China Eximbank provides $997.7 million preferential buyer’s credit for 600 MW Hwange Makomo Power Station Expansion Project

Project narrative

On December 1, 2015, the Export-Import Bank of China (China Eximbank) and Zimbabwe’s Ministry of Finance signed a $997.7 million preferential buyer’s credit (PBC) agreement for the 600 MW Hwange Makomo Power Station Expansion Project. The loan carries the following borrowing terms: a 20-year maturity, a 7-year grace period, a 2% interest rate, a 0.25% management fee, and a 0.25% commitment fee. It disbursed $200 million in June 2018, $129.6 million in 2020, $24 million in 2021, and $139.3 million in 2022. The loan’s amount outstanding (including principal, interest, and arrears) was $217,121,910.95 as of 2021. Zimbabwe’s Ministry of Finance used the loan proceeds to on-lend to Hwange Electricity Supply Company (HESCO), which is a special purpose vehicle (project company) that is jointly owned by Zimbabwe Power Company (64% equity stake) and Sinohydro (36% equity stake). HESCO entered into a power purchase agreement (PPA) with Zimbabwe Electricity Transmission and Distribution Company (ZETDC) to off-take electricity from the constructed Hwange 7 & 8 Thermal Power Station. HESCO is expected to service the China Eximbank PBC with revenue derived from power sales to ZETDC. The total cost of the 600 MW Hwange Makomo Power Station Expansion Project is $2.148 billion and it is being implemented on a public-private partnership (PPP) basis and financed according to a debt-to-equity ratio of 70:30. Standard Bank (unknown amount) and AfreximBank ($176 million) are the other sources of debt financing. 85% of the cost of HESCO’s engineering, procurement, and construction (EPC) contract with Sinohydro will be covered by the China Eximbank PBC. The remaining 15% ($176 million) will be provided through an equity contribution from Sinohydro. The purpose of the project is to construct Unit 7 and Unit 8 at the Hwange Makomo Power Station, and thereby increase the power generation capacity of the Hwange Makomo Power Station from 600 MW to 1200 MW (through the addition of two power generation units). Hwange Makomo Power Station is a coal-fired power plant and the 14th largest thermal station in the Southern African region. It is adjacent to the Wankie Colliery Open Cast Mine. The station was built in two stages. The first four power generation (4x120 MW) units were commissioned between 1983 and 1986 and the fifth and sixth power generation (2x220 MW) units were commissioned in 1986 and 1987. These six units are already functional and the station currently generates about 40% percent of the country’s electricity needs. Coal is delivered to the station by an overland conveyor belt which is 6 kilometers long from Hwange Colliery Company Limited (HCCL) as well as by trucks from Makomo and Coalbrick mines. Water that is piped 44 kilometers from the Zambezi River is pumped into two 150,000-cubic-meter reservoirs next to the station and conveyed by gravity to its point of use. Sinohydro is the EPC contractor responsible for project implementation and it has hired 2532 employees (620 Chinese workers and 1912 local workers) as well as 252 sub-contractor employees (including 217 local workers). After the PBC agreement with China Eximbank was signed on December 1, 2015, the lender demanded that the Government of Zimbabwe meet several conditions, including parliamentary ratification of the PBC; the establishment of a debt service reserve agreement (DSRA) between the Government of Zimbabwe, China Eximbank and HESCO; the establishment of a PPA between HESCO and Zimbabwe Electricity Transmission and Distribution Company (ZETDC); the establishment of an agreement between Government of Zimbabwe and HESCO outlining the incentives for the project (in terms of taxation) and guaranteeing ZETDC’s payments to HESCO; the signing of a coal supply agreement between HESCO and Makomo Resources, and the signing of a limestone supply agreement between HESCO and PPC (Zimbabwe). These requirements led to project implementation delays. The first loan disbursement from China Eximbank took place in June 2018, which paved the way for project commencement on August 1, 2018. The project was originally expected to reach completion within 42 months (February 1, 2022). A formal groundbreaking ceremony was organized on June 27, 2018. Then, on March 1, 2019, a foundation stone laying ceremony took place. As of November 2019, the project had achieved a 25% completion rate. Then, in September 2020, reports emerged that the borrower had failed to comply with the terms of its escrow account agreement with China Eximbank and it instead issued a savings bond as collateral (security) in favor of the lender. By February 2021, the project was running behind schedule; it had achieved a 58.29% completion rate (against a target completion rate of 78.5%). The delay was attributable to the COVID-19 pandemic and unpaid invoices (IPC payments). As of April 2022, Forbes Chanakira, a project manager for the Hwange Makomo Power Station Expansion, reported that the project had achieved an 84.2% completion (progress) rate. He reported that the turbines and generator sets for Unit 7 had been constructed and were awaiting commissioning. At that time, the boiler was about 93% complete and the coal stockyard was expected to be operational in May 2022. The boiler’s control system, the Distributed Control System (DCS), had also been activated. Hot commissioning, a process in which coal is used in the boiler to heat steam, was expected at the time to begin by July 2022. It was expected to last until November 2022 when the unit would be handed off. The two units were operational as of September 2023. The project allegedly also faced at least two instances of temporary disbursement halts by China Eximbank. The first in early 2018 was due to concerns over arrears owed to Sinosure. The second, in October 2019, was due to the government of Zimbabwe diverting $10 mil from an escrow account for the Robert Mugabe International Airport expansion project. Forbes Chanakira also stated in April 2022 that about 810 of the 875 transmission towers built between Hwange and Bulawayo had been placed. At the time, on the 368 km section between Hwange and Bulawayo, a new 400KV line — that would run parallel to the current lines — still needed to be built. The route had been separated into three sections: Bulawayo to Lupane, Lupane to Gwayi, and Gwayi to Hwange, where engineers were working on building towers alongside other construction work. At one point, this project had employed 450 people, but the project ultimately is expected to employ more than 3,000 people. 72 households were displaced by the expansion project, but beginning in 2018 were relocated through a compensatory housing project implemented by the Zimbabwe Power Company. There are some indications that the loan has faced repayment issues. In 2024, ZESA acting chief executive Eliab Chikwenhere appeared before the Zimbabwean Parliamentary Portfolio Committee on Energy, and noted that ZESA is having trouble repaying their external debt. He specifically needed that Zesa needs US$36 million per month to service the loan, but only intakes US$55 million per month.