The ADF PRG will used to promote public private partnerships by catalyzing commercial financing (private investment) through the mitigation of political risk. In the case of LTWP and the Suswa- Loyangalani transmission line projects, the perceived political risks are: (i) a potential delay in the construction of the transmission line (T-line), which is a Government of Kenya (GoK) undertaking to the project through a Letter of Support; (ii) off-taker risk, due to risk of non-payment of monthly invoices by the off-taker KPLC as per its obligations under the Power Purchase Agreement (PPA); and (iii) risk of termination of the PPA. The GoK Support Letter is envisaged to cover tax obligation of the investor; tariff regime; conditions for setting the tariff; protection against civil strife; protection against nationalization; and protection against transmission line risk due to political issues. Although the Development Financial Institutions (DFIs) lending to LTWP are comfortable with taking GoK risk through the PPA and the Letter of Support, the commercial lenders to LTWP are not, and it was for this reason that a PRG to be provided by the World Bank (IDA) was initially sought. To cover the risk of non-payment by KPLC of the monthly invoices, the project sponsors required a credit enhancement mechanism through the provision of an escrow account, which is included in the PPA. The commercial lenders however required further comfort against GoK risk particularly in the case of termination of the PPA. Since IDA decided not to provide a PRG for this project, new players including the Danish Export Credit Agency EKF and the European Investment Bank (EIB) came on board. EKF will be providing political and commercial risk guarantee for the commercial lenders, and EIB will provide a direct loan to the project as well as a political risk carve-out instrument. EKF's guarantee and EIB's political risk carve-out instrument, combined with the credit enhancement mechanism through the provision of an escrow account, which is already built into the PPA, cover all the GoK risks related to non-payment by KPLC.
The objective of the project is to meet the rapidly increasing demand by diversifying the country's energy resources and developing its renewable energy potentials. The project will also increase access to energy through connections to substations; planned geothermal plants will also be evacuated through the transmission line and in the medium to long-term lead to a decrease in end-user tariffs. The transmission line will also be connected to new and existing substations for improved power supply and distribution and planned geothermal plants will also be evacuated through the transmission line.
The Strategic Framework for the African Development Fund Partial Risk Guarantee (ADF PRG) Instrument states that private undertakings that involve sovereign exposure carry an additional risk premium as they are subject to, among others, political risks including governments' failure to honour commitments. As a result, the ADF PRG was approved by the ADF Deputies as a means of stimulating additional private sector investments in low income countries and to support the strategic objectives of ADF-12 and the Sixth General Capital Increase by complementing existing instruments through which the Bank Group supports private sector development and attractsprivate financing for development. The rationale for the Bank's intervention in this project via the ADF PRG, is further strengthened by the AfDB's Long Term Strategy (2013-2022) which indicates that poor access to energy/power is one of the major challenges for a successful economic transformation on the African continent, and thus promotes the development of sustainable infrastructure.