Nairobi, 24th of June 2015
Public Private Partnerships are approaches where government bodies and public entities come together to deliver a service to the population by development of needed infrastructure.The service need to be fulfilled by development of a piece of infrastructure is identified followed by generation of project proposals. A decision of whether to procure the project as a PPP or by regular government tendering is done. When the PPP option is chosen, the contract structuring and project development must take into account three key aspects politics, economics and execution. A dedicated unit to handle the transaction in form of a PPP unit is essential. After successful bidding the contract needs to be managed through construction and operation and finally over the life of the contract to its end ensuring value for money for the public.
The process of development and the essential aspects of each stage of a PPP project is as summarised below.
To illustrate, an example of the development of a Geothermal Power Plant in the Olkaria reservoirs in Kenya, similar to the captioned plant below, proposed by GeothermalAreUs Limited (GAU) with suggestion of a 25yr BOOT concession is offered. This is to be done in collaboration with KenGen (a publicly owned electricity generation company managing the Olkaria fields.
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| The 280 MW Olkaria Geothermal Power Plant in Kenya. Picture courtesy of Power Engineering International |
Upon reception of this unsolicited proposal, KenGen should proceed to check the fundamentals of the proposal. This includes whether the proposal is within the law (Kenya's PPP Act, 2013), whether it delivers on the need for cost effective energy generation, whether it negatively affects the debt exposure of the company and its majority shareholder, the Government of Kenya and finally whether there are efficiency gains in implementing this as a PPP. KenGen has the option of undertaking a similar project on its own as it had previously done for earlier Olkaria projects.
If the preliminary analysis returns a positive assessment for the PPP option then a transparent and competitive tendering process for the project as suggested by GAU should be undertaken to ensure that the most efficient approach is selected for implementation and that KenGen gets value for money. GAU could be given a right of matching any better bid or extra points for project origination in the evaluation process. KenGen would also be well advised to engage the PPP unit based in the Treasury as well as comply with regulator information requirements.
Supposing no other bid is as good as the GAU's bid, the focus should now be on the economics, politics and execution of the project to ensure value for money.
In the economics focus, KenGen must carry out due diligence on GAU to confirm the company has the power to enter into contract as well as being in good financial standing to acquire debt and deliver the project. The requirements must be clearly defined. This could be the delivery of 140MW of geothermal generated electricity in the most environmentally friendly and efficient manner, operation of the plant and transfer of the plant after 25 years. The cost, revenues and other fundamentals of the project as proposed must be checked to be sound. The roles of KenGen and GeothermalAreUs must be clearly defined. An example would be KenGen to ensure steam supply while GAU ensures electricity production and export to the grid operator. Risks should be allocated to parties best suited to handle them. KenGen would carry the steam resource risk while the technology and construction risks would be carried by GAU.
As to the political side of the project, the parties should get a political champion, in this case the Cabinet Secretary for Energy would be an ideal champion. The parties must also ensure that the stakeholders are identified, engaged and briefed all through the development of the project. The Energy Regulatory Commission, local communities and the off-taker are an example of key stakeholders. The environmental and social impacts of the proposed project should also be sufficiently addressed and a monitoring plan set up.
When it comes to execution, a PPP unit within KenGen would need to be set up to work with the Treasury's PPP unit to manage the project development. Local and foreign experts should be used by KenGen to strengthen its capacity. The development contract should include penalties and incentives for delivery of project milestones linked to the payment schedule. Quick and fair conflict resolution mechanisms should be set up and political interference with the deliverables and timelines avoided. No negotiations outside of the PPP technical teams should be allowed.
Contract management is also an important factor in the success of the project. KenGen should assign persons and resources to monitor and evaluate the project and later the project company throughout the period of the contract. The quality of service and fiscal situation as well as compliance with set environmental and social standards should be monitored and regular reporting to KenGen undertaken by GAU.
At the end of the 25 years, KenGen should ensure smooth handover of the facility and decide whether to retender for operations management, shut down the plant or otherwise.
Disclaimer: The project alluded to in this article is fictitious and is in no way related to any actual project being undertaken by any of the mentioned real and fictitious parties.
