2019/105 Supported by K NKONW A A WELDEGDEG E OL N ONTOET E S ESREI R E ISE S F OFRO R P R&A C T HTEH E NEENREGRYG Y ETX ITCREA C T I V E S G L O B A L P R A C T I C E THE BOTTOM LINE Attracting Private Participation and Financing in the Private financing and private participation in service delivery will Power Sector in Sub-Saharan Africa: Findings from a be required if Sub-Saharan Africa is to achieve affordable, reliable, Survey of Investors and Financiers sustainable, and modern energy for all by 2030. To find out how What does it take to attract private sector interest in in the developing world limit the scope to take on more public debt to elicit private interest in power (Gaspar and others 2019). Sub-Saharan Africa’s power sector? sector investments in the region, It is widely understood that private solutions—defined here as we surveyed 51 private investors Sub-Saharan Africa faces investment needs in the private sector participation in service delivery or private financing— and financiers. The results indicate hundreds of billions to achieve affordable, reliable, can help fill the investment gap if structured to minimize sovereign that investors perceive three obligations and contingent liabilities to private investors (Eberhard sustainable, and modern energy for all by 2030 segments of the market—power and others 2016). What is less widely understood is what constitutes generation, off-grid electrification, Fifty-seven percent of the population—around 600 million people— suitable conditions for attracting private solutions, including the and mini-grids—as ready for lack access to electricity, and continuous power outages constrain relative importance of different risk factors related to the policy and private solutions. The results the economic performance of those already connected to the grid regulatory framework, the sector context, and the country context provide insights for governments (Cozzi and others 2018; Blimpo and Cosgrove-Davies 2019). Tax (Waissbein and others 2013). and development partners. revenue and development finance are unlikely to be sufficient to close this investment gap, and rising concerns about debt distress How was the survey structured? A risk factor–based framework was used to B  enedict Probst is a fellow at the  ni Balabanyan is lead energy A Cambridge Centre for Environment, Energy, specialist in the East Africa Unit of the structure the survey and Natural Resource Governance (C-EENRG), World Bank’s Energy and Extractives Following Waissbein and others (2013), we used a framework that University of Cambridge. Practice. distinguished 10 risk factors, grouped into three categories, to evaluate the attractiveness of the investment environment in the  ichard Holcroft is a consultant R  ndrew Tipping is a managing A at Economic Consulting Associates, consultant at Economic Consulting power sector (table 1). The first category—policy and regulatory risk London. Associates. factors—includes the ease of market entry and exit, the clarity of investment priorities, and the certainty of cash flows. The second category—risk factors related to the wider sector context—includes  oern Huenteler is a fellow at J  eter Robinson P the sectoral track record of private solutions, sectoral growth C-EENRG and an energy specialist in the is a director at Economic (demand and supply), and private investors’ own track record in the East Africa Unit of the World Bank’s Energy Consulting Associates. sector. The third category—country context risk factors—captures and Extractives Practice. the wider governance and political environment, the macroeconomic 2 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a Table 1. Risk factors affecting the attractiveness of the investment environment to the private sector Risk factor Explanation Risks related to licensing, procurement/tendering, and general legal framework affecting 1. Ease of market entry investors’ ability to enter the market regulatory risk Policy and factors Risks related to government plans for electrification, generation, and transmission How are different countries 2. Clarity of investment priorities expansion and required technical standards in Sub-Saharan Africa Risks related to recovery of costs and investment returns, ability to enforce payment 3. Certainty of cash flow perceived in terms of past discipline, and government support investment experience Risks related to past experiences/lack of track record in the power sector, such as no/few context risk factors 4. Sectoral track record IPPs and low investment volumes Power sector and prospects for new Risks related to market size and prospective demand growth in the power sector, such as investments? 5. Sectoral growth low electrification rates and population growth Risks related to a firm’s lack of experience in the power sector of a given country, such as 6. Firm’s personal track record and access no/limited access to relevant decision makers Risks related to high political instability, poor governance, poor rule of law, and poor 7. Governance and political risk institutions Country context Risks related to the country’s integration into the international economy, as indicated by risk factors 8. Business environment access to international financing Risks related to economic growth, currency convertibility and transferability, fiscal 9. Macroeconomic framework discipline, and sovereign debt rating Risks related to the efficiency, depth, and track record of local banking and capital 10. Banking and capital markets markets, such as access to local debt and equity finance framework, the business environment, and the state of domestic sample covered all segments of the power sector (power generation, banking and capital markets. transmission, distribution, and off-grid and mini-grid solutions) and The survey focused on three sets of questions: both international and local respondents (figure 1). To triangulate the • How important are different risks when evaluating a new power results, we complemented the survey with quantitative and qualita- sector investment? tive data collated from public and World Bank sources. • How ready are different segments of the power sector for private To ensure that participants did not provide responses on solutions? countries and market segments with which they were not familiar, • How are different countries in Sub-Saharan Africa perceived in we allowed them to choose which countries and segments to rate in terms of past investment experience and prospects for new terms of readiness for private sector participation. Doing so created investments? potential for selection bias (if, for example, participants provided their opinions only in the most extreme cases). Our results indicate that Fifty-one private investors and financiers responded to the the willingness of investors to rate a country was not correlated with survey, which was conducted between January and May 2019. The the country’s perceived or actual readiness, however. 3 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a Figure 1. Characteristics of survey respondents How important are different risks when evaluating a new power sector investment? a. Half of survey respondents are incorporated in Africa Middle East Unknown Investors and financiers assign the greatest Asia importance to policy and regulatory risks, followed Among country context 2 1 1 Americas by country context risks and risks related to the 5 risks, governance and wider power sector context political risks are the 51 survey 26 Africa The risk appraisals of investors and financiers are detailed in figure 2. most critical, followed participants Among power sector policy and regulatory risks, the certainty of Europe 16 by the general business cash flow (avg. 7.4) is the most important factor for respondents, environment and with ease of market entry (avg. 6.6) and clarity of investment priorities (avg. 6.5) following closely behind. Among power sector the macroeconomic context risks, respondents rank sectoral growth potential as the most framework. b. Participants are mainly active in generation and off/mini-grid important (avg. 4.7); neither investors’ own track record (avg. 3.7) nor the sectoral track record (avg. 3.6) rank as important. Among country Retail context risks, governance and political risks are the most critical Transmission 6 (avg. 6.7), followed by the general business environment (avg. 5.6) 12 and the macroeconomic framework (avg. 4.3). Risks related to 34 Generation banking and capital markets are not considered important (avg. 1.7), Distribution 16 51 survey possibly because many respondents rely solely on international participants sources of finance. This finding suggests that there is still a long way to go in developing local markets for infrastructure financing, which 25 24 Mini-grid Off-grid will be needed as the market matures and scales up. Several other key messages emerge when comparing subgroups of respondents: c. Most participants are equity investors • Financiers (debt providers) assign less weight to country context risks than sponsors (equity investors), possibly because lenders Financiers are more likely to recover their investments than equity investors 7 and are better able to ringfence their investments. • Domestic investors assign less weight to country context risks 51 than international investors, likely because they are less exposed survey to exchange rate–related risks and are better able to mitigate participants 44 Equity investors country-specific risks. Note: Investors may fall into more than one category, causing totals to exceed 51. 4 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a Figure 2. Relative importance of different categories of risk to survey respondents a. Relative importance of different risk factors The average investor assigns the greatest importance to policy and regulatory risks (avg. 6.8), followed by country context (avg. 4.6) and power sector context (avg. 4.0) Risk Importance to investors 1. Ease of market entry 6.6 regulatory Policy + 2. Clarity of investment priorities 6.5 avg. 6.8 3. Certainty of cash flow 7.4 Power sector 4. Sectoral track record 3.6 context 5. Sectoral growth 4.7 avg. 4.0 6. Firm’s personal track record and access 3.7 7. Governance and political risk 6.7 Country context 8. Business environment 5.6 avg. 4.6 9. Macroeconomic framework 4.3 10. Banking and capital markets 1.7 0 1 2 3 4 5 6 7 8 9 10 Importance of risk (0 = lowest, 10 highest) b. Perception of country-context risks, by type of investor c. Importance of wider power sector context d. Importance of clarity of investment priorities Sponsors (equity providers) assign more weight to International investors assign more weight to Grid investors assign more weight to the Off-grid investors assign more weight to clarity country-context risk than lenders (debt providers) country-context risk than domestic investors power-sector context than off-grid investors of investment priorities than grid investors Sponsors 5.3 International 5.4 Grid 6.2 Off-grid 7.8 Lenders 4.0 Domestic 3.8 Off-grid 2.8 Grid 5.1 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Importance of country-context risk Importance of country-context risk Importance of power-sector context Importance of clarity of investment priorities Note: Respondents were asked to rank the three categories and the risk factors within them. The results were converted to a 1–10 scale. 5 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a • Grid investors assign more weight to power sector context risks have been positive. When asked to evaluate previous investments, than off-grid investors, likely because off-grid investors are 42 percent of respondents evaluated their experiences in the less affected by grid-based risks, which drive the power sector power sector in Sub-Saharan Africa as positive, with just 15 percent context. reporting negative experiences (43 percent reported mixed experi- • Off-grid investors assign more weight to clarity of investment ence). Most respondents indicated past investment experience in On balance, investors’ and priorities than grid investors, possibly because off-grid investors’ the off-grid, mini-grid, and generation segments; only a few reported financiers’ experiences in business models may be substantially influenced by the expan- experiences in transmission, distribution, or retail supply. There was sion of the conventional grid. no substantial difference in the evaluation of different segments; the power sector in Sub- the largest share of positive assessments of past experiences were Saharan Africa have been How ready is Sub-Saharan Africa’s power sector in the retail supply (54 percent), transmission (50 percent), and positive. off-grid (49 percent) segments. (The number of responses for retail for private solutions? supply and transmission was limited, as only a few investors had The readiness of the power sector in Sub-Saharan had experience in these sectors, likely because of the low perceived Africa for private solutions was evaluated in two ways readiness of these market segments.) Looking forward, the results suggest that readiness for private We asked respondents to rate their past investment experience in sector solutions in the power sector differs substantially across different segments of the power sector and to share their percep- sector segments. Grid generation, off-grid, and mini-grids were rated tions of prospective investment readiness in the next three years as more ready for private participation than retail supply, distribution, (figure 3). The survey results suggest that, on average, investors’ and and transmission. financiers’ experiences in the power sector in Sub-Saharan Africa Figure 3. Readiness for private investment of different power sector segments in Sub-Saharan Africa a. Retrospective evaluation of investment experience b. Prospective perception of investment readiness Off-grid Generation Generation Off-grid Mixed Mini-grid Mini-grid Negative Positive Retail Retail Transmission Distribution Distribution Transmission -40 -20 0 20 40 60 -40 -20 0 20 40 Rated by 46 participants Rated by 51 participants 6 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a How does the private sector perceive different they ranked nine countries as “positive” on average: Kenya, Uganda, Rwanda, South Africa, Nigeria, Côte d’Ivoire, Zambia, Senegal, and countries in Sub-Saharan Africa? Mozambique (figure 4, panel b, and figure 5, panel b). Most of these Several countries in Sub-Saharan Africa attracted countries have seen substantial power sector reform efforts, often substantial private investment in their power sector over a decade or more, to provide adequate policy and regulatory Readiness for private over the past decade frameworks for investment. Others have compensated for insuffi- sector solutions in the cient progress on power sector reforms by ringfencing individual We asked investors to evaluate their experiences in countries in investments from the wider power sector policy and regulatory power sector differs which they had invested. Respondents report “positive” experiences framework (through sovereign guarantees and external credit substantially across sector in six countries: Kenya, Namibia, Nigeria, Senegal, South Africa, and enhancement from international financial institutions, for example). segments. Tanzania (figure 4, panel a, and figure 5, panel a). Guarantees and credit enhancement can mitigate risks during Many of the surveyed equity investors and financiers plan to periods of policy and regulatory transition, but they should not be invest in the region in the next three years. When asked about the seen as replacements for reforms. most attractive markets for investments over the next three years, Figure 4. Retrospective investment experience and prospective readiness in Sub-Saharan Africa a. Retrospective evaluation of investment experience b. Prospective perception of investment readiness Positive Somewhat positive Neutral Somewhat negative Negative No data 7 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a Figure 5. Respondents’ retrospective and prospective perceptions of investment experience in Sub-Saharan Africa’s power sector, by country a. Retrospective evaluation of investment experience b. Prospective perception of investment readiness Tanzania Kenya When asked about the South Africa Uganda Nigeria most attractive markets Rwanda Kenya South Africa for investments over the Senegal Nigeria Mixed Namibia Côte d'Ivoire next three years, investors Zambia Zambia Negative Uganda Senegal Positive and financiers ranked nine Rwanda Mozambique Ghana Ethiopia countries as “positive” on Togo Ghana Somalia Cameroon average: Kenya, Uganda, Mozambique Benin Namibia Rwanda, South Africa, Mauritius Malawi Mali Madagascar Nigeria, Côte d’Ivoire, Madagascar Sierra Leone Guinea Zambia, Senegal, and Ethiopia Gabon Togo Burkina Faso Mozambique. Zimbabwe Tanzania Mauritius South Sudan Guinea Sierra Leone Botswana Niger South Sudan Malawi Seychelles Côte d'Ivoire The Gambia Cameroon Lesotho Burundi Guinea-Bissau Benin Cape Verde Burkina Faso -10 -5 0 5 10 Réunion Djibouti Comoros Angola Western Sahara São Tomé and Principe Niger Liberia Equatorial Guinea Zimbabwe Sudan Mauritania Mali Eswatini Eritrea Congo, Rep. Chad Burundi Somalia Congo, Dem. Rep. Central African Rep. -20 -10 0 10 20 30 8 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a How well do the survey results correspond to What drives decisions by investors and financiers in data-based assessments? the power sector? The survey checked how well data-based Investors and financiers interested in the power assessments of countries’ readiness for investment sector in Sub-Saharan Africa assign more Guarantees and credit reflect investors’ and financiers’ risk perceptions importance to policy and regulatory risks than to enhancement can mitigate country context risks and risks related to the wider Figure 6 shows that respondents’ perceptions of countries’ readiness risks during periods of correlate well with their 2017 Regulatory Indicators for Sustainable power sector context, such as the track record of policy and regulatory Energy (RISE) scores (ESMAP 2018). Investors’ perceptions are private investment transition, but they worse than their RISE scores would suggest in Ghana, South Africa, and Zimbabwe and better than their RISE scores would suggest in For this reason, even in difficult country and sector contexts, policy should not be seen as makers can attract private participation by putting in place policy Madagascar, Mozambique, and Nigeria. But these countries are out- replacements for reforms. liers. Overall, the correlation between RISE scores and private sector and regulatory frameworks that make projects attractive for private perceptions are strong, with an R2 of 0.47 for a sample of 35 countries. solutions. The survey suggests that the average investor or financier asks three sets of key questions, in the following order: Figure 6. Correlation between survey respondents’ perceptions of readiness for investment in the power sector and RISE scores in Sub-Saharan Africa 80 South Africa R2 = 0.4741 70 Ghana 60 Kenya Côte d’Ivoire Cameroon Uganda RISE 2017 overall score 50 Rwanda Ethiopia Tanzania Benin Zimbabwe Burkina Zambia Togo 40 Faso Malawi Senegal Niger Guinea Sudan 30 DRC Angola Sierra Leone Nigeria Burundi Congo (Republic) Eritrea 20 Mali Madagascar Liberia Mozambique Central African Republic Mauritania Chad South Sudan 10 Somalia 0 -10 -5 0 5 10 15 20 25 Perceived readiness (net positive score) Source: ESMAP (2018) and survey results. 9 A tt r a c t i n g P r i v at e P a r t i c i pat i o n a n d F i n a n c i n g i n t h e P o w e r S e c t o r i n S u b - S a h a r a n A f r i c a • Certainty of cash flows: What are the conditions related to the Eberhard, Anton, Katharine Gratwick, Elvira Morella, and Pedro MAKE FURTHER recovery of costs and investment returns? How can investors Antmann. 2016. Independent Power Projects in Sub-Saharan CONNECTIONS enforce payment discipline of the off-taker or customer? What Africa: Lessons from Five Key Countries. Directions in kind of government support is provided to secure investors’ cash Development, Energy and Mining. Washington, DC: World Bank. Live Wire 2015/47. “Kenya: First http://hdl.handle.net/10986/23970. flows? Commercial Financing for Power Plants Made Possible through a • Conditions of market entry: What are the risks related to ESMAP (Energy Sector Management Assistance Program). 2018. Series of IDA Guarantees,” by Teuta licensing, procurement, and tendering? What is the general legal Policy Matters: Regulatory Indicators for Sustainable Energy. Kaçaniku and Karina Izaguirre-Bradley. framework affecting investors’ ability to enter the market? Washington, DC: World Bank. http://hdl.handle.net/10986/30970. Live Wire 2015/49. “Promoting Solar • Clarity of country’s investment priorities: What are the govern- Gaspar, Victor, David Amaglobeli, Mercedes Garcia-Escribano, Energy through Auctions: The Case ment’s plans for electrification, generation, transmission, and Delphine Prady, and Mauricio Soto. 2019. “Fiscal Policy and of Uganda,” by René Meyer, Bernard distribution expansion? What are the technical standards, and Development: Human, Social, and Physical Investment for the Tenenbaum, and Richard Hosier. how are they enforced in the market? SDGs.” Staff Discussion Note 19/03, International Monetary Live Wire 2015/52. “Private Sector Fund, Washington, DC. https://www.imf.org/en/Publications/ Participation in Transmission Systems: The survey underscores that, despite many challenges, Staff-Discussion-Notes/Issues/2019/01/18/Fiscal-Policy-and- Making It Work,” by Pedro E. Sanchez experiences with power sector investments in Sub-Saharan Africa Development-Human-Social-and-Physical-Investments-for-the- and Samuel Oguah. have been more positive than negative. Indeed, many respondents SDGs-46444. Live Wire 2017/71. “Mobilizing planned to invest in the region in the next three years. Waissbein, Oliver, Yannick Glemarec, Hande Bayraktar, and Tobias Risk Capital to Unlock Geothermal Respondents perceive three segments—power generation, Schmidt. 2013. “Derisking Renewable Energy Investment. Potential,” by Roberto La Rocca, Peter Johansen, Laura Berman, and Migara off-grid electrification, and mini-grids—as ready for private solu- A Framework to Support Policymakers in Selecting Public Jayawardena. tions in Sub-Saharan Africa. They rank the following countries as Instruments to Promote Renewable Energy Investment in the most attractive markets for investments over the next three Developing Countries.” U.S. Department of Energy, Office of Live Wire 2017/76. “Increasing the Potential of Concessions to Expand years: Kenya, Uganda, Rwanda, South Africa, Nigeria, Côte d’Ivoire, Scientific and Technical Information, Washington, DC. https:// Rural Electrification in Sub-Saharan Zambia, Senegal, and Mozambique. These results provide insights www.osti.gov/biblio/22090458. Africa,” by Richard Hosier, Morgan for governments and development partners aiming to attract more Bazilian, and Tatia Lemondzhava. private solutions to their power sectors. The authors thank Sudeshna Banerjee, Marcus Williams, Dana Rysankova, Jon Exel, Rahul Kitchlu, and Jan Kappen for their help in designing and implement- References ing the survey and Arnaud Braud and Vivien Foster for providing peer review Blimpo, Mousa, and Malcolm Cosgrove-Davies. 2019. Electricity comments on the draft of this Live Wire. Access in Sub-Saharan Africa: Uptake, Reliability, and Complementary Factors for Economic Impact. Washington, DC: World Bank. http://hdl.handle.net/10986/31333. Cozzi, Laura, Olivia Chen, Hannah Daly, and Aaron Koh. 2018. “Commentary: Population without Access to Electricity Falls below 1 Billion.” International Energy Agency, Paris. https://www. iea.org/newsroom/news/2018/october/population-without-ac- cess-to-electricity-falls-below-1-billion.html. 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