Taxpayers’ exposure in Treasury’s secret power deals

A protracted legal battle pitting the government against a Virgin Islands-registered private power company has exposed the heavy financial risk that Kenyan taxpayers are facing in the many concessions the State has secretly granted private power producers.

At the centre of the dispute that is before the High Court in Nairobi is a support letter the government wrote to Kinangop Wind Park promising to compensate the power firm for any political risk faced during the construction of a Sh15 billion wind farm in Nyandarua.

The guarantee committed the government to paying “Kinangop Wind Park or to the financing parties, any and all amounts that would have been payable under the power purchase agreement, including without limitation, energy charges and any other payments arising from political events.”

The political events defined in the support letter include riots or any civil commotion, failure by a government agency to issue required authorisation or approvals needed for the project or an act of war — even if committed by a foreign country. The letter is among the 12 that the
Treasury has issued in support of power projects worth Sh343 billion or 5.7 per cent of Kenya’s GDP and have recently seen the International Monetary Fund (IMF) warn Kenya on the high risk to the taxpayer arising from guarantees whose terms are seldom made public.

The letter, which was signed by senior government officials, asked the relevant regulatory authorities to grant Kinangop Wind Park the necessary approvals and offered the power firm total insurance against any politically motivated event that may interfere with the construction of the plant.

Energy Principal Secretary Joseph Njoroge, his Treasury counterpart, Kamau Thugge, Kenya Power managing director Ben Chumo, Kinangop Wind Park director Jennifer Fletcher and Standard Bank of South Africa’s Kwame Parker signed the deal.

Kinangop Wind Park sparked the legal tussle with the filing of a compensation claim before the International Chamber of Commerce, arguing that the refusal by local landowners to cede space for the wind turbines was a politically motivated event whose losses qualify to be paid for under the political risk guarantee.

The Virgin Islands -registered company had commenced the sale of equipment it had moved to the project site, prompting the Attorney-General to seek orders blocking the sale from a Nairobi court.

Standard Bank of South Africa placed Kinangop Wind Park under receivership for defaulting on a Sh5.5 billion loan and the power company insists the default is linked to delays in the Kinangop project.

Should the International Chamber of Commerce rule in Kinangop Wind Park’s favour, the Kenyan taxpayer will not only pay the Sh5.5 billion loss, but also compensate the firm every cent it would have earned selling power to electricity distributor Kenya Power.

Kenya Power had agreed to buy electricity from Kinangop Wind Park at a price of 12 US cents (Sh12) per kilowatt hour. The plant was expected to produce 208 million kilowatts per hour of electricity in each operating year – enough to power 150,000 homes.

This means that the firm would have earned $25 million (Sh2.5 billion) from power generated in the first year of operation alone. Going by this calculation, the Kenyan taxpayers’ total exposure to the private power firm now stands at a minimum of Sh8 billion.

Failure to reach a deal

Attorney-General Githu Muigai has, however, insisted that the Virgin Islands-registered firm’s failure to reach a deal with land owners in Kinangop does not count as a political event as provided for in the 2013 support letter.

Kinangop Wind Park is a consortium of Norwegian private equity firm Norfund, South African asset manager Old Mutual and Sydney-based fund Macquarie.

READ: Wind power firm sues State over collapse of Sh15bn project

READ: IMF warns Kenya of Sh313bn undisclosed debt risk

Judge Lucy Njuguna of the High Court’s Civil Division has stopped Kinangop Wind Park (KWP) from selling any equipment it had moved to the ground, pending the hearing of the Attorney-General’s suit.

Mr Njoroge, the Energy PS, however, insists that the power producer was responsible for the botched project as it did not conduct proper environmental impact assessment (EIAs) as required by law before commencing the Sh15 billion project.

The absence of an EIA saw a Nakuru High Court stop Kinangop Wind Park from proceeding with the project – a decision that saw the firm announce that it had decided to abandon the project.

The EIAs were among the documents whose fast tracking the government had promised Kinangop Wind Park as per the 2013 letter of support.

“Upon written request of Kinangop Wind Park, the government of Kenya will use all reasonable endeavours to expedite the obtaining and renewal of such persons of authorisations as may be relevant to the project provided that prior to such request Kinangop Wind Park has diligently applied for and has been pursuing applications to obtain such authorisations,” the letter says.

The Kenyan government also agreed not to direct Kenya Power to enter into long-term power deals with companies providing unsustainable energy in order to provide space for Kinangop Power on the national grid.

It has emerged that the clause was included in the letter despite the government’s open support for the Sh200 billion Lamu coal power plant.
The Kinangop Power Park tussle came as the IMF raised the alarm over the high-level risk Kenyan taxpayers are facing should other power deals fail to materialise.

The IMF says in a report that the power purchasing contracts carry a real financial risk as they involve an obligation for a minimum demand or revenue guarantee (‘take’ or ‘pay’) supported by the government. The guarantees cover political risks and are underwritten by partial risk guarantee instruments provided by the World Bank.

Despite its clear warning, the IMF has offered no indication that the government has had to pay for any of the guarantees on behalf of Kenya Power between 1996 and 2013 when most of the guarantees were given.

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