11 January 2019

Zimbabwe: U.S.$400 Million Deal in Limbo

Government is reconsidering the US$400 million National Railways of Zimbabwe (NRZ) recapitalisation project to be jointly undertaken by the South African rail, port and pipeline company, Transnet and the Diaspora Infrastructure Development Group (DIDG) as it insists stakeholders have not agreed on the shareholding structure, among a myriad of unresolved issues stalling the deal, the Zimbabwe Independent can reveal.

In fact, NRZ general manager Lewis Mukwada said government was yet to decide on the suitability of DIDG and Transnet to carry out the multi-million dollar project, which has attracted the interest of major banks from South Africa.

A protracted due diligence exercise to determine the suitability of the consortium to roll out the multi-million dollar project is supposed to be finalised next month, enabling government to make a determination on whether or not to approve the deal. But owing to a number of thorny issues, the deadline could be missed.

Although President Emmerson Mnangagwa last year commissioned 13 locomotives, 200 wagons and 34 coaches, leased from the South African entity under the NRZ recapitalisation framework, the deal could be put off after it emerged that government has not yet given the consortium the nod to revamp the country's shambolic rail system. A framework of agreement relating to the deal was approved by cabinet two years ago, during former president Robert Mugabe's tenure. The deal was used as a model project by Mnangagwa during the run up to last year's elections, where he promised to open Zimbabwe for business and revamp the country's infrastructure among other promises.

The Independent understands a key meeting between government, NRZ and DIDG will be held on Tuesday to iron out issues.

Various banks, leveraging on the strength of the consortium's bid to rehabilitate Zimbabwe's rag tag rail network, have mobilised close to US$1 billion to finance the project.

The banks have provided term sheets but the government has been moving at a snail's pace amid concerns that some officials wanted the deal to collapse so that a company of their choice implements the project.

"A due diligence was carried on the DIDG and Transnet consortium. The results of this will be submitted to government together with draft agreements and recommendations on whether we should accept the deal or not," Mukwada said.

"Generally the scope of the project entails much more work than had been originally anticipated, because of its complexity which became more apparent as the project progressed. While considerable progress has been made, the original timelines set last year have had to be reviewed. The committee handling the project is submitting recommendations to its principals on the way forward."

The due diligence exercise encompasses various areas of the transaction which include technical, financial, commercial, human resources and legal activities.

Mukwada said stakeholders were also yet to agree on the shareholding structure although an agreement seen by the Independent last year revealed that the consortium had a 60% stake.

"Details of shareholding (among other issues) are still under discussion and will be made public once the deal is finalised," Mukwada said, noting that negotiations were still ongoing.

However, according to terms spelt out in the Framework Agreement between NRZ and the consortium reveals the parties agreed that the local rail operator would hold 40% equity in the joint venture while a 60% stake would be held by the South African entity.

"The consortium will form a joint venture company (JV1) to attract funding from one or more commercial lenders and development funding institutions, including the potential support and participation of certain eligible export credit agencies or similar institutions. NRZ and the consortium will establish another Joint Venture company (JV2) to be incorporated in Zimbabwe comprising JV1 and NRZ. The shareholding in JV2 shall be on a ratio and tenure to be agreed, indicatively 60% for JV1 and 40% for NRZ for a period of twenty five (25) years," reads the agreement.

The Framework Agreement was entered on January 31, 2018 with Larry Mavima, the then board chairperson of NRZ who is now Midlands Provincial Affairs minister, representing the local rail operator while DIDG was represented by its chairperson Donovan Chimhandamba.

As first revealed by the Zimbabwe Independent last year, a convoluted legal process under the due diligence exercise threatened to derail the project, though various banks had mobilised well over the US$400 million initially required to rejuvenate NRZ.

Now sources involved in the cumbersome negotiations say there are spirited efforts by top government officials to muscle out the South African consortium and rope in a new player to undertake the project.

"There were many players involved who wanted the deal and their strategy was to frustrate the South African consortium. This is why this deal has not come to fruition," one source said.

A crisis meeting held last month to resolve the bottlenecks besetting finalisation of the deal failed to resolve the impasse after the project's legal advisors disapproved of it, arguing the due diligence exercise was not complete.

Acknowledging "delays resulting from various factors", DIDG board chairperson Donovan Chimhandamba however said he remained hopeful that the deal would be back on track.

"Delays have been due to time lost over elections but also recent restructuring and reorganisation at Transnet which also had an impact on progression of the NRZ recapitalisation deal. These changes though they might have slowed down the process a bit, we believe the changes will strengthen the project and make it more sustainable in the long-run," Chimhandamba said.

Another source close to proceedings, however, said the deal would only be sealed after finalisation of various "transaction agreements" currently being negotiated by the parties involved.

"The final deal will be signed off subject to the approval of the agreements. It is only at that point that we will be certain that the consortium has been given the approval to implement the project. As it stands, anything can happen. There are still things the parties are still working on before the deal is approved," the source said.

Transport minister Biggie Matiza has previously indicated that the NRZ recapitalisation deal would collapse if stakeholders failed to resolve the outstanding issues by February.

As part of the legal due diligence, the ministry's legal advisors are demanding Transnet's board minutes for the past three years and documents of past court proceedings on litigation cases. They have also asked to be furnished with Transnet's contracts with its suppliers but the DIDG/Transnet consortium believes the demands are unreasonable and will violate agreements which have nothing to do with the NRZ deal.

A number of South African banks which include Standard Bank, Absa, Nedbank and the Industrial Development Corporation of South Africa had cumulatively mobilised close to US$900 million to bankroll the project. Ecobank of Kenya is also willing to inject US$100 million into the project while CBZ is waiting in the wings with a US$50 million war chest.

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