The Zambian energy sector demonstrates one of the cleanest carbon footprints in the world. More than 99 percent of the country’s grid electricity is generated from hydro electricity, which supports one of the largest energy intensive mining industries on the continent. While much of the grid was developed to support the mining dominated Copperbelt, the functional capital Lusaka, and the tourist capital Livingstone, the Zambian government has an ambitious plan to expand the economy beyond its previous boundaries on several fronts. There are plans to double the output of refined copper, introduce mechanised agriculture in new designated farming zones, develop new business parks, and increase rural electrification from three to 50 percent.
Copperbelt Energy Corporation (CEC) transmits and supplies energy in the Zambian Copperbelt, the economic heartland of this developing country. CEC operates around 900km of transmission lines, 38 high voltage substations and 80MW of thermal generation, and transmits and supplies around 800MW of power to Zambia’s strategic mining sector and the surrounding province. The company has also spearheaded an information revolution through the installation of optical fibre in the main commercial centres in Zambia.
The Zambian economy
The Zambian economy performed well during the international economic downturn of 2008 and 2009. This was facilitated by the significant increase in copper prices on the world market during the second quarter of 2009, and sustained growth in other sectors such as construction and agriculture. Committed capital projects in these sectors were in excess of $1bn (to be completed over different periods of time). Despite recessionary trends globally, Zambia registered real GDP growth of 6.3 percent in 2009.
Notwithstanding the steady development over the last few years, Zambia’s economy still faces challenges. In the energy sector the country has experienced power deficits due to growing demand and planned rehabilitation of units at the main hydro power stations. Further, the national levels of electrification are significantly low. As a result, the government is inviting investment in power generation and transmission projects.
The energy sector in much of Africa has relied for decades on respective African governments’ relationships with donors and development finance institutions to provide subsidised and concessionary finance for energy infrastructure investment. While this has provided competitive finance for specific projects, there has been little incentive for the respective state utilities to plan and develop projects in line with the growth potential of the host economies.
The host utilities have instead preferred to undertake projects proposed by the donors, preventing the laws of supply and demand from taking effect. The frequent load shedding and buzz of diesel generators characteristic of many African cities situated in economies endowed with abundant natural energy resources is testament to the failure of donors and African governments alike to understand the economics of energy. Keeping tariffs artificially low and failing to implement enabling legislation has crowded out private sector investment, and placed significant barriers to entry into an industry that provides a natural stimulus to economic growth, with a growth multiplier effect to the wider economy.
Thankfully, the situation is beginning to change, with a growth in the number of projects being opened up to the private sector for investment. In Zambia, the conditions for private sector involvement have gradually been falling into place with a trend towards cost reflective tariffs, the establishment of an independent regulator and the development of a grid code that will facilitate open access to the national grid. Reforms will need to go further to ensure that projects can become bankable, but the trend is clear. African countries can learn from their peers and in sub-Saharan Africa, Kenya leads the way in facilitating an attractive environment for the participation of the private sector. A number of Independent Power Producers (IPPs) are now operating in Kenya due to the proactive stance of its government in establishing a clear regulatory framework and tariffs that represent the true underlying cost of providing electricity.
Within Zambia, a number of IPPs have been allocated projects, although none have yet reached financial close. These include a 900MW hydro plant at Kafue Gorge Lower project, which is being developed by Sino Hydro using Chinese government financing; a 300MW coal fired power plant being developed by Nava Bharat and ZCCM Investments Holding; and CEC’s own Kabompo Gorge hydro plant, designed to generate 40MW.
The wider Southern African region is blessed with abundant energy potential due to its large rivers and undeveloped coal reserves. There is increasing pressure to favour regional hydro projects where possible, such as the Mphanda Nkuwa project in Mozambique: capable of generating 1,500MW when complete.
The Southern Africa Power Pool (SAPP) is an institution focused on encouraging a regional approach to investment in new power infrastructure, and promotes investment in regional power projects aimed at addressing the power deficit faced by many of its member countries. In March 2010 CEC was admitted to the full operational membership of SAPP, becoming the first private utility member of the 11-country electricity pool.
CECand the capital markets
CEC shares were listed on the Lusaka Stock Exchange in January 2008, through which 25 percent of shares were sold for a consideration of around $30m. The offer was significantly oversubscribed, with strong interest from local and international institutions and individuals. The share allocation process favoured smaller investors, resulting in a shareholder base largely comprised of Zambian residents and institutions.
There are a number of funds based in South Africa, the UK and the US with an appetite for African listed stock. As the returns in developed markets diminish, more institutional interest in African markets is expected going forward. Share prices on African exchanges are expected to match or exceed the growth in GDP, which for most African countries is likely to be higher than GDP growth in developed markets.
The majority of finance for new projects will be raised through debt, and there are a number of debt options available.
The development finance institutions such as IFC, DEG, African Development Bank, FMO and DBSA are prepared to finance infrastructure projects with amortising loans of tenors of up to 15 years (if the loan is deemed to be a public sector loan, even longer tenors are possible). Commercial banks are often able to match these terms, usually with a partially reduced tenor, provided that political risk cover is available. Perhaps the most significant development of the last five years has been the emergence of Chinese institutions such as the Industrial and Commercial Bank of China and China Exim Bank, which have been lending up to 85 percent of the total finance for projects with Chinese involvement.
The emergence of Chinese financing has certainly introduced a new element of competition into capital markets, but there has also been a trend towards bond financing as a means of financing infrastructure. This provides the investor with a marketable and tradable debt instrument, while the recipient of the funds has the benefit of a longer capital repayment holiday than is possible in a typical corporate debt structure. NamPower, the Namibian utility, recently issued a successful bond through a parallel listing on the Namibian and Johannesburg stock exchanges. Convertible bonds may be particularly attractive in today’s uncertain climate, providing the security of a guaranteed return with the possibility of upside if an investment plan achieves above expectations.
Future outlook for CEC
CEC is seeking to diversify its business model by participating in regional generation and transmission projects. CEC is developing a hydro power project in the north-western part of Zambia that will add 40MW to the national grid. This project, the Kabompo Gorge Hydro Power project, is estimated to cost about US$140m including the transmission line. Further, in July 2010 the government of Zambia granted CEC the authority to undertake feasibility studies for hydroelectric schemes on a river basin in the north-eastern part of the country.
The telecoms sector in Zambia has been developing rapidly in recent years. CEC has made investments in the sector through the installation of optic fibre on its power lines and offers broadband services to customers on the Copperbelt.
CEC has further acquired a 50 percent joint venture interest in Realtime Africa Alliance Limited, a company providing telecommunication and internet services in Zambia.
CEC prides itself in being a Zambian company, with a unique culture based around teamwork and an aspiration for excellence in its core engineering competences. CEC’s vision statement is “to be the leading Zambian investor, developer and operator of energy infrastructure in Africa by providing innovative solutions and building strategic partnerships through committed professional teams”. As the energy sector opens up, CEC will be competing for projects within the region, and the capital with which to fund them. It hopes to attract, develop and train the best indigenous talent in the region. Africa is in need of new champions and role models, and CEC aspires to be the company of choice for employees and investors alike.
For more information www.cecinvestor.com
