By Fitch Solutions
- The solar power generation sector will continue to offer opportunities for private investment in Zambia’s infrastructure sector, enabled by sectoral reforms following the successful implementation of the World Bank-led Scaling Solar programme.
- Our outlook for private investment opportunities in alternative infrastructure sectors, including rail and roads, is negative, as we do not expect much private-sector interest in such high-risk projects.
- Limited domestic availability of credit for infrastructure projects will persist and exacerbate revenue risks for foreign investors, as the Kwacha will remain on a depreciatory trajectory.
Private investment in Zambia’s infrastructure sector has hitherto been strongly focused on power projects. As such, Zambia has attracted the fourth largest amount of private investment in electricity infrastructure in Sub-Saharan Africa. In terms of overall private infrastructure investment over the past twenty years, Zambia’s USD2.8bn total investment put the country in seventh place, as it has attracted significantly less investment in other sectors, like transport infrastructure, than many of its regional peers. More recently, private infrastructure investment in Zambia has moved away from capital-intensive hydropower projects and towards smaller-scale solar power plants.
Solar Power Industry To Dominate Private Investment Focus
We expect that the solar power generation sector will continue to offer opportunities for private investment in Zambia’s infrastructure sector. In the course of Zambia’s participation in the World Bank-led Scaling Solar programme, the Zambian government reformed the sector so as to allow for private ownership of power production assets, increase transparency around tender processes, re-organise local content requirements, and empower the Industrial Development Corporation of Zambia (IDC) as a partner for future IPPs. The first Scaling Solar tender, which prompted price bids as low as USD0.06/kWh, resulted in the completion of two utility-scale solar power projects, respectively built and operated by Italy’s Enel, as well as France’s Neoen and US firm First Solar. The programme set a positive precedent for independent solar power production in Zambia and, against the backdrop of the aforementioned reforms, we expect that the industry will continue to attract private investment.
Foremost, the IDC and the World Bank’s International Finance Corporation (IFC) in 2017 signed an agreement for another auction of up to 500MW solar power capacity. While this second Scaling Solar tender will invite considerable private sector interest, there is a downside risk that private investment outside such replications of Zambia’s first successful Scaling Solar tender will face feasibility constraints. Indeed, the first auction’s low electricity price bids were enabled by significant de-risking efforts by the IFC. The IFC provided both a large amount of concessional financing and a very high degree of technical support for the implementation of the project. Without such financial and technical de-risking, independent solar power production projects would likely be unable to offer similarly low prices to the off-taking utility ZESCO. The resulting downside risk for independent solar power production projects will be limited by two factors. First, following the success of the first Scaling Solar programme in Zambia and given Development Financing Institutions’ (DFI) strong interest in financing renewable energy projects, especially as they increasingly avoid non-renewable thermal projects, there is no reason to doubt the availability of concessional financing for future solar power projects in Zambia. Second, we expect ZESCO to have a certain degree of tolerance for higher bids, thus allowing IPPs to accommodate a greater degree of risk by pricing their electricity less competitively. The utility’s significant debt burden and the fact that Zambia’s power supply will soon exceed overall domestic demand will encourage increased electricity exports. This would allow for sale at higher prices and would thereby contribute to ZESCO’s readiness to purchase electricity from independent power producers in Zambia at less competitive prices.
Our outlook for private investment opportunities in alternative infrastructure sectors is negative. While the government has earmarked several transport projects in the rail and roads sector to be developed as public-private partnerships, we do not expect much private sector interest in such projects. In both sectors, the region’s modest track record for public-private partnerships will discourage investors. In the roads sector, insufficient toll collection has often inhibited PPPs’ revenue generation. In the rail sector, projects would struggle to attract the necessary freight volumes for making investments in such capital-intensive infrastructure projects viable.
Below Average Project Risk Profile Points To Weak Project Financing Availability In Zambia
According to our proprietary Fitch Solutions Project Risk Index, Zambia’s risk profile underperforms the Sub-Saharan African average. Its Financing Score, which measures the domestic availability of credit for infrastructure projects, stands out in particular, being the lowest of any market in the region. We expect this trend to persist as the Zambian government will continue to turn towards the domestic banking sector in order to counterbalance its restricted access to foreign credit. In mid-November, the Zambian government failed to pay a coupon on a Eurobond by the expiry of its 30-day grace period. Our Fitch Solutions Country Risk Team expects the non-payment to squeeze the Zambian government’s access to external credit as it undermines investor confidence. In turn, we expect increased government demand for domestic credit, crowding out private-sector borrowers. A higher, albeit below average, Operation Score within our Project Risk Index reflects the Zambian government’s steps to improve the legal and institutional enabling environment for private investment in infrastructure. The PPP Department housed in the Ministry of Finance and established through the PPP Act in 2009 and the PPP Amendment Act in 2018, is supposed to act as a coordinating entity for stakeholders in public-private partnerships, such as the aforementioned IDC. Capacity constraints across different government entities, including the PPP Department, will continue to challenge timely completion of public-private partnerships in Zambia.
Kwacha Depreciation Increases Revenue Risk For Foreign Investors
Persistent exchange rate risks add to the negative impact of the limited availability of domestic credit as depreciatory trends for the Kwacha will continue to elevate risks for foreign investors expecting kwacha-denominated revenues. At Fitch Solutions, we expect that the kwacha will depreciate further from the spot rate of ZMW20.93/USD to ZMW21.90/USD at the end of 2020 and to an average of ZMW22.58/USD in 2021. Worsening relations between the government and Eurobond holders will reduce appetite for domestic assets and demand for the kwacha over the short term, while the Bank of Zambia will have limited capacity to intervene to support the exchange rate. Over the long term, the likelihood of prolonged negotiations regarding debt restructuring will continue to fuel uncertainty, with weakening terms of trade adding downward pressures on the currency. Our Mining team forecasts that domestic copper output will decline by 1.0% in 2021. This will constrain export growth next year, while a moderate recovery in private consumption should lead to an uptick in imports.
This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’). FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. The article has been sourced from Fitch Solutions and can be accessed by clicking here.