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Munyaradzi Mugowo, Director, Investfin Global Pvt Ltd,
ZIMBABWE
i18 - 22 May 2009
CTICC, Cape Town, SOUTH AFRICA
Falling power generation capacity in Zimbabwe and the potential of IPPs and PPP
initiatives
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Contents
1. Introduction
2. Zimbabwe’s power sector & nature of crisis
- power generation trends; supply and demand situation
3. Economic watershed & demand growth
4. PPP experiment in Zimbabwe
5. Deregulation of power sector
- the proposed reforms
6. Investment opportunities for IPPs and PPPs under
new framework
7. Conclusion
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
IntroductionGood news about 2009 Zimbabwe
• What is the good news?
- Inclusive government – the assignment & reforms
- Investment climate in the new dispensation
*restrictions on foreign ownership being reviewed;
*exchange control regulations relaxed
*one-stop shop for FDI being established to cut turnaround times
*commitment to protect private investments
- IMF Article IV Consultation report in May painted
a positive outlook for 2009 -- more consultations.
- Business confidence and economic outlook
* business executive expectations and consumer expectations
- Skills – unemployemnt rate as proxy
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Zimbabwe’s power sector
• a one-player industry. The Zimbabwe Electricity
Supply Authority (ZESA) Holdings is a legal monopoly
– established through an Act of Parliament.
• Act provides for a single investor, a single operator,
a single transmitter, a single buyer and a single
distributor of power (no marriage here).
• ZESA owns and operates two main power
generation plants:
- Kariba Power Station (Hydro) – 750 MW
- Hwange Power Station (Thermal) – 780 MW
- Others in Harare, Bulawayo & Munyati – 150 MW.
Nature of Zim’s power crisis
• Investment stagnation – installed capacity inadequate:
- Kariba constructed in 1953, & Hwange from 1974-1980.
- There have not been any major new capacity installations after these
- Rehab. and new expansion projects still face a financing challenge
- Poor PPP framework – high commercial risk
• Falling generation capacity
– ageing equipment, supply interruptions (8 interruptions 2007-8 alone)
- poor energy efficiency.
• Falling import cover
- decade of economic downturn has affected current account
• Unreliability of import sources
– supply erratic during peak periods
• Limited IPPs - only private, non-commercial, inward-looking.
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Installed vs. available generation capacity
’04’09
Source: ZESA
PLANT DEPEND-
ABLE
CAPACIT
Y
(MW)
CURRENT
AVAILABL
E
CAPACITY
(MW)
PLANT STATUS DEFICIT
MW
KARIBA 750 740 4 UNITS ON
STREAM
10
HWANGE 780 200 4 OUT OF 5
GENERATORS
DOWN
580
OTHERS (SMALL
THERMALS)
150 0 OUT OF
SERVICE (NO
FUEL, COAL)
150
TOTAL 1680 940 - 740
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Power generation trends continuedHwange Power Station – two-stage system (480 MW & 300 MW)
• Stage 1, comprises 4 turbo-alternators with 4 boilers
and a plant. All the 4 turbo-alternators currently off
line less than a year after they were rehabilitated:
Generators have over-lived their useful life – system overhaul required.
There have been frequent plant failures as a result of ageing
infrastructure. Until the last refurbishment in 2007, the plant had last
been properly maintained in 1987. (Repairing them just as good as trying
to raise the dead).
• Stage 2 – rehabilitation work yet to commence
• shortage of coal -- coal supplier, HCC, operating below capacity.
• Lack of critical spares & working capital constraints
• high average costs -- low plant capacity, high maintanance costs
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Power generation trendsKariba South Power Station – dependable plant
• The underground power station was constructed in
1953. It houses 6 X 100 MW generators.
• The plant and equipment are outdated and
dilapidated -- engineers and technicians are even
afraid of servicing them.
• Although it is Zimbabwe’s only reliable plant, there
have only been minimal refurbishments to the
generators since the station was established in 1953.
• If this plant fails, there is a blackout in the country! This is how precarious the situation is!
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Supply and demand situation
• Total installed capacity = 1650 MW
• Available capacity = 940 MW
• Generation deficit = 740 MW
• Available imports = 350 MW
• Total available capacity (+imports) = 1290 MW
• Exports to NamPower = 150 MW
• Total demand (base demand) = 1950 MW
• DEFICIT = -680 MW
Source: ZESA, SAPP
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Import supply situation
EXPORTER CAPACITY
(MW)
DURATION
OF
CONTRACT
SUPPLY STATUS
HCB (MOZA) 150 5 YEARS •RELIABLE SUPPLY
ESKOM (SA) 0 •SUPPLY CONSTRAINTS IN RSA
•HIGH COST
SNEL (DRC) 50 5 YEARS •UNRELIABLE
•ERRATIC SUPPLY AT PEAK
ZESCO
(ZAM)
150 5 YEARS •UNRELIABLE
•HARDLY AVAILABLE AT PEAK
TOTAL 350
Source: ZESA
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Zimbabwe’s import performance – US$m
Source: Reserve Bank of Zimbabwe
• 2006 -2008 statistics unavailable.
Regression analysis
• Economic meltdown aggravated after 2005
• Migration to multi-currency system – the impact on
public sector balance sheets and cash-flow.
• Consumer liquidity – moral suasion & temporary
price moratorium)
2000 2001 2002 2003 2004 2005
61.7 55.8 55.2 57.7 59.2 42.9
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Economic watershed & demand growth
• Suppressed demand for the past nine years as
capacity utilization in critical sectors of the economy
slumped to a record low.- manufacturing – under 10 percent (2007)
- agriculture – around 30 percent
- mining – under 15 percent.
• 2007-2008, power demand slumped 7.7% (SAPP)
• Capacity utilization in bulky power-consuming
industries projected to rise sharply.- closed mines being reopened & engineering firms reopening moribund plants
• This economic rebound has stoked power demand
to a level last seen around 2004 and all of sudden
ZESA is overwhelmed.
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Way forward• Generation capacity currently at just about 50%;
• Demand growing with projected economic recovery;
• Import supply not only volatile, but also expected to
down-trend;
• Import costs to rise as regional utilities implement
cost-reflective tariffs;
• Import cover diminishing ;
• A number of new projects on the cards- balance sheet weak
Only two scenarios can rescue Zimbabwe:
1. To deregulate power sector to bring IPPs on board
2. To re-visit PPP initiatives.
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
PPP experiment in Zimbabwe• PPPs are basically partnership arrangements
between a government or a public entity and a
private investor in the:
- designing,
- planning,
- financing,
- construction, or
- management
of projects both infrastructure and social services.
• PPPs not new to Zimbabwe. PPP guidelines were first
launched in 2004 when the government
restructured the Public Sector Investment (PSI)
programme to accommodate PPPs.
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
PPP experiment (continued)
• The PPP manual proposed a number of models,
including:
- Build-Operate-Transfer (BOT),
- Build and Transfer (BT),
- Build Own and Operate (BOO),
- Build Lease and Transfer (BLT),
- Rehabilitate Operate and Transfer (ROT),
- Rehabilitate Own and Operate (ROO)
- Contract Add and Operate (CAO).
• Each had a distinct package of incentives depending
on the risk born by the investor .
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Lessons• Since inviting the private sector for a dance in 2004,
the government is still alone on the dance-floor!
- Only quasi-government institutions like the National Social Security
Authority (NSSA) have come forth, but as a matter of statutory obligation.
Where did we go wrong?
• The macroeconomic climate deteriorated rapidly
between 2004 and 2009 and increased business risk;
• Hyperinflation of an unprecedented magnitude
made the investment climate unstable and
unpredictable for any type of investment, let alone
long-term, high-risk infrastructure investments.
- projects became exposed to excessive cost overruns and negative returns
on investments – difficult to compute the net present value.
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Lessons continued• Political upheavals stoked up political risk
- concerns over property rights protection, for instance, became a greater
factor than business risk. Infrastructure projects inherently high-risk.
- Property Rights Alliance (PRA)’s International Property Rights Index for
2008 ranked Zim and four others number 109 out of 115 economies.
• Perceived country risk as a result of sanctions also
hurt investor sentiment ;
• The PPP framework had many loopholes, notably:
- the government transferred business risk but retained administrative
functions such as tariff determination without recourse to a subsidy
structure , i.e., there were no financial benefits for the private party.
• Human capital flight
- hyperinflation eroded real incomes & triggered brain drain
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
“Come let’s reason together”
• In the Short-term Emergency Recovery Programme
(STERP) -- an 11-month economic stabilization blue-
print for the country -- the govt openly invited
private players into partnerships with both govt and
public entities:
In order to complement Government efforts, the private sector has a role in financing infrastructure development.
In recognition of this, the private sector is being invited under the Programme to participate in the provision of infrastructure on a public private partnership basis
(STERP, 434-5).
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Seizing the moment
• During a PPP capacity building workshop held in
Harare at the beginning of May, the government
undertook to:
- review the country’s PPP policies and guidelines passed in 2004 and
include buy-in from the private sector.
- identified power generation as one of 5 potential PPP areas.
- expressed readiness to assume a new role as “facilitator,” and
“regulator” of public service delivery rather than sole “provider”,
“operator” and “manager” of infrastructure and social services.
• The new spirit is in keeping with the IMF’s
recommendations under article IV cons.:
“Directors underscored that the revival of the economy depends critically
on quickly attracting private domestic and foreign investors and
improving competitiveness.”
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Economic watershed• The country has reached a critical economic juncture
where it aims to regain its economic footing and take
a leap forward.
• Without adequate power supply to industry, mines,
irrigated plantations, tobacco barns, hospitals and
households, economic turnaround is a pipedream.
• After operating unprofitably for nearly a decade,
ZESA’s capacity to power Zimbabwe’s economic
recovery bid is severely depleted
• From 2004 to 2008, it had to survive on quasi-fiscal
support for a number of reasons:
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Economic watershed
• Poor cash flows due to sub-optimal tariffs
In January 2006, RBZ governor remarked:
“When one observes that in most residential areas, a full
month’s electricity bill comes to a mere Z$20,000, which
amount translates to the price of a small bundle of firewood
to last for 2 hrs; or equally startling, that such monthly bill is
equivalent to no more than 2 packets of candles, it should
come as no surprise that ZESA cannot pay its way.”
• Foreign currency shortage to import critical spares
for plant and equipment maintenance.
• Inability to attend to faults – it goes back to poor
cash-flows & weak balance sheet.
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Deregulation of power sectorThe proposed reforms
• Government in the process of reviewing and
harmonizing policy and legislation governing PPPs
and IPPs.
- amendment of ZESA Act proposed to eradicate single investor and single
buyer regime so as to accommodate IPPs.
• New PPP law being considered.
- Law to provide for a full-fledged PPP unit at govt level to play an
administrative, advisory and supervisory role in PPP arrangements.
• Establishment of a balanced PPP manual
- manual to contain guidelines that cater for the commercial interest of
investors and the consumption interests of consumers.
• Independent regulator being considered -- review of tariff
regime in line with SAPP recomm.
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Investment opportunities for IPPs and PPs
A: New generation Projects – 3,400 MW
• The government has planned a number of diversified, long-
term power generation projects for 2009-2015, which it
cannot finance.
Source: SAPP
PROJECT CAPACITY
MWEXPECTE
D
COST
US$M
FUNDING/PROJECT STATUS
HWANGE
EXPANSION
600 2012 500 • FEASIBILITY STUDY DONE
•NO FUNDING, NO PARTNER
KARIBA SOUTH
EXPANSION
300 2012 200 •MOU SIGNED
•NO FUNDING, NO PARTNER
LUPANE (GAS) 300 2012 368 •NO FUNDING, NO PARTNER
GOKWE NORTH 1,400 2015 1,357 •PVT, PARTNER ENGAGED
BATOKA 800 2015 2,500 •GOVT-to-GOVT (Zim-Zam) PROJ
•NO FUNDING
18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA
Investment opportunities for IPPs & PPPsRegional transmission interconnection
• These generation projects are among the many
integrated projects that SAPP is coordinating to
boost power supply and trade in the regional pool.
• Because of its centrality, Zimbabwe is an important
link in the SAPP grid – the country has potential to
become a regional power hub.
If the Zimbabwe coughs, the whole SAPP system catches the flu!
• Some of the integrated transmission projects
involving Zim, include the ZIZABONA interconnector
(Zimbabwe-Zambia, Botswana-Namibia interconnector).
• NOTE: You can only transmit what you generate!
THANK YOU!
Investfin Global
Pvt Ltd