Business Editor’s Brief: Destroy the pillars of Hercules

02 Aug, 2015 - 00:08 0 Views
Business Editor’s Brief: Destroy the pillars of Hercules Many financiers are now reluctant to finance thermal power projects

The Sunday Mail

LEGEND has it that on the Pillars of Hercules – the two columns one on either side of the Straits of Gibraltar where the Mediterranean Sea meets the Atlantic Ocean – were inscribed the words “Nec Plus Ultra”, which mean “No Further”.

Many financiers are now reluctant to finance thermal power projects

Many financiers are now reluctant to finance thermal power projects

The words, it was believed, were meant to discourage sailors and navigators from travelling beyond this point as it was the end of the known world. According to Greek mythology, Hercules was the Greek demi-god who pressed the two mountain columns to separate Europe from Africa.

Figuratively, the pillars have become a symbol of restriction.

But as seafarers and explorers continued on their voyages, it was however discovered that the world indeed reached beyond these supposed pillars that were considered the marker for the end of the world.

Today, Spain’s coat of arms carries a symbol of the Pillars of Hercules, but its inscriptions, contrary to the original ones, have since been changed to “Plus Ultra”, which means “Further Beyond”.

It serves as an encouragement to go beyond limitations.

Zimbabwe has since 1999 – the period when it fell out with the UK and, by extension, the United States – struggled to attract meaningful investment as the negative sentiment that was fanned across the world market dampened investor appetite. Investment, particularly FDI, sagged. However, it is only in 2013 that the decline in FDI inflows bottomed out at US$400 million.

Investments picked up marginally last year to US$545 million, but are still below regional averages.

Neighbouring Mozambique and Zambia grossed US$4,9 billion and US$2,4 billion, respectively.

Over the past six years, investors are beginning to rediscover Zimbabwe as an irresistible investment destination. In 2010, global steel giants Arcelor Mittal and Essar Group tussled for a 70 percent stake in Ziscosteel, which holds more than 50 billion in iron ore reserves.

Essar eventually won the bid in 2011 but nothing meaningful has happened thus far.

Despite being a losing suitor in Ziscosteel, Arcelor Mittal was again linked to ferrochrome producer Zim Alloys last year.

There has been many such feel-good deals, but, regrettably, most of them do not take off.

Our investors, it seems, are standing on the Pillars of Hercules.

Last week, Finance Minister Mr Patrick Chinamasa announced that Pan-African Engineering Resources, an independent power producer, had secured a US$950 million loan from China to finance development of the first phase of the Lusulu thermal station in Binga.

The Lusulu coals fields in Binga, Matabeleland North Province hold more than 1,2 billion tonnes of coal reserves. The first phase of the project, which is scheduled to start in April next year and be completed during the first half of 2009, is expected to produce 600MW. The whole project, however, is supposed to generate more than 2 000MW.

But there is a catch: Financiers of the project insist on a power purchase agreement between the Zimbabwe Energy Regulatory Authority and Lusulu, including an agreement on the tariff that will be used.

Therein lies the hurdle.

Most local independent power producers have been finding it increasingly difficult to justify their investments to financiers, especially in an environment where the local tariff is considered to be unattractive. At US9c per kilowatt hour, Zimbabwe’s power tariff is considered to be very uneconomic.

A report that was compiled by the IMF in 2013 on the lessons and experiences of energy subsidy reform in sub Saharan Africa indicated that the average cost of electricity in the region was about US15c/kWh.

Also, the average cost of power is considered to be even higher in countries that rely primarily on thermal generation – USc21/kWh.

Despite being implored by the Zimbabwe Electricity Supply Authority to consider reviewing the tariff upwards, Zera has incorrigibly maintained the tariff at the current rate. Much of the reasons that have been used by Zera to review the proposals are populist; they seem to have nothing to do with any economic consideration.

While at face value such a populist move might seem to lead to a reasonable electricity bill, consumers are actually left none the better as they have to fork out more resources in order to buy alternative power sources, as underfunding of capital projects that usually results from limited revenues always leads to power shortages.

So, in essence, the cost of unavailable power is even more.

This is precisely the reason why some companies in 2009 were even prepared to help resuscitate Harare thermal power plant and be supplied with power at a cost of US18c/kWh.

Ordinarily, where governments feel they need to cushion consumers, they do so through subsidies and not through artificial pricing.

Had the local tariffs been cost-reflective, it is arguable that private investment would have been more.

It doesn’t make any sense to run short of investors in a sector where demand already exists.

There currently exists a shortfall of 1 000MW on the local grid, and the pre-paid electricity system makes the industry creditworthy as investments can be reasonably recouped. But even in light of such positive factors, major power projects remain grounded.

The Sengwa power project, which was supposed to add a meaty 2 000MW, remains uncertain.

Admittedly, international financiers are now being pressured to shun investments in thermal power plants as they are considered environmentally unfriendly.

For Zimbabwe to develop a sustainable power plan there is need to bite the bullet and make difficult decisions. There is need to further interrogate whether the current power tariff is sustainable.

What is however clear is that the current power supply situation is untenable and the level of investment in the sector still falls far short of short, medium and long-term expectations. This situation is not peculiar to the power sector alone.

Investors remain shut out of many sectors mainly because of bureaucratic red tape and the inability of local investors to lock in investors.

Since 2011 the Ziscosteel deal has remained sticky. There is little to no movement. It is, however, encouraging that Vice-President Emmerson Mnangagwa is championing creation of an investor roundtable to process investors.

Government has expressed displeasure with the current situation where it takes more than 24 months for an investor to get approval.

This combined with unnecessary bureaucracy is worsening an already bad situation.

It is sincerely hoped that this roundtable will help destroy the current limitations to investment, which seem to reinforce the perception that investment huge investment is impossible.

The country urgently needs to open up new frontiers.

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