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Zambia’s debt: Where did the money go?

FRAUD involving kickback payments and inflated pricing could be at the heart of Zambia’s 200 million US dollar (US$) solar milling project, according to comparative procurement figures obtained by Makanday.

The Chinese government provided the US$ 200 million loan to the project recipients – the Zambia Cooperative Federation (ZCF). ZCF then engaged a Chinese firm Shandong Dejian Group Company Limited, to set up the plants across the country.

Solar-powered milling plant

It is unclear how the milling plants worth far less could cost US$ 70,000 each as revealed by contract agreements seen by Makanday, almost three times the price given to Makanday by Shandong for a similar plant.

A quotation issued by Shandong’s senior sales engineer, Kevin Lee shows that the landed cost of a solar-powered milling machine, including shipping, is US$ 25,500.00 per unit. The unit includes solar panels, control cabinet, storage batteries and maize milling machine. The price of the prefabricated steel house including transport is US$ 4,620.00.

On its website, Shandong boasts of installing 2,000 sets of solar maize milling machines in Zambia and claims the machines have reduced mealie meal prices from K120 per 25kg bag to between K60 and K80. While Shandong says the cheap mealie meal has benefitted local people, the reality on the ground is contrary to their claims.

Pastor Chati Kasengele of the Pentecostal Holiness Church in Kasama, labelled the solar milling project as a useless “vanity project.”

“There is no (large) production of maize that requires hammer mills, what are the hammer mills for?” he asked. “Most of the milling plants are white elephants.”

Of the 13 milling plants surveyed in Northern Province last year by Makanday, for a variety of reasons, four were not functioning. These ranged from non-availability of spare parts to dysfunctional central control systems.

At Lukulu South, some 40 kilometres west of Kasama town, the plant had clocked over a month without operating.

Derek Sokoni, ZCF project director said 1,571 milling plants have been installed countrywide some of them will be connected to the national grid through an agreement with the rural electrification authority (REA).

Last year, ZCF director general James Chirwa defended the project saying it is meant to provide easy markets for small-scale farmers for their maize through their respective primary cooperatives.

“The original idea was for the milling plants to provide mealie meal to boarding schools, health facilities and other surrounding communities. But people have not grasped this model,” he said.

At night and on cloudy days, without storage devices such as batteries, the milling plants do not function. This makes the technology unreliable during the day when the sky is overcast.

“If there is no sunlight, we can’t operate because it is a direct energy thing,” said Bornface Ngoma, a plant operator at Mkaka multipurpose cooperative in Eastern Province.

“Usually, we start at 08:00 am to 15:30 pm and during winter we start late and knock off early,” he said.

In other areas where the milling plants have been built, workers have gone for months without pay. In some cases, the plants no longer function and have been abandoned by respective local cooperatives.

The distinctive card box-like structures cannot be missed. There is general uniformity between all of them scattered along many of Zambia’s highways. They consist of a blue rectangular metal structure, next to an array of solar panels that collect the sun’s energy to power them.

It was anticipated that the plants would encourage long queues of people waiting in line to mill their produce, mostly maize, for their staple food. But such queues are rare. This raises the question of whether local cooperatives, the beneficiaries of the milling plants can make enough money to pay back the loans which some say was imposed on them by their parent organisation – ZCF.

According to equipment lease agreements from ZCF seen by Makanday, local cooperatives must pay the loan over a 15-year period, through monthly instalments of K1,700. According to calculations by Makanday, each cooperative is to pay K 306,000 spread over a 15-year period.

“We know we are supposed to pay K1,700 monthly contributions, but we have never done so, because of poor operations,” said Luka Mutale, chairperson of Kelense multi-purpose cooperative in Kasama, Northern Province.

In recent years, Zambia’s external public debt has increased significantly, particularly since 2012. During a virtual meeting with creditors on 29th September this year, finance minister Dr Bwalya Ng’andu put the official figure at US$ 18.5 billion.

Dr Bwalya Ng’andu

“Zambia’s total public and publicly guaranteed debt reached US 18.5 billion, or approximately 104% of the gross domestic product as at end of 2019, impacting on Zambia’s ability to advance social and economic initiatives, especially in the current Covid-19 environment,” he said.

While this heavy borrowing has funded important infrastructure such as roads, energy, railways and telecoms, other loans have covered budget deficits. Makanday has established that some loans for infra­structure have had significant socio-economic benefits, while others have generated few benefits so far.

The solar hammer mill project falls in the category of projects that have fallen short of their initial promise of delivering solutions to the people.

With a promise to “industrialize” the country and “create 3,000 jobs, President Edgar Lungu turned to China for assistance. Xinhua, China’s official state-run press agency, extolled the solar milling plants project as one “that is expected to help with the landlocked African country’s industrialization and job creation agenda”.

While the project promised heaven on earth, including the lowering of the price of maize meal, it has delivered very little.

China has continued to roll out more loans for other projects, but some have similarly been wasteful and have been of little economic value, say economic experts. Since 2011 Zambia has been constructing roads at a fast rate.

Munali – Mutumbi Road (Lusaka)

Few have doubts over the need for better infrastructure. But the country has been overpaying some of the projects. A study by the World Bank in 2017 found that Zambia coughed up a whopping US$ 360,000 for each kilometre of road constructed, representing more than twice the African average.

Government’s own institutions have equally raised alarm about corruption. The Financial Intelligence Centre (FIC) notes in their 2018 money laundering and terrorism financing report that procurement corruption has led to the crowding out of legitimate businesses and increased costs of public projects.

A case in point is the Lusaka-Ndola dual carriageway, which government announced at a ceremony in September 2017, at a cost USD1.2 billion for a 321-kilometre stretch. Vocal public concern over the high price forced the government to ice the project, pending a review and revised project cost estimate.

Zambia has been very welcoming of Chinese debt to help boost the country’s infrastructure profile. The country’s long-standing traditional ties with China commenced in the 1970s, with the construction of the Tanzania-Zambia Railway, linking landlocked Zambia to the Tanzanian coast. To date, the country remains one of the largest recipients of China’s concessional lines of credit in Africa.

Further evidence of these close ties can be seen, for instance in the opening in 1997 of China’s first financial institution in Africa, its subsidiary of the Bank of China, offering personal and corporate banking finance and loans. Zambia’s central government ministries, such as the Citizenship and Immigration Department, has appointed the Bank of China as the preferred recipient of government payments for Zambian residence permits, for instance.

While China might be Zambia’s natural first creditor accounting for almost 30% of external debt, there is growing fear, for example, that debt from China has not been fully captured in the computation of official statistics. The government denies this is the case, but the situation is so opaque that it is hard to know the true picture.

Borrowing from China on a project-by-project basis has financed much of this investment. The transparency around these deals is said to be limited and, consequently, it is difficult to put an accurate figure on their scale.

Source: Ministry of Finance

Uncertainty in the methods used to tabulate government debt using figures of actual disbursements and not the amounts signed for, are believed to translate into immediate liabilities of interest on loans, which some lenders begin to charge the recipient immediately upon signing, and not upon release of the funds to the borrower, making debt calculations further more difficult.

The money has been spent and now the worries begin. Debt servicing is taking a substantial portion of government spending. According to the Jesuit Centre for Theological Reflection (JCTR), the budgeted external debt commitments for 2021 have been estimated at K27.7 billion.

Chinese project loans are often on a build-operate-transfer (BOT) model, resulting in Chinese or joint management for many years of specific projects, but no full take-over of whole institutions. In Zambia, this is the case for the hydropower projects with the power utility company ZESCO, the digitalisation of the broadcasting service ZNBC, and two airports in Lusaka and Ndola.

Several stories are circulating on China taking over essential infrastructure and central institutions as a result of the debt. Africa Confidential reported on 3rd September 2018 that “The state electricity company Zesco is already in talks about a takeover by a Chinese company, AC has learned. The state-owned TV and radio news channel ZNBC is already Chinese-owned.”

Others have added that Lusaka airport may also be taken over by the Chinese. Although the reality is a lot more different, it is however correct to say that Zambia has a looming debt crisis, but the Chinese are not the main culprits.

In their paper titled: How to Avoid Zambia’s Public Debt Toppling the Economy into Crisis, economists, Professor Oliver Saasa and Tony Dolphin cite reductions in public services such as education and health that will affect the quality and quantity of services.

In addition, they say, levels of social protection will be cut. Prices of food and other essential goods will rise faster than wages and poverty increase markedly in both rural and urban regions”.

Already, there is a noticeable worsening of crucial public services, in education and social protection, and less money for health. Government has gone for months without supplying health centres with medicines leading a critical shortage in most public hospitals.

https://makanday.com/critical-drug-shortages-hit-zambian-hospitals/

Zambians continue to ask questions about how the money from the debt has been utilised. At a 2019 debate in Lusaka, on the state of the economy, the issue of debt popped up and a representative from the JCTR, asked: “where did all the money go?”

“Zambia borrowed over USD 3 billion from the open market through the Eurobond, I think the first billion went to Zesco,” said Geoffrey Chongo of JCTR. “We haven’t seen much within Zesco, in terms of improvement. Can you imagine if we had invested that into solar, but we took this money into hydro where we are having challenges. So, we have to borrow again to take money to solar.”

“We have borrowed over USD 7 billion in the last seven years, but where has that money gone? Are the roads we have invested in adding value?” Chongo asked.

The debt has had little or no impact on poverty eradication. Central Statistical Office figures for 2018 show alarming levels of rising inequality in Zambia, worsened by high cost of living nationwide, with Western Province registering a whopping 82% poverty rate, closely followed by Luapula and Northern provinces at 81% and 79.9% respectively. Furthermore, of the national 54.4% poor, 40.8% are classified as “extremely poor.”

Tapo Primary School – Mongu (Western Province)

Mulongalwili Health Post – Monze (Southern Province)

 

 

 

 

 

 

In urban areas, figures by JCTR show that a family of five will require a monthly minimum of K7,000 just to meet its basic necessities. With majority of urban workers falling in the K3,000-K5000 monthly wage band, their earnings are barely enough to cover their needs.

Paying back these debts is putting huge pressure on Zambia’s finances. The biggest item in the budget used to be education. Today it is debt service, with K 27 .7 billion in the 2021 budget set aside for debt obligations. That amount is more than the budget for education and health put together.

While not exactly of equal magnitude, the striking similarities between Zambia and Venezuela regarding their debt management are hard to ignore. Both countries are single export commodity economies, oil in Venezuela, copper in Zambia.

And in both, faced with rising debt and falling export revenues, their respective governments failed to cut spending, dealing with the crisis by denying its existence and virulently repressing opposition. Political corruption, unemployment, authoritarianism and gross economic mismanagement worsened the crisis.

If the Venezuelan crisis is far worse, Zambia’s capacity to weather the worsening debt storm will be tested in the months ahead. With tripartite presidential, parliamentary and government elections scheduled next year, the governing Patriotic Front (PF) is already in election mode. How it deals with the country’s ballooning debt is likely to be a deciding factor on the elections’ outcome. Significantly, with the debt damage already far advanced, its options are very limited.

For instance, various banking analysis reports including Bank of America Merrill Lynch and Barclays cast a bleak debt outlook in the short term, with Barclays concluding that, while debt restructuring is not yet unavoidable, default and a balance of payments crisis” is likely.

Whatever happens, most analysts agree that for Zambia to pull through, a bailout is a prerequisite, either from Zambia’s all-weather friend, China, or alternatively, from the IMF.

But liquidity relief from China appears highly unlikely. Despite several trips to Beijing by high-ranking government delegations, no deal has been forthcoming. Unlike other sub-Saharan African countries (e.g. Ethiopia, Democratic Republic of Congo, Angola) Zambia is neither strategically important for China, and its copper assets belong to private international mining companies and are not a resource the government can exchange for Chinese support.

 

 

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  1. […] FRAUD involving kickback payments and inflated pricing could be at the heart of Zambia’s 200 million US dollar (US$) solar milling project, according to comparative procurement figures obtained by Makanday. The Chinese government provided the US$ 200 million loan to the project recipients – the Zambia Cooperative Federation (ZCF). ZCF then engaged a Chinese firm Shandong Dejian Group Company Limited, to set up the plants across the country. It is unclear how the milling plants worth far less could cost US$ 70,000 each as revealed by contract agreements seen by Makanday, almost three times the price given to Makanday by The post Zambia’s debt: Where did the money go? appeared first on Makanday Center for Investigative Journalism – Zambia., Makanday Center for Investigative Journalism – Zambia,Read More […]

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