Energy Management

The Global Recession is something that Zambia could not avoid. Low copper prices were yet another issue that Zambia had no control over in the last two years.

Can we say the same for energy? What explanations do we have for the continuous electricity crisis in the country? What excuses can we give for the fuel crisis that crop up every other month?

Over the last few years we have made management and board of director’s changes in the Zambia Electricity Supply Corporation (ZESCO). In the last ten years the private investment component in the Indeni Oil Refinery moved from the Italians of Agip to the French of Total and now there is talk of a third new investor picking up where the French want to pull out.

When Total first expressed interest in buying the Agip shares, they performed their due diligence like any other professional multinational before taking the plunge. It was clear that million of dollars would need to be pumped into the company to upgrade the plant and possibly expand the processing and production capacity in order to operate efficiently and profitably.

Zambia and Zambians later smelled a rat when Total, through their Middle East and Africa Vice President, started complaining through the media about the huge amounts of investment that was needed in order for Indeni to be put right. At the same time the media reported that Total was lobbying for a national contract to import processed fuels in an effort to build Zambia’s strategic fuel reserves which would be a backup fuel supply during times when Indeni would be in shut down mode for maintenance, or when there were problems with feed stock supply to the refinery.

To many Zambians the writing was on the wall. Total was seen to be an investor in the fuel sector that wanted to renege on its commitment to continue to run Indeni, and was not keen to pump in capital to improve its performance and productivity. The ranting in the media about huge costs was considered a ploy to back out of the deal with Government. Furthermore, the effort to supply finished fuel products to Zambia was noted to be another maneuver to relegate Zambia back to the pre Indeni days of importing fuels rather than feed stock. Zambians felt that Total was doing what other investors in other parastatal companies had done in the past. Buy, operate for a while, import from home country, demobilize, and shut down. This perception has been reinforced by Total’s silence in responding to calls by the public who want to know why Zambia is not importing crude oil from Angola for processing at an upgraded Indeni in Zambia.

What ever the business pressures and motives of the investor in Indeni are, we cannot say that we were unaware of the difficulties. The same applies to the Zambia Electricity Supply Corporation (ZESCO). Our neighbours in Zimbabwe, South Africa, and Botswana have navigated through the same energy crisis that Zambia is in. Today they are more energy stable than we are. So we should be asking ‘what are we doing wrong’? Or maybe the question is ‘what are they doing right’?

What seems quite clear is that our neighbours did not try to wish the energy problems away. They planned, strategized, committed, implemented, and held key people accountable for successes or failures.

Systems of energy management were immediately implemented especially when energy was in short supply. This meant that the scarce energy was being utilized as efficiently as possible by the nation. Working links were established between the energy suppliers and the media in involving the public to use energy more efficiently and suffer the consequences of blackouts and shortages if they did not cooperate.

Short term upgrades and expansion programs were immediately launched to relieve the pressure and stress on the energy reserves and generation systems, with the full knowledge that more robust medium and long term strategies would have to kick in the near future.

A clear appreciation was acknowledged that energy was a socio-economic resource that was necessary for building the economy and therefore needed to be as cheap to industry as possible to support the low cost of production in the different sectors of economic activity. This acknowledgement challenged the energy sector which was predominately Government run, to assess the role of private sector investment which looks for a high rate of return on investment in a relatively short time. This was noted to be very difficult in a sector that is acutely monitored and regulated by a statutory body of Government.

Our neighbours had their State Presidents keep a sharp eye on their Energy Minister to ensure that the sector was serving the development demands of commerce and industry. Where the Minister was found wanting, then the President would either crack the whip or make strategic changes in an effort to keep the wheels of industry turning.

Due to these efforts, Zimbabwe has propelled its industry from ten percent production to fifty percent production within the last nine months. South Africa is stable in respect to fuel and electricity supply. Botswana is not experiencing power outages or fuel shortages even though the country is currently going through an economic crisis.

Where does that leave Zambia? The scenario on the ground is that the country swings from power outages to fuel shortages on a regular basis. The hardware shops are packed with generators and solar lighting products to offer Zambians alternative electricity sources. Generators naturally extend the pressure on fuel supply and just help to make things worse. In some areas residents are busy queuing up for fuel at the available petrol station while at home there is no electricity so the cooking is being done on charcoal fires. The argument for bio fuels has become hotter than ever in an effort to allow people to develop their own energy sources thereby slowly pushing Government out of the way.

The ZESCO management, the board, and the Energy Minister continue to operate as if electricity shortages are normal. There is no sense of urgency or pressure that the public can visibly see to be convinced that our colleagues are taking things seriously. Nobody seems to be worried about losing their jobs probably because they are confident that Zambia and Zambians will tolerate the ‘post war’ like supply of electricity. No concerns seem to be acknowledged that factories and industries will not grow or expand because they cannot rely on a continuous electricity supply. ZESCO has even gone to the extent of issuing public notices that they will not take any responsibility for compensation for equipment damaged due to power fluctuations and erratic supply.

In the fuel sector, we will continue to swap one investor for another because the Energy Ministry is not holding the investors accountable to their commitments when signing the share purchase agreements. The regular but unplanned shut downs at Indeni appear to be just one of those things that nobody should complain about. It does not seem to bother the Energy Ministry that Zambians are wasting precious time and money looking for fuel when they should be producing goods for export and to feed their families. There are levies in place to finance the holding of strategic fuel reserves in the many depot tanks across the country. Why are they all empty? Who is responsible? Are we going to have these shortages regularly because we cannot keep reserves to back up supply when they are problems at Indeni?

The climax of the energy crises in Zambia is epitomized by the recent intervention of the State President before he left for Uganda. Firstly he had to apologize to the nation for the fuel shortage on behalf of his Energy Ministry, secondly he had to take charge of the Energy Ministry and instruct the Government to take the necessary steps to redress the shortage, and thirdly he had to literally indicate that he had no confidence in the Energy Ministry and therefore had to go out of his way to intervene in the ongoing energy crisis. In short, the President had to step up and micro-manage the Energy Ministry.

Zambia is a country that makes very good pronouncements and articulates very interesting development rhetoric. The energy sector is the backbone for agricultural, industrial, and mining development in the country. The time has come to acknowledge that we cannot continue to blame the energy problems on the lower ranks. Changes have been made to managements; changes have been made to boards, now it is time to make the changes at the very top if we are to prosper in the coming years as we launch the COMESA Customs Union and roll out our much talked about Economic Zones.

Published 27 October 2009

Public Private Partnerships

As 2009 draws to a close and we sprint through the last quarter of the year, some significant developments will mark the end of Zambia’s 45^th year of independence.

The Public Private Partnership Bill is expected to be enacted by parliament and assented to by the President before December. This legislation will usher in a formal framework for Public Private Partnerships in developing the nation.

It must be noted that business waits for no person or indeed for no legislation. To this end, Public Private Partnerships (PPP) have been in existence without any formal legislation for many years already. Schools, Universities, Hospitals, Pension Schemes, and many other products and services have been established under an un-written PPP relationship, in the spirit of doing business, and at the same time providing products and services to the public that would have been normally developed by the Government.

The PPP legislation enhances this ongoing effort and offers opportunities for structured and accelerated development if implemented with commitment and vision.

The last quarter of 2009 is likely to see the enactment of the Agriculture Marketing Bill too. This legislation attempts to rationalize the marketing of Zambia’s staple food crops and other agriculture produce with a special emphasis on formalizing the implementation of the Warehouse Receipting Program. The Warehouse Receipting Program will enable farmers to store their crops in fumigated and protected warehouses and still borrow finances from financial institutions against the warehouse receipt to enable them continue farming while their crops are in the process of being marketed.

This initiative constitutes the basis of another PPP model that develops collaboration between the private sector and the Government in the trading triangle of farmers, warehousing system, and the banking sector.

The Zambia Development Agency Act has recently undergone some amending to expand the opportunities for developing, managing, and investing the in the Multi facility Economic Zones (MFEZ) program. Again, the MFEZ roll out presents options for PPP implementation in developing the zones, managing the zones, and pro-actively marketing the opportunities for investing in the zones to both domestic and foreign investors.

The PPP initiative is not limited to the mining sector. The 2010 budget articulates programs for developing and upgrading airports around the country that will have a positive impact on enhancing tourism. Therein lays opportunities for PPP in construction work of the airport terminal buildings which will largely accommodate private companies in the tourism and related sectors.

The PPP story is therefore very useful as a tool for rapid economic development in Zambia, in addition to developing a mechanism to for public private dialogue and collaboration with a common goal. The common goal is one of economic and social development across the country.

The challenge is to recognize that the PPP program is not a ‘one size fits all’ remedy to resolve all our development needs. And yet the PPP idea is like a pair of shoes that one selects very carefully to be used to walk across specific terrain. Our challenge is to work out what terrain is applicable to PPP initiatives.

The 2010 budget appears to be a little too optimistic about the power and application of the PPP concept so it may be wise for us to take step back and re-assess where, how and why we want to apply it in the sectors that we have earmarked.

The rule of thumb is that the PPP concept works well in areas and sectors where private business naturally flourishes. Unfortunately the opposite is not necessarily true, whereby the PPP concept will thrive where the Government traditionally invests tax payer’s money. Government traditionally invests in sectors where there is strong regulation and control in the public interest and this is arguably the way it should be.

As Zambia looks to 2010 some good opportunities are available for PPP investments in developing programs to enhance tourism during the World Cup season in Southern Africa.

2010 also offers options for Zambia and Zambians to collaborate using the PPP model to make sure that the COMESA Customs Union serves the interests of the Zambian economy by developing strategies for trading with the member states such that Zambia expands her export markets and volumes.

China has taken full advantage of the PPP concept by working with her private sector to invest across the world in mining, construction, agriculture, and manufacturing to such an extent that China has the fastest growing economy of the world and holds foreign reserves in excess of two trillion US dollars.

The marketing of the PPP concept has been done. Now Zambia is faced with the challenge of strategic implementation with the new perception that a meeting point must be agreed upon where the public interest is served, and the private focus on making a profit is addressed.

Part of the PPP implementation process is to take stock of the work to be done with a view to setting aside the programs that are earmarked for tax payer investment through the Government mechanism, and selecting those programs that have the profile to return a profit on investment for the PPP program.

The wise always consider the concept development phase as the easy part of any initiative because it only carries the spirit and vision. The difficulty and the Devil are in the detail. So it promises to be, with the Public Private Partnership.

Published 20 October 2009

Reacting To 2010

The 2010 budget has been presented and the economic programs for the next 12 months are now on paper awaiting debate and ratification by Parliament before being implemented in January.

2010 is a pre-election year leading to the 2011 Presidential and General elections. It is quite obvious that many resources will go towards preparing the Electoral Commission of Zambia for the tripartite elections. It is also obvious that the campaigns will kick off next year by all political parties to please and attract the voting public in an effort to win the necessary votes to form the next Government. History reminds us all that vast amounts of money are poured into this exercise at the expense of structured development.

As the elections campaigns kick off in 2010, so does the World Cup dominate the African sporting calendar with the spotlight being on South Africa in particular and Southern Africa in general.

Many European and South American teams will scramble to South Africa and her southern region neighbours to finalize their master plans to lift the prestigious trophy by the end of the tournament. South Africa and her Southern Africa Customs Union (SACU) neighbours have invested resources in providing training bases for the World Cup visiting teams and are likely to reap the benefits of increased tourism.

Zambia may have to react to the challenges of the 2010 World Cup event by making some

overnight provisions. We have to assess whether the 2010 budget opens up options for attracting the massive flow of tourists into the sub continent. Is the 2010 budget providing for Visas on demand at our ports of entry to facilitate the attraction of South Africa bound tourists to visit Livingstone and the rest of the country? If we have not made any meaningful provisions to tap this opportunity, then we may have to react to the challenge with some creative interventions.

The 2010 World Cup will push the demand for accommodation throughout the region. Zambia has not responded to the anticipated demand and we do not have an up to date audit of bed spaces available in the country. If the 2010 budget has not addressed this issue then we may need to react to the evolving opportunities by persuading both Central Government and Local Government to collectively motivate and market the establishment of Guest Houses and Lodges to cater for the influx of visitors in 2010. The motivation exercise may have to waive the ‘red tape’ that is associated with licensing and permits, and the Local Councils may have to allow the ‘free’ erection of sign posts for these business investments. The Finance Ministry can inject a new enthusiasm by removing taxes during 2010 on the operations of Guest Houses and Lodges.

In order for Zambia to link to the 2010 euphoria, it will be necessary for regular flights to be established during the World Cup period. If the 2010 budget has not focused on this challenge, then another reactive investment may have to be made to open the skies to airlines that are willing to connect Zambia to South Africa and other parts of the world that will fly in those tourists that have put the World Cup in their plans for next year. This should not under play the impact of road transport that can cater for regional travel to and from South Africa

As the SACU prepares to engage with South Africa for the 2010 World Cup, Zambia has

joined other Common Market for Eastern and Southern Africa (COMESA) countries to launch a Customs Union in 2010.

The COMESA Customs Union poses some key challenges to member

states as it potentially offers an open market covering nearly 20 countries. Learning from the experiences of SACU, the weaker economies in a Customs Union will have to strategically re-engineer their economies to become equitable partners in the union or allow themselves to develop into markets for the stronger economies.

As for Zambia, the 2010 budget will need to make provisions for programs to support the rapid development of the Zambia manufacturing sector in an effort to build national capacity to produce and export into the Customs Union. If we have not catered for the Customs Union in our 2010 budget, then we may have to react by introducing some new initiatives to build and strengthen our capacity to manufacture, to process our food crops, and to package various commodities so that we can favourably compete with the better organized manufacturing economies of Kenya and Zimbabwe.

2010 promises to exhibit the first Multi Facility Economic Zone (MFEZ) in the country. Hopefully, the 2010 budget addresses the gap for Zambian investors to meaningfully and actively participate in this program. The media reports the increasing number of foreign investors taking up space in the MFEZ’s but there are no statistics given on domestic investors participating in the Zones.

Once again, if the 2010 budget does not address this anomaly, then some reactive measures may have to be introduced to attract and absorb Zambian investment if sustainable development is to be achieved.

As the details of the 2010 budget are released it is hoped that the concerns around responding to the challenges of 2010 will be addressed. It is better to have a ‘storm in a tea cup’ brought about by perceptions, anticipation and nail biting expectations, than to be in a situation where the country is forced to react to the emerging challenges that had not been strategically planned for in the budget.

Reaction is often very costly and is seldom done in the most cost efficient manner. Too often, reactions are always too late, and the opportunities are often missed, but the legacy of reactions tend to be poorly researched and constructed actions that create more public harm than good.

After going through the 2010 budget, is there an opportunity to plan some reactions for 2010?

Published 13 October 2009

Mines Suppliers

Local businesses on the Copperbelt that commonly refer to themselves as Mines Suppliers have emerged from tough times during the period of low copper prices.

The copper mining industry slowed down in 2008 and many suppliers found themselves discarded as suppliers to the mines as mining activity rapidly contracted in many mining operations, and in some areas such as Luanshya and Mazabuka, the mining operations came to a complete halt.

Dialogue with former mines suppliers at the time, revealed that many local companies had to shut down their business activities and look for other ways of earning a living and keeping family and children in rented houses and at schools. The Copperbelt was glum and the economic mood was one of despair.

A post-mortem of the mines suppliers’ predicament brought up some interesting information that characterised the sector.

It is quite evident that many mines suppliers thrived on the prolific spending by the mining companies in respect to transport, raw material, spare parts, machinery, out sourced maintenance, and several other services. This phenomenon generated a lavish life style amongst the mines suppliers such that many companies were relatively reckless in their spending patterns. This was evidenced by the number of luxury vehicles on the Copperbelt, the influx of speed boats, motor cycles, and quad bikes for recreational purposes, and the large number of people travelling for the Copperbelt to South Africa that necessitated as many flights out of Ndola as they were from Lusaka en route to Johannesburg.

Nightclubs, bars, guesthouses, and restaurants enjoyed the patronage of Copperbelt residents who exhibited lavish expenditure patterns on drinks and food as a result of the cash flow emanating from the mines suppliers.

The mines suppliers seldom put money aside in savings to cater for rainy days because they believed that the mining industry would always be there to offer business each day.

Very few mines suppliers considered diversification to spread their business risks. The thinking was that any other business was either too complicated or the profits margins were too small. Again, mines suppliers saw the mining sector as an all weather industry that would always be there for them.

Most mine suppliers invested in nonperforming assets that also depreciated in value very rapidly. State of the art music systems, luxury motor vehicles, and cutting edge ICT products were the main targets for excess cash in the hands of mines suppliers. The conversion rates for these assets into cash would seldom be better than 50% value.

Within six months into the mining sector slump Zambia experienced mines suppliers going bust and many supplies having to survive on borrowed resources. Vehicles were being sold at give away prices, children were being relocated from upmarket schools into Government schools, and recreation was being relegated to Shebeens.

In 2009, the mining industry has taken a turn for the better and copper prices have more than doubled on the world metal markets.

The mining companies have become somewhat cautious in their spending patterns and have in some cases, engaged consultants to perform price verifications for commodities and supplies quoted by mining suppliers. This has had the impact of reducing the profits made by mines suppliers even though the mining companies are expanding at unprecedented proportions.

Furthermore, many mining companies are demanding extended payment plans for goods supplied by the mines suppliers thereby compelling the suppliers to find outside capital to finance the imports. The income becomes more irregular and is disbursed in tranches, and the cost of money becomes dependent on the options offered by the banking sector.

Currently, mines suppliers are back in business and are challenged to rethink their futures. One hopes that the ‘ego patting’ exercise will not kick in whereby mines suppliers want to prove to the Copperbelt that they are in top form by recklessly spending on trivial luxuries.

The experiences of 2008 should be motivation to re-strategize such that the profits that are realised from this new copper boom are usefully invested in productive activities that will support the mines suppliers in times of difficulties.

It will be good to take a leaf from the employees on the Copperbelt that today will focus on how to make their companies more profitable and sustainable, than to dwell on yearly salary increases that are not performance related.

It is said that ‘It is forgivable to make a mistake once, but to repeat the same mistake signifies incompetence’. The mines suppliers are now being put to the test and the game is one of ‘do or die’.

Published 6 October 2009