Africa is the world’s fastest growing continent with 7% annual GDP growth forecasted for years to come. Energy infrastructure development will require vast sums of capital over the next decade, with recent reports forecasting $70B annual investment requirement in the continent, $45B of which would be for generation and $25B for transmission and distribution.[i] $32B of the total comes from renewables options. By deploying renewables, African countries can address their generation, rural access and reliability problems. Once considered too expensive to be feasible, renewable energy alternatives have seen significant cost declines due to technological advancement. The trend is motivating strong interest among private investors.
Opportunities in Ethiopia and Tanzania
Ethiopia will require well over $30B in renewable investment over the coming decade. Tanzania, though less focused on renewable sources, will require many years to bring natural gas production online, leaving room for significant renewable investment, particularly off-grid. Private sector opportunities for both Ethiopia and Tanzania can be seen addressing generation, access and reliability.
Both countries recognize an enormous funding gap for generation projects that only private capital can fill, and many significant projects are already under negotiation. The 1 GW Corbetti geothermal project has been in process for five years and will likely become a pioneer as Ethiopia’s first privately constructed and operated generation asset. In contrast, Tanzania already enjoys meaningful private sector contribution and has reduced its hydro dependence from 98% to 35% since 2002.[ii] Combined, the two countries hope to add nearly 35 GW of capacity over the next decade and recognize that much of the financing should come from private sources. In Ethiopia, much of the on-grid capacity will be scaled renewable projects while in Tanzania most will be natural gas plants.
Among the five regions of Africa (North, West, East, Central and Southern Africa), East Africa (303M population) has the lowest electricity penetration with only 23% of its population connected. Ethiopia and Tanzania have access ratios of 27% and 15%, respectively.[iii] The clear majority of the population of both countries lives in rural areas too far away from the main grid to expect access in the next few years. For remote areas that are relatively densely-populated, smaller mini-grids and micro-grids offer affordable solutions. For remote, sparsely-populated areas, distributed off-grid solutions from private sector providers are gaining traction, though more progress has been made in Tanzania than Ethiopia to date.
Poor grid reliability imposes large costs to industries primarily caused by expensive diesel usage (50¢ / kWh compared to 11¢ / kWh for solar in Tanzania) and lost production.[iv] Private companies can offer solutions such as privately-contracted mini-grids that, while costing more per kWh, offer lower actual costs due to their greater reliability.
Challenges in Ethiopia and Tanzania
Unsurprisingly, financing constraints pose the greatest challenges in both countries, though this issue manifests itself in different ways. Both governments face more demand for sovereign guarantees than can be supported. The IMF counts power purchase agreement (PPA) guarantees toward debt obligations for the countries, which affects their debt costs and ability to borrow. In Tanzania, TANESCO suffers from financial distress. Since it is the only possible counterparty for new generation capacity connected to the grid, this problem complicates any negotiations over project financing.
In Ethiopia, a lack of skilled workers and middle management capabilities in both the public and private sectors slows progress towards technocratic objectives. The approval process for new projects, for example, has long been plagued with bureaucracy and inefficiency. The government is working now to streamline the process, but a great deal of private capital has yet to be unlocked due to approval delays.
In Tanzania, the government is skeptical of projects with break-even tariffs above 8¢ / kWh, which includes most non-hydro renewable projects. Adopting a similar attitude, local Tanzanian banks consider renewable energy developments risky and only finance them on expensive terms. While the focus on cost makes sense in a poor country, this imposes challenges on renewable project developers who argue that a 12¢ / kWh retail tariff and need for more diversified generation sources should make some renewable projects feasible.
Many opportunities exist in the renewable space for private, for-profit organizations. Aside from the obvious opportunities to finance, develop and operate scale projects supplying the grid, we identified several interesting potential business models focused on off-grid, mini-grid and financing solutions.
Off-Grid. In Tanzania, Off Grid Electric (OGE) has clearly proven a practical B2C off-grid solar opportunity for homes exists. The OGE model works particularly well for areas without grid connections, as solar is almost always more expensive per kWh than the subsidized grid power. However, an OGE staff member comments: “Tanzania is large and rural. There are so many places where people have been promised the grid for 20 years, and so many places where it just doesn’t make economic sense to extend the grid.”
In Ethiopia, on the other hand, similar models have not taken off, largely due to lack of penetration of mobile money. However, Ethiopia has implemented more B2B off-grid solutions. As of December 2015, 109 wind- and solar-powered water pump projects were under construction across the country. As in Tanzania, these are also off-grid installations that reach where the grid cannot. Unlike in Tanzania, these focus on commercial applications, in some cases extending an agricultural growing season, and are aid projects rather than sustainable businesses.
Mini-grid. Mini-grid is another model for the private sector to provide renewable energy. Mini-grid refers to private generation, maybe of a few megawatts of power, which is then distributed in a small closed loop system to a group of homes or businesses. Mini-grids can be connected to the grid so that the state utility can offtake extra power, if such a contract is negotiated.
Financing. Private financing mechanisms can solve three major barriers to implementation: (1) lack of government guarantee, (2) lack of state utility buy-in, and (3) lack of financing for grid connections in rural areas. Private investors can guarantee PPA’s for a fee. Many projects get “stuck” at the government guarantee phase, since the government cannot take on more debt to guarantee the public utility’s payments. The large geothermal Corbetti project in Ethiopia is one such example. In these situations, Development Finance Institutions (DFIs) and private banks can step in to provide such a guarantee.
Cost of connection, not electricity, poses biggest impediment to rural electrification. Extending the grid to sparsely populated and remote areas has so far proven an insurmountable challenge in both Ethiopia and Tanzania, with only 10% of Ethiopia’s rural population and only 4% of Tanzania’s currently electrified. From speaking to the disparate actors challenged with solving this problem, we deduced that the biggest hurdle to electrification is the capital cost of the connection, and not the rural population’s ability to afford the ongoing per-kilowatt cost of electricity. In fact, kerosene, firewood, charcoal and other replacement sources of energy used by the rural population often cost more than the equivalent energy supplied through the grid. This insight has greatly informed the recommendations we have discussed across this document.
The fact that the rural population can afford to use the product, but not the capital cost of its development (in this case a grid extension) naturally creates an opportunity for both local and foreign investors. Distributed energy solutions, which involve the localized generation and distribution of electricity, are a mechanism through which the private sector can help electrify previously un-electrified rural populations.
Lack of established investment channels slows development. The renewable energy sectors in Ethiopia and Tanzania suffer from a lack of investment vehicles through which global pools of capital can invest at reasonable cost. This is a function of the underdeveloped nature of financial markets in both countries, and the lack of asset managers and developers with the relevant expertise.
Concessionary finance has a role to play. Long-term infrastructure investments in both countries are often led or financed by some form of concessionary finance, whether it be bilateral, multilateral or through DFIs. A renewable energy project in either Ethiopia or Tanzania will have financial characteristics similar to an early stage venture in the western context.
Commercial Real Estate
Consider the potential for private finance and delivery of your sector of infrastructure in each city over the next decade. What are the main opportunities? What are some of the key challenges?
There is tremendous potential for private finance to enter the market in the commercial real estate sector in both Addis Ababa and Dar Es Salaam. Even though there are many similarities in the way the sector operates, the nature of these opportunities is quite different in each city.
Entertainment and leisure options: There are currently no resorts within 100 km of Addis Ababa and the number of entertainment options available for consumption by the middle class is sorely lacking. Hilton has noticed this opportunity already and is building a resort at Lake Havasu in conjunction with Sunshine Real Estate. The middle class is growing rapidly in Ethiopia and the availability of disposable income for these middle-class families presents a great opportunity to introduce resorts, movie theaters, arcades, malls amongst other entertainment and leisure options.
Marketability of malls: Many of the malls that we observed are being plagued by problems such as lack of foot traffic and poor maintenance. This presents a significant opportunity to improve marketability of malls by executing better mall management strategies such as incentivizing anchor tenants that could attract more foot traffic to the mall and being more deliberate about selecting tenants that would appeal to a broader set of customers.
Manufacture finishings locally: Finishing and other high value goods that are necessary for completing construction projects currently have to be imported from outside Ethiopia. Due to the high import tariffs currently in place, these finishings end up costing developers a significant amount of capital and are often the reason construction projects don’t get finished. This problem can be mitigated by manufacturing these finishings locally and allowing developers to complete construction within their budget restrictions.
Dar Es Salaam
Retail revolution: The middle class in Dar Es Salaam is rapidly growing. There are many African, Chinese and Indian immigrants pouring into the country. These immigrants are used to a certain level of access to international brands and they will demand the same level of access in Tanzania. The retail sector is set to take off with the popularity of malls rising and a number of international brands looking to enter the market for this reason. The demand for retail space is soaring commensurate to the pace of the retail revolution.
Long-term stay business hotels: The rental market in Dar Es Salaam is currently skewed towards people demanding 6-12 months of rent in advance. In conjunction with this, traditional hotel rooms in Dar Es Salaam are quite expensive and long term stays can add up quickly for corporate clients. Long-term stay business hotels present an opportunity to provide value to an underserved market.
High quality construction companies: There is currently a need for high-quality construction companies as the market in Dar Es Salaam moves towards more sophistication. In the absence of establishment of professional standards by the government, developers have an opportunity to form a trade association that recognizes and rewards quality amongst construction companies.
Financing is a necessary element of development; however, inefficiencies in the credit market make allocation risky and expensive. Much of this inefficiency stems from a lack of risk assessment tools (credit scores, etc.) to allow the lender to individually assign risk adjusted interest rates. Interestingly, the responses to this problem differ substantially between Ethiopia and Tanzania. In Ethiopia, loans are offered at a standard interest rate to all counterparties regardless of creditworthiness, thus increasing the risk of the overall loan pool. In Tanzania, alternatively, loans are rarely offered, and only with extremely high interest rates if available.
Another funding opportunity in both Tanzania and Ethiopia exists in the pre-sales market. Although Ethiopians are particularly skeptical of this process, given the recent Access Real Estate fraud scandal, the lack of accurate market information and largely inefficient capital markets make pre-sales an attractive avenue to gauge market demand while accessing capital.
Second, there are significant opportunities in the retail, entertainment, and leisure industries as the middle-class population continues to increase and Western influences are desired. Within the hospitality sector, prior investment in both Ethiopia and Tanzania has largely centered on hotels for foreign tourists. Resorts in general are a relatively new concept and very few have considered the local population as their prime target.
Third, as private sector development continues to outpace government oversight, formation of trade associations among private companies could serve to fill this existing void, particularly regarding issues of quality standard, safety practices, and cross-sector coordination. These voids will become more prominent as foreign investment in both countries grows. Specifically, international investors will especially look for validation of quality in the absence of regulatory requirements prior to investing. Looking ahead, trade associations for different sectors (e.g. energy, infrastructure, real estate) can also work together to coordinate larger development projects and new neighborhoods as a way to supplement weak government city planning.
[i] “Africa Renewable Energy Roadmap to 2030” by International Renewable Energy Agency (IRENA), 2015.
[ii] “Renewable Energy in Africa, Tanzania Country Profile” by African Development Bank Group, 2015.
[iii] WorldBank Access to Electricity Indicator http://data.worldbank.org/indicator/EG.ELC.ACCS.ZS.
[iv] International Renewable Energy Agency (IRENA) 2014 Renewable Cost Database.