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Katharine Nawaal Gratwick & Anton Eberhard Management Program in Infrastructure Reform and Regulation. Lights out: investment conundrums and solution A survey of independent power projects in Africa. www.gsb.uct.ac.za/mir. Lights out.
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Katharine Nawaal Gratwick& Anton EberhardManagement Program in Infrastructure Reform and Regulation Lights out: investment conundrums and solution A survey of independent power projects in Africa www.gsb.uct.ac.za/mir
Lights out Source: Horvei (2005), IPP Development in Southern and South Africa: Current experience and future challenges, for “IPPs and PPAs: Frontiers in International Experience” Graduate School of Business, UCT,
What is RSA/Eskom doing? DSM 2 new OCGTs: Atlantis & Mossel Bay (1000 MW) 2 OCGT IPPs: Eastern Cape, Kwazulu Natal (1000 MW) 3 mothballed plants: Camden, Komati & Grootvlei (3,800 MW) Import projects: Kudu, Botswana coal plant
Status of RSA’s IPP program With RfP 7 months late: now expected: Bids: 3Q2006 Preferred bidder: 1Q2007 Financial close: 2Q2007 COD: 1Q2009 “We will not compromise on these deadlines” (Sept 2005, Nelisiwe Magubane, Deputy Director General)
Distinguishing features of RSA IPP projects • A changing reform environment: no longer plans for competition in the mkt, only for the mkt, at the margins • 2 plants • BEE • IPPs have access to local capital markets • Cost Recovery Mechanism & contract nullification • Changing timelines • Offtaker (Eskom) may access local & int’l capital, i.e. presently no capital scarcity (but to track/determine efficiency we need a private sector comparison)
International investment experience: early promise and then collapse SSA 6% of total funds, at height in 1997 World Bank PPI database
At the end of the 1990s… • Mutual renegotiation • Philippines (29 of 35 contracts renegotiated) • Thailand (most contracts renegotiated) • Unilateral renegotiation • Malaysia (most contracts renegotiated) • China (most contracts renegotiated) • Refusal to honour contract • Argentina (refusal to raise tariffs) • India (refusal to honour state guarantees for Dabhol) • Creeping expropriation • Mexico (stalling extension of natural gas pipeline) • Cancellation • Indonesia (27 contracts cancelled) • India (Dabhol) What is the experience in Africa?
IPPS in Africa Tunisia Morocco Egypt Burkina Faso Senegal Ethiopia Congo, B Cote D’Ivoire Ghana Kenya Nigeria Tanzania Developing world: 456 IPPs Africa: 27 IPPs (6% of total) in 14 countries Angola Mauritius
Scope of our discussion & research methodology • greenfield investments in generation by the private sector, in the form of Independent Power Projects (IPPs) • cases from Africa (Egypt, Kenya, Morocco, Nigeria, Tanzania, Tunisia), part of a global developing country study* • identifying factors that impact development & investment outcomes, recognizing that a sustainable investment is one where outcomes are in balance
Background to deals: mind games & the obsolescing bargain What’s in the mind of the investor and the public utility before they commit to a project? Are they at odds? And what’s the consequence? Obsolescing Bargain Theorypredicts that: bargaining position of foreign investor changes once heavy infrastructure built. Original deal becomes obsolete and host country can potentially expropriate the benefits. Investors try via risk engineering to lock up all risk in the contracts.
Evaluating IPPs: emerging country factors (1 of 2) 3 country level factors
Evaluating IPPs: emerging project factors (2 of 2) 6 project level factors
Inventory of projects (1 of 2) Countries evaluated: 3 (+3 ongoing) Projects evaluated: 9 (+7 ongoing) Technology/fuel: diesel generators (East Africa), OCGT (Egypt, Nigeria), CCGT (Tunisia/Morocco, Nigeria), Coal (Morocco), Geothermal (Kenya), Wind (Morocco) Investors (debt/equity): local, multilateral, development-minded firms (Globeleq, IPS) US/European multinationals (AES) PPAs terms: generally 20 years, main exception is Kenya, and BOO agreements Government guarantees: Egypt, Tanzania
Spotlight on Kenya: Electricity production by resource (1990-2004)
Plant Availability: IPP vs. KenGen thermal (2004-2006) IPPs: 95% vs. KenGen thermal: 60% Operating history (1996-2006): Westmont: 77%. Iberafrica: 89% Tsavo: 92% OrPower: 98% IPPs KenGen thermal
Capacity Utilization of IPPs vs. KenGen IPPs: 65% vs. KenGen thermal: 42%
Kenya: results & determining factors 4 IPPs on the ground (190 MW,15% of total), but development and investment outcomes mixed Westmont* sits idle off Mombassa; OrPower4** developed only 1/3 of its capacity Project management: Iberafrica*** reduced capacity $ voluntarily then negotiated 2nd PPA with charges ½ of original (challenging obsolescing bargain theory) Regulator playing significant role in tariff reductions for all IPPs ERB …publicly funded plants and one IPP in pipeline *Westmont generally refers to 1st IPP; **OrPower4 generally refers to 3rd IPP; Iberafrica generally refers to 2nd IPP (4th IPP was/is Tsavo).
Our findings: what factors made a difference in outcomes? (1 of 2) • Macroeconomic shock: currency devaluation and dollar-denominated PPAs (Egypt, less impact for RSA, with (some) local currency financing) • Coordination among stakeholders, i.e. donors, gvt ministries and Power Master Plan (TZ, evidence in RSA) • International competitive bidding practices (All, evidence in RSA) • Selecting bidders with ‘staying power’ (All & RSA) • -a new type of developer, IPS, • Globeleq, (Tata, YTL)
Our findings: what made a difference in outcomes? (2 of 2) • Locally available fuel supplies (Egypt, imported in RSA) • Incumbent fuel, comparison exacerbated during drought (TZ & Kenya, coal comparison in RSA) • Availability of Government guarantees (RSA, no guarantee and CRM failure risk) • Presence of an independent regulator • (RSA’s NERSA may play this role)
CONTRACT The way forward • Global developing country study (PESD) indicated that IPP success was a function of risk engineering but esp strategic management, challenging Obsolescing Bargain • Strategic management features prominently in African case studies to date with: • Tsavo standing out for its community fund • Iberafrica’s voluntary reduction in tariff (in contrast to Westmont) • Egyptian IPPs negotiating local currency payments • Tanesco availing non-payment of debt option Our next goal is to test the role of informal and formal contracts in the sustainability of projects
Appendix B: typical IPP contracts & stakeholders Providers of debt Lenders Shareholders EPC Contractor Loan Agreement Shareholders agreement EPC Contract Power Purchase IPP Project Company Agreement Fuel suppliers Power Off-taker FSA O&M Contract Permit License Government Concession Environmental Authorities Regulator O&M Contractor Government Source: Clive Ferreira - Fieldstone Modified from Clive Ferreira, Fieldstone
Appendix C: Project Risks & Mitigation Risk Mitigation Construction • Turnkey, lump sum, date certain contract • Liquidated damages for performance failure • Late completion • Reduced output • Inefficient (high heat rate) • Environmental compliance • Fixed fee contract with performance bonuses • Operational guidelines and penalties/termination for performance failure Operational • Low availability • High operating cost • Reliable fuel supply to specification • Adequate resources for life of project (PPA) • Proven reserves - fixed price • Alternative supply obligation • Liquidated damages for delivery failure Fuel Supply Source: Clive Ferreira - Fieldstone Source: Clive Ferreira, Fieldstone
Project Risks & Mitigation (Cont.) Risk Mitigation Revenue • Long term power purchase agreements (fixed) • Escrow accounts • Creditworthiness of Power Purchaser • Utility • Industrial User • Municipality • Demand for electricity Force Majeure • Force Majeure for unforeseen circumstances • Usually insurable • Strikes and labour disputes usually contentious issue • Parties to receive payments from power purchaser under Force Majeure Source: Clive Ferreira - Fieldstone Source: Clive Ferreira, Fieldstone
Sustainable IPPs and PPAs? • Conceptually simple (apparently) – but complex in detail because of difficulties in managing risk – political, legal, regulatory, commercial and social • Changing incentives for politicians, regulators, developers and financiers under conditions of asymmetric and imperfect information can lead to project conflicts and risks that are difficult to manage • Interaction with ongoing reform process? • Emergence of new kind of IPP firm: they combine modern management (market) with political connections (state); they are nimble, efficient, and can mobilise local and international capital and hedge and manage risk politically • Managing dynamic instability!
