Seven Deadly Challenges of Investing in African Energy Infrastructure: And What Power Africa is Doing About It
By: Andrew M. Herscowitz, Power Africa Coordinator
We all make mistakes — even when it comes to trying to end energy poverty. We’re trying our best, but there are seven deadly challenges that confront us when supporting the build-out of power infrastructure in Africa. We all can be guilty of (1) Mismanagement; (2) Pride; (3) Greed; (4) Inexperience; (5) Poverty; (6) Sluggishness; and, worst of all, (7) Fear.
In 2013, the U.S. Government launched Power Africa — a partnership, coordinated by the U.S. Agency for International Development (USAID), to double access to electricity in sub-Saharan Africa. Power Africa now has more than 170 public and private partners who collectively have committed more than $56 billion toward our collective goal of adding 30,000 megawatts (MW) and 60 million new electrical connections by 2030. To date, we have helped advance more than 120 power generation projects comprising 10,000 MW and 16 million new electrical connections. We have made significant progress, but we have a long way to go. In the process, we have encountered the seven deadly challenges and continue to think of ways to overcome them.
Mismanagement
Poor planning, often driven by politics, plagues all countries in the world — including those trying to lift their populations out of energy poverty. Politicians sometimes make big announcements for enormous power projects that give people hope, but don’t align with demand; projects that may never be completed, or if they do, they are decades off and will not benefit most of the population (and, in many cases, might cause significant environmental or social harm). The know-how exists to help countries scale a variety of existing power generation technologies in a responsible manner, as Power Africa has laid out in its Roadmap to 30,000 MW by 2030. It even took Power Africa almost one year after a launch that made big promises to develop our own Roadmap to achieve our goals. So we, too, were guilty of a big announcement without a well-defined plan in place. We must learn and do better.
We, too, were guilty of a big announcement without a well-defined plan in place. We must learn and do better.
Several new power generation projects were completed before the transmission infrastructure necessary to carry the electricity from the power plant to customers was in place (e.g., Lake Turkana in Kenya, and Kivuwatt in Rwanda). Consequently, countries found themselves on the hook to pay for millions of dollars of new electricity they could not use. Nigeria continues to have 12,000 MW of power generation capacity, but only 7,000 MW of transmission capacity.
We all have been so eager to add new power generation that we sometimes lose focus on how that new electricity will get to customers. To avoid further problems of this type, Power Africa completed a Transmission Roadmap that analyzed the anticipated power generation projects to be completed by 2022 with an overlay of planned transmission infrastructure. The Transmission Roadmap identifies the key transmission infrastructure and capacity-building priorities for the continent.
Most importantly, though, a government cannot expect its power sector to function properly if the sector and its institutions are not financially viable. According to a World Bank paper, only 2 of 39 power utilities in sub-Saharan Africa are solvent, creating ripple effects that undermine investment across the entire value chain. In many cases, people are not paying for the actual cost of producing power. Countries must establish and sustain cost-reflective tariff structures that balance viability with affordability.
Pride
Time and again, we have seen project developers and government officials alike insist on certain terms of an agreement that frankly may not be that important. It’s often because of pride — “this is how it must be done.” A government may insist on disputes being resolved in its local courts, while an international project developer may insist that disputes be resolved in London or New York. For large power projects, international arbitration usually makes sense. But disputes over issues of exaggerated importance can delay financial close or blow up deals. The reality, though, is that the historical default rate for project finance deals in Africa is quite low, among the lowest of any region in the world, and nobody actually wants to end up in litigation or arbitration (Moody’s Investor Services, “Default and Recovery Rates for Project Finance Bank loans, 1983–2017, 2019). In some cases, a dispute resolution process could even cost more than the project itself, as we warned a project developer in Rwanda when his 1.5 MW mini-hydropower project stalled over his insistence on an international arbitration clause.
Pride can prevent utilities from thinking outside the box. Power distribution companies (DISCOs) need to stop thinking of themselves as selling electrons. They must see what they can learn from the solar home system (SHS) companies. The SHS companies sell or lease appliances, where a few electrons from solar panels power the super efficient appliances that people really want and are willing to pay for. People don’t want electricity — they want light, a charged mobile phone, a functioning television, power tools. Electricity is just the input. DISCOs also must devise business plans for expanding their customer base and increasing their income through more creative means, such as appliance and tool leasing.
Development organizations must also be wary of our own pride. We must be patient and sensitive to the local culture and practice, and each country must make things happen at its own pace. That being said, we live in a globally connected world with a rising youth population. That youth population has lost patience with its own poverty, as borne out by the migration crises throughout the world. A country that has sufficient electricity has industry, and hence, jobs. We must work together to confront these challenges so that people do no feel compelled to leave their own country in order to emerge from poverty..
Recently, I stood on stage touting Power Africa’s so-called success in helping 10,000 MW of power projects reach financial close across all of sub-Saharan Africa over a six-year period. Five minutes later, a Portuguese Minister took the stage and announced that Portugal would be announcing a single, 10,000 MW tender for solar power alone. India is trying to add 10,000 MW of solar power each year! Africa comprises more than 50 countries, and I was celebrating 10,000 MW. While pride may protect a country from surrendering control to others, neither pride nor excessive assertions of sovereignty are going to give people light — at least not within this decade. But, these examples demonstrate concretely that large-scale growth is possible and possible at a rapid pace.
Some countries correctly emphasize the importance of their own sovereignty, and Power Africa’s interventions are specifically designed to help countries maintain control of their own resources for generations to come. We get frustrated, though, when we see countries potentially surrender sovereignty to another country by taking on unsustainable sovereign debt, often hidden in contingency clauses in non-transparent negotiations, for unsustainable, quick-fix power projects — projects that import foreign laborers and that come with manuals in a challenging foreign language. That’s not how power sector development should look.
We get frustrated when countries surrender sovereignty to another country . . . for unsustainable, quick-fix power projects that import foreign laborers and that come with manuals in a challenging foreign language.
Power Africa, for example, provides assistance that builds the local workforce. Power Africa projects create local jobs. And most debt that Power Africa projects assume is private debt, not sovereign debt. It also helps that a significant portion of U.S. Government assistance is in the form of grants, not financing. USAID’s mantra is that the purpose of foreign assistance is to end the need for its existence, and Power Africa lives by that mantra. We want strong, independent political and trading partners.
Greed
Greed comes in many forms including predatory pricing, theft, and corruption. When Power Africa was launched in 2013, it still was not uncommon for companies to propose non-competitive power projects that exceeded $0.25 or even $0.30 per kilowatt hour (kWh). While those prices were what the market supported at the time, thanks to a number of economic and political factors, including Power Africa’s contributions, very few governments are entering into power purchase agreements at more than $0.10/kWh today. This rapid decline in pricing can be attributed to new competitive tendering processes, increased market knowledge and confidence (which makes capital less expensive), and declining equipment prices. While some countries continue to have skepticism over the idea that if a private company earns a profit, then the country must be “losing” something, the reality is that a competitively tendered project helps a country lock in its financial liability at a competitive rate, placing the risk of cost overruns on the private company. It’s a win-win for the private sector and for the government.
USAID’s support of the African Development Bank’s African Legal Support Facility has ensured that many African governments have had access to top notch international legal counsel when negotiating power generation projects. While project developers are no longer in a position to be “greedy” given the abundance of market information out there, it is now incumbent on governments themselves to not be overly “greedy” and insist on pricing that is too low and that will invite poor quality projects. Most importantly, governments must respect the sanctity of contract and not wantonly breach contracts that already have been signed without paying fair damages. Greed may not always be the reason for renegotiations. Rather some governments simply entered into too many deals that obligate them to pay for electricity that they don’t think they will be able to use. But forced renegotiation, if conducted without appropriate transparency and respect for contract sanctity, threatens to scare off credible investors for years to come in not just the power sector, but in all sectors.
Theft continues to plague utilities across the continent. In some places, it seems that more electricity is lost through theft or poor billing practices than is paid for. In Nigeria, USAID helped four DISCOs reduce losses and generate more than $160 million in new revenues in under two years. Reducing those losses included climbing ladders and disconnecting non-paying users — including government entities — and then working with the DISCOs to strengthen billing and collection processes to make positive change sustainable. USAID also helped Nigeria train judges to prosecute electricity theft. Countries need to work with civil society organizations (CSO) to reach consensus that electricity theft is a crime — otherwise, the power sector never will emerge from debt. At the same time, partners like Power Africa need to work harder to help countries make power affordable for more people, and to strengthen customer engagement and communication.
Corruption — or at least allegations of corruption — continue to plague the power sector in Africa. Whenever a new power generation project is awarded — particularly through a non-competitive process — allegations of corruption begin to fly. Whether or not those allegations are true, African governments can rest assured that U.S. companies must comply with the Foreign Corrupt Practices Act (FCPA), and we send people to jail for violating the FCPA. To avoid allegations and appearances of corruption, countries seriously should consider doing business only with companies that must comply with the FCPA and other similar types of anti-corruption laws.
To avoid allegations and appearances of corruption, countries seriously should consider doing business only with companies that must comply with the FCPA and other similar types of anti-corruption laws.
Inexperience
Historically, most African countries have relied heavily on public sector financing of power projects. Countries now realize that the private sector has the capital available and willingness to invest in a way that can help countries accelerate electricity access. Nevertheless, many government officials until recently had been unfamiliar with internationally common practices for securing private sector investment in the power sector. Many also were unfamiliar with newer, competitive technologies such as wind, solar, and geothermal power. Since its launch, in 2013, Power Africa and its partners have helped more than 120 independent power projects (IPPs) reach financial close. Many of those deals involve governments that had never negotiated a power purchase agreement (PPA) with an IPP before; and some governments still have not closed a single deal. We are working with them to build capacity and gain that experience, though. To date, Power Africa, through the U.S. Department of Commerce’s Commercial Law Development Program (CLDP) has published several books, including Understanding Power Purchase Agreements, Understanding Power Project Financing, Understanding Power Project Procurement; and Understanding Gas & LNG Options. In addition, Power Africa has published a Guide to Community Engagement for governments and project developers so that projects do not get derailed based on social and environmental issues after significant time and money already has been spent. The U.S. Treasury Department also has embedded officials in African ministries to help them advance new public-private partnership structures.
Power Africa also provides direct training to ministry and utility officials and regulators. Power Africa’s network of more than 100 on-the-ground advisors are helping reduce the capacity gap with the hope that once Power Africa’s advisors help advance certain projects, the knowledge they leave behind will help ensure that decades of new projects will follow with local African officials in the lead. We also launched the Power Africa Legal Fellows Program with the Cyrus R. Vance Center for International Justice, enabling promising young African energy lawyers to expand their skills in U.S. firms before returning home to advance energy transactions. And we launched the Young African Leadership Initiative’s “Young Women in African Power” program, which brings together young female leaders in the power sector across the continent for a month of leadership training. Power Africa recognizes that the top 20 most gender-diverse utilities outperformed the bottom 20 in return on equity, which is why Power Africa has embraced USAID’s Engendering Utilities Program and has set goals for certain utilities to increase the number of women in their ranks and executive leadership.
Poverty
No government in the world by itself has the resources available to build the infrastructure necessary to end energy poverty. Rather, the private sector must provide the lion’s share of the financing. While the U.S. Government Power Africa agencies, including the Overseas Private Investment Corporation (OPIC), USAID, the Millennium Challenge Corporation (MCC), the U.S. Trade & Development Agency (USTDA), and the U.S.-African Development Foundation (USADF) collectively have spent or financed more than $3 billion to date to advance Power Africa’s goals, the 120+ power generation projects that have reached financial close are worth more than $20 billion. Much of that money has come from the private sector, including Power Africa’s 151 private sector partners.
There is an enormous untapped resource for energy infrastructure financing in Africa — local pension and sovereign wealth funds. Recently, Senegal achieved $0.05/kWh solar prices in the International Finance Corporation’s (IFC) Scaling Solar competitive tender. One of the factors that contributed to that low pricing is that Senegal’s sovereign wealth fund — FONSIS — has a 20% equity stake in the project. Having a local pension fund or sovereign wealth fund invest in a project, not only serves as an abundant source of inexpensive and long-term local currency-denominated capital, but it also derisks the project given that no government wants to see its pensioners lose their money. That derisking also brings down the cost of capital for international investors, resulting in even lower prices. For this reason, USAID is developing a program to help encourage African institutional capital to invest in power infrastructure.
Having a local pension fund or sovereign wealth fund invest in a project, not only serves as an abundant source of inexpensive and long-term local currency-denominated capital, but it also derisks the project given that no government wants to see its pensioners lose their money.
Of the 600 million people who do not have access to electricity in sub-Saharan Africa, it has been estimated that many people simply do not have the ability to pay for electricity. Governments need to devise rural electrification plans that take into account this reality and that do not saddle already financially vulnerable utilities with new unsustainable debt. Utilities can learn from the off-grid solar home system companies to determine how best to capture value from last-mile customers. Companies like Fenix International, owned by Engie, are selling rural customers 10 watt panels and helping them gain access to credit for the first time. Nevertheless, in many cases, governments will need to subsidize new electrical connections for these last mile customers.
Sluggishness
We all are guilty of sluggishness from time to time. It often is our failure to act quickly enough that is preventing people from getting access to electricity. We must treat energy poverty with a sense of urgency — making sure that no paperwork sits on any of our desks; and that governments quickly pass the requisite laws and regulations necessary to advance many power projects. Power Africa has been working for more than six years, spending millions of dollars, trying to help one government move its first IPP across the finish line. Everyone is confident that it will happen “in time.” Despite the best of intentions, perfection has become the enemy of the good. Millions of people remain in the dark. Things are moving too slowly.
Another government similarly has delayed more than a dozen solar IPPs, for a variety of reasons, including the belief that the prices were too high. But one reason that had been given recently (and is common across the continent) to delay further negotiations was that they needed to wait “until after the elections” before any final decisions were made. Power Africa is working with countries to strengthen the enabling environment through technical assistance to independent institutions such as regulators to ensure that regardless of who the head of state is, a deal can move forward and will be honored and sustainable.
In stark contradiction to sluggishness, the Government of Zambia, with support from the IFC’s Scaling Solar program that included $2 million in support from USAID, competitively tendered, financially closed, and commissioned its first solar projects at a lightning pace. Construction and commissioning took less than 18 months from financial close, bringing enough $0.06/kWh solar power to bring electricity to more than 30,000 people and a hospital.
Fear
Fear is the deadliest of all the challenges confronting the African power sector. Fear of renewable energy. Fear of IPPs. Fear of losing one’s job because of a privatization or a new technology. Fear of influential unions or influential individuals. Fear of frontier market investments and defaults. Fear of currency fluctuations. Fear of just making a bad decision. Fear is paralyzing, and it continues to paralyze the African power sector.
While some of these fears are justified (e.g., the fear of currency fluctuations), most of them are not. Some of the fears can be mitigated, and some of them simply need to be confronted head-on. Many people want to stick only with the technologies that they have known for years like hydro power and coal because there is fear of the unknown. But the reality is that many more technologies are competitive. For this reason, Power Africa takes an “all-of-the-above” technology approach — we do not have a preference as to whether a project is powered by gas, diesel, the sun, the wind, water, or coal. We want people to get access to the least expensive, most reliable and sustainable electricity as quickly as possible. Countries can build diverse, resilient, financially sustainable mixes of power generation. Most African countries have abundant renewable energy resources and the prices of renewable energy are coming down more and more every day. We will not support a particular technology for the sake of supporting that technology, unless there’s a compelling reason to do so.
Power Africa takes an “all-of-the-above” technology approach.
When something is new, there is a natural tendency to fear making a mistake. Government officials, development partners (including ourselves), and investors alike need to move beyond that fear and act quickly to advance private sector investment in energy infrastructure. Power Africa offers the plans, the tools, and the access to capital to help catapult the African continent out of energy poverty. The best advice my very first boss at USAID gave me was “Don’t be afraid to act because you’re worried that you’ll make a mistake. You’re trying to improve lives and people have been trying to tackle these issues for years. If you make a mistake, we’ll walk around the block and talk about it and figure out how to fix it. If it’s a big mistake, we’ll walk around the block twice.”
Let’s throw away fear and act. It’s upon all of us, though, to move beyond these seven deadly challenges.
