Presentation on Ghana Power Compact to UK-GHANA TRADE & - - PowerPoint PPT Presentation

Presentation on Ghana Power Compact to

UK-GHANA TRADE & INVESTMENT FORUM

Wednesday nesday, , June 28 2017

Presentation Objectives

 Introduce MiDA and what it does  Explain the goal and objectives of Compacts I & II  Discuss Ghana Power Compact and how it seeks

to address the root causes of unreliable and unavailable Power

 Explain the importance of the PSP in ECG and its

roadmap  Explain the structure of the ECG PSP Transaction.  Discuss the role of the Council of State

Background- MiDA

Statutory organization established in 2006 under Act 702, and Acts 709 & 897 as amended

 Located in the office of the President  Has a Board, a Management Team, Staff and will have Stakeholder Committees

Designated as the Accountable Entity to implement the Ghana Compact II Program To perform GoG’s rights and obligations to

• versee, manage, and implement the

Compact Programs Allocate resources and manage procurements To implement any other national development programmes funded by GoG and /or development partners

The Compact: What is it?

 An agreement between states

• r nations.

Ghana has signed Compacts with the US Government

 MCC-- US Government Agency

 Compact approved by Parliament.  It has the force of international law.  Enters Into Force (EIF) when certain agreed or pre- determined conditions are fulfilled

Compact Goal “ Poverty reduction through economic growth”

Compact I

 Ghana signed 1st Compact with the U.S.A in 2006  US$547 million Grant  Focused on Agriculture & Road Infrastructure  Entered into Force in 2007  Completed in 2012

Dr Paa Kwesi Nduom, Minister of Public Sector Reforms and Chairman of the Millennium Challenge Authority Board signed for Ghana, while Ambassador John Danilovich, Chief Executive Officer of the MCC, signed for the U.S.

Compact I: Objectives

 Enhance the profitability of cultivation, services to agriculture and product handling in support of the expansion of commercial agriculture among smallholder farmers  Reduce transportation costs affecting agricultural commerce at sub-regional and regional levels  Strengthen the rural institutions that provide services complementary to and supportive of, agricultural and agri-business development

Benefits of Compact I

Upgrades to sections of N1 Highway Improvements of Lake Volta Ferry Services Irrigation schemes Improvements of Trunk Roads (and feeder roads) GREATER ACCRA EASTERN/ VOLTA

COMPACT II--

THE POWER COMPACT

Compact II

 Also called the “Power Compact”  US Grant: US$ 498.2M

• Program Funding of US $469.3

million

• Compact Implementation

Funding of US $ 28.9 million

 GoG Contribution: US$ 37.4M  Total Project Funds (projected): US$ 535.6M  Compact term: Five (5) years from EIF

• Fin. Min. Seth Terkper signs COMPACT II for Ghana and CEO Dana

Hyde for MCC. Pres. Mahama and Sec. Kerry look on.

Objectives of Compact II

❖ Increase private sector investment and the

productivity and profitability of micro, small and large scale businesses

❖ Increase employment opportunities for men

and women

❖ Raise earning potential from self-

employment and improved social outcomes for men and women

Compact II-- Choice of Projects

 Constraints analysis (2012) revealed binding constraints to private sector investment and economic growth in Ghana.

 Inadequate and unreliable supply of electricity  Lack of access to credit  Lack of access to secure land rights

 GOG selected the first constraint as the key area to address in Compact 2.  Problem tree to identify root causes of constraints

The power sector problem tree

Lower productivity for businesses and firms Reliance on diesel and other energy sources High production losses for businesses High cost of energy intensive production

Insufficient access to power Low reliability

• f power

supply

Governance and regulatory framework does not meet needs of all stakeholders

Insufficient power supply to meet demand Transmission capacity is constrained Distribution system is constrained & inefficient

Low quality of social services

Limited Household Income generation

LEGEND: “Effects” are in purple “Starter problem” from CA in red Key nodes in orange Root causes in blue

EFOT and the Power Sector Problem Tree

Distribution system is constrained & inefficient High System Losses High Dx tech losses High commercial losses Frequent

• utages

Dx system equipment is old & obsolete Inadequate capacity of Dx network to accommodate growth in demand Utilities do not have balance sheets that allow them to borrow Uncontrolled development in urban areas High costs of credit and short term repayment periods Low reliability of power supply Distribution system is constrained & inefficient

LEGEND: “Effects” are in purple “Starter problem” from CA in red Key nodes in orange Root causes in blue

Problems identified are resolved through compact projects and activities and through government actions mandated by the Compact

Efforts to improve power sector –

(The Power Sector Reforms)

Energy crisis in late 1970s and early 1980s led GoG to consider reforms in power sector GoG Commissioned SYNEX of Santiago, Chile, to study power sector

 led to set up of Power Sector Reform Committee and development of Action Plan in 1994  Energy Commission & PURC formed later  Reforms consistent with changes in Chile, UK, Norway, Argentina, Ireland, Ivory Coast etc.

Motivations for the Reform then, were:

 Make the operation of the existing electric system effective and eliminate power shortage.  Provide private capital for the Power Sector as the existing Public Utilities were

• verwhelmed with debts and could not expand.

 Need to privatize Public Sector Enterprises to make them more effective.

Efforts to improve power sector – (The Power Sector Reforms)

 In 1994:

 VRA -- sole generator and transmitter of power,

 ECG /NED -- distributors, and  Ministry of Energy -- technical & economic regulator.  Some progress made at reform but not enough  Generation to be opened to private sector competition (i.e. IPPs)-- Completed

Distribution: ECG to be horizontally unbundled and private sector participation introduced in each regional distribution company

 Transmission would be open-access.

 Need to unbundle VRA (2008) -- COMPLETED

Rationale for Compact II Projects

• US$ 8b -- US$ 12b required for

new power generation plants in the next 10 years.

• Needed to meet increasing power

load growth demands

• GoG alone cannot meet funding

requirements

• IPPs to provide needed

investments

• Perception of no credible off-

taker hampers IPP investments in power sector

• Fear of failure to recover

investments in current off-taker distribution arrangements

• With other constraints in

generation, transmission and distribution, it is initially critical to resolve issues with distribution now.

• Other constraints in respect of

tariff setting and fuel availability are impediments and require resolution

• Projects selected based on

these facts and constraints

MiDA Compact II

Project Listing

• 1. ECG Financial & Operational Turnaround Project
• 2. NEDCo Financial & Operational Turnaround Project
• 3. Regulatory Strengthening & Capacity Building Project
• 4. Access Project
• 5. Power Generation Sector Improvement Project
• 6. Energy Efficiency and Demand Side Management

COMPACT PROJECTS & ACTIVITIES

ECG Financial & Operation al Turnaroun d

Private Sector Participation Modernizing Utility Operations Commercial Loss Reduction Technical Loss Reduction Outage Reduction

NEDCo Financial & Operationa l Turnaroun d

Private Sector Participati

• n

Modernizi ng Utility Operation s Tamale Service Area

Improvement

Commerci al Developm ent

Regulatory Strengthenin g & Capacity Building

Sector Performanc e Monitoring Capacity Building Tariff Review & Regulation

Access

Infrastructur e Upgrades Social Inclusivenes s & Improved Partnerships

Power Generation Sector Improveme nt

Operationaliz e “Gas to Power” Value Chain Facilitate LNG Development Strengthen Sector Planning & IPP Framework

Energy Efficiency & Demand Side Managemen t

Development and Enforcement

• f Standards

and Labels Improved Energy Auditing Education & Public Information Demand Side Infrastructure

The ECG Financial & Operational Turnaround (EFOT) Project

• 1. Private Sector Participation

(PSP) in ECG

• 2. Modernizing Utility

Operations

• 3. Reduction in Commercial

Losses and Improvement of Revenue Collection Rates

• 4. Technical Loss Reduction
• 5. Outage Reduction

Private Sector Participation. PSP vs. Privatization

PRIVATE SECTOR PARTICIPATION PRIVATIZATION

 Umbrella term describing forms of private sector involvement in the public space  Includes:

outsourcing, management contracts, leasehold, Concession and  privatization

 In the ECG Concession,

• wnership remains with GoG.

Therefore it is NOT privatization  Used loosely to refer to PSP  has a more focused meaning  It is therefore: the process of transferring

• wnership of a business,

enterprise, agency, public service or public property from a public sector to a private sector

PSPs in Ghana-- Previous experience

 Ghana has experience with PSPs. Seven are recorded by the World Bank. The two best known are:

 Privatization: Sale of 70% stake in Ghana Telecom to Vodafone  Concession: Twenty-year concession to MPS for container terminal at Tema

 Lessons learnt

 Operational efficiency: Vodafone turned around Ghana Telecom extending and improving quality of service  Performance: MPS invested around US$200 million which has greatly improved services and turn-around times at Tema  Transparency: The Ghana Telecom transaction had a negative public perception, in part because the deal was not seen as transparent. There was also an issue of a lack of transparency in the case of MPS  Regulation: The regulatory environment in both transactions was clear and works well  Human resources: In both transactions some workers were made redundant and paid off

PSPs in ECG: Power sector experience

ESBI Collaboration with ECG

 ESBI provided ad hoc technical assistance starting in the 1980s to manage specific technical projects, including the Customer Billing and Information System  This led to the successful implementation of a new billing system

EDF Assistance with ECG

EDF was retained to establish ECG’s Customer Service Department in 1994 6 managers were provided by EDF The contract was for 4 years

BXC Assistance with ECG

 BXC (China) currently contracted to reduce losses in the LV network in the coastal areas near Accra  Installation of prepaid meters for LV customers and of energy meters at the MV/LV transformers  Contract duration not known

 Experiences to date are focused on Technical Assistance (TA) or contractor services;

PSPs in ECG

The private sector:

 did not assume responsibilities for the

• verall results of the company

 did not invest and had no risk on the financial performance of the company  Improvements and changes were limited in scope.

The ECG PSP Activity

 The Compact offered two options:

 Partial Privatization and  a Concession

 Government chose Concession after further analysis  Transfer Operational Control to private sector  ECG’s assets will remain 100% GoG owned  Private partner will invest in, operate, and maintain the distribution network for a specified period

26

What is a Concession?

❖ Something conceded by a government or a controlling authority; such as in a grant of land, a privilege, or a service ❖ Ownership rights continue to reside with the public authorities save operation and development rights ❖ The concessionaire operates and manages the assets on behalf of government and gets paid through tariffs allowed by the regulator ❖ The concessionaire bears significant risk associated with investing in, operating, and developing the asset ❖ Concessions usually last for long periods of time ❖ The Concessionaire pays a (lease) fee for the right to use the assets ❖ Concession is similar to Abusa or Abunu

Advantages of a Concession

 Fosters economic growth if carefully negotiated  Allows the public sector to concentrate on the monitoring and regulation

• f obligations

 Ensures that real tariff levels reduce over time for the power sector  Creates jobs  Brings in needed investments  Builds the capacities of indigenous organizations and individuals  Introduces efficiencies in the

• perations of utilities

 Ensures minimum political interference, hence more stable service delivery

Disadvantages of a Concession

 Extensive dialogue and joint planning required prior to entering into binding contractual commitments  Require close monitoring in terms of contracts and enforcement of compliance and penalties  Often renegotiated, over life of concession

 This gives public perception that PSP is not working and affects public support

Rationale for PSP in ECG

 A technically and financially sound distribution subsector is key to the viability of the power sector  Distribution identified as weakest link in the power supply value chain  Unless distribution utility operates on sound commercial principles and pays for the power it buys from generators, sector investments will not be sustained  PSP in ECG is essential to solving the power problem in Ghana once and for all

Acceptable ECG PSP Transaction- as defined by the Compact

 Leverages private capital to address operational & commercial competencies necessary for specific challenges of ECG’s operation & which meets the following criteria:

• Includes a strategic partner meeting the requirements of the

Acceptable ECG PSP Provider

• Results from open, competitive and transparent process
• Encourages local participation at both the ownership and
• perational levels
• Is sensitive to local customs & conditions
• Ensures the equitable treatment of ECG Staff (No

retrenchment planned)

• Applies a corporate-wide approach with respect to operations,

management & governance of ECG

Acceptable ECG PSP Provider- as defined by the Compact

 Has relevant technical experience and a proven track record of helping electricity distribution companies of similar size and scope as ECG to become profitable.  Has relevant experience in developing countries  Has adequate financial capacity as evidenced by the ability to satisfy the minimum equity threshold and tangible net worth requirement set forth in the tender documents released by GoG for the Acceptable PSP Transaction  Is selected through a bidding process based upon parameters to be designed to maximise value for the Gov’t and meet Gov’t objectives

PSP in ECG – The Process

 The transaction management effort started in July 2015

 Held a road show event in Accra in April 2016  Issued a Request for Qualification in April 2016  Notified Pre-qualified Applicants in August 2016

 Prequalified consortia are led by:

 The Tata Power Company Ltd (India), with CDC (UK)  Manila Electric Company (Philippines)  ENEL S.p.A. (Italy) – No longer participating in process  CH Group (Ghana), with EDF and Veola  BXC Company Ghana Ltd (Ghana)  Engie Services S.A. (France)

 MiDA issued the RFP to Pre-qualified Applicants in

August 2016. First Bidder’s conference held in May 2017

33

Proposed Concession Structure

34

 Ghana is seeking a private partner, through a specially created investment vehicle, NewCo, and will:

 Operate ECG’s distribution business for 20 years  Include a 51% minimum Ghanaian private equity participation;  Retain all current ECG staff for its operations;  Meet local content requirements;  Make a minimum of $500m of investments in the first five years; and  Meet key performance indicators over the life of the concession.

Retail competition may be introduced after the fifth year Government of Ghana will not own shares in NewCo

Proposed Concession Structure II

35

 Lease payments shall be made up of

 Debt service for loans for distribution assets  Administrative costs for restructured ECG  Depreciation charge on ECG’s assets

 Indemnity

 ECG to indemnify NewCo for land, social, and environmental risks  NewCo to indemnify ECG for 5 years after concession

 Pre-transfer date working capital and construction works in progress, CWIP

 will remain with ECG  ECG will sign an agency agreement with NewCo to manage them

 Performance Indicators

 Regulatory regime will not change  More stringent requirements within the law will apply

Components of the Bidding Document (RFP)

 A draft Bulk Supply Agreement, BSA;  A draft Support Agreement;

 Addenda to the RfP will include:

 A Financial Evaluation Model  A Tariff Methodology;  A Distribution License;  A Sale License;

36

 Request for Proposals (RFP)

constitutes an invitation to Pre- qualified Applicants to submit a proposals to operate, manage, and invest in the electricity distribution business of ECG;  The RFP document includes details of the bid and the following draft Transaction Agreements:  A draft Lease and Assignment Agreement, LAA;

Lease & Assignment Agreement

The primary agreement.

 It sets out the relationship between ECG and NewCo and details the responsibilities, obligations and liabilities of the parties

Transfers leasehold interest in leased assets from ECG to NewCo Transfers ECG’s rights and titles to some of its movable property to NewCo and Grants NewCo access to other assets of ECG.

37

Government Support Agreement

 Guarantees payment of the buyout price  Guarantees other specific exposures  Indemnifies NewCo. from and against losses incurred by ECG; and  Guarantees energy consumption by critical GoG (security) installations

38

Bulk Supply Agreement

 Describes arrangements for bulk power supply to NewCo  ECG will retain current PPAs  Includes a back-to-back agency agreement with

• NewCo. to manage ECG’s portfolio PPAs and

 NewCo will pay the IPPs directly (or through a coordinated regulated arrangement)

39

Thank You www.mida.gov.gh