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James Simpson, Katharine Sonneborn and Giulia De Michelis
Over the last decade, Africa has, for the most part, demonstrated resilient economic performance.

However, sustainable and affordable energy development has not kept pace with economic growth. With the rising demand for power, Africa could witness a continued infrastructure gap which presents a genuine risk to its growth.

The challenges faced by the African continent in 2015 resemble some of those historically faced by the Middle East.

In both cases, regions had the chance to achieve significant economic growth due to an increase in consumer demand and an abundance of natural resources. At the same time, both faced a lack of investment in core infrastructure.

Middle Eastern countries took on the challenge of the infrastructure gap in part by developing Independent Water and Power Projects (IWPPs) and Independent Power Projects (IPPs).

Both have played a major role in the electricity and water sector in the Middle East, providing for significant additional generation and water production capacity in the region.

Over the past decade and a half, Abu Dhabi alone has procured one IPP and nine IWPPs, the most recent being the Mirfa IWPP, which closed in October 2014. These projects raised in aggregate approximately $14 billion in finance and will provide more than 14,500MW of contracted capacity.

Similar models to Abu Dhabi have also been successfully adopted by other countries across the region including Oman, Qatar, Bahrain, Saudi Arabia, Jordan and, more recently, Dubai and Kuwait.

Of course, the African and Middle Eastern contexts have significant differences.

As a result of the divergence of legal and political systems across Africa, as well as government stability, it may be hard to find a single legal or project framework that can be replicated across the continent. The consistency of project frameworks was a notable feature in Middle Eastern projects.

Likewise the impact of the Middle East’s more developed financial markets and commercial prowess in bringing these deals to fruition must not be underestimated.

Lessons across geographies

 

In spite of these differences, drawing on the Middle Eastern experiences can make a vital contribution to the successful development of power projects in Africa.

First, the Middle Eastern experience demonstrates the benefit of having a clear and consistent independent regulatory regime.

This can be customised to accommodate political realities while still facilitating private investment by ensuring fair regulatory oversight for both the public and private sectors.

For example, in 1998 Abu Dhabi issued a comprehensive legislative framework to govern its power and water sectors. This included a coherent regulatory regime, the provision of guidelines for the development of IPPs and IWPPs and, critically, the establishment of an independent regulator.

Projects like Mirfa are a testament to the success of these policies.

Second, a thorough, transparent procurement process is essential. Project procurement should be decided through specific non-discriminatory criteria and open to appropriate public scrutiny.

The opening of financial bids should take place on the bid submission date and in public.

Thirdly, is also essential for projects to be well structured and to follow a contractual template that delivers bankable projects while not requiring extensive reworking for each new development.

In the Middle East, the legal contractual matrix, with the power purchase agreement (PPA) at its heart, has rigidly followed precedent across the region regardless of changes in market conditions.

Fourth, the key to success is ensuring there is a bankable contractual structure. The PPA should ensure a source of revenue over a tenor which is sufficient to repay the project finance loan and provide a return to investors.

The careful selection of creditworthy counterparties is a critical factor in determining the bankability of the project. Fuel supply arrangements must also be secure, preferably by way of a fixed price long term supply agreement.

In Abu Dhabi, the Abu Dhabi Water and Electricity Company (ADWEC) is responsible for the fuel supply as well as being the single off-taker of electricity produced by all the Emirate’s IPPs.

No government guarantee is issued for ADWEC’s payment obligations. However, the Abu Dhabi government guarantees termination payments under the PPA.

Fifth, when setting a tariff consideration should be given to realistic and comprehensive calculations of the costs of generating power and to the price which end users can pay for the power.

In Abu Dhabi, payments by ADWEC to power producers have followed a take-or-pay structure comprising a capacity payment and an output payment. ADWEC also takes the fuel supply risk by paying fuel suppliers directly for the fuel consumed by the power producers.

Finally, projects in the Middle East were able to leverage all possible financing resources, from domestic capabilities to multilateral partners. These have included export credit agencies, multilateral financing institutions, development finance institutions and political risk insurance providers.

All these sources are likely to be vital for the development of projects in Africa as well. — This Is Africa

James Simpson is partner, Katharine Sonneborn is of counsel, and Giulia De Michelis is associate, at the international law firm Winston & Strawn.