framework for transmission line public-private ...pdf.usaid.gov/pdf_docs/pa00mpcp.pdf · framework...

Framework for

transmission line

Public-Private-

Partnership (PPP)

project

Framework | December 2016

Sanitized version

2

…while saving on costs compared to

government…

BOT models have accelerated expansion of

transmission networks…

… and reducing the burden on

governments’ balance sheets

34%

30-45%

Brazil2

23%

India3Peru1

Countries have successfully used BOT models to scale up

the transmission network while realizing savings and

reducing government balance sheet burden

SOURCE: World Bank workshop, World Bank PPI, ANEEL

1 Sample of 14 projects, 1998 – 2013 2 Price cap Brazilian regulator is willing to accept, based on government historical benchmarks

3 Statement by India’s regulator

Average country cost saving achieved in PPP concessions compared to government’s cost benchmarks

% Winning bid lower than benchmark

21,000 km of lines built

between 2006 and 2016

India

222 concessions awarded and

69,811 km of transmission lines

built from 1999 to 2015 Brazil

6,000 km of transmission line

built since 1998

Peru

India Chile

$23 bn USD of private

sector investment in

transmission from 1998-

2015 in Brazil, India,

Peru, and Chile

Brazil Peru

3

Contents

Strategic framework: concession model choice, risk

allocation, tariff mechanism, selection process

– BOT / BOOT concession model

– Risk allocation principles

– Pricing: tariff mechanism

– Selection process and evaluation criteria

– Contracting and transfer mechanisms

– Performance management

– Gov't obligations

Criteria to select a pilot transmission line

Case examples of strategic framework for specific projects

Country transmission privatization case examples

4

Concession

model

Risk allocation

I

Pricing

II

Selection

process

III

Government

obligations

IV

Contracting

and transfer

V

Performance

management

VI

0

Concession model framework was developed during an

Energy Ministry/DFI/ Donor workshop

▪ What are fair RoE and O&M costs?

▪ How will methodology be determined (Rol vs.

wheeling)?

▪ What pricing mechanisms are compliant with the

Client Country PPP Laws?

▪ Will there be (periodic) pricing reviews?

▪ Who will run the bidding process?

▪ What are the technical and financial criteria, and

relative weighting?

▪ What will be the localisation requirements (if

any)?

▪ Who will be the offtaker?

▪ What will be the selection period duration?

▪ What is the concession term?

▪ What will be the payment approach?

▪ Will there be a need for EOI, RFQ and RFP?

▪ What is the possibility of review under distress ?

▪ How will capacities be transferred?

▪ What will be the valuation at transfer?

▪ What is the governance process?

▪ Who will manage the contract at the

construction and operational stages?

▪ What will be the key KPIs and related

incentives or penalties?

▪ What will be requirement for reinvestment?

And at what levels?

▪ What is the allocation for construction and

operation risk?

▪ Will there be partial risk guarantees for

political risk or force majeure?

▪ How will credit-worthiness of the off-taker

be guaranteed?

SOURCE: Client workshop

▪ What will be Gov't’s involvement wrt. land,

stakeholders and permitting?

▪ How will Gov't approach planning and operations?

▪ Which regulations will be put in place to effect tariff

and contract approach?

▪ For how long will Gov't retain subsidies?

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Pipeline BOT project must balance financial returns and

speed of development across stakeholder’s interests

1 Colors signify level of relative importance within each stakeholder 2 Financier (stakeholder) is not included in analysis, as objectives of financier

largely line up with those of concessionaires; financier will want to ensure certainty of cash flows 3 Needs to be tested

Somewhat importantModerately importantHighly important

CONCESSION MODEL

Stakeholder objective (and level of relative importance1)

2

3

Gov't

Develop local talent

1) Reduce balance sheet liabilities

2) Ensure no increase in short-

term consumer tariff

Desires strong performance

(availability), potentially more

likely in private sector

Overall goal to speed up

infrastructure development

Concessionaire2

N/A

Requires viable return (>

X% IRR) to compensate

risks

Prefers control of asset

operations and maintenance

Desires careful PPP planning

by country new to PPP Tx

lines and bankable risk

allocation

Transmission utility

Develop own capabilities

in O&M

Create cost-reflective

tariff allowing

government-independent

balance sheet

May want to maintain

control over pipeline3

Desire to scale up quickly

but wants to be involved

and build up capabilities3

Objective

category

Skills and

capabilities

Economic

criteria

O&M control

Development

speed of new

infrastructure

4

1

Design considerations

▪ Project model should

prioritize skill-building & be

built into contract

▪ Project must bring in private

financing

▪ Project must balance

consumer tariff while satisfying

hurdle rate for

concessionaires

▪ O&M control should likely

reside within private party, at

least for some period of time

▪ Project will need to be fast

enough to satisfy Gov't

objectives, and planning must

mitigate risks of

concessionaires

7

A BOOT concession model best fits the client’s

strategic objectives

PPP CONCESSION MODEL

1 Excluding PPP models that require increase in property value for adjacent areas (Develop-Operate-Transfer) and PPP models applicable to existing infrastructure (e.g. Rehabilitate-Operate-Transfer)

Relevant1 PPP models as defined in

Client Country PPP Laws Fully meets objectives

Management contract No private financing, no shift of construction risk

Build-Own-Operate-TransferBOOT is the most common model for countries that maintain long

term public ownership

Output performance based

contract

No private financing, no shift of construction risk

Lease No private financing, no shift of construction risk

Concession No private financing, no shift of construction risk

Build-Own-Operate2 No transfer back of asset

Build-Operate2-TransferSimilar to BOMT, but public ownership of asset during concession

might pose disadvantages for financing

Build-Lease-Transfer

Split responsibility for maintenance (Transmission utility) and

construction (private party) might lead to conflicts regarding damages

and lower incentive for quality work by private party

Build-Transfer-Operate2 Private financing only covers construction period

Recommended model

Objectives

▪ PPP model should meet

Transmission utility’s

strategic objectives

– Relieve Gov't’s balance

sheet through securing

private-sector financing

– Transfer risk associated

with construction to

concessionaire

– Enable long term

flexibility for regulator

with Transmission

utility owning asset at

end of concession

▪ PPP model should minimize

total cost of ownership

▪ PPP model should have low

risk for disputes due to

unclear responsibility

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Summary of risk allocation matrix

RISK ALLOCATION AND MITIGATION

SOURCE: Expert interviews, World Bank Group PPPRIC, World Economic Forum (WEF), Global Infrastructure Hub (GIH)

Detailed later in documentx

Detailed risk allocation matrix in draft report

Risks typically owned by

public sector

Risks shifted to private

sector

▪ Subcontractor

performance

▪ Construction

▪ O&M

▪ Insolvency

▪ Accidents

▪ Vandalism and theft

▪ Interpretation of

tax laws

▪ Financing

Risks borne by both

sides in contracting

process

▪ Planning risk

▪ Change of scope risk

▪ Contractual /

legal risk

Reason risk cannot be shifted easily

to private party

▪ Land and wayleave

acquisitionI ▪ GOV is the party with most

influence on land risks

▪ Concessionaires are not willing to

take wayleave risk

▪ Political events (war, riots,

change in law or tax,

issuance of permits etc.)

II ▪ GOV is the party with most

influence on political events

▪ Buyer default - off-taker

risk of paymentIII ▪ Tx Utility does not have an

independent revenue source,

balance sheet and track record

▪ Foreign exchangeIV ▪ Size of KES funding pool is not

sufficient for pipeline of projects

10

Draft risk allocation matrix (1/5)


Entity bears the risk

Entity potentially bears the risk

Commercial

RiskRisk Category Description

Party who bears the risk

GOV

Private

partyTx Utility

Subcontractor risk

Defect risk (and adjudication of liability)

Construction risk

Operations &

maintenance:

performance risk

Change of scope

Off-taker (payment)

risk

Revenue risk1

1 Assumes a consumer tariff is in place): includes pricing [tariff] risk and volume[demand] risk

▪ The risk of subcontractor (first-tier and below)

defaults or insolvency May be exacerbated

through lack of international concessionaire

understanding on quality of subcontractors Kenya

Strategies to mitigate risk

▪ Private party to conduct due diligence of subcontractor

availability and performance

▪ Tx Utility or the operator repairs. Commonly used stores

are left behind by contractor as part of the contract

deliverables. It is possible to also use another manufacturer's

compatible or OEM parts or fabricate spares

▪ Clear EPC contract with output specifications: penalties for

delays (potentially incentives for early completion, but only

if economically makes sense - i.e., power being evacuated,

reduces losses in alternative line, improve generation mix)

▪ Clear O&M contract with output specifications, e.g.

availability has direct impact on payments

▪ Include clear definitions for scope in contract agreements,

and protocol for renegotiation of services and payment, with

scope change

▪ Change after execution is managed under the change

procedures in contract. Most standard form contracts and

procurement law impose upper limit on magnitude of

change possible

▪ GOV will need to offer expanded letter of support to cover

payment risk

▪ Partial credit guarantees from DFIs

▪ Potentially link Tx Utility's consumer tariff revenue and

concessionaire payments: i.e., shift from 100% fixed to some

portion of variable payment, depending on consumer-

Conduct detailed forecasts of energy consumption

▪ Liquidity support measures such as escrow fund or LC or

government guarantee

Rationale

▪ As Tx Utility is not privy to sub-

contracts (although it approves the list

of subcontractors, it cannot shoulder

any part of this risk and it is up to the

concessionaire to do his due diligence.

▪ After DLP is past, any latent defect

manifesting is Tx Utility risk

▪ GOV has role to ensure that inputs

(imported goods) are not held up in

being brought into Kenya

▪ Private party assumes risk to meet

targets (loss / availability, etc.) as

specified in contract agreement

▪ Change prior to contract signature can

be managed in negotiations

▪ Similar to Kenya Power's PPAs in

generation (historically) backstopped

by GOV [until now, in early 2017,

when Tx utility potentially has enough

of a track record and balance sheet to

stand on its own]

▪ Recommended payment model is fixed,

which leaves Tx Utility to bear

revenue risk due to variations in price

or volume

▪ Risk of which party is blamed in case of defect

after construction (only exists of construction

party is different than O&M party)

▪ On time, on spec, on budget (includes 'design'

risk / meeting specs, includes 'resource / input

risk' managing supply chain, and choice of

technology risk)

▪ O&M risk - asset KPIs, e.g., availability

▪ Project specifications changed (scope, route,

duration) ; change prior to contract signature /

change after contract signature

▪ Risk that the public partner does not meet its

payment obligations

▪ Related to off-taker risk,the contracting

authority's funding source may depend on

commerical and political factors out of their

control, e.g., energy consumption, or ability to

change consumer transmission tariff

11

RiskRisk Category Strategies to mitigate riskDescription Rationale


GOV

Private

partyTx Utility



Commercial

(contd.)

1 Only applicable if there is asset transfer in con-cession model; 2 only applicable if transmission tariff is introduced



Insolvency risk

▪ Risk that the SPC and/or an important

shareholder or stakeholder in the project

becomes insolvent and is unable to continue to

function

▪ N/A ▪ Increased transparency through due diligence requirements

before financial close

▪ There should be step-in rights for GOV / Tx Utility to get

someone else to finish the job. Insolvency should be a

default event.

Environmental risk

▪ The possibility of liability for losses caused by

environmental damage [that are not anticipated]

arising

(1) From construction or operating activities (see

operating risk) during the project term, or

(2) Pre-transfer activities whether undertaken by

the institution or a third party and not

attributable to the activities of the private

party or the subcontractors

▪ Thorough due diligence by the bidders of the project site

conditions

▪ Independent surveys of the project site commissioned by

the institution at its cost

▪ Institution indemnity for latent pre-transfer environmental

contamination, limited by a cap (subject to value for money

(“VFM”) considerations), for a specified period

▪ Remediation works to remedy identified pre-transfer

environmental contamination as a specific project

deliverable, including independent monitoring of

remediation works

▪ Private party should conduct due

diligence and assume site risk

Accidents

▪ Liability for accidents

(1) during construction

(2) during operation

▪ Public liability insurance for private party▪ Private party should have public liability

insurance and hold Tx Utility / GOV

harmless in the event of liability being

visited on these parties.

Collections risk2

▪ Liquidity support measures such as escrow fund or LC or

government guarantee

▪ Public entity: potentially Kenya Power /

Tx Utility

▪ Risk that user fees cannot be collected form users

as anticipated

Residual value1

▪ Several options to design asset transfer:

▪ Allow 0 residual value, depreciate the asset entirely

(favorable to private party for pulled-forward cash flows)

▪ 'Output specification' of level of quality needed to maintain,

attributing some residual value to it

▪ Risk of residual value of assets is not in

itself a risk, but rather a question of

contracting and which conditions need

to be met to enable transfer

▪ Risk that the value of assets at the end of the

project are not as anticipated [question in

contracting and process on how to value assets

and required O&M / reinforcements]

Vandalism and theft

▪ Technical design

▪ Monitoring and preemptive measures

▪ Risk of vandalism best managed by

party operating asset, subject

nevertheless to force majeure

provisions

▪ Damages through vandalism during construction

and operations

Interpretation of tax

laws

▪ Private party should investigate tax liabilities as part of its

due diligence, such as getting local advisors

▪ Interpretation of existing tax code

Change in tax post execution of

contract should be managed with

stability clauses in contract.

▪ Risk of concessionaire RFP not correctly accounting for

'corporate income tax' in Kenya; Tx Utility experience

shows that interpretations of tax code may differ

(generally quite complex), and the laws differ based on

which country the concessionaire is from

12



GOV

Private

partyTx Utility



Commercial

(financial)

Political & legal



Foreign exchange risk

▪ The possibility that exchange rate fluctuations will

impact on the envisaged costs of imported inputs

required for the construction or operations

phase of the project

▪ Hedging instruments (e.g., swaps)▪ Preference to denominate concession

contract in USD to set precedent for

future PPP transactions (limited KES

debt financing availability)

Wayleave acquisi-tion: delays through lack of social acceptance

▪ Social pushback on transmission line placement

causes delays, e.g., "not in my backyard"

phenomenon

▪ Choose pilot line with minimum visual impact

▪ Close community engagement early in the process to get

local public support

▪ Site acquisition is a risk most efficiently

handled by GOV / Tx Utility

Financing risk (includes interest rate)

▪ Risk that financing costs are higher than expected

due to unanticipated changes of interest rates

▪ Risk that that debt and/or equity is not available

when required and in the amounts and on the

conditions anticipated

▪ Hedging instruments (e.g., swaps)▪ Private party brings in financing and

bears risk of mraket fluctuations

Inflation risk

▪ Actual rate of inflation exceeds projected ▪ indexing of price could limit risk for private party▪ Assumes inflation; risk is minimised

through more frequent indexations

(i.e., monthly instead of annually)

Wayleave acquisition: delays through disputes over land registration and ownership

▪ Unregistered, deceased, absentee, registered to

insane / invalid, registered twice or more, or

disputed (communal land)

▪ Pilot line choice: choose line in region which Tx Utility has

had historically minimal issues with land titles / ownership



Land acquisition -

Substations

▪ Acquisition of rights, squatting (before

construction), prevention of construction

through protests, etc.

▪ Pilot line choice: choose line with substations built▪ ….

Wayleave acquisition:

disputes over quantum of con-sideration paid for right of way

▪ Landowner demands amounts in excess of

valuation (in which acceeding to those demands

leads to budget overruns and domino effect, or

breach of law with payment out of public funds),

or resisting demands leads to delay / negotiations,

forcible entry (against DFI policy)

▪ Choose pilot line with minimum number of project-affected

persons (fewer negotiation points)

▪ Explore option-to-purchase wayleave based on success of

RFP process





Commercial

(contd.)Insurance risk

▪ Substantial increases in the rates at which

insurance premiums are calculated, OR

▪ Changes in scope of insurance coverage (events

previously covered are no longer covered)

▪ … ▪ If uninsurable event occurs, termination of PPP agreement

following force majuere with compensation to private party

▪ Institution can potentially self-insure

13



GOV

Private

partyTx Utility



Political & legal

(contd.)

Political event as

defined in GOV

standardised support

letter




extrajudicial challenges

▪ Compensated landowners may interfere with

project implementation in a bid to eke out more

amounts

▪ Third parties may impede project progress in a

bid to coerce CSR projects and other benefits

such as employment or contracting of locals

▪ Enchroachers try to get payout but moved in

after the cutoff date






litigation risk may delay

progress and increase

costs

▪ …▪ Site acquisition is a risk most efficiently


▪ Risk of uncertain outcomes, cost of

representation, pace of litigation, and scope of

litigation (i.e., may be multi-faceted and involving

issues other than RoW)

Planning risk (includes

government conduct)

▪ During the feasibility phase of the project, a legal scan is

undertaken by the institution to identify all such consents.

The contract should spell out which permissions are Tx

Utility's responsibility and which ones are the private

party's.

▪ Release RFP only after all permits have been obtained

▪ As a rule of thumb, operational

licenses such as transporting out of

gauge equipment should be the private

party's whereas site permissions such

as physical planning should be with the

party that acquires site.

▪ The possibility that consents required from other

government authorities will not be obtained or, if

obtained, can only be implemented at a greater

cost than originally projected

▪ GOV standardised letter of support▪ Political & legal risks are best mitigated

through public party

▪ Any blockade, embargo, insurrection, civil

commotion or any act of sabotage

▪ GOV standardised letter of support

▪ Political risk insurance

▪ Economic equlibirum clause (onus on GOV to restore

economic balance - to compensate concessionaire for

financial changes due to change in law, back to agreed-upon

levels)

▪ Political & legal risks are best mitigated


▪ Any Change in law which has not been addressed

within the provisions of the Project Agreement



▪ Any riot to the extent that it is not attributable

to the action or inaction of the Company


disputes over timing of

payment

▪ Compensation my be made too early (and

landowners run out of money before

construction starts), or too late (after

construction begins, driven by lack of funds)

▪ Engage DFIs for funding to ensure fund availability at time of

payment

▪ Clear contracts with landowners specifying time of payment

▪ Implement programme management to ensure successful

execution of timing of payments



14



GOV

Private

partyTx Utility

Political & legal

(contd.)



Political event as

defined in GOV

standardised support

letter



▪ Any failure or refusal by a Governmental

Authority to issue or renew Authorisations in

spite of compliance with requirements



▪ A Change in Tax which has not been addressed

within the provisions of the Project Agreement



▪ Any expropriation confiscation, or compulsory

acquisition, of all or a portion of the propertiesor

assets of the Company

▪ Political & legal risks are best mitigated


▪ GOV standardised letter of support


▪ A non - insurable event of Force Majeure

affecting the Contracting Authority and to be

dealt with on project by project basis



Contractual / legal risk

▪ Risk of mistakes in the contracts related to the

project

▪ Mitigation for Tx Utility is to hire a PPP transaction advisor▪ …

▪ Declared war or act of foreign enemy ▪ GOV standardised letter of support▪ Political & legal risks are best mitigated


Force Majuere

▪ The possibility of the occurrence of certain

unexpected events that are beyond the control of

the parties (whether natural or “man-made”),

which may affect the construction or operation of

the project

▪ Defining “Force Majeure” events will be key, which need to

be tailored for each project: some events that are not

defined in one contract may be debilitating to a contractor

in another (e.g., suspending works upon negative advisories,

perhaps due to insurance)

▪ Clear protocol for termination for Force Majeure


▪ …

15

To minimize burden on Gov't some of the remaining public

sector risks could be carried by DFIs

RISK ALLOCATION

Typical risk allocation for realized

international projects

Proposed risk allocation Further engagement with DFIs and

market required to detail proposal

SOURCE: Expert interviews, DFI Group PPPRIC, World Economic Forum (WEF) Global Infrastructure Hub (GIH)

Letter of support covering

specific political events

▪ DFI guarantee of specific political risks, e.g., MIGA

political risk guarantee

▪ Political Risk Insurances (PRI) for specific events

(e.g. termination due to civil unrest) to reduce

required scope and cover of Gov't letter of

support

N/A

Mitigation mechanisms and allocation options for risks owned by public sector

Risk typically owned by public

sector

Low liability for Gov'tHigh liability for Gov't

Government distribution utility

DFIs / Export Credit Agencies (ECA) / private sector

insurers Gov'tPrivate party

Only limited risks

can remain on

private party to

ensure sufficient

interest and

competitive

bidding

▪ Distribution utility pays into

ring-fenced account

▪ Regulatory agency con-firms

inclusion of amou-nt into

regulated tariff for net neutral

effect

Some remaining contingent

liability for Gov't through

indemnity clause, typically

required for DFI support

▪ Short-term payment guarantees (e.g., 6-month DFI

coverage for buyer default)

▪ ECA Commercial Risk Insurance (CRI) for

specified causes of default

Pass through of risk to

consumer through tariff,

Client country power to

collect

Contingent liability will be in

USD (or other hard-currency)▪ Hedge instruments, e.g., DFI currency swap

Gov't letter of support only

covers selected events

after wayleave acquisition

▪ DFI-funded facility established prior to RFP to

acquire wayleaves, capitalised as part of project

costs at commercial closeN/A

Buyer default - off-taker risk

of payment [from

commercial risk only]

Foreign exchange and

inflation (of FX currency)

Land and way leave

acquisition

Political events (war, riots,

change in law, change in tax,

governmental issuance of

permits and approvals etc.)

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Recommended payment option for concessionaire

is a fixed annuity payment model

CONCESSIONAIRE PAYMENT MECHANISM

Recommended model for Client country

SOURCE: McKinsey global transmission analysis

1 Not exhaustive: countries may use multiple payment models, varying by region or concession nature (e.g., depending whether private party creates JV with government entity, or

2 Example structures are RoRAB (Return on Regulated Asset Base) or RoE (return on equity)

Energy-

indepen-dent

(ROI)

Energy-

dependent

Wheeling charge

payment for

energy transmitted

▪ Tariff price per

kWh times

volume

▪ US, Canada ▪ Developed markets with

stable and predictable

energy flow

Concessionaire payment model Payment

Example countries that

use the model1 When it’s usedAdvantages and disadvantages

▪ Private sector can take on part of

network extension planning

▪ Volume risk to concessionaire

requires stable demand forecasts

to allow investments

‘Annuity model’: annual payment covering cost and return of line

▪ Fixed annual

payment with

possible

escalation

▪ Malaysia, Brazil, Chile,

Peru, India, Australia,

UK

▪ Developing markets with

rapid network growth

▪ Without volume risk,

concessionaires are willing to

invest in rapidly changing markets

Fixed return

models (%):

regulator dictates

▪ Percentage return

on equity or asset

base2

▪ US

▪ UK (recently

introduced RoE)

▪ Established transmission

networks with advanced

regulatory systems

▪ Provides incentive for re-

investment to maintain assets

▪ Potential for disputes between

regulator and concessionaire over

additional investments

18

A model based on annuity payments to concessionaire is the

most likely option, but will likely require an increase in tariff

or Gov't subsidy

SOURCE: Team analysis

Energy Payment Tariff increase Gov't subsidy Preferred options

BOOT (annuity)BOT (annuity) BOOT (wheeling)

Consumer Dx UtilityTx

ConcessionaireConsumer Dx Utility

Tx

Concessionaire

Gov't subsidyTariff increase


Utility

Conces-

sionaire

Tariff

increase


Concessionaire

Gov't

subsidy

Con-sumer Dx UtilityTx

Utility

Conces-

sionaire

Tariff

increase

Gov't

subsidy

TARIFF MECHANISM

Option 1

▪ Consumers pay current tariffs to Dx Utility

▪ Dx Utility (or Transmission utility) pays annuity to

concessionaire

▪ Consumer tariffs increased or Gov't subsidy to cover

annuity payments

▪ Risk borne by Dx Utility (or Transmission utility) as

concessionaire receives full annuity payment regardless of

line availability or how much energy flows through the line

Option 2


▪ Dx Utility (or Transmission utility) pays annuity to

concessionaire

▪ Consumer tariffs increased or Gov't subsidy to cover

annuity payments

▪ Risk borne by Dx Utility (or Transmission utility) as

concessionaire receives full annuity payment regardless of

line availability or how much energy flows through the line

Option 3


▪ Dx Utility (or Transmission utility) pays wheeling tariff to

concessionaire under PPA-type agreement with guaranteed

minimum annual energy volume

▪ Concessionaire may agree lower tariff with potential for

upside based on energy volume above minimum

▪ Combination of tariff increase and Gov't subsidy may be

used to cover annuity payments

▪ Risk shared by Dx Utility (or Transmission utility) and

concessionaire as wheeling tariff payment is based on energy

but with potential for higher payments as demand grows

19

A single pilot line would result in 0.5% increase in consumer

energy tariffs while the entire 3,000KM pipeline would

result in 12- 14% increase

1 Based on current tariff value (bottom-up calculations from team);

NOTE: annuity payment requirements are simplified to using the ‘PMT’ formula – ignores several variables (interest during construction, working capital, depreciation, etc.)

SOURCE: Transmission utility tx project pipeline, Client country Power Annual Reports

TARIFF MECHANISM

3,000 KM pipeline by 2020

And for entire 2020 pipeline…

…total annuity payments of…

… and national retail tariffs increase by

ILLUSTRATIVE NUMBERS

▪ 3,000 KM of new tx lines

▪ Mix of 132 KV – 500 KV

▪ Estimated cost – 2.1 bn USD

▪ Annual energy tx (2020 proj.) –

12,000 GWh

▪ 2.5 USD ¢/kWh

▪ 12 – 14% increase

▪ 300 mn USD/year

Impact of one pilot line

Assuming for single pilot line…

…annuity payments will be…

…and national retail tariffs increase by...

▪ 330 KM, 220 KV

▪ Estimated cost

– 88 mn USD construction

– 16 mn USD wayleave

▪ Energy sold (2016) – 10,000 GWh

▪ WACC estimate of 9.0%

▪ 0.15 USD ¢/kWh

▪ 0.5% increase1

▪ 15 mn USD / year

20

Transmission or distribution utility will make annuity

payments to concessionaire under the BOT or BOOT model

SOURCE: Team analysis

Energy Payment

BOT model BOOT model

MWhGx

Dx

Utility

Tx

Transmission

utility

Consumer Concessionaire

MWh

$

$ MWh

$

Retail tariffs Annuity

Annuity payments will need to be covered by either increasing retail tariffs or through Gov't subsidy or both

Gx

Dx

Utility

Tx

Transmission

utility

Consumer

Concessionaire

MWh

$

$ MWh

MWh

Retail tariffs Annuity

$

Transmission utility pays concessionaire

Dx utility pays concessionaire

Dx Utility or Transmission utility pays concessionaire

Dx

UtilityConsumer

Tx

Concessionaire

Gx

Annuity Retail tariffs

MWh

$$

$ MWhMWh

$

Transmission

utility

TARIFF MECHANISM

▪ Counterparty to concession agreement will make

payments directly to concessionaire

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Selection process

SELECTION PROCESS

Target number of bidders after each evaluation step

6 6 4

15-30

RFP

responses

2Nego-

tiation

Responsiveness

(completeness of

technical bid)

QualificationTechnical evaluation

Financial evaluation

Creation of short list

comprising of technically

and financially qualified

bidders by

▪ Ranking of bidders

▪ Selection of top 6

Opening of

technical

envelope to

check for

completeness

Selection of top 4 bidders

based on ranking of technical

proposals by evaluation of

submitted details (e.g. project

plan, risk register, approach to

quality control)

Evaluation of

TCO/LTC

Concurrent

negotiation

with at least 2

bidders

23

Key RFQ screening criteria prescribe minimum or maximum

requirements for eligibility and weight specific experience

higher

SELECTION PROCESS

▪ The screening criteria

prescribes minimum (or

maximum) eligible

requirements for each of

the sections

▪ Weighting is higher for

specific experience

(transmission/power sector)

and specific concession

models (BOT/BOOT)

Screening criteria (RFQ)

General

▪ Eligibility of applicants

▪ Consortium setup and membership

▪ Letter of undertaking

▪ No historical contract non-performance

▪ No pending litigation

▪ No conflict of interest

Technical

▪ Project experience

– General experience

– Specific experience

▪ Profiles and CVs of key personnel

Financial▪ Financial ability and stability

▪ Tax compliance

24

RFP award criteria are based on a two-envelope process

where only successful technical bids are evaluated for

lowest total cost of ownership

SELECTION PROCESS

Award criteria (RFP)

General

▪ Determination of responsiveness

– Must meet the requirements of the Bidding Document without material deviation, reservation or omission

– Bid considered substantially non-responsive will be rejected

Technical

▪ Provide detailed design, installation and project management capabilities / methodology

– Engineering of transmission line - structural, civil and electrical

– Survey, soil investigation, profiles, tower spotting, foundations, erection, testing, etc. of transmission lines

– Project management - implementation schedule with matched resources (human, tools, equipment,

subcontractors)

– Quality control measures (at design, manufacture, erection, installation, testing and commissioning stages)

– Safety, health and environmental plan

▪ Must meet technical specifications and performance metrics

– Grid code requirements

– Availability requirements

– Other project specific performance requirements

▪ Provide proof of eligibility and conformity of facilities

Financial

▪ Preferred bidder selected based on lowest total cost of ownership (TCO) / lowest levelized transmission

charges (LTC)

▪ Bid bond

Evaluation will be a two-

envelope process

whereby

▪ Technical bids are

opened on day of

submission to check

for completeness

▪ All complete technical

bids are evaluated by

the Evaluation

Committee

▪ Financial bids of all

successful technical

bids are opened

▪ Preferred bidder

selected based on

lowest total cost of

ownership (TCO) or

lowest levelized

transmission charges

(LTC)

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Contracting and transfer mechanisms overview

Considerations for Client country

BOT

Design implications from DFI

Workshop Reference points

▪ Likely 20-30 years concession

▪ Project extension could be

considered as an option, but leave

terms open to negotiation

▪ Should consider useful life of asset

and increased maintenance costs

▪ Contract length of at least

20 years

▪ Need to determine

whether to include

extension option, and

terms for these

▪ International examples

– 20 years – Chile

– 30 years – Peru

– 35 years – India

– Certain projects allow for option extension of contract1

– Extensions must allow ability to renegotiate ‘escalation’ /

index mechanisms

▪ Client country PPP regulations have ‘soft’ recommendations

for maximum of 30 year concession

Contract length

(detailed next)i

▪ Hypothesis is for 0 residual value

on balance sheet, as long as

Gov't can afford to front-load

payments in annuity

▪ Need to specify what

condition assets should be

in upon transfer

(maintenance, warranty-

and insurance-related

criteria, etc.)

▪ 0 residual value:

– India lines generally leave 0 residual value

▪ Some residual value:

– Brazil generally will reimburse at transfer for only

authorized reinforcements

– Peru Aguaytía-Pucallpa line had no residual value at

transfer (no cost); only outstanding value on the

reinforcements made

Asset transferii

▪ Clauses must be written and

specified to determine value in

concession contract

▪ Need to specify exit

clauses, determinations of

value, revenue, liability

etc.

▪ Detailed clauses exist for other countries to define what

constitutes breach of contract and consequential processes for

each situation, detailing:

– Valuation of the asset

– Fulfilling liabilities

– Transferring information

– Transferring maintenance and operation status

Early ceding of

contract and

inability to fill

contract

iii

1 e.g., several India projects allow extension of contract

CONTRACTING AND TRANSFER

27

Option 1 –

Short term BOOT: e.g., < 10 years

Option 2 –

Long term BOOT – 20-35 years

▪ Attraction to investors: Quick recovery

of investment, which could mean more

attractive to potential investors

▪ Time to full equity: Quick transfer of asset to

Transmission utility / Gov't

▪ Flexibility in BOOT commitment: shorter

commitment in case of any disruption

to transmission business

▪ Lower payment: Lower monthly throughput

fees (capex and opex payments to project

company)

▪ Minimum salvage value: Longer tenure allows

minimum salvage value while keeping fees

competitive

▪ More applicants, large range of contract

prices: Clear preference for RFI participants;

majority prefers this option

to be most financially feasible to achieve

minimum salvage value while keeping

fees competitive

Contracting and transfer: length of contract should balance

interests of contracting authority and concessionaires

CONTRACTING AND TRANSFER

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Performance management incentives vary by country, but all

case examples focus on construction timelines and

availability metrics

SOURCE: Country case studies, DFI workshop

PERFORMANCE MANAGEMENT

Project phase

In addition to performance management incentives, case examples cite specific technical requirements:

Construction: requirements of using equipment passing reference standards (e.g., Client country Bureau of Standards, or IEC)

Line performance: voltage variations, frequency variations, transmission losses, and fault tolerances (several specified in the Client country grid code)

Reference points Hypothesis for Client country BOT

Performance

requirements

Operation and

maintenance

▪ Typically 95%+ in most countries (98% parts of India)

▪ Various approaches to penalties/rewards:

– Brazil penalizes concessionaire for performance below target

– India has penalties and rewards, both tied economically to loss on the line

▪ Frequency and severity of interruptions considered in Philippines

▪ Imperative to include availability

requirements

▪ Levels should be based on Gov't

objectives and historical

requirements

▪ Availability

requirements for

normal operation

capability, and the

capability of the

system

Construction

▪ Case examples tend to penalize late completion, with varying approaches to

early:

– Peru example offers Incentive for early completion;

– One Transmission utility EPC example contract does not incentivize early

completion

– Brazil and Cambodia cases offer penalty for late completion – Brazil,

Cambodia

▪ Some examples do allow concessionaire to develop own schedule of

deliverables, but it must be approved by the grantor

▪ Penalize late completion

▪ Potentially incentivize early

completion, if generation asset is

already on-line

▪ Can introduce flexibility with

allowing concessionaire to define

milestone schedules

▪ Completion time

relative to

scheduled

completion time

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Gov't would need to provide similar support for BOOT Tx

as done in generation projects Equivalent support provided

No support provided

SOURCE: Team analysis, Norton Rose Fulbright, African Energy

NOT SHOWN: Risk that is typically ‘shared’ between public and private parties, e.g., force majeure, arbitration / dispute resolution

1 Presence of demand risk assumes that there is a volume-based tariff in place

GOV'T TRACKER

Risk Typical support in generationProposed for Tx BOOT Strategies and resources to mitigate risk

Gov't support of risk category

Demand risk1

▪ Gov't contracts to pay concessionaire

fixed fee and absorbs demand risk

▪ Gov't analyze volume risk before

implementing tariff and PPP tender

• Demand risk taken in generation

project PPAs, with payments per MWh

on a take or pay basis

Wayleave acquisition

(acquiring of title /

rights to use land for

project)

▪ Acquisition of wayleave prior to

financial close

▪ DFI support with low-cost loan to fund early

wayleave acquisition

▪ Select pilot project with land consents

obtained and/or land funding from DFI

• Gov't prefers not to cover land risk

Regulatory risk

(issuance or renewal of

authorisations )

▪ Obtain all approvals prior to financial

close

▪ If recurrent approvals are required

check if it has to be included in letter

of support

▪ Due diligence by private party on consents

needed

▪ Obtain support (and potentially consents)

from other ministries before tender

• Letter of support covering failure to

issue approvals despite compliance with

required regulations

Early termination /

payment risk (breach

by public party)

▪ Guarantee by national treasury to back

Transmission utility’s payment

obligation

▪ Partial risk guarantee from DFI to strengthen

sovereign guarantee

• Letter of support provided (e.g., Lake

Turkana Wind Power Project)

Political events – force

majeure (war, riots,

insurrection, civil

commotion, sabotage)

• Letter of support for political events

(war, riots, insurrection, civil

commotion, etc)

▪ Letter of support for political events

adversely and materially affecting one

of the contracting parties (need of

guarantee for extreme political events

to be verified)

▪ Partial risk guarantee from DFI

▪ Clearly define political events in project

agreement

▪ Potentially a reduction of strength of letter of

support over time

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Selecting the right pilot line is crucial to attract private

sector interest and successfully prove the concept – several

filtering criteria were identified

1 USD 100 mn contract size is the target to attract initial private sector investment, per DFI workshop and team expert interviews

PILOT PROJECT AND PIPELINE

Pilot initiative funnel

TBD TBD

Full

Transmi-

ssion

utility

pipeline

TBD

Screening

criteria

Pilot projects

for decision

today

Right stage Right size Minimal land risk issues and high

likelihood of line demand

▪ Lower land risk: lines with

registered land, non-pastoralist

communities, and not

community

▪ Likelihood of line demand: assumptions of energy demand

growth in LCPDP still hold

▪ Feasibility study complete

▪ Seeking financing (but does

not have initial EPC

contracts signed)

▪ Aimed to be completed in

2-4 years

▪ Project is > USD 20 mn

construction cost (lines will

contribute significantly to

target contract size of USD

100 mn)1

SOURCE: Transmission utility project pipeline, concessionaire interviews, team analysis

ILLUSTRATIVE NUMBERS

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4 countries have been leaders in PPP Transmission models

1 (TSC) = sum of annual operation & maintenance cost (O&M) and the annuity of investment costs, calculated using a 12% RaR (real annual rate) for 30 years

Not shown: Philippines operates with a different model (whole-of-grid), rather than IPT contracts

Other countries have specific economic requirements (1) Philippines: foreign investment capped at 40%, with concessions 60% locally owned (2) Chile: bidders must also have risk rating of at least BB internationally and at least

BBB locally

FROM DFI WORKSHOP

CASE EXAMPLES

Country Tx growth

Typical

concess-ion TechnicalCountry Additional

Selection criteria

Process Financial

Typical model

used Winning Bid

India

▪ PGCIL (SOE) undertakes many

projects and can receive bid on

nominated basis

▪ Awarded to

lowest TCO

bidder

▪ Process run by

government-appointed

Bid-Process Coordinator

(BPC)

▪ Detailed guidelines and

bidding documents

standardized in 2006

35 yearsBOOT - operation

aspect involves

only maintenance

and asset

management2

Private sector built

21,000 km of lines in

last 10 years, 10.4% of

new lines built since

2002-2007 Electricity

Plan

Brazil

1999 to 2015

organized 38 tenders;

222 concessions and

69,811km of

transmission lines

under BOOT

BOOT - operation

aspect involves

only maintenance

and asset

management2

30 years ▪ Two-phase bid process:

phase 1 is sealed-bid

phase followed by a

second interactive bid

phase

▪ Winner is the

company

requiring

lowest

revenues for

being the

concessionaire

▪ Regulator (ANEEL)

prepares cap on price

it will accept based

on costs from public

database; Average

winning bid is 22.8%

below cost

▪ To avoid underbuilding, change

of ownership is prohibited

before commissioning.

▪ Bids must include bank

guarantee = 1% of reference

value of investment

▪ SOEs are allowed to bid

Peru

30 years ▪ Show

evidence that

they have

operated Tx

system of

minimum

length /

capacity

▪ … ▪ Awarded to contractor

with lowest Total

Service Cost (TSC) 1

▪ Standard bidding

document format,

revised with private

input

▪ Minimum amount of

equity and assets

during last FY

▪ Regulator sets price

cap on investment

and O&M costs

(average 36% lower

than estimated

annual)

BOOT ▪ Awarded to

contractor

with lowest

Total Service

Cost (TSC) 1

6,000 km of Tx lines

built under BOOT

contracts; 18 in total

Chile

20 years ▪ … ▪ … 7 tenders since 2006

over 10 projects and

1200 km (recently

including 140 km 500

kV line)

BOO (no

obligation for

private parties to

transfer)

▪ System operator runs

and determines the

process

▪ Standard bidding

document format, revised

with private input

▪ System

operator runs

and determines

the process

▪ SPV dedicated to Transmission

▪ Bids include bank guarantee of

2.55

36

Consolidated learnings from case studies

1 Cambodia Power Transmission Line Co LTD

CASE EXAMPLES

Risk allocation

>$X bn in BOT

investment

Pricing

Selection

process

Government

obligations

Contracting

and transfer

Performance

management

A

B

C

D

E

F

▪ Risk allocation depends heavily on early v. late stage tender

contract

– Most countries started with early stage tenders

– Early stage: concessionaire takes most design risk

(route and design, wayleave, etc.) (Peru)

– Late stage: government takes most design risk (Brazil,

India)

▪ Regulatory risk handled by government and must be

mitigated on best effort basis (Peru), and has obligation to

reduce perception of this risk (Brazil)

▪ Wayleave acquisition risk varies; some mitigate risk with

route and late-stage tenders (India), others require

concessionaire to acquire land (Peru)

▪ All countries except one (Cambodia) have fixed-payment

models

▪ Concessionaire rate of return for quoted project

(Cambodia) was ~15%

▪ Peru requires indexing of pricing and period review

▪ Bid winners are lowest total cost of

ownership - quoted annual fixed revenue

over concession period

▪ Countries vary in who manages the process;

India appoints a process coordinator, and

Chile has the system operator run it

▪ Technical experience requirement ranges,

must have worked on asset with similar size

and voltage (Peru)

▪ Financial requirements vary: minimum credit

rating (Chile)

▪ Some have localization requirements, 60%

minimum (Philippines)

▪ Bid bank guarantee of 2.5% of investment

(Chile), and 1% (Brazil)

▪ Selection period for some countries (India) is

less than 120 days in total

▪ Availability is a KPI across all contracts (generally 97+%)

▪ All contracts enforce adherence to construction

milestones

▪ Penalties exist for construction and availability

underperformance (Cambodia, Brazil), and replacement

time (Peru)

▪ Generally no reward for overachieving (Brazil)

▪ Reinvestment levels are not specified in any contracts

▪ Concession terms range by country, 20-30 years for each

▪ Payment approach in all but one cases reviewed is a fixed-payment model;

Cambodia has wheeling tariff1

▪ Most countries have separate prequalification and bid stage

▪ Valuation at transfer was only specified in one contract (Peru), which had

zero residual value with clauses for payment of reinforcements

▪ In most models, governments bear the demand risk (pay in

fixed annuities)

▪ [WIP, need to find more examples of government

guarantees]

37

5 specific projects from across the globe were also

reviewed in depth

SOURCE: DFI, ANEEL (Brazil), India planning commissions website,

Case studies Detailed next

Country

Peru Aguaytía-Pucallpa 138kV 132km BOOT Contract document

Brazil

Lote A do Leilão ANEEL nº

004/2014

230 kV and 525

kV

1802 km BOOT (operation =

maintenance and asset

management only)

RFP only

Chile

Línea 2x500 kV Pichirropulli –

Nueva Puerto Montt,

energizada en 220 kV

22kV line;

500kv double

circuit line

600km BOO (private parties do

not have to transfer

asset)

RFP only

CambodiaCambodia Power Transmission

Line Co Ltd

115 kV 221 km BOT DFI post-mortem review

IndiaUttar Pradesh Mix 221 km BOOT DFI post-mortem review

Project name Voltage Length Model Documents available

Varied information is available for any given PPP line within the available documents

Contract documents provide the most comprehensive details, with RFPs and 3rd party documents providing

mixed information

CASE EXAMPLES

38

Risk allocation

BOT

investment

Pricing

Selection

process

Government

obligations

Contracting

and transfer

Performance

management

A

B

C

D

E

F

Peru Aguaytía-Pucallpa 138 kV Transmission Line (2016),

BOOT early stage tender

CASE STUDY: PERU

▪ Concessionaires acquire land and plans route

▪ Burden of all GoP approvals (wayleave, environmental) is on the

concessionaire

▪ Government is required to help on ‘best effort’ basis to get

necessary approvals, if required by concessionaire

▪ Forex risk is mitigated through indexing of payments, but are paid

in soles (risk to concessionaire)

▪ Change of law risk that directly affects contract is taken by GoP

through with ‘Economic Equilibrium’ – renegotiation is allowed

▪ Tariff base is in accordance with Article 1 Law No 28832 (fixed /

wheeling) TBD-

▪ Investment cost and O&M included

▪ Tariff is indexed monthly to US WPSFD4131 (Finished Goods,

etc.)

▪ No information on selection process for this line

(document is contract award)

In general, for Peru:

▪ Bid winner is contractor with lowest Total

Service Cost (TSC)

▪ Minimum technical and financial requirements: (1)

minimum amount of equity and assets during last

FY, and (2) show evidence that they have

operated Tx system of minimum length / capacity

▪ Concession term: 30 years (starts from commercial operation)

▪ Option for extension exists, but process is not detailed

▪ Asset is transferred at zero cost, with only payment made from GoP is remaining

value of reinforcements put in place by concessionaire

▪ Government has right to terminate contract at any time

▪ Government shares regulatory risk with obligation to help ‘on a

beset effort basis’ with regulatory approvals

▪ Government must adhere to contract obligations, including

following procedure of restoring economic and financial balance

of the contract in case of change of law

▪ Government has minimum stipulations for what inputs /

resources can be included

▪ Schedule maintenance time capped at 16 hours / year

▪ Technical specs include maximum ‘loss’ provisions

▪ Construction milestones established with financial penalties

(avg ~$20,000 day) for missing milestones

39SOURCE: India Expert (phone interview); Western UP Power Transmission Co Environment and Social Due Diligence Report

India High Voltage line project context and overview (1/2)

CASE STUDY: INDIA

OutcomesSituation

▪ The Tx & Dx system in India is

a 3-tier structure comprising

distribution networks, state

grids and regional grids. The

interstate and inter-regional

transmission lines are owned

and operated by PGCIL or its

joint ventures

▪ Transmission was recognized

as an independent activity by

the Indian government in 1998,

with the enactment of the

Electricity Laws (Amendment)

Act which also allowed private

investments in the sector.

▪ In recent years, the number of

transactions and quantity of

power flows on the

transmission grid has increased

significantly

▪ The transmission line is

intended to relieve the

pressure on the existing

transmission lines and to

serve several long term large

transmission customers

▪ As January 2016 100 % of the

transmission line and 91%

substation engineering has

been completed.

BOOT example

1

2

Project Details:

▪ Construction of the transmission lines and the sub-stations for

system strengthening and evacuation of power in the state of

Uttar Pradesh.

▪ 12 Tx lines, 861 km in total (1,850 towers)

BOOT details:

▪ Concession period: 35 years

▪ The Consortium quoted an annual levelized tariff of 131.25 Bn

and emerged as the successful bidder for the PPP Project

▪ The project was awarded on a PPP basis, through international

competitive bidding on the basis of lowest levelized

transmission charges quoted in the bid process coordinated by

UP Power Transmission Company Limited (UPPTCL)

▪ Western UP Power Transmission Company Limited

(WUPPTCL) is implementing the Project on a BOOT basis

▪ WUPPTCL is responsible for undertaking ownership, financing,

design, engineering, procurement, construction, commissioning,

O & M of the Project and to provide Transmission Services to

the Long Term Transmission Customers

40

India High Voltage key design principles (2/2)

CASE STUDY: INDIA

SOURCE: India Expert (phone interview); Western UP Power Transmission Co Environment and Social Due Diligence Report

Pricing

B

Selection

process

C

BOT

investment

Risk allocation

A

Government

obligations

D

Contracting

and transfer

E

Performance

management

F

Land rights acquisition: Selection of land avoided all of the

following:

– does not involve resettlement

– fall under 'Schedule Area' or affecting tribal people

– pass through wildlife sanctuary

• Not available

Concession term: 35 years

Payment approach: Revenues: Fixed time, fixed price contract (international competitive bidding)

Winning Bid: 131.25 bn, quoted as annual levelized tariff

Procurement process:

– Uttar Pradesh Power Transmission Corporation Ltd

was authorized to act as the Bid Process Coordinator

– The bid was for a Transmission Service Provider to

establish the Transmission Line and Substation

– The project was awarded on a PPP basis, through

international competitive bidding on the basis of

lowest levelized transmission charges quoted in the bid

process

Debt to Equity ratio: 75% / 25% ($750M)

– $566M Debt: syndication loan with several lenders --

(Power Finance Corporation as lead lender + 3 others)

Land use: ▪ By applying the Land Acquisition Act, the department issues a

Gazette Notification showing the land details and its intention

to acquire the land for the project.

▪ The Government applies the Land Acquisition Act to give a

chance to the farmer to raise a complaint against the Land

Acquisition, if he is not satisfied with the rates

▪ After the above process, payment awarding procedures starts.

After awarding the payment procedures complete

41

Typical BOT framework principles in India

CASE STUDY: INDIA

SOURCE: 11/15/16 Expert interview; Client country BOT workshop Day 2

Pricing

B

Selection

process

C

BOT

investment

Risk allocation

A

Government

obligations

D

Contracting

and transfer

E

Performance

management

F

Payment security risk (off-taker) must be borne by GoI with

some letter of credit in order to incentivize private

involvement

Right of way: a risk taken by the developer in >95% of

instances; however, it may be specified for the government to

help out in cases of foreseen acquisition issues

Licensing (regulatory risk) is standard for GoI to support and

facilitate these

Operations: availability targets normally are at 98%

Incentives are tied directly to the economics

of the line

– Upside reward for > 98% will yield a positive return

– Below 98% availability is penalized accordingly

Construction incentives are specified across India e.g., 6

months for development, 1.5 years to begin operations, etc.

– Finishing early is not incentivized unless it will bring Gx

capacity onto the grid quicker

– Late penalties

Performance management process in construction is for

concessionaire to submit milestone report monthly for review

– Update progress and issues each month

Residual valuation is typically N/A (1 rupee);

– Concessionaire will have strong preference for this, as the cash flows are front-loaded

– Only question is if GoI can bear the additional cash flows front-loaded

Contract extensions are allowed for ~15 years, the key negotiating point is indexation of pricing mechanisms and ensuring the

relevance here

Breaking early of contract will result in payments between the parties, but depends on who breached and the rationale for breach

Process for timeline - the regulator will determine how long

the process should take once RFQ and RFP are drafted

Generic Timeline: RFQ publication to signing of contracts is

~180 days in total

Minimum time for RFP process is 3 months; for concessionaire

to get quotes from suppliers, etc. and ensure quality of

response

Key negotiating point is the indexation (escalation) of pricing

and how often its reviewed

– E.g., if payment is in local currency and there is rapid

fluctuation, may as for re-indexing of pricing on a more

rapid basis

Regulators will determine the index based on historical

benchmarks, but are not always accurate

3 main concerns of risk for private sector that GoI will play a role in

1) certainty of payment: contracting authority and government must

submit a LoC (letter of credit)

2) Right of way and land acquisition: vast majority of the time (>95%)

it will require no involvement from GoI; however, when issues are

foreseen, it must be written into the contract

3) Regulatory approvals and licensing must be supported by GoI

42

SOURCE: ADB “Proposed Loan (Cambodia) Power Transmission Lines Co., Ltd., Power Transmission Project (Cambodia) “DFI “Private Sector Participation in Electricity Transmission and

Distribution”; Ashley Brown “The Privatization of Brazil’s Electricity Industry”

Cambodia CPTL project context and overview (1/2)

CASE STUDY: CAMBODIA

OutcomesPre-reform situation

▪ Public sector: The Cambodian

government, in about 1996,

started looking to the private

sector as a source of

investment for the power

sector

▪ Electrification in Cambodia was

hampered because of the

supply shortage and high cost

of electricity. The electricity

tariff in Cambodia was among

the highest in the region

▪ Crisis: More than 95% of

power was supplied by

isolated, small generation

systems running on imported

diesel fuel, and these

distribution networks reported

power losses as high as 32% in

rural areas.

▪ Total energy sold to

consumers in the region

increased from less than 80

GWh in 2005 to 267 GWh in

2010

▪ Number of customers in the

three provinces that are

connected to the grid

increased from 35,498 in 2005

to 82,426 in 2010

▪ Electrification rate from 15%

in 2007 to 24% in 2010

▪ Diesel generator sets were

withdrawn once the project

was commissioned, and

almost 100% of diesel and

heavy fuel oil generation was

displaced

BOT / BOOT example

1

2

Project Details:

▪ 221 km of a single-circuit 115 kV transmission line, three 115

kV/22 kV substations and one 115 kV switching station.

▪ Transmission grid for northwest Cambodia which connected to

Thailand’s 115 kV line at the Thai border

▪ Transmission of approx. 23– 80 MW of equivalent capacity

over its 30-year life

▪ Construction of the project began in 2006, and it commenced

operations in December 2007

BOT details:

▪ Concession period: 30 years

▪ CPTL entered into a power transmission agreement (PTA)

with Électricité du Cambodge (EDC)

▪ This project enabled EDC to import reliable power from

Thailand at competitive rates under a PPA between the

Electricity Generating Authority of Thailand (EGAT) and EDC

▪ The agreement resulted from a power sector cooperation

agreement between Cambodia and Thailand, which is the

framework for power trade and technical assistance between

the two countries

43

Cambodia CPTL key design principles (2/2)

CASE STUDY: CAMBODIA

SOURCE: ADB “Proposed Loan (Cambodia) Power Transmission Lines Co., Ltd., Power Transmission Project (Cambodia) “DFI “Private Sector Participation in Electricity Transmission and

Distribution”; Ashley Brown “The Privatization of Brazil’s Electricity Industry”

Pricing

B

Selection

process

C

BOT

investment

Risk allocation

A

Government

obligations

D

Contracting

and transfer

E

Performance

management

F

▪ Concession term: 30 years

▪ Payment approach: A power transmission agreement (PTA) was signed between EDC and CPTL committing

EDC to pay a transmission charge calculated from the amount of energy received at the various delivery points

▪ Skills transfer: CPTL planned to enter into a joint arrangement with either the EPC or the Provincial Electricity

Authority of Thailand or both to develop an operation and maintenance program

▪ Construction risk: EPC is required to

correct defects, the contractor must

also pay damages (at 5% of the

construction contract price) for

delays or other failure to perform

according to specified criteria

▪ N/A

▪ Debt to Equity ratio: 62.5 : 37.5

▪ Debt: 15-year loan from consortium:

– ADB

– Exim Bank of Thailand

– ARCO International

– Foreign Trade Bank of Cambodia

▪ Returns: Expected IRR of 15.3% over the weighted

average cost of capital of 8.9%, and an ERR of 26.7%

▪ Revenues: Derived from the contractually stipulated

tariff formula indicated in the PTA. The transmission

service fee is applied to the energy transmitted to

derive the revenues, no transmission line losses are

assumed

▪ No indication that bids were held for developer

selection

▪ The EPC contract was awarded after competitive

bidding and comprehensive evaluation of bids. The

technical competence and experience of the bidders

were evaluated, as were the availability of construction

equipment

▪ Land use: This project was mostly built along highways under

public rights-of-way. A portion was built on land the project

sponsors already owned and compensation was paid for the

placement of certain poles on land already in use

45

Contents






– Brazil

– India

46SOURCE: Mckinsey, World Bank “Private Sector Participation in Electricity Transmission and Distribution”; Ashley Brown “The Privatization of Brazil’s Electricity Industry”

Result of private participationState-led interventions to open sector to private playersPre-reform situation

▪ Public sector: Brazil’s transmission was public until the late 1990’s. Electrobrascontrolled most electricity value chain through integrated companies; some states like Sao Paulo and Minas Gerais had their own integrated utilities

▪ High construction costs in generation due to cartel behavior among contractors; privatisation was believed to reduce this collusion

▪ Crisis: lack of investments during 1980’s caused power system scrapping; system was structured in 1990’s, reformed in 2001, and has since attracted private investors

▪ 40 auctions held between 1999 and 2015, awarding 226 projects

▪ 66,000 km of new transmission lines awarded

▪ Multiple transmission companies exist, coordinated by the National System Operator

▪ Majority of capital privately financed since 1999, sourced from National Development Bank (BNDES) and also global financial markets

1

2

3

Starting in 1993, Brazil pursued a set of legal and policy

reforms to open the transmission sector to privatization,

primarily through a BOOT model

BRAZIL - PRIVATE PARTICIPATION CASE STUDY

Legal reforms:

▪ National Privatisation Programme was established by a new elected government in 1990 through Law 8031/90

▪ In 1993, Law 8631/93 eliminated sector-wide constraints such as requirement of uniform national tariffs, a 10% rate of return, cross-company subsidies, etc

Policy mechanisms to structure incoming investment:

▪ Establishment of a stable remuneration mechanism, granting 30 years concession on new lines, with fixed annual income readjusted every year for inflation and reviewed every 5 years

▪ Competitive auctions to attract both public and private investments for the concessions, run by the regulator

Organisational change to support change:

▪ Creation of a centralized planning agency to coordinate generation and transmission expansion

▪ Creation of regulator to ensure a good level of service quality and affordable electricity costs

▪ Creation of an independent system operator to balance load

47

In 1993, legal reform removed several institutional, legal,

and regulatory constraints that had discouraged private

sector participation

SOURCE: Ashley Brown “The Privatization of Brazil’s Electricity Industry,” McKinsey

Previous obstacle Changes under Law 8631/93

Former tariffs were required to be uniform nationally

Tariffs could float regionally, to incorporate local variation in marginal costs of production, transmission, and distribution

Key elements

Tariffs

Previously at 10% and supported by tariff-setting and subsidy policy

No constraints on rate of return, to allow investors of varying costs of capital to participate in the marketRate of return

Short-term contracts to purchase power at tariffed rates

10-year (then extended) contract lengths to establish longer amortization and earn-back period

Contract term length

Elaborate system of cross subsidies between companies to maintain the 10% rate of return (CRC) and oil-derived generation (CCC)

Abolishment of nationally-set subsidies Subsidies


1

48

Under a “concession” system, a clear set of rules was

created to attract new investments to the transmission

sector in Brazil

SOURCE: Model Transmission Agreement

Brazil

Concession Period▪ ~30 years

Unitary charges/Tariff

▪ Annual revenues defined in auction readjusted by inflation▪ 5 years tariff review on operational costs

Performance standards

▪ Companies must meet defined availability requirements to avoid discounts on their annual revenues

Creation of additional capacity

▪ Small reinforcements or expansions may be proposed by the planning agency

▪ The revenues from additional capacity are defined according to the regulatory model and tariffs are reviewed every 5 years

Expiry of the contract

▪ At the point of expiry of the concession period (30 years), no termination fee is defined. Any non-depreciated asset will be indemnified at replacement value

BOOT-type contract to mobilise private investment in grid expansion


2

49

As part of a planning process for new transmission lines

that can take up to 8 years, auctions allocate different

lines to potential bidders based on lowest tariff bid


SOURCE: EPE, Aneel, McKinsey analysis

3T

ech

nic

al r

eport

s

phas

e

Description

1 -5 years

3 – 6

months

0.5 - 2

years

1.5 - 2

years

Time Steps

1

R2 Report▪ Explanation of Choice of Reference: The selected project should have its technical characteristics detailed, to allow

ANEEL to prepare the Bidding Edictal. This phase aims to ensure the feasibility of the project, however, without

constituting a base project

R3 Report▪ Social and Environmental Characterization and Analysis: For a new installation it is necessary to provide details of the

feasibility of carrying out the work, also from the social and environmental standpoints

▪ Technical, Economic and feasibility studies report: conduct an initial analysis of technical and economic feasibility of the

project, demonstrating a project competitiveness against other alternatives and establishing the basic characteristics of

the primary facilities of the enterprise, as well as an expected cost

R1 Report

R4 Report▪ Characterization of Existing Network: ANEEL should require owners of existing transmission assets to provide the

technical characteristics of their facilities and requirements for the new venture to operate smoothly with the

surrounding system

Auction edict and

bidding 2

▪ After R4 report, an auction announcement is released one month before the auction

– Companies bid on the annual revenues they require to build and operate the transmission line for 30 years

– All companies make a single bid and then results are shown

– In this regressive auction, the company that requires the lowest annual revenues is the winner of the process

Environmental

license3

▪ The winner of the auction is in charge of obtaining environmental licenses

– This process is often burdensome and may impact directly on the construction schedule

Construction and

operation permit4

▪ Once all licenses are granted, the company can build the transmission line

▪ After the conclusion, a final permit is required to operate the line

50

During the late 1990’s, Brazil also created a series of

governmental agencies to support the development of

the national electricity market


SOURCE: EPE, Aneel, McKinsey analysis

3

Historic development

Organizational chart

Energy Research

Agency

1

National Agency

of Electric Energy

2

National System

operator

4

Ministry of Energy and Mines

3

▪ Aneel was created by Law 9427/96 (started operating in

1997) to ensure affordable and quality electricity to clients in

Brazil

▪ ONS was created in 1998 by Law 9648/98 to coordinate the

operation of generation and transmission assets of the

National Interconnected System (SIN)

▪ EPE was created by Law 10847/04 after the major blackouts

that Brazil experienced in 2001

4 ONS – National System Operator▪ ONS is the responsible for the technical coordination of electricity dispatching and for the

management of transmission services▪ ONS is also responsible for helping the electric power plans for the next two years, as is

the one operating the system and really understanding where are the opportunities and weaknesses of it

3 EPE – Energy Research Agency▪ EPE aims to provide services in the field of studies and research to support the planning of

the energy sector including electricity, oil and its derivates, natural gas, coal, renewable energy and energy efficiency, among other

▪ In the power sector, EPE is in charge of the planning of transmission and generation expansion

1 MME – Ministry of Energy and Mines▪ The Ministry of Mines and Energy represents the Union as Grantor and formulator of public

policy, as well as inductor and supervisor of the implementation of these policies in the following segments– Geology, mineral and energy resources– Use of hydraulic power– Mining and metallurgy– Oil, fuel and electricity, including nuclear

2 ANEEL – National Agency of Electric Energy (Regulator)▪ ANEEL mains attributions are– Regulate the production, transmission, distribution and sale of electricity;– Supervise grants, permissions and electricity services;– Implement policies and guidelines of the federal government relating to the

exploration of power and exploitation of hydraulic potential;– Establish tariffs

51

Contents






– Brazil

– India

52

Privatisation in transmission sector began in 2000; Since

then ~12 private assets have been operationalized, with

significant activity in last two years

SOURCE: Press Search

1 JV between Tata power and PGCIL, line between Siliguri in West Bengal to Mandola in UP (near New Delhi), covering a distance of 1166 kms.

12 Transmission assets

Very few operational Private Transmission assets exist:

▪ Jhajjar KT Transco

▪ Jaigad Power Transco

▪ Powerlinks Transmission

▪ Jaypee Power Grid

▪ Torrent Power Transmission System Project

▪ CESC Budge Budge transmission line

▪ CESC Titagarh-Mulajore transmission link

▪ Adani Power Mundra - Line I: Transmission Line between

Mundra and PGCIL, Dehgam line

▪ Adani Power transmission Line between Mundra and

Mohindernagar

▪ Torrent Power transmission line from sugen plant

▪ KEC 765 kV Sipat – Seoni Transmission Line charged at 765

kV

▪ KEC 400 kV Double Circuit Ramagundam – Nagarjunsagar

Transmission Line for NTPC (PGCIL)

▪ KEC 132 kV Transmission line for Machkund Hydroelectric

Project in India

2000

▪ Envisaged two routes viz. Joint

Venture (JV) route and

Independent Private

Transmission Company (IPTC)

route

2003

▪ Unbundling of SEB’s to separate

generation, transmission and

distribution

▪ Electricity act 2003, opened door

for private player participation

2007

▪ PGCIL entered into

agreement with five

independent power

producers to form JV

to set evacuation

system

2011

▪ Competitive

bidding made

compulsory for

state transmission

projects

INDIA - PRIVATE PARTICIPATION CASE STUDY

2006

▪ Private investment in Power transmission sector

– First private transmission line (Powerlinks

Transmission1) became operational

▪ Introduced a new National tariff policy, 2006,

that allows government to adapt cost plus tariff

structure

▪ Announced plans to setup 11 mega PPP

transmission projects

– Two Nodal agencies REC and PFC

appointed

53SOURCE: Press Search; Team Analysis

Independent Private Transmission Company (IPTC) JV route

▪ Inter-state transmission lines is licensed by CERC1

▪ Intra-state transmission lines is licensed by SERC2

▪ JV with PGCIL

▪ JV with State Transmission Utility (STU)Entry

▪ 100% ▪ <74%FDI Limit

▪ 2 ▪ 3Operational projects

(#)

▪ Competitive Tariff-based bidding

▪ Revenue share per MW unit being the bid variable

▪ Tender Process (cost plus model)

▪ However, PGCIL started following competitive bidding process

since January 2011 and all the STU would switch to competitive

bidding by 2013

Bidding Process

▪ Lower ROE on account of competitive bidding ▪ Regulated Return (~15% ROE post tax)Return

▪ Have performance standards set in terms of transmission efficiency. Incentives – on pro-rata basis for achievement of the target

▪ Equity invested in foreign currency is allowed a return in the same currency and payment is made in Indian Rupees on the exchange rate

prevailing on the due date of billing

Framework of

Return

Examples▪ North Karanpura Transmission project (Reliance Power)

▪ Jhajjar KT Transco (Kalpataru Power)

▪ Powerlinks Transmission Pvt Ltd (Tata Power)

▪ Jaigad Power Transco (JSW Energy)


Private participation can be pursued through two routes,

Independent Private Transmission Company (IPTC) and JV

with PGCIL or STU

1. Central Electricity Regulatory Commission 2. State Electricity Regulatory Commission

54

There are several important clauses in the standard

concession agreement

SOURCE: Model Transmission Agreement

India

Concession Period▪ ~25 years with an extension period of 10 years

Unitary charges/Tariff▪ Unitary charges / tariff are indexed to WPI, to the extent of 30% only

Performance standards

▪ The number of forced outages in an year

▪ Transmission losses of the transformers to be maintained within specified normative levels

▪ In the event of failure of the concessionaire to operate the project, right of substitution prevails

Termination

▪ Compulsory buy-out by the Authority in case of termination

▪ Political force majeure and defaults by the Authority: Project debt would be fully protected by the Authority

▪ Default by the Concessionaire: 90% of the debt will be protected

▪ Non-political force majeure: 90% of the debt (net of insurance)

Creation of additional

capacity

▪ Allows the Concessionaire to treat the unutilised capacity of the Authority as the additional capacity

▪ The revenues from additional capacity are shared between the Concessionaire and the Authority

Real estate development▪ 25% of the revenue from real estate development and other businesses like advertisement would be shared with the

Authority

Expiry of the contract

▪ At the point of expiry of the concession period (25 years), a termination payment of 40x the monthly unitary charge

is paid. However, incase of an extension of 10 years in the concession period, no termination payment shall be

payable after expiry of the extended period
