Power Infrastructure

  1. Background

Westmont Mbossa Power Plant is a 46 MW barge-mounted kerosene fired power plant. Several coalescing challenges facing Kenya in the 1990s were the impetus for the construction of this power facility. As a result of severe drought in the early 1990s, generation from Kenya's hydroelectric dams was significantly reduced. The challenge was compounded by an aid embargo levied on the Government of Kenya (GoK) in 1991 and again in 1997 by the IMF. Also, Kenya also experienced a significant drop in foreign direct investment, rapid inflation, and lagging GDP growth.

 

In response to the energy crisis, the Government of Kenya (GoK) sought out international investors to finance stop-gap energy infrastructure projects. One such project was the 46 MW single cycle Westmont Mbossa Power Plant. Due to the critical nature of the power crisis, the project was commissioned only 11 months after a less-than-competitive bidding process. By the end of the 7-year Power Purchase Agreement (PPA), the private owners of the barge chose not to renew the PPA as the government and the owners could not come to an agreement regarding increased tariff charges. Since the conclusion of the PPA, it is widely reported that the developer, Westmont Ltd., has made attempts to solicit buyers for the plant, albeit unsuccessfully.

 

This article, the eighth case study on this website, examines the transactional structure of the plant and some of the factors that lead to its current inactivity.

 

  1. Ownership and Deal Structure

 

  1. Ownership
  1. The project was wholly owned by Westmont Ltd., a limited liability company owned by several Malaysian-based stakeholders.[1]
  1. Deal Structure
  1. The project was implemented under a Build, Own, and Operate (BOO) delivery structure.[2]
  2. A 7-year Power Purchase Agreement (PPA) exists between Westmont Ltd. and Kenya Power and Lighting Corporation (KPLC).[3] KPLC is a limited liability corporation and is majority owned by the Kenyan government.[4] KPLC is responsible for the transmission and distribution of electricity.
  1. Financing
  1. Total Cost
  1. $USD 20 million[5]

 

  1. Debt/Equity Ratio
  1. 100% ownership wholly financed by Westmont Ltd.[6]
  1. Loan Package
  1. The project was financed wholly through equity.[7]

 

  1. Project Guarantees
  1. Escrow Account: The GoK placed $USD 4.9 million in an escrow account at a rate of 25.9%. This escrow account served as one of the few project guarantees in the absence of private, sovereign, or international development bank guarantees.[8]
  1. Factors Leading to Current Inactivity At the end of the seven years PPA between KPLC and Westmont Ltd., Westmont chose not to renew for another seven years unlike Iberafrica, another plant commissioned at the same time as part of the government’s stop-gap strategy. Currently, the barge sits inactive. 

    The factors that lead to this current inactivity are numerous and interconnected. The aid embargo lobbied on Kenya came at a time of unfavorable macroeconomic conditions. This tenuous macroeconomic climate effectively raised premiums, and few investors were willing to assume the high level of risk. As a result, when private sponsors for stop-gap generation plants were selected, they were chosen from a limited pool of interested investors. This uncompetitive environment, combined with an expedited bidding process, created a cost structure that was ultimately unsustainable. With soaring operational costs, and the government unwilling to raise capacity tariff charges, the project no longer was financially viable for Westmont, and the company chose not to renew for a second PPA.

     

  1. Macroeconomic Challenges

GDP growth between 1990 and 1996 in Kenya was markedly sluggish. Beginning in 1990, Kenya experimented with trade liberalization policies that proved ineffective. Just before the implementation of liberalization policies, between 1985-1990, Kenya’s GDP growth rate averaged 5.5%.[9] From the commencement of trade liberalization policies until the construction of Westmont, growth was comparatively sluggish, crawling at a rate of 2.2%. At its lowest point between 1991 and 1993, the average growth rate of Kenya’s GDP was just 1%.[10]

 

Some factors contributed to Kenya's poor economic performance during this period. One such factor was a lack of foreign direct investment (FDI). Between 1990 and 1995, Kenya’s share of FDI among East African states was 15%. By contrast, between 1995 and 1996, its share dropped to 6%.[11]

 

One explanation of Kenya’s inability to attract FDI is high-interest rates. Amidst Kenya’s push towards trade liberalization, the Kenyan government printed treasury bills to re-assert control over inflationary pressures which resulted from loose banking regulations and irresponsible monetary policies.[12] The increase in government debt caused interest rates on Kenyan treasury bills to increase, which in turn, cause interest rates in Kenya in general to rise.

 

These rising interest rates significantly discouraged domestic and foreign investors from providing the Kenyan economy with the necessary capital it needed to grow its economy and fund utility projects. Even where local investors were interested in making investments, the credit costs were too expensive to make such investments financial viable.

 

Kenya's macroeconomic challenges were worsened by the overvaluing of Schilling d during the period, which had an adverse impact on PPA's denominated in $USD. Effectively, the fall in the exchange rate made Kenyan PPA’s even more expensive and unattractive.

 

Adding to Kenya's challenges was an aid embargo lobbied on the government by the IMF in 1991 and again in 1997. According to the IMF, the ban was levied due to "human rights violations, authoritarian politics, and severe maladministration.[13] The embargo further exasperated Kenya’s challenges. International development financial institutions, known for providing loans on riskier large scale infrastructure projects to developing nations, were barred from financing infrastructure projects in Kenya.

 

 

 

 

  1. Unsustainable Cost Structure

Kenya’s utility industry during the mid-1990s heavily relied on hydroelectric power. When several droughts struck Kenya in 1991, 1994 and 1996, the energy sector faced the challenge of insufficient generation capacity and a lack of financing for new projects.

 

These desperate circumstances forced Kenya to conduct an expedited procurement process. The government's plan was to secure short-term PPA’s to meet Kenya’s immediate energy needs.

 

The bidding process, however, was notably uncompetitive. The GoK chose to solicit private sponsors through a selective international tender. This process meant that the bidding process took place between a pre-selected shortlist of private international sponsors. In the end, only a handful of pre-approved bidders participated in the process.

 

Several negative impacts emerged from this bidding process. A PricewaterhouseCoopers report concluded that the expedited bidding process lacked proper financial analysis to ensure least cost development and was deemed as generally suspicious.[14]  The report also claimed that “KPLC did not fully employ transparent procedures in inviting bids and did not provide adequate information to bidders to enable them to submit their best bids.” An investigative report by the Kenyan Ministry of Energy further revealed that corruptive practices occurred between the private sponsor, Westmont Ltd., and the state-owned distributor, KPLC.

 

Another fundamental failure of the deal structure was its 7-year length. Although the World Bank warned that the repayment schedule of short-term projects should be at least be 14 years to ensure reasonable debt repayment, the Kenyan government opted for a 7-year PPA with Westmont Ltd.[15] As some would argue at the time, a 7-year short term PPA made repayment of debt practically impossible without significantly increasing tariff rates and capacity charges.

 

The result of this highly criticized bidding process was soaring costs. According to some scholars, the cost for Westmont was approximately twice that of comparable plants. The available data seems to support this conclusion. The nominal generation cost of Westmont, measured by shilling per kilowatt hour, was approximately twice that of other utility projects in Kenya in 2001 and 2002. In 2003 and 2004, the nominal generation cost was at times between 4 and six times higher than other plants in Kenya.[16]

 

These high costs were a significant point of contention during renegotiations following the expiration of the first 7-year term. With such high costs, Westmont Ltd demanded higher capacity charges. The refusal of the KPLC to raise tariff charges eventually lead to a breakdown in negotiations and Westmont Ltd. declined a second PPA.

 

 

  1. Conclusion

The current inactivity of the Westmont-Mbossa Power Plant owes as much to the transactional process as the circumstances that surrounded it. The aid embargo, drought and economic calamity faced by Kenya during PPA process created a situation that attracted few private sponsors and where due diligence was not prioritized. Still, the blame cannot be placed entirely on surrounding circumstances. Though the challenges facing Kenya in the 1990s were formidable, the corruption surrounding the process further compounded the problem. Ironically though unsurprisingly, the same corruptive practices that motivated the IMF to place an aid embargo on Kenya were the same practices that lead to the failure of Westmont.

 

In sum, the lessons from Westmont confirm what many in the industry now know about successful IPP projects in sub-Saharan Africa: transparency, competition, and due diligence are essential in creating a fair and sustainable agreement.
 

[1]  Turkson, John “Power sector reform in Sub-Saharan Africa” (2000)

[2] Eberhard, Anton and Katherine Nawal Gratwick “The Kenyan IPP Experience” (2005)

[3] Ibid

[4] The Kenya Lighting Power and Lighting Company Ltd, Information Referendum

[5] Supra note 2.

[6] Ibid

[7] Ibid

[8] Kenya National Assembly Official Hansard Record – Oct 30, 1997

[9] MacPherson, Malcolm and Tzvetana Rakovski “Exchange Rates and Economic Growth in Kenya."

[10] Kimenya, Mwangi; Francis Mwega and Njuguna Ndung’u “Understanding the African Lions: Growth Traps and Opportunities in Six Dominant African Economies."

[11] Nyamwenge, Matthew "Foreign Direct Investment in Kenya" (2009)

[12] Gertz, Geoffrey “Kenya’s Trade Liberalization of the 1980s and 1990s: Policies, Impacts, and Implications."

[13]" Tangri, Roger and Andrew Mwenda “The Politics of Elite Corruption in Africa: Uganda in Comparative African Perspective” (2013)

[14] Eberhard, Anton and Katherine Nawal Gratwick “Independent Power Projects in sub-Saharan Africa: Determinants of Success” (2016)

[15] Kenya National Assembly Official Hansard Record – Oct 30, 1997

[16] Eberhard, Anton and Katherine Nawal Gratwick “The Kenyan IPP Experience” (2005)