potential of IPPs and PPP Munyaradzi Mugowo, Director, Global Pvt Ltd, ZIMBABWE i 18 -22 May 2009 CTICC, Cape Town, SOUTH AFRICA Falling power generation capacity in Zimbabwe and …

Munyaradzi Mugowo, Director, Investfin Global Pvt Ltd,

ZIMBABWE

i18 - 22 May 2009

CTICC, Cape Town, SOUTH AFRICA

Falling power generation capacity in Zimbabwe and the potential of IPPs and PPP

initiatives

18 – 22 May 2009, CTICC, Cape Town, SOUTH AFRICA

Contents

1. Introduction

2. Zimbabwe’s power sector & nature of crisis

- power generation trends; supply and demand situation

3. Economic watershed & demand growth

4. PPP experiment in Zimbabwe

5. Deregulation of power sector

- the proposed reforms

6. Investment opportunities for IPPs and PPPs under

new framework

7. Conclusion


IntroductionGood news about 2009 Zimbabwe

• What is the good news?

- Inclusive government – the assignment & reforms

- Investment climate in the new dispensation

*restrictions on foreign ownership being reviewed;

*exchange control regulations relaxed

*one-stop shop for FDI being established to cut turnaround times

*commitment to protect private investments

- IMF Article IV Consultation report in May painted

a positive outlook for 2009 -- more consultations.

- Business confidence and economic outlook

* business executive expectations and consumer expectations

- Skills – unemployemnt rate as proxy


Zimbabwe’s power sector

• a one-player industry. The Zimbabwe Electricity

Supply Authority (ZESA) Holdings is a legal monopoly

– established through an Act of Parliament.

• Act provides for a single investor, a single operator,

a single transmitter, a single buyer and a single

distributor of power (no marriage here).

• ZESA owns and operates two main power

generation plants:

- Kariba Power Station (Hydro) – 750 MW

- Hwange Power Station (Thermal) – 780 MW

- Others in Harare, Bulawayo & Munyati – 150 MW.

Nature of Zim’s power crisis

• Investment stagnation – installed capacity inadequate:

- Kariba constructed in 1953, & Hwange from 1974-1980.

- There have not been any major new capacity installations after these

- Rehab. and new expansion projects still face a financing challenge

- Poor PPP framework – high commercial risk

• Falling generation capacity

– ageing equipment, supply interruptions (8 interruptions 2007-8 alone)

- poor energy efficiency.

• Falling import cover

- decade of economic downturn has affected current account

• Unreliability of import sources

– supply erratic during peak periods

• Limited IPPs - only private, non-commercial, inward-looking.



Installed vs. available generation capacity

’04’09

Source: ZESA

PLANT DEPEND-

ABLE

CAPACIT

Y

(MW)

CURRENT

AVAILABL

E

CAPACITY

(MW)

PLANT STATUS DEFICIT

MW

KARIBA 750 740 4 UNITS ON

STREAM

10

HWANGE 780 200 4 OUT OF 5

GENERATORS

DOWN

580

OTHERS (SMALL

THERMALS)

150 0 OUT OF

SERVICE (NO

FUEL, COAL)

150

TOTAL 1680 940 - 740


Power generation trends continuedHwange Power Station – two-stage system (480 MW & 300 MW)

• Stage 1, comprises 4 turbo-alternators with 4 boilers

and a plant. All the 4 turbo-alternators currently off

line less than a year after they were rehabilitated:

Generators have over-lived their useful life – system overhaul required.

There have been frequent plant failures as a result of ageing

infrastructure. Until the last refurbishment in 2007, the plant had last

been properly maintained in 1987. (Repairing them just as good as trying

to raise the dead).

• Stage 2 – rehabilitation work yet to commence

• shortage of coal -- coal supplier, HCC, operating below capacity.

• Lack of critical spares & working capital constraints

• high average costs -- low plant capacity, high maintanance costs


Power generation trendsKariba South Power Station – dependable plant

• The underground power station was constructed in

1953. It houses 6 X 100 MW generators.

• The plant and equipment are outdated and

dilapidated -- engineers and technicians are even

afraid of servicing them.

• Although it is Zimbabwe’s only reliable plant, there

have only been minimal refurbishments to the

generators since the station was established in 1953.

• If this plant fails, there is a blackout in the country! This is how precarious the situation is!


Supply and demand situation

• Total installed capacity = 1650 MW

• Available capacity = 940 MW

• Generation deficit = 740 MW

• Available imports = 350 MW

• Total available capacity (+imports) = 1290 MW

• Exports to NamPower = 150 MW

• Total demand (base demand) = 1950 MW

• DEFICIT = -680 MW

Source: ZESA, SAPP


Import supply situation

EXPORTER CAPACITY

(MW)

DURATION

OF

CONTRACT

SUPPLY STATUS

HCB (MOZA) 150 5 YEARS •RELIABLE SUPPLY

ESKOM (SA) 0 •SUPPLY CONSTRAINTS IN RSA

•HIGH COST

SNEL (DRC) 50 5 YEARS •UNRELIABLE

•ERRATIC SUPPLY AT PEAK

ZESCO

(ZAM)

150 5 YEARS •UNRELIABLE

•HARDLY AVAILABLE AT PEAK

TOTAL 350

Source: ZESA


Zimbabwe’s import performance – US$m

Source: Reserve Bank of Zimbabwe

• 2006 -2008 statistics unavailable.

Regression analysis

• Economic meltdown aggravated after 2005

• Migration to multi-currency system – the impact on

public sector balance sheets and cash-flow.

• Consumer liquidity – moral suasion & temporary

price moratorium)

2000 2001 2002 2003 2004 2005

61.7 55.8 55.2 57.7 59.2 42.9


Economic watershed & demand growth

• Suppressed demand for the past nine years as

capacity utilization in critical sectors of the economy

slumped to a record low.- manufacturing – under 10 percent (2007)

- agriculture – around 30 percent

- mining – under 15 percent.

• 2007-2008, power demand slumped 7.7% (SAPP)

• Capacity utilization in bulky power-consuming

industries projected to rise sharply.- closed mines being reopened & engineering firms reopening moribund plants

• This economic rebound has stoked power demand

to a level last seen around 2004 and all of sudden

ZESA is overwhelmed.


Way forward• Generation capacity currently at just about 50%;

• Demand growing with projected economic recovery;

• Import supply not only volatile, but also expected to

down-trend;

• Import costs to rise as regional utilities implement

cost-reflective tariffs;

• Import cover diminishing ;

• A number of new projects on the cards- balance sheet weak

Only two scenarios can rescue Zimbabwe:

1. To deregulate power sector to bring IPPs on board

2. To re-visit PPP initiatives.


PPP experiment in Zimbabwe• PPPs are basically partnership arrangements

between a government or a public entity and a

private investor in the:

- designing,

- planning,

- financing,

- construction, or

- management

of projects both infrastructure and social services.

• PPPs not new to Zimbabwe. PPP guidelines were first

launched in 2004 when the government

restructured the Public Sector Investment (PSI)

programme to accommodate PPPs.


PPP experiment (continued)

• The PPP manual proposed a number of models,

including:

- Build-Operate-Transfer (BOT),

- Build and Transfer (BT),

- Build Own and Operate (BOO),

- Build Lease and Transfer (BLT),

- Rehabilitate Operate and Transfer (ROT),

- Rehabilitate Own and Operate (ROO)

- Contract Add and Operate (CAO).

• Each had a distinct package of incentives depending

on the risk born by the investor .


Lessons• Since inviting the private sector for a dance in 2004,

the government is still alone on the dance-floor!

- Only quasi-government institutions like the National Social Security

Authority (NSSA) have come forth, but as a matter of statutory obligation.

Where did we go wrong?

• The macroeconomic climate deteriorated rapidly

between 2004 and 2009 and increased business risk;

• Hyperinflation of an unprecedented magnitude

made the investment climate unstable and

unpredictable for any type of investment, let alone

long-term, high-risk infrastructure investments.

- projects became exposed to excessive cost overruns and negative returns

on investments – difficult to compute the net present value.


Lessons continued• Political upheavals stoked up political risk

- concerns over property rights protection, for instance, became a greater

factor than business risk. Infrastructure projects inherently high-risk.

- Property Rights Alliance (PRA)’s International Property Rights Index for

2008 ranked Zim and four others number 109 out of 115 economies.

• Perceived country risk as a result of sanctions also

hurt investor sentiment ;

• The PPP framework had many loopholes, notably:

- the government transferred business risk but retained administrative

functions such as tariff determination without recourse to a subsidy

structure , i.e., there were no financial benefits for the private party.

• Human capital flight

- hyperinflation eroded real incomes & triggered brain drain


“Come let’s reason together”

• In the Short-term Emergency Recovery Programme

(STERP) -- an 11-month economic stabilization blue-

print for the country -- the govt openly invited

private players into partnerships with both govt and

public entities:

In order to complement Government efforts, the private sector has a role in financing infrastructure development.

In recognition of this, the private sector is being invited under the Programme to participate in the provision of infrastructure on a public private partnership basis

(STERP, 434-5).


Seizing the moment

• During a PPP capacity building workshop held in

Harare at the beginning of May, the government

undertook to:

- review the country’s PPP policies and guidelines passed in 2004 and

include buy-in from the private sector.

- identified power generation as one of 5 potential PPP areas.

- expressed readiness to assume a new role as “facilitator,” and

“regulator” of public service delivery rather than sole “provider”,

“operator” and “manager” of infrastructure and social services.

• The new spirit is in keeping with the IMF’s

recommendations under article IV cons.:

“Directors underscored that the revival of the economy depends critically

on quickly attracting private domestic and foreign investors and

improving competitiveness.”


Economic watershed• The country has reached a critical economic juncture

where it aims to regain its economic footing and take

a leap forward.

• Without adequate power supply to industry, mines,

irrigated plantations, tobacco barns, hospitals and

households, economic turnaround is a pipedream.

• After operating unprofitably for nearly a decade,

ZESA’s capacity to power Zimbabwe’s economic

recovery bid is severely depleted

• From 2004 to 2008, it had to survive on quasi-fiscal

support for a number of reasons:


Economic watershed

• Poor cash flows due to sub-optimal tariffs

In January 2006, RBZ governor remarked:

“When one observes that in most residential areas, a full

month’s electricity bill comes to a mere Z$20,000, which

amount translates to the price of a small bundle of firewood

to last for 2 hrs; or equally startling, that such monthly bill is

equivalent to no more than 2 packets of candles, it should

come as no surprise that ZESA cannot pay its way.”

• Foreign currency shortage to import critical spares

for plant and equipment maintenance.

• Inability to attend to faults – it goes back to poor

cash-flows & weak balance sheet.


Deregulation of power sectorThe proposed reforms

• Government in the process of reviewing and

harmonizing policy and legislation governing PPPs

and IPPs.

- amendment of ZESA Act proposed to eradicate single investor and single

buyer regime so as to accommodate IPPs.

• New PPP law being considered.

- Law to provide for a full-fledged PPP unit at govt level to play an

administrative, advisory and supervisory role in PPP arrangements.

• Establishment of a balanced PPP manual

- manual to contain guidelines that cater for the commercial interest of

investors and the consumption interests of consumers.

• Independent regulator being considered -- review of tariff

regime in line with SAPP recomm.


Investment opportunities for IPPs and PPs

A: New generation Projects – 3,400 MW

• The government has planned a number of diversified, long-

term power generation projects for 2009-2015, which it

cannot finance.

Source: SAPP

PROJECT CAPACITY

MWEXPECTE

D

COST

US$M

FUNDING/PROJECT STATUS

HWANGE

EXPANSION

600 2012 500 • FEASIBILITY STUDY DONE

•NO FUNDING, NO PARTNER

KARIBA SOUTH

EXPANSION

300 2012 200 •MOU SIGNED

•NO FUNDING, NO PARTNER

LUPANE (GAS) 300 2012 368 •NO FUNDING, NO PARTNER

GOKWE NORTH 1,400 2015 1,357 •PVT, PARTNER ENGAGED

BATOKA 800 2015 2,500 •GOVT-to-GOVT (Zim-Zam) PROJ

•NO FUNDING


Investment opportunities for IPPs & PPPsRegional transmission interconnection

• These generation projects are among the many

integrated projects that SAPP is coordinating to

boost power supply and trade in the regional pool.

• Because of its centrality, Zimbabwe is an important

link in the SAPP grid – the country has potential to

become a regional power hub.

If the Zimbabwe coughs, the whole SAPP system catches the flu!

• Some of the integrated transmission projects

involving Zim, include the ZIZABONA interconnector

(Zimbabwe-Zambia, Botswana-Namibia interconnector).

• NOTE: You can only transmit what you generate!

THANK YOU!

Investfin Global

Pvt Ltd

potential of IPPs and PPP Munyaradzi Mugowo, Director, Global Pvt Ltd, ZIMBABWE i 18 -22 May 2009 CTICC, Cape Town, SOUTH AFRICA Falling power generation capacity in Zimbabwe and …

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