China Eximbank provides $44.2 million preferential buyer’s credit for 14.8 MW Lunzua Hydropower Rehabilitation Project (Linked to Record ID#57392)

Project narrative

On July 31, 2009, China National Electrical Engineering Company (CNEEC) and the Government of Zambia signed a Letter of Intent, which outlined the possibility that CNEEC would work with ZESCO Limited to develop the 86MW Lusiwasi Lower Hydropower Expansion Project (captured via Record ID#57392) and the 15MW Lunzua Hydropower Rehabilitation Project (captured via Record ID#30467). In exchange for hiring CNEEC, the Government of Zambia requested that China Eximbank extend a preferential buyer’s credit (PBC) for both projects and that CNEEC arrange the financing. In 2013, China Eximbank and the Government of Zambia signed a $183.23 million PBC agreement for the 86MW Lusiwasi Lower Hydropower Expansion Project and the 15MW Lunzua Hydropower Rehabilitation Project. The borrowing terms of the PBC are unknown. According to a 2014 report from Zambia’s Office of the Auditor General (source ID#67159), the proceeds of the PBC were to be used by the borrower to finance (a) 85% ($139,353,132) of the cost of a commercial contract ($163,944,861.43) between ZESCO Limited and CNEEC for the 86MW Lusiwasi Lower Hydropower Expansion Project, which was signed on July 21, 2011; and (b) 85% ($44.2 million) of the cost of a commercial contract ($52 million) between ZESCO Limited and CNEEC for the 14.8MW Lunzua Hydropower Rehabilitation Project, which was signed on July 21, 2011. The remaining 15% was to be provided by the Government of Zambia in counterpart financing. The 14.8MW Lunzua Hydropower Rehabilitation Project involved the construction of a 14.8 MW hydro power plant along the Lunzua River, upstream of the existing 0.75 MW power plant (exact locational coordinates: -9.008021886558053, 31.39704686153931). The project was originally scheduled to reach completion on September 7, 2014. However, it encountered implementation delays. CNEEC mobilized to the project site at the end of September 2012 to prepare for commencement of main works. It commenced the final commissioning of the generating plant in September 2014. The project was ultimately completed on April 9, 2015. However, it has also become a source of local concern and controversy. One source of concern that emerged was overpricing and the fact that the CNEEC was selected as the contractor through a sole-source contract rather than through a competitive bidding process. Additionally, a Government of Zambia inquiry into CNEEC’s background revealed that the company did not perform to the required standards of good workmanship and quality delivery on previous contracts. ZESCO Limited eventually notified CNEEC of its intentions to terminate their commercial contract. Then, in October 2011, Government of Zambia made the decision to terminate the commercial contract with CNEEC. However, CNEEC was not willing to refund an advance payment of $32,334,632.75 that ZESCO Limited provided between December 21, 2010 and August 23, 2011. Upon consultation between the Government of Zambia and ZESCO Limited, it was decided that the commercial contract would be reinstated in order to avoid the additional costs that would arise from termination. More specifically, a "no-objection" was granted as per China Eximbank's request. Upon reinstating CNEEC in June 2012, ZESCO Limited agreed with CNEEC that the implementation would start with the 14.8MW Lunzua Hydropower Rehabilitation Project, and upon completion of that project, the contractor would proceed to implement the 86MW Lusiwasi Lower Hydropower Expansion Project. Also, in December 2015, a physical inspection of the project by Zambia’s Office of the Auditor General revealed several problems, including defects in the construction of the hydropower station. The Office of the Auditor General flagged that the ‘bridge on the access road to the power station had collapsed’ and the ‘office block was not in use despite having been completed’. It also noted that ‘a number of items still needed to be put into operation to provide a [hydropower generation] facility fit for commercial operations namely the telecommunication system and inter-tripping for the Mbala power line.