MALAWI MCC CONCEPT PAPERS GENERATE PRIVATE SECTOR

UNCLAS SECTION 01 OF 02 LILONGWE 000268

SIPDIS

LONDON FOR AF WATCHER PETER LORD

E.O. 12958: N/A
TAGS: EAID ENRG ELTN MCC MI
SUBJECT: MALAWI MCC CONCEPT PAPERS GENERATE PRIVATE SECTOR
INTEREST

REF: A. 08 LILONGWE 551

B. LILONGWE 122

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1. Summary: Malawi's recently submitted proposals for a
potential Millennium Challenge Account (MCA) compact
generated considerable private sector interest at a May 7
forum. The forum included a presentation on the concept
papers recently submitted by the MCA-Malawi Core Team
(MCA-M). Malawi is requesting MCA investments of nearly USD
500 million, focusing on the power, transport, and governance
sectors. With funding likely to be much lower than
requested, Post faces a significant challenge in managing
expectations and potential public diplomacy fallout. End
summary.


2. On May 7, the Millennium Challenge Corporation (MCC) and
the Corporate Council on Africa co-sponsored a private sector
forum to discuss Malawi's potential MCA compact. The event,
linked by DVC to MCC headquarters, drew an audience in
Lilongwe of over 50 senior private sector representatives. It
included presentations by the MCA-M Core Team describing the
sector-specific concept papers, and a lively question and
answer session involving all participants.

Focus on Power, Transport and Governance
--------------


3. Since September, when a national stakeholders conference
marked the end of the constraints analysis and initial
consultations phase (Ref A),the MCA-M team has been working
to develop concept papers for specific projects based on the
key development constraints identified. In view of the
probable funding levels and the five-year time frame for MCA
compact projects, MCA-M decided to focus on the power and
transportation sectors. Two concept papers for these sectors
were formally submitted to MCC on April 17. MCA-M will also
develop a smaller concept paper on governance, which will
build on the work done through Malawi's MCC Threshold Country
Program (TCP).


4. In the power sector, MCA-M proposes a broad range of
activities addressing generation, transmission, distribution
and off-grid electrification using renewable energy, as well
as institutional capacity-building. The program does not
include investments in any new generation capacity, but
rather targets efficient utilization of existing capacity and
improved generation reliability. Taken as a whole, the
proposal seeks to make investment in power generation
economically viable, whether investment is undertaken by
ESCOM, the current monopoly supplier, or by new independent
power producers. Total funding requested is USD 247 million.


5. In the transport sector, MCA-M proposes investments in
rail and road transportation, as well as the strengthening of
the administrative and regulatory regime. The rail sector
would receive the bulk of the funding, with projects
addressing the rehabilitation of the rail infrastructure
along the Nacala corridor (northern Mozambique's major port),
as well as the acquisition of locomotives and rolling stock.
The road projects would upgrade key feeder roads to improve
market access for rural populations. Total funding requested
is USD 194 million.


6. Following on the widely recognized success of Malawi's
TCP, MCA-M is also developing a series of governance
projects. Much smaller than the infrastructure projects, the
governance activities would fund capacity-building in fiscal
management and oversight begun by the TCP. Total funding
requested is expected to be in the USD 25-35 million range.

Private Sector Ready to Engage, Eager for More Information
-------------- --------------


7. Participation in the forum demonstrated that there is
already wide interest from the private sector for involvement
with Malawi's compact. Participants included potential
partners covering all phases of the compact, project design,
feasibility studies, capacity building, project management,
and construction. The most engaged included representatives
from General Electric, Lockheed-Martin, Portugal-based Mota
Engil, Scottish Development International, Malawi's Standard
Bank, and the U.S. Overseas Private Investment Corporation
(OPIC). Two speakers even expressed interest in working on
power generation projects that will benefit from compact
projects but are not slated to receive direct MCC funding.


8. While there was genuine enthusiasm for Malawi's concept
papers, there were also some concerns expressed. Several

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speakers commented on the importance of addressing the
regulatory environment in order to increase private sector
investment. Others stressed the need for capacity-building.
For example, one speaker noted the potential benefits of
carbon financing, but added the Malawi Energy Regulatory
Authority (MERA) lacks the capacity to take advantage of this
resource. For a number of potential partners, a key question
was what will be the final size of the projects, and of the
compact as a whole.


9. In response to the last point, MCC officials noted that,
although the budget for 2010 has not yet been approved, the
average compact size for sub-Saharan African countries has
been about USD 300 million, and that this amount would be a
good estimate for what Malawi might get. MCC has requested
from Congress funding of USD 1,425 million for 2010, with
Jordan, Malawi and the Philippines in line to sign compacts
during the year. MCC reps indicated that Malawi might hope
to get as much as USD 400 million, but only if this budget is
fully funded. Malawi's requested funding totals roughly USD
475 million, so significant cuts to the proposals are likely
to be needed.

Comment: Compact on Track, but Expectations are High
-------------- --------------


10. MCA-M has done its homework and gained broad based
support for the proposals. MCA-M has made a persuasive
argument that investment in the targeted projects will bring
tangible improvements in the country's prospects for economic
growth. At the same time, the GOM has decided to submit an
ambitious request, putting the onus of trimming programs on
the MCC. Given local enthusiasm for the projects, cuts will
be painful. Funding in the USD 300 million range will
represent less than two thirds of Malawi's request and would
require the removal of major elements of the proposals. Post
fully recognizes MCC funding constraints. However, if final
funding levels are substantially below Malawian expectations
that MCC is unable to reign in, Post will face a serious
public diplomacy challenge to avoid damage to USG credibility.
BODDE