The Lusaka - Ndola Dual Carriageway PPP: Opportunities, Risks, and Rewards

By Susiku I. Nasinda, FCCA

On 28th February 2023, the Government Republic of Zambia (GRZ) signed a US$650m, 25-year Public Private Partnership (PPP) Concession Agreement with Macro Oceans Investment Consortium (MOIC) to construct a 327km dual-carriageway between Lusaka and Ndola, one of the most important economic roads in the country. The PPP includes rehabilitation of the 45km Luanshya-Fisenge-Masangano road. Both roads have been in a deplorable state for years.

The Agreement gives MOIC a 25-year concession period to finance, design, construct, operate, and maintain the two roads. The concession period is split into two phases (3 years construction, and 22 years for operation and maintenance). MOIC is a Chinese Consortium/ SPV comprising AVIC International Project Engineering, China Railway Seventh Group, and Zhenjiang Communications Construction Group.

This historic deal is Zambia's largest PPP road project post independence, signalling a policy shift from using public funds & debt for infrastructure development, to a private sector led development agenda.

The project will result in the construction of the country's longest dual carriage way stretch of 327Km on the T2 (Lusaka -Kapiri) and T3 (Kapiri - Ndola) roads. Further, the deal includes construction of two new bypass roads in Kabwe and Kapiri Mposhi, leading to reduced travel time, decongestion of Kabwe and Kapiri, and enhanced road safety. The T2/T3 road connects Zambia's capital city, Lusaka to the mineral rich Copperbelt and Northwestern provinces. It is also the main gateway to the Democratic Republic of Congo (DRC).

Adopting the PPP financing model is crucial for Zambia during this period of debt distress. Zambia is currently negotiating an IMF backed debt restructuring deal through the G20 Common Framework. The country owes US$14bn to multilateral lenders, Euro-bond holders, and China.

In November 2020, the country was the first to default on Eurobonds during the Covid-19 pandemic when it failed to make a US$42.5m loan repayment to Eurobond holders. Consequently, the country’s sovereign credit rating for foreign currency debt (FCY) is default, while for local currency (LCY) being CCC+/CC, signifying substantial risk.

Introduction

The Lusaka - Ndola road plays a key role in enabling transportation of capital equipment, inputs, supplies, fuel, and labor-force to the mining sector. Naturally, it is also the main route used for copper exports to South Africa & China. Zambia derives 80% of its foreign exchange needs from copper exports. The sector also contributes 46% to the treasury in taxes.

The Lusaka – Ndola road facilitates trade between Zambia and the DRC. The road also has regional significance as supplies to DRC from South Africa largely pass through this road. The road also facilitates imports to Zambia, from the port of Dar Es Salaam in Tanzania (through Nakonde/ Kapiri Mposhi).

Over the last two decades, traffic volumes on the Lusaka-Ndola road have increased exponentially. This is mainly due to establishment of new copper mines in Northwestern province i.e., Barrick – Lumwana mine, 2009; First Quantum Minerals(FQM) – Kalumbila mine, 2010; ?and establishment of the Dangote Cement Plant in Ndola in 2015. Other factors include increase in import/ export trade between South Africa and the DRC, and increase in local trade,.

All these factors combined have led to increased traffic volumes between Lusaka, Copperbelt & Northwestern provinces, and the DRC resulting in severe damage to the road, longer driving times, traffic jams at peak hours, and nasty road accidents involving both public and private vehicles. Poor economic performance, tightened fiscal space, and high debt levels have made rehabilitation of the road and construction of a dual carriage way using public funds a pipeline dream. ?

The heavy traffic on the road, poor lighting and visibility during the night, let to a significant rise in fatal road accidents involving public transport vehicles being recorded on the stretch

. To curb the scourge, the government has been implementing a night ban on public service vehicles and trucks since November 2016. Trucks and large passenger basses are not permitted to travel from 10:00 pm to 04:00 am daily. This move causes a lot of chaos on the the highway during daytime. In its current state, the Lusaka-Ndola road makes travelling between the two 'capitals' a nightmare and costly exercise.

It is against this background that Hakainde Hichilema’s New Dawn Government has decided to find a lasting solution to this problem by signing a PPP contract with MOIC for construction of a dual carriageway between Lusaka and Ndola, and to rehabilitate the Luanshya-Fisenge-Masangano bypass road. The deal is strategic as it will ease transportation of copper exports as the country embarks on its ambitious programme to ramp up copper production from 800 metric tons to 3m metric tons per annum over the next decade.

It must be noted that plans to construct the dual carriage started in the previous regime. In 2017 the former government signed a US$1.25bn project finance deal with China Jiangxi Corporation to construct a dual carriage way between Lusaka and Ndola. However, the project was shrouded in controversy owing to the high cost of the project and unfavorable terms. This led to large public outcry and subsequent cancellation post the 2021 elections.

The new PPP deal is in line with government policy and the Eighth National Development Plan (8NDP) to run a private sector led economy, develop quality modern infrastructure, and create jobs for youth and women, in a transparent/ cost effective manner.

About Public Private Partnerships (PPP's)

According to Stefano Gatti, Public Private Partnerships are a form of Project Finance involving the public administration. Such initiatives are run by the private sector on the basis of concession contracts from government. The goods or services in question are sold to end users (as in the case of toll roads). PPPs must be distinguished from privatization which involves acquisition of public assets, business, industry or service by private firms. In Privatization, ownership and control transfers to the buyer, while in PPPs the project is jointly owned by government and the private party.

PPPs are an innovative way for governments across the globe to finance infrastructure needs, especially in cases where country is facing fiscal constraints. PPPs are popular in the energy, transport, and telecom sector. They have been very popular in Europe (where the legal and regulatory frameworks are well developed), in East Asia, as well as the Pacific.

Despite the presence of PPP Projects in Africa, the concept remains underdeveloped on the continent. Notable success stories of PPPs in Africa include the US$660m N4 toll road in South Africa/ Mozambique, The US$1.4 bn Mozal Aluminium Project in Mozambique, and the US$668m, 27km Nairobi Expressway PPP toll road project by China Road & Bridge Corporation (CRBC). In Sub Saharan Africa, South Africa has the highest number of PPPs with over 300 active projects.

For Zambia, which is currently experiencing a debt crisis, embarking on large scale PPP contracts will enable the country to pursue its strategic development agenda without falling deeper into the debt trap, as the project is financed by the private party (through a combination of debt and equity), and repayments for debt are made out of the cashflows from the project (toll fees).

Other PPPs by GRZ in the include the 35 year Chingola-Kasumbalesa PPP Concession Agreement with Turbo-Ka-Chin Investment Consortium signed in October 2022, the 12 year concession awarded to Zambia Intellectual Property Boarder Post Crossing Company Z(ip) BCC which expired in February 2023, and the controversial 65 year Luburma Market Concession Agreement to mention but a few.

Lusaka-Ndola PPP Factsheet

·??????Project Name: Lusaka to Ndola, Luansha to Fisenge to Masangano Public Private Partnership Road Project

·??????Total Project Cost: US$649.9m (US$577 construction cost; US$69m – interest during construction period; US$1.8m finance costs; US$1m working capital)

·??????Method of Procurement: Solicited Proposal (February 2022 – July 2022)

·??????Concessionaire: Messrs Macro Oceans Investment Consortium (MOIC LN Consortium).

·??????Concession Period: 25 years (3 years construction; 22 years operation & maintenance)

·??????Project location: Lusaka, Central, and Copperbelt provinces

·??????Concession Agreement Signing Date: 28th February 2023, Ndola

·??????Project Commencement Date: 6 Months from date of signing once the Concessionaire reaches financial closure. Emergency works to commence immediately.

·??????Equity & Guarantees: GoZ will not make any equity investments nor provide any sovereign guarantee for the entire period of the Concession.

·??????Local contractors to be allocated atleast 20% of all works under the Agreement as per Zambian PPP law.

Opportunities

The Lusaka – Ndola PPP deal provides a great opportunity for Zambia to develop modern infrastructure at Zero cost to the government.

During the signing ceremony on 28th February 2023, Minister of Finance and Planning Dr. Situmbeko Musokotwane announced that the government will neither spend any money nor provide sovereign guarantee for the project.

Subsequently, Infrastructure, Housing and Urban Development Minister Charles Milupi said that the PPP financing model will “guarantee infrastructure development and faster delivery using private capital given the challenging fiscal position that the country is facing arising from the Covid-19, poor economic performance, and huge public debt left by the previous regime.”

Most importantly, the Project will create 3000 direct jobs during construction period, and many other indirect jobs and business opportunities over the period of the concession.

Risks

Successful implementation of PPP projects rests on efficient risk allocation. This is because the Sponsor and lenders purely look to projects cash-flows for debt repayment, recouping of investment, and to provide returns to investors and equity shareholders.

There are generally two categories of risks involved in PPPs. These are pre-completion risks and post-completion risks. Pre-completion risks relate to the period between construction and commissioning, while post completion risks relate to the period after commissioning takes place, up to the end of the concession period. Successful risk allocation seeks to allocate the risk to the party that is best suited to manage it.

Pre-completion Risks

For the Lusaka Ndola PPP, the main pre-completion risks include but are not limited to:

??????i.?????????Construction risk – Quality, budget, and on-time delivery (36 months). This risk can be mitigated by signing a Fixed – Price Turnkey EPC contract between MOIC and the private contractor. For this to be successful, a key member of the Consortium such as AVIC must be the main contractor). A poor-quality road will increase maintenance costs and erode profits for the PPP, making it difficult to repay providers of debt and equity finance, and will deny the Zambian government the much-needed revenue from the deal.

????ii.?????????Environmental Risk – Obtain necessary licenses and approvals from the Zambia Environmental Management Agency (ZEMA) in a timely manner. GoZ must facilitate for speedy issuance of necessary licences and permits. this.

Post-completion Risks

??????i.?????????Market risk – Should traffic levels fail to rise to expected levels, or toll fees rise above acceptable limits, will government compensate the Concessionaire for the loss in revenue? Unlike power projects, road traffic and associated future cash flows are very difficult to forecast, making such projects very “unbankable.”While Zambia is projecting higher traffic volumes on the Lusaka-Ndola road arising from its ambitious plans to ramp up copper production from the current 800,000 metric tons to 3m metric tons over the next decade, slow investment in the sector may pose a threat to projected cashflows on the road project.

????ii.?????????Expropriation risk – This is the risk that government will forcibly confiscate and take over ownership of the PPP road, toll plaza’s, and weigh bridges without proper compensation. This is clearly a significant risk given the reliance of Project lenders on the cash-flows to be generated by the Lusaka – Ndola dual carriage way. Government involvement through an equity stake can mitigate this risk. The Concessionaire can also take out insurance to mitigate the risk.

Following the change of government in 2012, Zambia repossessed ZAMTEL Limited from Lapgreen, after the Libyan government injected US$257m in ZAMTEL.?This resulted in Lapgreen suing the Zambian government in international courts of law. A London court ordered Zambia to compensate Lapgreen/ Libya US$380m for nationalizing its assets.

To mitigate this risk, the government must strengthen laws that project PPP assets against expropriation, as this will guarantee more investments in future.

??iii.?????????Operating risk – An efficient toll collecting system with proven, modern technology should be deployed to avoid long queues at the toll gates. The toll plaza’s should have several gates, at least six on each side to ensure smooth flow of traffic. Options must be provided for online payments and e-tolls for bulk customers. Security also needs to be enhanced at toll gates. In 2021 an armed robber killed a police officer, raped two female toll collectors, and stole K38,000 at a named toll gate in Kasama.

Note that some risks are common to both the pre-completion and post-completion phases. These include exchange rate risk. This is a real risk for the project as the revenues for the Project will be in the local curency, the Kwacha i.e. toll fees) while the loan and equity finance will be in US dollars. A weak Kwacha will mean the Project Company, MOIC will need more Kwacha to pay for the same amount of US Dollars to lenders and investors. This risk can be mitigated through forward contracts and hedging, and by asking large customers (frequent road users) such as mining companies to pay their toll fees in US dollar.

Rewards

Rewards include the following:

??????i.?????????Local institutional investors such as the National Pension Scheme Authority (NAPSA) and the Workers Compensation fund, and other investment banks have the opportunity to invest in the project and receive interest payments. This will add value to the local economy and will add to development and strengthening of the local financial and capital markets.

????ii.?????????Government of Zambia will receive revenue share of up to 15% over the duration of the concession and additional amounts income from taxes i.e., US$1.1m total (Gross Revenue US$432k; Income Tax US$660k; WHT on dividends US$79k).

??iii.?????????Employment (3000 direct jobs during construction) and various business opportunities during the construction and operational phases of the Concession. Booth skilled and unskilled labour will be required over the entire 327Km plus 45Km stretches. Opportunities will arise to build new petrol stations, restaurants, turnpikes and more.

Conclusion

Construction of a dual carriage way between Lusaka and Ndola through a US$650m PPP deal between the government of Zambia and Macro Oceans investment Consortium is a welcome move. The government will be able to develop high grade infrastructure without spending money on construction and road maintenance for 25 years.

Instead, Macro Ocean Investment Consortium will finance, build, operate, transfer, maintain and operate the road and will recoup its investment through charging toll fees for 22 years. Construction will take 36 months.

The PPP approach will free up public funds and enhance expenditure in other key areas of development such as providing quality healthcare and education for all.

To be successful, financial closure for the Lusaka – Ndola Dual Carriageway is cardinal. Recent delays in debt restructuring talks under the Common Framework, with high sovereign debt owed to China & Chinese companies means that Chinese banks and the China Export & Credit Insurance Corporation would be very reluctant to lend money for the Lusaka – Ndola PPP project.

As such, over the next 6 months, the Concessionaire will seek to engage local lenders such as NAPSA and some commercial/ investment banks for possible financing of the project. Zambian’s must understand that high foreign debt makes it difficult for external financiers to lend monies for a Zambian project, hence the need to explore the local market to finance the deal. It also entails that interest earned on loans provided by such institutions as NAPSA will remain locally.

Timely completion of the project will demonstrate to the public that the New Dawn government is committed to delivering development using innovative approaches.

The author is a Chartered Accountant and Project Finance Expert. He holds a Master of Philosophy in Development Finance from Stellenbosch Business School. He is a Fellow Member of ACCA and ZICA.