The Ministry of Finance and Economic Affairs wishes to provide more information to the public on the status of the financing for the Lake Malawi-Lilongwe Water Supply Project.

 

  1. Background to the Project

In view of the dwindling water sources in the City of Lilongwe, the Government of Malawi in 2015 initiated a project to source water from Lake Malawi. Consequently, Lilongwe Water Board (LWB) signed an Engineering, Procurement and Construction (EPC) Contract on 19th December 2016 with Khato Civils Pty Ltd and South Zambezi Joint Venture. The Contract has seven condition precedents:

  • Securing financing;
  • Issuing a Sovereign Guarantee;
  • Receiving a ‘No Objection’ from the Director of Public Procurement and Disposal of Public Assets;
  • Incorporation of a Special Purpose Vehicle;
  • Due diligence on the Contract;
  • Compliance with the Construction Industry Regulations; and
  • Submission of a Programme of Works.

A positive Environmental and Social Impact Assessment Report was issued in respect of the Project.  The Contractor complied with all the condition precedents and by 2018, the Contractor mobilized equipment and established office sites. However, the Project could not commence because the financing that the contractor identified failed to meet the Government borrowing policy, which among other things, requires the financing to be concessional. The Contract required the Contractor to identify a financier of the Project while the Government of Malawi’s obligation was to issue a sovereign guarantee for the loan.

 

  1. Technical Aspects of the Project

The scope of the Contract is for the extraction of water from Lake Malawi to the city of Lilongwe, surrounding areas and town centres along the M14 Lilongwe – Salima Road. The Project involves abstraction and treatment of 100,000m3/day water from Lake Malawi (Salima) and transportation of treated water through a 120km transmission pipeline. The Project objective is to increase water availability for Lilongwe City and strengthen capacity of LWB and surrounding Towns to respond to adverse climatic conditions, hence sustain reliable water supply to its customers.

 

  1. Implementation Arrangements and the Special Purpose Vehicle (SPV)

The Project shall be implemented through a Special Purpose Vehicle (SPV) called the Salima-Lilongwe Water Supply Company (SLWSC) which will borrow funds, from Quay Energy Corp (AuS) Pty Ltd, amounting to USD313,447,757.00. The SPV was established on 29th August, 2017. The SPV has the Secretary to the President and Cabinet (SPC) and Secretary to the Treasury (ST) as its shareholders. Currently, the Directors of the Company are:  The SPC, the ST, the Solicitor General and Secretary for Justice, and the Chief Executive Officer (Lilongwe Water Board). In future, the board of the SLWSC will include other independent board members.

Although the Project was initially intended for LWB, Government has observed that other Water Boards, such as the Central Region Water Board and other customers, including potential irrigation schemes along the Salima-Lilongwe terrain, could equally benefit.

 

  1. Risks and Legal Considerations about the project

Pursuant to the Contract, the Contractor mobilized and commenced some preliminary works on the project, including carrying out geotechnical studies. The surveys and investigations were undertaken to feed into the feasibility study and detailed designs. The feasibility study, design concept and detailed designs were completed.

In 2018, while waiting for Project funds, the Contractor requested payment from Government for pre-construction activities. LWB obtained a facility from National Bank of Malawi amounting to USD 17 million as part payment to the contractor. Considering that there was no confirmed financing for the project, LWB wrote the ST asking that the Project activities by the contractor and the SPV operations be curtailed pending identification of financing. In June 2018, the Government directed the SPV to curtail all Project activities other than identification of financing.

Following the receipt of the letter curtailing Project activities, in August, 2019, the contractor triggered the arbitration clause in the Contract and claimed the sum of US$71.5 million representing compensation for contract termination. Through this litigation and considering that the Contractor has not defaulted Government risked paying huge compensation to the Contractor but with nothing to show for this huge outlay of Government resources. This coupled with the importance of the project, Government advised the contractor to continue searching for a financier with terms acceptable to the Government.

In 2021, the Contractor identified Quay Energy Corp (Australia) Pty Ltd to arrange financing for the project on terms acceptable to Government.  Financing terms were submitted through the Term Sheet dated 31st December 2021. Quay Energy Corp (Aus) Pty Ltd is financier established in 2021. Despite being established in 2021, there is no negative feedback on its directors and affiliates. Thorough due diligence was conducted on the Arranger of the financing.  Additionally, Quay Energy, has indicated that it would be working with reputable international financial institutions in arranging this financing hence the financing shall be syndicated. Thus, Quay Energy is not the financier but the arranger for the loan. The proposed loan amount for Salima-Lilongwe Water Project arranged by Quay Energy is US$313,447,757.00 and has the following basic terms: (i) Repayment Period of up to 25 Years, (ii) grace period of 6 years, (iii) Interest Rate 1.5% and (iv) a one-off payment for structuring fees of 2.5%.  These terms translate to a calculated Grant (GE) Element of at least 40%, which is above the required minimum GE of 35% for loan concessionality.

 

  1. Condition precedents to accessing funds from Quay Energy

The prior conditions to accessing the Loan facility include: (i) the signing of the negotiated Term Sheet by the Board of the SLWSC or its designated representative and Quay Energy Corp (Aus) Pty Ltd; (ii) the Ministry of Finance to furnish the Arranger, Quay Energy Corp (Aus) Pty Ltd with evidence confirming that all regulatory processes have been met for issuance of a Sovereign Guarantee of the Republic of Malawi in favour of Quay Energy Corp as a collateral for the loan; and (iii) the two parties would have to negotiate, sign and execute a detailed Financing Facility Agreement on the basis of the term sheet.

 

  1. Status of the Sovereign Guarantee for the Project

Upon the submission of the 2021 Term Sheet by Khato Civils, Government commenced preliminary discussion with the Financier and the contractor and the Term Sheet was subsequently initialed in December 2021. The Term Sheet formed the basis of both sides of the contract to commence their internal process that would culminate into negotiating and signing of a formal Financing Agreement in due course.

 

On its part, the Government of Malawi, through the Ministry of Finance and Economic Affairs, sought the approval of the Cabinet Committee on the Economy and later on approval of the full Cabinet.  As required by the Public Finance Management Act, section 63 (1), in relation to issuance of Sovereign Guarantee (SG), Honourable Sosten Gwengwe, M.P in his capacity as Minister responsible on issuance of SG, on 24th March 2022 informed Parliament of his intention to issue an SG in favour of Quay Energy subject to Terms and Conditions for issuance of SG.

 

  1. Conclusion

It should be noted that the Minister of Finance and Economic Affairs has not yet issued any SG in favour of Quay Energy. Following the approvals for issuance of SG, it is expected that Quay Energy, would submit to the Government of Malawi a detailed Financing Agreement, which shall be negotiated and publicly signed between Quay Energy and the Malawi Government. Quay is yet to submit the said Financing Agreement.

The steps taken so far by the Government of Malawi are the legal steps, which are required when it comes to issuance of the SG, particularly, section 63 (1) of the Public Finance Management Act of 2003 which provides that:

the Minister on behalf of the State, may, if it appears to be in the Public interest and necessary to do so, give in writing a guarantee or   indemnity upon such terms and conditions as the Minister thinks fit, in respect of the performance of any person, company or body corporate, organization or statutory body but may do so with prior approval of the Cabinet”.

 

Summary

  • Government has not yet negotiated or signed loan agreement with Quay Energy Corp.
  • Government has not yet issued any sovereign guarantee to Quay Energy Corp.
  • Government has demonstrated that all legal requirements on issuance of Sovereign Guarantee have been complied with.
  • A sovereign guarantee can only be issued once there is a Financing Agreement.

 

MINISTRY OF FINANCE AND ECONOMIC AFFAIRS

For more information, please contact

Mr. Taurai Banda

Public Relations Officer

Ministry of Finance and Economic Affairs

P.O. Box 30049

Lilongwe 3