PPAs can play a pivotal role in helping Africa access crucial energy sector investments
Africa has laid down the gauntlet on trying to close its electricity deficit gap. In nearly all countries improvement of access and distribution is singled out as a national priority because of its direct impact on economic development.
Despite these good intentions, many African countries still face fiscal, social and political hurdles in attracting the necessary investments to achieve universal energy access. And these hurdles are sometimes linked to the Power Purchase Agreements (PPAs) for energy projects. African governments should not underestimate the importance of implementing an efficient PPA process – failure to do so may be at their own peril.
With an estimated 3,500 existing and pipeline energy sector projects currently in Sub-Saharan Africa, there is tremendous potential for governments to improve access to energy. Here the need for transparent and bankable contracts is a priority particularly when these agreements are expected to cover projects spanning multiple decades involving many players – project developers, financiers, buyers, government agencies and other stakeholders.
The role of the PPA in power generation is critical because it governs the sale and purchase of power and is usually between the party who generates the power for sale ( seller / project company / producer)and the one seeking to purchase the power ( Offtaker / buyer). It is therefore pivotal for independent power generation projects. Lender inputs are also critical to the finalization of the PPA as most of these projects require third party debt, so whilst the Lender will not be direct party to the PPA their input and acceptance is crucial to funding in most cases.
Whilse the PPA governs the sale and purchase, there are usually a number of related contracts which interconnect by relating to the financing, building operation and sometimes maintenance of the power plants. These documents should usually be aligned to the PPA to ensure uniformity.
These complex agreements are the ultimate public-private partnerships. They lay the groundwork providing guidelines on the role and responsibilities for each party within the public and private spheres. But the sad fact is that In Africa, these agreements can take 5 to 10 years to complete, nearly two or three times longer than in other parts of the world, where 3 to 5 years is the norm. These long time frames can cause governments to miss out on opportunities and create obstacles for all parties involved in the project.
The stream of revenue under a PPA is the payments from the buyer under the PPA. If this fails, then the project will find it difficult to repay its lenders as required, this is why bankability is key to the PPA.
Lenders will want to avoid scenarios which can result in project failure and these scenarios include, but are not limited to (a) the tenor of the PPA – this needs to be long enough to allow repayment of debt and support refinancing where required (b) Changes in law and taxes – as this is an element outside their control, Lenders will want to find a way to mitigate such government actions (c) Off-taker risk – typically in Africa this poses a major concern and lenders will seek some reassurance that should the Off-taker ( typically a state entity) be unable to meet its contractual obligations then any resulting losses can be recouped elsewhere (d) Tariff – that this is realistic and achievable (e) reputation and experience of Sponsor (f) Currency – if payments and calculations are not in the same currency as debt repayment then a mechanism such as hedging will be required, as well as currency inconvertibility concerns addressed (g) Termination - the Lender will want assurance that the project debt will still be satisfied (h) remedies under default – ability to exercise rights if payment fails; and (i) Lender’s rights – step in provisions and security interest over project assets through the loan agreements and direct agreements.
Unfortunately, what we are observing on the ground in terms of bankable PPAs is light years away from where the governments should be heading if they are serious about attracting investors / lenders. In some countries, governments are:
• diluting or adding clauses that remove their liability in the event of cancellation
• insisting on a waiver of sovereign immunity, which acts as a blanket cover protecting them from law suits
• demanding an inclusion that local laws will govern any resulting arbitration, rather than international law, which is the best practice in other regions of the world
• weakening letters of support, which are typically required by financiers, to reduce the project risk profile
Rather than strengthening PPAs, which should be governments’ focus, these actions are causing them to be ineffective and to decrease investor / lender confidence. To advance their objectives, national governments should provide clear and consistent regulations, assign risks to those best suited to manage them and seek external support from credible companies to guarantee the risks.
This is typically the point where the African Trade Insurance Agency (ATI) can add value to a project. Most African governments have an IMF cap governing how much public debt they can assume, which is why they are often not able to provide government guarantees unless the project is sizeable. ATI’s role here is simple. We can step in to provide a stand-in guarantee for the government and we can also provide arbitration award default and a host of other political risk insurance covers to provide added security for the financier or the developer subject to the terms of the PPA.
Our primary advantage is that we are located near the risks we cover. As an African institution, we have come to realize that no country is the same – this ranges from a country’s capacity to handle large or small-scale projects to the energy mix they are each able to support. And beyond this, is the potential in each country, which ultimately determines the level of interest from investors.
There is clearly a lot of interest in the sector from many parties. For financing, we are seeing a growing appetite from domestic and regional banks to participate in syndicated loan deals. Traditional DFI;s appear more willing to invite African financiers to the table rather than going it alone. This is helping regional development finance institutions and larger African banks to take a share and gain an appetite for energy sector project finance.
ATI is also developing its appetite and ability to underwrite more deals in this sector. With the support of KfW and the European Investment Bank we are in the process of creating regional solutions that will ensure more sustainable energy sector projects are supported and completed across Africa, and that will increase liquidity support to the sector, giving projects a better chance at succeeding.