As the government goes on another shopping spree, international banks are reassessing plans for fresh lending to Lusaka
Israel and Zambia are almost ready to sign a new US$400 million package for high-tech aviation equipment to be funded with a loan from Israel’s Hapoalim Bank (AC Vol 59 No 7, Into the valley of debt). The deal is believed to include a new presidential jet. Russia is also set to deliver a Sukhoi SSJ regional jet airliner with a luxury specification suitable for a head of state.
Military experts question Zambia’s need for the new equipment it is ordering from Israeli contractor Elbit Systems, as well as its enormous cost. Elbit has $400m of existing supply contracts with the Zambian military for surveillance equipment and other services, such as 18 Skylark mini-drones, an unspecified number of F-5 supersonic jet fighters, ground vehicles, and upgrades to the air force’s Russian-made Mi-17 E transport helicopters. These deals, signed last year, also include centres for flight-training, and command control and communications.
One of the contracts was part-funded with a $48m loan from Israel Discount Bank, which was signed by President Edgar Lungu on 5 September 2016, Africa Confidential can reveal.
That was the day Lungu learned that the Constitutional Court had endorsed his election victory, restoring his residual executive powers prior to his inauguration on 13 September. Lungu’s rush to sign the $48m defence deal before waiting to form a cabinet raises suspicions about the use of the money. A $500m state guarantee he signed during this time later had to be cancelled (AC Vol 59 No 11, Debt spike threatens reserves).
The latest Elbit deal includes over $100m allocated for the purchase of an aircraft for civilian use, which will have a military tail number, AC has learned. The jet, we understand, is a Gulfstream G650 and would be earmarked for presidential use. Much of the rest of the $400m deal is a maintenance package, we understand.
The aircraft may also be equipped with Elbit’s MUSIC anti-missile system, which fires lasers at incoming heat-seeking missiles. Elbit has said it was supplying an African country with the MUSIC system in a context that suggested Zambia may be the client. A defence expert described the installation of such a system on a presidential jet as ‘insane’.
Some of the Israeli contracts are, like many of the Chinese loan-backed projects, over-priced, say financial experts in Lusaka. The upgrade of the Maina Soko military hospital in Lusaka by Israeli company Ashtrom is costing almost $200m, which officials close to the project say is extremely high. Ashtrom also has a $400m contract for military housing and barracks in Kawambwa District, which the same Zambian government source says is over-priced.
The overall cost of the Elbit and Ashrom contracts is $1.4 billion, although the government is still to sign the latest $400m tranche with Elbit. More than $50m of other equipment was ordered from Israel Weapons Industries in January 2017, mainly weapons and ammunition for the army, also funded with a loan from Hapoalim Bank.
The Gulfstream, however, may not be the only luxury aircraft set to fly from Kenneth KaundaInternational Airport. In a deal first reported in July 2017, Russia was set to deliver five Sukhoi Superjet SSJ100 regional jets (medium-range airliners), but this has been reduced to one, we hear in Lusaka. Initially, Yury Slyusar, President of Russia’s United Aircraft Corporation, said that in addition to four standard SSJ100s, there would also be ‘one aircraft in the VIP version for the head of state’. He was contradicted in August by Minister of Transport and Communications, Brian Mushimba, who told local press, ‘Zambia Airways is not talking to Russia about any planes…Those are conspiracy theories’. It is Africa Confidential’s understanding that under the revised deal, only the luxury-equipped SSJ100 will now be supplied.
A statement in July from Russia’s Ministry of Industry and Trade confirmed the original negotiations with Zambia, with the Minister of Industry and Trade, Denis Manturov, reported as having reconfirmed in September the supply of the VIP version SSJ100 at the Hydroaviation Salon 2018 expo. He added that the other four passenger aircraft remain under discussion.
It is part of a drive to boost Russia’s aviation exports, which soared by almost 50% last year. On 9 April in Nairobi this year, Russia’s state-owned export development institute announced a partnership with the African Import Export Bank (Afreximbank) for a $20bn fund towards financing packages for Russian-made commercial aircraft for African airlines, accompanied by a showcasing of the SSJ100.
Senior Patriotic Front sources confirmed that the deal offered to Zambia came with a hefty finance package. Although each SSJ100 costs about $35m, the sum being discussed was far greater, say senior officials. The total cost was at least $400m and may have included other elements besides the aircraft, they said. The details were never made clear to ministers, having been negotiated in secret, Africa Confidential was told.
After this, the end of Zambia’s borrowing spree may be in sight. Foreign lenders are putting discussions about new loans to Zambia on hold. The scandal over the misappropriation of public funds and a donor aid freeze, followed by a rapid weakening of the kwacha, which hit 12.5 to the US dollar on 1 October, and the downgrade by credit ratings agencies in July, have damaged market confidence (AC Vol 59 No 19, Bonds crash as donors cut funding).
Finance Minister Margaret Mwanakatwe has been urging all, including the International Monetary Fund to ‘be positive about the economy’. In private, senior civil servants say that cash shortages have resulted in a near-freeze in funding to government departments, as the treasury prioritises debt service. Suppliers are threatening to sue over unpaid government bills. Meanwhile, the IMF is in no hurry to replace its resident representative, who was recalled early from his posting after pressure from the Zambian government (AC Vol 59 No 18, Graft worsens cash squeeze). In the Fund’s latest internal listing of vacancies to be filled, the Zambia post was not included, we understand. It’s another sign that Mwanakatwe’s public optimism about the chances of a funded IMF programme are spin rather than substance, say senior diplomats.
This crisis has delayed the Israeli deal, which has been awaiting final authorisation since preliminary agreements were signed in May, and could still scupper it. Israeli officials worry about reputational problems caused by the deal and the bankers are questioning the chances of being paid – particularly as they see a growing risk of regime change.
Trying to boost revenues, the government is imposing new demands on mining companies. Relations became strained after Mwanakatwe announced changes in the taxation regime in her budget speech on 28 September. Zambia’s Chamber of Mines, in a statement on 4 October, said tax regime instability would make Zambia ‘uninvestable’. Mineral Royalty Tax hikes that will increase by up to 67% and ‘novel taxes not seen anywhere else in the world’ are among the factors the Chamber says will shrink the industry resulting in less tax revenue rather than the intended windfall.
Feeling the effects
Almost everyone is feeling the effects of the ballooning debt burden. On 2 October, just days after insisting that rumours of a fuel price rise were malicious gossip, the Energy Regulation Board announced a significant rise in fuel costs – caused by the kwacha weakening against the dollar. The rise comes just after news that Mwanakatwe had approved a salary increase for top officials including President Lungu on 9 August, backdated to 1 January this year.
Ferrari in the sky
Controversy continues over the planned €95 million-plus acquisition of two top-of-the-range twin-engined C-27J Spartan military transport aircraft from the Italian aerospace company Leonardo. The deal, signed barely two weeks after Finance Minister Margaret Mwanakatwe pledged to cease new borrowing, looks likely to cost the exchequer far more than the purchase price. ‘Where the manufacturers make their money isn’t in the initial supply, it’s the maintenance and support contracts. How they [Zambians] can afford to keep them in the air I don’t know – it will sink them,’ one ex-military pilot with experience of such transports told Africa Confidential.
Aircraft of this type are normally used by troops in special operations, such as covert raids or rescue missions, or stealthy extraction of military assets. Military experts consulted said they doubted Zambia had any requirement for them. The deal also comes with an eye-watering price tag. Arranged by the London branch of Italian bank Intesa San Paolo, with funds from the bank’s Dubai office, the structuring fee totalled US$1 million, we hear.