28 November 2012

Zambia: Insurers Can Benefit From U.S.$750 Million Euro Bond

analysis

THE year 2012 is passing so fast with some significant milestones by the Government of the Republic of Zambia.

One of these milestones is the acquisition of the record breaking US$750 million Euro bond.

Though the pursuit of this bond was initiated by the former regime, the bond has been issued in the present one.

I will not go into the political debate on who should get the credit, i.e., whether the Patriotic Front (PF) or the Movement for Multiparty Democracy (MMD) government.

What is important is the fact that as a country with the PF in government, we acquired the bond.

Why do I call obtaining a bond a milestone? Going by the prerequisites to acquiring one of that magnitude, it is evident that it is not an easy undertaking and no wonder few countries in Africa have managed to secure such a huge amount from the Euro zone.

It demonstrates that Zambia is doing something right which has triggered confidence to the issuer of the bond. Without doubt the right thing is embedded in the good economic performance and the ability to pay back, inter alia.

Suffice it to state that this is not the first time Zambia has acquired a sovereign bond.

The first one was a $50 million bond of June 1973 and later in September the same year another one amounting to $100 million was raised according to the Bank of Zambia annual report of that year.

The Minister of Finance Alexander Chikwanda proposed in the 2013 national Budget on how the Government plans to utilise the proceeds of the Eurobond funds.

He proposed to apply $430 million or 57.3 per cent of the proceeds towards road and rail transport projects and $255 million or 34 per cent on energy generation and transmission projects.

The minister further proposed that the balance of $65 million goes to fund central hospitals, SMEs and transportation and funding costs.

With the repayment period pegged at 10 years, the Government will need to ensure that the above proposals are carried out diligently so that the intended results are achieved.

It is very suggestive that the bond will stimulate economic activity and many industries are poised to benefit significantly from the utilisation of these funds.

My question today is on how the insurance industry in particular is going to benefit from the proceeds of these funds. Is the industry really going to benefit? If so then in what ways?

To start with 57.3 per cent is going towards the road and rail transport projects. We have seen that the Government has already implemented the 8,000 link Zambia project.

This means construction of new roads, patching some of them and of course many jobs will be created. Most of the contracts awarded by the Road Development Agency have an insurance clause.

The Agency is alive to the fact that such massive investments need protection in case of damage to the works going on or other auxiliary liabilities associated with project works.

There is also a maintenance period requirement of about 12 months after commissioning of the road which I believe is meant to deter shoddy works.

The insurance clause indicates the minimum insurance needed to be in place during the contract period.

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