Reducing the Resource Gap Can Create a Less Risky Region
NAIROBI 31 OCTOBER, 2011- Kenya’s incursion into Somalia has brought the issue of the region’s risk profile to the fore. As analysts debate the rationale behind Kenya’s decision, and the length and possible implications of the military’s action, the private sector and the public anxiously await the outcome on the sidelines.
While the debate continues, it is worth noting other important underlying risks in the region. These risks may not be as dramatic as war but they do have a devastating impact on the quality of life for the average person and on the investment and business climate.
Perhaps three of the most insidious risks are in economic and resource disparity, resource security and demographic challenges. On the surface these may seem benign but if we look closer these risks can be the cornerstone that ignites other risks and culminates in the type of widespread protests seen in the Arab world and North Africa.
The World Economic Forum’s Global Risks 2011 report, ranks economic disparity as one of the most important risks in the 21st century and “the second most important trend in terms of impact on the business community and as the most underestimated trend in terms of impact.” The report also underscores that the economic disparity and geopolitical conflict reinforce one another.
In East Africa the rising price of basic food items coupled with inflation and the high cost of borrowing is threatening to widen the poverty gap even further. The result is that millions of people may be forced to choose between basic necessities such as food, water or electricity. This is played out daily in local headlines as the price of staples such as maize took a significant hit in 2011, doubling over the last year.
For the past five months Burundi, Kenya, Tanzania and Uganda have reported rolling blackouts, which have been implemented by governments to resolve the drought-induced power shortage plaguing the region.
In Kenya, households have been faced with a 28.4% increase in their electricity bill. Meanwhile inflation, or the rate at which the cost of goods and services are rising, stood at 16.6 percent in August compared to a less than six percent rise in January.
Energy demand in the East African region is estimated to be growing 5.3% annually. To meet this demand, the Africa Infrastructure Country Diagnostics (AICD) report estimates that a commitment of $5.3 billion annually for the next decade will be needed.
To help ease the energy deficit, which it deems to be an important aspect of economic development, the African Trade Insurance Agency (ATI) this year, backed four important projects in Burundi, Tanzania and Zambia valued at over $500 million.
“We are seeing tremendous growth in the energy sector this year – as of September, 2011 our volume of business in this sector increased by 1822% over last year. I suspect that this staggering demand reflects the urgency the region is placing on ramping up its infrastructure,” notes Humphrey Mwangi, ATI’s Nairobi-based Senior Underwriter.
In September, Burundi raised its electricity tariffs for consumers by 124 percent to partly fund additional power generation projects. Access to electricity in the country is estimated to be just 3 percent of the population and experts say the demand is growing by as much as 13 percent annually.
Burundi, like many other countries is turning to the private sector investors to offload some of this large-scale expenditure. One such project is the rehabilitation of its water and energy infrastructure. While the World Bank is financing the project, Burundi had to attract reputable contractors to do the work. This can pose a challenge for some contractors who may be hesitant to enter into a contract with governments or government agencies.
On this project, ATI paved the way for an international energy company to complete a contract with the government by insuring them against a variety of political risks including the government’s failure to certify invoices during project implementation and unfair calling of bonds. This $17 million project is expected to provide increased access to water and electricity, decrease unplanned power outages and increase the government’s revenue potential.
Tanzania hosts two of the two largest energy projects in ATI’s history. Both projects are part of the government’s strategy to remedy an energy crisis that has seen power outages of as much as 12 hours per day for several months in the nation’s capital. In addition, the government hopes to increase from the current 11 percent, the number of households with access to reliable energy.
Due to prolonged drought across the country, its hydro-based power infrastructure has been unable to generate enough power to cope with domestic and industrial demand. The government contracted an energy company to build and operate a gas fired power plant that will eventually transmit power from the gas fields in the Somanga region to the capital Dar es Salaam.
ATI facilitated the transaction by providing Lenders All Risk Insurance protecting against non-payment to a regional bank that is providing bridge financing for the power plant.
This project will not only address the country’s immediate energy needs, but it is also expected to herald a strategic move by the government to diversify power generation away from hydro-based sources.
The second energy project backed by ATI in Tanzania is the construction of a $103 million turn-key power plant. The completed project will see the government own and operate two additional power plants which will add 100 MW of generation capacity to the existing grid and improve reliability and quality of the power supply to the national grid.
Based on the strength of its preferred creditor status agreement with the government of Tanzania, ATI was approached by the Norwegian Export Credit Agency to provide reinsurance on a lending facility that protects the lender against the risk that the government does not honour its commitment to repay the loan.
Southern Africa, like Eastern Africa, is no stranger to energy challenges. In Zambia the issue of rising commodity prices impacted on their ability to import petroleum, which in that country is the responsibility of the government.
Current fluctuations in international oil prices led to the regional bank financing the imports to increase their $350 million loan facility to cover the same volume of imports for the country. To reduce their risk exposure, the bank sought ATI insurance protection in the event that the government is not able to honour its commitment to repay the loan. The bank chose to partner with ATI on this deal based again on the strength of its preferred creditor status agreements with governments such as Zambia.
More projects such as these are needed to address the resource imbalance in many countries that struggle to meet the demands of citizens along with creating a hospitable environment for investors and business to flourish. Given the ever-present pressures of population growth – as the world recently reached the seven billion mark, and growing demands by the developing world for food, water and energy this appears to be a challenge that will be with us for decades to come.
If African governments choose to tackle the problem head on, the outlook may be promising. And perhaps in this war, the on-lookers will represent both public and private partners who see a business opportunity to develop a continent that makes economic and social sense.