Power markets across Sub-Saharan Africa are hungry for private investment. Cumbersome state utilities are bankrupt and unable to meet growing demands for generation capacity. IPPs are emerging, but are not easily swallowed by the debt markets. In a climate of well-documented political and economic volatility, wooing the private sector is far from straightforward. Innovative financing structures are needed to create the level of comfort demanded. The problems facing power generation in Sub-Saharan Africa are many and diverse. Crippling floods in Mozambique during 1999 and 2000 shut down the country's largest plant, the Cahora Bassa hydropower power, only a year after it reopened following the civil war. Kenya is attempting to move away from dependence on hydropower since droughts rendered much of its installed capacity useless. Tanzania also fell foul to severe shortages following low rainfall in the dam catchment area at the end of last year. Rwanda's deficit currently stands at 5MW although this is projected to grow as the country rebuilds infrastructure destroyed in the 1994 genocide.

IPPs are needed but there are significant obstacles. Foremost is political risk, prevalent to varying degrees all over the region. Until the bloody elections in 2000 and subsequent civil disruption, Ivory Coast was hailed as an example of relative political and economic stability. Now it is used by sceptics amongst private investors to demonstrate why the region is best avoided altogether.

Sub-Saharan Africa remains untouchable for investors without watertight cover in the form of multilateral support, government guarantees or political risk insurance. For the most part, IPPs have been funded by global power majors that have taken out large political insurance packages.

Kipevu benchmark
May 2000, however, was witness to a benchmark deal that could be copied widely across the region. The Kipevu II project in Kenya became the first openly bid BOOT concession for an IPP to close with an element of commercial bank backing. The concession for the $86 million, 75MW plant was awarded to lead developer, Wartsila NSD Power in 1998. Wartsila has retained 15.1% in the project company, Tsavo Power, and the remainder is held by CDC Group and a joint venture between Cinergy Global Power Ltd. and Industrial Promotion Services Ltd. IFC has also injected $1.05 million of equity. Construction of the plant is now almost complete, with test runs underway and the first invoice due to go out next month. A 20-year PPA is in place with the national electricity utility Kenya Power and Light Company (KPLC).

Debt was raised by lead arrangers IFC and Deutsche Investitions- und Entwicklungs-gesellschaft (DEG) to create a debt/equity split of 75:25. Senior debt amounts to $49 million, including direct loans from IFC and DEG to the tune of $16 million and $11 million respectively. The balance is made up with an IFC B loan, syndicated to a group of commercial banks. A further $4.6 million contribution comes in the form of mezzanine debt put together under an IFC C umbrella.

Syndication of the B loan was described as difficult by a spokesperson involved in the deal. Citibank originally agreed to come on board but pulled out just as financial close was looming. This has been put down to a combination of country and offtake risk, with emphasis on the latter. KPLC was born in the 1990s when Kenya's energy sector came under pressure to reform. The national utility was split, with KPLC running the distribution and transmission and Kenya Electricity Company (KenGen) operating the generating capacity. KPLC began trading stock and although it has a fairly strong operating record, KPLC is believed to have inherited considerable debts and operational deficiencies from its parent.

Following the loss of Citibank, Warstila approached a group of Finnish institutions to fill in. MeritaNordbanken, Leonia Corporate Bank and WD Power Fund came in on the B loan, while the Dutch development bank joined both the B and C tranches.

Since KPLC is not a state-owned entity, the offtake does not have a sovereign guarantee inherent and the government refused to issue one, despite pressure from lenders. With the risks in mind, comfort was sought elsewhere and found in the form of an escrow account. KPLC's customers within a designated revenue circle deposit their monies into an account, which is enhanced by a three month letter of credit. The amount builds up to about 140% of KPLC's required monthly payment and the debt is serviced from this. However, if the letter of credit is drawn, then the account must keep building until it is reinstated.

This model was based on one used previously in India. ?Its application in Africa sets an important precedent as it moves away from financing structure based upon government guarantees and is one small step towards breaking down the barrier to commercial bank financing in the region,? says Jeremy Connick, partner at Clifford Chance, advisers on the project.

If successful, this is a structure that could be repeated for IPPs across Sub-Saharan Africa. However, it pivots on the role of multilaterals, whose involvement is conditional on the pledge to create a transparent and competitive market. Kenya began making significant steps in this direction in the 1990s after suspension of international aid led to a decline in its energy sector, but it is not in the clear yet. KPLC's inheritance of debt, coupled with its subsequent aggressive policy of securing PPAs, has caused some alarm. Asad Yaqub, investment officer for the IFC states, ?the area designated to service Kipevu's debt has a strong cash flow but for the country as a whole, the energy sector might run into money problems.?

Connick agrees that the government's commitment to reform of the energy sector is the key and goes on to say that the Ugandans have set the conditions for privatisation well. ?They are restructuring their energy sectors and privatising in an attempt to raise a sensible amount of money.? Pre-qualifications have been submitted for 20-year concessions on the Ugandan Electricity Generation Company and the Ugandan Electricity Distribution Company. Bidders can apply for both but in the interests of transparency it is unlikely that one company would be awarded both. The concessions will not demand huge upfront sums, with the aim rather being to attract a steady stream of investment over a number of years. Estimates suggest that the generation sector requires roughly $7 million and the distribution $50 million. Any potential investors will have had their confidence inspired by the recent and significant increase in tariffs. The government has pledged to end subsidisation of power within a year.

Bujagali Hydro
A crucial component in kick-starting this process is the successful financing of AES' 250MW Bujagali hydropower project, which has been in the pipeline for years. Without the promise of this, which should take installed capacity up to demand, the concessions look decidedly less attractive. Delays have largely been due to environmental opposition, with the major issue being removal and compensation of communities currently living on the designated area. However, it is now believed to be back on track, with document signing due at the end of the year.

The architects of Bujagali's financing structure can take some lessons from those learnt at Kipevu. There are a number of similarities, including the creation of an escrow account. Commercial banks will be invited on board, although it is likely to be under a political risk insurance program rather than an IFC umbrella. Arrangers are IFC, African Development Bank and World Bank.

Power from Bujagali will rather be used to supplement capacity all over the country. Because of the size and significance of its successful operation, the Ugandan government is issuing a guarantee to the lenders. Although a good solution for landlocked Uganda that has no access to oil or gas, this is not likely to be repeated. In the context of restructuring and transparency, most governments are trying to move away from issuing guarantees. It is the Kipevu model that will be much easier to replicate. A smaller plant feeding a specific area can create a designated revenue circle to provide the necessary comfort.

Other countries, including Zimbabwe and Zambia have also pledged restructuring programs, widening the opportunity for private investment. Charles Liebenberg, head of power project finance, Standard Bank, points to possible hydropower plants in DRC. It seems that attitudes amongst private investors are changing, albeit very slowly. Multilaterals will remain a crucial component of any successful IPPs, although other sources of capital can be identified.

An increasing number of special purpose funds are emerging. The UK DFID has recently initiated the Africa Private Infrastructure Financing Facility (APIFF); set up to offer long term debt financing for private infrastructure projects in Sub-Saharan Africa. A consortium comprising the Standard Bank Group, Barclays Africa, the Netherlands Development Finance Company and Emerging Markets Partnership has secured the mandate to provide the finance and manage the fund.

The development of capital markets is a hot topic and most countries are trying to stimulate growth. Charles Liebenberg suggests that, ?DFI facilities can be utilised to enhance projects and selected elements of political risk and as such create opportunities to raise medium to long term debt in domestic capital markets.? A glance towards Latin America proves that capital markets can be built up, but it takes time. Liebenberg also points to an alternative, ?oil producing countries such as Angola and Nigeria generate $ revenue and if project debt can be attached to that, the deals become more attractive for lenders. If political risk is then sufficiently mitigated the deals become bankable.?

Certainly power starved Nigeria is in need of IPPs but many believe that despite its oil rich status, it will have trouble realising its ambitions. The political and commercial risks associated with this county may be insurmountable. (See Box)

As many of Sub-Saharan Africa's energy sectors do successfully implement restructuring programs and IPPs start emerging, opportunities for trading power will also grow. Fluctuating political relationships will arrest full liberalisation, but as private investment becomes more commonplace, so power will flow across borders with greater ease.

Trade in power is not a new phenomenon in Sub-Saharan Africa. South Africa has been the major driver to date, with Eskom generating about 70% of the region's capacity. Other countries also have a history of trading, particularly DRC, Zambia and Zimbabwe within the Southern African Development Community (SADC) and Kenya and Uganda have long had links.

Until the mid 1990s poor infrastructure seriously hampered the extent of trade. But key transmission links between South Africa and surrounding countries have now been put in place. Parallel to developments in infrastructure, a Southern African Power Pool (SAPP) was set up in 1995. Co-ordinated from Harare, the SAPP incorporates all the SADC countries and aims to allow members to alleviate power shortages and source comparatively cheap power. The key to its success is that South Africa's coal fired base load capacity complements hydro-based power sectors, suitable for peak capacity, elsewhere. With a major transmission line planned from northern Tanzania to Nairobi, Kenya and Uganda could also become incorporated into this expanding pool.

South Africa has predicted that it will need more capacity within the next five years. With a trade in full swing, IPPs in neighbouring countries that had succeeded in injecting liquidity and introducing competition to their power sector could compete with South Africa's de-regulated generation sector. (See Box)

IPPs are certainly becoming a more common scene on the landscape of Sub-Saharan Africa. In the context of successful restructuring programs, innovative financing techniques have allowed some success. But the region will remain a difficult host for financing projects of any nature. Cash strapped and politically volatile, most of the countries have difficulty attracting funding in time of global economic boom. As world liquidity shrinks and investors shy away from emerging markets, Sub-Saharan Africa is likely to be first to feel the neglect.

Nigeria
Despite its oil rich status and burgeoning industries, Nigeria is starved of power. Industrial development is severely hampered and June saw a third of the country plunged into darkness for up to two weeks. In an attempt to combat this, the government has announced ambitious plans to privatise NEPA and commission a large number of IPPs. A tender has been launched for advisory roles on the privatisation process.

To boost generation pending the privatisation of NEPA, the government has launched a program of Emergency Power Projects (EPP). The much publicised Lagos IPP falls under this category, aiming to fast track supply of 290MW to Lagos state. Originally an Enron project, January 2001 saw the majority stake pass to AES at a cost of $225 million. A Nigerian consortium, Y. F. Power holds a minority share. The generating barges began injecting 60MW into the national grid last month and should be performing at full capacity by the end of the year. A second diesel powered EPP is under construction in Abuja by Aggreko Inc.

A more long-term development is the advent of state initiated IPPs. These were inspired following a decree in 1999 designed to reduce NEPA's monopoly. The first fruits were born with the opening of a 20MW plant in the oil city of Port Harcourt in May of this year. The Rivers State has another two planned. To really address the country's power shortages, however, Nigeria is going to have to commission large, privately funded IPPs. There has been a lot of talk. AES are in discussions over IPPs in Ughelli and Agbara. A state-initiated project in Akwa Ibom has been commissioned to a sponsor LYK Group, which is in discussions over the financing.

And it is on the ability to successfully find funding that the future of these state-initiated IPP dreams depend. A spokesperson from AES predicted being able to raise debt finance with the aid of multilaterals and political risk insurance. The company has also stated an intention to refinance the Lagos EPP project.

Some people seemed less confident. Nigeria is regarded as having very significant political risk and many cited a question mark over who might actually lend in. It is rumoured that despite efforts of the current government to reduce corruption, even multilaterals would avoid IPPs in Nigeria. A different view emphasised not the political risk but the inefficiencies and lack of cash flow of NEPA. Privatisation has been on the cards for years but never got off the ground. And on the subject of refinancing, one banker pointed out that it would be very difficult to find interested parties. ?Multilaterals generally prefer greenfield projects and Export-Import banks are not going to be interested once the goods have already been exported.'

In the end, the best hope for boost Nigeria's power generation may not come from traditional power companies. Exploration and Production (E&P) companies have been coming under increasing pressure from the Nigerian government to reduce gas flaring. This has culminated in a series of MOUs between the government and E&P companies to develop IPPs. ?The major attraction for the E&P operators is that the IPPs provide the vehicle to reduce gas flaring and thus allow them to qualify for the development of associated new oil fields,' explains Mr. Godwin Ize-Iyamu, deputy general manager, corporate banking, United Bank of Africa. To provide comfort to the private companies, they will develop the plants in a joint venture with the country's national oil company, NNPC. The inclusion of NNPC in part mitigates the offtake risks associated with NEPA through agreed wrap around structures. As Ize-Iyamu points out, E&P companies have traditionally financed their activities with equity. Moreover, if they do go the non-recourse route, they have the added bonus of oil revenues to link to then debt.

South Africa
South Africa is not hampered by the same problems as many of its neighbours but it certainly has its own. Having recently been cited as investment grade and with very deep capital markets, there are a lot of available funds. ?At the moment there are simply not enough projects,' points out Jacobus Vlok. The major sticking point is the much discussed restructuring of state giant Eskom. The government has stated that this will fulfil the dual aims of promoting black economic empowerment and increasing economic efficiencies in the energy sector. Strong resistance has arisen, however, from within the politically powerful union group Cosatu, which objects on ideological grounds to what they see as a step in the direction of privatisation.

The government has remained dedicated to its aims, announcing that Eskom will be divided into separate generation, transmission and distribution companies. The latter is likely to remain a state monopoly, while the distribution amalgamates with existing local authority distributors. The newly created regional electricity distributors will then work towards rural electrification programs, which will require cross subsidisation. A further issue in the restructuring process is the outstanding debts many municipalities have with Eskom and can't repay. In the generation sector competition will be introduced systematically. The first step is to separate the power stations into a number of independent competing generation companies owned by the state, before selling some off. It is estimated that 10% will be made available for black economic empowerment companies by 2003.

The government has pledged to introduce competition and commission IPPs in order to meet the country's growing demand. A benchmark is expected during the next month with financial close of the country's first IPP. A 20-year concession has been awarded to AES for the refurbishment and operation of 40-year old Kelvin power station in Johannesburg. Although a significant step and proof of the government's commitment, this is unlikely to open the floodgates. Kelvin was a one-off tender for refurbishment of a plant that would otherwise of had to be shut down. It is unlikely that substantial investment could be attracted before Eskom's restructuring is well under way, paving the way for a transparent environment. If the proposed $1 billion greenfield Cape Power Project was to become a reality, the scene might be set. But progress on this has not moved beyond off the drawing board.

With a commitment to introducing competition, the need for more capacity, liquidity in local markets and increased activity in gas exploration South Africa is likely to see a market for IPPs flourishing before many of its counterparts. But lessons learnt from previous attempts to restructure utilities in the country suggest that project financiers probably shouldn't pack their bags quite yet.