Electricity distributor Kenya Power is negotiating a Sh29.3 billion loan from the Chinese government to finance the conversion of its overhead cables to underground lines in Nairobi, Kisumu, and Mombasa.

Joseph Njoroge, the company’s managing director, said the money is part of the Sh80 billion Kenya Power plans to invest in the medium term to improve the efficiency of its operations and cut costs.

“The Ministry of Finance is borrowing the funds from the Export-Import Bank of China (China Exim Bank) for onward lending to Kenya Power,” said Mr Njoroge.

Overhead electricity lines experience up to 10 times more disruption compared to underground cables, he said.

Negotiations are expected to close by December, paving the way for the projects to commence early next year. The loan is, however, being seen in some quarters as part of the reason the power firm is aggressively pushing for a phased increase in consumer tariffs beginning next month.

It is also expected to more than double the power firm’s debt burden to Sh50.8 billion from the June 2012 total borrowings of Sh21.5 billion, significantly diminishing the company’s headroom for more loans.

The loan will make Exim Bank Kenya Power’s single biggest creditor.

Equity Bank is currently listed as the electricity distributor’s largest lender, having advanced the company Sh5.6 billion in loans.

The World Bank’s International Development Association and the Kenya government, with a combined debt of Sh4.7 billion, and European Investment Bank (Sh3.1 billion) follow in that order.

Standard Chartered Bank has two separate outstanding loans of Sh4.9 billion and Sh1.5 billion.

Kenya Power’s balance sheet has more than doubled to Sh134.1 billion since 2008, while total borrowings have also grown by the same margin.

Mr Njoroge said three Chinese firms and one American multinational have expressed interest in the projects.

Chinese multinationals Nari Group, China National Machinery Equipment Import and Export Corporation (CMEC), and US firm Sefco Electric Supply are bidding for the Nairobi job.

China Xian Electric Group has placed a bid for the Mombasa and Kisumu works.

Though the power firm says the jobs will be competitively awarded, the decision by China Exim Bank to offer Kenya a concessionary loan for the project is expected to give the Chinese firms a head-start.

State-owned Exim bank has been the force behind China’s expansion into Kenya’s booming infrastructure sector where the Chinese firms have a huge presence.

Kenya Power says the underground power lines will significantly reduce electricity interruptions assuring the country of reliable supply. Overhead power lines are vulnerable to damage by strong winds, falling trees and motor vehicles, causing outages that can last for hours or even days.

Vandals are also steal the power cables. The resulting interruptions are estimated to cost the economy billions of shillings in lost productivity or in back-up power from diesel generators.

Aside from raising Kenya Power’s maintenance costs, electricity disruptions cause heavy revenue leakages worth hundreds of millions of shillings annually through system losses.

Kenya Power’s system losses stand at 17.3 per cent against efforts to cut it to 16.9 per cent by 2016.

The Energy Regulatory Commission (ERC) has since 2008 capped system losses that Kenya Power can claim from consumers at 15 per cent. This means Kenya Power must absorb the excess 2.3 percentage points system losses, worth about Sh1 billion annually.

Mr Njoroge said the company is also working on a joint venture that will see it manufacture transformers locally to cut its spending on electricity equipment.

“We expect to issue a tender early next year seeking a partner for local manufacture of transformers,” he said.

Kenya Power will be seeking a significant stake in the venture for control of the proposed operation. Local production of transformers is expected to create factory jobs and reduce the company’s exposure to foreign exchange fluctuations related to imports of the equipment.

Kenya Power will also be relieved of procurement delays that often lead to transformers being delivered nine months after the placement of the order.

“Even if the cost of producing the transformers locally turns out to be similar to the prices of imported transformers, the removal of costs associated with procurement delays alone will be worth it,” Mr Njoroge said.

Large capital expenditure and rising maintenance costs are part of the reason Kenya Power has applied to ERC seeking to raise its base tariffs by 21 per cent and nine per cent in March and July respectively.

It has also applied to raise its tariffs in July 2014 and July 2015, a move that if authorised will raise base power prices by four and 11 per cent respectively.

Public hearings on the proposed tariff increments were held on Monday in Nairobi. The Ministry of Energy is backing Kenya Power’s bid, citing the need for increased investments in the energy sector.

Kenya Power expects the tariffs to be approved without amendments, putting households on notice for a possible erosion of their budgets and a weakening of the competitiveness of Kenyan manufactured products in regional markets in the medium term.

Kenya Power has been stuck with the current tariffs since July 2008 following the government’s decision to suspend a February 2011 application for a tariff review.

Ministry of Energy officials said the decision to delay review of the tariffs was meant to help consumers and the economy cope with the high inflationary pressure prevailing at the time.

Source : abdas.org