Panel members at the Africa Energy Indaba’s conference on Power Purchase Agreements (PPA) and Independent Power Producers (IPP) said IPPS can help solve Africa’s power crisis
The keynote speakers and panel members at the fourth IPP and PPA Conference said on 23 February at the annual Africa Energy Indaba conference in Sandton IPPs can help solve Africa’s power crisis. The IPP and PPA conference was sponsored by Herbert Smith Freehills, an international law firm with extensive experience in advising IPPs in Africa.
Dr Elham Ibrahim from the African Union Commission said there was a need to involve IPPs in addressing Africa’s power needs as governments could not do it on their own. “I believe the time for more serious action has come for scaling up the implementation of renewable energy in Africa. The continent has abundant renewable energy resources in the form of hydropower, solar, wind, geothermal and bio-energy that are appropriate for responding to the challenge of energy access, especially for our large rural population”, she said.
IPPs are now present in 18 Sub-Saharan African (SSA) countries. Currently there are 59 projects of greater than 5 Megawatts (MW) capacity in SSA in countries other than South Africa with a committed capital investment of $11.1bn and 6 800 MW of installed generation capacity. Including South Africa adds 67 more IPPs, bringing the total to 126, with an overall installed capacity of 11,000 MW and investments of $25.6bn.
In addition to IPPs, significant increases in generation capacity have stemmed from Chinese-funded projects. Chinese-funded generation projects can be found in 19 countries in Sub-Saharan Africa. Eight of these countries have IPPs as well as Chinese-funded projects.
In South Africa the Renewable Energy Power Producer Procurement Programme (REIPPPP) was launched in 2011 by the Department of Energy and was a resounding success, spurring investment into SA’s energy sector with R194bn in commitments. At the end of 2015, 6 376 Megawatts (MW) of power was successfully procured from 102 IPPs in four bid rounds of the REIPPPP.
Of the 6 376 MW procured, just over 2 000 MW of electrical generation capacity has been connected to the national grid with more due to be connected in October this year. This is equivalent to just under half of the capacity of an additional coal-powered station, delivered in a third of the time.
Paddy Padmanathan from ACWA Power said in his keynote address that the key to successful IPPs was the allocation of risk to those best able to mitigate the risk. Although most risk analysis focused on the ability to pay of the offtaker, an equally important part was the willingness to pay as political changes could impact this factor half way through the term of the offtake agreement.
In that respect Jasandra Nyker from Biotherm Energy gave the audience comfort as she said that despite numerous changes in the head of government in Zambia, the renewable projects that she had been involved with had gone ahead without a hitch.
Investors in Tanzania’s power sector on the other hand are worried about the rising number of contract disputes between foreign companies and the government, including the row between IPP Symbion Power and Tanesco over the failure to pay for power from the 120 MW Ubungo gas-fired plant. Tanesco stopped taking power from Ubungo in May 2016, but under the terms of the PPA it continues to incur the charges each month. Symbion is owed around $35 million by Tanesco.
A recent successful IPP project in neighbouring Mozambique shows what can be done to address Africa’s power needs. In February 2016 Mozambique President Filipe Nyusi inaugurated the 120 MW Gigawatt Park gas-fired power station in Ressano Garcia. The project, which took 18 months to complete, was developed by South African investment group and majority shareholder in the project Gigajoule International.
The stalling by state-owned electricity utility Eskom on signing PPAs with 37 IPPs since July 2016 has undermined the credibility of the South African government. On 9 February 2017 President Jacob Zuma in his State of the Nation Address instructed Eskom to sign the outstanding PPAs.
“Eskom will sign the outstanding power purchase agreements for renewable energy in line with the procured rounds,” Zuma said. Panel members said however that the damage has been done and IPPs would in future be more wary of participating in South Africa’s power procurement.
Politicians and bureaucrats do not seem to understand the concept of “time is money” so the millions of dollars in interest charges while no revenue was being generated since July 2016 will make private sector investors wary of preparing bids where there was little certainty.
“The changing of the rules in midstream has done severe damage to South Africa’s hard won reputation as a reliable partner. What you need from governments as an IPP partner is certainty, predictability and trust that commitments will be met,” Matthew Ash from Ash Konzult said. Fazeel Moosa from Investec said that smaller projects have greater flexibility, while a modular approach to project development could also help establish trust between all parties concerned. “What we are seeing is that phased projects have a greater chance of success so Noor 1 for instance leads to Noor 2, Noor 3 and so on,” Moosa said.
Paddy Padmanathan from ACWA Power agreed and said that community involvement was also a key success factor. “When we develop a project we aim to maximize the retention of value in the local and national economy and in the local communities through maximizing the share of expenditure for construction and operation and maintenance at a local and national level. We do this by maximize local skills development and meaningful job creation, so with partners such as Nestle and Revlon we undertake in parallel, community development activity to uplift and contribute to the local economy and community,” he said.
Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status. The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.
This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago. In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.
However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced. Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.
The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.
The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.
On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.
The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.
Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.
Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).
“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.
Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.
This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.
For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.
Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers. “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.
‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’
According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.
Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.
“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.