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Brazil provides model for urgent African electricity reforms

By David Whitehouse
Posted on Friday, 7 June 2019 11:49

Windmills generating electricity for South Africa's electric company Eskom near Brackenfell on the outskirts of Cape Town (AP Photo/Schalk van Zuydam)

A sustainable African middle class won’t emerge without affordable electricity says Scott Mackin, managing director of Denham Capital.

Jobs in manufacturing, service and healthcare can’t be created without affordable electricity, he says. But electricity costs too much in most parts of Africa. Much of the existing infrastructure was built decades ago and is not adapted to current population growth.

The model that African governments should be looking at – but are not – is provided by Brazilian electricity reforms of the 1990s and early 2000s, Mackin argues.

  • Brazil’s reforms were initiated in 1996 under President Cardoso.

The key move: privatization of the electricity distribution companies.

  • The state has been able to protect itself against the risk of default by a distributor through advance escrow payments and, Malkin argues, the system is transparent and free of corruption.
  • The power system has therefore contributed to economic growth.
  • The Brazilan experience has hardly been plain sailing. The first wave of reform suffered from insufficient investment in generation expansion and higher consumer tariffs.
  • Brazil suffered a supply crisis from June 2001 to February 2002.
  • A second series of reforms in 2003-2004 regulated contracts between generators and distributors through auctions.
  • The overall result, Mackin says, is  “a functional power system in a dysfunctional country.”

Though Brazil is huge, the same could be done in smaller African states with maybe only two or three distributors, he argues, adding that three years is a reasonable timeframe for adoption.

‘Excess capacity’

Concerns about excess electricity generation capacity in Africa are a source of anger for Mackin.  “Excess capacity means that the network hasn’t been built out far enough” he says. China had excess capacity in the 1990s and now generates and uses far more electricity. “Governments should want excess capacity.” This allows businesses to see that there is a stable and reliable supply, with a reserve margin, he says.

Grids “need to be opened up more”, he says. “Nobody has really done enough.”

  • State grids, he argues, want to keep large businesses on their systems.

According to a World Bank report in 2016, South Korea alone generates as much electricity as all of sub-Saharan Africa. Installed generation capacity is in sub Saharan Africa was barely one-tenth that of Latin America, the report said, citing Latin American privatizations as pointing the way forward.

Mackin gives the example of rural Uganda, where he argues that buying a home solar system makes the difference in terms of a family being able to educate its children.  But extension and liberalization of the grid is “not happening soon in many parts of Africa.”

  • “Governments need to step back and be regulators, not principals,” Mackin says. “Economic growth follows electricity generation and never vice versa.”

Bottom Line: Africa badly needs more electricity – but its not going to happen without increased competition between distributors.

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