The Central Bank of Kenya has rejected a decision by the Cabinet to use the country’s foreign exchange reserves to fund five large privately owned power projects that were supposed to add 600 MW of power to the national grid by 2013.

The proposal to fund the projects from the national reserves account was based on a Cabinet paper signed by Finance Minister Uhuru Kenyatta and his Energy counterpart Kiraitu Murungi, dated July 5 this year.

Under the arrangement, the Central Bank of Kenya was to release $209 million to an escrow account from which funds were to be drawn by the Kenya Power and Lighting Company to issue letters of credit to the five independent power producers to serve as guarantees for future electricity payments to the IPPs by KPLC.

After the Cabinet passed the paper, Head of Public Service Francis Muthaura fired off a memo to the Ministries of Finance and Energy and the Central Bank to officially communicate the decision by the supreme policy-making body, directing that it be implemented forthwith.

But in an unprecedented display of independence, the Central Bank effectively countermanded what has been agreed by the Cabinet, reportedly informing the government that releasing $209 million from the country’s reserves would put adverse pressure on the exchange rate and have grave macroeconomic consequences.

The Central Bank also maintained that it had an obligation to keep national foreign reserves at a level equivalent to four months’ cover, arguing that releasing the $209 million would cause reserves to fall below that threshold.

The upshot is that what had been touted as a novel formula for financing five large fast-track power projects has now unravelled, throwing the electricity sector in the medium term into more cycles of crisis management.

Although the Central Bank’s position is not without, merit, the whole saga has left observers wondering why the Central Bank did not caution the Cabinet before it made the decision.

Is it conceivable — considering the close connections between the Treasury and the Central Bank of Kenya — that CBK was not consulted at the time the former and the Ministry of Energy were preparing the Cabinet paper? The jury is out.

The projects whose implementation will now be delayed are Lake Turkana Wind Power (300MW), Kinangop Wind Power (100Mw) and three diesel plants, namely the Athi River-based Gulf Power (84MW), the Thika-based Menelec Power (252MW), Triumph Power (84MW) and the geothermal plant Ol Karia Power4 (54MW).

Turkana Wind was supposed to get state guarantees worth $52 million for six months’ worth of electricity it would supply in advance.

Kinangop Wind was to get the equivalent of three months of electricity supplies or $18 million. Ol Karia Power 4 was to get $14 million, equivalent to four months’ supplies and the three diesel plants were to get six months guaranteed capacity charge and the state would buy the diesel they would burn, all for $18 million.

The idea behind these guarantees is to hedge the risk that KPLC would be unable to pay on time, in which case the government would step in and clear the bills.

The World Bank also sells political risk insurance to cover such eventualities, which in Kenya have not in any case happened so far.

If these power producers trusted the finances of KPLC and the government, there would be no need for such guarantees.

These are projects that were chosen on the grounds that they had short implementation lead times. They were supposed to help the country end the power rationing that has become common every year.

The Treasury and the Ministry of Energy have been playing a ping-pong game on how to structure the guarantees for the IPPs for a long time.

Long before the Cabinet came out with the plan it unveiled in July, other Cabinet papers had been written but did not see the light of day because of lack of consensus within the government on the matter.

In fact, there was a time last year when a paper prepared by the Ministry of Energy could not be tabled before the Cabinet because the two ministries could not agree on the way forward.

In the initial stages, the proposal was to provide the IPPs sovereign guarantees. The Treasury came out strongly to oppose sovereign guarantees, saying that guaranteeing the projects in the manner suggested was bound to increase the public debt beyond what was in the interest of the country.

Kenya’s public debt has gradually come down from a peak of 65 per cent of GDP to 40 per cent in net present value terms.

If the government guaranteed the five large energy projects, went the argument, the country’s external exposure would surge and adversely impact its international credit rating. “We do not want to be a HIPC country,” a senior Treasury official had told The EastAfrican at that time.

Secondly, the Treasury officials pointed out that the law in Kenya does not provide for sovereign guarantees to privately owned entities such as IPPs.

As it turned out, the idea of sovereign guarantees for the projects was quietly dropped. It was against this backdrop that the scheme that the Central Bank has now shot down was crafted.

How events evolve in the coming months remains to be seen. The EastAfrican has learnt that the government has initiated discussions with the World Bank for guarantees either under the Bank’s Partial Risk Guarantee Facility (PRGF) or Multilateral Guarantee Agreement (MIGA).

As we went to press, top MIGA officials had arrived in Nairobi to commence negotiations.
The snag for the IPPs is that since World Bank negotiations tend to drag on, time-frames have to be changed and lengthened, forcing them into new negotiations to confirm or review terms agreed with supply creditors.

It has been the practice for IPPs, especially those financed on a project finance basis, and their lenders to demand guarantees to backstop payment obligations from state-owned utilities.

Such guarantees can range from open-ended sovereign guarantees of the utilities’ debt obligations to having three to six months of the utilities’ payment obligations to the IPPs.

Countries that have offered sovereign guarantees include Uganda (Bujagali Power project), Tanzania (IPTL), Nigeria (AES Barge) and Cote d’Ivoire (Takorodi II power project).

In Kenya, the first IPPs were not given sovereign guarantees. But the investors were offered a slew of sweeteners, including guaranteed cost of fuel, guarantees against market and credit risks and a pledge that KPLC would purchase all the output from the project whether or not it needed it.

Tsavo Power, the only project-financed IPP, was granted sovereign guarantees. The sweeteners for the project include an off-taker agreement where all payments for power from KPLC are lodged in an escrow account to mitigate delay in payments.

Even though government officials will not openly state it, it is clear that part of the reason why giving guarantees to such projects has been difficult has to do with the fear of abuse of the facilities by the sponsors of the projects.

A top government official, speaking on condition of anonymity, told The EastAfrican that by involving the World Bank, those who have been opposing the project are hoping that fresh due diligence will now be done on issues such as ownership of the five projects and transparency issues relating to the negotiation of power purchase agreements.

Meanwhile, Kenya must brace for a season of electricity supply interruptions as the acute electricity supply deficits in the national grid continue to worsen.

The latest signs of stress in the system were a series of loadshedding incidents in the month of October blamed by the Ministry of Energy on withdrawal of generation capacity for maintenance.

With KPLC connecting new customers at the rate of 200,000 per month, the gap between supply and demand has been expanding rapidly, with the consequence that any minor problem in the system results in loadshedding and rationing.