Ideas & Debate

Energy reforms to set off ripples in various sectors

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Pump attendant fueling a vehicle at Shell Petroleum Station on Kenyatta Avenue in Nairobi on Wednesday, April 14, 2021. PHOTO | DENNIS ONSONGO | NMG

Summary

  • Power projects by independent power producers are considered to be PPPs, and a good number of them have been included in Kenya’s PPP pipeline.
  • PPPs may be impacted by the proposed changes around the framework governing the issuance of government support measures for infrastructure projects.

In his Mashujaa Day speech, President Uhuru Kenyatta promised that as part of the government’s economic stimulus plan, there would be a reduction in the cost of electricity by 30percent before the Christmas holiday.

The President made reference to the John Ngumi-led Taskforce on Review of Power Purchase Agreements that was set up to address concerns about the high cost of electricity, and which recently submitted its recommendations as to how the envisaged reduction of power costs could be achieved.

The recommendations of the task force include a raft of reforms some of which will likely have a ripple effect on investments in other sectors.

One of the areas that may be affected is the framework governing public-private partnerships (PPPs). Power projects by independent power producers are considered to be PPPs, and a good number of them have been included in Kenya’s PPP pipeline.

One of the recommendations of the task force is that KPLC should disclose in its annual report, the beneficial ownership of all independent power producers. This could easily end up being replicated across PPP projects in other sectors such as transport and healthcare, with other state corporations and public entities also being required to publish the beneficial owners of the counterparties to their PPP arrangements.

While there are already proposed amendments through a PPP Bill that is currently before Parliament, including a requirement for public entities to publish details of any PPP contracts entered into, this could end up being extended to include details of beneficial ownership of the private party particularly since active use of beneficial ownership data in public procurement is said to improve service delivery by enabling public entities to conduct better due diligence on their contractual counterparties.

PPPs may also be impacted by the proposed changes around the framework governing the issuance of government support measures for infrastructure projects. These include government letters of support, which are ordinarily issued through the National Treasury to private investors and lenders participating in the development and/or financing of public infrastructure as a credit enhancement tool to cover the political risk.

While government letters of support are binding, they are not considered to be sovereign guarantees and do not, therefore, require parliamentary approval prior to issuance. The presidential task force has proposed that government letters of support and other State support measures should only be issued as a last resort, for instance with respect to uninsurable risks, and with the approval of Parliament.

Implementation of this proposal will likely lead to a policy shift in the issuance of government support measures, not only in the power sector but also in other sectors. The requirement for parliamentary approval prior to the issuance of such government support measures will also mean that the process of obtaining the same will be more rigorous and time-consuming.

Other players that may be affected by the recommendations of the task force are commercial and industrial entities interested in generating power for their own use. One of the recommendations of the presidential task force is that such entities should only be granted a power generation licence if they intend to generate power using renewable technologies.

If this recommendation is to be strictly implemented, commercial or industrial users who may wish to generate power using non-renewable technologies (whether wholly or partially) risk being denied a generation licence. The task force has further proposed that a policy be passed governing the generation of power for their own use and players in this area should therefore expect increased regulation, coming at a time when KPLC has been experiencing heavy grid defection from its industrial users.

Recent media reports reveal that some notable commercial and industrial users such as Centum Investment Company Ltd (through its affiliate Two Rivers Power Company Ltd) and East African Breweries Limited are looking into ramping up their power generation capabilities.

While it is reported that these entities intend to rely on renewable technologies such as solar power, there are other commercial and industrial users currently generating their own power using non-renewable technologies and these may be adversely affected by the move to only license players that generate power using renewable technologies.

Finally, according to the 2021 Budget review and outlook paper that was recently published, the National Treasury is currently developing public investment guidelines on the prioritisation of ongoing projects and evaluation of all new projects, with the aim of ensuring alignment to Kenya’s developmental agenda.

The ongoing power sector reforms may impact the public investment guidelines being developed to the extent that the task force has recommended that the National Treasury only approve funding for power projects that are aligned to the Least Cost Power Development Plan, which sets out the government’s priorities with respect to the energy sector.

A replication of this general principle across other sectors will ensure that public spending is targeted and aligned to the relevant sector policies and Kenya’s developmental objectives in general.

From the above, the famous Kiswahili saying “ukiona cha mwenzako chanyolewa, chako kitie maji” comes to mind. Loosely translated, this means that when you see your companion getting shaved, prepare to be shaved as well.

In the context of the ongoing power sector reforms, it follows that players in other sectors should ready themselves for the ripple effects of the implementation of the far-reaching recommendations of the Taskforce on Review of Power Purchase Agreements.