REVISED FINAL REPORT September 2017 Task A: Sector performance and structural sector reform Deliverable 4.1: Options study for GECOL restructuring report Disclaimer and copyright note This document has been prepared only for the International © 2017 Bank of Reconstruction and Development ("IBRD") and solely PricewaterhouseCoopers for the purpose and on the terms agreed with the IBRD in our LLP agreement dated 21 March 2017 relating to Task A. All rights reserved. In this The scope of our work was limited to a review of documentary document, 'PwC' refers to the evidence made available to us. We have not independently UK member firm, and may verified any information given to us relating to the services. sometimes refer to the PwC network. Each member firm We accept no liability (including for negligence) to anyone else is a separate legal entity. in connection with this document. We have agreed with you that the report will be provided by you to GECOL for their consideration. We would ask that it not be provided to anyone else unless otherwise agreed in writing by us. This is a draft prepared for discussion purposes only and Please see should not be relied upon; the contents are subject to www.pwc.com/structure for amendment or withdrawal and our final conclusions and further details findings will be set out in our final deliverable. Strategy& | PwC Prepared for The World Bank 1 The present report focuses on assessing the options for GECOL restructuring, as by Task A ToR Focus of this report 1 2 Rapid assessment 3 4 5 Project Regulatory Restructuring of Project review and of the sector set-up reform key actors recommendation performance 1.1 2.1 Rapid sector 3.1 Gap analysis of the 4.1 5.1 Option study for Findings review and Data collection performance sector structure vs. GECOL restructuring final report assessment previous plan 1.2 3.2 4.2 Methodology, High-level options for Roadmap for Focus of team and approach sector reform establishing of LEMRA this report validation 3.3 Sector restructuring (framework, actors and roadmap) 3.4 Electricity Act 6 Workshop & trainings 7 PMO (progress reporting) Source: Task A inception report Strategy& | PwC Prepared for The World Bank 2 Power utilities have typically suffered common structural issues, thus experiencing the need for reform … Typical power utility evolution process Time The power utility A series of The state feels the need originates as vertical DIFFICULTIES in for electricity sector integrated STATE- meeting national needs reform and UTILITY OWNED MONOPOLY emerge RESTRUCTURING State monopoly rationale Typical issues emerged Reform objectives • Critical utility financial position • CUSTOMERS: improve • Minimizing coordination cost (excessive/inefficient costs and service quality, provide between supply chain functions tariffs not covering them) affordable electricity • Financing large-scale • Drained government’s fiscal • SUSTAINABILITY: strengthen investments in production and resources: inability to finance State/utility fiscal position, network assets expenditures and need to face promote efficient use of inputs • Enhancing consumer welfare other pressing public needs • EMPLOYEES: create first-rate and guaranteeing a critical • Low service quality and access efficient work environment, service for economic security to electricity, high emissions promote employee satisfaction Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 3 …and for Libya the same experience led to the launch of the current project, which so far identified the sector reform Libyan power utility restructuring process The power utility A series of The state feels the need Launch of the sector originates as vertical DIFFICULTIES in for electricity sector performance and integrated STATE- meeting national needs reform and UTILITY structural sector reform OWNED MONOPOLY emerge RESTRUCTURING (Task A) Weak sector governance Root- cause Sector structure (monopoly) Electricity sector reform Task A (3.1, 3.2, 3.3, 3.4) P issues Poor operating in Libya performance GECOL restructuring Task A (4.1) Focus of this report (identified Increasing costs in previous LEMRA establishing Task A Unbalanced tariff Task A (4.2) reports) framework Commercial losses and poor collection Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 4 The present document will lay-out the options for GECOL restructuring (then further deep-dived in Task C) Current report focus Electricity sector reform Wave I Wave II Ambition Vision 2018 M1 M2 M3 Current GECOL GECOL restructuring operating model 4.1 Options study for GECOL restructuring Current Libya (current document focus) electricity sector structure Assessment of the need for Section 1 GECOL restructuring Identification and evaluation Section 2 of target options Considerations on private Section 3 sector participation Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 5 Assessment of the need for GECOL restructuring Identification and evaluation of target options Considerations on private sector participation Strategy& | PwC Prepared for The World Bank 6 In Libya, most of the identified issues directly concern GECOL, thus driving the need for restructuring Major issues and implications Issues affecting Libya today Key reports Implications Reference project Task (root causes) (Task A and C) Regulatory reform Weak sector Need for sector governance restructuring Task A LEMRA establishment Structural reform of electricity sector Sector structure GECOL restructuring (monopoly) & GECOL operating model Institutional development Manpower / organizational rationalization review Increasing costs Process mapping ERP system review Poor operating Task C performance Institutional development Improving technical and performance improvement performance of GECOL Commercial losses Improving financial performance of customer and poor collection service Need for GECOL Unbalanced tariff restructuring – Tariff framework review, tariff structure set-up and excel framework Focus on next slides tool Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 7 Sector structure (monopoly) & GECOL operating model The current GECOL structure and operating model is clearly not aligned with the target organizational dimensions GECOL organization / operating model issues Criteria for the assessment of GECOL’s operating model I II III IV V VI Clearly defined Preparation Alignment Alignment vs. Results operating Efficiency for future with Strategic best practices accountability Identified issues model evolution Priorities BU “concentration” and 1 limited levers for effective BU management ! ! ! ! ! 2 Fragmentation of engineering & projects ! ! 3 Lack of a strong AFC function ! ! ! ! ! 4 Sub-optimal set-up of ICT ! ! ! ! 5 HR&O responsibilities partially outside MD area ! ! ! ! ! 6 Unclear role of Contracts & Development Accounts ! ! ! BoD overstaffed and 7 including functions typically under MD ! ! ! ! ! ! # Target organizational dimension ! Target organizational dimension negatively impacted by current organization Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 8 Increasing costs Both the number of FTEs and the average salary is significantly growing… # FTEs evolution (2010-15, ‘000) Average-salary evolution (2010-15, LD / FTE) Indexed vs. 2010 (100% = 2010 reference) 45 +4.0% 250% 41.7 40.1 +70% 214% 40 38.3 Average-salary 35.0 36.2 35 34.3 200% 30 150% 142% 25 20 Cumulated inflation1 100% (2010 reference) 15 10 50% 5 0 0% 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 1) IHS, inflation consumer prices Source: GECOL data collection ID13, Strategy& analysis Strategy& | PwC Prepared for The World Bank 9 Increasing costs …leading to low productivity and a considerable increase in personnel costs Productivity benchmark (2015) GECOL costs evolution (2010-15, Mn LD) GWh / FTE Although having a lower 18 17.2 +657 share of its total FTEs in Mn LD generation, GECOL has still 16 a worse productivity than 409 peer countries Salaries 14 1,065 11.7 108 12 Maintenance 81 10 9.5 115 8.21 Materials for O&M 5 8 -240 Mn LD 120 6 Various service 5.0 71 4 688 Fuel cost 449 2 Fuel transportation 23 0 to generation stations 6 Morocco Jordan Algeria Libya Egypt 356 2010 Other expenses Generation 254 2015 FTEs share 19% 20% 17% 10% 20% vs. total Note: includes Sonelgaz, ERC, CEGCO, SEPGCO, AES, QEPCO, ONEE-BE, Masen, and EEHC Generation Companies; 1) Updated with new data received Source: GECOL data collection ID17, GECOL data collection ID24, Corporate Annual Reports, Electricity Sector Regulatory Agencies Annual Reports, Strategy& analysis Strategy& | PwC Prepared for The World Bank 10 Poor operating performance The technical performance has dramatically worsened, severely impacted by low generation availability S/D evolution1 Reserve 3% -10% -5% -8% -31% -11% -15% -25% margin2 GW GECOL ready 10.8 11 10.3 10.2 for retirement 9.7 10.0 units 10 Third party 8.8 8.8 8.9 plants 9 8 38% 42% 42% 51% 33% 36% 55% 7 43% 55% Available 6 capacity excluding ready for 5 retirement and 4 third party plants from nameplate 3 67% 64% 62% 58% 58% 57% 49% 2 45% 1 0 2010 2011 2012 2013 2014 2015 2016 2017 Demand (peak demand)3 Unvailable capacity Available capacity5 Nameplate capacity4 1) Tripoli West unit 1 and 3 are assumed to be retired respectively in 2013 and 2011, University small gas plant is assumed to be retired in 2016; 2) (Available capacity – Peak demand) / (Peak demand); 3) Demand at generation level. Demand for 2017 is forecasted demand under Scenario C-Slow political stability scenario-UPDATED ; 4) Nameplate capacity estimated considering unit rated nameplate capacity and year in which the unit came in service. Total nameplate capacity includes 3rd party plants and units that are considered ready for retirement in 2017; 5) Considers only time availability computed on generating unit hours of operations during the year; Source: GECOL data collection ID4, Awardbrand - Improving GECOL technical performance report (Data received from GECOL Generation department), Strategy& analysis Strategy& | PwC Prepared for The World Bank 11 Commercial losses and poor collection Commercial losses and bad debt have steadily increased Evolution of commercial losses Evolution of receivables TWh Bn LD 25 24.1 2.5 2.3 21.1 1.9 2.0 20 2.0 16.1 15 1.5 12.6 1.3 10 1.0 6.4 5 0.5 0 0.0 2010 2012 2013 2014 2015 2010 2012 2013 2014 2015 Source: GECOL data collection ID12, GECOL data collection ID37 Strategy& | PwC Prepared for The World Bank 12 Unbalanced tariff framework An unbalanced tariff, combined with commercial losses and bad debt, is affecting the sector sustainability … Burden on the sector (Bn LD, 2015) 5.0 Burden on Subsidized tariff scheme Libyan state due to Tariffs do not reflect the economic cost 3.1 unbalanced of the supply tariff 1.9 D&A 10% Other 12% OPEX 0.9 Fuel cost 23% 0.8 Salaries 55% 0.2 Total cost Fuel GECOL Unreflective Max. Commercial Revenues Non Actual subsidies P&L costs tariff theoretical loss invoiced collection collected revenues1 revenues 1) Sum of (Tariff by customer class) x (Consumption by customer class) Source: GECOL data collection ID2, GECOL data collection ID7, GECOL data collection ID13, GECOL data collection ID37, Strategy& analysis Strategy& | PwC Prepared for The World Bank 13 Unbalanced tariff framework … Leading GECOL to incur in heavy losses … Evolution of GECOL P&L (subsidies included) (Bn LD) 3.0 Costs Government subsidies 2.5 2.5 Revenues from market 2.1 1.9 1.9 2.0 1.8 1.7 1.7 1.5 1.4 1.5 1.3 1.3 0.4 0.9 1.1 1.0 0.8 0.8 1.0 1.1 0.3 0.5 0.8 0.4 0.6 0.5 0.4 0.0 2010 2011 2012 2013 2014 2015 0.0 -0.2 -0.5 -0.4 -0.4 -0.6 -0.6 -1.0 Losses -1.2 -1.5 Profit -25% -81% -12% -26% -92% -46% margin (%) Source: GECOL collection ID13, Strategy& analysis Strategy& | PwC Prepared for The World Bank 14 Unbalanced tariff framework … And putting at risk its long-term financial viability GECOL Total Assets GECOL Total Equity and Liabilities (Bn LD) (Bn LD) Delta (Bn LD) Delta (Bn LD) 2010-14 2010-14 Largely non- 7.5 7.5 7.4 performing? 7.5 7.5 7.4 Mainly 7.1 7.0 7.1 7.0 towards NOC? 19% 26% 26% 17% 27% 31% 23% +0.9 ! 24% 37% 6% 48% +2.3 ! 20% 7% 12% 18% 23% 24% 21% 7% +0.1 10% +0.3 76% 69% 61% 61% 59% 56% 52% 50% 48% -0.8 -2.3 42% ! 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Receivables Trades payables Other current assets Other liabilities (exc. trade payables) Fixed assets Total Equity Source: GECOL collection ID13, Strategy& analysis Strategy& | PwC Prepared for The World Bank 15 Assessment of the need for GECOL restructuring Identification and evaluation of target options Considerations on private sector participation Strategy& | PwC Prepared for The World Bank 16 For each root-cause issue identified, we have developed two restructuring options that GECOL may consider Possible options by issue Root-cause issues in Libya Option 1 Option 2 Sector structure RADICAL GRADUAL Quick reorganization transition into Gradual reorganization evolution (monopoly) & GECOL holding company structure aimed at following a progressive unbundling path operating model achieving legal unbundling by 2019 towards legal unbundling by 2031 DRASTIC CONSERVATIVE Adopt a direct “push” approach by Adopt a retaining approach by granting Increasing costs downsizing the organization to optimal long-term sustainability of change for all efficiency targets the different stakeholders involved PRIVATE PARTICIPATION IN-HOUSE Poor operating Attract private resources to improve Improve service quality by leveraging performance sector performance and increase power internal resources and meet demand by generation capacity to meet demand developing an in-house investment plan AGGRESSIVE PROGRESSIVE Commercial losses Achieve 100% billing and 99% collection Address theft and insolvency ultimately and poor collection by 2021 through an aggressive metering improving progressively GECOL’s billing program and police enforcement SHARP PRUDENT Unbalanced tariff Achieve a fully cost reflective tariff with a Gradually increase tariff achieving a framework sharp increase in rates by 2021 partial coverage of P&L costs and cost of fuel subsidies by 2026 Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 17 Sector structure (monopoly) & GECOL operating model Depending on the unbundling approach chosen, GECOL may undertake a different organizational restructuring approach Reorganization options Option 1 Option 2 Radical Gradual Quick reorganization transition into a holding company Gradual reorganization evolution going hand in hand structure aimed at achieving legal unbundling directly with a stepped unbundling pathway (first accounting, from today’s situation followed by management unbundling and then legal) Wave I Wave II Ambition Fully Full legal Fully Accounting Functional Full legal Integrated unbundling Integrated unbundling unbundling unbundling Today Wave I Today M1 M2 M3 Projects within SBUs with SBUs and strong AFC, strengthened HR, ICT and AFC, ICT and E&P corporate HR corporate Holding As-is Holding structure As-is core functions core functions structure Strategy& | PwC Prepared for The World Bank 18 Sector structure (monopoly) & GECOL operating model In line with the unbundling process recommended, the gradual reorganization option is preferrable Options assessment Option 1 Option 2 Radical Gradual • Possibly ensures results accountability and improved • Enabled early-on SBUs accountability for results and PROS + operational efficiency • Rapid evolution away from monopoly towards more independent management • Parallel change of organizational structure, processes competitive sector structures and operating model • Challenging implementation both in terms of target CONS – structure and timing • Marked disruption risks for GECOL • Lengthier change process • Inflexible employee redeployment • Delayed benefits realized due to inefficiency of resulting • Delayed unbundled industry structure and risk of being RISKS operating companies “trapped” into intermediate steps without reaching the • Lost synergies and potential replication of activities final target among operating companies • Large consensus and leadership required EASE 0 • Extensive coordination effort needed among 4 • Persistent effort and commitment to ultimate organizational units target necessary • Required accounting and functional separation 1) Strategy for institutional development of GECOL report Source: Strategy& Analysis Strategy& | PwC Prepared for The World Bank 19 Increasing costs To control the increasing costs (i.e. personnel), GECOL may follow either an intrusive or a conservative approach Manpower cost-cutting options Option 1 Option 2 Drastic Conservative Adopt a direct “push” approach – focused on maximizing Adopt a retaining / re-skilling approach (preferring the the financial result, directly downsizing the organization socio-economic result), granting long-term sustainability to reach optimal efficiency targets of change for all the different stakeholders involved Example of possible solutions (illustrative) Example of possible solutions (illustrative) Temporarily or permanently terminate Freeze hiring Institute a hiring freeze and reassign Dismiss employment for a group of employees and reallocate employees to new department/positions Retrain for Train managers and staff professionals Retrain for Leverage current resources to fill unmet outside jobs to be hired outside the company inside work needs (e.g. train new technicians) Freeze salary Incentivize to Ask employees to take voluntary lay- Temporarily reduce/freeze promotions, and benefits leave offs, or offer buyouts & early retirement wages, benefits (e.g. paid holiday time) increases Loan staff, Lend employees to another company, Curtail Enhance productivity and limit/suspend furlough or schedule unpaid employee furloughs overtime approval for high-cost overtime hours Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 20 Increasing costs Given the current country situation and the high social costs involved, a moderate approach may be preferable Options assessment Option 1 Option 2 Drastic Conservative • Relevant cost savings immediately achievable (e.g. due • Sustainable approach minimizing socio-economic impact PROS to collective layoffs) + • Possibility to quickly gain efficiency and align • Opportunity to address unmet needs (e.g. lack of plant technicians) organizational structure to best practices • Severe economic impact on dismissed employees, • No/limited impact on efficiency/productivity CONS – especially in developing countries • Possible short-term increase in costs (e.g. due to buyout achievements and limited cost savings • Possible employee dissatisfaction or early retirement payments) • Popular opposition, protests • Limited financial / operational impact RISKS • Long-term socio-economic impact on national economy • Need for reallocation or training to fill current positions / (e.g. unemployment, GDP decrease, poverty, expertise gaps inflation/deflation, etc.) • Solution design subject to pressure from unions • Lack of strict application of Government’s EASE 1 • Implementation dependent upon Government’s 3 directions (enforcement of hiring freeze failed so approval far – unauthorized hiring ongoing) 1) Process mapping and manpower rationalization report Source: Strategy& Analysis Strategy& | PwC Prepared for The World Bank 21 Poor operating performance To improve operational performance, GECOL might either enable private participation or leverage in-house resources Operating performance improvement options Option 1 Option 2 Private participation In-house Attract private resources to improve sector Improve service quality by leveraging internal resources performance, leverage external capabilities, and and meet increasing demand needs by developing an increase power generation capacity to meet demand in-house (GECOL, State) investment plan requirements Preliminary revision of GECOL investment plan Net capacity increase vs. 2017 (GW) 12.6 15 11.5 12 9.2 9 7.6 6 4.7 3.7 2.6 3 0.5 0 -3 2018 2019 2020 2022 2024 2026 2028 2030 Long-term additions (11 new Steam, Gas, CC plants) Focus on next chapter Short-term additions (4 new Gas plants) Under-construction plants (Ubari, Khaleej) Phased-out capacity (6 plants1) 1) Include Steam (Khoms Steam, Tobruk, Misurata Steel) and Gas plants (Tripoli South, Zwetina Gas, Khoms Gas); Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 22 Poor operating performance Considering todays stability constraints, a solution closer to the in-house option seems the most achievable Options assessment Option 1 Option 2 Private participation In-house • Fast track capacity expansion once private investors • Focused in the short run on solving pressing sector’s PROS commit to entering the sector + • Enabled growing electricity needs satisfaction without issues (i.e. load shedding) and subsequently on restructuring and expanding existing facilities imposing large strains on national budget • Highly dependent on external forces (IPPs willingness to CONS – enter the sector) • Several prerequisites for private investment attraction • Required government support to implement the intended investment plan need to be satisfied • Heavy burden on government budget if GECOL is not • Delay in realization of investment plan combined with RISKS able to adhere to PPA conditions rising demand might worsen substantially reserve • If no investment in repairs is undertaken, unused and margin obsolete assets will populate GECOL’s BS • Required sovereign guarantees and letters of EASE 1 credit 3 • Large government support needed for • Large investments and effort required to satisfy realization of investment plan prerequisites for private investment attraction 1) ERP System review and Improving technical performance report Source: Strategy& Analysis Strategy& | PwC Prepared for The World Bank 23 Commercial losses and poor collection ILLUSTRATIVE Aggressive invoicing and collection targets imply a dramatic change with respect to historical performance… Commercial performance improvement options Option 1 Option 2 Aggressive Progressive Achieve 100% billing and 99% revenue collection by Address theft and insolvency ultimately improving 2021 through an aggressive metering program and progressively GECOL’s billing and considering that the police enforcement overall result will depend on the effect of the measures put in place 120 100% 120 100% 100% (%consumption) (%consumption) 100 100 Invoicing Invoicing 80 80 60 60 40 40 20 28% 20 28% 0 0 120 120 99% 99% 99% (% revenues) 100 (% revenues) 100 Collection Collection 80 80 60 60 40 52% 40 52% 20 20 0 0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Strategy& | PwC Prepared for The World Bank 24 Commercial losses and poor collection …hence, a more progressive option might be preferred in this case Options assessment Option 1 Option 2 Aggressive Progressive • Quick enhancement of GECOL’s cash position (if • Gradual investment in metering technology will reduce PROS + successful) negative impact on GECOL’s financial situation • Short term improvement on government budget due to • Consistency with historical performance potentially reduced subsidies to GECOL (if successful) • Less dependent on government support CONS – • Costly investments in metering and invoicing technology required • Lengthy gradual process requires careful planning and methodic implementation • Customer dissatisfaction might lead to retaliations RISKS against GECOL’s employees • Delayed effects on GECOL’s cash position • Reduced impact of measures due to macroeconomic situation • Option subject to large pressure for change by • Coordination between GECOL’s employees and EASE 1 the public opinion 4 electricity police is key for success • Implementation dependent upon government financial support 1) Improving financial performance of customer service report Source: Strategy& Analysis Strategy& | PwC Prepared for The World Bank 25 Unbalanced tariff framework To achieve a more cost reflective tariff, GECOL may target to sharply increase its tariff rates or do it more prudently Tariff framework improvement options Option 1 Option 2 Sharp Prudent Achieve a fully cost reflective tariff with a sharp increase Gradually increase tariff achieving a partial coverage of in rates by 2021 P&L costs and cost of fuel subsidies by 2024, protecting the most vulnerable through SSN Average Average tariff ILLUSTRATIVE tariff ILLUSTRATIVE Dhs/KWh 200 Dhs/KWh 200 180 174 180 Included lifeline 160 +30% 160 tariff for households with monthly 140 140 consumption below 120 120 a certain threshold 100 100 80 80 +6% 63 60 60 41 36 36 40 40 20 20 0 0 2015 2021 2024 2015 2021 2024 GECOL 100% 100% GECOL 100% Avg. tariff Avg. tariff 90% covering: covering: P&L costs 56% P&L costs 56% Cost of fuel 100% 100% Cost of fuel subsidies 0% subsidies 0% 0% 20% Source: Strategy& Analysis Strategy& | PwC Prepared for The World Bank 26 Unbalanced tariff framework A more prudent approach to tariff increase might help GECOL minimize customers’ resistance … Options assessment Option 1 Option 2 Sharp Prudent • Softer impact on customers resulting in enhanced public • Short term improvement on government budget due to acceptance PROS potentially reduced subsidies (if successful) + • Quick enhancement of GECOL’s financial situation (if • Smooth implementation of required technology without heavy investments needed successful) • Gradual price increases might be paralleled by service • Customers strongly incentivized to reduce demand level improvements • Inconsistent with current macroeconomic situation and CONS • Delayed benefits on GECOL’s financial situation – customers purchasing power • Key role of progressive service level improvements in • Large investment in advanced metering technology to guaranteeing public acceptance of increased rates ensure billing and collection required • Peaking electricity theft and skyrocketing bad debt due • Delayed GECOL’s financial sustainability which might RISKS to customers inability to pay bills inhibit further sector development (unbundling path) • High pricing not comparable with service level provided • Late adjustment of demand to new rates which might to customers worsen reserve margin • Overall strong economic situation improvement • Strong communication campaign needed to EASE 1 needed 4 convey reasons for tariff increase to customers • Required revolutionary change in customers • Strong government support needed throughout approach towards electricity subsidization the process 1) Financial performance assessment and financial models report (tariff framework review, tariff structure set-up and reform pathway and excel tools) Source: Strategy& Analysis Strategy& | PwC Prepared for The World Bank 27 Unbalanced tariff framework … And would be supported by the impacts of commercial losses decrease (equal to 160% tariff increase or 11k FTEs cut) Comparison of scenarios achieving identical financial impact (2015) A 69% Limit Burden on the sector Back to commercial 2010 levels (Bn LD) loss 21% (% max rev.) -0.3 B 95 Increase average +161% tariff 36 (Dhs/kWh) Same individual 1.8 effect of each 1.5 C scenario 42,000 Re-size 31,000 -11,000 manpower (‘000 FTEs) 2015 2015 actual scenario A, B, C 2015 2015 Source: Strategy& analysis actual scenario Strategy& | PwC Prepared for The World Bank 28 In conclusion, our recommendation is to follow a series of gradual but yet very effective restructuring options Recommended options Root-cause issues in Libya Recommended option Deep dived in report GRADUAL GECOL restructuring Task A Sector structure Gradual reorganization evolution (monopoly) & GECOL following a progressive unbundling path Task C operating model towards legal unbundling by 2031 Institutional development CONSERVATIVE Manpower / organizational rationalization review Adopt a retaining approach by granting Increasing costs long-term sustainability of change for all the different stakeholders involved Process mapping IN-HOUSE ERP system review Poor operating Improve service quality by leveraging performance internal resources and meet demand by Improving technical Task C developing an in-house investment plan performance Commercial losses PROGRESSIVE Improving financial Address theft and insolvency ultimately performance of customer and poor collection improving progressively GECOL’s billing service PRUDENT Tariff framework review, Task C Unbalanced tariff Gradually increase tariff achieving a tariff structure set-up and framework partial coverage of P&L costs and cost of excel tool fuel subsidies by 2026 Strategy& | PwC Prepared for The World Bank 29 Assessment of the need for GECOL restructuring Identification and evaluation of target options Considerations on private sector participation Strategy& | PwC Prepared for The World Bank 30 A reform process normally targets competition, and private participation is one of its key enabling steps Reform process in developing countries Vertical Example of reforms required to introduce competition Integrated Competition Organized power Monopoly Sector Private exchange unbundling participation market Focus in next slide Competition objective Possible impediments in developing countries Utilities insolvency Undeveloped capital markets preventing full payment of suppliers and to provide financing on the scale and terms deterring IPPs from developing large projects needed for investment in supply capacity Price reduction Lack of diversity in fuel supply Inadequate legal infrastructure needed for competition among generators for dispute resolution or enforcement of court (liberalized fuel cost, availability of fuel types) decisions / property rights (courts/arbitration) Service improvement Insufficient T&D / control system Limited market size to manage the complex pattern of power to support the number of viable sellers and flows in a competitive market purchasers needed for full competition Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 31 Different options for private participation exist… Private participation types From state to private Private-born Management Lease and Asset New assets contract Concession divestiture (i.e. IPPs) • The utility delegates • The lessee or • Government transfers • State partners with part of its operations to concessionaire is both ownership and private investor to a contractor, while responsible for financing operations satisfy a capital retaining control of required investments on requirement (e.g. add • The new owner is investment decisions state-owned assets generation capacity) responsible for financing and accountability for • The state often provides all future investments at • IPPs generally accept financial results a guarantee for these their risk construction and • Contractor’s investments, while operating risks, share • Performance is compensation is tied to being reimbursed for the fuel availability risk with controlled through performance use of the assets fuel suppliers, and are competition or general (improvement objectives • Compensation is tied to regulation (rather than insulated from demand, from contract terms) results (contract terms) contract terms) dispatch, price, FX risks Source: WBG, Strategy& analysis Strategy& | PwC Prepared for The World Bank 32 …each characterized by a certain degree of private sector involvement & specific benefits for the electricity sector… Private participation features Management Asset New assets Lease Concession contract divestiture (i.e. IPPs) Allocation of Operations and Private Private Private Private Private responsibilities maintenance Public and Commercial risk Public Private Private Private private Public and Capital investment Public Private Private Private private Asset ownership Public Public Public Private Private Duration 3-5 years 8-15 years 25-30 years Indefinite 25-30 years Benefits Operations improvement P P P P P Assets O&M P P P P P Knowledge transfer P O P O P Access to state of the art technology O O O O P EPC O O O O P New finance for investment O O O P P Vehicle for liberalization O O O P P Source: WBG, Strategy& analysis Strategy& | PwC Prepared for The World Bank 33 …but also with several prerequisites for successful implementation which today Libya does not fully satisfies Private participation prerequisites Management Asset New assets Lease Concession contract divestiture (i.e. IPPs) Prerequisites Cost-covering tariff, for successful Preferable Necessary Necessary Necessary Necessary no commercial loss implementation Good system Sufficient to set Necessary Necessary Necessary Necessary information incentives Good country risk Not necessary Good High High High rating Low to Political support Moderate High High High moderate Monitoring and Moderate Good Good Strong Strong regulatory capacity Libyan context: N/A Not Applicable Satisfied Not satisfied Source: WBG, Strategy& analysis Strategy& | PwC Prepared for The World Bank 34 The identified reform roadmap foresees the introduction of private participation only starting from Wave 2 … Private sector investment roadmap1 Measures Activities Wave I Wave II Ambition Owner Explore the possibility for management contracts/lease/concessions Ministry in charge/ GECOL Define clear jurisdiction for commercial disputes Ministry in charge Clarify IPP Commission role and responsibilities Ministry in charge Preparation for private Define IPP Commission composition Ministry in sector IPP Commission in operation charge investment Set competitive capacity allocation procedures IPP Commission Draft technical and financial requirements for tendering IPPs IPP Commission Establish credit support arrangements for PPAs Government (i.e. letters of credits, rolling guarantees from CBL1) Open tendering process for new IPPs IPP Commission/ LEMRA Today M1 M2 M3 Possible IPPs introduction Note: M = Milestone 1) Current private sector investment in the Non-RES business – Comprehensive roadmap & private participation is currently under discussion Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 35 …mainly because today more threats than opportunities are expected to impact GECOL once IPPs enter the sector Possible impact of IPPs introduction IPPs impact on electricity sector IPPs impact on GECOL OPPORTUNITIES Launch IPPs are often the first private investors in markets dominated by a state-owned utility, and can help • Foster private sector attraction and participation reform launch or enhance the reform process by showing the • Promote and contribute to GECOL’s evolution process benefits of private investment and management Help meet IPPs guarantee their output to the state-owned utility (acting as a single buyer) on the basis of a long-term • Limit power generation requirements demand PPA with a state-backed guarantee for the off-taking • Improve service quality and customer satisfaction needs utility’s performance Relieve Successful investments for IPPs may impede attempts to produce advanced sector-level outcomes, • Reduce ext./internal willingness to lead change reform as IPPs success in reducing power shortages may • Postpone advanced reform achievements pressure relieve pressure on policy makers for needed reforms Obstruct full High PPA prices under “take-or-pay” contracts may impede moves toward competition, as the differences • Reduce competitive pressure and related price competition THREATS with the lower prices emerging from a liberalized reduction/service improvement incentives fulfilment wholesale market become stranded costs Expose The cumulative obligations to purchase power from • Threaten GECOL financial position utilities to IPPs may expose power utilities to serious financial risk (e.g. when retail sales fell behind forecast levels) • Increase reliance on state financing capabilities financial risk Generate High rates of return compensating for poor investment environments create the risk of contract breakdown • Increase financial pressure on customers stakeholders (unaffordable payments) and may generate • Endanger commercial performance resentment resentment among power consumers or other parties Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 36 Moreover, a number of country-level factors are required to effectively attract private investment… IPPs success factors Libyan Success factor Success factor’s components context: Details Stable political/macro- e.g. low inflation, sound taxation policies, access to FX, economic environment fiscal prudence Stable e.g. possibility to enforce contracts, uphold laws, country Developed legal infrastructure arbitration, legal protection of property rights of investors, freedom to import goods, fuel, and services context e.g. good repayment record and investment-grade rating, Good country rating and previous experience with private investment Country e.g. cost-covering tariffs, transparent and predictable level Advanced reform stage licensing and tariff framework, access to the transmission network on transparent and equitable terms Developed e.g. planning linked to timely initiation of competitive electricity Competitive bidding practices tenders/auctions; resourced, fair, and transparent competitive procurement sector e.g. clear allocation of planning roles and functions; Project Coherent sector planning skilled, resourced, and empowered planning function level e.g. framework enshrined in legislation, and clearly specifying market structure, roles, and terms for private Clear policy framework and public sector investment, legislated rights to entry Advanced and exit from the power market by private suppliers regulatory e.g. competitive procurement of new generation capacity framework Transparent, consistent and required by regulator; fair allocation of new build fair regulation opportunities between utility and IPPs; prevention of anti- competitive practices by dominant power suppliers Source: WBG, Strategy& analysis N/A Not Applicable Satisfied Not satisfied Strategy& | PwC Prepared for The World Bank 37 …accompanied by a further set of project-level factors essentially contributing to IPPs investment success IPPs success factors Libyan Success factor Success factor’s components context: Details e.g. local capital/partner contribution (if possible); fair / reasonable ROE; experience with developing country Favorable equity partners project risk; development-minded firm with risk appetite Favorable for project; involvement of a DFI partner / government financing e.g. competitive financing, local capital/markets that mitigate FX risk; risk premium demand by financiers (or Favorable debt arrangements capped by off-taker) matching country/project risk; flexibility in terms and conditions (possible refinancing) Country level Solid commercial performance e.g. commercially sound metering, billing, collection Creditworthy off-taker e.g. efficient operational practices, low technical losses, Adequate managerial capacity sound customer service Project level e.g. stipulating capacity and payment, dispatch, fuel metering, interconnection, insurance, force majeure, Secure / Robust PPA N/A transfer, termination, change-of-law provisions, adequate refinancing arrangements, dispute resolution revenue e.g. escrow accounts, letters of credit, standby debt Security arrangements facilities, hedging/derivative instruments, committed stream N/A public budget or taxes/levies, targeted subsidies and (where necessary) output-based aid, hard currency contracts, indexation Source: WBG, Strategy& analysis N/A Not Applicable Satisfied Not satisfied Strategy& | PwC Prepared for The World Bank 38 Finally, investment risk and prospective rates of return in Libya (key IPP focus) are not yet mature Focus on IPPs Rationale Business case Key challenges for the state • Yielding net welfare benefits to • Private investment depends upon • Attract investors and successfully power consumers and society the balance between investment compete for international capital by risk and prospective rates of return offering competitive (but affordable) • Improving sector performance with limited capital availability (e.g. • A wide set of different risks apply: returns for investment risks attract private sector resources to 1. Dev. and construction phase risks 1 • Keep country and sector profile increase power generation 2. Operational phase risks 2 attractive (investors seek capacity and meet demand needs) predictability and control of risk) 3. Other 3 risks 1 2 • Land procurement • Offtake obligations Development Pre-construction Operational Market • Failure to commence • Curtailment and phase risks • Minimum requirements construction • Abandonment Performance • Dispatch • Delays in achieving CDO • phase risks Construction • Deemed completion Fuel and other Tolling arrangements • Fuel supply agreements • Construction cost escalation feedstock supply • Fuel transportation agreements • Right to occupy • Transmission company Site accessibility • Site suitability Transmission creditworthiness and availability • Site-related infrastructure Foreign • FX rate fluctuations Interconnection • Transmission interconnection exchange • Convertibility and remittance infrastructure • Delivery point 3 • Testing and commissioning Other risks Political / sovereign risk and expropriation Testing and • Failure to meet contract Compliance with law and change in law commissioning capacity • Output/heat rate risk Change in tax, change in control Source: US department of commerce, Strategy& analysis Strategy& | PwC Prepared for The World Bank 39