United Nations Capital Development Fund

IMPROVING REVENUE MOBILIZATION IN MALAWI:
STUDY ON BUSINESS LICENSING
AND PROPERTY RATES

By

Roy Kelly, Marco Montes, Edith Maseya,
Kenneth Nkankha, and Kiisa Tombere

PREPARED FOR
GOVERNMENT OF MALAWI
AND
the UNITED NATIONS CAPITAL DEVELOPMENT FUND
UNITED NATIONS DEVELOPMENT PROGRAMME
LILONGWE - OCTOBER 2001

This report was produced by independent consultants and does not necessarily reflect the views of the United Nations Capital Development Fund, the United Nations Development Programme, or that of any UN agency.

The Executive Summary is offered here on this page. For the full report, please download the pdf file.

EXECUTIVE SUMMARY [1]

Malawi is in the midst of an exciting decentralization reform. Since 1994, substantial progress has been made on establishing the broad legal and policy framework for decentralization. The Government of Malawi adopted a new Constitution in 1995 and a Decentralization Policy and a new Local Government Act in 1998. In September 2000, the Government issued an implementation action plan to guide the devolution process—the plan focuses on the initial five years of the expected ten-year implementation process.

Although the basic decentralization policy framework has been established, the major challenge facing Malawi is in its actual implementation. Recognizing the various institutional and resource constraints, the Government structured its decentralization implementation plan into two phases. The “crash programme” was to last from Sept. 2000 to June 2001 to focus on providing basic civic education on decentralization and holding local assembly elections. In addition, this phase was to include administrative and fiscal reforms that would enable the assemblies to fully participate in the decentralization process. Following this crash programme phase, the strategy was to involve a medium-term phase (2001-2004) that would begin devolving various central-level functions to the Assemblies (i.e., health, education, district roads, rural water supply, community services, community forests and buildings).

To assist the Government, this consultancy study focuses on local revenue mobilization. As the Terms of Reference identifies, the principal objective is to assist the Government develop a strategy to improve the ability of local assemblies to mobilize locally generated revenues—with specific focus on property rates and business licenses. The study is designed to focus on both policy and administration, covering issues related to the tax base, valuation, classification, tax rates, assessment and billing, collection, enforcement and taxpayer service.

The study is divided into three phases. Phase One focused on identifying the major policy and administration issues related to local revenue mobilization through discussions with key stakeholders and through site visits to several representative assemblies. This involved a two-week mission to Malawi from 1-12 April 2001. Phase Two focused on testing policies and administrative procedures for enhancing local revenues. This involved a two-week field exercise in Nkhata Bay District Assembly from 5-15 June 2001. Phase Three focused on data coding, data entry, data analysis, valuation model building, revenue estimation models, production of the license and rating registers and the Final Report which contains a set of recommended policy and administration procedures and a strategic action plan for reform implementation.

Local Revenue Mobilization in Malawi: The Context

The Local Government Act of 1998 provides the operational framework for local Assemblies to assume a greater devolution of political, financial and administrative powers. In addition to outlining procedures, functions and expenditure responsibilities for the Assemblies, the Local Government Act provides Assemblies with authorization to mobilize and manage revenues to fund their operations.

Assemblies are given three main revenues sources: locally generated revenues (traditional), central government transfers, and ceded revenues (non-tax revenues). The locally generated revenues (traditional) are to include property rates, ground rent, fees and licenses, commercial undertakings, and service charges.
The new Local Government Act (1998) introduced two major changes to the structure of locally generated revenues, namely:

Licenses have been shifted from the central government to the local assemblies (Section 44).
Property rating has been extended to all district assemblies—giving the rural district assemblies the right to collect property rates (Section 63).

Despite the policy announcements, the modalities for effecting these changes in the property rates and licenses are still under discussion. Of primary concern is how to best phase in the two revenue sources to ensure efficient and fair revenue mobilization. This raises some policy questions related to the definition and structure of the tax base and tax rates as well as key administrative questions concerning the maintenance of the tax base information, classification/valuation, billing, collection, enforcement and taxpayer service.

Local assemblies need to be empowered and strengthened with the capacity to more effectively manage and collect their locally generated revenues. Although the central government will be transferring financial resources through a new intergovernmental fiscal transfer system, it is essential for local assemblies to enhance their own source revenues in order to ensure local autonomy, promote accountability, enhance economic governance and local ownership and realize the decentralization efficiency gains by linking their revenue and expenditure decisions. It is essential that local assemblies have the power and ability to mobilize discretionary own-source revenues at the margin to allow truly local decisions—ones that are accountable to the local citizens—linking the additional local revenues to local services.

Local revenue mobilization in Malawi is generally low—primarily due to weak administration. In general, the revenue base information is incomplete, collections are low, and enforcement is virtually non-existent. Although policy can be fine tuned, the primary obstacle to successful local revenue mobilization is weak administration. Weak administration, combined with a lack of political will for enforcement, generates a low level of local revenue mobilization performance.

There is general agreement that the local assemblies have substantial potential for enhancing local revenues—especially from business licenses and property rates.[2] The primary obstacle is weak administration—thus, it is essential to develop simple, yet effective, administrative procedures that are capable of being implemented at the local level. As Figure 1 graphically illustrates, the administrative procedures must be comprehensive, covering all revenue administration functions—namely, tax base identification and information database management, liabilities assessment, invoicing, cash office management, collection monitoring, enforcement, and customer service.

FIGURE 1 : ADMINISTRATIVE FUNCTIONS FOR A PRE-ASSESSED REVENUE SYSTEM

As illustrated, local pre-assessed revenues—such as business licensing and property rates—have a common set of administrative functions and procedures. The tax objects must be identified and information collected, recorded and managed within the respective tax base registers. Using this information, assemblies must determine tax liability, produce liability notices, and deliver these bills to the respective taxpayers. The assessed taxes must be collected through a cash management office. Collections must be monitored and action must be taken against noncompliance. Throughout the administrative process, taxpayer service must be provided to promote voluntary compliance. [3]

In addition to the establishment of simplified, yet effective administrative procedures, local assembly capacity must be strengthened through targeted training, technical assistance and dissemination programs, with central level support from the Department of Local Government and the Decentralization Secretariat. In addition to the practical local administrative training, it is essential that local management capacity be strengthened to use the administrative information to mobilize additional local revenues.

The key to increasing local revenue buoyancy of business licenses and property taxation in Malawi is largely improved administration. The assembly must ensure that revenue is collected and enforcement undertaken against noncompliance, that all properties and businesses are captured in the respective registries, that property is valued based on accurate relative values and that businesses are classified properly, and that the tax levy and business fees are assessed accurately. Thus, the collection ratio (i.e., the extent to which the liabilities are collected and enforced), coverage ratio (i.e., the extent to which the tax objects are captured on the tax rolls), and the valuation/classification ratio (i.e., the extent to which the tax objects are valued accurately or classified correctly) are the critical administrative variables that ultimately determine effective tax rates, the tax burden for each property or business, the total revenue yield, economic efficiency and overall fairness. Malawi must therefore strengthen the assembly capacity to manage and administer all aspects of business licenses and property taxes—in order to increase the collection, coverage and valuation/classification ratios, as necessary.

Collection and Enforcement

Local revenue collection rates in Malawi are low—estimated to range between 20-50 percent. This is only an estimate since statistics on actual collection rates are difficult to identify since information on actual revenue collections is difficult to assemble and is usually compared based on tax collection targets not on billed liabilities or potential revenues. Of primary importance, however, is not the degree of under-collection, but rather the substantial scope for improvement.

To date, local assemblies rely mostly on individual persuasion to mobilize revenues—rather than utilizing the various enforcement mechanisms available through the Local Government Act. The lack of collection and enforcement can be attributed to several factors—one of which is the lack of apparent political will.

Mobilizing political will requires education and incentives to those involved in the revenue mobilization effort. The taxpayer must be convinced to pay the tax through receiving improved local services and perceiving that the taxes and fees are being administered fairly. The first priority must therefore be to improve service delivery—since people are always more willing to pay taxes and fees if in return they receive some tangible benefits or services.

As with all taxes, attention should also be given to educate the taxpayer on the rationale, procedures, obligations and responsibilities related to the business licenses and property tax. Having the ability to link revenue collections to improved service delivery, and a better-educated taxpayer population will enhance compliance. Mobilizing the community through enhanced participatory budgeting and civic participation will engage the citizens and also facilitate enhanced revenue collection.

The government must strictly follow the established laws, regulations and procedures to earn the credibility that the taxes and fees are being administered in a transparent, accountable and fair manner. Management and operational staff must be motivated to assist in the revenue mobilization effort—to ensure that the property tax/business registers are complete and kept up to date, assessments are calculated properly, tax demand notices are distributed, taxpayers are made aware of their obligations and the procedures to pay, and taxes and fees are collected systematically and fairly from all rate payers and businesses. Close supervision and improved management of revenue collectors can improve the revenue yield and equity of the rating and business licensing system. Enforcement against noncompliance is essential.

Currently, tax revenue compliance in Malawi is being monitored through the use of tax receipts and business licenses, which requires excessive local resources to check and identify individual compliance in the field on a case-by-case basis. Compliance depends on the tax collectors taking individual initiative and enforcement action to meet with the rate payers and businesses to check on the individual receipt or license. Although these spot compliance checks can generate additional local revenues, a well-maintained, up-to-date delinquency (i.e., defaulters) list can be used more effectively by scarce local enforcement resources to follow up on noncompliant taxpayers. These tax delinquency lists should be widely publicized to ensure transparent and consistent action against noncompliance. This will enable local assemblies to effectively target their resources to maximize collections from those in noncompliance.

Collection and enforcement must rely on a combination of positive incentives, sanctions and penalties. Positive incentives should be the first approach—convincing taxpayers and businesses to pay their required taxes and fees by providing improved local services, by administering the revenue system in an efficient and equitable manner and by providing taxpayer education and taxpayer services. Ultimately substantial voluntary compliance is essential in order to have a sustainable local revenue mobilization system.

However, to complement the positive incentives, the assembly must also use a series of sanctions and penalties where necessary and possible. Sanctions are essentially the withholding of a service for noncompliance. For example, a building permit or a local service such as water supply can be withheld unless the property tax or business license is paid. Under a property tax system, a local tax clearance certificate or a tax lien can be put on the property title that would prohibit the property from being transferred or sold until the tax is paid. Finally, penalties can be used—such as individual fines, closure of businesses, seizure and auction of movable assets and immovable property, cancellation of leasehold rights, or imprisonment. The creative and effective combination of positive incentives, sanctions and penalties can provide the basis for enhancing the revenue collection ratio.

The business license law in Malawi (Art. 36) provides for fines and imprisonment for up to one year for violating the Act (Art. 36) as well as the cancellation of the business license that would then lead to the closure of the business. The Local Government Act (1998) also provides for a variety of options to encourage collections and compliance for the property rates. Late payments can be dealt with through an interest rate of 4 percent per month (Section 86 (3)). The outstanding tax is considered a charge on the property and can be registered under the Land Act (Section 90). Ultimately all outstanding tax liabilities over three years are to be seized and auctioned in accordance with Section 91. [4]

The major obstacle to enforcement is in the implementation of the law, the legal provisions being quite comprehensive and clear. However, it may be that the law is too strict to be applied politically. For example, the mandate under Art 91 to seize all properties in noncompliance of the property rates is not realistic, manageable or desirable. Enforcement should be selective—with the objective not to collect revenue per se but to encourage greater voluntary compliance. Ultimately the objective for the property rates is to collect revenue—thus improving collection and enforcement is critical. Only through strict—yet selective—enforcement will it be possible to ensure that the property tax system is fair. [5]

Malawi should also consider a more active use of tax liens—sometimes known as caveats or encumbrances (Art. 90). Under this option, for example, the government could send a letter to all properties with outstanding arrears informing them that they have 30 days to clear their debt. If the debt is not cleared, the owners would be informed that a tax lien will be placed on the property. A tax lien is effective because (1) the property cannot be transferred or sold until the lien is cleared and (2) financial institutions are not likely to lend using the property as collateral. In contrast to a property seizure that requires a court order, a tax lien can be applied under the land act without a court order.

Tax Base Coverage

The coverage ratio of the local revenue registries seems to be quite low—resulting from either non-existent, incomplete and/or outdated information on the taxable objects (i.e., properties and businesses). Local business license registers contain only information on those few smaller businesses being issued licenses by the assemblies. Information on any larger businesses is contained in the business register at the Ministry of Industry and Commerce.

The property tax registers are also in various levels of completeness. Within the district assemblies, property tax registers do not exist and must be created for the first time. In the previously rateable areas, the property tax registers may be incomplete and out of date. Some of the last valuation rolls were completed around 1994/95, while many date back to the early 1990s. There is thus a need to update the basic information and valuations. Supplementary valuation rolls are needed to incorporate the new housing developments into the tax net.

Basic property information seems to be available in Malawi at least in the urbanized areas. The Ministry of Lands has the basic maps, property titles/deeds, and other baseline information. In fact, some of this information is computerized—with the ground rents registry and valuation rolls in various states of computerization. The key is to use these various information sources, along with simple field procedures, to empower local assemblies to create and maintain business and property registries. Assemblies must properly identify the tax object, collect the relevant tax object information, and maintain and manage the information in a systematic manner to keep it up-to-date. This involves using a system of simple maps, unique property identification numbers, property and business information collection forms, data collection and information management procedures.

The key, therefore, is to establish simple but effective property and business register standards and procedures, in order to collect and maintain only the essential information necessary for business licensing and property tax administration. Relevant information would include the legal information needed for tax assessment and billing as well as the physical property characteristics, business type and valuation-related information. All mapping standards and information needs should be tailored specifically to revenue objective. For example, the measurement and data quality standards for a fiscal cadastre are less than those required for a legal cadastre. The key is to ensure that the tax administration collects only timely, relevant and reliable information in a cost effective manner. It is better to maintain up-to-date information on a few key variables than to maintain an extended assortment of data that may become extremely cumbersome to keep up to date and that probably will never be used effectively.

Although existing tax object information should be used to the extent possible, it is often more cost effective to undertake a separate field data collection exercise to create, build and/or update the tax registers. Simple, cost effective approaches to field data collection have been used successfully in Indonesia and the Philippines [6]. Similar field data collection techniques have been field tested in Kenya under the Kenya Local Government Reform Programme (KLGRP), in Kampala City Council under the Nakivubo Channel Project and in Tanzania under the Urban Sector Rehabilitation Project (USRP).

Field data collection procedures must be restructured to be more cost effective. Currently in Malawi, the Local Government Act (1998) stipulates that “every valuation and the preparation of valuation rolls and supplementary valuation rolls shall be undertaken by a valuer registered under the Land Economy Surveyors, Valuers, Estate Agents and Autcioneers Act” (Art.67). The LGA then provides power to the valuer to enter into properties and officially request property information (Arts. 73 and 74, respectively).

It is important to recognize that there are two different skills involved in making a valuation roll—one is the collection of property information (i.e., measuring boundaries and areas, identifying and collecting basic land and improvement information, etc.) while the other is using this information and other market information to estimate a value for each property. Given the scarcity of registered valuers, the requirement to use valuers to collect field data is a major obstacle to increasing taxbase coverage at a reasonable cost. The actual collection of the property-related information should be the responsibility of the tax administration—not the valuer. The tax administration can then use local officials, surveyors, engineers, students, and others to collect the basic register information. The trained valuers should not be required to collect the information but should use various collected information to determine the valuation as required for rating purposes. In this way, the collection and maintenance of the tax registers can be done in a more cost effective manner, thereby increasing the coverage ratio.

Although policy measures adopted by the Government can facilitate the systematic maintenance of tax object-related information, the coverage ratio can only be substantially improved through adopting appropriate administrative procedures, providing the training and incentives to the administrative staff, and ensuring that the procedures are followed systematically. Given the dynamic nature of economic and property markets, this is a continuous and information intensive activity. Therefore, countries are increasingly depending on computers, linking the administrative procedures with the data processing capabilities of computers. Combined with simplifying the field data collection procedures and reducing the amount of property information being collected, computers can allow local governments to maintain their fiscal cadastre information in a cost effective and timely manner to ensure a high coverage ratio.
Rather than relying on a periodic creation and updating of business and property tax registers, Malawi needs to develop a system for the routine maintenance of the registers using the power of computers for database management rather than as primarily a typewriter to produce valuation rolls. This will require the design and systematic implementation of administrative procedures for fiscal cadastre construction and maintenance.

Valuation and Classification

Using the information from the registers, the tax administration must classify the tax object correctly for a unit tax assessment such as a license fee system or valued correctly for an ad valorem tax assessment such as a typical property tax system.

Accurate business classification depends on (1) having sufficient and unambiguous information on the business characteristics needed by the staff to correctly classify the businesses, (2) trained staff who can classify correctly and consistently, (3) proper supervision and oversight for quality control and (4) an appeals process to deal with cases of misclassification.

Accurate property valuations similarly depend on (1) having good descriptive physical property information which can be linked to market data or indicative valuation measures to all staff to ascertain the relative property value, (2) trained and knowledgeable staff who can use this information to determine the relative valuation, (3) proper supervision and oversight for quality control and (3) an appeals process to deal with cases of mistakes in valuation.

Both the classification and valuation accuracy affect the revenue potential, equity, efficiency, administrative feasibility and political acceptability. Generally speaking, business classification is quite straight forward—bases on objective descriptive information such as type of business and size. On the other hand, property valuation depends on estimating the relative value for each property. In countries with a lack of easily available market information, governments tend to rely on simple normative appraisal models for property tax purposes. In addition, countries everywhere are moving towards introducing systems of mass valuation rather than single property appraisals. [7]

Property valuations in Malawi tend to be out of date—with most Quinquennial Valuation Rolls (QVRs) in need of updating and Supplementary Valuation Roll (SVRs) in need of being undertaken. To address this, Assemblies are under pressure to revise the valuations based on updated property information and evidence of changes in relative market values. The key is to establish a system where relative property valuations can be determined with minimum administrative cost.

There are several issues affecting the ability of Malawi to create and update the valuation rolls. First, the Local Government Act has limited the preparation of the valuation rolls to only valuers registered under the Land Economy Surveyors, Valuers, Estate Agents, and Auctioneers Act (Section 67). With only 26 such registered valuers in Malawi—this presents a major challenge to create new valuation rolls for the district assemblies or updated valuation rolls for the cities and towns at a reasonable cost. Under normal market conditions, the price for rating valuation will be very high due to the lack of competition. Therefore, as in the past, the Government will need to regulate the pricing to ensure that prices are reasonable reflecting true costs and/or introduce alternative more cost effective valuation approaches for property tax purposes. Second, there is a lack of easily available market data since the greatest part of land and property is owned by the state (including parastatals and housing organizations) where leases and rents have been determined primarily by social policy not the market.[8] Third, inadequate resources are allocated to the Ministry of Lands to enable the timely updating and production of the various valuation rolls.

Recognizing these various constraints to producing valuations for rating purposes at a reasonable cost, the Local Government Act does provide for the option to apply a fixed sum levy on land and buildings “… in respect of any area which has not been designated by the Minister as a rateable areas under this Act or which for any reason has not been assessed or it not assessable…” (Section 64). This fixed sum levy provides the opportunity to introduce a simple property tax system based on a simple mass appraisal approach to generating tax liabilities. However to improve equity, Section 64 should be modified to allow for the inclusion adjustments for size, construction type, location, and access to services to increase the equity in assessments. [9]

In those areas designated as “rating areas” by the Minister, it is imperative that Malawi adopt a mass property valuation approach for rating purposes. As with the creation of cost effective fiscal cadastres, countries everywhere are increasingly shifting to simple mass valuation techniques rather than relying on individual single parcel appraisals. Experience shows that these mass valuation techniques can significantly reduce the cost of valuation for rating purposes. Use of these techniques allow scarce valuation expertise to concentrate their resources on developing mass valuation models, which perhaps individually valuing only those few, very high value and unique properties for rating purposes.[10] These simple mass valuation techniques can ensure that the absolute and relative levels of valuations are kept current at minimal costs.

The current approach of relying on individual parcel by parcel valuation, using registered valuers to both collect basic property information and to value the properties has led to outdated and expensive property rolls. Separating the data collection from the valuation and introducing simpler, mass valuation systems will assist to make the property tax an effective local revenue in Malawi. [11]

Recognizing the scope for enhanced local revenue generation through improving the collection, coverage and valuation ratios, the Government and the UNDP/UNCDF agreed to focus the second phase of the project on exploring the options for developing and refining the administrative policies and procedures necessary to construct and maintain tax registers for business licenses and property taxes. Phase Two thus involved a field exercise focused on Nkhata Bay District Assembly (NBDA) aimed at testing a set of administrative procedures which would allow assemblies to collect, manage and maintain the revenue registries needed for administering the business and property rates revenue systems. In addition, the field study provided the opportunity to develop a normative mass valuation model that could be applied to properties in Malawi. The following section will discuss the pilot project that was conducted from 5-15 June in Nkhata Bay District Assembly (NBDA).

Field Exercise in Nkhata Bay District Assembly

A field exercise in the Nkhata Bay District Assembly jurisdiction was conducted from 5-15 June to achieve four main objectives.

To test and refine the methodology for collecting and coding property and business data
To capture the information required for constructing the primary business and property registries within the Nkhata Bay District Assembly.
To capture the information required for proposing a simple assessment methodology for business licenses fees and property rating that could eventually be managed by the assembly.
To evaluate and refine the operational methodology for data collection and registration with an aim of replicating the exercise to other assemblies.

Following the initial two-week field exercise, the collected data and field experience was analyzed in order to develop

Business License and Property Rates Register
License Fee Schedule
Mass Appraisal Methodology
Mass Assessment Methodology
Revenue Estimation Models
Practical Lessons for Subsequent Replication
Action Plan for Nationwide Implementation

The NBDA field exercise covered a two-week period, using local assembly staff and students to undertake the fieldwork necessary to develop the business and property registries. The exercise involved 33 workers, divided into 11 field teams. The teams completed 2,137 forms which identified 721 businesses and 471 properties. The appraised valuation for the properties for rating purposes was estimated at MK1.26 billion—which at a 0.5% tax rate could generate MK 6.3 million annually.[12] The indicative businesses licensing revenue was estimated at MK.1.1 million annually. Logistical support for the field work was provided by the Decentralization Secretariat while the NBDA administration provided permanent administrative support and transportation for the field teams.

The raw data collected in the field was processed into meaningful information stored in adequately structured computer databases, suitable for effective and efficient data processing procedures. This information was then analyzed and used to build valuation models and to construct the registers for business licenses and property rates. The work involved coding, data entry, data analysis, valuation model building and calibration, and production of the business license and property rating registers.

These registers were presented and discussed with the Finance Committee of the Nkhata Bay District Assembly between 1-3 October 2001. A first draft of these registers was delivered to Nkhata Bay officers during the meeting held on 5 October 2001 in Lilongwe. Based on those discussions, some adjustments were made to improve the relative structure of land and buildings base values. However, the authors strongly feel that further discussions and refinement will be necessary to improve the values prior to use for taxation assessment.

Prior to using the results for revenue mobilization purposes in Nkhata Bay or for replication to other assemblies, the preliminary results must be thoroughly discussed by the national reform team and the local NBDA administration. The original objective of the pilot field exercise was to test a set of administrative procedures that could be used by assemblies to create the business and property registers in a cost effective manner. These tested procedures were to be then incorporated into a strategic reform action plan prior to replication and/or using the information for actual revenue mobilization purposes.

However, during the course of the field exercise, the NBDA expressed a strong interest to immediately use the results from the exercise for billing license fees and property taxes. In the absence of a carefully orchestrated public relations and education campaign to ensure that taxpayers fully understand the procedures, rights and responsibilities, refining the classification and assessment process to ensure an acceptable level of equity, and establishing an administrative framework for managing the revenue system, it would be premature to directly apply the exercise for revenue mobilization without possibly jeopardizing the intended reform effort. It is imperative that the Government undertake a thorough evaluation, discussion and refinement of the preliminary results of the exercise be undertaken prior to direct application for revenues mobilization.

Based on the policy and administrative review, combined with the applied field exercise in Nkhata Bay District Assembly, the following specific recommendations are made concerning property tax and business licensing reform.

Local Licensing Recommendations

Immediately transfer the Business License Revenues to Assemblies. This will be consistent with the Decentralization Policy and Local Government Act (1998). This can be accomplished by the Minister of Industry and Commerce who can designate the local assembly to be a licensing authority (Cap 46, Section 7) and can order that 100% of fees collected to be paid into the revenue of such local authority (Cap 46, Section 33).
Broaden the licensing base for Assemblies—through introducing a “Single Business Permit (SBP)” system that would comprehensively include all businesses and trade, including professions and occupations. The proposed Single Business Permit should be simple, able to be effectively administered locally. It should be structured to allow for a differentiation in fees by type of business and by size of business. In addition, the SBP structure should be comprehensive to include all business activities within a jurisdiction in order to increase the revenue potential, improve fairness, reduce economic distortions and simplify administration.
Assemblies should construct a comprehensive business register. Simple, yet effective, field data collection procedures should be adopted to enable assemblies to construct and maintain comprehensive business registers. Business registers should be constructed to be all-inclusive in anticipation of future policy change to allow assemblies to issue a permit on all businesses in their jurisdiction. Submission of these registers will be the monitoring indicator of assembly capacity.
Training and technical support should be given to enable assemblies to administer the business licenses. A training, dissemination and technical assistance support should be given to enable assemblies to build and maintain a business register, assess and bill the levies, collect and enforce against noncompliance and provide taxpayer service.
Rationalize (and simplify) the business licensing requirements to reduce administrative and compliance costs. Requirements should be simplified to focus only on the essential elements of raising revenues and regulating for health, safety and public welfare. Tax clearance certificates, for example, should not be a precondition for issuing licenses—if licenses are to include all economic activities ranging from informal sector traders to large-scale manufacturing and assembly. Information shall be forwarded to the Malawi Revenue Authority and other departments for their individual purposes.
Require that the business register information be available to the general public and to be reported to the Department of Local Government, Ministry of Industry and Commerce, and any other agency deemed essential. The information contained in the business registers provides the basis for mobilizing revenues and for taking regulatory action to protect the health, safety and public welfare of citizens.
Use computer technology to facilitate the administration management of local level licenses/permits. As with property rates, computers (though an Integrated Financial Management System (IFMS)) can assist local authority manage the entire license-related administration process. The IFMS can assist in the maintenance of the business register, assessment and billing, collection monitoring and enforcement, and taxpayer service.
A business sector public relations and education campaign should be provided to ensure business community understanding and support for the reform. A systematic mobilization of business community support will reduce possible misunderstanding and improve higher compliance. It is suggested that the business community representatives be included in the fieldwork on identifying and classifying businesses to improve the register coverage and accuracy.

Property Tax Recommendations

Property tax administration capacity within the Assemblies must be strengthened. Priority must be placed on enhancing the assembly capacity to manage all aspects of property tax administration—including property registry maintenance, valuation and appraisal, assessment and billing, collection, enforcement, and taxpayer service. Development of simple, yet effective systems and training are prerequisites to improved local capacity.
Assemblies should use a computer-assisted “Integrated Financial Management System” (IFMS) to manage their property taxes and all other revenues and expenditures. Currently assemblies are using a variety of stand-alone systems for database management, billing, and accounts—with little integration of the financial management and accounting components. A simple IFMS system, which manages the revenues and expenditures permanently comparing these against the budget, would empower assemblies to better manage their resources.
Priority must be placed on improving the collection, coverage and valuation ratios—in that order. Collection and enforcement seem to be the weakest link in the property tax administration—thus, deserving special attention. Without a system of effective collection and enforcement, there is little to be gained from increasing the coverage and valuation components. Using an IFMS system will ensure that the senior local management has the information necessary to undertake compliance, coverage and valuation related action.
Strict enforcement against noncompliance is essential. Amend the LGA (1998) and other relevant by-laws to facilitate enforcement (e.g. through allowing for the issuance of tax liens, tax clearance certificates, cancellation of leasehold titles, foreclosure on the property of defaulters, seizure and auction, etc.). Guidelines should be issued to assemblies on the various enforcement provisions to clarify the options and procedures.
Regulations and procedures for constructing the property tax registers should be issued. Keep the register requirements simple—and focused only on property tax-related information. Change the LGA (1998) to shift responsibility of the valuation roll to the Assembly—separating the functions of data collection and maintenance from valuation per se.
Mass valuation approach should be adopted for rating purposes. To minimize valuation for rating costs and time, it is recommended that a “mass valuation” approach to rating valuation be adopted. Individual property valuations should be limited to special high value properties—all other properties should be valued under the mass valuation approach.
An independent rating appeals board must be established. To ensure equity and accountability in the valuation process, Malawi must establish an independent appeals board rather than relying on the current system of allowing the valuer to deal with his own valuations.
Assemblies should be given training on the new procedures for property taxation. District assemblies especially need training and capacity development support since property taxation will be a new source of revenues. Training should be focused on the rationale and practice of property taxation, the policy and administrative procedures and approaches to improving taxpayer service. Assemblies with previous experience with property taxation should be given a refresher course with special attention on taxpayer service, collection and enforcement provisions.
Public relations campaign should be undertaken. In light of the new decentralization policy and the newly elected assemblies, the government should embark on a public relations campaign to fully inform the citizens on their rights and obligations. Brochures, posters, the mass media and citizen meetings should be used to provide information on the various property tax reforms. Successful public relations will facilitate the ability of the assemblies to construct accurate and comprehensive property tax registers. This public awareness campaign is especially necessary for the district assemblies which to date have never implemented a property tax system.
Tax rates should be initially capped to protect the interests of the taxpayers. Currently assemblies have unlimited authority to set tax rates in order to generate sufficient funds to meet all locally approved expenditures. Possible misuse of this freedom can place undue burden on taxpayers that can lead to mis-administration and possibly to tax revolts. It is therefore recommended to place a maximum tax rate of say 1 percent with tax rates above this subject to approval by the Minister responsible for local government.

Way Forward

The key to increased local revenue mobilization is to strengthen the capacity of assemblies to more effectively manage all aspects of revenue administration. This requires simple, yet effective, administrative procedures that can be implemented at the local level. These administrative procedures must be comprehensive, covering all revenue administration functions including tax base identification and information database management, appraisal and liabilities assessment, invoicing, cash office management, collection monitoring, enforcement, and customer service.

Inevitably these administrative systems must be supported using computers for information management. Priority must then be placed on building local capacity to successfully operate these systems, to educating the taxpayer citizen concerning their rights and obligations, and then implementing and monitoring the revenue mobilization reforms.

This study was designed to assist the government identify the policy and administrative parameters for a revenue mobilization support Action Plan. This Final Report contains the observations, analysis, and lessons and the recommendations for such an Action Plan.

In addition to the proposed Action Plan which follows, it is recommended that this Final Report be immediately followed-up with the following two activities:

1. Two-Week Workshop for Local Senior Management

In anticipation of replicating the Nkhata Bay District Assembly field procedures, this two-week workshop would disseminate the policy and administrative principles to prepare assemblies for revenue mobilization reform. The Workshop would be held for 40-50 staff from 10-12 Assemblies which would be included in the first phase of the revenue mobilization support Action Plan. The topics to be covered would include:

Principles of revenue mobilization and financial management
Integrated revenue administration
Field Work to build the registers
Calibrating the mass appraisal model
Data entry and analysis
Determining the rate and fee structure
Assessment, collection and enforcement
Taxpayer service and stakeholder education

2. Two-Day Study Tour to Kenya for Central Government PolicyMakers

To learn first hand about (1) the Single Business Permit and (2) Integrated Financial Management System (IFMS). Mutual interchange of ideas with the Kenya Local Government Reform Programme. The two-day study tour would involve 5-6 senior officials from the Department of Local Government, Ministry of Finance, Ministry of Commerce and Industry, and the Decentralization Secretariat. It is anticipated that the mission would be headed by the Permanent Secretary (Department of Local Government). The topics/activities to be covered would include:

Sharing of local government reform experiences
Single Business Permit (SBP) experience
Integrated Financial Management System (IFMS) experience
Property Rates Experience
Field visit to local authorities with SBP, Rates and IFMS reforms.

Proposed Revenue Mobilization Support Action Plan

To support the decentralization reform, it is recommended that a nationwide effort be undertaken to implement improved financial management and revenue mobilization in all 39 local Assemblies in Malawi. International experience demonstrates that successful fiscal reform begins with a serious review of all administrative policies and procedures, supplemented by improved information management. Therefore, the proposed revenue mobilization support Action Plan for Malawi is structured around the introduction of a computer-assisted Integrated Financial Management System (IFMS)—beginning with the revenue administration components related to property rates, licensing and cash management, followed by the introduction of the expenditure management, budgetary control and accountancy sub-components.

The Action Plan focuses on the design and implementation of a set of administrative procedures addressing all financial management operations of the Assembly. These administrative procedures will be integrated and implemented with the assistance of a computer-based information processing component. It will be through this combination of improved administrative and information processing components that assemblies will be enabled to improve overall revenue mobilization and financial management.

The Action Plan suggested is targeted specifically to overcome the administrative deficiency through enabling assemblies to more effectively manage their revenue resources—both those collected locally and those to be received through the intergovernmental transfer system and through ceded revenues. The suggested solution is comprehensive, introducing simple, yet effective, administrative procedures, establishing a local Integrated Financial Management System (IFMS), and strengthening local administration capacity through targeted training.

The Action Plan is designed to cover a period of 36 months (January 2002-December 2004). It will include activities on capacity development at both the central and local levels and the establishment of a centralized informatics support unit. This project would provide a consistent and uniform system and procedures to enable each Assembly to effectively manage their revenues, expenditures and budget monitoring activities. The IFMS systems would provide (1) the necessary financial operational and management tools for each assembly and (2) a consistent IFMS system to aggregate the local level financial information for central level policy analysis, monitoring and technical assistance.

The project would be implemented in three phases (See accompanying timeline):

Phase 1 would build on the initial field exercise conducted in the Nkhata Bay District Assembly (NBDA). This Phase would complete the construction of the property rates and business license registers, install all components of the revenue administration management sub-system (i.e., data maintenance, assessment, billing, collection, collection monitoring, enforcement, and customer service), install all components for the expenditure management and budget monitoring sub-system, and train local operational and management staff.

The objective would be to establish a well functioning IFMS in time to be fully operational by July 2002 (the start of the new fiscal year). The Nkhata Bay IFMS system would serve as a demonstration model for subsequent replication under Phase 2 and 3. During Phase 1, a series of financial management seminars would be held to expose all Assemblies on the principles and procedures of the IFMS, implementation strategy, and field work procedures. In addition, the Informatics Support Unit (ISU) would be established to adjust the IFMS software and procedures to the Malawi situation. [13]

Phase 2 would expand the project components to an additional 13 Assemblies—to be identified by the Government. As the attached timeline indicates, this Phase will also involve the construction of the relevant registers, installation of the software components, training on operations, procedures and management in preparation for full operationalization by June 2003. Mass billing for all pre-assessed revenues will be carried out in June 2003, with all revenue and expenditure operations in effect from July 2003 onwards. In addition, Phase 2 would continue to provide support and fine tuning to Nkhata Bay District Assembly, as required.

Phase 3 would further replicate the system to the remaining 25 assemblies. Phase 3 would include all relevant activities undertaken in Phase 1 and Phase 2. In addition, Phase 3 would continue to provide support to the 14 Assemblies included in the previous two phases.

Specific activities in the recommended Action Plan focus on the following:

Business Licensing Reform, including
- Converting the current selective business licensing system into a general Single Business Permit (SBP) that would include all business and economic activities.
- Creating locally-managed business registers—with assemblies providing information with which appropriate agencies and departments can monitor and enforce health, safety and environmental regulations.
- Immediately shifting the licensing revenues and the licensing authority to assemblies.
- Implementing a computer-assisted Business Registration Management System interacting with an automated Cash Office Management System
- Implementing the legal enforcement mechanisms to assist Local Assemblies pursue payment by non-compliant businesses
Property Taxation Reform, including
- Creating property tax registers in the district assemblies
- Implementing the computer-assisted Property Rates Management Systems (IFMS) interacting with an automated Cash Office Management System.
- Introducing mass valuation for rating purposes
- Implementing the legal enforcement mechanisms to assist assemblies pursue payment by noncompliant property tax payers.
- Commencing a stakeholder education campaign (e.g., taxpayers and local tax officials)
Financial Management Reform for other Revenues, Expenditures and Budget Management Issues, including
- Setting up a computer-assisted Business Permits Management Subsystem and a Property Rates Management Subsystem both integrated with an Office Management Subsystem, as a first step for implementing an Integrated Financial Management System (IFMS) addressing all Revenue, Expenditure and Budget Management issues in the Assemblies.
- Establishing local capacity to operate and manage the IFMS system, as well as management capacity to use the IFMS information for improving revenue mobilization, expenditure and overall budget management.

The most demanding component will be the Data Collection Exercise to gather the information related to business and properties. The Nkhata Bay District Assembly experience demonstrates that such an exercise can be conducted at moderate cost, in a reasonable time, and at an acceptable quality level. As identified in Section 3, several adjustments shall be introduced to improve the effectiveness and efficiency of the field data collection exercise. Based on the Nkhata Bay experience, the Action Plan should pay special attention to ensuring support on logistics, technical guidance and quality control for the data collected.

The Action Plan recommends that business license information be collected in all 39 assemblies to enable the identification, classification and registration of all businesses. In this way, a comprehensive business register can be constructed for each assembly, which can be used to mobilize revenues in an equitable, efficient, and cost effective manner. As argued earlier, the introduction of local business licensing will be easier than the property tax to implement and will be more acceptable to the local citizens for several reasons. First, businesses have a tradition of paying license fees throughout Malawi—thus, most businesses are accustomed to paying an annual license that should help ensure high compliance. Second, businesses have the cash to pay the licenses. Third, business license administration is quite simple—businesses are classified into broad categories, with an associated fee for each category—after which the fees are assessed, collected and enforced.

The Action Plan then recommends that priority be placed on building the property tax registers for the district assemblies. For these assemblies, a field exercise must be undertaken to collect the necessary information to enable a simple mass appraisal approach. For Assemblies that already use the rating system shall only need to provide the corresponding rates roll, including ratepayers identification, address, property value and current rate payable which shall be included into the corresponding Rates Management Subsystem to be used to issue the liability notices and provide for the broader management functions.

And finally, the Action Plan recommends that the priority be placed on expanding the IFMS revenue components to include all other local revenues and to the subsequent installation and operationalization of the expenditure and budget management components to deal with payroll management, procurement management, creditors monitoring, budget execution monitoring and accountancy.

Project Outputs

The objective of the 36-month project is to establish a fully-functioning Integrated Financial Management System (IFMS) in all Assemblies. The IFMS would include the revenue administration components, expenditure management components, and the budget monitoring components. The work would involve constructing the necessary registers/databases, installing the various IFMS modules, training local operational and management staff on all administrative and technical procedures, and establishing a central level Informatics Support Unit (ISU) to support the local IFMS activities.

Project Structure

The project would be housed within the Decentralization Secretariat to ensure proper coordination with other ongoing institutional and reform work (e.g., LGFC, etc.). Ultimately it would be expected that the Informatics Support Unit would be institutionalized within the Government (e.g., Department of Local Government, Local Government Finance Committee) to provide the informatics ongoing support for the IFMS, assembly budget analysis, policy analysis and other required support.

The project would be outsourced as a self-contained Scope of Work to a contractor who would be solely responsible for the delivery of the activities. The Decentralization Secretariat would be responsible for supervising the contractor to ensure proper coordination and logistic support as necessary. The total estimated cost would be about US$3.5 million—the cost per assembly would be about US$90,000.