Energy Minister Mathew Nkhuwa has confirmed that Maamba Collieries has opened arbitration proceedings in the London High Court against Zesco to recover $300 million owed for the supply of electricity.
Africa Confidential, in its latest publication revealed that a judgment in favour of Maamba Collieries could eventually force the liquidation of Zesco assets to meet the bill and further increase the already high risk of sovereign default.
Mr Nkhuwa told a media briefing that government is aware of the arbitration process between Maamba Collieries and Zesco in the London High Court but his Ministry has not been served with summons from either the company, or the court.
And Africa Confidential reports that Zambian bondholders are mystified by a ghost loan of a staggering half a billion United States dollars that the PF contracted between December 2019 and January 2020.
The creditors are further perplexed that the PF are refusing to reveal who lent them the money (which is unrelated to China or any of it projects) and the purpose it was used for, reports Africa Confidential in its latest edition released on 20th October 2020.
In a virtual meeting with bondholders in early September 2020, the Zambian government requested for a six months moratorium for a coupon payment but there was no quorum reached by the bondholders resulting in the decision being pushed to 13th November a day before 30 day grace period on the bond payments ends.
Public finances already cannot meet the bond coupon payments, making it unlikely that the state can bail out Zesco.
A judgement in Mwamba’s favour could eventually force the liquidation of Zesco assets to meet the bill and cause other debt dominos to fall, further increasing the already high risk of sovereign default.
Zesco’s debts are guaranteed by the state.
Public finances already cannot meet the bond coupon payments, making it unlikely that the state can bail out Zesco.
Electricity debt compounds default risk State electricity supplier Zesco’s assets are in danger of being liquidated to pay a debt of US$300 million to Maamba Collieries Limited for electricity supplied by its coal-fired power station, which is integrated with a coal mine.
Maamba invoked clauses in its contracts to force arbitration over the debt, which will take place in London after communications were made in the middle of this year.
Zesco is expected to respond in the next three weeks.
Maamba believes the court will favour it in the case, as it is a simple debt from a failure to pay for a service.
The hearings will take place ‘soon’, a source said, although Zesco will want to draw out the case as long as possible.
Typically, arbitration cases take a long time, and a judgment is unlikely until after the election next August.
Unless conditions improve radically for Zambia while the arbitration proceeds, the repercussions for Zesco and the government could be disastrous.
A default by Zesco could trigger cross-default provisions for other Zesco loans, meaning lenders could accelerate loan repayments – which neither Zesco nor the government can pay.
If Zesco cannot meet the arbitration court’s award, Maamba could seize Zesco assets to get its money.
This could worry major Chinese lenders including China’s Exim Bank and the Industrial and Commercial Bank of China (ICBC), which together lent US$1.7 billion for the Kafue Gorge Lower Hydro project.
The loan is ring-fenced and insured, however, and the asset could not be touched if Zesco remains a going concern.
Although the Eurobond and the Zesco debts are separate, both place demands on the Treasury that it cannot meet.
Zesco’s crisis comes after years of the government keeping electricity prices low to boost the Patriotic Front’s electoral prospects.
Lenders and international financial institutions, such as the African Development Bank, have pleaded with Zesco to cut a workforce which critics have called a ‘welfare system’ used to provide unproductive employment.
Zesco also, PF sources said, employs PF cadres in order to finance their and the party’s work.
This makes them effectively ‘ghost’ workers inflating the wages bill while contributing nothing to the company.
The AfDB in particular has been urging reform of Zesco’s employment policy.
And the news of the arbitration proceedings came just as holders of Zambia’s US$3 billion in bonds met on 20 October to consider its plea for a six-month standstill in coupon payments.
There was no quorum so the decision will now be taken on 13 November, one day before the 30-day grace period on the bond payments ends.
Many not in favour of the deal simply abstained, say sources.
The reprieve gives the government more time in which to improve its case for the standstill by offering evidence it is tackling key concerns such as Chinese debt and mending fences with the International Monetary Fund.
Up to now, the bondholders were unconvinced by the presentation Lusaka made to back the request for delay.
Instead of winning their confidence and sympathy, it confirmed their belief that Lusaka was guilty of gross financial mismanagement, one of them told Africa Confidential.
It was this, not Covid-19, as the government claims, that is to blame for the current credit squeeze, the source said.
Zambia has admitted that it cannot maintain payments on its Eurobonds or the bulk of its other external debt, raising the prospect of its de facto default becoming a formal one on 14 November.
On 14 October Zambia missed a $42.5m interest payment on the $1bn Eurobond due in 2024, the Treasury having stated the day before that it would be defaulting on all commercial loans, including Eurobonds, if creditors did not agree to its earlier demand for the standstill.
Two further Eurobond coupons fall due on 20 January and 20 March, making a total – including the missed $42.5m payment – of about $120m.
Zambia says it would use that six-month deferral to work out a plan with its advisors, Lazard Freres, and the IMF to make the debt sustainable.
But bondholders doubt this can be done, and previous claims by Lusaka about co-operation with the IMF have proved exaggerated.
Zambian officials have produced an analysis of its debt sustainability, but without IMF help.
Treasury sources say they are keeping it quiet because the outlook is so dire.
Finance Minister Bwalya Ng’andu previously promised to reduce the $7bn disbursement ‘pipeline’ of previously agreed loans by $5bn, but we understand the cut may amount to $1.3bn or less.
The bondholders were briefed on Zambia’s debt position on 22 September when Lusaka made its plea for the ‘standstill’ on payments.
The bondholders were shocked to find that $575m in unexplained new debt – not related to China or its companies’ projects – was incurred in December 2019 and January this year.
Lusaka refused to name the new creditors when answering bondholder questions on 7 October and instead only provided a breakdown of which amounts were on commercial terms and which on non-commercial terms.
It lumped the loans together with Chinese loan disbursements made during the same period to conceal – so the bondholders believe – the identity of the new creditors.
The government has become cagey about details of its debt.
Annual Economic Reports now only reveal the total contracted each year by lender without referencing individual projects, which was the norm prior to 2018.
AERs earlier than 2019 have been removed from the finance ministry website.
The 2019 AER shows $617m in ‘supplier credits’ in the table of loans contracted.
No such reference appears in any of the previous AERs seen by Africa Confidential and it is unclear who the creditors are.
Part of that sum may have come from Chinese dam-builder Sinohydro, which funded at least $400m of the Kafue Gorge Lower Hydro project – a 750MW power station now nearing completion – while Zesco was still trying to secure financing, a lawyer familiar with the figures said.
The presentation to bondholders also admitted that arrears worth $1.29bn were owed by parastatals, mainly Zesco, to domestic creditors.
This huge sum seems not to have been included in Zambia’s public debt and should be, Standard Bank said in a memo on 13 October which Africa Confidential has seen.
While other countries such as Angola have succeeded in requesting Chinese banks to have commercial loans included in the Group of 20 Debt Service Suspension Initiative (DSSI), Zambia has failed to do so, leaving arrears piling up – in particular to China’s Exim Bank.
The Treasury said in its statement of 13 October that it would only continue to pay foreign currency denominated debt for a few ‘priority projects’ without detailing which.
Until a few days ago Zambia was at least three months in arrears on its debt payments to the World Bank, Africa Confidential understands, which could have triggered a halt in funding for World Bank projects.
But Zambia cleared the debt to the World Bank just before it missed the Eurobond payment.
This indicates that a policy of prioritising Eurobond payments was abandoned because of the magnitude of the sums due.
Stalling World Bank social projects would damage the ruling Patriotic Front in next year’s election because these projects have high profiles and affect large numbers of Zambians, while Eurobond defaults can be spun as government defiance of greedy bankers unwilling to fund Covid relief.
