In the previous week’s piece, we discussed some of the challenges associated with Power Purchase Agreements (PPAs), including issues such as energy debt, oversupply of the contracted electricity, and concerns around mode of procurement just to mention a few. This week, the discussion focuses on the role of transparency in these power deals.
Although PPAs are contractual in nature and thus uphold the sanctity of contracts, it is important to recognise their direct impact on the public. The contracted electricity is intended for public use, and the funds pledged as guarantees in case of default ultimately are public resources. Therefore, transparency is an essential aspect of the business around power purchase deals. In other countries, disclosure of PPAs information is demanded unless particular terms would compromise the commercial competitiveness if they were disclosed. This practice is one that works towards not only promoting accountability but also boosting the public’s trust in government decision making processes.
Transparent PPAs not only create trust between lenders and the government, but also promotes confidence in such governments. As noted by the International Monetary Fund (IMF) and the World Bank’s report of 2018 on “strengthening public debt transparency”, adequate and accurate debt information disclosure is the best practice around borrowing and lending. This debt transparency extends to debt acquired through PPAs. This is critical because transparency in power deals will provide lending institutions with a clear picture of how much debt exists.
The Financial Intelligence Centre (FIC) 2018 trends report highlighted that public procurement processes were vulnerable to corruption due to lack of transparency. Cases of bid rigging through the manipulation of tender specifications resulted in the “crowding out of legitimate businesses”. Such practices contribute to a lack of transparency, eroding public trust in the procurement systems. The Handbook on Understanding Power Purchase Agreements developed by the African Development Bank and Partners demonstrates how transparency improves public trust in governments decisions. If the State utility communicates and frequently update the people on agreements being signed and the envisaged benefits and any other information relevant to be disclosed, the public will more likely trust the government’s decision of paying the utility’s debt when necessary.
Furthermore, by disclosing the terms of PPAs, governments and companies can demonstrate commitment to environmental and social standards, such as renewable energy targets, environmental protections, and community benefits. This transparency enables oversight groups to verify that PPAs align with sustainability and social responsibility goals, promoting cleaner energy development and fairer project impacts on local communities.
Fiona Woolf and Jonathan Halpern in their Paper titled “Integrating Independent Power Producers into Emerging Wholesale Power Markets” find that transparency also can also cause more investment to be attracted as it will bring about predictability and a fair regulatory environment. When investors know that contracts are fair and publicly scrutinised, they are more likely to commit to long-term projects and the utility is likely to enter into favourable agreements. Moreover, transparency will bring about opportunities for interested or prospective investors to measure risks such as market risk, and the technology required among others, in the end making investment in the energy sector easier.
In the Zambia’s context, transparent PPAs would serve as a vital risk-reduction tool, especially given the five-year government terms that often sharply contrast with the decades-long lifespans of power agreements. As noted by Badissy et al. (2021) in their article “The Case for Transparency in Power Project Contracts” transparency serves as a risk-reduction tool for both project developers and utilities by revealing and addressing potential issues early on. It would assist IPPs assess the political risk associated with government turnover and enable agreements to secure support across a wide political base, rather than being narrowly aligned with a particular administration. This broad support is crucial to ensure stability and continuity in energy projects, as deals benefiting only a small elite may be subject to renegotiation or cancellation when governments change.
In conclusion, transparent PPAs are critical in promoting public trust and promoting accountability. Transparency allows citizens, investors, and oversight bodies to hold parties accountable, verify commitments to environmental and social standards, and encourage fair pricing and competition. Ultimately, a transparent approach to PPAs lays the foundation for sustainable energy development, energy debt management, and strengthened governance in Zambia’s energy sector.
About the Author:
Lucy P. Musonda is an Advocate of the High Court of Zambia-AHCZ, she currently works for the Centre for Trade Policy and Development as a Legal Researcher. She holds an LLB from the University of Zambia and currently pursuing an MBA at Heriot-Watt University, Edinburgh School of Business.
