It is a good time to sponsor an energy project in sub-Saharan Africa.
The Obama administration’s Power Africa initiative is marshalling government resources to build out the sub-Saharan African energy sector. Success will depend on a similarly unprecedented response from the developer community, as well as cooperation from host governments, who will need to conduct procurement processes geared to attract public and private capital on appropriate terms. Whether these sectors will respond as the Power Africa initiative envisions remains to be seen.
Meanwhile, the US government is taking steps to improve the competitiveness of US equipment suppliers with those from China.
During his recent trip to Africa, President Obama announced plans to direct up to $7 billion in government resources to support US businesses building energy projects in sub-Saharan Africa. The goal is to double access to power in the region, focusing initially on six countries: Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania.
The $7 billion commitment was over-fulfilled with roughly $7.8 billion in funding commitments declared by five federal agencies. The participating US agencies will be keen to hear from developers with prospective generation, transmission and distribution projects in the region.
Eight private companies have committed alongside the US government to invest another $14 billion in power projects in the six target countries. The eight will be looking for suitable projects.
While no time period is attached to spending the dedicated funding, the declared goal is to double power generation in the target countries within five years.
The Africa Power initiative does not require action by Congress to implement.
Power Africa aims to add 10,000 megawatts of “cleaner, more efficient” electric generating, transmission and distribution capacity to bring electricity for the first time to an estimated 20 million homes and businesses and to ease what business leaders on the continent describe as their biggest problem: a lack of reliable electricity. The high cost of producing electricity as a result of outdated power plants and responding to blackouts with emergency power sources help to explain why African exporters still struggle to compete in international trade.
The public funding commitments are largely drawn from assorted existing federal loan, loan guarantee, political risk insurance and grant programs. These programs are variously aimed at financing energy projects, improving technical assistance, increasing energy reliability and sustainability, speeding up project implementation and enhancing risk mitigation.
In the numerical lead among the agency commitments are two US agencies that finance private projects: the Export- Import Bank of the United States and the Overseas Private Investment Corporation. Ex-Im Bank chairman, Fred Hochberg, declared that the bank would “make available $5 billion in support of US exports for the development of power projects” in sub-Saharan Africa. OPIC, which makes loans and guarantees loans from private lenders to projects typically with at least 25% US ownership and writes political risk insurance on project investments by US persons, has earmarked $1.5 billion.
The Millennium Challenge Corporation indicated that it is prepared to contribute up to $1 billion in new power generation, transmission and distribution projects. MCC will also invest in energy infrastructure, policy and regulatory reforms and host government capacity building.
The US Agency for International Development has pledged to contribute $285 million in technical assistance, grants and risk mitigation to advance private sector energy transactions by helping governments to adopt and implement policy, regulatory and other reforms necessary to attract private sector investment to the region’s energy sector. The US view is that the legal and regulatory regimes need work.
OPIC and the US Trade and Development Agency jointly committed to make available up to $20 million in project preparation, feasibility study and technical assistance grants to support the development of renewable energy projects.
The US African Development Foundation is launching a $2 million Off-Grid Energy Challenge, offering grants of up to $100,000 to African-owned and operated enterprises to develop or expand the use of proven technologies for off-grid electricity benefitting rural and marginal populations.
The US Trade and Development Agency also signed a memorandum of understanding with the Development Bank of Southern Africa to enhance cooperation on project development. The two committed to leveraging their respective resources to accelerate the development, financing and implementation of priority clean energy infrastructure projects. The partnership will leverage private sector resources and expertise to deliver innovative development solutions and greater investment in sub-Saharan Africa.
US efforts to develop renewable energy projects will be supported and coordinated by an interagency joint venture among the US Export-Import Bank, OPIC and the US Trade and Development Agency called the US-Africa Clean Energy Development and Finance Center. The Center, which recently opened in Johannesburg, is supposed to provide a coordinated approach to clean energy project development in sub-Saharan Africa. It will offer both US and sub-Saharan African project developers a centralized means to identify and access potential US government support for their clean energy projects. The Center will also coordinate its efforts with those of the US private sector, multilateral development banks, local development banks, private banks, private equity firms, and foreign governments.
The White House reported the following private sector investment commitments totaling nearly $14 billion. General Electric has promised 5,000 megawatts of new, affordable energy through provision of its technologies, expertise and capital in Tanzania and Ghana. Heirs Holdings, a pan-African proprietary investment company, has pledged $2.5 billion of investment meant to create 2,000 megawatts of new electric generating capacity over the next five years. Symbion Power has undertaken to raise $1.8 billion to invest in 1,500 megawatts of new energy projects in Power Africa countries over the next five years. The African Finance Corporation, an Africa-focused consultancy, will raise $250 million for investment in the power sectors in Ghana, Kenya and Nigeria. South Africa’s Harith General Partners, the inaugural fund manager appointed to manage a Pan African Infrastructure Fund, pledged $500 million across the sub-Saharan African power sector, including $70 million for wind energy in Kenya. Standard Chartered Bank committed to finance $2 billion worth of energy projects. Other companies now working on specific energy projects in the region include Aldwych International, which is developing large-scale wind projects in Kenya and Tanzania, representing a projected $1.1 billion investment, and Husk Power Systems, which plans to install 200 decentralized biomass-based mini power plants in Tanzania.
Beyond these numbers are many other projects under consideration or active development by US and other developers that did not work their way into the Power Africa pronouncements.
No doubt the announced commitments depend on a number of factors. To borrow from Moneyball, it is not the money, but what the money says. In this case, the numbers mean that the Obama administration and its trade- and investment-promotion agencies are taking African energy projects seriously — both as responses to regional barriers to development that need to be addressed and as a source of tremendous opportunities for US businesses.
There is no question that the demand for power is there. In 2012, the International Monetary Fund forecast that seven of the 10 fastest growing countries in the world will be in Africa. The World Bank expects Africa to grow faster than the world average in coming years. Domestic investments and intra-African trade are emerging as significant drivers of Africa’s new growth. All that growth will depend on access to reliable, sensibly priced power.
Arguably more important than the numbers announced, Power Africa, together with the complementary Trade Africa initiative to expand trade and economic ties with Africa, reflect the Obama Administration’s adoption of a “trade-notaid” strategy. That strategy aims for transparency, efficiency, standardization and reducing bottlenecks, roadblocks and corruption. Power Africa is also effectively an order to the participating agencies to concentrate more on finding and implementing energy projects in sub-Saharan Africa, an order that they should work hard to follow given its source.
While the goal of these initiatives, and US strategy more generally, will be sustainable business partnerships, conventional bilateral aid will continue to play a role. If the investment environments in African countries were reasonably adequate, then heroic initiatives would not be necessary to attract capital to their energy sectors. While great progress has been made in the region that has paved the way to the successful development of world class projects, such as the 250-megawatt Bujagali hydroelectric project in Uganda, the 84-megawatt Olkaria geothermal project in Kenya and a range of renewable energy projects under the REFIT program in South Africa, the region continues to be rife with barriers to entry and to ultimate success. The availability of funds to address regulatory and other legal reforms will continue to be an important part of the way forward.
Since 1999, the US Agency for International Development has spent an ever-increasing amount on foreign aid in Africa, including for trade and investment capacity building. For example, the US spent $16 million in 1999 on various infrastructure- related projects in Africa; it spent more than $435 million in 2011. Such aid has allowed countries to invest in streamlining regulations, limiting corruption and opening pathways for foreign-domestic cooperation. These efforts to improve the business environment have led to increased opportunities to invest in energy sector privatizations, with backing from the US Export-Import Bank, OPIC and the US Trade and Development Agency taking credit and country risks that exceed the appetites of commercial institutions.
Other countries have also recently pledged aid to support sub-Saharan African infrastructure. Japan has pledged $14 billion in aid to Africa over five years, and approximately half of the money will be targeted at infrastructure development, with Japan supporting its firms’ desires to export transport systems and power grids. The United Kingdom has supported 437 transactions totaling $30.5 billion, while France has supported 141 transactions worth a similar amount.
The controversial partner in the investment rush in Africa is China, whose investments in Africa have grown by a factor of 30 since 2005, with over 2,000 firms being represented in 49 transactions totaling $20.8 billion.
Commentators question whether Power Africa can compete effectively with China’s non-interventionist investment model, expressing concerns that China’s African investments are undercutting US efforts to increase efficiency and transparency in public policy and business practices. While US-supported investments take an active stance towards eliminating regulatory barriers and corruption, Chinese investment has taken a more hands-off approach for how host countries manage in-bound investments.
While China has pledged to provide African countries with $20 billion in loans, it has been criticized for the presumed, tacit tying of those loans to Chinese goods and services and even imported Chinese labor. Export financing by OECD members is also, of course, tied to national exports. However, the United States and the other OECD member nations, as well as numerous non-OECD members, have committed under the OECD Arrangement on Export Credits to regulate the terms on which they provide export financing, constraining the extent to which export credit terms can be discounted. This agreement avoids the cutthroat competition that had previously characterized dueling export credit agencies. Under the Arrangement, if a member wants to provide more substantially discounted terms, then those terms must become a grant, i.e., a gift, to comply with the Arrangement.
China has so far declined to join the Arrangement and openly ties not only its aid but also its export credits to the use of its own goods and services and provides that financing on terms that would violate the Arrangement. As a result, 40% of China’s global foreign aid expenditures in recipient countries worldwide are for construction projects in which China provides some or all of the financing, services, materials and labor on financing terms with which countries adhering to the Arrangement cannot compete.
The US policy focus on a sustainable business environment promoting local development and long-term investment opportunities is also in contrast to China’s non-interventionist approach of making substantial, even massive, investments in physical infrastructure, but without a similar level of regard to the regulatory, legal, political or other societal factors that may ultimately prove critical to the ultimate functioning of that infrastructure. Concerns have been raised that the Chinese model perpetuates circumstances that stand in the way of modernization and development of the host countries.
One blunt accusation is that Chinese bidders often win procurements with the lowest bid, but deliver facilities with a correspondingly low quality, requiring high maintenance that is beyond the capacities of the host countries to provide. The all-in cost of keeping such facilities in operation undermines the advantage seen in the low original cost. The US Trade and Development Agency is attempting to address this issue head on by partnering with the George Washington University law school and collaborating with various multilateral development banks, in an initiative to promote “life-cycle costing” and “best value,” rather than just lowest price, in bidding for public procurements. The life-cycle cost is the sum of all recurring and one-time (non-recurring) costs over the expected useful life of a project, including the costs to install, operate, maintain and upgrade and the remaining value at the end of its useful life.
US and European companies tend to believe that, while their equipment or construction may come at a higher initial price than that of Chinese and other low-cost competitors, the result will be a longer useful life with lower maintenance costs, yielding, in the long term, a better value for the purchasing country. Thus, a best value approach in bidding will benefit both US and European companies and, in the long run, their host country customers.
Another development outside of the Africa Power initiative that could have important consequences for how Africa Power develops is the US government’s recent announcement that, going forward, it will not finance, insure or otherwise support coal-fired power projects unless carbon capture and sequestration are used, except in the absence of feasible alternatives for “the poorest of the poor.” No one expects there to be any actual agency financing for coal-fired generation plants in Africa or elsewhere. Consequently, while Power Africa speaks of electrification broadly, the focus is likely to be on gas-fired or renewable energy projects.
For countries that lack access to natural gas, this may involve introducing more intermittent renewable energy sources into an already unstable grid, adding to the technical challenges that will need to be resolved.
While it remains to be seen whether Power Africa will succeed in bringing governments, investors and financiers together to address the electricity infrastructure needs of the region, it should at least succeed in drawing serious attention from commercial parties and public institutions to opportunities in the region’s energy sector.
Project developers will have a chance to explore those opportunities at various upcoming conferences. For instance, in 2014, OPIC and the US Agency for International Development plan to host jointly an African energy and infrastructure investment conference, bringing developers and other investors together with key US and African government officials to demonstrate the opportunities for investment and the tools and resources available from the US government and other partners to support those investments.