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DAM-L Indep. power development in Africa/LS (fwd)
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Date: Wed, 17 Oct 2001 14:59:22 -0700
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From: Lori Pottinger <lori@irn.org>
Subject: Indep. power development in Africa/LS
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An analysis of the financial side of developing private-sector power
projects in Africa; Bujagali is seen as a key project.
From Project Finance Magazine (from a web site)
IPP development in much of Sub-Saharan Africa has been crippled by
political risk. With global liquidity shrinking, can deals like
Kipevu and Bujagali, new infrastructure funds and power restructuring
restart the market. By Natasha Calvert
Power markets across Sub-Saharan Africa are hungry for private
investment. Cumbersome state utilities are bankrupt and unable to
meet growing demands for generation capacity. IPPs are emerging, but
are not easily swallowed by the debt markets. In a climate of
well-documented political and economic volatility, wooing the private
sector is far from straightforward. Innovative financing structures
are needed to create the level of comfort demanded. The problems
facing power generation in Sub-Saharan Africa are many and diverse.
Crippling floods in Mozambique during 1999 and 2000 shut down the
country's largest plant, the Cahora Bassa hydropower power, only a
year after it reopened following the civil war. Kenya is attempting
to move away from dependence on hydropower since droughts rendered
much of its installed capacity useless. Tanzania also fell foul to
severe shortages following low rainfall in the dam catchment area at
the end of last year. Rwanda's deficit currently stands at 5MW
although this is projected to grow as the country rebuilds
infrastructure destroyed in the 1994 genocide.
IPPs are needed but there are significant obstacles. Foremost is
political risk, prevalent to varying degrees all over the region.
Until the bloody elections in 2000 and subsequent civil disruption,
Ivory Coast was hailed as an example of relative political and
economic stability. Now it is used by sceptics amongst private
investors to demonstrate why the region is best avoided altogether.
Sub-Saharan Africa remains untouchable for investors without
watertight cover in the form of multilateral support, government
guarantees or political risk insurance. For the most part, IPPs have
been funded by global power majors that have taken out large
political insurance packages.
Kipevu benchmark
May 2000, however, was witness to a benchmark deal that could be
copied widely across the region. The Kipevu II project in Kenya
became the first openly bid BOOT concession for an IPP to close with
an element of commercial bank backing. The concession for the $86
million, 75MW plant was awarded to lead developer, Wartsila NSD Power
in 1998. Wartsila has retained 15.1% in the project company, Tsavo
Power, and the remainder is held by CDC Group and a joint venture
between Cinergy Global Power Ltd. and Industrial Promotion Services
Ltd. IFC has also injected $1.05 million of equity. Construction of
the plant is now almost complete, with test runs underway and the
first invoice due to go out next month. A 20-year PPA is in place
with the national electricity utility Kenya Power and Light Company
(KPLC).
Debt was raised by lead arrangers IFC and Deutsche Investitions- und
Entwicklungs-gesellschaft (DEG) to create a debt/equity split of
75:25. Senior debt amounts to $49 million, including direct loans
from IFC and DEG to the tune of $16 million and $11 million
respectively. The balance is made up with an IFC B loan, syndicated
to a group of commercial banks. A further $4.6 million contribution
comes in the form of mezzanine debt put together under an IFC C
umbrella.
Syndication of the B loan was described as difficult by a
spokesperson involved in the deal. Citibank originally agreed to come
on board but pulled out just as financial close was looming. This has
been put down to a combination of country and offtake risk, with
emphasis on the latter. KPLC was born in the 1990s when Kenya's
energy sector came under pressure to reform. The national utility was
split, with KPLC running the distribution and transmission and Kenya
Electricity Company (KenGen) operating the generating capacity. KPLC
began trading stock and although it has a fairly strong operating
record, KPLC is believed to have inherited considerable debts and
operational deficiencies from its parent.
Following the loss of Citibank, Warstila approached a group of
Finnish institutions to fill in. MeritaNordbanken, Leonia Corporate
Bank and WD Power Fund came in on the B loan, while the Dutch
development bank joined both the B and C tranches.
Since KPLC is not a state-owned entity, the offtake does not have a
sovereign guarantee inherent and the government refused to issue one,
despite pressure from lenders. With the risks in mind, comfort was
sought elsewhere and found in the form of an escrow account. KPLC's
customers within a designated revenue circle deposit their monies
into an account, which is enhanced by a three month letter of credit.
The amount builds up to about 140% of KPLC's required monthly payment
and the debt is serviced from this. However, if the letter of credit
is drawn, then the account must keep building until it is reinstated.
This model was based on one used previously in India. "Its
application in Africa sets an important precedent as it moves away
from financing structure based upon government guarantees and is one
small step towards breaking down the barrier to commercial bank
financing in the region," says Jeremy Connick, partner at Clifford
Chance, advisers on the project.
If successful, this is a structure that could be repeated for IPPs
across Sub-Saharan Africa. However, it pivots on the role of
multilaterals, whose involvement is conditional on the pledge to
create a transparent and competitive market. Kenya began making
significant steps in this direction in the 1990s after suspension of
international aid led to a decline in its energy sector, but it is
not in the clear yet. KPLC's inheritance of debt, coupled with its
subsequent aggressive policy of securing PPAs, has caused some alarm.
Asad Yaqub, investment officer for the IFC states, "the area
designated to service Kipevu's debt has a strong cash flow but for
the country as a whole, the energy sector might run into money
problems."
Connick agrees that the government's commitment to reform of the
energy sector is the key and goes on to say that the Ugandans have
set the conditions for privatisation well. "They are restructuring
their energy sectors and privatising in an attempt to raise a
sensible amount of money." Pre-qualifications have been submitted for
20-year concessions on the Ugandan Electricity Generation Company and
the Ugandan Electricity Distribution Company. Bidders can apply for
both but in the interests of transparency it is unlikely that one
company would be awarded both. The concessions will not demand huge
upfront sums, with the aim rather being to attract a steady stream of
investment over a number of years. Estimates suggest that the
generation sector requires roughly $7 million and the distribution
$50 million. Any potential investors will have had their confidence
inspired by the recent and significant increase in tariffs. The
government has pledged to end subsidisation of power within a year.
Bujagali Hydro
A crucial component in kick-starting this process is the successful
financing of AES' 250MW Bujagali hydropower project, which has been
in the pipeline for years. Without the promise of this, which should
take installed capacity up to demand, the concessions look decidedly
less attractive. Delays have largely been due to environmental
opposition, with the major issue being removal and compensation of
communities currently living on the designated area. However, it is
now believed to be back on track, with document signing due at the
end of the year.
The architects of Bujagali's financing structure can take some
lessons from those learnt at Kipevu. There are a number of
similarities, including the creation of an escrow account. Commercial
banks will be invited on board, although it is likely to be under a
political risk insurance program rather than an IFC umbrella.
Arrangers are IFC, African Development Bank and World Bank.
Power from Bujagali will rather be used to supplement capacity all
over the country. Because of the size and significance of its
successful operation, the Ugandan government is issuing a guarantee
to the lenders. Although a good solution for landlocked Uganda that
has no access to oil or gas, this is not likely to be repeated. In
the context of restructuring and transparency, most governments are
trying to move away from issuing guarantees. It is the Kipevu model
that will be much easier to replicate. A smaller plant feeding a
specific area can create a designated revenue circle to provide the
necessary comfort.
Other countries, including Zimbabwe and Zambia have also pledged
restructuring programs, widening the opportunity for private
investment. Charles Liebenberg, head of power project finance,
Standard Bank, points to possible hydropower plants in DRC. It seems
that attitudes amongst private investors are changing, albeit very
slowly. Multilaterals will remain a crucial component of any
successful IPPs, although other sources of capital can be identified.
An increasing number of special purpose funds are emerging. The UK
DFID has recently initiated the Africa Private Infrastructure
Financing Facility (APIFF); set up to offer long term debt financing
for private infrastructure projects in Sub-Saharan Africa. A
consortium comprising the Standard Bank Group, Barclays Africa, the
Netherlands Development Finance Company and Emerging Markets
Partnership has secured the mandate to provide the finance and manage
the fund.
The development of capital markets is a hot topic and most countries
are trying to stimulate growth. Charles Liebenberg suggests that,
"DFI facilities can be utilised to enhance projects and selected
elements of political risk and as such create opportunities to raise
medium to long term debt in domestic capital markets." A glance
towards Latin America proves that capital markets can be built up,
but it takes time. Liebenberg also points to an alternative, "oil
producing countries such as Angola and Nigeria generate $ revenue and
if project debt can be attached to that, the deals become more
attractive for lenders. If political risk is then sufficiently
mitigated the deals become bankable."
Certainly power starved Nigeria is in need of IPPs but many believe
that despite its oil rich status, it will have trouble realising its
ambitions. The political and commercial risks associated with this
county may be insurmountable. (See Box)
As many of Sub-Saharan Africa's energy sectors do successfully
implement restructuring programs and IPPs start emerging,
opportunities for trading power will also grow. Fluctuating political
relationships will arrest full liberalisation, but as private
investment becomes more commonplace, so power will flow across
borders with greater ease.
Trade in power is not a new phenomenon in Sub-Saharan Africa. South
Africa has been the major driver to date, with Eskom generating about
70% of the region's capacity. Other countries also have a history of
trading, particularly DRC, Zambia and Zimbabwe within the Southern
African Development Community (SADC) and Kenya and Uganda have long
had links.
Until the mid 1990s poor infrastructure seriously hampered the extent
of trade. But key transmission links between South Africa and
surrounding countries have now been put in place. Parallel to
developments in infrastructure, a Southern African Power Pool (SAPP)
was set up in 1995. Co-ordinated from Harare, the SAPP incorporates
all the SADC countries and aims to allow members to alleviate power
shortages and source comparatively cheap power. The key to its
success is that South Africa's coal fired base load capacity
complements hydro-based power sectors, suitable for peak capacity,
elsewhere. With a major transmission line planned from northern
Tanzania to Nairobi, Kenya and Uganda could also become incorporated
into this expanding pool.
South Africa has predicted that it will need more capacity within the
next five years. With a trade in full swing, IPPs in neighbouring
countries that had succeeded in injecting liquidity and introducing
competition to their power sector could compete with South Africa's
de-regulated generation sector. (See Box)
IPPs are certainly becoming a more common scene on the landscape of
Sub-Saharan Africa. In the context of successful restructuring
programs, innovative financing techniques have allowed some success.
But the region will remain a difficult host for financing projects of
any nature. Cash strapped and politically volatile, most of the
countries have difficulty attracting funding in time of global
economic boom. As world liquidity shrinks and investors shy away from
emerging markets, Sub-Saharan Africa is likely to be first to feel
the neglect.
Nigeria
Despite its oil rich status and burgeoning industries, Nigeria is
starved of power. Industrial development is severely hampered and
June saw a third of the country plunged into darkness for up to two
weeks. In an attempt to combat this, the government has announced
ambitious plans to privatise NEPA and commission a large number of
IPPs. A tender has been launched for advisory roles on the
privatisation process.
To boost generation pending the privatisation of NEPA, the government
has launched a program of Emergency Power Projects (EPP). The much
publicised Lagos IPP falls under this category, aiming to fast track
supply of 290MW to Lagos state. Originally an Enron project, January
2001 saw the majority stake pass to AES at a cost of $225 million. A
Nigerian consortium, Y. F. Power holds a minority share. The
generating barges began injecting 60MW into the national grid last
month and should be performing at full capacity by the end of the
year. A second diesel powered EPP is under construction in Abuja by
Aggreko Inc.
A more long-term development is the advent of state initiated IPPs.
These were inspired following a decree in 1999 designed to reduce
NEPA's monopoly. The first fruits were born with the opening of a
20MW plant in the oil city of Port Harcourt in May of this year. The
Rivers State has another two planned. To really address the country's
power shortages, however, Nigeria is going to have to commission
large, privately funded IPPs. There has been a lot of talk. AES are
in discussions over IPPs in Ughelli and Agbara. A state-initiated
project in Akwa Ibom has been commissioned to a sponsor LYK Group,
which is in discussions over the financing.
And it is on the ability to successfully find funding that the future
of these state-initiated IPP dreams depend. A spokesperson from AES
predicted being able to raise debt finance with the aid of
multilaterals and political risk insurance. The company has also
stated an intention to refinance the Lagos EPP project.
Some people seemed less confident. Nigeria is regarded as having very
significant political risk and many cited a question mark over who
might actually lend in. It is rumoured that despite efforts of the
current government to reduce corruption, even multilaterals would
avoid IPPs in Nigeria. A different view emphasised not the political
risk but the inefficiencies and lack of cash flow of NEPA.
Privatisation has been on the cards for years but never got off the
ground. And on the subject of refinancing, one banker pointed out
that it would be very difficult to find interested parties.
'Multilaterals generally prefer greenfield projects and Export-Import
banks are not going to be interested once the goods have already been
exported.'
In the end, the best hope for boost Nigeria's power generation may
not come from traditional power companies. Exploration and Production
(E&P) companies have been coming under increasing pressure from the
Nigerian government to reduce gas flaring. This has culminated in a
series of MOUs between the government and E&P companies to develop
IPPs. 'The major attraction for the E&P operators is that the IPPs
provide the vehicle to reduce gas flaring and thus allow them to
qualify for the development of associated new oil fields,' explains
Mr. Godwin Ize-Iyamu, deputy general manager, corporate banking,
United Bank of Africa. To provide comfort to the private companies,
they will develop the plants in a joint venture with the country's
national oil company, NNPC. The inclusion of NNPC in part mitigates
the offtake risks associated with NEPA through agreed wrap around
structures. As Ize-Iyamu points out, E&P companies have traditionally
financed their activities with equity. Moreover, if they do go the
non-recourse route, they have the added bonus of oil revenues to link
to then debt.
South Africa
South Africa is not hampered by the same problems as many of its
neighbours but it certainly has its own. Having recently been cited
as investment grade and with very deep capital markets, there are a
lot of available funds. 'At the moment there are simply not enough
projects,' points out Jacobus Vlok. The major sticking point is the
much discussed restructuring of state giant Eskom. The government has
stated that this will fulfil the dual aims of promoting black
economic empowerment and increasing economic efficiencies in the
energy sector. Strong resistance has arisen, however, from within the
politically powerful union group Cosatu, which objects on ideological
grounds to what they see as a step in the direction of privatisation.
The government has remained dedicated to its aims, announcing that
Eskom will be divided into separate generation, transmission and
distribution companies. The latter is likely to remain a state
monopoly, while the distribution amalgamates with existing local
authority distributors. The newly created regional electricity
distributors will then work towards rural electrification programs,
which will require cross subsidisation. A further issue in the
restructuring process is the outstanding debts many municipalities
have with Eskom and can't repay. In the generation sector competition
will be introduced systematically. The first step is to separate the
power stations into a number of independent competing generation
companies owned by the state, before selling some off. It is
estimated that 10% will be made available for black economic
empowerment companies by 2003.
The government has pledged to introduce competition and commission
IPPs in order to meet the country's growing demand. A benchmark is
expected during the next month with financial close of the country's
first IPP. A 20-year concession has been awarded to AES for the
refurbishment and operation of 40-year old Kelvin power station in
Johannesburg. Although a significant step and proof of the
government's commitment, this is unlikely to open the floodgates.
Kelvin was a one-off tender for refurbishment of a plant that would
otherwise of had to be shut down. It is unlikely that substantial
investment could be attracted before Eskom's restructuring is well
under way, paving the way for a transparent environment. If the
proposed $1 billion greenfield Cape Power Project was to become a
reality, the scene might be set. But progress on this has not moved
beyond off the drawing board.
With a commitment to introducing competition, the need for more
capacity, liquidity in local markets and increased activity in gas
exploration South Africa is likely to see a market for IPPs
flourishing before many of its counterparts. But lessons learnt from
previous attempts to restructure utilities in the country suggest
that project financiers probably shouldn't pack their bags quite yet.
Ryan Hoover
Africa Campaigns
International Rivers Network
1847 Berkeley Way
Berkeley, CA 94703
USA
Phone: (510) 848-1155 Fax: (510) 848-1008
www.irn.org
--
::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::
Lori Pottinger, Director, Southern Africa Program,
and Editor, World Rivers Review
International Rivers Network <'})))>><
1847 Berkeley Way, Berkeley, California 94703, USA
Tel. (510) 848 1155 Fax (510) 848 1008
http://www.irn.org
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