Zesco’s financial position is unsustainable - world bank

COMMENT - This is not very well written. It is hard to make out what is being said. "Unsustainable to ensure..." - what does Zesco's financial situation have to do with the viability of the power sector in Zambia? And what is 'government's share capital'?

Zesco’s financial position is unsustainable - world bank
By Kabanda Chulu
Tue 19 Jan. 2010, 04:01 CAT

THE World Bank has warned that Zesco Limited’s financial situation is unsustainable to ensure the viability of the power sector in Zambia.

And Zesco Limited has suggested to the government that its balance sheet be restructured by converting the power rehabilitation project (PRP) loans from the government to Zesco as government’s share capital aimed at reducing high interest costs and providing liquidity for the company’s commercialisation process.

Meanwhile, the rise in the demand for electricity requires Zesco to invest in excess of US $1 billion in new generation and transmission capacity but Zesco may not be able to secure such funding without government support or guarantees.

In its implementation completion report for the PRP, the World Bank stated that sustainability of the rehabilitated hydro power stations was unlikely because of Zesco’s poor financial position although it has described the implementation of the PRP as satisfactory.

It stated that without improvements in its financial position, Zesco would not be able to sustain the physical infrastructure of the refurbished power plants in good working condition.

“If adequate resources are not available in the future for spare parts, then maintenance and repairs are likely to be postponed as they were in the past with heavy long-term declines in system reliability, so the tariff issue is a critical one especially that 60 per cent of Zesco’s sales are to the copper mines at subsidised rates hence Zesco’s financial situation is unsustainable and if allowed to continue will undermine its commercialisation efforts and the viability of the power sector, so there is urgent need for action on tariffs, including the reopening of the sales contract with the mines.”

The report also recommended that senior managers at Zesco needed training in the commercial and financial sides of the business not just in the engineering side if they were to operate a company efficiently.

The PRP was scheduled to be completed by December 31, 2002 as per Development Credit Agreement signed between the government and the World Bank’s International Development Agency (IDA) on June 15, 1998 and other financiers such as the European Investment Bank and the Development Bank of Southern Africa (DBSA).

However, the project schedule has ‘slipped’ mainly due to delayed effectiveness of some credits and loans resulting from non-fulfillment of some conditionalities on time and protracted procurement process.

Hence, the revised implementation schedule was given a new estimated completion date of about August 2006 but as at now, the PRP is still ongoing with the completion date set for sometime next year.

Currently, Zesco is in a weak financial position partially caused by the high debt levels it has had to undertake to invest in its infrastructure.

“Zesco, therefore proposes that its balance sheet is restructured by converting the PRP on-lent and other PRP loans from government to Zesco as government’s share capital and the total PRP loans are equivalent to US $160 million and this will reduce the high interest costs of paying back these loans and thus free up liquidity for Zesco to meet its commercialization objectives,” stated Zesco acting managing director Cyprian Chitundu.

He stated that the proposed recapitalisation measures would have positive impacts on load shedding after completion of the PRP, increased service delivery through increased generation capacity resulting from completion of PRP and increased generation from new projects.

Chitundu stated that other positive impacts would include timely connection of new customers, metering of all existing and new customers, investment in distribution and supply systems, among others.

He observed that the recent improvements in commodity prices such as copper, cobalt and steel had led to an increase in the uptake of electricity.

“Other developments such as the multi facility economic zones, the planned farm blocks and the Northern tourism corridor will undoubtedly increase demand for electricity,” Chitundu stated.

“This rise in the demand for electricity requires Zesco to invest in excess of US $1 billion in new generation and transmission capacity but Zesco on its own many not be able to secure such funding from financial institutions without government support or guarantees.”

To meet the expected rise in demand for electricity, Zesco would require some kind of direct budgetary support from the government.

“Government should secure financing for the rehabilitation, up rating and expansion of the small hydro power stations in Northern Province. These will improve reliability of power supply to Eastern, Northern and Luapula Provinces which are currently experiencing voltage problems,” stated Chitundu.