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  • Star Report:  Malawi Compact
  • April 2020

Policy and Institutional Reforms

Compact Project(s) Major Policy Reform Condition Precedent (CP) Rating Narrative
Power Sector Reform Project Funding of Turnaround Facility (TAF) to meet ESCOM’s working capital and investment capital needs by the Government of Malawi in Fiscal Year 2012 prior to Entry into Force (EIF) Met on Time. Government did provide TAF funds prior to EIF; however, the funds were not needed in full in 2013 or in 2014-2016 due to ESCOM’s improved financial position. However, in 2017-2018 as ESCOM’s financial position deteriorated, the Government did not provide additional funds through TAF.
Power Sector Reform Project The Government will ensure that ESCOM has employed a professionally qualified Chief Executive Officer for ESCOM Met on Time. The Government hired a new CEO prior to compact EIF.
Power Sector Reform Project/ Infrastructure Development Project The Government shall have completed a construction schedule for the Kapichira II hydropower plant that is agreed with MCC Met on Time. Kapichira II was completed prior to compact EIF.
Power Sector Reform Project Government to provide evidence that it has converted a substantial portion of the debt owed to it by ESCOM into equity. Any remaining debt owed to the Government by ESCOM will be cleared from ESCOM’s balance sheet by EIF and the Government will ensure that ESCOM restructures its third-party debt obligations in a manner that affords ESCOM a reasonable debt-service burden, consistent with the Financial Plan. Met Late, following consultations between ESCOM and MCC. This was met within 2 quarters of compact EIF. Restructuring ESCOM’s debt combined with the tariff increase ESCOM received in 2014 supported initial improvements in ESCOM’s financial position from 2014-2016.
Power Sector Reform Project Prior to EIF of the compact, the Government and MCC to identify semi-annual benchmarks for milestones for jointly developed Government power sector reform agenda in the following areas: ESCOM finances; ESCOM operations; ESCOM governance; tariff reform; Malawi Energy Regulatory Authority (MERA) governance; and regulatory enabling environment for public and private sector participation. Met on Time. Semi-Annual Reviews were held during the compact and provided an opportunity for all stakeholders to review progress on critical milestones.
Power Sector Reform Project Based on the results of the cost of service study supported by MCC, the Government agrees to a phased implementation of full-cost recovery tariffs and schedules according to a timeline to be determined by entry into force of the compact. The Government will adopt the policy, legal, and regulatory changes necessary to implement tariff reform. Partially Met The initial opportunity for achieving this in 2014 did not lead to completion of this covenant – a higher tariff was approved, but was not cost-reflective. Expected annual tariff adjustments have not occurred on time. On October 1, 2018 (after the end of the compact), MERA approved a tariff increase of 31% over four years, lower than the increase sought by ESCOM, but more cost reflective than in the past. The increase will provide important benefits to ESCOM even as risks to financial sustainability remain.  
Power Sector Reform Project With MCC assistance, the Government will develop a detailed Financial Plan designed to restore ESCOM to financial and operational sustainability. The Financial Plan will be updated on a quarterly basis. Typically Met on Time or Met Late. Throughout the Compact, ESCOM generally submitted the Financial Plan on time while in a few quarters it was late. In 2017, ESCOM experienced challenges completing the updates on time due to changes in the corporate structure and accounts following the unbundling process.
Power Sector Reform Project The Government will ensure that the ESCOM Board adheres to clear benchmarks for good corporate governance, including: (a) compliance with the requirements under Malawi’s Companies Act, Public Financial Management Act, Public Audit Act, and the Energy Laws; (b) adherence to Malawi Code II, including duties of care and loyalty to the corporation and restrictions on conflicts of interest and related party transactions; (c) following the Sector Guidelines for Parastatal Organizations (the most recent of the draft or final form); and (d) staggering of ESCOM Board terms. The Government will review the continued membership of ex officio directors and the appropriateness of cross-representation on power sector boards and potential conflicts of interest that may arise between the regulator and regulated entities through board membership. Various other Corporate Governance improvements were also targeted. Partially Met The GOM has improved corporate governance in some ways, including through change in membership of ESCOM and EGENCO Boards to eliminate overlap and potential conflict of interest. Some steps were taken to improve operations of the ESCOM Board, including adoption of a board charter.The GOM has not consistently implemented other principles such as staggering of Board member terms. A Corporate Governance Benchmarking Study was funded by the compact in 2017; however, at the end of the compact, the recommendations had not been acted on and were not being tracked. The ESCOM Board in 2016-2017 especially was characterized by a low degree of oversight and a high degree of improper influence in ESCOM’s affairs.
Power Sector Reform Project Based on the Market Restructuring Plan, the Government will create a single buyer, either ring-fenced within ESCOM, or a separate legal entity so that the single buyer’s financial and system operation activities are autonomous from other ESCOM business units or government entities. Also, the Government will provide support to improve the credit worthiness of this single buyer. Initial study Met on Time Follow-on actions Not Met The Government enacted an amendment to the Electricity Act in June 2016 and as of January 1, 2017, unbundled ESCOM into two companies in line with the Power Market Restructuring Study conducted under the compact. A System Operator was established at ESCOM. The Single Buyer was not established and the GOM as of the end of the compact indicates it will establish the Single Buyer as an independent agency. However, there is no timeframe for this to occur and MCC does not know how this would be organized in the absence of the framework agreed on through the roadmap.