ELECTRICITY SUPPLY IN MALAWI IS THREATENED BY WEAK GOVERNANCE STRUCTURE IN ESCOM

Although government fully controls the Electricity Supply Corporation of Malawi (Escom) as a statutory body, the institution is, in fact, a private company limited by shares and is incorporated under the country’s Companies Act 1984.

This confused legal entity status for the organisation, according to documents Weekend Nation has seen, creates governance problems.

The documents indicate Escom was registered at the Registrar of Companies as a private company with registration number 5081 after changing from Electricity Supply Commission of Malawi.

The then assistant deputy registrar of companies a T. S. Chapambali issued the certificate of incorporation in Blantyre on July 29 1998.

Names of three directors, a managing director, a company secretary and auditors with a share capital of K100 million divided into 50 million ordinary shares of K2 each were presented during the registration process.

The directors were Secretary to Treasury, Comptroller of Statutory Corporations and general manager of the liquidated Malawi Development Corporation (MDC).

Wilfred Paul Amani was the managing director while Gautoni Kainja was the company secretary with Deloitte & Touche being the appointed auditors.

According to Escom’s Memorandum & Articles of Association, the number of members of the company was limited to 50 and was prohibited from making any invitation to the public to acquire any of the shares.

“The company will take over the assets and liabilities, including the goodwill of Electricity Supply Commission of Malawi created under the Electricity Act (Cap.73.03) of the Laws of Malawi,” reads part of Escom’s Memorandum & Articles of Association.

Escom independent

In 2015, Fichtner, a German management consultancy firm that specialises in energy and infrastructure sectors, in association with Azorom conducted an organisational review and transitional organisational structure for Escom and in its report it also says Escom is a private limited liability company whose powers are governed by the Companies Act and Articles of Association.

Under the Act, and the Articles of Association, an incorporated company can do anything that is legal without restrictions so long as it operates within the Act and Articles.

For instance, the Act and Articles mandate the utility company to independently borrow or give security to the borrowing, among others.

However, government through the Public Finance Management Act (PFMA) controls Escom and regards it as a statutory body governed by Part VIII of the Act which deals with duties and responsibilities of a statutory body.

While Escom has full powers under the Companies Act and Articles of Association, most of its commercial decisions are subjected to the Public Finance Management Act.

For example, Sections 72 and 73 of the PFMA require the corporation to seek approval from the Minister of Finance before considering any loan, overdraft or guaranteeing any loan.

PFMA also demands that Escom must submit its plans, budgets, reports and financial statements must also be sent to the Minister of Finance.

Additionally, government appoints board members and chairperson of Escom, hires and fires the chief executive officer (CEO), determines the CEO’s terms and conditions of service and approves most major decisions of the board.

“Escom suffers from confused legal entity status. On the one hand it is a statutory body under the Public Finance Management Act while on the other it is a private company limited by shares and incorporated under the Companies Act. The demands of these two Acts are very different and most times contradictory,” reads the May 11 2015 report by Fichtner on Escom’s organisational review and transitional organisational structure which was commissioned by Escom.

MDC, Air Malawi, Admarc same boat with Escom

However, Fichtner observes Escom was not alone as the country has had other institutions with such type of “confused legal entity status” such as the MDC Limited (liquidated in 2007) and Air Malawi Limited (liquidated in 2012) and the Agricultural Development and Marketing Corporation (Admarc).

“This creates governance problems. No wonder MDC and Air Malawi went into liquidation. Instead of operating on commercial lines, these two companies were subjected to a lot of pressure from politicians and ended up in a mess.

“Secondly, because these entities are created like normal commercial enterprises under Companies Act, creditors can easily petition for liquidation and there is no protection as it happened in the case of Air Malawi which received a creditors winding up petition and government came in with voluntary liquidation simply to save it from the chaotic creditors’ liquidation.

Hence, the need for such entitie to run on commercial lines to avoid these problems,” reads the report.

According to Fichtner, the PFMA has “very intrusive provisions” which are in conflict with the Companies Act governance provisions of incorporated legal entities.

The Companies Act also does not require government’s approval of Escom budget, government appointing Escom board members and the chairperson, hiring of Escom CEO, ex-officials to sit on the Escom board, the minister signing Escom contracts and issuing of administrative directions or instructions to Escom.

Reads Fichtner’s report: “We have found no legislation that authorises government to do these things in respect of Escom. Escom is governed by the Companies Act and the provisions of the Companies Act must be complied with in full.

“Hence we are of the view that such administrative instructions can only apply where the statutory body is not incorporated under the Companies Act. Escom restructuring will not be effective unless government eliminates the administrative instructions or oversight or intrusion.”

Private but not independent of government

But commenting on the issue, legal expert Ahmed Mussa said in an interview that being a private limited liability company did not mean Escom was independent of government which remains a majority shareholder (99 percent).

“This simply means that Escom is a separate legal entity from the government, but not independent of the government,” he said.

Mussa observed that government did not lose ownership of the institution and remained a majority shareholder even after Escom was registered as a private company in 1998.

However, Mussa said the arrangement has legal implications because being a majority shareholder, government “is essentially the ultimate decision maker for Escom”.

“The day-to-day management of Escom is left in the hands of the board, but it can only exercise powers granted to it under the Memorandum and Articles of Association or in accordance with Corporate Governance Rules or Rules set up by the shareholders.

“The other legal implication is that government appoints the Board of Directors subject to the Memorandum and Articles of Association and has a right to a share in dividends (profits) of Escom.

Court battle over legal status

Escom ownership’s status has also forced four accused persons who are charged of several counts of alleged abuse of office and neglect of duty by a public officer under the Corrupt Practices Act and the Penal Code, respectively.

But the accused have raised preliminary objections with the court arguing by virtue of Escom being a private company they were not public servants.

In their arguments, the accused through their lawyers, claim Escom is not a public company but a private company incorporated under the Companies Act. But the State, through the Anti-Corruption Bureau (ACB), argues that Escom is wholly owned by government with a shareholding of 100 percent and employees working with it are public servants.

Escom’s mandate is to procure, transmit and distribute electricity in the country.

 

Source: The Nation Malawi