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Monday, August 10, 2020

HOW ZESCO MADE AN IMAGINARY MULTI-MILLION DOLLAR LOSS

Columns HOW ZESCO MADE AN IMAGINARY MULTI-MILLION DOLLAR LOSS

By Nchinde Mampuulwa

The much-demonized Bulk Supply Agreement (BSA) between ZESCO Limited and Copperbelt Energy Corporation came to a-not-so-surprising end on the last day of March. Not surprising to many that had followed the unfolding of events. Zesco and government alike, from the highest office, had on many occasions spoken about how they wouldn’t renew that agreement many months before a feeble attempt to negotiate was made. This isn’t new and is not the focus of my reflection today.

What’s new is that for the first time that I’ve ever heard, Zesco early last week came out with numbers of the loss incurred under that accursed contract and that is commendable because for the longest time, Zesco and government have spoken about how the BSA disadvantaged Zambians but have never explained the rationale nor quantified anything. But now a Zambian taxpayer can better see how they could have been better off without that agreement.

A lot of figures were given by Zesco’s Patrick Mwila – $10 million, $12 million, $67 million, $120 million, $200 million and I’ve even read $500 million somewhere. All very confusing because while this is commendable, without context and any backing of rational analysis, documents, assumptions or reports that can be independently verified, they are just numbers being thrown in the air to achieve a certain purpose. However, let us discuss each of the amounts mentioned by Mwila but with a focus on the rationale in order to better be informed of his reasoning. This will help us to either agree or disagree with the thought process and, therefore, the conclusion.

Let’s attempt to discuss the reasons advanced for each of the amounts starting with $120 million which Mwila alluded to as the loss attributed to the tariff at which Zesco buys its 420MW from Independent Power Producers (IPPs) Maamba and Itezhi-Tezhi compared to the price at which power is sold to CEC. So Mwila is telling us that Zesco commits to buy power from these IPPs, all of which it sells to CEC and not any other customer in Zambia so that the entire loss is attributed to the expired contract between the parties.

One would ask why all the expensive power was solely attributed to CEC even though that power came on stream very recently in comparison to when Zesco got into contract with CEC? What about the rest of the customers Zesco supplies – the mines, commercial entities, farmers and residential consumers? What is the portion of the loss attributed to the rest of the customers?

Interestingly, in May 2019, Zesco/Ministry of Energy announced that the power company was seeking to commence re-negotiations of its power purchase agreements (PPAs) with both Maamba and Itezhi-Tezhi aimed at reducing the tariff. Keep in mind that these are PPAs approved by the Energy Regulation Board (ERB) in 2011.

Does that mean the tariffs agreed with the IPPs were too high and needed to be reduced to make them competitive yet these are the same high tariff being applied to CEC and on which the purported loss is computed? And does it mean that the tariff stated in the ZESCO-KCM power supply term sheet of $39/kW per month eliminates the loss to zero or is it that ZESCO will no longer sign contracts with any consumers at lower than the price electricity is being procured at from IPPs? The reasoning and assumptions cannot be correct and can’t be ascribed to the $120 million loss.

Turning to the $12 million Mwila says Zesco lost for using the CEC network to supply the rest of the customers in the Copperbelt, one wonders how this can be a loss. Is their position that the cost of operating the CEC network is zero, in which case Zesco would incur no cost to operate or reinvest in the network if they owned it themselves? It would be enlightening to hear an explanation from them on why they consider this a loss. Unless Mwila is telling us that Zesco transmits power from Kariba to Lusaka, for example, at zero cost using their network. This can be likened to someone paying for bus fare to deliver his goods for sale from Lusaka to Kitwe but considers the cost of the bus ticket as a loss and accuses the bus operator of causing him the loss. That cannot be commercially rational.
The next interesting one is the $10million which Zesco was ordered to pay for breaching a contract. Any commercial entity appreciates that contracts should be respected and that there are consequences when one applies jungle law as a basis for their operations.

Zesco admit to have gone against the provisions of the contract. As expected, they went before arbitration and lost yet they classify that as a loss. Typically, in any enterprise where responsibility and accountability are core values, a lapse of this nature where a senior manager even brags about breaching a contract should attract ramifications; but rather it seems that instead of being reprimanded for breaching a contract and not protecting shareholder value, the people in charge have found a reason to blame the wronged party as a justification for their misconduct. It appears that it’s easier for some people to blame their neighbours for their failures.

We now come to the alleged $67million loss arising from metering and Mwila’s claim that CEC does not allow Zesco access to its meters, hence, the loss. The Zesco supply point is where the Zesco network interfaces with the CEC network and those meters are owned by Zesco. How, then, can Zesco not have access to their own meters?

One can only speculate that what Mwila wanted was for CEC to allow Zesco to meter individual components of CEC customers’ equipment. Putting it simply, it’s like Zesco demanding to meter each item in a household from the fridge, stove, deep freezer and geyser rather than place the meter at the Distribution Box as is normally done.

Having analysed, even at this basic level, the rationale of what Mwila claimed, my suspicion is that Zesco felt the pressure of adding more sting to their bite to make their story believable but rather than provide the evidence that people can interrogate, they pick out huge numbers that are certain to turn the sentimental mind aghast, and that may work where the audience does not ask questions.

There is still quite a lot to be dissected in the statements and claims being put out and it would serve the public well to analyse more of the detail including both the CEC and ZESCO financial statements which should help provide more information.

9 COMMENTS

  1. When you listen to CEC MD Silavwe you won’t be left with any doubt that Zesco, the Ministry of Energy and ERB are in wrong hands. The matter is now in Court so we’ll wait and see

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  2. If facts speak for themselves, then what is the point disagreement? There is need to take the figures provide by ZESCO at face value without raising storm out of tea cup. Fooling and mocking ZESCO will not solve the problem. The country is still lagging behind in adoption of electric power as main source of energy at household level. What could be done about it? Insulating CEC as the agency between ZESCO and Mining Companies will not solve the problem. When ZESCO is not happy, then CEC can not be happy. As long as the separation between CEC and ZESCO is conducted according to the laws of the land, the country stands to gain. International arbitration could help in assuring CEC that ZESCO also means well for the country. Take time to accelerate electric power generation. Take time to…

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  3. International arbitration could help in assuring CEC that ZESCO also means well for the country. Take time to accelerate electric power generation. Take time to accelerate electric power distribution. Take time to industrial harmony.

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  4. I can foresee another huge court loss coming for ZESCO Zandt BOMA! The above basic but intelligent analysis tells it ALL!

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  5. There are leaders that will die and leave an extremly poor legacy. You can lie or try to cover up your bad deeds with propaganda, but history is no fool.
    Mobutu, Idi Amini, Adolf Hitler, Musolini, Nkurunziza, RB, FTJ, Jacob Zuma, its not that they didnt have propaganda tools and mouth pieces. Its simply that facts remain facts and you cant change them.
    The current leadership will be remembered for having destroyed, and sold the country to foreigners as well as raising corruption to unprecedented levels.
    And after death, they will face the ultimate judge who will call to account every single misdeeds.
    Discharging firearms, intimidation, violence and being an “advisor” to leaders, and wealth wont be able to save.

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  6. I don’t hv access to the bulk supply agreement contract, CEC financial statements, Zesco financial statements, cost and price information of independent power producers (IPPs) who sell power to Zesco to hv a basis for commenting on this article. Zesco has agreed to buy power at a certain price from IPPs and I believe at arm’s length. It will be interesting to see if the mines will now buy power from Zesco at a better price than whn they were getting it through an intermediary. It’s an issue where we all hv to rely on better-informed parties to educate the public.

  7. I have 2 questions:
    1. How does Lungu make appointments of trop people to our strategic institutions? and
    2. Will the next government in 2021 please pass a law that all public institutions will be publishing their quarterly and annual reports in the Government Gazette, so that we can al see where things are going? We are tired of incompetence in all pour entities, and we must delink the presidency from all our parastatals because the current scenario is too grotesque to live with. Ignorance does not get wiped off in an individual just because they won a dodgy election!

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