Energy projects: Three ways African governments can better attract private capital

Power lines 600x300

To say the continent’s energy deficit is ‘a problem’ is an understatement.

Two out of three people in sub-Saharan Africa live without electricity. The Africa Progress Panel estimates that power shortages diminish the continent’s growth by 2-4% a year. And in order to bring modern energy to all, the sector will require annual financing of around US$55bn for the next 15 years.

While the deficit may seem overwhelming, it has drawn international attention – particularly in the last decade. Global forums are increasingly providing space for world leaders to discuss possible solutions, and initiatives such as President Barack Obama’s Power Africa are bringing together governments and the private sector to help close the gap.

Furthermore, many African governments are beginning to realise the benefits of private sector involvement – both in financing and project management. Nigeria, for example, has undergone some critical reforms, with the government privatising the bulk of its power sector assets in 2013.

According to Akinwole Omoboriowo II, chairman and CEO of Genesis Electricity, private sector involvement is crucial in addressing Africa’s power challenge. The energy solutions firm – with investment partners such as General Electric (GE) and Cummins Co-Gen – has experience working with both public and private partners in a variety of countries across the continent.

In an interview with How we made it in Africa, Omoboriowo highlighted three policies that African governments should pursue to better attract private sector capital to their energy projects.

1. Developing a reputation for contract enforcement

“One of the biggest challenges that we have seen in our journey so far, would be political or country risk. And a subset of that would be the strict enforcement of terms of contracts, and some governments not meeting their obligations falling due.”

While many governments are eager to attract private sector investment, the perception (whether real or not) that some do not take contractual obligations seriously, is a major deterrent for investors.

Omoboriowo noted his firm has had an experience where a government hasn’t stuck to its side of the deal. “Sometimes a government just runs out of money, or a change of government implies change of policy, and contracts are terminated without due care or cause.”

For this reason, countries should put in place laws and regulations that enforce these contracts, so that irrespective of changes in government, qualifying investments are secured. An example is Nigeria’s Public Procurement Act – signed into law in 2007 – which protects investors from contracts being either violated or terminated without cause.

“It is going to take time for us to get into first class contract administration like you have in the First World,” continued Omoboriowo. “But I think, with time, these sorts of regulations, and their actual enforcement, would instil more confidence for foreign direct investors.”

2. Introducing competitive fiscal incentives

Governments should offer competitive fiscal incentives – such as granting extended periods of tax holidays – to investors of substantial projects, particularly renewable energy ventures.

While there is a five-year tax holiday offered in Nigeria, Omoboriowo noted many of these projects are only viable over a longer period.

“So it may be useful in Nigeria, for example, if the government extended the tax break for a longer period to match internationally acceptable financing terms, like 10 or 20 years or so.”

3. Combining CSR and project development

Another suggestion would be for governments to incentivise multinational companies to invest part of their corporate social responsibility (CSR) funds in supporting power projects – either directly or indirectly.

“The private sector has many roles it can play in partnership with the governments, and making it part of CSR for large local and foreign companies could provide very good sources of working capital and/or the minimum equity required to attract needed debt capital to finance qualifying power projects.”