The latest news between India’s Adani and State-owned entity in charge of the national electricity transmission grid- Ketraco- is the publication on Wednesday of details of the terms of the deal between them.
For the first time, our electricity sector is witnessing the entry of new private players known as Independent Transmission Projects -popularly known by the acronym -ITPs. So, we are now going to have IPPs on the generation side of the business and ITPs on the transmission side.
Ketraco also announced it is in advanced stages of on-boarding two other ITPs, namely, EDF of France and a consortium of investors called i-Africa 50&Poweergrid Ltd- that have presented privately initiated proposals to build some of the transmission lines on Ketraco’s list of projects to be delivered through the PPP route.
So, what are the salient aspects of the deal between Ketraco and Adani. First, what has been negotiated is what is known in PPP lingo as BOOT- buy operate and transfer after 30 years.
Under the arrangement, the PPP contractor builds the transmission line with its own money and recovers the investment from a monthly payment, also called availability payments- from transmission tariffs.
That tariff is fixed during the term of the PPP contract, only adjusted for inflation and unanticipated load increases on the transmission line.
Another key part of the BOOT model: the availability payments are linked to key performance initiatives and payment penalties when the terms of the service level agreement are not achieved. Thus, the revenue to Adani under the model will be based on annual payments negotiated but approved by the Energy and Petroleum Regulatory Authority (Epra).
Finally, the PPP contractor must bear the operational and lifecycle risks. In other words, Ketraco retains both the transmission system’s operation and control role of the line, while the PPP contractor is in charge of operations and maintenance of the line.
Is the electricity consumer at risk? The model allows the PPP contractor to pass through too many costs to the consumer tariff- the most significant of which is equity costs, the cost of finance, engineering costs, construction costs, way leave acquisition costs and taxes.
The experience we have with IPPs was that if you allow a private player to pass through all the costs to the tariff, you end up with expensive consumer prices.
It is a good thing to hear Ketraco declare publicly and on record that it is going to be involved in monitoring how Adani procures the engineering, procurement and construction component of the contract.
Ketraco has also said that as Adani moves and progresses towards achieving financial close, it will liaise and negotiate with international financial institutions to pump in money in the projects so that the cost of debt is brought to single digit levels.
Corruption risks? Yes, the area most prone to corruption risk in this transaction is acquisition of way- leave- the right of way granted by a landowner for erection of transmission towers.
Expect greedy elites to start hurriedly buying land situated along transmission line corridors as they angle to flip the land later to Ketraco and Adani at massive margins. We all saw how the game is played during compensation of land on the SGR project.
Indeed, land ownership is one of the most important causes of delays in transmission projects. Ketraco itself has paid billions of shillings in compensation.
Who between Ketraco and the PPP contractor should be responsible for way leave? How can the risks of implementation delays and overruns that come about as a result of problems with acquisition of way leave be allocated and shared?
Let’s face it, we are very weak when it comes to capacity at negotiating with foreign investors.
We only start whining about the agreements much later when the chickens have come home to roost- at the point when we belatedly discover that the obligations we signed away were just too onerous.
I make these remarks as an entry point to the disagreements between the Ministry of Energy and the investors behind the 310Mw Lake Turkana Wind Power project in Marsabit.
Take the cased of Lake Turkana Wind Power project. Did these guys anticipate difficulties Ketraco was going to experience with land acquisition and with securing way leave?
Yet land acquisition was going to be very problematic because the right of way was going to be 428 kilometres long and 60 metres wide. Worse, construction of the line was to result in involuntary displacement as well as the disruption to and loss of livelihoods for thousands of people.
The taxpayer ended up paying billions in penalties.
Mr Kisero is former Nation Media Group Managing Editor for Business and Economic Affairs, and a columnist for the Daily Nation and Business Daily.
