Why the U.S. government's plan to coordinate and invest in African energy could light up the continent.
- By Dale Mathias <p> Dale Mathias is chairman of the Partner's Forum, a group of American and African business executives who support USAID's senior leadership and the agency's new unit, the Private Capital Group for Africa. </p>
It’s no secret that Africa is booming. Of the world’s ten fastest growing economies of the past decade, six are in sub-Saharan Africa. In April, the World Bank predicted that, over the next three years, sub-Saharan Africa would grow more than twice as fast as the rest of the world. Africans are proud of this growth; they want partners who will invest in their continent outside the confines of foreign aid, and who provide business expertise as well as capital.
However, in sub-Saharan Africa, U.S. partners are surprisingly hard to find. As an editorial in Bloomberg View pointed out on July 7, Africa receives only 1 percent of U.S. foreign direct investment. China surpassed the United States as Africa’s largest trading partner in 2012, and too many U.S. businesses view Africa as a destination for aid, not investment.
Thankfully, Washington finally seems to recognize that the U.S. economy is losing out on African growth opportunities. On a visit to the continent from June 27 to July 2, President Barack Obama touted a sustained commitment to energy as a way in which the United States could help sub-Saharan Africa, while also creating investment opportunities for U.S. businesses. It’s a smart move. Currently, two-thirds of the population of sub-Saharan Africa lacks access to power. The World Bank estimates that, on average, manufacturers in the region experience power outages 56 days a year. These blackouts suppress sub-Saharan African gross domestic product (GDP) by 2.1 percent — that’s more than $25 billion per year. In Tanzania, where Obama visited a power complex developed with U.S. private sector involvement, only 14 percent of the population has access to electricity.
The problem in Tanzania and elsewhere is that state power companies see electric grids as their own private fiefdoms — corruption is rife, and these companies have little incentive to extend coverage. In the end, it’s the consumer that suffers: the average price of power in sub-Saharan Africa is nearly double that of the rest of the developing world.
But when a country privatizes its energy grids, it is usually able to decrease corruption, drop prices, and expand access — while at the same time offering high returns to investors. Nigeria, for example, passed legislation in 2005 that enabled it to begin privatizing its electric grid. And yet, currently, Nigeria produces only one-tenth the power of South Africa, even though its population is three times as large and its GDP is only slightly smaller. By continuing this process of privatization, however, Nigeria could see significant economic gains. But restructuring an electric grid is a difficult and expensive process.
That is where the United States can play a positive role. On June 30, Obama announced the initiative "Power Africa," which aims to double the number of sub-Saharan households that have access to electricity. Starting in Kenya, Nigeria, Ghana, Tanzania, Liberia, and Ethiopia, Washington will provide $7 billion in government funds over the next five years, and facilitate the investment of at least $9 billion from U.S. businesses such as GE and Symbion Power. A source in USAID told me that the agency expects another $6 billion from private commitments, soon. Beyond financing, Washington will also contribute insurance and technical assistance. But its most crucial role will be as a "closer" — guaranteeing that these projects actually get finished. As Obama said on July 1, "We can’t have a seven-year time frame for building a power plant." Part of this initiative is to speed up the process, making certain that governments and companies collaboratively focus on eliminating the bottlenecks that impede or bar private sector investment in their power sectors.
But even with commitments from high-level government officials across Africa to proceed with this initiative, many governments simply do not have trained personnel with expertise needed to deal with these matters. The pace of policy and regulatory change, as well as the speed with which individual transactions are approved, needs to accelerate. That requires a change in mind set which can be difficult to achieve. And then, of course, there will be the entrenched interests — from corrupt officials to businesspeople who sell fuel for generators — who prefer and profit from the status quo.
But the need for more efficient and universal power generation is real. The hotel that Obama stayed on in Tanzania experienced a power outage during his visit, according to one of the journalists who traveled with him. On June 30 in Cape Town, South Africa, Obama said that "Access to electricity is fundamental to opportunity in this age," adding that it’s the "energy that allows an idea to be transformed into a real business." If Obama succeeds, aid in Africa might undergo the same transformation.