Ignoring the risks of entering into a competition without doing the right preparation may have dealt a savage knockout blow to the hopes of developers wanting to enjoy the first round of a major growth in renewable energy in Egypt. Those wanting to enter other markets in Africa and elsewhere should take note.
The troubled developments have had warning signs written over them from the outset and those advisors who urged caution have had their disparaged conservative views vindicated. So what has happened? The basic paradigm of good commercial decision making has been overlooked through assumption and optimism which was unfounded.
Initial questions to the officials in the programme elicited responses which raised strong concerns around a detailed road map for completion, circular requirements for completing the PPA and Financial Close and an absence of commitment that tax and tariff rates would not be changed in the future. The concern over currency protection escalated and the IFI based investors could not accept a domestic arbitration clause, which the government bizarrely held out for despite accepting international arbitration in other projects. The weakness of the Egyptian Economy left the country in need of IMF and World Bank support which was not available without concessions from the government over currency regulations and arbitration provisions and a more realistic approach to tariff setting given current market pricing.
The core problem was the tariff. After the huge drop in tariff seen in the UAE and round two in Jordan and the levelised cost comparison in comparable states to Egypt the government became exposed to an over generous tariff for round one which would then expose the country to potential profiteering at the expense of investors.
The announcement last week that the IMF is in the final round of discussions on $12Bn facility for Egypt is great news but there is less publicised news that the government has told round one developers that unless they bring external investment for eighty-five percent of the funding their projects cannot go ahead. The projects affected have the round one tariff and some are balance sheet financed or have agreed local finance. An offer to others in round one who want to transfer their project into round two has been made but the tariff for round two will be reduced. The benefit in round two will be the availability of currency stabilisation through the IMF initiatives and arbitration provisions which protect investors under treaty provisions for investment by IFI bodies and others.
The rush to participate in round one overlooked the lack of detailed preparation by the government and some strange decision making on some key aspects. Advisors experienced in emerging markets look at the core legislative and regulatory structures and key ingredients of the process. In essence due diligence on the ability of the regulatory structure to allow a “Bankable” project to be delivered – country and market readiness assessments are critical. In Egypt those who advised caution were told not to worry and it will all be all right. Sadly experience suggests that is very seldom the case and Egypt is a stark reminder.
In all likelihood even those who manage to get their existing round one projects through will be faced with reduced tariff or increased taxes and so they have little option but to move to round two and get the best value they can out of the investment they have made in round one.
Although it is a sad situation it reflects the reality that changing markets and un-bankable projects can be toxic for those who rush in. In Africa the market is already moving quickly as is South America and Asia. Those with aspirations to participate would do well to get the basics right and do a diligence check on the national capacity to sustain the process of investment and development.