[Cancelled] China Eximbank provides $333.2 million preferential buyer’s credit for Phase II of Smart Zambia National ICT Development Project (Linked to Record ID#53093)

Project narrative

On December 28, 2017, China Eximbank and the Government of Zambia signed a $333,200,000 preferential buyer’s credit (PBC) agreement for Phase II of the Smart Zambia National ICT Development Project. The borrowing terms of the PBC included a 0.5% management (arrangement) fee ($1,666,000) and a 0.5% commitment fee. Its other borrowing terms are unknown. The borrower was expected to on-lend the proceeds of the PBC to ZESCO Limited, which would in turn used the proceeds to finance 85% of the cost of a $392 million commercial contract between the Government of Zambia (represented by the Cabinet Office) and Huawei Technologies Co., Ltd. As of July 2022, the loan from China Eximbank had achieved a 0% disbursement rate ($0 out of $333,200,000). However, the borrower did pay the $1,666,000 upfront (management) fee to the lender. The purpose of Phase II of the Smart Zambia National ICT Development Project is to (a) extend the ZESCO national optical fiber backbone by 2,700 kilometers covering 64 backbone sites; (b) establish a metropolitan area network with a cumulative cable distance of 3,600 kilometers across 17 districts; and (c) implement a full IP-based Access Network to cover 2,750 kilometers covering 17 districts. Smart Zambia Institute, ZESCO Limited, and Huawei Technologies Co., Ltd. were all expected to be involved in project implementation. Phase II commenced in May 2017; however, the project was a subject of local controversy and the China Eximbank loan for the project was eventually cancelled. In early 2022, Dr, Mbita Chitala, the Former Chairman of ZESCO’s Board of Directors, published a book entitled “Corporate Capture, the Political Economy of Electricity Management in Zambia 2014-2021, (How Not to Manage a State Enterprise),” in which he claims that Phase II of the Smart Zambia National ICT Development Project is plagued by corruption. More specifically, he claims that Zambia’s Secretary to the Cabinet Dr. Roland Msiska and later Dr. Simon Miri and his deputy, former Deputy Finance minister and Bank of Zambia Governor Patrick Mvunga, placed extraordinary pressure on ZESCO to accept an on-lending agreement for Phase II of the Smart Zambia National ICT Development Project. He writes that ‘[I]t was obvious that some people had either already benefited from the deal or were being prevented from benefitting. Some of the members of the [ZESCO] management expressed genuine fear of the situation and requested for my protection.’ He also writes that ‘[t]he President [of Zambia] advised me to cancel [an upcoming ZESCO Board] meeting which I gratefully did as I had planned to resign from the Board if the Board members resolved in the affirmative to accept the on-lent loan. […] I had earlier made up my mind that if the board accepted that [ZESCO] receive the USD 392 million as on lent to [ZESCO] by the Ministry of Finance knowing that [ZESCO Limited could not accommodate the loan on its balance sheet and further knowing that the loan was essentially a way of defrauding Zambia, I would respectfully resign as chairman and board member of ZESCO Limited. […] It was common knowledge that the more than US$ 60 million that the Ministry of Finance released as its 15% counterpart contribution funding for the loan was not only wrongly released but was also grossly abused and that many people may have received bribes on that deal and hence the pressure on ZESCO to accept the USD 392 million on-loan let instructions. […] It was apparent that since government money had been expended without any work to show for, this would add to the other scandals that the Auditor General used to publish as examples of abuse of public office of trust or common theft of public resources by politicians and public servants.’ Dr. Chitala also writes that ‘[f]rom the onset, ZESCO observed the difficulties in the project. It was clearly non-transparent and the ZESCO Board immediately brought this matter to the government officials that were advancing the project. […] ZESCO observed that Huawei had presented a solution to Smart Zambia for the optic fibre backbone network whose connection matrix was the same as what was existing in Zesco’s Fibrecom except for 4 links, namely Mongu-Lukulu, Kaoma-Mumbwa; Nakonde-Mbala and Chama-Nakonde. […] Further, Huawei had proposed to Smart Zambia to install their equipment in the same location as those already installed by ZESCO’s Fibreson Network. Huawei wanted to configure their equipment as redundancy to the existing ZESCO equipment which was basically to duplicate the ZESCO infrastructure and ZESCO noted that this was not necessary as ZESCO network rings were able to achieve that objective. […] Furthermore, ZESCO observed that Smart Zambia Institute had not conducted any on-site survey to justify the quantification of the Bill of materials. The figures totaling to USD 392 million that were submitted to ZESCO for the project scope were based on desktop estimation. ZESCO considered this omission as gravely unprofessional. […] It was evident according to ZESCO analysis that the whole project was a conspiracy to defraud Zambia. Huawei proposed a solution that was not only inferior to ZESCO existing network, but covered the same towns as those covered by ZESCO on the Metropolitan Network. […] Huawei and Smart Zambia Institute proposed to use equipment whose end of the market (EOM) was in 2013 and they further failed to provide to ZESCO a financial model of their business proposal on how ZESCO would have its Return on Investment (ROI). ZESCO Limited ultimately did not accept the on-lending facility from Zambia's Ministry of Finance.’ However, according to Dr. Chitala, Zambian government officials subsequently tried to sign an on-lending agreement with the Industrial Development Corporation (IDC). He writes in his book that ‘[t]he bureaucrats had to find a way of justifying this expenditure and I and the ZESCO Board appeared to be in the way of this criminality.’ Dr. Chitala also notes that the IDC, which had been incorporated by former Finance Minister Alexander Chikwanda in 2014, operated as a private company but was carrying itself as a state owned enterprise. He further suggests that the IDC was simply a tool for illicit activities by the politicians as it is not subjected to the Auditor General or the Public Accounts Committee of Parliament: ‘[s]ome observers regard it as an illicit company involved in laundering public assets. The company is strangely chaired by the President of the Republic and had given itself the mandate of unlawfully managing public enterprises.’ On July 29, 2022, the Ministry of Finance & National Planning (MOFNP) of Zambia announced that it was seeking lender approval to formally cancel the loan’s undisbursed balance ($333,200,000); however, it also noted that it had not yet secured formal lender approval for this action. This announcement came approximately 21 months after the Government of Zambia defaulted on its repayment obligations to Eurobond holders and approximately 6 weeks after China, France, and 14 other countries formed a creditor committee to discuss the Zambian authorities’ request for a debt treatment under ‘the Common Framework for Debt Treatment beyond the DSSI’ endorsed by the G20 and the Paris Club.