As with most parts of Southern Africa, Zimbabwe has had a power deficit problem for many years and the state-owned utility, Zimbabwe Electricity Transmission and Distribution Company (ZETDC), has had to rationalise the supply of electricity (also known as “load shedding”) on a regular basis.
Last November the utility was forced to temporarily shut down the country’s largest hydropower plants due to low water levels at the Kariba Dam, attributed to erratic rainfall patterns. The country will need to improve its energy mix to avoid an over reliance on hydropower. Sectoral reforms are encouraging private power players to invest in power generation assets, but it’s not easy.
“Independent power producers (IPPs) face difficulties in raising capital from foreign markets given the general lack of confidence in Zimbabwe as a safe investment destination,” explained Farai Mushoriwa of Harare-based law firm Mushoriwa Pasi Corporate Attorneys.
“We are happy that the Government of Zimbabwe (GoZ) has stepped in to introduce policy reforms that are aimed to give comfort and attract FDI in the sector. Through the introduction of the Government Implementation Agreement, the government aims to provide various investor-friendly guarantees to investors in the sector,” explained Mushoriwa. “While the full text of the standardised agreement is yet to be made public, indications are that the framework is to deal with, among other things, the problematic issue of currency convertibility and repatriation of proceeds for foreign investors. The government is also set to introduce a standardised, bankable PPA developed with the help of multilateral financial institutions to reduce pain points in such arrangements.”
Today, Zimbabwe has an energy deficit of between 145- and 500MW. The specific figure depends largely on the performance of the Kariba Dam hydropower plant and the Hwange thermal power plant, the country’s two main sources of power. There’s also the issue of off taker credibility – the legitimate fear that ZETDC wouldn’t be able to honour its obligations of a power purchase agreement.
“The Government Project Support Agreement is part of the measures that the government is putting in place to ensure that off taker risk is addressed, and this should delight potential investors in the sector,” said Mwanatsa Masona, also from Mushoriwa Pasi Corporate Attorneys.
There’s also much excitement about the possibilities afforded by off-grid solutions such as solar and wind. In another development, the government introduced net-metering in 2020 which incentivises commercial and domestic users to install power production units such as solar systems. For investors, particularly those with a strong ESG focus, solutions such as these are likely to be very attractive.
In the commercial and industrial space, there are also interesting changes which will open up opportunities. The government recently resolved that all exporting mining firms must settle their electricity bills in US dollars. Masona, argues that this has the potential to be a boon for local IPPs. “There is a clear opportunity to construct plants for these energy intensive mining companies and, in return, agree on tariffs that are more favourable than those offered to them by the national power supplier,” she said.
To make this sector more attractive, the Zimbabwean government has removed import duties on most solar-related products, and IPPs have been granted attractive tax holidays. Sector observers anticipate that these changes will have a positive impact on the wider sector and economy, and all eyes are on the much anticipated text of the support agreements touted by the government to see just how far they go to alleviate or offset the investment risk in energy in Zimbabwe.
While many of the risks associated with doing business in Zimbabwe are genuine, what are some common misconceptions? “The biggest misconception out there is that Zimbabwe resembles a war zone. Business risk exists everywhere in the world, but here it is blown out of proportion,” Mushoriwa commented.
“There’s a whole political history that is widely known about Zimbabwe in relation to the land issues and expropriation, but this is widely taken out of context and does not and certainly has not applied to any existing or planned power project. The role of business is to identify and mitigate risk, not to run at the first appearance of business difficulty. The reforms which are on the cards right now speak to such risk mitigation and investors would do well to take these under advisement of their legal and investment professionals,” he concluded.
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