Botswana’s ruling party has rid itself of the nationalism, protectionism, and cronyism of the previous administration. It will now seek to liberalise the economy, diversify away from mining sector dependence, and boost development of agricultural southern regions.
EXX Africa’s analysis series focussing on threats facing the aviation sector explores the incidence and impact of petty and grand corruption in some of Africa’s most important economic hubs.
In a three-part analysis briefing series, EXXAfrica is exploring specific threats to the aviation sector in Africa. In part two, we examine the threat posed by crime, whether by petty criminals or organised crime syndicates, and the impact this has on individuals and businesses.
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
Nigerian indefinite border restrictions on official trade with Benin and Niger are another setback to the continent’s free trade efforts, as import bans drive up inflation and stimulate demand for smuggled fuel and rice. Publicly stated motivations for the trade restrictions backed by the IMF do not disclose murkier political and commercial intentions behind the border closures.
The president makes a bold political gamble to force parliament to lift an interest rate cap which has starved private sector lending and is slowing economic growth. His government hopes to persuade the IMF to restore a standby credit facility to protect Kenya’s distressed credit ratings, yet other factors may thwart such a strategy.
The government seeks more revenue from the mining sector to provide a quick fix to a distressed economy caused by shrinking development assistance and depreciation of the local currency due to dwindling foreign reserves. Investors face heightened risk of arbitrary changes to the tax regime, contract renegotiation, and demands for repatriation of earnings.
Until Ghana finds ways to export its excess power supply, the country will be unable to fully pay its debts to private suppliers. However, despite mounting payment arrears for independent power producers in Ghana, the government will continue to intervene in the power sector and its fuel distribution to prevent power supply disruptions.
While an alleged coup plot has been overblown by the government for political gain, the incident does put a spotlight on the deployment of politically affiliated militia groups ahead of next year’s elections. Businesses also face heightened risk of contract frustration, tax increases, and discrimination as the government seeks to raise funds for its political campaign.
On 23 September, Information Minister Kojo Oppong Nkrumah announced security forces had thwarted a coup against the government. Most Ghanaians reacted with scepticism to the suggested plot even though the government has seemingly overblown the importance of the incident for political reasons. While EXX Africa assesses that there is a low probability of an unconstitutional transfer of power in Ghana, there is a growing risk of political violence ahead of next year’s elections which has been thrown into the spotlight by this alleged incident.
As Ghana enters a new election cycle, businesses will be exposed to increased risk of commercial disruption due to unrest and rising crime rates, as well as higher political risks such contract frustration, corrupt practices, and changes to taxation. A Ghanaian election year also usually distracts the president and senior civil servants from public administration and economic management, thereby often raising the risk of payment delays to contractors. There is ample precedent for such perils based on previous election cycles.
The alleged coup plot
On 23 September, the Ministry of Information claimed that security forces had foiled a plot to overthrow the government and arrested three people believed to have been amassing makeshift bombs, weapons and computer equipment. The alleged plot was unravelled on 20 September after fifteen months of close surveillance of the activities of the coup plotters, according to the government.
The three alleged coup plotters arrested by security forces are Dr. Frederick Yao Mac-Palm, who owns the Citadel hospital in Accra and is a vocal political activist on social media; Ezor Kafui, a local weapons manufacturer; and Bright Allan Debrah Ofosu. On 25 September, the government made further arrests of some unnamed military officers in addition to the initial three main suspects. The ministry has also published a list of the weapons retrieved during the security operation, including 22 improvised explosive devices, six pistols, a long knife, three smoke grenades, seven mobile phones, and three laptops. The detained military officers are being questioned over their suspected role in procuring these weapons but did not play an active role in the coup plot.
Security experts in Ghana contacted by EXX Africa, including retired military officers, have dismissed the allegation of a coup as implausible given the profile and background of the suspects and the inferiority of weapons and ammunitions seized. The three main suspects have no military training or security-related background. Our sources say these individuals would not have had the capability and resources needed to overrun the first line of defence of Jubilee House (the official residence of the president).
The coup plotters are being defended in court by Victor Adawudu, a staunch member of the main opposition party, the National Democratic Congress (NDC). The NDC has publicly dismissed the claimed coup plot as a ploy by the government to clamp down on opposition supporters and the party’s financial backers ahead of next year’s elections.
We agree that the foiled coup plot has been overblow by the government as part of its broader electioneering strategy to re-elect President Nana Addo Dankwa Akufo-Addo next year. However, the incident does reflect growing concern over increasing risk of political violence around the elections.
Political violence outlook
Electioneering and political machinations are gathering pace in Ghana ahead of the country’s presidential and parliamentary elections in December 2020. Part of the broader strategy of the main opposition NDC party to win the election is to build a coalition against the governing New Patriotic Party (NPP). The NDC is seeking to maintain its momentum through the formation of the Coalition for National Sovereignty (CNS), which comprises nine political parties (including the NDC and the Convention People’s Party) and civil society organisations. The NDC has appointed former president John Mahama as its presidential candidate, which may be a tough sell given Mahama’s poor record of handling Ghana’s economy and his administration’s inability to fight corruption during its tenure.
The opposition CNS coalition is set to focus its campaign rising crime rates and more frequent violence in the country, as well as corruption in the energy sector, alleged abuse of state procurement, a looming banking sector crisis, and the NPP government’s unmet promises of ‘one-district, one-factory’ (building a factory in each district) and ‘one-constituency, one-ambulance’ (providing an ambulance for each constituency). However, the tone of the campaign is often belligerent and regularly ties into deep-seated local grievances in communities, raising the risk of violent unrest.
In January, a by-election in the Ayawaso West Wuogon constituency triggered violence that was orchestrated by both main political parties. The unrest left two people dead and 18 others hospitalised with gunshot wounds. The violence that marred the Ayawaso West Wuogon by-election portends concern over the outcome of the coming elections, where both parties have resolved to win, seemingly at any cost as they deploy youth militia groups.
In the unrest at the Ayawaso West Wuogon by-election, a state security operative publicly slapped NDC parliamentarian Samuel Nettey George. The report of the Commission of Inquiry set up by the government to investigate the Ayawaso West Wuogon electoral violence recommended the dismissal and prosecution of the security operative for assaulting the lawmaker. However, the government rejected the recommendation, which further reinforced the opposition’s perception of the politicisation of state security operatives. Nonetheless, the NPP government is genuinely worried that the NDC is training its militia groups to help win the elections, by applying intimidation tactics.
Our local sources are warning that both main parties are financing and training their affiliated vigilante-style militia groups to intimidate opponents in a bid to ensure electoral victory. This also relates to the background to the alleged coup plot. The arrest of Dr Mac-Palm and his co-conspirators, and the seizure of ammunitions and weapons was an attempt by the government to foil plans by the NDC party to train and arm its vigilante groups, including the notorious Hawks militia group. The opposition has meanwhile accused the government of using state security operatives to attack its supporters and leaders.
State assets for political campaigning
Another key concern in the elections lead-up relates to contract certainty as the government has begun a spree of contract cancellations and asset confiscations in order to fund its campaigning. Various local companies, banks, and their partners are at heightened risk of discrimination and confiscation over the coming year.
On 9 September, President Akufo-Addo inaugurated a nine-member board of the State Interest and Governance Authority (SIGA), which will replace the Divestiture Implementation Committee and the State Enterprises Commission. SIGA is poised to be one of the most important bodies in regulating all state-owned enterprises (SoEs), as well as joint-venture companies (JVCs) with state equity participation. The government holds equity interests in key sectors of the economy including banking, insurance and allied services, mining, engineering, energy, petroleum and gas, and agriculture. The government has identified the entities that fall under SIGA supervision. These entities included 40 SoEs, eight JVCs, eight mining companies, and five regulatory bodies.
The official purpose for the creation of SIGA is to improve the efficiency of SoEs by managing their level of borrowing, ensuring payment of dividends to the state promptly and promoting transparency and accountability. The government acknowledged that only four SoEs, five regulatory bodies, eight JVCs, and eight mining companies had ever submitted audited accounts. Moreover, only nine companies, comprising two SoEs and seven JVCs, paid dividends to the government in 2017, according to the government. In terms of financial loss, SoEs recorded losses of about GH¢1.3billion (USD 240 million) in 2016 and an USD 18 million revenue shortfall in the first half of 2019. These figures indicate the worrying level of institutional corruption at the heart of many SoEs, which have been used as a source of political patronage, as well as funding mechanisms for the governments to finance their political campaigns.
No sooner than SIGA was launched, the administration confiscated the Akwatia diamond mining concession and assets of the Great Consolidated Diamonds Ghana Limited (GCDGL) a subsidiary of Jospong Group of Companies (JGC). The GCDGL, previously state-owned, was taken over by JGC in August 2011. However, in April the government cancelled the agreement on the ground that JGC had failed to meet the terms of the contract. On 18 September, officials of SIGA supported by state security including the military shut down the mines and took over all its assets. The management of JGC is accusing the government of abuse of power.
Other JVCs and state firms privatised by the previous government are at risk of similar heavy-handedness by SIGA in its drive to raise money for the government. The opposition has accused the government of applying selective intervention tactics to target certain businesses for political gain. The opposition has also accused the government of favouritism in selecting banks to bail out during the cleaning-up exercise undertaken by the Bank of Ghana in August 2017. The revocation of the licences of UT and Capital banks that led to their takeover by Ghana Commercial Bank was claimed to be unfair. Other banks that lost their license were UniBank, Beige, Heritage, and GN Bank belonging to Papa Kwesi Nduom, the leader of the opposition Progressive People’s Party.
Whereas the National Investment Bank was also undercapitalised, the central bank allowed the state-owned bank to continue its operations. The four banks that received government bailouts through the Ghana Amalgamated Trust bond were Agricultural Development Bank, OminiBSIC, Universal Merchant Bank, and Prudential banks. All of these were tied to state interests and the NPP ruling party’s backers.
The opposition has also condemned the privatisation of the operations of the Electricity Company of Ghana (ECG) to a private company, the Power Distribution Services (PDS). PDS is expected to invest over USD 580 million in the country’s power sector within the next five years after receiving the assets and operations of ECG on 12 September. There are concerns that PDS does not have the capacity to make the expected investment in Ghana’s power sector. In the event that the opposition wins next year’s elections, the PDS contract would be at risk of being reviewed, if not cancelled.
Furthermore, the reduction of state equity participation in the Aker energy project from about 48 percent to 18 percent has been also condemned by NDC presidential candidate John Mahama, who claims that individuals associated with current Finance Minister Ken Ofori-Atta and his company Databank took part in the renegotiation of the Aker energy deal.
President Nana Akufo-Addo has presided over an economic recovery since coming to power in 2016 and Ghana will again be one of the fastest growing economies in Africa in 2019. He faces a possibly tough re-election contest against the main opposition party candidate, former president John Mahama, in December 2020. In the meantime, the government will seek to fulfil some of the bold and populist pledges it made in the 2026 electoral campaign, including the completion of hundreds of small-scale manufacturing projects across the country. To meet such pledges, the government will source new revenues through tax increases and contract reviews.
With election year fast approaching, businesses are likely to experience fresh tax hikes. In the 2019 Supplementary Budget, the telecoms sector will see an increase in the Communication Service Tax (CST) from 6 percent to 9 per cent effective from 1 October 2019. Telecoms firms have already announced plans to pass on the cost to their customers. The 2020 budget to be announced in November this year is also likely to see tax increase on tobacco and alcohol, as well as VAT.
Meanwhile, there is also heightened risk of corrupt practices affecting commercial interests ahead of the elections. The NPP government is facing mounting allegations of mispricing contracts, cronyism, and fraud, in an apparent continuation of the previous NDC government’s practices. According to some sources, Ghana’s government is losing some USD 2.8 billion per year in revenues due to overpriced contracts and commercial criminality.
In terms of the pre-election security outlook, fierce rivalry between the country’s two main political parties makes violent protests almost inevitable, especially in the lead-up to elections. Politically motivated unrest is likely over corruption allegations and poor socio-economic situations. Hotspots for protests and riots include over-crowded areas of Accra, such as Fadama, Nima, Maamobi, Ayawaso, the Agbogbloshie market and the violence-prone ‘Sodom & Gomorrah’ area close to the central business district.
There are further concerns over violence in areas where illegal mining is rife. During an election year, there is a tendency for a spike in the activity of illegal miners, locally known as galamsey. State security forces are often redeployed from providing security at mining areas to protecting political leaders in election campaigns across the country. The recent crackdown on galamsey including the arrest of 20 Chinese miners on 13 September was an indication that the government is seeking to appease public demand for actions against foreign galamsey.
Furthermore, the failure of the government to prosecute and jail Chinese illegal miners for fear of upsetting the Chinese government has led to civil groups questioning the government’s commitment to fight the scourge. Part of the government’s concern is not to jeopardise the prospect of securing USD 2 billion for the Sinohydro bauxite project.
SEE COUNTRY OUTLOOK: GHANA
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