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
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.
A sprawling IMF-backed privatisation programme creates exceptional opportunities for investors across diverse sectors. State assets selloffs may also be the only course for Angola to reduce its massive public debt burden, to diversify away from the oil sector, and to slip out of an extended recession. Yet tenders and auctions will need careful management, transparency, and accountability to have their desired effect.
On 19 September, Angola’s privatisation programme’s technical group, the so-called ProPriv Programme, announced that 195 companies had been shortlisted for privatisation over the next three years. Most of the country’s state-owned or partially state-owned companies will be divested by next year, while larger state companies such as oil firm Sonangol will sell off key assets by 2022. Most companies and assets will be sold through public tender, with only 17 to be sold through the stock exchange.
The most well-known companies shortlisted for privatisation are state oil company Sonangol, diamond company Endiama, and airline TAAG, as well as banks BCI, BAI, BCGA, and Banco Económico, insurance firm ENSA Seguros, and the Angola Debt and Securities Exchange (Bodiva). Other state asset selloffs are planned in the textile, construction, brewing, agro-processing, and telecommunications sectors. Revenues from the sales are earmarked to bringing down the country’s high debt levels.
Angola’s government and the International Monetary Fund (IMF) are aiming to limit Angola’s government debt to gross domestic product (GDP) ratio to 90 percent. The IMF reported in June that Angola’s public debt stood at 91 percent of GDP in 2018. The country’s debt has increased significantly in recent years due to falling foreign currency oil revenues, which has led to a depreciation of the local kwanza currency and a rise in inflation. The privatisation programme is at the frontline of efforts to curb public debt to below 80 percent of economic output over the next two years.
However, two years into the presidency of João Manuel Gonçalves Lourenço and almost one year into the IMF’s three-year Extended Fund Facility, there remain significant challenges to recovering Angola’s economy, while foreign investors will remain cautious of committing to the privatisations. Nevertheless, the ProPriv Programme creates substantial opportunities for investors, particularly those in the banking sector.
Angola’s government aims to privatise a number of companies later this year, including ENSA-Seguros de Angola S.A., which is Angola’s largest insurance company. The state also seeks to sell its share in the breweries of Cuca, N’gola, and Nocal. Various smaller privatisations have also already been completed earlier in 2019, yet the largest divestments will commence from next year.
In 2020, the government aims to sell off its shares in another large group of state-controlled assets, including some major banks and construction company Mota Engil Angola, in which the Angolan government has a 20 percent stake. The banks prescribed for state divestment are Banco Angolano de Investimentos (BAI), Banco de Comércio e Indústria (BCI), and Caixa Angola.
The state will also sell its interests in mobile phone company Unitel and telecommunications operators Angola Cable, MSTelcom, TVCabo, and NetOne. Two cement companies are lined up for privatisation, namely Nova Cimangola and Secil Lobito, as well as three textile producers: Textang, Satec, and Africa Textile. Other companies shortlisted are bioenergy firm Biocom, agro-communal fund Aldeia Nova, and the Empresa Nacional de Exploração de Aeroportos e Navegação Aérea E.P. (ENANA), which operates Angola’s airports and controls civilian air traffic.
In 2021, the government intends to privatise the Angola Debt and Securities Exchange (Bodiva), downstream fuel distributor and marketer Sonangalp, telecoms firm Angola Telecom, airlines Sonair and TAAG Angola Airlines, and another bank – Banco Económico. TAAG, Angola Cable, Sonair and Banco Económico are some of the few companies that will be sold via the stock exchange, as will firms MSTelcom, ZEE, Multitel, Caixa Angola, and Aldeia Nova. This should give the newly privatised Bodiva a boost from 2021.
In 2022, ProPriv will proceed with the partial privatisation of some of Angola’s largest and most prominent state companies, including state oil company Sonangol, diamond mining firm Endiama, and postal service Correios de Angola. These companies have large assets both within Angola and internationally that may offer some of the most lucrative opportunities for both foreign and domestic investors. Sonangol is by far Angola’s largest company and one of the largest firms within Africa.
Sonangol asset selloffs
Sonangol has published an extensive list of foreign and Angolan commercial interests. The company is set to sell 50 subsidiary companies over the course of three years, as well as other assets. By the end of this year, the state oil giant is expected to dispose of 20 companies and assets. Within Angola, Sonangol also retains stakes in a broad variety of commercial sectors including healthcare, transportation, fuel refining, telecommunications, banking, construction, and mining.
Next year, the assets that are set to be sold off include the company’s subsidiaries in Cape Verde and São Tomé and Príncipe, as well as foreign interests in companies such as Founton (Gibraltar), Sonatide Marine (Cayman Islands), Solo Properties Knightsbridge (UK), Societé Ivoiriense de Raffinage (Cote d’Ivoire), Puma Energy Holdings (Singapore), WTA (France), and Sonandiets Services (Panama). Other foreign assets to be sold off include Portuguese real estate companies Puaça, Diraniproject III and Diraniproject V, in Sonacergy – Serviços e Construções, Sonafurt International Shipping and Atlantis Viagens e Turismo.
Sonangol chairman Sebastião Gaspar Martins retains the lead on the company’s asset selloffs, while working in close collaboration with Minister of State for Economic Coordination, Manuel Nunes Júnior, who oversees the ProPriv Programme. Both men are close confidantes of President Lourenço’s influential economic policy ‘czar’ Manuel Vicente, who is a former chairman of Sonangol and former deputy president. Much of the controversy surrounding the appointment of Gaspar Martins in May has centred on his role as CEO at Angolan junior oil firm Somoil, which was founded by Vicente almost 20 years ago and retains stakes in offshore oil blocks and interests in onshore production permits (See ANGOLA: SONANGOL RESHUFFLE PUTS ANTI-GRAFT CAMPAIGN INTO THE SPOTLIGHT).
Public tenders in the spotlight
Any sign that Sonangol chief Martins seeks to line up the elite to benefit from politically influenced tenders in privatisations would undo much of the economic benefits of the ongoing IMF programme. There are particular concerns that Somoil, which is affiliated to both Martins and Vicente, could improperly benefit from Sonangol asset sales. There is ample precedent that the loyalist network supporting President Lourenço is seeking to capitalise on their new positions of patronage.
In April, the government awarded the country’s fourth telecommunications license to little-known Telstar Telecomunicacoes, which beat 26 local and international firms. The deal triggered broad condemnation, since Telstar has no track record in mobile operations and being incorporated just over a year before the licence tender. The public fall-out earlier this year over the deal was mimicked on social media to such an extent that President Lourenço annulled the tender and ordered a new process. The IMF has also been critical of various other tender processes, including for the planned purchase of new aircraft earlier this year.
Such incidents have raised concern that the government is using President Lourenço’s liberalisation and transparency campaign not only to disarm political opponents, but also to ensure the support of its own favoured network of allies and supporters. Last year, EXX Africa released several analysis briefings and special reports, accurately forecasting such a scenario, raising particular flags over the influence of the new president’s family and the exceptional clout of Manuel Vicente (See SPECIAL REPORT: POLITICAL INFLUENCE AND PATRONAGE IN THE ‘NEW’ ANGOLA).
Manuel Vicente has a known background of opaque deals during his time as chairman of Sonangol and as deputy to then president dos Santos. His family and closest associates control an extensive network of business interests in Angola, Nigeria, Mozambique, and Europe. Many of these commercial interests have been tainted by allegations of corruption or mismanagement through various international probes. There is less publicly known precedent of impropriety on the part of Lourenço, who served as defence minister under dos Santos.
However, in EXX Africa’s publicly released report last year, we raised several questions over his purported role in the acquisition of military equipment during his time as defence minister through the same network of companies and individuals that has been implicated in Mozambique’s ‘hidden debt’ and corruption scandals. So far, the Angolan government has refused to respond to the report and questions remain over the due process over such procurements (See SPECIAL FEATURE: FALL-OUT OVER MOZAMBIQUE DEBT SCANDAL RISKS SPILL-OVER INTO ANGOLA).
The government has highlighted that transparency in tender processes will be a crucial tenet of the upcoming privatisations. The International Finance Corporation (IFC) of the World Bank, the country’s financial sector, business associations, and chambers of commerce are closely monitoring the government’s progress and the implementation of the ProPriv Programme. IMF approval for the release of another tranche of the USD 3.7 billion Extended Credit Facility will also hinge on transparency in the tender process. Angola has already received a total of USD 1.24 billion in less than a year from the Fund. The IMF programme has anchored Angola’s policy framework and shored up confidence in the country’s economy.
However, privatisations alone will not be sufficient to turn around Angola’s shrinking economy. Oil production is expected to continue to decline over the next year. The country has struggled to meet its quota agreed with the Organization of Petroleum Exporting Countries (OPEC) of 1.481 million barrels per day. As older wells deplete, and a lack of investment hampers the drilling of new wells, economic output is set to shrink by 2.6 percent this year and 3.6 percent in 2020. Moderate growth is only expected from 2021 once the economic restructuring and IMF-mandated reforms begin to benefit the broader the economy. Non-oil sectors will provide for the economic recovery, yet this is based on assumptions of improved transparency and accountability in coming years.
Meanwhile, painful reforms demanded by the IMF programme will begin to have their effect. We expect more strikes and protests, including from skilled workers in the cities and public sector employees who are exposed to any economic downturn due to public payroll cuts and high inflation which is expected to hover around 20 percent for the next three years. The IMF is mandating fiscal discipline that includes unpopular measures such as scrapping fuel subsidies and further devaluing the kwanza.
Loyalists of former president dos Santos are capitalising on mounting grievances over the economy and IMF austerity. The government is meanwhile seeking to scapegoat dos Santos loyalists for the economic malaise, claiming acts of economic sabotage lie at the heart of ongoing fuel shortages. This is starting to rip apart the usually unified MPLA ruling party that has ensured Angola’s political stability since the end of the civil war. Local well-placed sources tell us that the party could permanently split unless there is an improvement in the economy and the so-perceived ‘show trials’ of dos Santos family members and associates stop.
SEE COUNTRY OUTLOOK: ANGOLA
The government will capitalise on Robert Mugabe’s legacy to consolidate its authority and establish further control over patronage networks in the banking and agricultural sectors. However, it is failing to make headway on an economic recovery, taming inflation, and restoring power supply. The opposition is set to resume protests and strikes in coming weeks, raising the risk of a complete economic shut-down. Foreign partners, even benevolent ones, will struggle to push through any form of debt relief and a mooted bailout as the crisis deepens.
The latest outbreak of anti-immigrant violence in South Africa has been unusual only because of its timing coinciding with a major investment conference and the potential political motivations behind the attacks on foreigners. EXX Africa investigates the political and economic drivers of such violence, as well as the commercial impact of retaliatory action against South African interests elsewhere in Africa.
Algeria’s ruling general is either preparing to install himself as a strongman-president of an Egyptian-inspired securocratic state or he is seeking to transition political power to a civilian administration that will protect the military’s interests. EXX Africa investigates the probability and implications of both scenarios.
EXX Africa reflects on some of the political and economic challenges facing Africa’s last absolute monarchy, as the small landlocked nation emerges from recent contested elections and finds itself in an economic crisis.
The incoming transitional government will need to address three priorities if it is to last its three-year term: namely seeking prosecution of those held responsible for war crimes and violence against protestors; unravelling Sudan’s ‘deep-state’ of competing power networks that continue to control lucrative assets; and driving a sustained economic recovery, most likely with Gulf financial support.
Just weeks away from publishing its much-anticipated master plan for the struggling power sector, the government is considering prescribing financial assets and forcing pension funds and banks to invest in state utilities’ debt as an alternative to seeking IMF support. However, the government’s intention to renew nuclear power capability may be more considered and economically prudent than previous nuclear procurement plans.
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- EXX Africa director Keri Leicher participates at the Africa Investment Forum in Johannesburg to discuss investments into Africa
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