Ghana’s electricity supply is another reason for its attractiveness due to shortages that exist in most sub-Saharan African countries.
Typically, power plants feed an aging power grid, and governments set a regulated price below the cost of production for the utility companies that distribute power. The low price keeps users happy but it starves the utilities of the money they need to maintain and expand their systems, while the ensuing blackouts discourage investing in manufacturing.
Roughly two-thirds of Africans have little or no access to power,11 which creates a cycle of social and economic losses. Schoolchildren can’t do their homework after dark, hospitals struggle to keep medicines cold, and governments divert money from long-term development plans to short-term fixes.
Ghana broke this cycle by incentivizing commercial investment in power, including through signing long-term power-purchase agreements with private power producers that promise them payment even if power isn’t used.
That’s a concern for the state’s budget, and the onus is on the government to find new sources of demand. But having enough power is a big step in the right direction, says Justin DeAngelis, whose Boston-based private equity firm Denham Capital is an investor in several of the new plants. “Investments in power are leading indicators of economic growth,” says DeAngelis. “You need power to grow an industrial base and to keep the lights on for the populace.”
Developing and constructing power plants is a long process, he says, and the investment thesis differs from most “private equity-style” investments in Africa. Whereas many such investments are based on the notion of significant economic growth boosting the number of people with discretionary income and creating the potential for big returns. Denham Capital through its power investments is seeking a steady payback profile protected through long-term contracts and risk mitigation tools. DeAngelis notes the focus is on delivering new, low-cost sustainable infrastructure that helps the different countries in which Denham operates
These are typically found in power-purchase agreements, sovereign guarantees, insurance policies and other instruments available from international institutions, such as the World Bank.
Government aid and development agencies also offer investors this kind of help, including the US government’s Power Africa program. It gives investors resources from 12 state agencies, such as financing, political risk insurance, technical assistance and political access of the US International Development Finance Corporation.
The state agencies seek projects already in development but in need of help to overcome obstacles, and the overall aim is to add 30,000 megawatts of generation capacity and 60 million new connections for homes and businesses. Thus far, the program has helped to secure private investment worth US$20b, providing 10,471 megawatts of new capacity in development — more than half of it from renewable energy — and first-time access to power for 68 million people.12
Power Africa seeks to support private investors and considers economic development projects as commercial, for-profit activity, a shift from development initiatives of the past. These agencies could have used their capital to build one or two power plants themselves, but now they believe that small-scale support of existing private-sector ideas makes a bigger impact.
If all goes well, the small public capital dispensed will leverage greater amounts of private investment, backed by relationships the development institutions have cultivated. “The multilaterals and development finance institutions are not just lending into my deals,” says DeAngelis. “They bring advocacy and impact.”
Investors such as DeAngelis, as well as civil-society voices like Cudjoe, were disappointed when the state the state partially drew down and subsequently cancelled a management contract in November that the Millennium Challenge Corporation of the US negotiated as a part of Power Africa. The deal would have provided US$190m in funding for the electricity sector and awarded a management contract to an outside firm to reform the Electricity Company of Ghana, one of the two main distribution companies.
“It’s three steps forward and one step back sometimes with the reform process,” says DeAngelis. “But overall Ghana has been a good place to invest.”
But for countries that can speed up that process even just a little bit, says Cudjoe, new opportunities beckon thanks to the African Continental Free Trade Agreement. A total of 49 of 55 African countries have become signatories and Accra was chosen to site the secretariat.13 Implementation is sure to be a challenge, but the deal is a significant step toward a future of free trade within the continent.
“Countries that are reforming faster will be able to take most advantage,” says Cudjoe. “The opportunities are staring us in the face.”