Power Companies In Sub-Sahara: Highly Leveraged And In Need Of Restructuring
The loans agreed upon between Zambian officials and the Chinese Export-Import Bank are largely opaque, with few details disclosed to the public. This has given rise to conspiracy theories.
Zambians are frustrated by Chinese influence in the country, and locals complain that they are easily eliminated in favor of Chinese businesses in request for proposal (RFP) or tender processes with the government.
Those same locals are very aware that the loans provided to Zambia have to come with certain guarantees. An estimated one-third of the loans provided by China are secured against future commodities. But with the debt need growing, it is unclear if commodities are sufficient to both cover the cost of securing Chinese debt and raise enough tax revenue with mining companies for the government budget (see the recent raise on mining taxes).
All this coupled with a lack of public data brings the conversation back to Zesco. The Zambian power company is already indebted to regional countries. For example, Zesco owes $70 million to Electricidade de Mocambique (EDM). EDM, as a result, suspended the supply of power to Zambia from the Floating Thermoelectric Power Plant of Nacala.
Leveraged power companies are the norm
The Zesco situation, for all the criticism, is not the only messy scenario in sub-Saharan Africa.
Kenya Power grabbed the spotlight by replacing its CEO and 12 other senior managers in July. The power company’s woes do not end with management. It is also very levered up with some international banks lurking around for an opportunity to either lend more money or buy up current debt.
Acting as the country’s sole electricity distribution company, Kenya Power has aggressively spent to strengthen the country’s power network over the last five years. Although backed by a strong institutional framework and higher electricity tariffs, the major capital spending program has significantly weakened the balance sheet of the company, now estimated to have north of $700 million of liabilities.
A similar situation is at work in Ghana, where President Nana Akufo-Addo fired the country’s energy minister in August amid the renegotiation of a $510 million private power deal with Africa Middle East Resources Investment Limited. Akufo-Addo’s administration had recently reviewed the 250-megawatt deal in 2017 after claims that the country was overpaying by $150 million in the transaction first negotiated in 2015 under the previous administration.
That trouble with energy has trickled throughout the ecosystem with rising debt levels at power companies, such as the Volta River Authority (VRA). The Public Interest and Accountability Committee (PIAC) of Ghana recently indicated that the VRA’s debt to Ghana Gas was more than $750 million at the end of 2017. The amount raised eyebrows because it highlights the shortcoming in receivables to the Ghanaian government.
Ghana Gas itself owed nearly $250 million to the Ghana National Petroleum Corporation (GNPC) at the end of 2017. The Ghana power transmitter, Ghana Grid Company (GRIDCo), is also struggling as many energy players are indebted to the company, including the Electricity Company of Ghana (ECG) with approximately $150 million of debt owed to GRIDCo.
Balance sheet restructuring can be the answer
The list of leveraged power companies in sub-Saharan Africa is not a short one. Leverage is not necessarily bad but it’s a problem when liquidity is limited by high interest and impending principal payments, making cash flow marginal for other activities.
Officials at several regional power companies quietly admit that 70 percent-plus of cash flow is already allocated to scheduled interest and principal payments, leaving little cash for investment in upgrading or building new power plants and transmitters.
Most regional players are still actively pursuing aggressive growth plans, with power still a major development need in the region. Many governments are rightly supporting power providers with incremental increases to electricity tariffs and access to cheap development financing when available. Yet the balance sheets will remain too leveraged and poorly structured to sustain the expected growth.
The situations generally require more than additional capital from the government and private lenders. Furthermore, debt forgiveness is rarely available but can be helpful when it’s an option on the table. For example, the Gambian Ministry of Finance cleared the debts of the National Water and Electricity Company (NAWEC) to bring it back from the brink of bankruptcy under the new president, Adama Barrow.
Still, the reality of the emerging sub-Saharan African power story is that restructuring the balance sheet is as important as providing new capital. Over-indebtedness in U.S. dollars has hurt many emerging markets in downturns. Turkey and Argentina are current examples.
South Africa’s Eskom is similarly feeling the pain of U.S. debt as it attempts to optimize its balance sheet and pursue an aggressive investment plan in the near term.
Debt costs could reasonably come down over time with less leverage in the ecosystem of the regional power players. Local banks in some countries have raised rates on power companies because their exposure to default rises as international creditors are generally paid first in any liquidity crunch.
As these largely state-owned entities add more debt, we can only expect greater challenges in funding future growth and covering the day-to-day bills.
The question remains: When will government leaders push to restructure local power players? The answer cannot be “right before the power goes out”.
Kurt Davis Jr. is an investment banker with private equity experience focused on Africa and the Middle East. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at firstname.lastname@example.org.