BUSINESS INTELLIGENCE
Sub-Saharan Africa’s energy conundrum
Published: 30-AUG-04
Sub-Saharan Africa sits on some of the most significant potential fuel reserves in the world, yet it is estimated that no more than 20%, and in some countries as low as 5% of the population has access to electricity, falling to under 2% in rural
areas. Nigeria is the world’s 13th largest oil producer, with proven crude oil reserves and natural gas reserves estimated at 31.5 billion barrels and 4.5 billion cu m respectively, yet its effective generating capacity is less than 4,000 MW for a population in the region of 120 million.
The region possesses some of the largest water courses in the world (the Nile, the Congo, the Niger, the Volta, the Zambezi), and whilst hydroelectricity is by far the single largest source of electricity in a number of countries, these resources remain
largely untapped. It is estimated, for example, that Cameroon has hydro potential of up to 115,000 MW, and yet installed hydro capacity currently stands at less than 800 MW.
In the Democratic
Republic of Congo, the assessed potential for hydropower is by far the highest in Africa and one of the highest in the world. According to the US Geothermal Energy Association, the potential for geothermal energy in Africa’s Rift Valley using present-day technology is between 2.5 to 6.5 GW, yet in the region only Kenya has begun to exploit geothermal power with a meagre installed capacity of 45 MW.
Crumbling infrastructure
The bulk of the region’s generating capacity and transmission network was built in the 1950s and 1960s, and continued under-investment in maintenance and renewal has left, in many countries, a system creaking at the seams. Power outages, brown outs, and power surges are commonplace, whilst load shedding
in times of drought are routine.
A prolonged drought in 1999/2000 led to severe power outages in Kenya and Ethiopia, for example, whilst silting up of dams has led to a steady decline in capacity and concerns about dam failure. It is
estimated that some of Kenya’s dams are up to 70% silted and Malawi’s up to 80%.
Lack of capital continues to be the main constraint to growth. Historically, electric utilities have been run as state-owned monopolies. This has meant that access to investment capital has been constrained by ever more pressing demands on the
public purse. And at the same time, tariffs have typically been set too low to cover financing and asset replacement costs, in an attempt to stimulate industrial competitiveness and retail access.
With sector reforms progressing slowly, and an estimated investment requirement of US$ 3.2 bn per annum in new investment and US$ 2.9 bn in maintenance between 2005 and 2010 in generation alone, to close the demand gap in the region, there is no immediate end in sight to the energy deficit.
The answer lies in mobilising private capital, but this is not easy. Many governments have realised that public sector funds are simply inadequate to bridge
this gap. But constraints to private sector investment are many and progress on regulatory, restructuring and privatisation reform has been slow. Private investors see a variety of deterrents when they look at
the electricity sector in the region:
• Significant investment required for rehabilitation and catch
up maintenance
• Uneconomic and unbalanced tariff structures, which render
electricity systems financially unstable, although reform is progressing
in many countries in this area
• Lack of creditworthy customers, be it government-owned
institutions, struggling industry or cash strapped distribution
companies
• Small markets, with the exceptions of Nigeria and the opportunities
presented by the two regional power pools, one
fledgling, one putative.
This has meant that private investment in the sector to date has been limited primarily to relatively small Independent Power Projects many backed up by government credit guarantees,
transmission assets with contractually secure revenue streams (eg Copperbelt Energy in Zambia), and a small number of utility
privatisations.
Examples include Gabon, which awarded a 20-year concession to run the state-owned electricity and water utility, the Société d’Electricité et d’Eaux du Gabon (SEEG) to the French firm, Vivendi, in 1997, followed by a further sale to the public
in Gabon’s first Initial Public Offering.
This was sub-Saharan Africa’s first water and electric utility privatisation. In Cameroon, the national electricity company Société National d’Electricité (SONEL), a wholly integrated power company, was privatised in 2000. AES Corporation of the US acquired a 51% shareholding in Sonel with 20 year exclusive management responsibilities for generation, transmission and distribution assets. These two privatisations have had contrasting impact. In Gabon, the former loss making utility quickly turned to profitability.
In Cameroon, electricity
supply remains unreliable and power cuts have persisted three years after privatisation. At the same time, electricity prices have continued to rise and AES has had difficulties right-sizing the bloated workforce that it inherited.
Uganda privatised a major part of its power generation in 2002 when it awarded a 20-year concession to Eskom of South Africa to run its two main hydro power dams. The two dams, with an installed capacity of 380 MW, are situated on the River Nile and supply almost all of Uganda’s power.
Despite these obstacles, most countries in the region are now firmly on the road to reform. Whilst private investment into the sector in the last five years can be measured in the tens, there is nonetheless tangible progress towards greater private sector participation. The emphasis has been on legal and regulatory
reform.
A small number of countries, including Zimbabwe, Ethiopia and Zambia, are being left behind, whilst the majority have restructured
and reformed. Kenya split generation from its transmission and distribution in 1998, whilst Nigeria and Tanzania are in the process of doing so.
The hard part lies ahead, as governments are beginning to find that passing new legislation and unbundling the utilities is less than half the battle. Indeed, there are sound arguments to be made that the heavy emphasis on restructuring and unbundling in vain pursuit of the economist’s holy grail of competition has been a distraction away from the heart of the problem.
Competition works best where supply exceeds demand. Where the imperative is hundreds of millions of dollars of private capital to finance rehabilitation and expansion, there is nothing to beat a well regulated monopoly! There is no magic wand, but key amongst the imperatives will be:
• continued tariff reform
• a focus on fixing the whole system – private investment into
one part of the system, whilst the rest of it is bust will continue
to
prove either expensive, or impossible
• mobilising public sector capital (government and donor), but
using it sensibly
• the inevitable – getting right the balance of risk between
government and private sector, and becoming comfortable with
the returns that private capital will be expecting.
A tall order perhaps, but the alternatives are thin on the
ground.
Nick Allen ([email protected]) is the partner in charge of PricewaterhouseCoopers’ Privatisation and PPP practice in sub- Saharan Africa. He has worked exclusively advising governments and private sector in the UK, Eastern Europe and Africa on Private Sector Participation (PSP) and PPPs and is acknowledged as one of Africa’s leading authorities on privatisation and PPPs.
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