PowerChina Undertakes New Energy Project in Zambia Amidst Concerns Over Debt Burden to China and Collateralized Strategic Assets

On May 21, PowerChina Corporation (a subsidiary of Sinohydro Corporation) signed a $548 million contract with Zambia’s state owned power company, ZESCO, for the construction of three solar plants, which will contribute an estimated 600 MW of electricity to the country. The project is intended to help Zambia alleviate its approximately 810 MW energy deficit (as of March 2020) caused by drought and the country’s current dependency on hydropower. 

Although it remains unclear how the contract will be financed, the announcement comes in the context of a number of reports over the past six months of Chinese firms (including PowerChina) stalling on projects due to the failure of Zambian entities to repay existing debts, with strategic national assets (including Zesco) even discussed as possible collateral in debt default scenarios.

Zambia’s current external debt is equal to 96% of its GDP, a ratio that has raised concerns. Although exact figures remain unclear, by some accounts, China remains the country’s largest creditor, accounting for some 44% of Zambia’s total debt burden.  For some, these figures have put Zambia on the watchlist of countries exposed to pressures that come with an overdependency on Chinese financing – so-called “debt trap diplomacy.”

Calls for repayment of debt by Chinese lenders are now emerging as a point of contention between Lusaka and Beijing.  Chinese entities have even stalled lucrative energy projects in response to Zambia’s non-payment. In 2019, for example, progress stalled on PowerChina’s $2 billion Kafue Gorge Lower hydroelectric power plant, reportedly prompted by ZESCO’s inability to secure additional financing for the project from other lenders (more recent reports suggest that the project is back on track).  This follows the suspension of several Chinese road construction projects the same year, due to the Zambian government’s delayed payments to contractors and loan defaults. 

Varying reports have indicated that, thus far, Chinese entities have resisted Zambian efforts to restructure and refinance existing debt, with some Chinese these firms even reportedly demanding collateral for non-payment of arrears.  Indeed, ZESCO (the state-owned power company referenced above), Kenneth Kaunda International Airport, national broadcaster ZNBC, and some of the country’s lucrative mining assets have reportedly been mentioned as potential collateral in the event of Zambian debt default.