Public-Private Partnership Stories Afghanistan: DABS Kandahar Photo © Ahmad Shah Sahil Afghanistan’s national power utility, Da Afghanistan Breshna Sherkat (DABS), is responsible for providing power generation, transmission, and distribution services across the country. Following its incorporation in 2008, DABS struggled to provide sus- tainable service, particularly in the south of Afghanistan. To help address this, DABS hired IFC as the lead advisor on a performance-based public-private partnership (PPP) for one of its regional divisions. The PPP agreement was signed in August 2014. Power Generation Solutions, headquartered in Dubai, United Arab Emirates, in co- ordination with Afghanistan Holding Group, a local Afghan company, won the bid for a 4-year management support contract to improve the financial and operational performance of DABS’ Kandahar Operations Center (KOC), its regional division re- sponsible for the provinces of Kandahar, Helmand, Uruzgan, and Zabul. The winning proposal mobilized $27.5 million in grant funding from the United States Agency for International Development (USAID) to support contractor fees and additional net- work investment. The project is expected to provide improved electricity services to 300,000 people and over 10,000 businesses across the four provinces. This series provides an overview of public-private partnership stories in various infrastructure sectors, where IFC was the lead advisor. The advisory work was supported by the United States Agency for IFC Advisory Services in Public-Private Partnerships International Development (USAID). 2121 Pennsylvania Ave. NW Washington D.C. 20433 ifc.org/ppp BACKGROUND penalize the contractor for failure to meet performance targets and Da Afghanistan Breshna Sherkat (DABS) faces major operational timelines and for any failure to meet agreed contractor staffing challenges that affect its ability to provide sustainable services provisions. that meet power demands across Afghanistan. These challenges The structure of the agreement takes into account the unique are particularly prevalent in the south of Afghanistan, which has operational and security challenges in Afghanistan and through a not been connected to the well-supplied transmission network simple and measurable set of performance objectives balances the in the north, and has access to less than 35MW of generation risk allocation fairly between the private contractor and the KOC. capacity. Despite significant investment in the transmission and distribution network, losses in the Kandahar Operations Center (KOC) were estimated to be in excess of 60%. The average BIDDING billed tariff of $0.07 per kWh in the KOC did not come close to Five bidders were pre-qualified in September 2013 and one bidder meeting the average generation cost, before losses, of over $0.50 withdrew during the tendering process citing security concerns. per kWh. DABS, in partnership with USAID, recognized the Four bids were subsequently received in April 2014. Following importance of access to electricity for economic development, a comprehensive technical and financial evaluation, Power and appreciated the potential benefits of a private contractor to Generation Solutions/Afghanistan Holding Group Consortium improve KOC’s financial and operational performance, in order to won the bid for the management support contract. The winning put it on to a path towards sustainability. proposal included total available contractor fees of $23.4 million, with $4.1 million available for additional network investment. The proposal included many innovative implementation solutions IFC’S ROLE such as mosque forums to promote community engagement and Despite continuous underperformance in the KOC, and a commitment to provide free solar power lighting to low income significant capital investment in the transmission and distribution customers to reduce theft from the network. network, DABS had been unable to improve the financial and operational performance of the KOC. Therefore, in November The contract is the first-ever performance based PPP agreement in 2012, DABS engaged IFC as the lead advisor on the structuring Afghanistan and was signed in August 2014. and tendering of a performance-based PPP. IFC’s unique experience with PPPs, especially the successful tendering of a management contract for the Liberia Electricity Corporation, EXPECTED POST-TENDER RESULTS was seen as a major plus by both DABS and USAID. In addition, DABS appreciated IFC’s reputation for transparency and • Leverage $27.5 million grant funding from USAID attracting internationally reputable bidders, particularly given to support contractor fees and additional network Afghanistan’s challenging business environment. investment. IFC’s mandate included helping to select, through a transparent • Provide improved electricity services to 300,000 competitive process, a private contractor to reduce aggregate people and over 10,000 businesses. technical and commercial losses through a program of • Reduce aggregate technical and commercial losses management support, training, and performance based payments. by 7% per annum in the second, third, and fourth IFC provided strategic recommendations on the appropriate contract years. transaction structure, including defining the range of activities to be transferred to the private contractor and designing an • Install 50,000 meters. appropriate incentive mechanism. • Provide continuous training to over 350 staff in the KOC. TRANSACTION STRUCTURE IFC proposed a transaction structure based on a 4-year • Improve customer care services through the management support contract. The management support contract management of two new customer care centers. divided the project into two distinct but complementary work 02/2015 streams: (i) administrative support services and (ii) revenue improvement services. To match the two work-streams, payments under the contract are split into a fixed management fee to cover contractor personnel costs, and a series of performance-based fees structured around the reduction of aggregate technical and commercial losses. The agreement also sets out a comprehensive penalty regime to