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  • Star Report:  Malawi Compact
  • April 2020

Power Reform Project

Project Summary

The compact’s infrastructure investments were designed to fill critical gaps in Malawi’s power system that constrained the delivery of a reliable supply of electricity. However, these investments represented only a portion of what Malawi’s power sector required to meet the country’s economic development goals. Further, there was a risk that management and operational challenges, which had led to the sector’s poor condition at the time of compact development, would persist in the power sector. The compact, therefore, looked beyond infrastructure and took a more holistic approach to promote future growth and sustainability through the Power Sector Reform Project. The objective of the Power Sector Reform Project was to create an enabling environment for future expansion of the power sector by strengthening sector institutions and enhancing regulation and governance of the sector.

The Power Sector Reform Project was designed to complement the infrastructure modernization funded through the Infrastructure Development Project and support the Government’s reform agenda by improving the capacity and financial viability of Malawi’s public electricity utility and creating an enabling environment for future investment in the power sector. Prior to the compact, Malawi’s power sector had experienced several years of decline stemming from the factors below:

  • Underperformance of the utility was driven by the lack of modern management practices and confusing governance and reporting lines by ESCOM that led to operations driven more by political considerations than commercial factors;
  • Poor financial conditions in the power sector due to an electricity tariff that did not provide sufficient revenue to cover all operating costs, high levels of accounts receivable, and utility mismanagement. The lack of adequate financing contributed to limited investments and inadequate service delivery;
  • Underinvestment in the power sector, particularly in generation, creating a deficit of electricity supply. This was a result of the Government’s inability to finance new investments and the poor financial health of ESCOM, which could not be a viable partner for private investment; and
  • An outdated and inadequate legal and regulatory framework, which did not provide private investors with sufficient clarity or incentives to take interest in the Malawian energy market, particularly in light of the high country and commercial risk.
Addressing these issues required substantial changes in how Malawi’s power sector operated, ranging from amendments to existing laws, to movement away from a history of underpriced electricity services, to breaking with long-held habits that led to persistent low performance at the public electricity utility. The Power Sector Reform Project included the ESCOM Turnaround Activity and the Regulatory Strengthening Activity.

ESCOM Turnaround Activity

The objective of the ESCOM Turnaround Activity was to restore ESCOM’s operational health and rebuild the utility into a financially strong, well-managed company as it had been in prior decades. The activity sought to improve ESCOM’s performance and commercial viability through a strategy for an operational and financial restructuring based on a three-pronged approach: (1) revenue and cost management improvements; (2) ESCOM balance sheet strengthening by converting debt owed to Government into equity and retiring commercial debt; and (3) financial and operational enhancement through strengthened business processes and systems. During the compact term, the ESCOM Turnaround Activity was expected to result in improved financial sustainability, improved operational management and efficiency, and reinforced corporate governance practices at ESCOM. The ESCOM Turnaround Activity included the following Sub-Activities:

ESCOM Finances focused on ESCOM’s accounting and financial management practices to strengthen accounting systems, to improve internal controls and uses of the utility’s revenues, and to reduce losses resulting from poor billing and collections practices. The compact-funded technical assistance aimed to provide ESCOM with the technical assistance, training, and tools to accomplish these goals. The activity also funded the development of a financial model and an integrated information technology (IT) platform and management information system (MIS) to increase efficiency and controls in financial and operational management by replacing antiquated, complex, and overlapping systems.

ESCOM Operations provided ESCOM with technical assistance and capacity building to create and implement new policies to improve operational management. This included work which aimed to strengthen business planning, asset management, procurement procedures, and loss reduction. The logic of this sub activity posits that as ESCOM’s financial position improves, stronger operations would make effective use of these resources to deliver better services to ESCOM’s customers.

Corporate Governance promoted the adoption of more robust commercial and corporate governance principles to improve oversight and strategic decision-making. This included training for the ESCOM Board and support to develop improved processes and guidelines. Improved corporate governance practices were viewed as critical to transition ESCOM to the commercially-oriented approach to doing business that was necessary for sustainable future growth.

Some of the important achievements include:

  • Before the Power Sector Reform Project, ESCOM experienced challenges with operational and financial management due to a lack of updated technology to support its operations. Modern utilities require technology that allows them to collect, analyze and deploy many different, interconnected types of data. ESCOM previously used several different IT systems that were not linked to each other, creating room for errors or incomplete information when data was transferred across different systems. In addition, several processes such as billing, connection requests, and inventory management were conducted manually on paper, resulting in errors, delays, and opportunities for fraud. The compact invested in the ESCOM management information system (MIS), a state-of-the-art IT platform that aimed to provide ESCOM with the ability to modernize its financial and operational management practices. The MIS integrated all of ESCOM’s financial and operational requirements on a common system and digitized processes that used to be done manually. The MIS system was designed to reduce the scope for error, improve availability of data, and improve efficiency, saving ESCOM and its customers time and money. Additionally, the MIS created ESCOM’s first geographic information system (GIS) that mapped the utility’s network and customers to create a database that can be used for activities such as billing, maintenance, new connections, and network development. A GIS database is a critical tool for any modern utility, providing staff with the ability to quickly identify the locations of customers requesting connections and outages in the network.  Finally, the compact also provided funding for the development of a detailed financial model, capable of making cash flow projections to assist ESCOM in financial management.
  • Businesses require finance to expand their operations through strategic investments. Electricity utilities like ESCOM often also partner with energy producers in long-term contracts that can only be developed when the producers view the utility as a credit-worthy partner. Historically, ESCOM has been viewed as a risky borrower for financing institutions and by independent power producers (IPPs). Addressing this perception through activities to rebuild ESCOM’s financial health was a key goal of the Power Sector Reform Project. Following improvements to ESCOM’s financial position from 2013-2016, the Public-Private Infrastructure Advisory Facility—a trust fund managed by the World Bank that promotes private sector involvement in infrastructure projects and access to finance for sub-national entities—supported the first third-party evaluation of ESCOM’s creditworthiness that led to ESCOM being accorded a local, investment grade credit rating of BBB from Global Credit Ratings in December 2016.[[]] The credit rating reflected significant progress in ESCOM’s financial position supported by the compact, and provided helpful information to potential investors related to ESCOM’s ability to service its debts and to act as a counterparty to the private sector for investment in generation. However, ESCOM’s financial position later deteriorated again in 2017 due to failures to adjust tariffs to match costs, low water levels leading to declining energy sales, failure of customers to pay bills, and ongoing administrative inefficiencies. This means that there is more work to do to rebuild the necessary level of confidence in ESCOM’s financial health.
  • Electricity utilities need to have efficient processes, the right tools, and skilled staff to deliver services to their customers. Better processes mean more efficient use of resources and also result in improved revenues due to consistent service quality. Those revenues can then be re-invested in a virtuous cycle. Prior to the Power Sector Reform Project, ESCOM struggled to overcome inefficient processes that hampered its ability to undertake investments, develop and implement strong maintenance programs, and ensure collection of revenues. With compact support, ESCOM introduced a number of business process improvements and new policies across several areas. This included the production of annual procurement plans and improved integration in business planning processes to strengthen ESCOM’s ability to plan and execute maintenance and expansion projects. Revenue protection measures put in place with compact support were intended to help ESCOM reduce losses and secure funds it is due from customers. However, the benefits of this assistance were not evident in the final evaluation results, as losses remained higher than expected and maintenance expenditures declined.
  • The compact also sought to promote women’s representation in the energy sector and the utility, as well as in decision making positions. Under the Power Sector Reform Project, ESCOM hired a Gender and Social Inclusion (GSI) Manager in January 2016 and ESCOM’s Social and Gender Inclusion & Anti-Sexual Harassment Policy was developed by an inter-departmental policy team and approved by the Board of Directors in April 2017. In addition, MCC and MCA-Malawi provided technical support to the development of a Monitoring and Evaluation framework for the policy. Further support included conducting a GSI capacity needs assessment for ESCOM staff and management throughout the country, and developing a GSI capacity building plan.
  • As part of ESCOM’s Social and Gender Inclusion & Anti-Sexual Harassment Policy implementation, through a partnership with the University of Malawi, The Polytechnic, ESCOM launched a scholarship and internship program for high performing female students in the engineering field in February 2017. The first cohort of six students commenced their internships at ESCOM in June 2017. ESCOM launched another scholarship program for female students at the Malawi University of Science and Technology in November 2017. ESCOM plans to link these students with EGENCO for internship opportunities. In 2017 ESCOM started implementing its career talks program by focusing on three secondary schools in Blantyre with the aim of interesting female students in engineering courses and careers. An important part of the sustainability efforts for the project focused on providing trainings on the gender policy to ESCOM and EGENCO staff. A total of 866 people participated in these trainings (628 for ESCOM and 238 for EGENCO), with approximately 15 percent participation from women, reaching a total of 30 percent of workers within ESCOM and 47 percent of workers within EGENCO.[[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).]]
  • At the national level, MCC supported the process to review Malawi’s National Energy Policy by providing social and gender expertise to the policy review process. This included the production of a Gender and Energy Status Report through a survey that was conducted in five districts in Malawi. The support also covered all processes of developing the policy and its implementation and monitoring frameworks. The final policy was approved in March 2018.[[]] The Project also supported EGENCO as it developed its Social & Gender Inclusion and Anti-Sexual Harassment Policy, set-up a Gender Unit with an appointed Gender Specialist, and participated in the gender and social inclusion capacity building program in the final year of the compact.

Regulatory Strengthening Activity

The objective of the Regulatory Strengthening Activity was to make Malawi’s power sector more attractive for investments in generation and grid capacity, with the potential participation of the private sector. Private sector investment will be a critical factor in the future development of Malawi’s power sector with the Government no longer willing or able to fund investment in new infrastructure, especially generation. With scope for significant growth given low levels of electrification and use of electricity, Malawi could be an attractive target for investors bringing capital, technology, and skills. To attract investment, Malawi needs to ensure that there are appropriate incentives, clear processes, and a sound financial basis to give companies the confidence to enter the market.

The Regulatory Strengthening Activity focused on bolstering ESCOM’s financial position through tariff reform to ensure the utility could collect sufficient revenues to deliver reliable service. The Activity also aimed to implement best practice regulatory oversight and identify legal and policy changes that would facilitate private investment in a sustainable manner. The Regulatory Strengthening Activity is expected to result in a more cost-reflective tariff regime, improved market structure for private investment, and a strengthened regulatory environment. The Activity included three sub-activities:

The Enabling Environment for Public and Private Sector Investment Sub-Activity aimed to address legal and regulatory gaps in the power market, which constrained investment by the private sector. This included the production of an Independent Power Producer (IPP) Framework to provide clarity to investors on how to develop a project in Malawi, and to provide a road map for Malawian institutions to add new generation through private sector investment. This Sub-Activity also funded a study which identified options for restructuring the power market to attract private investment in generation. The compact then supported the restructuring of Malawi’s energy market based on the Government’s preferred option, leading to amendment of the Electricity Act and unbundling of ESCOM to create two utilities—ESCOM (a transmission and distribution company) and EGENCO (a generation company)—and preparation of new regulatory rules and guidelines.

Finally, this Sub-Activity supported capacity building and assistance to ESCOM to establish new business units—System & Market Operator and Single Buyer functions – necessary for the unbundled power sector and for ESCOM to procure generation through IPPs. For the System and Market Operator, new procedures were created for planning and dispatch of generation, operation of the power system to ensure stability and adequate supply, and metering of electrical flows. The Single Buyer technical assistance supported the production of transmission and generation expansion plans, development of processes and skills to procure new generation capacity, and management of contracts with generators, including EGENCO and potential IPPs. This work resulted in ESCOM’s short-term generation expansion plan that is used to procure new sources of power supply and is more aligned to needs and system characteristics.

The Tariff Reform Sub-Activity provided support that facilitated ESCOM’s tariff application for the 2014-2017 period, which resulted in a tariff increase. While lower than expected, this increase provided a financial boost for ESCOM and the power sector for the first several years of the compact. In April 2018, ESCOM submitted an application for a tariff adjustment covering the period 2018-2022. The compact funded a cost of service study and provided technical assistance to ESCOM to help submit this tariff application, and in October 2018 MERA announced a determination following a period of public consultations and technical reviews that approved an increase of 31 percent in average tariffs over a four-year period. This outcome will provide some benefits to ESCOM’s financial sustainability, even while risks remain if future adjustments are not made in a timely manner. ESCOM is also introducing a social tariff with lower rates provided to customers consuming small amounts of electricity as part of the reform efforts, which if properly implemented should help poorer households have opportunities to benefit from electricity services. 

Through the MERA Capacity Building Sub-Activity, the compact supported Malawi’s regulator in building skills and establishing new processes to enhance its ability to conduct oversight to facilitate growth in the power sector. This Sub-Activity included a benchmarking assessment to identify gaps in MERA’s performance against international comparators, recommendations on key performance indicators (KPIs) to oversee the restructured power market, and capacity building for MERA staff and other stakeholders in areas such as the role of the regulator in review and approval of power purchase agreements (PPAs) and oversight of IPPs, tariff setting and oversight processes, and regulatory oversight in the restructured power market.

Results seen from the Regulatory Strengthening Activity include:

  • ESCOM launched a competitive procurement for private investment in the development of solar power plants—Malawi’s first solicitation for IPPs. In September 2018, ESCOM signed its first power purchase agreement with a renewable energy IPP and a ground-breaking ceremony for the 60 MW plant in Salima took place in December 2018.[[]] In early 2019, ESCOM negotiated with other winning bidders as preparations for additional plants progress;
  • Malawi’s Electricity Act was amended and passed in parliament in 2016 based on options developed under the compact to improve the power market structure and attract more private investment. This also led to the restructuring of ESCOM to align with the new market design; and
  • The 2018 tariff application submitted by ESCOM to MERA was based on a more industry-standard tariff methodology, used a data-driven approach from a rigorous study that provided cost requirements, and MERA’s review process was reinforced with compact support. With appropriate political will to approve necessary tariff increases, the tariff application process can provide ESCOM with the resources it needs to support effective operations and growth over the next several years.
  • In 2014, a set of factors contributed to ESCOM realizing a much improved financial position. This included the introduction of a higher tariff, the commissioning of a new hydropower plant (Kapichira II), and the removal of debt from its balance sheet. Though ESCOM’s financial position improved,  it is important to note that ESCOM had poor performance in planning and executing capital investments and routine maintenance during this early period, resulting in a buildup of a large cash stockpile, reflecting how near-term financial improvements can mask weak operational performance. Nonetheless, from 2015-2016, the utility targeted a set of additional initiatives to further bolster its health, including a project to verify customer connections and remove illegal connections and to introduce pre-paid meters to counteract persistent high non-technical losses, and began to spend more money on maintenance and critical projects.
From 2016 onwards, however, ESCOM’s financial position began to deteriorate. This can be linked to the failure of MERA to approve anticipated phased tariff increases and automatic adjustments to the tariff to counteract the effect of inflation and currency depreciation. In addition, low water levels in the Shire River—the source of 98 percent of electricity generation in Malawi—led to lower sales and declining revenues in 2016 and 2017. Further pressure was introduced due to terms agreed to between EGENCO and an emergency power producer in late-2017. Finally, while performance had improved at the end of the compact period, ESCOM was continuing to see relatively high commercial losses (electricity theft) and non-payment of bills, especially by public institutions, which further degraded its cash flow position.

The reforms asked of Malawi under the compact were significant—cutting across the whole power sector and involving legal and policy amendments, financial support from the Government, organizational restructuring, regulatory reforms, and a host of process- and skill-based management improvements. The results of the challenging reforms targeted by the Power Sector Reform Project were mixed, as described in this report and through the evaluation findings summarized below. Initial progress in the ESCOM Turnaround Activity provided ESCOM with a window of opportunity characterized by relatively strong financial performance. However, these results were not sustained through the end of the compact, and performance challenges remain. The success and sustainability of many Power Sector Reform Project interventions rests on the assumption that people within the power sector stakeholder institutions will change their behavior and approach to doing their work. Such changes include learning and applying new knowledge and skills, adopting new processes or technology, introducing and responding to new incentives, and adopting a more commercially oriented mindset to managing the power sector.

At the outset of the Power Sector Reform Project, limited effort was invested in attempting to press for the desired changes in an organized manner. However, over the first two years of the compact, it became increasingly clear that this approach was having limited success. Poor accountability at sector institutions, especially ESCOM, at almost every level, including line supervisors, executive management, Board members, and Government oversight ministries was a key factor. This was exacerbated by a lack of mechanisms, such as performance measurements, that could enhance accountability. Additionally, limited buy-in from key stakeholders, including members of ESCOM’s management, reduced the impact of some Power Sector Reform Project activities. Finally, the overwhelming scope of changes being proposed and recommendations reinforced inertia on the part of staff who were being requested to perform demanding day-to-day work under challenging circumstances while at the same integrating new and complex recommendations. This extended to the introduction of the ESCOM MIS, which required massive shifts in business processes and skills across the entirety of the utility.

In response to these factors, MCC and MCA-Malawi adopted a more involved role to improve uptake and changes during the final three years of the compact. They did this through follow up with sector stakeholders on specific initiatives and also deployed activities—such as mentoring and on-site advisors—to achieve improved outcomes. Further, some activities such as the ESCOM MIS had built-in change management activities that relied on the use of communication methods such as SMS, Twitter, bulletin boards, t-shirts, etc., to encourage change amongst staff. Throughout other elements of the Power Sector Reform Project, such as the power market restructuring initiative, MCA-Malawi and MCC engaged in substantial efforts to generate required levels of support and pressure for expected changes. This included convening regular and ad hoc meetings to update stakeholders on progress and press for action on specific issues. MCC encouraged all stakeholders to speak out publicly supporting the need for cost-reflective tariffs to support growth in the power sector.

These efforts had mixed results as many of the same factors that created problems with initial engagement with the Power Sector Reform Project remained in place. For example, ESCOM Board members engaged more with oversight and accountability on some areas of ESCOM operations, but not always in an effective manner. ESCOM staff in particular still struggled under a heavy burden of day-to-day work and were challenged to find time to implement new recommendations even if they did find them important.

However, there are areas where changes in behavior or attitudes seem apparent even if not easily measured. For example, MERA took a stronger approach to holding ESCOM accountable for its performance during the compact by withholding tariff increases due to poor results on KPIs and in one case threatening to sue members of the ESCOM Board for dereliction of duty due to performance failures. In late 2016, ESCOM’s Director of Finance resigned under duress, having refused to certify an irregular procurement. Later, the ESCOM CEO who was dismissed in late 2017 spoke out when she identified procurement irregularities with a contract for diesel generators. While not definite, it is possible that these staff felt empowered to speak out due to a change in culture in the power sector; although, the very existence of such irregularities is a problem.

At the end of the compact, there was greater recognition and acceptance of the role of private investment in the sector going forward, which marked a change from the past when the Government was responsible for funding large investments in the power sector. Even as Malawi’s investment requirements to meet its goals for the power sector have risen, the Government’s willingness and ability to fund those investments has declined. Countries around the world have turned to private investment to bring essential capital, skills, and technology to drive growth in the power sector, and have noted publicly the importance of cost-reflective tariffs. Finally, in part as a result of the compact and due to the major changes introduced in the sector, there has been a trend towards increasing coordination between sector institutions—such as MERA and ESCOM—which was at times lacking in the past.

Through the end of the compact, MCC continued to press for improved performance and uptake of reforms in the sector, including through utilization of the data analysis and reporting functions in the ESCOM MIS, which will enable improved oversight of ESCOM’s operations. In addition, MCC encouraged MERA to continue its efforts to establish effective regulatory oversight and introduce accountability into the sector in a responsible manner. This includes the development of revised KPIs for oversight of the sector.

Evaluation Findings

MCC has commissioned an independent performance evaluation of the Power Sector Reform Project. Endline data collection took place in March 2019 and was compared with interim data collected by the evaluation team in November 2016 and March 2015. The evaluation addressed the following core questions:
  1. What were the results of the interventions - intended and unintended, positive or negative?
  2. What are the lessons learned and policy implications for similar projects?
At the regulatory, institutional, and policy level, the evaluation explored the potential impacts on utility operating costs and losses; financial sustainability; private investment, particularly in generation; and expansion of electricity access for customers, particularly the poor.

Status of the evaluation:

Component Status
Baseline Data collection completed in March 2015. Report released in March 2018.
Midline Data collection completed in November 2016. Report released in April 2019.
Endline Data collection completed in March 2019. Report released in June 2020.
The Key Findings of the Final Evaluation of the Power Sector Reform Project include:

Tariff Reform

  • Malawi’s electricity tariff is higher than it would have been without the compact, allowing for greater investment and sustainability in the sector.
Enabling Environment for Private Investment
  • Stakeholders agree that Malawi now now has a better environment for private sector investment in electricity generation, thereby achieving the key objective of the project.
Utility Financial Performance
  • The PSRP had an early effect on utility finances and achieved several key milestones, such as a detailed financial model and an updated accounting manual. However, the early gains of the PSRP have gradually eroded.
Utility Operations and Corporate Governance
  • Without a reform-oriented partner in the electrical utility, the PSRP had minimal influence on utility operations and corporate governance.
Policy Implications
  • The Malawi experience highlights the importance of anticipating political constraints, using technical assistance to support reform implementation, and employing adaptive management strategies to implement and institutionalize reform.
Learning from the Evaluation: MCC has identified the following programmatic and evaluation lessons based on the Final Report for Evaluation of the Power Sector Reform Project (PSRP) of the Malawi Compact.
  • Reform strategies should be appropriately attuned to the country context and level of development of the sector, such that priorities and proposed solutions respond to the most essential challenges.
  • Efforts to upgrade utility information systems should be started early on in the compact term to account for the length of time required for successful rollout, adoption, and continued system support.
  • Compact programming must recognize the challenges inherent in utility turnaround and dedicate sufficient resources and time with appropriate methodologies to achieve sustainable results.
  • Use the program logic to calibrate assumptions on reform outcomes and ensure results are both achievable and measurable.
  • Evaluations of complex reform projects should target a concise set of evaluation questions and focus evaluation reports on the sub-set of questions most pertinent at the time of data collection.
  • Evaluations of reform projects should embrace the use of novel methods to assess changes in institutional performance that are most critical to the theory of change.

There were several key lessons learned from the 2016 interim evaluation of the Power Sector Reform Project for MCC and future partner countries to consider when designing and implementing similar reform projects and evaluations.[[For details on how MCC is incorporating these lessons in current and future programming, see here:]]

All reports from the Power Sector Reform Project evaluation are located on the MCC’s public Evaluation Catalog.

Key Output and Outcome Indicators

Activity Key Performance Indicators Baseline (2012-2013) End of Compact Target (2018) Actual Achieved (09/2018) Percent Complete
Project level Operating cost-recovery ratio - Total revenue collected / Total operating cost (Percentage) 113 100 94 6%[[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.]][% Deviation]
Current Ratio - Total Current Assets / Total Current Liabilities (Ratio) 6.48 3.00 .66 78%[% Deviation]
ESCOM Turnaround Activity Average Collection Period – Quarterly (Days) 72 60 101.1 69%[% Deviation]
ESCOM Turnaround Activity Billing System Installed N/A 30-April 2018 18-Jan 2018 100%
Regulatory Strengthening Activity Cost-reflective tariff regime (Percentage) N/A[[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.]] 100 64 N/A
Regulatory Strengthening Activity Power Market Restructure Report Produced N/A 31-December 2014 30-April 2015 100%
Electricity Act Amended N/A 31-December 2016 6-June 2016 100%
Independent Power Producer Framework Approved N/A 31-March 2017 1-May 2017 100%

Explanation of Results

Under the Regulatory Strengthening Activity, a number of key milestones were achieved including difficult legislative and organizational restructuring actions led by the Government. However, completion of those reforms stalled in the last year of the compact, resulting in delayed progress in some critical areas related to tariff reforms and restructuring of the power market. Ultimately, MERA approved a 31 percent tariff increase in October 2018, after a months-long delay by ESCOM in submission of its tariff application (and shortly after the final reporting period of the compact). As the final evaluation observed, although Malawi does not yet have a cost-reflective tariff, the tariff review process yielded a tariff that was higher than what may have been expected, particularly for an election year.

ESCOM Turnaround

ESCOM’s financial and operational turnaround remains incomplete. Although the ESCOM MIS was operationalized in January 2018, challenges have emerged with the rollout and application of key reporting modules, which have continued beyond the end of the compact period. As described previously, ESCOM’s financial position was strong in the early part of the compact, with the cost-recovery ratio regularly about 150 percent.[[The cost-recovery ratio is the ratio of a utility’s revenues to cover its costs, including operating expenditures, depreciation and capital costs.]] Following this, ESCOM leveraged these financial improvements to spend more money on maintenance and critical projects, likely contributing to improvements in revenues and loss reduction efforts. However, the declines in the cost-recovery ratio and current ratio reflected in the table above are indicative of challenges the utility has faced with declining revenues as a result of insufficient tariff increases and low energy sales resulting from the effects of drought on hydropower plants. It should be noted that the figures reported on ESCOM’s finances do not reflect data from the final quarter of the compact, as prolonged challenges in the use and rollout of the ESCOM MIS have led to difficulties in reporting on these KPIs; the figures reported as “Actual Achieved” are therefore based on Quarter 19 data. Despite the lack of final data, the impact of the overall declines in revenues forced ESCOM to cut back on some operational expenses and investments in its network which could hurt future performance in the power sector. The introduction of a cost-reflective tariff matched with reduced unit costs and improved financial management will be critical for ESCOM to establish a truly sustainable financial position.

ESCOM’s ability to turn electricity delivered into cash receipts depends on collecting money from its customers in a timely manner. Historically, ESCOM struggled with high rates of theft, late payments, or simply non-payment by its customers. At the beginning of the compact period, ESCOM began an initiative to move most of its customers to meters that required pre-payment for electricity, rather than relying on collection after electricity was already delivered. This effort was complemented by a project to remove illegal connections, often turning previous non-paying consumers into regular customers. By 2018, more than 90 percent of ESCOM’s customers were using these pre-paid meters, cutting down on losses and collection challenges.

Unfortunately, customers that do not have pre-paid meters have proved problematic—including Government and other public or sensitive customers. These customers often accumulate significant arrears to ESCOM, and it is difficult to force them to pay because of political pressure to avoid disconnecting their electricity supply. The indicator for Average Collection Period captures only this problematic group of customers (excluding pre-paid customers), which is why performance has deteriorated. ESCOM has avoided significant reductions in revenues associated with low billing rates despite poor performance on this indicator due to continued progress in adding pre-paid customers. ESCOM is attempting to reach agreement with the Government on adding more public institutions to the pre-paid category which would further insulate the utility from negative financial impacts associated with its most challenging customers.

Regulatory Strengthening

The Power Sector Reform Project supported the Government of Malawi and other project partners in reaching several key milestones on the path to a more dynamic power sector. At the same time, progress towards compact goals has been mixed. ESCOM did conduct a competitive tender for several solar power IPPs in 2017 using the IPP Framework as a tool to guide them in this new process. Following negotiations with winning bidders, ESCOM signed the first power purchase agreement in September 2018 and ground was broken for a 60 MW solar power plant in December 2018 with operations targeted for late 2019. In early 2019, negotiations continued with other winning bidders. However, challenges in negotiations with IPPs and delays in fully establishing the single buyer unit have led to limited momentum toward additional new generation procurements. Plans for adding new generation exist, but have not been put into implementation despite strong commitment voiced by stakeholders in the power sector. Further work will be needed to fully establish the new market structure in a way that produces the results Malawi needs for power sector growth. During the post-compact period, MCC continues to closely monitor the completion of these reforms as part of its overall assessment of the Government of Malawi’s commitment to the achievement and sustainability of compact results.