48827 MAY 2009 Ashta Hydropower--Turning a Doubtful ABOUT THE AUTHOR Concept into a Technological Trailblazer MARTIN SOBEK is an Investment Officer in IFC's Infrastructure Advisory Services Department. He has 10 years of international experience in mergers and acquisitions, privatization, and PPP transactions in Europe, North America, and the Middle East. APPROVING MANAGER Angelo Dell'Atti, General Manager, Advisory Services ­ Infrastructure. The author would like to acknowledge Georgi Petrov and Nikola Mihajlovic for their valuable comments and contributions to this SmartLesson. The Ashta run-of-river hydropower plant weir. (Photo by Tullio Marrama) IFC played a key role in helping the Republic of exported its surplus to neighboring countries, Albania structure and implement its first large but it now experiences frequent power public-private partnership (PPP) transaction in outages that affect the country's economic the energy sector, which brought a strong and development and require it to rely on costly reliable international investor into the country. energy imports. Albania's power-generation Verbund, Austria's largest electricity company, systemisbasedalmostentirelyonhydroelectric won a 35-year concession to build and operate plants, the most important of which exploit the Ashta plant--the first major hydropower the Drin River basin. plant built in Albania in 30 years. Verbund will invest more than $220 million in the project, In February 2001, Albania's power utility, resulting in an expected savings on Albania's Korporata Elektroenergjetike Shqiptare, electricity imports in excess of $45 million contracted the China Water & Electricity during the first five years of the plant's Corporation (CWE) to build a hydropower operation. But the project has not been plant on the lowest reach of the Drin River, at without its challenges! From design to bidding Bushati, on a turnkey basis. The CWE plan to contracts, we learned what it means to featured a diversion weir, a headrace canal, an persevere--as described in the SmartLesson aboveground powerhouse, and a tailrace below. channel conveying the turbine-design discharge of 540 cubic meters per second to Background the Buna river, some 4.5 kilometers downstream of its confluence with the Drin. Some 30 years ago, Albania not only satisfied However, this plan would affect the levels of its own domestic electricity needs but also Lake Shkodra (an important wildlife refuge IFC SMARTLESSONS -- MAY 2009 1 shared by Albania and Montenegro), raising environmental with a reduced capacity. To avoid confusion with the and socioeconomic questions as well as riparian-rights original CWE plan, the new project was named Ashta, after issues for the two neighboring countries. the village where the powerhouse would be situated under the new project design. In May 2007, the Government In August 2001, the government suspended the CWE approved the new concept as the first pilot PPP transaction contract for an independent assessment of the plan's to be implemented under the new concession law. technical, environmental, financial, and economic feasibility by the German engineering firm Lahmeyer International Between July and September 2007, IFC reviewed all previous (LI). One of LI's suggested approaches envisaged reducing studies and design work, refined the overall concept, and the tailrace channel length so as to discharge the prepared a baseline design that could be realized on the powerhouse outflow back into the Drin River upstream of Ashta site. This baseline design specified some elements of the Buna confluence, slightly decreasing the available head the plan as essential to its viability, leaving sufficient but eliminating most of the project's adverse environmental flexibility for private investors to present sound and and social impacts and avoiding riparian issues. innovative technical solutions within these clearly defined boundaries. Next came an Environmental, Social, Health, The LI study took only a few months, but there was no and Safety Screening Study, in line with IFC standards and forward movement on the project until the fall of 2006, Equator principles, and several rounds of public when the Albanian Ministry of Economy, Trade, and Energy consultations with the affected communities. (METE) retained IFC to: In January 2008, the prequalification phase began, resulting · Createalegislativeframeworkthatwouldbeconducive in 12 submissions, 10 of which met the prescribed criteria. to PPPs and reflect best international practice; Nine international companies took part in a bidders · Help establish a PPP unit within METE; and conference in April 2008 and performed extensive technical · Identify,structure,andimplementapilotPPPtransaction and legal due diligence. In the following months, the IFC in the hydropower sector. team pre-negotiated the tender documents with potential investors in a transparent and nondiscriminatory manner, IFC drafted a new Concession Law, adopted in early 2007, incorporating some of their most substantial comments. and helped establish a PPP unit within METE. Afterward, During this stage, the government's reluctance to assume IFC studied the technical and financial viability of a number or share any of the project risks became evident. Besides of potential hydropower projects, and concluded that a the hydrological, geological, environmental, and land- modified version of the original Bushati project, acquisition risks typically associated with hydropower incorporating LI's approach to discharge the powerhouse developments, Ashta is totally dependent on the water outflow back into the Drin River upstream of the Buna releases from state-owned upstream hydropower plants confluence, offered the best prospect for a pilot PPP project and subject to a rudimentary regulatory framework in hydropower. However, there is no such thing as an easy (regulations on minimum ecological flows, water off-takes hydropower project. for irrigation, cascade operation rules, potential liabilities associated with existing structures, and so on)--factors that It took a lot of effort on the IFC side to persuade the constituted an obstacle to potential participants, several of government to move from the old design to the new design whom abstained from bidding. Those bidders that did not withdraw expressed concerns with these uncertainties and with the government's reluctance to address them during the discussion phase. In June 2008, two international investor groups (Verbund of Austria and a consortium of Electrabel of Belgium and Compagnie Nationale du Rhône of France) submitted technical and financial bids. In early July 2008, Verbund was selected as the winning bidder, and the contract was signed two months later. Lessons Learned 1) Projects require definition--and sometimes redefinition. This is a section of the Drin River that will form the intake of the Ashta plant. The Hydropower plans are extremely location- and three existing Albanian hydro plants located on the Drin have a total installed ca- design-sensitive. Consequently, unless the pacity of 1,350 megawatts, representing 83 percent of the country's total hydro project to be developed has already been capacity, and accounting for 98 percent of its national energy production. defined to a degree sufficient to estimate with (Photo by Tullio Marrama) some accuracy its costs--including the expenses required to mitigate its social and environmental 2 IFC SMARTLESSONS -- MAY 2009 impacts--as well as its predicted benefits, it becomes economic performance and potentially causing extensive impossible to consider a PPP approach until its engineering, flooding of neighboring villages. economic, social, environmental, and other features have been properly established. In the case of Ashta, the concept The IFC team assisted in drafting a Cascade Coordination had already been well studied, but it still was necessary to Agreement between the winning bidder, Verbund, and the review previous findings by means of technical due state-owned generation company, to ensure fair and diligence. As a result, IFC proposed a design that avoided transparent rules for cascade regulation and safety the environmental and social flaws of the original Bushati management. The agreement provides for regular water design. We also proposed renaming the project "Ashta" so releases under normal flow, and sets clear rules for as to provide it with a new "face" and cut links with the information sharing and crisis management in case of past environmental and social issues. This turned out to be extraordinary events such as floods. Verbund considered a very good move and a great example of how proper this issue a deal breaker and wouldn't have signed without marketing and management of public attitude can play a the agreement. key role in making a project with a difficult history happen. 4) It is extremely difficult to pre-negotiate a perfect 2) Something's gotta give.... We have to understand contract that will fit all possible scenarios. the client's objectives--and help the client understand what is realistic. In IFC Advisory Services, we usually try to pre-negotiate concession contracts with interested investors to the Initially, the government wanted the entire output of the maximum possible extent prior to the bid submission date, new hydropower plant to be subject to an off-take so as to ensure transparency and avoid lengthy post-award agreement between the future operator and the state- negotiations (during which the granting authority is in a owned generation company. The government also insisted lessfavorablebargainingposition).Allprequalifiedinvestors on having the highest possible installed capacity--in the are invited to submit comments to the contractual 60­70­megawatt range--at the lowest possible tariff. documents, which are then reviewed and accepted (or rejected) by the client and its advisers. This iterative process The reality in the case of a run-of-river plant, such as Ashta, is usually done in two rounds, combined with the bidders is that there is usually a tradeoff between the maximum conference, where such comments are discussed with all installed capacity and the minimum tariff level, since these prequalified investors in a transparent manner. plants lack a storage reservoir that would allow regular water releases and ensure optimal energy outputs. In In the case of Ashta, many investors were reluctant to practice, such plants benefit from economies of scale only commentoncertaintechnicalaspectsofboththeconcession up to a point: Once the plant reaches the size at which it has agreement and the off-take agreement, fearing that they the lowest production cost per kilowatt-hour, installing would disclose confidential information. As a result, the additional capacity simply increases the project cost without contractual documentation was fairly advanced from the achieving correspondingly higher benefits. commercial point of view, where all investors seemed to be in relative agreement, but was very general from the The IFC team analyzed various alternatives and explained technical side. Technical language (such as metering, their advantages and drawbacks to the relevant scheduled outages, construction process) was based on the stakeholders. Our estimates indicated that the lowest baseline project design that IFC and its consultants prepared production costs per kilowatt-hour would be achieved with for the tender. an installed capacity of 40­50 megawatts. METE finally agreed to have the off-take price as the most important The winning bid presented by Verbund included an evaluation criterion, so long as the total installed capacity innovative solution based on the StrafloMatrixTM was not allowed to fall below 40 megawatts. IFC's technology--a new concept for developing hydropower at assumptions turned out to be right, since the winning bid low-head sites where dams, weirs, or canals already exist. offered the lowest tariff at the installed capacity of 48.2 Projects that may not be financially viable, based on megawatts. conventional turbines and generators, may now be developed using this method. The StrafloMatrixTM design 3) Don't forget about the bidders: Understand their reliesonafactory-assembledgrid,ormatrix,ofstandardized concerns and work with your client to address possible generating units. Complete modules, including all the issues. associated mechanical and electrical equipment, are shipped to the project site, where they can be readily Being the most downstream plant on the Drin cascade, the installed into existing structures with minimal civil works Ashta plant is totally dependent on water releases from the required. The advantages of this concept are its 1) low plants upstream. So the winning bidder was understandably investment cost, 2) easy and inexpensive maintenance, and concernedthatthestate-ownedgenerationcompanymight 3) shorter construction periods, compared to conventional retain water in its reservoirs for extended periods and plants. Since this approach is new and original, we spent release it at times when it would be most advantageous for considerable time during the final negotiations, reviewing energy trading purposes (for example, at peak-power and adjusting the project's technical details and the times). Since Ashta has almost no storage, extreme water contractual terms to best reflect the peculiarities of the releases upstream would spill over the weir without winning bid. producing any electricity--negatively affecting the project's IFC SMARTLESSONS -- MAY 2009 3 The principal lesson here is: When drafting conduct a thorough technical examination of and pre-negotiating contractual documents both offers before making any with investors, rather than getting lost in recommendation to the contracting authority. technical minutiae, the team should focus on Several independent experts studied both the main commercial terms of the project, the offers in great detail for almost three weeks major risks envisaged, and their allocation, as and, to the great relief of all parties involved, well as on a set of fair and transparent found both offers to be compliant and evaluation criteria. Since you never know technically feasible. exactly what technical solution investors will come along with, a certain degree of 6) Important issues not addressed in the contractual flexibility is desirable, provided it's early stages of the tender can have a fair to all parties. Details stemming from potentially devastating effect later. different technologies can (and in some cases must) be hammered out only after the winning During the transaction-structuring phase, our project is known. team made a number of recommendations regarding the risk allocation and the necessary 5) Technical and financial bids should be changes to the regulatory framework required evaluated separately, but if the client insists to make the transaction more attractive. The on reviewing them simultaneously, you may Government, in an effort to shift project risks have to get creative to maintain objectivity to the future concessionaire, initially refused in the process. many of these recommendations. Moreover, it also wanted to remove certain events (such When evaluating final bids in an IFC Advisory as sudden tax increases) from the MAGA Services mandate, we prefer to open the (Material Adverse Government Action) clause, technical part of an offer first, to see whether putting the overall viability of the deal at it is complete, compliant with all the essential stake. project requirements, and technically sound. If it is, the technical offer receives a "pass" score, At the same time, certain regulations and only then is the bidder's financial offer (minimum ecological flow requirements, opened. If a technical offer receives a "fail" irrigation use of water, and so on) required score, the corresponding financial offer is not further refinement to comply with commonly opened, and the entire package is returned to accepted standards. IFC warned the client that the rejected bidder. investors would need clear "rules of the game" for their financial modeling purposes However, Albanian legislation required that (for example, a 4 percent versus an 11 percent both technical and financial offers be opened residual flow requirement would have simultaneously and be evaluated using a changed the economics of the project predetermined set of weighted criteria in a completely), but the Government did not comprehensive scoring formula. focus sufficiently on those concerns in the early stages. To avoid subjectivity in the evaluation of the technical criteria, the IFC team recommended As the tender progressed and the contractual a binary approach whenever a simple and documents were pre-negotiated, most of the transparent grading formula could not be prequalified investors raised those same issues. established. For example, an investor could After several rounds of investors' comments, receive either ten points or zero for the Ministry agreed to make changes to the DISCLAIMER "environmental and social acceptability of the contractual documentation (and to refine IFC SmartLessons is an awards project." Since such a project feature is either existing regulations), thus essentially saving program to share lessons learned acceptable or not acceptable ("pass or fail"), the deal. However, delays in addressing these in development-oriented advisory saying that one offer is "more" acceptable issues in the early stages of the project shifted services and investment operations. The findings, than the other and assigning acceptability the timetable and possibly discouraged some interpretations, and conclusions grades for it is inherently subjective. (You investors from bidding. expressed in this paper are those can't be "partly" married.) of the author(s) and do not Final Word: Making Change Happen necessarily reflect the views of IFC The only financial criterion used was the off- or its partner organizations, the Executive Directors of The World take price per kilowatt-hour of electricity TheAshtahydropowerplantisagreatexample Bank or the governments they produced, leaving no room for ambiguity. But of how IFC's involvement can bring about real represent. IFC does not assume since the legislation required technical and change by fostering innovative solutions. Our any responsibility for the financial offers to be opened at the same time, advice, perseverance, and out-of-the-box completeness or accuracy of the information contained in this the evaluation committee started thinking helped turn an old, environmentally document. Please see the terms unintentionally leaning toward the best and socially questionable concept into a and conditions at www.ifc.org/ financial offer from the first moment. The IFC sustainable project using the latest technology smartlessons or contact the team insisted that the evaluation committee in hydropower generation. program at smartlessons@ifc.org. 4 IFC SMARTLESSONS -- MAY 2009