Forbes.com. The Fragile Five fight back: when happens when you double your interest rates overnight
30 January, 2014
When Bread Is An Art Form
1 February, 2014FT BeyondBrics, Jan 31 2014
To see this article as it ran in the FT, click here
Nigeria has been beloved of investors lately, the accessible face of an irresistible rising demographic in sub-Saharan Africa. But it faces challenges, and none more so than the paucity of its infrastructure.
A new report this week by Ecobank spells out just how big that infrastructure gap is, and how it is replicated widely almost everywhere in mid-Africa. And it does so at a vital moment, as Nigeria is about to move to the second stage in its privatisation programme, involving the completion and sale of 10 national integrated power projects (NPPs), with a target of the end of March.
According to analyst Rolake Akinkugbe, Nigeria has just over 4,000MW of electricity generation capacity for a population of 160m people. That’s three times less than New York, which generates 13,000MW for its 10m people. 13,000MW is also the level of peak demand in Nigeria, which gives a clear sense of the undercapacity in the country.
It is a picture that is mirrored across the continent. Africa has 15 per cent of the world’s population, Akinkugbe says, but consumes 3 per cent of world energy output, and generates less than half of the 74,000MW peak demand requirement. One quarter of sub-Saharan Africans have access to power, and at least 30 middle African countries experience daily outages, costing them up to 5 per cent of GDP.
Akinkugbe says that plugging this gap will require at least $300bn in investment over the next two decades. This, she says, is both a critical gap that impedes the growth outlook of African economies, and a big opportunity. “The large gap in power infrastructure and the component parts of the electrification value chain would suggest that the sector provides a ready play for investors seeking new and rewarding growth opportunities,” she says. The annual funding requirement for the region’s power sector is $40.6bn, which is $20bn a year more than it currently gets.
So the need is readily apparent. But why would an investor commit?
The first phase of Nigeria’s power privatisation took place in 2013 with the sale of power generation and distribution assets to private investors. Seven sales were made, with an installed generation capacity of 5,440MW, for a total of $1.78bn, making a valuation of $550,000 per megawatt (if those numbers don’t appear to stack up, it’s because many of the purchases were not for 100 per cent of the asset). Akinkugbe says: “Given the revenue potential these assets probably represent a good investment, underpinned by the prospective future cash flows of the plants.” She estimates the assets could generate $1.2bn in revenue from full-year operations.
It’s interesting to compare that valuation with what’s happening elsewhere in the world. Akinkugbe says that costs per MW for generation assets have averaged $1.1m across key emerging markets and developed economies. That makes Nigeria look cheap.
The second phase of privatisation is coming, under which Akinkugbe believes the assets could yield estimated revenues of $1.1bn, making them look similarly attractive.
Then there’s transmission and distribution. Losses between sources of supply and points of distribution cost much as $5bn annually in Africa, with power utilities losing up to 25 per cent of power consumed. Infrastructure requirements for T&D reforms in West Africa alone stand at $500m over the next decade, the report says, with a clear opportunity in projects to upgrade existing transmission lines and distribution systems. Today, these projects are typically handled by multilateral and foreign institutions, such as the European Investment Bank’s role in upgrading transmission and distribution infrastructure in Zambia. There is a role for the private sector, Akinkugbe says.
Source: IMF, Ecobank
On the negative side, there are a number of considerations an investor would need to be comfortable with before funding African infrastructure. Capital requirements are big, project tenors are long – which means being comfortable with a government and local partners over the long run despite political or social volatility – and the availability of local bank funding is scarce.
On top of that, governments in Africa frequently subsidise tariff structures for electricity so that low-income people can still afford power, which has an obvious social merit and necessity, but undermines the commercial viability of projects for foreign investors. From the report:
While there is now a general trend towards liberalisation, the review of tariff structures, privatisation and the unbundling of power utilities, power utilities have suffered under financial stress, both from a result of revenue-under collection and weak cash flows. These have regularly undermined their ability to provide good partnerships with private investors.
In the end, success is going to come down to the regulators and public institutions tasked with keeping things running smoothly. “The role played by government especially in supporting the buyers of electricity is extremely critical,” Akinkugbe says. “Payments need to be made on time, and termination agreements need to be equitable.” In meeting Africa’s funding needs, the confidence and security of investors will be critical.
