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Deliverable 4.1: Options study for GECOL restructuring report
Task A: Sector performance
and structural sector reform
September 2017
REVISED FINAL REPORTP
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Prepared for The World BankStrategy& | PwC
Disclaimer and copyright note
This document has been prepared only for the International
Bank of Reconstruction and Development ("IBRD") and solely
for the purpose and on the terms agreed with the IBRD in our
agreement dated 21 March 2017 relating to Task A.
The scope of our work was limited to a review of documentary
evidence made available to us. We have not independently
verified any information given to us relating to the services.
We accept no liability (including for negligence) to anyone else
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
should not be relied upon; the contents are subject to
amendment or withdrawal and our final conclusions and
findings will be set out in our final deliverable.
© 2017
PricewaterhouseCoopers
LLP
All rights reserved. In this
document, 'PwC' refers to the
UK member firm, and may
sometimes refer to the PwC
network. Each member firm
is a separate legal entity.
Please see
www.pwc.com/structure for
further details
1
Prepared for The World BankStrategy& | PwC
The present report focuses on assessing the options for GECOL restructuring, as by Task A ToR
Focus of this report
Source: Task A inception report
Rapid sector
performance
assessment
Gap analysis of the
sector structure vs.
previous plan
High-level options for
sector reform
Option study for
GECOL restructuring
Roadmap for
establishing of LEMRA
2.1 3.1
3.2
4.1
4.2
Findings review and
final report
5.1
Data collection
1.1
Workshop & trainings6
Project review and
recommendation
Restructuring of
key actors
Regulatory
reform
Rapid assessment
of the sector
performance
Project
set-up
2 3 4 5
Sector restructuring
(framework, actors and
roadmap)
3.3
Electricity
Act
3.4
1
Methodology,
team and approach
validation
1.2
PMO (progress reporting)7
Focus of
this report
2
Prepared for The World BankStrategy& | PwC
Power utilities have typically suffered common structural issues, thus experiencing the need for reform …
3
Typical power utility evolution process
The power utility
originates as vertical
integrated STATE-
OWNED MONOPOLY
A series of
DIFFICULTIES in
meeting national needs
emerge
The state feels the need
for electricity sector
reform and UTILITY
RESTRUCTURING
State monopoly rationale Typical issues emerged Reform objectives
• Minimizing coordination cost
between supply chain functions
• Financing large-scale
investments in production and
network assets
• Enhancing consumer welfare
and guaranteeing a critical
service for economic security
Source: Strategy& analysis
• Critical utility financial position
(excessive/inefficient costs and
tariffs not covering them)
• Drained government’s fiscal
resources: inability to finance
expenditures and need to face
other pressing public needs
• Low service quality and access
to electricity, high emissions
• CUSTOMERS: improve
service quality, provide
affordable electricity
• SUSTAINABILITY: strengthen
State/utility fiscal position,
promote efficient use of inputs
• EMPLOYEES: create first-rate
efficient work environment,
promote employee satisfaction
Time
Prepared for The World BankStrategy& | PwC
…and for Libya the same experience led to the launch of the current project, which so far identified the sector reform
4
Libyan power utility restructuring process
Source: Strategy& analysis
Weak sector
governance
Sector structure
(monopoly)
Poor operating
performance
Unbalanced tariff
framework
Increasing costs
Commercial losses
and poor collection
Root-
cause
issues
in Libya
(identified
in previous
Task A
reports)
Electricity sector reform
Task A (3.1, 3.2, 3.3, 3.4)
GECOL restructuring
Task A (4.1)
LEMRA establishing
Task A (4.2)
Focus of this report
P
Launch of the sector
performance and
structural sector reform
(Task A)
The power utility
originates as vertical
integrated STATE-
OWNED MONOPOLY
A series of
DIFFICULTIES in
meeting national needs
emerge
The state feels the need
for electricity sector
reform and UTILITY
RESTRUCTURING
Prepared for The World BankStrategy& | PwC
Electricity sector reform
The present document will lay-out the options for GECOL restructuring (then further deep-dived in Task C)
Current report focus
5
Source: Strategy& analysis
Options study for GECOL restructuring
(current document focus)
Assessment of the need for
GECOL restructuring
Identification and evaluation
of target options
Considerations on private
sector participation
Current Libya
electricity sector
structure
Current GECOL
operating modelGECOL restructuring
4.1
2018 M1 M2
IWave IIWave
M3
Ambition Vision
Section 1
Section 2
Section 3
Prepared for The World BankStrategy& | PwC
Assessment of the need for GECOL restructuring
Identification and evaluation of target options
Considerations on private sector participation
6
Prepared for The World BankStrategy& | PwC
In Libya, most of the identified issues directly concern GECOL, thus driving the need for restructuring
7
Major issues and implications
Issues affecting Libya today
(root causes)
Weak sector
governance
Sector structure
(monopoly) & GECOL
operating model
Increasing costs
Unbalanced tariff
framework
Commercial losses
and poor collection
Poor operating
performance
Task AStructural reform
of electricity sector
Task CInstitutional development
and performance improvement
of GECOL
Reference project TaskKey reports
(Task A and C)Implications
Need for sector
restructuring
Need for GECOL
restructuring –
Focus on next slides
Source: Strategy& analysis
Regulatory reform
GECOL restructuring
Manpower / organizational rationalization review
ERP system review
LEMRA establishment
Institutional development
Process mapping
Improving technical performance
Improving financial performance of customer
service
Tariff framework review, tariff structure set-up and excel
tool
Prepared for The World BankStrategy& | PwC
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
Identified issues
Clearly defined
operating
model
Alignment vs.
best practices
Results
accountabilityEfficiency
Preparation
for future
evolution
Alignment
with Strategic
Priorities
BU “concentration” and
limited levers for effective
BU management! ! ! ! !
Fragmentation of
engineering & projects ! !Lack of a strong AFC
function ! ! ! ! !Sub-optimal set-up of ICT ! ! ! !HR&O responsibilities
partially outside MD area ! ! ! ! !Unclear role of Contracts &
Development Accounts ! ! !BoD overstaffed and
including functions
typically under MD! ! ! ! ! !
8
I
1
3
4
5
6
7
II III IV V VI
Target organizational dimension negatively impacted by current organization!
2
Source: Strategy& analysis
Sector structure (monopoly) & GECOL operating model
# Target organizational dimension
Prepared for The World BankStrategy& | PwC
Both the number of FTEs and the average salary is significantly growing…
5
40
20
10
25
35
0
45
30
15
41.7+4.0%
20152014
40.1
2013
38.336.2
201220112010
34.3 35.0
1) IHS, inflation consumer prices
Source: GECOL data collection ID13, Strategy& analysis
9
Increasing costs
0%
50%
100%
150%
200%
250%
2010 2011 2012 2013 2014 2015
Indexed vs. 2010
(100% = 2010 reference)
142%
214%
# FTEs evolution (2010-15, ‘000)
Cumulated inflation1
(2010 reference)
Average-salary
Average-salary evolution (2010-15, LD / FTE)
+70%
Prepared for The World BankStrategy& | PwC
GECOL costs evolution (2010-15, Mn LD)
…leading to low productivity and a considerable increase in personnel costs
Productivity benchmark (2015)
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
0
2
4
6
8
10
12
14
16
18
GWh / FTE
EgyptJordan
11.7
5.0
9.5
LibyaAlgeria
8.21
Morocco
17.2
10
+657Mn LD
-240Mn LD
409
71
356Other expenses
Fuel transportation
to generation stations 623
254
Fuel cost
Maintenance
120
Materials for O&M
81108
1,065
Various service
688
115
Salaries
449
5
2015
2010
Increasing costs
Generation
FTEs share
vs. total20% 17% 10%
Although having a lower
share of its total FTEs in
generation, GECOL has still
a worse productivity than
peer countries
19% 20%
Prepared for The World BankStrategy& | PwC
The technical performance has dramatically worsened, severely impacted by low generation availability
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
0
10
8
5
4
7
6
2
9
1
3
11
42%
10.3
49%58%
10.2
2015
10.0
55%
2013
45%
GW
58%
2017
51%
10.8
2014 2016
42%
36%
62%64%
9.7
2012
33%
67%
8.8 8.9
38%
2011
57%
43%
2010
8.8
Available capacity5Unvailable capacityDemand (peak demand)3
S/D evolution1
3% -10% -5% -8% -31% -11% -15% -25%Reservemargin2
Nameplate capacity4
11
GECOL ready
for retirement
units
Third party
plants
55% Available
capacity excluding
ready for
retirement and
third party plants
from nameplate
Poor operating performance
Prepared for The World BankStrategy& | PwC
Commercial losses and bad debt have steadily increased
Source: GECOL data collection ID12, GECOL data collection ID37
Evolution of commercial losses Evolution of receivables
2.0
2.5
1.5
0.5
1.0
0.0
Bn LD
2015
2.0
201420132012
2.3
1.9
1.3
2010
20
10
5
25
15
0
TWh
20152010
6.4
2014
24.1
2013
21.1
16.1
2012
12.6
12
Commercial losses and poor collection
Prepared for The World BankStrategy& | PwC
An unbalanced tariff, combined with commercial losses and bad debt, is affecting the sector sustainability …
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
Burden on the sector (Bn LD, 2015)
Actual
collected
revenues
Revenues
invoiced
10%
Non
collection
12%
Fuel
subsidies
0.8
Commercial
loss
GECOL
P&L costs
Max.
theoretical
revenues1
Unreflective
tariff
0.9
0.2
55%
23%
5.0
Total cost
3.1
1.9
Burden on
Libyan
state due to
unbalanced
tariff
Salaries
Fuel cost
Other
OPEX
D&A
Subsidized tariff scheme
Tariffs do not reflect the economic cost
of the supply
13
Unbalanced tariff framework
Prepared for The World BankStrategy& | PwC
… Leading GECOL to incur in heavy losses …
Source: GECOL collection ID13, Strategy& analysis
2.5
1.0
3.0
1.5
2.0
0.5
0.0
1.0
1.9
1.3
0.8
2012
1.7
1.41.51.3
0.4
1.1
0.6
0.8
2011
0.3
1.7
0.9
0.8
1.9
20142010
1.8
0.4
0.5
2.1
2.5
20152013
0.4
1.1
Revenues from market
Costs
Government subsidies
Evolution of GECOL P&L (subsidies included) (Bn LD)
Profit
margin (%)-81% -92% -46%-26%-12%
0.0
-1.0
-0.5
-1.5
-0.4
-0.6
-0.2-0.4
-1.2
-0.6
Losses
-25%
14
Unbalanced tariff framework
Prepared for The World BankStrategy& | PwC
… And putting at risk its long-term financial viability
7.1
7%
76%
37%
2012
7.0
17%24%
27%
7.5
20152014
7.4
42%
10%
7.5
2013
56%
7%
48%
2010
12%
2011
61%69%
6%
2014
21%
2015
7.4
48%
2012
7.5
52%
26%
59%
2011
7.0
31%
2013
23%
23%
20%
50%
7.1
26%
24%
7.5
2010
61%
19%
18%
Trades payables
Other liabilities (exc. trade payables)
Total Equity
Other current assets
Receivables
Fixed assets
GECOL Total Assets(Bn LD)
GECOL Total Equity and Liabilities(Bn LD)
+0.9
+0.1
-0.8
+2.3
+0.3
-2.3
Delta (Bn LD)
2010-14
!
!!
Source: GECOL collection ID13, Strategy& analysis
Delta (Bn LD)
2010-14
15
Mainly
towards NOC?
Largely non-
performing?
Unbalanced tariff framework
Prepared for The World BankStrategy& | PwC
Assessment of the need for GECOL restructuring
Identification and evaluation of target options
Considerations on private sector participation
16
Prepared for The World BankStrategy& | PwC
For each root-cause issue identified, we have developed two restructuring options that GECOL may consider
17
Possible options by issue
Root-cause issues in Libya
Sector structure
(monopoly) & GECOL
operating model
Increasing costs
Unbalanced tariff
framework
Commercial losses
and poor collection
Poor operating
performance
Option 1
Source: Strategy& analysis
Option 2
RADICALQuick reorganization transition into
holding company structure aimed at
achieving legal unbundling by 2019
DRASTICAdopt a direct “push” approach by
downsizing the organization to optimal
efficiency targets
SHARPAchieve a fully cost reflective tariff with a
sharp increase in rates by 2021
PRIVATE PARTICIPATIONAttract private resources to improve
sector performance and increase power
generation capacity to meet demand
AGGRESSIVEAchieve 100% billing and 99% collection
by 2021 through an aggressive metering
program and police enforcement
GRADUAL Gradual reorganization evolution
following a progressive unbundling path
towards legal unbundling by 2031
CONSERVATIVEAdopt a retaining approach by granting
long-term sustainability of change for all
the different stakeholders involved
PRUDENTGradually increase tariff achieving a
partial coverage of P&L costs and cost of
fuel subsidies by 2026
PROGRESSIVEAddress theft and insolvency ultimately
improving progressively GECOL’s billing
IN-HOUSEImprove service quality by leveraging
internal resources and meet demand by
developing an in-house investment plan
Prepared for The World BankStrategy& | PwC
Depending on the unbundling approach chosen, GECOL may undertake a different organizational restructuring approach
18
Reorganization options
Sector structure (monopoly) & GECOL operating model
Radical Gradual
Gradual reorganization evolution going hand in hand
with a stepped unbundling pathway (first accounting,
followed by management unbundling and then legal)
Quick reorganization transition into a holding company
structure aimed at achieving legal unbundling directly
from today’s situation
Functional
unbundling
Full legal
unbundling
Accounting
unbundling
Fully
Integrated
IWave IIWave Ambition
Today M1 M2 M3
Full legal
unbundling
Fully
Integrated
Today Wave I
As-is
SBUs with strong AFC, HR, ICT and
E&P corporate core functions
Projects within SBUs and
strengthened AFC, ICT and HR corporate core functions
Holding structureAs-is Holding structure
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
Gradual
In line with the unbundling process recommended, the gradual reorganization option is preferrable
19
Options assessment
1) Strategy for institutional development of GECOL report
Source: Strategy& Analysis
Radical
Sector structure (monopoly) & GECOL operating model
• Possibly ensures results accountability and improved
operational efficiency
• Rapid evolution away from monopoly towards more
competitive sector structures
• Enabled early-on SBUs accountability for results and
independent management
• Parallel change of organizational structure, processes
and operating model
• Challenging implementation both in terms of target
structure and timing
• Marked disruption risks for GECOL
• Inflexible employee redeployment
• Lengthier change process
• Delayed benefits realized due to inefficiency of resulting
operating companies
• Lost synergies and potential replication of activities
among operating companies
• Delayed unbundled industry structure and risk of being
“trapped” into intermediate steps without reaching the
final target
0• Large consensus and leadership required
• Extensive coordination effort needed among
organizational units
• Required accounting and functional separation
4 • Persistent effort and commitment to ultimate
target necessary
PR
OS
CO
NS
+
–
RIS
KS
EA
SE
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
To control the increasing costs (i.e. personnel), GECOL may follow either an intrusive or a conservative approach
20
Manpower cost-cutting options
Source: Strategy& analysis
Drastic Conservative
Adopt a retaining / re-skilling approach (preferring the
socio-economic result), granting long-term sustainability
of change for all the different stakeholders involved
Adopt a direct “push” approach – focused on maximizing
the financial result, directly downsizing the organization
to reach optimal efficiency targets
Dismiss
Retrain for
outside jobs
Temporarily or permanently terminate
employment for a group of employees
Train managers and staff professionals
to be hired outside the company
Incentivize to
leave
Loan staff,
furlough
Ask employees to take voluntary lay-
offs, or offer buyouts & early retirement
Lend employees to another company,
or schedule unpaid employee furloughs
Freeze salary
and benefits
increases
Retrain for
inside work
Institute a hiring freeze and reassign
employees to new department/positions
Leverage current resources to fill unmet
needs (e.g. train new technicians)
Curtail
overtime
Freeze hiring
and reallocate
Temporarily reduce/freeze promotions,
wages, benefits (e.g. paid holiday time)
Enhance productivity and limit/suspend
approval for high-cost overtime hours
Example of possible solutions (illustrative)Example of possible solutions (illustrative)
Increasing costs
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
Conservative
Given the current country situation and the high social costs involved, a moderate approach may be preferable
21
Options assessment
1) Process mapping and manpower rationalization report
Source: Strategy& Analysis
Drastic
Increasing costs
PR
OS
• Relevant cost savings immediately achievable (e.g. due
to collective layoffs)
• Possibility to quickly gain efficiency and align
organizational structure to best practices
• Sustainable approach minimizing socio-economic impact
• Opportunity to address unmet needs (e.g. lack of plant
technicians)
• Severe economic impact on dismissed employees,
especially in developing countries
• Possible short-term increase in costs (e.g. due to buyout
or early retirement payments)
• No/limited impact on efficiency/productivity
achievements and limited cost savings
• Possible employee dissatisfaction
• Popular opposition, protests
• Long-term socio-economic impact on national economy
(e.g. unemployment, GDP decrease, poverty,
inflation/deflation, etc.)
• Limited financial / operational impact
• Need for reallocation or training to fill current positions /
expertise gaps
1 • Solution design subject to pressure from unions
• Implementation dependent upon Government’s
approval
3 • Lack of strict application of Government’s
directions (enforcement of hiring freeze failed so
far – unauthorized hiring ongoing)
CO
NS
+
–
RIS
KS
EA
SE
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
To improve operational performance, GECOL might either enable private participation or leverage in-house resources
22
Operating performance improvement options
12
6
3
0
-3
9
15
2020
2.6
2018
0.5
12.6
2022
9.2
3.7
2019 2024 20302028
11.5
4.7
2026
7.6
Long-term additions (11 new Steam, Gas, CC plants)
Under-construction plants (Ubari, Khaleej)
Phased-out capacity (6 plants1)
Short-term additions (4 new Gas plants)
1) Include Steam (Khoms Steam, Tobruk, Misurata Steel) and Gas plants (Tripoli South, Zwetina Gas, Khoms Gas); Source: Strategy& analysis
Private participation In-house
Improve service quality by leveraging internal resources
and meet increasing demand needs by developing an
in-house (GECOL, State) investment plan
Attract private resources to improve sector
performance, leverage external capabilities, and
increase power generation capacity to meet demand
requirements
Preliminary revision of GECOL investment plan
Net capacity increase vs. 2017 (GW)
Focus on next chapter
Poor operating performance
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
In-house
Considering todays stability constraints, a solution closer to the in-house option seems the most achievable
23
Options assessment
1) ERP System review and Improving technical performance report
Source: Strategy& Analysis
Private participation
Poor operating performance
PR
OS
• Fast track capacity expansion once private investors
commit to entering the sector
• Enabled growing electricity needs satisfaction without
imposing large strains on national budget
• Focused in the short run on solving pressing sector’s
issues (i.e. load shedding) and subsequently on
restructuring and expanding existing facilities
• Highly dependent on external forces (IPPs willingness to
enter the sector)
• Several prerequisites for private investment attraction
need to be satisfied
• Required government support to implement the intended
investment plan
• Heavy burden on government budget if GECOL is not
able to adhere to PPA conditions
• If no investment in repairs is undertaken, unused and
obsolete assets will populate GECOL’s BS
• Delay in realization of investment plan combined with
rising demand might worsen substantially reserve
margin
1• Required sovereign guarantees and letters of
credit
• Large investments and effort required to satisfy
prerequisites for private investment attraction
3 • Large government support needed for
realization of investment plan
CO
NS
+
–
RIS
KS
EA
SE
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
Aggressive invoicing and collection targets imply a dramatic change with respect to historical performance…
24
Commercial losses and poor collection
Aggressive Progressive
Address theft and insolvency ultimately improving
progressively GECOL’s billing and considering that the
overall result will depend on the effect of the measures
put in place
Achieve 100% billing and 99% revenue collection by
2021 through an aggressive metering program and
police enforcement
Commercial performance improvement options
0
20
40
60
80
100
120
28%
100%
0
20
40
60
80
100
120
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
52%
99%
0
20
40
60
80
100
120
28%
100% 100%
0
20
40
60
80
100
120
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
52%
99%99%
Invo
icin
g
(%co
nsu
mp
tio
n)
Co
lle
cti
on
(%
re
ve
nu
es)
Invo
icin
g
(%co
nsu
mp
tio
n)
Co
lle
cti
on
(%
re
ve
nu
es)
ILLUSTRATIVE
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
Progressive
…hence, a more progressive option might be preferred in this case
25
1) Improving financial performance of customer service report
Source: Strategy& Analysis
Aggressive
Commercial losses and poor collection
Options assessment
• Quick enhancement of GECOL’s cash position (if
successful)
• Short term improvement on government budget due to
potentially reduced subsidies to GECOL (if successful)
• Gradual investment in metering technology will reduce
negative impact on GECOL’s financial situation
• Consistency with historical performance
• Less dependent on government support
• Costly investments in metering and invoicing technology
required
• Lengthy gradual process requires careful planning and
methodic implementation
• Customer dissatisfaction might lead to retaliations
against GECOL’s employees
• Reduced impact of measures due to macroeconomic
situation
• Delayed effects on GECOL’s cash position
1• Option subject to large pressure for change by
the public opinion
• Implementation dependent upon government
financial support
4 • Coordination between GECOL’s employees and
electricity police is key for success
PR
OS
CO
NS
+
–
RIS
KS
EA
SE
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
To achieve a more cost reflective tariff, GECOL may target to sharply increase its tariff rates or do it more prudently
Sharp Prudent
Gradually increase tariff achieving a partial coverage of
P&L costs and cost of fuel subsidies by 2024, protecting
the most vulnerable through SSN
Achieve a fully cost reflective tariff with a sharp increase
in rates by 2021
63
4136
0
20
40
60
80
100
120
140
160
180
200Dhs/KWh
20242021
+6%
2015
174
36
0
20
40
60
80
100
120
140
160
180
200
20212015
Dhs/KWh
2024
Cost of fuel
subsidies
GECOL
P&L costs
0%
56%
100%
100%
Avg
. ta
riff
co
ve
rin
g:
100%
100%
Cost of fuel
subsidies
GECOL
P&L costs
0%0%
56%
20%
90% 100%
Avg
. ta
riff
co
ve
rin
g:
Tariff framework improvement options
ILLUSTRATIVEILLUSTRATIVEAverage
tariffAverage
tariff
Option 1 Option 2
+30%
Source: Strategy& Analysis
26
Included lifeline
tariff for households
with monthly
consumption below
a certain threshold
Unbalanced tariff framework
Prepared for The World BankStrategy& | PwC
Prudent
A more prudent approach to tariff increase might help GECOL minimize customers’ resistance …
27
Options assessment
1) Financial performance assessment and financial models report (tariff framework review, tariff structure set-up and reform pathway and excel tools)
Source: Strategy& Analysis
Sharp
Unbalanced tariff framework
• Short term improvement on government budget due to
potentially reduced subsidies (if successful)
• Quick enhancement of GECOL’s financial situation (if
successful)
• Customers strongly incentivized to reduce demand
• Softer impact on customers resulting in enhanced public
acceptance
• Smooth implementation of required technology without
heavy investments needed
• Gradual price increases might be paralleled by service
level improvements
• Inconsistent with current macroeconomic situation and
customers purchasing power
• Large investment in advanced metering technology to
ensure billing and collection required
• Delayed benefits on GECOL’s financial situation
• Key role of progressive service level improvements in
guaranteeing public acceptance of increased rates
• Peaking electricity theft and skyrocketing bad debt due
to customers inability to pay bills
• High pricing not comparable with service level provided
to customers
• Delayed GECOL’s financial sustainability which might
inhibit further sector development (unbundling path)
• Late adjustment of demand to new rates which might
worsen reserve margin
1• Overall strong economic situation improvement
needed
• Required revolutionary change in customers
approach towards electricity subsidization
4• Strong communication campaign needed to
convey reasons for tariff increase to customers
• Strong government support needed throughout
the process
PR
OS
CO
NS
+
–
RIS
KS
EA
SE
Option 1 Option 2
Prepared for The World BankStrategy& | PwC
… 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)
Increase
average
tariff
(Dhs/kWh)
Limit
commercial
loss
(% max rev.)
Re-size
manpower
(‘000 FTEs)
Source: Strategy& analysis
-11,000
2015scenario
2015actual
31,000
42,000
69%
21%
95
36+161%
A
B
C
Back to
2010 levels
2015scenario A, B, C
1.5
2015actual
1.8
-0.3
Burden on the sector(Bn LD)
Same
individual
effect of each
scenario
28
Unbalanced tariff framework
Prepared for The World BankStrategy& | PwC
Recommended option
GRADUAL Gradual reorganization evolution
following a progressive unbundling path
towards legal unbundling by 2031
CONSERVATIVEAdopt a retaining approach by granting
long-term sustainability of change for all
the different stakeholders involved
PRUDENTGradually increase tariff achieving a
partial coverage of P&L costs and cost of
fuel subsidies by 2026
PROGRESSIVEAddress theft and insolvency ultimately
improving progressively GECOL’s billing
IN-HOUSEImprove service quality by leveraging
internal resources and meet demand by
developing an in-house investment plan
In conclusion, our recommendation is to follow a series of gradual but yet very effective restructuring options
29
Recommended options
Root-cause issues in Libya
Sector structure
(monopoly) & GECOL
operating model
Increasing costs
Unbalanced tariff
framework
Commercial losses
and poor collection
Poor operating
performance
Deep dived in report
Manpower / organizational rationalization review
ERP system review
GECOL restructuring
Institutional development
Process mapping
Improving technical performance
Improving financial performance of customer
service
Tariff framework review, tariff structure set-up and
excel tool
Task A
Task C
Task C
Task C
Prepared for The World BankStrategy& | PwC
Assessment of the need for GECOL restructuring
Identification and evaluation of target options
Considerations on private sector participation
30
Prepared for The World BankStrategy& | PwC
A reform process normally targets competition, and private participation is one of its key enabling steps
31
Vertical
Integrated
Monopoly
Reform process in developing countries
Competition
Example of reforms required to introduce competition
Source: Strategy& analysis
Competition objective Possible impediments in developing countries
Price reduction
Service improvement
Limited market sizeto support the number of viable sellers and
purchasers needed for full competition
Lack of diversity in fuel supplyneeded for competition among generators
(liberalized fuel cost, availability of fuel types)
Insufficient T&D / control systemto manage the complex pattern of power
flows in a competitive market
Inadequate legal infrastructurefor dispute resolution or enforcement of court
decisions / property rights (courts/arbitration)
Utilities insolvencypreventing full payment of suppliers and
deterring IPPs from developing large projects
Undeveloped capital marketsto provide financing on the scale and terms
needed for investment in supply capacity
Focus in next slide
Organized power
exchange
market
Private
participation
Sector
unbundling
Prepared for The World BankStrategy& | PwC
Different options for private participation exist…
32
Private participation types
Management
contract
• The utility delegates
part of its operations to
a contractor, while
retaining control of
investment decisions
and accountability for
financial results
• Contractor’s
compensation is tied to
performance
(improvement objectives
from contract terms)
Lease and
Concession
• The lessee or
concessionaire is
responsible for financing
required investments on
state-owned assets
• The state often provides
a guarantee for these
investments, while
being reimbursed for the
use of the assets
• Compensation is tied to
results (contract terms)
Asset
divestiture
• Government transfers
both ownership and
operations
• The new owner is
responsible for financing
all future investments at
their risk
• Performance is
controlled through
competition or general
regulation (rather than
contract terms)
New assets
(i.e. IPPs)
• State partners with
private investor to
satisfy a capital
requirement (e.g. add
generation capacity)
• IPPs generally accept
construction and
operating risks, share
fuel availability risk with
fuel suppliers, and are
insulated from demand,
dispatch, price, FX risks
Source: WBG, Strategy& analysis
From state to private Private-born
Prepared for The World BankStrategy& | PwC
…each characterized by a certain degree of private sector involvement & specific benefits for the electricity sector…
33
Private participation features
Source: WBG, Strategy& analysis
Management
contractLease Concession
Asset
divestiture
New assets
(i.e. IPPs)Allocation of
responsibilities
Operations and
maintenancePrivate Private Private Private Private
Commercial risk Public Private Private PrivatePublic and
private
Capital investment PublicPublic and
privatePrivate 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
Prepared for The World BankStrategy& | PwC
…but also with several prerequisites for successful implementation which today Libya does not fully satisfies
34
Private participation prerequisites
Source: WBG, Strategy& analysis
Management
contractLease Concession
Asset
divestiture
New assets
(i.e. IPPs)
Prerequisites
for successful
implementation
Cost-covering tariff,
no commercial lossPreferable Necessary Necessary Necessary Necessary
Good system
information
Sufficient to set
incentivesNecessary Necessary Necessary Necessary
Good country risk
ratingNot necessary Good High High High
Political supportLow to
moderateModerate High High High
Monitoring and
regulatory capacityModerate Good Good Strong Strong
Satisfied Not satisfiedN/A Not Applicable
Libyan context:
Prepared for The World BankStrategy& | PwC
The identified reform roadmap foresees the introduction of private participation only starting from Wave 2 …
35
Private sector investment roadmap1
Note: M = Milestone
1) Current private sector investment in the Non-RES business – Comprehensive roadmap & private participation is currently under discussion
Source: Strategy& analysis
Measures
Preparation
for private
sector
investment
IWave IIWave Ambition
Today M1 M2 M3
Possible IPPs
introduction
Ministry in charge/
GECOL
IPP Commission in operation
Clarify IPP Commission role and responsibilities
Ministry in
charge
Ministry in
charge
Government
Set competitive capacity allocation procedures
IPP Commission/
LEMRA
Owner
IPP Commission
Open tendering process for new IPPs
Establish credit support arrangements for PPAs
(i.e. letters of credits, rolling guarantees from CBL1)
Activities
Explore the possibility for management contracts/lease/concessions
Ministry in
charge
Define clear jurisdiction for commercial disputes
IPP Commission
Define IPP Commission composition
Draft technical and financial requirements for tendering IPPs
Prepared for The World BankStrategy& | PwC
OP
PO
RT
UN
ITIE
ST
HR
EA
TS
…mainly because today more threats than opportunities are expected to impact GECOL once IPPs enter the sector
36
Possible impact of IPPs introduction
IPPs impact on electricity sector IPPs impact on GECOL
Launch
reform
process
IPPs are often the first private investors in markets
dominated by a state-owned utility, and can help
launch or enhance the reform process by showing the
benefits of private investment and management
• Foster private sector attraction and participation
• Promote and contribute to GECOL’s evolution
Help meet
demand
needs
IPPs guarantee their output to the state-owned utility
(acting as a single buyer) on the basis of a long-term
PPA with a state-backed guarantee for the off-taking
utility’s performance
• Limit power generation requirements
• Improve service quality and customer satisfaction
Relieve
reform
pressure
Successful investments for IPPs may impede
attempts to produce advanced sector-level outcomes,
as IPPs success in reducing power shortages may
relieve pressure on policy makers for needed reforms
• Reduce ext./internal willingness to lead change
• Postpone advanced reform achievements
Obstruct full
competition
fulfilment
High PPA prices under “take-or-pay” contracts may
impede moves toward competition, as the differences
with the lower prices emerging from a liberalized
wholesale market become stranded costs
• Reduce competitive pressure and related price
reduction/service improvement incentives
Expose
utilities to
financial risk
The cumulative obligations to purchase power from
IPPs may expose power utilities to serious financial
risk (e.g. when retail sales fell behind forecast levels)
• Threaten GECOL financial position
• Increase reliance on state financing capabilities
Generate
stakeholders
resentment
High rates of return compensating for poor investment
environments create the risk of contract breakdown
(unaffordable payments) and may generate
resentment among power consumers or other parties
• Increase financial pressure on customers
• Endanger commercial performance
Source: Strategy& analysis
Prepared for The World BankStrategy& | PwC
Moreover, a number of country-level factors are required to effectively attract private investment…
37
IPPs success factors
Source: WBG, Strategy& analysis
Advanced reform stage
Stable
country
context
Developed
electricity
sector
Advanced
regulatory
framework
e.g. cost-covering tariffs, transparent and predictable
licensing and tariff framework, access to the transmission
network on transparent and equitable terms
Good country rating
Developed legal infrastructure
Stable political/macro-
economic environmente.g. low inflation, sound taxation policies, access to FX,
fiscal prudence
e.g. good repayment record and investment-grade rating,
and previous experience with private investment
e.g. possibility to enforce contracts, uphold laws,
arbitration, legal protection of property rights of investors,
freedom to import goods, fuel, and services
Competitive bidding practicese.g. planning linked to timely initiation of competitive
tenders/auctions; resourced, fair, and transparent
competitive procurement
Coherent sector planninge.g. clear allocation of planning roles and functions;
skilled, resourced, and empowered planning function
Transparent, consistent and
fair regulation
e.g. competitive procurement of new generation capacity
required by regulator; fair allocation of new build
opportunities between utility and IPPs; prevention of anti-
competitive practices by dominant power suppliers
Clear policy framework
e.g. framework enshrined in legislation, and clearly
specifying market structure, roles, and terms for private
and public sector investment, legislated rights to entry
and exit from the power market by private suppliers
Success factor DetailsSuccess factor’s components
Country
level
Project
level
Libyan context:
Satisfied Not satisfiedN/A Not Applicable
Prepared for The World BankStrategy& | PwC
…accompanied by a further set of project-level factors essentially contributing to IPPs investment success
38
IPPs success factors
Source: WBG, Strategy& analysis
Security arrangements
(where necessary)
e.g. escrow accounts, letters of credit, standby debt
facilities, hedging/derivative instruments, committed
public budget or taxes/levies, targeted subsidies and
output-based aid, hard currency contracts, indexation
Robust PPA
e.g. stipulating capacity and payment, dispatch, fuel
metering, interconnection, insurance, force majeure,
transfer, termination, change-of-law provisions,
refinancing arrangements, dispute resolution
Success factor DetailsSuccess factor’s components
Adequate managerial capacitye.g. efficient operational practices, low technical losses,
sound customer service
Solid commercial performance e.g. commercially sound metering, billing, collection
Favorable debt arrangements
e.g. competitive financing, local capital/markets that
mitigate FX risk; risk premium demand by financiers (or
capped by off-taker) matching country/project risk;
flexibility in terms and conditions (possible refinancing)
Favorable equity partners
e.g. local capital/partner contribution (if possible); fair /
reasonable ROE; experience with developing country
project risk; development-minded firm with risk appetite
for project; involvement of a DFI partner / government
Country
level
Project
level
Favorable
financing
Creditworthy
off-taker
Secure /
adequate
revenue
stream
Satisfied Not satisfied
Libyan context:
N/A
N/A
N/A Not Applicable
Prepared for The World BankStrategy& | PwC
Finally, investment risk and prospective rates of return in Libya (key IPP focus) are not yet mature
39
Focus on IPPs
Source: US department of commerce, Strategy& analysis
Rationale
• Yielding net welfare benefits to
power consumers and society
• Improving sector performance with
limited capital availability (e.g.
attract private sector resources to
increase power generation
capacity and meet demand needs)
Key challenges for the state
• Attract investors and successfully
compete for international capital by
offering competitive (but affordable)
returns for investment risks
• Keep country and sector profile
attractive (investors seek
predictability and control of risk)
Business case
• Private investment depends upon
the balance between investment
risk and prospective rates of return
• A wide set of different risks apply:
1. Dev. and construction phase risks
2. Operational phase risks
3. Other risks
Development
and
construction
phase risks
Pre-construction• Land procurement
• Failure to commence
Construction
• Abandonment
• Delays in achieving CDO
• Deemed completion
• Construction cost escalation
Site accessibility
and availability
• Right to occupy
• Site suitability
• Site-related infrastructure
Interconnection
infrastructure
• Transmission interconnection
• Delivery point
Testing and
commissioning
• Testing and commissioning
• Failure to meet contract
capacity
• Output/heat rate risk
Operational
phase risksMarket
• Offtake obligations
• Curtailment
Performance• Minimum requirements
• Dispatch
Fuel and other
feedstock supply
• Tolling arrangements
• Fuel supply agreements
• Fuel transportation agreements
Transmission• Transmission company
creditworthiness
Foreign
exchange
• FX rate fluctuations
• Convertibility and remittance
Other risks Political / sovereign risk and expropriation
Compliance with law and change in law
Change in tax, change in control
3
1 2
1
2
3