China Eximbank participates in $1.53 billion syndicated buyer’s credit for 750MW Kafue Gorge Lower Hydropower Plant Construction Project (Linked to Project ID#89492 and #92289)

On August 10, 2010, the China-Africa Development Fund (CADF), Sinohydro Corporation Ltd., and the Government of Zambia signed a Memorandum of Understanding (MOU) regarding a build-operate-transfer (BOT) contract for the Kafue Gorge Lower Hydro Power Station Project. The project was designed to address a power deficit in Zambia. It would involve the construction of a 140-meter high concrete-face rock fill dam (CFRD) with a length of approximately 378 meters. A surface powerhouse and five generator units would also be built. It was originally envisaged that the project would be completed by 2021 and created approximately 5,000 jobs. China Development Bank (CDB) was slated to provided financing to the project. The total cost of the project was reported to be $2 billion at the time. China’s Ministry of Commerce announced that a commencement ceremony for the project was scheduled for July 20, 2011. However, after a change of government in 2011, Zambia’s incoming Minister of Finance questioned whether the project would be sufficiently beneficial to Zambia and whether there were adequate transparency and control mechanisms in place. He wanted a second opinion regarding the technical solutions proposed by the Chinese side. The Government of Norway was asked to review the plans and give further advice, but the Norwegian Government did not wish to be involved. The Government of Zambia nevertheless decided to ‘unpack’ the original proposal and looked for alternative funding and investors. It suspended its MOU with Sinohydro Corporation Ltd. and CADF. However, after an open tendering process, Sinohydro Corporation Ltd. re-won the EPC contract on October 19, 2015. The project was ultimately financed as a public-private partnership (PPP) with a 85:15 debt-to-equity ratio. A special purpose vehicle called the Kafue Gorge Lower (KGL) Power Development Corporation Limited (KGLPDC) was created to manage the implementation of this PPP. It is wholly-owned by Zambia Electricity Supply Corporation (ZESCO) Limited, a state-owned power company. Then, on November 13, 2017, Kafue Gorge Lower (KGL) Power Development Corporation Limited signed a $1,530,576,039.16 syndicated buyer’s credit facility agreement with China Eximbank and ICBC for the 750MW Kafue Gorge Lower Hydro Power Plant Construction Project. The borrower was expected to use the proceeds of the loan to finance 85% of the cost of a commercial (EPC) contract with Sinohydro Corporation Ltd. ZESCO Limited reportedly agreed to cover the remaining 15% through an equity contribution, even though it had already made an $186 million equity investment in the project (with some of the proceeds from a $750 million Eurobond issuance in September 2012). China Eximbank’s estimated contribution to the loan is captured via Project ID#57536 and ICBC’s estimated contribution to the loan is captured via Project ID#92289. The final facility (loan) agreement included 87 loan conditions, none of which has been made public. Sinohydro Corporation Ltd. reportedly pushed to help the Government of Zambia complete all conditions before the syndicate would commit to finalizing the facility agreement. Zambia’s Ministry of Finance provided a sovereign guarantee in support of the loan and Sinosure provided a credit insurance policy (which cost the borrower approximately $100 million). The loan had disbursed $479,000,000 as of June 21, 2018, $551,291,040 as of December 31, 2018, $887,520,697 as of December 31, 2019, $932,015,102 as of December 31, 2020, and $1,200,000,000 as of January 2020. The loan’s amount outstanding was $965,692,012 (inclusive of $16,843,994 in interest arrears) as of June 30, 2021, $981,586,149 (inclusive of $32,738,132 in interest arrears) as of June 30, 2022, and $993,836,899 (inclusive of $44,988,881 in interest arrears) as of December 31, 2022. Construction began on January 15, 2016. However, the first loan disbursement (worth $479 million) from China Eximbank and ICBC did not occur until June 21, 2018. ZESCO Limited also hired a Norwegian private company, Norconsult, to act as its technical advisor and quality controller to ensure that Sinohydro Corporation Ltd. and other contractors honor their contractual obligations and international standards. BelFone Communications was contracted to a wireless communication system for the plant. Significant progress was made between 2016 and 2019: the North Western Province was connected to the national electricity grid following the commissioning of a 132 KV transmission line; costly diesel generation machines were decommissioned; and other transmission lines were completed to support mining projects in the region. The project had achieved a 72% completion rate by early 2020. However, the project experienced major delays in late 2019 when Sinohydro announced that it was halting its work due to the fact that it had not been paid for its services. Also, in later 2019 and early 2020, ICBC was reportedly reluctant to continue making loan disbursements due to the fact that the Government of Zambia had defaulted on its repayment obligations to several other external creditors. Then, in January 2020, China’s Ambassador to Zambia refuted reports by Africa Confidential that the project’s lenders had suspended disbursements, resulting in a stoppage of works at the hydropower plant. However, later that year, KGLPDC defaulted on its repayment obligations under the facility (buyer’s credit) agreement with ICBC and China Eximbank. Given that the buyer’s credit was insured by Sinosure, the EPC contractor (Sinohydro Corporation Ltd.) sought compensation through an indemnity payment. In January 2021, Sinohydro Corporation Ltd. filed an insurance claim with Sinosure, which in turn made an indemnity payment (worth $57.23 million) to Sinohydro Corporation Ltd. in May 2021. The COVID-19 pandemic and major cost overruns also led to project implementation delays. The cost of the EPC contract with Sinohydro Corporation Ltd. reportedly increased from $1.48 billion to $2 billion, and interest payments worth $312 million during the grace period were reportedly capitalized so that the borrower would not have to make loan repayments until the power plant began generating revenue. In July 2021, during the middle of Zambia’s presidential election campaign season, one of the five turbines (Turbine Number 2) of the 750 MW Kafue Gorge Lower hydroelectric power plant was commercially commissioned and it began to supply 150 MW to the national grid. As of April 2022, ZESCO reported that two turbines at the power plant were operational and producing 300 megawatts while a third turbine was undergoing a reliability test, but there was an apparent lack of activity at the project site and neither China Eximbank nor ICBC were making any loan disbursements. Then, in June 2022, Zambia's Energy Minister Peter Kapala announced that Kafue Gorge Lower (KGL) Power Development Corporation Limited had defaulted on its repayment obligations to China Eximbank and ICBC, and it was seeking to reschedule and restructure its outstanding debts to the Chinese creditors. He also announced that ZESCO would use internal revenues to complete the project and ensure that all turbines came online. One month later, in July 2022, China’s Ambassador to Zambia, Du Xiaohui, referred to the Kafue Gorge Lower hydroelectric power plant as a ‘a money printer made in China’ that could potentially early $1 million a day. On March 24, 2023, the fifth turbine was launched and the entire project was officially commissioned in a ceremony attended by President of Zambia Hakainde Hichilema. However, there were reports that ZESCO commissioned the plant later in late April 2023.

Additional details

1. The Chinese project title is 赞比亚下凯富峡水电站BOT项目 or 赞比亚下凯富峡 or 下凯富峡水电站 项目. 2. Most sources, including SAIS-CARI, records the face value of the loan as $1.5 billion. However, the exact face value of the loan (i.e. transaction amount) reported by AidData ($1,530,576,039.16) comes from a 2019 report from the Zambian legislature (source ID#99467 p. 15). 3a. The borrowing terms of the $1,530,576,039.16 syndicated buyer’s credit facility from China Eximbank and ICBC are unknown. However, on May 6, 2016, Development Bank of South Africa (DBSA) issued a $100 million loan for the 750MW Kafue Gorge Lower Hydro Power Plant Construction Project with a 15-year maturity, a 2-year grace period, and interest rate of 6-month LIBOR (0.933% in May 2016) plus a 9.4% margin. For the time being, AidData assumes that the same borrowing terms applied to the $1,530,576,039.16 syndicated buyer’s credit facility agreement with China Eximbank and ICBC. This issue warrants further investigation. 3b. A 2011 World Bank study of the project estimated that the loan for the 750MW Kafue Gorge Lower Hydropower Plant Construction Project would likely carry a 9% interest rate, a 16 year maturity, and a 6 year grace period. See https://documents1.worldbank.org/curated/en/803161501134492091/pdf/117641-WP-v3-ZM-ClimateRisk-Hydro-Appendices-PUBLIC.pdf 4. On May 17, 2018, Kafue Gorge Lower (KGL) Power Development Corporation Limited signed a $195,766,479.52 loan agreement with ICBC for the engineering, procurement and construction of three 330kV transmission lines and associated facilities to evacuate power from the 750MW Kafue Gorge Lower hydroelectric power plant. This loan is captured via Project ID#89492). 5. The exact size of Eximbank and ICBC’s respective financial contributions to the $1.53 billion syndicated buyer's credit facility agreement are unknown. For the time being, AidData assumes that the 2 members of the syndicate contributed equal amounts ($765,288,019.58). 6. Given that the Dubai (DIFC) Branch of ICBC served as the security agent for the ICBC/China Eximbank loan agreement (see https://www.zambialaws.com/Zambia2018Pdfsi/SI%2037%20of%202018.pdf) and the project was financed through an SPV with a project finance transaction structure, the ICBC/China Eximbank loan was almost certainly collateralized. According to a September 2020 IMF publication (IMF Country Report No. 22/292), "based on latest available data, as of end-December 2021, there was $2.4 billion of disbursed external foreign-currency debt with some form of security or escrow arrangement that could be considered as collateralized debt, including debt with a government guarantee or third-party (exporter) guarantee as security. All this debt is in arrears and, where the security or escrow provides for a claim on funds in a specific account, the authorities have reported zero balances in those accounts. Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is 'unrelated' when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts." 7. When lenders take collateral as security for their loans, a collateral/security agent is often appointed to enforce rights against the collateral in the event of the borrower’s default under the loan.

Number of official sources

30

Number of total sources

54