The need for investment in Sub-Saharan Africa electric power is urgent. To meet suppressed demand and provide additional capacity for electrification expansion in the region, approximately 7,000 megawatts (MW) was required to be added each year between 2005-2015. This expansion would have required upwards of $27 billion per year. However, actual funding to the electricity sector (for capital expenditure) does not exceed $4.6 billion a year—leaving an annual funding gap of more than $20 billion. Since public sources (utility income and fiscal transfers) contribute only about one-half of current capital investment requirements, there is a clear imperative for increased private investment, including through public-private partnerships (PPPs).
Between 1990 and 2011, approximately $9 billion of Sub-Saharan Africa’s private investment was made through management and lease contracts, concessions, divestitures, and greenfield investments, or independent power projects (IPPs). Seventy percent of the investments were in IPPs with a capacity of over 40 MW and long-term power purchase agreements with the primarily state-run utilities. There are approximately 25 such projects across a dozen African countries, and several more in the pipeline.
Originally, the expectation was that IPPs—with their risk-limiting project finance structures—would attract private investment into otherwise under-funded state-run electricity sectors. While private investment has increased, the public sector has also continued to invest.
Over 30 percent of projects during the last two decades have received equity investments from state agencies. And nearly every project over the same period has required foreign public debt, generally through multilateral or bilateral concessionary loans. Are we looking at the future, or just a blip on the screen?
The role of guarantee products
Many projects trace elements of success to the availability of partial risk guarantees (PRGs) and various levels of political risk insurance. These products have evolved considerably since the first IPPs took root. Kenya—one of the most popular IPP spots in the region—is an interesting case. In 1996, at the dawn of its first private power investment, sovereign guarantees were not extended because IPPs were supposed to free government balance sheets from contingent liabilities. However, approximately 15 years later, as governments recognized that the value of the guarantee outweighs the balance sheet concerns, PRGs are finally part of the deal for most new power plants.
As a result, four new plants in Kenya will benefit from a PRG. The government is required to counter guarantee less because the liability is small—less than five percent of the total project cost. Other projects benefitting from PRGs include Cameroon’s Kribi (216 MW), Côte d’Ivoire’s Azito (288 MW), and Uganda’s Bujagali (250 MW).
There’s a good reason for the success of PRGs: they insure against the risk of government (or a government-owned entity) failing to perform against its contractual obligations. PRGs are typically used where the project is large (or in the case of Kenya, when projects have been grouped together), the country is in an early stage of reform and/or has made clear reform intentions, and where there are commercial lenders.
Furthermore, the government of the country must request the PRG; thus, the project must be a priority both for the government and the institution (the World Bank or African Development Bank) providing the PRG. In some cases, the PRG can be further enhanced or replaced by political risk insurance from the Multilateral Investment Guarantee Agency.
While private investment has increased, the public sector has also continued to invest.
A new type of sponsor
The more traditional investors in African electricity are literally all over the map. Major players, including American firms such as AES and French giant Electricité de France, have made important investments in Cameroon, Côte d’Ivoire, Kenya, and Nigeria. Smaller Malaysian firms like Westmont and Mechmar were among the first in Kenya and Tanzania.
However, the universe of players is expanding. To fulfill future needs, two non-traditional sponsors have already begun making inroads. These include:
Triple bottom-line companies. Globeleq (U.K.) and Industrial Promotion Services (IPS-Kenya), with shares in projects in Côte d’Ivoire, Kenya, Tanzania, and Uganda, and Aldwych International (U.K.), involved in Kenya, are driven by commercial interests. However, their work emerged from agencies with strong commitments to social and economic development.
South-South investors. Indian and Chinese firms have also become increasingly involved in the power sector in Sub-Saharan Africa. Tata, India’s largest private integrated electricity firm, holds a 50 percent equity stake in Zambia’s Itezhi. Tata has been selected as the preferred bidder for two South African wind farms, and will also be the technical service provider for the recently privatized Benin Distribution Company of Nigeria. Chinese firm Shenzhen is involved in Sunon Asogli (Ghana) and Sinohydro in Kafue Gorge Lower Hydro Project (Zambia) and in Karuma Hydro in Uganda. China-Africa Sunlight Energy has been licensed by the Zimbabwe Energy Regulatory Authority to develop a plant for harnessing coal bed methane.
These are enthusiastic partners laying the groundwork for the future in projects where the traditional players have shown little interest. And with Sub-Saharan Africa’s investment gap at $20 billion annually, there is no shortage of opportunities for all.
This article is based on a larger review of independent power projects across Sub-Saharan Africa, undertaken by Eberhard and Gratwick, part of which was recently featured in “Investment Power in Africa: where from and where to?” published in The Georgetown Journal of International Affairs, “The Future of Energy,” Winter/Spring 2013.