The Case for Private Power
The private sector has a vital role to play in the development of Africa’s power generation capacity. Sub-Saharan Africa, which currently has over 600 million people without access to electricity, should look to the private sector and regional cooperation to boost power capacity, says Dr. S.Z Gata, Managing Partner of EMC Continental Ltd.
What are the challenges to establishing power projects in Africa?
There is really only one challenge. Unlike the rest of the world, in Africa the concept of private power is not well understood, and there is an inertia in creating the environment for the private sector to get involved. We have been slow to grasp the potential of private capital in the infrastructure sectors generally and the power sector in particular. Compared to the fuel sectors or the (ICT) communications sector which are operated under state-of-the- practice in regulatory systems.
If you look at the four segments of the supply chain in electricity supply industry: generation, transmission, distribution and retail supply, quite frankly, distribution and retail supply of electricity is not rocket science It is not complex. We can have private distributors and retailers, both big and small, just as in fuel distribution and retail supply business, or in the ICT and telecommunications services sector, etc. I do not see why we could not have the same contribution by the private sector in the electricity sector.
Transmission is capital and technology intensive; however, public-private-partnerships can be successful. Generation, worldwide, is increasingly private, following the advent of independent power producers, whose systems of development and operations have matured over the years. I just do not see why African governments continue to suffer the massive burden of generation capacity investments, where private capital is competitively chasing such opportunities.
Private power has proven to be so much cheaper and more reliable. Renewable Energy and natural gas-powered generation is particularly suited to private participation because it is modular and very scalable, thus allowing for both big and small players. PV solar has the added advantage of not needing transmission. Natural gas plants can also be modular, scalable and generally easier to finance, even on lease-hire basis.
To address this opportunity, I think you need institutional development and policy changes that promote and protect private sector investments, especially in renewable and gas generation and the distribution and retail supply sectors. Nigeria, Kenya and South Africa are examples of very established private markets, and they are now addressing their domestic power needs through well-structured private power investment programs. That era has commenced in Africa.
What are the obstacles to attracting the private sector in Africa’s power generation schemes?
The problem is risk, the so-called African country risk. This risk is not market risk or technology risk, but rather, the infamous regulatory and political risk. I think that multilateral and regional development finance institutions must step up the pressure to involve the private sector, which they could do in two ways:
First, they could link investment in power development, in countries they support, to GDP. For instance, you could say that no country should spend, from the public sector, X percent of GDP without involving the private sector in power generation investment. The Republic of Ireland for example limits the State Utility, ESB, to owning only 50% (max) of the Generation Capacity on the national system.
What I find to be strange is the appetite of World Bank and other development institutions, which lend only to governments of developing countries rather than to the private sector, despite the weak borrowing capacity of many governments across the continent. Nearly all of their lending programs are structured on government guarantees, which can never be realistically called.
These institutions seem to have no problem lending to governments that do not really have the ability to repay. At the policy level, we need to change the attitude of institutional lenders towards private sector developers. Governments are enticed to pile on national debt, where we could otherwise create an environment that incentivizes and protects private capital.
What are the obstacles to creating regional power pools in Africa, and what are the benefits to such coordination?
The real challenge is the lack of experience and hence the confidence in cross-border trade and investment transactions in Africa. It can be very challenging to get countries to come together and form a regional trade and investment platform.
We have to develop an acceptance of the fact that it is possible for governments to have cross-border resources that they equitably share and that interdependence on an economic resource as vital as electricity is possible.
Countries want to be assured that their economies can have adequate and affordable power even from facilities domiciled in other countries. So when you look at their national energy plans, they are domestic-focused and developed on the concept that national energy security means the nation must own the energy facility directly within its borders. This is despite that most African nations have neither oil reserves nor oil refineries within their territories.
The challenge is that we don’t have confidence in cross-border investments. We do not have, for instance, the same environment as in Europe, where a German company can buy energy stock on the London market, and investment can flow regularly from state to state. That is one big challenge we have to address. The second challenge is the coordination of cross border investments at the development phase. There is no experience on this.
Still, the case for regional cooperation is very real, as electricity is viciously susceptible to economies of scale. Zimbabwe, Zambia and Botswana started by demonstrating opportunities for inter-dependence through very small case studies.
A small distribution project to supply electricity from Zambia through Zimbabwe and then on to Botswana was undertaken with much doubt at the start. Out of that experience has emerged the Southern African Power Pool, which in turn, has inspired other Sub-Regional power pools across Africa.