National power utility Zesa Holdings deployed a US$1,4 billion Chinese loan to fund the complete makeover of Hwange Power Station’s Units 7 and 8, which were commissioned last year.
The product of this deal – which is mega by the standards of a debt strapped, forex squeezed third world economy — were two assets that today deliver a combined 600 megawatts (MW) to a country that only swung to firefighting mode after the power situation had bolted out of control.
Those desperate efforts delivered a bad deal by any measure. Given the blackouts that we have experienced for a full year, the Zesa board and executive must be held to account.
They took advantage of an opaque system, which feels too special to account to its citizens, to conceal crucial information that Zimbabwe’s tax payers ought to know. What were the terms of the deal? What are the interest rates? How long will Zimbabweans pay? What are the penalties, and how will conflicts be solved? We were kept in the dark. They entered into a transaction that today costs Zesa US$36 million monthly in debt service related to this specific deal.
If you want to see how bad this deal was, just take a look at the following statistics: Zesa told Parliament that it generates just about US$55 million per month in revenue. It means the power utility may be wiring just about 64% of its monthly revenue to service the Hwange debt. At 0,64%, Zesa’s debt to revenue ratio represents too high a debt load. This explains why, in the wake of debilitating power shortages triggered by falling water levels on Lake Kariba — where the main 1 050MW hydroelectric power facility lies — Zesa has struggled to import electricity to power industries. Surely, where can the substantial amounts required for imports come from, when Zesa finds itself paying about US$0,64 for every US$1 generated, to creditors of one project? This is why Zimbabwe has spent a full year in a regime of power cuts, which industries estimate to be grounding 60% of productive hours. It is expected that by the end of this year, 45 000 job opportunities would have been affected by power cuts, with 0,8% of gross domestic product wiped.
Those levels of redundancy are bad news. By agreeing to service the debt at US$36 million per month, Zesa made a big mistake. It is one of the worst ever transactions. Remember this is not the only debt that Zesa owes. There are other creditors. Borrowing is pretty much normal in business. But it becomes absurd when a whole executive and board sits in expensive boardrooms, at the public’s expense, to sign a deal that only benefits creditors, at the expense of millions of citizens —encouraged by the government.
I shudder to imagine the consequences of reported defaults on the risk profile of Zimbabwe, which is already struggling to service US$21 billion owed to various creditors. Remember these are state-guaranteed debts. I only hope that clauses in the agreement don’t give creditors the powers to resort to shutdowns. Markets were last year railroaded into paying some of the region’s most expensive tariffs, in order to build Zesa’s capacity to service the debt. Today, they do so grudgingly because they have no viable alternatives.
The debt presents the biggest threat to Zimbabwe’s long cherished recovery.If there is no other plan, Zesa must renegotiate the deal with China.
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It must plead for a sustainable payment plan. None will do it for us.
This is the only option that is likely to take us out of a predator’s jaws.
