Calling Startup African Entrepreneurs: Apply for the 2020 Tony Elumelu Foundation Entrepreneurship Programme

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  • Sixth Year of Programme and Tenth Anniversary of Foundation see Significant Enhancements to the TEF Entrepreneurship Programme
  • Creating a Personalised Entrepreneurship Journey for Applicants and Greatly Increased Access to Programme and Knowledge Base
  • Applications made through TEFConnect, Africa’s largest digital entrepreneurship network
Tony O. Elumelu, CON, Founder, Tony Elumelu Foundation and Dr. Awele Elumelu, Trustee, Tony Elumelu Foundation surrounded by African Entrepreneurs at the Tony Elumelu Foundation Entrepreneurship Forum.

The Tony Elumelu Foundation (TEF) has opened its application portal (www.tefconnect.com) for applications from African entrepreneurs across all African countries, for the 2020 cohort of the Tony Elumelu Entrepreneurship Programme. In 2019, 3,050 African entrepreneurs benefited from the Programme, a number which will meaningfully increase in 2020.

The TEF Entrepreneurship Programme is open to startup entrepreneurs, with innovative business ideas or businesses that have been in existence for less than 3 years, in any sector, from across Africa. The Programme is the $100 million commitment by African investor and philanthropist, Tony O. Elumelu to empower 10,000 entrepreneurs in 10 years, with the goal of creating millions of jobs and new revenue on the continent. The programme implements Mr Elumelu’s Africapitalism philosophy, which positions the private sector as the catalyst for African economic transformation, and an investment approach that values the creation of both social and economic wealth.

In commemoration of its 10th year anniversary, the Foundation will announce further enhancements to the Programme, providing additional benefits to Africa’s rapidly growing youth demographic. The changes in the 2020 TEF Entrepreneurship Programme emphasise a personalised entrepreneurship journey for every applicant and opening the platform to ensure a higher number of people trained, amplifying the Programme’s impact and reach. In just five years, the Programme has empowered over 9,000 beneficiaries from all 54 African countries, with training, mentorship and seed funding.

Speaking at the launch of the 2020 TEF Entrepreneurship Programme, Ifeyinwa Ugochukwu, CEO of the Tony Elumelu Foundation, said: “The transformation of Africa begins with empowering our young African entrepreneurs. With the recent enhancements made to our Programme and our growing list of partners, the Tony Elumelu Foundation is significantly increasing its impact across the continent. We encourage all startup African entrepreneurs across the 54 African countries to apply for the Programme, as we continue to empower the very best ideas that will create the much needed employment and revenue on the continent”.

The multilingual Application Portal is open on TEFConnect.com, the digital networking platform for African entrepreneurs, from January 1 to March 1, 2020.

SOURCE Tony Elumelu Foundation

CONTACT: Contacts: Ifesinachi Okpagu, [email protected], +234-1-2774641-5

Counter-poaching troops help with historic Black Rhino move in Malawi

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Soldiers have assisted African Parks who relocated critically Endangered Black Rhinos from South Africa to Malawi in one of the largest international rhino translocations to date

Soldiers from the 2nd Battalion Royal Gurkha Rifles have recently returned home from a 3-month counter-poaching deployment in Malawi. Based in Liwonde National Park they work with African Parks to train current and new rangers, helping to crack down on the illegal wildlife trade by improving patrolling effectiveness and information sharing skills.

Towards the end of the deployment the soldiers assisted with the careful offloading of the rhinos who had travelled by air and road from KwaZulu-Natal in South Africa. The project was led by African Parks in conjunction with Malawi’s Department of National Parks and Wildlife Ezemvelo KZN Wildlife.

There are around 5,500 black rhinos in the wild today as they are poached for their horn. This project will help boost the rhino population in the region and help preserve this critically endangered species for the next generation.

Since their release, African Parks is continuing to intensively monitor the rhinos as they settle in to their new environment.

Major Jez England, Officer Commanding British Army Counter Poaching Team in Liwonde:

“This latest counter-poaching deployment has been hugely successful. Not only do we share skills with the rangers, improving their efficiency and ability to patrol larger areas, but it also provides a unique opportunity for our soldiers to train in a challenging environment.

“Helping with the rhino move was a fitting end to our time in Malawi, getting up close to the animals we are here to help protect was an experience the soldiers won’t forget.”

So far, the Army has helped train 200 rangers in Malawi and thanks to effective management and an overhaul of law enforcement by African Parks and the DNPW, supported by the British Army, no high-value species have been poached in Liwonde since 2017.

Defence Secretary Ben Wallace said:

“The illegal wildlife trade is the fourth largest transnational crime behind drugs, arms and human trafficking and can have hugely destabilising consequences. With this deployment our Armed Forces have once again demonstrated their versatility and value by contributing to the conservation work taking place in Malawi.

“Working with local communities, host Governments and wildlife groups is key to our approach, we want to see sustainable, community led solutions that help promote security and stability for both the people and wildlife of Africa.”

The counter-poaching ranger partnering programme is funded by the Department for Environment, Food and Rural Affairs (Defra) and delivered by the British Army. The UK Government has committed over 36 million pounds to tackle the illegal wildlife trade between 2014 and 2021. Part of this is to help support transboundary work to allow animals to transit more safely between areas, and across national borders.

International Environment Minister Zac Goldsmith said:

“The UK is taking the lead in countering the illegal wildlife trade – including poaching for rhino horn which is a disastrous and destructive trade that threatens the very existence of the precious black rhino species.

“This deployment demonstrates the vital role the UK can play in that effort by sharing skills with international partners engaged in the fight against poaching and smugglers.”

SOURCE UK Department for Environment, Food & Rural Affairs

African Parks’ Most Hopeful Conservation News in 2019

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Successful conservation interventions are critical, now more than ever, to improve the trajectory of the planet’s biodiversity and the state of its ecosystems, as highlighted in the IPBES global biodiversity assessment published this year. Well managed protected areas are vital anchors of sanctuary, stability and opportunity for millions of people and countless species. With the largest and most ecologically diverse portfolio of parks under management by any one organisation across Africa, African Parks’ goal is to realise the ecological, social and economic value of these landscapes, preserving ecological functions, delivering clean air, healthy watersheds, carbon sequestration, food security, and better health for millions of people.

Here is some of their most hopeful news from 2019:

  • Zimbabwe’s exceptional Matusadona National Park which abuts Lake Kariba became the 16th park to join African Parks’ management portfolio. Through partnership with the Zimbabwe Parks and Wildlife Management Authority, they will fully restore the park as a leading wildlife sanctuary for the region.
  • One of history’s largest international black rhino translocations was concluded with the WWF Black Rhino Range Expansion Project, using source populations in South Africa to boost Malawi’s population to create a valuable range state for the critically endangered species.
  • The largest ever transport of rhinos from Europe to Africa was undertaken, releasing five Eastern black rhinos, bred successfully by the European Association of Zoos and Aquaria Ex Situ Programme, into Rwanda’s Akagera National Park, helping to build a sustainable wild population of this subspecies numbering only around 1,000 in Africa.
  • Cheetahs were introduced to Majete Wildlife Reserve in Malawi to form a crucial founder population and help grow the range of the vulnerable big cat; and almost 200 buffalo were released into Zambia’s Bangweulu Wetlands to restock one of the continent’s greatest wetland landscapes.
  • 100 years of conservation was celebrated with the Barotse Royal Establishment and Zambia’s Department of National Parks and Wildlife (DNPW) in Liuwa Plain National Park with the official opening of the world class King Lewanika Lodge. The event was testament to their 16-year partnership to restore the ecosystem, promote livelihoods development, provide employment, education, and support to thousands of people, while seeing the park emerge as one of the world’s top travel destinations hailed by The New York Times and TIME Magazine.
  • TIME Magazine featured Chad’s Zakouma National Park on its list of World’s Greatest Places 2019, and Akagera National Park in Rwanda continued to see remarkable strides in tourism development, with Wilderness Safaris opening the gorgeous luxury tented Magashi Camp.
  • With several partners they have installed the most advanced technology available, from Vulcan’s EarthRanger, ESRI, Smart Parks, and others, to improve real-time monitoring of wildlife and to support law enforcement within the parks.

These advancements are only possible because of the partnerships with national governments who entrust African Parks with managing their natural heritage. Their shared vision of a future for people and wildlife is realised through the generous funding received from a global community of committed supporters, including anchor donors: Acacia Conservation Fund (ACF), Adessium Foundation, Arcus Foundation, Dutch Postcode Lottery, European Union, Fondation des Savanes Ouest-Africaines (FSOA), Fondation Segré, Government of Benin, Howard G. Buffett Foundation, MF Jebsen Conservation Foundation, National Geographic Society, Oppenheimer Philanthropies, People’s Postcode Lottery, Save the Elephants and Wildlife Conservation Network’s Elephant Crisis Fund, Stichting Natura Africae, The Walton Family Foundation, The Wildcat Foundation, The Wyss Foundation, WWF-the Netherlands, WWF-Belgium, UK Aid, U.S. Department of State and USAID.

Overall, these gains are only possible because of the myriad support received, from events to charitable auctions and races, recommendations to friends, travel to the parks, bequests and helping to tell the story of the urgency of the conservation work, and to generous board members in Hong Kong, the Netherlands, Switzerland, the U.S. and South Africa.

CONTACT: Fran Read, +27-82-383-7558, [email protected]

Related Links

https://www.africanparks.org

SOURCE African Parks

South Africa: Cell C and MTN conclude extended roaming agreement

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 By Angelo Tzarevski, Senior Associate in the Competition & Antitrust Practice at Baker McKenzie in Johannesburg

 Two mobile carrier companies in South Africa, Cell C and MTN, have concluded an extended roaming agreement, which appears to be an expansion of a previous roaming agreement between the companies, concluded in May 2018.  In terms of the first agreement, MTN provided Cell C customers with 2G, 3G and 4G roaming services on MTN’s network in select areas across the country where Cell C had chosen to purchase coverage rather than establish its own infrastructure (mainly outside main metropolitan areas).  In terms of the new agreement concluded on 18 November 2019, access will be expanded to enable Cell C customers to roam on MTN’s data network nationally.

 Roaming agreements enable smaller operators or new entrants to offer services to their subscribers in areas where they lack their own network infrastructure, thus giving them the ability to compete with the large operators. Agreements of this nature are common in South Africa, as well as around the world.  In fact, the Competition Commission’s Data Services Market Inquiry remarked in its provisional findings report (published on 24 April 2019) that “national roaming is an important tool to facilitate entry of new operators and accelerate effective competition“. 

 The conclusion of the expanded roaming agreement will allow Cell C to offer national 4G coverage to customers through MTN’s network, without having to incur high costs in developing its own national network.  Ultimately, this enables Cell C to enhance its service offering and competitive position vis-à-vis the larger networks.

 Cell C has stated publicly that both parties will maintain their respective spectrums and each party will use its own frequencies. Cell C has also indicated that it will still have all its licences and control its core network, transmission, billing system and subscriber management.  MTN and Cell C will remain independent companies following the conclusion of the agreement. In order for the conclusion of the roaming agreement to have constituted a merger for competition law purposes, one party would need to acquire control over the business or productive assets of the other. The current roaming arrangement between Cell C and MTN does not appear to involve an acquisition of control but merely the provision of roaming services.

 In contrast, in 2015, MTN and Telkom attempted to conclude a network management services agreement and reciprocal roaming agreements, which would effectively let each party roam on the other’s mobile network.  This gave rise to an acquisition of control by MTN as MTN would have taken over the financial and operational responsibility for the roll out and operation of Telkom’s radio access network (including Telkom’s spectrum capacity).  The Competition Commission raised concerns with that transaction, which was ultimately abandoned by MTN and Telkom.

 In South Africa, Vodacom and MTN have by far the largest network coverage nationally.  Accordingly, all other network operators who seek national coverage (or partial coverage in areas where they lack their own infrastructure) make use of roaming arrangements with MTN and Vodacom.  The conclusion of the Cell C MTN agreement, therefore, does not necessarily signal an unfair advantage of the two operators compared with competitors. An advantage over competitors could arise depending on the specific terms of the agreement and quality of service that an operator can provide.  For example, if MTN is able to offer Cell C more competitive roaming rates or higher quality network service compared to another provider of roaming services, this would benefit Cell C, but this is not necessarily an unfair advantage or anticompetitive.

 The expansion of the roaming agreement between Cell C and MTN brings it in line with the current roaming agreement between Vodacom and Telkom, which was concluded in November 2018 to allow Telkom customers to roam on Vodacom’s LTE network nationally. Just as Telkom’s customers can make use of Vodacom’s data network nationally, the conclusion of the new agreement between MTN and Cell C, means that Cell C’s customers will be able to use MTN’s 2G, 3G and 4G network across the country.

South Africa: Competition Commission Releases the Final Report of Data Services Market Inquiry

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By Lerisha Naidu, Partner, Ryan McKerrow, Candidate Attorney, and Kirsty Gibson, Candidate Attorney, Competition & Antitrust Practice, Baker McKenzie Johannesburg

On Monday, 2 December 2019, the Competition Commission published the final report in relation to its Data Services Market Inquiry. The inquiry was initiated in August 2017 in response to persistent concerns from the public over high data prices. The purpose of the inquiry was to provide a better understanding of the market and value chain features that result in elevated data prices and to make recommendations that would facilitate a reduction in data prices.

The Commission received submissions from major operators and consumer rights organisations.  Following the furnishing of submissions, public hearings and further engagements with operators and other stakeholders were conducted. All of this culminated in the publication of a composite final report containing findings and recommendations emanating from the inquiry.  Based on international benchmarking and profitability analyses, the inquiry confirmed that data prices in South Africa are indeed disproportionately high.  In addition, the final report identifies four broad areas of concern (each of which are elaborated upon in detail below), namely:

  1. the existence of anti-poor retail pricing structures, which lack transparency;
  2. inadequate price-based competition in mobile markets;
  3. limitations in the availability of spectrum and access to facilities, which drive costs up; and
  4. the supply gap for fixed-line data services.

The key findings and recommendations are briefly set out below.

Data Prices in South Africa are Too High

According to the Commission’s findings, based on a comparative study conducted relative to other countries, data prices in South Africa are in fact substantially elevated.

In response to findings that local data prices are elevated relative to other African jurisdictions, mobile operators have argued against reliance on international price comparisons on the basis that they do not account for cost and quality differences across countries. However, the findings of the Commission are that despite certain shortcomings, such comparisons retain a measure of probative value. In any event, the inquiry found that the submissions furnished (including the underlying evidence) failed to demonstrate that cost and/or quality variations justified the identified differential pricing.

Ultimately, the inquiry takes the view that the high margins over costs earned by the relevant mobile operators in South Africa give rise to a prima facie case for excessive pricing in contravention of competition legislation.

Anti-Poor and Opaque Retail Pricing Structures

The inquiry found that data pricing structures in South Africa are anti-poor in that low-volume customers are charged higher prices per megabyte than high-volume customers.  Again, the inquiry found no cost justification for the differential pricing.

As a consequence of these retail pricing structures, poorer consumers tend to purchase short-validity bundles, which are cheaper. However, with short-validity bundles having very limited lifespans, this purchasing pattern does little to improve access to data.

In addition, the inquiry found that mobile operators gather and analyse personal data usage in order to make personalised offers, which tend to be aimed at maximising revenue per subscriber rather than offering lower prices to more price-sensitive subscribers. Moreover, the inquiry is of the view that that the complexity of pricing structures alone often leads to behavioural biases, which are exploited by operators. For example, complex pricing structures can be used to discourage consumers from engaging in research to determine the best price, both within and across mobile operators.

Inadequate Price-Based Competition in Mobile Markets

The inquiry notes that there is insufficient price-based competition in both the retail and wholesale mobile markets. It points out that, as a result of first-mover advantages, certain mobile operators have acquired substantial market power, which is not effectively constrained by challengers. The Commission believes that the existence of market power and ineffective competition is reflected in the prices prevailing in the market.

Based on historical evidence, the inquiry takes the view that mobile operators with significant market power are able to maintain their market shares without responding to aggressive pricing strategies by smaller rivals, which include offering data packages at more competitive rates. With such pricing strategies being relatively ineffectual, it appears that they have been largely abandoned.

Limitations in the Availability of Spectrum and Access to Facilities

Delays in digital migration have resulted in a failure to release high-demand spectrum, with the result that mobile operators are currently facing a spectrum shortage and a lack of access to low-frequency bands. This, according to the inquiry, has been a noteworthy driver of elevated data prices. However, subsequent to the publication of the provisional report of the inquiry, ICASA issued a memorandum outlining assignment criteria for the licensing of high-demand spectrum. The Commission has made submissions to ICASA in this regard and has undertaken to continue engaging with it on the licensing process, emphasising that affordability and access must be prioritised over revenue generation.

The inquiry is also of the view that enhancing access to facilities and sharing passive infrastructure, such as base stations, can significantly reduce the operating costs of mobile operators. Some operators have already engaged in a mutually beneficial sharing of passive infrastructure, and ICASA has put in place regulations governing facilities access. However, the regulations have been criticised on the basis that they fail to adequately address circumstances where incumbents with a large proportion of the facilities strategically exclude others from accessing those facilities. Moreover, on a conceptual level, it has been argued that the sharing of passive infrastructure may undermine the incentive to invest in new facilities.

Supply Gap for Fixed Line Data Services

Despite receiving limited submissions on the topic, the inquiry considered the role of fixed line supply as a possible alternative for access to data services. The inquiry’s interest in fixed line supply stems from its finding that this remains the predominant source of household, business and public data. The inquiry found that fixed line supply and other mobile data alternatives may provide cheaper, or possibly free, data services to consumers in particular geographical areas or at particular times of the day. The inquiry believes that this is not only advantageous in itself, but may also provide a source of competitive pressure, encouraging mobile operators to reduce their prices. The inquiry notes, however, that the benefits of fixed-line supply will only be meaningful if fixed-line services become pervasive, particularly in the poorer communities where they are currently largely absent.

Recommendations of the Inquiry

The inquiry’s recommendations are concerned with both immediate relief in respect of high data prices, as well as medium-term measures geared towards improving mobile data price competition and providing increased infrastructure alternatives.

Immediate Relief

The inquiry recommends that the relevant mobile operators be required to enter into independent agreements with the Commission, within two months of the publication of the final report, geared towards substantial and immediate price reductions, particularly in respect of prepaid monthly bundles. It is envisaged, on the basis of preliminary evidence, that such reductions should be in the region of 30%-50%. Furthermore, it is recommended that independent agreements with the Commission should be reached, within the same time period, to align the prices per megabyte for all 30-day prepaid bundles that are equal to or less than 500 megabytes, unless quantified cost differences are established. In addition, the inquiry recommends that all mobile operators be required to reach agreements with the Commission, within three months of the publication of the final report, on:

  1. the provision of a lifeline package of daily free data to all prepaid subscribers;
  2. a consistent industry-wide approach to the zero-rating of content from public benefit organisations and educational institutions; and
  3. operators informing their subscribers, on a monthly basis, of the effective price of all data consumed by the subscriber.

 Medium-Term Relief

The inquiry recommends legislative changes which are geared towards enabling cost-based access to facilities. It also recommends that the relevant mobile operators be required to enter into agreements with the Commission to ensure that their national roaming agreements with other networks are appropriately priced and that they introduce accounting separation for their wholesale network infrastructure. In addition, it is recommended that MVNOs (Mobile Virtual Network Operators) be required to reach agreements with the Commission to ensure that their wholesale rates reflect a discount when compared to retail rates.

Finally, the inquiry sets out recommendations focusing on the development of alternative infrastructure to provide data services in low-income areas and smaller cities and towns. To this end, it recommends that the national government provide incentives to FTTH (fibre to the home) providers to roll out services in low-income areas. The inquiry also recommends that all levels of government actively promote the development of free public Wi-Fi in these areas.

Moving Forward

Competition legislation provides that the Commission may refer a complaint to the Competition Tribunal on the basis of the findings emanating from the inquiry.  In terms of the recommendations, mobile operators failing to enter into the required agreements with the Commission will face prosecution. This, however, does not mean that the Commission is precluded from initiating new complaints where it believes that market participants have engaged in anticompetitive conduct. Further, the Commission has undertaken to monitor pricing levels and profitability in the data services market on a continuous basis until such point that competition in the market has reached the desired level.

In the implementation of the recommendations, one can expect to see legislative and policy developments in the near future. It remains to be seen as to the final form such developments will take.

The new Ivorian investment code: Tinkering with an imperfect system or pioneering a path?

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By Jonathan Ripley-Evans, Jenalee Harrison and Marie Terrien, Herbert Smith Freehills

Investor-State Dispute Settlement (ISDS) is facing significant opposition in its current form. Whilst some parties are engaged to find new common ground, others have unilaterally implemented measures aimed at ousting investor-state arbitration altogether.

Over time, more and more attention has been paid to the International Centre for the Settlement of Investment Disputes (ICSID) and its apparent lack of meaningful African representation, particularly in disputes involving African States. In an attempt to address the problem of African participation (amongst others), Côte d’Ivoire has released its revised Investment Code (2018-646).

At a high level, the 2018 Investment Code strives to promote socially responsible investment and employment by encouraging regional development and improving local content whilst increasing the competitiveness of the local business. Social responsibility and legal compliance are preconditions to receiving benefits under the 2018 Code.

Investors are encouraged to rely on local enterprises in exchange for certain benefits offered under the new regime. The new code also provides for the establishment of a dedicated Investment Promotion Agency, aimed at streamlining investment procedures.

The Government believes that the reform will strike the right balance between granting a return for investors on the one hand, and protecting the State’s interests through a mechanism of cooperation and shared growth, on the other.

However, this apparent positive development may mean little absent tangible protection of investments. To fully assess the enhancement of protection afforded to investors under the 2018 Code, one needs to consider the position under the 2012 Code.

DISPUTE RESOLUTION UNDER THE 2012 INVESTMENT CODE

Under article 20 of the 2012 Code, any dispute between natural or legal persons, whether foreign or Ivorian, relating to the application of the 2012 Code was to be submitted to the courts of Côte d’Ivoire or to an arbitral tribunal, unless settled amicably.

Whilst the mention of the amicable settlement was noble, the ambiguity surrounding its implementation rendered the provision relatively ineffective. Attempts at amicable settlement were not mandatory and conciliation required separate agreement between the parties on procedure.

The 2012 Code recognised the binding nature of agreements and treaties relating to the protection of investments and Côte d’Ivoire consented, through the mechanism of article 20, to the submission of investment disputes to ICSID.

The 2012 Code was a clear embrace of the principles espoused under the Washington Convention and this area is where, under the 2018 Code, one sees the most significant departure from the previous regime.

DISPUTE RESOLUTION UNDER THE 2018 INVESTMENT CODE

Article 20 of the 2012 Code has been entirely re-written, the principles of which are now found in article 50 of the 2018 Code.

Article 50 requires that parties “shall endeavour to resolve [their dispute] through amicable negotiations“. Ostensibly to clarify the ambiguity of the 2012 Code, the 2018 Code now makes it mandatory for parties to endeavour to resolve any dispute regarding the interpretation or execution of the 2018 Code, through amicable negotiations. It may, however, be argued that one form of ambiguity has been exchanged for another as the word “endeavour” is notoriously open to interpretation.

To complicate matters further, a time limit is imposed upon such amicable negotiations. If no agreement is reached by the parties within twelve months, the text provides that the Conciliation Regulations of the United Nations Commission on International Trade Law (“UNCITRAL”) shall apply. No guidance is given as to what constitutes the commencement of the amicable negotiation period which may lead to further uncertainty.

It would appear that the 12-month negotiation period, rather than constituting an extended period of mandatory negotiation, simply acts as a “long-stop” date, after which, the parties must proceed to Conciliation under the rules of UNCITRAL.

Notwithstanding the obligation to endeavour to resolve issues amicably, the parties may, by agreement, submit a dispute to arbitration.

The glaring omission from the 2018 Code is the withdrawal of the express consent to ICSID arbitration. Whilst Côte d’Ivoire remains a signatory to the Washington Convention, the Investment Code can no longer be relied upon as a source of consent by the host state to an ICSID arbitration. This omission appears deliberate and seeks to address one of the strongest criticisms against the current format of ISDS – the lack of African participation.

In place of an express reference to ICSID, the 2018 Code now provides for the submission of an investment dispute to the Arbitration Centre of the Common Court of Justice and Arbitration (“CCJA”) of the Organization for Harmonization in Africa of Business Law (“OHADA”). Unfortunately, however, such submission requires further agreement between the parties which is likely to present challenges in the future.

The 2018 Code also implements a “fork in the road” mechanism in terms whereof a disputant is bound to elect one method of dispute resolution, waiving any right to resort to an alternative forum.

CONCLUSION

Notwithstanding the existence of certain ambiguities, the 2018 Code has not only addressed most of the shortcomings of the 2012 Code (insofar at least as dispute resolution is concerned), but it has presented what appears to be a viable alternative to ICSID arbitration.

Rather than resorting to drastic measures such as the outright termination of BITs or the renunciation of all forms of investor-state arbitration, the 2018 Code seeks to protect the interests of the country whilst providing protection to investors in a manner more palatable to the African state.

ICSID arbitration remains a possibility under the 2018 Code but importantly, it is no longer the preferred option. Côte d’Ivoire has made a clear statement in support of African seated arbitrations by incorporating a reference to the CCJA.

There is no doubt that the 2018 Code appears to be a step in the right direction, the requirement that the parties reach an agreement before submission to arbitration places the dispute resolution mechanism of the 2018 Code at risk. For this reason, investors may still require a more deliberate and express commitment to the protection of investments from the government than is offered in the 2018 Code.

This post was originally published on the Kluwer Arbitration Blog, 30 November 2019.

Rwanda’s Lake Kivu: Electricity generation through methane gas

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By Colette Bitali, Associate Equity Juris Chambers, DLA Piper Africa member firm in Rwanda

 A hidden gem lies in the west of Rwanda, full of fear and promise. Just a few years ago, its full potential was untapped, its very nature was misunderstood, and it was considered a catastrophe waiting to happen. It is Lake Kivu, located on the border of Rwanda and the Democratic Republic of Congo, and covering an area of 2,700 km squared.

The lake contains naturally occurring carbon dioxide and methane gas, making it one of three lakes in the world – the other two being in Cameroon – known to have a deep concentration of naturally dissolved gases. Lake Kivu, however, has almost 1,000 times more concentrated dissolved gases than its Cameroonian counterparts, which both erupted in the 1980s. Lake Kivu has about 300 billion m3 of carbon dioxide and 60 billion m3 of methane gas, giving it the capacity to produce between 120 million and 250 million m3 of methane gas annually. The reason for this concentration of gases is that the lake sits in a highly volcanic area; carbon dioxide enters the lake from the volcanic rock beneath it and is converted into methane gas by the bacteria and fermentation of biogenic sediments in the lake. It has been likened to a bottle of fizzy drink that, when shaken, releases gas.

For many years, Lake Kivu was considered a hazard by nearby residents. After several people drowned, a myth emerged that the methane gas had sinking properties. There were also fears that the water was becoming more acidic and inhospitable for fish – a large source of food and income for residents. And most importantly, there was fear of the lake erupting by methane igniting once it came in contact with air and concern that nearby residents could be asphyxiated from toxic greenhouse gases.

 

Under Rwanda’s transformation agenda, the government wants to address the growing energy deficit by providing access to power to all Rwandans by 2024. So it decided to change the narrative around Lake Kivu by attracting private investors. In 1963, Union Chimique de Belge began using purified methane gas with a pilot plant in Rubona, a neighbourhood on the shore of Lake Kivu. But it was not until 2015 that further methane-to-power projects were implemented.

KivuWatt, a project managed by Contour Global, was the world’s first large-scale methane-to-power project. The project extracts methane from Lake Kivu to generate electricity, expanding households’ access to power, lowering costs, and reducing environmental hazards. The first phase of the project used three gensets to produce 26 MW of electricity for the local grid. The second phase is expected to deploy nine additional gensets at 75 MW, essentially doubling Rwanda’s power production. KivuWatt extracts gas from 350 m beneath the lake, and returns carbon dioxide into it to ensure balance and continuity of the ecosystem.

The methane gas is separated and used to propel turbines, which then generate electricity. Separately, the Lake Kivu 56 project plans to generate 56 MW under its 25-year concession with the Rwandan government, which has also entered into a USD400 million concession agreement with Gasmeth. Under this agreement, Gasmeth will process and compress the gas onshore to create compressed natural gas, and create a distribution and retail network for the distribution of this and biofuel replacement across the country.

The methane in Lake Kivu is estimated to have the capacity to generate 700 MW of electricity over a period of 55 years. Rwanda’s share of the total generation potential is about 350 MW, with the rest being shared with the Democratic Republic of Congo. The government has established a supervisory body – the Lake Kivu Monitoring Program – to ensure the safe extraction of methane gas and protection of the surrounding population through the preservation of the lake’s stability. Gas laws and regulations for methane projects are under review and expected to be gazetted soon.

The gas law will establish a framework for the development of gas infrastructure and operations in Rwanda. Investors have found it challenging to find experts and bring them to the remote area of the lake, and to mobilize the required financing. Despite this, they have managed to explore this natural resource and optimize its use for the benefit of Rwanda and themselves. More challenges lie ahead, but without a doubt Lake Kivu today holds more promise than risk.

Source: DLA Piper Africa Connected Issue 3: Energy in Africa – Innovation, Investment and Risk

The rise of alternative energy in Africa_Geothermal power generation

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By Lisa Dutiro, Candidate Attorney, Manokore Attorneys, DLA Piper Africa member firm in Zimbabwe

 While climate conditions threaten the hydropower industry, solar and wind power continue to offer commercial viability. But much of Africa’s renewable energy potential remains untapped and the scope for growth could create investment opportunities across the continent. Could geothermal energy be the solution to Africa’s energy crisis?

Africa is undergoing a period of accelerated economic growth and transformation in response to global pressures and demands. The availability of energy is a fundamental requirement for Africa to be able to foster and harness its sustained growth and achieve economic and social development. It has been estimated by the International

Renewable Energy Agency that by 2050 the continent will be home to at least 2 billion people – almost double its current population. The rapidly increasing populace has led to power production capacities in Africa failing to meet current levels of consumption and demand.

The deficiency in the supply of power across African nations is likely to hinder the continent’s drive to achieve its economic growth projections. The lack of power supply in various African countries can be attributed to the poor management of power utilities, the high costs involved in processing fossil fuels, the large losses that are experienced from the aged electrical grids as well as high tariffs. With the lowest electricity generation capacity and the most acute form of energy poverty in the world, Africa is in crisis because of the failure of traditional methods of power generation on the continent.

A move towards renewable energy

As Africa labours to seek sustainability through dependency on costly and polluting energy generation solutions, global efforts to eradicate reliance on finite fossil fuels have ushered renewable sources of energy into the spotlight. The use of renewable energy allows countries to enhance their self-sufficiency and limit dependency on

costly imports. Renewable energy is clean, nondepletable and has a much lower environmental impact than conventional energy sources. It guarantees sustainable future energy supplies and has the potential to provide Africa with the opportunity to achieve its economic objectives.

The growth of the use of renewable resources on a global scale has led the cost of associated technology to fall dramatically. According to statistics provided by the African Development Bank in 2017, Africa’s untapped renewable energy potential shows estimates of 350 GW for hydroelectric energy, 110 GW for wind energy,

15 GW for geothermal energy and 1,000 GW for solar. If this large reserve of renewables is exploited,

its effect could potentially alter the economies of many African countries, thus making it a key priority of sustainable development.

Historically, hydropower has been the most commonly used renewable source of energy in Africa. However, given climate change, hydropower generation has become very unpredictable as droughts continue to sweep across

the continent. More recently wind and solar power have become commercially viable, and although they are similarly reliant on weather conditions, solar energy potential in Africa remains high due to the continent’s location. Options for power generation from solar energy include utility-scale conventional or concentrated photovoltaic (PV) and concentrated solar thermal power (CSP) as well as small-scale PV systems suitable for off-grid power generation. Solar energy can also be used to produce heat for domestic users or non-intensive

industrial users.

Top ranking solar markets are South Africa and North African countries due to their strong policies and commitment to investment. The Ouarzazate Noor solar complex in Morocco is currently one of the largest

concentrated solar plants in the world; the plant aims to produce 2,000 MW by 2020, 680 MW of which has already been successfully launched. Wind turbines are widely used in most countries and are central assets for many rural communities.

Factors determining the potential of wind power are wind speed, pressure gradients and the geography of the landscape. The presence of deserts, coastlines and natural channels also make for favorable wind speeds. Consequently, the best regions in Africa for wind farms are in the rugged regions of the Sahara, along coasts and in the Southern African mountains and the horn of Africa. Wind power production in Sub-Saharan Africa is currently booming, and East Africa is leading the way with Kenya’s recently unveiled wind power project – Lake Turkana

Wind Power Farm, which is the largest wind farm in Africa. It has 365 turbines and a capacity to dispense 310 MW of reliable, low-cost energy to the national grid.

 

Much like wind and solar power, geothermal energy has the potential to support the African power sector as it moves away from being over-reliant on hydropower and towards becoming drought resilient. Africa’s known geothermal potential is predominantly present in the geologically active area of the Great Rift Valley, which extends from Djibouti to Mozambique. The valley is known to have over 30 active volcanoes and countless hot springs. With only 0.6% of Africa’s known geothermal potential being exploited, this energy source has been described as a hidden gem in Sub-Saharan electricity production.

Although countries around the continent are exploring renewable energy potential and engaging in many notable projects, few countries have specific renewable energy laws or investment incentives. This creates difficulties

in attracting foreign investment into the sector, and more so, into less-developed energy sources such as geothermal energy, despite its abundant potential.

The untapped potential of geothermal energy

Geothermal energy is a form of renewable energy that can produce sustainable electricity using the Earth’s own resources. It is generated and stored in the earth and can be captured from hot water springs or reservoirs located near the surface. These hot springs are found where water percolates into areas of volcanic activity in the Earth’s crust and becomes superheated before forcing its way back to the surface. Heat derived from the  hot water can be converted into electricity through electromagnetic induction. Geothermal heat can provide electrical power that is not dependent on weather conditions, making it a reliable renewable source of energy.

The three most known types of geothermal power plants which convert thermal energy to mechanical energy and finally to electrical energy are binary plants, dry steam plants and flash plants. Binary plants can exploit low temperatures and do not release geothermal fluids or environmental hazards into the environment, making them a preferable mechanism for geothermal power generation. Other innovative ways in which geothermal power

can be generated are through the conversion of waste heat from industrial processes, power stations and transportation into electricity through engineering that will permit the thermal energy produced from the waste to drive a turbine.

Although the necessary technology is not widespread in Africa, geothermal energy can also be used in industries that need heat at low temperatures. Kenya is currently the largest geothermal energy producer in Africa, with its power production contributing to over 40% of the country’s electricity generation. The East African nation has

successfully harnessed its geothermal capabilities, generating an estimated 630 MW, with nearly 400 MW of that production coming online since 2014. Kenya began exploring geothermal power in the late 1970s, and according to

the Geothermal Council Resource (a US industry association), the rise of Kenya’s geothermal industry ranks ninth in the world.

The Infrastructure Consortium for Africa and the United Nations Environment Program has estimated the potential of 20,000 MW of geothermal energy across Eastern Africa, and nations such as Tanzania, Uganda, Rwanda, Djibouti, Eritrea and Comoros have undertaken preliminary exploration for geothermal potential. Ethiopia is

currently harnessing its geothermal capacity, and according to Reuters, is aiming to reach 1 GW by 2021.

Burundi, Zambia and Uganda are also currently operating small-scale geothermal plants.

Geothermal exploration can be expensive and risky. Much like oil and gas exploration, the exact potential of a site can only be assessed and known once drilling has taken place. Further impediments to the harnessing of

geothermal potential in Africa are the lack of funding, lack of technical expertise and poor governance. Many governments are still developing knowledge capacity for the sector. Countries that have not included geothermal production in their legal frameworks need to amend existing frameworks or craft legislation regulating investment

schemes, development activities, the generation and distribution of electricity and the rights and obligations of holders of different kinds of licenses (exploration, development, use and selling) for geothermal exploration and production.

Various incentive schemes that apply to renewable energy projects or projects that are likely to have national and economic impact tends to draw investor interest. However, a lack of regulatory frameworks specifically pertaining to geothermal production has the potential to ward off prospective investors, emphasizing the need for legislative development in this area.

What’s next for Africa?

 In order for Africa to remain economically competitive and succeed in the rapidly growing global economy, its future energy needs will need to be considered and addressed at a legislative, technological and commercial

level. Reliance on costly fossils fuels has failed to meet current power demand across the continent and there is a need for further engagement of alternative energy sources by African governments, FDIs and regulators. Renewable sources of energy will assist in the eradication of poverty and deprivation among the African population and stimulate economic growth and activity in the region.

Further exploration into the mostly untapped potential of geothermal generation should be encouraged due to its reliability and ability to provide long-term, sustainable energy to the continent.

Source: DLA Piper Africa Connected Issue 3: Energy in Africa – Innovation, Investment and Risk 

Power reforms in West Africa: Challenges, prospects and opportunities

Africa Bulletin
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By Ogechi Onuoha, Associate Olajide Oyewole LLP DLA Piper Africa member firm in Nigeria

 Limited access to electric power and endemic electricity shortages are hindering the socio-economic development of West African countries, which are dependent on expensive fossil fuels. Nigeria and Mali have initiated and implemented some remarkable reforms in their power sectors in recent years that illustrate the developmental trends in the region’s power sector. In 2017, the total installed capacity in West Africa was 18 GW,1 excluding

Nigeria. Electricity trading in  West Africa accounts for only 5% of the gross demand, while countries like Togo, Benin and Niger are largely dependent on imports to meet demand.

Nigeria is endowed with large quantities of high-quality energy sources, including natural gas deposits, oil, hydro and solar. The country has the potential to generate 12,533 MW of electric power from its existing plants, but is currently only able to generate 4,000 MW, which is insufficient for its power needs.2 Although Mali has a high potential for solar, hydro and bagasse-based power generation, the country only has about 310 MW of on-grid installed  generation capacity to serve its population of almost 18 million people.3 Mali imports another 27 MW and has approximately 70 MW of off-grid production.

Innovations and recent developments

In addressing the challenges evident in Nigeria’s power sector and relating infrastructure, liquidity and governance, the government of Nigeria in 2001 launched a set of power reforms in the country which subsequently led to the

unbundling and privatization of electricity generation and distribution companies. Prior to the  privatization of the power sector, the National Electric Power Authority (NEPA) was the government regulatory body solely responsible for the generation, transmission and distribution of electricity in Nigeria. NEPA was, however,

characterized by infrastructural decay, lack of sustained investment, inadequate funding, government monopoly, corruption and an under-skilled workforce.

The government of Nigeria then inaugurated the Electric Power Implementation Committee (EPIC), which drafted the National Electric Power Policy (NEPP) in 2001 and, in turn, led to the enactment of the Electric Power Sector Reform Act (ESPR Act) in 2005. As part of the ESPR Act, the Nigerian Electricity Regulatory Commission (NERC)

was established as an independent electricity regulatory body while the Power Holding Company of Nigeria (PHCN) was incorporated as the initial transitional holding company of the 18 successor companies (including 6 generation

companies, 11 distribution companies and 1 transmission company) created from the defunct NEPA.

Subsequently, between November 2013 and November 2014, the privatization of all  the generation and distribution companies was successfully completed while the government retained ownership of the transmission company. The reforms were designed to be implemented through four stages of development, including:

  • The interim period, which began in November 2013 and involved the allocation of sector cash deficits across all market participants before expected tariff reviews;
  • The Transitional Electricity Market (TEM), when the Nigerian Bulk Electricity Trading (NBET) actively traded bulk power – as a buyer from generation companies (GenCos)/Independent Power Producers (IPPs) and resellers to distribution companies (DisCos);
  • The medium-term electricity market, which involved the cessation of NBET and the novation of contracts between NBET and GenCos/IPPs to DisCos. At this stage, the DisCos will commence direct purchase of power from the GenCos/IPPs for onward sale to the consumers; and
  • The final market, with bilateral contracts between electricity buyers and sellers at all levels, and a central balancing mechanism through the creation of a spot electricity market.

Although the TEM was effectively declared by NERC in 2015, the reforms have not gone beyond the interim period because some predetermined requisites for the TEM stage have not been met.

In 2017, the Nigerian government further initiated the Nigerian Power Sector Recovery Program (PSRP) to be implemented between 2017 and 2021. The PSRP, which was developed with the support of the World Bank, consists of a series of policies on the regulatory, operational, governance and financial interventions to be implemented by the Nigerian government over the identified  period. The aim of the PSRP is to:

  • Accelerate a recovery path for Nigeria’s power sector by improving the financial capacity of the NBET;
  • Improve the viability of distribution companies; strengthening the sector’s institutional framework;
  • Implement clear policies that promote and encourage investor confidence in the sector; and
  • Establish a contract-based electricity market or TEM which will ensure that electricity trading is done through contracts entered into between participants in the electricity market value chain.

Since 1998, the government of Mali has implemented a series of reforms through a host of legislative and statutory instruments formulated to redefine the role of the government in the energy sector and open it up

to the private sector. Some of the key policies relating to the power sector include:

  • The Stratégie Nationale pour le Développement des Energies Renouvelables was adopted in 2006 and aimed at promoting the widespread use of renewable energy technologies and equipment in order to increase the hare of renewable energy in national electricity generation up to 10% by 2015; developing the biofuel subsector for various uses including electricity generation; and searching for sustainable and suitable financing mechanisms for renewable energy.
  • The Lettre de Politique Sectorielle de l’Énergie was initiated for the period between 2009 and 2012 with the goal of completing the restructuring of Énergie du Mali SA (EDM) and tariff reforms and taking steps to ensure that there is a wide access to rural electricity, at affordable cost.
  • The Programme d’Urgences Sociales d’Accès à l’Énergie was developed as an emergency program by the EDM for implementation from 2017- 2021. The main objective of the program is to improve the quality of electricity supply and, subsequently, to create wider access to electricity in both urban and rural areas.

The emergency program includes the following activities:

  • Rehabilitation of existing power plants;
  • Rehabilitation and upgrade of existing transmission and distribution systems;
  • Improvement of billing and revenue collection; and
  • Increasing the capacity of the existing interconnections with Côte d’Ivoire, Senegal and Mauritania.

The following successes have been recorded since the implementation of the emergency program:

  • USD56 million revenue collected from overdue electricity bills issued before January 1, 2017, representing 58% of overdue bills;
  • A collection rate of 72% for bills issued after January 1, 2017, an 18% increase from 2016;
  • The securitization of illegal connections generating about USD12 million; and
  • The EDM has signed a contract for the rehabilitation of the Darsalam power plant (33 MW) and is currently negotiating to rehabilitate the generation units of the Sirakoro power plant (56 MW).

The government of Mali is also creating an enabling environment for private investors in the energy sector through several mechanisms such as the Fonds d’Électrification Rurale, established in May 2005 and managed by the  Agence Malienne pour le Développement de l’Énergie Domestique et de l’Électrification Rurale (AMADER),

which has the objective of providing funds for studies, strengthening the management capabilities of private operators and providing co-financing for rural electrification investments. 

Challenges in the implementation of reforms

The implementation of these reforms has not been without challenges. Despite the establishment of the Multi-Year Tariff Order (MTYO) in 2015, as a tariff model for an incentive-based regulation of electricity prices from time to time over a 15-year period, the end user tariff has not been cost reflective. The MYTO was established as part

of the drive for privatization and to ensure that prices charged by licensees are fair to customers and sufficient to allow the licensees to finance their activities and to allow for reasonable earnings for efficient operation.

The lack of cost-reflective tariffs has led to a huge sector cash deficit, which does not provide any investment incentive to private sector owners. This situation is further worsened by the inability of the NERC to implement reviews in order to alleviate the volumetric risks associated with the MYTO generation assumptions. The lack of cost-reflective tariffs has also adversely affected the performance ratio of DisCos in recent years. There has also been a lack of effective governance and enforcement of rules and policies in Nigeria’s power sector, which

has led to a mismanagement of funds, poor revenue generation and inefficient collection.

Nigeria’s power sector is faced with a lack of proper funding and dwindling income, which may be due to the collapse of global oil prices. The sector is also facing myriad structural problems that continue to hamper growth such as a shortage of gas supply for thermal plants, a high level of unpaid electricity bills and the country’s outdated and poorly maintained transmission network, which the government still owns but has put under private management. Also, the existing transmission network cannot handle more load than current peak electricity production. Furthermore, many of the new power operators have struggled to make progress, especially as they have had to contend with aging facilities requiring substantial investment to upgrade and expand.

Mali’s power sector has experienced poor management of its state-owned electricity utilities, relying on subsidies from government and multinational banks. The sector has huge financing needs and requires strong partnerships with investors, mostly from the private sector, in order to meet these needs. In addition to the investments needed for power generation, the transmission and distribution segments of the power sector will require approximately USD1.4 billion by 2034 and an average of USD27 million per year of investments, respectively.

Prospects and opportunities for growth

West Africa will continue to be an attractive investment destination given its abundant natural resources for power. The power and energy sector is a critical driver for growth and development across the continent and it is important that the sector reaches its full potential and addresses the energy needs of its consumers. West Africa is highly dependent on fossil fuel powered plants, which – besides the environmental implications – create a problem for supply and price variability.

There is an increasing need for the region to focus on low-fuel, low-carbon power systems for electricity generation which will help to alleviate the problem of access to energy, especially in rural areas of the region where the cost of transporting electricity from  large-scale power plants is high. The International Renewable Energy Agency (IRENA)13 predicts that renewables, including hydro, will account for more than 50% of the

power generation share by 2030 in West Africa, rising from the current level of 22%. Across the region, renewable technologies are a path to diversification of energy sources.

Hydropower is a significant source in Côte d’Ivoire, Guinea-Bissau, Liberia, Nigeria, Sierra Leone and Ghana. Solar PV, wind and biomass-based electricity generation remain a small part of the overall regional electricity generation mix in some countries. The three technologies together account for more than 90% of domestically produced, grid-connected electricity in Burkina Faso, Togo and Benin and more than 60% in Gambia, Guinea-Bissau and Senegal. By 2030, West Africa could benefit from importing more than 30 TWh of hydroelectricity via DRC and Cameroon, but Guinea also has the potential to become an electricity exporter by sending more than 4 TWh of electricity to neighboring countries such as Guinea-Bissau, Mali, Senegal, Sierra Leone, as well as to Côte d’Ivoire through Liberia.

Côte d’Ivoire would in turn, export to Mali, Burkina Faso and Ghana. In order to tap into the immense potential for growth in the power sector of West Africa, governments of the region need to design power policies which will address:

  • The maintenance of existing power infrastructure;
  • The periodic institutional reform of utilities and service providers; and
  • Improved subsidy policies and practices that could help save a substantial percentage of the annual cost required to fill infrastructural gaps.

Investment in off-grid renewable energy presents an attractive option for investors in countries where most of the population either have no access to the grid or are unable to afford a connection to the grid. Off-grid solar energy can provide access to lighting and, in some cases, mini renewable-based electricity generators. Furthermore, in order to encourage local sourcing and consequently reduce cost, West African countries can venture into the production of manufacturing materials and components required for power generation plants and distribution lines.

More indigenous companies should also be encouraged to venture into the construction, operation and maintenance stream for power projects. The role of the private sector in addressing the region’s power deficit

is crucial. In view of the increasing electricity demand and lack of adequate financial resources, more public-private partnerships (PPPs) should be encouraged in order to address the power deficit situations in the respective countries of the region. However, to achieve the level of investment required in the sector, there is a need to improve the investment conditions for electricity access-related projects.

This can be achieved by providing more clarity on the investment framework, ensuring market transparency

and encouraging consultations over the pace of grid extension in West Africa. Closer cooperation and linkages should also be built between investment promotion agencies in the region in order to enhance access to information on investment opportunities.

Conclusion

 The World Bank estimates that integrated power trade in West Africa could lead to cost savings of between USD5 billion to USD8 billion per year by enabling countries to import cheaper sources of electricity and increase access to affordable, reliable and modern energy. The integration of electricity grids is expected to create more sustainable sources for power generation by replacing baseload oil-fired power generation with renewable sources. The integration is also expected to ensure that there are fewer energy shortages and that the West African market becomes more attractive to private sector investment in power generation.

A well-functioning power market requires the right infrastructure as well as strong collaborations among the key players at all levels in the sector. For the regional power market to achieve its full potential, there must be improvement in the creditworthiness of the sector, contracts must be strengthened and guarantees provided, in order to boost investor confidence in the market.

Source: DLA Piper Africa Connected Issue 3: Energy in Africa – Innovation, Investment and Risk

Power generation in Kenya and Ghana – from take-or-pay to take-and-pay

Africa Bulletin
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By Carrie Davies MBE, Jonathan Brufal and  Robert Currall, Gowling WLG

In this article, our Africa team analyses the reasons behind the shift from a “take-or-pay” model for IPPs in Kenya and Ghana to a “take-and-pay” model. We also consider the potential impacts of this policy shift and effect on private sector’s appetite for investment into these markets.

Power generation in Kenya and Ghana – from take-or-pay to take-and-pay

Kenya has announced a shift in its approach to tariffs under longer-term Power Purchase Agreements between Kenya Power and Lighting Company (“KPLC“), the state-owned utility, and independent power producers (“IPPs“). Having previously used a “take-or-pay” model, Kenya plans to adopt a “take-and-pay” model, which will only see KPLC pay IPPs for power evacuated onto the grid.

The previous system: “take-or-pay”

Under a “take-or-pay” model, power suppliers are required to make power available to the offtaker for evacuation onto the grid, but are paid according to the agreed tariff, irrespective of whether or not the offtaker actually dispatches the particular plant. This provides comfort to developers that they will not finance and construct a plant that is used less than planned by the offtaker during its life. This is particularly relevant where IPPs are locked into long-term PPAs whereby they must make their electricity available to the offtaker before looking for a merchant solution. The “take-or-pay” model seeks to compensate IPPs for this opportunity cost and thus sustain private sector investment appetite.

The demand problem

Currently, generation capacity in Kenya significantly outstrips demand, with capacity estimated at 2,700 MW and peak demand at around 1,400 MW. The problem in Ghana, which also looks set to shift to a “take-and-pay” model for IPPs, is even more acute, with generation capacity estimated at 4,889 MW (although this is contested by some) and peak demand at 2,525 MW. As discussed below, however, the figures for demand belie the fact that electrification and industrialisation rates, and hence demand for electricity, still have substantial scope for growth.

The new system: “take-and-pay”

Under the new system, KPLC will only pay investors for the electricity that is evacuated onto the grid. At this point, it is unclear whether this change in policy will only apply to new PPAs or whether existing PPAs will also be renegotiated.

Impact

The rationale for moving to a “take-and-pay” system is to reduce the cost to KPLC of the provision of power. Given that end users have been required to subsidise such higher prices through their bills, there has been political pressure to reduce the burden of the “take-or-pay” system on users, which has been portrayed by some as a reward to the private sector for not producing.

While the shift to “take-and-pay” received positive commentary from some in Kenya, this may be short-lived given the potential sting in the tail of this policy, which is discussed below.

Decreased investor appetite?

The adoption of “take-and-pay” transfers risk to IPPs. Under the “take-or-pay” system, provided that an IPP fulfils the conditions for the generation of power, it is paid irrespective of whether such power is evacuated. “Take-and-pay” sees generators only paid for power evacuated onto the grid, making the project economics more challenging. Obtaining financing for projects on a “take-and-pay” model is likely to become more difficult; project finance lenders finance projects on the basis that, if a power project is available but not dispatched, the IPP receives a capacity payment equal to debt service. Renewables projects present an additional challenge, as they operate on a “must-run” basis, with their economics becoming unviable if they are required to shed power. Given the intermittencies of wind and solar, merchant offtake is unlikely to be a viable backstop if the plant is not dispatched.

Ghana – a salutary tale?

Having gone from power shortages five years ago to over-capacity on the generation side, Ghana is also considering a switch from “take-or-pay” to “take-and-pay”.

The Electricity Company of Ghana (“ECG“), the state utility, is paying approximately 2.5 billion cedis (US$ 454 million) per year for power that is not evacuated onto the grid. In July 2019, the Minister of Finance announced that Ghana would shift to a “take-and-pay” model,and in August 2019, a three-month consultation period was begun with the 43 IPPs that previously signed “take-or-pay” PPAs with ECG. This consultation is due to close at the end of November 2019.

The reaction

Former Chief Executive Officer of Ghana’s National Oil Company (GNPC) Alex Mould predicted that a move to “take-and-pay” risks “scar[ing] away prospective investors” and would make obtaining financing for new IPPs more challenging.

The impact of “take-and-pay” in Kenya will be significant for power sector investors. Investors will now shoulder the burden of all investment risk. This is likely to affect decisions to invest, not only in the power sector. Investors will question the value of contracts with state-backed businesses, if sudden, and potentially retrospective, changes in policy can so comprehensively undermine their business models.

Commentary from Bloomberg on the 3-month consultation period between ECG and the IPPs in Ghana suggested that some IPPs may elect to trigger termination clauses in their PPAs if a shift to “take-and-pay” is confirmed, because such a change may materially undermine the economics of their projects.

Conclusion

With the populations of both Ghana and Kenya growing at an annual rate in excess of 2% and both seeing increasing urbanisation (albeit from a lower base in Kenya) and industrialisation, the demand for electrification and reliable power is predicted to grow. While this will help close the gap between generation capacity and demand, the greater challenge will be to ensure that both countries’ electricity grids are updated and technically capable of accepting the higher electrical capacity that an expanding population and business sector will need to drive economic growth.

Private sector investment into the electricity sector in Africa has been a key component of the expansion of electrification and the positive impact this has on economic growth. Reducing the incentive for the private sector to invest by reallocating risk to IPPs may dampen interest from developers, and ultimately make it harder for governments to provide reliable electricity to their people.

Utilities looking to transition to a “take-and-pay” model without hampering private sector investment should also be looking at storage solutions to help balance grids without the financial penalty of having to pay for power not evacuated under “take-or-pay”, in order to give confidence to IPPs that power produced can be monetised.

Gowling WLG is a law firm with more than 1,400 professionals and a range of business support teams working to deliver world-class legal advice across 18 cities in the UK, Canada, Continental Europe, Asia and the Middle East.

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