AFRICA Confidential understands that Zesco’s assets are in danger of being liquidated to pay a debt of US$300 million to Maamba Collieries Limited.
The latest edition of Africa Confidential (AC) dated October 21, 2020, reports that Maamba Collieries Limited (MCL) has gone to court to recover US$300m from Zesco.
It adds that bondholders have also postponed a vote on the government’s request for debt relief.
MCL is the operator of Zambia’s only coal-fired power station.
“[MCL] opened arbitration proceedings with Zambia’s State-owned electricity utility, Zesco, to recover US$300 million it is owed for electricity supplied to the grid,” AC reports.
“A judgment in MCL’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.”
It states that public finances already cannot meet the bond coupon payments, making it unlikely that the State could bail out Zesco.
“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,” AC states further.
The AC notes that MCL invoked clauses in its contracts to force arbitration over the debt, which would take place in London after communications were made in the middle of this year.
It adds that Zesco is expected to be responding the next three weeks.
It further explains that MCL believes the court would favour it in the case, “as it is a simple debt from a failure to pay for a service.”
The AC quotes a source who tells them that “the hearings will take place soon”, but is quick to note that Zesco will want to draw out the case as long as possible.
The UK-based publication further indicates that 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,” AC reports, adding that 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, MCL 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.”
It added that: “the loan is ring-fenced and insured, however, and the asset could not be touched if Zesco remains a going concern.”
AC reports that although the Eurobond and the Zesco debts were 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,” explains AC. “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 wage bill while contributing nothing to the company. The AfDB in particular has been urging reform of Zesco’s employment policy.”