MALAWI TECHNICAL ANNEX

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL, USE ONLY MALAWI TECHNICAL ANNEX ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 13.5 MILLION (US$20 MILLION EQUIVALENT) TO THE REPUBLIC OF MALAWI AS PART OF THE SDR MILLION APL3 (US$15 1 MILLION EQUIVALENT) OF A US$424 MILLION EQUIVALENT REGIONAL ADAPTABLE PROGRAM LOAN Report No: T7718-MW REGIONAL COMMUNICATIONS INFRASTRUCTURE PROGRAM (APL3) REGIONAL COMMUNICATIONS INFRASTRUCTURE PROGRAM - MALAWI PROJECT (RCIPMW) June 4,2009 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Exchange Rate Effective April 30,2009 Currency Unit = Malawi Kwacha (MKw). MKw140.5 = US$l US$ = SDR 1 FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS ACB ACL AG APL BESTAP BP CAS CPI DA DISTMS DO EASSy EMP ESMF ESW FIMTAP FMS GDP GNI GoM GP HIPC ICT IDA IFC IFMIS IFR IPC ISP Anti Corruption Bureau Access Communications Ltd. Auditor General Adaptable Program Loan Business Environment Strengthening Technical Assistance Project Bank Procedures Country Assistance Strategy Consumer Price Index Designated Account Department of Information Systems and Technology Management Services Development Objective Eastern Africa Submarine System Environmental Management Plan Environmental and Social Management Framework Economic and Sector Work Financial Management, Transparency and Accountability project Financial Management System Gross Domestic Product Gross National Income Government of Malawi General Policies Highly Indebted Poor Countries Information and Communications Technology International Development Association International Finance Corporation Integrated Financial Management Information System Interim Financial Reports Internal Procurement Committee Internet Service Provider

3 ISR IXP LCS M&E MACRA Mbps MDG MEET MGDS MICE MISP MIXP MLNRE MoEPD MoF MoIT MoJ MoU NCB NPV OA ODPP OP OPC OPN PAD PC PDO PIAP PPP PURP QAG QEA8 RA RAP RBM RCIP RCIPMW RMS RPF RVP SAPMP FOR OFFICIAL USE ONLY Implementation Supervision Report Internet Exchange Points Least Cost Selection Monitoring and Evaluation Malawi Communications Regulatory Authority Megabits per second Millennium Development Goal Malawi Environment Endowment Trust, Malawi Growth and Development Strategy Ministry of Information and Civic Education Malawi Infrastructure Services Project Malawi Internet Exchange Point Ministry of Lands National Resources and Environment Ministry of Economic Planning and Development Ministry of Finance Ministry of Industry and Trade Ministry of Justice Memorandum of Understanding National Competitive Bidding Net Present Value Operating Account Office of the Director of Public Procurement Operational Policy Office of the President and Cabinet Operational Policy Note Project Appraisal Document Privatization Commission Project Development Objective Public Internet Access Point Public Private Partnerships Privatization and Utility Reform Project Quality Assurance Group Quality at Entry Assessment, 8th cycle Roads Authority Resettlement Action Plan Reserve Bank of Malawi Regional Communications Infrastructure Program Regional Communications Infrastructure Project Malawi Project Results Measurement System Resettlement Policy Framework Regional Vice Presidency Southern African Power Market Program This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may- not be otherwise disclosed without World Bank authorization.

4 SBD SDH SOE TOR UA US$ VAT VLP WB Standard Bidding Document Synchronous Digital Hierarchy State Owned Enterprise Terms of Reference Universal Access United States Dollars Value Added Tax Virtual Landing Point World Bank Vice President: Acting Regional Integration Director: Sector Director Country Director Sector Manager: Task Team Leader for the RCIP Program: Co-Task Team Leader for RCIPMW Obiageli Katryn Ezekwesili Richard Scobey Mohsen Khalil Michael Baxter Philippe Dongier Doyle Gallegos Mark Williams

5 AFRICA Regional Communications Infrastructure Program (RCIP) APL3 Malawi Project (RCIPMW) Malawi Technical Annex CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE... 1 A. B. C. I1. A. B. C. D. E. I11. A. B. C. D. E. IV. A. B. C. D. E. Country and sector issues... 1 Rationale for World Bank involvement... 2 Higher level objectives to which the project contributes... 3 PROJECT DESCRIPTION... 4 Lending instrument... 4 Project development objective and key indicators... 4 Project components... 5 Lessons learned and reflected in the project design... 7 Alternatives considered and reasons for rejection... 9 IMPLEMENTATION... 9 Institutional and implementation arrangements Monitoring and evaluation of outcomedresults Sustainability., Critical risks and possible controversial aspects., Credit conditions and covenants APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Safeguard policies Policy exceptions and readiness Annex 1: Major Related Projects Annex 2: Results Framework and Monitoring... 22

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7 Annex 3: Detailed Project Description Annex 4: Project Costs Annex 5: Implementation Arrangements Annex 6: Financial Management and Disbursement Arrangements. 38 Annex 7: Procurement Arrangements Annex 8: Economic and Financial Analysis Annex 9: Safeguards and Policy Issues Annex 10: Annex 11: Annex 12: Statement of Loans and Credits Country at a Glance Map Map No. IBRD

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9 I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. Economic performance has improved. Since 2004, the Government of Malawi has exhibited good macroeconomic management as evidenced by the significant decrease in interest rates, inflation and Government borrowing from private banks. The Government has continued to maintain good macroeconomic management and improved fiscal discipline. Malawi achieved the Highly Indebted Poor Countries (HIPC) completion point and has benefited from debt cancellation by the World Bank, the IMF and other creditors. 2. ICT is a key sector in the Government of Malawi s overall development strategy. Malawi, like many countries in Africa, has historically had an underdeveloped communications infrastructure which contributes to the high cost of doing business in the country. The Government of Malawi (GoM) in the Malawi Growth and Development Strategy (MGDS) has therefore placed a high priority on developing this sector. The Government is developing a National ICT Policy that will guide the reform process. The Regional Communication Infrastructure Program (APL3) Malawi Project (RCIPMW) will support these Government efforts to improve the quality, availability and affordability of communications services. 3. Despite wide network coverage, access is limited because of high prices. The telecommunications sector is currently witnessing strong private sector investment and aggressive rollouts from all operators. When compared to other countries in the region, Malawi has one of the best coverage rates with, according to operators, mobile communications networks covering more than 85 percent of the country. Telecommunications penetration rates have also risen significantly. However, at around 10 percent of the population, the penetration rate is lower than the regional average. This is primarily because the price of calls remains high, particularly when compared with low incomes2. Reducing the price of services to make them affordable to more people is a key objective for the Government. This will be achieved through competition and cost reduction measures. 4. Need to remove cost bottlenecks to international connectivity. Improving connectivity for all Malawians requires addressing cost bottlenecks at all levels. One of the major bottlenecks is price and capacity of international connectivity which is currently dependent on satellite connections. This situation will be improved once the submarine fiber optic cables currently under construction along the East coast of Africa are commissioned (see RCIP APL2 PAD). However, as a landlocked country, Malawi will still face the challenge of bringing capacity from the coastal landing stations into the country. For example, following privatization of MTL the company has embarked on an investment program to upgrade the network, and has commissioned recently the rollout of two fiber optic rings in the amount of $23m. Zain has also recently secured financing from IFC in the amount of $30m, and plans investments of $20m for this year alone. TNM, recently purchased by Press Corporation, is also increasing coverage, and implementing 106 sites for this year. A price basket constitutes 6.20 percent of per capita income, when compared to the Africa average of percent. 1

10 5. There are also bottlenecks at the national and local levels. In order to gain access to international communications services throughout the country, domestic backbone networks will be needed. There is already some development of these networks by the mobile operators, the incumbent fixed line operator and the national electricity company. With the arrival of new fixed and mobile operators, it is also anticipated that there will be further backbone network development in future. The key issue facing the sector will be how to encourage further investment into these networks while also ensuring that downstream competitors have access. Voice network coverage is relatively high and it is anticipated that this will continue to expand as networks develop and competition deepens. For the areas which are not currently covered by the existing networks, the Government of Malawi has a pilot universal access program implemented by the Malawi Communications Regulatory Authority (MACRA). B. Rationale for World Bank involvement 6. The project overcomes a key infrastructure bottleneck. The core objective of the project is to overcome a major bottleneck for the communications networks in Malawi - access to the coastal landing stations of the submarine cables. By providing resources to allow the Government to pre-commit to payment for a long-term supply contract, the World Bank is reducing investment risk for private operators and stimulating network development. In addition, by providing this up-front financial commitment, the Government is using World Bank financial support to impose openaccess terms on the network which will benefit everyone in the industry and, ultimately, customers. 7. Government is committed to the project. The Ministry of Finance (MoF) has requested IDA support for a project in the context of the Regional Communications Infrastructure Program (RCIP). The request shows broad Government commitment to improve access to communications infrastructure, which will create a solid foundation for economic growth and for meeting the Millennium Development Goals (MDGs). 8. The project is consistent with other World Bank-financed operations. RCIPMW is complementary to other projects that have been supported by the World Bank. These include the Privatization and Utility Reform Project (PURP), the Malawi Infrastructure Services Project (MISP) projects, and the Financial Management, Transparency and Accountability project (FIMTAP). Under PURP the Government of Malawi has already implemented major policy reforms in the sector, privatizing the stateowned operator and establishing an independent regulatory authority for the sector. Under MISP the Government has further developed appropriate tools for supporting Government goals in a fully liberalized environment, by developing a National ICT Policy and designing a -US$1.2 million Universal Access pilot project. Under FIMTAP the Government has set out to expand the reach of Government s network beyond Capital Hill and expand the use of the Integrated Financial Management Information System (IFMIS) to other main towns in Malawi. RCIPMW is complementary to these ongoing activities and builds on the achievements already made. 9. The project is building on best practices and emerging lessons learned from other World Bank financed operations. The project comprises innovative design elements, particularly in the way that it leverages public and private financial and 2

11 operational resources to meet Government policy objectives. The World Bank experience during preparation and early implementation of RCIP 1 and RCIP 2, as well as in-depth knowledge of emerging practices and trends collected through the recent Economic and Sector Work (ESW) report on Backbone Development in Africa are also highly relevant to this operation. This approach has also been strongly supported by the private sector during consultations in Malawi and in other countries in the region. 10. Building partnerships with neighboring countries. The World Bank is in a privileged position to convene and support negotiations between telecoms players in Malawi and its neighbors Mozambique and/or Tanzania which will be essential for the implementation of a project such as this. This position is further strengthened by the World Bank s involvement in the ICT sector throughout the region, particularly with the RCIP Program. 11. Building partnerships with the private sector. The Government s objective is to leverage as much as possible private sector investment in the development of infrastructure, developing effective Public Private Partnerships (PPP). The World Bank brings direct experience of similar financing and management arrangements from other sectors and from other countries. C. Higher level objectives to which the project contributes 12. Improving productive capacity and reducing the cost of doing business. The Malawi Country Assistance Strategy (CAS) ( ) identifies the high cost of doing business as a major constraint on all types of economic activity and the provision of public services. For Malawi to achieve higher and sustained growth performance, it will need to unleash the productive capacity of the economy. One key way of achieving this will be to expand basic infrastructure in telecommunications across the country, as pointed out by a recent growth diagnostic report3. In Malawi, use of the internet is limited even in the business community as costs are high and bandwidth is low. A better communications infrastructure and more affordable broadband services will help Malawi to compete with its neighbors and strengthen trade ties. 13. Connectivity as a tool for shared growth. In the case of Malawi, the connectivity development objective is expected to be an engine of shared growth achieved by improving quality, availability and affordability of broadband through (i) bringing down the cost of international connectivity by ensuring low cost connectivity from Malawi s borders to the submarine cable landing stations and (ii) strengthening policy and regulation to ensure that once in place, the infrastructure is accessible to all operators on open, transparent and non-discriminatory terms. 14. Creating incentives for private sector investment. By promoting the development of core infrastructure such as regional connectivity and ensuring that it is provided on an open-access basis, the Government is lowering the upstream costs for providers of retail communications services and thereby reducing barriers to entry. This will provide an incentive for investment and competition in the market which will provide sustained improvements in the provision of ICT services. The RCIPMW project will also directly target the enabling environment through supporting the institutions of Rapid Initial Growth Report, Kadale consultants, commissioned by DFID Malawi. 3

12 Government that are responsible for it. These include MACRA and the Ministry of Information and Civic Education (MICE). 11. PROJECT DESCRIPTION A. Lending instrument 15. Lending instrument. The lending instrument is an Adaptable Program Loan (APL). RCIPMW is part of the third phase of the RCIP program, with whose objectives it is fully consistent. 16. Breakdown of Regional and National IDA allocations. Since the project is a regional project, regional IDA funding can be used for up to two thirds of the full proposed IDA amount of the project, with the country allocations covering one third of the project cost attributable to each individual country involved. Table 1 below provides a summary of the regionalhational IDA breakdown for Malawi. Table 1: IDA Funding Regional National US$million IDA Pilot IDA Total RCIPMW Taxes. The Government will waive tax that is due on telecommunications services and consulting services provided under Component 2 of the project. Funds provided by the IDA Credit may be used to pay all taxes incurred on project activities which have not been waived by the Government. During project appraisal, the World Bank received a letter, dated April 28,2009, from MoF confirming this commitment. B. Project development objective and key indicators 18. Project Development Objective. The objective of the project is support the Recipient s efforts to improve the quality, availability and affordability of broadband within its territory for both public and private users. This will be done by using the Government s power as a purchaser of international connectivity to stimulate the development of intra-regional connectivity, thereby ensuring that Malawi has access to the submarine cables which are due to land along the East coast of Africa during The indicators for this and for other related activities are summarized in Table 2. Table 2:Monitoring and Evaluation Framework Project Development Objective Outcome Indicators At closing of project Connectivity development Volume of international traffic 400 objective: using proxy To contribute to lower prices for international capacity and extend International Internet bandwidth the geographic reach of broadband networks Volume of national traffic using 2 2% proxies: 4

13 0 Internet user penetration 0 Total teledensity (futed and mobile) Average price of international communications using proxy: 0 Price of wholesale international El capacity link 20% us$10,000 C. Project components 19. The objective of the RCIP Malawi project is to support the Recipient s efforts to improve the quality, availability and affordability of broadband within its territory for both public and private users. This will be done by using the Government s power as a purchaser of broadband connectivity to stimulate the development of regional connectivity, thereby ensuring that Malawi has access to the submarine cables which are due to land along the East coast of Africa during The project itself is in three components. 20. Component 1 - Enabling Environment (US$2.0 million). This component will provide support to the overall enabling environment for the project. This includes projectspecific activities and general support for the sector. 21. Subcomponent Capacity building an advisory support to sector agencies (US1.65 million). This subcomponent will provide technical capacity building and Monitoring and Evaluation (M&E) assistance to the agencies of Government involved in the ICT sector. The key agencies are the Privatization Commission (PC), MICE (including Department of Information Systems and Technology Management Services, DISTMS), MACRA and MoF. The technical capacity building component will support a range of activities designed to assist these agencies in project specific work and in improving the overall competitive and regulatory environment for the ICT sector. This includes (but is not limited to) the following activities: (a) support for negotiations with private and public agencies relating to cross-border connectivity development; (b) support for regulatory technical assistance to maximize benefits from access to capacity (regulatory tools to guarantee open access to national and international infiastructure, cost-modeling, price control mechanisms, interconnection, essential facility regulation, policy and regulatory competition law, spectrum management, etc) and for assessing the policy and regulatory environment and suggest possible changes; (c) policy and regulatory capacity building, consensus building activities and training; (d) support for drafting a new ICT Law to replace the Communications Act, 1998; (e) support for development of legal framework to support the development of Public Private Partnerships (PPP) arrangements in the ICT sector; and (Q capacity building for M&E. 22. Subcomponent Environmental, Social and Resettlement activities (US$0,3million). The activities to be undertaken as part of this project are unlikely to have any major environmental or resettlement implications. However, as is required under the laws of Malawi, the possibility has to be examined as part of the project design and then monitored during implementation. Operators and ISPs responsible for building 5

14 networks to supply connectivity to the Government under the project will be responsible for ensuring that they comply with the appropriate safeguards policies. The core activity under this component will to analyze the potential environmental and resettlement impact of the project during the detailed design phase. 23. Subcomponent Communications (US$O.O5million). This component will cover communications activities including a combination of project promotion among private-sector participants and public outreach activities. 24. Component 2 - Connectivity (US$14.5 million). This component will support regional and international connectivity in Malawi through three major subcomponents: 25. Subcomponent 2.1 PPP for regional connectivity (US12million). This subcomponent will support regional connectivity to link Malawi with coastal landing stations of the submarine cables which are due to be completed by This will be implemented through a Public Private Partnership in which the Government will sign a contract to buy international connectivity from one or more private operators. This will reduce the commercial risk to investors in fiber optic cable network infrastructure thereby encouraging them to invest and extend their networks. Any infrastructure developed under this project will be owned and operated by the private sector as part of competitive markets under the regulatory oversight of existing sector institutions. By retaining the option to connect through either Mozambique or Tanzania, the project supports a competitive tendering process for the provision of services and will promote competition between cables and between landing station. This component will include PPP design, studies, legal advice and transaction support. 26. Subcomponent 2.2 Enabling the establishment of a Virtual Landing Point (VLP) (US$0.5 million). The key to the success of the project will be ensuring that the private sector in Malawi all have equal access to the regional connectivity provided under the project. This will promote competition between players, maximize the usage of the connectivity and ensure that the benefits of lower connectivity are passed on to customers. The key to achieving this will be through the PPP contract design, the regulation of the sector and the establishment of a neutral point of interconnection to which all operators and ISPs can obtain access. The project will support the establishment and operation of this point of interconnection. 27. Subcomponent 2.3 Supply of broadband connectivity to institutions/rural access (US$2 million). This component will finance last mile connectivity to selected public institutions and Public Internet Access Points (PIAPs) within Malawi, to be provided by private operators and ISPs operating within the country. MACRA will provide technical inputs on the implementation of this component to ensure that it is consistent with the current arrangements for the Universal Access Pilot project. 28. Component 3 - Project Management (US$2 million). This component will consist of support to finance project management related issues: (a) a Project Manager; (b) a Technical Expert; (c) a Procurement Specialist; (d) a Financial Management Specialist; (e) office equipment; (f) audits; and (g) other operating expenses. 6

15 QAG QEA8 Quality Enhancement Recommendations on RCIP APLl Weak implementation capacity, capacity across the participating countries. Lack of procurement readiness + should pay more attention to streamlining and consolidating the various tenders. Corrective Action Taken as Part of RCIP Malawi Preparation. Contrary to RCIP1, resources from an on-going project (Business Environment Strengthening Technical Assistance Project (P103773) - BESTAP) were available during the preparation of RCIPMW and used to step-up World Bank project implementation capacity before RCIP Malawi.. went to the Board Shifting the Malawi component from RCIP2 to RCIP3 has allowed more time for the preparation of the project while retaining it in FY09. The PC will be the implementation agency for the project. It already has experience of implementing World Bank funded projects. The preparation of 7

16 Delays in staffing key positions, Low readiness of the first year s program for implementation (vary across participating countries though) + may cause the delay of completing the first phase within 4-5 years of implementation. Adequacy of the monitoring arrangements. + The panel concern that the project documents and monitoring information would be difficult to collect if there are large number of agencies that provide the data. The project documents do not seem to anticipate these kinds of difficulties. Risk management + for the improvement of the quality, the panel felt that additional steps (such as giving attention to capacity building during preparation, simplify the content of policy components, and extending the implementation period in weaker countries) would be helpfil and firther mitigate the institution risk. Limit the number of indicators to measurable items. (choose the indicators that provide more indication of outputs than outcomes.) the project has been done with close cooperation and support of BESTAP. There is therefore extensive experience of implementing World Bank projects in the institutions involved in this project. The procurement process will be simplified through the consolidation of the procurements into fewer, larger tenders thereby avoiding some of the challenges arising from large numbers of small procurements in other RCIP projects. As in RCIP2, extensive preparatory work has been undertaken prior to appraisal in order to minimize or eliminate the conditions for effectiveness. Staff are already in place in BESTAP and in the PC. This provides a foundation of capacity within the relevant Government institutions. A project manager has been identified through an international recruitment process. This person is expected to be in place shortly after negotiations. Key FM and Procurement staff in the PC have been reassigned to work fill time on RCIPMW. MACRA will be the agency with primary responsibility for collecting information indicators. This is consistent with its existing role. This will be complemented by additional M&E support provided through the project unit. The indicators selected for the monitoring of this project are filly consistent with the indicators that are collected by MACR4 as part of its regular sector monitoring program. Contrary to RCIPI, resources from an on-going project (BESTAP) have been used to raise the capacity of the relevant institutions (e.g. through recruitment of an ICT PPP specialist who will be responsible for the project and through preparatory analysis). This approach was successfidly used under the RCIP2 project in Rwanda. RCIP Malawi will have a 5-year implementation period as opposed to 4 years for RCIP Burundi and RCIP Madagascar The number of indicators used to monitor the project has been limited and focused on the key outputs of the project. These indicators have been discussed with the agencies responsible for collection (MACRA and PC). 34. Building on existing projects in Malawi. The World Bank has been supporting the Government of Malawi in the development of its Universal Access Pilot for the ICT sector through MISP. This project financed the development of the sector UA policy and strategy. It also funded the first tender for UA pilot services during 2009 which was successfully carried out and is currently under implementation. RCIPMW includes a similar component, building on the experience of the current project and operating within the same institutional framework. It has also been supporting the Government in the sector through BESTAP. 8

17 35. Detailed preparatory work has already been undertaken and is continuing. A feasibility study for the project was done in 2006/7 which provided the foundation for the project design. This was updated in 2009 and refined to include more details on the technical specifications and PPP design. 36. There is experience of cross-border infrastructure projects in the region, most recently through the Mozambique-Malawi Transmission Interconnection Project under the Southern African Power Market Program (SAPMP) (APL2) (P084404). The RCIP team has discussed the lessons learned under this project and included them in the design of the RCIP Malawi project. These include the challenges faced in intergovernmental discussions on commercial transactions and the need for detailed technical capacity within the Government, particularly where negotiations are taking place with experienced private sector players. E. Alternatives considered and reasons for rejection 37. Extensive domestic backbone building would not be justified. The project could include additional financing for backbone development. However, the private sector has already demonstrated a willingness to invest in domestic backbone networks and there are plans for further network roll-out over the next few years. With several players already offering wholesale backbone services (MTL, Escom Ltd. and Zain), there is already an emerging competitive market in this area. For this reason the project does not focus on domestic backbone but is limited to international connectivity and targeting open access to existing infrastructure. However, the project will be able to offer domestic backbone services in the Northern part of the country which is currently underserved by the existing and planned networks. 38. Financing long term satellite capacity would not be sustainable. While the project could finance long term purchase of satellite capacity, this would not be sustainable in the long run, given the associated high prices. The project therefore builds on the opportunity of the capacity available on the East coast submarine cables currently under development, and proposes to transport that capacity terrestrially to Malawi. This approach is also designed to trigger the further development of regional fiber connectivity which will have a long-term positive impact on the sector. 39. Direct involvement in the provision of communications infrastructure is contrary to international best practice and Malawi s sector policy. In some countries in the region, governments have opted to directly involve themselves in the operation of backbone networks. In the case of Malawi, the Government has chosen not to follow this route, a decision which is consistent with international best practice. Rather, the project will support the development of the networks through leveraging the Government s position as a buyer of international capacity to promote the development of network competition IMPLEMENTATION A. Institutional and implementation arrangements 40. RCIPMW will be based in the Privatization Commission (PC). The PC is the body that has been responsible for the implementation of the Government s successful 9

18 privatization program. Its mandate includes setting up PPPs and this role has become more significant as the privatization program has come to an end. The PC comes under the oversight of MoF but is an autonomous body with an independent Commission. As this project is designed around a PPP model, PC has been formally appointed by the Government to implement the project. In doing so, it will work closely with the other agencies of Government, including MICE and MACRA. Other key agencies will also provide guidance to the project through the Project Steering Committee which will be responsible for guidelines and advice regarding overall policy direction, general project oversight and implementation. 41. MACRA will provide technical inputs for component 2.3 of the project. Under the existing legal framework, MACRA is responsible for managing and implementing the Universal Access (UA) Pilot system. This arrangement has also been supported by the Malawi Infrastructure Services project, funded by the World Bank. RCIPMW will support these arrangements with MACRA being responsible for technical aspects of component 2.3 of the project. The PC will retain responsibility for procurement and financial management. 42. Specialized agencies will also play a role in project implementation. Not withstanding the management role of the PC, other sector agencies are also important for the success of the project. MACRA is particularly important since it has overall responsibility for the regulation of the ICT sector. The project will provide direct capacity building support to MACRA in the areas related specifically to the project (e.g. regulating open access to the virtual landing station) and in regulation of the sector overall. This support will cover detailed technical regulation in areas such as interconnection, licensing and competition regulation. It will also include the revision of the sector legislation in which MACRA will be closely involved. MICE will also be involved in the project through its role of sector oversight and coordination. Any e- legislation development which is undertaken under the project will also be managed by MICE. 43. A Project Steering Committee will provide guidance on the project. A project Steering Committee has been established and its kick-off meeting held. The role of the Steering Committee is to bring together key stakeholders within Government to provide advisory support to the project team and to form a means of communicating progress on the project to the key stakeholders within the Government. The members of the Steering Committee are: PC, MICE, MACRA, MoF, Ministry of Economic Planning and Development (MoEPD), the Roads Authority (RA), Ministry of Lands National Resources and Environment (MLNRE) and Ministry of Justice (MoJ). 44. The PC will be strengthened. The PC already has general expertise in PPPs and some sector specific experience. It has established FM and procurement systems. The Government has agreed to reassign a Procurement Specialist and Financial Management Specialist within the PC to work full time on the Project. These staff are currently paid for from PC resources. The World Bank team reviewed the capabilities of the proposed staff and found them acceptable. The PC will formally submit to the World Bank a request for single sourcing of the said staff. The process of recruiting an ICT specialist as project manager was well advanced at the time of appraisal. 10

19 45. Steps have been taken to ensure that the project is in an advanced stage of readiness for implementation. During the preparation of the project, the Government has taken a number of key steps to ensure that it is ready to begin implementation immediately the project is effective. Consultation with stakeholders. Extensive consultation has been carried out with stakeholders, both internally within the Government and externally with consumers and the private-sector. This has ensured that these stakeholders have been able to have inputs into the design of the project (e.g. the ownership structure of the virtual landing station, the use of the regional link to provide domestic backbone services in the North of Malawi etc.). They have also been sensitized to the objectives of the project. Establishment of the Steering Committee. The project Steering Committee will play a key role in ensuring that the project is successfully implemented. This committee has been established and the first meeting was held during project preparation on 11 March, Recruitment of the project manager. An international competitive recruitment process has been carried out to identify a project manager. This recruitment process is at an advanced stage. The PC has reassigned FM and procurement staff to work full time on RCIPMW. Procurement plan. The Government has prepared a procurement plan for the first 17 months of the project which has been discussed and agreed at appraisal. Project Implementation Manual. A draft of the project implementation manual has been prepared and was approved during project appraisal. 46. Annual work plans and budgets. The PC will prepare annual project work plans and budgets. The Steering Committee will provide comments and the PC CEO will submit to the Board of the PC for approval. Once approved by the Board, the workplan and budget will be submitted to the World Bank for no-objection. Work carried out by the project during the course of the year will be consistent with agreed plans and budgets. B. Monitoring and evaluation of outcomes/results 47. Monitoring and evaluation. Monitoring and evaluation of RCIP will be embedded in the various components of the project. The results framework is given in Annex 2. The project indicators have been selected to reflect the target outcomes for the project and to be consistent with the monitoring and evaluation that is currently carried out by the sector institutions. This means that the M&E framework for the project is fully consistent with existing government sector policy and institutional responsibilities. 48. MACRA is the institution with primary responsibility for M&E. MACRA, as sector regulator, is the institution with the primary mandate for collecting M&E data in the sector. Under the RCIP project, MACRA will retain this responsibility and will collect the data required to monitor the success of its implementation. The PC will agree with MACRA a schedule for data collection and reporting and will request data from the regulator on a regular basis. The PC will then use this data to provide regular M&E reports to the World Bank. 11

20 C. Sustainability 49. The Government of Malawi and the telecommunications operators are highly committed to the project. Government commitment to the project is a key to long-term sustainability. This has been clearly demonstrated throughout project preparation and through the Government s commitment to the ICT sector in the MGDS and the National ICT Sector Policy which are fully aligned with the activities of the project. 50. The project is consistent with existing sector policy. Under the RCIP Malawi project, the Government will use its position as a buyer of ICT services to stimulate network and market development. This supports the Government s policy of maintaining a privately owned and operated ICT sector The project supports competition. Tendering of all project expenditure means that the all licensed operators and ISPs will have an opportunity to compete to develop the networks. Once built, the contract between the network operator and the Government will ensure that this network infrastructure is available to all market players on nondiscriminatory terms. This will promote competition in the downstream market which will lead to more market entry, network resilience and service competition, all of which contribute to the sustainability of the project. This will be complemented by support to the regulatory and Government institutions with responsibility for the ICT sector to ensure that competition is supported and maintained. See section C.5 of the RCIP Program PAD for a more detailed discussion on sustainability. 52. The project is being implemented through the existing institutional structure. The key project implementation agency is the PC, working closely with MACRA and MICE. No new institutions are being set up and these institutions will all be operating fully within their existing mandate. This will improve the speed with which implementation can take place and increases sustainability through strengthening existing institutional mandates. D. Critical risks and possible controversial aspects 53. Need to mitigate risks of a complex and ambitious project. The RCIP program is clearly a complex and ambitious venture. Risks at program level are detailed in the RCIP program PAD. A number of risks related specifically to the planning and execution of the RCIP Malawi operation have been identified. These are summarized in Table 4 below, together with the proposed mitigation measures. 12

21 Table 4: Main risks and proposed Mitigation Measures Main Risks 1 Rating I Mitigation measures Country level Macroeconomic framework (a)the occurrence of terms of trade and or weather related shocks; and (b)the upcoming elections in 2009 which might reduce the Government s commitment to spending control. In the past, parliament has been prorogued. This has delayed approval and implementation of other IDA funded projects in L M IDA, in collaboration with other donors, will be supporting efforts by the Government to diversify the economy and to adopt a comprehensive ex-ante risk mitigation and contingency plan for reducing the country s vulnerability to drought. (b) Budget support by IDA and CABS will continue to be closely tied to maintenance of a sound macroeconomic framework. It is expected that, following the May elections, there will be a new composition of parliament, this risk will be mitigated. Risk of delays arising from international negotiations with Mozambique and Tanzania. heavily in the sector, and in particular in the development of the backbone. Capacity constraints in Malawi may determine that the private sector outpaces activities in the project. Project could be delayed as a result of the lack of institutional capacity. The project will require detailed and complex design of procurement and contract documents to ensure that the investment in infrastructure is attractive to the private-sector while also meeting public sector objectives. M M M M The World Bank is preparing RCIP operations in Malawi, Mozambique, and Tanzania and has tried as much as possible to coordinate preparation of the three projects. Since the project will be implemented through the private sector, it is expected that much of the effective cross-border interactions will not require direct high-level government to government contacts. However it has been agreed during appraisal that there would be contacts between the regulators to facilitate the implementation of the project. The project will not be investing in infrastructure in geographical locations where private sector would invest on their own. Maintaining close contact and appropriate consultation mechanisms with the private sector will ensure that investment is directed to where it is most needed. The project is being anchored in the PC, and dedicated staff are being hired to strengthen the unit. The project will. also be providing targeted capacity building and technical assistance to strengthen the National ICT policy through making capacity at MICE, as well as at MACRA and other participating ministriedagencies. Dedicated staff will be available at the PC to perform procurement tasks for the project. In addition, the team will also be provided with technical assistance to design the PPP arrangements involved in this project. Risk Rating: S - Substantial; M - Moderate; L - Low. E. Credit conditions and covenants 54. Conditions of effectiveness: 13

22 The Recipient has appointed to the PC a Project manager with qualifications, experience and terms of reference satisfactory to the Association. 55. Disbursement conditions. None 56. Dated Covenants (a) Not later than four months after the Effective Date, appoint independent auditors; and (b) Not later than three months after the date of effectiveness provide training to the Project FM staff on the Bank s policy and procedures on FM and Disbursement. 57. Other covenants (a) Maintain the financial management system including records, and accounts in accordance with the terms of financing agreement; (b) Prepare and furnish to the Bank not later than 45 days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Bank; and (c) Have the project s Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions and the annual audited Financial Statements submitted to the Bank not later than six months after the end of GoM s fiscal year, i.e. December 31 of each year. 14

23 IV. APPRAISAL SUMMARY A. Economic and financial analyses 58. RCIPMW will provide a major stimulus to the ICT market in Malawi. Currently the ICT market in general and the broadband market in particular faces a key constraint - the cost of international connectivity is very high as a result of the dependence on satellites. RCIPMW will help to overcome this constraint through providing low-costy high bandwidth regional connectivity to link the country to the global fiber optic network. This will reduce costs which are likely to be passed onto consumers as it is a competitive market. The project will also help to stimulate market growth through higher quality services which will increase demand. 59. The ICT industry makes a significant contribution to the overall economy. The ICT sector constitutes approximately 3 percent of total GDP. It is therefore a significant contributor to the overall economic output of the country. By lowering costs and increasing the size of the industry, the project will increase this economic contribution. 60. The ICT sector is a major generator of tax revenue for the Government. Currently, the ICT sector is a major generator of tax revenues through a combination of license fees, income tax, VAT and excise duty. As the sector expands as a result of this project, these tax revenues will also expand. 61. The economic rate of return for the project is positive. The Government will invest US$20 million in the project. In return for this, it will get access to high-bandwidth international connectivity which it can use for its own purposes. In addition, the wider ICT market will benefit through improved access to the submarine cables and the lower costs of international connectivity. The expected rate of return on the project is 24 percent, B. Technical 62. A detailed description of the design of the project is provided in Annex 3. This section briefly discusses some of the key design issues that were covered during project preparation and appraisal. 63. Project focus. There are a number of options for project design available under the RCIP Program. It was decided in Malawi to focus on regional connectivity for several reasons. 1) There are no regulatory restrictions on backbone network development and there is already an emerging competitive market in these services; 2) As a landlocked country, Malawi is likely to face difficulties accessing the submarine fiber-optic cables which are due to land along the East coast during 2009 and 2010; and 3) Malawi already has an e-government project in the planning stages. It was therefore concluded that access to the submarine fiber-optic cables was a priority area of focus for the project. 64. Ownership model. The ICT sector in Malawi is privately-owned and a competitive market structure has been set up. The Government has expressed a clear desire not to reverse this policy by becoming directly involved in infrastructure development. The project design has therefore been developed around this core policy. The Government s direct role in investment is kept to a minimum but rather it uses its 15

24 buying power as a large consumer of ICT services to stimulate private investment and to promote competition. 65. Institutional design. The central component of the project is a PPP with the Government acting as a buyer of capacity and the private-sector acting as the supplier. This will be implemented through a long-term supply contract which will also contain the open-access provisions which are central to the project and the RCIP Program overall. Key to the success of the project is therefore placing it in an institution with extensive experience of the design and negotiation of such contracts and the institutional mechanisms needed for their success. By placing the project in the PC, the Government has ensured that it is bringing to bear the institution s long experience in PPPs and largescale transactions. C. Fiduciary 66. Public Procurement in Malawi is governed by the Public Procurement Act The World Bank has reviewed this Law and found it satisfactory and made some recommendations for improvement. The office of Director of Public Procurement is reasonably staffed to undertake its role of regulation and monitoring but staff lack experience. The Government, with support fiom the World Bank through FIMTAP, has engaged procurement auditors to undertake audit of at least forty procuring entities including ministries of Agriculture, Health and Education. 67. Procurement under the project will be carried out by the PC. The PC is an entity known to the World Bank having implemented PURP (P063095) between and as a start up institution for BESTAP. It is a body corporate and has a Board (Commissioners) appointed by the President in accordance with the Public Enterprises (Privatization) Act, Cap. 46:07 of the Laws of Malawi. 68. Procurement arrangements within the PC. Within the PC, the overall body responsible for procurement is the Internal Procurement Committee (IPC) which is headed by the CEO. Other members of the IPC are the Administration Manager, Administration Officer, Accountant and three other subject specialists. The IPC is responsible for award of the contracts. The Office of the Director of Public Procurement (ODPP) undertook assessment of the PC procurement cycle management and gave it an unlimited authority to enter into contracts without prior review by the ODPP. At the time of the assessment there were only four organizations in the country to which the ODPP had given this authority. 69. Procurement procedures within the PC. The PC has policy and regulation manuals which incorporate policies and procedures for procurement of consultants and transaction advisors similar to those of the World Bank to supplement public procurement law and its regulations. In addition the organization has Administration and Accounting Manual which clearly delineates responsibilities and delegation of authority. Staff of the PC also subscribe to confidentiality and ethical behavior code which they sign on employment. 70. Procurement planning. The PC prepares a procurement plan which is approved by the Board together with the annual budget. The plan is also submitted to the ODPP. Procurement is initiated by the subject specialist and procurement opportunities are 16

25 advertised in the national and other international press. Evaluation of offers is based on tender documents and is undertaken by subject specialists within the PC assisted by external specialists as recommended by ODPP. Evaluation reports are written to World Bank formats and capture most important aspects. Filing of procurement proceedings was good but requires improvements to include evidence of acceptance of deliverables and payments made. The PC has experience of handling contractual disputes under projects funded by donors and by its own finances. The management of complaints and contractual disputes in some cases has been inadequate with protracted communications with bidderskontracted firms. The PC has committed to address this in future through the establishment of a standing committee to review bidder complaints and will involve ODPP in complex cases if necessary (see Annex 7). 71. Procurement risk assessment. The capacity of the PC to manage procurement will require strengthening for it to adequately manage the overall Project. This will be done through a combination of training and additional recruitment (see Annex 7). Provision for both of these has been included in the project budget. These measures have been included in the project design. The assessed risk is Moderate. 72. Procurement under the project will be carried out by the PC. The PC is an entity known to the World Bank having implemented PURP (P063095) between and as a start up institution for BESTAP. It is a body corporate and has a Board (Commissioners) appointed by the President in accordance with the Public Enterprises (Privatization) Act, Cap. 46:07 of the Laws of Malawi. 73. Guidelines. All international competitive bidding (ICB) and selection of consultants involving international consultants will be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 and revised in October 2006; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 and revised in October 2006, and the provisions stipulated in the Financing Agreement. 74. The PC has a strong financial management track-record. The PC has managed the Government s program of privatization and State Owned Enterprise (SOE) reform. It has a good financial management track record and the audit reports for the fiscal years 2007 and 2008 indicate sound financial management at the PC and gave unqualified audit opinions. The PC has developed FM systems over a period of time. The accounting system, FINPRO is being used by other IDA funded projects in Malawi and is a tried and tested system. The PC is also subject to significant public scrutiny. The oversight of the Board of Directors, Office of the President and Cabinet (OPC) and MoF enhance the internal control environment. 75. The PC s FM procedures have been updated. The PC FM manual required some revision in line with the institution s new role as well as to incorporate the project activities. This process was completed prior to negotiations. 76. The PC has already in place internal controls which are working well. The controls around approvals and authorization of transactions are sound. Some internal controls around payments and check signatories are working but need to be documented. The PC has strong oversight controls relating to budget approvals which will be adopted by and adapted to the RCIPMW. The PC has four accounting staff, excluding general 17

26 management. Basic segregation of duties is therefore possible and this has been implemented. The Government has reassigned a Procurement Specialist and Financial Management Specialist within the PC to work full time on the Project. The physical controls and other controls including passwords are working for the ICT system and will be replicated in the project. The PC makes use of an externally contracted Internal Audit function which will be extended to the project. The PC will extend its existing internal audit arrangements to the RCIPMW project. The internal auditors will carry out regular internal control reviews of the financial management system, including verification of expenditures and payments for contract. They will submit reports of the audit review on a semi-annual basis and will have an oversight role of monitoring the project s risks towards achieving its development objectives. 77. External audit arrangements. The Privatization Commission engaged Financial Auditors for its regular funding whose term of contract expires with the 2009 audit. The Project will require an external audit to be undertaken on terms and conditions acceptable to the Bank. The Terms of Reference for the external auditors were cleared by the Bank prior to negotiations. At its option, the PC may engage a single external auditor to undertake audit of both Project resources and its other work provided the agreed terms of reference have been incorporated to cater for Project activities. The auditors will prepare a separate audit report for the Project and will be required to express a single audit opinion on the financial statements of the project and its underlying records. In addition, the auditors will issue a management letter giving detailed observation and recommendations for addressing FM weaknesses and improving the FM system. The overall responsibility for appointing an auditor to the PC, including the project, lies with the Auditor General (AG). The PC will be required to submit audited financial statements complete with the management letter and management response, no later than six months after the end of the fiscal year. 78. This financial management assessment report has concluded that the FM residual risk of RCIPMW is Moderate. As such, a once a year supervision would have sufficed. However, this project will be supervised initially for two weeks in a year broken down into one week supervision twice a year. At each supervision mission, the FM arrangements of the project will be reviewed and the FM risk updated and an FM Rating of RCIPMW provided. Should the assessed risk change, the supervision intensity will also change. The FM Implementation Supervision Report (ISR) will be produced, filed and included in the Project s ISR. 79. Taxation. The Government will waive tax that is due on telecommunications services and consulting services provided under Component 2 of the project. Funds provided by the IDA Credit may be used to pay all taxes incurred on project activities which have not been waived by the Government. During project appraisal, the World Bank received a letter, dated April 28,2009, from MoF confirming this commitment. D. Safeguard policies 80. The proposed category for the Program is B. The physical components of this project will mostly be limited to the development of fiber-optic networks and of the virtual landing station. The risks associated with this kind of infrastructure are generally low, and the project is therefore assigned to environmental category B under OP As 18

27 land may be required for operators to install ICT facilities, OP 4.12 Involuntary Resettlement Policy is triggered. However, as fiber optic cables are laid along roads which are publicly-owned, the impact of this is expected to be minimal. Any such activity is carried out by operators in the normal course of their business and they will be expected to do so for any activities triggered by the purchase of connectivity services by this project. Operators will be expected to bear the cost of this. The project is not expected to impact indigenous peoples in any negative way, and therefore OP 4.10 is not triggered Program safeguard documents prepared and disclosed. An Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) have been prepared for the overall program. The ESMF and RPF for the Malawi project have been prepared. Consultations on these documents were carried out during project preparation and the views of stakeholders incorporated into the documents. These consultations included Government staff with responsibility for environmental and landrelated issues (Ministry of Lands, Natural Resources and Environment, MLNRE) and with non-government stakeholders (Malawi Environment Endowment Trust, MEET). Environmental and resettlement issues were also discussed during the Stakeholder Workshop held during project preparation on 12 March The draft ESMF and RPF documents were distributed to stakeholders, comments received and incorporated. The final versions of the ESMF and RPF were publicly disclosed within Malawi on 14 April, 2009 and were also made available through the World Bank s InfoShop on 14 April, A specific,costed Environmental Management Plan (EMP) and Resettlement Action Plan (RAP) will be prepared as necessary for the terrestrial facilities during project implementation, in line with the ESMF and RPF, once the exact locations of those facilities have been identified. It should also be noted that all project investment activities will be carried out by licensed operators and ISPs who themselves operate within the environmental and resettlement legal framework of Malawi. 82. Institutional arrangements for safeguard instruments. The institutional responsibilities for overseeing the preparation of the various safeguards instruments will lie with the implementing agency for the project (PC). Any specific required action for some of the Civil Works will be taken into account during project implementation. Institutional responsibilities for preparing the safeguard assessment strategy will be defined closely with the World Bank s Safeguards Team. In addition, civil works are not expected to take place for the first 12 months of project implementation. All safeguards 19

28 compliance requirements will be included in the tender specifications and will be included in supply contracts signed with operators under the project. E. Policy exceptions and readiness 83. The Project does not require any exception to the World Bank policies. 84. The Project has been appraised and is deemed ready to begin implementation. In particular: (i) fiduciary arrangements have been defined and will be in place by effectiveness; (ii) all key project staff is or will be in place by effectiveness; (iii) all the disclosure requirements have been met; and (iv) the results monitoring arrangements have been completed, the indicators have been specified and the baseline data collected. 20

29 Annex 1: Major Related Projects Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) Project World BanWIDA Financed Infrastructure Services Project (P057761)- Ongoing: The development objective of this project is to improve household welfare and strengthen economic growth in market centers and surrounding rural areas through the provision of core infrastructure services. The project includes support for electrification and ICT services in selected areas. Southern African Power Market Program (APL2) (P084404) - Pipeline: The Mozambique-Malawi Transmission Interconnection Project development objective is to (i) increase access to diversified, reliable, and affordable supplies of energy; and (ii) expand Malawi and Mozambique s opportunities to benefit from bilateral and regional power trading on SAPP. This project is currently delayed due to the suspension of parliament. It is expected that this will be resolved by August following the May election. Financial Management, Transparency and Accountability Project (P78408) - Ongoing: The objective of Component 2, Improving Financial Management, is to electronically link Government with an integrated financial management system that provides timely and quality data, while providing controls to improve expenditure management. Business Environment Strengthening Technical Assistance Project (BESTAP) (P103773) Ongoing: the objective of the project is to improve the business climate in Malawi through a wide range of different activities. One of these is the improvement of the capacity of the Government to undertake PPPs. This component includes support for the ICT sector. Latest Supervision Ratings (Bank-financed irojects only) Implementation Development Progress (IP) Objective (DO) MS Mu S Mu MS Mu S Mu USAID DFID IFMS and related Growth study and short studies on ICT applications (banking, agribusiness and health domains) ~ actory), MU (Moderately 21

30 Annex 2: Results Framework and Monitoring Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) 1. Monitoring and evaluation of RCIP will be embedded in the various components of the project. Technical assistance provided through the project will include support for M&E. Connectivity development Volume of international traffic Assess trends in international objective: using proxy: communications and regional To contribute to lower prices for 0 International Internet communications integration international capacity and extend bandwidth the geographic reach of broadband networks Volume of national traffic using 2 proxies: Assess level of access to communications services within 0 Internet user penetration targeted country 0 Total teledensity (fked and mobile) Average price of international communications using the proxy: Price of wholesale international El capacity link Assess competitiveness of countries with regards to cost of capacity Intermediate Results Results indicators for Each Use of results monitoring com ponen t Component 1: Enabling Environment, including Monitoring & Evaluation capacity-building Sound environment conducive to investment and competition Average price of mobile calls Monitor sector competitiveness and efficiency of regulation Component 2: Connectivity Unfettered access for all operators to regional infrastructure Broadband demand is not constrained by cost, access or quality Number of market players accessing capacity on submarine cables Retail price of Internet Access (US$ per month) Monitor competitiveness and assess fair access to infrastructure Monitor level of access to broadband services Competition in broadband service Monitor level competition in provision Number of operational ISPs broadband market Public access to internet Number of public internet access points (e.g. internet cafes) Monitor increase in affordable internet access. 22

31 2. RCIP will support the IDA Results Measurement System (RMS) by collecting data on the sector (including specifically on teledensity), thus aligning with the 14 indicators of countries development progress endorsed by IDA deputies at their meeting in Hanoi in July With the Program, the World Bank will have information to measure teledensity figures for participating countries in the regional Program. Baseline values for indicators and target values for the project are given in the following table. The Results Measurement System (Rh4S) was endorsed by the IDA Deputies at their July 2004 meeting in Hanoi. The indicators selected for IDA 14 Rh4S included: (1) Proportion of population below US$1 dollar per day; (2) Under-5 child mortality; (3) Prevalence Rate of Women aged 15-24; (4) Proportion attended by skilled health personnel; (6) Ratio of girls to boys in primary and secondary education; (7) Primary school completion rates; (8) Proportion of the population with sustainable access to an improved water source; (9) Fixed lines and mobile telephones per 1,000 inhabitants; (1 0) Formal cost of business start ups: (1 1) Public finance management; (12) GDP per capita; (1 3) Access of rural population to an all-seasoned road; and (14) Household electrification rate. 23

32 2 $1 0 * d 0 rg 23 8 % 0 z E N 8 N L c 2 U 8 s Y H e, U E CI

33 Objectives Annex 3: Detailed Project Description Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) 1. Overall project objective. The objective of the project is to support the Recipient s efforts to improve the quality, availability and affordability of broadband within its territory for both public and private users. This will be done by using the Government s power as a purchaser of international connectivity to stimulate the development of intra-regional connectivity, thereby ensuring that Malawi has access to the submarine cables which are due to land along the East coast of Africa during Component 1 - Enabling Environment (US$2.00 million) 2. Subcomponent Capacity building and advisory support to sector agencies (UW1.65 million). The PC is the executive agency of Government that is tasked with implementing the project. The skills of the staff and the experience of the institution have historically been focused on privatization transactions. As the PC evolves into a PPP Unit, the skills required will increasingly focus on the development and execution of PPP contracts. At the heart of the RCIP Malawi project is a PPP for the provision of broadband capacity to the Government of Malawi and to the market in Malawi as a whole. The capacity of the PC to handle the specialized skills required for ICT sector transactions will be supported through this component of the project. In addition to this, the other key sector institutions will also be supported. MACRA, as the sector regulator, will have ultimate responsibility for ensuring that the sector functions smoothly. It will also be the agency of Government responsible for the regulation of the PPP fiber-optic link, once the transaction is completed. MACRA will therefore also be supported under this component of the project. MICE, as the ministry responsible for the sector, will receive capacity building support under this project component. Finally, the Ministry of Finance will also receive some capacity building support under the project. The support will be a combination of training, direct advisory services and technical assistance of specific sector issues. It will also include direct support for the revision of the ICT legislation in the country to update it fully to reflect modern systems of telecommunications regulation, e-government, e-transactions and cyber security. The allocation of budget between the PC, MACRA, MICE and MOF is US$250,000, US$650,000, US$650,000 and US$lOO,OOO, respectively. 3. Subcomponent Environment, Social and Resettlement activities (US$0.30 million). The activities to be undertaken in this project are unlikely to have significant environmental or resettlement implications. However, under the laws in Malawi and, as outlined in the ESMF and RPF, Government agencies are required to examine the environmental and resettlement implications of work that they undertake. This activity will therefore provide the PC with the required analytical support to ensure that the environmental, social and resettlement implications of the services provided are examined. These activities will be carried out in close coordination with MLNRE, the government agency in Malawi with responsibility for environmental and resettlement 25

34 issues. The core activity will be to analyze the potential environment and resettlement impact of the project during the detailed design phase. This analysis will ensure that the detailed design specifications for the project minimize any potential negative effects. The licensee that wins the tender to supply connectivity under the project will be required to comply with the specifications laid out in the tender document as well as existing environmental and social protection law currently in force in the country. As is currently the case, the licensee will be responsible for compensating land-owners for network construction and will be responsible for mitigating any negative environmental impacts. These requirements will be spelt out in detail in the tender documents. 4. Subcomponent Communications (US%0.05 million). Communication activities to be included in the project. A communications budget is included in the project. This will cover a combination of project promotion among private-sector participants and public outreach activities. Activities to be financed through the project could fund activities aimed at, for example: (i) supporting proactive engagement of Civil Society Organizations (NGOs, faith-based organizations, youth organizations, ICTinterest groups etc); (ii) ensuring timely disclosure of key documents (such as environmental and social frameworks); (iii) Malawian institutions involved in the upgrading of ICT infrastructure within the country; and (iv) the private sector. Communications activities will be handled by the project team and the PC communications staff. Component 2 - Connectivity US%14.50 million 5. Subcomponent 2.1 (US%12.0 million). PPP for regional connectivity. This component lies at the heart of the project. It will set up the PPP that will deliver low-cost high bandwidth capacity into Malawi. 6. The high cost of international connectivity is a key constraint for the development of the broadband market in Malawi. Currently, operators and ISPs in Malawi are dependent on international satellite links for the provision of high band-width services. These are expensive, particularly for large-scale mass-market broadband applications. The regional connectivity situation is likely to change between now and Three submarine fiber-optic cables are currently under development along the East coast of Africa'' (see RCIP3 Program PAD for a status report on the submarine cables) and other ones are in the planning stage. Each one will provide very high bandwidth international communications capacity linking the countries along the coast with the rest of the world. Access to this capacity at competitive prices will have a profound positive impact on the viability of broadband services in East Africa region. However, as a landlocked country, Malawi does not have direct access to these cables and will require transit through Tanzania and Mozambique to access the landing stations. In the long-run, customers will only benefit if there are alternative, competing networks connecting Malawi to the submarine fiber-optic cables. 7. The project will establish low-cost, high-bandwidth international connectivity through a PPP. The Government of Malawi has a clear sector policy aimed at the projection of private sector investment and competition. Through the privatization 11 EASSy, SEACOMM and TEAMS 26

35 of MTL and the issuing of multiple sector licenses, it has demonstrated a clear commitment to this policy. The Government is currently a significant consumer of ICT services which it purchases primarily from the private sector. This role is expected to get bigger as the Government develops its own internal network and provides connectivity to public institutions outside of the major cities. The project is designed to leverage this role of Government as a consumer to stimulate private sector network development and competition. By committing to purchase regional connectivity, the Government is reducing the commercial risk of investment in regional network infrastructure. This will make it commercially viable for a private supplier of connectivity to build the necessary infrastructure. Once built, the marginal cost of such connectivity is low and competition will ensure that capacity increases and that prices fall. The project therefore establishes a PPP in which the Government is using its purchasing power to reduce the commercial risk for private investors. 8. The project will provide an alternative route for accessing the submarine fiber cables. By supporting the development of communications infrastructure to the Dar es Salaam cable landing stations, the project is providing an alternative route to the one that is currently under development to Maputo by MTL and the national operator in Mozambique. This will provide technical redundancy on access to the coast combined with competition between routes and landing stations. This will provide long-term improvements in quality of supply and reductions in prices. 9. The project will run a tender for the long-term supply of regional connectivity to the Government. Companies will bid to supply this connectivity. In order to supply this, they will need to develop additional infrastructure along the route. In addition to providing connectivity to the Government, the operator that wins the tender will be free to supply connectivity as a wholesale operator in all the countries through which it passes, subject to the regulatory frameworks of those countries. The project will therefore have two outcomes - 1) low-cost international bandwidth available to the Government; and 2) low-cost international bandwidth available to the Malawi market. This requirement will place the fiber connectivity in direct competition with the other providers of international connectivity (satellites, fiber along alternative routes etc.). This will have a major long-term impact on the market, reducing the cost of providing international services. 10. Investment costs. It is estimated that the total investment in new fiber-optic cables required to link the Malawi networks to the submarine cable landing stations in Dar-es-Salaam ranges between US$9 million and US$24 million, depending on average network construction costs and the extent to which existing fiber on Tanesco, the Tanzania electricity company s existing fiber can be utilized. It is possible that this total cost will reduce over time as the cost of network equipment falls and as domestic networks are rolled-out in Tanzania. Since this latter factor is determined by Tanzanian operators own investment plans which are continually evolving and highly confidential, it is not possible to get a precise view on what the state of domestic fiber roll-out in Tanzania will be when RCIPMW is underway. A second key issue that affects the cost to the Government for capacity purchase is that the Government will not be the only customer of the fiber network, so RCIPMW will not be the operator s only source of revenue. The sale of capacity to other customers (e.g. ISPs and competing network 27

36 operators) will generate revenues for the fiber network operator, thereby reducing the cost that the Government will be required to pay for its long-term supply contract. One of the objectives of running a competitive tender would be for the market to determine the minimum amount that the Government would be required to pay in order to make the project profitable. With an upper limit on the capacity payment under the project of US$lO million, the Government would have the ability to pay the equivalent of 60 percent of the average estimate of the total cost of network construction. 11, The private sector will retain ownership of the assets developed under the project. A key feature of the design of the project is that the Government will not own or operate assets developed through the project. The private sector will own and operate all of the assets developed to supply the services purchased under the contract. This is consistent with sector policy throughout the region, including in Malawi. It has also proved overwhelmingly to be the most successful model of infrastructure development in the region. The project will therefore operate within existing policy and regulatory frameworks, thereby supporting and strengthening them. The landing station within Malawi will be collectively owned by Malawi operators. See below for further discussion of the ownership and operational arrangements for this. The overall asset ownership structure is illustrated in Figure 1 Figure 1 : Ownership and Operational Arrangement I I I Landing party in Malawi local I Ta nzan ia opera tors I I I I )..'......".."".."""""...~...~ INDIAN OCEAN I i Maawi T I Tanzania i licensed- licensed i operator I operator i i i....i... I 12. The supplier of connectivity will be selected through an international tender process. There are currently many licensed operators in the market capable of providing fiber-based international connectivity to Malawi and this market is likely to deepen once the submarine fiber-optic cables are built along the East coast. The project will therefore be implemented through an international tender process. This tender will be for the supply of international connectivity, on a long-term capacity to the Government of 28

37 Malawi. These technical options will be examined as part of the detailed technical study to be carried out at the outset of the project. 13. There are already indications that the market is willing to supply. With the imminent arrival of submarine fiber-optic cables off the East coast, there is already significant activity in the market. Owners of capacity on all three cables (TEAMS, Seacom and EASSy) have launched marketing efforts in the region to sell long-term capacity contracts. This is a clear indication that the supply-side of the market is developing quickly and that there is likely to be significant interest in the tender to be launched under RCIP. 14. The project will not be required to finance the full cost of the network development. The Government will only be one of the customers of the network. The network will be allowed to sell capacity to other customers in Malawi, and along the route (subject to local regulatory and license frameworks) on a wholesale basis. The funding provided by the Government through RCIPMW project will be only the amount required to make the project commercially viable. As the fiber-optic backbone networks between Malawi and the coast develop through the normal course of market development, the financing gap required to establish a link for Malawi will be reduced. The tender process will allow the market to determine the minimum amount that the Government is required to pay in order to ensure that a private investor will develop the network. 15. Feasibility studies have already been undertaken. Two preliminary feasibility studies have been undertaken during the preparation of this project. The first one looked in detail at the situation with regards to domestic backbone infrastructure. The second looked at the regional picture in both Tanzania and Mozambique. Both studies examined the current and forecast market and network development in Malawi. The primary conclusions were that demand for ICT services in the country is growing rapidly and networks are developing to match this growth. MTL and Escom s domestic fiber networks are growing and the mobile operators are considering upgrading their current wireless networks to fiber. This is consistent with the experience in neighboring countries such as Uganda, Rwanda and Kenya where mobile operators have begun upgrading their core networks to fiber. The study also clearly identified the lack of low-cost international connectivity in Malawi as a major constraint on the further development of the broadband market. It outlined the need for a virtual landing station and the basic mechanism for its operation. 16. The first stage of the project will be the detailed feasibility of the regional market and design of tender documents and draft supply contracts. The detailed technical feasibility study will feed into the tender specifications that will guide the procurement. The detailed feasibility study and tender design may also include the following components: Detailed analysis of the financing options for the structure of the PPP. Detailed design of the tender process, including preparing tender documents. Preparation of the contracts that will govern the operation of the network facilities built under the project. 29

38 Examination of the regulatory implications of the activities to be carried out under the project. Advisory support during the tendering process. 17. Careful attention to quality/grade of service to be delivered will be incorporated into the design of the tender process and contractual structure. The detailed feasibility study will include drawing up quality and service levels and designing the structure of penalties to ensure that the provider of the international capacity constructs the network to the required specifications and meets its contractual obligations to supply connectivity. In addition, the tender process will ensure that only the strongest and highest quality operators are selected to be the capacity providers. 18. The project will include several in-depth consultations with industry stakeholders. The private-sector operators and ISPs in the region are both customers of the network and potential bidders for the supply contract. They are therefore major stakeholders in this project. It is essential that they are consulted in detail throughout the preparation, design and execution of the project. This consultation process has already started during the preparation of the project at the individual level and through the stakeholder workshop conducted on 12 March It will continue throughout the implementation with a number of individual contacts between the project team and the industry plus formal stakeholder workshops and bidders conferences. The project team will also look at setting up a Malawi operators working group to ensure that the operators have a mechanism for resolving design issues at the outset of the project. 19. The project will also provide domestic backbone infrastructure in the North of Malawi. Currently the backbone network infrastructure is concentrated in the South of the country and the North is currently underserved. However, the most likely route for the fiber to connect to the East coast would be to pass through the North of Malawi. At low additional cost, extra drop-off points on the regional fiber could be provided in Northern Malawi, thereby providing low-cost domestic backhaul and dark fiber. The detailed designs for this together with the terms of use would be developed during the detailed feasibility study phase of the project. 20. Subcomponent 2.2 (US$0.50 million). Establishment of a Virtual Landing Point (VLP). The fiber-optic link developed under this project connectivity Malawi to the coast will terminate in a Virtual Landing Point (VLP) at a location within Malawi. This VLP will be operated on an open-access basis and will provide a neutral point of interconnection for all operators and ISPs wishing to access the cable. This will provide low-cost connectivity to all players in the market and will stimulate competition in the downstream market. 21. The project will guarantee open-access to the VLP. Access to bottleneck facilities such as submarine cable landing stations has been a major issue in the past in other parts of the world. If this access is controlled by one operator and is not adequately regulated, then the international evidence shows that this will restrict the impact of new supplies of international connectivity on the market. The project will guarantee that this does not happen by ensuring that the VLP is controlled in a way which does not allow unrelated control by one or more parties. One possible management arrangement is collective ownership by the industry in Malawi and operation according to open-access 30

39 principles, defined by the Government through the project and enforced by MACRA the sector regulator. Similar arrangements exist for the Malawi Internet Exchange Point (MIXP). This arrangement has been discussed with the industry during project preparation and several ideas were proposed, including some more active participatory role for Government. An alternative approach is to have it included in the connectivity supply contract and operated under strict contractual terms. The detailed arrangement for VLP ownership and management will be developed during the early stages of the project, built around the core concept of a VLP ownership and management arrangement that delivers non-discriminatory access to all operators and ISPS. 22. Members of the VLP will be expected to providing financing. The VLP will ensure that operators have access to the fiber-optic cable into Malawi. It is therefore in their interest to ensure that they actively participate in its operation and supervision. The total investment cost of the VLP is low, relative to the cost of the rest of the network. This component of the project will finance the basic set of equipment for the VLP. The private operators and ISPs will finance the incremental costs of their participation in the VLP (e.g. interconnection etc.). This arrangement will ensure that it has direct financial leverage over the terms by which this VLP operates thereby ensuring that open-access is imposed on the facility. 23. Subcomponent 2.3 (US$2.00 million). Supply of broadband connectivity to institutions and in rural areas. In addition to providing low-cost international bandwidth, the project will support the development of last-mile connectivity into 100 specific institutions and/or points of presencepiaps within Malawi. Points of presencepiaps combine a facility where the public can access internet services plus wireless broadband coverage in the vicinity. One PIAP therefore provides internet access for multiple users and subscribers. This component will ensure that the project delivers services directly to end-users in the short-run, as well as stimulating market development at the upstream level. The mix between the public institutions and Points of PresencePIAPs will be defined during the detailed feasibility stage of the project. 24. This component builds on existing institutions and mechanisms. The Malawi Infrastructure Services Project (Grant H242-MAI) has been supporting the development of a Universal Access (UA) policy and strategy. It has also funded a pilot tender process for implementing this strategy which was successfully carried out during This same institutional arrangement and mechanism will be used to implement this component of the project, thereby strengthening the existing sector institutional arrangements. MACRA is also collecting a levy from the industry (currently set at 5 percent of net operating income) which will be used through the existing Universal Service mechanism. The RCIP project therefore is using an existing institutional mechanism for this component of the project and which has a long-term source of funding. This will ensure its sustainability. 25. The project will provide last-mile broadband connectivity to the public. This component of the project will target approximately 100 public institutions and PIAPs which are currently unable to access broadband connectivity. It will tender long-term contracts to supply this connectivity to the specified institutions as end-users. It will also tender contracts to provide PIAPs in currently underserved areas. The contracts for PIAPs will include a requirement to provide broadband internet services to any customers in the 31

40 proximity of the internet access point at tariffs which are consistent with the operators tariffs in other parts of the country. This is the model currently being used by MACR4 under the UA Pilot scheme. 26. MACRA and the PC will determine the balance between public institutions and PIAPs to be serviced by the project. They will also prioritize these institutions. The total number of public institutions in Malawi is shown in Table 7. Table 7: Total Number of Public Institutions in Malawi (1) District Assembly Offices 28 da 28 (2) Tertiary Hospitals (3) District Hospitals (4) Secondary Schools ,049 (5) Universities (6) Tech & Voc Training Colleges TOTAL The extent to which these institutions are suitable for utilizing broadband connections will depend on a number of factors: Location. Selected areas of the country will be identified as priorities. These will be selected during the design of the detailed technical studies. By identifying specific areas of the country, the tender can be divided into discrete lots, allowing smaller operators and ISPs to compete. It also provides an opportunity to phase the implementation of the scheme to allow the Government to develop expertise in running the process. The design of lots and tender structure will be finalized during the detailed feasibility study at the beginning of the project. Ability to use broadband. Not all institutions will be able to usefully utilize broadband connectivity. For example, the many schools do not have electricity and are therefore not able to use computers effectively. On the other hand, most of the tertiary and district institutions do have electricity. Institutions with the supporting infrastructure such as computers and electricity will be given priority. PIAPs are already being provided through MACRA s US Pilot program, funded by the Infrastructure Services Project. This program will be eligible for further funding under the RCIP program. The balance between public institutions and public internet access points together with the final selection of the number and location of institutions will be undertaken by the Government during the detailed feasibility study stage of the project. Willingness to bear recurrent costs. The ability of the recipient institutions to bear the recurrent costs of broadband services provided under the project will be a key factor in ensuring the long-term sustainability of the program. The willingness to support these costs is therefore a factor that will be included in the prioritization of institutions. 32

41 The project will undertake a process of prioritization, based on these factors to select public institutions. 27. Public access points. Under this component, the project will also support the development of PIAPs which will provide low-cost access to ICT services in areas of the country that are currently underserved. 28. Contract award process. These contracts will be competitively tendered so that operators compete on the basis of price to provide the services. This mechanism ensures that the amount of paid by the Government is the lowest and that public funds are efficiently used. After the contract award, the successful operator builds the infrastructure and operates it during the prescribed period. The payment is transferred to the operator only after the satisfactory completion of the construction milestones. 29. Recipient institutionspiaps will bear future current costs of the internet services provided under the project. Once the end of the contract is reached, the recipient will be expected to pay for the recurrent costs of the broadband connection. In the case of public institutions, these will be expected to pay the on-going costs of the broadband connection from their budgets. In the case of PIAPs, operators will be expected to continue operating the facilities on a commercial basis. Their ability and willingness to bear these costs will be an important part of the selection of institutions and PIAP locations. 30. This approach is consistent with UA pilot currently being implemented by MACR4. MACRA is currently implementing the UA pilot scheme and competitively tendering contracts to provide ICT services through PIAPs in underserved areas of the country. The first contracts under this program were awarded in April The program proposed in RCIPMW will be implemented in the same way. The selection and prioritization process followed will also be the same as that being implemented by MACRA under current arrangements. Component 3 - Project Management (US$2.00 million) 3 1. This component provides the project management activities to be carried out under the project. The activities described above will be implemented by a dedicated team at the PC, working closely with MACRA for activities under Subcomponent 2.3. This team will undertake the following activities: day to day project management, procurement, financial management, operation of the RCIPMW office within the PC. The costs incurred will include general operating costs, the cost of staff hired to work specifically on RCIPMW, cost of purchasing vehicles for the project and the cost of renting additional vehicles where necessary, communications, general office costs and the cost of services supporting the PC in implementing the project. 33

42 Annex 4: Project Costs Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) Project Cost By Component and/or Activity US% million COMPONENT 1 - ENABLING ENVIRONMENT 2.00 Subcomponent I : Capacity building and advisory support to sector agencies Training and capacity building for agency staff (PC, MACRA, MICE, MOF) Subcomponent 2: Implementation of the ESMF and RPF Evironmental and Resettlement impact assessement and mitigation Subcomponent 3: Communications Communications of project objectives and activities COMPONENT 2 - CONNECTIVITY Subcomponent 1 : PPP for regional connectivity Detailed feasibility study, financial analysis, tender design and advisory support 2.00 Purchase of international connectivity Subcomponent 2: Enabling the establishment of a virtual landing station Contract to develop the virtual landing station in Malawi 0.50 Subcomponent 3: Supply of broadband connectivity to imtitutions/rural access Supply of broadband connectivity to institutions 2.00 COMPONENT 3 -PROJECT MANAGEMENT 2.00 Subcomponent I: Core PPP Unit technicalproject management team Project manager Other technical support Subcomponent 2: Project support team Procurement Financial management Subcomponent 3: Other operating costs Support staff Office consumables Project operating costs Computers, printers etc. Furniture Transport Audit Total Baseline Cost Contingency 1.50 Total project cost

43 Annex 5: Implementation Arrangements Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) 1. The PC has been given the responsibility for implementing the RCIP Malawi project. Malawi like many other countries has been engaged in privatization in an effort to shift service provision from Government to the private sector. In Malawi, this process has been managed by the PC. Since the privatization program was completed, the overall priority within the Government has shifted from privatization to leveraging the private sector for public objectives through PPPs. The PC has been given responsibility for this and is therefore in the process of evolving into a PPP Unit. At the centre of RCIPMW is a PPP so this unit has been given responsibility for its implementation. Formally, the Commission of the PC is the executive body responsible for the project. The Commission meets quarterly to review major issues facing the PC, to discuss key issues and to participate in major decisions. The PC staff form the secretariat of the Commission. 2. The PC will work in cooperation with other relevant sector agencies: MICE and MACR4. MICE is the ministry with general responsibility for ICT. It therefore sets the policy agenda and provides high-level supervision for agencies such as MACRA. MICE will therefore have an important oversight role in the project. The long-term success of the project will be dependent on the role played by MACRA since it controls entry into the market, access to core facilities such as landing stations and polices anticompetitive behavior in the market. MACRA will be closely involved in the implementation of the project and will also be strengthened under the project. 3. MACRA will be responsible for implementing the Universal Access (UA) component of the project. The Government s National ICT Policy identifies MACRA as the agency with responsibility for implementing the country s UA pilot project. Subcomponent 2.3 of RCIPMW focuses on rural access and broadband in public institutions and is implemented via the Government s Universal Access pilot scheme. MACRA will therefore be responsible for day-to-day implementation of this part of the project, working closely with the PC. 4. A project steering committee has been set up to oversee the project. A Steering Committee has been set up for the project and the first meeting was held on 11 March, 2009 during the pre-appraisal mission. The key operating principles of the steering committee are as follows: Composition. The composition of the Steering Committee is: PC, Ministry of Information and Civic Education, Malawi Communications Regulatory Authority, Ministry of Finance, Ministry of Economic Planning and Development, the Roads Authority, Ministry of Lands National Resources and Environment and Ministry of Justice. Role ofthe committee. The role of the committee is to advise the PC in its implementation of the project and to ensure that all stakeholder institutions are kept fully in the loop with regards to project preparation. 35

44 e e e e e Representation. The Steering Committee will be chaired by the Principal Secretary of MICE and other institutions are formally represented at the level of Principal Secretary or their designees. The PC will be represented on the steering committee by the CEO. Frequency. The committee will meet as and when required but not less than quarterly. Secretariat. The PC will be the secretariat of the steering committee. It will be responsible for calling the meetings and will ensure that 2 weeks notice is given for steering committee meetings. Costs. It was agreed that, once the project is operational, the project will bear the costs of the Steering Committee. However, prior to the committee become operational, it was agreed that members will bear their own costs incurred in attending steering committee meetings. Procedures. All institutions represented on the steering committee are responsible for briefing their respective ministers. The Government standard for this briefing is within 48 hours of the meeting. 5. Project management and reporting structure. The implementation structure is illustrated in Figure 2. Figure 2: RCIPMW Implementation Arrangements (Commissioners) 1 Proiect Steerina Committee (MICE, MoF, MoEPD, PC, MACRA, MoJ, RA, MOL) (Project Manager, FM specialist, MACRA 6. The PC will be strengthened. The PC is taking on increasingly responsibilities for PPPs and its staff will therefore expand to take on these additional responsibilities. One of the first tasks in this area will be through the recruitment of a Project Manager. This process was well advanced at the time of appraisal. The PC has a core procurement 36

45 and FM staff. The Government has reassigned a Procurement Specialist and Financial Management Specialist within the PC to work full time on the Project. 7. World Bank supervision. The World Bank will conduct a minimum of one supervision mission per year during project implementation, including an annual progress review. A midterm review will be conducted, which will encompass: (i) a thorough review of the execution of the project and the achievement of project objectives to date; and (ii) agreement between the World Bank and the Borrower on recommended measures to ensure efficient execution of the project and successful achievement of project objectives in the period after the review, all in accordance with agreed performance indicators. The Recipient will provide the World Bank a project completion report within six months of credit closing and inputs to the Implementation Completion Report to be prepared by the World Bank. The World Bank will support public dissemination of project information, including supervision reports on the project s performance. 37

46 Annex 6: Financial Management and Disbursement Arrangements Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) Summary 1. An FM assessment of the financial management arrangements for the implementation of the proposed RCIPMW was conducted during the preparation of the project. The objective of the assessment was to determine: (a) whether the PC has adequate financial management arrangements to ensure that project funds will be used for intended purposes only in an economical and efficient way; (b) whether RCIPMW financial reports will be prepared in an accurate, timely and reliable manner; (c) whether the project s assets will be safeguarded. The financial management assessment was carried in accordance with the Financial Management Practices Manual issued by the Financial Management Sector Board in November, This assessment concluded that the PC has adequate FM arrangements that satisfies the World Bank s minimum requirements under OPBP Implementing Entity 2. The project will be implemented by the PC. The PC was established by an act of Parliament in 1996 with a mandate to manage the transactions of moving state owned enterprises into private sector control. The PC has a good financial management track record and the audit reports for the fiscal years 2007 and 2008 indicate sound financial management by the PC. Both audit reports had unqualified audit opinions. The auditors had no issues in the 2007 management letter and there were no major issues in the 2008 management letter. The audit reports were ready within the statutory deadline of four months after the year end of 30th June. The PC also successfully implemented PURP (P063095) which closed on 30th April The BESTAP project was initially housed at PC before moving to Ministry of Industry and Trade (MoIT). Risk Assessment and Mitigation 3. The following are necessary features of a strong financial management system: The FM section should have adequate number of skilled and experienced staff. The internal controls should ensure the conduct of an orderly and efficient payment and procurement process, and proper recording and safeguarding of assets and resources. The PC has these features. The Information System should support the project s requests for funding and meet its reporting requirements to funds providers including the Government of Malawi, IDA and other stakeholders. The accounting system for the PC, FINPRO satisfies these criteria. An independent, qualified auditor should regularly review the project s financial statements and internal controls. 38

47 The Risk Assessment and Mitigation table below shows the results of the assessment from the Risk Rating Summary. This identifies key risks that RCIPMW management may face in achieving the credit objectives and providing a basis for determining management action to address these risks. :rent Risks Countrv Level: Weak budget preparation, delayed audits and lack of follow up on audit findings Entitv Level. The mandate of the PC includes both privatizations and setting up PPPs. In the past, the PC s focus has been primarily on privatizations. It is now increasingly focusing on PPPS. Project Level Complex Regional Project whose implementation to some extent depends on the work of the others in other countries. M The Government with the help of its Development Partners is in the process of improving the national budget process and strengthening the capacity of the National Audit Office The PC has embraced the change. They have consulted widely including Government. PC. Staff is being retrained in line with its new mandate. The PC will recruit an experienced Project Manager. Shehe will be a good communicator to effectively liaise with the other stakeholders. FM staff have experienced transactions accountant who have been assigned to the project. M I No Project Manager is a condition for effectiveness Control Risks Relevance and completeness of the budget I process 5 I Accounting Whether the accounting system would render itself to IDA reporting The absence of a Project Manager may not allow for segregation of duties Satisfactory budget arrangements are in place and the budget is approved by Treasury PC uses FINPRO accounting system which has been tried and tested. The PC has updated its FM manual to include project activities. The project will recruit a Project Manager. Together with the PC CEO, he/she will provide adequate oversight and segregation of duties will be Effectiveness condition 39

48 Funds Flow A complicated funds flow situation (where funds move through several channels) would delay project implementation. Financial ReDorting While the PC has been implementing IDA and donor funded projects, some FM staff have not been exposed to IDA reporting requirements. - M recruitment was at an advanced stage at the time of project appraisal. A simple funds flow function will be maintained, as described in paragraph 12. M The PC will provide training, on the World Bank s policies and procedures on FM and disbursement and also encourage the project FM staff to attend training programs offered by some of the World Bank accredited training institutions. The project will produce and submit quarterly unaudited Interim Financial Reports - (IFRs). Auditing M 1.Continue with the current The current external external audit arrangement and auditors contract with will make new arrangements in expire after the FY09 audit. year 2. The audit terms of reference were agreed with the World Bank prior to negotiation Overall jl FM Risk Rating The overall risk rating is considered Moderaternis is derived from the fact that PC has successfully implemented IDA funded projects and the implementation of the risk mitigation measures described in this table. M M L M No Included as Dated Covenant (3 months after effectiveness). No No Strengths and Weaknesses of the Financial Management System 4. The strength of the PC financial management system lies in the experience of the institution in implementing donor funded projects including those funded by IDA. The PC has developed FM systems over a period of time. The accounting system, FINPRO is a tried and tested system that is being used by other IDA funded projects in Malawi. The PC is subject to public scrutiny due to its very nature. The oversight of the Board of Directors, Office of the President and Ministry of Finance enhance the internal 40

49 control environment. The internal controls have been developed and all indications are that they are working well. That the PC is evolving into a PPP Unit also poses challenges in terms of change of focus. Because of this change, the PC has drafted an FM manual to bring it in line with its new role as well as to incorporate the project activities. The implementing agency has in place some effective internal controls that will need to be documented as they update the FM manual Action Table 9: Fin: Update FM manual to include project activities and key internal controls for payments. Train PC staff in World Bank financial management and disbursement policies and procedures. Agree the IFR Format. Due Date Completed prior to negotiations. 3 months after effectiveness. Completed prior to negotiations. 4 Recruit the Project Manager By effectiveness. 5 6 Reassign a Procurement Specialist and Financial Management Specialist within the PC to work full time on the Project Submit fmal copy of the audit TORS to the World Bank Completed prior to negotiations. Four months after effectiveness. Responsible PC PC PC I pc PC PC Status at negotiations Completed prior to negotiations. Not completed. Completed prior to negotiations. At advanced stage but not yet completed. Completedprior to negotiations. Completed prior to negotiations. Institutional and Implementing Arrangements 5. RCIPMW will be implemented by the PC. The PC is responsible to MoF. The PC s Financial Management Specialist assigned to the project will be responsible for the project s FM system. The FM reporting to the PC CEO will see to it that: Budgeting quarterly unaudited Interim Financial Reports are submitted to IDA timely in form and substance acceptable to IDA; audited financial statements together with the auditors management letter and management response, are submitted to IDA within six months of the end of the fiscal year, that is, by December 3 1 each year; a sound financial management system is maintained throughout the project s life span; and all FM covenants and the project s FM procedures are implemented as agreed in the Financing Agreement. 41

50 6. RCIPMW will adopt the Malawi Government and PC budget year that runs from 1st July to 30th June. RCIPMW will follow the PC budget process which starts in March. PC budgeting is zero based and consultative. Drawing information from the project costs table and the annual work plans of the project as approved by the Project Manager broken down to quarterly expenditures, the RCIPMW Finance Manager will compile the project s annual budgets broken down into quarters. The Budget will be agreed with the Project Manager and presented to the PC management at a management meeting. After discussing the draft at management level, the Commission will approve the budget at a Board Meeting. Although the PC budget is not reflected in the Government annual budget, it is approved through the Government systems. The approved budget will then be sent to the Treasury in the Ministry of Finance for authorization. A detailed breakdown of project costs is provided in Annex 4. Accounting 7. Books of Accounts. The PC s FM section will.maintain adequate books of accounts for the FINPRO accounting system. The accounting system will be used to record, track, analyze and summarize its financial transactions. The project financial statements will be prepared on a modified cash basis in line with international best accounting practice. The accounting system will allow for the proper recording of the RCIPMW financial transactions, including the allocation of expenditures in accordance with its components, disbursement categories and its source of funds. Appropriate controls over preparation and approval of transactions are already in place. The FM manual will only need to be updated and issued out after including specific project activities. 8. Staffing. The PC currently has four skilled and experienced FM staff. While all FM staff will be involved in the project, a Financial Management Specialist has been assigned to work full-time on RCIPMW. Should the PC take on other projects, management will recruit more FM staff depending on the complexity and number of transactions the projects will have. The RCIPMW financial management system will be the responsibility of the Project Financial Management Specialist (FMS). The Project Manager will provide oversight to the project and this will be enhanced by the CEO s effective project monitoring. 9. Accounting System. FINPRO accounting software will be the accounting system that will record transactions and produce the IFRs and financial statements. The system has already been tested and is capable of recording and producing reports as required by IDA. FM staff at the PC have been trained on use of the FINPRO. The software service providers are in Mauritius but there is a representative in Malawi that can resolve minor day to day issues. Financial Reporting 10. Interim Financial Report format. The format of the unaudited IFRs has been discussed with the PC and should be agreed at negotiations. RCIPMW will be submitting to IDA, IFRs in the format and substance agreed at negotiation every quarter no later than 45 days after the end of the reporting quarter. The IFR will comprise of: 42

51 ' Sources and Uses of Funds report by disbursement category, showing actual, cumulative and expenditure variance; Uses of Funds report by component in summary and in detail; Designated Account (DA) Activity Statement; and Summary of expenditures for contracts subject to prior review; and not subject to prior review. The accounting policies and procedures adopted will be disclosed in Notes to the annual financial statements. The project will also produce the annual financial statements which will be audited by an independent and qualified auditor. The current Financial Reporting environment of PC indicates that PC successfully produces monthly management accounts within tight deadlines and gets its annual financial statements audited within the statutory four months period, Funds Flow and Disbursement Arrangements 11. Bank Accounts. The GoM will open and maintain a DA which will be in United States Dollars at the Reserve Bank of Malawi (RBM) under terms and conditions acceptable to IDA. The PC will manage the account and also open an operating account (OA) at a commercial bank acceptable to IDA in Malawi Kwacha. Because the DA will be located at the central bank, there will also be a need for a Malawi Kwacha Holding Account Holding Account (HA) at the central bank. The HA will be used to transfer funds from the DA to the operating account in the commercial bank, and funds will only be transferred to the HA when they are needed for reimbursement of expenditure claims submitted (and verified by PC) by the commercial bank. The operating account will work on a reimbursement basis. Every month end the commercial bank will claim from RBM the amounts spent for the month and RBM will reimburse from the RCIPMW HA at RBM. The commercial bank will not permit payments from the operating account prior to funds being deposited in the HA. This is the standard arrangement for all Government of Malawi projects which have designated accounts at the central bank. It should be noted that foreign contracts would be paid out directly from the DA. The regulations governing signing arrangements and DA, HA and OA monthly reconciliations are included in the updated FM manual. The signatories will include the CEO of the PC, the RCIPMW Project Manager; and the PC FM Specialist. 12. Funds flow diagram. The funds flow diagram depicting the flow of funds is shown in Figure 3.. Figure 3: Funds Flow Diagram 43

52 I IDA CREDIT Us% 2OM I RCIP DA ACCOUNT AT RESERVE BANK OF MALAWI IN US RCIP MALAWI Disbursement method. The project will use the Report-based disbursement procedures. Disbursements will be based on the unaudited Interim Financial Reports (IFR) that provides financial information on the entire project as described above under Financial Reporting and reflect all project activities, expenditure and financing. The format and content of the IFR has been discussed with the PC was agreed at negotiation. While advances on the basis of IFRs will be the primary disbursement method for the Credit, reimbursement, direct payment and Special Commitment may also be used for payments above 20 percent of the amount advanced to the Designated Account. Detailed disbursement procedures will be documented in the FM manual and further information is available from the World Bank Disbursement Hand Book and the Disbursement Guidelines which are both available on-line. 14. The initial disbursement will be based on the first year agreed budget and work plan. The Borrower will submit a request to IDA for the initial disbursement together with the approved budget and work plan. IDA will then transfer finds equivalent to six months of expenditure into the DA at RBM. Thereafter, the quarterly IFR will be used as a basis for requesting disbursements from IDA into the DA by completing a Withdrawal Application (WA) form The disbursement request will result from the IFR forecast for the next six months which must be in line with the approved work plans as reviewed and agreed with IDA. The funds transferred to the DA will only finance eligible project expenditures. 15. Disbursement Letter. IDA will issue a disbursement letter to the GoM. The letter which was discussed at negotiation will set out and summarize the additional disbursement arrangements and procedures under the project. Allocation of project costs by disbursement category 16. Table 10 shows the allocation of the proceeds of the credit by disbursement category. 44

53 Financing Expenditure Categorv Amount (US$) Percentage Consultants services, non-consulting services and l 1 l training for Component 1, I 2,000,000 I 100% Goods, works, Non-consulting services, and l 2 l consultants services for Component 2. I 14,500,000 I 100% Goods, Consultants services, and Operating Costs l 3 l for Component 3. I 2,000,000 I 100% I 4 I Unallocated I 1,500,000 I I I I- TOTAL I I I Internal Control and Internal Audit 17. The PC has already in place effective internal controls. The controls around approvals and authorization of transactions are sound. Some internal controls around payments and check signatories are working but need to be documented. The PC has strong oversight controls relating to budget approvals which will be adopted and adapted to the RCIPMW. Given that the Project will have four accounting staff excluding general management, basic segregation of duties will be possible. The physical controls and other controls including passwords are working for the ICT system and will be replicated in the project. All the controls described above will be documented in the updated financial management manual. 18. The PC makes use of an externally contracted Internal Audit function which will be extended to the project. For the 2008 financial year they contracted Corporate Governance Centre as their Internal Auditors. Some sample internal audit reports were reviewed and were of good quality. There were indications that management took action on the Internal Auditors recommendations. Minutes of the Audit Committee of the Board Meeting were made available where the internal auditors relayed their findings and recommendations. The internal auditors will carry out semi-annual control reviews of the financial management system and will have an oversight role of monitoring the project s risks towards achieving its development objectives. External Auditing 19. External audit arrangements. The Privatization Commission engaged Financial Auditors for its regular funding whose term of contract expires with 2009 audit. The Project will require an external audit to be undertaken on terms and conditions acceptable to the Bank. The Terms of Reference for the external auditors were cleared by the Bank prior to negotiations. At its option, the PC may engage a single external auditor to undertake audit of both Project resources and its other work provided the agreed terms of reference have been incorporated to cater for Project activities. The auditors will prepare a separate audit report for the Project and will be required to express a single audit opinion on the financial statements of the project and its underlying records. In addition, the auditors will issue a management letter giving detailed observation and recommendations for addressing FM weaknesses and improving the FM system. The 45

54 overall responsibility for appointing an auditor to the PC, including the project, lies with the Auditor General. The PC will be required to submit audited financial statements complete with the management letter and management response, no later than six months after the end of the fiscal year. 20. Audit track-record for the PC. The previous two years audit reports for the PC were reviewed and both in 2007 and 2008 the auditors issued unqualified audit opinions with generally clean management letters. As a matter of fact, the auditors did not issue a management letter in 2007 but issued a letter to the effect that there were no major issues to bring to management s attention. 21. Audit costs. The cost of the audit has been included in the Cost Table and IDA will finance reasonable audit costs out of the proceeds of the Credit. 22. Conditionality Negotiation: Clearance of procurement plan. Completed prior to negotiations. During appraisal, the Financial Management assessment had proposed specific actions as conditions of effectiveness, although it was confirmed that almost all these actions were fully met by the Government to the satisfaction of the Association prior to negotiations. It was agreed that these actions would be converted to conditions of negotiations and reflected as such in the Technical Annex. The following financial management actions were converted to conditions of negotiations: (a) the Financial Management Manual has been updated to include project activities and key internal controls for payments; (b) the IFR Format has been agreed; (c) a Procurement Specialist and a FM Specialist have been reassigned within the Privatization Commission to work full time on the Project. The re-assigned staff will be initially paid by the Privatization Commission prior to Project effectiveness; and (d) the Audit TORS have been submitted to the World Bank and cleared. Effectiveness : (a) Disbursement conditions the Recipient has appointed to the PC a Project manager with qualifications, experience and terms of reference satisfactory to the Association; 46

55 None Dated Covenants (a) Not later than four months after the Effective Date, appoint independent auditors; and (b) Not later than three months after the date of effectiveness provide training to the Project FM staff on the Bank s policy and procedures on FM and Disbursement. Other covenants (a) Maintain the financial management system including records, and accounts in accordance with the terms of financing agreement; (b) Prepare and furnish to the Bank not later than 45 days after the end of each calendar quarter, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Bank; and (c) Have the project s Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions and the annual audited Financial Statements submitted to the Bank not later than six months after the end of GoM s fiscal year, i.e. December 31 of each year. Governance and Accountability 23. Due to the national interest that the PC draws because of privatizing public institutions, the PC is under great scrutiny from the public. The print and electronic media, the Anti Corruption Bureau (ACB), the National Audit Office and the general public have over the years taken a lot of interest in the way PC conducts its business. This scrutiny is positive because it means that the general public, the media and the ACB play an oversight role in addition to that of the Board, the internal and external auditors, MoF and the Office of the President. At the moment PC management is considering the option of getting its senior staff including RCIPMW to be vetted by the ACB both in terms of personal integrity and the process of recruiting them. Financial Management Supervision Plan 24. The financial management assessment report concluded that the overall FM risk rating of RCIPMW is Moderate. As such, a once a year supervision would have sufficed. However, this project will be supervised initially for two weeks in a year broken down into one week supervision twice a year. Although the project FM risk rating is moderate, as a regional project it will require more net working with other implementing units and countries. At each supervision mission, the FM arrangements of the project will be reviewed and the FM risk updated and an FM risk rating of RCIPMW provided. Should the assessed risk change, the supervision intensity will also change. The FM 47

56 Implementation Support Report (ISR) will be produced, filed and included in the Project s ISR. Overall Conclusion 25. The overall conclusion of the assessment is that the proposed FM arrangements for the implementation of the project meet the World Bank s OPBP minimum requirements under financial management, subject to the implementation of the risk mitigating measures and the recommended FM actions described in paragraphs 3 and 4 above. 48

57 Annex 7: Procurement Arrangements Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) General 1. Public procurement in Malawi is governed by the Public Procurement Act of August The Act requires procurement Regulations to provide, inter alia, threshold for use of various procurement methods, bidding and bid evaluation procedures and contract management. The Law further establishes the Office of Director of Public Procurement (ODPP) with oversight for public procurement. The office became operational in 2005 with the appointment of the Director and other substantive officers. Procurement Regulations and Desk Instructions have been distributed to all procuring entities. The ODPP has also established a dedicated website for sharing of information, placing of adverts and notification of awards to the general public. The World Bank reviewed the Law and found it satisfactory with improvements required to be made on the following provisions in the regulations: (i) Article 162 (i) and ('j) of the Regulations - Participation of small enterprise which advocates artificial division of procurement into small lots to permit offers from small enterprises and promoting of set-asides for procurement to be restricted to small enterprises (ii) Article 79.4 of the Regulationsdomestic preference- which should not apply for procurement realized through National Competitive Bidding (NCB) (iii).article 79.3 (ii) of the Regulations: where non quantifiable evaluation criteria such as local content, transfer of technology, development of managerial, scientific and operational skills are mentioned as additional evaluation criteria. The office of Director of Public Procurement is reasonably staffed to undertake its role of regulation and monitoring. However most of the staff have inadequate experience in regulating and monitoring of public procurement. To strengthen this role, the Government with support from the World Bank through Financial Management and Transparency Project (FIMTAP) has engaged procurement auditors to undertake audit of at least forty procuring entities including ministries of Agriculture, Health and Education. 2. Procurement under the Project. Project procurement will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers' dated May 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. NCB will be in accordance with the Malawi Public Procurement Act which has been reviewed and found satisfactory to the World Bank. Foreign bidders would not be precluded for participation in National Competitive Bidding. Registration / classification of bidders may be used for establishing bidder qualification or preparing a list for use under price comparison procedure but not as criteria for bidding. Provisions of Article 162 (i) and ('j), Article 79.4 and Article 79.3 (ii) of the National Procurement Regulations will not apply to the project for procurement under NCB and shopping. In accordance with para.l.14 (e) of the Procurement Guidelines, each bidding document and contract financed out of the proceeds of the Financing shall provide that: (i) the bidders, suppliers, contractors and subcontractors shall permit the Association, at its request, to inspect their accounts and records relating to the bid submission and performance of the contract, and to have said 49

58 accounts and records audited by auditors appointed by the association; and (ii) the deliberate and material violation by the bidder, supplier, contractor or subcontractor of such provision may amount to an obstructive practice as defined in paragraph 1.14(a)(v) of the Procurement Guidelines. Procurement methods 3. Procurement of small Works. (Estimated total cost US$500,000). Works procured under this project will include the construction of the Virtual Landing Station. Works estimated to cost more than the equivalent of US$3,000,000 will be procured on the basis of International Competitive Bidding (ICB) and World Bank Standard Bidding Documents (SBDs) shall be used. Works estimated to cost the equivalent of more than U$50,000 but less than the equivalent of US$3,000,000 will be procured on the basis of NCB procedures. Contracts of works estimated to cost US$50,000 equivalent or less per contract may be procured under Shopping procedures, as described in the Procurement Guidelines. 4. Procurement of Goods and Telecom services'* (Estimated total cost US%12.0m). Goods procured under this Project will include motor vehicles, office equipment, telephony equipment and telecom services. The procurement will be done using the World Bank's SBD for all ICB and National SBD satisfactory to the World Bank for contracts to be procured under NCB procedures. Under the project, Goods and telecom services estimated to cost US$500,000 equivalent or more per contract will be procured under ICB procurement method. Goods and telecom services estimated to cost less than US$500,000 will be procured on the basis of NCB. Where practical, the goods to be purchased will be grouped and be procured under ICB contracts. Goods and telecom services that are estimated to cost less than US$50,000 equivalent per contract may be procured through shopping procedures in accordance with the procedures set forth in the World Bank Guidelines. 5. Direct contracting for goods or works. Direct contracting is contracting without competition (single source) and may be an appropriate method under the following circumstances: An existing contract for goods or works, awarded in accordance with procedures acceptable to the World Bank, may be extended for additional goods or works of a similar nature. The World Bank shall be satisfied in such cases that no advantage could be obtained by further competition and that the prices on the extended contract are reasonable. Provisions for such an extension, if considered likely in advance, shall be included in the original contract. Standardization of equipment or spare parts, to be compatible with existing equipment, may justify additional purchases from the original Supplier. For such purchases to be justified, the original equipment shall be suitable, the number of new items shall generally be less than the existing number, the price shall be reasonable, and the advantages of another make or source of equipment shall have been considered and rejected on grounds acceptable to the World Bank. The required equipment is proprietary and obtainable only from one source. l2 Telecom Services in this context means the purchase of telecommunication capacity 50

59 (d) (e) The Contractor responsible for a process design requires the purchase of critical items from a particular Supplier as a condition of a performance guarantee. In exceptional cases, such as in response to natural disaster 6. Procurement of non-consulting services. Non-consulting services are services that are not of intellectual or advisory in nature. Non-consulting services under this project will include airing of IEC messages and telecom services. The procurement of non-consulting services shall be as per provisions specified above for the procurement of goods. 7. Selection of Consultants (Estimated total cost US$5.05 million). Consulting services under the project will include specialist telecommunications advice, legal advice for the updating of ICT legislation, transaction advisory support and project communications activities. Except as detailed below, consulting services will be selected through competition among qualified short-listed firms based on QCBS. Consultants for financial audits and other repetitive services estimated to cost less than US$50,000 equivalent per contract may be selected through LCS method. Consulting services by firms estimated to cost less than US$200, 000 equivalent may be selected on the basis of Selection Based on Consultant Selection (CQS). As appropriate, other selection methods such as FBS, QBS may be used for selection of consulting firms. Individual consultants shall be selected on the basis of the IC method as per Section V of the Consultant Guidelines, 8. Single Source of consultants. Single-source selection may be appropriate only if it presents a clear advantage over competition: (a) for tasks that represent a natural continuation of previous work carried out by the firm, (b) in emergency cases, such as in response to disasters and for consulting services required during the period of time immediately following the emergency, (c) for very small assignments, or (d) when only one firm is qualified or has experience of exceptional worth for the assignment. 9. Commercial Practices: As component 2 - Connectivity - will involve public private partnerships (PPP) and may involve the use of financial intermediaries or transactions among private sectors, the Project may use Commercial Practices procurement method as defined under paragraph 3.14 of the Consultant Guidelines and paragraph 3.12 of the Procurement Guidelines. The specific details of the Commercial Practices that will be utilized will be submitted to the World Bank for review and acceptance prior to their use. Where such Commercial Practices are already known, they will be defined in the Project Implementation Manual 10. Training (Estimated total cost US$0.3 million). Consultants services for training estimated to cost not more than US$200,000 equivalent per contract may be procured through the Selection Based on CQS method. Consultant services for training estimated to cost US$200,000 equivalent or more shall be procured on the basis of QCBS or QBS as appropriate. When appropriate, training may also be procured on the basis of Direct Contracting subject to review and approval by the World Bank. The project will formulate an annual training plan and budget which will be submitted to the World Bank for its prior review and approval. The annual training plan will, inter alia, identify: (i) the training envisaged; (ii) the justification for the training, how it will lead to effective performance and implementation of the project and or sector (iii) the personnel to be 51

60 trained; (iv) the selection methods of institutions or individuals conducting such training; (v) the institutions which will conduct training, if already selected; (vi) the duration of proposed training; and (vii) the cost estimate of the training. Report by the trainee upon completion of training will be mandatory. 11. Short lists of consultants. Short-list of consultants for services estimated to cost less than US$200,000 equivalent per contract, may be comprised entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 12. Special Arrangements: The Government has reassigned a Procurement Specialist and Financial Management Specialist already working with the PC to work full time on the Project. The World Bank agreed to the proposed arrangement subject to the Government submitting a formal request for No Objection to single source. The request would include the job description of the staff and their detailed curriculum vitae. 13. Incremental operating Costs (Estimated total cost US0.65 million). These are the incremental costs incurred by the PC and MACRA, on account of the implementation of the Project, and on the basis of approved work plan and budget for the Project, operation and maintenance costs for Project vehicles, office supplies including costs of communications, faxes, internet and related services, consumables, travel costs and per diems, and accommodation, but excluding salaries of the Recipient s civil servants. 14. Prior review by the World Bank. The Borrower shall seek World Bank prior review in accordance with Appendix 1 of both Procurement and Consultant Guidelines for contracts above the thresholds as agreed in the procurement plan. For purposes of the initial procurement plan the Borrower shall seek World Bank prior review for (i) all works contract estimated to cost US$3,000,000 or more (ii) all goods contract estimated to cost US$500,000 equivalent or more (ii) all consultancy contracts with firms estimated to cost US$200,000 equivalent or more and (iii) all contracts with individual consultants estimated to cost US$lOO,OOO equivalent or more and (iv) all direct contracting and single source selection estimated to cost US$l,OOO equivalent and above (v) annual training plan and (vi) use of Commercial Practices procurement method. These prior review thresholds will be reviewed annually and any revisions based on reassessment of the implementing agencies capacity will be agreed with the Borrower in an updated Procurement Plan. All other contracts will be post reviewed during annual procurement post review missions and compliance verification monitoring. Assessment of the Agency s Capacity to Implement Procurement 15. The implementing entity for the Project will be the PC. The PC s mandate includes privatization and establishment of PPPs. Having completed the privatization process, the focus of the agency is shifting towards PPPs. Technical aspects of component 2.3 will be handled by MACRA but responsibility for procurement and financial management will remain with the PC. The PC will remain responsible for procurements carried out under this component. 16. Most procurement under the project would be carried out by the PC. A procurement capacity assessment of the PC was undertaken by World Bank staff during 52

61 project preparation. The PC is an entity known to the World Bank having implemented PURP (P063095) between and as a start up institution for BESTAP. 17. Staff of the PC. The PC has a staff compliment of 18 comprising Chief Executive Officer, Portfolio Managers, Administration Manager, Transaction Specialists and support staff. 18. Procurement arrangements within the PC. Within the PC, the overall body responsible for procurement is the Internal Procurement Committee (IPC) which is headed by the Chief Executive Officer. Other members of the IPC are the Administration Manager, Administration Officer, Accountant and three other subject specialists. The IPC is responsible for award of the contracts. The office of the Director of Public Procurement undertook assessment of the PC procurement cycle management and gave it an unlimited authority to enter into contracts without prior review by the ODPP. At the time of the assessment there were only four organizations in the country to which the ODPP had given this unlimited authority. 19. Procurement procedures within the PC. The PC has policy and regulation manuals which incorporate policies and procedures for procurement of consultants and transaction advisors similar to those of the World Bank to supplement public procurement law and its regulations. In addition the organization has Administration and Accounting Manual which clearly delineates responsibilities and delegation of authority. Staff of the PC also subscribes to a confidentiality and ethical behavior code which they sign on employment. 20. Administration. Administratively, procurement is the responsibility of the Administration Manager who acts as secretary for the IPC. The Administration Manager is responsible for preparation of procurement plans, tender documents, evaluation reports and contract documents. The Administration Manager heads a department with a staff compliment of nine (9). The administration Manager also manages IT, Human Resources and administration aspects of the organization. The incumbent Administration Manager holds a Master of Science degree in Business Analysis and Bachelor of Social Science and has over 16 years post masters degree experience. He has attended procurement sensitization meetings organized by the Office of the Director of Public Procurement, The Administration Manager is assisted by the Administration Officer who solicits quotations for low value procurements. Both the Administration Manager and Officer have worked with procurement specialists during the implementation of PURP and BESTAP and have developed expertise to reasonably prepare procurement documents and manage the procurement cycle. However the knowledge gained from the on-job coaching without some formal procurement training is inadequate to manage complex procurement envisaged under components 1 and 2 of the Project. 21. Procurement planning. The PC prepares a procurement plan which is approved by the Board together with the annual budget. The plan is also submitted to the ODPP. Procurement is initiated by the subject specialist and procurement opportunities are advertised in the national and other international press. Evaluation of offers is based on tender documents and is undertaken by subject specialists within the PC assisted by external specialists as recommended by ODPP. Evaluation reports are written to World Bank formats and capture most important aspects. Filing of procurement proceedings was 53

62 good but requires improvements to include evidence of acceptance of deliverables and payments made. The PC has experience of handling contractual disputes under donor funded and as well as its own financing. The overall management of complaints and contractual disputes was inadequate with protracted communications with bidderskontracted firms: 22. Procurement risk assessment. The capacity of the PC to manage procurement under preparatory phase of the Project is adequate but would require strengthening for it to adequately manage the overall Project. The assessed risk is Moderate. The following actions are proposed to mitigate the risks: Item 5 6 Issue Procurement plan not comprehensive and monitoring of plan inadequate. Key staff in procurement lack adequate grounding to undertake major procurement. Bidder complaintdcontract disputes takes longer to resolve. Contract awards are not consistently published in the press. Confidentiality requirements for staff involved in evaluation of tenders require strengthening. Procurement records management needs to be improved. Proposed Action Prepare comprehensive PC procurement plan to cover first 18 months of the project and monitorhpdate quarterly Reassignment of PC procurement PC staff to work full time on the project. A course in telecommunications procurement is to be provided. Constitute a standing committee to review bidder complaints and if necessary involve ODPP to resolve complex issues Publish contract awards to increase transparency and confidence in the bidding community Require staff involved in bid evaluation to take oath of secrecy. Improve Procurement Records Management by ensuring that complete procurement records are filed separately for each contract. The documents (adverts, evaluation reports, contracts, deliverables from the contract and payment information) should enable an auditor to follow the complete paper trail grocurement. of :nt Risk Action By PC PC PC PC Proposed Completion Date Completed during appraisal. Procurement staff were reassigned prior to negotiations. Training to be carried out on an ongoing basis. Completed prior to negotiations. Ongoing Ongoing Ongoing 54

63 Procurement Plan 23. Procurement plan preparation. The Borrower has developed a procurement plan for project implementation, which provides the basis for the procurement and selection methods. The plan was agreed between the Borrower and the World Bank at appraisal and will be available at the PC. It will also be available in the Project's database and in the World Bank's external website. The Procurement Plan will be updated in agreement with the World Bank annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 24. Procurement Supervision. In addition to the prior review supervision to be carried out from World Bank offices, the capacity assessment of the Implementing Agencies has recommended supervision missions to visit the field at least once a year to carry out post review of procurement actions. Annual Procurement Post Reviews and or independent procurement audits will also be carried out by independent consultants and would aim to: 0 0 verify that the procurement and contracting procedures and processes followed for the projects were in accordance with the Financing Agreement (FA); verify technical compliance, physical completion and price competitiveness of each contract in the selected representative sample; review and comment on contract administration and management issues as dealt with by participating agencies; review capacity of participating agencies in handling procurement efficiently; and identify improvements in the procurement process in the light of any identified deficiencies. General Procurement Notice and Contract award Disclosure Requirements 25. General Procurement Notice. A general procurement notice has been prepared and will be advertised in dgmarkets and UNDB online in addition to local papers of wide national circulation prior to effectiveness. For each contract procured through ICB and consultant assignments estimated to cost US$500,000 or more a specific procurement notice will be placed in dgmarkets, UNDB Online and local papers of wide national circulation. Within two weeks of receiving the World Bank's "no objection" to the recommendation of contract award, the Borrower shall publish in UNDB online and in dgmarket the results identifying the bid and lot numbers, the winning bidder, reasons for rejected bidders and the summary of scope of work. Procurement methods for Goods and Works Prior Review Threshold: Procurement Decisions subject to Prior Review by IDA as stated in Appendix 1 to the Guidelines for Procurement: 55

64 1. Works 2. Goods >=3,000,000 ICB All Contracts >=50,000 - <3,000,000 NCB None Shopping I <50y000 I None >= 1,000 Direct Contracting All contracts >=500,000 ICB All Contracts >=50,00 < 500,000 NCB None <50,000 Shopping None >= 1,000 Direct Contracting All Contracts Prequalification. In accordance with the provisions of paragraphs 2.9 and 2.10 of the Guidelines. : Reference to (if any) Project Implementation Manual: None Any Other Special Procurement Arrangements: Procurement Specialist and Financial Management Specialist will be re-assigned with Privatization Commission and thus recruited through Single Source basis subject to justification by Government Procurement methods for selection of consultants Prior Review Threshold: Selection decisions subject to Prior Review by World Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants: (a) Firms >=200,000 <200,000 >=1,000 QCBS CQS, LCS, QBS, FBS sss All contracts First contract All contracts I (b) Individual >=100,000 IC >=1,000 I sss All contracts All contracts I Short list comprising entirely of national consultants: Short list of consultants for services, estimated to cost less than US$ 200,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Any Other Special Selection Arrangements: N/A 56

65 Procurement Plan 26. Procurement plan. The procurement plan was discussed and agreed with the World Bank on April 27,

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70 Annex 8: Economic and Financial Analysis Regional Communications Infrastructure Program (RCIP) Malawi Project (RCIPMW) 1. The aim of RCIPMW is to promote the availability of affordable broadband services throughout Malawi by dramatically reducing the cost of international connectivity. The high cost of international bandwidth is currently the single most significant bottleneck in the provision of broadband. By providing low-cost access to the coastal submarine fiber optic cable landing stations, this bottleneck will be removed thereby reducing the cost of providing the service. This will make the broadband segment of the market much more commercially attractive than it currently is and will stimulate investment, innovation and employment. Market background 2. The communications market in Malawi is developing rapidly. Since privatization of MTL in 2006, the market has grown considerably. There are now approximately 1.6 million subscribers in total. There are two mobile operators, Zain and TNM, one fixed line operator, MTL and around 12 ISPs. ZAIN offers GSM and GPRS/EDGE services throughout the country and plans to launch 3G services during TNM offers voice and GPRSEDGE services throughout the country and plans to launch 3G services in MTL provides fixed (copper) wireline voice services and CDMA wireless voice and data. The ISPs use a range of fixed wireless data technologies including fixed WIMAX and VSATs for major customers. ESCOM, the state electricity utility, has laid a fiber optic cable between Lilongwe and Blantyre. The Government has awarded a third mobile license to Globally Advanced Integrated Networks Ltd. (trading as G-Mobile). It has also awarded a second fixed-line license to Access Communications Ltd. (ACL). Neither GAIN or ACL are yet operational. The growth of the telecommunications market is the result of increased competition, a pro-competitive regulatory environment and effective reductions in prices. 3. Current prices for satellite connectivity are very high but falling. The current price for satellite links from Malawi to teleports in Europe are around US$ per Mbps. There are some indications that these prices may fall in future as more satellite capacity comes on stream and competition in the satellite capacity resale market increases. Operators such as Gateway also have plans to lower prices further through installation of a hub in Malawi. The submarine fiber cables are currently proposing prices in the US$lOO-200 per Mbps range. By linking Malawi to these coastal landing stations, the project will bring these significantly international connectivity lower prices to the Malawi market. Expected impact of the project 4. The RCIP Malawi project will provide a major boost to the broadband market. The project will stimulate the broadband market through reducing the cost of provision of network services which will be passed on to customers, thereby accelerating the development of the broadband market. This itself will have a significant economic impact since the market will grow more quickly early on. 62

71 5. There are few benchmarks for broadband market growth in Africa. Broadband internet is a new industry in Africa and there are very few countries with advanced broadband markets on which to base economic calculations. The best estimates available are based on market penetration in different regions and from other segments of the telecommunications market. On this basis, it is anticipated that broadband penetration will rise from its current rate of close to zero to approximately 1.3 percent over a ten year period. This is a conservative assumption at the lower end of industry estimates but equates to over 100, 000 broadband users equivalent to 3 percent of the mobile users. This compares with a situation in which the project does not take place, resulting in a higher prices and slower market growth. In addition to market growth, there are a number of indirect benefits which are not possible to quantify because of lack of data. 6. The broadband industry will also make a small but significant contribution to the overall economy. The telecommunications sector makes a major contribution to the economy through investment, the value-added by the business and the taxes that companies pay. It is estimated that the contribution to GDP of broadband services in Malawi will be around 0.7 percent by 2014, in addition to the expected contribution of mobile services of around 4 percent. 7. The ICT sector is a major generator of tax revenues for the Government. The ICT sector is a major contributor of tax revenues in most African countries. This tax revenue typically comes in three streams: income tax, VAT and ICT-specific taxes (e.g., license-fee levies, excise duty etc.). In the case of VAT and ICT-specific taxes, it is possible to use Malawi-specific parameters in the estimates: VAT is equal to 16.5 percent, the license fees are set at 5 percent of net operating revenue and the excise tax is set at 10 percent. It is estimated that the broadband segment of the market in Malawi will contribute approximately US$86 million in tax revenues to the Government over a 10 year period. This excludes any initial license fee payments made when companies enter the market and any salary taxes paid by employees. 8. The provision and consumption of broadband services will generate large consumer benefits. Consumer economic benefit is measured by consumer surplus which is the economic benefit to customers of consuming ICT services, over and above the amount that they pay for it (Le., the net economic benefit arising from use of ICT). This is difficult to estimate because it is based on customers willingness to pay which is not directly observable. 9. Widespread broadband provision will also have a positive indirect impact on the economy through increased productivity. Investment in ICT has been shown to have a positive impact on the productivity of an economy 6. This occurs is many different ways which may vary between regions of the world. Examples of particular channels through which broadband could positively affect productivity in Malawi include:. Information Flows & Market Efficiency: ICT greatly reduces the costs of obtaining information. This has positive impacts throughout the economic. ICT applications have been used to help agricultural producers obtain more accurate information on prices, weather, new technologies, etc. In many African countries, these applications have traditionally operated on mobile voice networks. However, projects like e- Choupal in India have demonstrated that this type of application can also be used on l6 Roeller, Lars-Hendrik and Waverman, Leonard, Telecommunications Infrastructure and Economic Development: A Simultaneous Approach American Economic Review, 2001,91(4), pp