TREATIES AND OTHER INTERNATIONAL ACTS SERIES 13-920

________________________________________________________________________

ECONOMIC ASSISTANCE

Millennium Challenge Compact 

Between the 

UNITED STATES OF AMERICA

and MALAWI

Signed at Lilongwe April 7, 2011

with

Annexes 

and

First Amendment to

Millennium Challenge Compact

signed at Washington and Lilongwe 

July 26 and 31, 2013
 NOTE BY THE DEPARTMENT OF STATE

 Pursuant to Public Law 89—497, approved July 8, 1966

(80 Stat. 271; 1 U.S.C. 113)—

“. . .the Treaties and Other International Acts Series issued

under the authority of the Secretary of State shall be competent

evidence . . . of the treaties, international agreements other than

treaties, and proclamations by the President of such treaties and

international agreements other than treaties, as the case may be, 

therein contained, in all the courts of law and equity and of maritime

jurisdiction, and in all the tribunals and public offices of the

United States, and of the several States, without any further proof

or authentication thereof.”
 MALAWI

 Economic Assistance

 Millennium Challenge Compact

 signed at Lilongwe April 7, 2011;

 Entered into force September 20, 2013.

With annexes.

 And First Amendment to Millennium Challenge Compact.

 Signed at Washington and Lilongwe 

 July 26 and 31, 2013;

 Entered into force September 20, 2013.
NULLE~CHALLENGECOMWACT 

BETWEEN 

THE UNITED STATES OF AMERICA 

ACTING THROUGH 

THE NULLENNIUM CHALLENGE CORPORATION 

AND 

THE REPUBLIC OF MALA WI 
MILLENNIUM CHALLENGE COMPACT 

TABLE OF CONTENTS 

Article I. Goal and Objectives .......................................................................................... I 

Section 1.1 Compact Goal ............................................................................................. I 

Section 1.2 Program Objective ...................................................................................... I 

Section 1.3 Project Objectives ....................................................................................... I 

Article 2. Funding and Resources ..................................................................................... 2 

Section 2.1 

Section 2.2 

Section 2.3 

Section 2.4 

Section 2.5 

Section 2.6 

Section 2.7 

Section 2.8 

Program Funding ........................................................................................ 2 

Compact Implementation Funding ............................................................. 2 

MCC Funding··········································································'·················· 3 

Disbursement .............................................................................................. 3 

Interest. ........................................................................................................ 3 

Government Resources; Budget ................................................................. 3 

Limitations on the Use ofMCC Funding ................................................... 3 

Taxes ........................................................................................................... 4 

Article 3. Implementation ................................................................................................. 5 

Section 3.1 

Section 3.2 

Section 3.3 

Section 3.4 

Section 3.5 

Section 3.6 

Section 3.7 

Section 3.8 

Article 4. 

Section 4.1 

Section 4.2 

Section 4.3 

Program Implementation Agreement .......................................................... 5 

Government Responsibilities ...................................................................... 5 

Policy Performance ..................................................................................... 6 

Accuracy of Information ............................................................................. 6 

Implementation Letters ............................................................................... 6 

Procurement ................................................................................................ 6 

Records; Accounting; Covered Providers; Access ..................................... 6 

Audits; Reviews .......................................................................................... 7 

Communications ............................................................................................... 8 

Communications ......................................................................................... 8 

Representatives ........................................................................................... 9 

Signatures .................................................................................................... 9 

Article 5. Termination; Suspension; Expiration ............................................................... 9 

Section 5.1 

Section 5.2 

Section 5.3 

Section 5.4 

Article 6. 

Section 6.1 

Section 6.2 

Section 6.3 

Termination; Suspension ............................................................................ 9 

Consequences of Termination, Suspension or Expiration ........................ 10 

Refunds; Violation .................................................................................... I 0 

Survival ..................................................................................................... II 

Compact Annexes; Amendments; Governing Law ........................................ II 

Annexes ..................................................................................................... II 

Amendments ............................................................................................. II 

Inconsistencies .......................................................................................... II 
Section 6.4 

Section 6.5 

Section 6.6 

Section 6.7 

Section 3.8 

Article 7. 

Governing Law ......................................................................................... 11 

Additional Instruments .............................................................................. 12 

References to MCC Website ..................................................................... 12 

References to Laws, Regulations, Policies and Guidelines ...................... 12 

MCC Status ............................................................................................... 12 

Entry Into Force .............................................................................................. 12 

Section 7 .I International Agreement ........................................................................... 12 

Section 7.2 Conditions Precedent to Entry into Force ................................................. 12 

Section 7.3 Date of Entry into Force ........................................................................... 13 

Section 7.4 Compact Term .......................................................................................... 13 

Section 7.5 Provisional Application ............................................................................ 13 

Annex I: Program Description 

Annex II: Multi-Year Financial Plan Summary 

Annex III: Description of the Monitoring and Evaluation Plan 

Annex IV: Conditions to Disbursement of Compact Implementation Funding 

AnnexV: Definitions 

Toe- ii 
MILLENNIUM CHALLENGE COMPACT 

PREAMBLE 

This MILLENNIUM CHALLENGE COMPACT (this "Compact") is between the United 

States of America, acting through the Millennium Challenge Corporation, a United States 

government corporation ("MCC'), and the Republic of Malawi ("Malawi"'), acting through its 

government (the "Government') (individually a "Party" and collectively, the "Parties"). 

Capitalized terms used in this Compact will have the meanings provided in Annex V. 

Recognizing that the Parties are committed to the shared goals of promoting economic 

growth and the elimination of extreme poverty in Malawi and that MCC assistance under this 

Compact supports Malawi's demonstrated commitment to strengthening good governance, 

economic freedom and investments in people; 

Recalling that the Government consulted with the private sector and civil society of 

Malawi to determine the priorities for the use of Millennium Challenge Corporation assistance 

and developed and submitted to MCC a proposal for such assistance to achieve lasting economic 

growth and poverty reduction; 

Understanding that MCC wishes to help Malawi implement the program described herein 

(as such description may be amended from time to time in accordance with the terms hereof, the 

"Program") to counter a key binding constraint to sustained growth and diversification in the 

Malawi economy; and 

Acknowledging that to implement the Program, MCC wishes to make available to the 

Government an amount not to exceed Three Hundred and Fifty Million Seven Hundred 

Thousand United States Dollars (US$350,700,000), subject to the terms and conditions of this 

Compact; 

The Parties hereby agree as follows: 

ARTICLE 1. 

GOAL AND OBJECTIVES 

Section 1.1 Compact Goal. The goal of this Compact is to reduce poverty through economic 

growth in Malawi (the "Compact Goaf'). 

Section 1.2 Program Objective. The collective objective of the Program (the "Program 

Objective") is to (i) increase investment and employment income by raising the profitability and 

productivity of enterprises, (ii) expand access to electricity for the Malawian people and 

businesses, and (iii) improve delivery of social services. 

Section 1.3 Project Objective. To achieve the Program Objective, the Government will 

implement the Power Sector Revitalization Project described in Annex I (the "Project") with the 

assistance ofMCC. The objective of the Project is to improve the availability, reliability, and 

quality of the power supply by increasing the throughput capacity and stability of the national 

electricity grid, increase efficiency of hydropower generation, and create an enabling 
environment for future expansion by strengthening sector institutions and enhancing regulation 

and governance of the sector (the "Project Objective"). 

ARTICLE2. 

FUNDING AND RESOURCES 

Section 2.1 Program Funding. 

Upon entry into force of this Compact in accordance with Section 7.3, MCC will grant to the 

Government, under the terms of this Compact, an amount not to exceed Three Hundred and 

Forty One Million Five Hundred and Eighty Thousand United States Dollars (US$341,580,000) 

("Program Funding") for use by the Government to implement the Program. The allocation of 

Program Funding is generally described in Annex II. 

Section 2.2 Compact Implementation Funding. 

(a) Upon signing of this Compact, MCC will grant to the Government, under the 

terms of this Compact and in addition to the Program Funding described in Section 2.1, an 

amount not to exceed Nine Million One Hundred and Twenty Thousand United States Dollars 

(US$9,120,000) ("Compact Implementation Funding") under Section 609(g) of the Millennium 

Challenge Act of2003, as amended (the "MCA Act"), for use by the Government to facilitate 

implementation of the Compact, including for the following purposes: 

(i) financial management and procurement activities; 

(ii) administrative activities (including start-up costs such as staff salaries) and 

administrative support expenses such as rent, computers and other information technology or 

capital equipment; 

(iii) monitoring and evaluation activities; 

(iv) feasibility and any remaining project preparatory studies; and 

(v) other activities to facilitate Compact implementation as approved by 

MCC. 

The allocation of Compact Implementation Funding is generally described in Annex II. 

(b) Each Disbursement (as defined below) of Compact Implementation Funding is 

subject to satisfaction of the conditions precedent to such Disbursement as set forth in Annex IV. 

(c) If MCC determines that the full amount of Compact Implementation Funding 

available under Section 2.2(a) exceeds the amount that reasonably can be utilized for the 

purposes set forth in Section 2.2(a), MCC, by written notice to the Government, may withdraw 

the excess amount, thereby reducing the amount of the Compact Implementation Funding 

available under Section 2.2(a) (such excess, the "Excess CIF Amounf'). In such event, the 

amount of Compact Implementation Funding granted to the Government under Section 2.2(a) 

will be reduced by the Excess CJF Amount, and MCC will have no further obligations with 

respect to such Excess CIF Amount. 

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(d) Upon the written request of the Government, MCC may grant to the Government 

an amount equal to all or a portion of such Excess CIF Amount as an increase in the Program 

Funding. Such grant of additional Program Funding will be in writing and subject to the terms 

and conditions of this Compact applicable to Program Funding. 

Section 2.3 MCC Funding. 

Program Funding and Compact Implementation Funding are collectively referred to in this 

Compact as "MCC Funding", and includes any refunds or reimbursements of Program Funding 

or Compact Implementation Funding paid by the Government in accordance with this Compact. 

Section 2.4 Disbursement. 

In accordance with this Compact and the Program Implementation Agreement, MCC will 

disburse MCC Funding for expenditures incurred in furtherance of the Program (each instance, a 

"Disbursement'). Subject to the satisfaction of all applicable conditions precedent, the proceeds 

of Disbursements will be made available to the Government, at MCC's sole election, by (a) 

deposit to one or more bank accounts established by the Government and acceptable to MCC 

(each, a "Permitted Accounf') or (b) direct payment to the relevant provider of goods, works or 

services for the implementation of the Program. MCC Funding may be expended only for 

Program expenditures. 

Section 2.5 Interest. 

Unless MCC agrees otherwise in writing, the Government will pay or transfer to MCC, in 

accordance with the Program Implementation Agreement, any interest or other earnings that 

accrue on MCC Funding prior to such funding being used for a Program purpose. 

Section 2.6 Government Resources; Budget. 

(a) The Government will provide all funds and other resources, and will take all 

actions, that are necessary to carry out the Government's responsibilities under this Compact. 

(b) The Government will use its best efforts to ensure that all MCC Funding it 

receives or is projected to receive in each of its fiscal years is fully accounted for in its annual 

budget on a multi-year basis. 

(c) The Government will not reduce the normal and expected resources that it would 

otherwise receive or budget from sources other than MCC for the activities contemplated under 

this Compact and the Program. 

(d) Unless the Government discloses otherwise to MCC in writing, MCC Funding 

will be in addition to the resources that the Government would otherwise receive or budget for 

the activities contemplated under this Compact and the Program. 

Section 2. 7 Limitations on the Use ofMCC Funding. 

The Government will ensure that MCC Funding is not used for any purpose that would violate 

United States law or policy, as specified in this Compact or as further notified to the Government 

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in writing or by posting from time to time on the MCC website at www.mcc.gov (the "MCC 

Website"), including but not limited to the following purposes: 

(a) for assistance to, or training of, the military, police, militia, national guard or 

other quasi-military organization or unit; 

(b) for any activity that is likely to cause a substantial loss of United States jobs or a 

substantial displacement of United States production; 

(c) to undertake, fund or otherwise support any activity that is likely to cause a 

significant environmental, health, or safety hazard, as further described in MCC's environmental 

and social assessment guidelines and any guidance documents issued in connection with the 

guidelines posted from time to time on the MCC Website or otherwise made available to the 

Government (collectively, the "MCC Environmental Guidelines"); or 

(d) to pay for the performance of abortions as a method of family planning or to 

motivate or coerce any person to practice abortions, to pay for the performance of involuntary 

sterilizations as a method of family planning or to coerce or provide any financial incentive to 

any person to undergo sterilizations or to pay for any biomedical research which relates, in whole 

or in part, to methods of, or the performance of, abortions or involuntary sterilization as a means 

of family planning. 

Section 2. 8 Taxes. 

(a) Unless the Parties specifically agree otherwise in writing, the Government will 

ensure that all MCC Funding is free from the payment or imposition of any existing or future 

taxes, duties, levies, contributions or other similar charges (but not fees or charges for services 

that are generally applicable in Malawi, reasonable in amount and imposed on a nondiscriminatory basis) ("Taxes") of or in Malawi (including any such Taxes imposed by a 

national, regional, local or other governmental or taxing authority of or in Malawi). Specifically, 

and without limiting the generality of the foregoing, MCC Funding will be free from the 

payment of (i) any tariffs, customs duties, import taxes, export taxes, and other similar charges 

on any goods, works or services introduced into Malawi in connection with the Program, (ii) 

sales tax, value added tax, excise tax, property transfer tax or stamp duty tax, and other similar 

charges on any transactions involving goods, works or services in connection with the Program, 

(iii) taxes and other similar charges on ownership, possession or use of any property in 

connection with the Program, and (iv) taxes and other similar charges on income, profits or gross 

receipts attributable to work performed in connection with the Program and related social 

security taxes and other similar charges on all natural or legal persons performing work in 

connection with the Program except (I) natural persons who are citizens or residents of Malawi 

and (2) legal persons formed under the laws of Malawi (but excluding MCA-Malawi and any 

other entity formed for the purpose of implementing the Government's obligations hereunder). 

(b) The mechanisms that the Government will use to implement the tax exemption 

required by Section 2.8(a) will be set forth in the Program Implementation Agreement (the "Tax 

Schedules"). Such mechanisms may include exemptions from the payment of Taxes that have 

been granted in accordance with applicable law, refund or reimbursement of Taxes by the 

Government to MCC, MCA-Malawi or to the taxpayer, or payment by the Government to MCAMalawi or MCC, for the benefit of the Program, of an agreed amount representing any 

collectible Taxes on the items described in Section 2.8(a). 

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(c) If a Tax has been paid contrary to the requirements of Section 2.8(a) or the Tax 

Schedules, the Government will refund promptly to MCA-Malawi (or to another party as 

designated by MCC) the amount of such Tax in Malawi Kwacha and MCA-Malawi will refund 

that amount in US Dollars to MCC, unless otherwise provided by MCC, within sixty (60) days 

(or such other period as may be agreed in writing by the Parties) after the Government is notified 

in writing (whether by MCC or MCA-Malawi) that such Tax has been paid. If the amount of 

such Tax is converted to US Dollars from Malawi Kwacha, the rate of exchange applicable to 

such conversion shall be the US Dollar-Malawi Kwacha rate of exchange as published by the 

Reserve Bank of Malawi on the date of transfer. 

(d) In the event the Government fails to make a payment, including any refund, 

reimbursement, or other payment that falls hereunder in full when due (including VAT or other 

refund or reimbursement), interest shall be paid on such past due amount at a rate of the then 

current US Treasury Prompt Pay Interest Rate, calculated on a daily basis and a 360-day year 

from the due date of such payment until such amount is paid. 

(e) No MCC Funding, proceeds thereof or Program Assets may be applied by the 

Government in satisfaction of its obligations under Section 2.8(c). 

ARTICLE3. 

IMPLEMENTATION 

Section 3.1 Program Implementation Agreement. The Parties will enter into an agreement 

providing further detail on the implementation arrangements, fiscal accountability and 

disbursement and use ofMCC Funding, among other matters (the "Program Implementation 

Agreement' or "PL4"); and the Government will implement the Program in accordance with this 

Compact, the PIA, any other Supplemental Agreement and any Implementation Letter. 

Section 3.2 Government Responsibilities. 

(a) The Government has principal responsibility for overseeing and managing the 

implementation of the Program. 

(b) The Government will create and designate MCA-Malawi, a public trust to be 

created under the laws of Malawi, as the accountable entity to implement the Program and to 

exercise and perform the Government's right and obligation to oversee, manage and implement 

the Program, including without limitation, managing the implementation of the Project and its 

Activities, allocating resources and managing procurements. MCA-Malawi will have the 

authority to bind the Government with regard to all Program activities. The designation 

contemplated by this Section 3.2(b) will not relieve the Government of any obligations or 

responsibilities hereunder or under any related agreement, for which the Government remains 

fully responsible. MCC hereby acknowledges and consents to the designation in this Section 

3.2(b). 

(c) The Government will ensure that any Program Assets or services funded in whole 

or in part (directly or indirectly) by MCC Funding are used solely in furtherance of this Compact 

and the Program unless MCC agrees otherwise in writing. 

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(d) The Government will take all necessary or appropriate steps to achieve the 

Program Objective and the Project Objective during the Compact Term (including, without 

limiting Section 2.6(a), funding all costs that exceed MCC Funding and are required to carry out 

the terms hereof and achieve such objectives, unless MCC agrees otherwise in writing). 

(e) The Government will fully comply with the Program Guidelines, as applicable, in 

its implementation of the Program. 

Section 3.3 Policy Performance. In addition to undertaking the specific policy, legal and 

regulatory reform commitments identified in Annex I, the Government will seek to maintain and 

to improve its level of performance under the policy criteria identified in Section 607 of the 

MCA Act, and the selection criteria and methodology used by MCC. 

Section 3.4 Accuracy oflnformation. The Government assures MCC that, as of the date this 

Compact is signed by the Government, the information provided to MCC by or on behalf of the 

Government in the course of reaching agreement with MCC on this Compact is true, correct and 

complete in all material respects. 

Section 3.5 Implementation Letters. From time to time, MCC may provide guidance to the 

Government in writing on any matters relating to this Compact, MCC Funding or 

implementation of the Program (each, an "Implementation Letter''). The Government will apply 

such guidance in implementing the Program. The Parties may also issue jointly agreed-upon 

Implementation Letters to confirm and record their mutual understanding on aspects related to 

the implementation of this Compact, the PIA or other related agreements. 

Section 3.6 Procurement. The Government will ensure that the procurement of all goods, 

works and services by the Government or any Provider to implement the Program will be 

consistent with the "MCC Program Procurement Guidelines" posted from time to time on the 

MCC Website (the "MCC Program Procurement Guidelines"). The MCC Program 

Procurement Guidelines include the following requirements, among others: 

(a) open, fair, and competitive procedures must be used in a transparent manner to 

solicit, award and administer contracts and to procure goods, works and services; 

(b) solicitations for goods, works, and services must be based upon a clear and 

accurate description of the goods, works and services to be acquired; 

(c) contracts must be awarded only to qualified contractors that have the capability 

and willingness to perform the contracts in accordance with their terms on a cost effective and 

timely basis; and 

(d) no more than a commercially reasonable price, as determined, for example, by a 

comparison of price quotations and market prices, will be paid to procure goods, works and 

services. 

Section 3.7 Records: Accounting; Covered Providers; Access. 

(a) Government Books and Records. The Government will maintain, and will use its 

best efforts to ensure that all Covered Providers maintain, accounting books, records, documents 

and other evidence relating to the Program adequate to show, to MCC's satisfaction, the use of 

6 
all MCC Funding and the implementation and results of the Program ("Compact Records"). In 

addition, the Government will furnish or cause to be furnished to MCC, upon its request, 

originals or copies of such Compact Records. 

(b) Accounting. The Government will maintain and will use its best efforts to ensure 

that all Covered Providers maintain Compact Records in accordance with generally accepted 

accounting principles prevailing in the United States, or at the Government's option and with 

MCC' s prior written approval, other accounting principles, such as those (i) prescribed by the 

International Accounting Standards Board, or (ii) then prevailing in Malawi. Compact Records 

must be maintained for at least five (5) years after the end of the Compact Term or for such 

longer period, if any, required to resolve any litigation, claims or audit findings or any applicable 

legal requirements. 

(c) Providers and Covered Providers. Unless the Parties agree otherwise in writing, a 

"Provider" is (i) any entity of the Government that receives or uses MCC Funding or any other 

Program Asset in carrying out activities in furtherance of this Compact or (ii) any third party that 

receives at least US$50,000 in the aggregate ofMCC Funding (other than as salary or 

compensation as an employee of an entity of the Government) during the Compact Term. A 

"Covered Provider'' is (i) a non-United States Provider that receives (other than pursuant to a 

direct contract or agreement with MCC) US$300,000 or more ofMCC Funding in any 

Government fiscal year or any other non-United States person or entity that receives, directly or 

indirectly, US$300,000 or more ofMCC Funding from any Provider in such fiscal year, or (ii) 

any United States Provider that receives (other than pursuant to a direct contract or agreement 

with MCC) US$500,000 or more ofMCC Funding in any Government fiscal year or any other 

United States person or entity that receives, directly or indirectly, US$500,000 or more ofMCC 

Funding from any Provider in such fiscal year. 

(d) Access. Upon MCC's request, the Government, at all reasonable times, will 

permit, or cause to be permitted, authorized representatives ofMCC, an authorized Inspector 

General ofMCC ("Inspector Generaf'), the United States Government Accountability Office, 

any auditor responsible for an audit contemplated herein or otherwise conducted in furtherance 

of this Compact, and any agents or representatives engaged by MCC or the Government to 

conduct any assessment, review or evaluation of the Program, the opportunity to audit, review, 

evaluate or inspect facilities, assets and activities funded in whole or in part by MCC Funding. 

Section 3.8 Audits; Reviews. 

(a) Government Audits. Except as the Parties may agree otherwise in writing, the 

Government will, on at least a semi-annual basis, conduct, or cause to be conducted, financial 

audits of all disbursements ofMCC Funding covering the period from signing of this Compact 

until the earlier of the following December 31 or June 30 and covering each six-month period 

thereafter ending December 31 and June 30, through the end of the Compact Term. In addition, 

upon MCC's request, the Government will ensure that such audits are conducted by an 

independent auditor approved by MCC and named on the list oflocal auditors approved by the 

Inspector General or a United States-based certified public accounting firm selected in 

accordance with the "Guidelines for Financial Audits Contracted by MCA" (the "Audit 

Guidelines") issued and revised from time to time by the Inspector General, which are posted on 

the MCC Website. Audits will be performed in accordance with the Audit Guidelines and be 

subject to quality assurance oversight by the Inspector General. Each audit must be completed 

7 
and the audit report delivered to MCC no later than 90 days after the first period to be audited 

and no later than 90 days after each June 30 and December 31 thereafter, or such other period as 

the Parties may otherwise agree in writing. 

(b) Audits of Other Entities. The Government will ensure that MCC financed 

agreements between the Government or any Provider, on the one hand, and (i) a United States 

nonprofit organization, on the other hand, state that the United States nonprofit organization is 

subject to the applicable audit requirements contained in OMB Circular A-133, "Audits of 

States, Local Governments, and Non-Profit Organizations," issued by the United States Office of 

Management and Budget; (ii) a United States for-profit Covered Provider, on the other hand, 

state that the United States for-profit organization is subject to audit by the applicable United 

States Government agency, unless the Government and MCC agree otherwise in writing; and 

(iii) a non-US Covered Provider, on the other hand, state that the non-US Covered Provider is 

subject to audit in accordance with the Audit Guidelines. 

(c) Corrective Actions. The Government will use its best efforts to ensure that each 

Covered Provider (i) takes, where necessary, appropriate and timely corrective actions in 

response to audits, (ii) considers whether the results of the Covered Provider's audit necessitates 

adjustment of the Government's records, and (iii) permits independent auditors to have access to 

its records and financial statements as necessary. 

(d) Audit by MCC. MCC will have the right to arrange for audits of the 

Government's use ofMCC Funding. 

{e) Cost of Audits, Reviews or Evaluations. MCC Funding may be used to fund the 

costs of any audits, reviews or evaluations required under this Compact. 

ARTICLE4. 

COMMUNICATIONS 

Section 4 .I Communications. Any document or communication required or submitted by 

either Party to the other under this Compact must be in writing and in English. For this purpose, 

the address of each Party is set forth below. 

ToMCC: 

Millennium Challenge Corporation 

Attention: Vice President, Compact Operations 

(with a copy to the Vice President and General Counsel) 

875 Fifteenth Street, N.W. 

Washington, DC 20005 

United States of America 

Facsimile: (202) 521-3700 

Telephone: (202) 521-3600 

Email: VPOperations@mcc.gov (Vice President, Compact Operations) 

VPGeneralCounsel@mcc.gov (Vice President and General Counsel) 

8 
To the Government: 

Ministry of Finance 

Attention: Minister of Finance 

(with copies to the (a) Secretary to the Treasury and (b) Chief Secretary to 

the Government) 

Capital Hill 

Lilongwe, Malawi 

Tel: +265-1788030 

Fax: +265-1788384 

Email: secmof@finance.gov .mw 

To MCA-Malawi: 

Upon establishment ofMCA-Malawi, MCA-Malawi will notify the Parties of its contact 

details. 

Section 4.2 Representatives. For all purposes of this Compact, the Government will be 

represented by the individual holding the position of, or acting as, Minister of Finance of the 

Republic of Malawi, and MCC will be represented by the individual holding the position of, or 

acting as, Vice President, Compact Operations (each of the foregoing, a "Principal 

Representative"). Each Party, by written notice to the other Party, may designate one or more 

additional representatives (each, an "Additional Representative"). A Party may change its 

Principal Representative to a new representative that holds a position of equal or higher authority 

upon written notice to the other Party. 

Section 4.3 Signatures. Signatures to this Compact and to any amendment to this Compact 

will be original signatures appearing on the same page or in an exchange of letters or diplomatic 

notes. With respect to all documents arising out of this Compact (other than the Program 

Implementation Agreement) and amendments thereto, signatures may, as appropriate, be 

delivered by facsimile or electronic mail and in counterparts and will be binding on the Party 

delivering such signature to the same extent as an original signature would be. 

ARTICLES. 

TERMINATION; SUSPENSION; EXPIRATION 

Section 5.1 Termination; Suspension. 

(a) Either Party may terminate this Compact in its entirety by giving the other Party 

thirty (30) days' prior written notice. 

(b) MCC may, immediately, upon written notice to the Government, suspend or 

terminate this Compact or MCC Funding, in whole or in part, and any obligation related thereto, 

ifMCC determines that any circumstance identified by MCC, as a basis for suspension or 

termination (whether in writing to the Government or by posting on the MCC Website) has 

occurred, which circumstances include but are not limited to the following: 

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(i) the Government fails to comply with its obligations under this Compact or 

any other agreement or arrangement entered into by the Government in connection with this 

Compact or the Program; 

(ii) an event or series of events has occurred that makes it probable that the 

Program Objective or the Project Objective will not be achieved during the Compact Term or 

that the Government will not be able to perform its obligations under this Compact; 

(iii) a use ofMCC Funding or continued implementation of this Compact or 

the Program violates applicable law or United States Government policy, whether now or 

hereafter in effect; 

(iv) the Government or any other person or entity receiving MCC Funding or 

using Program Assets is engaged in activities that are contrary to the national security interests of 

the United States; 

(v) an act has been committed or an omission or an event has occurred that 

would render Malawi ineligible to receive United States economic assistance under Part I of the 

Foreign Assistance Act of 1961, as amended (22 U.S.C. 2151 et seq.), by reason of the 

application of any provision of such act or any other provision of law; 

(vi) the Government has engaged in a pattern of actions inconsistent with the 

criteria used to determine the eligibility of Malawi for assistance under the MCA Act; and 

(vii) the Government or another person or entity receiving MCC Funding or 

using Program Assets is found to have been convicted of a narcotics offense or to have been 

engaged in drug trafficking. 

Section 5.2 Consequences of Termination. Suspension or Expiration. 

(a) Upon the suspension or termination, in whole or in part, of this Compact or any 

MCC Funding, or upon the expiration of this Compact, the provisions of Section 4.2 of the 

Program Implementation Agreement will govern the post-suspension, post-termination or postexpiration treatment of MCC Funding, any related Disbursements and Program Assets. Any 

portion of this Compact, MCC Funding, the Program Implementation Agreement or any other 

Supplemental Agreement that is not suspended or. terminated will remain in full force and effect. 

(b) MCC may reinstate any suspended or terminated MCC Funding under this 

Compact if MCC determines that the Government or other relevant person or entity has 

committed to correct each condition for which MCC Funding was suspended or terminated. 

Section 5.3 Refunds; Violation. 

(a) If any MCC Funding, any interest or earnings thereon, or any Program Asset is 

used for any purpose in violation of the terms of this Compact, then MCC may require the 

Government to repay to MCC in United States Dollars the value of the misused MCC Funding, 

interest, earnings, or asset, plus interest within thirty (30) days after the Government's receipt of 

MCC' s request for repayment. Interest will accrue from the date of the violation and will be 

calculated at the 10-year U.S. Treasury Note rate prevailing as of the close of business in 

10 
Washington, D.C. as of the date ofMCC's request for payment. The Government will not use 

MCC Funding, proceeds thereof or Program Assets to make such payment. 

(b) Notwithstanding any other provision in this Compact or any other existing 

agreement to the contrary, MCC's right under Section 5.3(a) for a refund will continue during 

the Compact Term and for a period of(i) five (5) years thereafter or (ii) one (I) year after MCC 

receives actual knowledge of such violation, whichever is later. 

Section 5.4 Survival. This Section 5.4 and the Government's responsibilities under Sections 

2.7, 3.7, 3.8, 5.2, 5.3, and 6.4 will survive the expiration, suspension or termination of this 

Compact. 

ARTICLE6. 

COMPACT ANNEXES; AMENDMENTS; GOVERNING LAW 

Section 6.1 Annexes. Each annex to this Compact constitutes an integral part hereof, and 

references to "Annex" mean an annex to this Compact unless otherwise expressly stated. 

Section 6.2 Amendments. 

(a) The Parties may amend this Compact only by a written agreement signed by the 

Principal Representatives (or such other government official designated by the relevant Principal 

Representative). 

(b) Notwithstanding Section 6.2(a), the Parties may agree in writing, signed by the 

Principal Representatives (or such other government official designated by the relevant Principal 

Representative) or any Additional Representative, to modify any Annex to (i) suspend, terminate 

or modify any Project or Activity, or to create a new project, (ii) change the allocations of funds 

as set forth in Annex II as of the date hereof(including to allocate funds to a new project), (iii) 

modify the Implementation Framework described in Annex I, or (iv) add, delete or waive any 

condition precedent described in Annex IV; provided that, in each case, any such modification 

(I) is consistent in all material respects with the Program Objective and Project Objective, (2) 

does not cause the amount of Program Funding to exceed the aggregate amount specified in 

Section 2.1 (as may be modified by operation of Section 2.2(d)), (3) does not cause the amount 

of Compact Implementation Funding to exceed the aggregate amount specified in Section 2.2(a), 

and (4) does not extend the Compact Term. 

Section 6.3 Inconsistencies. In the event of any conflict or inconsistency between: 

(a) any Annex and any of Articles I through 7, such Articles I through 7, as 

applicable, will prevail; or 

(b) this Compact and any other agreement between the Parties regarding the Program, 

this Compact will prevail. 

Section 6.4 Governing Law. This Compact is an international agreement and will be 

governed by the principles of international law. 

II 
Section 6.5 Additional Instruments. Any reference to activities, obligations or rights 

undertaken or existing under or in furtherance of this Compact or similar language will include 

activities, obligations and rights undertaken by, or existing under or in furtherance of any 

agreement, document or instrument related to this Compact and the Program. 

Section 6.6 References to MCC Website. Any reference in this Compact, the PIA or any 

other agreement entered into in connection with this Compact, to a document or information 

available on, or notified by posting on the MCC Website will be deemed a reference to such 

document or information as updated or substituted on the MCC Website from time to time. 

Section 6. 7 References to Laws. Regulations. Policies and Guidelines. Each reference in this 

Compact, the PIA or any other agreement entered into in connection with this Compact, to a law, 

regulation, policy, guideline or similar document will be construed as a reference to such law, 

regulation, policy, guideline or similar document as it may, from time to time, be amended, 

revised, replaced, or extended and will include any law, regulation, policy, guideline or similar 

document issued under or otherwise applicable or related to such law, regulation, policy, 

guideline or similar document. 

Section 6.8 MCC Status. MCC is a United States government corporation acting on behalf of 

the United States Government in the implementation of this Compact. MCC and the United 

States Government assume no liability for any claims or loss arising out of activities or 

omissions under this Compact. The Government waives any and all claims against MCC or the 

United States Government or any current or former officer or employee ofMCC or the United 

States Government for all loss, damage, injury, or death arising out of activities or omissions 

under this Compact, and agrees that it will not bring any claim or legal proceeding of any kind 

against any of the above entities or persons for any such loss, damage, injury, or death. The 

Government agrees that MCC and the United States Government or any current or former officer 

or employee ofMCC or the United States Government will be immune from the jurisdiction of 

all courts and tribunals of Malawi for any claim or loss arising out of activities or omissions 

under this Compact. 

ARTICLE7. 

ENTRY INTO FORCE 

Section 7 .I International Agreement. Before this Compact enters into force, the Government 

will proceed in a timely manner to complete all of its domestic requirements for each of the 

Compact and the Program Implementation Agreement to enter into force as an international 

agreement. 

Section 7.2 Conditions Precedent to Entrv into Force. Before this Compact enters into force: 

(a) The Program Implementation Agreement must have been signed by the parties 

thereto; 

(b) The Government must have delivered to MCC: 

(i) a letter signed and dated by the Principal Representative of the 

Government, or such other duly authorized representative of the Government acceptable to 

MCC, confirming that the Government has completed its domestic requirements for this 

12 
Compact to enter into force and that the other conditions precedent to entry into force in this 

Section 7.2 have been met. 

(ii) a signed legal opinion from the Attorney General of Malawi (or such other 

legal representative of the Government acceptable to MCC), in form and substance satisfactory 

to MCC; and 

(iii) complete, certified copies of all decrees, legislation, regulations or other 

governmental documents relating to the Government's domestic requirements for this Compact 

to enter into force and the satisfaction of Section 7.1, if any, which MCC may post on its website 

or otherwise make publicly available; 

(c) MCC shall not have determined that after signature of this Compact, the 

Government has engaged in a pattern of actions inconsistent with the eligibility criteria for MCC 

Funding; 

(d) The Government has delivered to MCC evidence, satisfactory to MCC, that it has 

fully funded a turnaround facility for Electricity Supply Corporation of Malawi ("ESCOM') to 

meet ESCOM' s working capital and investment capital needs for the Government's Fiscal Year 

2012, as further described in Annex I to this Compact (the "Turnaround Facility"); 

(e) The Government will ensure that ESCOM has employed a professionally 

qualified Chief Executive Officer for ESCOM; and 

(f) The Government will have delivered a schedule for the construction of the 

Kapichira II hydropower plant that is acceptable to MCC. 

Section 7.3 Date ofEntrv into Force. This Compact will enter into force on the date of the 

letter from MCC to the Government in an exchange ofletters confirming that MCC has 

completed its domestic requirements for entry into force of this Compact and that the conditions 

precedent to entry into force in Section 7.2 have been met. 

Section 7.4 Compact Term.· This Compact will remain in force for five (5) years after its 

entry into force, unless terminated earlier under Section 5.1 (the "Compact Term"). 

Section 7.5 Provisional Application. Upon signature of this Compact, and until this Compact 

has entered into force in accordance with Section 7.3, the Parties will provisionally apply the 

terms of this Compact; provided that, no MCC Funding, other than Compact Implementation 

Funding, will be made available or disbursed before this Compact enters into force. 

SIGNATURE PAGE FOLLOWS ON THE NEXT PAGE 

13 
IN WITNESS WHEREOF, the undersigned. duly authorized by their respective 

governments, have signed this Compact. 

Done at Lilongwe, Malawi, this 7th day of April, 2011, in the English language only. 

THE UNITED STATES OF AMERICA. 

ACTING THROUGH THE MILLENNIUM 

CHALLENGE CORPORATION 

:-.Tame: Patrick Fine 

Title: Vice President, Department of Compact 

Operations 

THE REPUBLIC OF MALA WI, ACTING 

THROUGH THE MINISTRY OF FINANCE 

Name: Kenny Edward Kandodo 

Title: Minister of Finance 

SJGNATl-RE PAGE TO MlLLE."".\'JL\1 CHALLESGE CO:\lPACT 

BEn\"EE.'i TilE U"ITED STATES Of A\IERICA 

ACTLNG TIIROl'GII TIJE MILLES~1rl)l:!\t CIL4LLESGE CORPOR.J.TIO:r-1 

A!"riD TJIE REPl'BUC OF M,-\L\Wl 
ANNEX I 

PROGRAM DESCRIPTION 

This Annex I describes the Program that MCC Funding will support in Malawi during the 

Compact Term. 

A. PROGRAM OVERVIEW 

1. Background and Consultative Process. 

(a) Background. 

Malawi is a landlocked country in southeast Africa that gained independence in 1964 and has a 

population of approximately 13.8 million people. Although Malawi has seen economic growth 

average seven percent over the last six years, an estimated 51 percent of the population lives on 

less than US$1.25 a day, and gross national income per capita stands at approximately US$880 

(purchasing power parity ("PPP'') adjusted). The economy remains heavily dependent on rainfed agriculture and primary commodity exports, and sustained economic growth and 

development require increasing productivity of industry, agriculture, and services, as well as 

diversification of the economy. 

Malawi's economy faces numerous challenges, including a power sector that is one of the most 

severely constrained in sub-Saharan Africa. The economic costs of an unreliable and inadequate 

power supply, as well as the costs of inappropriate pricing and high technical and non-technical 

losses, are estimated at seven to nine percent of GDP. In order to improve the prospects for 

sustained growth, poverty reduction, and improved delivery of health and education services, the 

power sector must be stabilized and expanded. Building on its current efforts to reform the 

power sector, the Government seeks to invest in infrastructure, tum around its electricity utilityElectricity Supply Corporation of Malawi ("ESCOM")- and develop an enabling legal and 

regulatory environment for investment in the sector. The Program is designed to support these 

efforts and assist Malawi with the sector's transformation. 

(b) Consultative Process. 

Malawi was deemed eligible for Compact assistance in 2007. To coordinate the Compact 

development process, the Government formed a core team (the "MCA-Malawi Core Team") in 

March 2008 to work with MCC to develop the Program. In May 2008, the MCA-Malawi Core 

Team initiated an analysis of constraints to economic growth in Malawi, in collaboration with 

the World Bank, the U.K. Department for International Development and the African 

Development Bank. Pursuant to this analysis and an extensive consultative process with key 

stakeholders, the power sector was identified as a key constraint to economic growth in Malawi. 

2. Goal and Objectives. 

The Compact Goal is to reduce poverty through economic growth. The Program Objective is to 

increase investment and employment income by raising the profitability and productivity of 

enterprises, expand access to electricity for the Malawian people and businesses, and improve 

delivery of social services. The Project Objective is to improve the availability, reliability, and 

quality of the power supply by increasing the throughput capacity and stability ofthe national 
electricity grid, increase efficiency of hydropower generation, and create an enabling 

environment for future expansion by strengthening sector institutions and enhancing regulation 

and governance of the sector. 

3. Beneficiaries. 

By reducing power outages and technical losses, enhancing the sustaipability and efficiency of 

hydropower generation, and increasing the potential kilowatt hours ("kWh") of throughput to 

electricity consumers, the Program will reduce energy costs to enterprises and households, 

improve productivity in agriculture, manufacturing, and service sectors, and support the 

preservation and creation of employment opportunities in the economy. The Parties expect the 

Program to result in the following benefits and distribution thereof: 

• An estimated 5 million individuals will benefit by year 20 after the Compact 

Term through reduced domestic and enterprise energy costs, increased 

employment income, and profits; 

• An estimated US$2.4 billion of income benefits to Malawi at the present 

discounted rate of 10 percent; 

• An estimated 40 percent of beneficiaries are currently extremely poor, and 60 

percent are poor1

; and 

• Extremely poor individuals will gain approximately US$221 of benefits in PPP 

terms, and poor individuals will gain an average of US$291 (estimates based on 

recent employment and electricity connection patterns, and incorporate effects of 

a modest rise in tariffs, to partly finance expanded access). 

These estimated income benefits do not include the full value of improvements to the delivery of 

health and education services of improved power supply, but these are likely to be important 

both economically and socially. All projected results depend upon complementary investments 

in generation capacity, as well as the successful implementation of the infrastructure 

investments, the sustained turnaround ofESCOM, and the realization of power sector reforms. 

B. POWER SECTOR REVITALIZATION PROJECT 

To advance the Program Objective, the Parties have designed a project to achieve a betterperforming power sector with improved availability, reliability and quality of the power supply, 

increased efficiency of hydropower generation, and strengthened sector capacity and governance 

(the "Power Sector Revitalization Project'). Set forth below is a description of the Power Sector 

Revitalization Project that the Government will implement, or cause to be implemented, with 

support from MCC Funding. 

1 "Extremely poor" is defined as living on the equivalent amount in 2010 ofless than US$1.25 per day 2005 PPP 

adjusted dollars, and ''poor" is defined as living on less than US$2.00 per day 2005 PPP adjusted dollars. 

ANNEX!- 2 
The Power Sector Revitalization Project consists of the following activities (each an "Activity"): 

• Investing in infrastructure development, including investment by the Government 

in new generation, and MCC Funding for generation and increased transmission and distribution 

capacity ("Infrastructure Development Activity"); and 

• Rebuilding ESCOM into a financially strong, well-managed utility and 

developing a regulatory environment that supports public and private investment in new 

generation capacity and expanded access ("Power Sector Reform Activity"). 

1. Infrastructure Development Activity. 

The Infrastructure Development Activity will rehabilitate, upgrade and modernize ESCOM's 

generation, transmission and distribution assets in most urgent need of repair, in order to 

preserve existing generation, improve the capability of the transmission system, and increase the 

efficiency and sustainability of hydropower generation. To facilitate the development and 

implementation of the Program, MCC is providing support for the Government's ability to 

identify and prioritize investments in the sector by developing an integrated resource plan. MCC 

Funding will support significant investments in the power system infrastructure to preserve 

generation and stabilize and modernize the transmission and distribution network. 

The Infrastructure Development Activity is only viable, technically and economically, if the 

Government and ESCOM maintain current generation assets and expand the generation capacity 

of the power system. Under the Infrastructure Development Activity, the Government will 

invest in new generation by completing the construction of the Kapichira II hydropower plant. 

Additionally, the Government will continue to seek to attract sustainable investment from the 

private sector and other donors to add significant amounts of new generation to the system. 

The Parties expect that by the end of the Compact Term, the Infrastructure Development 

Activity, together with the Government's commitment to complete construction ofKapichira II, 

will result in increases in generation capacity (from 286 MW to approximately 356 MW), 

network throughput capacity (from 260 MW to approximately 410 MW) and distribution 

capacity (from 868 MVA to approximately 1,078 MVA), and a reduction of total system losses 

from 20-25 percent to 18 percent. 

(a) Integrated Resource Plan. 

To facilitate the development and implementation of the Program, MCC is supporting the 

development of the Malawi 2020 Integrated Resource Plan ("IRP") to enhance the 

Government's efforts to add generation. The objective of the IRP is to identify a prioritized list 

of generation resources that can help the Government and ESCOM meet the increasing demands 

for power in a manner that balances the objective of least or low cost power to users and 

diversification of energy sources, and to increase the impact of the Project. The expected 

outcome of the IRP is an executed plan to target and secure increased investments in the power 

system. 

(b) Nkula A Refurbishment Sub-Activity. 

MCC Funding will support the refurbishment of the Nkula A hydropower plant, with the 

objective to improve the availability of power in Malawi by reducing outages caused by the 

ANNEX!- 3 
condition of the assets, and maximizing power output from Nkula A. The refurbishment will 

improve the reliability of the plant, extend its useful life, and thereby avoid a partial or total 

failure of the plant. 

(c) Transmission Network Upgrade Sub-Activity. 

This sub-activity is designed to upgrade the backbone of the transmission network to: (I) 

improve the quality and reliability of supply in the northern, central, and southern regions of the 

country; (2) increase the capacity to move power from the south where 98 percent of Malawi's 

power is generated to the central and northern regions; (3) reduce technical losses on 

transmission lines; and (4) provide a secure transmission link between the southern and central 

regions. 

MCC Funding will support the following investments: 

(i) 220kV high voltage power line (the transmission "backbone" of the 

Malawi power system as currently configured) from the Nkula B hydropower plant to Lilongwe, 

which covers the southern and central regions of Malawi; the section of the backbone from Bawi 

or Golomoti, as the case may be, to Lilongwe - subject to completion and results of a full 

feasibility study and environmental and social impact assessments; and 

(ii) 132kV line parallel to existing 66kV and 33kV lines from Chintheche to 

Luwinga and from Luwinga to Bwengu in the northern region. 

(d) 

Activitv. 

Transmission and Distribution Upgrade, Expansion. and Rehabilitation SubThis sub-activity includes investments in the southern, central, and northern power systems of 

the Malawi power network. MCC Funding will support the following measures: 

(i) Upgrading (up-rating) of existing network connections (33kV, llkV); 

(ii) Extension of existing substations (including 66kV); 

(iii) Up-rating of transformers in existing substations; 

(iv) Development of new substations; 

(v) Installation of improved protection systems; 

(vi) Provision of new network extensions and connections; and 

(vii) Installation of new controls and communication systems (SCAD A). 

(e) Environment and Natural Resource Management ("ENRM'') Sub-Activitv. 

The objective of the ENRM sub-activity is to help the Government and other relevant 

stakeholders address the growing problems of aquatic weed infestation and excessive 

sedimentation in the Shire River which cause costly disruptions to downstream power plant 

operations. MCC Funding will support the following measures: 

ANNEX! -4 
(i) Mitigation of the impact of the weeds and sedimentation through 

mechanical and biological measures (in accordance with international best practices), including 

the purchase and use of dredgers and weed-harvesting equipment at existing hydropower plants 

and the Liwonde Barrage, and expanded use of upstream biological control measures; and 

(ii) Development and implementation of an Environmental and Natural 

Resource Management Action Plan ("ENRMAP''), acceptable to MCC, that enables an improved 

understanding of the environmental, social (including gender), and economic factors that cause 

or contribute to weed infestation and sedimentation in the Shire River, and establishes a set of 

prioritized interventions based on economic, institutional, policy, legal, environmental and social 

criteria to increase capacity to address these factors, in collaboration with other donors and 

stakeholders. 

The Parties expect that the ENRM sub-activity will decrease outages and increase electricity 

output at the Nkula, Tedzani, and Kapichira hydropower plants that are currently affected by 

invasive weeds and excessive sedimentation. The ENRM sub-activity is also expected to 

improve land use and watershed management practices in the Shire River basin to help resolve 

underlying environmental and social issues that affect hydropower, communities, and other users 

dependent on ecosystem services. 

(f) Public Sector Power Sector Preservation and New Generation Investments. 

An essential part of the Infrastructure Development Activity is the addition of new generation for 

the utilization of the new and upgraded transmission and distribution assets. The economic 

viability ofMCC-funded investments is contingent on maintaining at least the current generation 

capacity of the power system (286 MW) during the Compact Term and then expanding it by at 

least 64 MW no later than the end of the Compact Term. In addition to this new generation, the 

Government expects to add significant generation to the system in the coming years, and MCC 

Funding will support planning and technical assistance through the IRP. 

To achieve the preservation and new generation required under the Compact, the Government 

commits to meet milestones. Under the preservation milestones, the Government commits to 

taking all steps necessary to maintain current generation capacity in accordance with a plan 

developed by ESCOM in line with industry best practices, as acceptable to MCC. If the system's 

generation capacity falls below 286 MW, unless caused by the temporary shutdown of plants for 

maintenance or rehabilitation or force majeure, the Government will use commercially 

reasonable efforts to obtain interim replacement output. Under the new generation milestones, 

the Government commits to providing a construction schedule for the 64 MW Kapichira II 

hydropower plant ("Kapichira II') prior to entry into force and completing construction by the 

end of the Compact Term. The Government will provide quarterly updates to MCC on the 

satisfaction of milestones of the Kapichira II construction schedule. 

2. Power Sector Reform Activity. 

The Power Sector Reform Activity complements the Infrastructure Development Activity by 

providing support for the Government's policy reform agenda and building capacity in pivotal 

sector institutions: ESCOM, the Malawi Energy Regulatory Authority or its successor 

("MERA"), and the Ministry ofNatural Resources Energy and Environment ("MNREE'). The 

Power Sector Reform Activity consists of two sub-activities: the ESCOM Turnaround subactivity and the Regulatory Strengthening sub-activity. 

ANNEX I- 5 
{a) ESCOM Turnaround Sub-Activitv. 

The objectives of this sub-activity are to restore ESCOM's financial health and rebuild ESCOM 

into a financially strong, well-managed company. MCC Funding will support three main areas 

of the turnaround: finances, corporate governance and operations. 

(i) Finances. 

MCC Funding will support the provision of technical assistance and equipment to ESCOM, 

including: (I) development of a detailed financial plan for 2011-2016; (2) deployment of a 

financial turnaround team; (3) development of a non-technical loss reduction study; (4) 

assistance in rapid billings and collections improvements; (5) strengthening of internal controls; 

( 6) rebuilding of the customer database; (7) pursuit of debt collection; (8) development of a new 

automated financial management system; (9) assistance with tariff applications to the regulator; 

and (I 0) assistance with fixed asset mapping. 

The Government agrees that a detailed financial plan for ESCOM is at the core of understanding 

and resolving the current financial challenges of the company. With MCC assistance, the 

Government will develop a detailed financial plan (the "Financial Plan") designed to restore 

ESCOM to financial and operational sustainability. The Financial Plan will project the working 

and investment capital needs ofESCOM for the 2011-2016 fiscal years, as agreed to with MCC. 

The Financial Plan will be based upon key financial inputs, such as projected accounts 

receivables and payables, future maintenance and capital investment needs, tariff increase 

projections, planned operational efficiencies, annual results of operations pursuant to audited 

financial statements, and other inputs relevant to obtain sound projections of the budget support 

that the Government will provide, if required, through the Turnaround Facility. The Financial 

Plan will be updated on a quarterly basis with current ESCOM financial information, and will be 

approved by ESCOM's Board of Directors and the Government, as shareholder. 

The Government will create and fund the ESCOM Turnaround Facility to support ESCOM's 

working capital and investment needs, as identified in the Financial Plan, during the Compact 

Term. The Government and MCC will identifY specific milestones in the Malawi budget process 

and review progress leading up to the appropriation of funds for the Turnaround Facility. The 

Government will transfer to the Turnaround Facility, by the start of each ESCOM fiscal year 

(July-June) the required funding for that fiscal year to cover the maximum projected shortfall for 

ESCOM in working and investment capital under the Financial Plan. The Government will 

apportion this funding through the Government budget prior to the start of each fiscal year, 

beginning FY2011-20!2. The ESCOM Board will control the use of funds disbursed from the 

Turnaround Facility. The funding and expenditure, if needed, of the Turnaround Facility in 

accordance with the Financial Plan will be a condition to Disbursement of continued MCC 

Funding. 

The Government has converted a substantial portion of the debt owed to it by ESCOM into 

equity. Any remaining debt owed to the Government by ESC OM will be cleared from 

ESCOM's balance sheet no later than entry into force of the Compact. In addition, the 

Government will ensure that ESCOM restructures its third-party debt obligations in a manner 

that affords ESCOM a reasonable debt-service burden, consistent with the Financial Plan. 

ANNEX!- 6 
(ii) Corporate Governance. 

To improve corporate governance and support the turnaround, MCC Funding will support: (I) 

recruitment services for key personnel; (2) twinning/mentoring arrangements or management 

contract support; (3) a performance management system; and (4) strategic planning by the board 

of directors ofESCOM ("ESCOM Board"). MCC funding will provide technical assistance on 

corporate performance standards, including a study on best practices and benchmarks for 

corporate governance of electric utilities with regional, continental and international benchmarks 

and recommendations for ESCOM no later than the end of the second year of the Compact Term 

(the "Corporate Governance Benchmarking Study"). 

The Government will ensure that ESCOM employs a Chief Executive Officer (CEO) prior to 

entry into force of this Compact. The individual selected for CEO will have at least ten years of 

public utility management experience, preferably at the CEO level, and a professional 

qualification in engineering, business, or finance. 

The Government recognizes that good corporate governance ofESCOM is essential for longterm performance of the company and commits to improve ESCOM' s corporate governance 

framework and practices. The Government will ensure that the ESCOM Board adheres to clear 

benchmarks for good corporate governance, including: (A) compliance with the requirements 

under Malawi's Companies Act, Public Financial Management Act, Public Audit Act, and the 

Energy Laws; (B) adherence to Malawi Code II, including duties of care and loyalty to the 

corporation and restrictions on conflicts of interest and related party transactions; (C) following 

the Sector Guidelines for Parastatal Organizations (the most recent of the draft or final form); 

and (D) staggering ofESCOM Board terms. 

The Government warrants that ESCOM has restructured its existing ESCOM Board committees 

to have the following three committees: (i) Finance and Audit Committee; (ii) Technical 

Committee; and (iii) Appointments and Remuneration Committee. The Government will ensure 

that future nominations and appointments to the ESCOM Board will be done in accordance with 

a framework established pursuant to Malawi's Parastatals Reform Programme. 

The Government will ensure that ESCOM submits and publishes its annual audited financial 

statements and annual reports to the relevant authorities, and will publish reports similar to those 

applicable to listed companies under Malawi's Companies Act, all of which will be posted on 

ESCOM's website. Quarterly reports will be made available to key stakeholders, including 

MCA-Malawi and MCC. 

MCC Funding will support an annual performance audit of ESCOM operations. Prior to each 

audit, MCC and the Government will agree to the terms of reference based on standards for 

companies in Malawi, including Malawi Code II and the Companies Act. The Government will 

ensure that ESCOM takes appropriate corrective action to address any material weaknesses or 

recommendations identified through the audit. 

To improve ESC OM's coordination with the Government, the Government will designate and 

coordinate all interaction with ESCOM through its Department of Statutory Corporations or a 

replacement or successor Government ministry or agency ("DSC'). The Government will 

ensure that all Government interaction with and shareholder oversight ofESCOM will be 

coordinated through DSC. 

ANNEX! -7 
(iii) Operations. 

MCC Funding will support change management efforts, including developing organizational 

design, conducting performance management reviews, and designing human resources strategies. 

MCC Funding will support the procurement division by strengthening the internal control 

environment and developing policies and procedures to implement best practices in procurement. 

MCC Funding will support other operational assistance, including live wire repairs, asset 

management, occupational health and safety, safety and diagnostic equipment, and critical spare 

parts. 

MCC Funding will also support the development ofESCOM's annual maintenance plan. The 

Government will ensure that ESCOM budgets and expends the amount set forth in the 

maintenance plan (based on a percentage ofundepreciated asset value) for preventive 

maintenance of generation, transmission and distribution assets. 

The GOM affirms that ESCOM will adhere to the Public Procurement Act ofMalawi and the 

policies and procedures of the Government's Office of the Director of Public Procurement 

("ODPP'). ESCOM will also take the following steps: (I) strengthen the Internal Procurement 

Committee as an effective manager and overseer of procurement; (2) develop procurement 

benchmarks and milestones; (3) restructure its procurement and stores management staff to 

streamline operations; (4) minimize redundancies and fill skill gaps; (5) conduct public outreach 

through an information campaign; ( 6) design and agree on a new procurement organization 

structure merging procurement and supply; (7) secure guidance from ODPP; (8) develop a 

formal process to draft annual procurement plans; and (9) review and restructure the stores 

function and conduct regular stock checks. 

(b) Regulatory Strengthening Sub-Activitv. 

The Regulatory Strengthening sub-activity complements the Infrastructure Development Activity 

and the ESCOM Turnaround sub-activity by providing support for the Government's policy 

reform agenda and building capacity in pivotal sector institutions, MERA and MNREE. The 

objectives of the Regulatory Strengthening Sub-Activity are to develop a regulatory 

environment, consistent with best practices in independent power utility regulation, that support 

investment in generation and grid capacity at an affordable cost, with the potential participation 

of the private sector. 

(i) TariffReform. 

The Government understands that appropriate tariff levels are critical to ESCOM's financial 

recovery and the growth of the power sector. MCC Funding will support a cost of service study 

to determine appropriate tariff levels and schedules to achieve full cost recovery, more efficient 

utilization of electricity, and achievement of social objectives. Based on the results of this study, 

the Government agrees to a phased implementation of full-cost recovery tariffs and schedules 

according to a timeline to be determined by entry into force of the Compact. Without reducing 

current tariff levels, the phased implementation will ensure an incremental increase in the scope 

of tariff levels and schedules, that will begin with a tariff that permits recovery of operating 

costs, thereafter recovery of operating costs plus capital replacement charges, and by the end of 

the Compact Term recovery of capital replacement costs, capital replacement charges and capital 

expansion charges. This full-cost recovery tariff should include recovery of operating expenses, 

financing costs actually incurred by ESCOM, capital replacement charges and capital expansion 

ANNEX!- 8 
charges so that tariffs reflect ESCOM's long-run marginal costs. The Government will also seek 

to ensure adequate protection of poor and vulnerable groups through a lifeline tariff or other 

mechanism in a manner which is consistent with average total cost recovery and efficient 

utilization of electricity. 

The Government will adopt the policy, legal and regulatory changes necessary to implement 

tariff reform, including: (I) rationalizing the five percent inflation fluctuation trigger and the 

four-year interval for review of base tariffs and tariff adjustment formula, so that tariffs may be 

adjusted on a basis that supports the viability oflicensees; and (2) improving the components and 

definitions for the tariff adjustment components (collectively, the "Tariff Indexation 

Framework"). 

(ii) MERA Capacity Building. 

MCC Funding will support capacity building at MERA to improve its regulatory oversight 

activities and operations. This work will include the development and implementation of 

training and mentoring ofMERA staff, and complementary activities designed to develop 

MERA. MCC Funding will also assist MERA to develop peer relationships with other 

regulatory bodies or related organizations. 

MCC Funding will be used to complete a study to support the Government's commitment to 

further develop independent and capable governance of MERA. This study will be completed by 

the end of the second year of the Compact Term. The study will focus on best practices and 

benchmarks for corporate governance for electricity regulators, including regional, continental 

and international benchmarks and recommendations for the future governance ofMERA (the 

"Sector Benchmarking Study"). 

The Government will ensure that MERA develops new technical codes for transmission, 

distribution and metering to account for captive, cogeneration and other forms of generation. 

MERA will also develop new "use of system" charging mechanisms, implement the design for a 

bilateral market, and develop codes to implement existing legal provisions on third-party access 

to the transmission network. MCC Funding will support these activities through technical 

assistance. 

The Government will consider changing the composition of the board of directors ofMERA 

("MERA Board''), to make the MERA Board and its governance procedures consistent with best 

practices for independent regulatory authorities in the region and internationally. Specifically, 

the Government will review the continued membership of ex officio directors and the 

appropriateness of cross-representation on power sector boards and potential conflicts of interest 

that may arise between the regulator and regulated entities through board membership, such as 

the presence of the Principal Secretary for Energy Affairs and the Director of Energy Affairs on 

the MERA Board. To the extent that Government ex officio members continue on the ESCOM 

and MERA Boards, the Government affirms its commitment to ensuring that the ESCOM and 

MERA Boards meet standards applicable to Malawi parastatals with respect to conflicts of 

interest and independent decision-making, that the ex officio directors on the MERA Board will 

continue to be non-voting members, and that regulatory rulings are transparent. 

The Government will ensure that the scope ofMERA's power sector responsibilities is limited to 

regulation and policy implementation, and not for policy development or the solicitation of new 

generation. 

ANNEX I -9 
In recognition of another key indicator of their progress developing a model regulatory 

institution, the Government and MERA confirm that levies and other charges applicable under 

the Energy Laws are, and have been, sufficient to cover MERA's operating expenses. The 

Government will ensure that MERA will publish an annual report including audited financial 

statements, as required under the Energy Regulation Act. MCC Funding will be used to support 

MERA in its development, including development of an annual report. 

(iii) Enabling Environment for Public and Private Sector Investment. 

MCC Funding will support the Government's efforts to implement a suitable market model 

based on the studies performed in connection with the development of this Compact. MCC 

Funding will support MNREE's efforts to study and design (1) a single buyer model for the 

power sector ("SBM Plan"); and (2) the building blocks of a bilateral power trade market. MCC 

Funding will also assist with stakeholder education and outreach to support consumer 

organizations, industrial and commercial users, and other key players in advocating for improved 

service. In addition, MCC will seek to work with Parliament to strengthen its role in oversight of 

the power sector. 

Based on the SBM Plan, the Government will create a single buyer, either ring-fenced within 

ESCOM, or a separate legal entity so that the single buyer's financial and system operation 

activities are autonomous from other ESCOM business units or government entities. Also, the 

Government will provide support to improve the credit worthiness of this single buyer. The 

Government will not unbundle ESCOM, except as otherwise provided herein, and shall not make 

effective the provisions in Section 4 and Parts IV and V of the Electricity Act that limit licensees 

to one license. 

The Government will also clarifY the Rural Electrification Act (the "REA") so that entities that 

pursue rural electrification activities without receiving funding from the Rural Electrification 

Fund are not subject to the REA's internal rate of return and megawatt size restrictions. The 

Government will also revise its National Energy Policy to allow charging of differential tariffs 

for off-grid electrification. 

(c) Power Sector Reform Agenda Semi-Annual Review. 

The Government and MCC will jointly supervise, through specific milestones, progress on the 

implementation of the Government's power sector reform agenda in the following areas: ESCOM 

finances; ESCOM operations; ESCOM corporate governance; tariff reform; MERA governance; and 

regulatory enabling environment for public and private sector participation (collectively, the "Power 

Sector Reform Agenda"). The Government and MCC have specified the milestones below, for 

which new capitalized terms are further defined in Annex III. Prior to entry into force of the 

Compact, the Parties will identifY semi-annual benchmarks for each milestone. The parties will 

conduct a semi-annual review of progress on the Power Sector Reform Agenda. Corrective 

action, acceptable to MCC, as needed to ensure satisfactory progress, will be a condition of 

continued MCC Funding. 

(i) ESCOM Finances. 

The financial health ofESCOM will be tracked by setting and maintaining the following 

financial ratios and covenants: 

ANNEX 1- 10 
(I) Cost Recovery Ratio; 

(2) Current Ratio supported by cash flow statements; 

(3) Bad Debt Ratio; 

(4) Average Cost of Electricity Billed; and 

(5) ESCOM Billing and Collection Efficiency. 

(ii) ESCOM Operations. 

Improvements in the operations of ESC OM will be measured by the following areas: 

(I) Quantity of Electricity Metered; 

(2) Quantity of Electricity Billed; 

(3) Reduction in Losses; 

(4) Voltage Quality; 

(5) Maintenance Expenditures; 

(6) Reduced Outages; and 

(7) Annual Procurement Audit. 

(iii) ESCOM Comorate Governance. 

ESCOM corporate governance will be measured by ESCOM' s performance on: 

(I) Corporate Governance Benchmarking Study; 

(2) Annual performance audit reports; and 

(3) Public annual report and audited financial statements. 

(iv) TariffReform. 

Progress on tariff reform will be phased and measured by: 

(I) Cost of service study; 

(2) Tarifflevels and schedules; 

(3) Tariff Indexation Framework; and 

( 4) Tariff design efficiency, including, a lifeline tariff. 

ANNEXI-11 
(v) MERA Governance. 

Improvements in MERA's governance and capacity will be tracked by: 

(I) Sector Benchmarking Study; 

(2) Peer review; and 

(3) Public annual report and audited financial statements. 

(vi) Improved Market Structure for Private Investment. 

Key milestones in the establishment of an enabling environment will be: 

(I) Single-buyer model formed; and 

(2) Legal framework for strengthened electricity market. 

3. Environmental and Social Safeguards. 

The Project will be implemented in compliance with the MCC Environmental Guidelines and the 

MCC Gender Policy, and any resettlement will be carried out in accordance with the World 

Bank's Operational Policy on Involuntary Resettlement in effect as of July 2007 ("OP 4.12") in a 

manner acceptable to MCC. The Government also will ensure that the Project complies with all 

national environmental laws and regulations, licenses and permits, and applicable international 

conventions and treaties, except to the extent such compliance would be inconsistent with this 

Compact. Specifically, the Government will: (a) cooperate with or complete, as the case may 

be, any ongoing environmental assessments, or if necessary undertake and complete any 

additional environmental assessments, social assessments, environmental management plans, 

environmental and social audits, resettlement policy frameworks, and resettlement action plans 

required under the laws of Malawi, the MCC Environmental Guidelines, this Compact, the 

Program Implementation Agreement, or any Supplemental Agreement, or as otherwise required 

by MCC, each in form and substance satisfactory to MCC; (b) ensure that Project-specific 

environmental and social management plans are developed and all relevant measures contained 

in such plans are integrated into project design, the applicable procurement documents and 

associated finalized contracts, in each case, in form and substance satisfactory to MCC; and (c) 

implement to MCC's satisfaction appropriate environmental and social mitigation measures 

identified in such assessments or plans. Unless MCC agrees otherwise in writing, the 

Government will fund all necessary costs of environmental and social mitigation measures 

(including, without limitation, costs of resettlement) not specifically provided for or that exceed 

the MCC Funding specifically allocated for such costs in the Detailed Financial Plan for the 

Project. 

To maximize the positive social impacts of the Project, address cross-cutting social and gender 

issues such as human trafficking, child and forced labor, and HIV/AIDS, and ensure compliance 

with the MCC Gender Policy, and to the extent that such does not conflict with MCC's Gender 

Policy, the Malawi National Gender Policy as ultimately adopted by the Government, the 

Government will: (i) develop a comprehensive social and gender integration plan which, at a 

minimum, performs a gender, institutional and policy review relevant to the Compact Project, 

identifies approaches for regular, meaningful and inclusive consultations with women and other 

ANNEX I- 12 
vulnerable/underrepresented groups, consolidates the findings and recommendations of Projectspecific social and gender analyses and conducts additional gender analysis as needed, and sets 

forth strategies for incorporating findings of the social and gender analyses into final Project 

designs and additional targeted activities as appropriate ("Social and Gender Integration 

Plan"); (ii) ensure, through monitoring and coordination during implementation, that final 

Activity designs, construction tender documents and implementation plans are consistent with 

and incorporate the outcomes of the social and gender analyses and Social and Gender 

Integration Plan; and (iii) on an annual basis, review and update the Social and Gender 

Integration Plan as needed to reflect lessons learned and project-specific analysis. 

During the development of the Compact, MCC and the Government assessed and identified the 

potential environmental and social impacts and risks of the Activities. Under the definitions 

articulated in MCC' s Environmental Guidelines, (I) the Infrastructure Development Activity is 

classified as a Category A project; (2) the Power Sector Reform Activity is a Category C project; 

and (3) the ENRM sub-activity is categorized as a Category B project. In addition to 

environmental risks, MCC has also identified certain social and gender-related and resettlement 

risks from the Activities. 

Several measures have been taken to mitigate the risks associated with these Activities. 

Environmental and Social Impact Assessments ("ESIAs") have been developed for the 

Infrastructure Development Activity, and additional environmental and social (including gender) 

analysis and mitigation planning will be carried out for certain activities of the Infrastructure 

Development Activity and the ENRM sub-activity. MCC will require appropriate storage and 

disposal, possibly outside of Malawi, of oil-contaminated soils, PCB-contaminated oils, soils and 

equipment, and other hazardous waste associated with implementation of the Infrastructure 

Development Activity. MCC Funding will be used to design and implement a hazardous waste 

management plan under the Infrastructure Development Activity. MCC will also require, and 

MCC Funding will support, measures to ensure appropriate disposal of weeds and sediment 

extracted from dredging and weed harvesting operations at the hydropower plants. The 

Government has identified potential sites for the disposal of weeds and sediment associated with 

implementation of the ENRM sub-activity and will require appropriate development and 

management of such sites. 

To address resettlement risks, a Resettlement Policy Framework has been prepared to specifY 

how resettlement planning and implementation will proceed in connection with the Compact 

Activities. This resettlement framework will attempt to minimize loss of land and immovable 

assets, and avoid physical displacement of residential and other structures. In the event an 

Activity triggers involuntary resettlement, MCC Funding will support the development of a 

resettlement action plan by MCA-Malawi in consultation with relevant Government entities, and 

such resettlement action plan will be submitted for approval to MCC. 

The Compact will fund additional analysis of social and gender-related implications of the 

Activities. This analysis will build upon preliminary work conducted during Compact design to 

ensure that the Activities are implemented so as to address and integrate the needs of vulnerable 

groups, in adherence with MCC's Gender Policy. 

ANNEX!-13 
4. Donor Coordination. 

MCC and the MCA-Malawi Core Team have sought development partners with complementary 

expertise on energy issues and whose further involvement could help ensure sustainability of the 

Compact. During Compact development, MCC's review of feasible investments identified 

approximately $200 million more in beneficial projects than currently feasible under the 

Compact. Given MCC 's inability to finance these otherwise important investments, MCC has 

discussed with the World Bank and the African Development Bank- the other key donors 

supporting the power sector in Malawi -the possibility of partnering to support a comprehensive 

power sector reform program. This reform program could also include sector institutional 

strengthening activities such as capacity building and technical assistance for the MNREE' s 

Department of Energy. 

MCC has also been in discussions with the International Finance Corporation (IFC) regarding 

creating an appropriate enabling environment for private sector and IFC investment. IFC 

recently funded a study that identified barriers to private sector investment in energy efficiency 

and renewable energy opportunities and scoped potential IFC investments. IFC's report 

identifies a critical need for technical assistance for the Government to establish an enabling 

environment in order to facilitate these energy efficiency and renewable energy opportunities. 

As ofNovember 2010, MCC is considering incorporating the IFC's recommendations in the 

policy, regulatory and legal framework strengthening activity currently supported under the 

Compact. 

5. USAID. 

While USAID does not currently play an active role in implementing this Compact, MCC is 

seeking USAID involvement to provide technical assistance for the power sector. MCC is 

investigating whether USAID's Africa Infrastructure Program (AlP) could potentially provide 

technical assistance to the Government of Malawi to assist them with structuring agreements 

with independent power producers and capacity building for MERA. In addition, MCC will 

coordinate its outreach initiatives with the Malawi parliament, media and civil society under the 

Regulatory Strengthening sub-activity with USAID's complementary governance and 

accountability initiatives under its Malawi Legislative Strengthening program. 

6. Sustainability. 

The Compact includes several measures to ensure sustainability ofMCC's investment. As 

designed, both the Power Sector Reform Activity and the ENRM sub-activity are targeted to 

ensure sustainability of the Infrastructure Development Activity. In addition, the Infrastructure 

Development Activity includes certain sustainability safeguards such as requiring a certain 

percentage of asset value to be set aside for preventative maintenance. 

Substantial progress on the Power Sector Reform Activity is essential to the magnitude and 

sustainability of the Compact investments in physical infrastructure, and to the sustained 

economic growth of Malawi. The Power Sector Reform Activity also addresses key structural 

issues in the power sector including tariff reform, creating an environment capable of attracting 

private sector investment, and ensuring the creation of a strong and independent energy sector 

regulator. These reform activities are structured both as covenants in the Compact and 

conditions to entry into force of the Compact, or will become conditions to disbursement in the 

ANNEX I- 14 
Program Implementation Agreement. Due to the weed and sedimentation problems plaguing 

Malawi's almost entirely hydropower-based generation facilities, the ENRM sub-activity will 

also provide necessary steps to ensure sustainability of the Compact. 

In addition to the sustainability benefits inherent in the project design of the Power Sector 

Reform Activity and the ENRMAP, the sustainability of the Infrastructure Development Activity 

will also heavily depend on a robust maintenance regime for generation, transmission and 

distribution assets. As part of the Infrastructure Development Activity, MCC will require a 

certain percentage of its asset value be set aside for preventative maintenance of its MCC funded 

as well as other assets. 

C. IMPLEMENTATION FRAMEWORK 

1. Overview. 

The implementation framework and the plan for ensuring adequate governance, oversight, 

management, monitoring and evaluation, and fiscal accountability for the use ofMCC Funding 

are summarized below. MCC and the Government will enter into the Program Implementation 

Agreement, and any other agreements in furtherance of this Compact, all of which, together with 

this Compact, set out certain rights, responsibilities, duties and other terms relating to the 

implementation of the Program. 

2. MCC. 

MCC will take all appropriate actions to carry out its responsibilities in connection with this 

Compact and the Program Implementation Agreement, including the exercise of its approval 

rights in connection with the implementation of the Program. 

3. MCA-Malawi. 

In accordance with Section 3.2(b) of this Compact, MCA-Malawi will act on the Government's 

behalf to implement the Program and to exercise and perform the Government's rights and 

responsibilities with respect to the oversight, management, monitoring and evaluation, and 

implementation of the Program, including, without limitation, managing the implementation of 

Projects and their Activities, allocating resources, and managing procurements. The Government 

will ensure that MCA-Malawi takes all appropriate actions to implement the Program, including 

the exercise and performance of the rights and responsibilities designated to it by the 

Government pursuant to this Compact and the Program Implementation Agreement. Without 

limiting the foregoing, the Government will also ensure that MCA-Malawi has full decisionmaking autonomy, including, inter alia, the ability, without consultation with, or the consent or 

approval of, any other party, to: (I) enter into contracts in its own name; (2) sue and be sued; (3) 

establish Permitted Accounts in a fmancial institution in the name ofMCA-Malawi and hold 

MCC Funding in such accounts; (4) expend MCC Funding; (5) engage a fiscal agent who will 

act on behalf ofMCA-Malawi on terms acceptable to MCC; (6) engage one or more 

procurement agents who will act on behalf ofMCA-Malawi, on terms acceptable to MCC, to 

manage the acquisition of the goods, works, and services required by MCA-Malawi to 

implement this Compact; and (7) competitively engage one or more auditors to conduct audits of 

its accounts. The Government will take the necessary actions to establish and maintain MCAMalawi, in accordance with the terms hereof including the applicable conditions precedent to the 

Disbursement of Compact Implementation Funding set forth in Annex IV to this Compact. 

ANNEX! -15 
MCA-Malawi will be administered and managed by a Board of Trustees and a Management 

Unit. In addition, MCA-Malawi will have a Stakeholders' Committee to continue the 

consultative process during implementation of the Program. MCA-Malawi will be incorporated 

through a trust deed under Malawi's Trustees Incorporation Act, which trust deed will be 

included in the Program Implementation Agreement (hereinafter referred to as the "MCAMalawi Trust Deetf'), which will, collectively, set forth the responsibilities of the Board of 

Trustees, the Stakeholders' Committee and the Management Unit. The MCA-Malawi Trust 

Deed will be developed and adopted in accordance with MCC's Guidelines for Accountable 

Entities and Implementation Structures, published on the MCC Website (the "Governance 

Guidelines"), and will be in form and substance satisfactory to MCC. MCA-Malawi on behalf 

of the Government will administer the MCC Funding. 

(a) Board of Trustees. 

(i) Composition. MCA-Malawi will be governed by a board of trustees (the 

"Board of Trustees"), which will consist of voting members representing the Government, 

private sector, and civil society groups, as well as a non-voting representative ofMCC as an 

observer. The appointment of the trustees will be articulated in the MCA-Malawi Trust Deed 

and will adhere to MCC's Governance Guidelines. Subject to further discussion, members 

representing the Government will include the Secretary of the Treasury, the Principal Secretary 

for Natural Resources Energy and Environment, and the Principal Secretary for Development 

Planning and Cooperation. Non-government members will be nominated by key private sector 

and civil society groups rather than by the Government, and may include but shall not be limited 

to the Council for Non-Governmental Organizations in Malawi (CONGOMA), the Economics 

Associations of Malawi (ECAMA), and the Malawi Confederated Chambers of Commerce and 

Industry (MCCCI). There will be a minimum of seven trustees, and a maximum of nine trustees. 

The composition of the Board of Trustees will comply with the Governance Guidelines, to 

MCC's satisfaction. 

(ii) Roles and Responsibilities. The Board of Trustees will be responsible for 

overseeing the implementation of the Program and will have final decision-making authority and 

responsibility over the implementation of the Program. The Board of Trustees will meet 

regularly; the frequency of meetings will be set forth in the MCA-Malawi Trust Deed and will be 

in accordance with the Governance Guidelines. The specific roles of the voting members and 

non-voting observers will be set forth in the MCA-Malawi Trust Deed. The chairperson of the 

Board of Trustees will be selected by a majority vote of the Trustees. On at least an annual basis 

or as otherwise required by the Government, the Board of Trustees will report to the Government 

on the status and progress of the Compact regarding implementation, financial matters, 

procurements, and other matters identified by the Government. 

(b) Stakeholders' Committee. 

(i) Composition. A Stakeholders' Committee will be selected according to a 

process in accordance with the MCC's Governance Guidelines and the MCA-Malawi Trust 

Deed, as approved by MCC. Without limiting the foregoing, as required in MCC's Governance 

Guidelines, the Stakeholders' Committee will be composed of inter alia, representatives from 

non-governmental organizations, civil society, private sector, and local and regional government 

Program beneficiaries. 

ANNEX! -16 
(ii) Roles and Responsibilities. Consistent with the Governance Guidelines, 

the Stakeholders' Committee will be responsible for continuing the consultative process 

throughout implementation of the Program. While the Stakeholders' Committee will not have 

any decision-making authority, it will be responsible for, inter alia, reviewing, at the request of 

the Board of Trustees or the Management Unit, certain reports, agreements, and documents 

related to the implementation of the Program in order to provide advice and input to MeAMalawi regarding the implementation of the Program. 

(c) Management Unit. 

(i) Composition. The management unit, which will be led by a competitively 

selected Chief Executive Officer, will be composed of competitively selected staff with expertise 

in the key components of the Program, including, without limitation, a Deputy Chief Executive 

Officer, Legal Advisor, Human Resources Officer, Power Director, Communications and 

Outreach Director, Finance and Administration Director, ESA Director, Deputy Director for 

Social and Gender Issues, Procurement Director, Policy Specialist, M&E and Economics 

Director, and MIS Specialist (the "Management Unit"). The Management Unit will also include 

such other personnel as provided for in the MCA-Malawi Trust Deed. The directors will be 

supported by :;tppropriate additional staff to enable the Management Unit to execute its roles and 

responsibilities. 

(ii) Roles and Responsibilities. The Management Unit will be based in 

Lilongwe, Malawi, and will be responsible for day-to-day implementation oftbe Compact, with 

oversight from the Board of Trustees. The Management Unit will serve as the principal link 

between MCC and the Government, and will be accountable for the successful implementation 

of the Program, the Project, and each Activity. As a recipient ofMCC Funding, MCA-Malawi 

will be subject to MCC audit requirements. 

4. Implementation Arrangements. 

Subject to the terms and conditions of this Compact and any related agreements entered into in 

connection with this Compact, MCC and the Government have identified certain institutions, 

including ESCOM, MERA and MNREE, that may receive technical assistance or other support 

under this Compact, and that, together with MCA-Malawi, will have key roles in the 

implementation of the Project and the Activities (each, a "Project Partner"). The Government 

will ensure that the roles and responsibilities of each Project Partner will be clearly articulated in 

an agreement between MCA-Malawi and the Project Partner, which agreement must be in form 

and substance satisfactory to MCC (each a "Project Cooperation Agreemenf'). 

The Government will ensure that ESCOM, as a Project Partner, will do the following in support 

of the Project: (a) provide access to its facilities and cooperate with MCA-Malawi, and its 

consultants (including the PMC as defined below); (b) dedicate key staff to the Project, including 

engineers, environmental, social and gender specialists, and monitoring and evaluation 

personnel; (c) bear any transportation costs and per diems and incidental expenses for any of its 

personnel who travel in connection with the Project; and (d) provide administrative and technical 

support and use of appropriate office space and facilities. 

MCA-Malawi will contract a project management consultant ("PMC') to manage and supervise 

the implementation of the infrastructure portions of the Infrastructure Development Activity and 

will assist MCA-Malawi with technical evaluations and contract negotiations. The Project 

ANNEXI-17 
Cooperation Agreement between MCA-Malawi and ESCOM will set fortb the roles and 

responsibilities of each entity and any coordinating mechanisms to ensure that the PMC is able to 

successfully carry out its mandate. The PMC will also provide technical assistance to ESCOM 

with respect to project management. 

5. Fiscal Agent. 

Unless MCC otherwise agrees in writing, the Government, directly or through MCA-Malawi, 

will engage one or more fiscal agents (each a "Fiscal Agent"), who will be responsible for 

assisting the Government with fiscal management and ensuring appropriate fiscal accountability 

ofMCC Funding. Duties of the Fiscal Agent will be set fortb in the Program Implementation 

Agreement and in such agreement as the Government, directly or indirectly through MCAMalawi, enters into with each Fiscal Agent, which agreement shall be in form and substance 

satisfactory to MCC. 

6. Procnrement Agent. 

Unless MCC otherwise agrees in writing, the Government, directly or through MCA-Malawi, 

will engage one or more procurement agents (each as "Procurement Agenf') to conduct and 

certify specified procurement activities in furtherance of the Compact. The roles and 

responsibilities of the Procurement Agent will be clearly articulated in the Program 

Implementation Agreement and in such agreement as the Government, directly or indirectly 

through MCA-Malawi, enters into with each Procurement Agent, which agreement shall be in 

form and substance satisfactory to MCC. Each Procurement Agent will adhere to the standards 

set forth in the MCC Program Procurement Guidelines and ensure that procurements are 

consistent with the procurement plan adopted by MCA-Malawi pursuant to the Program 

Implementation Agreement, unless MCC otherwise agrees in writing. 

ANNEXI-18 
ANNEX II 

MULTI-YEAR FINANCIAL PLAN SUMMARY 

This Annex II summarizes the Multi-Year Financial Plan for the Program. 

1. General. 

A multi-year financial plan summary ("Multi-Year Financial Plan Summary") is attached 

hereto as Exhibit A. By such time as specified in the PIA, the Government will adopt, subject to 

MCC approval, a multi-year financial plan tbat includes, in addition to tbe multi-year summary 

of estimated MCC Funding and the Government's contribution of funds and resources, the 

annual and quarterly funding requirements for the Program (including administrative costs) and 

for the Project, projected both on a commitment and cash requirement basis. 
EXHIBIT A 

MULTI-YEAR FINANCIAL PLAN SUMMARY 

COMPO:'Ii.KYf CIF Year I Year 2 Year3 \ear4 YearS Total 

I. POWER ~ECJ OR REVJTALIZATIO~ PROJECT 

(a) Infrastructure Development 2,978,000 12,134,000 80,191 ,000 80,715,000 64,344,000 42,638,000 283,000,000 Activity 

(i) Nkula A Refurbishment - - 4.436,000 7,762.000 7,762,000 2,218,000 22.178.000 Sub-Activity 

(ii) Transmission Network 1,7 12,000 6,843,000 48.862,000 45. 151 ,000 35,280,000 25,531.000 163,379,000 Upgrade Sub-Activity 

(iii) T&D Upgrade, Expansion. 740,000 2,590,000 19,090.000 19,675.000 15,377,000 11.086,000 68.558.000 

and Rehabilitation Sub-Activity 

(iv) Environment and Natural 

Resource Management Sub- 526,000 1,588,000 6,133,000 7.910,000 5,925.000 3.803,000 25.885.000 

Activity 

(v) Resettlement: Action Plan - 1,11 3.000 1.670,000 217.000 - - 3,000,000 

Development and Implementation 

(b) Power Sector Reform 3,352,000 4,4 70,000 4,469,000 4,4 70,000 4,469,000 4,470,000 25,700,000 Acti,,ity 

SUBTOTAL 6,330,000 16,604,000 84,660,000 85,185,000 68,813,000 47,108,000 308,700,000 

2. CROSS-CL"ri'ING SLIPPOIU 

(a) Gender Integration 260.000 348.000 348.000 348.000 348.000 348.000 2.000.000 

(b) Monitoring and Evaluation 387.000 2.259.000 1.073.000 1,073.000 858,000 1,350,000 7.000.000 

SUBTOTAL 647,000 2,607,000 1,421,000 1,421,000 1,206,000 1,698,000 9,000,000 

3. PROGRAM ADMINISTRA fiON 

(a) MCA-Malawi Administration 2. 143.000 3.607,000 3,602.000 3,899.000 3.940.000 4.076,000 21.267.000 

(b) Financial Management and - 2,060,000 2. 122,000 2.185,000 2,25 1.000 2.3 19.000 10,937.000 Procurement Controls 

(c}_Financial Audits - 150.000 155.000 159.000 164,000 168,000 796.000 

SlTBTOTAl 2,143,000 5,817,000 5,879,000 6,243,000 6,355,000 6,563,000 33,000.000 

TOT -\L C0\1P.\CT BUDGET 9,120,000 25.028,000 91,%0,000 92,849,000 76,.374,000 55,.369,000 350,700,000 

ANNEX TT- 2 
ANNEX III 

DESCRIPTION OF MONITORING AND EVALUATION PLAN 

This Annex III (this "M&E Annex") generally describes the components of the Monitoring and 

Evaluation Plan ("M&E Plan") for the Program. The actual content and form of the M&E Plan 

will be agreed to by MCC and the Government in accordance with MCC's Policy for Monitoring 

and Evaluation of Compacts and Threshold Programs as posted from time to time on the MCC 

Website (the "MCC Policy for Monitoring and Evaluation of Compacts and Threshold 

Programs"). The M&E Plan may be modified as outlined in MCC's Policy for Monitoring and 

Evaluation of Compacts and Threshold Programs with MCC approval without requiring an 

amendment to this Annex III. 

1. Overview. 

MCC and the Government will formulate and agree to, and the Government will implement or 

cause to be implemented, an M&E Plan that specifies: (a) how progress toward the Compact 

Goal, Program Objective and Project Objective will be monitored ("Monitoring Component'); 

(b) a process and timeline for the monitoring of planned, ongoing, or completed Activities to 

determine their efficiency and effectiveness; and (c) a methodology for assessment and rigorous 

evaluation of the outcomes and impact of the Program ("Evaluation Component'). Information 

regarding the Program's performance, including the M&E Plan, and any amendments or 

modifications thereto, as well as progress and other reports, will be made publicly available on 

the website ofMCC, MCA-Malawi and elsewhere. 

2. Program Logic. 

The M&E Plan will be built on a logic model which illustrates how the Program, Project and 

Activities contribute to the Compact Goal, the Program Objective and the Project Objective. 

The goal of the Compact is to reduce poverty through economic growth. The Program Objective 

is to: (a) increase investment and employment income by raising the profitability and 

productivity of enterprises; (b) expand access to electricity for the Malawian people and 

businesses; and (c) improve delivery of social services. The outcomes of the Project Activities, 

otherwise referred to in the Compact as the Project Objective, are to improve the availability, 

reliability, and quality of the power supply by increasing the throughput capacity and stability of 

the national electricity grid, increase efficiency of hydropower generation, and create an enabling 

environment for future expansion by strengthening sector institutions and enhancing regulation 

and governance of the sector. These results are expected to contribute to Malawi's own povertyreduction and economic growth goals as defined in the Malawi Growth and Development 

Strategy ("MGDS''). 

3. Monitoring Component. 

To monitor progress toward the achievement of the impact and outcomes of the Compact, the 

Monitoring Component of the M&E Plan will identify: (I) the Indicators (as defined below), (2) 

the definitions of the Indicators, (3) the sources and methods for data collection, (4) the 

frequency for data collection, (5) the party or parties responsible for collecting and analyzing 

relevant data, and (6) the timeline for reporting on each Indicator to MCC. 
Further, the Monitoring Component will track changes in the selected Indicators for measuring 

progress towards the achievement of the Program Objective and Project Objective during the 

Compact Term. MCC also intends to continue monitoring and evaluating the long-term impacts 

of the Compact even after Compact expiration. The M&E Plan will establish baselines which 

measure the situation prior to a development intervention, against which progress can be 

assessed or comparisons made (each a, "Baseline"). The Govemment will collect Baselines on 

the selected Indicators or verify already collected Baselines where applicable and as set forth in 

the M&E Plan. 

(a) Indicators. 

The M&E Plan will measure the results of the Program using quantitative, objective and reliable 

data ("Indicators"). Each Indicator will have benchmarks that specify the expected value and 

the expected time by which that result will be achieved ("Target'). All Indicators will be 

disaggregated by gender, income level and age, and beneficiary types to the extent practicable. 

Subject to prior written approval from MCC, the Govemment or MCA-Malawi may add 

Indicators or refine the definitions and Targets of existing Indicators. 

(i) Compact Indicators. 

(1) Goal. The M&E Plan will contain the following Indicators related 

to the Compact Goal. The Target of these Indicators is to contribute to the national goals 

specified in the MGDS. Although the Program contributes to these goals, satisfaction of these 

goals is not intended to be solely attributable to the Project: 

(2) 

in the following tables. 

(A) Absolute poverty rate' nationwide: 35-40 percent living on 

less than US$1.00 a day in 2010 to 33.3 percent by 2016; 

and 

(B) Absolute rural poverty rate nationwide: 40 percent living 

on less than US$1.00 a day in 2010 to 36 percent by 2016. 

Other Indicators. The M&E Plan will contain the Indicators listed 

MCA-Malawi will update Baselines for key Indicators after new data becomes available, 

including the Malawi Integrated Household Survey III, after a new billing system is installed at 

ESCOM, and after a Cost of Service study and Integrated Resource Plan are completed. 

Indicators on outages and load shedding will be refined prior to entry into force of the Compact 

and during the first year of the Compact. Financial Targets and performance will be reviewed 

and updated regularly, as defined in Annex I of the Compact. 

2 Poverty rates cited above are based on MCA-Malawi Core Team projections using poverty line ofUS$1.00 a day. 

Annex I defines poverty line as US$1.25 a day. 

ANNEX III- 2 
Table 1: Compact-Wide Results. 

The following are Indicators and Targets for the monitoring of the Program Objective as further 

described in paragraph 2 of Part A of Annex I. The Project is expected to contribute to the 

achievement of these Indicators and Targets, but is not solely responsible for the results. 

Objective Level Indicators 

Business 

due to power Average value of sales losses due interruptions and 

to electricity outages % 16.97 TBD 

quality, 

finn 

Increased Electricity as a major Profitability obstacle to doing Rank 9.8 5 and business4 

Productivity 

of Doing 

Business in Back~up diesel 

% 6.55 TBD Malawi generation for firms5 

Energy sales to 

% Est 46 55-65 industrial customers 

% 9 9.5 • II 

Percentage of 

population electrified % 3.0 3.2 

disaggregated by 

Improved national, urban and 

rural % 11.5 TBD 

Electricity 

Access for 

Households % 43.6 TBD and Key 

Social Electric Power Services (Total kWh billed in all regions) I kWh per 

Total population capita 103 111-115 

Percentage of total schools and 

% TBD TBD total health centers connected 

3 Indicator is sourced from World Bank Enterprise Survey, 2009. Baseline data reflects manufacturing sector data 

only. MCA-Malawi will explore developing a tool to capture information for smaller, informal firms. 4 1ndicator sourced from Malawi Chamber of Commerce (MCCCI) survey, 2009. 5 Indicator sourced from World Bank Enterprise Survey, 2009. 6 "LV" is defined as low voltage; "MV" is defined as medium voltage. 

ANNEX III- 3 
Expansion of 

Sector to 

Better Meet 

Demand for 

Power 

Investment in energy 

sector, disaggregated 

by private and public 

sectors, and 

generation and other 

assets7 

System Maximum 

Demand Met Total demand met by the system 

Table 2: Infrastructure Development Activity. 

US$ million 0 TBD 

MW 0 TBD 

MW 

The following are Indicators and Targets for the monitoring of the Infrastructure Development 

Activity as further described in paragraph I of Part B of Annex I. 

Quantity of Electricity Total MWh billed in ali regions MWh 1.421,9589 1,800,000 Billed 

Total System Losses 

(Technical and Non- % 20.1310 17.5 

Technical) 

Reduction in Transmission System % 8.5411 6.5 Losses Technical Losses 

Distribution System 

Technical & Non- % 11.5812 8 

Technical Losses 

System Average Customer Reduced Interruption [No. of customer interruptions> 3 Interruptions NA TBD Outages Frequency Index minsffotal customers} I customer 

7 Data and targets will be sourced from Malawi's Electricity Investment Plan and Integrated Resource Plan. 8 Target will be calculated using total installed capacity minus 10 percent reserve margin for largest plant. 9 Baseline data are sourced from MCA Compact Development Indicator Tracking Template Pilot Exercise FY2010. 10 Baseline data are sourced from MCA Compact Development Indicator Tracking Template Pilot Exercise FY20 10, 

and reflect the average for the fiscal year. 11 Baseline data are derived from MCA Compact Development Indicator Tracking Template Pilot Exercise FY20 10, 

and reflect the average for the fiscal year. 12 Baseline data are derived from MCA Compact Development Indicator Tracking Template Pilot Exercise FY20 10, 

and reflect the average for the fiscal year. 

ANNEX III -4 
System Average Customer Interruption Duration TBD Intem.Iptions NA 

Index ("SAID!") I customer 

MW 2.5 TBD 

Total System Load Hours 27,500 5,800 Shed13 

MW TBD 

% 83 90 

Improved Voltage Quality, quality of disaggregated by power at % 83 90 transmission and primary distribution substations14 

% 83 90 

Number of residential Customer 67,316 3,139 additional 

customers connected 

to electricity, Customer 59,375 1,540 additional 

disaggregated by 

region Customer 22,612 1,255 additional 

Number of Customer 11,751 343 additional commercial customers 

connected to 

Customer 9,189 301 additional Increased electricity, 

Connections15 disaggregated by Customer 4,158 258 additional region 

Number of industrial Customer 4,204 8 additional 

customers connected 

to electricity, Customer 2,510 9 additional 

disaggregated by 

region Customer 812 I 0 additional 

13 Load shedding Indicators and their definitions will be refined prior to entry into force of the Compact and in the 

full M&E Plan. 14 Substations will be identified in the full M&E plan. 15 Data for Baseline are sourced from June 2010, ESCOM sales statistics and does not include export customers. 

The Indicator is useful for monitoring trends and performance as a function of overall sector growth, and will be 

used for impact evaluations. Targets are based on the Project's technical benefits projections from ICF-CORE 

Feasibility Study and which were used in ERR analysis. 

ANNEXlll- 5 
Transmission Kms 0 153 

Lines 

Upgraded, Kms 0 79 

Rehabilitated 

and Extended 

Sum of transmission transfonner 790 additional 

MVA 991.5 through T ransfonner capacity Activity 

Increased 

Network % TBD 98-100 

Control and 

Improved Percentage of communication % TBD 90-95 Data links available in installed sites 

Distribution Kms of new 33-kV lines upgraded Kms 0 113.3 

Network or built by Activity 

Upgraded, 1 1-kV cables built by Kms 0 5.44 Extended and 

I or Distribution substation Sum of distribution transfonner Operational capacity capacity MVA 868 

Table 3: Environment and Natural Resource Management (ENRM) Sub-Activity. 

Due to the distinct nature of the data collection and outcomes of the ENRM sub-activity, it has 

been broken out into a separate table below. The following table describes the key Indicators 

and Targets for the monitoring the ENRM sub-activity and its relevant components, as further 

described in paragraph !(e) of Part B of Annex I. 

ANNEX Ill- 6 
Sum MWh by HEP unavailable 57,218less 

Improved due to weed and sedimentation MWh TBD than Baseline 

availability of faults 

hydroelectric 

power plants Percent utilization or 85 (Nkula A) 

Actual energy generated by HEP (HEP) in operating ratio of HEP, 75 (Nkula B) 

MWh I Theoretical maximum % 90 (fedzani 1&11) generation disagfegated by energy of installed capacity MWh 75 (Tedzani III) 

HEP1 85 {Kapichira I) 

Distribution of 

invasive aquatic Km' TBD TBD 

species 

gender gender responsive Legal framework adhering to the Legal Legal 

findings and recommendations of framework framework responsive legal and policy the ENRMAP developed. 17 adopted adopted and effective framework enacted 

institutional 

and policy 

environment 

Legal framework enabling for Operational payment Legal Legal 

sustainable for ecosystem services ecosystem fmance developed as framework framework 

environmenta mechanism established per the fmdings of the ENRMAP adopted adopted 

I management established 

and 

Improved MillionMK TBD TBD 

Control of 

Aquatic 

Weeds 

Million MT 13.4 20.0419 

17 Legal framework may include environmental management bill (including establishment of the National 

Environmental Management Authority), water resource management bill, and development of a new soil 

conservation bill. 18 Indicator is useful for monitoring trends and performance as a function of overall ecosystem conditions. 19 Total harvested material will depend on the performance of harvesting measures and biological controls. 

ANNEXIII-7 
Average peak weight in metric 

21620 tons of weed harvested at MT 120 

Liwonde barrage 

Number ofbiocontrol inoculations 

conducted, disaggregated by key Number TBD TBD 

location 

TBD TBD TBD 

ESCOM expenses on Total MK expended by ESCOM 

per year on silt removal, including MillionMK TBD TBD silt managemenf!2 

staff, equipment and fuel 

Head pond volume for Nkula I 

Improved Original head pond volume for % 30 75 

Control of Nkula 

Silt Percentage of head 

pond available % 50 75 

% 50 75 

Table 4: 'Power Sector Reform Activity. 

The following are Indicators and Targets for the monitoring of the Power Sector Reform Activity 

as further describe<\ in paragraph 2 of Part B of Annex I. Key Targets and Baselines for these 

Indicators will be defined prior to entry into force of the Compact. Targets on financial 

Indicators will be reviewed semi-annually as defined in paragraph 2(c) of Part B of Annex I, and 

updated on a yearly basis. 

Improved 

Financial 

Sustainability Cost Recovery Ratio Total Actual revenue I Projected 

operating expenses24 % TBD Greater than 

1000/o 

20 Total harvested material will depend on the perfonnance of harvesting measures and biological controls. 21 Indicator will be refined after completion of key feasibility studies and design work for the ENRMAP. 22 Indicator is useful for monitoring trends and perfonnance as a function of overall ecosystem conditions. 24 Total revenue based on energy, demand and fixed charges revenue. Operating expenses include cost of generation, 

transmission and distribution operations, corporate expenses, and financing costs to be incurred. 

ANNEX III- 8 
Total Actual Revenue I Projected Greater than operating expenses plus capital % TBD 100% replacement costs25 

Total Actual Revenue f Projected 

operating expenses plus capital % TBD 1000/o replacement plus capital 

costs26 

Debt Equity Ratio Total Debt IT otal Equity Ratio TBD TBD27 

Acid or Quick Test Ratio TBD TBD 

Current Ratio Ratio TBD TBD 

Progress against milestones set as 

a result of independent expert 

Quality ofESCOM assessment based on international 

and regional best practices and TBD TBD TBD Corporate Governance Malawi law as articulated in 

Improved Governance 

Internal and Study. 

External as 

Governance 

ofESCOM I or benchmarking 

and the study on issues such as quality of 

Power Sector Regulatory regulatory decisions based upon 

Independence and sound analysis, conformity with TBD TBD TBD 

Effectiveness28 Laws of Malawi, independence, 

and transparency based on 

international/ regional best 

and governing principles 

Improved % TBD 85-90 

ESC OM Billing and Financial Collection Efficiency29 

Management 

% TBD 85-90 

23 Financial targets will be set after financial modeling is completed, and will be updated annually. Data will be 

sourced from audited financial statements. Baseline for Cost Recovery Ratio is sourced from World Bank 

Benchmarking Study. Indicators are useful for monitoring trends and perfonnance as a function of overall financial 

and investment conditions. 25 Capital replacement costs include depreciation. 26 Capital expansion costs include cost of long-term system expansion projects. 27 Targets to reflect results of financial analysis and/or MERA regulations. 28 Indicator to be refined after assessment tool has been defined prior to ElF. 29 Baselines will be set after a new billing system is installed. 

ANNEXlll-9 
~ 

Tahir~: Pm\ er Sector Reform At·th it~ 

I ' '' ~ll:lmml~ month] x I 00 for CES 

[Iotal revenue from post-paid 

bills collected in current month I % TBD 85-90 total post-paid billed in previous 

month l x 100 for NES 

Indicator to be defined prior to 

Electricity Metered entry into force and in the full TBD TBD TBD M&E plan, in accordance to 

Ann~ I. 

Average Collection 365 I (Total post-paid sales I 

((Beginning accounts receivables+ Days 180 50 Period in days ending accounts receivable) /2)) 

Bad Debt (Percentage of accounts over 180 Days TBD TBD davsl I (total accounts receivable) 

365/ (Total credit purchases I 

Average Creditor Days ((Beginning accounts payables + Days !50 60 

ending accounts payables) I 2)) 

ESCOM Financial Plan with 

Financial Plans agreed upon financial ratios and Update to - Update to plans updated covenants as defined in Annex I Plans 

under Compact updated 

Publication of Audited ESCOM audited financial 

Publication Annual 

Financial Statements statements made public as defined of statements 0 publication in Annex I under Comoact 

Yearly Government financial MWK TBD 0 contribution required Millions 

Working Capital Gap Yearly Government financial IOO%if 

Financed30 contribution as fraction of amount 

Percentage NA positive 

indicated by MCC-approved amount 

Financial Plan reQuired 

Average time to Average time to restore power for 

Days 3.36 2.7 hieh voltage forced outages respond to forced 

Average time to restore power for Improved outages Days 5.60 3.5 

Quality of MV I LV forced outages 

Customer Customer satisfaction 

Percent improvement in key Service and perceptions of 

indicators of customers' ESCOM service, satisfaction, disaggregated by % TBD TBD 

disaggregated by 

; gender gender 

Improved Average Cost of [Total expenses for Gx, Tx and 

ESCOM Electricity Billed Dx (MK) I total electricity US$/kWh TBD TBD 

Operational (kWh) generated(kWh)'US$] 

Management 

Maintenance Actual maintenance expenditures I 

and Planned maintenance budget as % TBD 100 Efficiency Expenditures defmed in Annex 1

31 

3

° Financial targets will be set after financial modeling is completed, and will be updated annually. Data will be 

sourced from audited financial statements and other sources of financial information. 31 Maintenance plan is based on a percentage ofun-depreciated asset value for preventive maintenance of 

generation, transmission and distribution assets. 

ANNEX lii - l 0 
Table -1: Po\\ er Sector Reform Acth it~ 

~~~~--~ 

Improved 

management 

of 

procurements 

byESCOM 

Strengthened 

Regulatory 

Environment 

Market 

Structure for 

Private 

Procurement Audits 

Procurement threshold 

statements and annual 

report published by 

MERA Resolutions 

Power Market 

Structure 

Adherence to ESCOM 

maintenance plans as defmed in 

completed by Auditor General's 

Office receiving satisfactory 

by ODPP as a result of improved 

ESCOM compliance to 

Audited financial statements and 

annual report published 

Plans 

Audit 

Million MK 

Days 

Framework 

Annual 

Report 

% 

Laws passed 

NA 

TBD 

0 

0 

Yearly update 

to plans 

TBD 

Increase over 

Baseline 

TBD 

Framework 

approved and 

implemented 

Yearly 

publication of 

report 

TBD 

(b) Data Collection and Reporting. The M&E Plan will establish guidelines for data 

collection and reporting, and identifY the responsible parties. A performance monitoring task 

force will be created at ESCOM, with participation by MERA and MCA-Malawi. Compliance 

with data collection and reporting timelines will be conditions for Disbursements for the relevant 

Activities as set forth in the Program Implementation Agreement. The M&E Plan will specifY 

the data collection methodologies, procedures, and analysis required for reporting on results at 

all levels. The M&E Plan will describe any interim MCC approvals for data collection, analysis, 

and reporting plans. 

(c) Data Oualitv Reviews. As determined in the M&E Plan or as otherwise requested 

by MCC, the quality of the data gathered through the M&E Plan will be reviewed to ensure that 

data reported are as valid, reliable, and timely as resources will allow. The objective of any data 

quality review will be to verifY the quality and the consistency of performance data across 

different implementation units and reporting institutions. Such data quality reviews also will 

serve to identifY where those levels of quality are not possible, given the realities of data 

collection. 

ANNEX lil - II 
(d) Semi-annual Reviews. Semi-annual reviews of the Power Sector Reform Activity 

will be conducted as outlined in paragraph 2(c) of Part B of Annex I. 

(e) Management Information System. The M&E Plan will describe the information 

system that will be used to collect data, store, process and deliver information to relevant 

stakeholders in such a way that the Program information collected and verified pursuant to the 

M&E Plan is at all times accessible and useful to those who wish to use it. The system 

development will take into consideration the requirement and data needs of the components of 

the Program, and will be aligned with existing MCC systems, other service providers, and 

ministries. 

(f) Role ofMCA-Malawi. The monitoring and evaluation of this Compact spans one 

discrete Project and two Activities, and will involve a variety of governmental, 

nongovernmental, and private sector institutions. In accordance with the designation 

contemplated by Section 3.2(b) of this Compact, MCA-Malawi is responsible for 

implementation of the M&E Plan. MCA-Malawi will oversee all Compact-related monitoring 

and evaluation activities conducted for each of the Activities, ensuring that data from all 

implementing entities are consistent, accurately reported and aggregated into regular 

performance reports as described in the M&E Plan. 

4. Evaluation Component. 

The Evaluation Component of the M&E Plan will contain three types of evaluations: (I) impact 

evaluations; (2) project performance evaluations; and (3) special studies. MCC also intends to 

continue monitoring and evaluating the long-term impacts of the Compact even after Compact 

expiration. The Evaluation Component of the M&E Plan will describe the purpose of the 

evaluation, methodology, timeline, required MCC approvals, and the process for collection and 

analysis of data for each evaluation. The results of all evaluations will be made publicly 

available in accordance with MCC's Policy for Monitoring and Evaluation of Compacts and 

Threshold Programs. 

(a) Impact Evaluation. The M&E Plan will include a description of the methods to 

be used for impact evaluations and plans for integrating the evaluation method into Project 

design. Based on in-country consultation with stakeholders, the strategies outlined below were 

jointly determined as having the strongest potential for rigorous impact evaluation. The M&E 

Plan will further outline in detail these methodologies. Final impact evaluation strategies are to 

be included in the M&E Plan. The following is a summary of the potential impact evaluation 

methodologies. 

(i) Infrastructure Development Activity. The evaluation will attempt to 

assess the effectiveness of individual transmission lines and distribution investments in reducing 

outages and improving power quality, particularly in northern Malawi using a combination of 

approaches, to include potentially an interrupted time series approach, exogenous spatial 

variation due to the project, combined if sufficiently informative with phased implementation of 

distribution projects. The incremental impacts of improved reliability, quality and access to 

power will be estimated by comparing key intermediate outcomes, including changes in business 

investments and productivity, between businesses with access to infrastructure improvements, 

those without access to improvements, and for those in areas or zones that experience greater or 

ANNEX III- 12 
lesser improvements in electricity due to differential levels of infrastructure upgrading. Gender 

disaggregated information for female-headed businesses will be pursued to the extent possible. 

(ii) Power Sector Reform Activity. The most rigorous evaluation possible 

will be conducted, possibly employing an interrupted time series approach. The evaluation will 

estimate the causal relationship between changes in sector governance with: (I) changes in 

ESCOM financial and operational performance; and (2) increases in private investment, 

generation capacity and electricity coverage for different groups such as female-headed 

households and regions of the country. The evaluation will also assess: (A) the extent to which 

improvements in MERA independence and regulatory capacity result in improved quality of 

service and supply by ESCOM; and (B) the extent to which this Activity improves the efficiency 

(employees per customer, response time to outages, etc.) and reduces losses at ESCOM. 

Differentiated impacts on customer service and access to men, women, and vulnerable groups 

will be explored. 

(iii) Environment and Natural Resource Management (ENRMl Sub-Activity. 

The evaluation will attempt to isolate the causal factors linking weed and siltation in the Shire 

river basin to outages downstream at generation sites, particularly the extent to which palliative 

weed and silt management measures reduce the frequency and duration of outages and improve 

plant availability at hydropower plants downstream of Liwonde barrage. Potentially using a 

difference-in-differences and/or matching design, the evaluation will also attempt to look at how 

increases in tariff and/or electrification affect consumer energy choices, such as the use of 

charcoal and fuel wood, and the impact ofthe latter has on the environment. To the extent 

appropriate, differentiated impacts on different income groups, males vs. females, formal and 

informal firms, and factors such as access or non-access to capital will be explored. 

In order to implement the most rigorous evaluations possible, the Goven\ment and ESCOM will 

cooperate in assembling the required time series and other data required to implement the chosen 

methodology. 

(b) Project Performance Evaluation. The M&E Plan will make provision for 

evaluations of all relevant Project activities. The M&E Plan will also make provision for final 

Project level evaluations ("Final Evaluations"). With the prior written approval ofMCC, the 

Government or MCA-Malawi will engage independent evaluators to conduct the Final 

Evaluations at the end ofthe Project. The Final Evaluations will review progress during 

Compact implementation and provide a qualitative context for interpreting monitoring data and 

impact evaluation findings. They must at a minimum: (i) evaluate the efficiency and 

effectiveness of the Activities; (ii) determine if and analyze the reasons why the Compact Goal, 

Program Objective and Project Objective, outcome(s) and output(s) were or were not achieved; 

(iii) identifY positive and negative unintended results of the Program; (iv) provide lessons 

learned that may be applied to similar projects; and (v) assess the likelihood that results will be 

sustained over time. 

(c) Special Studies. The M&E Plan will include a description of the methods to be 

used for special studies, as necessary, funded through this Compact or by MCC. Plans for 

conducting the special studies will be determined jointly between the Government or MCAMalawi and MCC before the approval of the M&E Plan. MCC, the Government and MCAMalawi have agreed to conduct the following study as part of the Power Sector Reform Activity: 

ANNEX III - 13 
(i) Prior to entry into force of the Compact, the Government and MCC will 

agree on a method by which to independently evaluate and assess Malawi's regulatory 

environment and the governance ofESCOM and the power sector in Malawi as a whole. MeAMalawi and the Government will then conduct both the Corporate Governance Benchmarking 

Study and the Sector Benchmarking Study by Year 2 of the Compact. 

The M&E Plan will identify and make provision for any other special studies, ad hoc 

evaluations, and research that may be needed as part of the monitoring and evaluating of this 

Compact. Either MCC, MCA-Malawi or the Government may request special studies or ad hoc 

evaluations of Activities, or the Project as a whole prior to the expiration of the Compact Term. 

When the Government engages an evaluator, the engagement will be subject to the prior written 

approval of MCC. Contract terms must ensure non-biased results and the publication of results. 

(d) Request for Ad Hoc Evaluation or Special Study. IfMCA-Malawi or the 

Government require an ad hoc independent evaluation or special study at the request of the 

Government for any reason, including for the purpose of contesting an MCC determination with 

respect to a Project or Activity or to seek funding from other donors, no MCC Funding resources 

may be applied to such evaluation or special study without MCC's prior written approval. 

5. Other Components of the M&E Plan. 

In addition to the monitoring and evaluation components, the M&E Plan will include the 

following components for the Program, Project and Activities, including, where appropriate, 

roles and responsibilities of the relevant parties and providers: 

(a) Costs. A detailed cost estimate for all components of the M&E Plan; and 

(b) Assumptions and Risks. Any assumption or risk external to the Program that 

underlies the accomplishment of the Program Objective, Project Objective and Activity 

outcomes and outputs. 

6. Approval and Implementation of the M&E Plan. 

The approval and implementation of the M&E Plan, as amended from time to time, will be in 

accordance with the Program Implementation Agreement, any other relevant Supplemental 

Agreement and the MCC Policy for Monitoring and Evaluation of Compacts and Threshold 

Programs. 

ANNEX liJ- 14 
ANNEX IV 

CONDITIONS PRECEDENT 

TO DISBURSEMENT OF COMPACT IMPLEMENTATION FUNDING 

This Annex IV sets forth the conditions precedent applicable to Disbursements of Compact 

Implementation Funding (each a "CIF Disbursement'). Capitalized terms used in this Annex IV 

and not defined in this Compact will have the respective meanings assigned thereto in the 

Program Implementation Agreement. Upon execution of the Program Implementation 

Agreement, each CIF Disbursement will be subject to the terms of the Program Implementation 

Agreement. 

1. Conditions Precedent to Initial CIF Disbursement. 

Each of the following must have occurred or been satisfied prior to the Initial CIF Disbursement: 

(a) The Government (or MCA-Malawi) has delivered to MCC: 

(i) an interim fiscal accountability plan acceptable to MCC; and 

(ii) a CIF procurement plan acceptable to MCC. 

2. Conditions Precedent to each CIF Disbursement. 

Each of the following must have occurred or been satisfied prior to each CIF Disbursement: 

(a) The Government (or MCA-Malawi) has delivered to MCC the following 

documents, in form and substance satisfactory to MCC: 

(i) a completed Disbursement Request, together with the applicable Periodic 

Reports, for the applicable Disbursement Period, all in accordance with the Reporting 

Guidelines; 

(ii) a certificate of the Government (or MCA-Malawi), dated as of the date of 

the CIF Disbursement Request, in such form as provided by MCC; and 

(iii) if this Compact has entered into force in accordance with Article 7, (I) a 

Fiscal Agent Disbursement Certificate and (2) a Procurement Agent Disbursement Certificate. 

(b) If any proceeds of the C!F Disbursement are to be deposited in a bank account, 

MCC has received satisfactory evidence that (i) the Bank Agreement has been executed and (ii) 

the Permitted Accounts have been established; 

(c) Appointment of an entity or individual to provide fiscal agent services, as 

approved by MCC, until such time as the Government provides to MCC a true and complete 

copy of a Fiscal Agent Agreement, duly executed and in full force and effect, and the fiscal agent 

engaged thereby is mobilized; 

(d) Appointment of an entity or individual to provide procurement agent services, as 

approved by MCC, until such time as the Government provides to MCC a true and complete 
copy of the Procurement Agent Agreement, duly executed and in full force and effect, and the 

procurement agent engaged thereby is mobilized; and 

(e) MCC is satisfied, in its sole discretion, that: 

(i) the activities being funded with such CIF Disbursement are necessary, 

advisable or otherwise consistent with the goal of facilitating the implementation of the Compact 

and will not violate any applicable law or regulation; 

(ii) no material default or breach of any covenant, obligation or responsibility 

by the Government, MCA-Malawi or any Government entity has occurred and is continuing 

under this Compact or any Supplemental Agreement; 

(iii) there has been no violation of, and the use of requested funds for the 

purposes requested will not violate, the limitations on use or treatment ofMCC Funding set forth 

in Section 2.7 of this Compact or in any applicable law or regulation; 

(iv) any Taxes paid with MCC Funding through the date ninety (90) days prior 

to the start of the applicable Disbursement Period have been reimbursed by the Government in 

full in accordance with Section 2.8(c) of this Compact; and 

(v) the Government has satisfied all of its payment obligations, including any 

insurance, indemnification, tax payments or other obligations, and contributed all resources 

required from it, under this Compact and any Supplemental Agreement. 

3. For any CIF Disbursement occurring after this Compact has entered into force in 

accordance with Article 7. 

MCC is satisfied, in its sole discretion, that: 

(a) MCC has received copies of any reports due from any technical consultants 

(including environmental auditors engaged by MCA-Malawi) for any Activity since the previous 

Disbursement Request, and all such reports are in form and substance satisfactory to MCC; 

(b) the Implementation Plan Documents and Fiscal Accountability Plan are current 

and updated and are in form and substance satisfactory to MCC, and there has been progress 

satisfactory to MCC on the components of the Implementation Plan for the Projects or any 

relevant Activities related to such CIF Disbursement; 

(c) there has been progress satisfactory to MCC on the M&E Plan and Social and 

Gender Integration Plan for the Program or Project or relevant Activity and substantial 

compliance with the requirements of the M&E Plan and Social and Gender Integration Plan 

(including the targets set forth therein and any applicable reporting requirements set forth therein 

for the relevant Disbursement Period); 

(d) there has been no material negative finding in any financial audit report delivered 

in accordance with this Compact and the Audit Plan, for the prior two quarters (or such other 

period as the Audit Plan may require); 

ANNEX IV- 2 
(e) MCC does not have grounds for concluding that any matter certified to it in the 

related MCA Disbursement Certificate, the Fiscal Agent Disbursement Certificate or the 

Procurement Agent Disbursement Certificate is not as certified; 

(f) if any of the officers or key staff ofMCA-Malawi have been removed or resigned 

and the position remains vacant, MCA-Malawi is actively engaged in recruiting a replacement; 

and 

(g) MCC has not determined, in its sole discretion, that an act, omission, condition, or 

event has occurred that would be the basis for MCC to suspend or terminate, in whole or in part, 

the Compact or MCC Funding in accordance with Section 5.1 of this Compact. 

ANNEX IV- 3 
ANNEXV 

DEFINITIONS 

Activity has the meaning provided in Part B of Annex I 

Additional Representative has the meaning provided in Section 4.2. 

Audit Guidelines has the meaning provided in Section 3. 8(a). 

Baseline has the meaning provided in paragraph 3 of Annex III 

Board of Trustees has the meaning provided in paragraph 3(a)(l) of Part C of Annex I 

CIF Disbursement has the meaning provided in Annex IV. 

Compact has the meaning provided in the Preamble. 

Compact Goal has the meaning provided in Section l.I. 

Compact Implementation Funding has the meaning provided in Section 2.2(a). 

Compact Records has the meaning provided in Section 3. 7(a). 

Compact Term has the meaning provided in Section 7.4. 

Corporate Governance Benchmarking Study has the meaning provided in paragraph 2(a)(ii) of Part B 

of Annex I 

Covered Provider has the meaning provided in Section 3. 7(c). 

Disbursement has the meaning provided in Section 2.4. 

DSC has the meaning provided in paragraph 2(a)(ii) of Part B of Annex I 

ESCOM has the meaning provided in Section 7.2(d). 

ESCOM Board has the meaning provided in paragraph 2(a)(ii) of Part B of Annex I 

ENRM has the meaning provided in paragraph I (e) of Part B of Annex I 

ERNMAP has the meaning provided in paragraph I (e)(ii) of Part B of Annex I 

ESJAs has the meaning provided in paragraph 3 of Part B of Annex I 

Evaluation Component has the meaning provided in paragraph I of Annex III 

Excess CIF Amount has the meaning provided in Section 2.2(c). 

Final Evaluations has the meaning provided in paragraph 4(b) of Annex III 

Financial Plan has the meaning provided in paragraph 2(a)(i) of Part B of Annex I 

Fiscal Agent has the meaning provided in paragraph 5 of Part C of Annex I 
Governance Guidelines means MCC 's Guidelines for Accountable Entities and Implementation 

Structures, as such may be posted on MCC's Website from time to time. 

Government has the meaning provided in the Preamble. 

Implementation Letter has the meaning provided in Section 3. 5. 

Indicators has the meaning provided in paragraph 3(a) of Annex III. 

Infrastructure Development Activity has the meaning provided in Part B of Annex I. 

Inspector General has the meaning provided in Section 3. 7(d). 

Intellectual Property means all registered and unregistered trademarks, service marks, logos, names, 

trade names and all other trademark rights; all registered and unregistered copyrights; all patents, 

inventions, shop rights, know how, trade secrets, designs, drawings, art work, plans, prints, manuals, 

computer files, computer software, hard copy files, catalogues, specifications, and other proprietary 

technology and similar information; and all registrations for, and applications for registration of, any of 

the foregoing, that are financed, in whole or in part, using MCC Funding. 

IRP has the meaning provided in paragraph 1 (a) of Part B of Annex I. 

Kapichira II has the meaning provided in paragraph 1 (f) of Part B of Annex I. 

kWh has the meaning provided in paragraph 3 of Part A of Annex I. 

M&E Annex has the meaning provided in Annex III. 

M&E Plan has the meaning provided in Annex III. 

Malawi has the meaning provided in the Preamble. 

Management Unit has the meaning provided in paragraph 3 (c)(i) of Part C of Annex I. 

MCA Act has the meaning provided in Section 2.2(a). 

MCA-Malawi Core Team has the meaning provided in paragraph 1(b) of Part A of Annex 1 

MCA-Malawi Trust Deed has the meaning provided in paragraph 3 of Part C of Annex I. 

MCC has the meaning provided in the Preamble. 

MCC Environmental Guidelines has the meaning provided in Section 2. 7(c). 

MCC Funding has the meaning provided in Section 2.3. 

MCC Gender Policy means the MCC "Gender Policy" (including any guidance documents issued in 

connection with the guidelines) posted from time to time on the MCC Website or otherwise made 

available to the Government. 

MCC Policy for Monitoring and Evaluation of Compacts and Threshold Programs has the meaning 

provided in Annex Ill. 

MCC Program Procurement Guidelines has the meaning provided in Section 3.6. 

ANNEXV-2 
MCC Website has the meaning provided in Section 2. 7. 

MGDs has the meaning provided in paragraph 2 of Annex III 

MERA has the meaning provided in paragraph 2 of Part B of Annex I. 

MERA Board has the meaning provided in paragraph 2(b)(ii) of Part B of Annex I 

MNREE has the meaning provided in paragraph 2 of Part B of Annex l 

Monitoring Component has the meaning provided in paragraph 1 of Annex Ill 

Multi-Year Financial Plan Summary has the meaning provided in paragraph 1 of Annex II 

ODPP has the meaning provided in paragraph 2(a)(iii) of Part B of Annex I 

OP 4.12 has the meaning provided in paragraph 3 of Part B of Annex l 

Party and Parties have the meaning provided in the Preamble. 

Permitted Account has the meaning provided in Section 2.4. 

PMC has the meaning provided in paragraph 4 of Part C of Annex I 

Power Sector Reform Activity has the meaning provided in Part B of Annex I 

Power Sector Reform Agenda has the meaning provided in paragraph 2(c) of Part B of Annex I 

Power Sector Revitalization Project has the meaning provided in Part B of Annex I 

PPP has the meaning provided in paragraph I (a) of Part A of Annex I 

Principal Representative has the meaning provided in Section 4.2. 

Procurement Agent has the meaning provided in paragraph 6 of Part C of Annex I 

Program has the meaning provided in the Recitals. 

Program Assets means any assets, goods or property (real, tangible or intangible) purchased or financed 

in whole or in part (directly or indirectly) by MCC Funding. 

Program Funding has the meaning provided in Section 2.1. 

Program Guidelines means collectively the Audit Guidelines, the MCC Environmental Guidelines, the 

MCC Gender Policy, the Governance Guidelines, the MCC Program Procurement Guidelines, the 

Reporting Guidelines, the MCC Policy for Monitoring and Evaluation of Compacts and Threshold 

Programs, the MCC Cost Principles for Government Affiliates Involved in Compact Implementation 

(including any successor to any of the foregoing) and any other guidelines, policies or guidance papers 

relating to the administration of MCC-funded compact programs and as from time to time published on 

the MCC Website. 

Program Implementation Agreement and PIA have the meaning provided in Section 3.1. 

Program Objective has the meaning provided in Section 1.2. 

ANNEXV- 3 
Project has the meaning provided in Section 1. 3. 

Project Cooperation Agreement has the meaning provided in paragraph 4 of Part C of Annex L 

Project Objective has the meaning provided in Section 1.3. 

Project Partner has the meaning provided in paragraph 4 of Part C of Annex L 

Provider has the meaning provided in Section 3. 7(c). 

REA has the meaning provided in paragraph 2(b)(iii) of Part B of Annex I 

Reporting Guidelines means the MCC "Guidance on Quarterly MCA Disbursement Request and 

Reporting Package" posted by MCC on the MCC Website or otherwise publicly made available. 

SBM Plan has the meaning provided in paragraph 2(b)(iii) of Part B of Annex L 

Sector Benchmarking Study has the meaning provided in paragraph 2(b)(ii) of Part B of Annex I 

Social and Gender Integration Plan has the meaning provided in paragraph 3 of Part B of Annex L 

Supplemental Agreement means any agreement between (a) the Government (or any Government 

affiliate) and MCC (including, but not limited to, the PIA), or (b) MCC and/or the Government (or any 

Government affiliate), on the one hand, and any third party, on the other hand, including any of the 

Providers, in each case, setting forth the details of any funding, implementing or other arrangements in 

furtherance of this Compact. 

Target has the meaning provided in paragraph 3(a) of Annex III 

Tariff Indexation Framework has the meaning provided in paragraph 2(b)(i) of Part B of Annex L 

Tax Schedules has the meaning provided in Section 2.8(b). 

Taxes has the meaning provided in Section 2.8(a). 

Turnaround Facility has the meaning provided in Section 7.2(d). 

United States Dollars or US$ means the lawful currency of the United States of America. 

USAID is the United States Agency for International Development. 

ANNEXV-4 
FIRST AMENDMENT 

TO 

MILLENNIUM CHALLENGE COMPACT 

BETWEEN 

THE UNITED STATES OF AMERICA 

ACTING THROUGH 

THE MILLENNIUM CHALLENGE CORPORATION 

AND 

THE REPUBLIC OF MALA WI 
FIRST AMENDMENT TO 

MILLENNIUM CHALLENGE COMPACT 

PREAMBLE 

This FIRST AMENDMENT TO MILLENNIUM CHALLENGE COMPACT (this 

"Amendment'), is made by and between the United States of America, acting through the 

Millennium Challenge Corporation, a United States government corporation ("MCC'), and the 

Republic of Malawi ("Malawi''), acting through its government ("Government') (individually a 

"Party" and collectively, the "Parties"). All capitalized terms used in this Amendment that are 

not otherwise defined herein have the meanings given to such terms in the Compact (as defined 

below). 

Recalling that the Parties signed the Millennium Challenge Compact between the United 

States of America, acting through MCC, and Malawi acting through the Government, on April 7, 

2011 (the "Compact'), pursuant to which MCC grants to Malawi, subject to the terms and 

conditions of the Compact, MCC Funding in an amount not to exceed Three Hundred Fifty 

Million Seven Hundred Thousand United States Dollars (US$350, 700,000) for a Compact Goal 

to reduce poverty through economic growth in Malawi; 

Recognizing that the Parties desire to amend certain parts of the Compact, including its 

Annexes, as more fully described in this Amendment; 

Intending to memorialize these amendments to certain aspects of the Compact, including 

its Annexes, without changing the overall value or term of the Compact; 

NOW, THEREFORE, the Parties hereby agree as follows: 

AMENDMENTS 

1. Amendment to Section 1.2. 

Section 1.2 (Program Objective) of the Compact shall be amended to read as follows: 

"Section 1.2 Program Objective. The collective objective of the Program (the "Program 

Objective") is to (i) reduce the cost of doing business in Malawi, (ii) expand access to electricity 

for the Malawian people and businesses, and (iii) increase value-added production in 

Malawi. The Program consists of the projects described in Annex I (each a "Projecf' and 

collectively, the "Projects")." 

2. Amendment to Section 1.3. 

Section 1.3 (Project Objective) of the Compact shall be amended to read as follows: 

"Section 1.3 Project Objectives. The objectives of the Projects (each a "Project Objective" and 

collectively, the "Project Objectives") are: 

(a) The objective of the Infrastructure Development Project is to improve the 

availability, reliability, and quality of the power supply by increasing the throughput capacity 

and stability of the national electricity grid and increasing efficiency of hydropower generation. 
(b) The objective of the Power Sector Reform Project is to create an enabling 

environment for future expansion of the power sector by strengthening sector institutions and 

enhancing regulation and governance ofthe sector. 

(c) The objective of the Environmental and Natural Resource Management Project is 

to mitigate the growing problems of aquatic weed infestation and excessive sedimentation in the 

Shire River Basin to reduce the costly disruptions to Malawi's hydropower generation." 

3. Amendment to Annexes I -III, V. 

Annexes I, II, III, and V of the Compact shall be amended to read as indicated in Annexes I, II, 

III, and V, which are attached to and an integral part of this Amendment agreement. 

GENERAL PROVISIONS 

4. Amendment Entry into Force. 

This Amendment shall enter into force on the later date (the "Amendment Entry into Force 

Date") of (i) the date of the last letter in an exchange of letters between the Principal 

Representatives of each Party confirming that each Party has completed its respective domestic 

requirements for entry into force of this Amendment or (ii) the date of entry into force of the 

Compact. 

5. Provisional Application. 

Upon signature of this Amendment, the Parties shall provisionally apply this Amendment until 

the Amendment Entry into Force Date. 

SIGNATURE PAGE BEGINS ON THE NEXT PAGE 

2 
IN WITNESS WHEREOF, the undersigned, duly authorized by their respective 

governments, have signed this Amendment, in duplicate. 

FOR THE UNITED STATES OF AMERICA, 

ACTING THROUGH THE MILLENNIUM 

CHALLENGE CORPORATION 

FOR THE REPUBLIC OF MALA WI, 

ACTING THROUGH THE MINISTRY OF 

FINANCE 

Name: 

Title: 

Place: 

Date: 

v 

.:To~~to..~ B~ 

Vice President, Compact 

Operations (Acting) 

Was~~~, OG 

J.C, .r.dy 1.013 

Name: /Ce '-" l i M ~ Title: Minister of Finance 

Place: t / o ""-~w .Q... 

Date: 31 stc_.l~/7 2 o t.J 

SIGNATURE PAGE TO FIRST AMENDMENT TO MILLENNIUM CHALLENGE COMPACT 

BETWEEN THE UNITED STATES OF AMERICA 

ACTING THROUGH THE MILLENNIUM CHALLENGE CORPORATION 

AND THE REPUBLIC OF MALA WI 
MILLENNIUM CHALLENGE COMPACT 

PREAMBLE 

This MILLENNIUM CHALLENGE COMPACT (this "Compacf') is between the United States of 

America, acting through the Millennium Challenge Corporation, a United States government corporation 

("MCC'), and the Republic of Malawi ("Malawi"), acting through its government (the "Government') 

(individually a "Party" and collectively, the "Parties"). Capitalized terms used in this Compact will have the 

meanings provided in Annex V. 

Recognizing that the Parties are committed to the shared goals of promoting economic growth and the 

elimination of extreme poverty in Malawi and that MCC assistance under this Compact supports Malawi's 

demonstrated commitment to strengthening good governance, economic freedom and investments in people; 

Recalling that the Government consulted with the private sector and civil society of Malawi to 

determine the priorities for the use of Millennium Challenge Corporation assistance and developed and 

submitted to MCC a proposal for such assistance to achieve lasting economic growth and poverty reduction; 

Understanding that MCC wishes to help Malawi implement the program described herein (as such 

description may be amended from time to time in accordance with the terms hereof, the "Program") to 

counter a key binding constraint to sustained growth and diversification in the Malawi economy; and 

Acknowledging that to implement the Program, MCC wishes to make available to the Government an 

amount not to exceed Three Hundred and Fifty Million Seven Hundred Thousand United States Dollars 

(US$350,700,000), subject to the terms and conditions of this Compact; 

The Parties hereby agree as follows: 

ARTICLE 1. 

GOAL AND OBJECTIVES 

Section 1.1 Compact Goal. The goal of this Compact is to reduce poverty through economic growth in 

Malawi (the "Compact Goaf'). 

Section 1.2 Program Objective. The collective objective of the Program (the "Program Objective") is to (i) 

reduce the cost of doing business in Malawi, (ii) expand access to electricity for the Malawian people and 

businesses, and (iii) increase value-added production in Malawi. The Program consists of the projects 

described in Annex I (each a "Projecf' and collectively, the "Projects"). 

Section 1.3 Project Objectives. The objectives of the Projects (each a "Project Objective" and collectively, 

the "Project Objectives") are: 

(a) The objective of the Infrastructure Development Project is to improve the availability, 

reliability, and quality of the power supply by increasing the throughput capacity and stability ofthe national 

electricity grid and increasing efficiency of hydropower generation. 

(b) The objective of the Power Sector Reform Project is to create an enabling environment for 

future expansion of the power sector by strengthening sector institutions and enhancing regulation and 

governance of the sector. 

REPLACEMENT PAGES TO FIRST AMENDMENT TO MILLENNIUM CHALLENGE COMPACT, BETWEEN THE UNITED STATES OF AMERICA, 

ACTING THROUGH THE MILLENNIUM CHALLENGE CORPORATION, AND THE REPUBLIC OF MALA WI 
----------- 

(c) The objective of the Environmental and Natural Resource Management Project is to mitigate 

the growing problems of aquatic weed infestation and excessive sedimentation in the Shire River Basin to 

reduce the costly disruptions to Malawi's hydropower generation. 

ARTICLE2. 

FUNDING AND RESOURCES 

Section 2.1 Program Funding. 

Upon entry into force of this Compact in accordance with Section 7.3, MCC will grant to the Government, 

under the terms of this Compact, an amount not to exceed Three Hundred and Forty One Million Five 

Hundred and Eighty Thousand United States Dollars (US$341 ,580,000) ("Program Funding") for use by the 

Government to implement the Program. The allocation of Program Funding is generally described in 

Annex II. 

Section 2.2 Compact Implementation Funding. 

(a) Upon signing of this Compact, MCC will grant to the Government, under the terms of this 

Compact and in addition to the Program Funding described in Section 2.1, an amount not to exceed Nine 

Million One Hundred and Twenty Thousand United States Dollars (US$9,120,000) ("Compact 

Implementation Funding") under Section 609(g) of the Millennium Challenge Act of2003, as amended (the 

"MCA Acf'), for use by the Government to facilitate implementation of the Compact, including for the 

following purposes: 

(i) financial management and procurement activities; 

(ii) administrative activities (including start-up costs such as staff salaries) and 

administrative support expenses such as rent, computers and other information technology or capital 

equipment; 

(iii) monitoring and evaluation activities; 

(iv) feasibility and any remaining project preparatory studies; and 

(v) other activities to facilitate Compact implementation as approved by MCC. 

The allocation of Compact Implementation Funding is generally described in Annex II. 

(b) Each Disbursement (as defined below) of Compact Implementation Funding is subject to 

satisfaction of the conditions precedent to such Disbursement as set forth in Annex IV. 

(c) If MCC determines that the full amount of Compact Implementation Funding available under 

Section 2.2(a) exceeds the amount that reasonably can be utilized for the purposes set forth in Section 2.2(a), 

MCC, by written notice to the Government, may withdraw the excess amount, thereby reducing the amount of 

the Compact Implementation Funding available under Section 2.2(a) (such excess, the "Excess CIF 

Amount'). In such event, the amount of Compact Implementation Funding granted to the Government under 

Section 2.2(a) will be reduced by the Excess CIF Amount, and MCC will have no further obligations with 

respect to such Excess CIF Amount. 

REPLACEMENT PAGES TO FIRST AMENDMENT TO MILLENNIUM CHALLENGE COMPACT, BETWEEN THE UNITED STATES OF AMERICA, 

ACTING THROUGH THE MILLENNIUM CHALLENGE CORPORATION, AND THE REPUBLIC OF MALA WI 

2 
ANNEX I 

PROGRAM DESCRIPTION 

This Annex I describes the Program that MCC Funding will support in Malawi during the 

Compact Term. 

A. PROGRAM OVERVIEW 

1. Background and Consultative Process. 

(a) Background. 

Malawi is a landlocked country in southeast Africa that gained independence in 1964 and has a 

population of approximately 13.8 million people. Although Malawi has seen economic growth 

average seven percent over the last six years, an estimated 51 percent of the population lives on 

less than US$1.25 a day, and gross national income per capita stands at approximately US$880 

(purchasing power parity ("PPP") adjusted). The economy remains heavily dependent on rainfed agriculture and primary commodity exports, and sustained economic growth and 

development require increasing productivity of industry, agriculture, and services, as well as 

diversification of the economy. 

Malawi's economy faces numerous challenges, including a power sector that is one of the most 

severely constrained in sub-Saharan Africa. The economic costs of an unreliable and inadequate 

power supply, as well as the costs of inappropriate pricing and high technical and non-technical 

losses, are estimated at seven to nine percent of GDP. In order to improve the prospects for 

sustained growth, poverty reduction, and improved delivery of health and education services, the 

power sector must be stabilized and expanded. Building on its current efforts to reform the 

power sector, the Governrnent seeks to invest in infrastructure, turn around its electricity utility -

Electricity Supply Corporation of Malawi ("ESCOM')- and develop an enabling legal and 

regulatory environment for investment in the sector. The Program is designed to support these 

efforts and assist Malawi with the sector's transformation. 

(b) Consultative Process. 

Malawi was deemed eligible for Compact assistance in 2007. To coordinate the Compact 

development process, the Government formed a core team (the "MCA-Malawi Core Team") in 

March 2008 to work with MCC to develop the Program. In May 2008, the MCA-Malawi Core 

Team initiated an analysis of constraints to economic growth in Malawi, in collaboration with 

the World Bank, the U.K. Department for International Development and the African 

Development Bank. Pursuant to this analysis and an extensive consultative process with key 

stakeholders, the power sector was identified as a key constraint to economic growth in Malawi. 

2. Description of Program and Beneficiaries. 

The Program is designed to reduce poverty in ¥.ala~i Qy_~dressing the constraints of the power 

sector to economic growth. The Program Objective is to reduce the cost of doing business, 

expand access to electricity for the Malawian people and businesses, and increase value-added 

production in Malawi. The Program consists of three Projects: 
• The Infrastructure Development Project's objective is to improve the availability, 

reliability, and quality of the power supply by increasing the throughput capacity and stability of 

thenational electricity grid and increasing efficiency of hydropower generation through 

investments in infrastructure development, including investment by the Government in new 

generation, and MCC Funding for generation and increased transmission and distribution 

capacity; 

• The Power Sector Reform Project's objective is to create an enabling environment 

for future expansion of the power sector by strengthening sector institutions and enhancing 

regulation and governance of the sector by rebuilding ESCOM into a financially strong, wellmanaged utility and developing a regulatory environment that supports public and private 

investment in new generation capacity and expanded access; and 

• The Environmental and Natural Resource Management Project's obje.ctive is to 

mitigate the growing problems of aquatic weed infestation and excessive sedimentation in the 

Shire River Basin to reduce the costly disruptions to Malawi's hydropower generation by 

investing in weed and sediment management, and implementing better environmental and natural 

resource management in upstream areas. 

By reducing power outages and technical losses, enhancing the sustainability and efficiency of 

hydropower generation, and increasing the potential kilowatt hours ("kWh") of throughput to 

electricity consumers, the Program will reduce energy costs to enterprises and households, 

improve productivity in agriculture, manufacturing, and service sectors, and support the 

preservation and creation of employment opportunities in the economy. The Parties expect the 

. Program to result in the following benefits and distribution thereof: 

• An estimated 983,000 individuals will benefit over a 20 year period through 

reduced domestic and enterprise energy costs, leading to increased profits; and 

• An estimated US$872.6 million of income benefits to Malawi at the present 

discounted rate of 10 percent. 

These estimated income benefits do not include the full value of the benefits of improved 

governance and regulation in the power sector, and how reform of the sector will translate to 

increased poverty reduction. It is also anticipated that improved power supply will lead to 

improvements to the delivery of health, education, and other public services, which are likely to 

be important both economically and socially. Projected results depend upon complementary 

investments in generation capacity, as well as the successful implementation of the infrastructure 

investments; the sustained turnaround of ESC OM, and the realization of power sector reforms. 

B. DESCRIPTION OF PROJECTS 

. Set forth below is a des·cription ofeach of the Projects that the Government will implement, or 

cause to be implemented, using MCC Funding to advance the applicable Project Objective. In 

addition, specific activities that will be undertaken within each Project (each, an "Activity"), 

including sub-activities, are also described. 

ANNEXI-2 
1. Infrastructure Development Project. 

The Infrastructure Development Project will rehabilitate, upgrade and modernize ESCOM's 

generation, transmission and distribution assets in most urgent need ofrepair, in order to 

preserve existing generation, improve the capacity of the transmission system, and increase the 

efficiency and sustainability of hydropower generation. To facilitate the development and 

implementation of the Program, MCC is providing support for the Government's ability to 

identify and prioritize investments in the sector by developing an integrated resource plan. MCC 

Funding will support significant investments in the power system infrastructure to preserve 

generation and stabilize and modernize the transmission and distribution network. 

The Infrastructure Development Project is only viable, technically and economically, if the 

Government and ESCOM maintain current generation assets and expand the generation capacity 

of the power system. Under the Infrastructure Development Project, the Governme~t will invest 

in new generation by completing the construction of the Kapichira II hydropower plant. 

Additionally, the Government will continue to seek to attract sustainable investment from the 

private sector and other donors to add significant amounts of new generation to the system. 

The Parties expect that by the end of the Compact Term, the Infrastructure Development Project, 

together with the Government's commitment to complete construction ofKapichira II, will result 

in increases in generation capacity (from 286 MW to approximately 352 MW), network 

throughput capacity (from 310 MW to approximately 960 MW) and distribution capacity (from 

868 MVA to approximately 1,078 MVA), and a reduction of total system losses from 20-25 

percent to 18 percent. 

(a) Integrated Resource Plan. 

To facilitate the development and implementation of the Program, MCC is supporting the 

development of the Malawi 2020 Integrated Resource Plan ("IRP'') to enhance the 

Government's efforts to add generation. The objective of the IRP is to identify a prioritized list 

of generation resources that can help the Government and ESCOM meet the increasing demands 

for power in a manner that balances the objective of least or low cost power to users and 

diversification of energy sources, and to increase the impact of the Project. The expected 

outcome of the MCC-supported IRP or substitute strategic investment master plan approved by 

the Government and agreed to by MCC is to target and secure increased investments in the 

power system. 

(b) Nkula A Refurbishment Activity. 

MCC Funding will support the refurbishment of the Nkula A hydropower plant, with the 

objective to improve the availability of power in Malawi by reducing outages caused by the 

condition of the assets, and maximizing power output from Nkula A. The refurbishment will 

improve the reliability of the plant, extend its useful life, and thereby avoid a partial or total 

failure of the plant. 

(c) Transmission Network Upgrade Activity. 

This Activity is designed to upgrade the backbone of the transmission network to: (1) improve 

the quality and reliability of supply in the country; (2) increase the capacity to move power from 

the south where 98 percent of Malawi's power is generated to the central and northern regions; 

ANNEX I-3 
(3) reduce technical losses on transmission lines; and (4) provide a secure transmission link 

between the southern and central regions. 

MCC Funding will support the following investments: 

(i) 400kV high voltage power line (the transmission "backbone" ofthe 

Malawi power system as currently configured) from the Phombeya (near the Nkula B 

hydropower plant) to Lilongwe, which covers the southern and central regions of Malawi; 

subject to completion and results of a full feasibility study and environmental and social impact 

assessments; and 

(ii) 132kV line parallel to existing 66kV and 33kV lines from Ghintheche to 

Luwinga and from Luwinga to Bwengu in the northern region. 

(d) Transmission and Distribution Upgrade, Expansion, and Rehabilitation Activity. 

This Activity includes investments in the southern, central, and northern regions of th~ Malawi 

power network. MCC Funding will support the following measures: 

(i) Upgrading (up-rating) of existing network connections (33kV, llkV); 

(ii) Extension of existing substations (including 66kV); 

(iii) Up-rating of transformers in existing substations; 

(iv) Development of new substations; 

(v) Installation of improved protection systems; 

(vi) Provision of new network extensions; and 

(vii) Installation of new controls and communication systems (SCAD A). 

(e) Public Sector Power Sector Preservation and New Generation Investments. 

An essential part of the Infrastructure Development Project is the additionofnew generation for 

the utilization of the new and upgraded transmission and distribution assets. The economic 

viability ofMCC-funded investments is contingent on maintaining at least the current generation 

capacity of the power system (286 MW) during the Compact Term and then expanding it by at 

least 64 MW no later than the end of the Compact Term. In addition to this new generation, the 

Government expects to add significant generation to the system in the coming years, and MCC 

Funding will support planning and technical assistance through the IRP. 

To achieve the preservation and new generation required under the Compact, the Government 

commits to meet milestones. Under the preservation milestones, the Government commits to 

taking all steps necessary to maintain current generation capacity in accordance with a plan 

developed by ESCOM in line with industry best practices, as acceptable to MCC. If the system's 

generation capacity falls below 286 MW, unless caused by the temporary shutdown of plants for 

maintenance or rehabilitation or force majeure, the Government will use commercially 

reasonable efforts to obtain interim replacement output. Under the new generation milestones, 

the Government commits to providing a construction schedule for the 64 MW Kapichira II 

ANNEX I -4 
hydropower plant ("Kapichira II') prior to entry into force and completing construction by the 

end of the Compact Term. The Government will provide quarterly updates to MCC on the 

satisfaction of milestones of the Kapichira II construction schedule. 

2. Power Sector Reform Project. 

The Power Sector Reform Project complements the Infrastructure Development Project by 

providing support for the Government's policy reform agenda and building capaCity in pivotal 

sector institutions:· ESCOM, the Malawi Energy Regulatory Authority or its successor 

(''MERA"), and the Ministry of Energy ("MoE'). The Power Sector Reform Project consists of 

two activities: the ESCOM Turnaround Activity and the Regulatory Strengthening Activity. 

(a) ESCOM Turnaround Activity. 

The objectives of this Activity are to restore ESCOM's financial health and rebuild ESCOM into 

a financially strong, well-managed company. MCC Funding will support three main areas of the 

turnaround: finances, corporate governance and operations. 

(i) Finances. 

MCC Funding will support the provision of technical assistance and equipment to ESCOM, 

including: (1) development of a detailed financial plan for ESCOM fiscal years 2013-2018; and 

(2) development of a comprehensive management information system that includes a new 

automated financial management system and fixed asset mapping . 

. The Government agrees that a detailed financial plan for ESCOM is at the core of understanding 

and resolving the current financial challenges of the company. With MCC assistance, the 

Government will develop a detailed financial plan (the "Financial Plan") designed to restore 

ESCOM to financial and operational sustainability. The Financial Plan will project the working 

and investment capital needs ofESCOM for the 2013-2018 fiscal years, as agreed to with MCC. 

The Financial Plan will be based upon key financial inputs, such as projected accounts 

receivables and payables, future maintenance and capital investment needs, tariff increase 

projections, planned operational efficiencies, annual results of operations pursuant to audited 

financial statements, and other inputs relevant to obtain sound projections of the budget support 

that the Government will provide, if required, through the Turnaround Facility. The Financial 

Plan will be updated on a quarterly basis with current ESCOM financial information, and will be 

approved by ESCOM's Board of Directors and the Government, as shareholder. 

The Government will create and fund the ESCOM Turnaround Facility to support ESCOM's 

working capital and investment needs, as identified in the Financial Plan, during the Compact 

Term. The Government and MCC expect to identify milestones in the Malawi budget process 

and review progress leading up to the appropriation of funds for the Turnaround Facility. The 

Government will transfer to the Turnaround Facility the funding for each fiscal year to cover the 

projected shortfall for ESCOM in working and investment capital under the Financial Plan by the 

start.of each ESCOM fiscal year (July-June), unless otherwise agreed in writing between the 

Parties. The Government will apportion this funding through the Government budget, beginning 

, FY2013-2014. The ESCOM Board of Directors will control the disbursement of funds from the 

Turnaround Facility according to the terms set forth in a supplemental agreement among the 

Parties and ESCOM (the "Turnaround Facility Agreement'). The funding and expenditure, if 

needed, ofthe Turnaround Facility in accordance with the Turnaround Facility Agreement will 

ANNEX I- 5 
be a condition to Disbursement of continued MCC Funding. The Government has .converted a 

substantial portion of the debt owed to it by ESCOM into equity. Any remaining debt owed to 

the Government by ESCOM will be cleared from ESCOM's balance sheet no later than entry 

into force of the Compact. In addition, the Government will ensure that ESCOM restructures its 

third-party debt obligations in a manner that affords ESCOM a reasonable debt-service burden, 

consistent with the Financial Plan. 

(ii) Corporate Governance. 

To improve corporate governance and support the turnaround, MCC Funding may support: (1) 

recruitment services for key personnel; (2) twinning/mentoring arrangements or management 

contract support; (3) a performance management system; and (4) strategic planning by the board 

of directors of ESCOM ("ESCOM Board''). MCC funding will provide technical assistance on 

corporate performance standards, including a study on best practices and benchmarks for 

corporate governance of electric utilities with regional, continental and international benchmarks 

and recommendations for ESCOM no later than the end of the second year of the Compact Term 

(the "Corporate Governance Benchmarking Study"). 

The Government will ensure that ESCOM employs a Chief Executive Officer (CEO) prior to 

entry into force of this Compact. The individual selected for CEO will have at least ten years of 

public utility management experience, preferably at the CEO level, and a professional 

qualification in engineering, business, or finance. 

The Government recognizes that good corporate governance of ESCOM is essential for longterm performance of the company and commits to improve ESCOM's corporate governance 

framework and practices. The Government will ensure that the ESCOM Board adheres to clear 

benchmarks for good corporate governance, including: (A) compliance with the requirements 

under Malawi's Companies Act, Public Financial Management Act, Public Audit Act, and the 

Energy Laws; (B) adherence to Malawi Code II, including duties of care and loyalty to the 

corporation and restrictions on conflicts of interest and related party transactions; (C) following 

the Sector Guidelines for Parastatal Organizations (the most recent of the draft or final form); 

and (D) staggering ofESCOM Board terms. 

The Government warrants that ESCOM has restructured its existing ESCOM Board committees 

to have the following three committees: (i) Finance and Audit Committee; (ii) Technical 

Committee; and (iii) Appointments and Remuneration Committee. The Government will ensure 

that future nominations and appointments to the ESCOM Board will be done in accordance with 

a framework established pursuant to Malawi's Parastatals Reform Programme. 

The Government will ensure that ESCOM submits and publishes its annual audited financial 

statements and annual reports to the relevant authorities, and will publish reports similar to those 

applicable to listed companies under Malawi's Companies Act, all of which will be posted on . 

ESCOM'swebsite. Quarterly reports will be made available to key stakeholders, including 

MCA-Malawi and MCC. . . 

··MCC Funding will support an annual performance audit ofESCOM operations. Prior to each 

audit, MCC and the Government will agree to the terms of reference based on standards for 

companies in Malawi, including Malawi Code II and the Companies Act. The Government will 

ANNEX I- 6 
ensure that ESCOM takes appropriate corrective action to address any material weaknesses or 

recommendations identified through the audit. 

To improve ESCOM's coordination with the Government, the Government will designate and 

coordinate all interaction with ESCOM through its Department of Statutory Corporations or a 

replacement or successor Government ministry or agency ("DSC'). The Government will 

ensure that all Government interaction with and shareholder oversight of ESCOM will be 

coordinated through DSC. 

(iii) Operations. 

MCC Funding will support change management efforts, including developing an organizational 

design, conducting performance management reviews, and designing human resources strategies. 

MCC Funding will support the procurement division by strengthening the intemal control 

environment and developing policies and procedures to implement best practices in procurement. 

MCC Funding will support other operational assistance, including (1) deployment of a financial 

tumaround team; (2) development of a non-technical loss reduction study; (3) assistance in rapid 

billings and collections improvements; 4) strengthening of intemal controls; 5) rebuilding of the 

customer database; (6) pursuit of debt collection; (7) development of a new automated financial 

management system; (8) assistance with tariff applications to the regulator; and (9) assistance 

with fixed asset mapping. MCC Funding may also support training in live wire repairs, asset 

management, occupational health and safety, as well as safety and diagnostic equipment, and 

critical spare parts. 

MCC Funding will also support the development ofESCOM's annual maintenance plan. The 

Government will ensure that ESCOM budgets and expends the amount set forth in the 

· maintenance plan (based on a percentage of undepreciated asset value) for preventive 

maintenance of generation, transmission and distribution assets. 

The GOM affirms that ESCOM will adhere to the Public Procurement Act of Malawi and the 

policies and procedures of the Government's Office of the Director of Public Procurement 

("ODPP"). ESCOM will also take the following steps: (1) strengthen the Intemal Procurement 

Committee as an effective manager and overseer of procurement; (2) develop procurement 

benchmarks and milestones; (3) restructure its procurement and stores management staff to 

streamline operations; (4) minimize.redundancies and fill skill gaps; (5) conduct public outreach 

through an information campaign; (6) design and agree on a new procurement organization 

structure merging procurement and supply; (7) secure guidance from ODPP; (8) develop a 

formal process to draft annual procurement plans; and (9) review and restructure the stores 

function and conduct regular stock checks. 

(b) Regulatory Strengthening Activity. 

The Regulatory Strengthening Activity complements the Infrastructure Development Project and 

the ESCOM Tumaround Activity by providing support for the Government's policy reform 

agenda and building capacity in pivotal sector institutions, MERA and MoE. The objectives of 

the Regulatory Strengthening Activity are to develop a regulatory environment, consistent with 

best practices in independent power utility regulation, that support investmentin generation and 

grid capacity at an affordable cost, with the potential participation of the private sector. 

ANNEXI-7 
(i) TariffReform. 

The Government understands that appropriate tarifflevels are critical to ESCOM's financial 

recovery and the growth of the power sector. MCC funding will support tariff, regulatory, and 

energy policy support toward this end. MCC Funding will suppo1i a cost of service analysis to 

determine appropriate tariff levels and schedules to achieve full cost recovery, more efficient 

utilization of electricity, and achievement of social objectives. Based on the results of this 

analysis, the Government agrees to a phased implementation of full-cost recovery tariffs and 

schedules according to a time line to be determined by entry into force of the Compact. Without 

reducing current tariff levels, the phased implementation will ensure an incremental increase in 

the scope of tariff levels and schedules, that will begin with a tariff that permits recovery of 

operating costs, thereafter recovery of operating costs plus capital replacement charges, and by 

the end of the Compact Term recovery of capital replacement costs, capital replacement charges 

and capital expansion charges. This full-cost recovery tariff should include recovery of 

operating expenses, financing costs actually incurred by ESCOM, capital replacement charges 

and capital expansion charges so that tariffs reflect ESCOM's long-run marginal costs. The 

Government will also seek to ensure adequate protection of poor and vulnerable groups through 

a lifeline tariff or other mechanism in a manner which is consistent with average total cost 

recovery and efficient utilization of electricity. 

The Government will adopt the policy, legal and regulatory changes necessary to implement 

tariff reform, including: (1) rationalizing the five percent inflation fluctuation trigger and the 

four-year interval for review of base tariffs and tariff adjustment formula, so that tariffs may be 

adjusted on a basis that supports the viability of licensees; and (2) improving the components and 

definitions for the tariff adjustment components (collectively, the "Tariff Indexation 

Framework"). 

(ii) MERA Capacity Building. 

MCC Funding will support capacity building at MERA to improve its regulatory oversight 

activities and operations. This work will include the development and implementation of 

training and mentoring ofMERA staff, and complementary activities designed to develop 

MERA. MCC Funding will also assist MERA to develop peer relationships with other 

regulatory bodies or related organizations. 

MCC Funding will be used to complete a study to support the Government's commitment to 

further develop independent and capable governance ofMERA. This study will·be completed by 

the end ofthe second year of the Compact Term. The study will focus on best practices and 

benchmarks for corporate governance for electricity regulators, including regional, continental 

and international benchmarks and recommendations for the future governance of MERA (the 

"Sector Benchmarking Study"). 

The Government will ensure that MERA develops new technical codes for transmission, 

distribution and metering to account for captive, cogeneration and other forms of generation. 

MERA will also develop new "use of system" charging mechanisms, implement the design for a 

bilateral market, and develop codes to implement existing legal provisions on third-party access 

to the transmission network. MCC Funding will support these activities through technical 

assistance. 

ANNEX I- 8 
l_ 

The Government will consider changing the composition of the board of directors of MERA 

("MERA Boartf'), to make the MERA Board and its governance procedures consistent with best 

practices for independent regulatory authorities in the region and internationally. Specifically, 

the Government will review the continued membership of ex officio directors and the 

appropriateness of cross-representation on power sector boards and potential conflicts of interest 

that may arise between the regulator and regulated entities through board membership, such as 

the presence of the Principal Secretary for Energy Affairs and the Director of Energy Affairs on 

the MERA Board. To the extent that Govenm1ent ex officio members continue on the ESCOM 

and MERA Boards, the Government affirms its commitment to ensuring that the ESCOM and 

MERA Boards meet standards applicable to Malawi parastatals with respect to conflicts of 

interest and independent decision-making, that the ex officio directors on the MERA Board will 

continue to be non-voting members, and that regulatory rulings are transparent. 

The Government will ensure that the scope of MERA' s power sector responsibilities. is limited to 

regulation and policy implementation, and not for policy development or the solicitation of new 

generation. 

In recognition of another key indicator of their progress developing a model regulatory 

institution, the Government and MERA confirm that levies and other charges applicable under 

the Energy Laws are, and have been, sufficient to cover MERA' s operating expenses. The 

Government will ensure that MERA will publish an annual report including audited financial 

statements, as required under the Energy Regulation Act. MCC Funding will be used to support 

MERA in its development, including development of an annual report. 

(iii) Enabling Environment for Public and Private Sector Investment. 

MCC Funding will support the Government's efforts and capacity to implement a suitable 

market model based on the studies performed in connection with the development of this 

Compact. MCC Funding will support training and capacity building at MoE as well as its efforts 

to study and design (1) a restructured model for the power sector ("Restructuring Plan"); and 

(2) the building blocks of a bilateral power trade market. MCC Funding will also assist with 

stakeholder education and outreach to support consumer organizations, industrial and 

commercial users, and other key players in advocating for improved service. In addition, MCC 

will seek to work with Parliament to strengthen its role in oversight of the power sector. 

Based on the Restructuring Plan, the Government will create, as necessary, an appropriate 

institutional structure, either ring-fenced within ESCOM, or a separate legal entity so that the 

newly created institution's fmancial and system operation activities are autonomous from other 

ESCOM business units or government entities. Also, the Government will provide support to 

. improve the credit worthiness of this potential new institution. The Government will not 

unbundle ESCOM, except as otherwise provided herein, and shall not make effective the 

provisions in Section 4 and Parts IV and V of the Electricity Act that limit licensees to one 

license. 

The Government will also clarify the Rural Electrification Act (the "REA") so that entities that 

pursue rural electrification activities without receiving funding from the Rural Electrification 

Fund are not subject to the REA's internal rate ofreturn and megawatt size restrictions. The 

Government will also revise its National Energy Policy to allow charging of differential tariffs 

for off-grid electrification. 

ANNEX 1-9 
(c) Power Sector Reform Agenda Semi-Annual Review. 

The Government and MCC will jointly supervise, through specific milestones, progress on the 

. implementation ofthe Government's power sector reform agenda in the following areas: 

ESCOM finances; ESCOM operations; ESCOM corporate governance; tariff reform; MERA 

governance; and regulatory enabling environment for public and private sector participation 

(collectively, the "Power Sector Reform Agenda"). The Government and MCC have specified 

the milestones below, for which new capitalized terms are further defined in Annex III. Prior to 

entry into force of the Compact, the Parties will identify semi-annual benchmarks for each 

milestone. The parties will conduct a semi-annual review of progress on the Power Sector 

Reform Agenda. Corrective action, acceptable to MCC, as needed to ensure satisfactory 

progress, will be a condition of continued MCC Funding. 

(i) ESCOM Finances. 

The financial health ofESCOM will be tracked by setting and maintaining the following 

financial ratios and covenants: 

(1) Cost Recovery Ratio; 

(2) Current Ratio supported by cash flow statements; 

(3) Bad Debt Ratio; and 

(4) ESCOM Billing and Collection Efficiency. 

(ii) ESCOM Operations. 

Improvements in the operations ofESCOM will be measured by the following areas: 

(1) Quantity of Electricity Metered; 

(2) Quantity ofElectricity Billed; 

(3) Average Cost of Electricity Billed; 

(4) Reduction in Losses; 

(5) Voltage Quality; 

(6) Maintenance Expenditures; 

(7) Reduced Outages; and 

(8) Annual Procurement Audit. 

(iii) ESCOM Corporate Governance. 

ESCOM corporate governance will be measured by ESCOM's performance on: 

(1) Corporate Governance Benchmarking Study; 

ANNEXI-10 
(2) Annual performance audit reports; and 

(3) Public annual report and audited financial statements. 

(iv) TariffReform. 

Progress on tariff reform will be phased and measured by: 

( 1) Cost of service analysis; 

(2) Tariff levels and schedules; 

(3) Tarifflndexation Framework; and 

( 4) Tariff design efficiency, including, a lifeline tariff. 

(v) MERA Governance. 

Improvements in MERA's governance and capacity will be tracked by: 

(1) Sector Benchmarking Study; 

(2) Peer review; and 

(3) Public annual report and audited financial statements. 

(vi) Improved Market Structure for Private Investment. 

Key milestones in the establishment of an enabling environment will be: 

(1) New power market pursuant to the Restructuring Plan; and 

(2) Legal framework for strengthened electricity market. 

3. Environment and Natural Resource Management ("ENR.M'') Project. 

The objective of the ENRM Project is to help the Government and other relevant stakeholders 

address the growing problems of aquatic weed infestation and excessive sedimentation in the 

Shire River which cause costly disruptions to downstream power plant operations. MCC 

Funding will support the following measures: 

(a) Mitigation of the impact of the weeds and sedimentation through mechanical and 

biological measures (in accordance with international best practices), including the purchase and 

use of dredgers, trash rakes, diversion booms, conveyers, disposal trucks and weed-harvesting 

equipment at existing hydropower plants and the Liwonde Barrage as well as identification of 

environmentally-appropriate disposals sites, and expanded use of upstream biological control 

measures ("Weed and Sediment Management Activity"). 

(b) Development and implementation of an integrated set of activities, acceptable to 

MCC, aimed at improving environmental and natural resources management (ENRM) in the 

Shire River Basin. These activities should be based on analysis of the environmental, social 

ANNEXl-11 
(including gender) and economic factors that cause or contribute to Weed infestation and 

sedimentationin the Shire River, should target the drivers of land-use degradation in the Shire 

River Basin, and should be implemented in collaboration with other donors and stakeholders. 

The Parties expect that these ENRM activities will decrease outages and increase electricity 

output at the Nkula, Tedzani, and Kapichira hydropower plants that are currently affected by 

invasive weeds and excessive sedimentation. The ENRM Activity is also expected to improve 

land use and watershed management practices in the Shire River basin to help resolve underlying 

environmental and social issues that affect hydropower, communities, and other users dependent 

on ecosystem services ("ENRM Activity"). 

(c) To complement the ENRM Activity, a Social and Gender Enhancement Fund 

("SGEF') will support improved land use management and natural resource-based economic 

development activities carried out by women and vulnerable groups in the Shire River Basin. 

Because women are often primary decision makers in natural resource-based economic activities 

that in turn impact land use practices, the SGEF will support activities that directly or indirectly 

improve control and sustainable management of resources by women and vulnerable groups, 

which in turn will reduce sedimentation and natural resources degradation, increase economic 

opportunities, and contribute to the ENRM objective of decreasing outages at downstream 

hydropower plants ("Social and Gender Enhancement Activity"). 

4. Environmental and Social Safeguards. 

The Projects will be implemented in compliance with the MCC Environmental Guidelines, the 

International Finance Corporation ("IFC') Performance Standards on Environmental and Social 

Sustainability ("IFC Peiformance Standards"), and the MCC Gender Policy in a manner 

acceptable to MCC. The Government also will ensure that the Projects comply with all national 

environmental laws and regulations, licenses and permits, and applicable international 

conventions and treaties, except to the extent such compliance would be inconsistent with this 

Compact. Specifically, the Government will: (a) cooperate with or complete, as the case may 

be, any ongoing environmental assessments, or if necessary undertake and complete any 

additional environmental assessments, social assessments, environmental management plans, 

environmental and social audits, resettlement policy frameworks, and resettlement action plans 

required under the laws of Malawi, the MCC Environmental Guidelines, the IFC Performance 

Standards, this Compact, the Program Implementation Agreement, or any Supplemental 

Agreement, or as otherwise required by MCC, each in form and substance satisfactory to MCC; 

(b) ensure that Project-specific environmental and social management plans are developed and 

all relevant measures contained in such plans are integrated into project design, the applicable 

procurement documents and associated finalized contracts, in each case, in form and substance 

satisfactory to MCC; and (c) implement to MCC's satisfaction appropriate environmental and 

social mitigation measures identified in such assessments or plans. Unless MCC agrees 

otherwise in writing, the Government will fund all necessary costs of environmental and social 

mitigation measures (including, without limitation, costs of resettlement) not specifically 

provided for or that exceed the MCC Funding specifically allocated for such costs in the Detailed 

Financial Plan for the Projects. 

To maximize the positive social impacts of the Projects, address cross-cutting social and gender 

issues such as human trafficking, child and forced labor, and HIV I AIDS, and ensure compliance 

with the MCC Gender Policy and the MCC Gender Integration Guidelines, and to the extent that 

ANNEXI-12 
such does not conflict with MCC's Gender Policy, the Malawi National Gender Policy as 

ultimately adopted by the Government, the Government will: (i) develop a comprehensive social 

and gender integration plan which, at a minimum, performs a gender, institutional and policy 

review relevant to the Projects, identifies approaches for regular, meaningful and inclusive 

consultations with women and other vulnerable/underrepresented groups, consolidates the 

findings and recommendations of Project-specific social and gender analyses and conducts 

additional gender analysis as needed, and sets forth strategies for incorporating findings of the 

social and gender analyses into final Project designs and additional targeted activities as 

appropriate ("Social and Gender Integration Plan"); (ii) ensure, through monitoring and 

coordination during implementation, that final Project designs, construction tender documents 

and implementation plans are consistent with and incorporate the outcomes of the social and 

gender analyses and Social and Gender Integration Plan; and (iii) on an annual basis, review and 

update the Social and Gender Integration Plan as needed to reflect lessons learned and projectspecific analysis. 

During the development of the Compact, MCC and the Government assessed and identified the 

potential environmental and social impacts and risks ofthe Projects. The Projects are classified 

as follows in accordance with MCC's Environmental Guidelines and the IFC Performance 

Standards: (1) the Infrastructure Development Activity is classified as a Category B project 

given that the majority of the risks and impacts are site-specific, relatively minor and can be 

readily mitigated through site-specific environmental and social management plans; (2) the 

Power Sector Reform Project is classified as a Category C project given that it js unlikely to have 

adverse environmental and social impacts; and (3) the ENRM Project is classified as a Category 

D project given that the Project will, among other activities, be used to provide assistance to 

selected grant recipients 

Several measures have been taken to mitigate the risks associated with these Projects. 

Environmental and Social Impact Assessments ("ES/As") have been developed for the 

Infrastructure Development Project, and additional environmental and social (including gender) 

analysis and mitigation planning will be carried out for certain activities of the Infrastructure 

. Development Project and the ENRM Project. MCC will require the development of a Hazardous 

Waste Management Plan that will identify the appropriate storage and disposal, possibly outside 

ofMalawi, ofoil-contaminated soils, PCB-contaminated oils, soils and equipment, and other 

hazardous waste associated with implementation of the Infrastructure Development Project. 

MCC Funding will be used to design and implement a hazardous waste management plan under 

the Infrastructure Development Project. MCC will also require, and MCC Funding will support, 

measures to ensure appropriate disposal of weeds and sediment extracted from dredging and 

weed harvesting operations at the hydropower plants. The Government has identified potential 

sites for the disposal of weeds and sediment associated with implementation of the ENRM 

. Project and will require appropriate development and management of such sites . 

. To address resettlement risks, a Resettlement Policy Framework has been prepared to specify 

how resettlement planning and implementation will proceed in connection with the Compact 

Activities. This resettlement framework will attempt to minimize loss of land and immovable 

assets, and avoid physical displacement of residential and other structures. In the event a Project 

triggers involuntary resettlement, MCC Funding will support the development of a resettlement 

action plan by MCA-Malawi in consultation with relevant Government entities, and such 

resettlement action plan will be submitted for approval to MCC. 

ANNEX I- 13 
The Compact will fund additional analysis of social and gender-related implications of the 

Projects. This analysis will build upon preliminary work conducted during Compact design to 

ensure that the Projectss are implemented so as to address and integrate the needs of vulnerable 

groups, in adherence with MCC's Gender Policy. 

5. Donor Coordination. 

MCCand the MCA-Malawi Core Team have sought development partners with complementary 

expertise on energy issues and whose further involvement could help ensure sustainability of the 

Compact. During Compact development, MCC's review of feasible investments identified 

approximately $200 million more in beneficial projects than currently feasible under the 

Compact. Given MCC's·inability to finance these otherwise important investments, MCC has 

discussed with the World Bank and the African Development Bank - the other key donors 

supporting the power sector in Malawi- the possibility of partnering to support a comprehensive 

power sector reform program. This reform program could also include sector institutional 

strengthening activities such as capacity building and technical assistance for the MoE's 

Department of Energy. 

MCC has also b~en in discussions with the IFC regarding creating an appropriate enabling 

environment for private sector and IFC investment. IFC recently funded a study that identified 

barriers to private sector investment in energy efficiency and renewable energy opportunities and 

scoped potential IFC investments. IFC's report identifies a critical need for technical assistance 

for the Government to establish an enabling environment in order to facilitate these energy 

efficiency and renewable energy opportunities. As ofNovember 2010, MCC is considering 

incorporating the IFC's-recommendations in the policy, regulatory and legal framework 

strengthening activity currently supported under the Compact. 

6. USAID. 

While USAID does not currently play an active role in implementing this Compact, MCC is 

seeking USAID involvement to provide technical assistance for the power sector. MCC is 

investigating whether USAID's Africa Infrastructure Program could potentially provide 

technical assistance to the Government to assist them with structuring agreements with 

independent power producers and capacity building for MERA. In addition, MCC will 

coordinate its outreach initiatives with the Malawi parliament, media and civil society under the 

Regulatory Strengthening Activity with USAID's democracy and governance projects. The 

MCC will also coordinate its ENRM activities in the Shire River Basin with USAID's 

environmental projects, especially in the Balaka and Machinga Districts which are the principal 

areas of geographical overlap between MCC's and USAID's respective interventions. 

7. Sustainability. 

The Compact includes several measures to ensure sustainability ofMCC's investment. As 

designed, both the Power Sector Reform Project and the ENRM Project are targeted to ensure 

sustainability of the Infrastructure Development Project. In addition, the Infrastructure 

Development Project·includes certain sustainability safeguards such as requiring a certain 

percentage of asset value to be set aside for preventative maintenance. 

Substantial progress on the Power Sector Reform Project is essential to the magnitude and 

sustainability of the Compact investments in physical infrastructure, and to the sustained 

ANNEX 1-14 
economic growth of Malawi. The Power Sector Reform Projectalso addresses key structural 

issues in the power sector including tariff reform, creating an environment capable of attracting 

private sector investment, and ensuring the creation of a strong and independent energy sector 

regulator. These reform activities are structured both as covenants in the Compact and 

conditions to entry into force of the Compact, or will become conditions to disbursement in the 

Program Implementation Agreement. Due to the weed and sedimentation problems plaguing 

Malawi's almost entirely hydropower-based generation facilities, the ENRM Project will also 

provide necessary steps to ensure sustainability of the Compact. 

In addition to the sustainability benefits inherent in the project design of the Power Sector 

Reform Project and the ENRMAP, the sustainability of the Infrastructure Development Project 

will also heavily depend on a robust maintenance regime for generation, transmission and 

distribution assets. 

C. IMPLEMENTATION FRAMEWORK 

1. Overview. 

The implementation framework and the plan for ensuring adequate governance, oversight, 

management, monitoring and evaluation, and fiscal accountability for the use ofMCC Funding 

are summarized below. MCC and the Government will enter into the Program Implementation 

' Agreement,·and any other agreements in furtherance of this Compact, all of which, together with 

this Compact, set out certain rights, responsibilities, duties and other terms relating to the 

implementation of the Program. 

2. MCC. 

MCC will take all appropriate actions to carry out its responsibilities in connection with this 

Compact and the Program Implementation Agreement, including the exercise of its approval 

rights in connection with the implementation of the Program. 

3. MCA-Malawi. 

In accordance with Section 3.2(b) ofthis Compact, MCA-Malawi will act on the Government's 

behalfto implement the Program and to exercise and perform the Government's rights and 

responsibilities with respect to the oversight, management, monitoring and evaluation, and 

implementation of the Program, including, without limitation, managing the implementation of 

Projects and their Activities, allocating resources, and managing procurements. The Government 

will ensure that MCA-Malawi takes all appropriate actions to implement the Program, including 

the exercise and performance of the rights and responsibilities designated to it by the 

Government pursuant to this Compact and the Program Implementation Agreement. Without 

limiting the foregoing, the Government will also ensure that MCA-Malawi has full decision-

. making autonomy, including, inter alia, the ability, without consultation with, or the consent or 

approval of, any other party, to: (1) enter into contracts in its own name; (2) sue and be sued; (3) 

establish Permitted Accounts in a financial institution in the name ofMCA-Malawi.and hold 

MCC.Funding in such accounts; (4) expend MCC Funding; (5) engage a fiscal agent who will 

act on behalf ofMCA-Malawi on terms acceptable to MCC; (6) engage one or more 

procurement agents who will act on behalf ofMCA-Malawi, on terms acceptable to MCC, to 

manage the acquisition of the goods, works, and services required by MCA-Malawi :to 

implement this Compact; and (7) competitively engage one or more auditors to conduct audits of 

ANNEXI-15 
its accounts. The Government will take the necessary actions to establish and maintain MCAMalawi, in accordance with the terms hereof including the applicable conditions precedent to the 

Disbursement of Compact Implementation Funding set forth in Annex IV to this Compact. 

MCA-Malawi will be administered and managed by a Board of Trustees and a Management 

Unit. In addition, MCA-Malawi will have a Stakeholders' Committee to continue the 

consultative process during implementation of the Program. MCA-Malawi will be incorporated 

through a trust deed under Malawi's Trustees Incorporation Act, which trust deed will be 

included in the Program Implementation Agreement (hereinafter referred to as the "MCAMalawi Trust Deed"), which will, collectively, set forth the responsibilities of the Board of 

Trustees, the Stakeholders' Committee and the Management Unit. The MCA-Malawi Trust 

Deed will be developed and adopted in accordance with MCC's Guidelines for Accountable 

Entities and Implementation Structures, published on the MCC Website (the "Governance 

Guidelines"), and will be in form and substance satisfactory to MCC. MCA-Malawi on behalf 

of the Government will administer the MCC Funding. 

(a) Board of Trustees. 

(i) Composition. MCA-Malawi will be governed by a board of trustees (the 

"Board of Trustees"), which will consist ofvoting members representing the Government, 

private sector, and civil society groups, as well as a non-voting representative of MCC as an 

observer. The appointment of the trustees will be articulated in the MCA-Malawi Trust Deed 

and will adhere to MCC's Governance Guidelines. Subject to further discussion, members 

representing the Government will include the Secretary of the Treasury, the Principal Secretary 

for Natural Resources Energy and Environment, and the Principal Secretary for Development 

Planning and Cooperation. Non-government members will be nominated by key private sector 

and civil society groups rather than by the Government, and may include but shall not be limited 

to the Council for Non-Governmental Organizations in Malawi(CONGOMA), the Economics 

Associations ofMalawi (ECAMA), and the Malawi Confederated Chambers of Commerce and 

Industry (MCCCI). There will be a minimum of seven trustees, and a ;maximum of nine trustees. 

The composition ofthe Board of Trustees will comply with the Governance Guidelines, to 

MCC's satisfaction. 

(ii) Roles and Responsibilities. The Board of Trustees will be responsible for 

overseeing the implementation of the Program and will have final decision-making authority and 

responsibility over the implementation of the Program. The Board of Trustees will meet 

regularly; the frequency of meetings will be set forth in the .MCA-Malawi Trust Deed and will be 

in accordance with the Governance Guidelines. The specific roles of the voting members and 

non-voting observers will be set forth in the MCA-Malawi Trust Deed. The chairperson of the 

Board of Trustees will be selected by a majority vote of the Trustees. On at least an annual basis 

or as otherwise required by the Government, the Board of Trustees will report to the Government 

on the status and progress of the Compact regarding implementation, financial matters, 

procurements, and other matters identified by the Government. 

(b) Stakeholders' Committee. 

(i) Composition. A Stakeholders' Committee will be selected according to a 

process in accordance with the MCC's Governance Guidelines and the MCA-Malawi Trust 

. Deed, as approved by MCC. Withoutlimiting the foregoing, as required in MCC's Governance 

ANNEX I -16 J 
Guidelines, the Stakeholders' Committee will be composed of inter alia, representatives from 

non-governmental organizations, civil society, private sector, and local and regional government 

Program beneficiaries. 

(ii) Roles and Responsibilities. Consistent with the Governance Guidelines, 

the Stakeholders' Committee will be responsible for continuing the consultative process 

throughout implementation oftheProgram. While the Stakeholders' Committee will not have 

any decision-making authority, it will be responsible for, inter alia, reviewing, at the request of 

the Board of Trustees or the Management Unit, certain reports; agreements, and documents 

related to the implementation of the Program in order to provide advice and input to MCAMalawi regarding the implementation of the Program. 

(c) Management Unit. 

(i) Composition. The management unit, which wjll be led by a competitively 

selected ChiefExecutive Officer, will be composed of competitively selected staff with expertise 

in the key components of the Program, including, without limitation, a Deputy Chief Executive 

Officer, Legal Advisor, Human Resources Officer, Power Director, Communications and 

Outreach Director, Finance and Administration Director, ESA Director, Deputy Director for 

Social and Gender Issues, Procurement Director, Policy Specialist, M&E and Economics 

Director, and MIS Specialist (the "Management Unif'). The Management Unit will also include 

such other personnel as provided for in the MCA-Malawi Trust Deed. The directors will be 

supported by appropriate additional staff to enable the Management Unit to execute its roles and 

responsibilities. 

(ii) Roles and Responsibilities. The Management Unit will be based in 

Lilongwe, Malawi, and will be responsible for day-to-day implementation of the Compact, with 

oversight from the Board ofTrustees. The Management Unit will serve as the principal link 

between MCC and the Government, and will be accountable for the successful implementation 

of the Program, the Project, and each Activity. As a recipient ofMCC Funding, MCA-Malawi 

will be subject to MCC audit requirements. 

4. Implementation Arrangements. 

Subject to theterms and conditions of this Compact and any related agreements entered into in 

connection with this Compact, MCC and the Government have identified certain institutions, 

including ESCOM, MERA and MoE, that may receive technical assistance or other support 

under this Compact, and that, together with MCA-Malawi, will have key roles in the 

implementation of the Project and the Activities (each, a "Program Partner"). The Government 

will ensure that the roles and responsibilities of each Proje<;t Partner will be clearly articulated in 

an agreement between MCA-Malawi and the Project Partner, which agreement must be in form 

and substance satisfactory to MCC (each a "Program Cooperation Agreement') . . 

The Government will ensure that ESCOM, as a Program Partner, will do the following in support 

ofthe Program: (a) provide access to its facilities and cooperate with MCA-Malawi, and its 

consultants (including the CE as defined below); (b) dedicate key staff to the Program, including 

engineers, environmental, social and gender specialists, and monitoring and evaluation 

personnel; (c) bear any transportation costs and per diems and incidental expenses for any of its 

. personnelwho travel in connection with the Project; and (d) provide administrative and technical 

support and use of appropriate office space and facilities. 

ANNEX I-17 
MCA-Malawi will contract a consulting engineer ("CE') to design and supervise the 

implementation of the infrastructure portions of the Infrastructure Development Project and will 

assist MCA-Malawi with technical evaluations and contract negotiations. The Program 

Cooperation Agreement between MCA-Malawi and ESCOM will set forth the roles and 

responsibilities of each entity and any coordinating mechanisms to ensure that the CE is able to 

successfully carry out its mandate. The CE will also provide technical assistance to ESCOM 

with respect to project management. 

5. ·Fiscal Agent. 

Unless MCC otherwise agrees in writing, the Government, directly or through MCA-Malawi, 

will engage one or more fiscal agents (each a "Fiscal Agent"), who will be responsible for 

assisting the Government with fiscal management and ensuring appropriate fiscal accountability 

ofMCC Funding. Duties oftheFiscal Agent will be set forth in the Program Implementation 

Agreement and in such agreement as the Government, directly or indirectly through MCAMalawi, enters into with each Fiscal Agent, which agreement shall be in form and substance 

satisfactory to MCC. 

6. Procurement Agent. 

Unless MCCotherwise agrees in writing, the Government, directly or through MCA-Malawi, 

will engage ·one or more procurement agents (each as "Procurement Agent") to conduct and 

certify specified procurement activities in furtherance of the Compact. The roles and 

responsibilities of the Procurement Agent will be clearly articulated in the Program 

Implementation Agreement and in such agreement as the Government, directly or indirectly 

through MCA-Malawi, enters into with each Procurement Agent, which agreement shall be in 

form and substance satisfactory to MCC. Each Procurement Agent will adhere to the standards 

set forth in the MCC Program Procurement Guidelines and ensure that procurements are 

consistent with the procurement plan adopted by MCA-Malawi pursuant to the Program 

Implementation Agreement, unless MCC otherwise agrees in writing. 

ANNEX I- 18 
ANNEX II 

MULTI-YEAR FINANCIAL PLAN SUMMARY 

This Annex II summarizes the Multi-Year Financial Plan for the Program. 

1. General. 

A multi-year financial plan summary ("Multi-Year Financia!Plan Summary") is attached 

hereto as Exhibit A. By such time as specified in the PIA, the Government will adopt, subject to 

MCC approval, a multi-year financial plan that includes, in addition to the multi-year summary 

of estimated MCC Funding and the Government's contribution offunds and resources, the 

annual and quarterly funding requirements for the Program (including administrative costs) and 

for the Projects, projected both on a commitment and cash requirement basis. 
EXHIBIT A 

MULTI-YEAR FINANCIAL PLAN SUMMARY 

CO:\IPONEN r Cll' Year I Ye~~ Year~ Year.t Yeat·5 Total 

l. INFRASTRUCTURE DEVELOPMENT PROJECT - ~ 

(a) Nkula A Refurbishment Activity 23,187 - 6,318, 154 11,061,507 11,061,507 3,156,335 31,620,690 

(b) Transmission Network Upgrade 1,735,723 8,013,346 47,013,724 45,513,666 35,326,017 24,264,725 161,867,202 Activity 

(c) T&D Upgrade, Expansion, and 693,090 2,773,990 17,266,65 1 18,662,454 14,532,557 9,698,366 63,627,10l\ Rehabilitation Activity 

SUBTOTAL 2,452,000 10,787,336 70,598,529 75,23,7,627 60,920,081 37,ll9,426 257, ll5,000 

2. POWER SI:CTOR REFOR!\1 PROJECT 

(a) ESCOM Turnaround Activity 2,552,000 3,33 7,026 3,365,244 3,365,244 3,365,244 3,365,244 19,350,000 

(b) Regulatory Strengthening 800,000 I, 132,574 1,104,356 1,104,356 1,1 04,356 I , 104,356 6,350,000 Activity 

SUBTOTAL 3,352,000 4,469,600 4,469,600 4,469,600 4,469,600 4,469,600 25,700,000 

3. ENVIRON\1ENT AND NATURAL RESOURCE MANAGEMENT PROJECT 

(a) Weed and Sediment 33,000 109,828 3,416,026 5,559,270 4,442,9 14 2,323,962 15,885,000 Management Activity 

(b) Environment and Natural 708,000 2,115,022 2,544,244 1,544,244 1,544,244 1,544,244 10,000,000 Resources Management Activity 

(c) Social and Gender Enhancement 203,000 359,400 359,400 359,400 359,400 359,400 2,000,000 Activity 

SUBTOTAL 944,000 2,584,250 6,319,670 7,462,914 6,346,558 4,227,606 27,885,000 

4.!\lONITORING AND EVALUATION 

(a) Monitoring and Evaluation 387,000 2,109,129 779,401 1,496,871 352,907 1,874,691 7,000,000 

SlJBTOTAL 387,000 2,109,129 779,401 1,496,871 352,907 1,874,691 7,000,000 

5. PROGRAM ADMINISTRATION 

(a) MCA-Malawi Administration 1,885,000 3,658,600 3,653,600 3,950,600 3,991,600 4,127,600 21,267,000 

(b) Financial Management and - 2,060,000 2, 122,000 2,185,000 2,25 1,000 2,319,000 10,937,000 Procurement Controls 

(c) Financial Audits 100,000 130,000 135,000 139,000 144,000 148,000 796,000 

SUBTOTAL 1,985,000 5,848,600 5,910,600 6,274,600 6,386,600 6,594,600 33,000,000 

TOTAL COMPACT BUDGET ' 9,120,000 25,798,915 88,077,800 94,941,612 78,475,746 54,285,923 350,700,000 

A NNEX II - 2 
ANNEX III 

DESCRIPTION OF MONITORING AND EVALUATION PLAN 

·This Annex III (this "M&E Annex?') generally describes the components of the Monitoring and 

Evaluation Plan ("M&E Platt") for the Program. The actual content and form of the M&E Plan 

will be agreed to by MCC and the Government in accordance with MCC's Policy for Monitoring 

and Evaluation of Compacts and Threshold Programs as posted from time to time on the MCC 

Website (the "MCC Policy for Monitoring and Evaluation of Compacts and Threshold 

Programs"). The M&E Plan may be modified as outlined in MCC's Policy for Monitoring and 

Evaluation of Compacts and Threshold Programs with MCC approval without requiring an 

amendment to this Annex III. · 

1. Overview. 

MCC and the Government will formulate and agree to, and the Government will implement or 

cause to be implemented, an M&E Plan that specifies: (a) how progress toward the Compact 

Goal, Program Objective and Project Objective will be monitored ("Monitoring Component"); 

(b) a process and tiineline for the monitoring of planned, ongoing, or completed Activities to 

determine their efficiency and effectiveness; and (c) a methodology for assessment and rigorous 

evaluation of the outcomes and imr>act of the Program ("Evaluation Component'). Information 

regarding the Program's performance, including the M&E Plan, and any amendments or 

modifications thereto, as well as progress and other reports, will be made publicly available on 

the website ofMCC, MCA-Malawi and elsewhere. 

2. Program Logic. 

The M&E Plan will be built on a logic model which illustrates how the Program, Projects and 

Activities contribute to the Compact Goal, the Program Objective and the Project Objectives. 

The Compact Goal is to reduce poverty through economic growth. The Program is designed to 

reduce poverty in Malawi by addressing the constraints of the power sector to economic growth. 

The Program Objective is to: (a) reduce the cost of doing business; (b) expand access to 

electricity for the Malawian people .and businesses; and (c) increase value-added production in 

Malawi. 

The outcomes ofthe Projects, otherwise referred to in the Compact as the Project Objectives, are 

to improve the availability, reliability, and quality of the power supply by increasing the 

throughput capacity and stability of the national electricity grid, increase efficiency of 

hydropower generation, create an enabling environment for future expansion of the power sector 

by strengthening se.ctor institutions and enhancing regulation and governance of the sector, and 

mitigate the growing problems of aquatic weed infestation and excessive sedimentation in the 

Shire River Basin to reduce the costly disruptions to Malawi's hydropower generation. These 

results are expected to contribute to Malawi's own poverty-reduction and economic growth goals 

as defined in the Malawi Growth and Development Strategy ("MGDS''). 
3. Monitoring Component. 

To monitor progress toward the achievement of the impact and outcomes of the Compact, the 

Monitoring Component of the M&E Plan will identify: (1) the Indicators (as defined below), (2) 

the definitions of the Indicators, (3) the sources and methods for data collection, (4) the 

frequency for data collection,{~) the party or parties responsible for collecting and analyzing 

relevant data, and (6) the timeline for reporting on each Indicator to MCC. 

Further, the Monitoring Component will track changes in the selected Indicators for measuring 

. progress towards the achievement of the Program Objective and Project Objectives, Outcomes, 

and Outputs during the Compact Temi. MCC also intends to continue monitoring and evaluating 

the long-term impacts of the Compact even after Compact expiration. The M&E Plan will 

establish baselines which measure the situation prior to a development intervention, against 

which progress can be assessed or comparisons made (each a, "Baseline"). The Government 

will collect Baselines on'the selected Indicators or verify already collected Baselines where 

applicable and as set forth in the M&E Plan. An indicator's Baseline sl,lould be established prior 

to the start of the corresponding Activity. 

(a) Indicators. 

The M&E Plan will measure the results of the Program using quantitative, objective and 'reliable 

data ("Indicators"). Each Indicator will have benchmarks that specify the expected value and 

the expected time by which that result will be achieved ("Targef'). All Indicators will be 

disaggregated •by gender, income level and age, and beneficiary types to the extent practicable. 

Subject to prior written approval from MCC, the Government or MCA-Malawi may add 

Indicators or refine the definitions and Targets of existing Indicators. 

(i) Compact Indicators. 

(1) Goal. The M&E Plan will contain the following Indicators related 

to the Compact Goal. Although the Program contributes to these goals as specified in the 

MGDS, satisfaction of these goals is not intended to be solely attributable to the Program: 

(2) 

in the following tables. 

(A) Annual real GDP growth rate; 

(B) Annual real per capita income; and 

(C) Absolute poverty rate' nationwide. 

Other Indicators. The M&E Plan will contain the Indicators listed 

MCA-Malawi will update Baselines for key Indicators after new data becomes available, 

including the Malawi Integrated Household Survey III, after a new billing system is installed at 

1 Poverty rates cited above are based on MCA-Malawi Core Team projections using poverty line ofUS$1.00 a day. 

Annex I defines poverty line as US$1.25 a day. 

ANNEXIII-2 
ESCOM, and after a Cost of Service analysis and Integrated Resource Plan are completed. 

Indicators on outages and load shedding will be refined prior to completion of the M&E Plan 

during the first year of the Compact. Financial Targets and performance will be reviewed and 

updated regularly, as defined in Annex I of the Compact. 

Table 1: Compact-Wide Results. 

The following are Indicators and Targets for the monitoring of the Program Objective as further 

described in paragraph 2 of Part A of Annex I. The Projects are expected to contribute to the 

achievement of these Indicators and Targets, but are notsolely responsible for the results. 

Objective-Level Outcome·lndicators 

Business sales losses 

due to power Average losses (including 

interruptions and production and time costs) due to % 12.1 (2009) Reduction over 

quality, disaggregated electricity outages as percentage baseline 

by firm size2 and of total sales value3 

Reduced cost Average annual kWh of diesel of Doing Back-up diesel generation consumed by Reduction over Business in generation for firms 4 registered firms with a diesel · % 6.55 (2009) baseline Malawi 

Total value of underpricing, 

Hidden costs of technical and non-technical 

losses, and bills not collected as % 264 (2009)5 TBD electricity percentage of revenue of the 

Number of residential customers 67,316 Customer (2010) Not Targeted6 

Number of residential 

customers connected Customer 59,375 Not Targeted 

to the grid, (2010) 

disaggregated by 

Improved region Number of residential customers 22,612 Not Targeted 

Electricity in Malawi connected to the Customer (2010) 

Access and ESCOM grid- Northern region 

Availability Number of commercial customers 

Number of in Malawi connected to the Customer 11,751 Not Targeted 

commercial customers ESCOM grid- Southern region (2010) 

connected to the grid, 

disaggregated by Number of commercial customers Not Targeted region in Malawi connected to the Customer 9,189 (2010) 

ESCOM grid- Central region 

2 Indicator is sourced from World Bank Enterprise Survey, 2009. Baseline data reflects manufacturing sector data 

only. MCA-Malawi will explore developing a tool to capture information for smaller, iriformal firms. 3 To be refined in survey questionnaire. Indicator is used only for monitoring purposes. 4 Indicator sourced from World Bank Enterprise Survey, 'f009. Indicator is used only for monitoring purposes. 5 Indicator is sourced from World Bank Africa Infrastructure Country Diagnostic report, 2010 6 Indicator will be used for monitoring purposes. 2013 ERR projections of3,139 additional customers by end of 

Compact. · 

ANNEX III- 3 
Customer 4,158 (2010) Not Targeted 

Number of industrial customers in 

Malawi connected to the ESCOM Customer 4,204 (2010) Not Targeted 

grid- Southern region [Power LV I 

Number of industrial +Power 

customers connected Number of industrial customers in 

to the grid, Malawi. connected to the ESCOM Customer 2,510 (2010) Not Targeted 

disaggregated by grid - Central region [Power LV 

region +Power 

Number of industrial customers in 

Malawi connected to the ESCOM Customer 812 (2010) Not Targeted 

grid- Northern region [Power LV 

+Power 

Electric Power (Total kWh billed in all regions) I kWh per Consumption per Total population ca~ita 103 (2010) 128 

Investment in energy 0 (2013) TBD sector, disaggregated outside 

by private and public 

sectors, and generation MW of investment MW 0 (2013) TBD 

and other assets 7 

Expansion of 

Sector to Better Total Electricity Total System Generation GWh 1925 (2014) 2725 

Meet Demand Generated produced in a year 

for Power 

Annual electricity billed (MWh) MWh 619,000 890,000 to residential customers 

Total Electricity Annual electricity billed (MWh) MWh 274,000 

Consumed 394,000 to commercial customers (2014) 

Annual electricity billed (MWh) MWh 628,000 903,000 to industrial customers (2014) 

Table 2: Infrastructure Development Project. 

The following are Indicators and Targets for the monitoring of the Infrastructure Development 

Project as further described in paragraph 1 of Part B of Annex I. 

Reduction in 

Losses 

Total System Losses 

(Technical and. NonTechnical) 

Outcome Level Indicators 

% 21.0 (2010) 18.5 

7 Data and targets will be sourced from Malawi's Electricity Investment Plan and/or Integrated Resource Plan. 

ANNEXIII-4 
Transmission New 132-kV lines km 0 (2013) 133 

Lines 66-kV lines built by Upgraded, New 66-kV lines built km 0 (2013) 103 

Rehabilitated 

New 400-l<V lines 400-kV lines built by and Extended km 0 (2013) 173 built 

8 Substations will be identified in the full M&E plan. 

ANNEX III- 5 
Transmission Sum of transmission transformer 670 additional 

substation capacity capacity added by Compact MVA 0 (2013l throughMCC 

Activity 

Increased SCAD A Availability- Percentage of master station 

Network Transmission availability '% TBD 95-100 

Control and 

Improved SCAD A Coverage Percent of Transmission 

Data Transmission Substations with SCAD A % 47 (2013) 85 

Acquisition 

KmsofNew km of new 33-kV lines upgraded Distribution Distribution lines km 0 (2013) 37 

Network or built or built by Activity 

Upgraded, KmsofNew 11-kV cables built by km 0 (2013) 29 Extended and Distribution Cables 

I or Distribution substation Sum of distribution transformer 74 additiOnal 

Operational capacity capacity added by Compact MVA 0 (2013)10 through 

Table 3: Power Sector Reform Project. 

The following are Indicators and Targets for the monitoring of the Power Sector Reform Project 

as further described in paragraph 2 of Part B of Annex I. Key Targets and Baselines for these 

Indicators will be defined prior to completion of the M&E Plan. Targets on financial Indicators 

will be reviewed semi-annually as defined in paragraph 2(c) ofPart B of Annex I, and updated 

on a yearly basis. 

Table 3: P1mcr Sccto1· Rd'onu Proj(•ct 

~~~-:&§~~~ Outcome Level Indicators 

Improved 

Financial Cost Recovery Ratio Total Actual revenue I Projected % TBD Greater than 

Sustainability operating expenses12 100% 

I Solvency of 

9 Total MVA available at baseline is 991.50. 10 Total distribution substation capacity at baseline is 868 MV A. 12 Total revenue based on energy, demand and fixed charges revenue. Operating expenses include cost of generation, 

transmission and distribution operations, corporate expenses, and financing costs to be incurred. 

ANNEXIIl-6 
Improved 

Internal and 

External 

Governance 

ofESCOM 

and the 

Power Sector 

Improved 

Financial 

· Management 

Debt Equity Ratio 

Acid or Quick Test 

Current Ratio 

Quality ofESCOM 

Corporate Governance 

Regulatory 

Independence and 

Effectiveness16 

ESCOM Billing and 

Collection Efficienci7 

Total Actual Revenue I Projected 

operating expenses plus capital 

replacement costs13 

Total Actual Revenue I Projected 

operating expenses plus capital 

replacement plus capital 

costs14 

Total Debt I Total Equity 

Current Assets I Current 

Liabilities, excluding receivables 

and stocks 

Current Assets I Current 

Liabilities 

Progress against milestones set as 

a result of independent expert 

assessment based on international 

and regional best practices and 

Malawi law as articulated in 

Corporate Governance 

Benchmarking Study. 

Progress against milestones set as 

a result of independent expert 

assessment and I or benchmarking 

study on issues such as quality of 

regulatory decisions based upon 

sound analysis, conformity with 

Laws of Malawi, independence, 

and transparency based on 

international I regional best 

practices and governing principles 

in conformance with Annex I 

Greater than % TBD 100% 

% TBD 100% 

Ratio TBD TBDis 

Ratio TBD TBD 

Ratio TBD TBD 

TBD TBD TBD 

TBD TBD TBD 

% TBD 85-90 

11 Financial targets will be set after fmancial modeling is completed, and will be updated annually. Data will be 

sourced from audited fmancial statements. Baseline for Cost Recovery Ratio is sourced from World Bank 

Benchmarking Study. Indicators are useful for monitoring trends and performance as a function of overall fmancial 

and investment conditions. 13 Capital replacement costs include depreciation. 14 Capital expansion costs include cost oflong-term system expansion projects. 15 Targets to reflect results offmancial analysis and/or MERA regulations. 16 Indicator to be refmed by end of Compact Year 1 after benchmarking and I or other assessment tool has been 

defmed. 

17 Baselines will be set after a new billing system is installed. 

ANNEXIII-7 
Electricity Metered TBD TBD TBD 

Average Collection Days. 180 50 Period in days 

Bad Debt Days TBD TBD 

Average Creditor Days Days 150 60 

Financial Plans agreed upon financial ratios and Update to Update to plans updated covenants as defined in Annex I Plans 

Publication of Audited Publication 0 Annual 

Financial Statements of.statements publication 

US$ TBD 0 

Working Capital Gap Yearly Government l00%if 

Financed18 contribution as fraction of amount Percentage 100% positive 

indicated by MCC-approved amount 

Financial Plan 

Improved Customer satisfaction Percent improvement in key and perceptions of Quality of ESCOM service, indicators of customers' % TBD TBD Customer disaggregated by satisfaction, disaggregated by 

Service gender 

Average Cost of [Total expenses for Gx, Tx and 

US$19/k:Wh Improved Electricity Billed Dx (MK) I total electricity $.0669 $.1044 

ESCOM generated(kWh)*US$] 

Operational Actual maintenance expenditures I 

Management Planned maintenance budget as % TBD 100 

and Maintenance defined in 

Efficiency Expenditures Adherence to ESCOM Yearly update maintenance plans as defined in Plans NA to plans 

18 Financial targets will be set after financial modeling is completed, and will be updated annually. Data will be 

sourced from audited financial statements and other sources of financial information. 19 US$ refers to 2013 USD. 20 Maintenance plan is based on a percentage ofun-depreciated asset value for preventive maintenance of 

generation, transmission and distribution assets. 

ANNEX Ill- 8 
Days TBD TBD 

USCentslk:W TBD TBD21 

Schedules h 

Refinement oflegal basis for tariff Framework 

Strengthened Tariff Indexation indexation framework adopted Framework 0 approved and 

Regulatory Framework and implemented, as defined in implemented 

Environment Audited financial 

statements and annual Audited financial statements and Annual Yearly 

report published by · annual report published Report 0 publication of 

MERA report 

Percentage of ESCOM 

MERA Resolutions performance reports reviewed on % TBD 

time 

Plan Restructuring 

developed Plan adopted, 

Improved Restructured power market and and new 

Market planning and preparation preparation institutions, 

Structure for Power Market for if required 

Private Structure implementati under Plan, 

Investment on created 

Revised Energy Laws in Amended laws conformity with Compact Laws passed passed and enacted 

Table 4: Environment and Natural Resource Management (ENRM) Project. 

The following table describes the key Indicators and Targets for monitoring the ENRM Project 

and its relevant components, as further described in paragraph 3 of Part B of Annex I. In 

addition, Indicators for monitoring the Social and Gender Enhancement Activity will be 

developed and refined prior to completion of the M&E Plan during the first year of the Compact. 

~ Baseline and targets to be sourced from final Detailed Financial Model. 

ANNEX III- 9 
Improved 

availability of 

hydroelectric 

power plants 

(HEP) in 

generation 

Reduced 

weed 

infestation 

and siltation 

Long-term 

sustainable 

arrangement 

established to 

Energy not served due 

to weeds and 

sedimentation 

Percent availability, 

disaggregated by HEP 

Percent utilization or 

operating ratio ofHEP, 

disaggregated by HEP 

Distribution of 

invasive aquatic 

species 

Operational payment 

for ecosystem services 

mechanism established 

Total number of hours that Nkula 

· Ais able to produce electricity/ 

Total number of hours in a month 

Total number of hours that a plant 

· is able to produce electricity/Total 

number of hours in a month 

Actual energy generated by HEP 

MWh I Theoretical maximum 

energy of installed capacity 

MWh 

Area of weeds in upper 

Shire River basin as observed in 

Output Level Indicators 

Legal mechanism enabling 

ecosystem finance developed and 

implemented as per the findings 

of the ENRMAP 

ANNEX III - 10 

MWh 

% 

% 

% 

Km2 

Legal 

mechanism 

implemented 

TBD 

TBD 

TBD 

Nkula Falls 'A' 

(3x8)24 MW 

0.87 

Nkula Falls 'B' 

(5x20) 100 MW 

0.73 

Tedzani Falls I 

(2xi0)20MW 

0.95 

Tedzani Falls 

(2x26 .3 5} 52 

MW0.73 

Kapichira FallS 

Phase I (2x32) 

64MW0.73 

Kapichira falls 

Phase II (2x32) 

64MW 

TBD 

57,218 less 

than Baseline 

TBD 

TBD 

Nkula Falls 'A' 

(3x8) 24 MW 0.95 

Nkula Falls 'B' 

{5x20) 100 MW 0.9 

Tedzani Falls I (2xl0) 

20MW0.95 

TBD 

Legal 

mechanism 

· implemented 
inoculations, Number ofbiocontrol inoculations 

disaggregated by key conducted, disaggregated by key Number TBD TBD 

location location 

Efficiency of Feeding scars on sampled water 

biological control on hyacinth based on standardized TBD TBD TBD 

water hyacinth methodology22 

Output Level Indicators 

ESCOM expenses on Total USD expended by ESCOM 

Improved aquatic weed per year on aquatic weed control, USD TBD TBD 

Control of management23 including staff, equipment and 

Aquatic Amount of weed Weeds Million harvested at Liwonde 13.4 20.0424 

MTimonth month 

ESCOM expenses on Total USD expended by ESCOM 

sediment per year on silt removal, including USD, TBD TBD 

managemene5 staff, equipment and fuel 

Head pond volume for Nkula I 

Improved Original head pond volume for % 30 75 

Control of Nkula 

Silt Percentage of head Head pond volume for Tedzani I 

pond available Original head pond volume for % 50 75 

Tedzani 

Head pond volume for Kapichira I 

Original head pond volume for % 50 75 

(b) Data Collection and Reporting. The M&E Plan will establish guidelines for data 

collection and reporting, and identify the responsible parties. A performance monitoring task 

force will be created at ESCOM, with participation by MERA and MCA-Malawi. Compliance 

with data collection and reporting timelines will be conditions for Disbursements for the relevant 

Activities as set forth in the Program Implementation Agreement. The M&E Plan w:ill specify 

the data collection methodologies, procedures, and analysis required for reporting on results at 

all levels. The M&E Plan will describe any interim MCC approvals fo:r data collection, analysis, 

and reporting plans. · 

(c) Data Quality Reviews. As determined in the M&E Plan or as otherwise requested 

by MCC, the quality of the data gathered through the M&E Plan will be reviewed to ensure that 

data reported are as valid, reliable, and timely as resources will allow. The objective of any data 

22 Indicator will be refined with the Department of Fisheries based on their previous experience implementing a 

similar program with DflD. 23 Indicator is useful for monitoring trends and performance as a function of overall ecosystem conditions. 24 Total harvested material will depend on the performance of harvesting measures and biological controls. 25 Indicator is useful for monitoring trends and performance as a function of overall ecosystem conditions. 

ANNEX III - 11 
quality review will be to verify the quality and the consistency of performance data across 

different implementation units and reporting institutions. Such data quality reviews also will 

serve to identify where those levels of quality are not possible, given the realities of data 

collection. 

(d) Semi-annual Reviews. Semi-annual reviewsofthe Power Sector Reform Project 

will be conducted as outlined in paragraph 2( c) of Part B of Annex I. 

(e) Management Information System. The M&E Plan will describe the information 

system that will be used to collect data, store, process and deliver information to relevant 

stakeholders in such a way that the Program information collected and verified pursuant to the 

M&E Plan is at all times accessible and useful to those who wish to use it. The system 

development will take into consideration the requirement and data needs of the components of 

the Program, and will be aligned with existing MCC systems, other service providers, and 

ministries. 

(f) Role ofMCA-Malawi. The monitoring and evaluation ofthis Compact spans one 

discrete Project and two Activities, and will involve a variety of governmental, 

nongovernmental, and private sector institutions. In accordance with the designation 

contemplated by Section 3.2(b) ofthis Compact, MCA-Malawi is responsible for 

implementation of the M&E Plan. MCA-Malawi will oversee all Compact-related monitoring 

and evaluation activities conducted for each of the Activities, ensuring that data from all 

implementing entities are consistent, accurately reported and aggregated into regular 

performance reports as described in the M&E Plan. 

4. Evaluation Component. 

The Evaluation Component of the M&E Plan will contain three types of evaluations: (1) impact 

evaluations; (2) project performance evaluations; and (3) special studies. MCC also intends to 

continue monitoring and evaluating the long-term impacts of the Compact even after Compact 

expiration. The Evaluation Component of the M&E Plan will describe the purpose of the 

evaluation, methodology, timeline, required MCC approvals, and the process for collection and 

analysis of data for each evaluation. The results of all evaluations will be made publicly 

available in accordance with MCC's Policy for Monitoring and Evaluation of Compacts and 

Threshold Programs. 

(a) Impact Evaluation. The M&E Plan will include a description of the methods to 

be used for impact evaluations and plans for integrating the evaluation method into Project 

. design. Based on in-country consultation with stakeholders, the strategies outlined below were 

jointly determined as having the strongest potential for rigorous impact evaluation. The M&E 

Plan will further outline in detail these methodologies. Final impact evaluation strategies are to 

be included in the M&E Plan. The following is a summary of the potential impact evaluation 

methodologies. 

(i) Infrastructure Development Project. The evaluation will attempt to assess 

the effectiveness of individual transmission lines and distribution investments in reducing 

outages and improving power quality using a combination of approaches, to include potentially 

ANNEX III - 12 
an intern.lpted time series approach, exogenous spatial variation due to the project, combined if 

sufficiently informative with phased implementation of distribution projects. The incremental 

~mpacts ~f improved reliability, quality and access to power will be explored by comparing key 

mtermedmte outcomes, including changes in business investments and productivity, between 

businesses with access to infrastructure improvements, those without access to improvements, 

and for those in areas or zones that experience greater or lesser improvements in electricity due 

to differential levels of infrastructure upgrading. Gender disaggregated information will be 

pursued to the extent possible. 

(ii) Power Sector Reform Project. The most rigorous evaluation possible will 

be conducted, possibly employing an interrupted time series approach. The evaluation will 

estimate the causal relationship between changes in sector governance with: (1) changes in 

ESCOM financial and operational performance; and (2) increases in private investment, 

generation capacity and electricity coverage for different groups such as female-headed 

households and regions of the country. The evaluation will also assess: (A) the extent to which 

improvements in MERA independence and regulatory capacity result in improved quality of 

service and supply by ESCOM; and (B) the extent to which this Project improves the efficiency 

(employees per customer, response time to outages, etc.) and reduces losses at ESCOM. · 

Differentiated impacts on customer service and access to men, women, and vulnerable groups 

will be explored . 

. (iii)· Environment and Natural Resource Management (ENRM) Project. The 

evaluation will attempt to isolate the causal factors linking weed and siltation in the Shire river 

basin to outages downstream at generation sites, particularly the extent to which palliative weed 

and silt management measures reduce the frequency and duration of outages and improve plant 

availability at hydropower plants downstream of Liwonde barrage. Potentially using a 

difference~in-differences and/or matching design, the evaluation will also attempt to look at how 

increases in tariff and/or electrification affect consumer energy choices, such as the use of 

charcoaland fuel wood, and the impact of the latter has on the environment. To the extent 

appropriate, differentiated impacts on different income groups, males vs. females, formal and 

informal firms, and factors such as access or non-access to capital will be explored. 

In order to implement the most rigorous evaluations possible, the Government and ESCOM will 

cooperate in assembling the required time series and other data requirea to implement the chosen 

methodology. · 

(b) Project Performance Evaluation. The M&E Plan will make provision for 

evaluations of all relevant Projects. The M&E Plan will also make provision for mid-term and 

final Project level .evaluations ("Mid-term Evaluation" and "Final Evaluations"). With the 

prior written approval ofMCC, the Government or MCA-Malawi will engage independent 

evaluators to conduct the Mid-term and Final Evaluations at the end of the Project. The 

E~aluations will review progress during Compact implementation and provide a qualitative 

context for interpreting monitoring data and impact evaluation findings. They must at a 

minimum: (i) evaluate the efficiency and effectiveness of the Projects; (ii) determin..e if and 

analyze the reasons why the Compact Goal, Program Objective and Project Objectives, 

outcome(s) and output(s) were or were not achieved; (iii) identify positive and negative 

ANNEX III - 13 
'lllli?tended results of the Program; (iv) provide lessons learned that may be applied to similar 

proJects; and (v) assess the likelihood that results will be sustained over time. 

(c) Special Studies. The M&E Plan will include a description of the methods to be 

used for special studies, as necessary, funded through this Compact or by MCC. Plans for 

conductingthe special studies will be determined jointly between the Government or MeAMalawi and MCC before the approval of the M&E Plan. MCC, the Government and MCA-

·Malawi have agreed to conduct the following study as part ofthe Power Sector Reform Project: 

(i). By end of Year }.of the Compact, the Government and MCC will agree on 

a method by which to independently evaluate and assess Malawi's regulatory environment and 

·the governance ofESCOM and the power sector in Malawi as a whole. MCA-Malawi and the 

. Government will then conduct both the Corporate Governance Benchmarking Study and the 

Sector Benchmarking Study by Year 2 of the Compact. 

The M&E Plan will identify and make provision for any other special studies, ad hoc 

evaluations, and research that may be needed as part of the monitoring and evaluating of this 

Compact. Either MCC, MCA-Malawi or the Government may request special studies or ad hoc 

evaluations of Projects, or the Program as a whole prior to the expiration ofthe Compact Term. 

When the Government engages an evaluator, the engagement will be subject to the prior written 

approval ofMCC. Contract terms must ensure non-biased results and the publication of results. 

(d) Request for Ad Hoc Evaluation or Special Study. IfMCA-Malawi or the 

Government require an ad hoc independent evaluation or special.study at the request of the 

Government for any reason, including for the purpose of contesting an MCC determination with 

respect to a Project or Activity or to seek funding from other don.ors, no MCC Funding resources 

may be applied to such evaluation or special study without MCC's prior written approval. 

5. Other Components of the M&E Plan. 

In addition to the monitoring and evaluation components, the M&E Plan will include the 

following components for the Program, Project and Activities, including, where appropriate, 

. roles and responsibilities of the relevant parties and providers: 

(a) Costs. A detailed cost estimate for all components of the M&E Plan; and 

(b) Assumptions and Risks. Any assumption or risk external to the Program that 

underlies the accomplishment of the Program Objective, Project Objectives and Activity 

outcomes and outputs. · 

6.. Approval and Implementation of the M&E Plan. 

The approvaL and implementation of the M&E Plan, as amended from tim~ to time; Will be in 

accordance with the Program Implementation Agreement, any other relevant Supplemental 

Agreement and the MCC Policy for Monitoring and Evaluation of Corripads and Threshold 

Programs. 

ANNEX III - 14 
ANNEXV 

DEFINITIONS 

Activity has the meaning provided in Part B of Annex 1 

Additional Representative has the meaning provided in Section 4.2. 

Audit Guidelines has the meaning provided in Section 3.8(a). 

Baseline has the meaning provided in paragraph 3 of Annex Ill 

Board of Trustees has the meaning provided in paragraph 3(a)(i) of Part C of Annex 1 

CE has the meaning provided in paragraph 4 of Part C of Annex 1 

CIF Disbursement has the meaning provided in Annex IV. 

Compact has the meaning provided in the Preamble. 

Compact Goal has the meaning provided in Section 1.1. 

Compact Implementation Funding has the meaning provided in Section 2.2(a). 

Compact Records has the meaning provided in Section 3. 7(a). 

Compact Term has the meaning provided in Section 7.4. 

Corporate Governance Benchmarking Study has the meaning provided in paragraph 2(a)(ii) of Part B 

ofAnnexl 

Covered Provider has the meaning provided in Section 3. 7 (c). 

Disbursement has the meaning provided in Section 2. 4. 

DSC has the meaning provided in paragraph 2(a)(ii) of Part B of Annex 1 

ESCOM has the meaning provided in Section 7.2(d). 

ESCOM Board has the meaning provided in paragraph 2(a)(ii) of Part B of Annex 1 

ENRM has the meaning provided in paragraph 3 of Part B of Annex 1 

ENRM Activity has the meaning provided in paragraph 3(b) of Part B of Annex 1 

ESIAs has the meaning provided in paragraph 4 of Part B of Annex 1 

Evaluation Component has the meaning provided in paragraph 1 of Annex Ill 

Excess CIF Amount has the meaning provided in Section 2.2(c). 

Final Evaluations has the meaning provided in paragraph 4(b) of Annex 111 
Financial Plan has the meaning provided in paragraph 2 ( a)(i) of Part B of Annex l 

Fiscal Agent has the meaning provided in paragraph 5 of Part C of Annex l 

Governance Guidelines means MCC 's Guidelines for Accountable Entities and Implementation 

Structures, as such may be posted on MCC 's Website from time to time. 

Government has the meaning provided in the Preamble. 

IFC has the meaning provided in paragraph 4 of Part B of Annex I. 

IFC Performance Standards has the meaning provided in paragraph 4 of Part B of Annex l 

Implementation Letter has the meaning provided in Section 3.5. 

Indicators has the meaning provided in paragraph 3(a) of Annex Ill 

Inspector General has the meaning provided in Section 3. 7(d). 

Intellectual Property means all registered and unregistered trademarks, service marks, logos, names, 

trade names and allot her trademark rights; all registered and unregistered copyrights; all patents, 

· inventions, shop rights, know how, trade secrets, designs, drawings, art work, plans, prints, manuals, 

computer files, computer software, hard copy files, catalogues, specifications, and other proprietary 

technolqgy and similar information; and all registrations for, and applications for registration of, any of 

the foregoing, that are financed, in whole or in part, using MCC Funding. 

IRP has the meaning provided in paragraph 1 (a) of Part B of Annex l 

Kapichira II has the meaning provided in paragraph 1 (e) of Part B of Annex l 

kWh has the meaning provided in paragraph 2 of Part A of Annex l 

M&E Annex has the meaning provided in Annex Ill 

M&E Plan has the meaning provided in Annex Ill 

Malawi has the meaning provided in the Preamble. 

Management Unit has the meaning provided in paragraph 3 (c)(i) of Part C of Annex l 

MCA Act has the meaning provided in Section 2.2(a). 

MCA-Malawi Core Team has the meaning provided in paragraph 1 (b) of Part A of Annex l 

MCA-Malawi Trust Deed has the meaning provided in paragraph 3 of Part C of Annex l 

MCC has the meaning provided in the Preamble. 

MCC Environmental Guidelines has the meaning provided in Section 2. 7 (c). 

MCC Funding has the meaning provided in Section 2.3. 

ANNEXV -2 
MCC Gender Policy means the MCC "Gender Policy" (including any guidance documents issued in 

connection with the guidelines) posted .from time to time on the MCC Website or otherwise made 

available to the Government. 

MCC Policy for Monitoring and Evaluation of Compacts and Threshold Programs has the meaning 

provided in Annex Ill , . , 

MCCProgram Procurement Guidelines has the meaning provided in Section3.6. 

MCC Website has the meaning provided in Section 2. 7. 

MERA has the meaning provided in paragraph 2 of Part B of Annex l 

• MERA Board has the meaning provided in paragraph 2(b)(ii) of Part B of Annex l 

MGDS has the meaning provided in paragraph 2 of Annex Ill 

Mid-term Evaluation has the meaning provided in paragraph 4(b) of Annex Ill 

MoE has the meaning provided in paragraph 2 of Part B of Annex l 

Monitoring Component has the meaning provided in paragraph 1 of Annex Ill, 

Multi-Year Financial Plan Summary has the meaning provided in paragraph I of Annex 11.. 

ODPP has the meaning provided in paragraph 2(a)(iii) of Part B of Annex l 

Party and Parties have the meaning provided in the Preamble. 

Permitted Account has the meaning provided in Section 2. 4. 

Power .Sector Reform Agenda has the meaning provided in paragraph 2(c) of Part B of Annex l 

PPP has the meaning provided in paragraph 1 (a) of Part A of Annex l 

Principal Representative has the meaning provided in Section 4.2. 

Procurement Agent has the meaning provided in paragraph 6 of Part C of Annex l 

Program has the meaning provided in the Recitals. 

Program Assets means any assets, goods or property (real, tangible or intangible) purchased or financed 

in whole or in part (directly or indirectly) by MCC Funding. 

Program Funding has the meaning provided in Section 2.1. 

Program Guidelines means collectively the Audit Guidelines, the MCC Environmental Guidelines, the 

, MCC Gender. Policy, the Governance Guidelines, the MCC Program Procurement Guidelines, the 

Reporting Guidelines, the MCC Policy for Monitoring and Evaluation of Compacts and Threshold 

Programs, the MCC Cost Principles for Government Affiliates Involved in Compact Implementation 

(including any successor to any of the foregoing) and any other guidelines, policies or guidance papers 

, relating to the administration of MCC-funded compact programs and as from time to time published on 

the MCC Website. 

ANNEXV -3 
Program Implementation Agreement and PIA have the meaning provided in Section 3.1 . . 

Program Objective has the meaning provided in Section 1.2. 

Project(s) has the meaning provided in Section 1.3. 

Project Cooperation Agreement has the meaning provided in paragraph 4 of Part C of Annex I 

Project Objective(s) has the meaning provided in Section 1. 3. 

Project Partner has the meaning provided in paragraph 4 of Part C of Annex L 

Provider has the meaning provided in Section 3. 7(c). 

REA has the meaning provided in paragraph 2(b)(iii) of Part B of Annex l 

Reporting Guidelines means the MCC "Guidance on Quarterly MCA Disbursement Request and 

Reporting Package" posted by MCC on the MCC Website or otherwise publicly made available. 

Restructuring Plan has the meaning provided in paragraph 2(b)(iii) of Part B of Annex l 

SBM Plan has the meaning provided in paragraph 2(b)(iii) of Part B of Annex l 

Sector Benchmarking Study has the meaning provided in paragraph 2(b)(ii) of Part B of Annex l 

SGEF has the meaning provided in paragraph 3(c) of Part B of Annex 1 . 

Social and Gender Enhancement Activity has the meaning provided in paragraph 3(c)of Part B of 

Annex1 

Socialand Gender Integration Plan has the meaning provided in paragraph 4 of Part B of Annex 1 

Supplemental Agreement means any agreement between (a) the Government (or any Government 

affiliate) and MCC (including, but not limited to, the PIA), or (b) MCC and/or the Government (or any 

Government affiliate), on the one hand, and any third party, on the other hand, including any of the 

Providers, in each case, setting forth the details of any funding, implementing or other arrangements in 

furtherance of this Compact. 

·Target has the meaning provided in paragraph 3(a) of Annex /11 

Tariff Indexation Framework has the meaning provided in paragraph 2(b)(i) of Part B of Annex l 

Tax Schedules has the meaning provided in Section 2.8(b). 

Taxes has the meaning provided in Section 2.8(a). 

Turnaround Facility has the meaning provided in Section 7.2(d) . 

. Turnaround Facility Agreement has the meaning provided in paragraph 2(a)(i) of Part B of Annex 1 

United States Dollars or US$ means the lawful currency of the United States of America.. 

USAID is the United States Agency for International Development. 

ANNEXV -4 
Weed and Sediment Management Activity has the meaning provided in paragraph 3(a) of Part B of 

Annex[ 

ANNEXV- 5