Rizwan Fazal, director of Lake Turkana Wind Power, speaks with John Crabb about the challenges of implementing a large renewable energy project in Kenya, the complexities of arranging financing and the role of government in ensuring the project’s survival
Let’s start by talking about the origins of the Lake Turkana Wind Power Project (LTWP). How did you first become involved?
I'm part of the founding group, I’m both the director of shareholders and I was the project finance advisor, which involved putting together the deal from financing, regulatory and technical points of view. In that role I was looking for legal counsel and various other advisors that were required for the team, that would eventually, over the years, put together the project.
Did you encounter any problems in the initial planning stages of the project?
If you consider the Kenyan energy sector, the penetration of energy is very, very low, at about 20%, and there is a lot of reliance, or there was a lot of reliance, on thermal power. Most of this is emergency thermal power, and we also have a very weak grid network in place.
Putting a wind farm in a place that is logistically very difficult to get to, it is 428 km away from the closest interconnect point for the grid system, is extremely challenging. Also from a logistical point of view the site is 1200 km from the sea port where the turbines and the rest of the equipment would arrive, and they would need to be transported.
The site is also 700 km from Nairobi, the capital city, so it is very, very isolated, in an area that is completely un-serviced. One problem that we have, in terms of the grid network, is making sure that the transmission line would be in place. Making sure that we can actually safely deliver the 300MW, which contributes 17% of Kenya's installed capacity, in a safe and reliable manner.
A project of this scale was a new and a novel concept in the Kenyan sector, so we were dealing with a regulator and an off taker that had never actually negotiated with, or dealt with, an IPP [independent power producer] that was generating wind power.
And what about financing, how straightforward was it to secure?
It took just over five years to put the financing in place, it's the single largest investment in Kenya's history. The debt is the largest that has been raised in the private sector for any project in Kenya to date, with approximately $625 million for total project costs just for the wind farm, excluding the transmission line, which is public sector. Out of that $450 million was from debt financing and the rest from equity.
The initial stages involved bringing on inboard an anchor lender, the African Development Bank, and then supplementing the lending group as we went along as we reached crucial milestones where you reach a point of bankability. It was difficult for a number of reasons, the sheer size of the project and the various technical challenges that I mentioned earlier on.
A lot of studies were required to demonstrate that the project would be able to; a, deliver power; b, deliver power safely to the system and c, could be constructed on time, given that it was the first multi-EPC contract not to be wrapped, so to speak.
So it was a very complicated process?
Yeah, it's a fairly complicated structure, it doesn't have one single point of contact, we have six contractors involved. We have the wind turbine supplier, Vestas. We have Siemens for the electrical grid network, and the hi-voltage substation. We have RXB from China that is doing the dynamic reactive power compensating system, simply called a stat-com, that makes sure that the power that comes out from the wind farm is safely integrated in to the grid, and at the same time removes any reactive power or harmonics that could damage the wind turbines in the reverse order.
We then had to build a 208 km public road for the contractors, and then because they are so far away we had to develop an infrastructure housing contract, and that was also separately negotiated. Getting that done, and then having a project manager that could actually put together the planning, the interface management and the coordination of the construction in such a way that the lenders would actually accept not having one primary point of responsibility was also quite a challenge from a lending point of view. But, we eventually got there.
Did you have a clear model for the financing from the outset?
We had an initial model during the feasibility stage. Of course it was not perfect, and as we went along we figured out that the lenders required more items. Because we were carrying out the various parts simultaneously there were many technical studies going on.
In the initial stages it was not anticipated that any problems would come from the technical integration, in other words the grid stability. When we eventually found the problem, it was something that could only be fixed from the off taker side, the distributors side or the transmission operators side.
But, given that they were public sector, we figured if they were to go ahead and fix the problem; a, we would not be able to control the time, or the quality, and b, it would be very unlikely that it would meet our deadlines. So we added on that kind of cost into the model, and obviously that grew. We originally forecasted the project at $475 million, and it closed at $625 million.
Was there any investment from any areas of the market that particularly surprised you?
I wouldn't say I was surprised, I think I would actually say the contrary. The investment came from all of the usual suspects in the African market, for most Sub-Saharan African deals it is usually the same players that we deal with. In that sense, we had everyone who we thought would be there.
Perhaps what was surprising is that there was almost nothing in terms of local financing from local banks, even if it were ancillary facilities or financing structures, not even down to a letter of credit, even that was not possible. That's just the nature of true project finance in the Sub-Sharan Africa market; north of the Kalahari and south of the Sahara, is just not evolved and therefore you have to rely on a lot of the international PFIs who typically play here.
How much of a setback was it when the World Bank pulled out of the project?
What was interesting is the way that the World Bank tried to get involved in the project in the first place, because typically the World Bank doesn't come into projects like this. They weren’t involved in the project in the end, it was an amicable parting but we didn't actually want them in you know, it was the best outcome for us to just say no.
And what about the involvement of the EIB; how did they get involved in the project?
One of the early lenders that we approached after the African Development Bank was the European Investment Bank. They are very active in the region, very active in the sector, know the market very well and were an obvious choice to turn to. At one stage they were almost the largest lender, when you look at the consolidated facility.
Was there any particular part of society that demonstrated the most involvement?
There were a number of parties that gave more than you would have expected. In no particular order; the Africa Development Bank was very steadfast and always believed in the project. They were the first ones to came on board in 2008, and they stood by the project even in its darkest days, and this project has had more than nine lives. They always stood by and always supported the project. At one point they went out of their way, making sure that they bridged a $25 million loan facility that was not available in the end from a debt point of view.
They came in with sub-debt, they came in with an enhanced facility, they facilitated the traditional loan structure to get around critical, structural, and financial engineering issues. When the world bank left, the rest of the lenders, particularly the two commercial banks who were piggy backing on the EIBs facilities, insisted on a political risk guarantee (PRG) structure for the delay in the transmission line, and the African Development Bank actually put together the first ever PRG structure.
Lake Turkana was the Guinea pig on that, but the African Development Bank worked tirelessly to make sure that it was in the right place to close this project, which is clearly an admirable element. They were slightly inefficient, but you overlook that in the grand scheme of things when you see their commitment, and they eventually came through.
The EIB was good, ETF was very good. ETF is the Danish export credit agency coming in on the back of IFU, who are one of the equity parties, and also Vestas. Vestas was also very good, because they agreed to come in as an equity player for 12.5% during the construction, and they will eventually be taken out by google, post construction, at actual cost.
Last year you denied rumours that Google was investing in the project. Was there any truth in that?
Well at that stage both Vestas and Google were in the process of final negotiations and discussions with LTWP, and as part of the confidentiality undertakings we were not permitted to speak about the proposed transaction. Also given that Google and Vestas are both listed companies, any statement could have had an impact on the market. Nothing had been signed and we knew that it was a work in progress, so we were not willing to say anything until there was a signature on the dotted line.
Google will buy out Vestas 12.5% stake at the time of actual project completion date, so they are not an equity player as yet. They are not a shareholder today, but there is an agreement that subject to the project finishing in accordance within its schedule and budget, on time, and with the transmission line being in place, and so long as the lenders grant the certificate for actual project completion, which is estimated to be in about two more years, then Google will step in to the shoes of Vestas and assume an equity participation in LTWP.
Legally, did you come across any stumbling blocks when choosing a location for the project?
There some issues, there are always lots of legal challenges in a project like this. The first step is to make sure that your project has all of the legal aspects that are required for the bankability of the project, given its location, size, and some of the technology that is involved.
The multi-pronged EPC land structure nature of the contract certainly made it a very legally challenging project from every angle. We had 13 lenders and seven equity parties, so if you think about the sheer financing structure and documentation involved in that, then yes, it was certainly very, very challenging.
What about the location itself, has that caused any problems?
Once you are at the site then it is just an offshore wind farm like any other, if I can use that as an analogy. It is remote and logistically difficult to get to, and once you're there it's no different to operating an off shore wind farm. Then you have to consider the land and community matters; Turkana is an area that has previously not seen that kind of investment or infrastructure being built, and that that poses its own legal challenges, especially when coupled with regulatory and political issues. You really have a hot bed of issues that you are dealing with.
So what role has the Kenyan government had in the project?
A number of roles, they have been very supportive over the years. In fact we've actually gone through three governments; we've gone through the Kibaki government, the grand coalition government, and then of course the current government. In terms of facilitation of the project, all three governments have been fantastic from a Kenyan perspective. This is not to say that we have not been frustrated or that it’s been a bed of roses, but on the whole we have always been able to work with and count on government support and commitment.
In terms of providing impetus, such as some required exemptions or undertakings, or with the participation of the development finance institutions and under various frameworks of the government, they have all been forthcoming. Naturally it is more in process, and in some cases conflict between policy makers and implementers, that we find stumbling blocks, and the government can do more to streamline this process for investors.
They have taken over the responsibility of the transmission line and they have allocated €32.5 million, out of the necessary €142.5 million of the construction costs, with the balance coming from the Spanish government. So they've also put their money where their mouth is.
In defence of the traditional notion that governments are a system of rent seekers, or that they are difficult to work with - the government has not been a stumbling block. That was never the problem, if anything they were always there for the project. The key problem was that projects of this scale simply get caught-up in a myriad of policy decisions that were designed for small or non-infrastructure sector related projects, and, we get bundled together, from a policy perspective, in that situation.
From a general regulatory point of view, and from a political point of view, that is where the aspect of risk comes in. When we started the project Kenya only had a national government, but in 2010, half way through the project, Kenya implemented a new constitution and adopted a system of devolved government. So whereas for three years prior to that we were dealing with a national government, whether it was matters of land or issues on site, suddenly we were dealing with both national and local governments.
So when the frustrations come out, it's more about the whole nature of the political landscape, from a national and devolved point of view, like who you deal with and who's word finally carries on the day. Those are the challenges, I wouldn't say frustrations, less steady, but more challenges.
The frustrations have probably come in some aspects of importation, tax exemption, and in terms of actually operationalising what was undertaken, given, or supported. So, we certainly have challenges in the implementation stage, but on the whole it would not have gone through without the government of Kenya's unwavering support, that much is clear.
Can you tell me more about Kenya Vision 30, and LTWPs involvement in it?
Vision 2030 is the brainchild of the Kibaki government and is the development programme covering the period 2008 to 2030. It is based on unlocking the potential of the economy and anchored on three key pillars; economic; social; and political governance. Therefore, from a policy perspective, the government is required to work towards what they call Vision 2030 goals. They are akin to the millennium development goals; electrification of x % of the total population by 2030, making clean water accessible to the citizens, and opening up new areas of trade and development.
For LTWP and Vision 2030, there was a mutual symbiotic relationship. The project would clearly contribute to Vision 2030 objectives and from the project perspective, the endorsement by Vision 2030 enabled us to be taken seriously by various arms of government that are slightly detached from the bigger picture, thus enabling LTWP to be treated as a flagship project for the Country.
Lake Turkana was considered to be a key driver of Vision 2030 for so many reasons, including politically, given its size and impact in an area of the country that was previously marginalised.
How important do you think it is for Kenya to reduce its reliance on imports and hydropower?
Incredibly. Lake Turkana will displace €120 million of imported fuel, every year. That is very significant, that is many months’ worth of import cover. There is a broad range of macroeconomic affects that arise from the domino effect of having cheap power; from the stability of the shilling, to increased pressure on interest rates mechanisms, inflation and currency accessibility. We have the cheapest power in the country, after geo-thermal, which is something of an anomaly because the geothermal cost is determined post-exploration, whereas ours includes the whole spectrum. So it is a fairly important project in that respect.
If it were up to you, are there any specific rules or regulations related to the energy industry that you would like to see changed in Kenya?
There are a number. If you start from the strap in terms of the PPA (power purchase agreement), it took us many years to negotiate, and if I was a regulator I would make sure that there was a largely coordinated and standardised power purchase agreement, so that you don't spend years and million in negotiations. Of course you can't have it perfect, and it can’t be the same for every project because of project specific issues, but that is number one.
Number two, in terms of spurring investment in the country there are a myriad of rules and regulations, some which were proposed that are there for reasons that are completely unknown, or may have been put there to stop a certain loophole that was being exploited in another sector. It results in particular project, or projects of this nature, suffering the consequences of ill devised or not clearly articulated legislation. The tax exemption is a classic example, the law provides for certain things, interpretations say something else, practice is something else, and eventually you find a solution which is something else- and then the operationalising of that is something else entirely.
Let’s talk about legal counsel, for how much of your work do you use external counsel, and for what sort of work do you need them for?
Largely from the project side we used Allen & Overy, and then the local counsel that they oversaw was Anjarwalla & Khanna, as part of the Africa Legal Network (ALN), and the international counsel for the lenders was Trinity International. The ALN was responsible for local law matters, so land, PPA in terms of local law aspects, but not necessarily the more industry focused international law practice, which was Allen & Overy.
In terms of counsel on the whole, I can’t even imagine how many firms from all over the world were involved in this project. Just in Kenya for example, every contractor required a different firm for local legal counsel.
When you do work with external counsel, are there any firms that particularly stand out?
We’ve worked with the best of the best in the market, and everyone has generally faired very, very well. So the question is: which one really went out of their way, and without whom would this project not have closed?
We chose A&O and we have a fantastic relationship as far as I'm concerned, and the project is concerned. They were superb, and lived up to its high repute of a providing a very good, bespoke service. They did not delay the contract negotiations, they focused on the key issues and delivered to us exactly what was required.
From a financing point of view the benefit came from them having worked with many of the parties or lenders on the other side of the table, so knowing how they work and where you can press the buttons- it was invaluable. It was Tim Scales’ team with Shaun Beaton and the rest of the group, they were always accessible and always available to provide advice, which was great.
Of course, they were excellent, but many other firms also did a very good job. Trinity started off a little bit dramatic in terms of trying to hype up the risk of the project to the lenders, but Kaushik Ray in particular, who is a partner there, and previously at A&O, was outstanding. It takes that individual lawyer to pull together from the lenders side, and he was very, very good in terms of working with the A&O team and making sure that you know you didn't end up with pedantic lawyer fighting, or trying to establish who is better than the other.
Kaushik from Trinity was certainly very pragmatic and worked very well with A&O, and I would actually say that from an international counsel point of view, together, they made this deal.
How do you choose your external legal counsel?
Well obviously our domestic firms don't have the capacity. In Kenya the market is very regulated from a legal perspective, international law firms are not allowed to set up shop in Kenya, you have to be a local firm. It's only now that you are seeing tie ups, but still no international law firm presence.
No Kenyan law firm has the capacity, I would dare say that Anjarwalla learnt a lot on the job, but had no clue about what project financing was, save for the word, when they started this project. Today they may be able to say they understand project finance, but seven years ago not a single Kenyan law firm understood what the term project finance was, and what it entails.
We had relatively little choice in terms of local counsel, but in terms of international of course, we had the wide spectrum of magic circle firms to choose from. We met many of them, but in addition to the zeal and passion that was demonstrated by Allen & Overy, and the knowledge that they have of the market, they really understood the challenges that we were going to face. Their initial talking point about how we would get around those issues, was very impressive, it wasn’t just a pitch, it was let’s sit down and brainstorm the project, whoever you choose is up to you.
For a very client centric, pragmatic approach to legal solutions, coupled with commercial acumen and the bespoke knowledge that they have, they stood out from among the rest, and I daresay that if I had to do it again, I would go back to them.
We asked a lot of questions during the financing arrangements, but now that we are half way through construction, and I get to pick what was negotiated in the EPC contract or financing documents, I really appreciate now why some things were insisted on upon by Allen & Overy. Even though we may have felt at the time, why don't we just leave it this away? The analysis at that time was sound, and has been proven, and tested in practice.
What are your key criteria when selecting external counsel?
Knowledge of the market is very important, and you want to be able to deal with partners, people who know their job, who run teams that are multi-focused and multi-skilled. When we were dealing with A&O, if we were dealing with an IP matter, they would draw in someone from London's IP team, if it was a derivatives matter, we knew that a separate team would immediately be brought in and I wouldn't have to start from scratch in terms of bringing everyone up to speed. It was done internally and you are dealing with one firm, one team, and everything else just comes together.
Cost is of course an issue, international counsel are expensive, and on a project of this size we spent a lot of money on legal fees. In the end, you have to balance between value added vs. spending a lot of money in the early stages of development on legal fees, or other more important matters that need to be determined, and ascertained for bankability.
Their tie up and local knowledge of the market is incredible, as is their ability to be commercial whilst at the same time meticulous. In the African or Sub-Saharan African project finance sphere what is generally accepted in other part of the world cannot be taken for granted here, and you have to really think through certain issues. So when I’m looking for law firms, I’m not looking for someone who can graft, I'm not looking for something who thinks that they win negotiations, I’m looking for someone who can look through the document, look through the project issues, and say, if you are faced with an issue like this, these are, in our experience, the various options that you will have. In determining that this is how they will get across the message from a legal perspective, this to me is where Allen & Overy shone.
How do you see the legal market in Kenya, do you think that the presence of international firms is likely to go?
There is no choice, I mean you can't be an island and at the same time want to participate in global affairs. There are a lot of international law firms that have already made either formal, or informal ties, with local law firms. There are many London law firms that are already involved in the market, and it's only a matter of time before the market will be opened up, I dare say.
I doubt another two years will pass before we see the rules and the regulations change, they are already in the process of discussions. There is of course resistance and lobbying from the local domestic firms, but that will not last long, and it won’t have a dramatic impact on the outcome.
What you have is the old boys club in Kenya, like in similar markets, and you know you are not spoilt for choice in terms of quality and bespoke advice, but still everyone thinks that they are very good, and charges a lot. In some cases some local law firms are even more expensive than magic circle law firms, and they can shrug it off by saying 'what choice do you have, we are the best among the worst?'
Do you think the recent trend of consolidation within the market is going to continue?
Absolutely, there is no question about it.
How do you see the Kenyan energy sector changing in the coming years?
The Kenyan energy sector is very politically driven. Kenya has an ambition to put five to 10,000MW of power into the grid over the next 10 or 12 years. The gestation period of projects is six or seven years, so first of all the ambition to get that much power in to the system is unrealistic, and over ambitious. On the other hand, that may not be a bad thing because I do not believe that there is a demand at the moment, nor will there be in five to six years, for five to 10MW. In this quagmire you now have a situation where everyone is scrambling if you have a PPA, or if you have an energy project, because nowadays that seems to be what is sexy from an infrastructure point of view.
Therein lies the problem because you are not going to find funding, the market's going to be overloaded with power and the gestation periods are very long. So what you tend to see is that smaller, less viable projects actually make it, and when I say less viable, the project is ok and will operate fine- it will generate power. It takes the same efforts to close a 10MW as a 1000MW project, except for the scale of the numbers, and what happens is you are going to find that the projects that actually make it, are not necessarily the best suited from a macro-economic or from a geo-political point of view.
If you know how to get your way through the system, you'll probably get your projects done. Once you are there, you have displaced some other projects, because not everyone can get through, and that other project might actually be the one that is more viable, and better in the long term.
How is the energy sector going to change? We’re going we’ve been dominant players in terms of KenGen coming up as the largest IPP as it is, and consolidating their base in geothermal. We are going to see political pressures on coal projects, and whether that is viable or not I am not qualified to say. We are going to see a lot of the Chinese players coming into projects, again driven mainly by geopolitical issues.
That's what you are going to see; it's a flurry of activity, but I am not sure how many will close to be honest.
Why don't you think they will close?
For all of the reasons I mentioned, if you want to make a 1000MW coal plant, it's not simply putting 1000MW in to the system, you have to get it out to market. Will you be able to raise the money with all the issues surrounding it, by interrupting the clean energy drive that is centred on geothermal in terms of over exploitation? Some projects have been pushed up politically rather than economically, and there are a lot of issues that will eventually catch up with these projects.
Has this project set any useful precedents for any similar developments in the future?
Yes and no. I think on a larger scale, so a bird eye point of view, when you do a project of this size, facing the challenges and the using the structures that we went through, a signal that gets sent out that the market is mature and can handle this kind of complicated project, and everyone gets excited.
On the other hand people will also understand that other markets are easier to work in, and they will also learn from our frustrations and our issues. Certain people coming into the market are going to be very cautious about the whole resolution; it has been a problem for the last few, because some aspects are going to be very boring they can get some perspective on issues of land and communities, on expectation management, the role of government, strength of undertaking, and so on. A lot of those are going to be put to test, but if the question is: ‘It going to be easier to do projects because of Lake Turkana?’ For private sector players, I think the answer is no, because the bar is always raised with every subsequent protocol.
Finally, are there any further projects for your company in the pipeline in the next few years?
I mean the site is large and the wind resource is huge, so as and when the opportunity to expand the project to the next phase, or subsequent phases, arises, both from a regulatory demand and a political shareholder perspective, we certainly have the will, but we will have to make that decision at the time. I guess the priority is to get the project to be commissioned, in time.
Lake Turkana Wind Power
Rizwan Fazal is the director and chairperson of the risk and audit committee of Lake Turkana Wind Power in Kenya. He was responsible for overseeing the activities of a consortium of equity investors in the 300MW Lake Turkana Wind Power project.
Fazal has 18 years of corporate, project and structured finance experience. In project finance, he specialises in risk identification and mitigation, and debt and equity structuring.
Fazal’s Previous positions include executive management roles at Stanbic Bank, ABN AMRO and First American Bank, and he was head of PricewaterhouseCoopers’ infrastructure finance team in Sub-Saharan Africa.