The World Bank has advised the Malawi Government to consider increasing electricity tariffs to make Electricity Supply Corporation of Malawi (Escom) financially sustainable and attract investment in the power sector.
The bank has said this in its latest Country Private Sector Diagnostics (CPSD) report for Malawi which Vice-President Saulos Chilima officially launched yesterday at the Bingu International Convention Centre in Lilongwe.
Titled The Road to Recovery: Turning Crisis into Economic Opportunity, the report examines opportunities and constraints in four key sectors of energy, digital infrastructure and services, transport and logistics and agribusiness.
The bank identifies the four sectors as key areas where private sector solutions can create or expand markets and make substantial contributions to development impact.
Narrowing down to specific sector assessment, the World Bank alongside its private sector financing arm International Finance Corporation (IFC), observes that Escom and its related institutions should be at the centre of the new administration’s efforts to improve the performance of State owned enterprises (SOEs).
The bank said earlier reform efforts were met with little interest by the leadership within most SOEs such as Escom, adding that “mismanagement and corruption allegations have remained commonplace”.
There are currently 67 commercially operating SOEs in Malawi, many of which play justifiable roles in the market and have helped expand economic activity and services into rural areas over the past years.
Citing Escom as an example, the World Bank said that most parastatals have limited autonomy and operate with little transparency, thereby opening the door for political interference and mismanagement.
Reads the report in part: “Past governments have largely failed to address the weaknesses in these institutions, promising reforms, but failing to fully implement them.
“The new administration replaced the boards of all parastatals in September 2020 and will need to continue to work with these boards to improve the management, performance and transparency of the institutions.”
Zeroing on the energy sector and Escom in particular, the bank said the top priority should be making Escom financially sustainable, advising that for this to happen, national electricity tariffs need to be adjusted to become cost reflective.
The bank, which is Malawi’s largest external creditor for the past decade, has also estimated a funding gap of $1.8 billion (about K1.5 trillion) in generation, transmission and distribution, and off-grid services.
During the launch, World Bank country manager Hugh Riddell said the bank and IFC are proud partners of Malawi in transformational investments such as the Mpatamanga Hydropower Project and the Shire Valley Transformation Project.
He described the projects as flagships, not just in terms of scale and ambition, but also in their public-private partnership
Commenting generally on the report, Chilima, who is also Minister of Economic Planning and Development; and Public Sector Reforms, said the publication is clear on what needs to be done in Malawi.
He stressed that tackling challenges facing the private sector requires prudent macroeconomic management and action to ensure the stability of the country’s financial sector in current turbulent times.
Said Chilima: “We must make sure that our commitments today are followed by actions.
“If there is a question that the CPSD should spark in us, then it is this: What will each of us do to promote the building of a strong private sector in Malawi to spur more economic activity? Let there be no spectators or Monday coaches.”
The Wor ld Bank’s recommendation for electricity tariff adjustment comes at a time when the Malawi Energy Regulatory Authority (Mera) is set to consider a 10 percent increase in electricity tariffs.
In a published statement on September 14 2021, Mera said the tariff adjustment proposal would be considered after assessing Escom’s performance against the agreed key performance indicators (KPIs) and findings of the annual regulatory audit.
In an interview in The Nation edition of September 15 2021, Mera consumer affairs and public relations manager Fitina Khonje said there are KPIs on service quality to be achieved through investments and others relating to revenue performance.
She said the financial KPIs include current ratio
and acid test, trade payable, interest coverage, collection efficiency, maintenance costs as a percentage of operational costs and net surplus as a percentage of revenue.
Non-financial KPIs cover areas of connection targets, system losses and transmission interruption indices.
Reacting to the proposal, Consumers Association of Malawi (Cama) executive director John Kapito said Escom did not deserve an upward tariff adjustment because it did not meet some of its KPIs.
He said: “For instance, consumers are still unable to be connected to electricity and if they get connected, it is at an unaffordable cost. What’s the point in continuing with a tariff base where the supplier has failed to perform?”
Under the 2018-2022 Escom Base Tariff Schedule, Mera in October 2018 approved a 31.8 percent base tariff for the four-year period.
The implementation of the base tariff was segmented into four annual tranches of 20 percent, 7.2 percent, negative three percent and 10 percent tariff adjustments for the first, second, third and fourth years in that order.
The 20 percent tariff increase for the first year translated into an average tariff hike of K88.02 per kilowatt hour (kWh) up from K73.23 per kWh.
In February 2020, Escom qualified for 1.65 percent instead of seven percent of the second tranche of the base tariff based on performance on the agreed KPIs. Mera awarded a further 5.63 percent based on Automatic Tariff Adjustment Formula (Ataf), making a total of 7.28 percent tariff adjustment. However, the tariff increase was not implemented immediately.
But the planned three percent tariff reduction of the base tariff in the third year was premised on the planned decommissioning of the Aggreko diesel generators which were procured by government on an emergency basis to feed 78 megawatts (MW) of power into the Escom grid. However, the power supply contract for Aggreko was extended after mostly solar-powered Independent Power Producers (IPPs) failed to beat the roll-out deadlines to fill the power supply gap that would have been created by the decommissioning of Aggreko diesel generators.
In March 2021, Mera approved a 10.62 percent electricity tariff increase, comprising 4.9 percent revenue recouping adjustment due to non-implementation of a tariff increase that was approved in February 2020 and 5.72 percent being the Ataf outcome.
Escom public relations manager Innocent Chitosi is on record as having said a number of factors have seen Escom failing to secure cost-reflective tariff revenue.
Currently, access to electricity in Malawi is at about 10 percent of the population.