Contents

1. Africa Utility Week 05Challenges of Undertakingan IPP in South Africa as a PPPJames Aiello17 May 2005

2. Contents • Introduction to PPPs in South Africa • Legislation and Regulations • Motivation for IPPs as PPPs • Challenges • Institution • Feasibility Study • Affordability • Value for Money • Transfer of Significant Risks • The Way Forward

3. Introduction to PPPs in South Africa • South Africa has established firm regulatory framework in which national and provincial governments can enter into public-private partnership agreements (PPPs) • Based on UK, Australian, New Zealand & Canadian experiences • PPP is a: • Written contract between government and a private sector entity • Whereby private sector entity performs a government service • And receives a fee for so doing • In circumstances demonstrating affordability to government, value for money and the transfer of significant risk to the private sector

4. Legislation and Regulations • Public Finance and Management Act (No. 1 of 1999) • Aims to modernise system of financial management in Public Sector • Is a fundamental break from past regime • Is the basis for more effective governance framework • Enables public sector managers to manage, but are accountable • Ensures timely provision of quality information • Eliminates waste and corruption in use of public assets • Empowers Minister to enact appropriate regulations • Provides for the creation of the National Treasury’s PPP Unit

5. Regulation 16 • Regulates PPPs at the provincial and national level • Defines a PPP • Sets forth the processes by which PPPs are procured • Project inceptions • Feasibility study – TA I • Demonstration of affordability • Demonstration of value for money • Description of risk allocation between government and the private sector • PPP Unit has published PPP Guidelines • Are “Instructions” to government institutions • Compliance required to achieve Treasury Approvals

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7. Motivation for IPPs and PPPs • South Africa wants 30% of new power from IPPs • Not to introduce competition into electricity production per se • Purpose is to provide needed energy quickly • Currently not enough peaking capacity • Mining growth, beneficiation will require • Reserve capacity below international standards (>15%) • Will require 1000 MW each year from 2007 – 2010 • Fuel diversity/security important, but not determinative • Currently in midst of procurement for 1000 MW via OCGT

8. Motivation for IPPs and PPPs, continued • Fiscus cannot afford to build required additional supply • Want private sector to finance • International best practices = IPP • PPP processes in place • Provide a structure for procurement • Provide disciplined approach • If current project successful, provides important model • Additional benefits: • Black Employment Equity • SMME development • Skills transfer and training • Local economic development

9. Challenges • Institution • PPP definition: “perform government service” • Typical PPP has private sector undertaking a sponsor’s service • Project Sponsor is Department of Minerals & Energy (DME) • DME is not currently providing electricity services • Authority of DME to procure new electricity generation capacity • Eskom’s mandate • Eskom’s role in an IPP • Cabinet Memorandum as mandate • Legislation pending – out for public comment

10. Challenges, continued • Affordability • Treasury Requirement • Affordable to the sponsoring institution • Affordability to whom? • South Africa as a whole • Ultimate users of the energy • Compared to what standard? • If Eskom – what about government subsidies? • IPPs can be more expensive • Peaking plants more expensive

11. Challenges, continued • Value for Money • PPP Guidelines: • Cheaper (out of pocket), over life of project, for private sector to do than for institution to undertake • Involves identification and quantification of risks allocated to private sector • Since DME is not going to be out of pocket, with what institution is comparison made? • Eskom pretty efficient at building and operating electricity generating plants

12. Challenges, continued • PPP Guidelines permit consideration of Qualitative factors • Cabinet wants it • Other considerations important • Fiscus • BEE • SMME • Skills Transfer • Fuel Diversity • Immediate generation capacity gap dictates

13. Challenges, continued • Transfer of Significant Risks: • Typical PPP transfers risks from Institution to Private Sector • Here, Institution (DME) not bearing risks in the first instance • Ultimate risk take is the Off-Taker – Eskom • Risk allocation typically important to Financial Institution • Check balance sheet of SPV members • Assume Institution will want to continue to provide service • Here, Lenders will want commitment government will want to continue to provide service

14. The Way Forward • Current OCGT IPP: • Seeking TA IIA approval • Preparation of procurement documents • Request For Qualifications • Formation of SPV • Short-listing qualified SPV • TA IIB is next • Allows negotiation with preferred bidder • TA III – Treasury Approval of negotiated agreement

15. Concluding Remarks • PPP process is being “bent” to accommodate IPPs • Not only instance, however: • Direct agreement between mine & province • Eco-tourism projects • Anticipate further analysis & motivation for adjustment of the PPP processes to allow the current project to go forward • Goal, as indicated, to develop an IPP Template for use going forward • Watch this space.

16. Thank you Questions/Comments James Aiello PricewaterhouseCoopers 011 797 5077 james.aiello@za.pwc.com