MALAWI REIGNING IN PARASTATALS, PUSHING

UNCLAS SECTION 01 OF 02 LILONGWE 000107

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TAGS: KMCA KCOR PREL ECON EINV EAID MI
SUBJECT: MALAWI REIGNING IN PARASTATALS, PUSHING
PRIVATIZATION


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distribution.

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SUMMARY
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1. (SBU) President Bingu wa Mutharika has recently
reactivated the GOM's privatization program with a public
speech strongly endorsing the Privatization Commission's
efforts to push ahead with selling parastatal corporations.
He is also said to have ordered the halt of operations at the
Malawi Development Corporation, and to be considering
reconstituting the boards of many parastatals to replace
political appointees with technocrats. These moves appear to
aim at bringing the expensive and corruption-ridden
commercial operations of the Government under control. End
summary.


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AN AMBITIOUS NEW PLAN, DEFYING RESISTANCE
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2. (SBU) At the launch of the Privatization Commission's
strategy conference last week, President Mutharika delivered
a definitive answer to speculation about a possibly
state-centric approach to develop Malawi's economy. Shortly
after Mutharika took office, the Privatization Commission
itself had become suspicious when he took the portfolio for
statutory corporations to himself and immediately froze all
pending privatizations. The GOM explained that this was to
vet the pending deals for possible corruption. At least some
observers, knowing that Mutharika had previously advocated
state-centric approaches to economic growth, figured this was
the first step to shutting down the privatization pipeline.


3. (SBU) But at the launch on January 25, Mutharika not only
delivered a televised speech endorsing privatization, he also
required his entire Cabinet to attend the day-long seminar.
Describing privatization as an opportunity for both the
private sector and the public, Mutharika outlined a program
for accomplishing 65 privatizations over the next three years
(compared with 64 privatizations over the past 8 years). He
also proposed three changes to the program started in 1997:

--A different sequence of privatizations to reflect new
priorities
--Emphasis on public-private partnerships in cases where sale
of assets is unpalatable
--Creation of a social program to address layoffs


4. (SBU) Mutharika also made a bid for support among his
Cabinet in pushing privatizations forward, saying that
overcoming resistance to privatization must be an integral
part of the plan. After Mutharika left the meeting, however,
several Cabinet members made it clear that the President has
some ways to go to recruit them to the cause. They pointed
to several problems with past privatizations: inappropriate
use of proceeds, short-term unemployment, and heavily foreign
ownership, among others. Mutharika will need Cabinet and
Parliament approval for several components of the program,
including the new divestiture plan and specific approvals for
a number of "strategic enterprises."


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IN THE MEANTIME, SOME QUICK ACTION
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5. (SBU) As an indication of Mutharika's current attitude
toward parastatals, he is reported to be on the verge of
reconstituting the boards of several--and possibly all--major
parastatals. Several reliable and well-placed officials have
confirmed these reports. He has complained publicly that the
previous administration passed out board seats as political
candy, which has resulted in incompetent and often dishonest
boards. High on the target list would be electrical utility
ESCOM, agricultural conglomerate ADMARC, and the
manufacturing and real estate conglomerate Malawi Development
Corporation (MDC).


6. (SBU) In the case of MDC, Mutharika is not waiting for a
clean sweep of parastatal boards to take action. The company
operates or owns substantial interest in commercial real
estate, light manufacturing, hotels, and financial services
throughout Malawi. Faced with a crushing debt burden, a
series of failed investments, and rumors of corruption, MDC
recently applied to the GOM for a fresh infusion of capital.
The President instead shut the company down for a review of
its finances, hoping to get a clearer financial picture
before deciding its fate.


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COMMENT: THE HEAD IS THINKING; WILL THE BODY FOLLOW?
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7. (SBU) Mutharika has pushed the theme of economic growth
since his inaugural address. Many local observers have
wondered whether he would choose the well-worn path of
statist solutions rather than enabling the private sector to
assume the work of building a viable Malawian economy.
Mutharika's plans for aggressive privatization indicate that
these suspicions are unjustified. If he can pull it off, a
rapid privatization schedule will deliver much-needed
short-term revenue and clean up a major locus of corruption.
That said, however, it is clear he has much work left to
persuade the rest of his government, let alone the rest of
the body politic, to go along.

GILMOUR