As Symbion Power awaits arbitration in a case against Tanzania at the International Chamber of Commerce, a gloomy view of Africa is shaping up among investors like Paul Hinks, Symbion’s chief executive, who told a February conference in Kampala: “I wouldn’t say I am really excited for Africa […]. The ability to get projects off the ground is getting more and more difficult.” But Hinks was not always this pessimistic.
As young man, in 1980, he started his career at a Zimbabwean utility and worked on projects in 16 countries across Africa over a period of four decades. He then emerged as one of the most ardent proponents of electrification in Africa – so much so that when then US president Barack Obama announced his ambitious Power Africa Initiative in June 2013, he stood at Symbion Power’s thermal plant in the Ubungo suburb of Dar es Salaam. And in March the following year, Hinks testified in Congress, appealing for bipartisan support for the initiative, which he called “a long-term game-changer for the people of Africa.”
But even for the Afro-optimist he was then, this outlook masked a surging undercurrent of payment risk, driven by insolvent state utilities. Within three years of Symbion Power launching operations in Tanzania in 2011, for example, the company was owed $70m. And by June 2016, Tanzania under President John Magufuli was turning into Symbion Power’s worst nightmare: the government cancelled a 15-year power purchase agreement for the 120MW Ubungo plant while a highly anticipated licence for another 600MW plant in the southern region of Mtwara never panned out.
“In Tanzania we have been supplying power for about six years; for those six years we were never in the black. We were always in the red, at one stage we were $85m in the red,” Hinks said. “And then two years ago, the government stopped paying us completely, so we had of course to file arbitration,” he said, referring to the case at the Paris-based court in which the company is seeking to be paid $561m.
Symbion is not alone in its Tanzanian misery. Globeleq and PanAfrican Energy often fire off protest letters over arrears for natural gas supplies to the country’s thermal power plants. In Africa, such payment risk is ranked as the highest cause for concern for investors, according to the African Trade Insurance Agency (ATI).
“The need to mitigate off-taker payment risks remains one of the key impediments to projects reaching financial closure,” John Lentaigne, ATI’s chief underwriting officer tells The Africa Report. “The picture is, however, nuanced, with some of our member countries demonstrating an improved risk profile in the power sector, whilst in others it is more evidently deteriorating,” Lentaigne adds.
In sub-Saharan Africa, 609 million people do not have access to electricity, a 2017 World Bank report shows. Of the 20 countries with the largest electricity access deficits in the world, 16 are African, the report says, citing the weak financial state of the utilities as one of the biggest challenges to expanding grid-based electrification. Governments often want utilities to charge low rates, hurting their bottom lines. The World Bank also estimates that the continent needs to create generation capacity of 7,000MW per year and invest in transmission systems to bridge the electricity gap.
Despite weak energy infrastructure and a growing demand in many countries, private investment and involvement in African energy remains modest because of the lack of long-term financing, political and regulatory uncertainty and weak utilities, said a March joint statement by the European Investment Bank, Munich Re and ATI. Insurers, they said, have historically been limited in their capacity to cover such risks.
Insurance steps up
Hence, the three entities offered $1bn in reinsurance capacity to target sustainable energy projects in Africa. A risk-sharing platform, the African Energy Guarantee Facility, will offer insurance against sovereign or sub-sovereign non-payment and political risk insurance covering expropriation and currency inconvertibility.
This could help move projects, like that of Moshi Shaban. Since 1996, the Tanzanian national has been pursuing a fish-processing project on the shores of Lake Tanganyika. Frustrated by the lack of power, Shaban decided to invest in a 5MW dam to supply the region of about 60,000 people. He undertook a feasibility study in 2014, but has been forced to shift timelines after delays in getting permits. “Since the beginning of the feasibility study [there have been] numerous changes, delays and rescheduling,” Shaban tells The Africa Report.
Shaban says investors have been hard to come by to inject part of the $6.3m required. Despite the prospect of 24% return on equity, access to foreign investment is difficult and Tanzania’s commercial banks seek very high lending rates.
Financing limitations also make large-scale projects less attractive to private investors. “We don’t see projects any more that go into the 500MW [range]. It’s very often within the range of 30-200MW,” says Johan Van Kerrebroeck, French firm Engie’s regional manager for East Africa. He says that is also due to a trend toward electricity decentralisation.
Still, risks abound. “We often see that it takes a long time before projects start and this is a risk because, in between, something can happen,” Kerrebroeck adds. Many projects also face land-owner risk, as “it isn’t always that clear on how the land can be used for infrastructure projects. Even if you go deep into your corporate social responsibility strategy, engage everybody and use professional consultants to help out, still there’s a risk that, sooner or later, you will face a problem which is unexpected and hard to tackle,” he says. One way Engie mitigates such risks is teaming up with local partners. The idea is to “start small and build up as you understand the environment,” Kerrebroeck concludes.
East Africa offers many examples of the problems associated with improving energy provision. Uganda’s Umeme is regularly cited as one of the best power concessions in Africa and the 2016 World Bank study on making power affordable listed Uganda and the Seychelles as only two countries in sub-Saharan Africa with a financially viable electricity sector because utilities fully recover their cost of supply.
But that narrative of success is quickly falling apart. For the past 13 of its 25-year concession since 2005, Umeme claims to have made investments in the grid to the tune of $500m. This was to cut technical losses, the kind that result from poor distribution systems. Those losses still stand at 17%. A recent review by the ministry of energy put overall losses at 38%, higher than pre-concession levels of 28%. Asserting that the losses should have been “wiped out” by Umeme’s investments, President Yoweri Museveni came out against the extension of Umeme’s concession this year.
Other institutions highlight key problems in project development. “Currency is the elephant in the room,” according to Loyiso Jiya, the ‘s principal deal originator for energy projects. “We struggle with currency shortfall cover. We are aware that the African Development Bank is coming up with an instrument to deal with that, but at the moment it’s a challenge,” he says.
Launched in April, the Kinyerezi II power plant in Tanzania will inject 240MW into the grid,
but the country has fallen foul of other investors after failing to pay its bills
From the June 2018 print edition
Understand Africa's tomorrow... today
We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.