In a major policy shift the government now decides to provide a convertibility guarantee for public private partnership (PPP) projects.
The decision that is taken by the government has been considered as a big deal for those who are interested to be part of huge projects under PPP.
After massive study and legal document development through Ministry of Finance (MoF), the government enacted the PPP 1076/2018 proclamation that makes it formalized for private sector involvement through public projects for the benefit of both sides.
The February 2018 proclamation allows establishing a favorable and binding legislative framework that promotes and facilitates the implementation of privately financed infrastructure projects by enhancing transparency, fairness and long terms suitability.
Since then the PPP Director General (PPP-DG) was also established under MoF to harmonize the operation between contracting authority from the public side and private party.
PPP-DG that is looked after by the board combined by directors; seven from public and two from the private sector has also a responsibility to sort projects, mostly mega projects, that shall be included under PPP or not as per the proposal of contracting authority that may include state owned enterprises or public offices.
Under the PPP; efficiency on project handling, innovation, and knowledge transfer and using as alternative financing to reduce government project financing has been stated as the pillars.
As per the initial stage the government has designed the PPP to be financed through a scheme that has never been backed by the government guarantee.
It was recalled that the first PPP bid for Scaling Solar schemes at Gad and Dicheto had been opened in September 2019. Then the first PPP solar energy project had been awarded to the Saudi based Acwa Power, which offered the lowest independent power purchase (IPP) tariff compared with similar projects on the continent and one of the lowest globally.
As per its financial offer the company gave USD 0.252/kWh for the Gad scheme in the Somali region and USD 0.0598/kWh on the Dicheto scheme in the Afar region.
However, as per the bid requirement the company had also promised that it would come with the finance from Chinese sources without the government guarantee, since access to foreign currency in Ethiopia is not easy.
Tilahun Tadesse, PPP-DC Secretariat, said that project that was awarded to Acwa has delayed up to now due to different reasons but mainly because of the impact of COVID 19.
After the COVID 19 impact, the financiers who promised to finance the 125 MW each solar projects had come up with changes on its operation and stated that it has paused some operations because of the pandemic impact. The 250 MW power project is expected to consume USD 250 million.
Due to that the Saudi company was forced to look for other financing sources, while most of the interested financers have set convertibility guarantee from the government as a precondition.
However, based on National Bank of Ethiopia (NBE) foreign currency guideline it has stated that the government would not give convertibility guarantee and based on the country law there is not convertibility guarantee for the private sector investment.
Tilahun said that most of companies that are interested to engage on PPP highly insist that the government gives them the guarantee to realize the projects, “we have assessed different alternatives to solve the concerns of companies or financiers to come up with a way out for their demands. We are now considered that we have to come up with some degree of flexibility on the up coming project.”
“For instance currently 6 solar projects are on bidding process under PPP and most of interested bidders are requesting to get convertibility guarantee,” he added.
As per the assessment to solve the challenges three optional areas have been evaluated; saving some amount of foreign currency that Ethiopian Electric Power generates from power export in order to use it for services and other payments, to establish a revolving fund under a pool, and the third option being for any public projects to give guarantee from the government (MoF).
“These projects are renewable power projects. Whoever the government of private sector develops these projects have their end goal in generating power due to that guarantee may be considered on it for the private sector,” he explains, adding, “by itself generating energy is a means of earning foreign currency due to that the only thing we have to be is cautious and to use the crucial alternatives to tap the needed development.”
As per the evaluation of PPP-DG, the government shall consider to give convertibility guarantee and the case has been evaluated in depth up to the senior level at the Office of the Prime Minister.
Tilahun told Capital that the government has considered that in order to operationalize the PPP some sort of flexibility for few periods should be required.
MoF, which is responsible to give guarantees, may select projects that would get guarantee.
According to Tilahun, the Scaling Solar schemes would be the first project to benefit the government first policy shift that has come to effect about two weeks ago.
Acwa is expected to come up with financiers from South Africa and Europe, while Tilahun said that they have not disclosed it. “We are waiting for them,” he remarked.
The company might manage the project for twenty years with an optional five year extension.
The financial close that was postponed for more than two times mainly because of the pandemic would be ended early October. 23 projects have been identified under PPP from over 100 proposals, while from the selected project some shall not be executed under PPP as per the recommendation that came from detailed studies. Roads, energy, housing, and health are included on the selected projects.
Except in some special cases, the PPP project threshold is USD 50 million and above.
As per the government’s projection, 25 percent of all projects will be covered by PPP.