Competition AND Direct Negotiation
Is competitive bidding always the best way to get more power online more quickly? The majority of Power Africa deals have been made through direct negotiations between private companies and African governments; however, African countries from Morocco to South Africa, and Ghana to Ethiopia are pushing for competitive bidding programs. Countries in North America, Europe, Latin America, and most recently South Asia believe competitive bidding programs will lead to lower prices for power, crowding-in for private investment, and the standardization of processes that are often seen as convoluted.
Many donors and governments working in sub-Saharan Africa, including Power Africa, see the growing trend of competition across the continent positively. The conundrum is that many sub-Saharan African governments do not have the luxury of waiting for competitive procurement programs to address their need for cleaner, reliable, and more affordable power in the short term.
Competitive Bidding — The Upside. Competitive bidding can result in the best value for money. A country gets higher quality products and services, enhanced transparency and predictability, and lower prices that help close government subsidy gaps and reduce electricity bills for end-users. Not only does that yield potential political benefits, but also there is evidence that competitive procurements are less likely to be the subject of renegotiations and contract disputes, which can save time over the life of the project.
…And the Downside. Developing a competitive bidding program that is effective and sustainable can be a long, expensive, and slow process. In a country with a massive power deficit, how much GDP is lost as the country takes years to plan, compete, award, and build a power project, instead of simply getting power online through a non-competitive process? Even if a country has political will, a solid regulatory environment, and local knowledge, it can take a year to plan a tender with even an experienced team. It can take another year to develop bankable project documents that ensure a fair deal and that entice foreign investors. It can take a third year, or likely even longer, to run a bidding process, qualify bidders, award and sign a contract, and get to financial close. And even then, there’s the construction period — which only goes smoothly if the highest social and environmental protocols have been applied throughout the development process. The old adage ‘time is money’ is an understatement for developing countries that need power as soon as possible and rely on donor assistance to make that happen.
An Alternative? So why not choose a negotiated deal approach that can procure grid power quickly? That way factories don’t have to run on expensive back-up power until the tender process is completed. Moving slowly has been causing lucrative anchor clients to start producing their own power, as Aliko Dangote does in Nigeria. As a result, distribution companies are losing their best-paying clients who use the most power.
Perhaps a country looking to bring power online faster can opt for a negotiated deal approach that puts all the cards on the table up front — from investment potential to nameplate capacity — and procure power in a seemingly shorter period of time. Plenty of information is available, thanks in part to Power Africa, about what a country should reasonably expect to pay for different power generation technologies. Power Africa’s partners are offering power now at a fraction of the cost of what governments were being asked to pay prior to Power Africa’s launch just four years ago. And Power Africa’s broad Toolbox offers countries plenty of resources to help support a fair and sustainable negotiation.
Which Choice is Best? Actually, it’s not ‘either, or’, but rather an ‘and’ scenario. Our advice to countries with a power deficit: reassess power procurements in light of the possible upshots of competitive procurements and continue to negotiate deals directly with private companies until clear, sound, procurement strategies and supporting policies prove relatively effective. In both cases, governments need specialized knowledge and transparent processes that align with international best practices, which will help stabilize investor confidence. They also should focus on best-value procurements, including using value engineering and life-cycle analysis to escape the trap of least-cost procurements, which often yield poor quality goods and services that rapidly lose value.
To ramp up to competitive bidding, governments need sufficient time for planning and implementation. The first round of a new competitive bidding program will take time and be filled with unexpected challenges — directly negotiated deals will help fill the time gap by ensuring projects can generate power capacity in the interim and cross the finish line. Those governments that can continue to make progress on negotiated deals while building the capacity to competitively procure projects may reap significant long-term benefits of patient knowledge capital (or going slow to go fast). Power Africa is amassing tools and resources to help governments make smarter power procurement decisions — we invite you to submit examples of best practices of governments that are taking steps in consideration of both — negotiated and competitive auction deals.
African Legal Support Facility (ALSF) and the Commercial Law Development Program (CLDP), Understanding Power Purchase Agreements, http://cldp.doc.gov/sites/default/files/Understanding_Power_Purchase_Agreements.pdf.
IRENA Renewable Energy Auctions — Analyzing 2016 — Executive Summary (published 2017): http://www.irena.org/DocumentDownloads/Publications/IRENA_REAuctions_summary_2017.pdf
IRENA and the Clean Energy Ministerial, Renewable Energy Auctions: A Guide to Design, http://www.irena.org/DocumentDownloads/Publications/Renewable_Energy_Auctions_A_Guide_to_Design.pdf.
Maurer, Luiz T.A. and Luiz A.Barroso, Electricity Auctions: An Overview of Efficient Practices, World Bank, http://documents.worldbank.org/curated/en/114141468265789259/pdf/638750PUB0Exto00Box0361531B0PUBLIC0.pdf.