Cablegate: Zimbabwe's Response to Usitc On Infrastructure

VZCZCXRO7819
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0898/01 2771051
ZNR UUUUU ZZH
R 031051Z OCT 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 3521
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

UNCLAS SECTION 01 OF 03 HARARE 000898

SENSITIVE
SIPDIS

USITC FOR L SCHLITT

E.O.12958: N/A
TAGS: ETRD ECON EAGR PGOV ZI
SUBJECT: ZIMBABWE'S RESPONSE TO USITC ON INFRASTRUCTURE

REF: STATE 85109

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SUMMARY
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1. (U) Zimbabwe's infrastructure has been deteriorating over the
past decade of economic decline. Foreign currency shortages, skills
flight, and lack of maintenance have been largely responsible for
the decline. The deteriorating infrastructure negatively affects
the country's export competitiveness as it raises the cost of doing
business. A number of firms in the clothing and textiles sector
stated that in addition to investing in infrastructure to increase
export competitiveness, the government should stabilize the economy
and let the forces of supply and demand determine the exchange rate.
END SUMMARY.

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Deteriorating Road Infrastructure
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2. (U) As of 2007, Zimbabwe had a classified road network of 88,300
km, of which approximately 17 percent was paved. Trunk roads are
generally in a fair state of repair, but the condition of urban and
unpaved rural roads has deteriorated markedly in recent years. Road
maintenance is constrained by a severe shortage of funds.

3. (U) Our discussions with firms in the clothing and textiles
sector revealed that roads do not hinder export competitiveness.
According to Ms Bortolan of Security Mills Private Limited, the
company is not constrained in moving goods by road. Sharing
Bortolan's assessment were Chitey Laxmidas of Styles International
Private Limited, which exports leisure wear to the U.S., and Jeremy
Youmans, Group Finance Director of Paramount Garment Works (Pvt)
Limited and Chairman of the Clothing Manufacturers Association.
Youmans, in fact, believes that Zimbabwe's road network is a
competitive advantage within the region.

4. (SBU) A 2007 World Bank study of roads, railways, water, energy
and telecommunications subsectors in Zimbabwe noted that although
the formation of a semi-autonomous State Highway Authority (SHA) had
been mooted in 2001, it had not taken shape due to uncertainty
surrounding funding, hyperinflation, and the shortage of foreign
exchange. Moreover, collaboration between government and the
private sector enunciated in 2004 through the publication of private
public partnership (PPP) policy guidelines has not progressed. The
legal instruments required to support policy implementation have not
been finalized, even though some trunk roads, such as the route to
South Africa, carry sufficient traffic to generate attractive
returns on private sector investment. Civil engineer and road
expert Rob Geddes told us that the toll fees required to make such a
venture profitable may be politically unacceptable. He attributed
failure to build the Harare-Beitbridge road to such considerations.

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Antiquated Rail Sector
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5. (SBU) Zimbabwe has 2,760 km of rail track. As of July 2008,
there were 165 locomotives, of which only 65 were operational; only
57 percent of the over 10,000 wagons were operational; and only 42
percent of the passenger rail cars were working. According to M.T.
Karakadzai, General Manager of parastatal National Railways of
Zimbabwe (NRZ), a full train can carry the same amount of cargo as
53 thirty-ton trucks.

6. (SBU) Old and failing equipment lowers NRZ's performance and
compromises network reliability. According to Karakadzai, out of a
design capacity of 18 million tons/year, NRZ is only capable of
moving about 7.5 million tons/year. The NRZ's automated centralized
train control (CTC) system is also obsolete and subject to
vandalism. Karakadzai said that, as of July 2008, 77 percent of the
CTC system was not working, resulting in numerous accidents.
Zimbabwe's critical skills shortage exacerbates the problem, as most
artisans have emigrated to neighboring countries leaving the NRZ
with 3,000 vacancies for skilled artisans as of the end of July
2008.

7. (U) NRZ must import about 90 percent of its spares, and it
requires three million liters of imported diesel per month to
operate. The shortage of foreign exchange to purchase spare parts
compounds NRZ's problems and compromises its ability to meet
customer needs.

8. (SBU) While Bortolan said the deterioration of the rail network
had not constrained exports, Laxmidas recounted how derailments and
cargo handling equipment failure had cost his company an entire
consignment of goods destined for the U.S. in 2007. A crane
breakdown had delayed the loading of goods onto a container. Once
en route, the train was delayed by a derailment along the

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Zimbabwe-Chiqualaquala route to Mozambique, leading to the goods
being redirected. By the time the container reached Durban, the
ship had left port and the sale was lost. In reaction, Styles
International began using costly airfreight to the U.S. to meet
tight delivery deadlines.

9. (SBU) Youmans also bemoaned NRZ's operations, noting that it
failed to supply coal to textile firms for the dyeing process.
Youmans calculated that it was twenty times cheaper to move goods by
rail than by road, and an efficient rail system therefore would
reduce costs significantly and create a competitive advantage in
international markets.

10. (U) Karakadzai said the NRZ was using its own resources to
rehabilitate rolling stock and track. The initiative is expected to
put some 2,000 wagons back on track. Another NRZ initiative is to
produce spares locally by bringing a former spares supplier to NRZ.
Moreover, NRZ bought Fort Concrete in order to manufacture railway
sleepers itself. In addition, the NRZ is seeking to invest in
private public partnership programs, noting that the
build-own-operate model had been used successfully in the
construction of the Bulawayo-Beitbridge Railway.

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Inadequate Electric Power Generation/Distribution
--------------------------------------------- ----

11. (U) Electric power generation from Zimbabwe's power stations
falls far short of demand. Zimbabwe's electricity generating
equipment is antiquated. The World Bank report states that no major
investment in expanding generating capacity has occurred since 1986,
although investment in distribution infrastructure in rural areas
has increased. In the meantime, Zimbabwe Electricity Supply
Authority's (ZESA) customer base has swelled by some 40 percent over
the past eleven years and the waiting list for connections has
increased tenfold.

12. (U) Many transformers are old and overloaded--the urban network
is 20-30 percent overloaded. In recent years, maintenance has been
less than 10 percent of the planned level. As a result, the number
and frequency of breakdowns have increased. In addition, the rate
of connecting new clients has fallen sharply and the quality of
service has plummeted. Non-technical losses caused by increased
vandalism of distribution equipment have also surged. Thieves, for
example, steal transformer oil, leading to breakdowns and to
downtime as imported spare parts take months to procure. In the
meantime, in a vicious cycle, overloading of other transformers
causes more breakdowns.

13. (U) A major constraint on ZESA is the shortage of foreign
exchange to purchase spare parts and new equipment, and to fill the
power shortfall with imported power. This factor plus the exodus of
skilled labor to the region are at the root of the decline in
service. Many engineers emigrated to South Africa when the former
Chief Executive, Sydney Gata, resigned to work for Eskom, the South
African utility, leaving a yawning gap in skills and experience.

14. (U) Coal supply to Hwange Thermal Power Station is constantly
interrupted due to machine breakdowns at the nearby Wankie Colliery.
The dragline excavator fails frequently as does the belt that
conveys coal to the power plant. The NRZ does not have reliable
locomotives, wagons and signaling equipment to move coal to
Zimbabwe's other power stations in a cost effective manner.

15. (U) Youmans underlined that the textiles sector requires steady
power. If power fails, for example, in the middle of dyeing, the
entire textile batch is written off. Our interlocutors at Security
Mills and Styles International added that load shedding impeded the
expansion of exports because it prevented companies from meeting the
tight deadlines set by international clients.

16. (U) Sub-economic tariffs that do not reflect cost are at the
root of ZESA's problems. With regard to the mining sector, the
Chamber of Mines and ZESA signed a Memorandum of Agreement, with the
blessing of the Exchange Control Authorities, for mining firms to
pay for power in foreign exchange in return for uninterrupted power
supplies. The arrangement is confined to the mining sector and does
not address the general power distribution challenge, however.

17. (U) In order to boost electricity generation, the GOZ enacted
legislation in 2003 that allows for independent power projects
(IPP). However, the small number of projects that have been
developed make a negligible contribution to the national grid.

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Breakdown in Telecommunications
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18. (U) According to a World Bank report, Zimbabwe's sole provider
of fixed lines, TelOne, has about 332,000 fixed lines in servQ

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At the official population estimate of 12 million people, this gives
a low teledensity of about 2.8 percent; even if the population
figure is significantly overstated, teledensity is low. TelOne is
also operating equipment that has outlived its useful life.
Moreover, there is a long waiting list of customers to be connected.

19. (U) Zimbabwe has about 1.3 million mobile subscribers, giving a
penetration rate of 9 percent. However, service provision is poor
with call completion rates between mobile networks estimated at less
than 10 percent. During peak times, it is nearly impossible to make
a call from one mobile network to another. Although the regulatory
authority, the Posts and Telecommunications Regulatory Authority of
Zimbabwe (POTRAZ), is empowered to fine or withdraw a license if
suppliers fail to meet agreed service levels, it has to prove that
the limitations are not beyond the operators' control.

20. (U) International communications are achieved through two
Intelsat satellite earth stations and two international digital
gateway exchanges. Private operators are required to route at least
out-going calls through the government-owned gateways. Difficulties
in making payments to foreign suppliers due to foreignQange
shortages have resulted in periodic disruptions to international
connections.

21. (U) Fixed line reliability is poor primarily because of
antiquated equipment. Moreover, frequent power cuts disrupt the
operations of telephone exchanges. As with most operations in
Zimbabwe, the biggest constraint to expansion in the
telecommunications sector is the shortage of foreign exchange. With
the additional problem of a very low tariff regime,
telecommunication services have declined sharply in recent years.

22. (U) Paramount Garment Works stated that poor communications
constrained its operations. It was almost impossible to place
international calls. In addition, some mobile service providers
were not allowing clients to make international calls. Security
Mills and Styles International concurred that telecommunications
inadequacies were a major constraint to expanding their markets.

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Macroeconomic Stabilization Vital
---------------------------------

23. (U) Overall, all firms interviewed agreed that the
deterioration in infrastructure had made their exports less
competitive. However, they said the biggest constraint on export
competitiveness was macroeconomic instability. Once this was
addressed, and the exchange rate was determined by forces of supply
and demand, they all felt that Zimbabwe's exports would become more
competitive internationally. They did not see the soft issue of
customs procedures as hindering exports, contrary to the 1990s when
bureaucracy was regarded as a major deterrent to exporting.

MCGEE

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