16 March 2015

PPPs: Zimbabwe considers alternative development funding mechanisms

This article was written by Lloyd Manokore (Partner, The Corporate Counsel) and Tendai Rwodzi (Associate, The Corporate Counsel).

Introduction

The Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZIMASSET) economic blue print was formulated by the Zimbabwean Government for implementation for the period from October 2013 to December 2018.  ZIMASSET explains the government’s economic turnaround strategy and policy for the abovementioned five year period. The aim of the blue print is to achieve “..sustainable development and sociable equity anchored on indigenization, empowerment and employment creation.”[1] It is our view that the blue print presents a prospective opportunity for investors who are looking at Zimbabwe as an investment destination.

Projects in ZIMASSET

ZIMASSET focuses on four strategic clusters in order to meet the Zimbabwean Government’s objectives: 

  • Food Security and Nutrition
  • Social Services and Poverty Eradication
  • Infrastructure and Utilities
  • Value Addition and Beneficiation.

The Government rightly recognizes the urgent need to develop Zimbabwe’s infrastructure in order to develop the economy. It also acknowledges the country’s key role as a transit point for goods and services for the SADC region, especially for the landlocked countries to the North such as Zambia, Botswana and Malawi. The priority infrastructure subsectors articulated in ZIMASSET include water and sanitation, public amenities, ICT, electricity supply and transport.

The infrastructure set up in Zimbabwe is quite unique compared to other African countries in that Zimbabwe has been described as having the characteristic of both a ‘middle income country’ and ‘a fragile state’.[2] The basic infrastructure at most is in place and largely needs rehabilitation. Zimbabwe’s infrastructure has disintegrated significantly due to a period of hyperinflation and economic regression. 

Like most countries in SADC, the shortage of power in Zimbabwe has led to a significant decline in industry capacity utilization and resultant economic activity. Zimbabwe currently produces approximately 1320 megawatts against a base demand of about 2200 megawatts. Energy is therefore another huge focus area for Government.

Financing Challenges

The Zimbabwean Government requires an investment of approximately US$27 Billion to execute the projects that have been earmarked in terms of ZIMASSET.  With a severely constrained fiscal space that is way off the funding range the Government evidently needs to consider alternative financing models and appears increasingly pragmatic in its approach to the same. The Government is considering a variety of financing models. Owing to Governments funding challenges, there has been a renewed effort by the Zimbabwean Government to pursue Public Private Partnerships (PPP’s) as an alternative investment vehicle. We consider that ZIMASSET has therefore unlocked the real potential for PPPs in Zimbabwe.

PPP’s in Zimbabwe

Prior to ZIMASSET, there has been a slow uptake of PPP projects in Zimbabwe. Some of the earlier major projects include, namely, the Beit-bridge Railway (BBR), the New Limpopo Bridge and the Newlands By-Pass in Harare. The Newlands Bypass was completed in 2007 on a build and transfer basis (BOT), with the constructor handing over the project to the government upon completion.[3]

The building of the Limpopo Bridge was the first BOT project in Africa and was awarded to a private investor in 1993 by the Governments of Zimbabwe and South Africa. Whilst the Beit-bridge Railway was implemented on a BOT basis, it involved the construction of a 350km railway line which in turn shortened the time by railway between the South African border and Bulawayo (Zimbabwe’s second capital city) from a matter of days to hours.[4]

More current in the PPP arena, is the rehabilitation of roads and tolling projects on the major highways in Zimbabwe by Infralink. Infralink is a joint venture company in which the Zimbabwe National Road Administration and Group Five (a major South African Construction company) hold 70 % and 30 % equity stake respectively. The joint venture company has secured funding for the project through the Development Bank of Southern Africa. 

The Zimbabwean Government has prioritized PPPs in the Zimbabwe Energy Policy of 2012 and reiterates this prioritization in ZIMASSET. In order to solve the energy crisis which the country currently faces in the form of power outages, the Government is keen on investors looking to partner with Government or its state owned electricity company, Zimbabwe Electricity Supply Authority ( ZESA). At present the Zimbabwe Power Company (ZPC), (a subsidiary electricity company of ZESA), has engaged several private investor on several generation expansion projects. 

One of the major power projects involves the extension of a major hydro power generating station known as Kariba South Power Station. The tender was given to Sinohydro, a Chinese-owned entity and is being funded by Chinese financiers. 

We have noted an increased interest for Zimbabwean projects from regional and international development finance institutions as well as international private firms. In January  2015, Zimbabwe hosted a French business delegation organized by MEDEF (The French Business Confederation) and its members were mainly comprised of infrastructure firms. There was also a visit by two  British delegations in October 2014 and in  February 2015   It will be interesting to see what emanates from these initiatives. 

Drawbacks in the regulatory framework

However, we have observed that the Government’s enthusiasm for foreign investment is yet to be met with an investor-suitable regulatory framework. Even though the ZIMASSET blueprint has formulating PPP legislation as one of the key strategies, there is no PPP legislation in place as yet. 

At present, investors rely on the PPP guidelines of 2004 for guidance; however these do not have a binding effect. PPPs still need to be effectively facilitated and promoted with the implementation arrangements guided by a transparent and competitive process. On a positive note, however, Government seems to acknowledge this and the PPP Bill is currently before Parliament.  

Other aspects affecting the PPP frameworks, however, have already been adopted.  For instance, the Government has put in place incentives incorporated under a BOOT PPP model, where investors get incentives for entering into a PPP scheme, including a five year tax holiday, and a reduced tax rate for the subsequent five years.[5] In addition, PPPs involving infrastructure projects are accorded National Project Status, which allows the investor to enjoy a number of tax and customs exemptions.

Other key considerations and the role of the lawyer

For investors commencing projects in Zimbabwe, the oft heard concerns are:

  • Political risk in light of the countries’ history
  • Indigenization laws
  • Securing property rights
  • Ensuring a bankable project for the comfort of the financiers.

In our experience, projects that are succeeding in this environment are as a result of the parties addressing issues that are unique to their project. The Government, in our experience, is amenable to discussions and very approachable. Government deems itself as a partner in finding solutions to the questions that arise when the project structure is being finalized.  An early consultation with us can seek to identify these issues upfront.

Conclusion 

ZIMASSET is a document full of ambitious growth targets but most importantly sets a clear vision of where the country seeks to go. We are of the firm view that any investment strategy for Zimbabwe would be lost if this blue print is totally ignored. 

ZIMASSET presents opportunities for investors interested in Zimbabwe and opens up the potential for PPP arrangements in Zimbabwe. The Government has identified PPP’s as a viable tool for addressing Zimbabwe’s infrastructural and developmental needs and our experience is that the Government is committed to seeing these projects through and is currently putting in mechanisms such as local laws and regulations in place to facilitate PPP projects. 

While we concede that the objectives and projects anticipated in ZIMASSET will need a longer time frame to be implemented, we are of the view that the ZIMASSET articulates government’s strategy and key focus areas opening up opportunities for private investors. 

With the guidance of good advisors, investors interested in projects will be able to package their project in a manner that is bankable, which is in line with the country’s policy, protects the interests of investors and mitigates risks involved.

[1] Zimbabwe Agenda for Sustainable Socio-Economic Transformation, p.6

[2] “British Expertise” Zimbabwe  Scoping Report 28 0ctober to 31 October, p.3

[3] “ZEPARU” The Scope for the Private Partnerships for infrastructure development in Zimbabwe, p.4 

[4] Ibid

[5] Supra Zeparu, p.5

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