Report No. AAA34-ZM Zambia Growth, Infrastructure, and investments Role for Public Private Partnership Public Disclosure AuthorizedPublic Disclosure Authorized June 26, 2008 Poverty Reduction and Economic Management 1 Africa Region Public Disclosure AuthorizedPublic Disclosure Authorized Public Disclosure AuthorizedPublic Disclosure Authorized Document of the World Bank Public Disclosure AuthorizedPublic Disclosure Authorized Table of Contents Preface ............................................................................................................................. 1 . Executive Summary ............................................................................................................... i 1. Infrastructure. Growth. and Investment Needs in Zambia ........................................... 1 Introduction ..................................................................................................................... 1 1.1. Infrastructure and Growth ....................................................................................... 2 1.2. Access to Infrastructure ........................................................................................... 5 1.3. Infrastructural Spending and Investment Needs...................................................... 6 1.4. Issues of Regulation. Tariff Setting and Affordability .......................................... 13 2. Benchmarking Zambia’s Public Private Partnerships in Infrastructure .................... 22 Introduction ................................................................................................................... 22 2.1. Sector by Sector Analysis ...................................................................................... 23 A . Telecom .............................................................................................................. 23 B . Energy ............................................................................................................... 23 C. Water ................................................................................................................ 25 D. Transport .......................................................................................................... 26 2.2. Implications for Public Private Partnerships ......................................................... 27 3. Obstacles to PPPS and Policy Solutions ...................................................................... 30 3.1. Lessons from other Regions .................................................................................. 30 3.2. Tariff Challenges ................................................................................................... 31 A . Telecommunications ......................................................................................... 32 B. Energy .............................................................................................................. 34 C. Water ................................................................................................................ 35 4 . The Legal and Regulatory Framework Supporting PPPs in Zambia .......................... 37 4.1. Separation between Policy and Regulatory Functions .......................................... 37 4.2. Regulatory Governance ......................................................................................... 38 5 . Key Public Private Partnership Challenges for Zambia ............................................. 41 Introduction ................................................................................................................... 41 5.1. Cross-Sectoral Challenges ..................................................................................... 41 5.2. Relation between National and Sub-National Governments ................................. 42 References .......................................................................................................................... 47 Annex 1: Lessons from Public Private Partnerships in Infrastructure ............................... 49 Annex 2: Bank’s Available Instruments ............................................................................. 57 -1- List of Tables Table 1.1 Growth Changes due to Infrastructure Developments. 2001-5 vs . 1991-5 ........ 2 Table 1.2: Potential growth improvements for Zambia due to infrastructure development (i.e . adjustment of the its level of infrastructure development to a representative level) ............................................................................................................................ 4 Table ..1.3: Access to Infrastructure in Zambia compared to its peers and across income distribution ................................................................................................................... 6 Table 1.4: Central government’s expenditure on infrastructure.......................................... 7 Table 1.5: Central Government Budget and Infrastructure Expenditures .......................... 7 Table 1.6: Share of Sectoral Infrastructure Expenditures in the Central Government Budget .......................................................................................................................... 8 Table 1.7: Expenditures of SOE’s Central Government Budget and Infrastructure Expenditures ................................................................................................................ 8 Table 1.8: Investment needs in generation. transmission and distribution....................... 10 Table 1.9: Investment needs in road transport .................................................................. 13 Table 1.10: Structure of Tariffs Implemented by Water Utilities. 2007 .......................... 20 Table 1.1 1: Structure of un-metered tariffs ...................................................................... 21 Table 1.12: Structure of Stand-post/Public Fountain Tariffs ........................................... 21 ‘Table 2.1: Zambia PPI Projects (1997-2006) ................................................................... 23 Table 3.1: Cost Recovery of African Utilities .................................................................. 35 List of Figures Figure 1.1: .ZESCO’s financial performance (1998-2004) ............................................... 16 Figure 1.2: Household Utility Expenditure ...................................................................... 17 Figure 1.3: Household Expenditure on Electricity ........................................................... 17 Figure 1.4: Household Expenditure on LPG .................................................................... 18 Figure 1.5: Household Expenditure on Wood Charcoal ................................................. 18 Figure 1.6: Utility Affordability ....................................................................................... 18 Figure 1.7: Household Expenditure on Water .................................................................. 19 Figure 1.8: Electricity prices in selected African countries .............................................. 20 Figure 2.1: PPI Investment Trends (1991-2005) .............................................................. 22 Figure 2.2: PPI by Sector (1997-2006) ............................................................................. 23 Figure 3.1: Price of one minute peak rate call to USA, US$, 2006 .................................. 32 Figure 3.2: Mobile prepaid monthly tariff basket. US$. 2006 ......................................... 33 Figure 3.3: Consequences of Zamtel’s Monopoly ............................................................ 33 Figure 3.4: Electricity prices across the region ................................................................ 34 Figure 4.1: Water Supply & Sanitation Regulatory Framework in Zambia ..................... 38 Figure 4.2: Regulatory governance .................................................................................. 39 -2- List of Boxes Box 1.1: How to measure and disentangle Quantity and Quality of various infrastructure assets and its impact on growth ................................................................................... 3 Box 2.1: ZESCO: From Privatization to Commercialization Strategy ........................... 24 Box 2.2: PPP in Water and Sewer and Solid Waste Management .Mine Townships Services .Asset Holding Company Copperbelt Province -2000-2005 ...................25 Box 2.3: Potential projects for Public Private Partnerships in electricity ........................ 28 Box 5.1: The South African Public Sector Comparator Model........................................ 44 Box 5.2: Public Sector Comparator Criticisms in the UK and Australia ......................... 46 -3- ABBREVIATIONS AND ACRONYMS AICD Africa Infrastructure Country Diagnostic BoZ Bank of Zambia CEC Copperbelt Energy Corporation CGE Computer General Equilibrium Model CPI Consumer Price Index cso Central Statistics Office DRC Democratic Republic of Congo DSA Debt Sustainability Analysis DTIS Diagnostic Trade Integration Study EBZ The Export Board of Zambia EPZ The Export Processing Zone ERB Energy Regulatory Board EU European Union FDI Foreign Direct Investment FSAP Financial Sector Assessment Program FNDP Fifth National Development Plan FTA Free Trade Area FY Fiscal Year Fz Free Zone GDI Gross Domestic Income GDP Gross Domestic Product GNI Gross National Income GRICS Government Research Indicator Country Snapshot GRZ Government of the Republic of Zambia