The upcoming presidential run-off election in Guinea-Bissau pits two very divergent political systems against each other, while the prospect of a military intervention remains high. Regional countries will closely monitor the vote for its implications on regional drugs trafficking and financing of terrorism and militancy across the Sahel.
Ethiopia’s construction of a hydroelectric dam on the Blue Nile has long-stimulated tensions with Egypt and Sudan over control of water resources in the Nile valley with the prospect of a violent escalation always looming. However, with new signs of cooperation emerging in November, we assess the current state of the dispute and the likelihood of achieving consensus.
Desperately searching for new funds to finance its record 2020 budget, Nigeria’s government will seek quick cash pay-out settlements from international oil companies by claiming massive tax and royalty arrears following a change in legislation. Even so, recovering oil sector revenues are unlikely to meet expenditure requirements, thus forcing the government to again tap into debt markets.
The Chinese government is reassessing its role in landmark infrastructure projects in Africa due to concerns over commercial viability, while some African governments themselves are rejecting Chinese financing conditions. This trend is opening a new avenue for concessional funding and boosting the role of development finance institutions while seeking broader collaboration with commercial institutions.
In November, Uganda’s state-run Uganda Railways Corporation will begin a USD 267 million rehabilitation of its railway network. The country’s dilapidated 1,266 kilometres metre-gauge network was built a century ago by its former British colonial power. Bulk cargo operators have been seeking investment in the railway for years as regional road systems struggle to cope with the number and weight of lorries on Uganda’s roads. The rehabilitation of the aging metre-gauge track is far less extensive than the initially envisaged construction of a standard gauge railway to link the landlocked country to similar regional networks.
Uganda had previously failed to secure USD 2.2 billion in Chinese funding for its section of the Standard Gauge Railway (SGR) regional project. The ambitious SGR was originally designed to connect Kenya’s Indian Ocean seaport of Mombasa to Uganda, South Sudan, Rwanda, Burundi and other regional countries. However, delayed oil production in Uganda has raised Chinese concerns over repayment and Chinese partners have decided not to sign off on Uganda’s SGR project. China’s CNOOC co-owns the country’s fields and final investment decision has been indefinitely postponed by its partner oil companies Tullow and Total following disagreements over tax policy (See UGANDA: CRUDE PIPELINE SUSPENSION IS MAJOR SETBACK TO OIL SECTOR DEVELOPMENT).
Instead, the rehabilitation project will be partially financed by a USD 23.7 million grant from the European Union and the Ugandan government is seeking further investment from international development finance institutions. The rehabilitation works will now be undertaken by French firm Sogea-Satom, rather than a Chinese firm as originally envisaged. However, Uganda may struggle to raise the required financing due to mounting concerns over political instability, insecurity, and debt sustainability that has raised alarm bells among development partners (See UGANDA: PROTESTS, TRADE DISRUPTION, AND OIL DELAYS DESTABILISE POLITICAL OUTLOOK).
Uganda’s railway negotiations reflect a changing pattern in Chinese investment on the continent, particularly in East Africa, as well as some West African countries. EXX Africa looks at two key trends that are redefining China’s role in Africa. Firstly, some African countries are themselves rejecting Chinese investment or cancelling existing agreements. Secondly, China’s concerns over repayment and debt sustainability are motivating it to withdraw from previously pledged commitments or to refuse further financing agreements, as in the case of Uganda’s SGR. EXX Africa examines the evidence for both trends and the implications for development financing on the continent.
Africa rejects Chinese infrastructure deals
Over the past year, several African countries, including Kenya, Tanzania, and Sierra Leone, have cancelled large-scale Chinese-funded infrastructure projects. This activity has prompted suggestions that China’s role in Africa is changing and that its dominant financing role has come under threat.
Bagamoyo port, Tanzania
Most notably, in June, Tanzanian President John Magufuli appeared to cancel a USD 10 billion port construction project in Bagamoyo, reportedly saying that the financing terms presented by Hong Kong-based conglomerate China Merchants Port Holdings were ‘exploitative and awkward.’ Bagamoyo Port, financed by China and Oman’s sovereign wealth fund, would have become the largest port in East Africa as a 20 million TEU (20ft-equivalent unit) container port. The project has faced heavy delays over the past five years.
The Bagamoyo project was a major connectivity initiative being pursued by China in East Africa under its Belt and Road Initiative (BRI) programme. The project included construction of several rail lines and roads to oil fields. As per the agreement, the port, once built, would have been leased to China for a period of 99 years, during which Tanzania would not have had any say on who else could invest in the port upon its operationalisation. There was also a threat that the Chinese-operated Bagamoyo port would undermine the ongoing USD 522 million expansion of Dar es Salaam port that would enable it to triple its current capacity when complete by the end of 2019. As a result of the publicity of the terms of the agreement, Tanzanians had started to turn against the Bagamoyo project and the country’s populist president therefore indicated he would cancel it.
In October, Tanzania’s government issued a strict set of conditions for the Bagamoyo project, including a guarantee of compensation for any losses incurred during project implementation, as well as to revoke tax waivers granted to the Chinese companies, including waivers of a land tax, workers’ compensation tax, a skills development levy, a customs duty, and value added tax. The conditions are unlikely to be approved by China and the project may now have been ‘killed off’ completely (See SPECIAL REPORT: IS EAST AFRICA CHANGING ITS ATTITUDE TOWARDS CHINESE INVESTMENT?).
Lamu power plants, Kenya
Also in June, Kenyan judges at the National Environmental Tribunal said officials had failed to conduct an appropriate assessment of the impact of Kenya and East Africa’s first coal plant that was planned to be constructed in Lamu, a UNESCO World Heritage Site and nature reserve area. The tribunal cancelled the license for developer Amu Power and thwarted plans for the 1,050 megawatts plant that is majority financed and built by Chinese firms.
Even though the ruling was seen as a blow to the government of President Uhurru Kenyatta in its boost of power generation expansion, the tribunal’s cancellation of the license has also been interpreted as retaliation against China’s refusal to fund the next phase of the Standard Gauge Railway (SGR) connecting Naivasha to Kisumu (See KENYA: THE KENYATTA LEGACY UNDER SIEGE).
Freetown airport and port, Sierra Leone
In Sierra Leone, President Julius Maada Bio cancelled a Chinese funded USD 400 million loan agreement signed by his predecessor to build a new international airport at Mamamah. The project faced resistance from the IMF, the World Bank, and its own feasibility study. Bio specifically singled out the airport project’s alleged graft and massive debt burden. The cost would have represented 11 percent of the country’s GDP, according to some estimates. Bio has also been cautious about the suggestion by China that it build and finance a USD 1.2 billion bridge across the Freetown estuary to Lungi International Airport as an alternative to the Mamamah airport idea.
At the Forum on China-Africa Cooperation last September, the government has cooled on some major Chinese-funded infrastructure projects, the latest of which is a plan to expand Freetown port, which desperately needs expanding. The scheme aims to expand Freetown’s Queen Elizabeth II Quay with construction and finance from China under the Belt and Road Initiative (BRI). China’s Tidfore Group is slated to spend USD 708 million on the design and construction of four new terminals and yards. Finance would come from the Industrial and Commercial Bank of China and its Exim Bank on a sovereign guarantee by the Sierra Leone government. According to local sources, China has told the government that there is no risk to government finances because the project is fully insured, and ‘off balance sheet’.
However under a concession agreement signed in September 2017, the government in Freetown has allowed a joint venture of BVI-based Sky Rock Management and the National Port Development Sierra Leone to manage the project as ‘developers’ and act as an intermediary between the Sierra Leone government and the Chinese contractors. The agreement commits the government to a Development Levy Fee to be collected by Tidfore for 16 years, generating some USD 950 million, a profit of 25 percent on the project cost. Tax officials in Freetown have complained that the levy, which would be charged over and above all usual port handling charges, would raise the cost of freight using the port so high that shippers would avoid using it, leading to an overall loss of revenue and threatening repayments of the loan (See SIERRA LEONE: MINING CONTRACT REVIEW COULD BOOST TRANSPARENCY AND ACCOUNTABILITY).
China’s repayment concerns
Over the past year, also, some major African projects, including massive rail construction projects in Uganda, Ethiopia, Djibouti, and Kenya, have come under scrutiny, leading China to write-off some loans and refusing to commit to further financing. The SGR regional project in East Africa offers the most striking evidence of Chinese cooling to African infrastructure development.
China committed USD 3.2 billion for the first phase of the SGR railway but there are concerns that the project is not commercially viable. The recently launched Mombasa-Nairobi line is already suffering from operational losses, which has intensified fears over repayment on these obligations. China has also become more aware of the international criticism it has recently faced by continuing to lend to indebted countries such as Kenya and Uganda.
Rather than committing to the next phase of the standard gauge railway, China has instead offered to rehabilitate the aging metre-gauge railway line from Naivasha to Kisumu and the Uganda border. This is more than what China has offered Uganda, which had been seeking development funding for its own railway rehabilitation. China has also committed to financing a toll-road connecting western Nairobi to Jomo Kenyatta International Airport, a project which is to be carried out by China Road and Bridge Corporation. New Chinese funding also consists of loans at low interest rates and partnerships with private firms to commission Chinese telecoms firm Huawei to build a new data centre in Konza tech city that is currently under construction near Nairobi.
However, competition for engaging in infrastructure projects in Kenya is intensifying. At the forefront, is US construction firm Bechtel which is hoping to build a new highway from Mombasa to Nairobi, financed by a public-private partnership involving the US Export-Import Bank, the Overseas Private Investment Corporation, and the US International Development Corporation. The US highway would damage the commercial operations of the Chinese-operated SGR between the two cities and potentially force Chinese credit insurers to bail out the project, like they did for the Djibouti to Addis Ababa railway last year. The SGR’s high freight charges (that were raised again by 80 percent earlier this year), as well as its inefficient container terminals and administrative restrictions would make a highway a more palatable solution for cargo operators.
A growing number of African countries are facing an uncertain outlook over the next year in terms of the servicing and repayment of their debt, while many governments continue to tap into international debt markets to finance massive infrastructure projects. As concerns over the impact of a global trade war on African economies mount and the continent faces a looming debt crisis, the IMF has recently shown some flexibility in its bailout terms. The Fund is preparing to step in as lender of last resort in many debt-burdened or cash-strapped countries while softening its conditionalities in the face of competing Chinese loans.
The role of the IMF at a time of mounting concerns over Africa’s debt is particularly important considering the expected impact of the global trade war on the continent’s economic output. An escalation of the US-China trade stand-off could more than halve the current forecast of just 3.2 percent growth for the sub-continent. Any impact might be softened by a weakening US dollar and falling borrowing costs, but the effect of falling trade flows and economic output should not be underestimated.
Thus, the IMF is set to play an important role in offering debt relief to African countries in coming years. The Fund currently classifies six African countries as being in debt distress, including Mozambique, Sudan, and Zimbabwe. It rates another ten countries as being at high risk of debt distress, including Zambia, Ghana, and Ethiopia. EXX Africa has previously also expressed concerns over some of the continent’s largest economies like Kenya, Nigeria, and South Africa. Although the need for IMF intervention in these economies seems unlikely if the balance of payments remains sound.
The loosening of IMF conditionalities is indicative of its future approach towards other African countries that are likely to require a bailout in coming years. Loosened lending conditions will prove good news for many African governments seeking urgent debt relief, although will do little to improve transparency and curb corruption which remains one of the heaviest obstacles to economic development. African governments are increasingly integrating infrastructure investment options into a more competitive landscape that seeks to bridge the massive annual financing gap. However, accomplishing sustained economic growth, meeting revenue collection targets, and achieving positive indicators will be required to balance growing debt levels and record fiscal expansionism.
This activity has prompted suggestions that China’s role in Africa is changing and that its dominant financing role has come under threat. However, there is no evidence to suggest that African governments are steering away from Chinese investment. Instead, the region is fostering more competition from a broader source of funding. Chinese financing is often more expensive and with shorter maturities than the terms offered by multilateral financial organisations. Some forms of syndicated commercial lending from western banks and export credit agencies offer further competition in the increasingly varied investment climate in Africa.
Aviation in Africa is booming. Africa’s passenger numbers will grow at the second highest rate globally for the next 15 years after the Asia-Pacific region. Some 100 international and regional airlines are competing for this market. However, the success of the industry is being challenged by a particular set of risks. In a three-part analysis briefing series, EXX Africa explores specific threats to the aviation sector in Africa.
An array of foreign investors is lining up to inject billions of dollars into Ethiopia’s much-vaunted telecoms sector, while Chinese funding is set to support the indebted state telecoms company. The sector’s liberalisation will be a key test for the government’s reformist strategy and a bellwether for future privatisations. EXX Africa examines the political and economic risk outlook for telecoms liberalisation.
Although Abu Bakr Al Baghdadi played little more than a symbolic role within Islamic State affiliate groups in Africa, his death is likely to achieve the undesired effect of increasing the terrorism threat in many African countries primarily through renewed intent and unchanged capabilities.
Zambia’s finance minister is taking firm steps to stabilise the economy and to resume negotiations with the IMF on a credit facility. However, he will face political pressure to maintain spending levels and miss fiscal deficit targets, while a looming power sector collapse may further undermine the country’s already distressed economy.
Many sub-Saharan African countries have set ambitious targets around the incorporation of renewable energy in their power mix over the next decade. EXXAfrica’s latest briefing explores the opportunities and challenges for private investors in some of the continent’s most prominent economies.
It is estimated that over 640 million Africans still do not have access to electricity – representing a staggering 60 percent of the total population of the continent. While a hindrance to economic and social development, this gap also means that sub-Saharan Africa constitutes the world’s largest untapped market for electrification, and consequently represents a huge opportunity for renewable energy.
Our latest analysis briefing provides a bird’s eye view assessment of this opportunity in sub-Saharan Africa’s three largest economies – Nigeria, South Africa, and Kenya – over the next decade and highlights promising shifts in some smaller economies as well.
While Nigeria is endowed with vast natural resources that could be harnessed for renewable power, this potential remains largely untapped. Of its installed capacity, between 80-85 percent of electricity generation comes from thermal power – mainly gas. According to the US Power Africa Programme, despite having over 12 MW of capacity, most days Nigeria only generates around 4 MW of power. Coupled with a rapidly expanding population, Nigeria has ever growing energy needs. In an attempt to turn this around and address massive electricity shortfalls in the country, the government has developed several plans to ensure growth in renewables over the next decade.
The Nigerian Renewable Energy and Energy Efficiency Policy (NREEEP), approved in April 2015, commits Nigeria to achieving a greater share of its national electricity supply from renewable energy sources by 2030. To achieve this, the country’s Renewable Energy Master Plan (REMP) intends to increase the supply of renewable electricity to 23 percent in 2025, and 36 percent by 2030. Through this, renewable electricity would then account for 10 percent of Nigeria’s total energy consumption by 2025 before being expanded to around 20-30 percent by 2030. While Nigeria’s REMP provides for 20 percent by 2030, individual government ministries have promised 30 percent by 2030.
While hydropower is the main source of renewable energy generation in Nigeria today, given the risk of droughts, the country is looking to diversify its energy resource mix with a strong focus on solar. Over 2017 and 2018, for example, the country invested more than USD 20 billion in solar power projects to boost the capacity of its national grid and reduce reliance on it by building mini-grids in rural areas without access to electricity. To this end, a USD 350 million World Bank loan is being used to build 10,000 solar-powered mini-grids by 2023 in rural areas.
In addition, according to a ‘job census’ report by Power for All, a non-governmental organisation, growth in the renewable energy sector is already having a positive spinoff in terms of job creation where the sector’s workforce is now comparable with traditional power grids and utilities in Nigeria. The sector currently employs 4,000 informal jobs compared to 10,000 employed across the country’s traditional energy sectors. Most importantly, jobs in the renewable energy sector are expected to grow by 100 percent in the next four years in Nigeria.
Despite the vast potential for renewables in Nigeria, growth has been hindered by a lack of funding, prolonged discussions around tariffs in bilateral engagements with investors – as opposed to through open tenders – volatility of the local currency, the basing of tariffs in Naira as opposed to US dollars, and unresolved liquidity issues in the sector.
There are further concerns that the government will continue propping up the currency and maintain costly subsidies, both policies which foster massive fraud and embezzlement. As the budget deficit widens, debt servicing spikes, and some banks continue to struggle, there are growing concerns that Nigeria may be running into ‘bankruptcy’. EXXAfrica addressed such issues in various recent analysis briefings (See NIGERIA: WEAK TAX COLLECTIONS AND ASSET SEIZURES POSE RISK TO REPAYMENT OUTLOOK).
According to South Africa’s Ministry of Energy, around 91.2 percent of electricity generation comes from thermal power stations whilst around 8.8 percent comes from renewables. The release of the country’s long-awaited Integrated Resource Plan (IRP), approved and made public on 18 October 2019, has the potential to change this, however. The last such plan was the IRP 2010 promulgated in March 2011. The latest plan maps out the scale and pace of new electricity generation capacity to be commissioned until 2030 and has a strong focus on renewables.
The IRP provides for 14,400 MW of new generation to come from wind, 6,000 MW from solar photovoltaic (PV), 3,000 MW from gas, 2,500 MW from hydro, 2,088 MW from storage and 1,500 MW from coal. Given the long lead times, preparation will start now for new nuclear builds that will come online after 2030. South Africa’s only nuclear power station, Koeberg, is coming to the end of its life by 2024. The government is in talks with the state utility, Eskom, to refurbish the station and extend its life until 2044. Thereafter, modular nuclear power station stations will be built to replace the decommissioning of coal-fired plants.
As demonstrated, there is a strong focus on renewables in the plan with 48 percent of new energy capacity to come from wind, 20 percent from solar, 10 percent from gas, and eight percent from hydro. Moreover, the private sector is expected to largely fill this gap, as there will be no more complex and expensive baseload infrastructure projects that the country previously pursued. Indeed, upon the launch of the plan, Energy Minister Gwede Mantashe confirmed this when he noted that government urgently needed another 4,000 MW installed as quickly as possible. It is expected that there will be at least two IPP rounds within the next two years.
In addition to presenting an opportunity to IPPs, the growth in renewables also has the potential to help kick-start manufacturing in this regard as well. Equipment manufacturers of wind and other renewable energy inputs have said that these projects would go a long way to establishing South Africa as a manufacturing base for components, boosting exports to the rest of Africa.
One of the main criticisms of the IRP is that it repeats the past mistake made of assuming a demand for electricity that is far too high. In 2016, the difference between actual electricity sent out compared to the expected amount to be sent out was 18 percent. The median forecast for such growth is based on an average GDP growth rate of 4.26 percent by 2030, whilst the low forecast is based on 1.33 percent.
Many do not believe this will materialise. Not only is this likely to impact electricity tariffs and Eskom’s ability to service its debt, but it may mean that the IRP will have to be updated in a few years should demand growth prove to be lower. Such revisions are likely to impact policy certainty and investor confidence. EXXAfrica has covered the isusue of enery sector reform in various recent briefings and a new report on renewables in the power mix is upcoming in coming weeks (See SOUTH AFRICA: PRESIDENT FACES CRUCIAL DECISION ON ESKOM REFORM IN POLICY ADDRESS).
Kenya leads in exploiting renewable energy sources in Africa as these sources already contribute significantly to the overall energy mix in the country. The country currently has an energy mix consisting of around 85 percent of renewables, for example, largely driven by geothermal and hydro. The next ten years promises to provide even more opportunity in this regard.
Kenya has a stated goal of 100 percent renewable energy generation by 2030 to be complemented by a diverse technology mix. Although hydropower contributes significantly to energy production at the moment, given the risk of unreliability during periods of drought, the government is looking to enhance solar, wind, thermal, and geothermal generation in its long-term plans.
One of the ways in which the government is ensuring this is by entering into major public-private partnerships. This was demonstrated as recently as August 2019 when the Kenyan Investment Authority and Meru County Government entered into a Memorandum of Understanding with global renewable energy developers to build Africa’s first large scale hybrid wind, solar PV, and battery storage project – the Meru County Energy Park. The park will provide up to 80 MW of renewable energy, consisting of up to 20 wind turbines and more than 40,000 solar panels.
Electricity generation from wind specifically is also expected to attract significant investment over the next decade. In March 2019, for example, the largest wind power plant in Africa – the Lake Turkana Wind Power Project (LTWP) – became fully operational. Further wind energy investments from the private sector are expected to be facilitated by the country’s Feed in Tariff (FiT) policy and its Least Cost Power Development Plan. In this regard, Kenya’s power industry generation and transmission system planning is undertaken on the basis of a 20 year rolling Least Cost Power Development Plan (LCPDP), which is updated every year. Wind has been prioritised in this.
The growth in renewables is also expected to have a significant impact on the job market, as witnessed in Nigeria. According to Power for All, decentralised renewable energy companies in Kenya account for 10,000 jobs – only 1,000 fewer than the national utility. Moreover, renewable energy jobs are expected to grow by 70 percent in Kenya over the next four years.
Following a review of Purchase Power Agreements by a taskforce in 2016, a number of key recommendations were made to improve the market. Chief among these was the reduction in the tariffs under the FiT policy to help manage costs and keep in line with the LCPDP. Policy certainty around mini-grids was also called for, as was improved access to finance and land.
Recent cancellations of high-profile hydropower dam projects have also called into question the viability of some projects, the risk of contract frustration, and the persistent threat of corruption affecting large projects. In July 2019, Kenyan Finance Minister Henry Rotich was arrested on suspicion of financial misconduct related to the construction of two dams overseen by Italian construction company CMC Di Ravenna. The case is highly politically motivated and the projects concerned have since been cancelled (See KENYA: FINANCE MINISTRY FALLS AT THE HEART OF POLITICAL POWER STRUGGLE).
Beyond these three large economies, Ghana and Ethiopia have been identified as having significant renewable energy potential as well.
Looking at Ghana, in February 2019, its Energy Commission lodged its own REMP, setting out the blueprint for power production until 2030. Under the plan, Ghana aims to increase installed renewable capacity – which, under the classification, excludes hydropower projects greater than 100 MW – from 2015 levels of 42.5 MW to 1,364 MW by 2030. To achieve this, the government plans to enact tax reductions; exemptions on import duties and value-added tax through to 2025 on materials, components, machinery and equipment that cannot be sourced domestically; and, import duty exemptions on plant parts for electricity generation from renewables.
Looking at Ethiopia, despite its large energy potential, the country is experiencing energy shortages as it struggles to serve a population of over 100 million people and meet growing electricity demand, forecasted to grow by approximately 30 percent per year. Its Growth and Transformation Plans I and II seek to rectify this, outlining multi-year plans to transform the country into a middle-income country by 2025 and to starkly increase electricity generation, particularly through hydropower – which accounts for 70 percent of current power generation – but also through solar power and wind. Numerous tenders have already been released to help reach this target, with the latest tender call for the provision of mini-grids in 25 rural towns being made in mid-October 2019.
Sub-Saharan Africa’s smaller economies also present significant opportunities for investors. The five countries with the highest renewable energy investment as a percentage of GDP globally, for example, are all emerging or developing economies. From sub-Saharan Africa, Rwanda and Guinea-Bissau make this list. Other smaller economies have also set renewable energy targets, demonstrating a commitment to the development of this sector. This includes Cape Verde, Djibouti, and Swaziland.
From the continent’s largest economies to its smallest, it is clear that there is a focus on the development of renewable energy in sub-Saharan Africa. Growth of this sector promises to not only plug the gap with regard to electricity generation, particularly in light of a growing population, but to help the continent achieve its climate goals.
While the opportunities and indeed the challenges differ from market to market – as a result of local political, socio-economic and security challenges – investors should nevertheless recall some of the more generalised risks that they may face when investing in this sector in sub-Sahara Africa.
These may include:
– A weak or underdeveloped regulatory environment;
– Shifting energy policies under new regimes;
– The creditworthiness of state-owned utility companies;
– Corruption and/or political pressure;
– Lack of financing for projects; and,
– Contestation over land.
SEE COUNTRY OUTLOOK: NIGERIA, SOUTH-AFRICA, KENYA, GHANA, ETHIOPIA
The main opposition’s rejection of election results is based on credible evidence of voter intimidation and ballot manipulation which EXXAfrica flagged three months ago. However, the results are unlikely to be overturned by the courts and a return to civil war or sustained widespread violence is unlikely. Violent demonstrations are however expected in urban hotspots in coming weeks and months.
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