ICA Report: "WHEN THE POWER COMES: AN ANALYSIS OF IPPS IN AFRICA"
18 July 2012
This report analyses the outcomes of independent power projects (IPPs) across Sub-Saharan Africa. Approximately 23 such projects have taken root to date, concentrated mainly in 11 countries. A suite of country level and project level factors play a critical role in determining project success, chief among them: the manner in which planning, procurement and contracting are coherently linked, the role of development finance institutions along with the development origins of firms and credit enhancements.
What prompted the development of independent power producers (IPPs) and why are they presently among the most visible elements of power sector reform? Where and why have they taken off and proved successful? And where are the successes less marked?
At the beginning of the 1990s, virtually all major power generation throughout Africa was financed by public coffers, including concessionary loans from development finance institutions. These publicly financed generation assets were considered one of the core elements in state-owned, vertically integrated power systems. In the early 1990s, however, a confluence of factors brought about a significant change. With the main drivers identified as insufficient public funds for new generation and decades of poor performance by state-run utilities, African countries began to adopt a new ‘standard’ model for their power systems, influenced by pioneering reformers in the US, the UK, Chile and Norway. Urged on by multilateral and bilateral development institutions, which largely withdrew from funding state-owned projects, a number of countries adopted plans to unbundle their power systems and introduce private participation and competition. Independent power projects, namely, privately financed, greenfield generation, supported by non-recourse or limited recourse loans, with long-term power purchase agreements with the state utility or another off-taker, became a priority within overall power sector reform. IPPs were considered a solution to persistent supply constraints, and could also potentially serve to benchmark state-owned supply and gradually introduce competition. IPPs could be undertaken before sector unbundling. An independent regulator was also not a prerequisite since the PPA laid down a form of regulation by contract.
This report analyses the outcomes of IPPs, focusing primarily on Sub-Saharan Africa.* Approximately 23 such medium- to large-scale projects have taken root to date, concentrated mainly in 11 countries. All totaled, approximately 4.1GW of IPP capacity has been added. With few exceptions, they represent a small fraction of total generation capacity and have mostly complemented incumbent state-owned utilities. Nevertheless, IPPs have been an important source of new investment in the power sector in a number of African countries; consider for instance Togo, in which Centrale Thermique de Lomé (CTL), the country’s first IPP raised installed capacity by approximately 40 percent (from 149 MW to 249 MW); meanwhile, at 250 MW, Bujagali is expected to increase the Uganda’s installed capacity by approximately 30 percent. The projects covered in this report account for the majority of installed IPP capacity and investment in Sub-Saharan Africa.
The majority of projects have delivered and their contracts have largely been upheld (namely CIPREL and Azito in Côte d’Ivoire, Takoradi II in Ghana, Iberafrica, Tsavo, OrPower4 and Rabai in Kenya, Afam VI in Nigeria, CTL in Togo, and Namanve in Uganda). A number of additional IPPs have reached financial closure and are under construction (Bujagali in Uganda and Itezhi Tezhi in Zambia). Furthermore, in Kenya, financing is presently being arranged for three more IPPs, following an international competitive tender (as well as three directly negotiated projects). Finance is also being sought for the long-awaited addition to Ghana’s first IPP, Takoradi II, as well as over a 1000 MW of new power generation, via three different plants, in Zambia. Finally, although not the 1000 MW that were initially envisioned, Eskom is harnessing 376 MW via its Medium Term Power Purchase Programme to help avert power shortages in South Africa, with a range of independent producers.
There have, however, been some high profile mishaps that may have prejudiced the record in SSA. One project has recently concluded its arbitration (AES Barge in Nigeria) and for a second project (IPTL in Tanzania) arbitration is ongoing, however, both projects still form important parts of the power supply in these countries. The costs of another IPP in Tanzania (Songas) escalated as a result of the unplanned, and later disputed, contracting of IPTL. A dispute over escalating investment costs also marked the Okpai project in Nigeria. In addition, in Senegal, GTi Dakar is under financial distress, and the country’s second IPP, Kounoune I, is also facing challenges due to its inability to procure adequate quality fuel, among other challenges. Changes may be noted in the contracts of one Kenyan plant (OrPower4, which reduced its tariff for the second phase of the plant). One project (Westmont in Kenya) had an initial 7-year contract that was not renewed. The other early IPP in Kenya (IberAfrica) renewed its contract, albeit with much lower capacity charges, and has recently doubled its capacity.
Post contract-changes, projects have largely gone on to make a significant contribution to the country’s generation mix (the exceptions being Westmont, which ceased operation, and IPTL, which operated intermittently during and subsequent to its arbitration proceedings). What is different about those projects that have seen no change to date? To what extent may the development and investment outcomes be perceived to be in or out of balance? What are the contributing elements to success in each of these projects?
A suite of country level and project level factors have emerged as playing a critical role in determining project success, chief among them: the manner in which planning, procurement and contracting are coherently linked, the role of development finance institutions along with the development origins of firms and credit enhancements. These and other such factors are spelled out in detail, along with detailed project appendices on each of the 23 IPPs profiled.
In sum, while there is evidence for contract unravelling across the pool of Sub-Saharan African IPPs, where an imbalance is perceived between development and investment outcomes, the incidence of such unravelling does not necessarily signal the end of a project’s operation. New agreements may be reached that prove sustainable. Meanwhile, efforts must continue to close the initial gap between investors and host country governments’ perceptions and treatment of risks (or else examples of further contract unravelling will continue). Finally, the means of closing the gap may not be only, or mainly, via increasing the sort of new protections, including partial risk guarantees or political risk insurance, and may instead lie in systematic treatment of the numerous contributing elements to success defined by this report.
*The decision to focus on Sub-Saharan Africa, rather than expand the analysis to the whole continent of Africa, was taken primarily due to the markedly different investment climate of North African countries, which impacts the size and scale of projects and their associated development. On average, North African IPPs have been more than double the size of their SSA counterparts (at an average of 491 MW vs. 177 MW for SSA).
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