Zambia: Selected Issues

This paper analyzes the efforts taken to create fiscal space for the implementation of the fifth national development plan and the risk associated with it, examines the role of monetary policy in determining inflation, and discusses policy options to achieve low inflation. It also identifies areas where reform strategy needs more attention and suggests that reforms of financial system regulation need to be accelerated to ensure stability of the system. It analyzes traditional reserve adequacy measures, and finds looming power crisis as an obstacle to growth.


This paper analyzes the efforts taken to create fiscal space for the implementation of the fifth national development plan and the risk associated with it, examines the role of monetary policy in determining inflation, and discusses policy options to achieve low inflation. It also identifies areas where reform strategy needs more attention and suggests that reforms of financial system regulation need to be accelerated to ensure stability of the system. It analyzes traditional reserve adequacy measures, and finds looming power crisis as an obstacle to growth.

V. Electric Power in Zambia—Potential Obstacle to Growth1

A. Introduction

1. A secure supply of electricity at competitive cost is essential for economic growth. Economic growth has rebounded in Zambia in recent years, not least because of the recovery of mining activity, and demand for electricity has soared. When the current recovery began, Zambia enjoyed an excess supply of electric power as generating capacity had been installed during the 1960s and 1970s on the expectation that the Zambian economy would expand over time. The opposite, of course, happened, leaving Zambia with a power surplus for export into the region.

2. The rapid expansion of mining and other activities in recent years and the need to take capacity out of generation for long-overdue rehabilitation have virtually exhausted Zambia’s surplus of electric power. Load-shedding is already extensive to non-mining business and residential electricity users during peak periods and is bound to get worse in the near term as demand continues to increase while supply remains stagnant.

3. Over the medium-term, a potential power shortage threatens to become an obstacle to the continued growth of the Zambian economy. Further expansion of mining, agriculture, and manufacturing requires increased access to electricity. With the whole southern Africa region in power deficit, the increased supply will have to come largely from additional power generation within the country. While there is an abundance of hydro potential to be harnessed in Zambia, bringing on line new capacity will require heavy investment and in many instances long lead times. The poor financial condition and operating performance of ZESCO, the state-owned power company, render it ill-equipped to undertake the needed investment in new power generation capacity.

4. This paper reviews conditions in Zambia’s power sector and examines options for addressing the key challenges. It first looks at the background to the looming power shortage in Zambia. It then reviews key features of and institutional arrangements in Zambia’s electricity sector. Next it focuses on the key player in the sector, ZESCO. Thereafter it considers a plan or roadmap for moving forward. A final section concludes.

B. The Looming Power Shortage

5. Zambia has not seen any significant addition to its power generating capacity since the mid-1970s. Installed capacity is about 1,700 MW, mainly in two large power plants, one on the Zambezi River (600 MW) built in the 1960s, the other on the Kafue River (900 MW) built in the 1970s. When built, the power plants were mainly intended to supply Zambia’s large copper mining sector. However, output from this sector shrank steadily during the 1980s and 1990s, resulting in declining demand for electricity.2

6. Available power from Zambia’s hydroelectric plants is currently significantly below installed capacity. Because of prolonged neglect of maintenance, the large power plants built in the 1960s and 1970s have in recent years required extensive and unexpectedly costly rehabilitation, which has taken individual turbines and generators out of commission for extended periods. Currently about 450 MW of generating power is being rehabilitated leaving available a peak power supply of only 1200–1300 MW, well below current peak demand of 1400–1500 MW. As the power purchasing agreements that the mining companies have with ZESCO and the Copperbelt Energy Corporation (CEC, see below) call for an uninterruptible supply, the shortage of power results in extensive load shedding for non-mining businesses and households during periods of peak demand. This situation will persist until the ongoing rehabilitation is completed in early 2009.

7. The completion of the rehabilitation of existing capacity will bring only short-term relief. Power demand has increased by almost 50 percent since 2002 and could increase by another 30 percent over the next three-to-four years, in view of current plans to expand mining output and increase the population’s access to electricity. Such an increase would raise demand above existing capacity, even when fully rehabilitated. In view of the limited import possibilities given the regional power deficit,3 new domestic generating capacity is needed to meet the growing demand from mining and other economic activities, as well as the demand arising from the authorities’ ambitious plans to expand and deepen the electrification of the country.

8. Zambia’s hydropower potential is relatively abundant. It is estimated that at least another 6,000 MW of power can be generated from Zambia’s rivers. Specific options for expanding power generation capacity have been identified. These include projects that could be brought on line relatively quickly (within three-to-four years); these are the Itezhi-Tezhi project (120 MW) on the Kafue River and the Kariba North expansion (360 MW) on the Zambezi River. Further into the future (six-eight years) would be the Lower Kafue Gorge project (750 MW). A central challenge in developing these projects will be to obtain the required financing of up to $1.5 billion. ZESCO has reached preliminary understandings with TATA of India on developing the Itezhi-Tezhi project and with Sino-Hydroelectric of China regarding the Kariba North expansion. Whether ZESCO or a private sector party or consortium should be selected to develop these projects is a question that should be addressed.

C. Zambia’s Electricity Sector

9. Electricity use in Zambia is heavily concentrated in mining. Mining accounts for about one half of electricity use in Zambia, and this share could grow in the future as mining expands further. In the mining sector, ZESCO supplies power mainly through a privately-owned intermediary, the Copperbelt Energy Corporation (CEC).4 Access to electricity is largely limited to the urban centers of Lusaka, Livingstone, and in the Copperbelt. It is estimated that only 20 percent of the population of Zambia use electricity; 40 percent of the urban population but only 2 percent of the population in rural areas. Under the Fifth National Development Plan (FNDP), the government aims to raise the level of electricity use to 30 percent of the population over the next five years, particularly through rural electrification efforts.

10. Electricity tariffs in Zambia are low, both by regional standards and relative to generating costs. According to a Cost of Service Study prepared in 2006,5 the average electricity tariff in Zambia amounted to 2.66 cents per kilo Watt hour (c/kWh), ranging from 2.34 c/kWh for mining to 5.87 c/kWh for commercial users; residential users paid on average 3.05 c/kWh.6 The Cost of Service Study also estimated that full cost recovery for ZESCO would require a 48 percent increase in the average electricity tariff, ranging from 2.4 percent for commercial users to 148.5 percent for residential users; mining tariffs would need to rise by 28.5 percent to achieve full cost recovery. From 2002 to 2006, the ERB approved cumulative tariff increases for ZESCO of only 17 percent, while the CPI more than doubled. The low electricity tariffs are at least partly the result of the long legacy of overabundance of supply, as well as the political sensitivity of tariff increases. In the meantime, the structure of electricity tariffs tends to be anti-poor in that connection fees are high ($500–600).

11. The Zambian power sector is governed by three pieces of legislation: The Energy Regulation Act (1995), the Electricity Act (1995), and the Rural Electrification Act (2003). The Energy Regulation Act established the Energy Regulation Board (ERB), which is responsible for the licensing, monitoring, and supervision of operators in the energy sector. The Energy Regulation Board, which is appointed by the Minister for Energy and Water Development, must also approve electricity tariffs. The Electricity Act abolished the statutory monopoly of ZESCO in the power sector and provided for new entrants although none have emerged since the Act was passed. The Rural Electrification Act aims to facilitate the expansion of electrification into rural areas. This relatively modern legal framework for the electricity sector has proved inadequate to attract private sector investment to the sector and provide a secure supply of electricity. Low electricity tariffs are one reason for the lack of private sector interest, while the absence of a guaranteed access to ZESCO’s transmission and distribution networks is another.


12. While not a statutory monopoly, ZESCO handles virtually all generation, transmission, and distribution of electricity in Zambia. ZESCO is a troubled company, beset by inefficiencies and high costs. According to the Cost of Service Study, ZESCO experienced five straight year of losses from 2002–06. Low electricity tariffs are certainly one reason for ZESCO’s poor financial performance during this period. However, operating performance measured against key indicators was also exceptionally poor: (i) trade receivables were at 80–90 percent of turnover; (ii) one-third of all customers were unmetered and the lifeline tariff was 300 kWh, leading to revenue erosion; (iii) distribution losses, whether through theft or increased unmetered use, stayed high; and (iv) staffing levels and costs rose, the latter at a rate well in excess of the rate of inflation; with ZESCO employees well compensated by Zambian standards, ZESCO’s wage bill has accounted for around 50 percent of operating costs and turnover. ZESCO’s inefficiencies and high costs are well known in Zambia. This has undoubtedly contributed to the strong resistance to increases in electricity tariffs. ZESCO has accumulated substantial tax arrears, while a number of government agencies and parastatals, particularly water utilities, have failed to pay there electricity bills on time. At current revenue and cost levels, ZESCO is a financially unviable company that is incapable of mobilizing resources for the necessary expansion of power generation and the electricity grid.

13. ZESCO’s problems have been known for a long time and considerable efforts have been put into improving its performance. At Zambia’s decision point under the HIPC Initiative in 2000, the privatization of ZESCO was set as a trigger for the completion point. The government abandoned the privatization option in 2003 and chose instead, in consultation with the World Bank and the IMF, a strategy of commercialization intended to achieve the same objectives as privatization. The commercialization strategy emphasized strengthened governance and business practices. ZESCO’s Board of Directors was to be made more independent, with a clear majority to be nominated by private stakeholders. ZESCO was also to be required to operate on a commercial basis and to provide evidence of its capacity to do so, including through the formulation of a business plan, collection of amounts owed by government, and the absence of financial support from government (including through tax arrears). While a formal assessment of the commercialization strategy is yet to be completed, it appears not to have led to the improvement in ZESCO’s financial and operating performance that was the overarching objective of the strategy. Earlier it was envisaged that a negative assessment of governance and performance outcomes under the commercialization strategy would lead to the revival of the privatization option. However, this would not seem to be politically feasible.

E. A Plan for Moving Forward

14. Key to any plan for responding to the looming electricity crisis is Zambia is an increase in electricity tariffs. Electricity tariffs need to be raised to a level that can support the financing of the needed investment in expanded generation, transmission, and distribution capacity. This is a prerequisite whether the needed investment is undertaken by ZESCO, the private sector, or through public-private partnerships. Given the size of the tariff increases needed, they should be phased over an extended period to lessen the impact on customers. The terms of bulk sales agreements to mining companies also need to be renegotiated. The mining companies have indicated that they are ready to discuss revised terms, recognizing that current tariffs are unsustainable and unable to support the expanded power supply that they require. The mining companies have also indicated that they are prepared to form a consortium that could finance, build, and operate new power plants.

15. It is also essential to revitalize efforts to improve ZESCO’s efficiency and lower its costs. ZESCO has submitted to the ERB a multi-year schedule of tariff increases that would bring tariffs to the estimated full cost recovery level. The ERB has indicated that it will condition approval of any tariff increases on a significant improvement in ZESCO’s operational performance across a range of indicators. The successful implementation of such a plan would most likely require strengthened corporate governance, including the granting of greater independence to ZESCO’s Board of Directors. It would also require a strengthening of the ERB to enable it to effectively monitor and enforce compliance with the indicator targets.

16. Notwithstanding its reluctance to privatize ZESCO, the Zambian government should also re-evaluate the role of ZESCO in the expansion of the country’s power sector and explore more fully the role that the private sector could play. Even with an increase in tariffs, ZESCO will continue to have a hard time raising the needed financing for investment because of its track record and weak balance sheet. Once a decision has been taken to raise tariffs to cost recovery levels, it should be possible to attract private interest in investment in the power sector. This would require guaranteed access to the transmission network and suggests that the unbundling of ZESCO’s generation, transmission, and distribution operations could be necessary.

F. Conclusion

17. Zambia faces a looming power crisis. Urgent multi-pronged action is needed to ensure the availability of sufficient electrical power to sustain economic growth at the rates envisaged in the FNDP. Electricity tariffs need be raised significantly to make investment in new capacity profitable and to attract private interest. ZESCO needs to improve its performance and its dominant role in Zambia’s power sector should be reconsidered.


Prepared by Birgir Arnason.


At its peak, output from Zambia’s copper mines exceeded 700,000 tons per year. By the late 1990s, annual copper output had fallen to well below 300,000 tons.


ZESCO is a member of SADC’s Southern African Power Pool (SAPP) which aims to create a common market for electricity in the southern Africa region. In the past, ZESCO has sold excess electricity through the SAPP. With electricity demand in the region, particularly in South Africa, growing strongly, a regional power deficit is emerging that would make it difficult and costly for ZESCO to import electricity from neighboring countries.


Historical reasons account for this arrangement. Before hydro-electricity became available from ZESCO, the mining companies met their electricity needs through a jointly-owned company. Two new mines, Kansanshi and Lumwana, purchase electricity directly from ZESCO.


Prepared for the Energy Regulations Board (ERB) and ZESCO by a group of consultants led by IPA Energy Consultants.


For comparison, residential and commercial users in Kenya, Mozambique, Namibia, and Uganda pay three to five times more than their Zambian counterparts for electricity (Zambia Business Forum, Position Paper on the Electricity Industry in Zambia, July 2007).