By Peter Reat Gatkuoth
May 4, 2019 (SSNA) — The Republic of South Sudan is endowed with abundant Renewable Energy Resources like Biomass, Solar, Wind, Geothermal and Hydro. However, despite the abundance of such resources in the country, most of these resources are not exploited due to absence of appropriate project finance mechanisms and problems created by the traditional method of project development and funding.
In order to alleviate such an issue, the government of the Republic of South Sudan has to adopt Build, Operate and Transfer (B.O.T) model to exploit the renewable energy resources available in the country. This paper seeks to analyze the renewable energy program in the Republic of South Sudan and the B.O.T model of project financing, associated risks, lessons, recommendations and underlying issues therein.
The author admits that the country may suffers energy constraints if effort is not taken to ease the high demands of power. Lack of adequate and reliable power has consistently been cited as a major constraint to South Sudan’s economic growth. Therefore, investing in renewable energy projects appears to be a silver bullet to address energy constraints in the Republic of South Sudan.
South Sudan is an infant nation that joined the United Nations as the 193rd member of states. The new nation is located in East-Central Africa. It is a landlocked country that borders six countries. Ethiopia in the East, Central Africa in the west, Sudan in the North and Kenya, Uganda and DRC in the South. Prior to the independence, it was part of the Republic of Sudan. The history of Republic of South Sudan is identified more by conflict and violent; itself is the product of conflict with the Northern Sudan which was resolved through the peaceful agreement in 2005.
The Republic of South Sudan has a total primary energy consumption of 0.0682 quadrillion Btu which equals 16.62 Mio tons of oil equivalency. Sixty-five percentage (65%) of the total primary energy consumption is generated from biomass which can be generated from firewood (69.6%), charcoal (14.6%) and crop residues 3.5% (Ayre J, 2016). Electricity is contributing only 2.6% to the national energy balance while oil products which are mainly used for vehicles and thermal power plants account for the remaining 9.7%. The Republic of South Sudan has installed capacity of 711 MW, consisting of hydropower (582 MW; 71%).
Source: Ministry of Finance and Economic Development (JUBA)
The Republic of South Sudan depends on biofuel and petroleum products from the oil and gas sector. By the end of the year 2016, the Republic of South Sudan had to import 2,156,782 TOES. Regarding electrical power generation, hydropower accounts for about 26% of the total installed capacity of 422 MW. The actual total electricity capacity is 330 MW and the country’s peak demand is about an estimate of 489 MW. Essentially, the hydro- power plants in the Republic of South Sudan have a low operation cost but their initial cost is very high. These are divided into high and low depending on the level of their capacity generation. It comprises classifications that have no internationally established consensus. It sometimes depends on jurisdiction to jurisdiction with an acceptable rule of thumb of up to 10 MW for small hydro which is the norm for the European Small Hydropower Association (ESHA) and the International Network on Small Hydropower (INSHP).
The Republic of South Sudan has exhibited high potential and impetus to generate power from renewable energy resource. In order to archive such goals; the government has to launch various renewable energy programs and initiate partnership agendas with different countries such as Congo, Sudan, Ethiopia, Uganda, and Kenya’s Geothermal Development Company (GDC) to assist the country in exploring and developing its own geothermal energy source.
Power supply in Juba, the capital city of the Republic of South Sudan is estimated at 17 MW (10 MW operational) installed diesel power plant and it distributed 11 kV and 415/230-volt networks. It has been further reported that power supply is too weak due to shortage of generation to meet demand. There has been a repeatedly reports of marginal capacities of the distribution system to supply new customers; and high losses in the distribution networks due to poor and low levels of power (SSAFTA, 2017). In most cases, the supply of the power is resulted in supply constraint leading to forced blackouts and load shedding in the country. Most households and businesses are supplied from constrained, costly and unreliable captive power generation which has affected the quality of life, delivery of services and restrained business development in and around Juba (SSAFTA, 2017).
In order to address the problem of continued load-shedding and power constraints in the country, the Republic of South Sudan further launched South Sudan Development Plan (SSDP) as a mechanism to balance energy mix and guarantee security of supply of energy needs in the country (SSAFTA, 2017). The program is intended to assess among other issues, electricity supply networks in South Sudan (SSD). Hence, there has been a lot of challenges which include shortage in generation and weakness of distribution networks. The program also considers the reformation of Juba Power Generation Station and Juba Power Distribution system as a move to improve electricity supply in the city (SSAFTA, 2017).
Additionally, the world Bank in collaboration with other stake holders in the energy sector of the Republic of South Sudan established South Sudan Infrastructure Action Plan (SSIAP) which reinforced the SSDP findings and proposed, among others, the development of Fula Rapids Hydropower Plant (HPP) and rehabilitation of Juba electricity networks in order to improve the power supply in the city in the short-to-medium term (SSAFTA, 2017). The project in question gave rise to two other joint projects like the Juba Power System Diagnostic, funded by International Finance Corporation (IFC) and Electricity Distribution in Juba and Torit (funded by Norfund).
All these projects were conducted in the year 2012. Analysts and authors contended that all these programs have complied with all environmental and regulatory requirements.
|Area||Units||Capacity per unit||Total capacity||Comments|
|8||1.5 Megawatts (Mw)||12 Mw||Operational|
|5||1 Mw||8 Mw||Not operational|
|Malakal||6||0.8 Mw||4.8 Mw||Operational|
|Wau||2||1 Mw||2 Mw||Operational|
|Bor||2||1 Mw||2 Mw||Under construction|
|Yambio||2||1 Mw||2 Mw||Under construction|
|Rumbek||2||1 Mw||2 Mw||Under construction|
|Renk||S/Station||40 megavolt amperes
Source: Ministry of Energy, Petroleum and Mining (Republic of South Sudan
Fundamentally, the Republic of South Sudan has not enacted an integrated energy law to govern the exploitation of renewable resource. The overall energy sector policies and objectives are set out in the National 11th-five (5) year plan with more details in the subsequent sub-policies. The medium-term framework provides for Poverty reduction and economic development of South Sudan towards achieving its vision 2040. Through the implementation of the said strategic plan, the government seeks to support and encourage national development to archive the following energy objectives.
- Archive annual GDP growth of 5.6% with the goal of doubling the GDP Percapita by 2040
- Reduce energy consumption per-unit of GDP by 20% and total discharge of major pollutants by 10% by 2040. The average energy saving rate should be 4.4% with total MTC saved during this period. It should be noted that the country made these goals mandatory and binding to both the central and local government.
South Sudan’s 11-5 Year plan is detailed in its subsequent policy of Medium to long term conservation plan. The sub policy seeks to set up detailed energy conservation targets in archiving micro-management goals. The plan further calls for an ambitious investment program of USD 700 million for the energy sector aimed at more than doubling the number of customers and tripling the total installed generation capacity of the country. The South Sudan National Development plan also calls for electrification of all 10 state capitals, expansion of the local distribution networks and installation of the regional interconnections.
Long duration of the projects
Renewable energy technologies by their nature have high up-front costs and low ongoing operating costs. Making access to long term funding for such projects is a necessity in order to spread the period of repayment of funds. Unfortunately, in many developing countries like South Sudan, financial institutions find it difficult and sometimes impossible to finance such project with a very long lifespan. They prefer to finance projects with a short lifespan in order to recover their funds within the shortest possible time. This is because the financial institutions lack experience with renewable energy technologies and are therefore unable to assess the risk involved.
Limited Recourse Nature of Project Financing
Renewable energy technology projects seek access to funds on a project finance basis. The security for the loan comes from future project cash flows and with no up-front collateral being required from the project sponsor. The project sponsor has no limited direct legal obligation to repay the project debt or make payments if the project cash flows prove inadequate to service the debt. Financial institutions in South Sudan are not willing to lend on a project finance basis.
High exposure to Risks
Renewable energy projects are quite vulnerable to risks such as political risks, technological risks, construction risks, operational risks, market risks and environmental risks. Most banks in South Sudan will prefer to lend to projects with – less risks or where the risks have been mitigated.
The size of the projects
Most renewable energy projects in developing countries like South Sudan are small in size. This creates significant problems in obtaining private financing. Economies of scale in due diligence are significant, and many larger financial institutions will be unwilling to consider small projects. Smaller projects may apply for loans from domestic and regional banks, operating in smaller economies particularly where they lack the resources themselves to make large-scale loans. Even the larger grid-connected renewable energy projects are generally smaller than their conventional counterparts. As a result, they often struggle to attract funding from larger financiers.
Limited Technical and Institutional Capacity
There is limited technical and institutional capacity in both the public and private sector to implement and manage renewable energy investments. Most financial institutions do not understand renewable energy technologies and the possible associated risks. Because of knowledge gap, they are not prepared to finance renewable energy projects.
Lack of an integrated Energy law
Fundamentally, the Republic of South Sudan has not enacted an integrated energy law to govern the exploitation of renewable resource. The overall energy sector policies and objectives are set out in the National 11th – five (5) year plan with more details in the subsequent sub-policies. Ideally a renewable project should be implemented under a transparent and enforceable legal framework. Project sponsors and lenders should be in a position where the rights and obligations which have been negotiated and set out in the relevant project documents can be enforced ultimately through the local courts. In cases where project financiers are unsure about the factors listed above; this can be a real handicap in obtaining limited recourse financing where the ability to enforce complex contracts against government-owned entity is the underlying security available to lenders.
B.O.T as a Model of project financing
“Build–operate–transfer is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, own, and operate a facility stated in the concession contract. A private party or concessionaire retains a concession for a fix period from a public party, called principle (clients) for the development and operation of public facility” (Seijaka S, 2011). Many renewable energy projects around the world are structured on the BOT model. This usually involves the government granting a concession or license to the project company to construct, finance, operate and maintain a facility over a period of the concession before finally transferring a fully operational facility to the government at no cost. During the concession period, the project company owns and operates the facility and collects revenue in order to repay the financing and investment costs. The development consists of the financing, design and construction of the facility, managing and maintaining the facility adequately and making it sufficiently profitable.
The advantage of using a concession in renewable energy Financing is that the government will not borrow money for the project. This reduces the constraint on public borrowing and frees funds for other projects. It is also a way of attracting Foreign Investments and technology (Seijaka S, 2011). Under the BOT structure, the government has to agree to compensate the project company against certain risks such as un-insurable force majeure risks and changes in the law. The government should also grant tax concessions or holidays. This makes the structure attractive to financial institutions and therefore bankable. In Uganda for instance, the Bujagali power project was developed, financed, constructed and maintained by Bujagali Energy Ltd (BEL) on a BOT basis. BEL is a special purpose companies incorporated in Uganda and privately owned by Industrial Promotions Services (Kenya) Ltd (IPS (K)). BEL is to sell the electricity to Uganda Electricity Transmission Company Ltd, under a 30-year Power Purchase Agreement. Ideally after the 30 years; the project will be transferred to the government of Uganda (Kabanda, 2011).
Risks in B.O.T, Projects.
Political Risks in B.O.T projects arise from government policy that substantially impair and threatens the profitability of a projects. Analysts and authors contend that the concept of political risk involves any changes in the atmosphere of a Host Government (HG) that may threaten and affect the life cycle of the project (Kabanda, 2011). Political risk may also comprise an outbreak of war or strife at the location of the investment, expropriation, currency transfer restriction based on political motives; unstable political and legal regime, lack of support from government and political violence. However, it must be noted that this kind of risk is not confined to the most unstable system in the developing world and it’s a mistake to simplify political risks into only the regimes in the developing countries (Kabanda, 2011).
Essentially, regulatory risks involve changes in the law, rules and regulations that govern the basis and operation of a particular projects. At the time of investment, the existing laws might be favorable to the terms of the contract. However due to the long-time duration of some of these projects, any slight or substantial change in the legislation may affect and substantially impair the core investment of a project. Regulatory risk is common in renewable energy projects because such projects have a long-life cycle and attract huge sums of investment (Kabanda, 2011). The research conducted by different authors reveals that regulatory risk is a major concern in the B.O.T projects by investors and project sponsors because of the core impact they have on the operation of the project.
In a B.O.T project, the operator is the company or entity charged with the responsibility of maintaining the quality of the assets that generate the project’s cash flow. Off course, lenders and investors want to make sure that the assets remain productive through the life of the project or more importantly from their perspective. The operational risk arises where the agent fails or does not monitor the performance of the project, hence exposing the other banks to the risk of the project due to poor supervision by the agent bank (Global Project Finance, 2011).
Though B.O.T projects focus on the Cash-flow of the project, and not the balance sheet of the project or credit worthiness of the sponsors, lenders and project financiers in a B.O.T projects would still need to access the credibility and trustworthiness of project sponsors to ensure that they meet their cash calls and obligations; for if they fail it would impact on the project and actual investments (Global Project Finance, 2011).
Contract price Risk
In B.O.T projects, developers may face a contract price risk which may have repercussions not only on the ultimate construction cost but also on the economic merit of the project and its profitability (Global Pr. Fin, 2011). The sums originally intended to cover the investment costs, may not be adequate to meet the CPA as well and a new round of financial negotiations may have to be embarked on, possibly, in the face of considerable resistance from parties providing funds (Global Proj. Fin, 2011).
This technical risk is based on technicalities that may affect and have an impact on the project. Among other things, technical risk involves the construction difficulties like equipment breakdown, completion delays due to change in project structure/design and operation risks. Some of these technical risks are fallout from other risks (kabanda, 2011). For example, completion delay can be due to undue interference from the government, delay in funding, lack of peace and stability at the investment location (Kabanda, 2011). Technical risks are common in all B.O.T projects particularly in renewable energy project like Hydro-power projects. In Uganda the Bujagali power project was developed, financed, constructed and maintained by Bujagali Energy Ltd (BEL) on a BOT basis. BEL is special purpose companies incorporated in Uganda and privately owned by Industrial Promotions Services (Kenya) Ltd (IPS (K)). However, the research indicated technical risk as a major problem that has hindered and halted the operation of the project.
Addressing risks in B.O.T projects means risk management, which is the Identification, analysis and resolution of risks followed by the coordinated and economical application of resources to minimize, monitor and control the probability of any event that may affect the progress and operation of a project. Risk identification in renewable energy projects can be quantified as the product of various strategic pressure that hinders and halt the progress of a project. There are number of techniques that can be used to identify risks in renewable energy projects and these are; (a) Physical inspection, (b) Flow charts (c) fault trees (d) Hazard indices among other techniques (Kabanda, 2011).
Using finite resources to create lasting benefit to South Sudanese
The government through the energy regulatory agencies/authorities on behalf of the country should opt for strategies designed to use finite resource sparingly. Archiving such benefit can be through using the resources to develop competencies through education, infrastructure development together with financial and social capital that can extend even beyond production and decommissioning of the field. Furthermore, both the regulatory authorities and international Company (IC) should take into account the basic principle of intergeneration equity, that is to say, by utilizing the resource not only for the current; but also for the future benefit. The activities of the current generation should not put a burden on future generations especially with regard to depletion of none renewable resources.
Enact a comprehensive energy law
Like the Republic of Uganda, South Sudan should enact a comprehensive energy law to govern the exploitation of Renewable Energy Resource. In support of this assertion, Uganda passed the Energy policy/Law in 2002 with precise provisions related to exploitation of Renewable Resource. The policy recognizes Regulatory Best Practice (RBP) as the cornerstone for Government’s institutional reform policy. RBP is based on the principle that a regulatory agency should be separated and has to be independent from the entities being regulated as discussed previously.
The author maintains that the Republic of South Sudan has not enacted an integrated energy law to govern the exploitation of renewable resource. The overall energy sector policies and objectives are set out in the National 11th-five (5) year plan with more details in the subsequent sub-policies. This puts the country at risk and therefore copying and learning from Uganda’s existing legal regime would be the best option for the Republic of South Sudan to successfully exploit her renewable resource.
While the full regulatory process gets underway, there are less costly measures that government can adopt including a requirement for energy regulatory agencies to develop local safety and health policies in tandem with the existing local laws. All international companies operating in the South Sudan have safety and health policies. These Policies are not contextualized to reflect the local legal and operating regime. In addition, the research reveals that the policy and legal provisions in the Republic of South Sudan are not explicit in setting the necessary support mechanisms for workers in the energy sector to organize themselves in a Trade Union. It’s therefore recommended that the key institutions of government should encourage and facilitate workers in the energy sector to form Workers Union as part of the efforts to ensure a successful regulatory regime.
Capacity and Institutional Building
Like the Republic of Uganda, South Sudan should consider the notion of National Capacity Building as essential in order to enable the country fund renewable energy projects successfully. The government should put more concern on programs designed to enhance economic development and transformation as a tool to archive Development, Sustainability, endurance and financial prosperity. Economic Development and transformation must put more focus on development of infrastructure necessary in archiving the desired goals in line with 2020 South Sudan’s vision and strategies.
Incorporate other primary energy sources.
The Republic of South Sudan lean to incorporate other primary energy sources to the electricity mix and support the government plan to divert some crude oil into electricity generation. Prioritizing emergency stock piling especially given the current existing socio-political crisis and being a landlocked country; the lack of access to ports became major challenges for the development of primary energy resources. Strengthening the integral management of the water basins in a way that builds both energy (through hydroelectricity) and ecosystem resilience through the already set out Nile Basin initiative and the South Sudan Water Policy can help the government and the society at large to benefits from the energy resources.
Use an appropriate financing structure
From the discussion above, the most appropriate renewable energy financing structure for large on grid projects in South Sudan is the B.O.T (Build-Operate-Transfer) since it reduces the constraint on public borrowing. It frees funds for other projects, and it is also a way of attracting foreign investments and technology into South Sudan. The risk to the lenders is adequately mitigated by the government guarantees and the Power Purchase Agreement. In the case of small scale off grid power projects like solar; leasing is the most appropriate structure since it allows for easy acquisition of machinery for domestic and commercial use.
Given the political sensitivity of many power generation projects and the fact that government agencies are likely to be involved, projects can rarely be treated as ordinary commercial developments albeit on a larger scale. In order to ensure bankability of renewable energy projects, there is a need for government of Republic of South Sudan to support the country’s renewable energy projects. This support can be in the form of budgets, approvals, letters of support or guarantees of the debtor’s obligations. In this way, renewable energy projects would become attractive to financial institutions since some risks would have been mitigated.
Mitigation of Risks
There is need to put in place mitigation mechanisms for the risks associated with renewable energy financing. In the case of political risks, insurance cover may be available from multilateral agencies such as the Multilateral Investment Guarantee Agency (MIGA) or Africa Trade Indemnity (ATI), both associated with the World Bank. The other risks can be insured by the national insurance companies.
In order for the Republic of South Sudan to take full benefit of its Renewable Energy potential, sound project finance structures need to be put in place to enable project developers secure funds from financial institutions to invest in renewable energy. While different finance structures exist, the most appropriate structure for large hydro power projects in South Sudan is the B.O.T model. For small scale power projects, it is the lease contracts model. The role of the government is critical since it creates the enabling environment for project financing by way of putting in place policy and legislative framework; and in some cases, guaranteeing and protecting against risks.
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Peter Reat Gatkuoth is a citizen of South Sudan and member of Jonglei Federation Society in diaspora. Please don’t hesitate to reach him at email@example.com.