On 15th October, 2021 the Minister of Energy, Mr. Kapala, appraised Members of Parliament on ZESCO’s debt position. The minister announced that the national utility’s total debt was standing at $3.5billion. The country’s main electricity supplier has amassed debt due to costly payables due to emergency power supplier and Independent Power Producers, among other reasons.
In his speech, the Minister gave a breakdown of the $3.5billion debt as of September, 2021. It was attributed to four main causes. Firstly, costly emergency power imports. The 2014/2015 drought resulted in a power deficit which led the government and ZESCO to procure emergency power imports at triple ZESCOs average selling price and with no upward tariff adjustments to help recover the cost, arrears accrued to over $200million during 2015/2016 drought season.
Secondly, the mismatch between average electricity buying tariff and selling price. ZESCO buys electricity at an average of $0.11 Kw/h from IPPs (to mitigate the deficit) and sells at $0.7 Kw/h which is a step down but it expected tariffs to migrate by the time plants would come online. Unfortunately, due to the delay in tariff escalation to recover the cost, arrears with IPPs including Maamba Collieries, Ndola Energy and Itezhi-Tezhi Power Corporations accrued to $1.1billion.
Thirdly, the non-payment of bills by government and mining companies. ZESCO is owed over $39million by the central government, water utility companies and parastatals. As of August 2021, mining companies including Konkola Copper Mines (KCM), First Quantum Minerals (FQM) and CEC owed ZESCO $886million as a consequence of inability to pay and dispute over invoices, for this reason, late payment penalties now stand at $60million.
Between 2018/2020, amounts due to ZESCO for goods and services delivered that are expected to be uncollectable, amounted to $0.6billion. Fourth, depreciation of the kwacha. ZESCO had been borrowing to fund large capital projects like the Kafue Gorge and Mr. Kapala mentioned that 95% of the borrowing is paid in dollars while 70% of operating costs are also paid in dollars. Therefore, between 2018-2020, as the kwacha depreciated to as low as $1 to $22, ZESCO made losses amounting to $432million which it could not recover as no tariff adjustments were made since January 2020 when the exchange rate was at a $1 to K12.
ZESCO has set out mitigation measures in its three part Turnaround Strategy 2021-2025 that will seek to Stablise, Recover and return the company to Growth. Part of the strategy will include resolving the company’s debt to independent energy suppliers. This will require engaging independent Power Producers to renegotiate tariffs to stop the accrual of arrears and formulation of a payment plan to clear outstanding arrears. This renegotiation of tariffs with the IPPs was first mooted in September 2019 by the then Minister of Finance Margaret Mwanakatwe. Furthermore, debt resolution will also include conversion of loans by government into equity as well as restructuring other debt facilities into longer tenure loans.
Another aspect of the Turnaround will see the company enhance its revenue collection ability. This will require engaging KCM over liquidation of arrears in excess of $175million and engaging government on clearance of outstanding balances of $53million and develop innovative ways of earning revenue.
The Minister of Energy in an interview during his visit of Maamba Collieries affirmed that government had set out with a view to getting ZESCO to restructure the debt. With ZESCO on a path to debt restructuring, the benefits will be “cost reflective tariffs that ensure a return on investment and attracts private sector investment,” Mr. Kapala said in the ministerial statement given in Parliament on the Status of Zambia’s Electricity generation and demand profile. Debt restructuring will also improve its performance of its general functions including generation, acquiring, transmission and supplying of electricity and allow for ZESCO to be on more agreeable terms with its IPPs. It also opens the door for the capacity to diversify ZESCO’s energy generating mix which could see a decline in the power outages that plague the companies supply.