsequent public sector management issues.

1.3 It was agreed that the PSMR would be restricted to issues affecting the Central Government(i.e. the core and sector ministries; excluding the legislative and judicial branches, the police anddefence establishments and the local government structures) and the parastatal sector. The ParastatalSector organizations addressed by the PSMR are the twenty-six statutory bodies and four state-ownedcompanies that are supervised by the Department of Statutory Bodies, and 54 Treasury Funds whichare under the supervision of the Ministry of Finance. These are described in Section A of Chapter 3and listed in Annex 3-1 of this report. The ministries and departments comprising the areas ofCentral Government that are covered by the PSMR are listed below:

Ministries

Office of President and CabinetMinistry of FinanceMinistry of HealthMinistry of JusticeMinistry of Education and CultureMinistry of External AffairsMinistry of WorksMinistry of Local GovernmentMinistry of Community ServiceMinistry of Trade and IndustryMinistry of LaborMinistry of Transport and CommunicationMinistry of Forestry and Natural ResourcesMinistry of AgricultureMinistry of Energy and MiningMinistry of Information and Tourism

-2 -

Departments

Department of Housing and Physical PlanningDepartment of Economic Planning and DevelopmentDepartment of Statutory BodiesPrinting and Stationery OfficeChitukuko Cha A Mai -CCAMRegional Administrator (North)Regional Administrator (South)Regional Administrator (Centre)National Research Council of MalawiPublic Service CommissionPost and TelecommunicationsPersonnel Management and TrainingNational Statistical OfficeYouth and Malawi Young Pioneers.

1.4 It was further decided to look at different types of issues affecting performance of publicsector agencies. One set of issues would be cross-cutting such as remuneration and personnelmanagement policies, affecting all government operations and over which no one ministry or agencyhad much control. The other set of issues would be those inhibiting performance of individualministries or agencies. Th- Government was interested in determining whether there were a commonset of problems af'acting all ministries which might lend themselves to a set of common solutions.Finally it was decided to examine the parastatal sector to see how the sector had performed over thelast five years, to recommend areas for improvement and to assess whether there were anyappropriate lessons from the experiences of the parastatal seccor that could be applied to themanagement of sector and core ministries and vice versa.

1.5 PSMR contains four chapters. The remainder of this chapter describes PSMR's approach andmethodology and provides a summary of Malawi's recent economic performance. Chapter twor,.views management issues affecting performance of the Central Government. The performance ofthe parastatal sector is addressed in chapter three. Chapter four corcludes with PSMR's findings andoffers a strategy for managing the change proc-ss. Annex I contains a list of PSMR'srecommendations.

B. APPROACH

1.6 In approaching PSMR, the Government (SPC and advisers) requested that an effort be madeto include local perspective in the review process. It was Government's belief that some of theprevious efforts to approach public sector management improvements had failed because of lack ofappreciation of Malawi's cultural and political heritage. The review team attempted to meet thisrequest by including Malawian rmembers (consultants from the Malawi Institute of Management), andby testing PSMR's hypothesis, preliminary findings and conclusions on numerous Malawian officials,including two public meetings with the SPC and his Principal Secretaries.

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C. RECENT ECONOMIC PERFORMANCE 1/

1.7 As a landlocked African country with more than eight million people, Malawi sufferedthrough its share of adversities in the 1980s. Besides an international economic climate that was notparticularly favorable for its agriculture-based economy, the country was buffeted by the civil strifein neighboring Mozambique, which not only caused the closure of its traditional trade routes to thesea, but also led to a large influx of displaced persons that significantly increased the burden onGovernment's limited services and infrastructure. Even without these shocks Malawi would be apoor country, though its current per capita income of $248 would probably be higher.

1.8 Beginning in the early 1980s, Malawi responded with a series of stabilization and structuraladjustmnent programs. Certain policy responses, including expanded fiscal deficits and the impositionof import controls, compounded the difficulties and discouraged private sector output and confidence.The years of 1986 and 1987 were a time of crisis in which per capita GDP fell, current accountbalances deteriorated, foreign reserves declined and fiscal imbalances increased. In 1988,Government introduced a policy of strict financial discipline, with the objective of encouraging a shiftof resources from the Government to the private sector as the focal point of economic growth.Structural policies included liberalizing the import regime and introducing financial, fiscal andparastatal reforms. The economy has responded to these measures with real GDP growth increasingfrom 1.1 percent in 1986 to 4.8 percent in 1990, and 7.8% in 1991.

1.9 The Government's development strategy until recently has concentrated resources ondeveloping iwtional infrastructure and a highly productive agricultural estate sector and, while thishas generaliy produced impressive results in terms of exports, it has been at the expense of the socialsectors. To address problems of widespread poverty and food insecurity, of high population growthand infant mortality rates and of illiteracy and low educational achievements, the Govermnent hasbeen increasing the share of budget expenditures on human infrastructure. Expenditure on socialservices increased from 19 percent of the recurrent budget in 1985/86 to 26 percent in 1989/90, andfrom 15 percent to 23 percent of the development budget over the same period.

1.10 The Government's financial position has continued to improve since 1986/87, when the deficitreached 13 percent of GDP. The figure has come down to 6.6 percent in 1989/90, and is expectedto improve further to 5.8 percent in 1990/91. The fiscal improvement has resulted primarily fromreduced recurrent expenditure. From a peak of 24 percent of GDP in 1986/87, recurrent expenditurewas 20 percent in 1989/90, and is projected to fall further to 18.3 percent in 1990/91. A primarycontributor to the decline was constraint on the growth of wages and salaries.

I/ Information is from Malawi - Recent Economic Developments, IMF, February 1991; Malawi -Public Expenditure Review, World Bank, April 1990; and Malawi - Growth Through PovertvReduction, World Bank, March 1990.

-4-

CHAPTER 2

MANAGEMENT ISSUES IN THE CENTRAL GOVERNMENT

2.1 This chapter will examine three distinct aspects affectiri.; management of the CentralGovernment in Malawi. First it will review management of civil service employment and wages,providing data on trends in both areas and on the competitiveness of civil service salaries comparedwith those in the parastatal and private sectors. Second, it will review management of the CommonServices, examining issues affecting performance of a specific sub-set of civil servants - those thatbelong to Common Services and are managed by the heads of their services rather than by theMinistries in which they work. Third, it will look at management in Government Ministries,identifying issues and suggesting ways of improving performance.

A. MANAGEMENT OF CIVIL SERVICE EMPLOYMENT AND WAGES 2/

(i) Employment

2.2 Historically, Malawi has been known for its conservative approach to employment in thepublic sector, particularly in comparison with many other African countries where, until recently,double digit annual growth rates were not uncommon. The overall annual growth of establishedpositions from 1979/80 (36,775) to 1989/90 (58,580) was 4.8 percent.

2.3 The 1990 Public Expenditure Review Report (PER) notes the discrepancy between figuresreported in the Establishment Estimates appended to the budget and those based on ledgers maintainedin the Department of Personnel Management and Training (DPMT), in the Office of the Presidentand Cabinet. These figures were updated by the mission as noted in Table 2.1, and indicate that thediscrepancy remains, although it appears to have stabilized. According to both sets of figures, thenumber of established positions increased in the most recent two year period by 13-14 percent.

Table 2.1: Nuwber and Increase in Civil Service EstablishedPositions, 1980/81-1987/88

Nuimer of EstabLished Percentage of IncreasePositions

DPNT gI Budget t/ DPHT Budget

1960/61 U.274 39,824 -1981/82 45.144 43,345 1.9X1982/83 46,380 45,333 2.9X1983/84 47,977 - 3.411984/85 48.178 - 0.04X1985/86 48,267 46,666 0.01X -1986/87 51.786 49,673 7.3X 6.4X1987/88 57,108 51,699 10.3X 4.1Z1988/89 60.245 54,256 5.51 4.911989/9 65, A0 58,580 8.7X 8.0X

a/ Source: DPNTW/ Source: Table of Civil Service Establishment, various years.

2V Civil service employment refers to employees in the civil service both in established and -xon-established positions. It does not include parastatal employees (discussed in the next chapter)nor employees of local govermments.

- -

2.4 Some of this increase can be explained by the Government's decision to limit the growth ofnon-established posts, which have averaged between 20,000 and 25,000 over the past few years, andto transfer many of these into established positions. As will be seen in the next section, the wage billas a percentage of non-debt recurrent expenditure has been modest over the last few years except inthose years where there have been sizeable pay increases, thus indicating some trade-offs betweenestablished and non-established positions. Information is sketchy on non-established positions (22,592were reported by DPMT in 1986/87), and greater effort is required to track the number of workersin these positions.3/ Nonetheless, the increase in growth of established positions is of growingconcern.

2.5 Also of concern is the change in the composition of the civil service establishment. As canbeen seen in Table 2.2, growth in employment in the last two years has been in the "non-priorityestablishment" (i.e., categories other than education, health and agriculture. These categories havehad double digit growth compared with declines in establishment positions in the Ministry of Worksand only modest increases in Health and Agriculture.

Table 2.2: Nataf -- Civit Service Establisimnt1985/86 - 1989/90

Totat of WHich:Year Estabtishment Agriculture Ecication Health Works Other

(a) (a)

1985/86 46666 5814 15219 4897 1881 188551986/87 49673 6431 16792 4897 2186 193671967/88 51699 7036 16965 4771 2227 20700198B/89 54256 7112 16965 4771 2157 232511989/90 58580 7275 18646 4820 1806 262S3

Percentage shares:1985/86 100.0% 12.5X 32.6X 10.5Z 4.01 40.4X1986/87 100.01 12.91 33.81 9.91 4.41 39.011987/8B 100.0% 13.61 32.8Z 9.21 4.31 40.011988/89 100.01 13.11 31.3X 8.81 4.01 42.911989/90 100.01 12.4X 31.51 8.21 3.1X 44.8X

Percentage growth p.a.:1985/86(b) 1.01 5.?$ 0.51 -0.1X 2.0X 0.2Z1986/87 6.41 10.6Z 10.31 0.01 16.21 2.711987/88 4.1Z 9.41 1.01 -2.6X 1.91 6.911988/89 4.91 1.1X 0.0% 0.01 -3.11 12.311989/90 8.01 2.31 8.71 1.01 16.3X 12.81

Average growth:579/80-889/90 4.81 9.6Z 2.51 7.51 0.81 5.5X

Notes: (a) Decrease in 1989/90 presunbly reflects transfer of Suppties to ministry of Finance.(b) Average arnuat growth rate between 1982/83 and 1985/86.

Source: Tabte of Civit Service Establishment, Budget Estimates, various years.

3/ Most non-establishment workers are on daily or monthly contracts and work for the minimumwage and do not receive any benefits. They are generally unskilled laborers and many areemployed by the Ministries of Agriculture and Works doing seasonal jobs.

- 6-

2.6 It is evident that Government is encountering difficulty in managing the overall growth of thecivil service, especially growth in non-priority areas. The Policy Framework Paper (PFP) notedGovernment's intention to limit overall growth in the civil service to 1-2 percent per annum, withemphasis going to health, education and agriculture.4/ The Government could successfully tightenup employment practices by developing and then using the Establishment Register as the coredocument both for budgeting and for authorizing recruitment of new positions. At present DPMTkeeps a ledger of what it believes to be the authorized posts for each Ministry/department, but thisis not widely circulated and it is not authoritative. As already noted, DPMT's figures do not agreewith those appended by Treasury to the Budget Estimates. Treasury and DPMT should reconciletheir differences and agree on one set of numbers, to be published as the Establishment Register andupdated arniually as part of the budget routine. The annual process of producing the EstablishmentRegister would link manpower and financial budgeting in a desirable way.

Recommendations

2.7 It is recommended that the Government improve establishment and employment control by:

* Freezing the creation of new establishment positions while it is reviewing theEstablishment Register and reconciling the number of existing positions betweenTreasury and DPMT; future growth should be constrained - probably in the rangeof 1-2 percent - and concentrated on the priority social sectors, so that emphasis canbe placed on improving wages;

* making the Establishment Register an authoritative document, published annuallyalong with the Budget;

* ensuring that the recruitment procedure includes a check that posts are (a) establishedand (b) vacant before recruitment proceeds;

* making forward projections (ceilings) of Establishment posts as a manpower planningframework fur each Ministry; and

* improving monitoring of non-Established temporary and industrial class posts andincluding a report of their estimated numbers and/or budget allocations as acompanion document to the annual Establishment Register.

CiH) Wages

2.8 Wages in the context of this report refer to the daily pay that workers in non-established postsreceive. Salaries refer to the annual remuneration received by civil servants in established positions.In addition, civil servants are also eligible for non-cash or indirect benefits such as housing. Thissection of the report will focus on (i) the role of indirect benefits, (ii) wage and salary movementsas measured by several indices, including the cost of living; (iii) the competitiveness of civil servicesalaries in comparison with those in the parastatal and private sector; and (iv) policy guidelines to beconsidered in formulating Government wage and salary policy.

4/ Policy Framework Paper 1989/90-1991/92, June 1990.

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2.9 Indirect Benefits: Indirect benefits play an important role in the total compensation receivedby civil servants. Housing is the most significant indirect benefit. A senior official living in agovernment house in Lilongwe or Blantyre would pay 10-12.5 percent (depending on whether it wasfurnished) of monthly salary in rental charges, or MK 150-200/month. A similar house on the openmarket would rent for about MK 1800-2500/month (equal to or greater than the civil servant'snmonthly salary). Given the limited stock, government housing is available to only one-third of thecivil service and Government provides no housing allowance or other benefit for civil servants thatare housed privately, creating problems in terms of equity of the overall benefit package. TheGovernment is actively addressing this problem with the help of UNDP, the World Bank and otherdonors. The thrust of the effort is to devise a program that would enable civil servants to buygovernment houses they occupy or, if they are privately housed, to obtain mortgage funds to buyfrom the private sector. PSMR supports the Government's decision to gradually move out of thehousing business (except for specific requirements, such as the need to house government officialsposted in remote locations), and to establish a housing benefit that is equitable, transparent andavailable to all.

2.10 The second most significant indirect benefit is training, both local and foreign. Althoughtraining is intended to serve a useful purpose, increasingly it has become, in the eyes of the Malawiancivil servant, an "income generating activity." Foreign training has always offered opportunities forsaving foreign exchange while on extended study tours, but it is only recently that local training hasprovided a means of enhancing income. Government's decision in September 1990 to establish highsubsistence allowances for Government officials attending donor sponsored conferencer . seminars andworkshops provided the impetus. With rates ranging from MK 130-156/day if accommodation is notprovided, civil servants can earn the equivalent of 20 percent or more of their salaries from a monthlong course (assuming that they stay with relatives or friends). While some donors refuse to pay thespecified subsistence allowances, others acknowledge these allowances to be an acceptable way ofproviding income supplements. Government's subsistence policy creates problems for local traininginstitutions, like the Malawi Institute of Management, which discover that civil servants will notattend its courses unless it matches the subsistence rates donors are prepared to pay. The World Bankhas addressed these and other issues in its Training Sector Study (Report No. 8671, June 1990). Thereport addresses a range of issues related to improving the efficiency of the training sector.However, the issue of training as an income generating activity will not be fully resolved untilGovernment effectively addresses the problem of declining real wages of civil servants.

2.11 Trends in Civil Service Salaries:5/ Various indices are useful when examining civil servicewages. First, there is the share of wages and salaries in the recurrent budget. Table 2.3 indicatesthe position is as follows:

s/ See footnote 1 of Executive Summary on the significant pay increases granted to civilservants in April and May 1992.

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Table 2.3: PubLic Expenditure an Wages and SaLarfes if

Vages and Salaries as Wages and Salaries asPercentage of Won-debt Percentage ofRecurrent Expenditure Gross Consuiption

1981/82 32.0 38.1198Z/83 33.8 39.81983/84 32.9 41.?1984/85 33.0 39.81985/86 31.5 40.31986/87 32.3 38.81987/88 37.4 44.61988/89 32.6 38.01989/90 36.5 44.91990/91 31.8 38.5

Source: Nalawi Goverruent, Economic Report, 1989-1990.

2.12 In each column, there are significant increases in the ratio in 1987/88 and 1989/90. Thesepresumably reflect the short-term effects of the two main salary increases during the 1980s. Theseratios indicate that wages and salaries have tended to stabilize at around 30-35 percent of non-debtrecurrent expenditure and 4045 percent of gross consumption, and have not been increasing as aproportion of total expenditure. The ratios indicate that the effects of budget stringency appliedduring the adjustment programs in the 1980s have been felt on both the wage and non-wagecomponents of the recurrent budget. In many African countries, Government's have allowed salariesto increase as a percentage of recurrent expenditures during times of adjustment, reducing the fundsavailable for operational expenses and leading to a severe curtailment of Government activity.Malawi has avoided this pitfall, although in doing so, since it did not reduce employment, it hascurtailed the real value of salaries.

2.13 One indicator of the health of the civil service pay structure is the compression ratio, the ratiobetween the highest and lowest paid civil servants. This ratio is based solely on salaries, sinceindirect benefits are difficult to quantify. Consequently, the ratio tends to have a lower bias thanwould be the case if indirect benefits -- which tend to be larger the higher one is in the civil service -- were included. In many African countries, the ratio is less than 10. As noted in Table 2.4, thecompression ratio is significantly higher in Malawi, and has been so since at least 1974/75. The 1989pay increase, which averaged 20 percent, increased lower level salaries by up to 85 percent andhigher level salaries by 12 percent, thus reducing the compression ratio from 48 to 30.

6/ Annex 2-1 provides data on the Central Government Recurrent Expenditures from 1981/82 to1990/91. Note that Gross Consumption used in this table is a sub-category of CentralGovermment Expenditure, netting out transfers. Annex 2-1 also provides information fromwhich this table was derived.

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Table 2.4: Selected Goverment Salaries

Grade 1974/75 1979/80 1986/87 1989/90

Superscate and Acdin.SI/Pi High 5937 10368 19104 21696

Executive and Tech.B3 Low 1038 1371 2064 3180BI High 3375 4455 7704 8736

Clerical wnd TAC2 Lou 222 294 576 720Cl High 1311 1794 3636 4224

NursingU6 Low 1038 1371 2064 3180Ml High 4053 5868 9048 10968

TeachingETI Low 2145 3750 5688 7720ETI High 2709 4455 7704 8736T5 Low 222 294 540 720TS High 276 363 924 1488

NessseiersSCIV Low 150 225 396 732SCI High 363 546 1680 2040

Coqpressfon Ratio 40 46 48 30

Source: Civil Service salaries frm DPMT.

2.14 The compression ratio itself does not indicate whether civil service salaries are adequate interms of providing a living wage nor attractive in comparison with parastatal and private sectorsalaries. In the case of Malawi, the ratio indicates that within the structure there is significantdistance between the lowest paid and highest paid civil servants, allowing for increasing levels ofresponsibility, to be rewarded by appropriately higher salaries.

2.15 Table 2.5 provides ratios of government salaries to the urban minimum wage at four differentperiods between 1974/75 and 1989/90. The table indicates that salaries at the lowest level are abovethe urban minimum wage, however salaries at all levels have been declining in terms of the urbanminimum wage since 1979/80. While all suffer when inflation is high and wage adjustments areinfrequent, those in the lower scales suffer disproportionately more given that their salaries are soclose to urban minimum wage.

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Tabte 2.5: Ratio of Governoent Salaries to Urban Ninim Wage

6rade 1974/75 1979/80 1986/87 1989/90

Superscate and Admin.SI/Pi High 59.4 103.7 68.8 40.0

Executive and Tech.B3 Low 10.4 13.7 7.4 5.9Bi High 33.8 44.6 27.8 16.1

ClericaL and TAC2 Lou 2.2 2.9 2.1 1.3Cl High 13.1 17.9 13.1 7.8

NursingM6 Lou 10.4 13.7 7.4 5.9Nl High 40.5 58.7 32.6 20.2

TeachingETI Lou 21.5 37.5 20.5 14.2ETI High 27.1 44.6 27.8 16.1T5 Low 2.2 2.9 1.9 1.3T5 High 2.8 3.6 3.3 2.7

NessengersSCIV Low 1.5 2.3 1.4 1.3SCI High 3.6 5.5 6.1 3.8

Urban Nini.m Wage 1.0 1.0 1.0 1.0

Minimum Wage - Urban Daily Wage x 250 (from Naawd Growth Through Poverty, Tabte 5.03)

Source: Civit Service sataries from DPfT.

2.16 It is also useful to look at the performance of government salaries in real terms in recentyears. Table 2.6 provides information on salary movements since 1974/75, with 1986/87 set as thebase year (equals 100), as this was the year salaries were significantly adjusted in response to therecommendations of the Civil Service Review Commission. Salaries have been deflated by theBlantyre Low Income Index to 1980, and by the Composite Price Index thereafter. 'rhe tableindicates that salaries in real terms have declined significantly since 1986/87, amounting in 1990/91to only 52 percent of their value at the top levels of the civil service (SI/Pl). The decline has notbeen quite so drastic at the lower end of the scale, since the 1989/90 nominal increase was biasedtowards low earners. At the bottom of the messenger scale (SCIV), the 1990/91 salary was worth86 percent of its 1986/87 level.

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Table 2.6: Natadi - Civit Service Salaries by Category 1974/5-199019 (Indlex)(1986/87=100; deflated by Blantyre Lou Incinc Index to 1980,ard by Composite Price Index thereefter)

74/75 75/76 76/77 77/ 73/79 79/80 80/81 81/82 82/83 83/84 84/85 85/86 66/87 87/88 88/89 89/90 90/91

Superscale and ftden.SI/PI Loi 118 102 159 153 141 126 122 111 106 94 84 73 100 79 60 58 52SIUPI High 111 96 161 155 143 128 125 126 121 107 96 84 100 79 60 59 53S8PS Low 179 154 198 190 175 158 153 139 138 122 110 96 100 79 60 58 52S8/Pe High 177 153 204 195 180 162 157 150 141 124 112 97 100 79 60 60 54

Admin. & ProfessionalAl LOw 165 142 195 187 172 155 150 136 138 121 109 95 100 79 60 60 53Al High 174 151 217 208 192 172 168 157 159 140 126 110 100 79 60 61 55

Executive L TechnicalB3 Low 180 156 197 189 175 157 153 138 141 124 112 97 100 79 60 80 7283 High 132 114 144 139 128 115 112 148 151 133 120 104 100 79 60 62 56SI LoW 179 155 196 188 173 156 151 137 138 122 110 96 100 79 60 61 55B1 High 157 136 172 165 152 137 133 134 158 140 126 110 100 79 60 59 53

Clericat Officers Z TAsC2 Lo 138 119 152 145 134 121 108 140 149 131 118 103 100 79 60 65 58C2 High 110 96 121 116 107 96 94 117 122 107 97 84 100 79 60 60 54C1 Los 184 160 202 194 179 161 156 141 144 127 115 100 100 79 60 62 56C1 Nigh 129 112 146 141 130 116 113 147 150 132 119 103 100 79 60 60 54

Secretariat ServiceD8 Low 124 111 154 140 147 130 117 102 100 79 60 62 55D8 HiSh 190 171 143 145 151 133 120 104 100 79 60 63 57

Executives £ Tech. OfficersD6 Low 86 75 131 126 177 159 155 140 146 129 116 101 100 79 60 62 56D6 High 57 49 101 151 193 173 122 152 158 139 125 109 100 95 72 73 65D1 Low 65 57 196 188 173 156 151 137 138 122 110 96 100 79 60 61 55D1 Hiugh 95 82 172 165 152 137 133 138 159 140 126 110 100 79 60 59 53

SCIV LoW 136 117 169 162 149 134 131 142 151 133 120 104 100 79 60 96 86SCIV Nigh 85 74 106 101 94 84 82 152 158 139 125 109 100 79 60 67 60SCI Low 103 89 128 123 114 102 99 144 150 132 119 104 100 79 60 62 56SCI High 77 67 96 93 85 77 75 155 161 142 128 112 100 79 60 63 56Nursing ServiceXb Low 180 156 197 189 175 157 153 138 141 124 112 97 100 79 60 80 72N6 Nigh 131 113 143 137 126 114 110 160 164 1" 130 113 100 86 65 68 61Ml Low 171 148 201 193 178 160 153 139 138 122 110 96 100 79 60 58 52h1 High 160 139 193 185 170 153 149 141 141 124 112 97 100 82 62 63 56

0 ISS8888 8888

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2.17 Civil Service, Parastatal ard Private Sector Salary Differentials Recent and reliable dataon earnings in the various sectors of the economy are not available. The benchmark is providedby the ILO Comprehensive Human Resources Study. Information from that study indicates thatsignificant differentials existed in 1987 between the public, parastatal and private sectors in thetechnical and professional occupations and among workers with diplomas and higher educationaldegrees. Table 2.7a notes that Individuals in professional and technical occupations earned 68percent more In the parastatal sector and 77 percent more in the private sector than counterpartsin the civil service. The differential was much lower for those in the semi-skilled clerical andmanual occupations with the private sector reporting lower earnings than the public sector.Similar trends were noted when educational background was considered (Table 2.7b).Differentials were small for those with limited education, while individuals in the parastatal andprivate sectors with diplomas or higher degrees were earning salaries 50-100 percent higher thansimilarly educated individuals working in the civil service.

Table 2.7a: Neon Basic Mnthly Earmings of Skilled Eptloyeesby Sector, and Major OccWuetionah Group and Citizenship (1987)

(Kuacha) (X of Govt. Earnings)Govt. Para. Private Govt. Para. Private

Professioral Technical 352 593 622 1001 168X 177XOcutt ions

Other Professional 304 673 751 1001 221X 247XOc04IOtions

Sub-Professional and 224 324 315 100l 145X 1411Technician Occupations

Other Sub-Professional 196 260 209 100l 1331 1071Ocetpatiom

Skilled Clerical and 171 223 234 1001 1301 1371Manual Occupations

Smei-skilled Clerical 111 151 107 1001 136X 96Xaid Manual Occupations

Source: ILO, Coq2rehensive Ht~ Resources Study, Table 3.2.

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Table 2.7b: Nkon Basic Nonthty Earnings of SkilledEeployees by Eduational tualificatifon

(Kwacha) (2 of Govt. Earnngs)Govt. Para. Private Govt. Para. Private

None 93 112 93 1002 134X 1051

Prinary Certificate 14" 151 137 100X 105l 95X

Junior Certificate 177 197 217 1001 1I11 123X

NCE or Equivatent 209 258 334 1001 1232 160X

'A Level or Equivalent 390 581 643 1002 149X 165Z

Diploma or Equivalent 272 535 546 lOOX 197X 2011

Degree or Equivalent 499 703 734 1002 1412 1472

Post-graduate 644 832 1288 1002 129X 2002

Source: ILO, Comprehensive Huim Resources Study.. Table 3.2.

2.18 Since 1987, when the above data was collected, one can surmise that the situation for thebetter ee.ucated, more experienced staff in the civil service has deteriorated compared withsimilarly qualified staff in the parastatal and private sectors. As noted earlier, salaries at themiddle and top levels have declined in real terms so that presently they are about half their 1987levels. Evidence collected during PSMR indicates that parastatal and private sector salaries havebeen adjusted annually since 1987 to account for inflation, so it is likely that some higher levelsalaries in the civil service may have fallen as low as one quarter of the private sector equivalent.Differentials at the bottom end of the scale were less at the time of the ILO survey and will alsohave grown much less because of the weighing of the 1989 adjustment.

2.19 It is evident that Government has deliberately taken a cautious stance on salaries in orderto protect its fiscal position. The costs implied by this stance are sigaificant in terms of impacton the morale of Government employees. Although there does not appear to be large scaleabsenteeism and moonlighting among Government staff, the decline in real pay and the growinggap between private and public earning has such consequences as:

(a) distorting decisions that relate to training or travel, since these are viewed asways of supplementing incomes; and

(b) exacerbating the drift from Government employment into the private sector.

2.20 Wage Policy Guidelines: Government salaries should be reviewed and adjusted soonerrather than later. Government needs to develop a mechanism that would operate - preferablyon an annual basis - to adjust salaries to account for inflation, economic growth, availability ofrecurrent revenue, and growth in employment. The Government's Statement of DevelopmentPolicies, 1987-1996 (DEVPOL) describes Government's overall intention to maintain theappropriate value of public sector remuneration, but a more fully worked out set of policyguidelines is required to ensure that competing objectives of policy are appropriately balanced andthat individual decisions affecting remuneration and incentives are mutually consistent.

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2.21 Issues to be considered in drawing up policy guidelines include:

(a) Affordability and the baJance between persgnal emoluMents and other charges.It is important to monitor not only the total of public expenditure on wages andsalaries but also the balance between this and other expenditures. In Malawi'scase, housing subsidy represents a hidden component of remuneration, which alsoneeds to be taken into account.

(b) Costs of Living. Inflation affects different groups differently (high vs. lowincome, those in Government-subsidized housing vs. others), and this should betaken into account in monitoring and adjustments.

(c) General Comparability between Public. Parastatal and Private Sectors. While itis inappropriate for Government generally to be a wage-leader, it is alsoinefficient if Government falls too far behind (costs in morale, turnover,vacancies); policy should be based on a view of the desired characteristics of thelabor market: e.g. efficiency (appropriate signals regarding skills, avoidance ofpersistent economic rents) and avoidance of unnecessary rigidities (employmentconditions that unduly restrict ability to respond to market signals, e.g housingand pension terms). A reasonably stable relationship between sectors is desirable(to avoid large fluctuations in differentials between the sectors).

(d) Scarce Skills and Economic Efficiency of Pay Structures. There may be conflictbetween equity and market approaches to determining pay structures; publicsector pay determination often concentrates on horizontal equity (equivalencesarrived at through job evaluation), but this can be a handicap in attracting andretaining professionals whose skills are in short supply; appropriate responsesdepend on whether shortage is temporary or structural; possible reactionsinclude: special allowances, extended scales, employment of expatriates,contracting for services instead of hiring employees, and ad hoc measures suchas personal-to-holder awards or upgrading of individual posts. The danger isthat, without benefit of a clear overall strategy, successive ad hoc measures willlead to increasingly costly distortions in pay structures.

(e) Balance between Pay and Other Benefits. The general preference should be fora simple, transparent pay package, but there are inevitably complications, suchas pension schemes, and there is also the historical legacy of housing: inMalawi's case housing anid remuneration policies have to be considered intandem.

Recommendations

2.22 Recent trends in civil service wage practices raise a number of issues. Government hasmaintained its fiscal austerity and has not allowed the wage bill to increase relative to availablerecurrent revenue. Deterioration is particularly noticeable at the top end of the scale where thegap between public parastatal and private sector salaries is widening. However, Government hasopted to allow employment levels to increase rather than to adjust salaries, the opposite of whathad been recommended in the PER and PFP, which called for negligible growth in civil serviceemployment and gradual restoration of the 1987/88 real wage level. If Government's recent

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employment/wage practlies are not checked, the impact on the Malawi civil service could becatastrophic. Similar patterns have been observed in other African countries and the results havebeen familiar: civil services that have been incapacitated by excessive numbers and part-time staffthat seek additional remuneration by moonlighting or extracting rents from their Governmentposition.

2.23 Recommendations on constraining employment practices have already been made.Recommendations on the principles guiding wage policy and the process for formulating such apolicy are as follows: 7/

(a) Government should adjust salaries regularly, preferably on an annual basis. Inadjusting salaries, Government should consider the following factors:

(i) maintain an appropriate relationship between public, parastatal and privateremuneration; and

(ii) maintain an efficient and equitable Government salary structure by keeping thecompression ratios and incentives for scarce skills under regular review, andby limiting the role of indirect benefits, such as housing and training, bymaking these benefits transparent and accessible to all civil servants, and, overtime and as salaries improve, reducing indirect benefits as a proportion oftotal compensation.

(b) Government should strengthen its capacity for the timely analysis of remunerationissues. Responsibility for developing a detailed Government policy statement onpay and related issues should be vested in the Office of the President andCabinet, drawing on staff from Treasury, DPMT, EP&D, the Department ofStatutory Bodies and the Ministry of Labor. Responsibility for rapid analysis ofbudgetary implications of differentiated pay adjustments should rest with EP&D,who also should be responsible for including a review of pay and cost of livingtrends in the Annual Economic Report and Budget Speech.

B. MANAGEMENT OF COMMON SERVICES

2.24 Most civil servants are managed by the Principal Secretaries of their respectiveMinistries, but some 10,000, or roughly 20 percent, belong to the nine common services and aremanaged separately.l/ As noted in Table 2.8, the Messenger, Personnel and Accounting

71 PSMR does not make any specific recommendations on immediate wage increases, becausethese need to be considered along with changes in other macro-variables. It would appear thatthe PER's recommendations for increasing salaries to their 1987/88 will not be possible giventhe larger than anticipated increases in employment in 1989/90 and 1990/91. However,PSMR's analysis indicates that within the framework set out by the PER, the total wage billfor 1990/91 was 13 percent less than would have been permitted under the PER's projections(see Annex 2-2 .

8/ Th°lb term 'managed here refers to the day-to-day control over the civil servant. Recruitmentinto the service, promotions and terminations are managed by the Public Service Commissionand DPA1ET. Rotations or lateral movements are the responsibility of the head of the common

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Common Services are the three largest, each one accounting for 20-25 percent of the total. Interms of impact on Government affairs, the Administrative and Economics Common Services,although small in numbers, provide the pool from which most senior Government civil servantsare drawn.

Table 2.8: Numbers of Civil ServantsBelonging to Ccn n Services in 1990/91 2/

Comcn Service No. of Staff Percont

Accounting 2499 24PAinistrative 313 3Data 638 6Econaimc Pltirng 149 1Nessengerfal a256 24Personnel 2087 20Secretarial 1387 13Statistical 519 5Stores 391 4

Totat 10509 100

Source: DPIT

2.25 The concept underlying the common service is that individuals with specialized trainingor skills should be managed in a way that develops their expertise. As members of a CommonService, staff officers are posted to Ministries and Departments by the respective heads of theCommon Services based on career needs and the requirements of the concerned agencies. Intheory, the Common Services provide opportunities for specialized training in the field ofexpertise and for professional growth that would otherwise be constrained if an individual's careerwere limited to one Ministry or Department.

2.26 As an example, the Accountant General, as head of the Accounting Common Service, isresponsible for some 2500 Government accountants, of whom only a small percent are posted inthe Ministry of Finance where the Accountant General is based. If an accountant is required bythe Ministry of Agriculture, a request is made by the Principal Secretary to the AccountantGeneral. When the position is filled, the Principal Secretary, Agriculture becomes theControlling Officer for that accountant, responsible for his day-to-day assignments. TheAccountant General is the Responsible Officer and remains in charge of the individual's careerdevelopment and can transfer the officer to another assignment when deemed appropriate - eitherto meet the needs of the service, of the individual, or of the Ministry to which the officer is goingto or departing from.

service or the Principal Secretar of a Ministry, except in situations involving high rankingcivil servants or inter-ministerial movements of non-common service staff which areorchestrated by OPC and DPMT.

2/ Annex 2-3 provides detailed staffing numbers of each Common Service byMinistry/Department and grade.

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2.27 PSMR examined management of the Common Services as a companion to the review ofmanagement practices within Ministries and Departments. PSMR's approach has been toconsider (a) whether Common Service shortcomings are specific to the Common Services orreflect more general weaknesses, (b) the likely costs and consequences of abandoning theCommon Service approach and ihow any alternative would operate in practice, and (c) whetherthere are opportunities for improvtment short of abolishing the Common Services. PSMRcollected data through interviews with Common Service personnel, the heads of all the CommonServices and a large number of Principal Secretaries.

2.28 Few officials recommended abandoning the Common Service principle. To justify suchan approach, one must anticipate that departmental employers would be better than the CommonServices at recruitment, retention, deployment and training -- but all these are problems ofdepartmental employment too. The same constraints of public service pay and recruitmentprocedures would apply; departments which had only a few common service cadre posts wouldnot offer attractive career opportunities to professionals, and would be unable to prevent theirofficers seeking promotion elsewhere. The benefits of ensuring uniform standards and providingprofessional backstopping could be lost. Consequently, PSMR recormmends retaining theCommon Services with the exception of the incipient Messengerial Common Service. PSMRfound that there were no strong reasons on either professional growth grounds, training or degreeof expertise to warrant a Common Service for messengers. Suggesticns on ways to improvemanagement of the other Common Services are provided in Annex 24.

2.29 PSMR has identified three major problems with the operations of Common Services:

(a) excessive staff turnover,

(b) excessive vacancies, and

(c) insufficient understanding within the Common Services of their roles andfunctions.

2.30 The first two problems - excessive staff turnover and -acancies - are severeimpediments to the efficient operation of Government. If these problems could be solelyattributed to the Common Services and could be solved if the Common Services were abolished,then that would have been recommended. However, PSMR found that these problems weregeneric to Government and applied to Ministerial staff belonging to Common Services as wellas to those that do not. Each of the problem areas, along with recommendations to improveperformance, are discussed below.

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O) Exaesive Staff Turnover

2.31 One of the most striking aspects of civil service life in Malawi is the frequency of staffmovements among middle level staff and up. I0/ Table 2.9 summarizes the limitedinformation that was available on staff postings in 1990. For the common services, specificinformation was not available on how the postings were distributed between staff in themiddle/upper ranks (PO/SO - Si) and the remainder, but, based on staff interviews, most of themovement appears to have occurred in the middle and upper ranks. The numbers alsounderestimate the total impact as the base reflects total establishment pcsitions, many of whichare vacant either because the incumbent is on training or the position is to be filled throughrecruitment (see Table 2.10). The numbers would indicate that some staff, both in the CommonServices and out, could be moving as frequently as once a year, and stories of an individualmoving several times in less than a year are not uncommon.

Table 2.9: Rate of Postings 1/1/90 - 21/12/90

Total Total SQ/PO U of Posted X X of SO/POEstablishmnt & Above and above

Comon ServiceAccountants 2,499 (138) 89 4 (65)Adsinfstrative 313 (218) 15 5 (7)Data Processing 319 (58) 44 14 (76)Economics 149 (149) 29 20 (20)Statistics 519 (60) 32 6 (53)

Ministriesworks MA (154) 24 (16)Agriculttre A (105) 259 (26)

Source: DPNT.

2.32 In investigating some of the reasons to explain the velocity of movement, it becameevident that any number of events could prompt a transfer. Promotions, long-term trainingopportmities, retirement and leakage to the parastatal and private sectors were standard reasons.The high numbers of vacancies within the middle/upper ranks also created pressures to movearound a limited pool of qualified staff. Finally, it was evident that a number of other eventscould trigger a move. These include: either the Controlling Officer or the Responsible Officercould request an individual to move, the individual could request the move, and a third party,either in Government or out, could request to have someone moved. Not all moves were agreedto and there were many instances where a Responsible Officer of a Common Service wouldpropose a transfer of a Common Service staff and the Principal Secretary of the Ministry losingthe Afficer would request and succeed in getting the order to be canceled. However, it wouldappear that there is something specific to the Malawian environment that sanctions movement asa way of dealing with personality differences or performance problems.

10/ Middle level civil servants are those that enter from college at grade PO or SO (forprofessional officer or staff officer), or are promoted to PO/SO from lower ranks. Theseofficers then proceed up the ranks first to P8/S8 and then through successive promotions (iftheir ability so justifies) to Deputy Secretary (P4/S4), Senior Deputy Secretary (P3/S3),Principal Secretary (P2/S2) and Secretary to the President and Cabinet (SI).

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Rteommedtons

2.33 To reduce excessive staff turnover within the Common Services, it is recommended thatthe Government:

c adopt guidelines on reposting and promotion to minimize inter-Ministerialtransfers (guidelines to require, inter alia, advance consultation betweenresponsible officer and controlling officer);

* improve personnel record keeping and information systems to better track staffrotations;

* encourage guidance rather than transfer as the first reaction to difficulty;

* for each Common Service, review balance of senior posts (promotionopportunities) between core ministries and satellites; and

* minimize disruptive effects of training by longer horizon for training plans.

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60) ESccessive Vacancies

2.34 The problem of excessive vacancies in the civil service has been well documented. Arecent study, undertaken by the Malawi Institute of Management and funded by the UNDP, notedthat within the ranks of middle and senior civil servants (AO/PO and above), the vacancy ratewas 35 percent II/. Data in Table 2.10 indicate a lower figure, but these numbers would bemuch higher if only the vacancies at levels AO/PO and above had been counted.

Table 2.10: Vacancy Situations as of December 31, 1990

No. ofNinstry/Departmnt Total Estabulishent Vacancies X

Accountant 2.499 433 17Data Processfig 319 6 14Ecomicfs 149 40 27StatIstics 519 132 25Stores 391 61 16

Source: DPW

2.35 The MIM study reviewed the factors contributing to the high vacancy rate, and PSMR'sanalysis of the vacancy situation in the Common Services came up with similar conclusions. Themain factors are:

Recruitment Process - The average time to recruit a new graduate into the civil serviceis 32 weeks.

Promotion Process - The average time to promote an officer from one grade to anotheris 62 weeks.

Training - Currently there are some 420 Malawians on overseas training which accountsfor about 10 percent of all established positions at levels AO/PO and above. Anotherlarge number of Malawian civil servants are out of their offices at any given timeattending local training courses, workshops and seminars. DPMT has a training poolsystem which can be used to fill vacancies when staff are away on overseas training, butthe system is not in use because DPMT is unable to predict requirements far enoughahead to get them included in the budget.

Bonding - The Government's bonding policy, which requires 5 years of service after thetraining is completed, is seldom enforced. Private sector employers openly recruitMalawians who have returned from "bonded" training, and rarely, if ever, doesGovernment require that the requisite bonding payment be made.

Salaries - As noted in the previous section, Government salaries are declining in realterms and in comparison with those offered by the private and parastatal sectors

II/ A Studv to Identify Options for Reducing the Vacancy Rate of the Malawi Civil Service,Malawi Institute of Management, March 1991.

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RecomMndfations

2.36 Vacancies contribute significanly to the lack of capacity within the Common Services aswell as within the civil service as a whole. The underlying factors causing the extensive delaysin recruitments and promotions relaie to the lack of capacity to push the paperwork rapidlythrough the system Oike the rest of Government, the agencies involved in these processes aresuffering from extensive vacancies) and, more importantly, the excessive scrutiny that isexercised by a large number of players in the process. It would appear that this desire forscrutiny is connected to the need to ensure that a number of factors are considered in recruitmentand promotion - fairness, competence, regional balance, loyalty and acceptability. Therecommendations herein, which are largely consistent with the recommendations in the MIMreport, are designed to shorten the process without sacrificing adequate mechanisms for control.

2.37 It is recommended that Government consider the following actions:

* streamline the recruitment process by eliminating unnecessary steps and allowingparallel rather than serial procedures where possible (the MIM study hasidentified measures that could reduce the recruitment time from 32 to 12 weeks);

- investigate measures to reduce time for promotions (the MIM study has identifiedmeasures that would reduce the promotion time from 62 weeks to 14 weeks forcompetitive positions and 6 weeks for non-competitive ones);

3 revive the use of DPMT's training pool to allow long-term training vacancies tobe covered; and

* review bonding regulations and either enforce or abandon them.

(lii) InsuMcient Understanding within the Common Services of their Roles andFunctions

2.38 A major concern expressed about the Common Services was the question of loyalty.Many staff believed that for Common Service Officers the long-term importance to their careerof allegiance to the responsible officer who heads the Common Service detracts from loyalty totheir present controlling officer. It is inevitable that divided loyalty is bound to exist as long assystems are not in place that provide guidelines on what a career in the Common Service meansin terms of entry, training and promotion requirements.

2.39 Part of the difficulty is that the heads of the Common Services fill substantive jobs andhave little time available to manage their Common Services. Moreover, they do not haveseparate personnel officers or training staff assigned to them to assist with Common Services'management. Consequently only a few Common Services have up-to-date procedure manuals orprovide induction training. The performance appraisal system provides for comments onperformance from both controlling and responsible officers, but the system at present isconfidential - the performance report is not shared with the staff - and there is little interactionbetween the controlling and responsible officers except in performance cases.

2.40 Government is taking steps to deal with the problems experienced in the CommonServices. With British aid assistance, experts are assisting DPMT draft comprehensive schemesof services for some 80 job families that exist within the civil service. These will provide

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guidelines on entry, training and promotion requirements, and, for jobs in the Common Services,will spell out the respective roles of the responsible and controlling officers. Government hasaccepted the idea of an open performance appraisal system and has contracted with MIM toprovide assistance in designing and introducing the system within the civil service. A keyelement in the successful introduction of these improvements in management practices will be thesupport and encouragement provided by the Government's leadership - the Secretary to thePresident and Cabinet, the Principal Secretaries, and the heads of the Common Services.

Recommendations

2.41 To improve the understanding of the roles and functions of the Common Services, it isrecommended that:

* schemes of service be introduced that show overall duties of each cadre Oobdescriptions) as well as entry, training and promotion requirements for allCommon Services;

* procedures manuals be prepared for various fuctions undertaken by commonservice personnel (e.g., accounting, stores, budgetary, etc.), induction trainingbe provided for new recruits, and professional seminars and other in-servicetraining be organized to assist career development; and

- an open performance appraisal system be introduced.

C. MANAGEMENT OF GOVERNMENT-MINSTRES AND PEPARTMENT

(a! Background and Approach

2.42 The Government of Malawi's interest in improving e' tiveness in the public sector hasled to a number of donor-financed management studies of various Ministries and Departments.Following review of several of the more extensive and costly of these Ministry-specificmanagement reviews, the Government developed some observations and concerns regarding themanagement problems that had been identified in these studies and the degree to whichmanagement improvements had been successfully implemented. Specifically, Government notedthat:

* there appeared to be considerable similarity among the types of managementproblems identified in the studied ministries; and

* it appeared that some ministries had made more progress than others inimplementing the recommended management improvements.

2.43 Government wished to learn from these experiences and to develop a practical andeconomical approach to improving the management effectiveness and efficiency across a broad

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spectrum of the Malawi Public Sector. It-requested PSMR to undertake a review of previousmanagement studies 1;/ with the following objectives in mnind:

* to determine whether "common" management problems were found to exist inmost or all of the organizations studied, and to test the likelihood of theirexistenze throughout Malawi Government organizations by conducting briefmanagement reviews in three target Ministries/Departments: Education andCulture; Transport; and Economic Planning and Development;

* to assess the progress of the previously-studied ministries in implementingrecommended management improvements and to determine which factorscontributed to success or failure; and

* to propose recommendations that draw on Malawi's experiences for improvingpublic sector performance.

2.44 PSMR collaborated extensively with Government in meeting the above objectives (theprocess is described in Annex 2-5). Information was collected through extensive interviews andsurveys of senior and middle staff in both the studied and target Ministries/Departments. Theremainder of this section will summarize the common management problems that were identified,indicate the factors that appear to have contributed to previous successes or failures to improvemanagement practices, and recommend a set of potential solutions that could be tailored to meetthe needs of specific Ministries and Departnents. A strategy for implementing such a programis provided in Chapter 4.

*ii) Identification of Common Management Problems

2.45 Based on a review of the studies, and assessments made in the target Ministries, PSMRhas concluded that there are a set of common management problems that in all likelihood extendthroughout the public sector. These are not the problems that exist at the "task" level - withMinistries/Departments engaged in widely differing missions involving many specializeddisciplines there will always be specific problems of a technical nature that have unique solutions.However, from middle management and above, PSMR found common problems centering aroundmanagement and supervisory issues. These problems are summarized as follows:

I. Sector Strategies, Ministries' functions and structures and managers'responsibilities are neither clearly understood nor appropriately defined, resultingin uncertainty over what Ministry is responsible for and who is accountable formanagement decisions;

12/ The major management studies reviewed by PSMR include:* Report of the Malawi Civil Service Review Commission and its reviews of The

Department of Personnel Management and Training, the Ministry of Health, and theMinistry of Agriculture, 1985

* The Ministry of Works and Supplies Management Study, DeLeuw Cather/PriceWaterhouse, 1987-88

* The Ministry of Finance Management Review, Price Waterhouse, 1988* The Ministry of Education and Culture Management Review, Price Waterhouse, 1988* The Ministry of Agriculture Management Study, Deloitte Haskins Sells, 1990

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II. Ministries with regional operations are characterized by excessive centralized(headquarters) decision-making;

111. Inadequate program performance and cost data is generated and available to assistwith management decision-making;

IV. Inadequate program evaluation is carried out at the Ministry level which impedesproper national program policy, planning and budgeting decision-making;

V. Ministry managers regularly overrun their budget allocations;

VI. Ministries' training and development programs are not systematically developedand tend to not be based upon the identification of skills deficiencies or otherspecific training needs;

VII. Ministry supervisors exercise limited control over the attendance andperformance of their subordinates; and

VIII. Vertical and horizontal management communications within and betweenMinistries are poor.

2.46 The above problem statements have been drawn from numerous examples ofdysfunctional management practices noted in the studies or observed in the target ministries.Amex illustrates these practices.

dii) Factors that Contributed to the Success or Failure of Previous Efforts tQImprove Management Practices

2.47 PSMR found that it was easier to identify the causes for failure than to isolate the factorsthat contributed to success. For one, there have been more failures than successes, "failures" inthe sense that there has been little if any perceptible change in the performance of the Ministryor Department that was studied. The following conditions were generally associated with the lesssuccessful management improvement efforts:

* top Management did not fully understand the identified problems and did notcommit to their resolution;

* action plans were perceived as imposed, rather than as the product of agreementbetween the consultants and Ministry management;

* recommendations exceeded a Ministry's capability to implement;

* recommendations were outside a Ministry's jurisdiction or control;

* clear responsibility for implementation was not established; and

* the possible benefit of implementing a recommendation was not balanced againstthe consequences of its failure in its undertaking;

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2.48 Determining successful interventions has been difficult because the criteria definingsuccess has rarely been established ex ante. The interventions that appear to have been successfulhave avoided to a large measure the above problems. The 1986-1995 National Health Plan wasdeveloped with technical assistance that related well to the Ministry. Ministry staff participatedin preparing the plan and the resulting program has been widely accepted. An ongoingmanagement improvement program in the Ministry of Works appears to be moving in the rightdirection. The program has some concrete, measurable goals, e.g., km of road maintained orbuilt measured by cost and time criteria, that will be one proxy of success. Other goals will bethe timeliness and quality of their budget submission and investment plan. Ministry personnelhave been involved constantly throughout the problem "buy-in" period and during theestablishment of implementation strategies and priorities. Whether the program remains a successover the long-term, especially once technical assistance is withdrawn, remains to be seen.

(iv) Potential Solutions for Improving Management Practices

2.49 PSMR has identified a number of potential solutions for each of the eight identifiedproblem areas. These solutions have been assessed by their requirements for technical assistance,their expected benefits in addressing the problem, and their risk in terms of how hard they willbe to introduce given the existing management culture. Table 2-11 below illustrates one specificexample, the problem of poor lateral and vertical management communications and the potentialsolutions.

Table 2-11: Potentiat Solutions for inistry/Department Nanagement Problems

Problem: Poor Lateral and Vertical Nanagement Counmications

Potential Solutions TA Benefit Risk

R.gular, agendised, minutes top staff meeting to hi 1oRegular, minutes mid-management meeting to med loPbnthly expanded commfication meetins lo med toYearly budget fotlementationtevaluatfon seminar o hi medPolicy and procedure process to hi toEmployee nersletter to hi medTop mnagement mopen door Lo lo toTop _anaemt operational tours lo med toAwards, e.g. meployee of monthm etc. lo med toCurrent events bulletin board lc med toS.glestlen box to lo to

2.50 The potential solutions will need to be tailored for each individual Ministry andDepartment, and a separate plan drawn up. PSMR prepared tentative improvement models forthe three target Ministries/Departments. These models, however, would need further elaborationwithin the target Ministries/Departments to confirm the problems and work out the specificstrategies.

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RecmmMfdatLfons

lmatj~emet ActiconStgos for-a Segcffic Ministry

jf:j~~~~flt w- Team meet wi'th Principat secretary to identify theMinitry' trrovemet Team (to be corrpriscd of Ministry managers) and to schedule initial

*d~e Maageent A~~oveentTeam facititate a series of Ministry meetings and workshops

t':....., -,... '-.."

4e*dewingthe Minfstry's strategy (as set out in OEVPOL) and updating ittob onitn with Malawi's current economnic policy and mediurs-term

* Reiewng th inistry's functions and structure for carrying out agree

V:....~ ~ ~ ~ ~~# -.0f... :-l ..

eA 6Ach' "in agrem ,n on the inisry.,'s ident Ifiedeet-9 management problems as.-hes relte to achileving sectOrat objectives."

..-- :.., ..f-.. St.. ~.0 ..

* Snsurivig alt ma. --.,nages -urnderstad t th@ problems end the reasons for the

f ~ ~~~~~ ~ ~~~ . ..... ....::.. . . .;~~~~~~~~~.. .e ......... .. . .. * ~ ~:o . #Sv rtyv -to . y o . r Lam.,. eachin ..greement Ton t severity arnd ri lSotrtoiX tSy othe obes

.. try r entIfing ttchbe coinristeds omresources and s ca tes to s.drtake

..~~~~~~~~~~~~~~~~ ....... .

:provement Snii ." '. ': <, ,...,:~~~~~~~~~~~rd,,

: :::S' .'. .. .. .. ' .. :' -'. .. .'

4 . steseng Ipeove ment Teaasresolutin) opetions a nd ec bwrsops.,,,,,riect~~ ~ toward:ad ..

2.51 It ,,R recommened tran thhGovermnent s srraye fotas veto fiprovete perforance of

Minstie and;9^..fff. Departmet balons1sthe lnes w1hrelsene abovent Goermnen wloulad needimtoestbls

anre eiung cp tthe ar sto a manamtent iprovement pgcure for eatr out aheed

Mnsrsf anh g at agr ee nfpt. oexeirts Mtanaglamn4 t I ates and

;l. tossetermi ng the specific severity atn respons for the inl problmsan g

on the adoption uof athin-sryaose slns thet miitmiedtthen.of i ts f honimat p am.

propsed ommo Manpracheto theseaMinit re-spcdifatc theprovement ofnnn tecnicvetinsi

presented Maaeebelow.n ~ei odut olw-pvst adpoie

an,X rn-onr caailt tohcrr out amage nt impovmn prora that woul inov

Ministry staff and a small team of management experts (Management Improvement Teams) thatwould meet to determine the specific severity and reasons for the identified problems and agreeon the adoption of action-based plans that minimized the need for technical assistance. Aproposed common approach to these Ministry-specific improvement planning interventions ispresented below.

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CHAPTER 3

MANAGEMENT OF THE PARASTATAL SECTOR

A. BACIKGON

(i) Definition

3.1 This section reviews the performance of Malawi's public enterprises during the past fiveyears, focuses on key areas foz improvement and suggests recommendations and an action planfor implementation. A World Bank study of the parastatal sector I1/ completed in 1987 hasprovided the framework for this analysis and serves as a basis of comparison.

3.2 The universe of public enterprises in Malawi is composed of 132 entities that havevaL-ing degrees of Government ownership and management control. This includes 38Goverment institutions created by statute (statutory bodies), 4 state-owned registered companieswhich operate under the Companies Act, 54 1A4 independently-managed Treasury Funds, 3trusts, and 33 companies wholly or partly owned by two statutory bodies - the AgriculturalDevelopment and Marketing Corporation (ADMARC) or the Malawi Development Corporation(MDC). The statutory bodies include autonomous bodies (such as the Reserve Bank of Malawi),commercial enterprises and subsidized operations which fulfill an administrative or socialpurpose. Treasury Funds are special funds within Treasury, often that began as donor-fundeddevelopment projects, that also perform a variety of commercial and social functions. Trusts areseparate legal entities that may be private or Government-owned and managed as independentbodies, such as the donor-funded Small Enterprise Development Organization of Malawi or theTobacco Research Institute of Malawi. In the last category, ADMARC and MDC hold all or amajority of shares in 15 companies and have minority positions in 18 other joint ventures. Acomplete list of public enterprises is provided in Annex 3-1.

3.3 This report focuses on the management of the twenty-six statutory bodies and three state-owned companies that are supervised by the Department of Statutory Bodies (DSB) - referredto as "parastatals" in this report - plus the 54 Treasury Funds which are under the supervisionof the Ministry of Finance. These include the most important public enterprises in Malawi. Assuch, they have been the focus of several years of donor efforts designed to improve theirmanagement and financial performance. Outside technical assistance has been provided toimprove the capacity of the two institutions - DSB and the Ministry of Finance - responsibefor their supervision. This report will discuss the influence of these institutions upon thedevelopment of the sector and their future roles. It will concentrate on commercially-orientedparastatals and Treasury Funds rather than those that serve an administrative or social purpose.

la/ Malawi: Report on Parastatal Restructuring, Eastem and Southern Africa Region, Januay 28,1987.

[4/ There were 55 Treasury Funds at 31 March 1990, but 54 at 2 Ianuary 1992. The MalawiEntrepreneurs Development Institute (MEDI) ceased to be a Treasury Fund in April 1990 andbecame a Trust.

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(ii) Impact on the Economy

3.4 Parastatals and Treasury Funds play a key role in the economy. They account for over20 percent of Malawi's GNP and 22 percent of total fixed investment. Parastatals have amonopoly in railway and air travel services, electricity and water supply, housing developmentand radio broadcasting. Although it only has a legal monopoly on marketing smallholder tobaccoand cotton, ADMARC dominates the marketing of virtually all smallholder crops. Parastatalsalso encompass regulatory activities (Malawi Bureau of Standards, Tobacco Control Commission,Petroleum Control Commission), educitional, cultural and humanitarian causes (Malawi Collegeof Accountancy, Chichewa Board, Malawi Council for the Handicapped) as well as developmentalefforts (Malawi Export Promotion Council). Several joint ventures with majority Government/parastatal ownership also exercise great influence on the economy; both of Malawi's commercialbanks, for example, are majority-owned by Government and parastatals.

3.5 Parastatals have a relatively small share of foreign borrowings. As of end fiscal year1990, commercial parastatals accounted for only 9 percent of Malawi's total foreign borrowing.This signifies that a large share of parastatal investments are financed from internally generatedfunds. About MK 140 million has been directly lent from donors to parastatals (of which MK93 million is to ESCOM) plus an additional MK 136 million has been on-lent from theGovernment to parastatals. Commercial parastatals had an outstanding domestic debt of MK 490million, of which 30 percent was in the form of Government loans to ADMARC and MalawiRailways.

3.6 Prior to 1987, commercial parastatals were a heavy drain on Government finances. In1986, for example, Government provided over MK 100 million to commercial parastatals. Sincethen, flows from the Government have been dramatically reduced while, for the first time,parastatals are remitting income, in the form of debt repayment and taxes, to the Government.Subsidies to commercial parastatals have remained fairly level, averaging about MK 5 million peryear between 1987-90. (See Annex 3-2). The bulk of these subsidies have gone to MalawiRailways, with smaller sums to the mining company and smallholder tea authority. (See Annex~). The largest flow from the Government to commercial parastatals during 1987-90 has beenin the form of new loans (MK 72 million), capitalization (MK 4 million) and debt-to-equityconversions (MK 26 million of which most was for Air Malawi). During the past four years,eight commercial parastatals have transferred a total of MK 26 million to the Government in theform of debt and interest repayment and, to a much lesser extent, taxes. No dividends have yetbeen forthcoming.

3.7 By end 1990, only two commercial parastatals were still receiving direct subsidies fromthe Government - Malawi Railways and MIDCOR. While Malawi Railways is expected to needsubsidies for the foreseeable future, MIDCOR is expected to become self-sustainirg by the nextfiscal year. In addition to the MK 5.8 million that these two enterprises received, theGovernment provided about MK 23 million in new loans, of which most were loan funds on-lentto the Lilongwe Water board. Air Malawi's financial condition dramatically improved due to theGovernment's decision to convert about MK 21 million in debt into equity. Kamuzu InternationalAirport, which was transferred to DSB supervision in late 1990, also receives a hidden subsidyfrom the Governmen.. The Government services its MK 165 million debt directly since KIA'srevenues are woefully inadequate. Similarly, Government is paying the externally contracted debtof the Wood Industries Corporation (WICO).

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3.8 Subsidies to non-commercial, subve:nted parastatals increased steadily during the fouryears between 1986/87 and 1989/90. Over half of these subsidies went to two operations - theMalawi Broadcasting Corporation (radio) and the Malawi National Examinations board.Nevertheless, some of these subvented parastatals have increased their ability to be self-sustaining.

3.9 Parastatals and Treasury Funds also account for a large share of salaried employment.They have about 26,000 full-time employees which is about 30 percent of total employees in thepublic sector. Treasury Funds, alone, employ a total of about 6,000 full-time staff. The largestemployers are the Malawi Post Office and the Plant and Vehicle Hire Organization with 3,200and 500 staff, respectively. A lot of the smaller development funds, on the other hand, do nothave any permanent staff. Ministry staff are seconded to these TFs as needed.

(iii) Financial Overview of Parastatals and Treasura Funds

3.10 Financial Performance of Commercial Parastatals: A key feature of structuraladjustment programs during the past decade has been to improve the efficiency of commercialparastatals and reduce their financial burden on Government. With a few exceptions, such asMalawi Railways, this aim is being accomplished.

3.11 Since many parastatals are monopolies which set tariffs based on cost and most performsocial as well as commercial functions, profitability is not a reliable indicator of efficiency.Nevertheless, certain trends are clear. Cumulative losses for 13 commercial parastatals in thethree years leading up to 1986/87 amounted to over MK 11 million while cumulative profits forthe next three years were over MK 50 million.l5/ (See Annex 3-4). The return on assets ofthis group grew from barely one percent in 1987/88 to over four percent. While the net worthof these enterprises changed little between 1984/85 and 1986/87, it more than doubled between1986/87 and 1989/90. Net working capital almost tripled during the same period.

3.12 The chief reason for this dramatic switch is the improvement in ADMARC's performancedue to restructuring and sale of those companies in its portfolio that represented the heaviestdrains. The electricity company, ESCOM, also doubled its net profits to reach almost MK 30million in 1989/90. An increase in tariffs combined with improved operational efficiency hasmade this the most profitable commercial parastatals in Malawi, enabling it to finance fiurtherexpansion of services. Malawi Railways lost money throughout this period and is expected toincur losses for the foreseeable future. To address these issues and minimize future losses, MRis currently preparing a comprehensive restructuring programs with assistance from the WorldBank and the British Overseas Development Administration.

3.13 Financial Performance of Non-Commercial Parastatals: Financial data on the non-commercial parastatals is sketchy compared to that collected on their commercial counterparts.Key financial indicators for FY89 and FY90, shown in Annex 3-5, indicates that revenues andreserves increased for most of the non-commercial parastatals while grants and other sources o&outside capital remained fairly level. On a consolidated basis, profits declined primarily due tothe poor performance of the Malawi Bureau of Standards, Malawi Export Promotion Council andNational Herbarium. While the Malawi Broadcasting Corporation was the only non-commnercial

15/ Comparisons are made for the 13 commercial parastatals that were supervised by DSBthroughout this period.

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parastatal to receive a Government grant, all except four of these parastatals received other typesof assistance from a variety of special funds.

3.14 fjpancial Performance of Commercial Treasury Funds: Malawi has 54 distinctTreasury Funds of which 18 are of a commercial nature. By end of FY 90, the commercially-oriented Funds had estimated combined revenues of MK 242 million, profits of MK 60 millionof which MK 17 million were transferred to Govermnent, and a combined net worth of about MK330 million. (See Annex 3-6 . The Malawi Post Office, the largest Treasury Fund, accountedfor one-third of these revenues, about 60 percent of combined proflts and two thirds of totalinvestment. Most of the Treasury Funds were fairly small; ten, for example, had annual salesof less than MK 1.5 million. While almost half of the commercial Treasury Funds incurredlosses until 1987/88, their financial performance appears to have improved in recent years. In1990/91, only the District Water Supply and the District Rest Houses Chain fund were expectedto be unprofitable. However, these numbers may be very deceptive since the accounts of someof these enterprises are not accurate. Some of the Treasury Funds have begun to producefinancial statements only within the last three years. Proper provisions for bad debts have not,in most cases, been made and depreciation expanses are often understated.

3.15 Some of the larger commercial Treasury Funds are owed substantial amounts byGovernment Ministries, the police and other public institutions. These arrears continue to mounteach year; the Treasury Funds are unable to collect and find it difficult to refuse additionalservices to these same debtors. For example, in 1989/90, arrears owed to the Malawi Post Officeand the Plant and Vehicle Hire Organization amounted to MK 53 million and MK 17.5 million,respectively. The Ministry of Finance needs to play a more active role in enforcing thesecollections.

3.16 Financial Performance of Non-Commerdal Treasury Funds: The non-commercialTreasury Funds are grouped into 19 development- oriented Treasury Funds and 17 AgriculturalDevelopment Division Credit funds. The development-oriented funds include diverse activitiessuch as: tho Prison Rewards and Fines Fund, which is managed by the prison staff, the UNDPHousing Fund, which is the remnant of funds given by UNDP to Government to constructhousing for UNDP staff, the Excluded Vehicles Fund, which lends vehicles to Ministries like acar rental agency and the charcoal production fund, which serves the social purpose of teachingthe general public how to produce and use charcoal.

3.17 Total revenues collected by these funds amounted to only MK 23.5 million in 1989/90,consolidated profits were about MK 2 million and capital expenditures were about MK 4 million.(See Annex 3-7!. Four received Government subsidies in 1989/90 totalling MK 8.7 million.The largest development-oriented fund, the Primary School Fees Fund had revenues of about MK7 million (including a MK 2 million Government grant) while the smallest, the Chief's AdvancesFund, had only MK 4,000.

B. INSTITUTIONAL FRAMEWORK OF PARASTATALS

3.18 A number of institutions exercise varying degrees of control over each parastatal'soperations. The board of directors and management have no authority to set policy and, thus,must seek approval from one or more of Government entities. Although many actois areinvolved in policy-making, the Department of Statutory Bodies plays the most active role insupervising the operations of most of the statutory bodies. The Ministry of Finance (also calledthe Treasury) has paramount authority over budget approval and, thus, has particular influence

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over all parastatals which rely on Government for subsidies or fixing tariffs. The Departmentof Economic Planning and Development within the Office of the President and Cabinet is alsoconcerned with tariff policy and examines the feasibility of new investments. Parent Ministriesare supposed to clarify Government policy in the parastatal's sector of operations and oftenperform an advocacy role on behalf of the parastatal vis a vis other decision-making entities. Therole of the Parent Ministries has, in general, diminished during the past few years as DSB hasgrown in influence.

(i) Department of Statutory Bodies

3.19 Background: DSB was created in 1981 as part of the Office of the President and Cabinetto assist and supervise statutory bodies. The Statement on Development Policy issued in 1987defined its role to be "to monitor parastatal performance and assist parastatals in both policyanalysis and planning, and financial and personnel management". DSB has, on the whole, playeda positive role in the development of the sector. While a variety of factors have been responsiblefor an improvement in parastatals' performance during the past five years, DSB has been one ofthe most important influences. It has devised impressive systems to monitor and evaluate thefinancial performance of parastatals, proposed good initiatives to improve parastatal management,provided valuable assistance in the design of financial systems, contributed to board meetingdiscussions and arranged for appropriate training courses. DSB often serves as a catalyst to spurvarious concerned Government ministries and the parastatal to reach a decision rather than settingpolicy itself. Its twenty person staff had responsibility over 29 parastatals by early 1991; itrecently received authority over Kamuzu International Airport but will lose responsibility for theWood Industries Corporation when its sale to the private sector is finalized.

3.20 One lingering problem is that DSB still lacks any statutory authority. Since DSB has nolegal status, its functions and relationship to parastatals and other Government entities have notbeen formalized. Its responsibilities are defined by administrative rather than legal dictate andits authority stems from its respected position within the Office of the President and Cabinet.Clarification of DSB's status, authority and responsibilities is a difficult issue but it is also longoverdue. It will require the authority of Government to monitor parastatal results but, also, theflexibility not found in the civil service to offer compensation needed to recruit and retain highcaliber professionals. It should be allowed to recruit on terms at least no worse than those of thelargest parastatals; otherwise it will be difficult to retain staff who will be respected by the seniorparastatal staff that they are supposed to supervise. Such individuals need to have secure tenureand not be at the mercy of sudden transfers to other Government departments.

3.21 Qpertions: Although DSB has provided useful guidance to parastatals, it has also beencriticized for meddling in decisions that should be delegated to management. A DSB circularissued in mid-1990 only confirmed parastatal managers' suspicions that their authority wasextremely limited. It specified that virtually all important management decisions required priorDSB approval: terms and conditions of employment for members of the board of directors andstaff, bonuses or other forms of staff remuneration, any contract appointments, appointment,promotions, disciplining and dismissal of senior staff, training (if external or not entirely fundedby the parastatal), external business travel, major procurement contracts, revenue and capitalbudgets, new projects, appointment or change of auditors, tariff or fee charges, fraud, borrowing,sale of major assets and any other policy issues.

3.22 DSB does not have adequate staff to "micromanage" parastatal affairs nor should that beits role. It was designed to "monitor parastatal performance and assist parastatals in both policy

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analysis and planning and financial and personnel management".j./ DSB has slipped intoplaying a very hands-on role in parastatal management due to a few excesses and poor decisionstaken by some statutory body managers. Since it is difficult and time-consuming to right wrongsonce committed, the Government has adopted a more conservative approach by limiting sharplydecisions which lie within management's authority.

3.23 The solution to this problem lies not in transferring parastatal management responsibilitiesto DSB but rather to (i) improve the quality and integrity of parastatal managers; (ii) specifypenalties for the type of problems which have arisen in the past; (iii) set performance targets andthen carefully monitor their achievement; and (iv) take immediate action to enforce penaltieswhen abuses occur. The Government appears to be taking positive steps in this direction withthe planned introduction of a performance system which is designed to improve managementquality and accountability.

3.24 Staffing: Since the 1987 World Bank parastatal review, DSB's capacity to analyze thefinancial performance of statutory bodies has improved significantly. Staff have developed acomputerized data base which is regularly updated and provides a comprehensive view of thefinancial condition and performance of each enterprise. DSB has also increased its capacity toexamine the accounts of parastatals by recruiting two local accountants on its staff; DSB, thus,has the distinction of being one of the few Government agencies able to attract and retainqualified accountants on its staff. However, it has been difficult to recruit qualified individualsto fill two vacant auditor positions.

3.25 DSB needs to strengthen its accounting and auditing staff further. Its current level ofsuch human resources is inadequate to perform this critical job, that is, to follow-up on reportsdone by the Auditor General, perform spot-checks of accounts and provide accounting advice.DSB has been given the responsibility of coordinating the operational audits performed by theAuditor General, reviewing each report and presenting recommendations to the Audit Committeeand Treasury. These audits have discovered financial irregularities which have resulted in thecensure or dismissal of staff. This process is needed to stem such abuses. DSB's technicalassistance role is particularly needed by smaller parastatals which are not able to attract qualifiedaccountants to their staff due to their inability to offer competitive salaries.

3.26 On its twenty person staff, DSB also has a team of four economists on its staff to reviewinvestment projects. These economists, however, appear to be focusing exclusively on financialrather than economic analysis. DSB should review all investments by examining both aspectscarefilly. Special attention should be focused on the effect of trade and exchange rate policieson the economic viability of parastatal investments to avoid encouraging inefficient operations.DSB needs to strengthen its capacity to conduct such economic analysis.

3.27 One of DSB's most important functions is to analyze issues of common interest to theparastatal sector and recommend general policies. In 1990, a consultant was hired to proposecommon terms and conditions of service for parastatal staff and devise a housing scheme whichwould enable staff to purchase their own homes. These proposals, particularly the latter, needfurtier study. DSB also contracted a short-term consultant to analyze the management of thetransport fleet owned by parastatals. Motor vehicles are one of the single largest expenses forparastatals; ESCOM, for example, manages a fleet of over three hundred vehicles. The report

16/ DEVPOL, page 156

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revealed considerable mismanagement of these resources and recommended that DSB engage afull-time consultant for two years to design and monitor more efficient systems within theparastatals.

3.28 Another potentially important DSB function is to coordinate appropriate training forparastatal managers. DSB has hired a full-time consultant to help design and contract for trainingcourses. However, the poor attendance and high number of "no shows" at such seminars havebeen disappointing. Apparently, parastatal staff have been reluctant to attend training seminarsbecause DSB does not give per diem allowances, but rather provides meals and lodging directly.Many donors provide high per diems for those undergoing donor-financed training in Malawi;this practice has perverted the incentive structure for local training courses. Trainees judgecourses by how financially remunerative they are, rather than whether they are appropriate fortheir needs. Once the financial incentives for training are equalized, choices will again be basedupon the worth of the course; until then, flagrant abuses can be expected to continue. One of themore time-consuming tasks of DSB management has been to scrutinize parastatal requests fortraining; reform of the system is needed so that this policing role can be dropped in favor ofmore important duties.

3.29 Several donors have provided assistance to DSB with generally good results. This hasincluded the World Bank (one financial analyst seconded for two years), the United NationsDevelopment Program (a two year project for monitoring and evaluation and training activities),the United Kingdom (a long-term financial analyst and DSB Comptroller) as well as voluntaryorganizations. Most of the outside technical experts - both long and short-term - have playeda positive role in the development of DSB's institutional capacity. The Comptroller of StatutoryBodies, an individual seconded from the British Overseas Development Agency, has played aparticularly crucial role in transforming DSB into a capable supervisory body and launching newinitiatives to improve parastatals' performance. The only criticism of technical assistance hasbeen that in a few cases, DSB incurred excessive delays in securing technical assistance due toinefficient contracting procedures of the donor agency. This caused serious delays in achievingtargets set in DSB's work program.

3.30 DSB's total professional staff need not be larger than 10-15 technicians, if those with theproper qualifications and motivation are found. An ideal team would include about two managers(a Comptroller and deputy), three accountants/financial analysts, one financial systems advisor,two auditors, two senior economists and a computer/data base management expert. TheGovernment's strategy for improving parastatal performance for the past decade has been tostrengthen DSB's capacity and authority at the expense of the autonomy of parastatalmanagement. If DSB loses this capacity before the parastatals' own management has beenreinforced, then it is likely that parastatal performance will deteriorate.

3.31 The key post is that of DSB's Comptroller. The momentum of reform will slackenconsiderably if the post of Comptroller for the Department of Statutory Bodies remains vacantor is filled with the wrong person. A highly skilled individual with the appropriate managerialand technical qualifications, as well as sensitivity to the Malawian cultural context, is needed.Strong direction is required from the top of the organization to withstand the inevitable pressuresfor higher parastatal salaries, overseas training and other perquisites.

3.32 Additional qualified Malawian accountants who have strong training and managementskills as well as auditors must also be recruited as full-time staff. Given the shortage of suchindividuals, DSB must be able to pay competitive wages or it will need to seek donor funding for

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expatriates to fill these slots. DSB should be encouraged to establish a small field office inBlantyre with two individuals who would be responsible for monitoring the enterprises locatedin the south.

3.33 In addition to the full-time staff mentioned above, DSB will continue to need outsideadvisors. Longer term consultants are needed to further refine and implement a housing purchasescheme for parastatals, provide technical advice on transport fleet management, develop andmonitor accounting systems, and coordinate a human resources development strategy forparastatal staff. Another full-time computer systems advisor will need to be hired when thecurrent Peace Corps volunteer ends her assignment. While this work could be accomplished byrecruiting several individuals for multiyear terms, experience in other countries has shown thatit may be more cost-effective to contract an expert in each field to conduct 2-3 month missionsto Malawi on a regular basis for several years. Short-term consultants will also be needed to help(i) prepare performance indicators and contracts for managers; (ii) conduct technical revihews ofparastatals; (iii) refine terms and conditions of service; (iii) analyze other policy issues; and (iv)design and present specialized training courses.

3.34 Future R4l: DSB's future role should be limited to establishing performance indicators,monitoring and evaluating parastatal performance, providing assistance in accounting, financialanalysis and investment appraisal, helping to implement policies that affect the sector (e.g.housing, terms and conditions of service), assisting in management development and designingand supervising a privatization policy for Government. As mentioned earlier, as the quality ofboards and management improves and a system of management performance contracts is adopted,it is expected that DSB will take a more decentralized approach to parastatal operations. It willconcentrate on sector-wide policies and the monitoring of results rather than being involved inoperational issues.

3.35 DSB should focus upon those public enterprises that have the greatest economic impactand can benefit most from DSB services. Currently, DSB staff spend a disproportionate time onsmaller, subvented parastatals at the expense of larger ones; they get swamped by the details ofeveryday operations of parastatals instead of focussing on broad policy issues. DSB should retainsupervision responsibility for conmercial parastatals and those subvented statutory bodies whosefinancial performance has improved in recent years to the point that they have the possibility ofbecoming financially self-sustaining. The subvented parastatals with hope of improving theirviability are: the Malawi Broadcasting Corporation, Malawi National Examinations board,Malawi Bureau of Standards and the Malawi Council for the Handicapped. The rest of thesubvented parastatals could be supervised adequately by their Parent Ministries. As will bediscussed in the section on Treasury Funds, we also suggest that Government transform selectedTreasury funds into statutory bodies and delegate monitoring to DSB.

3.36 On the other hand, DSB should design a privatization policy and action plan for theGovernment which identifies public enterprises that no longer serve a strategic national interest.DSB should provide oversight for the privatization of all public enterprises but assumeimplementation authority over statutory bodies, Government-owned companies and TreasuryFunds which are to be divested. Enterprises which are not of strategic importance to theeconomy would be more efficiently managed in the private sector; this would enable Governmentto concentrate its resources on parastatals such as Malawi Railways which are important tonational security. DSB could build upon the techniques that were successfully used to sell a

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number of ADMARC's companies and farms since 1987.17/ The Malawi DevelopmentCorporation, however, has not sold off its mature portfolio nor has it undertaken any newinvestments In several years. Government, through its implementing agency DSB, needs to directMDC to return to its mandate which is to develop and then sell off companies to the privatesector.

Reommendations

3.37 It is recommended that:

(a) DSB's future role should be limited to establishing performance indicators,monitoring and evaluating parastatal performance, providing assistance inaccounting, financial analysis and investment appraisal, helping to implementpolicies that affect the sector (e.g. housing, terms and conditions of service),assisting in management development and designing and supervising aprivatization policy for Government.

(b) The Ministry of Justice or other appropriate Government entity prepare concreteproposals for DSB's legal status, objectives, authority and responsibilities. Anappropriate structure would be an entity that is part of Government, but whichcan pay salaries at levels closer to the private sector. However, DSB should notbe established as a parastatal holding company as that would create the need toestablish another oversight capability to monitor DSB's performance. Perhapsestablishing DSB as a Board or Commission would provide the appropriate legalframework.

(c) DSB take immediate steps to recruit outside consultants to identify performanceindicators for selected statutory bodies.

(d) DSB extend the performance system to include senior managers of commercialstatutory bodies as soon as it has been tested on a pilot group of GeneralManagers.

(e) DSB augment its accounting staff in Lilongwe and consider opening an office inBlantyre so that accounting advice may be offered more easily on an ongoingbasis to statutory bodies in the southern part of the country.

(f) DSB improve its capacity to perform economic analyses of investments byappointing a senior-level economist and sending its other economists for specialtraining.

lZ/ The privatization of ADMARC holdings has had a beneficial impact on ADMARC's cash flowand allowed it to concentrate on its primary objectives. The infusion of new capitd andtechnical expertise plus new or more autonomous management has enabled the financialperformance of the companies which have been sold, in general, to improve as well. TheWood Industries Corporation and several ADMARC-owned companies - the National OilIndustries Ltd, Auction Holdings and Grain and Milling Corp. - are in the process of beingdivested.

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(g) Government and donors review the current incentive structure for local training.

(h) Government move responsibility for monitoring completely non-commercialsubvented parastatals - MCA, National Library, MEPC, PCC, Chichewa board,Accountants board, National Herbarium - from DSB to Parent Ministries.

(i) Government continue its privatization program and direct DSB to formulate aprivatization policy statement and action plan. Government should considerdirecting DSB to supervise the sale - partial or whole - of the followingenterprises within the next five years:

(i) Parastatals: Malawi Book Service, Malawi Dairy Industries.

(ii) MDC's Portfolio: Packaging Industries, MPICO, Import and ExportCompany, Tourism Development, Bata, Chillington Agrimal, ECO Systems,ENCOR, Leopard Match, Pipe Extruders, Commercial Bank of Mala*i,National Insurance Company. This would require reinforcing MDC staffcapacity to manage these sales.

qi) Ministry of Finance, Parent Ministries and the Department ofEconomic Planning and Development

3.38 The Ministry of Finance approves annual budgets presented by parastatals, providesguarantees for commercial loans, when needed, and authorizes all Government advances,subsidies, loans, and equity infusions. It also is one of the institutions that approves tariffs setby Government monopolies. During the past five years, as some parastatals' performance hasimproved and they have graduated from requiring such assistance, their interaction with Treasuryhas diminished.

3.39 Treasury's weak institutional capacity affects its handling of parastatal issues. Althoughrepresentatives from Finance sit on parastatal boards, in general, their contribution to discussionsis negligible. This is because its representatives are fairly junior officers who lack the experienceand ability to function as fully contributing Board members.

3.40 Since the Ministry of Finance has the authority to approve parastatals' investmentdecisions, it plays an important role in the financial health and development of parastatals. Itsinaction on negotiating a settlement of arrears owed by ministries to statutory bodies and TreasuryFunds has impacted negatively upon these parastatals' cash flow. Such inadequacies have hadrepercussions on the performance of the sector in the past and continue to inhibit its efficientmanagement.

3.41 Parent Ministries are responsible for providing guidance on technical policy matters toparastatals that operate in their sector. Since DSB lacks technical expertise of parastataloperations, the Parent Ministries still have an important role to play. Parent Ministries have beenmost active in determining pricing decisions (crop prices, railways, utilities) and often play anadvocacy role on behalf of the parastatal. The capacity of Parent Ministries to analyze suchissues appears, however, to be inadequate. This has resulted in a delay in decision-making aswell as poor monitoring of technical indicators to judge performance after decisions have beentaken.

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3.42 Some parent Ministry staff indicated that they prefer to concentrate their energies onpublic enterprises that they control more fully - such as Treasury Funds and trusts rather thanstatutory bodies that report to DSB. Large important parastatals such as ADMARC receive theattention of the Principal Secretary; most parastatals, however, have fairly low-level participationof parent Ministry staff at board meetings. ESCOM, for example, deals more with DSB onpolicy issues than with the Ministry of Trade and Industry.

3.43 While the role of the parent Ministry vis-a-vis statutory bodies appears fairly clear inabstract terms, parent Ministry staff say that in practice a lot of 'grey areas" and overlap existsbetween their responsibilities and those of DSB. The legislation which establishes DSB shouldalso clarify its responsibilities versus those of the parent Ministries.

3.44 The Department of Economic Planning and Development within the Office of thePresident and Cabinet exhibits the same problems as those of the parent Ministries and theMinistry of Finance. Often junior officers unfamiliar with the parastatal's dossier are sent toboard meetings. By automatically referring policy matters to headquarters, these officers reducethe rationale for their participation as board members. EP&D's responsibilities include assessingthe economic viability of parastatal investment projects which appears to duplicate what DSBbelieves to be part of its mandate. It also participates in tariff-setting decisions along with DSB,the parent Ministry and Treasury.

Recommendations

3.45 It is recommended that:

* To avoid unnecessary duplication, Government concentrate the economic analysisof parastatals within DSB and reduce EP&D's oversight responsibilities forparastatals

C. OPERATIONAL EFFECTIVENESS OF STATUTORY BODIES

3.46 Although five year corporate plans, from which annual budgets are drawn, are nowstandard operating procedure, the aim of rationalizing the planning process has been subvertedby shortcomings in the budgeting process. The budget committees and boards of directors formany parastatals do not work efficiently because EP&D and Finance ministries send low-levelstaff who are not sufficiently conversant with the dossier. The effectiveness of boards ofdirectors and the authority and quality of managers vary considerably among parastatals. Boardswith competent and influential chairmen elicit the participation of high-ranking ministry officialsand have considerable authority to take decisions without further Government review; otherboarus serve only an advisory role. Retention of highly qualified staff appears to be anotherproblem, particularly among lower grade commercial parastatals. However, salary was not thesole reason for turnover: the ability of the manager to motivate staff and provide interesting workopportunities was another important factor. While it appears difficult to retain the staff thatmanagement wants, it appears almost equally difficult to dismiss unwanted staff. Firing of staffaccused of theft and fraud is a lengthy, time-consuming process. Finally, a considerable amountof staff time and parastatal assets are tied up in staff houses and loans.

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(i) CorDorate Planning and Budgetina

3.47 Significant attempts have been made during the past five years to rationalize the planningprocess of parastatals. Almost all of the commercial parastatals have developed corporate plans;only the Malawi Book Service and KFCTA do not yet have one while the Malawi DevelopmentCorporation has not updated its plan in recent years. However, these planning tools appear tobe used by only a few parastatals: the Blantyre and Lilongwe Water Boards and ESCOM. Forthese parastatals, their five year plans have a direct relationship to their annual budgets and areregularly modified. The presence of longer-term donor funding helps to legitimize this forwardplanning exercise. For the rest, it is regarded as potentially useful, but, in practice, a not veryrelevant exercise since Treasury uses other criteria to set annual budgets.

3.48 The budgeting process, could use some strengthening. About September of each year,the Ministry of Finance issues parameters to be borne in mind when drawing up each parastatal'sbudget. The parastatal's general manager submits the budget to the Board of Directors, whichoften has a spec.di budget review subcommittee. Ministry of Finance, EP&D, parent Ministriesand DSB (as a non-voting participant of all boards), thus, have the opportunity to revise thebudget at this time. However, normally the representatives of these Ministries are fairly lowlevel officials, who make minimal changes. Once approved by the Board of Directors, the budgetis submitted to the Budget Committee. The Budget Committee, established in 1987, is chairedby DSB and includes members from Treasury, EP&D, the Parent and any other concernedMinistry.

3.49 The purpose of the Budget Committee is to finalize parastatals' budgets. The Committeeoften makes substantial changes in the draft budget submitted by the Board of Directors. It isnot unusual to have ministries repudiate what emerges from this exercise as well. Ministrystrategy often is to agree or remain non-committal in public and disagree in more private fora.The final decision is taken by the Ministry of Finance, which may reverse the recommendationof the Budget Committee, if the need arises. The current and capital budgets are approved bythe Minister in charge of Statutory Bodies (the Life President) before the beginning of the newfiscal year. Authorization from the Ministry of Finance to implement the capital budget plan,however, may require several additional months.

3.50 This corporate planning and budgeting process is long and drawn out, involving fivedistinct steps from preparation to approval:

(a) formulation of plans by Board of Directors;

(b) review by the Budget Committee, chaired by DSB;

(c) review by the Ministry of Finance;

(d) approval by the Life President; and

(e) authorization by the Ministry of Finance to implement the capital portion of theapproved budget.

It would be difficult to dismantle this process, but efforts should be undertaken to make theGovernment's review and approval process as light as possible. Best practice would have theparent ministries' and finance ministry's reviews as light as possible, within a timetable

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framework agreement which sets out the objectives and performance targets of the corporationand the operational freedoms it may expect.

RecfoMmendatlons

3.51 It is recommended that:

* Corporate plans be incorporated as a planning tool for all larger commercialparastatals.

* Ministries should send senior level representatives (minimum P7 level) to serveon the Boards of parastatals and on the Budget Committee.

* Government should quicken the pace of its review of parastatals' annual currentand capital budgets, providing a framework of objectives and operational targetsand a timetable within which the exercise will occur.

(ii) Boards of Directors

3.52 Board of directors members are nominated by DSB to the Secretary to the President andCabinet'and appointed by the Life President. In addition to drawing ex-officio members fromParent and related Ministries, Treasury and DSB (which has observer status), several individualsare selected on the basis of experience and special skills pertaining to the respective parastatal.Most parastatal boards include members from the private sector and community and women arerepresented on all boards. Parastatal boards are reconstituted every two years. New boards wereappointed in July 1990; this has resulted in an improvement in the quality of board members aswell as higher attendance at board meetings than in the past. Previously, some boards haddifficulty achieving a quorum. Raising the fees received by board members has contributed tostrengthening this important management body.18/

3.53 The current role of the board is to work with management on recommendations for policyformulation and on the execution of Government approved policies. The role of the board is notclear in many instances and decision-making lines are not properly defined. Many boardmembers are frustrated that they are required to refer all decisions to Government. Others arediscouraged that they have not been consulted on important matters, such as the renewal of ageneral manager's contract.

3.54 To improve the situation, the boards should get a clear picture of what their role is andwhat is expected from them. This should include defining the decision-making mechanism andissues upon which the board can make a decision. Budgets, the setting of tariffs for monopolyparastatals, large investments and borrowings should still require Government approval. Butother issues, such as the hiring and firing of staff below the general manager, should be relegatedto within the board's authority.

3.55 Greater authority, however, requires that board members merit such delegation.Although the composition of the board has improved in general since the last round of

18/ Board chairpersons may receive a maximum of MK 3,500 while members may receive MK2,500.

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appointments, It appears that some board members lack the appropriate skills for membership.The current balance between technlcal and socio-cultural needs appears skewed; this inhibits anIn-depth understanding and handling of issues which are needed to provide proper advice. Whenboards lack members who are conversant with the issues, then they have been inhibited fromanalyzing issues in-depth; Instead, meetings become routine exercises of "rubber stamping" thegeneral manager's proposals. Once a good board exists, however, the Government should tryto reduce turnover. The current practice of replacing boards every two years contributes to theirimpotency. Although some members are reappointed, the presence of many new membersreduces the boards' knowledge of enterprise operations and, thus, their effectiveness.

3.56 Attendance at board meetings has been remarkably good in the past year for most of theparastatals. However, as mentioned earlier, problems have occurred with Governmentrtpresentatives. While Principal Secretaries are supposed to attend as ex officio members, oftenthey delegate this responsibility to other Ministry staff. The delegation in itself is not wrong butthe problem has been the level and irregularity of the delegate. The officers sent to represent thePrincipal Secretary often are not conversant with the issues and are too junior to contributeconfidently on their Ministry's stance. These officers typically make no contribution duringboard meetings and, instead, promise to refer the matter.

3.57 Sometimes members of the board have not been able to discuss issues effectively becausepapers have been distributed only a few days before the meeting. This has not allowed boardmembers sufficient time to read the materials and form an opinion. To enhance participation atmeetings, papers should be distributed at least two to three weeks in advance.

3.58 Board effectiveness is linked directly to the personality and position of the chairman ofthe board. Competent and powerful chairpersons guarantee a high turnout for meetings and elicithigh level representation from Government. Such boards have taken important decisions oninvestments, salary levels and hiring/firing of staff without seeking further DSB approval. It,therefore, follows that the choice of a chairperson of the board be matched with the importanceof the parastatal. Powerful and highly respected chairpersons should be assigned to the equallyimportant parastatals. Some board chairpersons indicated that their position would be enhancedif communications between the parastatal and Government (DSB and the Secretary to thePresident and Cabinet) were channelled through them. While this may be too bureaucraticallycumbersome and lead to inefficiencies, board chairpersons should be informed of all major issues.

Recommendations

3.59 Based upon the above findings, it is recommended that:

* Government issue a directive which defines the role of the board and enhancesits authority over certain decisions.

* The composition of the board should be carefully scrutinized to ensurecompetence of members in analytical issues. There should be a better balanceof technical and socio-cultural skills.

* Board members serve a three year term and terms be staggered to ensurecontinuity.

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* The attendance at board meetings be restricted to certain level of seniority (P7/S7and preferably PS/SS) and the chairman be given a list of Government alternaterepresentatives In advance.

* All correspondence from Government to the general manager be copied to thechairman and that a communication link be established between the generalmanager, the chairman and DSB.

(ttt) The Management of Parastatals

3.60 Management of parastatals varies significantly across parastatals in its effectiveness andquality. The thoroughness of the recruitment procedure appears to be an important factordetermining the quality of general managers while remuneration levels influence a parastatal'sability to attract and retain the next level of management.

3.61 The four major players in the recruitment process are the Department of Statutory Bodies,Treasury, a panel of interviewers and the chairperson of the of the board. When donor fundingis sought, then the donor also plays a major role in recruitment. If any of the players exertsundue influence, then the risk of recruiting an unacceptable manager Is high.

3.62 As of early 1991, six commercial parastatals had expatriate general managers. Theexperience with expatriates has been mixed; the transfer of capacity to Malawians has been lessthan desirable. One problem has been that some donors are not able to offer the competitivesalaries needed to attract highly qualified expatriate managers to Malawi. The Government hasaccepted these grant-financed individuals without properly checking up on references andqualifications. Sometimes, fear of offending the donor has caused the Government to acceptindividuals of doubtfiu suitability. The capacity of some of these managers has been foundwanting and a few have been fired. The question of salaries for the expatriate staff should notvictimize the parastatal into accepting a substandard general manager. ESCOM has recentlyexperimented with a process of using an expatriate general manager to train a Malawiancounterpart (see Box 2).

3.63 Mank~y Maluwianl manager have benxppoimnted wto aattl a s~fRen elfr serving ancuarinGvernent Thesoe i~nd iviul hxavet genena crimicized thr ehboting anlac Uoftinitiativeead

bsiness expherience,iand, thoe UaNDP rtpofrth descrtbedt exhie.r "ivn.uilgth servicday Ametly"

.itfi moat ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... .........-

3.63 Many Malawian managers have been appointed to .p ..satl afe.srigay.erin Government. These individuals have been criticized for exhibiting a lack..of.initiative.andbusiness experience, and, as on UNDP report described it, exhiit a "civil service mentality-

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3.64 The introduction of the proposed performance system should help to improve the qualityof both Malawian and expatriate general managers. This performance system has three maincomponents: (i) the formation of panels to select qualified general managers (GM); (ii) theidentiflcation of performance criteria by which to judge the GMs' performance; and (iii) thelinking of OMs' remuneration to the achievement of these performance targets. The Governmenthas already selected 15 influential business, Government and community leaders to serve onpanels which will interview the managers of all commercial parastatals. These panels will iudgewhether current managers are appropriate for their positions; those who are judged unqualifiedare supposed to be replaced. Since these managers are supposed to be of the same high calibreas those found in the private sector, the next stage will be to offer correspording compensation.

3.65 The identification of these performance targets - which achieve a proper balance betweentransitory short-term gains versus longer term growth and include technical as well as financialcriteria - must be tailor-made for each parastatal. DSB has identified a half-dozen indicators tomeasure the performance of four parastatals, but admits that it does not have the necessary staffto design this performance system properly. Consultants with expertise in designing performancemonitoring systems as well as those with technical expertise in the activities being assessed areneeded to identify performance criteria and be available to assess their compliance on a regularbasis.

3.66 Managers selected by the panels are to be given a two year contract which specifies theseperformance criteria and offers compensation which matches private sector comparators. Asignificant portion of the managers' compensation will, however, be in the form of a bonus whichis tied to achieving these performance targets. The method of determining proper compensationalso needs outside assistance to be developed further.

3.67 This performance system is in its nascent stages but appears to offer a promising avenueto develop parastatal nanagement. By early 1991, the first group of panel members had beentrained in techniques by which to judge management. Nevertheless, it should be stressed that towork, DSB must continue to serve as a countervailing check on parastatal management.Although DSB exercises undue control over many statutory bodies, it has very little influence inothers. It has virtually no say in the policy decisions taken by a few statutory bodies, ADMARCand Air Malawi, for example, which have influential board chairmen and managers. This toomay prove dangerous.

3.68 For this system to work, general managers must also be given the authority needed to runa commercial enterprise properly. This means giving general managers the power to hire andfire senior staff (with ex-post board approval) and more freedom to maneuver and take policydecisions in response to changing market conditions. Managers of privatized parastatals citedtheir increased authority to respond to problems and take advantage of opportunities as one ofthe most important benefits of moving from Government to private ownership. These managersbelieved that this increase in autonomy was a major factor which contributed to improvedfinancial performance at their enterprises.

3.69 The morale and competence of senior technical staff also varies greatly among parastatals.Not surprisingly, parastatals with poor managers suffer a high degree of turnover of technicalstaff. Income is only one of the factors underlying turnover problems. It is of greaterimportance for the subvented parastatals since their income levels approximate those of the civilservice. Some of the larger commercial parastatals such as ADMARC and Air Malawi, however,are able to offer a salary and benefit package which approximates that in the private sector. Most

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others serve as a training ground for individuals to develop certain skills and then leave for moreremunerative jobs. Smaller and subsidized parastatals are not able to recruit trained accountantsand engineers due to their inability to pay the relatively high salaries commanded by theseprofessions. The scarcity of these individuals negatively affects the financial and technicalmanagement of these parastatals and increases the importance of DSB's role.

Recommenldations

3.70 To improve the management of parastatals, it is recommended that:

* Expatriate managers should be required to train Malawian counterparts to assumetheir positions. Preferably, a switch in positions should occur in the middle ofthe expatriate's term.

* If the performance system for general managers is successful during its pilotstage, then Government should extend the system to the next layer of staff andeventually include all staff members who contribute to the achievement ofperformance targets.

(v) Wagefi and Salaries

3.71 Parastatals are grouped into four categories based upon size Indicators. Each year, DSBsets the minimum and maximum increase for each parastatal's total wage bill and the maximumsalary for the general manager. (See Annex 3-8!. The parastatal's previous year's performanceis taken into consideration when setting these rates. Nevertheless, there are exceptions to thissystem. Parastatal managers - both expatriate and Malawian - that have been hired on acontractual basis are excluded from the maximum salary limits. The financial comptrollers ofADMARC and the Air Malawi, for example, earn significantly more than the general managersof other large commercial parastatals.

3.72 During 1986-89, this era of fiscal austerity caused Government to freeze all parastatalsalaries. This has been somewhat compensated for in recent years: in April 1989, Governmentgranted a 25 percent overall increase (minimum 20 percent, maximum 35 percent) while in April1990, the overall increase was 12.5 percent (minimum 10 percent, maximum 20 percent). Atfirst a few commercial parastatals that had been performing poorly were excluded from the 1990salary increase, but this decision was reversed after a few months. Subvented statutory bodies,on the other hand, generally receive lower increases which conform to those given to the civilservice. They received a 16 percent increase in 1989 but had no increase in 1990.

3.73 Despite wage freezes in some years, survey results show that the wage bill forcommercial parastatals increased steadily between 1987 and 1990. (See Annex 3-9). Althoughthe number of total full-time staff appears to have remained fairly level, wages increased by about50 percent. While wages of higher level staff of commercial parastatals are, in general, £owerthan private sector counterparts, those at the bottom end of the scale earn about the same whetherthey are in the private or parastatal sector. Wages of subvented parastatals with a commercialactivity such as the Malawi Broadcasting Corporation, however, conform to civil servicestandards which appear inadequate to retain qualified technical staff.

3.74 To help recruit individuals ' 3kills in short supply, such as accountants, theGovernment has begun a policy of paying salary supplements. Accountants employed by

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parastatals earn an additional MK 6,000 per annum in supplements. However, qualifiedaccountants earn upwards of MK 50,000 in the private sector, more than twice their salary inparastatals. Thus, it is expected that this policy will not help to resolve the current problem facedby all parastatals of recruiting and retaining qualified accountants. In the short-term, smallercommercial parastatals should consider reducing this cost by sharing accountants, supplementedby lower level bookkeepers or hiring donor-sponsored accountant advisors.

RSDeomdations

3.75 It is recommended that:

* Government issue a policy paper on tying staff remuneration more closely toachievement of performance targets. DSB should design and supervise itsimplementation for selected commercial statutory bodies.

* Smaller commercial parastatals share accountants engaged on a full-time basisthrough DSB or contracted directly with a group of statutory bodies. Theseroving accountants would review the work of parastatal bookkeepers and preparefinancial statements and budgets.

(v) Housing Benefit

3.76 The salary and benefit package of parastatals for senior level staff is fairly generous.Although the salaries for higher level and special skilled staff (accountants) are significantly lowerthan those in the private sector, the benefits offered by parastatals usually compare favorably.However, not all senior staff automatically receive the same benefits; some senior level staffreceive housing benefits, for example, while others do not. The high price of housing makes itdifficult for some parastatals to offer this benefit to new higher level staff. Lower level staff wholive in rural areas, such as those working for the railways or electricity companies do receivehousing but most lower level staff do not. In all, about 40 percent of parastatal employeesreceive a housing benefit. Of the 7,000 employees who are housed, about 75 percent live inproperty provided by their employer, about 20 percent live in houses rented from the MalawiHousing Corporation or private landlords while the remaining 5 percent receive a housingallowance.12/

3.77 The value of housing plus other benefits often greatly exceeds the monthly salary of a midor senior level staff member living in Blantyre or Lilongwe. It is not unusual for a senior staffmember who earns MK 15-20,000 per year to be receiving an additional MK 30-50,000 eachyear in housing benefits - either the market rental value of a house owned by the company orthe value of the housing allowance.2Q/ Housing prices in urban areas have skyrocketed inrecent years due to severe shortages. There are also cases of having staff members impute amarket value to their own houses and receiving that amount as a housing supplement from the

12/ Source: Housing for Employees of Statutory Bodies, Oliver Bynes, Nov mber, 1990, page 5

2QI Source: World Bank Parastatal Survey Results, 1991

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company.2I/ Many private sector firms, on the other hand, do not provide housing orhousing supplements or company loans to their staff. Given the absolute scarcity and inflated costof middle to upper income housing in major cities and high interest rates, this is a significantbenefit which induces mid-level parastatal staff to stay in their positions.

3.78 Survey results indicate that commercial parastatals have about MK 130 million tied upin housing that they own and sublet to employees. (See Annex 3-1).22/ This amount is fairlyevenly distributed between urban and rural areas; ADMARC alone accounts for almost 60 percentof this housing. Non-commercial parastatals have much less of an investment in housing foremployees, owning only about MK 4 million. This total is equivalent to a sizeable chunk of thesecommercial parastatal assets.21/ In addition, by a conservative estimate, in 1990, they spentan additional MK 14 million on housing allowances, maintenance and rental. It is not uncommonfor parastatals also to cover the cost of gardeners, watchmen and repairs for staff that live incompany houses. An estimated MK 3.7 million is spent each year by parastatals to maintain theiremployee-occupied housing.24/ Subvented, non-commercial parastatals, according to surveyresults, have much fewer resources devoted to staff housing.

3.79 Not only is this costly for the parastatals, but the management of such housing requiressignificant amounts of administrative time. In addition, parastatal staff complain that when theyretire, they lose their company-supplied house and cannot afford to move to comparable houses.Enabling parastatal employees to purchase their own homes, thus, could have significant benefits.

3.80 Based on the above considerations, in its Statement of Development Policies, theGovernment expressed its commitment to: (i) limit public sector investment in housing and sellits existing housing stock; (ii) give public servants the freedom to choose between renting andbuying; and (iii) develop further the production of low cost housing. It has agreed, in principle,to introduce a housing scheme whereby parastatal employees would be assisted to purchase theirown homes.

3.81 DSB has completed a draft housing scheme plan for parastatal employees which advocatesselling the entire stock and using the proceeds to establish a fund which would finance thepurcbase of homes for all parastatal employees. This concept is similar to the housing schemebeing discussed for the civil servants. A trust was established in late 1990 in which severaldonors, including the World Bank have expressed interest. However, for a housing scheme towork - for parastatal employees as well as civil servants - constraints which are limiting thesupply of housing must also be alleviated. This will require liberalizing the land developmentmarket as well as the housing finance market. Currently, the Malawi Housing Corporation has

21/ DSB's housing study estimates that in the case of properties rented from owner occupiers, theaverage rent paid by a statutory body to its own employee is MK 11,475 per annum.

22/ DSB's housing study estimated the worth of housing owned by parastatals to be greater thansurvey results - about MK 173 million.

23/ It is impossible to compare the market value of housing owned by commercial parastatals withtheir total stated assets since the latter are, for the most part, based upon historical cost. Thetotal value of commercial parastatals' assets at end FY 1990 was estimated to be MK 1.1billion.

2A1 Source: DSB Hous_ report, page 6.

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a monopoly on the development of new land while the New Building Society has exclusive rightsfor providing mortgage financing. These institutions are not able to provide s^-ices to the entiresector efficiently.

RecommendatiQns

3.82 It is recommended that:

* DSB design and supervise the implementation of a home ownership program ona pilot basis. Long-term technical assistance wiUl be needed to design a schemewhich is reasonable, affordable and equitable. The Government might considerrequesting assistance from the World Bank or other donors in funding a trustfund to help finance a parastatal housing scheme.

(vi) Q)her Benefits

3.83 In 1986, general managers were no longer allowed to use their company car for personaluse and stopped receiving free water and electricity in their company homes. In 1990, thisregulation was relaxed to allow managers to use company cars for a maximum of 1,500kilometers per month. The company reimburses managers at a rate of MK .20 per kilometer upto 1,500 kIn; if use exceeds this limit, then managers are charged MK 1.20 per km. This systemappears to be difficult to supervise and may be subject to widespread abuse.

3.84 Company loans are another benefit that virtually all parastatal staff have taken advantageof. By end FY 1990, parastatals had MK 3.6 million of outstanding loans to about half of theirstaff. The average loan size was only MK 450, indicating that most loans are for emergencypurposes. However, parastatals also provide loans for automobiles, stoves, furniture and otherlarge purchases. The interest rate on these loans is between 8-12 percent per year, which issubstantially below the corresponding commercial rates of about 15-20 percent. These loans tieup significant resources plus require a great deal of time to administer. Private sector companiesmore rarely provide such staff loans. Other benefits offered by parastatals - health care and apension fund - are also standard in the private sector.

Recommendations

3.85 It is recommended that:

* Parastatals transfer the function of providing staff loans for major asset purchases- cars, furniture, stoves, refrigerators - to commercial banks. Parastatal wouldcontinue to provide loans for emergency purposes.

(vii) Training

3.86 Parastatals staff suffer from inadequate managerial and technical skills - a deficiency thatcould be improved with appropriate training. Parastatals employees, particularly middle andsenior-level staff, receive a 'ot of training. The average employee trained, according to surveyresults shown in Annex 3-11, underwent about 20 days of training in Malawi and/or about fourmonths overseas. However, a DSB evaluation of this training concluded that the currentapproach was extremely wasteful. Most of *.e training has not succeeded in improving trainees'

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performance in their current jobs. Indeed, many of the courses have been fairly irrelevant toimproving the fit between the skills of the trainee and their job requirements. Overseas traininghas a strong academic rather than practical bias and is often chosen on the basis of the availabilityof donor scholarships rather than its intrinsic merit.

3.87 Most trainees' motivation for attending courses, particularly those on longer or overseastraining, has been to advance their careers by getting other jobs in the private or public sector.Another key inducement has been financial, since generous per diem allowances comprise animportant supplementary, tax-free source of income. This benefit provides an importantinducement to retain mid-level staff since Malawian private sector employers provide trainingwhich does not have the same financial incentives. Malawian subsidiaries of large multh,ationalcompanies, such as Cargill, send staff to training courses at headquarters where all expenses arecovered and per diems are not provided.

3.88 Some parastatals have no budget for training while some have training officers and speida considerable amount of their operating expenses on training. With a few exceptions likeMalawi Railways, few training officers of parastatals have any background in human resourcesdevelopment. Rather, their job is to collect information on courses and scholarships, selectindividuals for training and fill out the related paperwork. They lack the incentive or time toanalyze training needs.

3.89 A few notable exceptions emerge amidst a generally unfavorable report on theeffectiveness of training. The Malawi Institute of Management is in the process of designingcourses that are tailored to meet the needs of Malawian enterprises. Private and parastatal staffwho have attended these courses have stated, in general, that these courses are of high quality.However, as mentioned earlier, DSB has noticed that some parastatal staff have declined toattend these training courses because MIM's per diem compares unfavorably with that offeredby other donor-sponsored training courses. Some of the larger parastatals such as ADMARCoffer training courses which would be relevant for staff of other parastatals.

3.90 Also, a few parastatals have well-planned overseas training and twinning arrangements.For example, the Lilongwe Water board sends its engineers to the Staffordshire Water board aspart of a twinning arrangement while the Malawi Dairy Industries sends middle managers to acenter in Swaziland for technical training which is extremely relevant. The Department ofStatutory Bodies has a management development officer whose job should be to rationalize thetraining of parastatal staff, design appropriate training courses and on-the-job training initiativesand evaluate their effectiveness.

Recommendations

3.91 It is recommended that:

* Government change the incentive structure for training. Training should belinked directly to job requirements.

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D. TREASURY FUNDS ORGANIZATION AND PERFYORMANCE

3.92 The establishment of revolving funds within Treasury has served the useful purpose ofenabling these entities to retain earnings and carry funds forward from year to year. Some ofthese funds started as donor projects while others were conceived to provide some managerial andbudgetary autonomy for services rendered to the Government. The Plant and Vehicle HireOrganization, for example, rents and repairs motor vehicles as well as construction equipmentto Govermnent. It also serves an informaJ role of repairing privately-owned vehicles in ruralareas which do not have alternative facilities. Central Government Stores serves as a purchasingagent for Government agencies. An exception is the Malawi Post Office which provides a serviceto the general population.

3.93 However, the institutional structure used to supervise these Treasury Funds is notsufficiently rigorous for large commercial operations. The unit within Treasury is not strongenough to cope with the development of improved financial systems and controls for the largercommercial Treasury Funds. And, many of these functions now are more efficiently performedby the private sector.

(i) Ministry of Finance Supervision

3.94 Although the Treasury Funds are treated as an extension of their Parent Ministries, theMinistry of Finance has oversight responsibilities. In addition to fulfilling its typical role ofapproving budgets, investments and borrowings of Treasury Funds, it plays the same supervisoryrole for Treasury Funds as DSB does for parastatals. The UNDP has provided a long-termtechnical expert for three years to help build the capacity of a unit within Treasury to supervisethe Treasury Funds. This advisor has helped to standardize Treasury Fund accounts into acommon format and to train Treasury Fund bookkeepers in accounting practices. Since theadvisor's term expired in early 1991, the unit has been staffed by two junior officers, neither ofwhom have a background in accounting or financial systems.

3.95 Most of the difficult work, however, still lies ahead. The commercial Treasury Fundsthat are retained by Government need much better supervision. Financial discipline must startwith a thorough audit of each commnercial Treasury Fled. Then, a supervisory bodv must takeresponsibility for the follow-up on these audits, the development of appropriate financial systemsand controls, the replacement or reinforcement of management and staff, the implementation ofcash flow management techniques and the introduction of a performance monitoring andevaluation system, such as is being developed for statutory bodies. Treasury Fund staff alsorequire substantial training to enable them to maintain these systems. Monetary transfers toGovernment from selected commercial Treasury Funds currently seem to be determined in anarbitrary fashion without due consideration given to these companies' own investment needs.Medium-teru corporate planning is needed to help rationalize these transfers as well as otherinvestment issues. This supervisory agency also must develop policies to improve the operationalefficiency of Treasury Funds as well as management development programs.

3.96 Lack of action by the Ministry of Finance has contributed to growing debts owed toTreasury Funds by Govenment ministries and agencies. Debts owed to the five largestcommercial Treasury Funds, mainly from Government entities, tripled from MK 34 to 103million between 1986/87 and 1988/89. (see table below). The Ministry of Finance has not usedits influence to reduce those arrears owed by other Government agencies. It has also not given

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a clear signal to these Funds that they are to stop supplying services to entities which have largearrears. This type of guidance is long overdue.

Arrears Owed to Treasury Funds(in thousands of NK)

1987/88 1988/89 1989/90

Nalawi Post Office 18,177 24,828 52784PVHO 6,189 10,7m 17,555Central GovermeWnt's Stores 7,116 16,316 18.765Govermsent Press Fund 1,535 3,146 7,787Central Medical Stores 1.389 6,447 6.377

Totat 34,406 61,514 103,268

Source: 1990 Ministry of Finance Anutal Report on Treasury Fund Perforaces.

3.97 The Treasury Funds unit does not have the capacity to perform the strong supervisory,management/financial systems development and training function required by the Treasury Funds.This role will be assumed by a donor-funded Smallholder Agricultural Credit Authority for thecredit Treasury Funds. However, the Government must find other institutional mechanisms tosupply this expertise for the rest of the funds.

3.98 Many of these funds were established in the years after independence to provide goodsand services not offered by the fledgling Malawi private sector. Today, services such as poultryand egg marketing and car rentals are done more efficiently by the private sector. Since severalexcellent private furniture makers exist, Manufacturing and Production Fund is no longer neededto produce furniture for the public and private sector. It is time for Government to review thecommercial Treasury Funds and determine whether it is necessary to keep all within Governmenthands.

Recmmendations

3.99 It is recommended that:

* Government transform selected Treasury funds which provide direct services tothe public into Statutory Bodies and delegate monitoring to DSB. Candidatesinclude the Malawi Post Office. Government should determine which servicescurrently performed by these entities could be subcontracted to the private sector.

* Government consider sale of the Egg Marketing Funds in Blantyre, Lilongwe andMzuzu, the Manufacturing and Production Fund and the Borehole ConstructionFund.

* Government review whether the remaining Treasury Funds should be entirelysupervised by their Parent Ministries or remain within the purview of theTreasury Funds unit. If the latter option is chosen then Government must

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strengthen the capacity of the unit within Treasury so that it can adequatelysupervise these entities.

° Comprehensive external audits be performed on all commercial Treasury Fundswithin the next two years.

* Treasury take initiative to settle Government arrears owed to Treasury Funds.

(ii) Operational Effectiveness of Treasura Funds

3.100 Although Treasury Funds do have managers, Parent Ministries exercise considerablemanagerial control over the Treasury Funds. Each Treasury Fund has an advisory board chairedby a representative of the Parent Ministry rather than a board of directors. The Ministry ofFinance as well as other relevant ministries are also represented on this advisory board.Nevertheless these boards do not function effectively and, in practice, Treasury Fund managersreport solely to their Parent Ministry on all but financial matters.

3.101 Low salaries constrain the retention of good managers, mid-level staff and skilledlaborers. Since Treasury Funds offer civil service salaries, their personnel problems mirror thosein the Government. PVHO, for example, serves as a training ground for mechanics since theycan earn several times their Government salary in a private garage. Frequent turnover is also dueto the movement of common service personnel which causes constant disruption in Treasury Fundactivities. These factors combined with the weakness of the Treasury Fund unit means that thereis an inadequate management capacity to serve as a countervailing influence to the ParentMinistries. The checks and balances between the general manager, the board of directors, thesupervisory body and the Parent Ministry, which is being developed for parastatals, does not existfor Treasury Funds.

3.102 Lack of good accountants and properly trained bookkeepers have translated into poorfinancial management systems. The Tourism and Hotel Marketing Treasury Fund, for example,did not even produce a balance sheet until the unit within Treasury helped to put one together in1989. The financial records of the non-commercial Treasury Funds are in even worse shape.Substantial technical assistance is needed to improve the financial systems of commercial TreasuryFunds and introduce cost accounting methods so that prices reflect true costs. The Malawi PostOffice is receiving technical assistance to help computerize its financial systems. However, forthis system to continue functioning after the technical experts have left will require the intensivetraining of staff. Remuneration levels will need to be raised or these skilled individuals will leavethe Post Office for higher wages in the private sector soon after their training has beencompleted.

3.103 Unlike commercial parastatal managers, their commercial Treasury Fund counterparts donot produce comprehensive five year plans; many prepare only rudimentary annual budgets. Thesupervisory agency needs to work with the managers of the commercial Treasury Funds toestablish an effective monitoring system, similar to that conceived for the parastatals. This wouldinclude the establishment of a few annual performance targets which focus management'sattention on the key objectives of the company. In addition, the supervisory organization shouldfollow DSB's example of monitoring financial indicators of all Treasury Funds on a quarterlybasis.

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Recommendations:

3.104 It is recommended for Treasury Funds that remain within the public sector that:

(a) A performance monitoring and evaluation system be introduced for all TreasuryFunds which includes:

(i) a five year corporate plan, modified each year.

(ii) an annual plan which establishes both financial and technical performanceobjectives.

(iii) quarterly financial reports.

(b) A performance system for managers, similar to that being introduced forparastatals, be designed and implemented for the larger commercial TreasuryFunds.

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CHAPTER 4

C QKUIN ND SMATErGY F'OR MANAGING THE CHANGE PROCESS

A. CONCLUSIQNS

4.1 Comparing management practices in the public sector with those in the parastatal sector,one can conclude that:

(a) management in the parastatal sector, especially among commercial enterprises,seems relatively efficient and competent, while in the public sector there is lackof focus or tightness in the system;

(b) parastatal employees are generally well motivated and well compensated and thistranslates into performance; in the public sector there is noticeable lack ofmotivation and performance is weak;

(c) when discipline problems emerge, or there is fraud, parastatal managementusually takes action; public sector managers appear unable to either reward goodperformance or penalize it when its bad.

4.2 Analyzing why things work in Malawi's parastatal sector, one can conclude:

(a) the presence of a tough oversight agency, DSB, has played a primary role inkeeping commercial parastatals on a straight path;

(b) salaries and compensation practices offer good incentives to perform;

(c) staff issues are not a serious problem, skilled positions are filled by expatriatesif Malawian staff are not available; and

(d) poor performance and corrupt practices are dealt with.

4.3 To extrapolate from the above, as well as from the recommendations presented in theprevious chapters, the priority actions for Government to consider in supporting public sectormanagement improvements are:

(a) EmployMent Controls - The recent high growth of establishment positions isalarming, especially as the growth has occurred in the non-priority sectors.Govermnent should consider a one year freeze on increases in establishedpositions and concentrate on filling vacancies. Government should allow forestablishment growth in the priority social sectors by reducing establishmentpositions in the non-priority sectors. Future growth should be limited and tied toGovernment's ability to increase salaries to more attractive levels.

(b) Salary Increases - The Government will not be able to motivate and retain staff,especially at the middle and upper levels, unless it moves the salary structurecloser to levels in the parastatal and private sectors. Government needs toconsider a process and a mechanism that will permit continual evaluation of the

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civil service salary structure in relation to movements in the public and privatesectors and provide for annual adjustment of salaries to reflect inflation and theneed to compete for certain skills and professions. Particular attention should bepaid to adjusting salaries at the top end of the service.

(c) Fill Vacancies and Streamline Recruitment and Promotion Processes - Aprerequisite to any substantive program of management improvement is fillinga substantial number of existing vacancies at middle levels and above. Vacantpositions which cannot be filled within one year should be removed from theEstablishment Register.

(d) Create a Strong Capability In the Central Government tQ Oversee the Process ofImproving Management of the Public Sector - The Central Government needsto mimic DSB's role in the parastatal sector and create capacity in the Office ofthe President and Cabinet to oversee management changes. Office needs to haveability to reward good performers and penalize bad ones.

(e) Enforcpe DSB's role in Parastatal Sector by Clarifying its Legal Status - DSB'srole has been useful in exercising oversight, though at times it suffers fromexcessive interference in the affairs of the parastatals. DSB's legal status needsto be defined and its ability to pay competitive salaries assured. The role ofComptroller of DSB is crucial and needs to be filled by an appropriately qualifiedindividual. DSB's future role should be limited to establishing performanceindicators, monitoring and evaluating parastatal performance, providing assistancein accounting, financial analysis and investment appraisal, helping to implementpolicies that affect the sector (e.g. housing, terms and conditions of service),assisting in management development and designing and supervising aprivatization policy for Government.

(f) Begin Implementation of the Performance MQnitoring System for CommercialEUaxsals - DSB needs to recruit outside consultants to identify performanceindicators for selected statutory bodies and to design carefully the contracts withgeneral managers that are selected by panels.

(g) Transform Selected Treasury Funds into Statutory Bodies and DelegateMonitoring to DSB - Potential candidates include the Malawi Post Office, Plantand Vehicle Hire Organization, Government Hotel and District Rest HousesFund.

B. SlIRATEGY FOR MANAGING THE CHANGE PROCESS

4.4 To introduce a program to improve public sector management, Government would requirean oversight and facilitation capacity. The Government would be able to accomplish much of theprogram on its own, with technical assistance employed as necessary to support the process. Itis recommended that the Secretary to the President and Cabinet oversee the implementation ofthe program and that a small Coordinating Change Unit (CCU) be established in the Office ofthe President and Cabinet. It is recommended that the CCU be headed by the Deputy Secretary(Review), an existing position in the Office of the Principal Secretary for Administration. TheCU would be responsible for coordinating the day to day activities of the program, which wouldinclude monitoring implementation progress, bringing issues requiring solution to the attention

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of the SPC, arranging technical assistance contracts, liaising with existing Governmentcommittees involved in areas of the program's concern, and providing periodic status andevaluation reports on the program's activities. It is recommended that the CCU be staffed by twoprofessional staff at either the PS or P7 level, as well as appropriate clerical and support staff.

4.5 The Government would be responsible for implementing the action plans contained in thenext section and in many cases can do so with its own resources. However, Government haslimited capacity to meet its existing mandate and at the same time devote energy to improvingits operations. Consequently, the judicious use of technical assistance - primarily short-term -is suggested as an enabling mechanism, to allow Government to get the most out of itscommitment to management improvements.

4.6 It is recommended that the CCU employ a mix of local and external consultants. Localconsultants bring to the assignment familiarity with Malawian conditions and cultural practices,and this provides an essential prism through which to view management change. Externalexpertise allows the best international practices to be brought to bear on the situation at hand.A mixture of both types of consultants would lead to maximum results.

4.7 Donor assistance would be required to support the program's technical assistance needs.If there is progress on addressing the priority actions listed above and on establishing theoversight capacity in OPC, Government should anticipate positive donor response in meeting theprogram's external assistance requirements.

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POSTSCRIPT

1. Government's concern during the discussion of the Public Sector Management Review (PSMR)report in June was focused on how best to achieve management improvement throughout the civil service.Consequently, it was agreed that the a major component of the proposed Bank-supported project, InstitutionalDevelopment 11 (a successor to the on 'ng Institutional Development Project), would focus on this subject. ThisCivil Service Management Irr- -j ient Program (CSMIP) will have four sub-programs: (i) ManagementImprovement in Ministries and :Jepartments; (ii) Civil Service Pay and Employment Reform; (iii) Strengtheningthe Capacity of the Ministry of Finance; and (iv) Strengthening the Capacity of DPMT. A Coordinating ChangeUnit (CCU) located in the Office of President and Cabinet (OPC), will be established to manage the changeprocess. The second component is the request from Government for further assistance to the Malawi Instituteof Management (MIM) whose training and consulting activities contribute significantly to managementimprovement in the civil service, the parastatals and the private sector.

2. Project Objectives and Summary Description: The CSMIP will help to improve efficiency andeffectiveness in the civil service by helping to solve specific management problems that have been identified asbottlenecks to improved performance across ministries and departments. These problems include insufficientunderstanding of managers' roles and responsibilities, excessive centralization of decision making, poorinformation management, lack of cost consciousness and accountability, inadequate program evaluation,inappropriate training programs, and poor vertical and horizontal communication. The program will also help todesign and implement a robust, transparent and fair salary structure that would be adjusted on a regular basis andwould be capable of attracting and retaining skilled professionals and managers. Furthermore, the program willhelp to strengthen establishment control through computerization of the personnel management system; concludethe streamlining of recruitment and promotion procedures; and develop strategies for providing appropriatetraining for all categories of civil servants. These objectives will be refined and reformulated into a monitorableaction-plan at appraisal.

3. The institutional strengthening of the DPMT which is the core agency responsible for personnelmanagement and training issues is intended to facilitate the achievement of the different management improvementmeasures. The other :nstitutional strengthening activity is in the MOF and the actions to be taken are focusedon economic and financial management. They will support the implementation of the Government's structuraladjustment program and help the ministry to provide the necessary support to line ministries that are implementingsectoral adjustment programs. Finally, the further assistance to MIM would seek to help consolidate the solidachievements it has recorded in undertaking high quality management training and consulting activities for thepublic, parastatal and private sectors. The assistance will consist mostly of (a) providing Technical Assistance tohelp strengthen institutional capacity building and (b) the construction of a satellite campus in Blantyre, thecommercial capital of the country.

Parastatal Sector Management

4. Government's first reaction to the recommendations in the PSMR report on the management ofthe parastatal sector was tlJat a Committee would be established to 'examine the recommendations in detail and... establish the implications for implementation." By October 1992, Government had abandoned the idea ofestablishing a Committee in favor of a decision to request the inclusion of a component to strengthen theDepartment of Statutory Bodies (DSB) in the proposed ID II. The proposed aims and objectives of the componentare as follows:

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(a) To strengthen DSB which, in view of the very specialized nature of its work must be able torecruit -Ad retain the appropriate skills. To do so, it must be outside the Civil Service-be semiautonornous. Appropriate legislation will need to be drafted specifying its functions or roles andresponsibilities, staffing/organizational structure, etc.

(b) To strengthen the Monitoring and Evaluation capability of DSB to enable it carry out functionssuch as Value of Money (efficiency) reviews and project and economic analysis effectively.

(c) To have a pool of well trained staff who will effectively carry out their functions. Trainingshould include both long and short term courses as well as seminars, workshops and study tours.

(d) To determine which activities DSB should retain and which ones should be delegated toBoards/Management. This should help DSB to focus on key issues and cutting out unnecessaryadministrative (micromanagement) duties.

(e) DSB should also have funds for appropriate consultancies, technical assistance, and performanceincentives.

(f) To continue reviewing the present status of PEs and confirm whether there is justification forcontinued operations under a PE status, design and establish legal, commercial and financialmechanisms required for divestment as well as privatization.

(g) To design a comprehensive performance contracting system for commnercial PEs initially,extending it to cover subvented PEs later.

(h) Revise and redefine the roles of the various oversight entities (OPC, Treasury, TechnicalMinistries, Boards) including alternatives for a more decentralized monitoring system.

These objectives will be examined in relation to the recommendations in the PSMR on the management of theparastatal sector at appraisal with a view to developing a third project component focused sharply on the desirablere-orientation of the role of the DSB.

5. Project preparation Facility (PPF) Advance for the proposed Project was approved in October1992 to finance, amrong others, three studies on: (i) Government-wide information technology policy; (ii)organizational audit of the Department of Personnel Management and Training; and (iii) Wages, salaries andfringe benefits in the Civil Service. Project appraisal is scheduled for the last quarter of FY93.