PPPs and PS Involvement in Energy Sector Development

Sam Cho, Ph. D

UNECA-GPAD

 Outline

I. PPPs in Africa – rationale & PPPs in development

II. Financing – sources, gaps and experiences

III. The Main PPP Challenge in SSA’s Power Sector

IV. Main Success Factors

V. UNECA in Promoting PS Participation and PPP Implementation 

I. PPPs in Africa

Rationale -Why PPP in Africa? Needs and Gap in Infrastructure and

ServicesStrengthening Africa’s infrastructure requires

massive investmentsLarge capital needs to invest in infrastructure

- for development and competitivenessOverall infrastructure gap: estimated at $40

billion per year between 2005-2015New Study: $75 billion deficits

Rationale - Why PPP in Africa? Gap in infrastructure, especially under-investment in

new sectors Public Sector Constraints – Source of Financing

Traditionally, infrastructure development has mainly been the domain of the public sector

Governments, however, can’t meet the growing demand for infrastructure and services

Constrained public capital due to deficits and/or prudent fiscal management lead to decreasing public expenditure on infrastructure

ODA – unreliable and decreasing ODA estimated share on infrastructure is: 21%: that

include transport, energy, communications Therefore, need for funding mix – to shift away from

governments towards PS investment

Problematic Factor for Doing business in Africa

Two main impediments to PS business – financing & poor infrastructure

In Africa, PPI role for energy sectoris much lower than in other sectors/regions

Source: AICD 2010

Growing Demand for PPPs in Development

PPP is a direct response to the challenge of development PPP can effectively combine the resources of private sector

and inputs of public sector Private sector: access to finance, business experience,

technical expertise, and entrepreneurship Public sector: accountability, legal framework, regulations,

social responsibility, and an enabling environment PPP implemented as an alternative for privatization PPP is situated between government monopoly and

complete privatization can avoid some of the pitfalls of privatization: i.e. unemployment, higher prices and corruption

PPP vs. privatization: In PPP, government enters into a long term business relationship with the PS oversees the public interest for quality, safety and certainty therefore, governments retain ownership

Risk allocation is a key issue in PPP – Usually, the government assumes non-commercial risk, while the PS takes care of the commercial risk

II. Financing

Domestic sources: Insufficient and limited

National saving is extremely low, Available bank funds for long term finance is

limited, banks face an asset –liability mismatch, The financial market is shallow and have limited

financial instruments, (there is no secondary market for securities),

There is no independent sovereign credit rating institution in most countries,

Public bond market (BM) is underdeveloped. In most countries, CB doesn't have BM for pricing risks and corporate bonds,

Institutional investors - such as pension and insurance funds - are small and constrained by legal institutional capacity

External Sources of Financing

International banks - Usually, they prefer short-term, and require credit enhancement to mitigate risks – both political and economic;

Private Infrastructure Fund : Mostly in the form of equity and/or debt finance. This source has dried out recently following the global financial crisis;

Multilateral and bilateral donors : This source is used for technical support, financing of infrastructure, and for credit enhancement. Major sources of fund Include AFDB, WB, EU-Africa Infrastructure Trust Fund, Italy, UK, etc; and

Sovereign Wealth Funds: SWF loan from middle income countries – China (China Africa Investment Fund), India, Gulf States (Dubai Investment Capital)

Sectoral funding gaps

Source: AICD 2010

Approaches to overcome infra financing gap Identify and prepare bankable projects for PPP- based

on sound economic and financial feasibility study and a realistic assessment of risks,

Most infrastructure projects might not necessary be bankable - due to: High and front loaded cost, presence of redistributive factors in pricing outputs, long pay–back period and possible risks including forex risks,

Investment projects require supplementary finance to make them bankable through public sharing of the cost, using various funding mechanisms.

Among the mechanisms include Viability Gap Scheme (VGS), Financial Intermediary Loan (FIL).

Experience in IPP financing schemes

Viability Gap Scheme: The scheme allow public financing to fill capital investment funding gap at initial stage of the project so as to make the project viable,( the source of fund could be government budget, or external source particularly, ODA, etc),

Max allowed VGA share is across economies: a) India =20%, Ghana= 50%.

Financial Intermediary loan (FIL): This facility is used for long term local currency components of a project.

Experience of PPP investment in power sector in Africa (2000-09)

No of projects US $ Mill

Greenfield concessions 25 5237

Brownfield concessions 11 1461

Mgmt/Lease 28 106

Other PPIs : Divesture full/partial)

5 436

Other PPIs (Merchant projects)

0 0

TOTAL 69 7241

III. The Main PPP Challenge in

SSA’s Power Sector

Key issues in PPP

Consensus building Lack of consensus on benefits of PPPs - ideological

differences and limited experience Misunderstanding/different understanding of PPP concept PPPs are not a panacea – certain successful cases, while

there are failed cases PPPs, in some cases, are not politically acceptable:

concerns about price increases and exclusion of the poor Perceived uneconomical projects such rural infrastructure

attract less interest from private sector PPPs resulted in creation of new monopolies in some

African countries

Key issues in PPP Investment climate and regulatory framework

Image of Africa in doing business environment and investment climate improving but more needs to be done

Limited base of entrepreneurial and financial capital to participate in privatizations or PPP (in bidding for assets) a limiting factor in expanding PPPs

Uncertainty in legal and regulatory environment Lacking of transparency (and rule of law) raises questions

about the credibility of PPPs; results in negative views on PPPs

Most PPPs require credit enhancing scheme and hence supplementary guarantee fund from abroad

Public sector: capacity building for PPP implementation Performance of PPP projects depends on capacity of public

sector Limited capacity of African governments to plan, negotiate

and manage PPP projects – including lack of technical and collaborative skills

Weak domestic private sector marginalized in PPP projects need to improve local participation

Key issues: Project Preparation

What does NEPAD’s STAP tell us about PPP project prep in SSA?

NEPAD STAP evaluated several times since 2003 Many STAP projects were politically driven, wish-list

projects Fundamental misunderstanding re project preparation

(what is it, how to do it, how much does it cost) What is PPP “project preparation”?

Different costs (& cost-recovery options) for: lenders, governments, private bidders (winning vs. losing bidders)

Upstream preparation vs. downstream procurement & transaction work

Cost & difficulty reflected in in popularity of greenfield project (60% in LICs) -- Lack of performance data reflected on brownfield systems

Key issues in PPP

Upstream          Scoping and prioritizing project conceptsPreparation          Strategic options studies

         Surveys and tests         Policy diagnosis and reform/adjustment         Arrangements for managerial and financial mgmt support         Arrangements for procurement support         Preparing operations manuals         Training and workshops         Adjustments to governance frameworks         Project pre-feasibility and feasibility studies          Studies of environmental, social and other impacts         Preparation of safeguard instruments for donors and MDBs

Downstream          Preparing TORs for consulting services to implement the projectTransaction          Structuring the PPP arrangement

         Business case analysis of PPP affordability, VFM, etc.         Preparation of bid documentation needed for PPP         Procurement and contract negotiation

o   Issuing Request for Expressions of Interesto   Bidder pre-screeningo   Issuing RFPo   Evaluating proposalso   Negotiations with preferred biddero   Final contract award

Project Preparation

How much does PPP preparation cost in the UK? 2005 study of procurement/transaction costs on 55 UK PPPs:

Government = 3.5% Winning bidder = 3.8% Losing bidders = 5.0%

About 12% of capital value How much does PPP preparation cost in a LIC?

2010 DFID-funded study of procurement/transaction costs plus upstream preparation costs:

Government = 2.0% (for upstream prep) Government = 3.0% (for procurement/transaction) Winning bidder = 4.5% Losing bidders = 5.5% Premium = 2.0% (for new/difficult sectors)

About 17% of capital value

Total government prep. Costs on a $100m IPP (72 mw) > $6m

Who has money for PPP project preparation?

The World Bank, EU-Africa ITF, InfraVentures, PPIAF, NEPAD IPPF, DBSA preparation fund, REC funds, etc.

But not enough: doubling PPI in SSA’s power sector ($7.3 bn in new investment) will require $438m in prep costs

What happens if prep money 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 project preparation

Project Preparation (cont)

IV. Main Success Factors

Government Actions to Improve the Availability of Finance and the Effectiveness of PPP

Clear sector policy strategy and identified projects for PPP;

Strong macro economic environment and a strong country credit rating;

Legal and regulatory framework for PPP; Good governance structure and implementation

capacity; Good upstream project analysis including realistic

assessment of the risks and risk sharing arrangement; Rationalized structure of PPP contract; Insurance and credit enhancement system; Implementation capacity to avoid delay and reduce

transaction costs in the implementation of IPPs ; and Institutional quality (incl. avoid price paddling,

corruption) in setting up PPA .

Success Factors - Country Level

Favorable investment climate More bidders Cheaper finance (project finance)

Clear, implemented sector policy Transparent regulation – do regulators help

or hurt PPPs? Planning – PPP vs. SOE roles clear? Competitive procurement – fewer problems if

more than one bidder Managing contingent liabilities

Success Factors - Project Level

Strong equity partners Previous country experience Developing country risk experience

Favorable debt arrangements (DFIs) Secure revenue (e.g., in power):

Creditworthy off-taker (guarantees helpful) Hard currency PPA (but costly for govts)

Size matters: in power: >200 mw more attractive

Transaction skills: negotiate, renegotiate, ongoing strategic mgmt

Project preparation: adequate resources needed

V. UNECA in Promoting PS Participation and PPP

Implementation

UNECA Private Sector Development Priority Areas

PSD Fostering enabling environment; Supporting the development of micro and SMEs;

Enhancing role of PS in development Promotion of private investment; and PPP and Participatory approach in public service

delivery – Primarily energy / new and RE

UNECA activities & support to member countries

Knowledge products through research, and publications, ( e.g. background papers, Handbook on PPP in Africa);

Establish platform for knowledge and experience sharing across member countries;

Advisory services & TA to member countries,

Facilitate better access to innovative financing instruments; and

Facilities coordinated support from international and regional institutions.

PPP Related Activities 2012 UNECA-AfDB-AUC Tripartite Joint Event

All Africa Energy Week (AfDB) Conference of Energy Ministers (AUC) Pan-African Investment Forum (UNECA)

Establishment of PPP Working Group in Africa – for concerted efforts & coordinated support in delivering a series of PPP outputs Members of the PPP WG incl: AfDB, AUC, WBI, IFC, ICA,

UNECA, and representatives from African governments, and regional power pools

Priority areas include new and RE, investment promotion, project finance, and capacity building within the member states and power pools

Thank You!