How commercial power companies are wreaking havoc in developing countries

Saad Hasan :

In the 1990s, the World Bank started pushing for the liberalisation of energy markets.

The communist Soviet Union had just collapsed. And the belief that governments had no job running businesses was gaining steam around the globe, making it easier for the World Bank to convince many countries to hand over the job of electricity production to private companies.

Thirty years since the privatisation trend began, that experiment has turned into a nightmare of inflated and seemingly insurmountable bills for close to a billion people in developing and low-income countries, including Bangladesh, Ghana, The Gambia, Indonesia, Kenya, Nigeria, Pakistan, the Philippines, Rwanda, Tanzania and Zambia.

Despite abundant power plants in these countries, tens of millions of people have to endure blackouts every day. Since governments don’t have the money to buy expensive electricity, they often borrow from banks to make the payments, plunging their already heavily indebted populations further into debt.

Private electricity generators, known as Independent Power Producers (IPPs), are now facing pushback from the public, politicians and activists as they drain national budgets.

People know little about IPPs since households and factories don’t interact with them on a day-to-day basis. Utility companies serve as the middlemen, interfacing with the IPPs to buy electricity and collecting bills from customers, leaving end consumers with no direct access to the actual power providers.

In many cases, IPPs, which own and run power plants, are backed by foreign investors headquartered in rich countries and are managed via offshore firms, beyond the reach of local laws.

As for the equipment like turbines and boilers needed for the power plants to function, a handful of companies in the United States, Germany, France and China produce these parts.

The business model IPPs follow involves selling electricity to state-run utility companies under long-term contracts, known as Power Purchase Agreements (PPAs), which are kept confidential and therefore away from public scrutiny.

The PPAs offer guaranteed returns on capital to private owners even if no electricity is produced.

Payments are made in US dollars even though the utility companies collect bills in local currencies.

The PPAs also include take-or-pay clauses, which means a public utility company must buy power from the IPP even if it’s too expensive or there’s no need for it. Corruption has flourished in multimillion-dollar deals, and a whole industry of consultants whose job it is to help multinationals get lucrative project deals has emerged.

Whenever a country faces an energy shortfall, IPP consultants resort to intense lobbying, offering PowerPoint presentations to government officials and promising them a future of steep economic growth that is only possible if electricity capacity is increased.

As blackouts lead to street protests, governments panic and rush to add megawatts (MW) to the grid. In the end, too much generation capacity is purchased and consumers – and taxpayers, in general – are left to foot the bill.

“I’m sure that they (consultants) play different roles in different cases, but certainly one of their roles on occasion has been to funnel corrupt money,” says Professor Louis T. Wells, who teaches international management at Harvard Business School. He adds: “You pay the consulting firm money for its services and some of that money goes as bribes to officials to smooth the deal.”

One of the most blatant abuses of IPP projects recently played out in the West African country of Ghana.

The dumsor saga
In May 2016, heavy-duty trucks – each one laden with a 25 MW generator – pulled onto a dusty field in western Ghana.

A jumble of wires connected them together and this ‘operation’ became the 250 MW AMERI (Africa and Middle East Resources Investment) power plant.

When that project deal was signed a year earlier, frequent hours-long power outages were derailing daily life in Ghana. So bad was the situation that “dumsor,” the Ghanaian term for load shedding, became an internationally recognised word and was included in the Oxford Dictionary.

Ghana’s electricity crisis had begun on August 27, 2012, when pirates tried to hijack an oil tanker in the Gulf of Guinea. As a navy patrol chased them, the pirates tried to escape with the tanker’s anchor dragging along the seabed.

It ruptured the West African Gas Pipeline, which transports natural gas from Nigeria to Ghana, where it was used as fuel to run thermal power plants.

With no gas, the power plants were shut. A dry spell had reduced water flow in the Akosombo Dam and cut off the output of its associated hydroelectric plant, which had historically produced the bulk of Ghana’s electricity.

As blackouts persisted, the government of then-President John Mahama went into overdrive, signing agreements with many IPPs.

“Politicians can make 10 percent, 20 percent on contracts with IPPs. They won’t be able to do that with a public sector electricity utility,” says Barnaby Joseph Dye, a lecturer at the University of York, who researches infrastructure projects in the Global South.

Until that point, Ghana’s public utility, which runs its own power plants, had done a commendable job in meeting the country’s electricity requirements. Ghana, with a population of 33 million, has an electrification rate of 86 percent.

Everyone is connected to the grid except for those living in far-off villages, says Dye.

“But that doesn’t mean people use a lot of electricity. They need to maybe run a fridge, a television or a washing machine. But Ghana added much more electricity than it needs – much more than the demand.”

Corruption is rampant in multimillion-dollar power projects. Built on the city outskirts, people don’t know what goes on inside the smoke-emitting facilities.

“It’s a way of rent-seeking. Politicians can extract money from the IPPs,” says Dye.

The AMERI power plant is a classic example of how such shady deals work.
The person who put the deal together and negotiated the terms with Ghana’s government was one Umar Farooq Zahoor, a Norwegian of Pakistani descent.

He was the CEO of AMERI, a company that was registered in Dubai, UAE, months before President Mahama’s government awarded it the contract. This shell company had no prior experience in the power industry.

Zahoor was wanted by the Norwegian police in connection with the largest bank fraud in the Nordic country’s history, and Interpol was on his tail when the deal was signed. More recently, Zahoor was in the news as part of the ‘watch’ scandal, which led to the sentencing and imprisonment of Pakistan’s former Prime Minister Imran Khan.

In the deal Zahoor struck with Ghana, AMERI essentially played the role of a middleman. It got the contract and arranged finances, then handed over all the technical work – including procurement of generators and running of the plant – to a third party.

The trailer-mounted generators were manufactured by General Electric (GE), the American power equipment giant that has been a key beneficiary of the energy sector’s liberalisation in the past three decades.

A specific type of gas-fired GE power plant called TM 2500+ was installed in Ghana. Though this type of power plant has been deployed in many countries, it is designed as a stop-gap measure and comes in handy only when there’s an immediate need to shore up electricity output.

These generators can be shipped and transported quickly – there’s a reason they’re mounted on the back of truck trailers. GE says these generators can be up and running in 11 days.

The AMERI project – developed on a build, own, operate and transfer (BOOT) basis – cost Ghana $510 million. An investigation by the Norwegian newspaper Verden Gang (VG) determined that the deal was overpriced by at least $150 million.

In Ghana, the project fanned intense debate over corruption allegations and eventually led to Energy Minister Boakye Agyarko’s removal in 2018.

Others
As for then-President Mahama, he denied wrongdoing in awarding the contract. But soon after being voted out of office in 2016, he accompanied an AMERI delegation to Namibia where the company was trying to win a power generation contract. It never did.

Around a dozen IPPs now operate in Ghana. The country doesn’t need so many, yet it has to pay them every month as dictated in the iron-clad PPAs.
By the end of June 2023, IPPs claimed the Ghanaian government owed them $1.7 billion.

And as scandalous as these facts and figures are, Ghana is far from being the only case in which a few executives and middlemen deceived an entire nation.

A ‘capacity’ crisis
This wasn’t the first time a country went from facing a severe electricity shortfall to an excess power supply, with little means to pay for it except by drastically jacking up consumer tariffs.

In Ghana, the government has increased electricity tariffs by more than 50 percent in the past few months so it can raise enough funds to pay the IPPs.
Indonesia, Nigeria and Pakistan have all gone through a similar cycle.

But how can extra power capacity become a problem? Isn’t it convenient to have spare megawatts on hand? Why can’t we just switch off a power plant if we don’t need it?

“IPPs are in business to make profits and pay debts,” says Kingsley Osei, a lawyer who studies legal contracts for infrastructure projects like power plants.

Up until the 1990s, the World Bank, the Asian Development Bank and other development financial institutions financed large power projects in the public sector. These projects – such as the Tarbela hydropower project in Pakistan, completed in 1976 – were aimed at propping up the power sector in developing countries. Profit-making was not a priority.

Once the private sector entered the scene, a new system emerged that was geared towards ensuring sufficient return for private investments.

So lucrative was the business that The New York Times noted in a 1995 story that “from gambling companies to satellite and cable television owners,” everyone was rushing to bid for power plants.

Private companies borrow hundreds of millions of dollars from banks to build a power plant. Whether the power plant generates electricity or not, they have to pay interest and principal on loans. Similarly, they employ engineers to run machinery, buy supplies like lubricants on a regular basis, and pay insurance premiums. And then there’s the profit. Since these are all fixed costs; they won’t go anywhere even if a plant does not operate.

So once a power plant is built and capacity is added to the grid, there’s no going back on it. To ensure they are adequately compensated, the IPPs sign PPAs with the government that include a ‘capacity payments’ clause – a contractual obligation that’s draining the budgets of several developing countries.

For instance, an agreement for a 100 MW power plant covers a period of 20 years, during which the government, via its utility company, promises to buy 80 percent of the plant’s capacity no matter what the circumstances.

This means even if the national grid is not taking a single megawatt from the power plant, the government (taxpayers) pay for 80 MW to the plant’s owner.

The contracts are airtight, often protected under Bilateral Investment Treaties (BITs), which allow private firms to sue governments at the International Center for Settlement of Investment Disputes (ICSID). Losing a case at this World Bank-led arbitration court can result in hundreds of millions of dollars in penalties.

Even developed countries such as the Netherlands and Spain have been dragged to the ISCSID by power producers in recent years.

How the IPPs became so pervasive is a story that can be traced back to the UK during the government of late Prime Minister Margaret Thatcher.

A grocer’s daughter
In the 1980s, Thatcher began privatising state-run companies, including water and power utility providers. By the time she stepped down in 1989, more than 40 public sector companies, including the British Telecom, were in private hands. Tens of thousands of workers were laid off.

Across the Atlantic, US President Ronald Reagan had come to power. Like Thatcher, he was against a bigger government and believed a free market could take care of itself.

“You know, Margaret Thatcher was the daughter of a shop owner. Her father owned a local store,” says David Boys, Deputy General Secretary of Public Services International, a global union of government employees.

“In her mind and also in her political philosophy, like a lot of those who come from the Milton Friedman school of thought, human beings will get their freedom in the market because they are free to exercise their purchasing power.

And by exercising their purchasing power, they’re able to force the companies to change their behaviour.”

But this idea didn’t exactly work in the energy sector.
For proponents of free markets, liberalisation of the electricity market was the next best thing to complete privatisation.

The World Bank proposed an “unbundling” of the power sector. Unbundling meant separating the generation, transmission and distribution parts of the electricity supply chain and selling them off in parts.

In public hands, state-run utilities did everything from running power plants to carrying electricity on high-voltage wires (those big towers you see on city outskirts) and selling it to consumers.

Power utilities are natural monopolies – you can’t have two separate power cables bringing electricity to your home.

So the idea of fostering competition between companies in the transmission and distribution parts of the supply chain wasn’t replicated widely. It was the generation of power – power plants – that became a target for private investors.

In those initial years, World Bank experts wrote lengthy reports in favour of the IPP model.

They’d make a case for a country’s economic growth and would calculate all the electricity it would need in the coming years to adequately supply its households and factories.

The government can’t do this on its own, they’d argue.

Robert Ichord, the former deputy assistant secretary of the US Department of Energy, says energy market’s liberalisation eased pressure off the public sector, which haemorrhages money due to corruption and political interference.

Ichord was among the officials who played a vital role in promoting energy market liberalisation in the 1980s and 1990s. In 1986, he wrote a concept paper titled ‘Private Sector Power and Distribution Project,’ in Pakistan, arguing in favour of the model.

The countries that get into trouble with IPPs are mostly those suffering from chronic financial mismanagement, he argues, adding that the electricity sector in many of these countries is burdened with subsidies as electricity is sold to consumers below its actual cost and theft is rampant.

Another thing that has put power plants under the spotlight is the high price of fuel.

Most of the IPPs around the world are thermal power plants. They use oil, gas or coal as fuel to make steam, which then turn turbines to generate electricity.

The cost of electricity shoots up with the rise in fuel prices. But politicians, fearing backlash from voters, drag their feet on increasing consumer tariffs. As the deficit builds up, governments struggle to pay IPPs.

The money to construct these thermal power plants in developing countries mostly comes from rich nations.

That’s primarily because countries like Kenya that need electricity don’t have mature capital markets to raise hundreds of millions of dollars for the investment required.

Foreign investors ask for a higher rate of return when they put money in developing countries, which they see as riskier destinations for their investments, says Harvard Business School’s Louis T. Wells, who is co-author of a seminal book on IPPs, ‘Making Foreign Investment Safe.’
“You expect the investor to take some risk. But here the risk is shifted to the government.”

(To be continued)
(Saad Hasan is a staff writer at TRT World).