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Deliverable 4.1: Options study for GECOL restructuring report

Task A: Sector performance

and structural sector reform

September 2017

REVISED FINAL REPORTP

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Prepared for The World BankStrategy& | PwC

Disclaimer and copyright note

This document has been prepared only for the International

Bank of Reconstruction and Development ("IBRD") and solely

for the purpose and on the terms agreed with the IBRD in our

agreement dated 21 March 2017 relating to Task A.

The scope of our work was limited to a review of documentary

evidence made available to us. We have not independently

verified any information given to us relating to the services.

We accept no liability (including for negligence) to anyone else

in connection with this document. We have agreed with you

that the report will be provided by you to GECOL for their

consideration. We would ask that it not be provided to anyone

else unless otherwise agreed in writing by us.

This is a draft prepared for discussion purposes only and

should not be relied upon; the contents are subject to

amendment or withdrawal and our final conclusions and

findings will be set out in our final deliverable.

© 2017

PricewaterhouseCoopers

LLP

All rights reserved. In this

document, 'PwC' refers to the

UK member firm, and may

sometimes refer to the PwC

network. Each member firm

is a separate legal entity.

Please see

www.pwc.com/structure for

further details

1


The present report focuses on assessing the options for GECOL restructuring, as by Task A ToR

Focus of this report

Source: Task A inception report

Rapid sector

performance

assessment

Gap analysis of the

sector structure vs.

previous plan

High-level options for

sector reform

Option study for

GECOL restructuring

Roadmap for

establishing of LEMRA

2.1 3.1

3.2

4.1

4.2

Findings review and

final report

5.1

Data collection

1.1

Workshop & trainings6

Project review and

recommendation

Restructuring of

key actors

Regulatory

reform

Rapid assessment

of the sector

performance

Project

set-up

2 3 4 5

Sector restructuring

(framework, actors and

roadmap)

3.3

Electricity

Act

3.4

1

Methodology,

team and approach

validation

1.2

PMO (progress reporting)7

Focus of

this report

2


Power utilities have typically suffered common structural issues, thus experiencing the need for reform …

3

Typical power utility evolution process

The power utility

originates as vertical

integrated STATE-

OWNED MONOPOLY

A series of

DIFFICULTIES in

meeting national needs

emerge

The state feels the need

for electricity sector

reform and UTILITY

RESTRUCTURING

State monopoly rationale Typical issues emerged Reform objectives

• Minimizing coordination cost

between supply chain functions

• Financing large-scale

investments in production and

network assets

• Enhancing consumer welfare

and guaranteeing a critical

service for economic security

Source: Strategy& analysis

• Critical utility financial position

(excessive/inefficient costs and

tariffs not covering them)

• Drained government’s fiscal

resources: inability to finance

expenditures and need to face

other pressing public needs

• Low service quality and access

to electricity, high emissions

• CUSTOMERS: improve

service quality, provide

affordable electricity

• SUSTAINABILITY: strengthen

State/utility fiscal position,

promote efficient use of inputs

• EMPLOYEES: create first-rate

efficient work environment,

promote employee satisfaction

Time


…and for Libya the same experience led to the launch of the current project, which so far identified the sector reform

4

Libyan power utility restructuring process


Weak sector

governance

Sector structure

(monopoly)

Poor operating

performance

Unbalanced tariff

framework

Increasing costs

Commercial losses

and poor collection

Root-

cause

issues

in Libya

(identified

in previous

Task A

reports)

Electricity sector reform

Task A (3.1, 3.2, 3.3, 3.4)

GECOL restructuring

Task A (4.1)

LEMRA establishing

Task A (4.2)

Focus of this report

P

Launch of the sector

performance and

structural sector reform

(Task A)

The power utility

originates as vertical

integrated STATE-

OWNED MONOPOLY

A series of

DIFFICULTIES in

meeting national needs

emerge

The state feels the need

for electricity sector

reform and UTILITY

RESTRUCTURING


Electricity sector reform

The present document will lay-out the options for GECOL restructuring (then further deep-dived in Task C)

Current report focus

5


Options study for GECOL restructuring

(current document focus)

Assessment of the need for

GECOL restructuring

Identification and evaluation

of target options

Considerations on private

sector participation

Current Libya

electricity sector

structure

Current GECOL

operating modelGECOL restructuring

4.1

2018 M1 M2

IWave IIWave

M3

Ambition Vision

Section 1

Section 2

Section 3


Assessment of the need for GECOL restructuring

Identification and evaluation of target options

Considerations on private sector participation

6


In Libya, most of the identified issues directly concern GECOL, thus driving the need for restructuring

7

Major issues and implications

Issues affecting Libya today

(root causes)

Weak sector

governance

Sector structure

(monopoly) & GECOL

operating model

Increasing costs

Unbalanced tariff

framework

Commercial losses

and poor collection

Poor operating

performance

Task AStructural reform

of electricity sector

Task CInstitutional development

and performance improvement

of GECOL

Reference project TaskKey reports

(Task A and C)Implications

Need for sector

restructuring

Need for GECOL

restructuring –

Focus on next slides


Regulatory reform

GECOL restructuring

Manpower / organizational rationalization review

ERP system review

LEMRA establishment

Institutional development

Process mapping

Improving technical performance

Improving financial performance of customer

service

Tariff framework review, tariff structure set-up and excel

tool


The current GECOL structure and operating model is clearly not aligned with the target organizational dimensions

GECOL organization / operating model issues

Criteria for the assessment of GECOL’s operating model

Identified issues

Clearly defined

operating

model

Alignment vs.

best practices

Results

accountabilityEfficiency

Preparation

for future

evolution

Alignment

with Strategic

Priorities

BU “concentration” and

limited levers for effective

BU management! ! ! ! !

Fragmentation of

engineering & projects ! !Lack of a strong AFC

function ! ! ! ! !Sub-optimal set-up of ICT ! ! ! !HR&O responsibilities

partially outside MD area ! ! ! ! !Unclear role of Contracts &

Development Accounts ! ! !BoD overstaffed and

including functions

typically under MD! ! ! ! ! !

8

I

1

3

4

5

6

7

II III IV V VI

Target organizational dimension negatively impacted by current organization!

2


Sector structure (monopoly) & GECOL operating model

# Target organizational dimension


Both the number of FTEs and the average salary is significantly growing…

5

40

20

10

25

35

0

45

30

15

41.7+4.0%

20152014

40.1

2013

38.336.2

201220112010

34.3 35.0

1) IHS, inflation consumer prices

Source: GECOL data collection ID13, Strategy& analysis

9

Increasing costs

0%

50%

100%

150%

200%

250%

2010 2011 2012 2013 2014 2015

Indexed vs. 2010

(100% = 2010 reference)

142%

214%

# FTEs evolution (2010-15, ‘000)

Cumulated inflation1

(2010 reference)

Average-salary

Average-salary evolution (2010-15, LD / FTE)

+70%


GECOL costs evolution (2010-15, Mn LD)

…leading to low productivity and a considerable increase in personnel costs

Productivity benchmark (2015)

Note: includes Sonelgaz, ERC, CEGCO, SEPGCO, AES, QEPCO, ONEE-BE, Masen, and EEHC Generation Companies; 1) Updated with new data received

Source: GECOL data collection ID17, GECOL data collection ID24, Corporate Annual Reports, Electricity Sector Regulatory Agencies Annual Reports, Strategy& analysis

0

2

4

6

8

10

12

14

16

18

GWh / FTE

EgyptJordan

11.7

5.0

9.5

LibyaAlgeria

8.21

Morocco

17.2

10

+657Mn LD

-240Mn LD

409

71

356Other expenses

Fuel transportation

to generation stations 623

254

Fuel cost

Maintenance

120

Materials for O&M

81108

1,065

Various service

688

115

Salaries

449

5

2015

2010

Increasing costs

Generation

FTEs share

vs. total20% 17% 10%

Although having a lower

share of its total FTEs in

generation, GECOL has still

a worse productivity than

peer countries

19% 20%


The technical performance has dramatically worsened, severely impacted by low generation availability

1) Tripoli West unit 1 and 3 are assumed to be retired respectively in 2013 and 2011, University small gas plant is assumed to be retired in 2016; 2) (Available capacity – Peak

demand) / (Peak demand); 3) Demand at generation level. Demand for 2017 is forecasted demand under Scenario C-Slow political stability scenario-UPDATED ; 4) Nameplate

capacity estimated considering unit rated nameplate capacity and year in which the unit came in service. Total nameplate capacity includes 3rd party plants and units that are

considered ready for retirement in 2017; 5) Considers only time availability computed on generating unit hours of operations during the year;

Source: GECOL data collection ID4, Awardbrand - Improving GECOL technical performance report (Data received from GECOL Generation department), Strategy& analysis

0

10

8

5

4

7

6

2

9

1

3

11

42%

10.3

49%58%

10.2

2015

10.0

55%

2013

45%

GW

58%

2017

51%

10.8

2014 2016

42%

36%

62%64%

9.7

2012

33%

67%

8.8 8.9

38%

2011

57%

43%

2010

8.8

Available capacity5Unvailable capacityDemand (peak demand)3

S/D evolution1

3% -10% -5% -8% -31% -11% -15% -25%Reservemargin2

Nameplate capacity4

11

GECOL ready

for retirement

units

Third party

plants

55% Available

capacity excluding

ready for

retirement and

third party plants

from nameplate

Poor operating performance


Commercial losses and bad debt have steadily increased

Source: GECOL data collection ID12, GECOL data collection ID37

Evolution of commercial losses Evolution of receivables

2.0

2.5

1.5

0.5

1.0

0.0

Bn LD

2015

2.0

201420132012

2.3

1.9

1.3

2010

20

10

5

25

15

0

TWh

20152010

6.4

2014

24.1

2013

21.1

16.1

2012

12.6

12

Commercial losses and poor collection


An unbalanced tariff, combined with commercial losses and bad debt, is affecting the sector sustainability …

1) Sum of (Tariff by customer class) x (Consumption by customer class)

Source: GECOL data collection ID2, GECOL data collection ID7, GECOL data collection ID13, GECOL data collection ID37, Strategy& analysis

Burden on the sector (Bn LD, 2015)

Actual

collected

revenues

Revenues

invoiced

10%

Non

collection

12%

Fuel

subsidies

0.8

Commercial

loss

GECOL

P&L costs

Max.

theoretical

revenues1

Unreflective

tariff

0.9

0.2

55%

23%

5.0

Total cost

3.1

1.9

Burden on

Libyan

state due to

unbalanced

tariff

Salaries

Fuel cost

Other

OPEX

D&A

Subsidized tariff scheme

Tariffs do not reflect the economic cost

of the supply

13

Unbalanced tariff framework


… Leading GECOL to incur in heavy losses …

Source: GECOL collection ID13, Strategy& analysis

2.5

1.0

3.0

1.5

2.0

0.5

0.0

1.0

1.9

1.3

0.8

2012

1.7

1.41.51.3

0.4

1.1

0.6

0.8

2011

0.3

1.7

0.9

0.8

1.9

20142010

1.8

0.4

0.5

2.1

2.5

20152013

0.4

1.1

Revenues from market

Costs

Government subsidies

Evolution of GECOL P&L (subsidies included) (Bn LD)

Profit

margin (%)-81% -92% -46%-26%-12%

0.0

-1.0

-0.5

-1.5

-0.4

-0.6

-0.2-0.4

-1.2

-0.6

Losses

-25%

14



… And putting at risk its long-term financial viability

7.1

7%

76%

37%

2012

7.0

17%24%

27%

7.5

20152014

7.4

42%

10%

7.5

2013

56%

7%

48%

2010

12%

2011

61%69%

6%

2014

21%

2015

7.4

48%

2012

7.5

52%

26%

59%

2011

7.0

31%

2013

23%

23%

20%

50%

7.1

26%

24%

7.5

2010

61%

19%

18%

Trades payables

Other liabilities (exc. trade payables)

Total Equity

Other current assets

Receivables

Fixed assets

GECOL Total Assets(Bn LD)

GECOL Total Equity and Liabilities(Bn LD)

+0.9

+0.1

-0.8

+2.3

+0.3

-2.3

Delta (Bn LD)

2010-14

!

!!

Source: GECOL collection ID13, Strategy& analysis

Delta (Bn LD)

2010-14

15

Mainly

towards NOC?

Largely non-

performing?






16


For each root-cause issue identified, we have developed two restructuring options that GECOL may consider

17

Possible options by issue

Root-cause issues in Libya

Sector structure

(monopoly) & GECOL

operating model

Increasing costs

Unbalanced tariff

framework

Commercial losses

and poor collection

Poor operating

performance

Option 1


Option 2

RADICALQuick reorganization transition into

holding company structure aimed at

achieving legal unbundling by 2019

DRASTICAdopt a direct “push” approach by

downsizing the organization to optimal

efficiency targets

SHARPAchieve a fully cost reflective tariff with a

sharp increase in rates by 2021

PRIVATE PARTICIPATIONAttract private resources to improve

sector performance and increase power

generation capacity to meet demand

AGGRESSIVEAchieve 100% billing and 99% collection

by 2021 through an aggressive metering

program and police enforcement

GRADUAL Gradual reorganization evolution

following a progressive unbundling path

towards legal unbundling by 2031

CONSERVATIVEAdopt a retaining approach by granting

long-term sustainability of change for all

the different stakeholders involved

PRUDENTGradually increase tariff achieving a

partial coverage of P&L costs and cost of

fuel subsidies by 2026

PROGRESSIVEAddress theft and insolvency ultimately

improving progressively GECOL’s billing

IN-HOUSEImprove service quality by leveraging

internal resources and meet demand by

developing an in-house investment plan


Depending on the unbundling approach chosen, GECOL may undertake a different organizational restructuring approach

18

Reorganization options


Radical Gradual

Gradual reorganization evolution going hand in hand

with a stepped unbundling pathway (first accounting,

followed by management unbundling and then legal)

Quick reorganization transition into a holding company

structure aimed at achieving legal unbundling directly

from today’s situation

Functional

unbundling

Full legal

unbundling

Accounting

unbundling

Fully

Integrated

IWave IIWave Ambition

Today M1 M2 M3

Full legal

unbundling

Fully

Integrated

Today Wave I

As-is

SBUs with strong AFC, HR, ICT and

E&P corporate core functions

Projects within SBUs and

strengthened AFC, ICT and HR corporate core functions

Holding structureAs-is Holding structure

Option 1 Option 2


Gradual

In line with the unbundling process recommended, the gradual reorganization option is preferrable

19

Options assessment

1) Strategy for institutional development of GECOL report

Source: Strategy& Analysis

Radical


• Possibly ensures results accountability and improved

operational efficiency

• Rapid evolution away from monopoly towards more

competitive sector structures

• Enabled early-on SBUs accountability for results and

independent management

• Parallel change of organizational structure, processes

and operating model

• Challenging implementation both in terms of target

structure and timing

• Marked disruption risks for GECOL

• Inflexible employee redeployment

• Lengthier change process

• Delayed benefits realized due to inefficiency of resulting

operating companies

• Lost synergies and potential replication of activities

among operating companies

• Delayed unbundled industry structure and risk of being

“trapped” into intermediate steps without reaching the

final target

0• Large consensus and leadership required

• Extensive coordination effort needed among

organizational units

• Required accounting and functional separation

4 • Persistent effort and commitment to ultimate

target necessary

PR

OS

CO

NS

+

–

RIS

KS

EA

SE

Option 1 Option 2


To control the increasing costs (i.e. personnel), GECOL may follow either an intrusive or a conservative approach

20

Manpower cost-cutting options


Drastic Conservative

Adopt a retaining / re-skilling approach (preferring the

socio-economic result), granting long-term sustainability

of change for all the different stakeholders involved

Adopt a direct “push” approach – focused on maximizing

the financial result, directly downsizing the organization

to reach optimal efficiency targets

Dismiss

Retrain for

outside jobs

Temporarily or permanently terminate

employment for a group of employees

Train managers and staff professionals

to be hired outside the company

Incentivize to

leave

Loan staff,

furlough

Ask employees to take voluntary lay-

offs, or offer buyouts & early retirement

Lend employees to another company,

or schedule unpaid employee furloughs

Freeze salary

and benefits

increases

Retrain for

inside work

Institute a hiring freeze and reassign

employees to new department/positions

Leverage current resources to fill unmet

needs (e.g. train new technicians)

Curtail

overtime

Freeze hiring

and reallocate

Temporarily reduce/freeze promotions,

wages, benefits (e.g. paid holiday time)

Enhance productivity and limit/suspend

approval for high-cost overtime hours

Example of possible solutions (illustrative)Example of possible solutions (illustrative)

Increasing costs

Option 1 Option 2


Conservative

Given the current country situation and the high social costs involved, a moderate approach may be preferable

21

Options assessment

1) Process mapping and manpower rationalization report


Drastic

Increasing costs

PR

OS

• Relevant cost savings immediately achievable (e.g. due

to collective layoffs)

• Possibility to quickly gain efficiency and align

organizational structure to best practices

• Sustainable approach minimizing socio-economic impact

• Opportunity to address unmet needs (e.g. lack of plant

technicians)

• Severe economic impact on dismissed employees,

especially in developing countries

• Possible short-term increase in costs (e.g. due to buyout

or early retirement payments)

• No/limited impact on efficiency/productivity

achievements and limited cost savings

• Possible employee dissatisfaction

• Popular opposition, protests

• Long-term socio-economic impact on national economy

(e.g. unemployment, GDP decrease, poverty,

inflation/deflation, etc.)

• Limited financial / operational impact

• Need for reallocation or training to fill current positions /

expertise gaps

1 • Solution design subject to pressure from unions

• Implementation dependent upon Government’s

approval

3 • Lack of strict application of Government’s

directions (enforcement of hiring freeze failed so

far – unauthorized hiring ongoing)

CO

NS

+

–

RIS

KS

EA

SE

Option 1 Option 2


To improve operational performance, GECOL might either enable private participation or leverage in-house resources

22

Operating performance improvement options

12

6

3

0

-3

9

15

2020

2.6

2018

0.5

12.6

2022

9.2

3.7

2019 2024 20302028

11.5

4.7

2026

7.6

Long-term additions (11 new Steam, Gas, CC plants)

Under-construction plants (Ubari, Khaleej)

Phased-out capacity (6 plants1)

Short-term additions (4 new Gas plants)

1) Include Steam (Khoms Steam, Tobruk, Misurata Steel) and Gas plants (Tripoli South, Zwetina Gas, Khoms Gas); Source: Strategy& analysis

Private participation In-house

Improve service quality by leveraging internal resources

and meet increasing demand needs by developing an

in-house (GECOL, State) investment plan

Attract private resources to improve sector

performance, leverage external capabilities, and

increase power generation capacity to meet demand

requirements

Preliminary revision of GECOL investment plan

Net capacity increase vs. 2017 (GW)

Focus on next chapter


Option 1 Option 2


In-house

Considering todays stability constraints, a solution closer to the in-house option seems the most achievable

23

Options assessment

1) ERP System review and Improving technical performance report


Private participation


PR

OS

• Fast track capacity expansion once private investors

commit to entering the sector

• Enabled growing electricity needs satisfaction without

imposing large strains on national budget

• Focused in the short run on solving pressing sector’s

issues (i.e. load shedding) and subsequently on

restructuring and expanding existing facilities

• Highly dependent on external forces (IPPs willingness to

enter the sector)

• Several prerequisites for private investment attraction

need to be satisfied

• Required government support to implement the intended

investment plan

• Heavy burden on government budget if GECOL is not

able to adhere to PPA conditions

• If no investment in repairs is undertaken, unused and

obsolete assets will populate GECOL’s BS

• Delay in realization of investment plan combined with

rising demand might worsen substantially reserve

margin

1• Required sovereign guarantees and letters of

credit

• Large investments and effort required to satisfy

prerequisites for private investment attraction

3 • Large government support needed for

realization of investment plan

CO

NS

+

–

RIS

KS

EA

SE

Option 1 Option 2


Aggressive invoicing and collection targets imply a dramatic change with respect to historical performance…

24


Aggressive Progressive

Address theft and insolvency ultimately improving

progressively GECOL’s billing and considering that the

overall result will depend on the effect of the measures

put in place

Achieve 100% billing and 99% revenue collection by

2021 through an aggressive metering program and

police enforcement

Commercial performance improvement options

0

20

40

60

80

100

120

28%

100%

0

20

40

60

80

100

120

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

52%

99%

0

20

40

60

80

100

120

28%

100% 100%

0

20

40

60

80

100

120

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

52%

99%99%

Invo

icin

g

(%co

nsu

mp

tio

n)

Co

lle

cti

on

(%

re

ve

nu

es)

Invo

icin

g

(%co

nsu

mp

tio

n)

Co

lle

cti

on

(%

re

ve

nu

es)

ILLUSTRATIVE

Option 1 Option 2


Progressive

…hence, a more progressive option might be preferred in this case

25

1) Improving financial performance of customer service report


Aggressive


Options assessment

• Quick enhancement of GECOL’s cash position (if

successful)

• Short term improvement on government budget due to

potentially reduced subsidies to GECOL (if successful)

• Gradual investment in metering technology will reduce

negative impact on GECOL’s financial situation

• Consistency with historical performance

• Less dependent on government support

• Costly investments in metering and invoicing technology

required

• Lengthy gradual process requires careful planning and

methodic implementation

• Customer dissatisfaction might lead to retaliations

against GECOL’s employees

• Reduced impact of measures due to macroeconomic

situation

• Delayed effects on GECOL’s cash position

1• Option subject to large pressure for change by

the public opinion

• Implementation dependent upon government

financial support

4 • Coordination between GECOL’s employees and

electricity police is key for success

PR

OS

CO

NS

+

–

RIS

KS

EA

SE

Option 1 Option 2


To achieve a more cost reflective tariff, GECOL may target to sharply increase its tariff rates or do it more prudently

Sharp Prudent

Gradually increase tariff achieving a partial coverage of

P&L costs and cost of fuel subsidies by 2024, protecting

the most vulnerable through SSN

Achieve a fully cost reflective tariff with a sharp increase

in rates by 2021

63

4136

0

20

40

60

80

100

120

140

160

180

200Dhs/KWh

20242021

+6%

2015

174

36

0

20

40

60

80

100

120

140

160

180

200

20212015

Dhs/KWh

2024

Cost of fuel

subsidies

GECOL

P&L costs

0%

56%

100%

100%

Avg

. ta

riff

co

ve

rin

g:

100%

100%

Cost of fuel

subsidies

GECOL

P&L costs

0%0%

56%

20%

90% 100%

Avg

. ta

riff

co

ve

rin

g:

Tariff framework improvement options

ILLUSTRATIVEILLUSTRATIVEAverage

tariffAverage

tariff

Option 1 Option 2

+30%


26

Included lifeline

tariff for households

with monthly

consumption below

a certain threshold



Prudent

A more prudent approach to tariff increase might help GECOL minimize customers’ resistance …

27

Options assessment

1) Financial performance assessment and financial models report (tariff framework review, tariff structure set-up and reform pathway and excel tools)


Sharp


• Short term improvement on government budget due to

potentially reduced subsidies (if successful)

• Quick enhancement of GECOL’s financial situation (if

successful)

• Customers strongly incentivized to reduce demand

• Softer impact on customers resulting in enhanced public

acceptance

• Smooth implementation of required technology without

heavy investments needed

• Gradual price increases might be paralleled by service

level improvements

• Inconsistent with current macroeconomic situation and

customers purchasing power

• Large investment in advanced metering technology to

ensure billing and collection required

• Delayed benefits on GECOL’s financial situation

• Key role of progressive service level improvements in

guaranteeing public acceptance of increased rates

• Peaking electricity theft and skyrocketing bad debt due

to customers inability to pay bills

• High pricing not comparable with service level provided

to customers

• Delayed GECOL’s financial sustainability which might

inhibit further sector development (unbundling path)

• Late adjustment of demand to new rates which might

worsen reserve margin

1• Overall strong economic situation improvement

needed

• Required revolutionary change in customers

approach towards electricity subsidization

4• Strong communication campaign needed to

convey reasons for tariff increase to customers

• Strong government support needed throughout

the process

PR

OS

CO

NS

+

–

RIS

KS

EA

SE

Option 1 Option 2


… And would be supported by the impacts of commercial losses decrease (equal to 160% tariff increase or 11k FTEs cut)

Comparison of scenarios achieving identical financial impact (2015)

Increase

average

tariff

(Dhs/kWh)

Limit

commercial

loss

(% max rev.)

Re-size

manpower

(‘000 FTEs)


-11,000

2015scenario

2015actual

31,000

42,000

69%

21%

95

36+161%

A

B

C

Back to

2010 levels

2015scenario A, B, C

1.5

2015actual

1.8

-0.3

Burden on the sector(Bn LD)

Same

individual

effect of each

scenario

28



Recommended option

GRADUAL Gradual reorganization evolution

following a progressive unbundling path

towards legal unbundling by 2031

CONSERVATIVEAdopt a retaining approach by granting

long-term sustainability of change for all

the different stakeholders involved

PRUDENTGradually increase tariff achieving a

partial coverage of P&L costs and cost of

fuel subsidies by 2026

PROGRESSIVEAddress theft and insolvency ultimately

improving progressively GECOL’s billing

IN-HOUSEImprove service quality by leveraging

internal resources and meet demand by

developing an in-house investment plan

In conclusion, our recommendation is to follow a series of gradual but yet very effective restructuring options

29

Recommended options

Root-cause issues in Libya

Sector structure

(monopoly) & GECOL

operating model

Increasing costs

Unbalanced tariff

framework

Commercial losses

and poor collection

Poor operating

performance

Deep dived in report

Manpower / organizational rationalization review

ERP system review

GECOL restructuring

Institutional development

Process mapping

Improving technical performance

Improving financial performance of customer

service

Tariff framework review, tariff structure set-up and

excel tool

Task A

Task C

Task C

Task C





30


A reform process normally targets competition, and private participation is one of its key enabling steps

31

Vertical

Integrated

Monopoly

Reform process in developing countries

Competition

Example of reforms required to introduce competition


Competition objective Possible impediments in developing countries

Price reduction

Service improvement

Limited market sizeto support the number of viable sellers and

purchasers needed for full competition

Lack of diversity in fuel supplyneeded for competition among generators

(liberalized fuel cost, availability of fuel types)

Insufficient T&D / control systemto manage the complex pattern of power

flows in a competitive market

Inadequate legal infrastructurefor dispute resolution or enforcement of court

decisions / property rights (courts/arbitration)

Utilities insolvencypreventing full payment of suppliers and

deterring IPPs from developing large projects

Undeveloped capital marketsto provide financing on the scale and terms

needed for investment in supply capacity

Focus in next slide

Organized power

exchange

market

Private

participation

Sector

unbundling


Different options for private participation exist…

32

Private participation types

Management

contract

• The utility delegates

part of its operations to

a contractor, while

retaining control of

investment decisions

and accountability for

financial results

• Contractor’s

compensation is tied to

performance

(improvement objectives

from contract terms)

Lease and

Concession

• The lessee or

concessionaire is

responsible for financing

required investments on

state-owned assets

• The state often provides

a guarantee for these

investments, while

being reimbursed for the

use of the assets

• Compensation is tied to

results (contract terms)

Asset

divestiture

• Government transfers

both ownership and

operations

• The new owner is

responsible for financing

all future investments at

their risk

• Performance is

controlled through

competition or general

regulation (rather than

contract terms)

New assets

(i.e. IPPs)

• State partners with

private investor to

satisfy a capital

requirement (e.g. add

generation capacity)

• IPPs generally accept

construction and

operating risks, share

fuel availability risk with

fuel suppliers, and are

insulated from demand,

dispatch, price, FX risks

Source: WBG, Strategy& analysis

From state to private Private-born


…each characterized by a certain degree of private sector involvement & specific benefits for the electricity sector…

33

Private participation features


Management

contractLease Concession

Asset

divestiture

New assets

(i.e. IPPs)Allocation of

responsibilities

Operations and

maintenancePrivate Private Private Private Private

Commercial risk Public Private Private PrivatePublic and

private

Capital investment PublicPublic and

privatePrivate Private Private

Asset ownership Public Public Public Private Private

Duration 3-5 years 8-15 years 25-30 years Indefinite 25-30 years

Benefits Operations

improvement P P P P P

Assets O&M P P P P P

Knowledge transfer P O P O P

Access to state of

the art technology O O O O P

EPC O O O O P

New finance for

investment O O O P P

Vehicle for

liberalization O O O P P


…but also with several prerequisites for successful implementation which today Libya does not fully satisfies

34

Private participation prerequisites


Management

contractLease Concession

Asset

divestiture

New assets

(i.e. IPPs)

Prerequisites

for successful

implementation

Cost-covering tariff,

no commercial lossPreferable Necessary Necessary Necessary Necessary

Good system

information

Sufficient to set

incentivesNecessary Necessary Necessary Necessary

Good country risk

ratingNot necessary Good High High High

Political supportLow to

moderateModerate High High High

Monitoring and

regulatory capacityModerate Good Good Strong Strong

Satisfied Not satisfiedN/A Not Applicable

Libyan context:


The identified reform roadmap foresees the introduction of private participation only starting from Wave 2 …

35

Private sector investment roadmap1

Note: M = Milestone

1) Current private sector investment in the Non-RES business – Comprehensive roadmap & private participation is currently under discussion


Measures

Preparation

for private

sector

investment

IWave IIWave Ambition

Today M1 M2 M3

Possible IPPs

introduction

Ministry in charge/

GECOL

IPP Commission in operation

Clarify IPP Commission role and responsibilities

Ministry in

charge

Ministry in

charge

Government

Set competitive capacity allocation procedures

IPP Commission/

LEMRA

Owner

IPP Commission

Open tendering process for new IPPs

Establish credit support arrangements for PPAs

(i.e. letters of credits, rolling guarantees from CBL1)

Activities

Explore the possibility for management contracts/lease/concessions

Ministry in

charge

Define clear jurisdiction for commercial disputes

IPP Commission

Define IPP Commission composition

Draft technical and financial requirements for tendering IPPs


OP

PO

RT

UN

ITIE

ST

HR

EA

TS

…mainly because today more threats than opportunities are expected to impact GECOL once IPPs enter the sector

36

Possible impact of IPPs introduction

IPPs impact on electricity sector IPPs impact on GECOL

Launch

reform

process

IPPs are often the first private investors in markets

dominated by a state-owned utility, and can help

launch or enhance the reform process by showing the

benefits of private investment and management

• Foster private sector attraction and participation

• Promote and contribute to GECOL’s evolution

Help meet

demand

needs

IPPs guarantee their output to the state-owned utility

(acting as a single buyer) on the basis of a long-term

PPA with a state-backed guarantee for the off-taking

utility’s performance

• Limit power generation requirements

• Improve service quality and customer satisfaction

Relieve

reform

pressure

Successful investments for IPPs may impede

attempts to produce advanced sector-level outcomes,

as IPPs success in reducing power shortages may

relieve pressure on policy makers for needed reforms

• Reduce ext./internal willingness to lead change

• Postpone advanced reform achievements

Obstruct full

competition

fulfilment

High PPA prices under “take-or-pay” contracts may

impede moves toward competition, as the differences

with the lower prices emerging from a liberalized

wholesale market become stranded costs

• Reduce competitive pressure and related price

reduction/service improvement incentives

Expose

utilities to

financial risk

The cumulative obligations to purchase power from

IPPs may expose power utilities to serious financial

risk (e.g. when retail sales fell behind forecast levels)

• Threaten GECOL financial position

• Increase reliance on state financing capabilities

Generate

stakeholders

resentment

High rates of return compensating for poor investment

environments create the risk of contract breakdown

(unaffordable payments) and may generate

resentment among power consumers or other parties

• Increase financial pressure on customers

• Endanger commercial performance



Moreover, a number of country-level factors are required to effectively attract private investment…

37

IPPs success factors


Advanced reform stage

Stable

country

context

Developed

electricity

sector

Advanced

regulatory

framework

e.g. cost-covering tariffs, transparent and predictable

licensing and tariff framework, access to the transmission

network on transparent and equitable terms

Good country rating

Developed legal infrastructure

Stable political/macro-

economic environmente.g. low inflation, sound taxation policies, access to FX,

fiscal prudence

e.g. good repayment record and investment-grade rating,

and previous experience with private investment

e.g. possibility to enforce contracts, uphold laws,

arbitration, legal protection of property rights of investors,

freedom to import goods, fuel, and services

Competitive bidding practicese.g. planning linked to timely initiation of competitive

tenders/auctions; resourced, fair, and transparent

competitive procurement

Coherent sector planninge.g. clear allocation of planning roles and functions;

skilled, resourced, and empowered planning function

Transparent, consistent and

fair regulation

e.g. competitive procurement of new generation capacity

required by regulator; fair allocation of new build

opportunities between utility and IPPs; prevention of anti-

competitive practices by dominant power suppliers

Clear policy framework

e.g. framework enshrined in legislation, and clearly

specifying market structure, roles, and terms for private

and public sector investment, legislated rights to entry

and exit from the power market by private suppliers

Success factor DetailsSuccess factor’s components

Country

level

Project

level

Libyan context:

Satisfied Not satisfiedN/A Not Applicable


…accompanied by a further set of project-level factors essentially contributing to IPPs investment success

38

IPPs success factors


Security arrangements

(where necessary)

e.g. escrow accounts, letters of credit, standby debt

facilities, hedging/derivative instruments, committed

public budget or taxes/levies, targeted subsidies and

output-based aid, hard currency contracts, indexation

Robust PPA

e.g. stipulating capacity and payment, dispatch, fuel

metering, interconnection, insurance, force majeure,

transfer, termination, change-of-law provisions,

refinancing arrangements, dispute resolution

Success factor DetailsSuccess factor’s components

Adequate managerial capacitye.g. efficient operational practices, low technical losses,

sound customer service

Solid commercial performance e.g. commercially sound metering, billing, collection

Favorable debt arrangements

e.g. competitive financing, local capital/markets that

mitigate FX risk; risk premium demand by financiers (or

capped by off-taker) matching country/project risk;

flexibility in terms and conditions (possible refinancing)

Favorable equity partners

e.g. local capital/partner contribution (if possible); fair /

reasonable ROE; experience with developing country

project risk; development-minded firm with risk appetite

for project; involvement of a DFI partner / government

Country

level

Project

level

Favorable

financing

Creditworthy

off-taker

Secure /

adequate

revenue

stream

Satisfied Not satisfied

Libyan context:

N/A

N/A

N/A Not Applicable


Finally, investment risk and prospective rates of return in Libya (key IPP focus) are not yet mature

39

Focus on IPPs

Source: US department of commerce, Strategy& analysis

Rationale

• Yielding net welfare benefits to

power consumers and society

• Improving sector performance with

limited capital availability (e.g.

attract private sector resources to

increase power generation

capacity and meet demand needs)

Key challenges for the state

• Attract investors and successfully

compete for international capital by

offering competitive (but affordable)

returns for investment risks

• Keep country and sector profile

attractive (investors seek

predictability and control of risk)

Business case

• Private investment depends upon

the balance between investment

risk and prospective rates of return

• A wide set of different risks apply:

1. Dev. and construction phase risks

2. Operational phase risks

3. Other risks

Development

and

construction

phase risks

Pre-construction• Land procurement

• Failure to commence

Construction

• Abandonment

• Delays in achieving CDO

• Deemed completion

• Construction cost escalation

Site accessibility

and availability

• Right to occupy

• Site suitability

• Site-related infrastructure

Interconnection

infrastructure

• Transmission interconnection

• Delivery point

Testing and

commissioning

• Testing and commissioning

• Failure to meet contract

capacity

• Output/heat rate risk

Operational

phase risksMarket

• Offtake obligations

• Curtailment

Performance• Minimum requirements

• Dispatch

Fuel and other

feedstock supply

• Tolling arrangements

• Fuel supply agreements

• Fuel transportation agreements

Transmission• Transmission company

creditworthiness

Foreign

exchange

• FX rate fluctuations

• Convertibility and remittance

Other risks Political / sovereign risk and expropriation

Compliance with law and change in law

Change in tax, change in control

3

1 2

1

2

3

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