Commentary, 26th June - 3rd July, 09

Suggestions that ZESCO limited requires additional loans for it to embark on major investment and rehabilitation projects will seriously chock the company both in the short and long term. The reality is that the capital structure of ZESCO is highly geared implying that its capacity to finance its operations through debt are seriously constrained. This alone poses a threat on the solvency of the entity.

The existing short term loans have been procured from both international organizations such as the World Bank as well as local commercial banks. By mainly being short term loans, it means that ZESCO will always contend with servicing obligations by borrowing from one entity to pay off another such that in reality, the effectiveness of debt finance on the sustenance of the entity is negative. Worse still the interest rate charges to these loans are not uniform. In addition, the foreign exchange rate fluctuations have a negative impact on the company’s cash flows.

Just like Zamtel, the competitiveness and viability of this institution depends on a sustainable and efficient capital structure that is a fine balance between debt and equity finance. Just recently, President Rupiah Banda made comparisons about the performance of Zamtel with that of other players in the industry and came up with the observation that the company was underperforming. The truth is that utility companies hardly survive if their operational and expansion programmes are entirely dependant on debt and internal reserves.

The two realistic options for ZESCO as for now are to restructure the outstanding bills with clients as suggested by the former managing director Robinson Mwansa as well as going to the stock market to deepen its capitalization needs. Though deemed expensive, the listing process is a one off expenditure but with long term benefits and Zambians, together with foreign investors, will still come on board despite the existing negative balance sheets. In other words, ZESCO’s profitability does not depend on higher tariffs but efficiency and economies of scale.

ZESCO is a very large company with cash flow needs falling both in the short and long run and bank loans cannot sustain huge cash injections. Before any serious considerations are made about tariff adjustments, a reputable financial engineer is needed to structure the capital to a proper balance that will enable ZESCO grow capacity and build their revenues over time and meet its financial commitments without pressure.

ZESCO further needs to separate its challenges so that it ascertains what is immediate, medium and long term. In the long term they need to be at a different level where the market will have increased (regional) services that are stabilized, reliable and cost efficient. Right now ZESCO management is fighting fires and this increases the cost of doing business. For example, you do not need the chairman of the board on sight when there is a problem. This means the entire board and management, including the minister have to travel around and this is a cost to the company!