Beating Africa’s Power Problem: The Issues Holding Africa Back

Solar Valley Addis Ababa (Picture: Stiftung Solarenergie)

Sub-Saharan Africa is in desperate need of power generation — the entire sub-continent combined has about half of the power capacity of Japan, despite having eight times the population. In what has become one of the most quoted statistics about Africa — about half of the population of Sub-Saharan Africa, an estimated 600 million people, lack access to electricity. And many areas that can boast electricity access and grid connectivity still face shortages and rolling blackouts due to lack of capacity, hampering growth and economic development. The issues surrounding Africa’s electricity shortages are multifaceted and include decades of neglect in building up country-wide infrastructure, a lack of international investment, poor regulatory frameworks and the difficulty surrounding bankability of power projects.

Africa’s power problem is a trans-continental issue, and every region (with the exception of North Africa, which has an access rate of 97 percent) has been struggling to catch up with the rest of the world in terms of power infrastructure. West Africa’s electricity access rate is at 47 percent, Southern Africa is at 43 percent, Central Africa is at 25 percent and East Africa is at 23 percent. In comparison, China’s access rate is 100 percent, India’s access rate reached 82 percent in 2016 and Brazil has an access rate of 97 percent.

As recently as 2012, Kenya’s power scenario was perfectly in line with its neighbors, with an electricity access rate of just 25 percent. In the years since, however, Kenya has turned its power sector upside down and inside out — transforming its electricity framework in terms of regulatory policy and investment, and strategically building up both generation capacity and transmission infrastructure. Today, Kenya’s electricity access rate stands at 73 percent and the country is on track to meet its goal of 95 percent access by 2020 — making it one of the world’s greatest power success stories. It took the United States more than a decade to accomplish the same task. And despite having similar access to resources — including renewable sources like hydro, geothermal and wind, as well as nonrenewable fuel sources like gas — neighboring Tanzania lags well behind with an access rate of just 32 percent.

Playing Catchup in Power Generation

To best understand Kenya’s strategies for success, the factors that have hindered the development of Sub Saharan Africa’s power development must be understood Again, these factors are many and multi-dimensional but a foundational problem is the unequal footing on which African countries have had to base their modern infrastructure development due to the inequitable (and often cruel) legacy of European colonialism. The impacts of colonialism vary greatly from country to country but the underdevelopment of infrastructure and human resources, as well as the export of African resources from the continent — both natural resources and people — for the betterment of Western economies is a recurring theme in Africa’s development progress.

As African countries began to emerge from colonialism in the 1940s, they started the long, complex process of nation-building decades or even centuries behind other regions. By contrast, industrialization first began in the United Kingdom in the 1700s. The United States, as another example, began building its comprehensive electricity infrastructure system in the 1920s Many African countries on the other hand, didn’t begin serious work on public electricity infrastructure development until the 1970s. South Sudan, Africa’s youngest country, didn’t see its first non-diesel, non-generator power plant constructed until this year — putting it a full century behind the United States in terms of public power development.

Insufficient Regulatory Frameworks

Not only did Sub Saharan Africa start its infrastructure development after other nations, it also faces modern issues like corruption and bureaucracy, slow economic growth and extreme poverty, political instability, bankability of projects and a lack of international investment — issues that are woefully intertwined. Though not specific to the energy sector, many African countries have (at best) inefficient regulatory regimes and (at worst) corrupt bureaucracies. In the energy sector specifically — which is investment-heavy and complex with issues like tariffs, subsidies, supply/demand calculations, fuel supplies and questions of access complicating the sector — many regulatory regimes in Africa are simply insufficient. The African Development Bank, in its 2018 report on the energy regulations in Africa, said “much work remains in strengthening regulatory independence vis-a-vis the regulated industry and the executive branch of government, as well as capacity for regulators to be able to effectively regulate the electricity sector and ensure its long-term health and sustainability.” Notably, many African countries lack an independent regulator for pricing, which the private sector views as instrumental for making investment decisions.

Inefficient and burdensome regulations come into play here. Many African countries rank at the bottom of the World Bank’s annual “Doing Business” report, which grades countries’ regulatory policies in several categories, including starting a business, permitting, resolving insolvency, enforcing contracts, paying taxes and trading across borders. The average Ease of Doing Business score for Sub Saharan African countries for regulatory quality is less than 40 and compares to 73 in the Organization for Economic Co-operation and Development countries, with the top score an 86.59 from New Zealand and the bottom score a 20.04 from Somalia.

Though many African countries rank extremely low on the global index, continent-wide reform efforts have improved overall scores. The time it takes to register a business in Sub Saharan Africa, for example, declined from 59 days in 2006 to 23 days in 2019, half of the ten countries that recorded the most improvement between 2018 and 2019 came from Sub Saharan Africa — Kenya, Djibouti, Togo, Côte d’Ivoire and Rwanda. The report also notes that Sub-Saharan Africa is the region that has seen the most reforms since 2012, boasting 107 reforms across 40 countries. The cost to register a new business has declined from 192 percent of income per capita in 2006 to 40 percent of income per capita in 2018, and the average paid-in minimum capital has declined from 212 percent of income per capita to 11 percent over the same period. The issues don’t stop with poor regulatory frameworks, but this is an imperative step to improving the situation, as it is a factor government can directly control, unlike issues including macro-economic factors like foreign exchange risks and environmental security.

Indebtedness & Poverty Hindering Growth

As Dr.  S. Z. Gata, Managing Partner at EMC Continental (Africa) Ltd, said in an interview with Africa Oil & Power, the primary risk for private sector investment is not technology or market risk but “the infamous regulatory and political risk.” The private sector often steers clear of investment because of the political and regulatory risk associated with African power projects. In these situations, the only investors tend to be development institutions lending directly to governments. But, Gata says, this dependency creates an issue regarding bankability of projects and government guarantees on the investment, as well as a debt burden many African countries can’t carry.

“These (development) 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,” he said. “Governments are enticed to pile on national debt, where we could otherwise create an environment that incentivizes and protects private capital.”

An even more complex issue to tackle, and part of the overall issue of indebtedness, is actual bankability of individual projects due to servicing a poor population. Quite simply, many Africans cannot afford to pay full-price for electricity, which means the price of electricity is often heavily subsidized or the available market is significantly smaller than in other parts of the world.

Tanzania’s state-owned utility Tanesco, for example, heavily subsidizes its power sector. A 2007 World Bank report estimated Tanesco was operating at an annual loss of USD $50 million per year, selling power at US$c7 per kWh, compared with an average cost of US$c10 per kWh. By 2017, Tanesco had debts of $363 million, could not afford to generate new capacity and was seeking a loan of $200 million from the World Bank to cover old debts. In 2018, the World Bank approved a $455 million loan for Tanzania’s power problem, and, in the same year, Credit Suisse loaned the government $200 million for its power sector. Still, the utility operates at a loss — losing about SH265.30 per unit, or about US$c12 per unit, and its overall indebtedness has only increased, according to The Citizen.

Issues like political instability also plague Africa’s power sector. South Sudan, as previously mentioned, has just commissioned its first power plant this year. The young country has struggled with civil unrest for decades, first as part of Sudan waging war for independence granted in 2011 and subsequently dealing with rebel insurgencies again since 2013. Civil strife makes investment tricky and, as Ann Norman, General Manager for Pioneer Energy said in a previous AOP interview, only the most risk-hardy investors are likely to enter South Sudan. Until some stability is achieved, instability is likely to continue as an impoverished population fights for jobs and economic change. Both caused by and effected by this instability, South Sudan’s electricity access rate is about 1 percent — the worst in the world.

Despite the challenges, the importance of building of Africa’s power sector cannot be overstated. As Peter Voser, a former CEO of Royal Dutch Shell and an Energy Community Leader of the World Economic Forum stated in a report by the WEF, “Without heat, light and power you cannot build or run the factories and cities that provide goods, jobs and homes, nor enjoy the amenities that make life more comfortable and enjoyable. Energy is the ‘oxygen’ of the economy and the life-blood of growth, particularly in the mass industrialization phase that emerging economic giants are facing today as their per capita GDP moves between approximately US$ 5,000 and US$ 15,000.”

According to the same World Economic Forum report, electricity outages (not including lack of access outright) cost Sub Saharan Africa 2.1 percent of GDP, as well as losses in productivity, competitiveness and employment which are more difficult to measure numerically. The dire cost to development caused by poor electricity access along with Kenya’s remarkable success should have development institutions and governments around the world asking the same question: how are they doing it?

First published: Africa Oil&Power

 


 

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