ppps and ps involvement in energy sector development sam cho, ph. d uneca-gpad
TRANSCRIPT
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!