Three years after the completion of the $350.1 million (K287 billion) Millennium Challenge Corporation (MCC) energy compact, Malawi’s power sector is yet to fully embrace key reforms, Business Review has established.
The development, according to energy experts and economists, puts at risk the viability and sustainability of the country’s power sector while also suffocating future power sector expansion plans envisaged under the compact agreement with United States (US) government through MCC.
The experts say the delays to implement the agreed reforms jeopardise the US Government investment aimed at modernising the power sector while also limiting Malawi’s ability to expand access to electricity, now at about 10 percent.
Business Review has also learnt that restoration of financial health at the Electricity Supply Corporation of Malawi (Escom) remains a pipe-dream for the parastatal to realise both financial and operational turn-around contrary to the compact’s key tenets of the Power Sector Reform Project (PRSP), one of the three key components of the first compact.
The first compact was implemented between September 2013 and September 2018.
PSRP, compared to other two components of the compact— namely Infrastructure Development Project and the Environment and Natural Resource Management project— provided technical assistance and a management information system to support the theory that fostering an operationally and financially sustainable energy sector could lead to reduced cost of doing business, expand access to electricity and increased value-added production.
Before the close of the energy compact both Escom and Electricity Generation Company (Malawi) Limited (Egenco) developed clear sustainability plans and MCC has continued to engage the Malawi Government on the full implementation of some of the reforms during the development of the second compact.
In a written response, US Embassy in Malawi through its Public Diplomacy Section, said MCC is encouraged by the continued engagement and commitment by the Malawi Government to the sustainability of the first compact even as further steps are needed to fully realise compact benefits over the long-term.
“MCC looks forward to collaborating on the sustainability of the second compact, currently in development,” reads the response.
According to the US Government, the sustainability of the power investments will require long-term routine maintenance so that the investments remain functional over time, adding that further growth in the sector will also require additional investment.
Escom’s financial health in focus
Business Review analysis shows that by December 2020, Escom’s operating cost recovery ratio had worsened between January 2020 and December 2020 from 128 percent to 118 percent.
This ratio, which is also known as expense recovery ratio, measures the cost to operate an entity or property compared to the revenue brought in the property.
“The declining trend in this ratio means that if the trend continues, Escom runs the risk of making losses even though it is currently breaking even,” said a Lilongwe-based financial analyst, who once worked in the power sector.
However, our analysis of Escom’s recent financial health indicates that at the beginning of 2020, the current ratio was at 1.8 percent and increased to three percent in the second quarter, but later dropped to 0.64 by June 2021, signalling unhealthy business status of Escom.
Escom attributes such a plummeting of the ratio to its inability to convert sales into cash as most government institutions and quasi-government institutions owed the institution about K25.6 billion in electricity bills as at December 31 2020, according to a 2021 Malawi Government Annual Economic Report.
Escom complains in the report that its low liquidity level poses a serious challenge to the operations of the corporation as most suppliers’ accounts fall to over 200 payable days due to insufficient cash flow.
Escom continues to owe its major suppliers, namely Egenco, National Oil Company (Nocma) and Aggreko International billions of kwacha and the three companies make up 90 percent of Escom’s payables.
In the 2019/20 financial year, Escom reportedly made a profit after-tax of K3.2 billion and this was an improvement from a loss of K12.9 billion registered in the prior financial year.
According to an agreement between Escom and MCA-Malawi, which was an implementing agency of the MCC energy grant, PSRP’s efforts were meant to strengthen Escom’s ability to provide high-quality services through the restoration of the corporation’s financial health while also rebuilding Escom into a financially strong and well-managed company.
In a written response, Escom public relations manager Innocent Chitosi admitted that in the aftermath of MCC compact, a number of issues arising from power market reforms had not yet been fully addressed.
He said Escom had not yet aligned its strategy to Electricity (Amendment) Act of 2016, adding that its functional structures and staff are yet to be fully aligned with the Act, to enable Escom to execute its mandate in line with the revised power market regulations.
Said Chitosi: “Failure to address the above has resulted in challenges to fully implement systems and processes, which should have allowed Escom to comply with power market reforms.
“Direct implications of the above is the failure to secure cost-reflective tariff revenue, which resulted in challenges in operational effectiveness, limited revenues to pay for rehabilitation and preventive maintenance of transmission and distribution and meet requirements of new connections.”
But he said Escom is able to leverage on MCC investments to secure more grant and loan financing, adding that between 2018 to date, Escom has accessed on-lent loan amounting to $144 million (about K118 billion) and grant financing $6 million (about K4.9 billion) from the World