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WITH the two 300MW generators at Hwange Extension coming on stream in the last quarter of this year and early next year, coal demand will dramatically increase, like more than double with Hwange Thermal needing to almost triple consumption considering the state of its older two phases and their reduced demand.
Plans to renovate the older six units, the four 120MW boiler-turbine-generator units commissioned in the early 1980s and the two 220MW units commissioned in the late 1980s, will further increase demand for coal.
That station at the moment is operating at around 420MW, around half its practical capacity considering the under-sized cooling system, and significantly under half its installed capacity.
Plus there is the large 500MW privately-owned station being built in stages by Tsingshan steelmaker in Hwange to ensure supplies to its Manhize steelworks in Chivhu, plus the demand for coke by steelmakers, which will include both Tsingshan and a resuscitated Zisco.
So coal miners need to increase their capacity fast, and this is not just mining, but also the equipment they need to use to get the coal to the power stations.
The practical, and least damaging method, is to use a conveyor from the mine to the power station. This is not only far more economical than using large trucks, which are pricey in themselves and consume a lot of diesel, but also causes a lot less damage.
In any case when we are talking about 15 000 tonnes of coal a day, a truck fleet becomes difficult. Even with short journeys and rapid turn around, so there are several trips a day for each truck, the fleet needs to be very large, while a decent set of conveyors can do the job continuously, and are powered by a tiny percentage of the power generated by the station they are feeding.
This requires large sums for investment, for both the mining and the moving and that is where the banks are going to have to come in. And banks being banks they want to be sure that the borrower can pay back the loan, and that means when the borrower sells things that they can sell throughout the term of the loan, so they can make the money needed.
The sort of money needed to expand or open mines and fix up and expand the conveyor systems is not the sort of money that can be paid off in a year.
The problem is that the procurement rules and tenders put out could only be for contracts lasting a year. There are good reasons for this, especially considering the sort of messy financial and procurement environment that Zimbabwe has experienced in the past.
It gives very tight controls, it prevents a miner from acting as if they have a guaranteed customer forever and so do not have to try that hard, and it prevents newcomers from entering the business even if they might be more efficient.
This was recognised when the Cabinet agreed this week that the owner of the new 600MW extension at Hwange, the Hwange Electricity Supply Company, which will need the new capacity in coal if it is to operate once the two giant units are able to generate, could sign longer-term contracts.
This is not that revolutionary. By now there must be a great deal of data on the costs of coal mining, including the capital costs.
There is more than one company mining coal in the area, so there is competition, both actual and potential. And the extra demand is so great that it is unlikely that a single miner can supply the lot.
The miners who win the tender also need to be on the ball. A proper contract can give them a reasonable profit, but only if they are efficient. This, with the debt they will have to carry, is a strong motive to ensure that management levels are very high.
The multi-year contracts obviously need to be drawn up exceptionally carefully, with penalty clauses and the like, and the prices agreed backed by solid accounting.
The need to ensure that ultra-efficient companies can make a proper and reasonable profit must be hedged by the realisation that a dud company is going to go down the tube.
The coal supply contracts are not and must not be the equivalent of running a mint that produces cash regardless of how well the mining companies are run. We have been down that road in the past and need not make a repeat journey.
This is where the Procurement Regulatory Authority of Zimbabwe needs to be creative to ensure that the public are properly served.
The one year contracts had the advantage that a dud supplier could be culled before much damage was done. So the multi-year contracts need their own rules that ensure that there are no duds, and that those bidding can deliver, and continue delivering.
It is not impossible to generate such rules. Multi-year supply contracts are hardly unusual or rare in global business and professionals in procurement must have created functioning rule systems that work, so Zimbabwe can draw on this corpus of knowledge and create its own. We can have our cake and eat it if we do this right.
Emergency procedures to cure past vices need not be regarded as something handed down on Mount Sinai, but on the other hand the new circumstances and needs do not imply that just a timeline is adjusted.
Fixing over-rigid rules means that the new rules still have to be effective, and that controls against dishonesty and bad management cannot just be abandoned, but the controls have to be practical for all parties. We are learning a lot as we return to normality and grow away from past errors and stagnation, and we have to be able to apply what we have learned. PRAZ needs to take into account practical needs, while at the same time being an efficient regulator.
The regulator will have to be creative and innovative to get the new rule system working well, but those two requirements are now needed across the board in Zimbabwe and it is not impossible to be at the same time prudent, innovative and practical.
Hesco’s needs are unlikely to be unique, for example someone investing in an expensive factory to make medicine will need multi-year contracts, so PRAZ needs to develop the systems properly that can be used by other State entities.
As a practical matter, those putting up the finance may well need to be pro-active as well, making sure their mining customer remains on the ball.
Lenders can normally put in conditions into their loan agreements that ensure they have rights of inspection and rights of information. They are probably looking after other people’s money so that is reasonable.
Online Reporter