While Ethiopia has expanded its energy production capacity tenfold in the past 25 years, it continues to experience energy shortages as it struggles to meet its population’s demand for electricity.
Ethiopia’s population is growing by more than 20% per year and it is struggling to provide access to electricity, which is currently available only to around 41% of the population.
Ethiopia has ambitious plans to exploit its significant unharnessed renewable energy potential, not only to meet domestic demand but to become an exporter to the region and play a part in addressing the electricity access deficit in East Africa.
In order to lower the burden on its high sovereign debt levels, the government has, since 2016, taken considerable steps to attract private sector investment into the power sector to support its ambitious pipeline of renewable power projects, and is actively moving from public generation investments to independent power producer (IPP) projects.
The debt financing for Ethiopia’s first set of renewable power IPPs has come entirely from development finance institutions (DFIs).
Yet, a number of those DFIs are at the same time providing Ethiopia with the financial and technical expertise it needs to support its ongoing policy and power sector reforms, with the key objective of increasing private commercial parties’ participation in Ethiopia’s power sector.
In particular, with its US$200m Renewable Energy Guarantees Program, approved in May 2019, the World Bank is aiming for an increase in the amount of private capital mobilised under Ethiopia’s IPP programme from nothing in 2018 to at least US$800m by 2025, and in the share of private capital, equity and debt deployed in new IPPs from 25% in 2019 to 65% by 2025.
Private sector parties will be following with interest the progress made on the first projects under Ethiopia’s 2018 Public Private Partnerships (PPP) Proclamation as well as watching the implementation of the government’s ambitious reform agenda, against a backdrop of considerable political uncertainty in Ethiopia.
Ethiopia’s PPP Proclamation
The PPP Proclamation, together with a PPP Directive issued by the Ethiopian Ministry of Finance & Economic Cooperation, the Ministry of Finance, pursuant to the PPP Proclamation sets out a PPP legislative framework to promote and facilitate the implementation of privately financed infrastructure projects – projects relating to oil, mines, minerals and rights of air spaces are excluded.
It establishes a PPP Directorate General, a special unit within the Ministry of Finance, responsible for the development and implementation of PPP-related guidance. In particular, the PPP Directorate General has issued PPP Implementation Guidelines detailing the required procedures and authorizations to undertake PPP transactions.
Generally, an investor wishing to participate in a PPP will need to procure a project through a tendering process, ie an open bid with prequalification. The tender is usually initiated by an interested public body or a state-owned public enterprise, the Contracting Authority. The tendering process and the tender result will need to be approved by the PPP Board – a special board consisting of representatives of several ministries and members of the private sector, and chaired by the Ministry of Finance.
Investors will need to demonstrate sufficient financial and technical capacity to undertake the project, as well as appropriate reliability and experience, and meet the relevant evaluation criteria set forth in the request for proposals.
If successful, the investor will sign a PPP Project Agreement with the Contracting Authority. The parties to the PPP Project Agreement could opt for arbitration as a method of dispute resolution. Among other things, the investor will need to incorporate a project company in Ethiopia, whose sole purpose will be to implement the PPP Project Agreement.
Ethiopia’s first renewable energy IPPs
With approximately 90% of the installed generation capacity being from hydropower, Ethiopia’s power generation capacity is currently very vulnerable to droughts and the state is consequently seeking to diversify its power supply sources. The newly approved PPP framework and guidelines are being applied to non-hydro renewable resources such as solar, wind, and geothermal.
Strategically, Ethiopia Electric Power, the country’s state-owned electricity producer, signed an agreement with the International Finance Corporation (IFC) to advise on initially developing up to 500MW of solar power under the IFC’s Scaling Solar Program. The idea is that the initiative will provide a reliable complement to hydropower with a quick construction timeline.
In 2019, the country used its PPP framework to issue an RFQ for two initial projects that will total 250MW. The RFQ was well received by the market, with 12 developers pre-qualifying and the tender awarded to Saudi Arabian developer ACWA following a record bid. Herbert Smith Freehills LLP is advising the World Bank with respect to its Renewable Energy Guarantees Program that is being utilized on these projects.
Ethiopia’s Ministry of Finance stated that the US$0.02526-per-kWh tariff offered by ACWA for the two sites is “the lowest in Africa and one of the lowest globally”. The Gad and Dicheto projects are planned for the eastern regional states of Somali and Afar.
The second round of Ethiopia’s solar programme, which was originally for four projects and 500MW, and subsequently expanded to six projects and 750MW with a likely cost of about US$798m, is also being procured under its new PPP framework and the Scaling Solar Program.
Ethiopia Electric Power has carried out a wind resource assessment that was backed by the World Bank Group and the Danish government. This assessment will be used to help develop Ethiopia’s proposed wind IPPs with the intention of procuring the projects following the Scaling Solar model and with nine potential sites under consideration.
Similar principles could potentially be applied to hydropower but given the additional complexities of such projects a slightly different approach to the scaling model may be necessary.
Accession to the New York Convention
As part of its efforts to attract foreign direct investment, Ethiopia has concluded Bilateral Investment Treaties (BITs) with 34 countries, of which 20, including those with China, France, Germany and the Netherlands, but not those with Spain and the UK, are already in force.
These BITs contain standard investment protections such as guarantees of fair and equitable treatment and treatment equivalent to that provided to nationals, so-called national treatment, and investors of third countries, so-called most favoured nation treatment, as well as protection against unlawful expropriation.
If investors are based in a country where there is no such treaty in force, it may be possible by careful structuring of the investment to obtain access to treaty protections under an existing treaty. This is usually done by investing through a corporate entity incorporated in a state that has an investment treaty in force with the host state.
Such treaties generally allow for their investment protections to be enforced by the investor directly against the state before a neutral arbitration tribunal. These tribunals are established under the dispute resolution provisions of the treaty. BITs typically give investors several alternative dispute resolution options. For example, under the Ethiopia-Netherlands BIT, qualifying investors can commence arbitration against Ethiopia under the Additional Facility Rules of the Convention on the Settlement of Investment Disputes (the ICSID Convention).
The Additional Facility Rules allow for ICSID-governed arbitration even if the host state is not a party to the ICSID Convention, as is the case with Ethiopia, or under the Arbitration Rules of the United Nations Commission on International Trade Law, the UNCITRAL Rules.
Importantly, on February 13 2020 Ethiopia’s parliament passed a proclamation to ratify the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the New York Convention, which proclamation is reported to have been published in the Official Gazette dated April 13 2020. On 24 August 2020 Ethiopia acceded to the New York Convention.
The 164 countries that are party to the New York Convention are required to recognise and enforce arbitral awards made in other states with very limited and strictly construed exceptions. Ethiopia will become the 165th party to the New York Convention.
Ethiopia has acceded to the New York Convention subject to certain reservations, providing that Ethiopia will apply the New York Convention only to: (i) awards rendered in other New York Convention contracting states; (ii) differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the laws of Ethiopia; and (iii) arbitration agreements concluded after the date of Ethiopia’s accession.
In accordance with its provisions, the New York Convention will enter into force for Ethiopia on the 90th day after the deposit of Ethiopia’s ratification instrument with the Secretary-General of the United Nations, on 22 November 2020.
Going forward, it will therefore be all the more important for parties considering investing in Ethiopia to check whether their investment would benefit from: (i) an arbitration agreement to which the New York Convention would apply; and (ii) BIT protection.
If an investor is not itself a national of a country which has a BIT in force with Ethiopia, it may be able to obtain such protection by investing through an entity that does have such nationality, with that entity then protected by and able to bring an arbitration under the BIT in question.
It is worth noting that PPP Project Agreements may provide for the settlement of disputes between the Contracting Authority and the investor through arbitration, and also that the New York Convention may apply to an award rendered in a non-ICISD Convention arbitration under a BIT.
Ethiopia’s priority reforms
Factors that continue to constrain private sector development in Ethiopia include, in particular: the complex and restrictive nature of the regulatory environment for starting and operating a business; largely outdated commercial legislation and inefficient logistics, which create significant bottlenecks and are not fit for purpose in 2020; and financial repression, notably negative real interest rates and discretionary allocation of credit to selected sectors.
In 2019, Doing Business – the World Bank Group study that ranks economies based on quantitative indicators relating to their business regulations and protection of property rights – ranked Ethiopia 159th out of 190 countries globally for ease of doing business. It was ranked only 168th for starting a business, 142nd for dealing with construction permits and 156th for trading across borders. By way of comparison, Kenya was ranked 129th for starting a business, 105th for construction permits, 117th for trading across borders, and 56th overall globally.
In December 2018, a national initiative was launched to improve Ethiopia’s Doing Business performance, and in September 2019, the Government of Ethiopia unveiled a Homegrown Reform Agenda intended to complement the structural reforms that had already been initiated to address these issues. These are supported by a US$2.9bn program approved by the IMF Board in December 2019.
Further reforms that are expected to contribute to an increase in foreign direct investment relate, in particular, to a reduction of the regulatory burden on foreign-owned businesses operating in Ethiopia and to new proclamations on investment and competition enabling foreign participation in a broader set of economic sectors and enhancing competition.
Ethiopia is expected to establish a clear procedure and framework for the privatization of state-owned enterprises, and to update its Commercial Code, which currently has an inadequate legal framework for modern business operations including shareholder rights and activities relating to the establishment, operation, and closure of a business.
The renewable power sector is expected to withstand the downturn resulting from the Covid-19 pandemic and to continue to be very active, not least as a result of investors’ increasing focus on the environmental sustainability of their investments.
Ethiopia clearly offers a wealth of potential. However, while considerable strides have been made to attract private sector investment into Ethiopia’s power sector, the political situation remains fragile. The elections scheduled for August 2020 have been postponed indefinitely due to the pandemic and Prime Minister Abiy Ahmed has said that his government will stay in charge until elections can be held safely.
Private sector parties interested in Ethiopia’s pipeline of renewable power projects will accordingly want to monitor closely developments in the political situation in Ethiopia over the next few months, and their impact on the government’s power sector reform process, as well as the progress of the first projects under Ethiopia’s PPP Proclamation.
source Herbert Smith Freehills