Star Report: Malawi Compact | Updated June 2021 | April 2020

Compact Sustainability

The Malawi Compact took a systemic approach to strengthening the nation’s power sector—recognizing the need for infrastructure, policy reform, and environmental management in order to drive the sector forward as no one investment alone could result in sustainable change. Sustainability of the compact was integrated across all three projects.

Infrastructure: Both ESCOM and EGENCO developed sustainability plans as part of project implementation. These plans outline archiving procedures for detailed design and as-built drawings; and procedural and financial operations and maintenance planning. Emphasis was placed on ESCOM’s and EGENCO’s involvement in final inspections of the works, particularly of the Nkula A hydro power generator and various substations as part of the capacity building for ESCOM and EGENCO. In addition to the sustainability plans, the compact provided training to the appropriate EGENCO and ESCOM staff for proper operation and maintenance of the new assets and both utilities’ personnel participated in the functional tests and trial runs prior to commissioning of the assets. After the compact period, ESCOM is expected to upgrade transmission and distribution substations that are currently or will soon become overloaded. This will also prepare the system for future increases in generation capacity.

Policy Reform: The Power Sector Reform Project was designed to not only strengthen the sustainability of MCC’s compact investment but all of Malawi’s power sector. Through activities that sought to improve the financial and operational health of ESCOM and update the legal and regulatory framework to support increased investment, the project intended to help Malawi secure the resources necessary to achieve sustainability and growth in the power sector. The project required comprehensive changes from a capacity, procedural, institutional, and political point of view, touching a diverse set of stakeholders throughout the sector. Achieving and then sustaining these changes was dependent on a wide set of assumptions, as outlined in the project summary above.

In practice, many of the assumptions made at the outset of the compact were not fully realized during implementation, impacting the compact’s ability to deliver planned results. For example, political will for tariff reform was only partially present—initial tariff adjustments led to improved financial outcomes for ESCOM, but were not followed through to the end of the compact. Legal reforms to restructure the power market, including an amendment to the Electricity Act, lost momentum and expected changes to the operation of Malawi’s power sector had yet to be fully implemented at the end of the compact. Efforts to add new generation through private sector investment moved forward tentatively but were delayed due to the novelty of these processes in Malawi and resistance to change from some stakeholders.

The compact introduced a number of rapid changes to Malawi’s power sector that have resulted in improvements in some areas while progress has been limited in others. These reforms provide a basis for continued improvements in how Malawi’s power sector operates and the outcomes it produces. However, the sustainability of the Project and compact investments as a whole will be dependent on the Government and other stakeholders maintaining their commitment to reform goals.

Tariff Reform & Financial Sustainability: ESCOM’s financial health is critical to the sustainability and growth of the sector as a whole. Without a financially viable ESCOM, existing investments will be hard to maintain (including servicing IPP payments and maintaining EGENCO’s financial position) and new investments will be starved of resources or dissuaded due to the poor financial position of the sector. In order for ESCOM’s financial health to improve, it is critical that tariff reform continue and become more firmly established. Further, ESCOM must be able to collect revenues from its customers on a timely basis.

Despite initial optimism following an increase to the tariff in 2014 and an additional adjustment in 2015, additional regular increases were not implemented during the compact period, resulting in a declining financial position for ESCOM and the power sector as a whole. Additional challenges have resulted due to new costs to ESCOM related to energy purchases that have not been passed on to consumers, resulting in costs exceeding revenues for several months.

In the last year of the compact, MCC continued to press the Government, ESCOM, and MERA to commit to the steps necessary to secure financial sustainability in the power sector, most prominently through ESCOM’s 2018 tariff application, with an increase in rates approved by MERA in October 2018. In addition, the compact continued to support ESCOM and EGENCO in conducting financial modeling and planning that would allow them to better manage their finances. The compact also provided important assistance to ESCOM to improve its accounting practices and systems, which, in turn, resulted in ESCOM’s producing more prudent financial accounts. However, political will from the Government and other stakeholders is necessary if the long-term financial health of Malawi’s power sector is to improve.

ESCOM Operational Efficiency: Improvements in ESCOM’s financial position are a means to an end—improved electricity services. This requires ESCOM to effectively use the revenues it collects to invest in network expansion and maintenance and to add new customers to its system. The compact provided assistance to ESCOM to improve critical performance areas such as procurement, inventory management, loss reduction, and other business processes. Improvements in these areas have been limited due to both financial constraints and to inadequate management. ESCOM’s management and Board will have to demonstrate consistent levels of oversight to ensure the improvements in operations and ESCOM staff will have to continue to perform at high levels. The introduction of the ESCOM MIS may play a significant role in promoting sustainability in operational and financial management, subject to the need for ESCOM staff and management to address critical challenges with the initial rollout commit to using this powerful tool to improve results.

Regulatory Oversight to Ensure Sector Integrity: At MERA, the compact supported an effort to benchmark the utility against international comparators and then develop an institutional strengthening plan that would help it to close gaps identified. Similarly, capacity building was provided in some of those areas to introduce key concepts and strategies to address some of the gaps in performance. MERA’s Board reviewed the strengthening plan and several initiatives moved forward such as introducing a framework for review of power purchase agreements and an enhanced tariff review process.

Transitioning to More Reliable Sources of Power: A key factor in improving electricity services in Malawi is, in developing additional electricity supply, Malawi needs to ensure the reliability of the supply sources which could mean diversifying from hydropower. Transitioning away from the hydropower along the Shire River will be essential to securing Malawi’s access to more reliable sources of generation, which are not subject to the variability in water flows seen in recent years.

The Power Sector Reform Project provided support to ESCOM to develop a generation expansion plan which prioritizes diversification away from the Shire River, including through solar power projects, an interconnector to import power from Mozambique, and other options. The need for diversification has become clear to most stakeholders in Malawi, and efforts to advance this work were proceeding at the end of the compact. While challenges exist to adding new sources of generation, it is likely that new sources of energy will be tapped more frequently moving forward.

Environmental Management: The ENRM Project was designed with a focus on sustaining MCC’s investment in hydropower and in the long-term, sustaining the water resources this type of power generation requires. The project addressed the costly impact of environmental damages to Malawi’s hydropower infrastructure at the source—helping to sustain MCC’s infrastructure and policy reform investments. In order to effectively use the tools provided through the ENRM Project over time, EGENCO must maintain strong operational practices and sufficient financial resources; these resources must come from their contractual relationship with ESCOM. Therefore, environmental sustainability is linked to the financial sustainability addressed through the Power Sector Reform Project, especially the introduction of a cost-reflective tariff.

The compact’s five-year lifespan is inadequate to solve the problems of soil erosion and aquatic weed infestation, which will prove to be ongoing challenges for the foreseeable future. Therefore, the establishment of the Shire BEST with the Payment for Ecosystem (PES) mechanism in place will allow initiatives piloted during the compact to be sustained moving forward. With this initial investment in the PES included in the energy tariff, Shire BEST can demonstrate effective soil erosion reductions and make a case for inclusion in the next tariff application in four years. The ENRM Project’s success depends—to some extent—on the ability of the Trust to strategically invest its resources and dynamically adapt to the needs of local communities in order to incentivize poor land-owners to invest in more costly, time-consuming practices needed to improve land and soil quality. Ultimately, the Trust will need to diversify funding either from other PES stakeholders or donors such as the World Bank.

  • 1. Transmission refers to the bulk movement of high-voltage electrical energy from where it is generated (such as a power plant) to an electrical substation. Distribution refers to the local wiring from substations to consumers.
  • 2. This activity was also supported by complementary funds from the GOM.
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  • 6. Taulo, John L; Gondwe, Kenneth Joseph; SEBITOSI, Adoniya Ben. Energy Supply In Malawi: Options And Issues. J. Energy South. Afr., Cape Town ,  V. 26, N. 2, P. 19-32,  May  2015
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  • 8. For more information on MCC’s Suspension and Termination Policy, please visit our website here:
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  • 11. Under MCC’s country ownership model, governments receiving MCC assistance are responsible for implementing the MCC-funded programs. Partner governments establish units known as accountable entities, referred to as MCAs, to manage implementation for compact projects.
  • 12. The unit cost of electricity from petrol/diesel generators is far higher than that of grid-supplied electricity in Malawi, a landlocked country whose fuel is imported from afar.
  • 13. According to the Integrated Household Survey (2004-2005), fewer than 6 percent of households nation-wide were supplied with electricity.
  • 14. While data on female employment in the construction industry is difficult to find in Malawi, the World Bank ILO reported that the percentage of female employment in industry (which includes mining and quarrying, manufacturing, construction, and public utilities) in Malawi was 6.1 percent in 2018.
  • 15. GSI Implementation Report Malawi Compact, November 2018
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  • 17. At the time of the trainings, ESCOM had a total of 2,036 employees (1,825 men and 211 women), and EGENCO had 509 employees (465 men and 44 women).
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  • 20. For details on how MCC is incorporating these lessons in current and future programming, see here:
  • 21. Percent deviation from the target is calculated for this indicator, as well as others noted in this table, instead of percent complete. Progress for this indicator is best tracked by percent deviation from the target, because the actual should be as close to the target as possible. A percent deviation of 0% implies the target has been reached, and percent deviation closer to 0% implies better achievement than a higher percent deviation. Percent deviation is calculated using the following formula: 100*|Actual-Target|/Target. Because this indicator is a ratio of Total Revenue / Total Costs, a deviation above or below the target may reflect either a stronger financial position (a positive result), or a failure to effectively meet their maintenance and capex (spending) targets.  A target close to 100% indicates that ESCOM is effectively balancing available revenue with effective execution of core functions to operate the grid.
  • 22. A baseline for this indicator is unavailable, due to the fact that ESCOM did not have a reliable estimate for its long-run costs at the start of the compact, a key input to this indicator. The Project provided support for a Cost of Service Study which informed the development of the 2018 tariff application, with projections of costs through 2022.
  • 23. The cost-recovery ratio is the ratio of a utility’s revenues to cover its costs, including operating expenditures, depreciation and capital costs.
  • 24. These two segments of the Shire River Basin are upstream from Malawi’s main hydropower plants.
  • 25. In coordination with the World Bank, MCC prioritized five of the 10 hotspots in the Middle Shire, and the World Bank program worked in the other five.
  • 26. REFLECT was developed by ActionAid in 1993 and first used in El Salvador (South America), Bangladesh (Asia) and Uganda. REFLECT is now used in over 60 countries to tackle problems in agriculture, HIV/AIDS, conflict resolution and peace building. It is based on the theory pioneered by the Brazilian educator Paulo Freire Link
  • 27. ENRM Grantees guidance questionnaire for the GSI Implementation Report Malawi Compact
  • 28. ENRM Grantees guidance questionnaire for the GSI Implementation Report Malawi Compact
  • 29. Payment for Ecosystem Services are programs where a beneficiary or user of an ecosystem service (such as hydropower use by electricity users) make a direct or indirect payment to the provider of that service, which is then used to maintain the natural resource. PES programs can also benefit the conservation of the ecosystem being used.
  • 30. Infrascope has several uses for various audiences. For project sponsors, it can assist in and lower the cost of market entry by providing country research. For donors and governments, it can assist in the policy dialogue around PPPs. Other donors may also be able to use the indicators from Infrascope for their own M&E purposes, while academic researchers may also find Infrascope to be a useful tool.