Project Number: E.02.1.6.1.1/E.02.1.6.4/E.02.1.6.2.1/E.02.1.6.2.3 Project Title: Zambia-Tanzania Kenya Status: S3 programme/project structuring and promotion to obtain financing Countries Region Zambia, Tanzania, Kenya East Africa Project Location (current line Pensulo (Zambia) through Mbeya in Tanzania to Isinya Kenya via Iringa, Singida routing) and Arusha (all in Tanzania) Sector Sub - sector Energy Transmission Project description Bi-directional 2,206 km 400MW 400kV power transmission line Objectives Promoting power interconnection across the continent and facilitating the creation of a Pan African power market Economic Sustainability and Promote and stimulate development of new power generation projects and expected benefits electricity export potential Improve quality of power to Northern Zambia (via Kasama) and Western Tanzania (Sumbawanga) Reinforce the national grid in Tanzania (and make Tanzania an operating/trading member of SAPP) Assist Kenya diversify fuel sources for generation -hydro, thermal, etc REC EAC, COMESA, SADC Project Sponsors Governments of Zambia, Tanzania, Kenya (ZTK) Implementing Authorities Lead co-ordinating agency at present: Office for Promoting Private Power Investment (OPPPI) of the Government of Zambia Project Management Unit (PMU) to be established by the ZTK governments to manage the project until the formation of the transmission company, Transco, which will be a special purpose vehicle (SPV) Off - takers ZESCO to sign a wheeling agreement for use of the Interconnector to supply the Northern Region of Zambia TANESCO to sign a wheeling agreement for power supply to Tanzania KETRACO/ KPLC to sign a wheeling agreement for power supply to Kenya Project Status Pensulo-Kasama (within Zambia) is under implementation but the route seems to be not coinciding with the ZTK Shinyanga-Singida-Iringa (Tanzania Backbone) is fully funded and under construction. It seems that this line is also not coinciding with the initial route which was to run from Singida to Mbeya COMESA-Governments MOU for Funding of ZTK s Project Management Unit (PMU) signed & disbursement commenced Project has accessed funds pledged by EDF during the North-South Corridor Summit (Lusaka 6-7 April 2009) through COMESA Increased interest from Lenders & Donors (ADB, DFID, DBSA, EIB, KfW, etc) Total estimated Project Value USD 1,116.3 billion Way Forward Heads of state agreement to be signed in third quarter of 2013 Formal contact with potential lenders/commencement of resource mobilization Nov/Dec 2013 Power Purchase & Wheeling Agreements Negotiation & Signing January/March 2014 Due diligence, negotiations & signing with lenders January/May 2014 EPC contract procurement June 2014 Financial close July 2014 Political Support All 3 governments to provide sovereign guarantees to cover any shortfalls in cash during operations 1
2
Background The idea for the construction of the Zambian-Tanzania-Kenya (ZTK) Interconnector started off as a bilateral project between Zambia and Tanzania more than two decades ago. It was one of the remnants of the golden era (mid -1960s to the late 1980s) of the politico-economic cooperation between the two countries. The transmission line was meant to connect the electricity grids of Zambia and Tanzania from the Zambia town of Serenje (precisely a sub-station called Pensulo) through the Zambian provincial town of Kasama, landing in the Tanzanian town of Mbeya before continuing into the Tanzanian grid. The idea of building a transmission line between Zambia and Tanzania was spurred as much by the political pressures of the time (to cement the already strong politico-diplomatic relations between the two countries) as by economic objectives and realities (to assist improve the electricity supply in Tanzania, in the face of persistent bouts of drought while providing a market for surplus power from Zambia). For Zambia and Tanzania, cooperation covered many spheres of economic activity. In this regard several major projects were undertaken by the two countries from the late 1960s onwards; some still active today, while others are no longer operational. Among the existing ones are the Zambia-Tanzania Railways and the Tanzania-Zambia Pipeline, better known by their respectively acronyms, TAZARA and TAZAMA. After a long period of inactivity, the proposal to interconnect Zambia and Tanzania regained momentum from the second half of the 1990s, due to the following reasons: Persistent droughts in the face of growing economies and power demand in the entire East Africa forcing Kenya, Tanzania and Uganda to resort to more expensive generation sources; Availability of competitively priced power in Zambia and some of the SAPP member countries; Creation of the SAPP by Governments and utilities of the Southern African Development Community (SADC), which introduced the concept of trade in electricity and in turn necessitating interconnections among SAPP members; Tanzania is a SAPP member but is not connected to the grid (and the Project would correct this anomaly); The looming power deficit in Eastern and Southern Africa, necessitating increased grid interconnections, to assist each other in the hour of need (more especially after the completion of the power rehabilitation projects in Zambia and DR Congo, which will result in incremental generation and surpluses at least in the short to medium term); The decision by the African Union, through its NEPAD initiative, to accelerate the development of Interconnectors across the African Continent. The various circumstances and events listed above led to an increased tempo in the desire to have the hitherto Zambia-Tanzania Interconnector turn into reality. Thus, the period 1995-97 saw the completion of the techno-financial feasibility study by a joint team from the national utilities of South Africa (Eskom), Tanzania (TANESCO) and Zambia (ZESCO). 3
The feasibility study led to the signing, in 1998, of an Inter-Governmental Memorandum of Understanding (IGMOU) between the GOT and the GRZ, providing the much needed political authority for the development of the Project. The IGMOU between GOT and GRZ was then expanded to include the GOK in 2003; thus, transforming the hitherto bilateral project into a trilateral one. The achievements to date for this project are presented below. Technical Power Availability confirmed Technical Review on-going and expecting approval of changed routing at next Ministerial Meeting ESIA Consultant identified Financial Project Development Structure & Financing Strategy agreed PMU Funding sourced ZESCO & other SAPP power suppliers ready to negotiate PPAs Commitment of Donors and Lenders to the ZTK as part of promoting Regional Integration Projects (and Commitment of the Tripartite, i.e. COMESA, EAC & SADC) Political The 3 countries have approved the signing of Heads of Agreement Recruitment of PMU Senior officers commenced Securing adoption as part of PIDA Economic Sustainability and Strategic Importance The power deficits that Eastern and Southern Africa have experienced in the last few years should be seen as an opportunity rather than as an obstacle to the development of the ZTK Interconnector. If anything, it is this stark reality that, to some extent, has contributed to the new impetus to accelerate development of this project. Countries of Eastern and Southern Africa, more than ever, see this project as part of the solution to the problem, parallel with the envisaged increased tempo in the development of new power generation in virtually all the countries in this part of Africa. The project should engender a spirit of increased cooperation among and between utilities. Thus, encourage more power trading among utilities of Eastern and Southern Africa; especially given the differing seasons and time zones, in terms of peak and off-peak periods. In essence, make the advent of a two-way trade between East and Southern Africa possible. This would be very much in line with the NEPAD objectives of promoting access and usage of electricity throughout Africa. 4
The objectives of the project are as follows: Contribute to the realisation of the NEPAD objectives of increased power interconnections across Africa Facilitate trade in power (from the SAPP to the EnAPP and vice versa) Offer improved reliability and security of power supply to both Southern and Eastern Africa Encourage investment in new power projects by linking generation to potential customers through the provision of power transmission capacity Promote economic development in Eastern and Southern African through closer regional integration Meet the immediate and future power demand in Eastern and Southern Africa by providing transmission capacity The HVAC design will make it possible to drop power along the route to Isinya in Kenya, which will go a long way in assisting these countries achieve one of the key Millennium Development Goals, i.e. increased access to electricity Contribute to poverty alleviation by offering rural communities along the Project route access to electricity (for domestic as well as cottage and small scale industries) Improve quality of power to Northern Zambia (via Kasama ) and Western Tanzania (Sumbawanga) Reinforce the national grid in Tanzania (and make Tanzania an operating/trading member of SAPP) Assist Kenya diversify fuel sources for generation -hydro, thermal, etc.). Notably, given the sub-regional and inter-regional dimension of this Project, it follows that when it comes to reviewing the potential market, the net must be cast wider to include not only the three countries directly involved in the Project, but also the existing and future sub-regional power arrangements and institutions; such as the Southern African Power Pool (SAPP), the East African Power Pool (EAPP) and the Eastern African Power Pool (EnAPP). Thus, through this Project, three key economic sub regions of Africa shall be interconnected: creating a vast market beyond the original interconnection plans. This project will not only connect the SAPP and the EAPP but will, with the construction of the Kenya-Ethiopia interconnector create linkage to the EnAPP; thus creating a power market from Cape Town to Cairo. 5
There would several beneficial impacts felt throughout the region, as follows: Increased Access to electricity It will improve access to electricity in three countries (and contribute to the attainment of the Millenium Development Goals) For rural communities, access to electricity will mean reduction in over reliance on fossil fuels such as wood, charcoal and paraffin (with attendant reduction in deforestation) This Project will assist East African countries reduce reliance on expensive thermal power with concomitant reductions in thermal emissions by efficient utilisation of abundant hydro power resources in Southern Africa Benefit to communities Improve the capacity and quality of education in urban and rural areas through the introduction of longer teaching hours and the provision of modern technology Small and medium sized rural hospitals could perform procedures hitherto prohibited by lack of electricity Improve communication through the use of fibre optic line technology throughout the network Job - creation and income generation Both rural and urban areas shall benefit from creation of electricity powered small scale industries, which will go a long way in improving the livelihood of the communities and thus assist with poverty alleviation Improve job creation capacity by facilitating industrial and commercial activity through the provision of reliable power source Facilitate irrigation projects and access to markets for agricultural Projects The ZTK demand profile (as shown below) and the limited supply options in East Africa point towards the importance and urgency of the Interconnector. To this end, a high load factor is expected during the forecast period. The Base Case Financial Model assumes a load forecast of 80%, which is reasonable, considering the macro-economic fundamentals of the Region. 6
Apart from power emanating from the three countries, there is potential to source electricity from afar afield with significant benefit to the ZTK. Among the potential sources of power for the ZTK is Inga in DR Congo (using the existing transmission line from Inga to Luano in Zambia and which continues as part of the North-South corridor through Zimbabwe, Botswana and South Africa). There is also the big pool of power currently being developed on Ethiopia which could subsequently be accessed using the Ethiopia-Kenya interconnector. Technical Specifications This Project will connect the Zambian grid to Kenya, via Tanzania; covering distance of 2,206 km. The Interconnector shall be constructed as a bi-directional 400MW double circuit 400 kv power transmission line in sections from Pensulo in Zambia to Isinya in Kenya as shown below. Zambia A second 330kV circuit from Kabwe will be strung to the existing line to Pensulo to enable the transfer of 400MW to Mbeya (via Kasama) Tanzania A 400 kv line from Mbeya to Iringa will provide the strong path for power to be delivered to the northern load centres Kenya Another 400 kv line from Singida onwards to Arusha will be required to deliver power to the Arusha load centre as well as transmit power to Isinya 7
A summary of the work to be carried out for the Interconnector development is set out in the tables below, the total length of the transmission line is 1870km. Work in Zambia Voltage (kv) Length (km) Year of Implementation Kabwe Pensulo 330 298 2013 (single circuit) Pensulo - Kasama 400 373 2013 (double circuit) Kasama Zam Tan 400 221 2013 Border (double circuit) Total 892 Work in Tanzania Voltage (kv) Length (km) Year of Implementation. Zam -Tan Border 400 103 2013 Mbeya (double circuit) Mbeya Iringa 400 349 2013 (single circuit) Singida Arusha 400 316 2013 (single circuit) Arusha Tan / 400 106 2013 Kenya Border (single circuit) Total 784 Work in Kenya Voltage (kv) Length (km) Year of Implementation Tanzania Kenya 400 104 2013 border to Isinya Total 104 8
Project Structure SHAREHOLDERS: ZAMBIA TANZANIA KENYA Equity LENDERS Debt PROJECT COMPANY/SPV: Head Office: Lusaka International Status O&M Contract KETRACO/ KPLC TANESCO ZESCO Wheeling Agreement Wheeling Arrangement EPC Contract ZESCO & OTHERS KETRACO KPLC TANESCO & OTHERS EPC CONTRACTOR (S) The Project shall be developed by the public sector as a unitary system covering the three countries. A combination of high returns required by the private sector and the need to keep average cost of financing low (in order to minimize impact on the ultimate tariffs) renders this project a candidate for concessionary funding. The Government of the Republic of Zambia, acting through its hydropower development agency the Office for Promoting Private Power Investment (OPPPI), has been given the responsibility by the Government of Kenya and the Government of the United Republic of Tanzania to undertake the coordination of the Project. A Project Management Unit (PMU) will be jointly established by the ZTK Governments. It will manage the project until the formation of the transmission company (Transco or the SPV). The responsibilities of the PMU will subsequently be taken over by Transco. 9
The PMU shall assist the ZTK Governments during project implementation. The three countries shall assign personnel to the PMU, which on attainment of commercial operations, shall hand over the Project to Transco. A single SPV shall be created to own the assets and operations of the Interconnector. The rationale for a funding structure based on the single SPV is the ability to access concessionary funding without the constraints of the individual country limits. Figure 1: Organisational Structure of the PMU The security structure shall be underpinned by sovereign guarantees from the Sponsors. It is therefore possible that the single SPV could also be structured to achieve a credit standing higher than any of the each individual country or the power utilities in each of the respective countries. The funding structure is premised on the following assumptions: TRANSCO (the Special Purpose Vehicle, SPV) will not be involved in the buying and selling of power (i.e. the Power Purchase Agreements, PPAs) wheeling of power TRANSCO will derive its revenue from the wheeling charge on the power transported to various customers Figure 2: Funding Structure TRANSCO s sole responsibility will be the TRANSCO will be the vehicle for developing ZTK All borrowing for the project will be done through TRANSCO TRANSCO will be responsible for debt service. ZESCO, TANESCO and KETRACO/ KPLC have committed to sign firm wheeling agreements for the use of the Interconnector. It is the Sponsors intention to create an open access transmission line. The loan funding 10
shall be serviced by the proceeds of the wheeling charges based on firm off-take commitments. The details of the funding structure shall be developed further in consultation with key lending partners for the Project. REGULATORY REGIME: At present there is no regional regulatory body which could supervise the operation and use of the Interconnector from an independent regulatory perspective. To this end, it is recommended, to avoid unnecessarily delaying the implementation of Transco, that individual countries regulate the sections of Transco in their individual countries taking into account the sub regional requirements of institutions like SAPP and EAPP. This notwithstanding, it is further recommended that the three electricity regulators (Kenya, Tanzania and Zambia) be directed by GOK, GOT and GRZ to form a standing mechanism for close corporation in the regulation of Transco. To create one regulator solely for this interconnector, will require amendments of existing laws and statues in each of the three countries. This will not only be cumbersome but could significantly delay the execution of his project. Hence, the recommendation made above. OPERATIONS AND MAINTAINANCE: The O&M functions shall be divided into two categories: Daily O&M services: This is the daily task of running and monitoring the facilities and would include tasks such as the wheeling of power in accordance with instructions given by those with responsibility for power trading and co-ordinating as necessary within ZESCO, TANESCO, KETRACO/ KPLC and other customers from a technical perspective, the operation of the switch yards, the operation of the transmission system, and the program of continuous maintenance required for the facilities including the transmission lines clearance. The Daily O&M services shall be outsourced to ZESCO (Zambian section), TANESCO (Tanzania section) and KETRACO/ KPLC (Kenya section) in their respective territories. Strategic Management Services: The Strategic Management services include making investment decisions into transmission, making expenditure decisions regarding the control and maintenance effort and negotiating pricing decisions for congestion management. This function of the O&M shall be provided by the SPV in each respective territory independent of ZESCO, TANESCO and KETRACO/KPLC. It is possible that Transco could sub-contract part of these functions to a private sector company under a Public Private Partnership (PPP) arrangement; subject to demonstrated advantages flowing to Transco for such endeavours. 11
Project Status Several new developments have taken place, as follows: Zambia accelerating ZTK by developing the Pensulo-Kasama sector (contract awarded & funding secured) Tanzania developing Iringa-Singida sector as part of national Backbone Project (funding secured) Kenya & Tanzania finalising Environmental & Social & Impact Assessment under the Nile Basin Initiative A Technical Review (Current Routing, Capacity & Configuration) is on-going Power demand in EAPP / EaPP and SAPP increasing at a rate higher than anticipated COMESA-Governments MOU for Funding of ZTK s Project Management Unit (PMU) signed & disbursement commenced Recruitment Process for PMU Senior Officers commenced ZTK-NELSAP meeting held December 2012 in Livingstone, Zambia to coordinate Project development; Project adopted by the AU-NEPAD-AfDB (PIDA) Programme (October 2011) as part of East- South Power Transmission Corridor; Project has accessed funds pledged by EDF during the North-South Corridor Summit (Lusaka 6-7 April 2009) through COMESA SAPP has confirmed power availability minimum 400MW by the time ZTK is commissioned Increased interest from lenders and donors (ADB, DFID, DBSA, EIB, KfW, etc.) The Ethiopia-Kenya interconnector seen as complimentary rather than competing project to ZTK Heads of Agreement to be signed in the third quarter of 2013. Further, there are several new developments taking place in the various links, as follows: Pensulo-Kasama Kasama-Mbeya ZESCO is implementing this section of the interconnector through Mpika to also meet requirements in the Luapula, Northern & Muchinga provinces of Zambia (Single Circuit 330kV) Funds for feasibility studies secured and procurement of a consultant has commenced (400kV Double Circuit) Mbeya-Iringa Feasibility Studies and Tender documents completed (400kV Double Circuit) Iringa-Singida Works started and funds committed (400kV Double Circuit) Singida-Arusha-Isinya Feasibility Studies and Tender documents completed (400kV Double Circuit) 12
The proposed timetable is presented in the table below: Activity Date Meeting of Officials June 2013 Signing of Heads of Agreement July 2013 Letters to potential lenders (Debt financing) July 2013 Meeting of Energy Ministers & Signing of Shareholders Agreement Formal contacts with potential lenders/commencement of resource mobilization (Debt & Equity) September 2013 November/December 2013 Power Purchase & Wheeling Agreements Negotiation & Signing January/March 2014 Due diligence, negotiations & signing with lenders January/May 2014 EPC Contract Procurement June 2014 Financial Close July 2014 Risk Analysis Under certain circumstances the lenders may be exposed to risk of adverse events which will affect the Project s ability to service its debt. In general, these risks may arise in construction phase, if capital costs are more than estimated or there are significant delays; during the operating phase if revenues are less than forecast or the operating expenses and debt service costs exceed assumed levels. The causes of the risks may or may not be within the Project s control. In general, the Project will seek to mitigate many of the key risks through a combination of the following risk mitigation measures: Seeking guarantees, indemnities, and similar assurances given by the counterparties to the project agreements; Commercial insurance for the cost of replacing or repairing assets and consequential loss of revenues arising from the loss of, or damage to, these assets; Interest hedging agreements; Matching the currency of the revenue of the PPA to the currency of the debt service; Use of proven technology. The following risk analysis focuses on certain principal risk categories and identifies, where relevant, the risk mitigation measures that are traditionally considered for such risk categories. This is not an exhaustive list of risks or their mitigation. 13
The table below provides a Risk and Mitigation Analysis for the Project during construction and in commercial operations. Risk Political Nationalisation Seizure of Assets Regulatory Changes (Planned /Abrupt) Foreign Exchange Regime Changes Commercial Completion Risk Liquidated Damages & Due cost escalation damages Failure to Raise Required Finance Mitigation Political Risk Insurance Political Risk Insurance Political Risk Insurance Political Risk Insurance Fixed Price, Turnkey Project, performance guarantee EPC Contractor Selection Intense Project pre-marketing & DFI support CONSTRUCTION RISKS: The Interconnector will span a distance of more than 1,600km when complete. There are risks of capital costs overruns and significant delays during construction. These risks are largely mitigated by running an international competitive process ( ICB ) in the identification of a financially and technically capable EPC contractor. As indicated in Section 5.6, the EPC contract will have price completion and performance guarantees. The objective is to award the contract on a fixed price, date certain and with predictable performance parameters. INTEREST RATE RISK: Transco, the borrowing vehicle, shall consider entering into appropriate interest rate hedging mechanisms to mitigate the risk to the Project of increased interest costs. FOREIGN EXCHANGE AVAILABILITY, CONVERTIBILITY, TRANSFERABILITY: The power supply agreements between ZESCO, TANESCO and KETRACO/KPLC should be denominated in United States Dollars. To mitigate significant risks of currency devaluation, convertibility and availability, the PPA contracting parties should consider using hedging as a tool for value preservation (given that revenues will be in local currency and wheeling charges need to be paid in foreign currency). Any failure by the PPA contracting parties (Transco customers) to pay or transfer foreign currency, could significantly affect the Transco cashflow; which could in turn affect its capacity to service its debts. It is expected that Transco customers will explore political risk guarantee to mitigate the risk of currency convertibility and transferability. CREDITWORTHINESS OF THE POWER PURCHASERS: This Project is hinged on the ability of the PPA contracting parties to meet their obligations to each other. The proposed supply through the Interconnector and the corresponding cash outlay represents a manageable portion of the offtake for TANESCO and KETRACO/KPLC and, to some degree, ZESCO. Recent market indications have demonstrated the market s willingness to accept the TANESCO and KETRACO/KPLC credit. ABILITY OF SUPPLIERS TO MEET DEMAND: The development of this project has been prompted by the increasing demand for electric power in East Africa. Due to phenomenal growth that economies of Eastern Democratic Republic of Congo, Kenya, Rwanda, Tanzania and Uganda have been experiencing in the last decade or so, the demand for power has increased substantially. Some of these countries (e.g. Kenya and 14
Uganda) have had to resort very expensive emergency power suppliers. Hence the need to explore the possibility of drawing power from Southern Africa, Zambia in particular. A combination of existing generation capacity, on-going rehabilitation and uprating of old power stations (with concomitant incremental capacity) and the new power generation projects currently under implementation or planned for development in the next five years or so, there should be sufficient capacity in Zambia and SAPP in general to satisfy requirements for this Project. Thus, from the supply perspective justifying this project. Financial Status Total estimated Project Value USD 1,116.3 billion Distribution of Estimated project costs: USD (million) EPC 995.0 Upfront Cost 16.7 Commitment Fees 9.8 Advisory Services 8.9 Interest During Construction 71.7 DSRA 10.0 Initial Working Capital 3.0 Total Uses 1,116.3 Financing was obtained in 2005 for project development from AfDB, DBSA through a NEPAD facility. Almost secured, the amount of USD 5.2 million through the 10th European Development Fund. It is envisaged that the funding for the project shall be mobilized from a combination of concessionary and commercial funding institutions. Further, the sponsoring Governments have committed to provide the necessary counterpart funding To demonstrate their faith and the importance of the Project, all three governments have agreed to provide sovereign guarantees to cover any shortfalls in cash during operations Funding Gap Approx. USD 1 billion 15