On May 25, 2012, MIGA issued guarantees of up to $61.5 million covering the non-shareholder loan (including estimated swap exposure) by Absa Bank Limited of South Africa to Thika Power Ltd in Kenya. The guarantees will have a term of up to 15 years, providing coverage against the risk of breach of contract.
The project consists of the construction (on a build, own, and operate basis) of an 87 megawatt heavy fuel oil plant located at Thika, approximately 35 kilometers from Nairobi. Melec PowerGen Inc. was awarded the contract following a competitive bidding process for the development of the Thika plant. The total project cost is estimated at €112.3 million ($151 million). Thika has entered into a 20-year power purchase agreement with Kenya Power and Lightning Co. The project is supported by a standby letter of credit from a commercial bank and is further guaranteed by an International Development Association (IDA) partial risk guarantee to cover short-term liquidity.
Kenya is facing ongoing energy shortages driven in part by the economy’s rapid growth. A recent World Bank study found that unreliable electricity supply lowers the annual sale revenues of Kenyan firms by about 7 percent and reduces Kenyan annual GDP growth by about 1.5 percent. The additional 87 megawatts provided by the plant will directly contribute to economic growth by reducing the energy shortfall that threatens economic growth and providing power supply consistent with the country’s Least Cost Power Development Plan. Moreover, the project should reduce the country’s excessive dependence on hydropower that has exposed the country to concentration risk in the past, most recently during the extreme droughts of 2007-09. Finally, the project is consistent with the World Bank Group’s priority of unleashing Kenya’s growth potential by expanding electricity infrastructure based on the participation of the private sector.
The project is also aligned with MIGA’s priorities of encouraging investments in countries eligible for assistance from IDA, promoting South-South investments, and facilitating complex infrastructure investments.