Editorial: Sub-Saharan Electricity Shortages Threaten Economic Growth

Editorial: Sub-Saharan Electricity Shortages Threaten Economic Growth



By Anne Bergman

Long queues snaked across the lobby as individuals attempted to withdraw funds from Kigali’s largest bank. Internet across the city had been down since morning — and on it, the software banks relied to access accounts. This was the third internet failure in the past two days – a consequence of ever-increasing citywide power cuts. As Rwanda seeks to become the IT hub of East Africa — like other nations across the continent — the country must contend with large-scale power failures and their detrimental effect on investment.

Energy poverty plagues Sub-Saharan Africa, limiting enterprise development and stifling economic growth. Approximately 30 percent of the region has access to electricity, but supplies remain unpredictable. Nations cope with insufficient generation and transmission capacity, poor reliability and prohibitively high costs. The lack of energy infrastructure is attributable to a dearth of financial and regulatory failures. Inadequate monetary investment, ambiguous government regulation and low population densities have hindered development and threaten future private investment.

Traditionally, energy sector financing has been derived from a country’s gross domestic savings. However, immature markets and high development demands have impeded national saving in much of Sub-Saharan Africa. This problem has been exacerbated by under-investment in industrial sectors and an absence of sufficient economies. Lack of savings has limited energy service expansion and the little financing that does exist has been allocated to basic maintenance and rehabilitation projects.

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In an attempt to remedy sector failures, urged on by investors and regulators, many Sub-Saharan nations have unbundled their power utilities. This deregulation of energy markets over the past few years has created opportunities for private sector financing in generation. However, transmission infrastructure struggles to keep pace. South Africa, Kenya and Nigeria have experienced an influx in investment from independent power producers resulting from advantageous energy policies and credit worthy financial institutions. A select few countries have made vast inroads in energy provisions as a result of foreign-led IPPs. Last year, Uganda’s power supply increased 30 percent at the completion of the Bujagali Hydropower facility while Togo’s Centrale Thermique de Lome added 40 percent to the country’s generation capacity.

Unfortunately, this is not the case in many deregulated markets. Companies continue to contend with poor institutional quality and unclear regulatory frameworks. As is the case with Songas in Tanzania, some firms pay a hefty price for supplying electricity. A consortium of companies led by the U.K. based Globeleq, Songas provides one third of Tanzania’s electricity supply. Over the past six months the government has struggled to uphold their contract with the firm and is presently $51 million in arrears. High profile contract disputes like this have led to slower than expected growth in the sector.

Those companies that have made investments are choosing them wisely. As energy projects are highly reliant on non-recourse debt, firms are seeking out politically stable nations with high credit ratings. Less than half of Sub-Saharan Africa’s countries have received a credit rating and only three of those, Botswana, Namibia and South Africa, hold investment grade debt. As a result, multi-lateral institutions, bi-lateral institutions and export agencies have filled the energy project space. These organizations, including the International Finance Corporation and African Development Bank, maintain strict credit standards and require strong project economics. Despite their involvement, there remain huge gaps in energy provision across the continent.

As a consequence of persistent under-investment, electricity demand continues to out-pace supply. Businesses across the region are resigned to purchasing electricity from both public sector utilities and private sector providers in an attempt to meet internal needs. An inability to acquire consistent supplies causes companies to make suboptimal decisions around production. Investors choose relocation, factor and production substitution and output reduction to increase profitability when faced with energy shortages. Although present industry seems able to cope with such obstacles, future economic growth will rely more heavily on infrastructure development.

The past few years have witnessed an increased interest in Sub-Saharan Africa that has led to investment across the continent. As new investors enter these markets, electricity sector development will become a necessary component of private company planning and government policy. Established entrepreneurs are hoping to capitalize on this gap by making their own investments in power generation facilities. In 2012, Nigeria’s Aliko Dangote announced a $7 million investment in the country’s energy sector, agreeing to provide 2000MW of generation capacity. This investment follows on the heels of other large-scale energy projects undertaken by private companies. Gecamines, the Congolese mining concession, also announced their interest in building a coal-fired power plant to support mining operations in the south of DRC late last year.

Private power provisions will solve immediate needs but large-scale infrastructure projects are necessary to attract outside investment. As Sub-Saharan countries continue to grow at exponential rates and electricity demand skyrockets, even greater pressure will be placed on existing infrastructure. Over the next few years, governments must prioritize energy sector expansion or be faced with decreased investment and economic stagnation.