ICRR 12960 Report Number : ICRR12960 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 10/08/2008 PROJ ID : P063095 Appraisal Actual Project Name : Privatization And US$M ): Project Costs (US$M): 32.2 30.2 Utility Reform Project Country : Malawi Loan/ Loan /Credit (US$M ): US$M): 32.2 30.2 Sector Board : FPD US$M ): Cofinancing (US$M): Sector (s): Central government administration (40%) General energy sector (15%) General information and communications sector (15%) Water supply (15%) General industry and trade sector (15%) Theme (s): State enterprise/bank restructuring and privatization (67% - P) Regulation and competition policy (33% - S) L/C Number : C3395 Board Approval Date : 06/27/2000 Partners involved : Closing Date : 12/31/2004 12/31/2007 Evaluator : Panel Reviewer : Group Manager : Group : Ismail Arslan Rene I. Vandendries James Sackey IEGCR 2. Project Objectives and Components: a. Objectives: The original project objective was to improve quality of and access to economic and physical infrastructure for private sector development . This objective was to be achieved through (i) divestiture of government ownership in telecommunications, power, water and other identified public enterprises; (ii) strengthening of regulatory functions in telecommunications, posts, power and railways; and (iii) completion of a postal investment program. The project had a very slow start compared to its original implementation plan . By December 31, 2004, the project's original closing date, only 40 percent of the credit had disbursed with marginal progress registered on the core program of preparing utilities in the infrastructure sectors for privatization . The following were the reasons for the slow implementation : (i) political support for privatization was uncertain; (ii) the time and effort needed to prepare and execute significant privatization was underestimated at the outset; (iii) the level of public awareness and support needed for the success of the program was also underestimated; (iv) experience from implementing the project over four years suggested that improvements in the project's governance arrangements were required to help accelerate the implementation . The project was restructured in 2005 to address the above underlying causes of slow disbursement . The revisions in the project objective were primarily in the nature of reducing the scope of the project . The new objective was to enhance the climate for private investment by reducing the state's direct participation in the business sector. The restructured project was to concentrate on a limited number of pre -privatization and privatization activities, and therefore, the primary focus of the project would become the improvements of utility infrastructure and its regulation . In addition, the restructured project would also support the commercialization of public enterprises and reduction of subsidies to these entities to achieve its objective . b.Were the project objectives/key associated outcome targets revised during implementation? Yes If yes, did the Board approve the revised objectives /key associated outcome targets? Yes Date of Board Approval: 08/23/2005 c. Components (or Key Conditions in the case of DPLs, as appropriate): The original project had four components : 1. Pre-privatization assistance: This component supported the restructuring activities in : (i) ESCOM (Electricity Supply Cooperation of Malawi Limited)--including conducting a tariff study, establishing a financial management system and the purchase of high voltage metering equipment; and (ii) MTL (Malawi Telecom Limited)--ensuring that Y2K compliance was achieved. 2. Postal sector support: The component would support the three year business plan of Malawi Posts Cooperation (MPC) in order to help the postal service progress towards full cost recovery after its separation from MTL. The support provided would be through funding of consultancy for management support and training, postal and office equipment, and vehicles . 3. Support to regulatory institutions : This component would enhance the operations of the Malawi Communications Regulatory Authority (MACRA) for postal and telecommunications regulation and the Electricity Council (ENCO) for power regulation. Further, this component would also assist the government in evaluating the benefits of and, if appropriate, in establishing a multi -sectoral regulatory agency . 4. Privatization:This component was focused on supporting the development of divestiture options and /or the implementation of the chosen divestiture methods for utility divestitures including : Malawi Telecom Limited (MTL), electricity, and water. In addition, it would support the privatization of seven public economic enterprises--including Air Malawi, Malawi Lake Service, three public banks, and a number of ADMARC (Agriculture Development and Marketing Cooperation ) subsidiaries. The restructured project retained the core programs of the original loan, albeit with streamlined activities, the postal support component was expanded and renamed "commercialization", and the following two components were added: (i) post-privatization monitoring; and (ii) implementation and capacity building . The restructured project had six components : 1. Pre-privatization assistance: This component continued to support the restructuring of ESCOM, which involved dividing it into three business units --generation, transmission and distribution . The component would also support the acquisition by the Blantyre and Lilongwe Water Boards of new metering equipment to improve their billing system. 2. Commercialization: This component supported the restructuring of ADMARC to separate its commercial operations from its social activities into two separate institutions through funding of consultants . The restructuring of ADMARC included preparation of a restructuring plan, a human resources audit and a retrenchment plan. The MPC would continue to be supported in its efforts towards full cost recovery and improved postal services. 3. Support for Regulatory Frameworks : This component would continue to support the creation and strengthening of sound regulatory frameworks and building regulatory capacities for the telecommunications, energy and transport sectors . 4. Privatization: This component would continue to support the MTL privatization . It would also support a strengthened public awareness and stakeholder outreach campaign . In addition, the component would fund consultancy services for a few non -utility divestitures. 5. Post-privatization monitoring: This component would take on board lessons learnt from implementing the project over the four years period and from successful privatization programs elsewhere . It would support PERMU (Public Enterprise Reform Monitoring Unit of the Ministry of Finance ) through building capacity to carry out its mandate of pre and post privatization monitoring . 6. Implementation and capacity building : The project also financed salaries and equipment for the Privatization Commission and the PIU (project implementation unit). It would also support capacity building for privatization and public private partnership (PPP). d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: The project was approved by the Board on June 27, 2000, for SDR 21.8 million ($30.2 million equivalent) of IDA financing, with a closing date of December 31, 2004. The closing date was extended initially to December 31, 2005 after it became clear that the original four years would not be enough to complete the project activities . Then, the project was restructured in 2005 to simplify it and to address the underlying causes of slow disbursement, with a closing date of December 31, 2007. 3. Relevance of Objectives & Design: Relevance of Objectives . The objectives of the project were fully relevant to the development issues faced by Malawi in 2000. The project was, furthermore, consistent with the priorities in the Bank's 1998 CAS and remains consistent with the priorities of the 2003 and 2007 CASs. The growth of private firms within the economy, especially those focusing on export -led growth, was impacted by poor quality of infrastructure service delivery. In addition, Malawi's state-owned enterprises' sector was a heavy burden on public finances and also an important factor in the lack of private sector development in the country . The underlying objectives of the credit, promotion of private sector development and improvement in the quality of and access to infrastructure services, were highly relevant at the time of preparation of the project . The objectives remain relevant . Relevance of Design . The original design of the operation did not take into account the time and effort needed to prepare and execute significant privatization transactions . The key privatization activities were in the utility infrastructure sectors where services were historically provided by state -owned monopolies, with prices controlled by the government. There was also a severe disconnect between the complexity of this project and Malawi's implementation track record and absorptive capacity . The main shortcoming was the limited buy -in for some of the project components and conditionalities, such as privatization of large public utilities portfolios in a short period, establishment of a multi -sector regulator, and ADMARC restructuring . 4. Achievement of Objectives (Efficacy): The achievement of objectives are discussed below taking into account performance both before and after restructuring of the project: Pre- Pre -privatization Assistance : Pre-privatization activities for MTL and ESCOM were satisfactorily completed . In the case of MTL, this led to successful privatization of the public enterprise . Efficacy in this area is rated as substantial . Postal Services Support / Commercialization : There was a remarkable transformation in the MPC's financial and business performances . The company no longer receives government subsidies, nor does it depend on cross-subsidies from MTL, and it has diversified its revenue generating services such as internet access. There was a significant improvement in postal services in terms of timely mail delivery . All the project output indicators related to postal services were achieved . Regarding the commercialization sub -component, the subsidiaries of ADMARC were privatized, the company downsized more than 400 staff and sold off some of its redundant assets. ADMARC has become a commercial trading company without subsidy . The company is instructed to cross-subsidize its operations--using profits generated in well-established markets to offset possible losses in less developed areas . The restructuring plan called upon ADMARC to pass ownership of approximately 50 percent of its warehouses to a new company, the Malawi Warehousing and Trading Company (MAWTCO), for lease to the private sector . However, the formal establishment of MAWTCO and transfer of ADMARC warehouse assets to the new leasing company is still pending . Efficacy in this area is rated substantial. Regulatory Reform and Regulatory Institutions : A study for the establishment of a multi -sector regulator was completed in 2004. The recommendations of the study were : (i) to strengthen the existing communications regulator, the Malawi Communication Regulatory Authority (MACRA); and (ii) to establish two new regulatory authorities, one for the energy and water sectors and another for transport . The project supported a set of capacity building activities to MACRA, including training for most staff on a range of topics such as licensing, legal issues, and frequency management . This assistance was very timely given the privatization of MTL, the rapid growth in mobile phones and technological developments . The project also helped to improve the institutional capacity in the National Electricity Council (NECO) to regulate the electricity sector . There was also progress in improving the legal framework and in establishing a regulatory agency, the Malawi Energy Regulatory Authority (MERA), in the energy sector, but this agency is not yet operational . There has been no progress in establishing a regulator for the water and transport sectors . Efficacy in this area is rated modest. Privatization : After a long lead time and a couple of unsuccessful attempts, the fixed line operator, the Malawi Telecommunications Limited (MTL), was finally privatized in February 2006 with 80 percent of the ownership going to private Malawian investors and the government retaining ownership of the remaining 20 percent with a plan to divest it through a public offering on the Malawi Stock Exchange within five years . The transaction yielded $30 million in privatization revenue. While a limited time has passed since the completion the of privatization transaction, the financial performance of MTL was improved significantly and some $ 20 million invested in new technologies . Privatization has also had a significant impact on financial market development, both through a more developed banking system (as a result of the privatization of four state banks ) and the development of the Malawi Stock Exchange . As documented in the ICR and a Privatization Impact Study, a majority of privatized enterprises improved their product quality, increased employment and tax payments . Efficacy in this area is rated as substantial. Post- Post -privatization Support : The project provided support to post -privatization monitoring through training for the Public Enterprise Reform Monitoring Unit (PERMU) staff at the Ministry of Finance . This function was eventually taken over by the Privatization Commission . There were several studies on the impact of privatization on different groups (private sector, local population and government ). Efficacy in this area is rated as modest. Implementation and Capacity Building : Critical in the implementation of the privatization program was the ability to retain professional staff to coordinate and supervise the privatization process . The project supported the salaries of professional staff at the Privatization Commission . It also contributed to the strengthening of institutional capacity in the Privatization Commission through technical assistance and training . Efficacy in this area is rated as substantial. 5. Efficiency (not applicable to DPLs): ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re -estimated value at evaluation : re- Rate Available? Point Value Coverage/Scope* Appraisal % % ICR estimate % % * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: There were important shortcomings in the operation's achievement of its objectives, and therefore, the project outcome is rated as "moderately satisfactory." The long delay in project implementation has also affected the outcome rating. The key outcomes: 1. The MTL was finally privatized in February 2006 and its financial performance improved . 2. The MTL increased the working telephone lines capacity to 230,111 at the beginning of 2008 from 40,000 in 2000. Approximately 60,000 of these new lines are in the rural areas . 3. The MPC registered a significant improvement in performance with intra -city mail delivered in one day, mail between cities delivered within three days, and mail to rural areas within five days . In addition, the project achieved its impact indicator of increasing the number of letters handled per staff per annum, from 45,600 in 2000 to 65,000 in 2007. 4. Limited progress was made in improving access to grid -based electricity. A residential access rate of 6 percent was targeted in the project by December 2004, but this ratio was only 5.5 percent in 2006. The electricity access rate remains very low in Malawi even compared to the Sub -Saharan average of 16 percent. Frequent power outages and cuts in service continue to act as a constraint on private sector growth and competitiveness. Budget subsidies to public enterprises were reduced from MK 1.54 billion in 2001 to MK 0.8 billion in December 2007 (at constant 2001 Malawi Kwachas). a. Outcome Rating : Moderately Satisfactory 7. Rationale for Risk to Development Outcome Rating: The risk to development outcomes is small . There is little reason to doubt the continuation of the achievements in privatization, in the postal services and telecommunication sectors or of the smooth operation of the regulatory agency. Mitigating factors include the government's commitment to move ahead with the recently approved Business Environment Strengthening Technical Assistance Project ($15 million), which aims to reduce the cost of doing business, improve service delivery to the private sector and provide targeted support to small and medium enterprises. a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: at -entry.In Quality -at- entry some ways the project was well prepared and instituted some mitigation measures at the entry phase, including drawing lessons learned from similar private sector development projects . But it was far too ambitious both in terms of speed at which difficult privatizations could be carried out and in terms of scope by including utilities (telecommunication, energy and transportation ) as well as diverse commercial sectors. Quality of supervision . Implementation problems were not fully reported in the supervision reports initially. Although very little was achieved at the end of 4.5 years of implementation up to the restructuring, the project's IP and DO were mostly rated satisfactory . The IDA missions were regular with strong follow -up by the region-based Bank staff especially after the restructuring . As indicated in the ICR, the Bank could have acted sooner to address the slow implementation problems in the early stages of the project . The presence of the task team leader in the country office from 2005 onwards strengthened communication between IDA and the borrower and the response time to requests for no objection averaged four working days, with the exception of large procurements and of issues which required more careful analysis . at -Entry :Moderately Satisfactory a. Ensuring Quality -at- b. Quality of Supervision :Moderately Satisfactory c. Overall Bank Performance :Moderately Satisfactory 9. Assessment of Borrower Performance: The privatization program was suspended twice, in 2001 and 2004. In the first instance, the government suspended all privatization activities in 2001 following political resistance from the opposition . Again in 2004, following general elections, the new government suspended the privatization program while new senior officials familiarized themselves with the legal and institutional framework for privatization . While these two reviews did not necessarily mean a withdrawal of political support from the program, more than twelve months of implementation time were lost between the two reviews, including the time it took to rebuilt momentum after each suspension was removed . The government was also very slow with decisions affecting the stakeholders in project implementation, particularly before the restructuring . The Privatization Commission was implementing the program with little or no engagement from the government . These issues were addressed during the restructuring by reconstituting the Project Steering Committee with senior representatives of Ministries that had a stake in the privatization program . Political oversight of the privatization program remained in the President's Office but technical oversight was delegated to the Ministry of Finance. This helped to accelerate the project and privatization program implementation . a. Government Performance :Moderately Satisfactory b. Implementing Agency Performance :Satisfactory c. Overall Borrower Performance :Moderately Satisfactory 10. M&E Design, Implementation, & Utilization: During the design of the project, the aspect of M&E was not fully considered . The appraisal report contained both output and outcome indicators, but there was no monitoring by the implementation units (the PIU and Privatization Commission) at the initial stage. The M&E aspects were put into place after the slow implementation reported in the mid-term review, which was conducted by a joint IDA - government team in 2003, three years into implementation. It is likely that the restructuring that was undertaken after four years of implementation would have been done much earlier had the M&E plan been designed and implemented properly from the beginning. After restructuring of the project, implementation and utilization of M&E improved . Several surveys were undertaken by the Privatization Commission at the household and firm levels on the impact of privatization on three broad target groups, namely the private sector, local population and government . These surveys and better monitoring of the results framework contributed positively to the implementation of the privatization program. a. M&E Quality Rating : Modest 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): At the design stage of the project, no major environmental impact was envisaged . Some public enterprises on the privatization program, such as ESCOM, Air Malawi and MTL, were recognized as a possible source of pollution or other environmental problems related to on -going or future practices. It was decided that rather than undertake a wholesale environmental assessment for all public enterprises at once, the task be done on a case by case basis closer to the privatization transaction . This would ensure that the results were more current . In the event, only Air Malawi and MTL were subject to environmental audits . 12. Ratings : 12. ICR IEG Review Reason for Disagreement /Comments Outcome : Satisfactory Moderately There were important shortfalls in a Satisfactory number of areas as shown by the performance indicators detailed in section 4 and section 6 above. In addition, the outcome rating suffered because of long delays in implementing the project components. Risk to Development Moderate Moderate Outcome : Bank Performance : Satisfactory Moderately Project design was overly ambitious Satisfactory and the Bank was too slow in restructuring it. Borrower Performance : Moderately Moderately Satisfactory Satisfactory Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate . 13. Lessons: The ICR has several good lessons, but two stand out . First, there is a need for consensus on privatization issues especially at the policy makers level . Without this consensus, there are always delays in program implementation. Second, a robust and well targeted public awareness program is critical to sustain public support, especially for the larger, and politically difficult transactions . After the restructuring, these lessons were absorbed leading to speedier implementation . 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: This is a very good ICR, clearly written and transparent . It does contain all necessary information, including that needed to arrive at appropriate ratings . Annex 2 on outputs by component is somewhat repetitive of the text and could have been incorporated into it . a.Quality of ICR Rating : Satisfactory