December 12, 2020
Africa’s BRICs held back by lack of electricity
Lack of access to electricity is holding back the prospects of potentially high-growth African economies.
The Africa List Business Barometer, published this month, is based on a survey of 394 executives in the Democratic Republic of Congo (DRC), Ethiopia, Ghana, Tanzania, Uganda and Zambia.
Only 54% of respondents reported a stable electricity supply. Business leaders across the board called for an improvement, the barometer found. The DRC, Ethiopia, and Zambia fared the worst, with an average of 51% of respondents having reliable access to electricity.
The aim of the survey was to focus on “Africa’s BRICs” with the highest growth potential, says Taeya Abdel Majeed, manager at the survey’s publisher The Africa List. The acronym BRIC was coined by Goldman Sachs in 2001 to highlight the potential economic growth of four major emerging markets: Brazil, Russia, India and China. Those countries started to cooperate, and the first summit of BRIC countries was held in 2009. The following year, the group voted to invite South Africa to join, so BRIC became BRICS.
Failure to increase energy production and consumption over the long term is the factor that distinguishes South Africa from the BRICs.
Total primary energy consumption in South Africa in 2019 was 5.6% lower than in 2010, according to the BRICS Energy Research Platform.
Off-grid financing
The barometer found resilience in business confidence despite COVID-19, with 76% of those surveyed saying that business conditions in their countries are satisfactory or good. Still, says Majeed, there’s no way sustained economic growth can be achieved without better electricity supply.
Improved local currency credit access for off-grid energy projects has a part to play.
A report from the African Development Bank (AfDB) in November finds that most African countries rely on hard currency debt for the financing of energy infrastructure. That means exchange-rate risks which are expensive to hedge and drive up energy costs. So there’s a need to develop the capacity of local financial intermediaries to offer local currency credit, says the AfDB.
- Companies such as M-KOPA, BBOXX and Zola EDF are operating at a scale where they need access to local currency finance to support growth of their organisations, rather than just raising more equity, the AfDB says.
- Such companies need to leverage the value of their consumer receivable assets, or loans that they have made to their customers to buy their products. But the collateral requirements of local banks are a major obstacle.
The AfDB in 2018 launched the Distributed Energy Service Companies (DESCO) financing programme in sub-Saharan Africa. The bank works with commercial lenders and debt funds to structure receivables-backed transactions to supply off-grid power companies with local-currency capital to scale up.
- If the company defaults, the lender takes over the receivables that have been pledged.
- Further security for lenders, the AfDB says, can be achieved by splitting the power company into operating and asset units with separate legal entities.
- The operating company sells and maintains solar home systems, while the asset company obtains debt from lenders on the basis of the receivables.
- The AfDB notes that bank margins on local currency finance have remained persistently high, meaning expensive loans for the borrowers.
- It’s possible, the AfDB says, that guarantees are best targeted at capital market issues or intermediaries raising capital who then provide local currency debt, rather than banks.
Bottom line
Africa’s BRICs won’t scratch the surface of their potential until off-grid power providers have better access to finance.
