The Development Situation in Malawi

MAL 2

 

The Development Situation in Malawi

 

Submission to the Commons Select Committee

How the UK can best help to improve opportunities for economic growth, job creation and meeting the Millennium Development Goal targets in Malawi?

 

Garry Whitby

 

January 2012

Abbreviations Used

AfDB African Development Bank

AIDS Acquired immune deficiency syndrome

BAM Bankers Association of Malawi

BCA Business Consult Africa

BDS Business Development Services

BMO Business Membership Organisation

CSR Corporate Social Responsibility

DEMAT Development of Malawian Enterprises Trust

DPC Development Planning and Cooperation

DWCP Decent Work Country Programme

EEAG Economic Empowerment Action Group

EU European Union

FSTAP Financial Sector Technical Assistance Programme

IBAM Indigenous Businesspersons Association of Malawi

ILO International Labour Office

ISO International Standards Organisation

JICA Japanese International Cooperation Agency

M&E Monitoring & Evaluation

MGDS Malawi Growth & Development Strategy

MARDEF Malawi Rural Development Fund

MAWIMA Malawian Women in Mining Association

MBS Malawian Bureau of Standards

MCCCI Malawi Confederation of Chambers of Commerce & Industry

MDC Malawi Development Corporation (now defunct)

MDC Management Development Centre

MEDI Malawian Entrepreneurs Development Institute

MEPC Malawi Export Promotion Council

MIPA Malawi Investment Promotion Agency

MTIC Malawi Trade and Investment Centre

MIRTDC Malawian Industrial Research & Technology Development Centre

MoIT Ministry of Industry and Trade

MoL Ministry of Labour

MRFC Malawi Rural Finance Corporation

MSB Malawi Savings Bank

MSME Micro, Small and Medium Enterprises

NABW National Association of Businesswomen

NASME National Association of SMEs

NBS New Building Society Bank, just called NBS Bank

NEEP National Economic Empowerment Policy

NGO Non-governmental Organisation

NSO National Statistical Office

ODPP Office of the Director of Public Procurement

OIBM Opportunity International Bank of Malawi

OSH Occupational Safety and Health

OVOP One Village One Project

PPP Public-Private Partnership

PSD Private Sector Development

SADC Southern African Development Community

About the Author

Garry Whitby has been working in International Development for over 35 years, and has worked on assignments in Malawi from June 1977 until now, including living and working in Malawi from 1977-78, 1986-1988, and 1990-1998.

He is a Chartered Engineer, but now specializes in business sector development. He worked for the private sector in Malawi in his early career, then for DEMAT a business development service organization, undertook a study of economic development potential in the Rural Growth Centres for GTZ, an industrial sector study for UNIDO, became the UNDP/ILO funded Chief Technical Advisor at MEDI, before managing his own development consulting business, PPI Consultants in Malawi managing donor funded interventions, which included the DFID Community Schools Project and School Support Systems Programme.

In 1998 he joined Deloitte & Touche and ran their development consulting business in Southern Africa. During that time he managed a number of DFID programmes in South Africa. He was also involved in pioneering and testing the challenge fund concept in a developing country context.

In 2007-2009 he worked for Danida in Vietnam on their Business Sector Programme Support, as Senior Advisor to the Ministry of Planning and Investment on provincial business environment improvement.

He is currently working on an assignment to help Malawi development a new MSME Policy and Strategic Plan through wide consultation and discussions with key stakeholders in Malawi. Coincidently, he was in Malawi during the July 20th demonstrations and gained first hand comments from respected Malawians on the situation in their country.

His development philosophy is to implement projects with local private sector professionals, with government officials restricted to policy and strategy formulation; and, to develop innovative approaches to implementing development programmes; particularly involving private sector players.

Summary

History

1. Malawi has a long history of supporting small enterprises throughout the country, and under the Banda era (1964-1994) he established a number of business support institutions to promote Malawian enterprises. Initially, these institutions worked reasonably well and had clear mandates which complemented each other. But there was little, if any private sector involvement in their formation or operation, bar token board memberships. Banda famously boasted that the private sector was well and strong ….and owned by Government.

2. Various donor led programmes developed a sector approach to MSME promotion, but since multi-party democracy in 1994 the new governments had their own ideas on what these institutions should do causing confusion and blurring their mandates. Policies were developed in isolation, again with little consultation with the private sector.

Approach

3. Given that Malawi is now fragile and facing being a failed state, the approach for the UK Government should be to work more closely with the private sector, help them organize themselves into business associations and groups to advocate for a better business environment. This will, admittedly, require capacity building to improve management and development of appropriate services for business association members.

4. In addition, the UK Government should seek to develop private sector providers of business services, which have been crowded out of the market by the government backed organizations – which are becoming increasingly less effective, and are certainly inefficient.

5. The Malawi Government should not get involved in implementation, but should concentrate on policy formulation and economic strategy decisions, in consultation with the private sector.

What should be done?

6. Growth programmes should be aimed at strengthening small businesses, they should be broad based, create supportive policies and regulations, and be sector specific.

· Strengthening of private sector institutions to provide training and advisory services; as well as to link small businesses to information, technology, raw materials and markets.

· Improve business and financial management skills to entrepreneurs so that financial institutions feel comfortable to lend

· Capacity building of business associations to provide improved and new services to members

· Create solutions to access to technology and technical skills training

· Holistic assistance to entrepreneurs working in identified growth sectors to overcome the aforementioned constraints

How should it be done?

7. Experience of working in Malawi for over 30 years indicates that implementing programmes is best done with private sector professionals, in consultation with Government officials. But establish open and transparent procedures that the Government officials and the public can see are fair; and, keep eyes and ears open, be aware of what is happening; and, manage programmes by moving around and being visible. Report back to Government officials on a regular basis with facts.

8. Establish management teams, be consultative, involve a cross section of staff at all levels – make it difficult for Senior Officials/Team Leaders to make decisions on their own without consultation. Put them in a position of having to reverse joint decisions agreed at management meetings. Gain wide range of views by consulting junior, middle and senior management separately, in their respective peer groups to prevent pressure from seniors, and get fresh views and ideas from junior members.

The main report discusses the types of interventions that are needed with a situational analysis in Malawi, highlighting weaknesses.

Interventions and Situational Analysis

Background

9. According the Decent Work Country Programme in Malawi the labour force is 6.1 million people; 2.5% work for private business and 1.1% on estates; 3.6% in the public sector meaning that only 442,000 are in formal employment. This leaves 5.6-5.7 million either unemployed/under-employed, employed in subsistence farming, or in the informal sector. The growth in Malawi is bound to come from the Micro, Small, Medium Enterprise sector; where most employment opportunities exist. Therefore, the perceptions of MSME sector stakeholders in Malawi are important; indeed, their participation is required to transform the sector, and release it from Government, albeit well intentioned, interventions.

10. Malawi has many institutions assisting this sector, and they have largely remained the same, but their roles have become confused by Government interventions and policies over the last 10-20 years. Recent decrees by government have been to rationalize the MSME sector institutions, but the mandates for the new institutions have either not been written or thought through but certainly not made available to the existing institution heads or made public.

Proposed Malawi Development Bank

Since the collapse of thee Malawi Development Corporation, MDC, there has been no development bank in Malawi. However, the MSB and MRFC, are both wholly government owned; and, they are being considered for merging to form the Malawi Development Bank. Indebank and its small sister, Indefund, were once 50% owned by Government though ADMARC, but are now also wholly government owned. Government bought out the other shareholders – FMO, DEG, IFC and CDC. International best practice, however, indicates that Governments should not own banks or get involved in provision of finance.

Proposed SME Development Board/Enterprise Development Company of Malawi

MEDI, SEDOM and DEMAT are proposed to merge into one organisation. International experience, again, indicates that business development services and provision of finance are not a good combination as it is difficult to be both an advisor as well as a debt collector. Should the proposed merger go ahead, it would be advisable that SEDOM’s role in the provision of finance should be rolled into one of the other organisations providing finance, and only their training and industrial estates activities are merged into the new organisation. SEDOM and DEMAT also provide BDS including courses in business management skills, although their activities have reduced in intensity over the last few years. Indeed there is an opinion amongst stakeholders that they have out-lived their usefulness.

Proposed Malawi Trade and Investment Centre

MEPC and MIPA are to be merged, indeed were merged on paper this year, but are yet to co-locate. The mandate for the new organisation is the combined mandates for the separate institutions. Neither institution is strong, now is the opportunity to restructure and reassess their respective mandates.

11. There is a plethora of reports on growth, including the Malawi Growth and Development Strategy, and, indeed the Lilongwe Growth and Development Strategy. There are also many "policies" written by various Ministries. These were drafted supposedly with wide consultation, but there was little evidence that the private sector or public were consulted fully or participated in the drafting of policies. Worse still, the policies were neither disseminated nor implemented.

Role of Business Associations/Business Membership Organisations

12. Business Associations can advocate for change in the MSME sector, and reducing the government sponsored interventions which have diminished in quality over time with Governmental budget constraints. Businesses that can organize themselves into groups or associations can provide services to their members at a lower cost and at better. Such services could be:

· Advocacy and lobbying of government and local authorities in removal of policies and de-regulation.

· Joint supply services, marketing, networking and selling services

· Technology and technical process promotion and development

· Provide information, internet & library services

· Adjudicate contracts/provide legal advice and certify product quality & documentation

13. There are a number of business associations representing the MSME sector nationally: NASME and NABW out-lived their usefulness as powerful members lost sight of the aims and bureaucracy was more important than service delivery. Members split off to form new groups or branches, such as IBAM and EEAG. All are re-establishing themselves; indeed fighting for the same members. In addition there are numerous groups and coops. Malawi Congress of Chambers of Commerce and Industry is the apex BMO representing the larger, more established businesses in Malawi (317 members), so MSMEs have moved away from membership of MCCCI because of the dominance of the larger companies, and their small voting rights.

14. Consequently, most associations are weak and need management and leadership training to enhance their ability to deliver their respective mandates. Equally, they lack financial resources to truly represent and support their members needs and advocate on their members behalf. There is room for donors to work with business associations, enhance their capacity and assist them develop services for their members and overtake those being provided by government backed organisations.

Management and entrepreneurial development

15. There is a need to develop management and entrepreneurial capacity in small businesses. The approach should couple training with follow-up consultancy and business advice. Training and consultancy should be provided by the private sector. This requires:

· Development of a cadre of trainers geared towards giving business advisory services as business counselors

· Owner/entrepreneurs, after short training courses, benefiting from a dedicated business counselor to implement the specific knowledge learnt

16. The key institution for entrepreneurship development in Malawi remains MEDI, with the Polytechnic and the Management Development Centre holding business management courses; including an elective on entrepreneurship. Bunda Agricultural College has recently de-linked from University of Malawi to merge with Natural Resources College; and, these should be encouraged to increase capacity of entrepreneur development, such as agriculture business management.

17. These institutions need enhancing with new resources to fulfil and expand their mandates. MSMEs believe that Malawi needs to start introducing entrepreneurship into schools at an early stage to instil a culture of entrepreneurship and enterprise in young people. There are road-side entrepreneurship and artisanal businesses popping up all over Malawi, but in particular along arterial roads into main cities, such as Lilongwe and Blantyre.

18. Private sector suppliers of management skills training have been somewhat crowded out of the market by government backed institutions, despite great demand for such training. Business Consult Africa was established with DFID funding to fill a perceived gap in the market.

Access to Finance and Financial Services

19. The first step to accessing finance and financial services is to strengthen the small businesses themselves in financial management skills and improve their internal management, to include:

· Development of the financial management capability within small businesses

· Improve access to credit for short, long term capital by working with financial institutions to develop SME credit and group guarantee schemes

· Provision of financial products - such as leasing, rent-to-buy, hire purchase, debt factoring, trade credit etc

· Assistance in negotiation of loan finance through business counselors, and business plan preparation and appraisal

· Promotional programmes for financial institutions to better understand small businesses to be receptive to their needs

20. Only 18% of the population in Malawi is banked. The Commercial Banking sector, however, recognise the value of being in the microfinance market: of the 11 commercial banks in Malawi, 6 have departments dealing with micro-credit. The commercial banks are presented by the Bankers Association of Malawi (BAM), who is looking at launching a financial inclusion project with micro-finance institutions such as FINCA and PRIDE.

21. The Malawi Government owned Malawi Savings Bank (MSB) was formed out of the post office savings facility in 1995, but admits that their repayment in the MSME lending has been poor, as low as 60%. The Malawian Government established the Malawi Rural Development Fund (MARDEF) in 2005 and in 2009 introduced the Youth Enterprise Development Fund under the same management. The Malawi Rural Finance Corporation is governments leading institution for loans in rural areas, with repayments as high as 98%, but currently down to 91%.

22. Small Enterprises Development Organisation of Malawi(SEDOM) was established in 1985 and has been giving out loans, capitalised by EU initially, and has managed revolving funds for World Bank and more recently AfDB. Both SEDOM and Development of Malawian Enterprise Trust (DEMAT) were involved in the Small and Medium Enterprise Fund (SMEF), a revolving fund from government at 15% interest. The SMEF was highly politicised and repayments were negligible.

23. Stakeholders, however, feel that this is still not enough, that interest rates are too high, and that more funds should be made available for business start-ups; and, in particular long term lending for capital equipment which could improve efficiency and productivity. It has also been commented that banks do not always understand the business, and therefore are reluctant to lend. But there is an opinion of thought from the financial institutions that access to finance is not the problem, but a cadre of entrepreneurs that understand how to manage and develop their businesses, is the main problem – banks do not want to lend to people who are not enterprising.

Access to Markets and Information

24. For any business to grow and prosper they need to develop and expand their markets, and find new and better customers. This requires

· Identification of market opportunities (local, national, regional and international) and a programme to link small business groups to identified market opportunities

· Direct buyer-seller matching at trade fairs, selling missions and trade consulates

· Promoting business inter-firm cooperation to assess their procurement processes to include sub-contracting from small businesses to larger industries

25. Malawi Export Promotion Council (MEPC), established in 1971 do market surveys, but rarely disseminates the information. Therefore, MSMEs are left to identify their own markets: local retailers and wholesalers will take local produce; but exports are normally organised at a much smaller scale through intermediaries from development projects which have links with international markets. Getting certification and meeting standards are crucial to export marketing. Malawi Bureau of Standards (MBS) established in 1972 is still not a full member of ISO, and is only a corresponding member.

26. Malawi Investment and Promotion Agency (MIPA) established in 1991 manages the inward investment in Malawi; but is not proactive and does not produce investment materials for its missions around the world. It is only reactive, processing on average 7 applications per month. It does not work with MSMEs although recognises it has a responsibility to MSMEs as they are needed by larger companies wishing to operate in Malawi.

Access to Technology and Skills Training

27. Productivity improvement, expansion and diversification involve process improvement and use of more advanced production methods and technologies. Therefore, the technology related services would include:

· Management of technology and production processes

· Recognized expert technical advisory services in specific process improvements targeted to a particular market

· Training in quality improvement, ISO certification, 6 Sigma, process control, and planned maintenance

28. The apex body for technology development is the Malawi Industrial Research and Technology Development Centre (MIRTDC), which became operational in 1993. It has developed a number of technologies for rural enterprise; but it estimated to have only helped 200 MSMEs since inception; and is reportedly proposed to merge with a new University of Science and Technology.

29. The higher education sector cannot take all qualifying students, and there are 10 students for every place in a Malawian university. This means that many Malawians do not get into University and need alternative forms of education and training. Skills training are handled by the TEVETA, which levies industry for a skills training. TEVET accredits technical skills training curriculum and institutions. National Construction Industry Council - NCIC provides training targeting the construction industry.

Access to Land and Workspace

30. Access to workspace and purpose built structures for MSMEs would have an impact as most operate informally at the road side. A permanent structure would:

· enhance the ability of MSME to get finance, because banks need a permanent address before giving loans

· improve their ability to get certification of produce, because businesses needed clean and hygienic premises from which to operate

· businesses need permanent structures for decent work and OSH for its employees

31. Therefore, MSMEs need better access to land and industrial shells. There are industrial sites in Malawi for larger businesses. The Ministry of Housing and Urban Development allocates land for light industrial use, which would be suitable for MSMEs, mainly on leasehold for 99 years, although there are some cases of freehold being granted in urban. But unless land is made available along main thorough fares into towns, enterprises are unlikely to occupy out-of-the-way sites allocated for small business activity.

32. Enterprises prefer to occupy freehold land just outside urban areas because of lesser restrictions from authorities. Authorities such as District Assemblies, and Lands and Physical Planning need to move quickly because land is being occupied in an un-planned manner affecting future orderly establishment of urban expansion. In rural areas customary land is deemed to be public land, and the Chief has the powers to allocate land for occupancy and specific use. Once allocated, the "owner" can apply for a lease in his/her name though the District Commissioner, who approaches the Land Commissioner. Once granted it then becomes private land on leasehold for 99 years.

33. The new Land Bill, which is currently with Cabinet for approval before being sent to Parliament, aims to change the law so that once land has been allocated by the Chief, the land can be registered without applying for a lease in the owner’s name, and once registered it becomes freehold, which can then be used for collateral with a bank – although the banks still have to accept this.

Business environment improvement

34. Malawi faces the challenge of speeding up and broadening the regulatory reforms process to stimulate market growth. Finding ways to speed up change is an urgent matter. There is a need for an inventory of regulations and a transparent process of rapidly reviewing regulations against simple criteria

· Is the regulation legal?

· Is the regulation necessary for future policy needs?

· Is the regulation business-friendly?

35. The aim is to identify unnecessary, outdated, complex, and illegal regulations that no longer serve a useful purpose. The burden should then be on the regulator to defend why the regulation should be kept; or it should be eliminated. Each regulation should passes through three levels of review – by ministries/departments themselves, by business stakeholders, and by an independent decision making unit, which develops the final recommendations. Surviving regulations are placed into a comprehensive electronic regulatory registry to improve legal security and transparency as it is maintained in the future.

Model for Growth and Job Creation