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By Hugh Hawarden*Â
ENERGY and telecoms have dominated infrastructure financing for Africa over the last decade. However, the large-scale power development market requires a rethink. In East Africa for instance, the sector is fairly quiet at the moment, pointing to a mismatch between the kinds of projects that have been funded versus what’s most needed. Several countries in the region will attest to excess capacity currently and new projects that are being developed are often aiming to sell some of their extra capacity to their neighbours, even though neighbouring states are in a similar position.
So on face value, no power is required. But if you look at the image taken from space of the Earth lit up at night, Africa is still darker than anywhere else. So surely power is required? Yes, of course, but where exactly, is the problem.
The majority of rural African communities are still without power and will probably have no access to the grid at any time soon. So large generation projects supplying hundreds of megawatts of power are of no value to them. For instance, Grand Inga, the hydro-electric project in the Democratic Republic of Congo (DRC) that aims to generate an additional 40,000MW, would be of no use to the people in a rural village in the DRC or its neighbours unless connections are made to their homes.
This is where the public-private partnership model becomes tricky. The private sector can develop, finance and build multi-megawatt independent power projects, but rural electrification has traditionally been the responsibility of the public sector. And delivery has been slow on this front.
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Governments at the national level generally focus on large-scale power procurement programmes and the private sector and development finance institutions (DFIs) all rush in to finance these, driving down the costs of power while boosting the energy and related industries. But a lot of the power projects lack “last mile” connectivity and never get to the rural homes that really need it.
Municipalities and provincial administrations need to roll out the distribution networks that are the drivers of electrification, yet they often lack the ability to do so, resulting in bottlenecks while people are still unable to access the grid.
The solution to this is to involve the private sector. In cold terms, this offers a capitalistic opportunity: there is demand but the problem is how to make the opportunity attractive to the private sector as a secure investment. The solutions are already available – distributed networks; isolated and portable energy systems, that are generally renewable; and mini-grids. Mini grids are perhaps the best option because projects can be large enough to attract commercial funding and successful solutions could be easily replicated.
Mini-grids can operate autonomously without being connected to a central government-owned and operated grid, making it viable for an isolated community. But it can still be designed to connect into the central grid when  the grid becomes available. Very importantly, it can also be disconnected if the national grid fails.
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The funding solution still needs to be refined for wide adoption by financiers and this could be a ripe opportunity for DFIs and commercial banks to work together. A co-funding package with DFI first-loss options coupled with more secure commercial bank senior debt portions could offer a workable solution. It is likely that users will not be very bankable. But when combined in a portfolio, such a solution could offer commercial banks the comfort of knowing that their portion of the repayment requirements will always be covered. DFIs could therefore facilitate the creation of the portfolio and recycle their contribution to attract more commercial debt.
For Africa to really be lit up at night, more capital should be targeted towards solutions for rural electrification programmes, not only through grants (which will always remain small), but as replicable and attractive funding opportunities for private parties.
When it comes to power production, going big may not be the answer. It may be time to go small – but in a big way.
- Hugh Hawarden is Senior Transactor at Rand Merchant Bank.Â
