The legacy of colonialism may continue to shape contemporary Africa, but policymakers must also grapple with more recent follies as they struggle to address the legal and financial ramifications of decades of poorly structured and inadequately implemented infrastructure development. Many of the inconsistencies and contradictions that dog Africa’s power sector stem from reactive policymaking geared towards managing the fallout from previous poor decisions, as well as ensuring alignment with the short-term interests of political players.
Power sector investments last a long time and need strong protection under the law. Investors need certainty and guarantees of return. Many tell African Energy that all they need is for governments to stand by their decisions. However, bad decisions can haunt economies desperate for development. It is easy to respond by calling on governments to “make better decisions”. The most successful investors realise that their projects must be in the best interests of the host country – and that the investor shares responsibility for the decision to go ahead.
This conundrum is apparent in several of the largest sub-Saharan African markets, where progress is hindered by issues with power purchase agreements (PPAs). Ghana is saddled with PPAs signed in a panic by the previous administration (AE 361/20) and the consequences of cancelling them are still not fully understood. One estimate said it could cost more than $400m, an apparent reflection of how bad these deals may have been.
Nigeria is working through the consequences of a botched privatisation, in which the sale of power assets was meant to spur private investment, but a majority of generation and distribution companies are confronted with effective insolvency, stalling further large-scale private investment (AE 365/1). Billions of dollars of public money and government-guaranteed debt will be pumped in to keep the sector afloat over the next few years. Kenya is paying the price for a poorly conceived expansion plan that has saddled it with a bulky pipeline of projects (AE 370/4). Clearly unsure which direction to take, the government may continue simply to react to its difficult situation rather than taking the necessary long-term strategic decisions.
Poor planning and stop-start implementation contribute to the long lead times that have blighted so many projects. PPAs signed earlier in the project development process start to look expensive when it takes years for finance to be put in place while governments – and their partners – dither over guarantees, vested interests and local content. This results in renegotiation or dispute, which can represent a serious political risk to investors.
The protracted fight about the cost of the first round of renewable energy projects in South Africa and their effect on Eskom is just one example of how public anger over local jobs, ownership, poor service and high tariffs can be directed at otherwise worthwhile projects.
The electricity supply industry needs to become more flexible in its approach to contracts that, for whatever reason, are no longer in a country’s best interests. While this starts with good governance and effective policymaking, investors also need to work more closely with those governments that are committed to resolving past errors to ensure that interests really are aligned. Otherwise, the sector will continue to hobble from one crisis and delay to the next. and governments might follow the Tanzanian model of enshrining the absolute precedence of the state over private companies in law.
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