PPP role of multinational companies in electricity sector

PPP role of multinational companies in
electricity sector
www.istepanian.com
Harry Istepanian
Senior Fellow Iraq Energy Institute
I r a q E n e r g y F o r u m – B a g h d a d
S e p t e m b e r 2 0 1 9

© 2019 Harry Istepanian
Rationale for public-private partnership
To involve in the reconstruction efforts of deteriorated
public electricity supply in most conflict affected areas of
the country due to significant damages of the
infrastructure.
To participate in reduction of Iraq’s power generation
deficit which is a significant constraint on the country’s
growth and development.

Overall damage and losses
9
Power plants are
operating partially or
need repair
8 Power plants have
been completely
destroyed
The energy sector is one of the worst
damaged sectors in terms of total
damage cost at IQD 13.2 trillion (US$
11.3 billion).
$4.3 billion
Total damage cost of oil and gas sector
$7 billion
Total damage cost of electricity sector
Source: Ministry of Planning (2018)

Electricity Damaged Assets
17
92
43
6
9
34
2
43
8
9
45
20
5
5
5
0
6
8
8
47
23
1
4
29
2
37
0
0 20 40 60 80 100
Power Plant
Substation (distribution)
Substation (transmission)
Substation (Generation)
Mobile Plants
Networks
Kiosk sub-plants
Feeders
Admin offices
Completely Destroyed Partially Damaged Total Damaged

Iraq’s electricity sector sustainability
Rehabilitate electricity
infrastructure to increase supply
availability and quality after
clearance of explosive hazards
1 – 3 years 4 – 7 years 8+ years
Add new on-grid and off-grid
generation capacity, also
through renewable energy
sources
Reinforce the electricity network by
expanding and upgrading the
generation, transmission and
distribution infrastructure, and by
increasing power system efficiency
Improve supply reliability and
reduce losses, and mobilize policy
incentives and standards for
increased investments in renewable
energy
Operationalize the new electricity
law and undertake sector reforms
Develop a strategy for international
power exchange to promote regional
power grid integration
Generation Transmission Distribution Consumers

Ministry of Electricity Fiscals
$9.1 billion
Required for reconstruction of power sector
$4.5 billion
Short term requirement
$3.9 billion
Total Investment budget (2019)
Source: Ministry of Planning, Ministry of Electricity (2018)

Why Public-Private Partnership?
Iraq needs a new business environment for reconstruction
program

PPP in Iraq’s economic environment
Utility
restructuring
Corporatization
Decentralizations
Civil works
Service
contracts
Management &
operating
contracts
Leasing
Concessions
BOT projects
DBOs
Joint ventures
Partial
divestiture of
public assets
Full
divestiture
Low HighExtent of private sector participation
Public owns and operates
assets
Public-private Partnership
Private sector owns
and operates assets
Iraq needs to develop the Public-private partnership mechanism for effective
collaboration between the public and private sectors on projects that require
significant capital investments and/or services. Both parties needs to share the tasks
and risks of the project while maintaining their own identity and responsibilities.

Most common
PPP model
Options for private sector participation
Full Divestiture
Technical
Assistance
Service
Contract
Management
Contract
Lease
Contract
Concession Contract
3-5 yrs
5-15 yrs
1-3 yrs
25-30 yrs
Risktransferredcontractuallytoprivatesector
Contract
Duration
Limited risk transfer to private sector
government control
Full risk transfer
No government control
Substantial risk transfer
government control
As the contract term increases, an increasing amount of risk can be allocated to the private sector© 2019 Harry Istepanian

“Public Private Partnerships should be very important tool for GoI
reconstruction program and strategy for any long-term
investments. The aim is to encourage the public and private
sectors to think more about sharing their risks of their
development plans and what they can together form a win-win
relationship to increase the value of the financial investments in
Iraq infrastructure.

Win-win solution for electricity sector financing
Alleviation/remov
al of the
government’s role
Injection of
private capital in
public services
Increased
budgetary
certainty
Maintaining
oversight to
ensure quality
Attractive risk
weighted returns
Government
guarantees mitigate
certain risks
Long-terms
investment
opportunities
To operate under
a clear regulatory
framework
Government
Objectives
Private Sector
Goals

What benefits PPP will bring to the electricity sector?
Public-
Private
Partnership
(PPP)
reduction in the relative
GDP share of the oil
sector
Economic
Diversification
providing better public
services through
improved operational
and maintenance
efficiency
Better Services
incentivizing the private
sector to deliver projects
on time and within budget
Incentivization
imposing budgetary
certainty by setting
present and the future
costs of infrastructure
projects over time
Fiscal certainty
as a way of developing local
private sector capabilities
through joint ventures with
large international firms, as
well creating new job
opportunities
Iraqization
gradually exposing state
owned enterprises and
government to increasing
levels of private sector
Competition

Win-win solution for electricity sector financing
Capital and operating costs are paid by the MoE, including
costs related to cost overruns and late delivery of the
infrastructure.
Cost
Overruns
Construction
Phase Operation & Maintenance Phase
O&M Cost Overruns
Estimated
Investment
Costs
O&M Costs
100% Public Financing
DelaysCost
Time
The public sector only pays over the long term once the infrastructure has been
delivered and services are being provided according to contractual requirements. The
private sector finance the capital costs using equity and debt with return dependent
upon the delivery of the services (including quality).
Monthly payment to private
sector to cover fixed and
(Incl. debt service and return on
equity costs)
PPP
Time
Construction
Phase Operation & Maintenance Phase
Cost

Key Success factors for PPPs
Government support
• Strong Government support from
the outset
• Creation of a dedicated PPP entity
Legislative framework
• Establish a sound institutional,
legal, and regulatory framework
Risk mitigation
• Risks allocated to the party that is
best able to manage them
Affordability
• Willingness of the end-consumers
to pay but also realistic tariffs
and subsidy levels
Successful PPP

Structure of PPP project financing
Ministry of Electricity
Private party (special
purpose vehicle)
EPC contractor
Financial Institutions
(debtors)
Loan
agreement
Stakeholders
Equity
PPP agreement
Ministry of Finance

Challenges of implementing PPP in Iraq
– Security & instability war against ISIS and related security issues
– Slow decision making and inconsistent public policies
– Lack of transparency and appetite for negotiated deals
– Willingness to pay Public unwilling to pay commercial rates for infrastructure
services
– Affordability Limited ability to pay by low income households (low per capita
income)
– Over-sized public sectors Reluctance to address due to unemployment concerns
– Capital markets mostly under-developed and inexperienced (e.g. short debt
maturities, limited fixed rate local currency bank financing, domestic
institutional sources of infrastructure equity)
– Low infrastructure spending Historic under investment in infrastructure.
– Institutional, legal and regulatory framework weak or inexistent

Why establish a PPP Law now?
A PPP Law establishes
clear process that
would help expedite
projects development
and implementation
process
project selection criteria,
identification, screening and
approval process
Main provisions of contract
including the value of bid bonds
and performance bonds.
prequalification procedures,
bidding criteria; contract
issuance and rendering
procedures

Why establish a PPP Law?
A PPP Law sends a
clear signal to
investors that the
Government is
committed to
develop PPPs
Main contract clauses allocating
rights and responsibilities of the
public/private sector
Termination procedures
Types of guarantees and
financial support that might be
offered

Investment climate reform
The long road ahead

Investment climate reforms in place
Economic reform unit in the Prime Minister’s Office
to help set overarching economic and commercial policies to ease doing business in Iraq, attract FDI, and
optimize the role of FDI in the country’s overall investment and socioeconomic development strategy.
High-level committee for investment and construction
to examine the fundamental and strategic issues impacting investment promotion, developing plans for large-
scale investment projects and their follow up, and removing the obstacles to investment in accordance with
the objectives of the National Investment Law No. 13 of 2006 as amended (NIL).
Capping of state-owned banks’ exposure to SOEs
to reduce the distortions and level the playing field between SOB and private sector banks by curtailing the
access of SOE’s to cheap SOB financing. The Central Bank of Iraq (CBI) also removed restrictions on private
banks to provide financial services to SOE’s.
Public procurement reforms
GoI developed and indorsed three critical tools to ensure the effective and efficient use of public resources in
public procurement: (1) National Bidding Documents; (2) Sector Bidding Document; and (3) a National
Implementation Manual (NIM).

Investment policy reform
Draft arbitration law
to proceed with a transformational reform to improve the domestic arbitration regime by adopting an
UNCITRAL* compliant modern Arbitration Law based on international standards.
Accede to the New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 to ensure the proper enforcement of
arbitral awards in accordance with the terms of the Convention.
Approved a risk-based approach for the issuance of investment licenses
To limit investment licenses only to high-risk projects in sensitive sectors and industries. Operationalize the
National Investment Commission as One-Stop-Shop for investors by implementing a sector-specific “fast track”
approach to expedite the process of the Investment Licenses.
Introduction of an “investor visa” category
To enable the NIC and Ministry of Interior to streamline the visa process for investors.
Appoint ERU of the OPM for the execution reform action plan.
The decree requires the ERU to report to the Council of Ministers periodically on progress of reforms and to
identify specific areas where there are delays or lack of action.
* United Nations Commission on International Trade Law

– Enabling private sector participation in the economy: These reforms are focused on the
public-private partnership framework and reforms related to state-owned enterprises and their
role in the economy.
– Reforming investment policies: These reforms are focused on attracting investment,
facilitating investor entry, and improving investor retention.
– Reforming regulation of business operations: Reforming the regulatory framework and
practices around business operations, including registration of businesses and property and
cross-border trade.
– Governance reforms: These reforms are focused on the broader governance context for
investment and government-to-business relations in Iraq, including procurement, anti-
corruption, and the creation of high-level ownership of reform delivery and change
management.
Key areas of investment law reform

Major investments in electricity sector
Baiji-1 Power Station (6 x
169 MW)
Baiji-2 GT (6 x 160 MW)
Hartha Power Station (200
MW) + (2 x 660 MW)
North Station Thermal
Power Station (4 x 350
MW)
Salah Al-Deen Thermal
Power Station (2 x 610
MW)

A final word

“The need for PPP in Iraq post war against ISIS isn’t only for
financing projects in electricity sector as it is the case in other
countries but the importance of PPP in Iraq is for increasing the
performance, efficiency, management skills and in house expertise
for leading long term development plans of the country.

Thank you
www.istepanian.com

PPP role of multinational companies in electricity sector

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