What have been the main challenges and risks for this project?
A project like this has a long perception period. So it depends at which phase of the project you are looking at - development phase, implementation, operations. Each phase has it own challenges. So it is not as if there is “a” challenge in a project like this, of this scale and this nature, in a country like Kenya; there is only challenges. It is one big challenge. But if we look at various phases; if we take the development phase to start with. The challenge is that you have an idea - that idea was conceived a long time ago; Dutch people traveled to the area. You have heard the story. The idea has that they wanted to build a wind farm. So the idea is great and it was a great idea because we are where we are.
But actually to transform the idea to something that can become a reality - the conception of the idea versus the actual implementation or conclusion of the development phase is two completely separate issues. So the idea always has to start somewhere and a few of the still current shareholders they had this idea of this fantastic wind in the area where we are. From that moment one you start to look at what it takes; what it takes to a situation where you can attract capital - equity - where you find interesting finances, i.e. how do you bring your project from the conception to an actual delivery. In that development phase there are many challenges; technical challenges, logistical challenges, financial challenges, and so on. So, what you need to do in a project like this is that you start with the basics; the wind needs to be good, but how do you prove to your lenders and to your shareholders that there is good wind? So you need to do wind measurements for at least a year - that is standard in the wind energy sector. But we actually started to measure the wind very quickly after we decided to push the idea prove that the wind was there and it was of the level we thought it would be, so it would justify the investment on this project because this is not a normal wind farm. There was absolutely nothing; there was no infrastructure in the area, so every large part of the infrastructure we had to build, like the excess road of 200km. But other projects where you do not have that challenge, you do not have to build a 200km road or they do not have to build a village because they are much closer to the living world and they do not have to rely on everything they do themselves. So actually, what you start doing is once your core - your wind, that’s where everything starts - and the wind really justifies the project of this scale at a attractive cost of energy; an attractive price to the Kenyan consumer. The technical challenges - connecting the the windfarm to the Kenyan grid system. Once we concluded that technically it is possible, financially it is possible, then you get to the next phase where you start the project and you start approaching potential equity partners. But we found that it was actually quite easy to get interest for the project. Although we had changes in the development phase, where one party would withdraw, but there was always who were interested to join. So that actually worked out quite well. When you have the technical and the financial elements in place, you start looking at the bankability of the project; what does it take to attract external funding - debt in this particular case to bring it to financial close. That actually requires quite a few things, because beside the environmental pyramids and what have you, the most important thing it requires is a Power Purchase Agreement.
That is an agreement, which came to the Kenyan government, became a very lengthened process to get to a conclusion of the PPA and get to the understanding that both sides of the table agreed to what we were going to do, that took time. But we also managed that in the end, while we were talking to our lenders at the same time. Actually, our lenders required certain government guarantees for the construction of the transmission lines for instance that it would begin on time and stop on time. And we are actually looking at a very long delay right now. So we needed to have certain guarantees for the government that in case infrastructure required to connect would not be finished on time that we would be entitled to compensation. Not so much compensation, but we would be entitled to invoice the government for the energy we would have produced, so we actually would fulfill our financial obligation. Because the moment you reach financial close - when the development phase is finished - financial close means that money will be disbursed to you. But at the same time it also triggers your repayment schedule and that goes hand in hand; once you have financial close, you know exactly when you need to repay the interest and the principal, etc. So your financial obligations start to kick in right there and then. Although the money flow initially is in our direction, once you complete with
construction the money flows into the other direction - not all of it of course because we need to make a return as well. And that is why these government insurances need to be in place because in case the transmission line would have been delayed - which it is right now - our financial obligations continue. So, that was also a challenge to get that done with the government, so that we all were on the same page. The insurance we got from the government was necessary because we got an delay.
What are the risks in a project like this besides the guarantee from the government - I’m thinking of the context of Kenya, in comparison to a project in Germany?
That would have been the same in Germany. There would have been no difference in banking the deal. That reassurance would have guaranteed from the German government - or whatever bankable German institution it may be - there has to be a guarantee in place because we are relying on certain infrastructure which is not in our span of control, because if the transmission constriction would be in our span of control then that insurance from the Kenyan government would not have been necessary. Because then the wind farm and the transmission line would be in our hands. Then the lenders would take a view; do you trust the capability of the Lake Turkana Wind Power to build a transmission line as well as a wind farm and can everything be connected to the grid? If the answer is yes; they are good. With the wind farm, that was actually the case, because there is no other collateral or no other guarantee than the money that the shareholders are putting in; that is really the security that lenders have because out shareholders are not putting in money if they do not think it can work. So, that would have been a different scenario. So, if the transmission lines would have been in our hands then the nature of the project changes, but since we have infrastructure outside of our span of control - since the government is building the transmission lines - the insurances have to come from the government of Kenya; so the guarantees have to come from the government of Kenya.
What is the status of the transmission lines?
The transmission lines should have been there in September of 2016, so we are now a year and a half down the line. It was not going well with the Spanish company Isolux Ingeniera SA; they were not able to get a good grip on the project. The government decided to terminate it last year in August and find a new contractor. They found a new contractor and I am actually very positive about that one; it is a Chinese consortium between NARI Group Corporation and Guizhou Engineering Company, and they came together and were awarded the balance of the transmission lines construction works. So, that was in the end of January this year [2018] and we will see how it goes, but knowing Chinese companies for what they can do, if they put their mind to it I am actually quite optimistic that we will see a predictable completion date of the transmission line evolving in the coming two or three months.
But you have received payment already, right?
We have received the payment last year.
The PPA?
Yeah.
What effect has the long delay had on the investors?
In principle, it should not have had an impact on the investors at all - that was the whole structure of the transaction. But obviously, Kenya is not a country where money is floating in the streets - neither in the Kenyan government, and we understand that. So, we have restructured the PPA in what we call The Second Variation Agreement on the Power Purchase Agreement. So, we had a variation on the PPA, where we restructured these payments to actually softens the blow to the government, so that they would not have to dish out all the cash. It was also in our interest because we knew that if we pushed the envelope it was not going to work because there is too much resistance. In my view, the Kenyan government - at that time - had a view that the risk was almost zero, but when the risk transpires, which is perceived to be almost zero, and when it transpires it becomes a very expensive risk and they would have needed help. So we sat with the government for a couple of months to get a
restructured document like this, but that is what we have achieved. Did we get what we really wanted? Probably not. But did we receive from the government what we needed in order to continue our operations? Absolutely. So, we are actually grateful for the government for the support they have been able to give us.
So you don’t get a specific amount according to the PPA?
Yeah, we do, because we have varied PPA, so the PPA today is a different PPA compared to a year ago. So, we get exactly what we have agreed in the renegotiation with the government and we are content with that.
But did you say that they might be resisting paying?
No no no no, we have received what we have to receive. The government has paid in accordance with what we have agreed. But before - based on the PPA that was in place until 8-9 months ago - they said “guys, can we sit down and look at a solution that also works for us in a better way”. We needed to play a little game there of course, but they are our one and only client.
How well have contracts been enforced in LTWP?
If you mean enforcing in the sense that there is a contractual dispute and you go to court, we have not had those cases.
What we mean is more contracts with the government.
You do not want to take the government to court, do you? So you negotiate if there is an issue. Whenever there is an issue, we believe in the dialog and not in the confrontation.
Also in Kenya?
Also. It is the same. There is no difference. We always find a solution somewhere. If both sides are reasonable and if they think logically, there is always a solution. So we want to stay out of court or disputes situations as much as we can. There is another project here in Kenya called Kinangop and Kinangop actually is in court, in arbitration right now. Will they ever be able to bring it back to the normal run? I don’t know, but don’t think so. I don’t think it can happen anymore. There is too much pain in that whole process, which actually takes away the foundation for a proper cooperation.
Our view is quite different; we are always going to listen and to discuss reasonably. It is when people get unreasonable it becomes very difficult to - in general - come to an agreement. If you only want to have it your way; it does not work.
What is going to happen after the 20 years of the PPA?
The official answer is that the project ends there. The PPA can be extended, but then you need to renegotiate. If you look at all the wind projects globally, after a 20 year term it normally pays a good dividend. If you can be granted the construction for another 20 years to repower - because
technology has advanced in 20 years time, there will be better alternatives. I can’t predict what will happen, but the project’s life span is the duration of the PPA. And if the PPA - for whatever reason - is not extended we need to demobilize. The whole project is financially written off. The business case is the duration of the PPA, so if there is no extension to it nobody is losing anything, because our shareholders actually are working on that duration, so your business case has that end date and your return is based on that and not on an expectation that you might add on another 10 years.
Which actions have you done to ensure contracts have been enforced by the government, so they do not cancel contracts?
Well, they can’t cancel because that is actually not possible - a contract cannot just be cancelled like that. The PPA we have cannot just be cancelled, because then the other guarantees kick in and the government still needs to take responsibility of the investment. The Kenyan government has been very supportive to this project all the time. You cannot do this project if you don’t have support from the government - you cannot. Do we need an advantage over the government? We have never felt it like that. The government has been a good partner to us.
Do you feel you can trust the government?
Can you trust any government? Being the Danish or the Dutch. I have seen thing in my country were I thought that the credibility of the government was at stake. I mean, the Kenyan government is not different; it is Eastern Africa, but that does not mean that the fundamentals of governing are different from Europe or whatever. The government is also has the best interest for the Kenyan citizens - that is what they are here for.
We wanted to ask you to what extent it was an advantage to have a partnership with the state, but it sounds like the project could not be done without the state.
The government has no stake in the project; they are not a shareholder or anything. But if you don’t have political support to large scale projects like this - or from the county government, national government - you can’t really do this without the support. You need to have certain exemptions.
Otherwise the project is financially not feasible. Stuff like that are things that the government actually can give without any problem. Without it [the government] it would be very difficult to do it. The facility role that the government is playing - also in Kenya - is mandatory for projects like this to succeed. So it is these enablers that a government can give you, or refuse to give you. We did not get any special treatment in the sense that we got something from the government that nobody else has.
But there are thing where they say that it is in the national interest to do this so we will support it.
You were talking earlier about that it was easy to attract investors.
Yeah, let me put it this way; we were never short of interest.
So, what was it about this project that made it interesting?
This is of course a unique adventure. This has never been done globally. This project is the largest infrastructure investment in this country ever. Look at the operational environment we need to work in - it is a boy scout's dream to be able to do this. Also the engagement we have with the communities around us; it’s actually one big PR. I mean, what is wrong about this project? Nobody can give me anything that is wrong; it is clean energy, it is cheap, we provide huge employment in the area, we are doing projects all over the place in order to support the communities, and we have shareholders which are making a return at the same time. So, this project was very sexy for our shareholders, because out shareholders are active in the energy sector and African infrastructure, so to them it was a golden opportunity.
Was there any characteristics of the investors that you wanted to be part of the project or was it simply a question of a certain amount of equity?
You want to have a group of shareholders that feel good. If an investor has something that the other investors can agree with as a reasonable expectation for the project to deliver on and the chemistry in the shareholder group is there; you can move on. But if you have shareholders that - whatever it is, risk appetite, risk perception or whatever - are not cohesive, you can’t do it. Because if you have diverse opinions all the time you cannot move together as a group. So, we were not looking at a specific profile investor. We have Norfund, IFU, Finnfund, this project is typically a project that they love. This is what they want to do in Africa. This is a big project, big impact, this is making a
difference; perfect project for them. The other shareholders we have are private shareholders as well.
The private investors are slightly different, they also want to do the right thing, for sure, but for them the return appeals a bit higher. But that does not prohibit the relationship between the shareholders because everybody want the same; realize a project which makes a difference and make a return at the same time.
To what degree does it affect the project that Vestas sells its stakes to Google?
This is pre discussed as well with all the shareholders because the deal has been on the table for a long time. Vestas will sell their stake at actual project completion, which means that me need to be connected to the transmission line. And actually they cleared Google as a potential buyer already