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LESSONS LEARNED FROM IMPLEMENTATION OF A SUCCESSFUL PPP PROGRAM 2 SETTING THE STAGE THE BUILDING BLOCKS OF A SUCCESSFUL PPP PROGRAM

SETTING THE STAGE The building blocks of a successful PPP program Public Private Partnership PPP programs resulting in successful enabling frameworks for private investments in Renewable Energy RE are few and far between In order to prove successful the framework must be built from the bottom up This Lessons Learned briefing note outlines how GET FiT Uganda put in place the appropriate building blocks of a successful program and how the GET FiT approach can inform future efforts in other countries THE BUILDING BLOCKS THAT MUST COME TOGETHER TO ENABLE A SUCCESSFUL PPP PROGRAM ARE NUMEROUS The experience from GET FiT Uganda awards the implementation team the hindsight to reflect on these building blocks and their relative importance in terms of a successful program Drawing on this experience KfW commissioned a study of 10 African countries1 in 2015 16 to assess the prospects of establishing a new GET FiT program The assessment was based on a set of criteria that were considered to be representative along five dimensions column headings in table below intended to constitute the rather full range of essential building blocks for a successful RE PPP program The specific strengths and weaknesses of a country s framework provided the starting point for determining the probability of success the scale of the effort required and the specific instruments relevant for the program 1 Multiconsult ASA and Frankfurt School 2

READINESS ASSESSMENT CRITERIA www getfit uganda org 3

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Four critical questions were assessed in order to determine whether a GET FiT type PPP program could provide the decisive support to a specific country 1 re e ort to ntrodu e under nned e ono a nde endent ower rodu er t e t ere a trong e ono u t ate a e to e ade 2 t ere a u re u t are o ent e trong o and regu ator tart ng o nt t at t e ound 3 t ere u ent g e e r ate n e t ent o t a w to reate t e ena ng en ron ent or 4 t ere a trong a e to e ade n ter o donor a ue or one w a donor ontr ut on do ore t an u t u d e r ate n e tor and n tead ro e o et t ene o renewa e redu e ate ange a t and or ead to a tran or at ona ange If the answers to these questions are largely yes then a PPP program similar to GET FiT has a good starting point for success If not the program implementers are likely to face an uphill battle the entire way Below we reflect on these four questions in light of lessons learned from Uganda Certain weaknesses in the policy framework governing the renewable energy sector in Uganda had become a road block for faster realization of vast renewable energy potential in Uganda The timely intervention of KfW with GET FiT mechanism addresses almost all the impediments for sector growth 5 BHATIYA Ec oPower Rwimi

THE FUNDAMENTAL BUILDING BLOCKS IN UGANDA 1 Economic viability was assured by an imminent power shortage and generally good renewable sources As a result of power and fuel supply shortages between 2006 2008 Uganda saw its GDP growth drop from 6 6 5 to 4 5 costing the economy hundreds of millions of dollars During and following this period Uganda entered into agreements to purchase expensive emergency fossil fuel based generation With the prospect of rapidly growing electricity demand and the commissioning of large hydropower schemes still years away the regulator ERA was determined to avoid a repeat of shortages in power supply KfW and its partners were offering a pragmatic and long term solution to this challenge through fast tracking a portfolio of small renewable energy projects With substantial resources for small hydro biomass and solar power projects there was a short and long term economic case to be made for establishing the enabling framework The recent memory of a national power crisis was a powerful motivation at all levels of government to drive the program forward 2 Decades of sector reform and private investment focus provided a reasonable starting point for targeted support Prior to the development of the GET FiT program the Ugandan power sector was among the most liberalized on the continent in terms of unbundling and private sector participation Nonetheless the framework for IPPs was patchy with key bankability gaps there was a lack of standardization and a lack of coordination among sector stakeholders and development partners GET FiT was able to build on the relative strengths of the framework while providing highly targeted assistance to fill in gaps primarily under the guise of the transaction documents 6

3 The sector regulator ERA Electricity Regulatory Authority assumed full ownership of the program targets and became a true champion of the program Through the course of implementation hurdles were encountered at all levels of government and in government policy Providing a sovereign guarantee and the exact nature of this guarantee is always a contentious issue The correct design and application of tax incentives can take a project from the black to the red in financial viability terms ERA guided the program through this maze of approvals and no objections which could not be done by a development partner or a consultant Norway is proud to be a partner in the GET FiT Uganda program Its success in leveraging private investments in the Ugandan renewable energy sector using limited donor funding is a model example of how smart development assistance can be done Through its stimulation of private investments the program fits perfectly with the Norwegian strategy for development assistance to renewable energy Hans Peter Christophersen Energy Councillor Royal Norw egian 4 in Uganda Embassy The looming power deficit combined with a commitment to cost re ective REFiTs provided a strong case for development assistance The near term outlook for the sector including prospects of renewed electricity shortages and expensive polluting thermal power production galvanized a sense of urgency around results This provided a good case for development assistance However lasting impacts have really emerged due to the commitment by both the electricity regulator and KfW to see the reforms standardized agreements and REFiT adjustmens through to fruition Without such commitment it is likely that prospects of national power shortages alone would have been insufficient for ensuring the emergence of a truly functional IPP framework Indeed while short term crises partly present an opportunity to pursue reform the GET FiT experience is that the commitment and staying power of the program champion is decisive for ensuring meaningful and long lasting impacts plus value for money for development partners www getfit uganda org 7

REALITY CHECKS Experience from implementation has revealed several reality checks that should inform future designs and implementation of PPP programs 1 There are no short cuts for market testing transaction documents Power Purchase Agreements PPAs and Implementation Agreements cannot be developed by ministries regulators development partners or consultants in isolation the signatory counterparts must be directly and continuously involved This may seem obvious but there are many examples of stranded processes where documentation is prepared in isolation and often not to a bankable standard Consequently the off taker may not sign the documents or the Ministry of Finance cannot accept guarantee clauses 2 3 4 Short cuts can turn into dead ends In Uganda the development of the standardized documents had many iterations and involved extensive market testing taking nearly two years to achieve signing As this is an intensive costly and long process it is only really justified when targeting standardized agreements and a portfolio of projects as well as a creating a basis for other countries efforts Each country s starting point is different and the tool boxes have to be tailored It could be difficult to find a market at a similar level of liberalization or a champion as empowered and engaged as ERA in Uganda In each country the policy gaps institutional framework donor landscape etc will all be different Nonetheless it is important that a holistic PPP program maintains its fundamental approach of identifying and targeting the set of critical policy institutional and financial gaps preventing the timely implementation of the privately promoted infrastructure In markets with immature project portfolios the path to construction can be long In Uganda significant hydro biomass and solar potential had been identified and studies carried out prior to the development of the GET FiT program Notably a robust pipeline of relatively mature projects was identified several of these already having obtained development permits and or licences This existing pipeline turned out to be essential to ensuring progress and eventual success in GET FiT Uganda Despite the existence of this pipeline the program had to overcome challenges and delays associated with bringing the projects up to a sufficiently mature level of technical and E S preparedness to allow for financial close To ensure a pipeline of projects particularly hydro or biomass development partners should look to stimulate market activity immediately potentially in parallel with efforts to establish the program Taking charge with regards to grid integration of the RE portfolio The GET FiT Uganda experience demonstrated that even in a relatively advanced power market it was very challenging to ensure grid connection of the portfolio There is a risk that this may result in congestion losses and or even significant deemed energy charges for the utility For a PPP program targeting such a large RE portfolio a systematic and proactive approach is necessary from the start driven by the network operator Initially grid infrastructure planning and investments required by the project portfolio was largely considered Government responsibility outside the scope of the GET FiT program although highlighted as a key risk to be closely monitored During implementation it became increasingly clear that a stronger level of coordination was needed supported by additional funding Future programs may benefit from a more integrated approach on proactive and coordinated planning of associated infrastructure or inclusion of necessary infrastructure into the projects 8

KEY LESSONS Key lessons to inform the future planning of PPP programs with the aim of achieving enabling frameworks for commercial infrastructure investments Open discussions at the early stages Discuss the hard commercial realities with the offtaker the Ministry of Finance etc at early stages Take the time to build a common understanding and rely on external experts to build this understanding Critical issues are more easily absorbed and dealt with early as they will form the foundation of the transaction documents It is critical that a PPP program is truly woven into the over arching ambitions of the country A succesful enabling framework requires that a bankable set of transaction documents is institutionalized Efforts to get the standardized transaction documents will be expensive intensive and at times tedious However this is where the entire enabling framework becomes solidified and formalized where the sector fundamentals risk allocations and incentives are brought together negotiated in detail and ultimately form the basis of a bankable agreement It is truly the center piece around which the other elements revolve In Uganda KfW has been instrumental in ensuring that local building blocks materialize into a viable program and actual investments Critical long term tasks include managing stakeholders to pull in the same direction pulling in appropriate views and expertise at the right times and ensuring fiduciary controls Thus having a credible international implementing institution with the proper mandate involved in addition to the local champion is key to successfully implementing the PPP program While GET FiT Uganda focused on providing a REFiT top up to incentivize private investment it is equally applicable to consider a buydown for the utility to make RE IPPs competitive affordable The GET FiT Premium Payment Mechanism is generally referred to as a top up to bring returns up to acceptable levels for the private sector and promoting increased REFiTs in host countries In some cases REFiTs may be at or near cost reflective levels but the utility relunctant to lock into relatively high cost dollar based 20yr PPAs This would imply that donors could consider a buy down rather than a top up which would target the affordability of RE for utilities rather than lifting returns to acceptable levels for investors Interventions targeting a buy down could be justified by the reflection that high risk premiums in LDCs and dollarbased PPAs put capital intensive renewables initially at a disadvantage to fossil fuels thus potentially calling for international cost sharing over the medium to long term In these cases development partners could assist to bridge the gap realize projects contribute to reducing risk premiums and ultimately helping find middle ground on a reasonable tariff structure and level and thus assist countries to make a transition to RE IPPs As opposed to Uganda this would imply a true cost sharing model not motivated by a medium term goal of increasing REFiTs but improving attractiveness of RE IPPs and lowering risks by means of demonstration IPPs In this regard a GET FiT type mechanism could be an effective channel for large scale climate finance which shares the cost burden of RE with LDCs www getfit uganda org 9

z ABOUT K C A B program which was jointly developed by the Government of Uganda the Electricity Regulatory Agency ERA and KfW was designed to leverage commercial investment into renewable energy generation projects in Uganda GET FiT is being supported by the Governments of Norway the United Kingdom and Germany as well as EU through the EU Africa Infrastructure Fund Multiconsult ASA of Norway is the Implementation Consultant The main objective of GET FiT Uganda is to assist the country in pursuing a climate resilient low carbon development path resulting in growth poverty reduction and climate change mitigation The program is fast tracking a portfolio of 17 small scale renewable energy RE generation projects promoted by private developers and with a total installed capacity of 158 MW This will yield approximately 770 GWh of clean energy production per year and leverage close to MEUR 400 in investments for RE generation projects with a limited amount of results based grant funding A more comprehensive description of the tools and approaches applied by GET GET FiT Secretariat ERA House Plot 15 Shimon Road Nakasero P O Box 10332 Kampala Uganda THE GET FiT LESSONS LEARNED SERIES SUPPORTED BY