Zimbabwe Infrastructure Report Q1 2013

BMI View: Zimbabwe’s construction industry is posting growth befitting an attractive frontier market.The huge potential to rebuild the country and address the significant infrastructure deficit is attractingrisk tolerant companies and first movers. Chinese funding is also flowing in to support the rebuilding ofelectricity and water infrastructure. On the other hand, the economy is seeing rising demand forresidential and commercial real estate as per capita income grows. The business environment also seemsto be slowly improving, as rewards on offer expand. The country has seen its Infrastructure Risk/RewardRating gradually but consistently increase on a quarterly basis. Whilst still only in 12th position, it is asign of progress. These trends are guiding us to maintain a strong growth outlook for the country’sconstruction sector, with annual average growth of 9.3% between 2013 and 2017.

Key developments in the sector include:

Russian oil & gas company Rosneft proposed plans for a US$700mn refined oil productspipeline in October 2012 which would link Mozambique’s port of Beira with Harare. The projectalso includes construction of a new storage depot near Harare. Zimbabwe’s oil consumptionexceeds the capacity of the existing pipeline, meaning oil is currently being carried via truckwhich is costly and slow. The draft proposal is due to be completed in late 2012, with permitsalready secured for the project.

Investment into the country’s water sector is boosted with the announcement that the KunzviWater Development Corporation (KWDC) obtained US$375mn in financing in July 2012 forconstruction of the Kunzvi dam. The dam, which will be developed on a build-operate-transferbasis, is due to be constructed between 2012 and 2015. Vinci and Group Five are thecontractors.

China is paying significant attention to Zimbabwe’s power sector, which is in need ofinvestment, and is planning to funnel billions of dollars into the sector. In mid-September 2012,China's Guangdong Bureau of Coal Geology announced plans to build a 1,200 megawatts(MW) coal fired power plant with an investment of US$3.5bn. This followed news in July 2012that ZESA was in negotiations with China Railway Group over construction of a 1,000MWcoal fired power plant. The government is also in negotiations with China to provide a loan ofUS$350mn for the 300MW expansion of the Kariba South Power plant. The negotiations havebeen ongoing for over two years, with China's ExIm Bank initially slated to be providing theloan. The project is likely to be built by Sinohydro – the sole bidder for the project. China isalso supporting the water sector, in July 2012, the US$1.2bn National Matabeleland ZambeziWater Project received funding from China, allowing it to progress. The project, which includesconstruction of a dam and pipeline, is crucial to support the agricultural sector in Matabeleland.



France is also investing into Zimbabwe’s utilities sector. The largest project currently in thepipeline is a 2,000MW project located near the Lusulu coal fields in Binga, Matabeleland North.The US$3bn project was approved in January 2012. The power plant is being developed by anunnamed French consortium and would be built over a four year period. More recently, in July2012, the KWDC obtained US$375mn for the construction of the Kunzvi Dam. KWDC, whichis a consortium of companies including France’s Vinci and South Africa's Group Five, holds a30-year contract to build, own, operate and transfer the dam. Construction was due to start in late2012 and be completed in 2015.

Residential and non-residential construction is continuing to benefit from rising demand. TheUS$100mn Mall of Zimbabwe project, located in Borrowdale, is a clear sign of growingconsumer spending power. The mall, which will be the largest in the country and the secondlargest in Africa, will serve the surrounding affluent neighbourhoods. The project was approvedby the Harare City Council in July 2012 and construction was due to start in October 2012 for aduration of two years. The mall is being developed by UK-based Augur Investments and SouthAfrica’s McCormick Property Development.

Plans to establish the Zimbabwe Construction Industry Council (ZCIC) were progressing in July2012, and a draft bill was due by Q412. Establishing a council would significantly improve thestructure of the construction industry, with the implementation of legal procedures and a code ofconduct to ensure adherence to health and safety standards and quality of work. Capacityutilisation has increased dramatically in the country’s construction sector, which has sufferedfrom a lack of finance and raw materials. The matter is even more pressing after concerns wereraised over Chinese labour practises in the country, which are attracting international attention.

It is estimated by African Development Bank that US$5bn needs to be invested in Zimbabwe’sinfrastructure by the private sector in order to rehabilitate the sector. However, major improvements in thebusiness environment are needed to attract international investment. Some interest has been registeredand we are seeing a slow trickling through of private investment, which is creating signs of life acrossvarious sectors. However, pertinent risks to our outlook remain:

The primary risk to the construction sector is a shortage of finance. International lenders,investors and donors are all steering clear of Zimbabwe, due to concerns about political risk.This is inhibiting the flow of capital and could impact planned projects.

Political risk concerns should come as no surprise to investors looking to Zimbabwe. Concernsover a successor to President Robert Mugabe and the timing and political climate in the run up toelections are causing investors to hold off on entering the sector.

The indigenisation law is a major deterrent for investors looking to establish themselves inZimbabwe, and some have already left the country. Although the law has been implementedarbitrarily, the threat is enough to deter many, leading to an absence of crucial funding andindustry capacity growth.