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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?
5
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
0
I
II
III
IV
VI
V
6
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
8
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
0
I
II
III
IV
VI
V
9
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)
RISK ALLOCATION AND MITIGATION
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
Party who bears the risk
GOV
Private
partyTx Utility
Draft risk allocation matrix (2/5)
RISK ALLOCATION AND MITIGATION
Commercial
(contd.)
1 Only applicable if there is asset transfer in con-cession model; 2 only applicable if transmission tariff is introduced
Entity bears the risk
Entity potentially bears the risk
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
RiskRisk Category Strategies to mitigate riskDescription Rationale
Party who bears the risk
GOV
Private
partyTx Utility
Draft risk allocation matrix (3/5)
RISK ALLOCATION AND MITIGATION
Commercial
(financial)
Political & legal
Entity bears the risk
Entity potentially bears the risk
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
▪ Site acquisition is a risk most efficiently
handled by GOV / Tx Utility
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
▪ Close community engagement early in the process to get
local public support
▪ Site acquisition is a risk most efficiently
handled by GOV / Tx Utility
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
RiskRisk Category Strategies to mitigate riskDescription Rationale
Party who bears the risk
GOV
Private
partyTx Utility
Draft risk allocation matrix (4/5)
RISK ALLOCATION AND MITIGATION
Political & legal
(contd.)
Political event as
defined in GOV
standardised support
letter
Entity bears the risk
Entity potentially bears the risk
Wayleave acquisition:
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
▪ Close community engagement early in the process to get
local public support
▪ Site acquisition is a risk most efficiently
handled by GOV / Tx Utility
Wayleave acquisition:
litigation risk may delay
progress and increase
costs
▪ …▪ Site acquisition is a risk most efficiently
handled by GOV / Tx Utility
▪ 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
through public party
▪ Any Change in law which has not been addressed
within the provisions of the Project Agreement
▪ GOV standardised letter of support▪ Political & legal risks are best mitigated
through public party
▪ Any riot to the extent that it is not attributable
to the action or inaction of the Company
Wayleave acquisition:
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
▪ Site acquisition is a risk most efficiently
handled by GOV / Tx Utility
14
RiskRisk Category Strategies to mitigate riskDescription Rationale
Party who bears the risk
GOV
Private
partyTx Utility
Political & legal
(contd.)
Draft risk allocation matrix (5/5)
RISK ALLOCATION AND MITIGATION
Political event as
defined in GOV
standardised support
letter
Entity bears the risk
Entity potentially bears the risk
▪ Any failure or refusal by a Governmental
Authority to issue or renew Authorisations in
spite of compliance with requirements
▪ GOV standardised letter of support▪ Political & legal risks are best mitigated
through public party
▪ A Change in Tax which has not been addressed
within the provisions of the Project Agreement
▪ GOV standardised letter of support▪ Political & legal risks are best mitigated
through public party
▪ Any expropriation confiscation, or compulsory
acquisition, of all or a portion of the propertiesor
assets of the Company
▪ Political & legal risks are best mitigated
through public party
▪ GOV standardised letter of support
▪ Political risk insurance
▪ A non - insurable event of Force Majeure
affecting the Contracting Authority and to be
dealt with on project by project basis
▪ GOV standardised letter of support▪ Political & legal risks are best mitigated
through public party
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
through public party
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
▪ Political risk insurance
▪ …
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.)
I
II
III
IV
16
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
0
I
II
III
IV
VI
V
17
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
Consumer Dx UtilityTx
Utility
Conces-
sionaire
Tariff
increase
Consumer Dx UtilityTx
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
▪ 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 3
▪ Consumers pay current tariffs to Dx Utility
▪ 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
21
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
0
I
II
III
IV
VI
V
22
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)
25
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
0
I
II
III
IV
VI
V
26
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
28
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
0
I
II
III
IV
VI
V
29
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
30
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
0
I
II
III
IV
VI
V
31
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
32
Contents
Strategic framework: concession model choice, risk
allocation, tariff mechanism, selection process
Criteria to select a pilot transmission line
Case examples of strategic framework for specific projects
Country transmission privatization case examples
33
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
34
Contents
Strategic framework: concession model choice, risk
allocation, tariff mechanism, selection process
Criteria to select a pilot transmission line
Case examples of strategic framework for specific projects
Country transmission privatization case examples
35
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
Strategic framework: concession model choice, risk
allocation, tariff mechanism, selection process
Criteria to select a pilot transmission line
Case examples of strategic framework for specific projects
Country transmission privatization case examples
– 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
BRAZIL - PRIVATE PARTICIPATION CASE STUDY
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
BRAZIL - PRIVATE PARTICIPATION CASE STUDY
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
BRAZIL - PRIVATE PARTICIPATION CASE STUDY
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
BRAZIL - PRIVATE PARTICIPATION CASE STUDY
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
Strategic framework: concession model choice, risk
allocation, tariff mechanism, selection process
Criteria to select a pilot transmission line
Case examples of strategic framework for specific projects
Country transmission privatization case examples
– 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)
INDIA - PRIVATE PARTICIPATION CASE STUDY
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
INDIA - PRIVATE PARTICIPATION CASE STUDY
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