1. Africa Utility Week 05 Challenges of Undertaking an IPP in South Africa as a PPP James Aiello 17 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