If a project is economically viable – ie the rate of return exceeds the interest rate on the loan that finances it – it may be able to service the debt from its own revenues / benefits. It also adds more to GDP than to the debt stock – reducing the debt/GDP ratio. On the other hand, if a project is uneconomic (IRR < interest rate) it adds to the debt stock (and debt service) but not to GDP – increasing debt/GDP.
Most PF borrowing was for transport projects, particularly roads. However, few non-urban roads had enough traffic to justify upgrading. In the early 2000s the Road Sector Investment Programme (RoadSIP) looked at the entire road network and prioritised roads for repair or upgrading based on traffic forecasts and cost. By the time PF was elected in 2011 most of the viable road projects had already been completed; only marginal and unviable non-urban roads remained.
Despite this, PF borrowed over $5 billion to pave roads. If RoadSIP was correct, much of this was wasted. Another unviable project was the $360 million borrowed for KK International Airport terminal. Though basic, the old terminal was quite adequate. While the new one may look impressive, it is unlikely to generate much extra traffic and – at $360m – is clearly a ‘white elephant’.
It is not possible to assess loans or how much debt a government can afford to contract without knowing what projects the loans will be used to finance and how viable they are. In theory, if all projects had high enough rates of return government could borrow almost without limit. Where projects are uneconomic, this reduces the sustainable level of borrowing.
By increasing debt without generating revenues needed to service the loans, PF’s unviable projects were a major cause of Zambia’s default. Yet neither parliament nor civil society raised any objections to the projects at the time. Decisions were made by the President and Ministers without economic advice.
If Zambia is to avoid defaulting on its debt for a third time, it is vital that from now on it only borrows for projects which are economically viable. There are encouraging signs that the current government recognises this, with the recent publication of Guidelines for appraising projects as required by the National Planning and Budgeting Act.
As well as monitoring the existing debt stock, public scrutiny of new government borrowing should always include assessment of projects for which new loans are to be contracted. Parliament and civil society need to be more critical of infrastructure loans than previously and take closer interest in project details; they should satisfy themselves that a project is viable before examining loan details.
Alan Whitworth (EAZ member, ZIPAR 2010-2012)
London, July 2023