Zimbabwe Power Company
Kariba dam, Zambezi river basin
Approximately 37 per cent of Zimbabweans have access to electricity. Although this is higher than the African average of 31 per cent, there is still a significant gap between installed capacity and peak demand in Zimbabwe (approximately 1,200MW). As a result , Zimbabwe is reliant on importing power via regional interconnectors. The Zimbabwe state utility, ZESA Holdings, imports up to 40 per cent of its power requirements from Eskom (South Africa), Cahora-Bassa (Mozambique) and SNEL (the Democratic Republic of Congo) through the mechanism of the Southern Africa Power Pool. Where this demand gap is not bridged, there is extensive load shedding, especially during peak periods.
To rectify the deficit in installed capacity, Zimbabwe Power Company (ZPC) launched an electricity generation expansion programme – involving initially the improvement and expansion of the existing 920MW Hwange coal power station and the extension of the existing 750MW Kariba South hydropower station.
The Kariba dam is situated in the Zambezi river basin between Zambia and Zimbabwe and dates back to 1958, when the damming of the Zambezi river resulted in the creation of Lake Kariba . There are two hydropower stations at the dam – the Kariba North hydropower station owned by Zambia, and the Kariba South hydropower station owned by Zimbabwe. Kariba South was commissioned in 1962, and generates electricity from water drawn from Lake Kariba, forcing it through a short intake and vertical penstock to a turbine where hydroelectric power is produced in the coupled generator. The water is then discharged downstream back into the Zambezi river.
The extension is intended to increase the installed capacity of Kariba South by the addition of a further two units of 150MW each, so resulting in an aggregate 1,050MW installed capacity. The hydropower plant is to be wholly owned and operated by ZPC’s subsidiary, Kariba Hydro Power Company (Private) Limited (KHPC) and completion is scheduled for 2018. KHPC has entered into a power purchase agreement with Zimbabwe Electricity Transmission and Distribution Company (ZETDC).
To finance the project, the government signed a 20-year US$320 million sovereign loan with the Export-Import Bank of China (China Exim) in November 2013, and drawdown of this debt has started with an initial US$80 million tranche being drawn down. As part of the EPC side of the project, ZPC is contributing US$35 million (10 per cent of the project costs) through equity. ZPC is funding its equity and other project costs through commercial bank borrowing which is structurally backed by a power purchase agreement with Nampower (as a second offtaker alongside ZETDC). Despite the loans including sovereign debt, there are many traditional project finance aspects to the project and KHPC will service the debt from revenue derived from power sales.
Norton Rose Fulbright was appointed by ZPC in January 2012, on a dual mandate covering both the Kariba South and Hwange expansion projects. Our London office is leading on project and construction document aspects and our Johannesburg office is leading on finance documents. Since being appointed, we have worked closely with the financial adviser, KPMG (Johannesburg and Harare offices), the technical adviser, Hatch (Johannesburg) and local Zimbabwean counsel Gill, Godlonton & Gerrans (GGG).
In respect of Kariba South, our principal work has involved:
- negotiating the updated power purchase agreement with ZETDC
- advising on the US$354 million construction contract, from the tendering to preferred bidder stages, and final award to Sinohydro Corporation on 20 December 2012
- advising on the options and terms for operation and maintenance arrangements
- advising on the land rights for the project – the delineation of the site border, the transfer of the Kariba South site from the Zambezi River Authority to ZPC and the transfer of rights in Kariba South from ZPC to KHPC through an asset transfer agreement
- advising on the China Exim funding for the project, and on the bridge and term loan equity support financing with commercial banks and development finance up until financial close in November 2014.
A structure of the project is shown in the following diagram:
- Hydrology – while the expansion increased the peak generation capacity of Kariba South, it did not increase overall annual generation capacity, as Kariba South is allocated an overall fixed amount of water by the Zambezi River Authority, which it is already fully utilising.
- The PPA was highly technical – given the requirement to cover the existing and the extended power station – and we had to identify the appropriate personnel to provide an accurate framework of current operations. This meant holding calls and meetings with the power station manager, and then working with technical and commercial advisers to put fundamental principles into drafting to ensure that the updated PPA provided an improved operational framework which did not hinder current operations.
- On the construction aspects, as an expansion project we needed to advise on the risks of any interruption to the existing station as well as setting out stringent requirements (and remedies) in relation to the blasting and drilling works. The EPC Contract was executed relatively early in the overall process so we also needed to provide for the period between execution and full release of the works including limited escalation provisions.
- Raising finance for the project was the most crucial part of the project and involved a bespoke public tender process with a strong emphasis on raising the necessary funds for each project. The funding for the EPC Contract itself involved a hybrid finance structure including a loan by China Exim to the Government of Zimbabwe for 90 per cent of the price of the EPC Contract and the on-lending of the loan to KHPC on a secured project finance basis. China Exim took senior ranking security over project assets and receivables relating to the KHPC PPA. The remaining 10 per cent of the EPC Contract and other project costs is being funded through commercial bank finance which is structurally subordinated.