Releasing the floodgates of finance (The Africa Report n°31 – June 2011)

Getting a bankable project together, along with a solid power developer, is the key to achieving lift off in Africa’s power sector.

The lack of uninterrupted, reasonably-priced electrical power is a millstone around Africa’s neck. Industries that could otherwise be competitive are edged out by imports. Children are forced to stop studying when the sun sets. Hospital equipment is restricted to the most basic levels because vaccines and other products require refrigeration. Agricultural lands that would blossom with powered irrigation have to make do with the occasional rainfall. Very occasionally, the beer is warm.

Africa generates just 3.1% of global electricity production. As Brian Dames, the new CEO of South Africa’s Eskom explains, « Spain generates as much power as sub-Saharan Africa. » Electrification in Asia is at 90%; in Africa, the average coverage in a country is 25%. Latin America, with around half of Africa’s billion-strong population, consumes almost twice as much as Africa’s 562TWh per year.

This situation is not sustainable on a continent where middle class aspirations and fast-growing economies cannot afford bottle-necks. A step change in approach has already been signalled by the African Development Bank and other development financiers. New legislative frameworks allowing independent power producers (IPPs) to sell electricity into the grid have led some promising projects to take off, like the Bujagali hydropower project in Uganda, a 250MW power plant in development by a consortium of Sithe Global Power and Industrial Promotional Services, a division of the Aga Khan Fund for Economic Development.

But for every success story, there are a hundred opportunities going begging. « There is a significant amount of money looking at investing in African power, at least ten funds – Helios, Globeleq, RenCap, Macquarie Bank, IFC among others – but the projects just aren’t there, » says Paul Nickson, former senior advisor for power at RP Capital Group and now vice-president at Geometric Power, Nigeria’s first IPP. He sees billions of dollars queuing up to invest in African electricity infrastructure. Currently it is generator vendors such as Broadcrown – which recently won a major contract to supply Globacom with 2000 generators for their mobile phone masts – that do well in Nigeria.

A successfully structured project is the holy grail of African power. Without it, the bankers will not move. But the timeframe of investment in the sector means that things are not so simple. The long life span of projects can leave investors at the mercy of changing political regimes or nose diving economies that leave contracting parties unable to honour the original tariff regime.

The bankable project is one that has several elements: it has cleared its licensing hurdles; has a solid power-purchasing agreement from a utility that can make Regular payments; an electricity tariff that investors and final consumers are comfortable with; and a fuel supply that is locked down for the same length of time as the power purchasing agreement. Solomon Asamoah, deputy CEO of Nigeria’s Africa Finance Corporation, explains that the tariff agreed between the regulator and the private sector operator is especially important for the stability of a project. « Too often we see companies rub their hands together thinking they have got a great deal on the tariff, only to see the whole thing be renegotiated a few years down the line. It needs to be a win-win from the beginning. »

One of the reasons that big funds are staying away from investing in African power is the illiquidity of the investment. However, North African IPPs have switched hands more than projects south of the Sahara. Equity in the first Egyptian IPP was sold by InterGen and Edison to Globeleq, a company that emerged out of the Commonwealth Development Corporation. This was then sold on to Tanjong of Malaysia and Aljomaih of Saudi Arabia. Tanjong subsidiary Kuasa Nusajaya also bought equity from Egypt’s second and third IPPs that were developed by France’s EDF. Tunisia’s IPPs have also seen a great deal of equity changing hands.

For Nickson, this is a good thing: « The process goes through three very distinct phases. There is a high-risk venture capital phase, where entrepreneurs such as ourselves try to put these projects together and get them financed. » Then there is an initial teething phase, where the project is considered fairly high-risk, but where the funding is in place, the power station is being built and problems with the government ironed out. And then there is the mainstream stage, which can easily last for 20 years, when the project would get flipped to a major utility investor, which could well be a mutual fund, someone who wants a stable stream of high income earnings for a period of time. »

The lack of a middle tier of project developers who construct and manage power stations is a key reason why Africa lacks a vibrant pipeline. There are only a few companies currently operating in this role in Africa, such as AES, which as AES-Sonel installed a heavy-fuel power station in Limbe and is building Cameroon’s second IPP in Kribi. AES also runs a 270MW power barge in Nigeria. ContourGlobal has built and runs a l00 MW power station in the Togolese capital, Lomé.

The lack of these developers is perhaps due to the difficulty of getting paid. The advent and popularisation of prepaid meters is starting to change the paradigm, bringing the innovation that unlocked the mobile phone revolution in Africa and reassuring utility operators – and ultimately investors – that they will get their money.

By installing prepayment meters, the Lesotho Electricity Company managed to raise collection rates from 19% in 2001 to 99% in 2007. The company replaced more than 8,000 standard meters in homes, government offices and businesses with prepayment meters. It also set up a series of automatic vending machines for credit, which supplement operations with sales agents, allowing users to top up their meters whenever they need to do so. Electricity sales doubled between 2002 and 2007, proving – as with mobile phones – that Africa is ready to pay for power.

Nicholas Norbrook, Cape Town

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