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Power broker: Funding energy growth in Africa – Makhtar Diop

By Patrick Smith
Posted on Monday, 8 October 2012 09:22

More than 25 years in development economics have taught Senegal’s Makhtar Diop some tough lessons about the realities of politics and big ideas. Diop points to the limited impact of the past decade of strong growth, better macroeconomic management and ambitious regional integration plans: “If you look at the structure of the economies in Africa 10 years ago, there hasn’t been much change.”

That is in terms of what African countries produce, where they buy and sell and, perhaps most importantly, how much African countries trade with each other. Lesson number two is that changing those economic relations requires committed reformers working behind the headlines, who are backed by determined political will. Successes will bring investment from the continent and beyond, and staunch the illicit outflows that have undermined development.

Africa’s capital inflows are recovering after the 2008-2009 global slowdown. In 2011, foreign direct investment in Africa rose by 25% to $35.6bn after steep falls in the two previous years. Remittances from the diaspora have risen to $25bn, according to figures posted by African central banks. Unofficial estimates are much higher.

Diop took over as vice-president of the World Bank’s Africa section in May, returning to Washington DC with some bold ideas after a protracted stint as the Bank’s country director in Brazil. Among these ideas are efforts to boost Africa’s ailing power generation and distribution networks, and joining up economies through trade and better communications. Diop also wants to work on improving mining and oil contracts: “If you go to a country and you manage to get a dubious contract with corrupt people that destroys their environment or a contract that is worth a billion dollars for one million dollars … how can we make your life more difficult?”

Having held the finance portfolio in the early heady days of Senegalese president Abdoulaye Wade’s administration in 2000-2001, Diop saw the political barriers facing reformers first hand. He pushed through the modernisation of the customs services and substantially raised revenue. Yet Wade was said to have described him as “not enough of a politician”. In the light of Wade’s ignominious exit, that must rank as an unintended compliment.

Electricity is at the top of his agenda. “The provision of energy is promising. I consider that as one of my number one priorities in Africa,” says Diop, arguing that reliable power supply is key to attracting investment. Building power pools is a Bank priority, reinforcing the efforts of Africa’s regional economic communities. New gas finds in East and West Africa offer the potential to boost the region’s power supplies, Diop says: “I just had a conversation with President Jakaya Kikwete of Tanzania, as they have plans to use the excess gas for domestic electricity production. I know the Senegalese authorities are in talks with Mauritania on gas exports. We would like to put a big power line between Senegal and Mauritania.” The World Bank’s Multilateral Investment Guarantee Agency is in talks with both countries.

Power hungry

Such is the demand for electricity in South Africa that for the first time since democratic elections in 1994 the country has agreed substantial World Bank loans to finance three new power stations. But they are all coal fired, raising environmental concerns. New World Bank president and veteran environmentalist Jim Yong Kim confronted these issues at the Brookings Institution in Washington DC in July, saying: “The data that I’m seeing about changes that are happening today that we didn’t think would happen for three or four years, the impact of a one-degree rise in the temperature of the oceans that we didn’t think would happen until we got to two to three degrees’ rise … this is extremely disturbing. We have to put the science of climate change in front of all of our member countries.”

In Washington, Dr Kim outlined the debate at the centre of the Bank’s discussions: “One group will say, ‘We must protect the environment.’ Another will say, ‘You also use coal and you fuel your development on the basis of coal. We simply want to provide power to our hospitals. We want to provide lights for the schools. We want to provide energy so the private sector can develop. We need to do that.'”

In Ethiopia, power project critics are focusing on the Bank’s approval in July of a $684m loan for a 1,000km transmission line linking Kenya’s grid to Ethiopia’s. Protesters led by high profile Kenyan campaigner Ikal Angelei, Human Rights Watch and Survival International say that Ethiopia’s Gibe III Dam will cut the water flow to Lake Turkana, damage the Omo River’s ecosystem and displace more than 5,000 people.

Gibe III is part of the Ethiopian government’s plan to develop more hydropower projects to generate up to 10,000MW of cheap power for industrial development, some of which it will sell to Djibouti, Kenya, Sudan, Yemen and eventually Egypt. Last year, work started on the Grand Ethiopian Renaissance Dam (GERD) on the Blue Nile, which should generate 6,000MW. Local support runs high but the project faced strong opposition from environmentalists. After the World Bank financed the construction of the Gilgel Gibe I hydropower project in 1997, it pulled back. The Industrial and Commercial Bank of China stepped in to fill the gap in 2010, and Chinese financiers are backing several other dams in the country. Ethiopia’s government will pay for the GERD from a mix of local and foreign finance.

The Bank is committed to financing the East African Power Pool, a regional intergovernmental body based in Addis Ababa, aimed at pooling energy resources, and its officials frequently commend Ethiopia’s economic track record. Amid the arguments, the Bank tries to balance environmental and economic imperatives. “We are not financing the Millennium Dam [the former name of the GERD]. I repeat that three times,” emphasised Diop. “When we were approached, we provided our opinion. We had very clear advice on what would be sustainable environmentally. We decided on this basis not to go ahead.”

Diop distinguishes between financing the interconnection and Ethiopia’s environmentally questionable hydropower projects. “We will connect the grid of Kenya to the grid of Ethiopia … to create the conditions to have electricity in East Africa integrated,” he explained. Linking the two grids will increase supply and cut prices, he added. What about the argument that financing the transmission lines is also an indirect way of financing the dam project? Diop replies: “Let’s reverse the question. We should not finance it? We should not interconnect countries?”

For now, Ethiopia has plenty of options. “Ethiopia has been pretty successful in mobilising a share of international aid. They have been able to demonstrate good results, to improve significantly on human development indicators such as education,” said Diop.

Ethiopia, particularly with its economic and strategic relationship with Kenya, is a critical part of East Africa’s energy and natural resource development plans. “What is happening in terms of our discovery of natural resources today will shape a lot of the future of Africa in the next 10 years … We are at a critical point,” he concluded.

That is why Diop wants to encourage countries to press for better natural resource deals. The push for transparency helps, but the problems often start in the negotiating room. “You have a big investor who would come with a lawyer they pay $10,000 an hour and you have the minister of mining who has barely two computers and just one economist sitting there. Guess what? The contract will not be the best for the country. Sometimes the minister of finance isn’t even in the room,” said Diop. His remedy is to offer top-flight legal and financial advisors for contract negotiations: “Personally, I would like to sit with the heads of state that I meet and say, ‘These resources are available to you, Mr President.'”

Tackling corruption

He differentiates between two types of companies. “You now have category A companies, which want to do things well, which have learned from the errors of the past … know that destroying your environment is not good, abusing people is not good, bribing people is not a good way o fbusiness.” Set against these are the category B companies, which, Diop says, “want to believe the world hasn’t changed. I don’t know from which country they are coming, but I can tell you that they exist, unfortunately.”

The question, says Diop, is what incentives will make more category B companies turn into category A companies. Transparency and growing worries about reputational risk might help. “I’m thinking about the blood diamond experience,” says Diop. “I would like to see if it can be replicated with other commodities.”

Certainly, if one country secures better contracts, it may raise the bar for others. Holding up fairer contracts with higher local revenue as examples should cut the cost and time of negotiating.

Having broken the mould of the World Bank bureaucracy – he is the first Francophone to hold the Africa region’s vice-presidency – Diop wants to set out fresh ideas about economic change. Amid burgeoning international enthusiasm for Africa, Diop adds the realism and pragmatism of the practitioner●

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