Part I of this article was originally published by African Business Review on November 26, 2014.
Unquestionably, Africa has in recent years been undergoing a period of strong economic development. This is anticipated to continue with the growth rate in Sub-Saharan Africa expected to reach 5.2 percent in 2014, up from 4.7 percent in 2013.
To maintain this growth trend, Africa has an urgent need to raise the levels of investment in its power sector. Energy development has notably not kept pace with the rising demand for electricity in the continent.
According to the World Bank, 25 of the 54 African countries are in an energy crisis, with only 25 percent of Sub-Saharan Africa’s population having access to electricity. In this context, privately-financed independent power projects (IPPs) are a potentially efficient vehicle for meeting these needs. IPPs in the African continent, however, are facing major challenges in attracting the level of investment required, which is estimated at around $41 billion per year.
In this article we examine the successful IPPs and independent water and power projects experience in Abu Dhabi and the Middle East and consider what lessons learned from this experience may contribute to the effective development of IPPs in Africa.
In the Middle East, the IPP and IWPP model was first implemented in Abu Dhabi by the Abu Dhabi Water and Electricity Authority (ADWEA) for the Taweelah A2 project in 1998. Since then, IPPs have played a major role in the electricity and water sector, accounting for approximately 96 percent of the total generation capacity.
To date, Abu Dhabi has procured 10 IPP and IWPP’s; the most recent being the Mirfa IWPP, which closed in October 2014, resulting in an aggregate of approximately $13 billion raised on a project finance basis and over 13,300MW of contacted capacity. These have rigidly followed precedent from a contractual standpoint, regardless of changes in market conditions.
The IPP model has also been successfully adopted, with certain variations, by other countries across the Middle Eastern region, including Qatar, Bahrain, Saudi Arabia and, more recently, Kuwait and Dubai.
When considering the application of the Abu Dhabi/Middle Eastern model to Africa it is important to avoid over-generalisation. Of course, Africa is a very vast continent with not only different legal systems, but also different socio-economic and political realities. Not all of the success factors distinguishing the Abu Dhabi model can therefore be equally replicated in different African jurisdictions as no single method will work for every opportunity.
Long Term Strategy
One key lesson that can be applied across the African continent is the benefit of a long-term strategy for developing a successful IPP program, where a Government sets a clear strategy and establishes a regulatory regime which facilitates private investments and ensures fair regulatory oversight.
In Abu Dhabi for instance, the Emirate has since 1998 issued comprehensive polices to regulate the power and water sectors, including by providing guidelines for the development of IWPPs, developing a regulatory regime and establishing an independent regulator named the Regulation and Supervision Bureau. Political support is essential as strategy is notably driven by realities; although politics is often the enemy of strategy.