A CSIS Commentary by Tony O. Elumelu
Courtesy: Center for Strategic & International Studies, Washington, DC
Mr. Elumelu, an African business leader and philanthropist, is chairman of Heirs Holdings, a proprietary investment company that builds sustainable African businesses, and a lead partner in the U.S. Power Africa initiative.
Tony O. Elumelu, was the featured speaker at a recent CSIS Africa Program public event, Powering Africa’s Progress, which focused on the critical need to accelerate power generation and infrastructure development in Africa. In this CSIS Commentary, Mr. Elumelu expands on his call for governments, development agencies, and the private sector to collaborate on the long-term strategic investments that will ultimately drive Africa’s growth and development.
There is no debating that access to affordable electricity is essential for Africa’s development and self-sufficiency. More than 70 percent of the population of sub-Saharan Africa lacks access to electricity. Businesses spend up to 60 percent of their operating costs on power alone. Every 1 percent increase in electricity outages reduces Africa’s per-capita GDP by approximately 3 percent.
Despite this (and remarkably so), the continent is home to 7 of the 10 fastest growing economies in the world. Imagine the potential that could be unleashed if we get electricity right. Imagine the GDP growth, the education, and job opportunities for our youth and the families lifted out of poverty. Imagine Africa’s future.
Closing the power deficit in sub-Saharan Africa will mean generating an additional 300,000 megawatts (MW) of power; the current baseline is 68,000 MW (60 percent of which is produced by South Africa) according to World Bank statistics. This will require $300 billion of investment by 2030, according to the International Energy Agency. Such a massive capital outlay can only occur with the participation of an empowered private sector in coordination with African governments and development institutions. Powering Africa cannot be accomplished otherwise.
In recent meetings in Washington, D.C., with members of Congress, U.S. government officials, development agencies, and policymakers, I was pleased to find that the conversation on Africa has shifted dramatically. First, Africa’s friends in America now understand that lack of access to reliable power is the main constraint to economic growth. Second, there is a bigger emphasis on private-sector-led growth as a driver of development. Recognition of these two realities is behind the U.S. government’s Power Africa initiative, which calls for $7 billion in U.S. financial support and has already leveraged an additional $9 billion in private-sector investment. It also underlies the Electrify Africa Act, introduced with bipartisan support in the U.S. Congress.
I applaud and embrace these initiatives, and I am fully committed to helping them succeed. But if investors are going to step forward, other stakeholders will need to join in helping to “de-risk” investment, reward innovation, and support those partnering for the sake of a collective benefit.
A Coordinated Solution for a Continental Challenge
As chairman of an investment company that operates exclusively in sub-Saharan Africa and has committed to investing $2.5 billion in Power Africa, I am very familiar with the challenges that await the private sector in investing in power in Africa.
There is no amount of capital investment or entrepreneurial zeal that will provide affordable and sustainable access to electricity for Africa’s 1.5 billion people without the full buy-in and energetic support of African governments.
In many countries the enabling environment for investment does not yet exist. Regulatory and taxation policies can be unclear. Tariff pricing is not yet rational or predictable. There are few incentives for long-term investment, and systems lack clarity and transparency. Investments require rules that are clear, contracts that will be honored, and conditions that will be reliable.
In addition to sound policies, governments need to pay attention to commercial incentives like tax holidays and limiting restrictions on the importation of equipment. Initiatives like a “one-stop shop” to negotiate the often complex bureaucratic process of obtaining the right permits could save hundreds of man-hours.
Multilateral and bilateral development agencies, like the African Development Bank, also need to consider prioritizing the provision of funds to create sovereign guarantees, bond securitization, and other ways of de-risking the sector with the clear objective of facilitating private investment in power. Funds could be pooled and reprogrammed for this purpose. Similarly, development finance institutions need to be unleashed to provide support to sustainable and responsible investment in the power sector.
Bilateral and regional development partners could also prioritize technical assistance to governments to support the establishment of sound policies and operational frameworks and build public-sector capacity in critical areas such as regulatory enforcement and procurement.
The good news is that many African leaders are catching on. In Nigeria, the recent Electric Power Sector Reform Act ended the government’s monopoly in power generation, transmission, and distribution. It allows 100 percent ownership of the business for investors, mandates an independent regulator to police the sector and a market operator to help manage day-to-day operational challenges, and establishes a tariff structure that allows businesses to plan financially. In addition, the government also provides a sovereign guarantee partially underwritten by the World Bank, which protects investors in the event of a default on payments by the government.
Heirs Holdings’ acquisition of the Ughelli Power plant in Nigeria for $300 million was possible because three sets of stakeholders—the private sector, the government, and an international financial institution—were working together, driven by the shared goal of enabling the private sector to drive development. This was a three-way strategic and operational partnership that can and should be replicated, and it is a prime example of “Africapitalism”—my belief that long-term investment in key sectors like power can create economic prosperity and social wealth, benefiting investors and Africa’s development future.
Finally, regional cooperation among African states ultimately will provide an exponential boost to electricity access. This requires long-term thinking, submitting local policies to regional and sometimes international requirements, and allowing investments to cross borders. There are many schemes already in place, particularly in West Africa, but they have proven unreliable thus far, forcing individual countries to look inward rather than finding solutions together. This challenge must be overcome.
The recommendations outlined here are not particularly difficult to implement, yet their potential impact could be a determining factor in unleashing Africa’s growth potential. Imagine Africa’s future.
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