africa utility week 05 challenges of undertaking an ipp in south africa as a ppp james aiello 17 may...
TRANSCRIPT
Africa Utility Week 05Challenges of Undertaking
an IPP in South Africa as a PPP
James Aiello
17 May 2005
Contents
Introduction to PPPs in South Africa
Legislation and Regulations
Motivation for IPPs as PPPs
Challenges
Institution
Feasibility Study
Affordability
Value for Money
Transfer of Significant Risks
The Way Forward
Introduction to PPPs in South Africa
South Africa has established firm regulatory framework in which national and provincial governments can enter into public-private partnership agreements (PPPs)
Based on UK, Australian, New Zealand & Canadian experiences
PPP is a:
Written contract between government and a private sector entity
Whereby private sector entity performs a government service
And receives a fee for so doing
In circumstances demonstrating affordability to government, value for money and the transfer of significant risk to the private sector
Legislation and Regulations
Public Finance and Management Act (No. 1 of 1999)
Aims to modernise system of financial management in Public Sector
Is a fundamental break from past regime
Is the basis for more effective governance framework
Enables public sector managers to manage, but are accountable
Ensures timely provision of quality information
Eliminates waste and corruption in use of public assets
Empowers Minister to enact appropriate regulations
Provides for the creation of the National Treasury’s PPP Unit
Regulation 16 Regulates PPPs at the provincial and national level
Defines a PPP
Sets forth the processes by which PPPs are procured
Project inceptions
Feasibility study – TA I
Demonstration of affordability
Demonstration of value for money
Description of risk allocation between government and the private sector
PPP Unit has published PPP Guidelines
Are “Instructions” to government institutions
Compliance required to achieve Treasury Approvals
6
Motivation for IPPs and PPPs
South Africa wants 30% of new power from IPPs
Not to introduce competition into electricity production per se
Purpose is to provide needed energy quickly
Currently not enough peaking capacity
Mining growth, beneficiation will require
Reserve capacity below international standards (>15%)
Will require 1000 MW each year from 2007 – 2010
Fuel diversity/security important, but not determinative
Currently in midst of procurement for 1000 MW via OCGT
Motivation for IPPs and PPPs, continued
Fiscus cannot afford to build required additional supply
Want private sector to finance
International best practices = IPP
PPP processes in place
Provide a structure for procurement
Provide disciplined approach
If current project successful, provides important model
Additional benefits:
Black Employment Equity
SMME development
Skills transfer and training
Local economic development
Challenges
Institution
PPP definition: “perform government service”
Typical PPP has private sector undertaking a sponsor’s service
Project Sponsor is Department of Minerals & Energy (DME)
DME is not currently providing electricity services
Authority of DME to procure new electricity generation capacity
Eskom’s mandate
Eskom’s role in an IPP
Cabinet Memorandum as mandate
Legislation pending – out for public comment
Challenges, continued
Affordability
Treasury Requirement
Affordable to the sponsoring institution
Affordability to whom?
South Africa as a whole
Ultimate users of the energy
Compared to what standard?
If Eskom – what about government subsidies?
IPPs can be more expensive
Peaking plants more expensive
Challenges, continued
Value for Money
PPP Guidelines:
Cheaper (out of pocket), over life of project, for private sector to do than for institution to undertake
Involves identification and quantification of risks allocated to private sector
Since DME is not going to be out of pocket, with what institution is comparison made?
Eskom pretty efficient at building and operating electricity generating plants
Challenges, continued
PPP Guidelines permit consideration of Qualitative factors
Cabinet wants it
Other considerations important
Fiscus
BEE
SMME
Skills Transfer
Fuel Diversity
Immediate generation capacity gap dictates
Challenges, continued
Transfer of Significant Risks:
Typical PPP transfers risks from Institution to Private Sector
Here, Institution (DME) not bearing risks in the first instance
Ultimate risk take is the Off-Taker – Eskom
Risk allocation typically important to Financial Institution
Check balance sheet of SPV members
Assume Institution will want to continue to provide service
Here, Lenders will want commitment government will want to continue to provide service
The Way Forward
Current OCGT IPP:
Seeking TA IIA approval
Preparation of procurement documents
Request For Qualifications
Formation of SPV
Short-listing qualified SPV
TA IIB is next
Allows negotiation with preferred bidder
TA III – Treasury Approval of negotiated agreement
Concluding Remarks
PPP process is being “bent” to accommodate IPPs
Not only instance, however:
Direct agreement between mine & province
Eco-tourism projects
Anticipate further analysis & motivation for adjustment of the PPP processes to allow the current project to go forward
Goal, as indicated, to develop an IPP Template for use going forward
Watch this space.
