Power Privatization Series: Zambia Case Study

Zambia is a particular case. In contrast to most African countries that have historically dealt with power shortages, for the greater part of the second half of the 20th century, Zambia had a surplus of power production that it exported to other countries. But a combination of factors, including decreased foreign demand, flat internal demand growth and extremely low electricity tariffs, ran the national electricity company ZESCO into a catastrophic financial situation in the 1990s that precipitated a privatization process.1 Backed by the World Bank and the IMF, Zambia was one of the first adopters of this economic shift in the region. Lack of political strength has, however, curbed the potential benefits of privatization and Zambia is today on the brink of blackout.2

Regulation

In 1994, following a change in government, Zambia enacted its first energy policy stating the authorities’ intent to reduce their involvement in the energy sector to an exclusively regulatory level. In 1995, the Electricity Act established the grounds for liberalizing the energy sector and to privatize the national electricity company ZESCO. The same year, the enactment of the Energy Regulation Act initiated the creation of one of the earliest independent power regulatory institutions in Africa, the Energy Regulation Board, which oversees developments in the sector and brings together the interests of consumers and suppliers.

Implementation

In 1996 the Zambian government started divesting from some of its energy managing and producing assets. The privatization of the national mining company in the Copperbelt Province led to the independent purchase of its Power Division, which controlled the distribution network for the mining sector, by the Anglo-American consortium Copperbelt Energy Corporation (CEC).3 It has since been sold to local investors. This was the first private entry into the Zambian energy sector since the 1970s. This was followed by the sale of the Mulungushi and Lunsemfwa power plants to the Lunsemfwa Hydro Power Company (LHPC) in 2001. Today LHPC is the only private power producer in the country, with a 38 MW capacity. Plans followed to privatize ZESCO but were faced with growing popular discontent, as the benefits of privatization were slow to materialize. The government opted against privatization and promoted a deep restructuring of the company, allowing it to work more closely with private players, assuring limited governmental interference and drafting a goal-driven business plan for the company. Under-funding has, however, limited the benefits of this change and the lack of success in raising electricity tariffs has brought ZESCO to the brink of bankruptcy, while at the same time keeping private investors away. Current prices would undoubtedly bring losses to any investor. Where before the surplus of power was a problem, today Zambia has a power deficit of around 500 MW.4

Financing

Zambia’s power privatization has mostly been financed through debt relief and development programs promoted by the World Bank and the IMF. The country has long tried and failed to attract foreign capital since the limited electricity tariffs have been maintained at non cost-reflective levels. Recently, funding from Chinese and Indian development banks5 have allowed for the construction of a coal-fired power plant and hydropower plant, which should help curb power-shortages in the near future and answer demand growth.666 Governmental inability to raise tariffs will however undermine these ventures, private or public, in the long run.6

Conclusion

As an early adopter of privatization, Zambia hasn’t been able to overcome endemic problems. While the market has been liberalized, and the conditions put in place to facilitate and attract investment in this demand-hungry market, one barrier remains. Zambia has one of the world’s lowest electricity tariffs at $0.03 per kWh, more than 200 times lower than in Namibia. While tariffs stay so artificially low it will be impossible for any investor to expect profit, and hence, impossible for the country to attract investment to the sector7.

In our final case study of this series later this week, we will analyze Uganda’s privatization efforts. Learn more about the dynamics of the power sector in Africa at Africa Oil & Power on June 6-7 in Cape Town.

Join the conversation on Capital Raising and the Gas Industry at the AOP Investor Forum in London, May 10, 2018