metadata: authors: 0: author: Dominguez Torres,Carolina
1: author: Foster,Vivien
count: Zambia
docna: 0: docna: Zambia's infrastructure : a continental perspective
docty: Policy Research Working Paper
subtopic: Rural and Renewable Energy,Hydro Power,Water and Energy,Hydrology,Energy Sector Regulation,Renewable Energy,Transport Services,Intelligent Transport Systems
teratopic: Transport,Infrastructure Economics and Finance,Energy,Water Supply and Sanitation,Finance and Financial Sector Development
abstracts: cdata!: Infrastructure improvements contributed
            0.6 percentage points to Zambia's annual per capital
            GDP growth over the past decade, mostly because of
            exponential growth in information and communication
            services. The power sector, by contrast, pulled the growth
            rate down by more than 0.1 percentage points. Improving
            Zambia's infrastructure endowment could boost growth by
            up to 2 percentage points per year. Zambia's relatively
            high generation capacity and power consumption are
            accompanied by fewer power outages than elsewhere in the
            region. But Zambia's power sector emphasizes the mining
            industry, while household electrification is about half that
            in other resource-rich countries. Zambia's power
            tariffs, among the lowest in Africa, are less than half the
            level needed to accelerate electrification and keep pace
            with mining sector demands. In power as in just about every
            other aspect of infrastructure, rural Zambians lag well
            behind their African peers. In a country where 70 percent of
            the population depends on agriculture for its livelihood,
            this represents a huge drag on the economy. Zambia would
            need to spend an average of $1.6 billion a year over the
            decade 2006-15 to develop the infrastructure found in the
            rest of the developing world. This is equivalent to 20
            percent of Zambia's GDP and about double the
            country's rate of investment in recent years. Closing
            the country's annual infrastructure funding gap of $500
            million requires raising more funds, looking for more
            cost-effective ways to meet infrastructure targets, and
            eliminating the inefficiencies that cause the loss of $300
            million annually.
geo_reg_key: 517195,517191
repnme: repnme: Zambia's infrastructure : a
            continental perspective
display_title: Zambia's infrastructure : a
            continental perspective
listing_relative_url: /research/2011/03/13921966/zambias-infrastructure-continental-perspective
topicv3: Water m1326522 137,Transport m1326661 135,Hydropower and Dams m1327326 527,Power Tariffs m1503430 3942,Traffic Management m1583399 4231
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Transport,Infrastructure Economics and Finance,Energy,Water Supply and Sanitation,Finance and Financial Sector Development
no_of_pages: 42
author_keys: 0: author_key: 1063818
1: author_key: 452278
model_extractions: WPS5599 Policy Research Working Paper 5599 Zambia’s Infrastructure A Continental Perspective _Vivien Foster Carolina Dominguez_ The World Bank Africa Region Sustainable Development Department March 2011
Policy Research Working Paper 5599

# **Abstract**

Infrastructure improvements contributed 0.6 percentage points to Zambia’s annual per capital GDP growth over the past decade, mostly because of exponential growth in information and communication services. The power sector, by contrast, pulled the growth rate down by more than 0.1 percentage points. Improving Zambia’s infrastructure endowment could boost growth by up to 2 percentage points per year.

Zambia’s relatively high generation capacity and power consumption are accompanied by fewer power outages than elsewhere in the region. But Zambia’s power sector emphasizes the mining industry, while household electrification is about half that in other resource-rich countries. Zambia’s power tariffs, among the lowest in Africa, are less than half the level needed to accelerate electrification and keep pace with mining sector demands.

In power as in just about every other aspect of infrastructure, rural Zambians lag well behind their African peers. In a country where 70 percent of the population depends on agriculture for its livelihood, this represents a huge drag on the economy.

Zambia would need to spend an average of $1.6 billion a year over the decade 2006–15 to develop the infrastructure found in the rest of the developing world. This is equivalent to 20 percent of Zambia’s GDP and about double the country’s rate of investment in recent years.

Closing the country’s annual infrastructure funding gap of $500 million requires raising more funds, looking for more cost-effective ways to meet infrastructure targets, and eliminating the inefficiencies that cause the loss of $300 million annually.

This paper is a product of the Sustainable Development Department, Africa Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at vfoster@worldbank.org and/or cbricenogarmendi@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Zambia’s Infrastructure: A Continental Perspective

## **_Vivien Foster and Carolina Dominguez_**

### **Acknowledgments**

This paper draws upon a wide range of contributions from sector specialists from the Africa Infrastructure Country Diagnostic Team; notably, Dick Bullock on railways, Mike Mundy on ports, Heinrich Bofinger on air transport, Maria Shkaratan on power, Elvira Morella on water and sanitation, Michael Minges on information and communication technologies, Nataliya Pushak on public expenditure, and Alvaro Federico Barra on spatial analysis.

The paper is based on data collected by local consultants and benefited greatly from feedback provided by colleagues in the relevant World Bank country teams; notably, Kapil Kapoor (country manager), Boris Enrique Utria (Sector Leader), Gael Raballand (roads), Pierre Pozzo di Borgo and Lucien Andre Aegerter (railways), Diep Nguyen-Van Houtte (power), Midori Makino and Elisabeth Sherwood (water), and Gareth Locksley (ICT).
# Contents

|**The continental perspective**|**2**|
|---|---|
|**Why infrastructure matters**|**2**|
|**The state of Zambia’s infrastructure**|**5**|
|Roads|8|
|Rail|10|
|Air transport|11|
|Water supply and sanitation|12|
|Power|16|
|Water resources|19|
|Information and communication technology|20|
|**Financing Zambia’s infrastructure**|**23**|
|How much more can be done within the existing resource envelope?|26|
|Annual funding gap|31|
|What else can be done?|32|
|**Bibliography**|**34**|
|General|34|
|Growth|34|
|Financing|34|
|Information and communication technologies|34|
|Irrigation|35|
|Power|35|
|Transport|35|
|Water resources|36|
|Water supply and sanitation|36|
|**About AICD and its country reports**|**37**|

iii
nfrastructure improvements contributed 0.6 percentage points to the annual per capita growth of Zambia’s gross domestic product (GDP) over the past decade, mostly because of the exponential Igrowth of information and communication technology (ICT) services. Poor performance of the power sector _reduced_ the per capita growth rate by 0.1 percentage point. Simulations suggest that if Zambia’s infrastructure platform could be improved to the level of the African leader—Mauritius—per capita growth rates could increase by 2 percentage points per year.

Zambia’s high generation capacity and relatively high power consumption are accompanied by fewer power outages than its neighbors. But Zambia’s power sector is primarily oriented toward the mining industry, while household electrification, at 20 percent, is about half that in other resource-rich countries. Zambia’s power tariffs are among the lowest in Africa and are less than half the level needed to accelerate electrification and keep pace with mining sector demands. Meeting future power demands and raising electrification rates will be difficult without increasing power tariffs.

Improving Zambia’s infrastructure requires reform of its administrative and regulatory processes (for example, to remove obstacles to regional trade), as well as substantial physical investments. Because of border delays along the north-south corridor (now being tackled by the government) road and rail freight crawls along at a pace of little more than 10 kilometers per hour. Lack of effective regulation also allows Zambia’s rail operator to charge exorbitant tariffs while providing lackluster service.

On just about every aspect of infrastructure, rural Zambians lag well behind their African peers. In a country where 70 percent of the population depends on agriculture for its livelihood, this represents a huge drag on the economy.

Zambia would need to spend an average of $1.6 billion a year over the decade 2006–15 to develop the infrastructure found in the rest of the developing world. This is equivalent to 20 percent of Zambia’s GDP (similar to what China invested in infrastructure in the mid-2000s), and is about double the country’s rate of investment in recent years. The power sector alone accounts for 32 percent of these spending needs.

Inefficiencies cause the loss of $300 million (or 4.3 percent of GDP) a year that could be recouped by suitable policy and institutional reforms. Underpricing of power and related subsidies cost the economy $152 million a year, even though Zambia’s relatively low-cost power could be afforded by most of the population at cost-recovery prices. Distribution losses and low rates of collection by water utilities represent a further $52 million, while low rates of execution of capital budgets in the road transport sector mean that $39 million of budgeted resources are not spent within the financial year.

Zambia’s infrastructure funding gap of $500 million a year (6.5 percent of GDP) could be largely offset by strategic policy choices. Closing the gap requires raising more funds and looking for more costeffective ways to meet infrastructure targets. Adopting lower-cost solutions (such as standposts, boreholes, improved latrines) to meet the Millennium Development Goals for water supply and sanitation could save $218 million a year. Participation in the regional power market could save $160 million. And eliminating overengineering in the road sector could save $60 million. Reallocation of disbursements that exceed requirements could make an additional $90 million available for more productive uses each year.

If current levels of inefficiency are allowed to persist, and in the absence of additional funding, it will take at least 30 years to meet Zambia’s infrastructure targets at today’s spending levels. With efficiency gains, Zambia could reach the targets within 15 years.
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE Zambia’s infrastructure situation is more hopeful than that of many other African countries. Infrastructure spending needs—though large—are not beyond the realm of possibility, and Zambia’s resource wealth and relatively well-off population provide a more solid financing basis than is available to many other countries. Zambia’s infrastructure funding gap—though substantial—can be dramatically reduced through measures to stem inefficiencies and lower costs.

# The continental perspective

The Africa Infrastructure Country Diagnostic (AICD) has gathered and analyzed extensive data on infrastructure in some 40 Sub-Saharan countries, including Zambia. The results have been presented in reports covering different areas of infrastructure—ICT, irrigation, power, transport, and WSS—and different policy areas, including investment needs, fiscal costs, and sector performance.

This report presents the key AICD findings for Zambia, allowing the country’s infrastructure situation to be benchmarked against that of its African peers. Given that Zambia’s economy is dependent on mining, it will be benchmarked against other resource-rich economies in Africa, as well as against other African low-income countries. Detailed comparisons will also be made with immediate regional neighbors in the Southern Africa Development Community (SADC).

Several methodological issues should be borne in mind. First, because of the cross-country nature of data collection, a time lag is inevitable. The period covered by the AICD runs from 2001 to 2006. Most technical data presented are for 2006 (or the most recent year available), while financial data are typically averaged over the available period to smooth out the effect of short-term fluctuations. Second, in order to make comparisons across countries, we had to standardize the indicators and analysis so that everything was done on a consistent basis. This means that some of the indicators presented here may be slightly different from those that are routinely reported and discussed at the country level.

# Why infrastructure matters

During the five years 2003–07, Zambia’s economic performance was relatively strong; by 2007 it had neared the 7 percent growth rate needed to make a significant impact on poverty reduction. The overall contribution of infrastructure to improved growth in Zambia in the early 2000s was 0.6 percentage points, substantially less than for other countries in the region (figure 1). Zambia’s ICT sector was responsible for most of this growth as it added 0.47 percentage points to the per capita growth rate, while the power sector reduced per capita growth by 0.13 percentage points. If Zambia could improve its infrastructure to the level of middle-income countries in the region, performance could grow by as much as 2.6 percent per capita.

2
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ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# The state of Zambia’s infrastructure

Zambia’s economic activity and population are heavily concentrated along the central copper belt running from Lusaka in the south up to Ndola in the north on the Congolese border. Zambia’s poverty rates show poverty incidence of less than 40 percent around the main population centers of the copper belt, rising to greater than 70 percent for all other regions of the country. Zambia’s power and ICT networks mirror this economic geography, with clear north-south backbones and very limited east-west spurs (figures 3b and 3c). The road network provides a broader coverage of the country, but the outlying segments in the far east and west of the country tend to be those in the poorest condition (figure 3a), with traffic flows heavily concentrated on the north-south axis. Zambia is one of the more urbanized countries in Sub-Saharan Africa, with an urbanization rate of over 50 percent.

This report begins by reviewing the main achievements and challenges in each of Zambia’s major infrastructure sectors, with the key findings summarized in table 1. Thereafter, attention will turn to the problem of how to finance Zambia’s outstanding infrastructure needs.

**Table 1. Achievements and challenges in Zambia’s infrastructure sectors**

||**Achievements**|**Challenges**|
|---|---|---|
|Air transport|Lusaka plays a significant role in regional air<br>transportation||
|ICT||Increase GSM coverage by addressing regulatory hurdles<br>responsible for market-efficiency gap<br>Secure competitive access to new East African submarine<br>cables|
|Power|Substantial and reliable power-generation<br>capacity relative to peers|Raise tariffs to allow for longer-term sustainability of the sector|
|Railways|Rail network built to serve needs of mining<br>sector|Address underperforming rail concession and major border<br>delays for transit traffic|
|Roads|Trunk network in good condition and<br>maintenance adequately funded|Shift resources away from overengineered trunk roads toward<br>neglected rural networks<br>Address major delays at border crossings by embracing trade<br>facilitation agenda|
|Water resources||Expand irrigated area to cover land with high economic<br>potential|
|WSS|Relatively high access to piped water and<br>flush toilets|Reduce hidden costs of water utilities<br>Reverse increased reliance on surface water and practice of<br>open defecation|

_Source:_ Own elaboration based on findings of the report 5
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ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# Roads

## **Achievements**

Zambia has made major progress with its main trunk road network. Despite relatively low road densities, analysis suggests Zambia’s primary and secondary networks provide basic regional and national connectivity, linking the provincial capitals to Lusaka, and Lusaka to the main international border crossings. More than 80 percent of Zambia’s paved road networks are in good or fair condition, on par with its middle-income neighbors and well ahead of the typical performance of resource-rich countries in Africa (table 2). The establishment of a second-generation road fund in the country resulted in a stable allocation of resources to the sector. Zambia is one of the few countries in the region with a road sector budget in excess of what is needed to maintain the main road network, and adequate to address the rehabilitation backlog (figure 4). During the early 2000s, Zambia spent 3 percent of GDP on the roads sector on average—a relatively high allocation.

**Table 2. Zambia’s road indicators benchmarked against Africa’s low- and middle-income countries**

||Unit|Resource rich|**Zambia**|Middle-income<br>countries|
|---|---|---|---|---|
|Paved road density|km/1,000 km<sup>2</sup><br>of arable land|97.6|**56.3**|146.8|
|Unpaved road density|km/1,000 km<sup>2</sup><br>of arable land|128.2|**95.0**|257.8|
|GIS rural accessibility|% of rural pop within 2 km from all-season<br>road|19.7|**16.8**|22.9|
|Overengineering of network|% of main road network paved despite low<br>traffic volumes|15.0|**65.0**|20.0|
|Paved road traffic|Average annual<br>daily traffic|1,408.2|**736.6**|2,558.3|
|Unpaved road traffic|Average annual<br>daily traffic|54.2|**45.2**|14.9|
|Paved network condition|% in good or fair condition|67.9|**83.0**|82.0|
|Unpaved network condition|% in good or fair condition|61.4|**25.0**|57.6|
|Perceived transport quality|% firms identifying as major business<br>constraint|27.4|**10.6**|4.8|

_Source:_ Gwilliam and others 2008, derived from AICD national database downloadable from http://www.infrastructureafrica/aicd/tools/data _Note:_ GIS = geographic information system.

8
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ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# Rail

## **Achievements**

Zambia’s rail sector is critical to its mineral-based economy. Rail transport continues to be the most competitive for large bulk, time-insensitive commodities, such as Zambia’s copper production. The country’s rail network has two operators: (i) the Railway Systems of Zambia (RSZ) serves the north-south corridor and connects with the Zimbabwean rail operator for onward service to the Port of Durban; (ii) the Tanzania and Zambia Railway Authority (TAZARA) operates an eastward route from the copper belt into Tanzania and on to Dar es Salaam. The first of these is an awarded concession, while the second continues to be operated directly by the state.

**Table** **<u>3. Railway indicators for Zambia and select countries, 2000–05</u>**

||CFM (Angola)|BRC (Botswana)|CEAR (Malawi)|RSZ (Zambia)|Spoornet (South Africa)|TAZARA (Tanzania-<br>Zambia)|TransNamib (Namibia)|NRZ (Zimbabwe)|
|---|---|---|---|---|---|---|---|---|
|Concessioned (1)/ state run (0)|0|0|1|1|0|0|0|0|
|Traffic density, freight, 1,000 tonne-<br>km/km|469.0|827.0|90.1|406.1|2,426.9|461.3|475.3|901.8|
|Passenger density, 1,000 passenger-<br>kms/km|||38.0|91.9|60.3|147.0|32.7|165.6|
|**Efficiency**|||||||||
|Labor productivity (1,000 traffic units per<br>employee)|121.0|722.1||502.0|3,308.1||||
|Carriage productivity (1,000 passenger-<br>km per carriage)|||1,176.5|3,285.7|||||
|Locomotive productivity (million traffic<br>units per locomotive)||||25.1|||||
|Wagon productivity (1,000 net tonne-km<br>per wagon)||||376.5|||||
|**Tariffs**|||||||||
|Average unit tariff (UT), freight, U.S.<br>cents/tonne-km|3.0||5.8|3.9|||||
|Average UT, passenger, U.S.<br>cents/passenger-km|1.0||1.0|0.8|||||

_Source:_ Bullock 2009, derived from AICD railways database downloadable at http://www.infrastructureafrica.org/aicd/tools/data Empty cells denote that data not available.

## **Challenges**

Zambian railways’ low traffic densities are well below the viability threshold of at least 2 million tons per kilometer for railways of this kind, making it difficult to capture the revenues needed to maintain assets. Also, performance for the RSZ is mixed, while TAZARA performance data is largely unavailable (table 3).

10
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE Low traffic volumes complicate the financial viability of any concession arrangement. In the case of the RSZ, the lack of a clear regulatory framework or administrative capacity to supervise the contract has made it difficult for the government to provide clear oversight. For example, the RSZ practices discriminatory pricing against transit traffic from the Democratic Republic of Congo (DRC) to Dar es Salaam, charging $2.00 per tonne-km versus the normal tariff of around $0.05 per tonne-km. These tariffs reflect an abuse of monopoly power aimed at diverting trade flows from the DRC away from Dar es Salaam and toward Durban, with the same concessionaire operating the Zambian rail network and the Beit Bridge border crossing from Zimbabwe into South Africa. The high level of these tariffs has a distortionary effect on traffic flows and investment decisions along the entire corridor. For example, copper exports from the DRC are currently going by road in order to avoid these charges, even though they are more suited to rail transportation. Resolving this situation is not simple, and would probably require a major renegotiation of the rail concession contract, combined with careful tariff regulation thereafter.

The lack of reciprocal access rights delays rail transit through Zambia and along the entire northsouth corridor. A rail freight journey of 3,000 km from Kolwezi on the DRC border to the port of Durban takes 38 days to complete—9 days of travel time and 29 days associated with customs clearance and loading and interchange. Freight moves no more than 4 km per hour on average, and the aggregate costs of delays along the corridor have been estimated at $120 million per year. The Zambian rail network contributes to these delays. Access from one rail system to another is restricted for technical reasons or connecting rail operators simply do not have the necessary traction capacity to service existing traffic. Poor traffic planning causes undue delays, and operators are not incentivized to provide reliable interconnection services. Reducing these delays requires revision of the contractual relationships and access rights linking these railways to ensure transparency and fairness in reciprocal track access rights.

# Air transport

## **Achievements**

Zambia’s overall air traffic doubled between 2001 and 2007. By the standards of its neighbors, Zambia is handling a relatively high volume of such traffic, at 1.46 million seats per year. Its domestic air transport sector remains modest and is a fraction of that found in Angola, Mozambique, and Tanzania. This may reflect the fact that the most economically significant cities are relatively close together and well connected by road and rail.

## **Challenges**

Even as overall traffic has increased, connectivity (measured by the number of city pairs served) has declined from 35 to 25 in recent years, typical across Africa over this period. Lusaka has relatively good intra-African connectivity compared to many other capitals in the region. But the aging aircraft fleet in Zambia presents another challenge, and its renewal is slower than in neighboring countries.

The recent collapse of Zambian Airways puts the future of the domestic market in question. Experience from neighboring Tanzania may be relevant in this respect. Following the demise of Air Tanzania, a joint venture was set up to form the private airline Precision Air, with 51 percent ownership by Tanzanian interests and 49 percent by Kenyan Airways. The airline has grown substantially, and 11
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE Tanzania now has one of the most vibrant domestic air transport markets in Africa, offering competing services on all routes.

**Table 4. Air transport**

|Country|Angola|Zambia|Tanzania|Botswana|Namibia|Zimbabwe|Mozam-<br>bique|
|---|---|---|---|---|---|---|---|
|TRAFFIC (2007)||||||||
|Domestic seats<br>(millions per year)|1.20|0.44|1.87|0.24|0.08|0.24|1.14|
|Seats for international travel within Africa<br>(millions per year)|0.48|1.46|1.27|—|—|1.11|0.58|
|Seats for intercontinental travel (millions<br>per year)|0.59|0.11|0.59|—|0.24|0.18|0.09|
|Seats available per capita|0.13|0.17|0.9|—|—|0.11|0.09|
|QUALITY||||||||
|% of seat-km in older aircraft|0.1|19.8|17.1|0|1.1|15.5|16.3|
|% of seat-km in newer aircraft|59.6|63.8|79.3|100|79|71.4|57.0|
|% of seat-km in aircraft of unknown age|40.2|16.4|3.6|0|19.9|13.0|26.7|

_Source:_ Bofinger, 2009. Derived from AICD air transport database downloadable from http://www.infrastructureafrica.org/aicd/tools/data — = data not available.

# Water supply and sanitation

## **Achievements**

Zambia already has relatively good access to high-end water and sanitation solutions (table 5). About 34 percent of Zambia’s population has access to utility water, whether from private taps or standposts; compared with only 24 percent in other resource-rich countries of Africa. Access to septic tanks, at 18 percent, is far ahead of peer countries.

As for trends in recent years, Zambia – along with other African countries – is moving fastest with intermediate options (figures 5 and 6). The real action in WSS has been in expanding access to wells or boreholes and traditional latrines, for an additional 1 percent of the population each year. By contrast, coverage of high-end solutions such as piped water and flush toilets has declined slightly in Zambia, while growth in standposts and improved latrines has been modest. This pattern is consistent with elsewhere in Sub-Saharan Africa.

12
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

**Table 5. Benchmarking water and sanitation indicators**

||Unit|Resource<br>rich|**Zambi**|**a**<br>Middle-income<br>countries|
|---|---|---|---|---|
|Access to piped water|% pop|12.0|**18.3**|52.1|
|Access to standposts|% pop|12.6|**15.6**|18.9|
|Access to wells/boreholes|% pop|49.0|**46.9**|6.0|
|Access to surface water|% pop|23.7|**19.0**|13.0|
|Access to septic tanks|% pop|1.6|**18.1**|40.8|
|Access to improved latrines|% pop|6.4|**1.6**|1.4|
|Access to traditional latrines|% pop|54.8|**53.1**|30.4|
|Open defecation|% pop|27.6|**27.0**|14.3|
|Domestic water consumption|liter/capita/day|90.3|**80.7**|187.6|
|Urban water assets in need of rehabilitation|%|42.0|**42.0**|25.0|
|Revenue collection|% sales|69.7|**68**<sup>*****</sup>|100|
|Distribution losses|% production|43.6|**44.9**|27.4|
|Cost recovery|% total costs|55.6|**65.4**|80.6|
|Total hidden costs as % of revenue|%|270.4|**236.4**|<br>855.2|
|US cents per m<sup>3</sup>|**Zambia**|Scarce water re|sources|Other developing regions|
|Residential tariff|**48**|60|||
|Nonresidential tariff|**59**|120||3.0–60.0|

_Source:_ Banerjee and others 2008. Derived from AICD water and sanitation utilities database downloadable from http://www.infrastructureafrica.org/aicd/tools/data _Note:_<sup>*****</sup> Average of three largest utilities.

# **Challenges**

The share of the population without access to safe solutions is increasing over time (figures 5 and 6). Despite doing well at the high end of the coverage spectrum, Zambia does not fare much better than its peers when it comes to the percentage of the population relying on surface water or practicing open defecation. A full 19 percent of Zambia’s population continues to rely on surface water and as much as 27 percent of the population continues to practice open defecation. Moreover, trends in household access to WSS services from successive household surveys show that the share of the population living in these insanitary conditions continues to increase. An additional 0.8 percent of the population each year relies on surface water and an additional 0.4 percent of the population practices open defecation. The high health risk associated with these practices makes this a very troubling finding.

Zambia’s water utilities have relatively high levels of hidden costs due to inefficiencies (figure 7). First, utilities recover only about two-thirds of the total cost of service provision (when full capital costs are taken into account). Second, utilities are collecting only about 70 percent of the revenues owed by their customers. Third, about 45 percent of water produced is lost in distribution due to technical and nontechnical factors. This poor performance is not atypical of water utilities in other resource-rich countries in Africa, even if it lags far behind the performance of middle-income countries in the region.

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ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# Power

## **Achievements**

Zambia is endowed with a relatively large amount of cost-effective hydropower. In terms of electricity supply, Zambia enjoys a much more favorable position than many of its neighbors (table 6). Due to the demands of its large-scale mining sector, Zambia has a relatively large generation capacity and power consumption per capita, several times higher than that of other resource-rich countries in Africa. Abundant hydro resources allow Zambia to produce electricity at around $0.08 per kilowatt-hour (kWh), about half the average cost of electricity production in Africa.

The national utility Zambian Electricity Supply Company Ltd. (ZESCO) also performs relatively well in terms of operational efficiency. In the two key indicators of operational performance, revenue collection and distribution losses, ZESCO performs well relative to the resource-rich peer group and near the level of the middle-income peer group (table 6).

**Table 6. Benchmarking** **<u>power indicators</u>**

||Unit|Resource<br>rich|**Zambia**|Middle-income<br>countries|
|---|---|---|---|---|
|Installed power-generation capacity|MW/mill. people|43.2|**154.9**|798.6|
|Power consumption|kWh/capita|205.7|**771.0**|4,479.3|
|Power outages|Day/year|14.5|**49.8**|5.9|
|Firms’ reliance on own generator|% consumption|44.9|**19.5**|10.9|
|Firms’ value lost due to power outages|% sales|7.0|**3.7**|1.6|
|Access to electricity|% population|46.1|**20.1**|59.9|
|Urban access to electricity|% population|79.4|**50.0**|85.2|
|Rural access to electricity|% population|28.0|**3.5**|31.8|
|Growth access to electricity|% population/year|2.4|**0.3**|1.5|
|Revenue collection|% billings|81.1|**96.5**|100.0|
|Distribution losses|% production|25.8|**12.0**|10.1|
|Cost recovery|% total cost|53.9|**39.1**|100.0|
|Total hidden costs as % of revenue|%|168.3|**93.3**|0.1|
|U.S. cents|**Zambia**|Predominantly<br>generatio|hydro<br>n<br>Oth|er developing regions|
|Power tariff (residential at 75 kWh)|**2.9**|10.3||5.0–10.0|
|Power tariff (commercial at 900 kWh)|**4.4**|11.7|||
|Power tariff (industrial at 50,000 kWh)|**2.9**|11.4|||

_Source:_ Eberhard and others, 2008 Derived from data downloadable at AICD on-line power utilities database http://www.infrastructureafrica.org/aicd/tools/data _Note:_ MW = megawatt.

16
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# **Challenges**

Access to electricity is only 20 percent in Zambia, less than half of what is found among the relevant African peer groups. Power access lags behind in both urban and rural areas, but the gap for rural electrification is particularly large—more than 3 percent in Zambia versus 30 percent in the peer groups. Not only is access low, but it has also been stagnant over time. Only 0.5 percent of the Zambian population is newly electrified each year, compared with 2 percent in the peer groups. While power is relatively abundant in Zambia, much of that power is going to the mining sector, leaving relatively little for domestic consumption.

Low power tariffs undermine the sustainability of the power sector. At $0.03–$0.04 per kWh, Zambia has some of the lowest power tariffs in Africa (figure 8). Looking across the developing world, Zambia’s power tariffs fall below the typical price range of $0.05–$0.10 per kWh. While Zambia’s power production costs are low, tariffs are lower. Both historic and long-run marginal costs are close to the mark of $0.08 per kWh (figure 9). Tariffs are capturing only about 40 percent of historic costs, and the power sector today is living on the investments of the past without making provision for the future. South Africa’s recent power shortages demonstrate the dangers of putting off change for too long. Underpricing of power creates hidden costs that are as large as the overall level of revenues (figure 10). Given the relatively low costs of power in absolute terms, it should be feasible for Zambian consumers to pay fullcost recovery tariffs. A stronger cash flow for the ZESCO would help to finance the needed expansions in generation capacity to keep pace with growing demand and to accelerate the pace of electrification.

Zambia’s long-term power supply options could be affected by the evolution of regional power trade in the framework of the Southern African Power Pool (SAPP). Zambia already imports a relatively small amount of power from neighboring DRC. Plans to further develop the Inga hydropower site in the DRC could lead to a large expansion in low-cost hydropower for the DRC, available for export to countries such as Zambia. While Zambia has attractive hydropower resources of its own, the long-run marginal cost of hydropower generation in the DRC, at around $0.014 per kWh, is about half the equivalent cost in Zambia. In the medium term, therefore, Zambia will face a strategic choice between developing more domestic hydropower resources versus strengthening its cross-border interconnectors with the DRC. Adopting a regional approach could save Zambia $160 million a year in power-supply costs in the long term.

17
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ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE Zambia’s population could be reached by a GSM signal on a commercially viable basis if measures were taken to dismantle regulatory barriers and promote competition to increase the market (figure 12).

The state-owned telecommunications incumbent, Zambia Telecommunications Company Ltd. (ZAMTEL), is characterized by inefficiency and an inability to compete with private mobile operators. The operator has become increasingly dependent on state financial support. The ZAMTEL monopoly is responsible for the exceptionally high prices of international voice communication that are observed in Zambia. In response, the government initiated a privatization process that aims to introduce private investment and management practices into the fixed-line sector.

**Table 7. Benchmarking ICT indicators**

||Unit|Resource rich|**Zambia**|Middle-income<br>countries|
|---|---|---|---|---|
|GSM coverage|% population|66.9|**53.0**|85.1|
|International bandwidth|Mbps/capita|4.0|**4.4**|104.0|
|Internet|Subscribers/100 people|0.1|**0.2**|3.0|
|Landline|Subscribers/100 people|19.3|**8.5**|34.8|
|Mobile phone|Subscribers/100 people|11.4|**20.9**|30.0|
|Labor productivity|Subscribers/employee|405.1|**505.8**|756.8|
|Quality of service|Faults/100 main lines|82.4|**90.8**|50.8|
||**Zambia**|Without submarine|cable<br>Other|developing regions|
|Price of monthly mobile basket|**14.6**|11.12||9.9|
|Price of monthly fixed-line basket|**8.9**|13.58||—|
|Price of 20-hour Internet package|**81.5**|67.95||11.0|
|Price of a 3-minute call to the United States|**5.5**|2.59||2.0|
|Price of intra-Africa calls, mean|**1.2**|0.72||n.a.|

_Source:_ Minges and others, 2009 Note: — = data not available; n.a. = not applicable.

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<!-- Start of picture text --> Congo, Dem. Rep. of [_]<br>Madagascar pe<br>Zambia OO<br>Congo, Rep. of PT<br>Niger OO<br>Mozambique Pd<br>Chad OO<br>Botswana PT<br>Namibia —<br>Lesotho _——<br>Tanzania pt<br>Ethiopia ——<br>Cameroon PY<br>Cape Verde [___]<br>Burkina Faso PE<br>Malawi =<br>Sudan ——<br>Kenya —_<br>Senegal [____<br>Céte d'Ivoire PY<br>Benin C—O<br>Ghana pd<br>Uganda #1<br>Rwanda [_-———]<br>Nigeria PY<br>South Africa<br>0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%<br>% of population<br><!-- End of picture text -->
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

**Table 8. High international call charges driven both by technology and market power**

|US$|Percent<br>cases|Call within Sub-<br>Saharan Africa|Call to the<br>United States|Internet dial-up|Internet<br>ADSL|
|---|---|---|---|---|---|
|Without submarine cable|67|1.34|0.86|68|283|
|With submarine cable|33|0.57|0.48|47|111|
|<br>Monopoly on international gateway|16|0.70|0.72|37|120|
|<br>Competitive international gateway|16|0.48|0.23|37|98|

_Source:_ Minges and others, 2009

# Financing Zambia’s infrastructure

Zambia needs to implement an ambitious infrastructure investment agenda over the next decade. In order to meet its most pressing infrastructure needs and catch up with developing countries in other parts of the world, Zambia needs to expand its infrastructure assets in a number of key areas. The targets outlined in table 9 are purely illustrative in nature, but they represent reasonable aspirations. Developed in a way that is standardized across African countries, they allow for cross-country comparisons of the affordability of meeting the targets, which can be modified or delayed as needed to achieve financial balance.

**Table** **<u>9. Illustrative investment targets for infrastructure in Zambia</u>**

||**Economic target**|**Social target**|
|---|---|---|
|ICT|Fiber-optic links to neighboring capitals and submarine cable|Universal access to GSM signal and public<br>broadband facilities|
|Irrigation|Develop 23,000 hectares that are economically viable for<br>irrigation|n.a.|
|Power|Refurbish 1,700 MW of generation and develop 1,700 MW of<br>new generation|Raise electrification to 24%<br>(50% urban and 15% rural)|
|Transport|Achieve regional (national) connectivity with good quality 2-<br>lane (1-lane) paved road|Provide rural road access to 80% highest value<br>agricultural land, and urban road access within<br>500 meters|
|WSS||Achieve MDGs|

_Source:_ Derived from Foster and Briceño-Garmendia 2009 n.a. = not applicable.

Meeting these illustrative infrastructure targets for Zambia would cost $1.6 billion per year over the next decade. Capital expenditure would account for 70 percent of this requirement. The country’s power needs represent the single largest item and are estimated to be $0.6 billion per year to refurbish 1,700 MW of generation capacity and develop a further 1,700 MW of new capacity. The second-largest item is the expenditure of $0.5 billion a year for the WSS sector, needed to meet the MDGs. Both transport and ICT spending needs are somewhat lower (table 10).

23
<!-- Start of picture text --> SSA age of the GDP<br>LIC -Fragile<br>LIC...<br>SADC<br>Resource..<br>MIC<br>Madagas..<br>Mozambi..<br>Zambia<br>Malawi<br>Lesotho<br>Namibia<br>South..<br>0 10 20 30 40<br><!-- End of picture text -->
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE Zambia already spends a sizeable $0.7 billion per year to meet infrastructure needs (table 11). (Due to the nonavailability of financial statements from the ZAMTEL, the state-owned telecommunications incumbent, these figures represent a lower limit for the level of infrastructure spending in the country.) About 65 percent of the recorded total is allocated toward capital expenditure and 35 percent toward operating expenditures. Two-thirds of total spending is domestically financed, coming from the pockets of Zambian taxpayers and users of utility services. Focusing on infrastructure investment alone, about half is funded by the public budget and the remaining half by a range of external financiers—primarily private investors and official development assistance (ODA) partners. Zambia receives relatively little infrastructure investment from countries outside the Organisation for Economic Co-operation and Development (OECD). Private finance goes almost entirely to the ICT sector, while ODA is evenly split between the transport and WSS sectors.

**Table 11. Existing financing flows for infrastructure,** **<u>average, 2001–06</u>**

|Sector||||$m per year||||
|---|---|---|---|---|---|---|---|
||O&M<br>Public sector|Public sector|<br>ODA|Capital expenditure<br>Non-OECD<br>financiers|PPI|Total CAPEX|Total<br>spending|
|ICT|n.a.|n.a.|1|0|89|90|>90|
|Power|99|70|2|8|0|81|180|
|Transport|99|85|52|6|3|145|245|
|WSS|35|67|47|1|9|123|158|
|Total|233|224|99|15|101|439|>673|

_Source:_ Briceño-Garmendia, Smits, and Foster 2008. _Note:_ Due to nonavailability of ZAMTEL financial statements the data represent a lower bound on total spending. PPI = private participation in infrastructure; OECD = Organisation for Economic Co-operation and Development; n.a. = not applicable.

25
<!-- Start of picture text --> Sub-Saharan Africa po<br>nonfragile low-income countries po<br>COMESA Pe<br>SADC {| sd<br>middle-income countries {_<br>fragile low-income countries po<br>resourch-rich countries [{<br>Lesotho [TCCid<br>Mozambique Pe<br>Zambia [id<br>Namibia | Cid<br>Malawi [sd<br>South Africa pd<br>0 2 4 6 8 10 12<br>% of GDP<br>capital expenditure Ooperations and maintenance<br><!-- End of picture text -->
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# **Table 12. The** **<u>efficiency gap</u>**

||ICT|Power|Transport|WSS|Total|
|---|---|---|---|---|---|
|Overstaffing|—|—|—|2|2|
|Distribution losses|—|6|—|22|27|
|Undercollection|—|0|0|30|30|
|Undermaintenance|—|—|0|—|0|
|Low budget execution|0|2|39|17|57|
|Underrecovery of costs|—|152|20|25|198|
|Total|0|160|59|96|315|

_Source:_ Briceño-Garmendia, Smits, and Foster 2008. — = data not available.

Undercharging for power services costs Zambia about $152 million per year (more than 2 percent of GDP). As noted above, Zambia’s power tariffs of $0.03–$0.04 per kWh barely cover half of the full economic costs of power production. Overall, the national power utility, ZESCO, covers barely 40 percent of its costs. The associated financial burden is substantial at the macroeconomic level, amounting to more than 2 percent of GDP, and is also several times larger than that found in other resource-rich countries in Africa (figure 15). Underpricing of water services, though significant in absolute terms and substantially higher in Zambia than in other resource-rich countries in Africa, remains less of a macroeconomic issue due to the relatively low turnover of the sector, amounting to 0.4 percent of GDP.

Zambia’s inequitable access to power and water makes subsidized tariffs a highly regressive policy. Zambian power consumers are having the full capital costs of their service (implicitly or explicitly) subsidized by the state. Given that 84 percent of households with access to power belong to the top quintile of the budget distribution—and indeed 99 percent of those with access belong to the top two quintiles of the distribution—this amounts to a highly regressive subsidy (figure 16). Though less significant in absolute magnitude, subsidies to the water sector are equally regressive in nature since the pattern of access to piped water mimics that of access to power.

27
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ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

**Figure 17. Those with access (and many of those without access) do not face major affordability problems**

<!-- Start of picture text --> 100%<br>90%<br>80%<br>70%<br>60%<br>50%<br>40%<br>30%<br>20%<br>10%<br>0%<br>1 2 3 4 5 6 7 8 9 10 11 12<br>USD/month<br>Lower/Upper bound cost of household consumption of electricity Zambia LIC<br>% of households spending less than 5% of their monthly budget<br><!-- End of picture text --> _Source:_ Banerjee and others, 2008.

Distribution losses and low collection rates of water utilities are costing the country $52 million a year. While Zambia’s power utilities are relatively efficient by the standards of its peers, Zambia’s water utilities are relatively inefficient when judged by the same standard (figure 18). Whereas water utilities in other resource-rich African countries typically face operational inefficiencies that amount to 0.14 percent of GDP, the operational inefficiencies of Zambian water utilities are wasting 0.7 percent of GDP. Just under half of this waste derives from unaccounted water, and just over half from undercollection of revenues.

30
<!-- Start of picture text --> 1<br>0.9<br>0.8<br>0.7<br>a 0.6<br>‘es 0.5<br>= 04<br>0.3<br>0.2<br>0.1<br>0<br>Zambia resource-rich countries<br><!-- End of picture text --> <!-- Start of picture text -->
1.0<br>0.9<br>0.8<br>0.7<br>a 0.6<br>‘es 0.5<br>= 04<br>0.3<br>0.2<br>0.1<br>0.0<br>Zambia resource-rich countries<br><!-- End of picture text -->
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE comprehensive information on existing spending; however, based on the experience of other African countries, it is safe to assume that a funding gap for this sector is small or nonexistent.

**Table 13. Funding** **<u>gaps by sector</u>**

||ICT|Power|Transport|WSS|Total|
|---|---|---|---|---|---|
|Spending needs|(218)|(631)|(289)|(471)|(1,609)|
|Existing spending|90+|180|245|158|673|
|Efficiency gains|n.a.|160|59|96|315|
|Funding gap|n.a.|(291)|15|(217)|(493)|
|Potential for reallocation|0|30|65|0|95|

_Source:_ Briceño-Garmendia, Smits, and Foster 2008. n.a. = not applicable.

Every year about $95 million more is spent than needed to meet Zambia’s estimated infrastructure requirements (recall table 9). Most of this overspending is on the transport sector ($65 million), which in recent years is being funded at rates apparently over and above long-term requirements. There is also evidence of overspending on O&M in the power sector, due to utility inefficiencies and an overextended distribution network. Since there is a large funding gap in this sector, these resources would be better diverted to finance power investments.

# What else can be done?

There are a number of ways of addressing the infrastructure funding gap; filling it with money is not the only relevant approach. A number of policy choices relating to technology selection and regional approaches to infrastructure development could reduce the gap by lowering the costs of meeting infrastructure targets. Alternatively, there is the possibility of taking a longer period of time to meet defined goals.

Adopting lower-cost technologies for meeting the MDG targets for WSS could reduce Zambia’s infrastructure funding gap by $0.2 billion. The estimated cost of reaching the MDG targets is based on Zambia maintaining its current mix of WSS technologies, which as noted tends to be skewed toward higher-end solutions such as private taps. If, instead, the service expansion needed to meet the MDG targets was undertaken entirely through lower-end solutions, such as standposts and boreholes, the associated cost could fall substantially, by $218 million or almost one-half.

Eventually, importing power from the DRC through an enhanced SAPP could reduce the funding gap by $0.2 billion. Although not feasible at present, in the medium to long term (as the DRC develops the hydropower at Inga), a larger volume of low-cost power would become available through the SAPP. Since the DRC’s hydropower resources are more cost-effective than those of Zambia, the latter could reduce its power-sector development costs substantially in the longer term by moving toward increased reliance on power trade, with potential cost savings of $160 million per year.

Adopting more appropriate standards for paved roads could shave a further $0.1 billion from the funding gap. The spending needs for the transport sector assume that regional and national connectivity standards will be met by standard asphalt paved roads. But, in practice, it may be possible to reduce costs 32
ZAMBIA’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE by adopting more appropriate paving technologies. For example, use of single-surface treatment instead of asphalt surfacing would reduce road sector development costs by $60 million per year.

If it were possible to adopt all of the above policy measures at once, Zambia’s infrastructure funding gap would all but disappear. The combined value of these cost-saving policy measures is $453 million, which is very close to the funding gap of $493 million. While it may not necessarily be possible to reap all of these cost savings in the medium term, this calculation serves to illustrate the power of strategic policy choices in ensuring the feasibility of meeting the country’s infrastructure needs.

Holding spending at current levels but going after efficiency gains would allow Zambia to meet identified infrastructure targets in 15 years instead of the notional 10 years from 2006-2015 assumed for this exercise. Assuming that Zambia had no means of raising additional infrastructure finance and was not able to implement the cost-saving policies described above, the only way to meet the infrastructure targets would be to take a longer period of time than the decade that was contemplated at the outset of this exercise. If Zambia were able to redress the various inefficiencies identified above, and preserve overall spending at current levels, the targets would take 15 years to reach, which is to say they would be achievable by the year 2020. Without tackling inefficiencies, the country would take another 15 years, or until 2035.

Zambia’s infrastructure situation is more hopeful than that of many other African countries. For a start, infrastructure spending needs—though large—are not beyond the realms of possibility. Second, Zambia’s resource wealth and relatively well-off population provide a more solid financing basis than is available to many other countries. Third, Zambia’s funding gap—though substantial—can be dramatically reduced through a range of policy measures aimed at stemming inefficiencies and lowering costs. In sum, notwithstanding the numerous infrastructure challenges that Zambia faces, their resolution looks much more tractable than in the case of many African peers.

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