Hwange, Kariba rip-off . . . Power projects inflated by $478m

Prosper Ndlovu Business Editor
ZIMBABWE could have been prejudiced of an estimated $478 million in inflated costs for the Kariba South-Hydro and Hwange Power Station units 7 and 8 expansion projects that were awarded to the Chinese owned firm – Sino-Hydro Company, experts say.

The two mega power projects worth a combined $2,33 billion and seen as long-term solutions to the country’s perennial power outages have drawn criticism from politicians and energy sector experts who want them to be investigated.

Experts feel the cost structure for infrastructure upgrades in the two projects by Sino-Hydro was not justified when measured against global standards.

The 600MW Hwange extension project is being built at a cost of $1,5 billion from an initial $1,1 billion that the state-run Zimbabwe Power Company signed with the contractor last October. This represents $2,5 million per megawatt.

The Kariba South tender was once described as a fraud by the former finance minister Tendai Biti, who objected to the raising of the project cost from $355 million to $533 million. He said no due diligence had been done and warned the government from sleep-walking into unfair contracts in its desperation to secure funding for important national projects.

“With European contractors, who are generally expensive, the uppermost limit in power projects construction is $2 million for a megawatt,” an expert who has participated in negotiations for several power projects in Southern Africa said yesterday.

“The effective price for 600 megawatts should be $1,2 billion,” he added. “If you factor in the country risk financing costs, legal and other ancillary charges, it really shouldn’t go beyond $1,3 billion.”

The expert said the $1,5 billion price tendered and accepted by the ZPC meant that an extra $200 million was levied on the construction project without proper accounting. “If, as has been said, this is associated with country risk, then a whole new set of questions must be asked. Given there is an inelastic demand for power in the region, there are various off-takers who could purchase and guarantee the payment of the loan via the utilisation of Zimbabwe’s excess capacity on completion of the project,” said the expert.

“Given this fact, it’s therefore clear that there are no risks associated with financing a power project in a region starved of power.”

Experts say the $533m Kariba South expansion project should not have cost more than $278 million, which was charged for a 360MW project in neighbouring Zambia.

They contend the top-up of $178 million on Kariba and $300 million on Hwange for a combined total of $478 million could have been used to build another 250MW power station.

In October last year, Morocco started work on a 1,386 megawatt coal-fired independent power project at a cost of $2,6 billion — representing $1,8 million for a megawatt.

Said the energy expert: “The question must be asked, what is this $478 [extra on Kariba and Hwange] being used for and who sanctioned it?

“And given that the former energy minister (Dzikamai Mavhaire) and his deputy (Munacho Mutezo) who presided over these agreements were fired for incompetence, and were cited as being corrupt, surely these contracts must be relooked at?”

At the signing ceremony for the Hwange Power Station units 7 and 8 expansion project last October, Mavhaire stated that the $1,1 billion engineering, procurement and construction (EPC) contract was to cover transmission infrastructure from the power station to Insukamini and Marvel substations in Bulawayo and Sherwood near Kwekwe — but indicated it would be reviewed to $1,5 billion.

“It will be constructed at an estimated EPC contract cost of $1,174 billion,” he said adding: “The cost will rise to $1,5 billion, including development costs such as technical consultancy fees, loan interest and trust accounts for servicing the loan once draw-downs on the loan begin.”

Zesa board chairman Hebert Murerwa said he was not involved in the deal and professed ignorance about the actual costing.

But Lovemore Matuke, who chairs the Parliamentary Portfolio Committee on Mining and Energy, acknowledged the outcry over costs and blamed the involvement of “too many” hands. “We’re aware of the outcry over amounts charged for tendered projects and the explanation we got was that a certain percentage of the total cost is incurred in regulatory charges by government agencies such as the Environmental Management Agency (EMA) and others,” he said.

“We feel these are public projects and government departments should not be making money out of it because all that money will go back to government coffers.

“As a committee, we’re saying involvement of so many government ministries seeking to make money is also causing delays in project processes.”

ZPC managing director Noah Gwariro, in his end of 2014 report, said that China Exim Bank released the initial drawdown of 25 percent for the Kariba South project on October 31 last year for the project to officially commence on November 10. The project is expected to be completed by March 2018. In the same report, Gwariro said a down payment had since been made to Sino Hydro by ZPC for the pre-commencement project work for Hwange.

On Monday, Gwariro defended the jump in Kariba South costs insisting it was impossible to compare the project with the $278 million expansion of Kariba North Expansion in Zambia.

“Kariba North was built after Zambia’s independence and when they built their power station, they built four units and they had also done some work for extra units they later built,” he said. “The power house, for example, had been excavated but we’ve to build a new one here and there is a lot of reinforcement to be done. There are also pre-commencement works, which were done on Kariba North, which we hadn’t done on Kariba South. We also have a situation where work on Kariba South was done about six years after the work on Kariba North so there’s a difference on time value of money. This isn’t a simplistic comparison and people will need to make thorough assessment looking into all those areas.”

But Biti, now a member of MDC Renewal which broke away from the MDC-T, yesterday insisted both deals had not been properly structured, criticising the failure to put the power projects to tender. “When the Chinese come to a country with corrupt people, they double or treble the charges and get valuable assets for nothing. We’ve the procurement law that says service management projects must go to tender. But that’s not happening and Sino-Hydro didn’t go to tender,” said the former finance minister.

“The Chinese are milking this country for nothing. The $1,5 billion charged for Hwange is too much for a standard 600MW project. This figure could be overcharged three times more. We raise these things in Parliament but these guys don’t care. Now the government itself has started complaining.”

New Energy Minister Samuel Undenge, who replaced Mavhaire in January, could not be reached for comment as his mobile phone rang unanswered.