Political risks and red tape scare away investors from EA energy sector

The Turkana wind power plant during construction. In Kenya, the government has a history of welcoming private investment but the nature of the political system does present challenges. FILE PHOTO | NMG 

In Summary

• Study shows that political uncertainty in the region coupled with bureaucracy in approving infrastructure projects have made it difficult for investors in the energy sector to secure international financing for their projects.
• According to the report, the major obstacle for many renewable energy projects in Africa is securing international financing and reaching a deal on project financing could take over five years longer for African projects than for their counterparts in more stable investment environments.
• Only 145 million people in East Africa are connected to electricity, creating opportunities for investors in renewable energy.

By JAMES ANYANZWA
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Less than a quarter of the East African population, estimated at 145 million, have access to electricity — the lowest electrification rates in the world.

However, this provides opportunity for renewable energy investors, a new study by the British Oxford Institute for Energy Studies shows.

But the study, which was released last week, shows that political uncertainty in the region coupled with bureaucracy in approving infrastructure projects have made it difficult for investors in the energy sector to secure international financing for their projects.

According to the report dated August 2018, the region’s renewable energy sector presents a vibrant investment environment with opportunities for large on-grid projects in geothermal and wind, as well as commercially viable distributed solar investments, but political, regulatory and security risks have contributed to long delays in project finance.

“In some cases, investors have pulled out of projects or closed operations down entirely as a result of the regulatory uncertainty or physical threat to their assets,” the report says.

Delays

According to the report, the major obstacle for many renewable energy projects in Africa is securing international financing and reaching a deal on project financing could take over five years longer for African projects than for their counterparts in more stable investment environments.

These delays are evident in the two region’s largest on-grid developments such as the Kenya’s Lake Turkana Wind Power Project, which took nine years to reach a financial close, and the Corbetti geothermal project in Ethiopia, which has already taken seven years, with financial close still an estimated 18 months away.

“For many private investors, Africa presents an unfamiliar and potentially unstable operating environment,” reads to the report. The majority of investors in Africa look for external financing to implement their infrastructure projects given the limited sources of domestic financing.

According to the report, financiers are keen on understanding the regional political, regulatory, and security environment as part of the risk assessment process before releasing their money to investors in the region.

“Each country presents a unique risk environment and knowing the drivers of these risks should be a fundamental part of the project financing process,” says the report.

In Ethiopia, one of the most significant risks to companies operating in the country is currency shortages.

Access to forex in Ethiopia has been a major obstacle for businesses for years, a situation that worsened over 2017 and 2018.

Even in the priority sectors, which are given preferential access, businesses frequently complain about delays of over three months in accessing foreign currency.

The delays are caused by a systemic imbalance in the Ethiopian economy, which means that the government spends significantly more forex than it earns.

In addition, the government’s public investment programme requires costly imports of machinery and equipment.

While this programme is designed to promote the manufacturing sector – which is vital for increasing the country’s exports – the sector still accounts for less than 10 per cent of the country’s GDP.

The resulting unfavourable trade balance is unlikely to reverse in the immediate future, meaning there will still be change shortages of forex.

The report notes that despite the funding challenges, the appetite for renewable energy projects in Africa has increased over the past few years, with the cost of solar and wind equipment falling.

For instance, in October 2017, Kenya’s M-Kopa raised $80 million in debt financing.

According to the report, East Africa is home to one of the largest hydropower projects in the world — the GERD dam Ethiopia — and Lake Turkana in Kenya.

State-dominated approach

Equally, two record-breaking off-grid ventures are also to be found in the region including M-Kopa in Kenya and Off Grid Electric in Tanzania.

Ethiopia’s abundant natural resources, ambitious electrification targets and green credentials make a seemingly perfect combination for investors in renewables but its state-dominated approach to economic development has limited private-sector growth.

However, since last year, the government has opened the energy market to international investors.

According to the report, one of the most significant risks to companies operating in Ethiopia is currency shortages.

In Kenya, the government has a history of welcoming private investment but the nature of the political system does present challenges.

According to the report, a major concern for investors in Kenya is the frequency and scale of political crises, uncertainty over the regulatory environment and corruption.

“Corruption is a significant risk in Kenya and over 30 per cent of businesses expect to have to pay bribes. Government officials are often implicated, and it is not uncommon to hear of scandals involving millions of dollars in lost funds,” reads the report