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Public-private ties right for electricity financing

In 2008, the Government of Kenya launched the country's development programme from 2008 to 2030, known as its ‘Vision 2030’. Its objective is to ‘transform Kenya into a newly industrializing, middle-income country’. The development programme is based on three ‘pillars’: economic, social, and political. One of the infrastructural enablers of the three pillars is energy. Kenya is expected to use more energy in the commercial sector on the road to achieving the vision.

The energy flagship projects as outlined in the document include - increasing electricity availability through power generation; drilling and steam field development of wells; development of multi-purpose dams by Regional Development Authorities; increasing electricity access; construction of pipeline and storage facilities and development of new and renewable sources of energy.

As part of its long-term energy plan, the Government of Kenya intends to increase generation and expand transmission and distribution networks. Particularly, the Government has set out to - increase generation to 33,000+ MW by 2030, add 8,500 km of new lines, increase access to 100 percent of the population by 2020 and build out of infrastructure costed at $14-18Billion.

Evidently, Kenya’s power plan is aggressive and the capital expenditure implications for accomplishing the plan, are colossal. Kenya has consistently and persistently experienced budget deficits and there’s little hope that this will change in the coming years. Unless Kenya adopts an alternative option to public sector financing, attaining the Vision 2030 power goals will be a pipe dream.

In this regard, the government can opt for Public Private Partnerships (PPPs). PPPs are various forms of collaborations between the public and private sectors for the provision of public services or public infrastructure in the public interest. PPPs are a variant of privatization in the sense that a public function is deputed to the private sector. With PPPs, however, the government continues to participate in some way. PPPs offer a veritable alternative to traditional financing while also presenting opportunities for technology and expertise leveraging. Whilst their benefits may seem apparent, PPPs are delicate and complex and if not structured properly can easily become a ball and chain.

For power generation, the government can opt for Build -Operate-Transfer (BOT) agreements, where the private partner would be responsible for building and operating the plant and at the end of the contract period would transfer the plant to the government. For transmission, it may opt for concession agreements or a Design-Build-Finance-Operate-Maintain (DBFOM) contract. The private partner would be contracted to finance, build, operate and maintain a part of the grid in exchange for a revenue stream from transmission fees. As for distribution, a concession over Kenya’s distribution utility (Kenya Power) encompassing all functions relating to distribution of electricity would be ideal. The private partner would take over management of Kenya Power and would be responsible for operating, maintaining and upgrading the distribution network as well supplying electricity to consumers. The private partner would then recoup its investment from user fees.

So far, there are only 5 PPP power projects in Kenya and only three have reached post procurement stage. Very few private partners have a balance sheet that would justify corporate finance for the huge capital costs of these ventures. Project Finance is therefore more appropriate for them. The government can play a part in making the projects more bankable by - coupling the generation BOTs with full offtake Power Purchase Agreements (PPAs) and where the off-taker is not creditworthy, offering guarantees for the off-taker’s obligations; offering tax concessions since taxes greatly reduce project cash flow; supporting the project in the form of subsidies, guarantees or indemnities; offering land and other logistical facilities to reduce capital costs and coordinating and expediting obtaining of approvals, permits and consents.