UNECA High Level Workshop UNECA High Level Workshop

PPPs in Africa’sPPPs in Africa’sEnergy SectorEnergy Sector

James Leigland

UNECA Consultant June 29, 2011 Addis Ababa

Questions

1. Why start with power?

2. Can PPPs help?

3. How much help is needed?

4. What are the key types of PPP projects in the power sector?

5. What is the biggest challenge for large power PPPs?

6. Conclusions

Why Start with Power?

Electricity infrastructure is central to economic growth and poverty reduction, but SSA’s…

“…is the least developed, least accessible, least reliable, most costly to operate, and, on average, highest priced of any region in the world.”

Source: U.S. International Trade Commission, 2009

Power sector in crisis

AICD: SSA is a global outlier

0

200

400

600SSA

South

Asia

East

Asia

0255075100

SSA

South

Asia

East

Asia

030060090012001500

SSA

South

Asia

East

Asia 0

0.030.060.090.120.15

SSA

South

Asia

East

Asia

Generation capacity (MW per million population)

Electrification rate (Percentage of households)

Electricity consumption (kWh per capita per year)

Power prices (US$ per kilowatt-hour)

Source: AICD , Preliminary Results, 2008

Impacts

• Business sector:o Face 56 days of outages per yearo Lost sales revenues

• 5-6% formal sector• 20% informal sector

o Equipment damage cost 1% sales revenueo Most large firms run generators $0.40/kwh

• Social services:o Lack of illumination/refrigeration in health serviceso Absence of lighting affects educationo Power disproportionately affects most other sectors

Causes

• Small systems:o 23 systems < 200 MW - 36 systems < 1,000 MW

• Inefficient technology:o SSA has 10% of world’s hydropower resources – less

than 1% exploited (65% coal)

• Management inefficiencies:o cost $6 billion per year

• Precipitating factors: o drought, conflict, oil price shock

Can PPPs help in

the power sector?

Widely used in developing countries

Source: PPI Project Database

Current US millions

-

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000 19

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Global

SSA

Globally, 45% of PPI went to power in 2009, in SSA only 3.5%

• Generation benefits: 2/3 of IPPs in 12 countries resulted in…

“…investment leading to power generation, at prices and quality levels that met reasonable government expectations”

(Woodhouse, 2005)  

• Distribution benefits: 160 PPPs vs. 90 SOEs… decreased distribution losses by 11% increased bill collection rates by 45% increased the electricity sold per worker by 32% increased number of residential connections by 29%

(Gassner, et al., 2009)

Global performance

• Modest spread:– ¾ have some form of PPI in power sector – 1/3 have IPP projects– 7 have more than one IPP

• Documented benefits:– IIPs have been an important source of new investment in the

power sector – the majority of projects have delivered and their contracts have

been upheld– the performance of IPPs is generally superior to that of state-

owned plants (Eberhard & Gratwick, 2010)

• Notable IPP successes: Kenya & Cote d’Ivoire

• Massive new IPP programs: Nigeria & Ghana

SSA performance

How much help is needed?

Electricity ICT Irrigation Transport WSS TOTAL

Spending needs 40.8 9.0 3.4 18.2 21.9 93.3

O&M 14.1 2.0 0.6 8.8 7.0 33.0Capex 26.7 7.0 2.7 9.4 14.9 60.4

Existing spending 11.6 9.0 0.9 16.2 7.6 45.3

O&M 7.0 2.0 0.6 7.8 3.1 20.4Capex 4.6 7.0 0.3 8.4 4.5 24.9

Funding Gap 29.2 0.0 2.5 2.0 14.3 48.061% 0% 5% 4% 30% 100%

O&M 7.1 0.0 0.0 1.0 3.9 12.6Capex 22.1 0.0 2.4 1.0 10.4 35.5

SSA’s power sector needs = 61%of required new investment

Source: AICD 2010

Actual capex – little PPI for power

Source: AICD 2010

US billions

Additional funding needed

Source: AICD 2010

US billions

Additional funding needed

Source: AICD 2010

US billions

What are the key types of

PPP projects in

the power sector?

Types of PPI projects in power

• 20 IPPs in 10 years; average size = 91 MW IPPs essential but remain marginal in SSA

SAA’s available generating capacity (without SA) (less than Argentina, Thailand, or Turkey)

• 7 distribution concessions in 10 years Important because of massive rehab needs (60% of assets)

Huge risks require extensive mitigation

Example: Umeme in Uganda

• 8 mgmt or lease contracts in 10 years Efficiency improvements crucial Seem to meet targets but often blamed for sector-wide problems Examples: Tanesco and KPLC

Regional Hydro IPPs

• The need for hydro IPP projects is clear Nepad, AU, RECs recognize the need for large hydro IPPs Power projects much more attractive over 200mw Regional hydro would allow power trading

• But performance has been disappointing STAP unsuccessful Only two national-level hydro IPP in last decade (Bui & Bujagali) Key countries: DRC, Ethiopia, Guinea Need for power “exporters” and “importers” Inga III illustrates problems with truly regional hydro IPPs

• Key role of national governments• Will PIDA help?

What is the biggest

challenge for large

power PPPs? Project preparation funding

and expertise

Upstream Phase 1: Enabling Designing enabling legislation

Preparation Environment Designing regulatory approaches

Project relevant institutional reforms

Policy reforms

Capacity building to support projects

Consensus building re projects

Phase 2: Project Identification of desired outputs

Definition Prioritization vs. other projects

Identification of project champions

Action planning (TORs, etc.)

Pre-feasibility studies

Phase 3: Project Financial modeling

Feasibility Economic, Social, Technical, and

Environmental studies

Phase 4: Project Public/private options assessment

Downstream Structuring Project finance

Preparation Legal structuring

Phase 5: Transaction Procurement/ contract drafting

Support Financial/ legal negotiations

Phase 6: Post-Signing Post-signing financial arrangements

Support 5-year tariff reviews

Renegotiation/ refinancing

Upstream preparation adds to costs in SSA

Preparation in LICs – Hugely expensive

• How much does PPP preparation cost in the UK? 2005 study of downstream preparation costs on 55 UK PPPs:

o Government = 3.5%

o Winning bidder = 3.8%

o Losing bidders = 5.0%

About 12% of capital value

• How much does PPP preparation cost in a LIC? 2010 DFID-funded study of upstream costs plus downstream

preparation costs:o Government = 3-5% (for upstream prep)o Government = 4-5% (for downstream prep)o Winning bidder = 4-5%o Losing bidders = 6-7%o Premium = 2-3% (for new/difficult sectors)

About 19-25% of capital value

Minimum total govt prep costs on a $100m IPP (72 mw) > $8m

Project preparation – What is needed?

• Who has money for PPP project preparation?

DevCo/IFC Advisory, Nepad IPPF, DBSA prep funds, REC funds, EU-Africa ITF, InfraVentures, WB trust funds (PPIAF, GPOBA, etc.), PIDG facilities

But not enough money or expertise for large PPPs

• What happens if grant funding is insufficient? Delayed start-up, delayed draw-downs Rigidly sequential preparation Increased costs, overall delays, project misfires

• What is needed? Special donor funded facility for large project preparation To provide funding plus preparation expertise $300 million needed for 3-year pilot period – just for power

• Power is central to growth & poverty reduction• But SSA’s power sector is in crisis• PPI in power is important in other regions (44% of PPI)• But only 3.5% of total PPI in SSA – a fraction of total capex

needed in the sector• Regional power PPI needed for size, access to hydro

power, and power trading – but even more difficult to do (never been done)

• Changes needed in govt attitudes, capacity, and enabling environments to facilitate more PPPs

• More grant funding needed for project preparation• Minimum $300 million needed now for 3-year pilot facility –

just for power

Conclusions

Thank you