Malawi - Privatization nd Utility Reform Project

Report No. PID7404 Project Name Malawi-Privatization and Utility (@) Reform Project Region Africa Regional Office Sector Privatization; Telecommunications & Informatics Project ID MWPE63095 Borrower(s) Implementing Agency Address PRIVATISATION COMMISSION CDL House, 5 Independence Drive, PO Box 937, Blantyre, Malawi Contact Person: Mr. Dye Mawindo, Executive Director Tel: (265) 623.655 Fax: (265) 621.248 Email: privatisation@malawi.net Environment Category B Date PID Prepared June 2, 2000 Projected Appraisal Date May 8 - 12, 2000 Projected Board Date June 27, 2000 1. Country and Sector Background The deterioration of Malawi's infrastructure and the resulting low and unreliable service coverage has been identified as one of the principal constraints to private sector development (PSD) in a survey of the private sector conducted for the 1997 World Development Report. Since 1997, the Government of Malawi (GOM) began the process of reforms in key infrastructure sectors as discussed below.(a) Privatization program. The Public Enterprises (Privatisation) Act of April 1996 and the Divestiture Sequence Plan (DSP) consisting of a list of 100 PEs approved by the Cabinet Committee on the Economy in August 1997 provide the basis for the establishment of the Privatisation Commission and the authority to privatize a particular enterprise respectively. Implementation of the reform agenda has been an ongoing process, and as of December 1999, 35 out of 100 PEs on the DSP were privatized.(b) Telecommunications and postal sectors. The Communications Sector Policy statement of August 1998 and the Communications Act of November 1998 provide the basis for the reform agenda with the goals to increase the number of working lines to not less than 150,000 by the end of 2003, improving service quality and reducing prices. Implementation of the reform agenda has commenced - transaction advisors for the sale of Malawi Telecommunications Limited (MTL) have been appointed in October 1999; activities supporting the separation of MTL and the Malawi Posts Corporation (MPC) are well underway; the Malawi Communications Regulatory Authority (MACRA) has been established; and separate Boards and management for MTL and MPC have been appointed. A Business Plan for MPC has been prepared. Based on this plan, MACRA approved a rate increase effective April 1, 2000. Further, based on the business plan, the Ministry of Finance and Economic Planing (MOF) will allocate in its FY2001 budget a provision of subsidy for postal services.(c) Power sector reform. Implementation of the reform agenda  has commenced with: (i) the establishment of the Electricity Council (EC) in January 1999; (ii) the incorporation of ESCOM in July 1998 into a limited liability company wholly owned, for the time being, by the Government; (iii) the transfer of all assets, liabilities, property and staff of the old ESCOM to the new ESCOM Limited; and (iv) commencement of a commercialization program for ESCOM. In addition, a task force was appointed to oversee the commercialization program as well as formulate a power sector policy statement. This has since resulted in the draft Power Sector Policy Statement of July, 1999, which is still awaiting cabinet approval, and the draft revised Electricity Bill, 2000, which had been published for consideration by Parliament. The key elements of the sector policy statement were the separation of ESCOM into generation, transmission and distribution units and commencement of privatization of distribution immediately with subsequent privatization of generation. (d) Water sector reform. In 1994, the government defined its sector strategy in the National Water Resources Management Policy and Strategies. Urban water boards have expanded facilities, extended service coverage and have introduced some measures to improve efficiency but their financial condition has deteriorated in recent years despite tariff increases. The involvement of the private sector is considered essential in order to establish autonomy and appropriate incentive structures and a study of Private Sector Participation (PSP) options will commence shortly to identify options for involving the private sector in provision of water supply service in the two primary urban centers in Malawi - Blantyre and Lilongwe. 2. Objectives The project's objective is to improve quality of and access to economic and physical infrastructure for private sector development. 3. Rationale for Bank's Involvement The privatization and utility reform programs have both been a significant part of the government's structural adjustment program which the Bank has supported through the First and Second Fiscal Restructuring and Deregulation Projects. The Bank has also been previously involved in supporting GOM's privatization program through an IDF grant. The key issue has been that in the past there has been a limited requirement for financing technical assistance. However, with the larger transactions and the larger fees for utility privatization and the Technical Assistance requirements for new regulatory institutions, the government decided to consolidate these requirements under the proposed project. 4. Description The project would consist of four components:(a) Privatization component. This component would support the development of divestiture options and/or the implementation of the chosen divestiture methods for utility divestitures including: MTL, electricity distribution and transmission, and water. Initial funding for the MTL transaction advisors has been provided through PPF. In addition, the component would fund consultancy services associated with at least seven identified non-utility divestitures included in the DSP. (b) Support to regulatory institutions. This component would enhance the operations of the Malawi Communications Regulatory Authority for postal and telecommunications regulation and the Electricity Council for power regulation. Further, this component would also assist the government in evaluating the benefits of and, if -2 -  appropriate, in the establishment of a multi-sectoral regulatory agency. Financing for the telecommunications regulatory agency (MACRA) is already being provided by DANIDA under parallel financing.(c) Postal sector support. This component would support the three year business plan of MPC in order to help the postal service progress towards full cost recovery after its separation from MTL. The support provided would be through funding of consultancy for management support and training (possibly through a twinning arrangement with another postal administration), postal and office equipment, and vehicles. The government would provide a subvention over the project period to meet the interim financing gap arising from tariffs not increasing sufficiently to meet operating costs of MPC.(d) Pre-privatization Assistance. This component would support restructuring activities: (a) in ESCOM - including the conducting of a tariff study, establishing a financial management system and separating the financial statements of the Strategic Business Units and the purchase of high voltage metering equipment; and (b) in MTL - ensuring that Year 2000 compliance is achieved. The latter activity was financed through the Project Preparation Facility and has been completed. 5. Financing Total ( US$m) GOVERNMENT 3.3 IDA 28.9 Total Project Cost 32.2 6. Implementation The Privatisation Commission would act as the unit coordinating project implementation and would be responsible for accounting and disbursement for all components. With regard to procurement, the privatization component would be implemented by PC; the regulatory reform component would be implemented by EC and MACRA; postal sector support component would be implemented by MPC and the pre-privatization assistance the component by MTL and ESCOM. 7. Sustainability This project provides technical assistance for a well defined, timebound process of enterprise divestiture under the privatization component and pre-privatization assistance to get PEs to the point of divestiture under the pre-privatization assistance component. Once the transactions are completed, there should be no need for continuing assistance in this regard. Similarly, the postal sector support component has been designed so that IDA funding is utilized for financing upfront investment and start-up management support for the new MPC. Subsidy requirements for the first two years are to be met from the government budget and thereafter increased tariffs, volume of business and cost efficiencies should lead to break-even operation. Finally, under the regulatory component, initial support is being provided for strengthening regulatory functions in recent reformed sectors. The key sustainability issue relates to ensuring that sufficient skills are developed in regulation and sufficient financing is available for the new created regulatory agencies. 8. Lessons learned from past operations in the country/sector There have been no prior IDA privatization projects in Malawi. Limited assistance has been provided through an IDF grant in support of privatization. Implementation of this grant indicates the following. -3 -  First, that there has been local ownership of the privatization process. With capacity built in the Privatisation Commission, the GOM has some capacity required to initiate and follow-up on future work in privatization. International and regional experience on privatization and sector reform indicate the following "best practice" features: Government commitment to and leadership of the privatization and sector reform programs are essential to success; strong privatization agency; availability of resources to address the social cost of reform by funding severance packages for redundant employees from privatization proceeds; and consistent approach across sector reform and privatization processes. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : No major environmental impact is envisaged. The privatization process will involve some PEs that might be the source of pollution or other environmental problems related to on-going and future practices (e.g. PEs operating in power generation). The approach adopted has been to agree on a specific set of guidelines for conducting EA but to defer conducting the EAs closer to when the privatization transaction would occur. The government with funding from IDA PPF hired a private consultant to carry out an environmental audit of MTL, which is in the process of being privatized. The report evaluated the existing environmental problems resulting from activities while under public sector ownership and developed an Audit Action Plan which will assist MTL to take necessary and appropriate measures to clean up existing environmental damage, protect and manage the environment in a manner consistent with the requirements of the Environmental Management Act, 1996 and the World Bank's safeguard policies in particular OP/BP/GP 4.01. In accordance with the safeguard policies, a pre-screening of privatization candidates to be funded under the project was undertaken and the list of privatization candidates for which environmental audits and/or assessments would be undertaken was agreed. When such audits/assessments are undertaken prior to transactions, they will be reviewed and cleared by the Bank. 11. Contact Point: Task Manager Gaiv M. Tata The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202)473-2175 Fax: (202)614-0798 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop - 4-  Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending August 18, 2000. - 5 -