Power is one of the biggest drivers of economic growth and competition in Africa. David Humphrey, head of infrastructure and power at Standard Bank Group, writes for ft.com on how African states should continue to work to first turn the lights on, then keep them on.
A year on and I am sitting on a tropical island, eating my dinner on the beach and, like in Namibia, the Tanzanian African night sky remains unpolluted by man-made light. Good news and bad news…
Generally it has been a difficult year for developing Africa’s power needs. A combination of lower commodity prices, China’s economic slowdown, dollar strength and local currency weakness have made it a tough year for nearly all African governments. Revenues are down, the cost of servicing debt is up, and where dollar liabilities have needed to be serviced by local currency that has often led to a lack of liquidity in the local currency markets. As a result, we have seen government projects slip, and with them the ability to fund or procure much-needed power infrastructure development, despite the lower cost of fuel generally.
The political landscape that either helps or hinders power infrastructure development has generally been on the hindering side, though the last quarter has seen some encouraging developments. Failure by governments to allow cost-reflective tariffs is the single most important reason for the lack of power development in sub-Saharan Africa.
For some reason many politicians believe cheap power for some is worth having at the expense of no power for most. And while cheap power does meet a social need, it does not translate into economic growth unless the tariff is cost-reflective. Tariff increases are often seen as vote losers, but failure to provide power in the first place seems less of an issue. The need for sensible planning by governments, in conjunction with the private sector, who will provide most of the technology, expertise and capital, has never been greater, and until this relationship beds down, we will not see consistent progress across the continent.
Several lessons have been re-learned this year, particularly in Nigeria and Ghana, where inaction around tariff increases saw both sectors go further into debt at an overall level. In Ghana, load shedding became widespread this year, as VRA and ECG struggled with maintenance and reliability issues. Revenues suffered as a result. However, the reality was that the lack of revenue and no government subsidy meant there was no ability to cope with the underlying issues. Finally the government almost doubled tariffs in December. We await to see what happens in 2016, but the power sector in Ghana is precariously poised at present.
In Nigeria, President Jonathan’s final goodbye to the power sector in April was to undo tariff increases published in February and, despite the optimism created by Buhari’s election in May, the sector has made little progress since then. Only with the appointment of the former Governor of Lagos, Babatunde Fashola in November, is further progress likely, and that not before 2016. This year has otherwise been one in which the size of the fiscal hole the power sector in Nigeria is in has only grown greater.
There are shards of light: in Tanzania, the new president, John Magufuli, has already brought much pragmatism to government, and there are encouraging signs at last Tanesco may be about to go through significant reform. Despite local difficulties in some projects, notably over land, Kenya’s power sector has progressed well in 2015, with the country now in surplus for the first time in decades, and more power stations are under construction to meet the continued extra demand.
In Zambia, the power sector has been affected by drought, the downturn in the copper industry, and lack of revenue. Emergency power will be needed because of the low levels in the Zambesi. The energy regulator as a result authorised major tariff increases in December, which was both brave and sensible, as the government has no money to afford any more subsidies.
Elsewhere, we see steady progress in Mozambique, where EDM is quietly but effectively strengthening and enhancing the grid as more power projects come on line. Botswana is planning further capacity at its major power station, Morupule. Namibia, long the beneficiary of cheap power from South Africa, is now having to confront difficult choices – developing the offshore domestic Kudu gas field at a time when global oil prices are at 10-year lows, or going for a mix of renewable and imported gas power.
In South Africa, under the leadership of Brian Molefe, a sudden calm seems to have taken over at Eskom. We have not had load-shedding for months, and renewable projects come on stream at regular intervals. That is not to say South Africa is out of the proverbial power woods yet. Eskom’s funding needs remain substantial to complete Medupi and Kusile, and at the same time maintain ageing coal plants and strengthen the grid. Given consistent economic policy and sensible price increases, however, Eskom has the ability to deliver over time and I remain optimistic that in five years’ time the power issue in South Africa will be a thing of the past.
So 2015 has been a difficult year for power in Africa. As in other emerging markets in Asia in the 1990s and 2000s, African governments are having to confront aspiration with reality – and the reality is that progress in the power sector can only happen with regulation that allows cost-reflective and sustainable tariffs, with a culture of user pays (led by government, as governments need to set the example), utility collects, and a track record is created that allows for investment through the private sector and state-owned utilities on a sustainable basis.
Fortunately, increasing numbers of African governments are now facing that reality, and taking the necessary steps to allow for further investment. Hopefully 2016 will be a better year. More power, sustainably priced, as the consumer prefers to have first lights, and then lights that stay on… even if the consequence is that the African night sky becomes a little bit dimmer in future!
This article first appeared on ft.com under the heading “African power: first turn the lights on, then keep them on”.
Read more about Standard Bank Group’s expertise in infrastructure and power projects in Africa.