Creating an Enabling Public Private Partnership Environment to Harness Kenya’s Power Potential as a Catalyst to Achieving the Objectives of Vision 2030
By Sonal Sejpal & Aleem Tharani
Posted: 4th July 2013 08:50Introduction
Kenya’s national development agenda is anchored on the “Kenya Vision 2030” Policy (the Vision 2030 Policy), which aims to create “a globally competitive and prosperous country with a high quality of life by 2030”. The Vision 2030 Policy has identified power generation as a key foundation and one of the infrastructural “enablers” upon which the economic, social and political pillars of this long-term development strategy will be built.
Public Private Partnerships are seen as an important tool for producing an accelerated and larger pipeline of infrastructure investments in Kenya and reducing the infrastructure deficit in the country. It is therefore envisaged that a large majority of the flagship projects under the Vision 2030 Policy will be implemented on the basis of joint ventures between the public sector and the private sector.
With this background we shall consider the current environment in Kenya for undertaking public private partnerships with an emphasis on the power sector.
The Legal Framework
We now have regulations which enable government to undertake a public private partnership in accordance with the provisions of the Public Private Partnership Act 2013 (the PPP Act). The provisions of the PPP Act apply to every contract for the financing, construction, operation, equipping or maintenance of a project or for the provision of public services undertaken as a public private partnership (PPPs).
The Relevant Institutions
The PPP Act creates a new framework under which PPPs can be undertaken. This new framework can be summarised as follows:
a) The PPP Act establishes the Public Private Partnership Committee (PPP Committee) whose functions include ensuring each PPP agreement is consistent with the PPP Act, formulate policy guidelines on PPPs, approve project proposals and approve project lists;
b) The National Treasury is required to establish a PPP unit (the PPP Unit) whose role includes to serve as the secretariat and technical arm of the PPP Committee and provide technical, financial and legal expertise to the PPP Committee and any node established under the PPP Act; and
c) Each governmental authority is required to establish a PPP node (PPP Node) whose functions include: the identification and screening of projects, the preparation and appraisal of each project agreement to ensure viability, to ensure parties comply with the PPP Act, to undertake the tendering process and monitor implementation of agreements.
It is necessary therefore that PPP Projects be pursued within the new framework requiring interaction between the relevant governmental authority, the relevant PPP Node, the PPP Unit and the PPP Committee of the National Treasury.
A Qualifying PPP
The PPP Act imposes certain obligations on governmental authorities to ensure that PPP opportunities are properly investigated prior to being adopted. In this regard the PPP Act requires a governmental authority proposing to enter into a PPP to, amongst other things, undertake a sector diagnostic study and assessment covering the following: (i) technical issues; (ii) legal, regulatory and technical frameworks; (iii) institutional and capacity status; and (iv) commercial, financial and economic issues.
Privately Initiated Proposals
The PPP Act provides that a governmental authority may consider a privately initiated investment proposal for a project without subjecting the proposal to a competitive procurement. For such a proposal to be pursued there must be, amongst other things, an urgent need for continuity in the construction, development, maintenance or operation of a facility or provision of a service and engaging in the competitive procurement process would be impractical or there exists only one person or firm capable of undertaking the project.
Investor Protection – Credit Risks & Political Risks
Kenya is increasingly being seen (in comparison to its East African neighbours) to offer a robust investment environment for independent power producers (IPPs) through the various credit enhancement and political risk guarantees offered to IPPs that invest in the Kenyan power sector. The structure currently available to investors has been used to bank various power projects and includes the following:
(a) Off-taker Payments Risk - this is mitigated by the issuance to the IPP of an irrevocable letter of credit (the LC) securing approximately three months’ worth of payments under the power purchase agreement (PPA) entered into between the IPP and the off-taker. Where a power purchase agreement is terminated as a result of an off-taker default, in most cases the IPP will be permitted (through the terms of the power purchase agreement) to drawdown on the amount available under the LC as part payment of any termination compensation by the off-taker; and
(b) Political Risks - At present, the occurrence of a political event that adversely affects a project is mitigated through the following: (i) Issuance by the Government of a letter of support (the GOK Support Letter) and (ii) Procuring political risk insurance from institutions such as the Multilateral Investment Guarantee Agency. With regards to the GOK Support Letter it should be noted that: (i) the Government does not guarantee any of the off-taker’s payment obligations under the power purchase agreement; and (ii) the Government undertakes to compensate the project sponsor and the lenders from the occurrence of any “political event” so as to put the project company in the position it would have been in had the event not occurred.
Renewable Energy Developments
The Ministry of Energy has recently published a Feed-In-Tariffs Policy On Wind, Biomass, Small-Hydro, Geothermal, Biogas And Solar Resource Generated Electricity (December 2012 issue) (the FIT Policy). The Fit Policy and the standardised power purchase agreement accompanying it incorporate the following features: (i) there is no bidding for renewable sites and resources – a first come, first served system applies; (ii) the plants are ‘embedded’ (which in our view would imply that any connected PPA should be based on a pure “take-or-pay” structure); (iii) the power plants are connected at distribution voltages; and (iv) the tariffs set out under the FIT Policy include a standardised allowance for interconnection costs.
Although the publication of the FIT Policy can be viewed as a step in the right direction by the Ministry of Energy, the current FIT Policy and standard PPA that accompany it are not (as currently drafted) bankable for the following reasons:
(a) The standard PPA is not based on a pure “take-or-pay” model and therefore an IPP takes dispatch risk in relation to the off-taker. This is unlikely to be acceptable to most IPPs; and
(b) The tariffs set out under the FIT Policy are fixed but the costs of interconnection, including the costs of construction, upgrading of transmission/distribution lines, substations, and associated equipment, are to be borne by the developer. Development costs for transmission infrastructure will vary on a project by project basis depending on the extent of transmission infrastructure required and it is therefore unlikely that an IPP will currently be able to bank renewable projects that require extensive transmission infrastructure to be developed whose cost is not covered under the fixed tariff currently in place under the FIT Policy.
The PPP Act, having only recently been promulgated, provides an all encompassing framework within which PPPs can be undertaken under Kenyan law. The true test of whether the framework envisaged under the PPP Act is successful will in all likelihood come once the Cabinet Secretary for the National Treasury issues the regulations required under the PPP Act to make the Act operational. Investors should welcome the new provisions allowing for privately initiated proposals.
With respect to the FIT Policy, additional stakeholder involvement with the Government of Kenya will be required to bring the policy and any standardised PPA up to a bankable standard (for example, by providing a two tiered fixed and variable tariff structure under which plant development costs and debt financing costs can be recovered together with any costs incurred in the development of transmission infrastructure) so that smaller renewable energy projects that do not require the same credit enhancements structures and political risk coverage as large projects can be undertaken on a profitable basis by project sponsors.