Private sector, a response to the power capacity shortfall
Sub-Saharan Africa’s power capacity shortfall limits local peoples’ access to basic services and is a major obstacle to the region’s economic development. Expanding installed capacity, however, requires substantial funding – funding that cannot be delivered by governments alone. The private sector could play a significant role in meeting this finance gap – and yet its share of electricity production remains marginal. Many countries have not been able – or willing – to embark on the necessary reforms to enable the private sector to contribute significantly in an industry often viewed as strategic and socially sensitive. For its part, private business remains reluctant to invest in environments it sees as lacking transparency and in which the only direct clients are national electricity companies that are often barely solvent, or worse. Yet Côte d’Ivoire, Kenya and South Africa show that the private sector can contribute not just financially but by providing genuine technical expertise and by helping to diversify the energy mix. The private sector can outperform the public sector, too. Although its production costs may appear higher, they are not necessarily higher than the costs of the new public-sector power stations. Besides, various studies show that, from an economic perspective, producing expensively is always preferable to not producing at all.
What governments can do
A priority for national governments is to restore their national electricity companies to financial health – and a key step in this is to price their electricity properly. These companies’ difficulties come, in the main, from the public authorities’ reluctance to sell electricity at its real price – primarily for social reasons. Although this approach may seem legitimate, it does not necessarily achieve its aim, as subsidies do not always benefit those most in need. Moreover, subsidies are not viable over the long term: a public operator that does not cover its costs cannot have the resources to expand its production capacity – which means that it has to resort to expensive emergency generators, further aggravating its financial situation. Public authorities also need to ensure that they possess the human and organisational resources necessary to create a clear, transparent and competitive contractual environment. In particular this means establishing an independent regulator, setting up clear processes for awarding contracts and separating the functions of distribution, transmission and production. These measures will reassure investors and are crucial to ensure a balance between profitability for private operators, and the economic and developmental impact for the state.
Going beyond urgency
Governments also need to elaborate and consistently implement a least-cost development plan. Independent power producers’ production costs are reputed to be comparatively high – and this is exacerbated when projects are developed as a matter of urgency, to remedy unanticipated capacity deficits. Yet when independent power projects are integrated within long-term development plans, and are not used as substitutes for less expensive public ones, their impact can be wholly positive. Planning also enables states to invest in long-term options such as renewable-energy sources that have the advantage of improving a country’s energy independence but require substantial front-end investments. There is a long road ahead and increasing awareness of the benefits offered by the private sector will take time. In this context funders have a vital role to play in supporting private-sector projects and helping governments create an environment favourable to the development of independent power producers.
Ed.: This opinion piece is taken from issue No. 18 of Proparco’s Private Sector & Development magazine.
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