Country Context

Malawi is a landlocked country in southeast, sub-Saharan Africa, which gained independence from the United Kingdom in 1964. The country is split into three regions (southern, central, and northern) with its capital, Lilongwe, in the central region and commercial hub, Blantyre, in the southern region.

Malawi’s estimated population as of 2019 is approximately 18 million people. It is one of sub-Saharan Africa’s most densely populated countries, with high levels of poverty and inequality, due to an economy heavily based on agricultural production. At the compact’s signing in 2011, an estimated 71 percent of the Malawian population lived on less than $1.90 a day, and the gross national income per capita stood at approximately $280. 3  Poverty in Malawi is driven by a poorly performing agricultural sector, unstable economic growth, and limited business opportunities. 4

MCC’s relationship with Malawi dates back to December 2004, when it was initially selected for a Threshold Program by MCC’s Board of Directors. At the time of selection, Malawi did not pass the MCC scorecard because it failed the Control of Corruption indicator, a must-pass indicator. The $20.9 million threshold program focused on fighting corruption using a multi-pronged approach of reducing opportunities for corruption and strengthening the government’s ability to manage and monitor its finances. 5  During the course of the threshold program, which lasted from September 2005 to October 2008, Malawi improved its performance on the Control of Corruption indicator, subsequently passing both the indicator and the FY2008 scorecard overall. It has continued to pass the scorecard since then.

MCC’s Board selected Malawi to develop a compact in December 2007. In 2008, the Government of Malawi, with support from a team of MCC economists, conducted constraints to economic growth and root cause analyses. These analyses found that Malawi was experiencing substantial and consistent power outages of 8 to 12 hours a day, creating significant challenges for both businesses and households. In 2009, Malawi had an installed capacity of only around 284 MW, with an access to electricity level of approximately 5-9 percent (only about 1 percent in rural areas), and per capita supply at approximately 90 kilowatt hours (kWh) per year. Meanwhile the demand for electricity was estimated to be 295 MW and expected to grow to 478 MW by 2015 and 757 MW by 2020. Malawi’s power sector was clearly falling behind many of its peers in sub-Saharan Africa and not meeting the needs of Malawians. 6  This rapidly deteriorating situation cost businesses and households hundreds of millions of dollars per year in lost productivity, higher costs of living, and reduced employment income.

A number of stakeholders—including some of the most important and largest businesses in the country—noted that problems in the power sector were creating financial difficulties, which in some cases led to companies foregoing or abandoning investments in Malawi. The analyses also noted that Malawi’s ability to diversify its economy beyond agriculture, particularly in rural areas, was being constrained by lack of reliable electricity. Prospects for sustaining growth and diversifying economic production were poor, and delivery of health and education services were adversely impacted. Much of this lost growth represented lost poverty reduction as well.

Within the power sector, in addition to the lack of generation capacity, deteriorating conditions at existing power plants, and an aging and overloaded electricity network, were identified as the leading causes of the high losses and frequent network outages. The condition of the power grid had degraded due a prolonged period of underinvestment in network maintenance and expansion, including limited additions of new generation capacity to match growing demand for electricity. Significant investments were needed to ensure that Malawi’s power sector could fulfill the needs of a growing population and goals for a more modern, diversified economy. Without an adequate power supply to service existing customers or expand access, goals for economic growth and poverty reduction would not be met.

MCC feasibility studies estimated that Malawi would need more than $2.5 billion for the rehabilitation, modernization, and expansion of the entire transmission and distribution system, as well as the increased generation capacity, if the country was to reach its goal of substantially increasing electrification rates by 2020. Therefore, critical investments in infrastructure were identified as a clear need to support the Government of Malawi’s objective to increase the reliability of electricity service and support future growth in the country’s electrification rate. By investing in Malawi’s limited electricity network, it was believed that the compact could serve as a catalyst and lay the foundation for additional investment in generation, especially from the private sector.

However, it was clear that investments in infrastructure alone would not be sufficient to resolve the constraint posed by poor electricity services. Without improvements in the overall management of the power sector, there was a risk that conditions would again deteriorate following completion of the compact and that the private sector investment in Malawi’s power sector would not continue. Compared to its neighboring countries, Malawi had yet to adopt significant sector improvements, including those sector and governance reforms that have proven to be successful in rapidly expanding electricity supply and access in similar contexts.

The Government initiated steps in 2004 to improve the trajectory of the country’s power sector, including the introduction of an independent regulator (Malawi Energy Regulatory Authority or MERA), changes to management at the public electricity utility (Electricity Supply Corporation of Malawi or ESCOM), and an updated Electricity Act. (The primary stakeholders in Malawi’s power sector and their roles at the time of compact development are captured in Figure 1.) However, further action was needed to reach the country’s goals. To build on those previous reform actions taken by the Government, the compact aimed to both improve the capacity and financial viability of Malawi’s electric utility and create an enabling environment for future investment in and expansion of the power sector through activities focused on strengthening sector institutions, in addition to promoting sector reform and regulation.

Malawi’s energy sector was also constrained by its dependence on hydro-electric power. Approximately 98 percent of Malawi’s energy generation comes from a series of hydro-powered plants along the Shire River, which are susceptible to adverse hydrological conditions such as droughts and sediment build-up that significantly reduce hydropower efficiencies and production capacity. Improvements to the power sector that were envisioned under the reform initiatives would ultimately lead to an enabling environment for increased private sector investment in the sector and, therefore, diversification of generation sources beyond hydropower through the private sector investments. However, improved environmental and natural resource management was also needed to improve the sustainability of Malawi’s existing generation assets.

Efficient hydropower generation was threatened by poor land-use practices, deforestation of the watersheds, and limited rainfall and increased drought. Compact interventions targeted reducing deforestation and improving land management practices to reduce soil erosion and improve the ability of the watersheds to retain rainfall and release it over longer periods while improving the livelihoods of the communities along the Shire River Basin. Since women play a key role in management of natural and community resources, addressing gender equality was necessary for sustainability of the compact investments.

The economic logic of the Malawi Compact was based on reducing the costs of doing business in Malawi by reducing power outages and technical losses, enhancing sustainability and efficiency of hydropower generation, and increasing energy throughput. The reduction in energy costs would result in improved productivity of firms and lower costs of living to households. The Beneficiary Analysis posited that the compact would help households and enterprises in the agricultural, manufacturing, and service sectors.

MCC signed the Malawi Compact in April 2011. In July 2011, MCC placed an operational hold on compact activity in light of significant concerns regarding governance in Malawi, notably its commitment to political pluralism, human rights, and the rule of law. 7  Subsequently, in March 2012, MCC’s Board voted to suspend the compact with Malawi due to a pattern of actions by the Government of Malawi that it deemed inconsistent with the democratic governance criteria that MCC uses to select its compact partners. 8  MCC’s Board expressed serious concerns about the economic and political situation in Malawi, and emphasized the need for the Government of Malawi to respect the rights of its citizens and civil society organizations to assemble and speak freely. 9  At the time of suspension, the compact had not yet entered into force and no significant funding had been expended. In June 2012, MCC’s Board voted to lift the suspension of the Malawi Compact, determining that since new President Joyce Banda’s inauguration in April, the President and her government had taken clear steps to reverse the pattern of actions that had led to Malawi’s suspension. The remedial steps included improvements to the human rights environment, government accountability, and the resumption of sound economic policy. 10

The Malawi Compact was amended in July 2013 to respond to changes in the sector and additional information acquired during the operational hold and suspension. The compact entered into force on September 20, 2013 and ended on September 20, 2018. The Millennium Challenge Account-Malawi (MCA-Malawi) 11  implemented the compact on behalf of the government and at the end of the 120-day administrative closure period in January 2019, became the Malawi Millennium Development Trust (MMD). MMD, funded by the Government of Malawi, is tasked with continuing to support the compact partners in sustaining the compact investments for a period of at least one year.

The Malawi Compact was one of MCC’s most ambitious reform-focused programs to-date. The number and breadth of reforms asked of Malawi were significant—cutting across the whole power sector and involving legal and policy amendments, financial support from the Government of Malawi, organizational restructuring, regulatory reforms, and a host of process- and skill-based management improvements. In addition to compact reforms extending the sustainability of MCC’s infrastructure investments through adequate fiscal management, operations management, and utility governance management, the compact also included an environment and natural resource management project to ensure sustainable power generation and to protect MCC and future private sector investments.

At a Glance

Compact Economic Benefits

Original Compact Project Amount: $350.7 million

Total Disbursed: $346.7 million

Estimated benefits correspond to $348.0 million of project funds, where cost-benefit analysis was conducted

This compact used a compact-wide cost-benefit model to generate the estimated economic rate of return (ERR). Therefore, project-specific economic rates of return were not estimated. The economic rate of return at closeout was estimated to be 25.4 percent, seven percentage points higher than the ERR estimated at compact signing. The higher estimated ERR is primarily attributable to two factors:

1. The ERR model at compact signing anticipated an additional 3 MW of generation capacity to Nkula A. However, the project increased the generation capacity of the Nkula A plant by 12 MW (from 24 MW to 36 MW).The closeout ERR model includes the additional 12 MW of generation capacity.
2. The ERR model at compact signing assumed an annual growth rate of residential connections of 0.5 percent. Under this assumption, the total number of residential connections at the end of the 20-year period would be 234,419 connections. However, over the five years of compact implementation, the average annual growth rate of residential connections was between 10 and 15 percent. Therefore, the close-out ERR assumes an annual growth rate of residential connections of 12.5 percent for the remaining 15 years of the ERR model period. Under this assumption, the total number of residential connections at the end of the 20 year period was 2,030,239 connections. The revised number of estimated beneficiaries over the 20 year period is 7,393,789 individuals.