Over recent years, private investors have started to scale up their involvement in the sector. Power Africa, an initiative backed by USAID, has more than $54bn of commitments from its more than 140 private sector partners. Private sector engagement is on the rise, energised by initiatives such as the New Deal on Energy for Africa and the US-led Power Africa Initiative.
Recent years have seen private sector involvement grow in leaps and bounds, starting out from the generation sector and now migrating into transmission and distribution. Power Africa’s Beyond the Grid initiative has for example seen over 40 private sector partners involved in developing mini-grid and distributed power services and infrastructure in Sub-Saharan Africa’s rural and peri-urban populations.
At country level, outliers such as Kenya have aggressively sought out private investment in the generation sector, and are now pivoting this towards the transmission sector. Nairobi’s robust focus on reforms has paid off.
South Africa has also led the way in private power provision. “If you look back 10 years ago, there were under 60 independent power projects,” says Bhavtik Vallabhjee, Head of Power, Utilities and Infrastructure at South Africa’s ABSA Group. “Now we’ve had 112 IPPs, which has been a staggering success story for the country in terms of foreign direct investment. And every single project had a contribution from a foreign developer. That has injected in excess of R200bn [$11.9bn] into the economy.”
The need for private investment will grow even more acute in light of the coronavirus pandemic’s impact on the continent. From the perspective of Africa Infrastructure Investment Managers (AIIM), which manages $1.9bn of investments in 19 countries across the continent, the outlook for investment remains nuanced and varied between countries.
“We’re certainly going to see governments that are highly leveraged, essentially struggling from a debt service perspective,” says Olusola Lawson, Investment Director at AIIM. “And these governments are going to need multilateral interventions to keep the wheels spinning. This obviously has a second order effect in terms of the energy space, because in several countries across Africa, energy value chains continue to struggle and the utilities are backed by the sovereign. So, we’re going to see an impact in terms of continued sovereign support to credit enhance electric utilities.”
However, Lawson says there will also be an increase in commercial offtakers looking for alternatives to existing utility supplied power as they look for more reliable power sources and governments relax regulations to allow for self-generation or off-grid solutions in the face of public funding constraints.
Although more space is being created for private funding, one of the impacts of Covid-19 is that banks are likely to become much more selective about opportunities they pursue, looking at them primarily from the perspective of capital gains that are now under pressure.
“What’s even more important than normal, when you look at a project finance transaction is the bankability as this is long-tenor limited recourse financing – the robustness of the project, the track record of the developer that is behind it and the quality of the EPC and O&M contractors behind it, amongst others,” says Vallabhjee. “Banks will certainly to be looking at the larger developers and those with a substantial balance sheet and a track record to be able to execute these projects.”
If African economies are to make the most of the opportunities, they will need to continue to double down on reform, as a World Bank report released in September 2019, Rethinking Power Sector Reform in the Developing World, notes.