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Sunday, 15 June 2008

Parastatal Madness, 3rd Edition

After blogging on this here and here, I am cautiously optimistic after reading Zambia’s latest promises to the IMF that the ZESCO madness is being dealt with:

The government is conscious of the gravity of the current shortage of electric power and the risk it poses to sustained growth. Development of the electricity sector is vital to achieving sustained high growth and reducing poverty. In particular, greater electricity generation will be needed to support the envisaged expansion of mining, private sector growth, and the planned rural electrification program. There is a need to strengthen policies to ensure that sufficient electricity generation capacity is installed as quickly as possible to meet a rapidly growing demand. To this end, the government will develop policies with specific strategies to (i) gradually adjust electricity tariffs to reflect the cost of service; (ii) attract private investments and competition in the sector; (iii) increase the operational efficiency of ZESCO and strengthen its governance; and (iv) ensure that ZESCO has sufficient resources to implement the planned rehabilitation and new generation projects.

Given the urgency, the government intends to complete this action plan no later than June 2008 (structural performance criterion). Further, as a first step to improve the financial footing of ZESCO, the government will ensure that all arrears to ZESCO from ministries, provinces, and spending agencies (MPSAs) are paid by end-December 2008. Moreover, the MoFNP will issue a circular instructing all ministries, provinces, and spending agencies (MPSAs) that (i) all utility bills for each quarter are to be paid from the quarterly budget funding and (ii) all funds released for payment of utility bills should not be reallocated by MPSAs.

As I have said in previous blogs, many of these companies really only underperform due to the large debts owed to them. Its good that common sense is largely prevailing. But a note of caution – these temporary moves suffer from serious commitment issues. Even if the current government pays off these debts, whats to stop the next government accumulating similar debts? We need to take away the reason for accumulating these debts and that calls for elimination of the government “capture” of ZESCO. The same applies to ZAMTEL and parastatals suffering from this problem.


  1. You mention the need to attract private sector investment into energy generation. You overlook the fact that such investment has been much discouraged by the government's abrogation of the development agreements entered into with the mining companies, especially with regard to the stability periods. The reversal by act of parliament of contracts entered into by the Zambian government gravely weakens the confidence of potential investors. How can they be sure that the Zambian government will not restrict the prices they can charge and thereby make their investments uneconomic?

  2. Murray,

    Just let it rest. The government has money now, so they don't need to rely on 'foreign investors'.

    They can hire either domestic or foreign companies and commission power projects themselves.

    There has been way too much emphasis put on 'attracting foreign investment', at the detriment of actual development of local capacities.

    Besides, there is a lot of opportunity for turning away from huge projects and to solar energy, which makes people less dependent on the grid, and biofuels, which would make the country less dependent on the importation of fuel. And which would stimulate agriculture at the same time.

  3. Murray,

    A very important point.

    It strikes me that investment always price in those risks. A new government could come in and always eliminate previous taxes. Thats why most investors prefer development agreements.

    Having said that, I do think the mining agreement probably were special. They were signed at time in Zambia's history when transparency was not there. I think most investors now appreaciate the current conditions are better and there are no agreements that the Mwanawasa administration has signed that they have reneged on.


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