A review of the Rabai IPP Project

Introduction
The Rabai IPP Project in Kenya reached financial close in October. Trinity acted for the project sponsors in the transaction. Representing more than two year’s work, the completion of the Project represents a significant achievement for all involved, particularly given the legal challenges posed by events such as those following the political events in Kenya in December 2007. We are particularly proud to be associated with the project, which is the largest foreign investment in Kenya since the formation of the current power sharing government. The project will significantly improve the ability of the Kenya Power & Lighting Company Ltd (“KPLC”) to meet the ever increasing demands for power of its customer base.

In this review we look at the Rabai project, some of the challenges faced by the sponsors and its advisers and the key factors that played a part in bringing the project to financial close.

The Project
The Rabai Power Project is a 90MW heavy fuel oil independent power project located near Mombassa in Kenya. The project is founded on a 20 year power purchase agreement (“PPA”) with KPLC and was awarded to the consortium formed by Burmeister & Wain Scandinavian Contractor A/S (“BWSC”) and Aldwych International Limited (“Aldwych”). The power station will consist of five Wartsila 18V46 medium speed heavy fuel oil driven generator sets, and a 5.3 MW steam turbine generator will be added to increase the output and efficiency of the plant. EPC expertise is to be provided by BWSC and its Kenyan subsidiary under a turnkey, fixed price EPC Contract, while the operation and maintenance of the plant will be undertaken by a joint venture between the sponsors. Construction management is to be undertaken by a subsidiary of Aldwych International Ltd. The fuel supply agreement is currently the subject of a competitive tender process which is due to be completed at the end of October 2008.

The PPA and Government Support
A notable aspect of the transaction was the concerns of the lenders and investors in respect of political risk. These concerns were obviously highlighted by the political events in December 2007 and January 2008. Throughout PPA negotiations, KPLC made it clear that, as a commercial entity, it had no more control over political and legal events in Kenya than the project company – Rabai Power Limited (“RPL”). It, therefore, refused to accept any liability for such events. Eventually, the Government of Kenya stepped up to the mark in respect of political risks by providing a support letter which allowed the project to be financed on a limited recourse basis.

Financing of the Project
Financing for the project was secured from senior and mezzanine lenders through a competitive process arranged by the Sponsors. The senior loan for the project is a €79 million term loan with a 14 year tenor. The Mezzanine Loan is €5,640,000 with a tenor in excess of just over 15 years.

Challenges
As noted above, the project faced a number of challenges before reaching financial close.

The events following the general election in 2007 are well publicised. The political upheaval resulted in additional legal and commercial challenges for the sponsors and its advisers. In particular, a delicate negotiation with the Government of Kenya in relation to government support was required to appease lender and investor concerns.

In addition to the challenges arising from the political unrest associated with the disputed elections, a challenge to the validity of the PPA tender process was commenced by one of the disappointed bidders. The challenge was initially rejected by the Kenyan tender commission, however, an appeal against that decision was lodged with the Kenyan high court. This obviously raised a number of ancillary challenges for the project and its advisers particular as a result of the delays and adjournments arising from the litigation. A robust rebuttal of the various allegations was coordinated and, eventually, the legal challenge was withdrawn.

As mentioned, one of the principal challenges arising from the political events and litigation in relation to the project was the resulting delay. This had numerous adverse consequences, not least in relation to the supply of the Wartsila engines which were reserved for a limited period of time through the payment of reservation fees. The delays put at risk the supply of the engines and threatened the project given that the waiting time for the supply of medium speed engines from Wartsila was in the region of 2 years. Fortunately, the engines were retained, largely because of the faith of the sponsors in the project.

Of course, the project was also brought to the market right at the time when rumours of an impending issue with the liquidity of the financial system were commencing. As the project developed, so did the rumours until it became clear that there was a major liquidity issue brewing in the loan markets. Fortunately, for the project, the nature of the lenders provided a certain degree of insulation from the financial chaos which encircled it. Nevertheless, the collapse of Lehman Brothers literally hours before financial close was due to occur could still have shaken confidence to the extent that the lenders might have been tempted to declare a “material adverse effect” and refused to have disbursed the loan proceeds. Fortunately, the lenders were experienced enough not to push the panic button and duly disbursed (although concerns were expressed even at this late stage with certain aspects of the financial structure for the project).

Success Factors
As with all projects, success is often the result of the patience, perseverance and dedication of the sponsors and investors and their respective teams of advisers. This is particularly true for the Rabai project. Specifically though, achieving the milestone of financial close in the Rabai project owes much to the following factors:

• the sponsors are experienced developers of projects in difficult jurisdictions. The faith they held in Kenya as a home for their investment outweighed concerns relating to the politics of the country that might have made other less experienced developers think twice;
• KPLC stuck by the project and the tender process that it had conducted when it could easily have capitulated to political pressure to re-run the tender for a third time. Furthermore, KPLC proved itself as being a tough and effective counterparty to the PPA discussions. From a sustainability perspective, the deal that was struck is demonstrably on an arm’s length and the Project as a whole shows how tender procedures can be successfully conducted to the benefit of the procuring authorities;
• the lending group was also able to take a long-term view of the political situation in Kenya and were supportive of the project notwithstanding the obvious threats which it faced; and
• the advisers on both the sponsor and lender side showed a significant amount of experience, patience and dedication in adapting to circumstances and joining forces to deal with the myriad of issues that needed to be addressed.

Conclusion
On the face of it, the Rabai project is a relatively straight-forward IPP. The technology is standard and the contractual and financial packages are relatively simple. What makes the project a major achievement for the sponsors, KPLC and Kenya is the background against which financial close was achieved. Without the dedication of all parties involved and an ability to look to the long-term (a quality which is not always apparent in African jurisdictions), it is highly likely that the project would have gone the way of other proposed African IPPs and would not have been financed. Nevertheless, with the project now under construction, Kenya can look forward to an estimated 1000 new jobs for local residents and, within the next 12 months, sufficient power to light 400,000 households and the displacement of extremely expensive temporary generation projects which, in itself, is projected to save the Kenyan authorities billions of shillings.