Year in review 2013

Risk management

The M&E Consultant has prepared a “Risk Analysis and Management Monitoring Tool” (Appendix X). Going forward, this tool will be employed by the Secretariat in tracking and following up key risks. Since mobilization, the Secretariat has focused on management of the following risks:
 
  1. Interconnection risk. Ensuring that the individual projects can interconnect to the grid and that the grid can evacuate the power from each of the projects to the demand centres involves significant coordination, funds and time. Given current constraints in the grid, this risk is significant. In the worst case, the projects will be constructed and UETCL will be stuck with “deemed energy” payments, which could become a major financial burden. This issue has been highlighted by KfW and GET FiT and ERA and MEMD have taken dedicated steps to address the matter. Specifically, a top level management meeting between ERA, UETCL, REA and UMEME is planned for May 2014 and is likely to result in a task force to address the issue of timely integration of the GET FiT portfolio into the national grid. Additionally, KfW has taken an active role in mobilizing funding for preparation and financing of the critical HV line in Eastern Uganda between  Mbale-Bulambuil (key for evacuation of Siti I & I HPP and potential future generation projects in the Mount Elgon area). A feasibility study will be supported through a grant from the EU ITF and additional investment grants and loans will be sourced. Furthermore, technical assistance for ERA and UETCL in managing interconnection and grid integration issues related to the GET FiT portfolio are being discussed and development partners are being approached for additional funding.
     
  2. Project-level technical risks. With the Implementation Consultant now mobilized, the technical risks and key follow-up points for each project, including e.g. compliance with IFC Performance Standards and interconnection, are being tracked and managed. The Secretariat has developed a comprehensive Project-tracker tool utilized also by KfW and ERA and MEMD staff which allows for continuous monitoring of critical issues for each project. This provides an opportunity to identify early on key challenges within all applicant or approved projects, and to monitor their progress throughout. 
     
  3. Considerable time used to achieve financial close and construction start. The approval of the Standardized PPA and IA should make an important contribution to preventing further delays. Additionally, the Secretariat has decided to initiate supervision visits to the most advanced projects, partly in order to increase pressure on ensuring progress. In addition to the project-tracker, the Investment Committee has endorsed the Secretariat’s proposal for shorter and stricter time-frames following approval – or risk losing the GET FiT commitment.
     
  4. Delayed implementation of the projects. Energy generation projects are generally prone to delays during construction. This can be due to capacity and financial constraints of the developer, faulty planning, but also adverse conditions outside of the control of the developer. Through the portfolio approach the impact of these issues on GET FiT is to some extent mitigated, but serious risks remain: Delays in commissioning of the individual projects will negatively affect the time bound objectives of GET FiT. On a financial management level, it will result in either a temporary build-up of cash and/or project-level disbursement beyond 2023. In the worst case, projects are not able to meet the required deadlines, as set out by either their award letter or their DFA and a decision is made to retract the funding commitment. 
     
  5. Weak capacity of developers. Several developers and/or major shareholders may lack competence regarding either hydropower or IFC environmental and social performance standards. To address this risk, all approved developers have achieved a minimum score on these issues in the appraisal process. Nevertheless this risk element remains to a certain degree, particularly with respect to IFC standards. The Implementation Consultant is now available for discussions with GET FiT developers, on an ongoing basis.  Further, a dedicated one-day workshop with developers and their consultants regarding the topic of IFC Performance Standards is scheduled for June 2014.
     
  6. Low number of sufficiently developed projects applies for support. The slight downward trend between round 1 and round 2 applications, both in terms of quantity and quality raises some concern. In order to have a realistic opportunity to achieve the overarching targets, the program is dependent upon a successful third and final RFP – targeting some 50 MW, with an ambition of a high biomass/bagasse percentage. To the degree project funding commitments from previous rounds needs to be reallocated (due to failure to meet deadlines), the ambition level will be even higher. As a response to these concerns, the third and final round will be carried out a full year after round 2 (instead of 7 months) and the announcement has already been communicated to the market. It is also expected that the E&S Workshop will make an important contribution to the quality of project applications.
     
  7. Corruption/bribes. In general, the performance-based disbursement methodology under GET FiT reduces the risk for corruption or fraudulent behaviour. Further to requested declarations by developers during the tender process, the developer financing agreements under GET FiT, foresee a range of termination and repayment rights in cases of any misconduct and of material deviations from statements/ information or documentation submitted and subject to the application process. The Implementation Consultant will visit project sites bi-annually and assess the procurement process and construction progress for such deviations. GET FiT also provides for a grievance mechanism for (anonymous) complaints by the public through the GET FiT.
     
  8. Political and cross-border risks. Two of the largest projects in the GET FiT portfolio (Kikigati SHP and Kakira bagasse plant) are currently plagued by critical “external” risks that threaten their viability as eventual GET FiT supported projects. Given their combined capacity of some 36MW, this is a critical risk for the portfolio and eventual results. Both projects are actively being followed up and at the point where the committed funds are required for other projects, rescindment of the GET FiT commitment will be strongly considered. Both developers have been informed about this possibility.