Project Finance

Africa

Power partners

24 September 2003



Constantine Ogunbiyi and Simon Norris explain how the New Partnership for Africa?s development will affect the future of the continent?s energy sector


VARIOUS international developers and generators have operated, or are operating, IPPs in countries in Africa: notably, US-based AES Corporation, Electricité de France, Hydro-Quebec of Canada, Germany?s Siemens, CMS Energy Corporation and Cinergy Global Power (both of the US). Eskom Enterprises of South Africa is also a significant regional player with a presence in nearly 30 African countries.
However, inward foreign direct investment (FDI) flows into Africa decreased by an estimated 41%i last year to US$11B with inflows falling in 108 of the 195 countries for which data is available. Although FDI in Africa has historically, and remains, dominated by oil and gas producers (including Angola, Nigeria, Algeria and Equatorial Guinea), the state of the world energy markets and the resultant financial difficulties experienced by the global players in that sector, particularly American-based developers, has led to
an apparent dearth of power developers looking to invest in
the African markets.
Will African states be able to attract the much-needed FDI to develop their energy sectors? At present, Africa only has 20,921MW of installed capacity in operation. Nigeria and South Africa
dominate the power sector in West and Southern Africa
respectively, with Egypt and Morocco leading the way in North Africa. At least half of the continent?s current power supply is
generated from coal-based facilities; this figure is expected to decrease to around 35% by 2020, mainly as a result of new projects running off natural gas and hydro power.
The United Nations Conference on Trade and Development
predicts an end to the FDI downturn in Africa due to expanded exploration and extraction of natural resources; continued and enhanced implementation of regional and international free trade initiatives; and increased privatisation activity. The New Partnership for Africa?s Development (NEPAD) initiative reflects these concepts and others required to encourage the development of projects in Africa, such as a need for political stability; respect for democracy and the rule of law; the development of appropriate legal and
regulatory frameworks; the need for transparency, capacity and good governance at government and corporate level; and a suitable level of economic and social infrastructureii.
The private sector participants in the Africa Energy Forum in Lausanne stressed certain factors necessary to attract investment into Africa including political stability; a long-term sector plan from government; the absence of subsidies; the right people in the
right positions; reducing the lead time from project tender to
implementation; and the absence of overly bureaucratic procedures and corruption. These factors are all directly or indirectly
embodied in NEPAD?s objectives.
NEPAD
NEPAD defines an ambitious programme to deal with issues across the African continent from social to economic and political
programmes, including the promotion of regional markets;
improvement of transparency, governance and economic management; promotion of free market access; capacity building within
government; mobilisation of domestic capital and resources and establishment and improvement of infrastructure.
To achieve its initiatives in the energy sector, NEPAD has outlined certain priorities: to reduce the costs of energy, extending access and ensuring sustainability and availability; to develop proper regulatory and policy frameworks, pricing and tariffs; to improve managerial and technical abilities; to improve the existing hydro and renewable energy capacity; and to advance the development of regional projects (see box). NEPAD?s Short Term Action Plan has identified various projects intended to support sustainable energy development, certain of which have been highlighted below.
Hydro power
The potential for hydroelectric power plants along the length of the Nile Valley, and rivers such as the Zambezi, the Congo and the Senegal, is huge. Yet, only about 7% of Africa?s hydro capacity has been developed.
Nile states, including Uganda, the Democratic Republic of Congo, Ethiopia and Sudan, are planning to develop significant new hydro capacity. Potential projects in Uganda, for instance, include Bujagali Falls, Karuma Falls and the Kiira plant. The fact that AES has decided to cease its participation in the Bujagali Falls project, and that few independent power producers currently have the
financial resources available to invest the time and money required to rehabilitate or successfully develop a hydro power project, does not paint a healthy picture for African hydro projects. Hydro power developers may be cautious to invest until the completion of a
successful hydro IPP on the continent. However, the emergence of new developers, notably the Chinese, and financiers (such as the development finance institutions from Asia, the Gulf and Southern Africa) may yet result in these and other planned projects being successful, though not necessarily on a full private sector basis. It may be that more of a public/private sector partnership approach (similar to that seen in a number of the large infrastructure projects in Western Europe) will be required.
Certain risks best assumed by the public sector should be taken by a host government, with the counterparty risk of such government being underwritten, perhaps, by agencies such as the World Bank. Such structures could start to provide a catalyst to new development and risk capital being attached to the continent.
The estimated US$555M civil engineering contract for the Merowe damiii in Sudan was awarded to two Chinese concerns, a joint venture of China International Water & Electric and China National Water Resources & Hydropower Engineering Corporation. The vast majority of the financing is being provided by four development funds from the Middle East: the Arab Fund for Social and Economic Development, the Abu Dhabi Fund for Development, the Saudi Fund for Development and the Kuwaiti Fund for Arab Economic Developmentiv. This is China's second project in the Sudanese power sector. The first, the construction of a gas-fuelled power station at Al Jaily, was awarded to Harbin Power Engineering Company last year and partly financed by the Export Import Bank of China. In addition, the construction of the US$224M 300MW Tekeze hydro power project (expected to be commissioned in 2008) in Ethiopia, managed by the China National Water Resources and Hydropower Engineering Corporation, marks enormous potential for Africa?s hydroelectric power generation.
The US$259M 184MW Gilgel Gibe project in Ethiopia is expected to be commissioned this year. The Ethiopian government is funding US$23M of the costs, with the World Bank providing a US$190M loan, and another loan of US$46M being granted by the European Investment Bank. Although these projects are not being implemented on an IPP basis, they will significantly improve capacity in the region, and hopefully spur on development by making the case for private sector participation in other industry sectors.
Ethiopia?s first IPP, being developed in Gojeb by Mohammed International Development Research Organization & Companies (Midroc), will consist of a 150MW hydro power facility. It is expected to be commissioned by 2006 and may prove to be the catalyst required to open up the market to private sector investment.
Congo-B relies almost entirely on the Democratic Republic of Congo?s Inga dam for its supply of energyv. To remedy this, the government of Congo-B entered into an agreement with China National Machinery & Equipment Import & Export Corporation (CMEC) in March 2003 for the construction of a dam and a 120MW power stationvi where the Congo and Kasai rivers meet at Imboulou. The construction commenced in mid-September 2003.The Export-Import Bank of China is expected to provide the majority of the US$280M, with Congo meeting its financial commitments to Beijing through the supply of oil.
Plans are afoot to develop the hydro-potential of the Congo river and transform it into a regional source of electricityvii. The US$6B, 40,000MW ?Inga Grand? project is the largest of a series of mega-projects for transforming the continent. Eskom will lead a joint venture of power utilities from Angola, Botswana, the DRC, Namibia and other members of the Southern African Power Poolviii, and form a company to manage and operate the generation and transmission infrastructure of the DRC?s Inga Dam.
The first power lines would link Inga to South Africa via Angola and Namibia, with the next phase stretching 4000km north through the Central African Republic and Sudan to Egypt. Nigeria wants to take Inga power to West Africaix and Eskom also talks of exporting power to Europe, via Spain.
Commentators question the likelihood of Inga being successful but there is no doubt that its implementation would be a massive boost for Africa?s power sector and NEPAD and should spark interest within the private sector.
There are positive examples for the hydro power sector and NEPAD in Mali, Mauritania and Senegal. The Manantali dam
project in Mali, constructed in the 1980s, was originally to include the construction of a 200MW power station and a 1300km network of transmission lines to the capitals of Mali, Mauritania and Senegal. However, due to political difficulties, the generating facilities only came online in December 2001, supplying power to Mali's grid. This was in no small part achieved with the assistance of a US$33.5M loan from the AfDB in March 2000. In July 2002 and November 2002 respectively, Senegal and Mauritania connected their power grids to Manantali. Under a May 2002 agreement, the Manantali Water Management Company will own the infrastructure and equipment at Manantali and Eskom will handle the marketing and distribution of powerx.
Hydro power is potentially the panacea to Africa?s energy
problems. However, the risks associated with the huge costs of
development, Africa?s unpredictable weather patternsxi and the
environmental and social implications of such projects, have
resulted in this sector being underdeveloped. This has resulted in many countries seeking to reduce reliance on hydro power by increasing and expanding thermal generating capacity.
Gas to Power
Recent gas discoveries in Africa have made combined-cycle power plants economically viable and competitive. The Gulf of Guinea is an emerging player in the global hydrocarbon industry with the recent development of the sector in Angola and Nigeria being
mirrored in many other Gulf of Guinea nations. Although the West African Power Pool (WAPP) (see box) and the West African Gas Pipeline (WAGP) projects remain in their infancy, their success would provide the basis on which electricity generated in any part of the region could be exported to any other part of West Africa. This would revolutionise the energy sector in the region and would
represent the embodiment of NEPAD?s regionalisation objectives.
The Joint Venture Agreement for the 620km West Africa Gas Pipeline, will transport gas through the existing Escravos-Lagos Pipeline System to the existing terminus near Lagos from where the WAGP will run for about 56km onshore, to the Nigerian coast, and then offshore to Aboadze in Ghana, where the Takoradi Thermal Power Station is sited. In February 2003, the Presidents of Ghana, Nigeria, Benin and Togo signed the West African Gas Pipeline Treaty which provides for a comprehensive legal, fiscal and regulatory framework and a single authority for the implementation of the
project. In April, CMS Energy announced a planned US$100M expansion of its thermal power facility at Takoradi, which will
convert the facility from an oil-fired to a gas-fired plant, utilising gas transported from Nigeria through WAGP. When WAGP is
completed, Ghana plans on converting the other oil-fired facilities at Takoradi and Tema to natural gasxii.
WAGP has been in development for many years arguably
without a realistic prospect of coming to fruition. Its success has been dependent upon the ability of a creditworthy lead developer to enter into long-term gas purchasing obligations in Ghana. Whether the NEPAD initiative has had any impact on that potential success is, at best, debatable though it is clear that the project reflects a number of NEPAD?s objectives including the production of affordable energy; increased regional integration and the liberalisation of markets. Potential developers and the public sector alike no doubt maintain a watching brief over this project with the hope that the success will act as a catalyst for similar cross-border projectsxiii.
The power of NEPAD
It is obvious that many of the issues which NEPAD aims to resolve are relevant to the success of the projects highlighted above. It is also clear that the success of these projects will encourage further private sector developers and, therefore, FDI into Africa. There are two connected issues to consider: (i) Has the existence of NEPAD acted as either a catalyst or a facilitating factor to the projects? development? and (ii) is NEPAD alone sufficient?
In considering the first issue, although it is difficult to point to
concrete evidence that NEPAD has had a significant or tangible impact, the very fact that NEPAD?s high profile has focused Africa?s and the wider global community?s attention on the problems and challenges on the continent is a positive factor. Many of the energy and infrastructure projects above will require huge amounts of investment, both short and long term from within and, inevitably, outside Africa. The fact that NEPAD highlights the annual funding requirement of US$64B; the need for regional markets and co-operation; the strengthening of enabling legislative and regulatory regimes; the establishment of good governance; and the importance of developing political support and governmental capacity (and
provides various forums where such issues can be explored and
discussed) ? essential factors in the success of every project ? at least should ensure that the governmental agencies involved in these
projects are as aware of these crucial issues as the private sector.
Is NEPAD alone sufficient?
In response to the second issue, the mere existence of the NEPAD initiative, although a catalyst, is not the only factor required to attract investment. There are other relevant factors to consider. Ignoring the existence, though not the ongoing essential role, of more ?traditional? players in the emerging markets such as the World Bank, IMF and other multilateral agencies, the recent launch of various funds for Africa will provide a significant boost to those investors looking for finance for projects on the continent. For example,
the Emerging Africa Infrastructure Fund (EAIF) has commitments of US$305M and will provide long-term finance for projects in
various sectors, including the power sector. The Commonwealth Fund for Africa is aimed at the same sectors as EAIF and has raised in excess of US$200M. Mechanisms to reduce the long lead times between project conception to implementation are also being
developed. DEVCO (being developed by various European
governments and the IFC) is intended to be a public private
partnership to structure business opportunities to attract private finance and to offer them by competitive tender to the national and international private sectors.
DEVCO will absorb development costs, reducing the cost
burden and risk for the private sector participants. Similarly, GUARANTCO is a proposed guarantee facility for local currency bond issues and commercial debt, which will help to develop local capital markets.
The importance of political risk insurance in making investments in emerging market economies cannot be underestimated. Recent trends indicate that the use of political risk insurance from providers such as MIGA, ECIC, EFIC and SACE can significantly impact the viability and bankability of major projects by reducing the country risk, making the project more attractive to developers and financiers alike. The successful closure of the Sasol-sponsored natural gas pipeline project will stand as an important example of this trend.
As has also been highlighted above, support from various
developmental institutions in the Middle East, Asia, and Africa should lead to various new state run projects coming onlinexiv, thus improving the enabling infrastructure for further projects.
The need for sustainable and affordable power across Africa remains and, in fact, only increases in urgency. A new vision for such sustainable development of infrastructure, including power and
associated transmission facilities, is required. NEPAD is clearly visionary in its aims, however, much more than idealistic goals will be required to stop the retreat of private sector developers and encourage them back to the continent.
The regulatory framework in many countries in Africa needs to be overhauled; sensible and coordinated management and training needs to be put in place at both utility and regulation level; agencies such as the World Bank and African Development Bank need to work with governments to create new packages of incentives and acceptance of a new manner of risk allocation with such institutions acting as effective guarantor; regional power pools need to start to coordinate better ? not all countries can be net exporters of power!
NEPAD is a good start ? it promotes the right principles for
much needed development in Africa. The ultimate test of NEPAD will be results ? real infrastructure built on the continent. This will happen once the principles of NEPAD have been embodied in
governments, with the assistance of all relevant agencies, in all
relevant measures, policies, good governance safeguards and
incentives which will then, along with the other factors discussed above, facilitate such projects.
Simon Norris and Constantine Ogunbiyi are project finance lawyers in Cadwalader, Wickersham & Taft LLP?s projects group in London. They both specialise in energy sector and infrastructure projects with a particular focus on Africa and other emerging markets. Norris can be contacted on (+44) 207 170 8738 or [email protected] and Ogunbiyi on (+44) 207 160 8760 or [email protected]
The authors would like to thank their colleague Patrick Leece for his insightful contributions

Regional Initiatives

The pooling of energy resources in Africa will allow under-supplied countries (or those supplied primarily by hydroelectricity and subject to fluctuations of supply during drought cycles) to have immediate access to a pool of electricity when required (and contribute to such a pool when they are able to). The idea has had most success to date in southern Africa. The Southern African Power Pool (SAPP) links a number of countries allowing them to purchase power at regulated prices. Countries linked through the SAPP network are: South Africa, Mozambique, Zimbabwe, Zambia, Namibia, Botswana, the Democratic Republic of Congo, Swaziland, Tanzania, Lesotho and Malawi. Kenya and Tanzania are likely to establish a connection to the Zambian power grid, which would bring Kenya into the SAPP. In West Africa, the countries in the Economic Community of West African States (ECOWAS) have started to put into operation the plan for the creation of a West African power pool (WAPP), which was conceived about 20 years ago. In December 1999, ECOWAS heads of state declared their intention to integrate their national power grids, along the lines of a loose pool, with no central dispatching/command centre. In September 2000, a Memorandum of Understanding (MOU), establishing the mutual obligations of the parties in developing WAPP, was signed by ECOWAS energy ministers in Lome, Togo. Specific obligations include supporting the implementation of priority interconnection projects (including rights of way and security and eventually to cover the entire a power transmission network that will interconnect the entire West African sub-region) and allowing transmission system operators to develop and implement strategies and programs to facilitate regional electricity trading.Earlier this year, West African energy ministers met to adopt the ECOWAS Energy Protocol and an information and communication system to warn member states on possible power shortages and identify preventive measures. The Energy Protocol aims to put in place a legal framework that will allow for a long-term cooperation in the energy sector, so as to increase investment and trade in the West Africa sub-region. Participating member states have worked with the ECOWAS Secretariat to make critical decisions regarding institutional arrangements, the required regulatory framework and other structuring issues for the pool. The African Development Bank (ADB) has recently provided a US$15.688M credit facility for the development of a 330kV, 70km long transmission network between Nigeria and Benin. The Nigeria-Benin transmission line is one of the projects highlighted in the NEPAD Short Term Action Plan and phase 1 of the wider Nigeria-Benin-Togo-Ghana interconnect project.




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