3_evaluation 3_investment Opportunity in the Power Sector in Africa

Exploring Investment Opportunities

Exploring investment opportunities for the power sector in emerging economies

Purbashish Ganguly, Karanvir S. Sidana, Spreha Kanika, Siddhi Agarwal, Dheer Vora, Aseem Rohatgi

ABSTRACT

The emerging economies especially the African continent offer great opportunities for investment to target high profits. The GDP growths of these countries have been twice or even thrice of global GDP growth. We are looking for investments opportunities in the power sector in African countries for our client. The African continent has a major demand-supply gap in the power sector. With the discovery of new natural resources almost every day, the African countries have a great potential for an industrial boom. After studying the macro-economic environment, the business laws & policies and banking regulations of the African countries we have Ethiopia, Tanzania, Ghana, Zambia, Namibia, Kenya, Mozambique and Nigeria suitable for investing in the power sector.

KEY WORDS: Emerging economies, Africa, power sector, investment, GDP, natural resources, macro-economic framework, bank lending rate, investor friendly policy, power transmission efficiency, demand, supply, electrification.

INTRODUCTION

“An emerging market economy (EME) is defined as an economy with low to middle per capita income.” (Antoine W. Van Agtmael, World Bank) For the current 2015 fiscal year, low-income economies are defined as those with a GNI per capita per annum, calculated using the World Bank Atlas method, of $1,045 or less in 2013; middle-income economies are those with an annual GNI per capita of more than $1,045 but less than $12,746.

Such countries constitute approximately 80% of the global population, and represent about 20% of the world's economies. The Global GDP growth in 2017 will be around 3.5-4% (International Monetary Fund). By 2017, the emerging economies will contribute more than 55% to the global growth compared to only 35% in 2000 (Global Economic Watch 2013, PWC).

Our client, who is primarily in infrastructure business, is considering investing in the power

sector of African countries because it feels that the growth in the Indian construction and civil infrastructure is stagnating. Since the Indian power sector is already occupied by 30 players and is dominated by players like NTPC Ltd, Power Grid, NHPC, Tata Power (RNCOS, 2013), they are looking to invest in African countries in search of higher returns.According to West’s report on African bio-resources 'exploited, Africa has a large quantity of natural resources including oil, diamonds, gold, iron, cobalt, uranium, copper, bauxite, silver and petroleum. Extraction and processing of these mineral-ores will drive further the commercial demand for energy (RNCOS, 2013).

THE CONTEXT

According to report “Prospects to the African power sector” by IRENA, Africa currently has an installed capacity of 147GW, comparable to the capacity China installs in one to two years. The

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average per capita electricity consumption in sub-Saharan Africa (excluding South Africa) is just 153 kWh per year which is one-fourth of the consumption in India and is just 6% of the global average. According to the same report, around 600 million people in African continent lack access to electricity and blackouts occur daily in many African countries. Thus many countries depend upon the expensive diesel power generation for their electricity demands which costs these countries 1%-5% of their GDP annually. All these factors make Africa highly attractive for investment in power sector.

According to Africa Growth Initiative, the continent is extremely rich in minerals, energy resources and uncultivated arable land. The surprising part here is that most of the land has been unutilized and untouched. Less than 50% of the land has been surveyed and it is already being speculated that Africa contains more than half the world’s gold, more than 40% of its platinum and vast deposits of copper, diamonds and iron ore. It can be inferred that deposits of higher gold and other valuable minerals could lead to more industries being set up and that will lead to higher power requirement (Foresight Africa, 2013).

Africa continues to become more open and democratic. Since 1991, peaceful transitions of political power have occurred in more than 30 instances in sub-Saharan Africa. This would lead to better government policies which will make the inflow of investment from foreign countries stable (The African Competitiveness Report 2013, World Economic Forum).

Also, almost 40% of the African population is under the age of 18 and that promises to be an extremely big and productive working population. As these younger and more educated people enter the workforce, consumer expenditures in sub-Saharan Africa are projected to rise from $600 billion in 2010 to

nearly $1 trillion in 2020. This will further push the demand for power.

Africa has probably the highest growth potential among all the continents. The IMF predicts that out of the ten fastest growing economies from 2011-2015, seven of them will be in sub-Saharan Africa and expects Africa to take from Asia the title of the world’s fastest growing region.

APPROACH TO THE PROBLEM

Examining Demand and supply in Power IndustryThe demand and supply trend in the power industry will be addressed with the help of research journals (Rosnes and Vennemo 2012) that would assist in investigating the gap and thus realising opportunity in the African market

Investment climate and ease of doing businessIt is vital to understand the business environment of nation before deciding on investment. The approach would use academic journals (Eberhard and Gratwick 2011) and to compare investment scenarios in different countries of Africa

Current Macroeconomic Environment Assessing current macroeconomic scenario through available reports (Investment Climate in Africa program – Comparative Report ) and published articles (The role of central banks in macroeconomic and financial stability, BIS paper) in different nations of Africa so as narrow down the research to the countries that can reap the maximum profit for power sector.

Evaluating future growth and its impact on power sector The evaluation would be done by referring available research journals (Chete, Adeoti, Adeyinka, and Ogundele 2014) and articles

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(Economic Report on Africa - Making the Most of Africa’s Commodities: Industrializing for Growth, Jobs and Economic Transformation 2013) so as to shortlist the countries with high growth potential and the effect of such growth on power sector

LITERATURE REVIEW

Examining Demand and supply in Power Industry

Demand side analysis

There are broadly three trends which should contribute to increasing demand for power in Africa: growing population, rapid urbanization, high GDP growth rate.

The population of Africa is growing fast as opposed to world growth rate of 1.8%. This is accompanied by rising per capita income and rapid urbanization. (2.3% IRENA report 2013) It is projected that the African population will grow to 2-3 billion by 2050 from 1.051 billion in 2010. The urbanisation trends currently show a wide range from as high as 50% in Nigeria to 18% in Ethiopia. In some North African countries it is projected as high as 70%. It is projected to increase by 20 percent points by 2050. Almost 66% of the population will then live in cities (See Table 1) Today 34% of the population lives in urban areas and the rest are still rural. African countries have been growing at around 4% on average and are expected to grow at around 6 times by 2050.( UN Population Division 2009)

The model by Rosnes O. & Vernnemo H. geographically divides the African continent into 4 power pools:

Southern Africa Power Pool(SAPP) consisting of Democratic Republic of the Congo (DRC), , Mozambique, Malawi, Namibia, South Africa, Angola, Zambia ,Zimbabwe.

The Central Africa Power Pool (CAPP) consisting of Cameroon, the Central African Republic, Chad, the Republic of the Congo (Br), Equatorial Guinea and Gabon.

The East Africa Power Pool (EAPP) consists of Burundi, Djibouti, Egypt, Ethiopia, Kenya, Rwanda, Sudan, Tanzania and Uganda.

The Western Africa Power Pool (WAPP) consisting of Benin, Burkina Faso, Côte d'Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo.

Using the econometric model by Khanna and Rao 2009, we arrive at the conjecture that urbanization and per capita income are important factors driving demand. The coefficient on urbanization is highly statistically significant. (See Table 2)

Checking on individual countries we find that the need for electricity is huge in Africa as there are countries whose 90 plus percent of population go without consuming electricity. (See Table 3)

We look at the existing production and consumption patterns of power and try and analyze supply gaps in these countries. (CIA World FactBook)

Looking specifically at Ethiopia’s refined petroleum sector, a gap exists in terms of consumption and production. It does not produce any refined petroleum, yet imports 42,500 bbl/day (2010 est) Tanzania shows a similar consumption production gap in the electricity sector. Production is at 4.302 billion kWh (2010 est.), 3.403 billion kWh (2010 est.) is consumed and 50 million kWh (2010 est.) is imported. Also with regards to refined petroleum it shows a

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similar trend. It doesn’t produce refined petroleum, consumes about 43,310 bbl/day (2011 est.) and imports 30,750 bbl/day (2010) implying a demand supply gap.

If we look at Ghana, we see that it’s mainly an oil producing economy. Oil projects are being developed and are expected to come on line in a few years. Estimated oil reserves have increased to almost 700 million barrels and Ghana’s growing oil industry is expected to boost economic growth. Even this is a crude oil exporter but import dependent for refined petroleum products.

In Zambia, production of electricity stands at 11.19 billion kWh (2010) while consumption is at 7.96 billion kWh (2010).It imports 23 million kWh (2011) of electricity while it is exporting 578 million kWh (2010). As regards crude oil, it produces 174.6 bbl/day (2012) and imports 12,500 bbl/day (2010 est.). Namibia is another country relying on imports for electricity generation. It produces 1.331 billion kWh (2013), consumes 4.238 billion kWh (2013), exports 89 million kWh (2013) and imports about 2.907 billion kWh (2013).

There is much speculation today that urban economies in sub-Saharan Africa are greatly improving and that the region may be on the brink of an upsurge in economic development. In terms of urbanization some economies that show positive signs of urbanization in terms of growth in urbanization are Burkina Faso, Tanzania, Cameroon, Rwanda, Ghana, Tanzania, Zimbabwe, Democratic republic of Congo, Angola and Kenya (Potts 2013).

As far as per capita GDP in terms of purchasing power parity we see that which countries are performing well (See Appendix Table 4) (CIA World Fact Book, 2013).

Hence these factors give a fair idea of the demand side factors affecting the African economies.

Investment climate and ease of doing business

Two third of additional capacity needed in Sub-Saharan Africa (SSA) by 2030 is yet to be built (IRENA, 2012). The World Bank estimates that between $120 billion and $160 billion needs to be invested each year to bring energy access to everyone in sub-Saharan Africa by 2030.

To satisfy this increasing demand, the African countries have either the conventional sources of energy (natural resources like coal, petroleum etc.) or the unconventional sources (i.e. renewable sources like wind, solar etc).

Among alternative sources hydropower has lowest cost, next is onshore wind, biomass. Solar is currently more expensive, but it has a huge potential and costs are rapidly falling.( Appendix Table 5)

According to IRENA, 2012, between 2008 and 2030, renewable approach will cost around USD 700 billion more as compared to the non-renewable. But, in the long run the cost will be 1 trillion lower than the cost of non-renewable sources, hence strong investments are needed in the short run. Thus many small countries could leapfrog directly into renewable based system if Public-Private Partnerships (PPPs) and Independent Power Projects (IPPs) are supported by suitable policies.

Factors favoring investment in SSA (IRENA, 2013):1) English language skills (official in many Sub-Saharan countries)

2) Improving literacy and education, availability of splendid resources and cheaper labor force

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3) Around 90 million people with household incomes exceeding $5,000, meaning that they can direct more than half of their income towards discretionary spending rather than necessities. This number could reach a projected 128 million by 2020.

When it comes to foreign direct investment (FDI) in Sub-Saharan Africa (SSA), the common perception is that FDI is largely driven by natural resources and market size. The three largest recipients of FDI are Angola, Nigeria and South Africa. 3 points to be interpreted (Asiedu, 2013).

First, it suggests that FDI in the region is mainly determined by an uncontrollable factor, and natural resource-poor countries or small countries will attract very little or no FDI, regardless of the policies the country pursues.

Second, the countries in SSA are small in terms of income—23 out of the 47 countries in the region have a GDP of less than US $3 billion

Third, in resource-rich countries, FDIs are concentrated in natural resources and investments in such industries tend not to generate the positive spillovers (e.g. technological transfers, employment, creation) that are often associated with FDI.

According to the same report, however, a good infrastructure, an educated labor force, macroeconomic overall stability, openness to FDI, an efficient legal system, less corruption and political stability also promote FDIs. A benchmark specification tells us that a decline in corruption from the level of Nigeria to that of South Africa has the same positive effect on FDI as increasing the share of fuels and minerals in total exports by about 34.84 per cent.

Country level factors affecting the Independent Power Plant Market

Several elements have contributed to the success of IPP projects in SSA (Eberhard et al., 2013) like a favorable investment climate, new policy frameworks and regulation, the linking of planning, procurement, and contracting and low-cost fuel and secure fuel contracts.

Standard Bank Group is of the opinion that in order to facilitate greater investment from the private sector, governments on the continent need to address five key areas (Standard Bank Report, 2012), some of which we have used to rank/compare prospective countries in SSA:-

1) The development of an integrated power policy

This is a combination of various factors like funding, partnering, pricing and taxing the power sector. Individual parameters are analyzed in the following segments.

2) Creating an investment-friendly environment:

Based on investor friendly government policies, world ranking of top SSA countries compiled in Table 6 (see appendix), suggests Ghana, Mozambique and Nigeria to be most investor friendly nations. Factors considered are extent of disclosure, investor protection, extent of director liability, ease of shareholder suits (World Bank Report 2013).

3) Executing a bankable independent power procurement program:

Improper Power Purchase Agreements (PPAs) deter companies from investing and getting funds. Thus, they require support from the economy’s financial sector. In many of the sub-Saharan African countries, central banks still lack the necessary autonomy- financial sectors are thin and have difficulty in mobilizing domestic savings and attracting foreign private

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capital; banking institutions are fragile; and intermediation is inadequate. So, steps should be taken to (Basu et al., 2011) ensure that central banks are independent and fully accountable, deepen and broaden financial markets, establish or strengthen the institutions responsible for the prudential regulation and supervision of banks, complete the rehabilitation of weak commercial banks and improve on loan recovery and open the banking sectors to healthy competition and inculcate best practices

As per the relative ranking based on lending rates (World Bank Report, 2013, Table 7 in appendix ), Namibia, Zambia and Mozambique are the top three countries with relatively lower cost of capital.

4) Suitable regulations:

As per the World Bank Report, 2013, Namibia, Malawi and Ghana figure in the top three sub Saharan countries to offer business friendly tax laws and regulations. (Appendix, Table 8). Factors include complexities of obtaining licenses, permits and obtrusive tax rates.

5) Development of a reliable regional distribution network:

Based on relative ranking of countries on efficiency (power transmission losses), (World Bank Report, 2013, Table 9, see appendix), Nigeria, Ethiopia and Angola lead the list of countries with relatively efficient power transmission network while Ghana, Zambia and Namibia suffer large losses in power transmission itself.

Current Macroeconomic Climate

Economic prospects of African countries depend largely on domestic and global factors, which are highly uncertain. Continued weakness in global economy is one of the downside risks and the prominent channels of transmission of weaker global growth would be depressed commodity

export earnings, decrease in export volumes and tourism receipts, reduced FDI inflows, worker’s remittances and lowered official development assistance. A significant transmission channel is trade and the deepening of debt crisis in Europe and the political instability due to tensions between Russia and the Europe along with the weak global growth can threaten to interrupt the stable remittances, FDI and ODA flows. (www.africaneconomicoutlook.org).

The evaluation criteria for the presence of a stable and sound environment yet growing investment climate will involve taking into consideration macroeconomic indicators like Government fiscal budget and the general debt levels of government, gross national savings, leading and lagging economic indicators such as construction permits, rental leases and inflation, unemployment and the access to developed domestic debt markets and strong financial systems which can otherwise destabilize a economy with sound macroeconomic fundamentals. (The role of central banks in macroeconomic and financial stability, BIS paper 76)

Continuing forward by dividing African continent into four power pools as mentioned before (Rosnes O. & Vernnemo H.) we see that the North African countries like Libya, Tunisia, and Algeria which have a significant exposure to European markets and relatively high shares of total exports in GDP are particularly exposed to the weakness of European economy.

The combined GDP growth rate of Western African region has been projected to grow at 7.4% in 2014 and has been consistently higher since last four years, as compared to Central and Eastern African countries whose combined GDP has picked up due to increased consumption, rise in oil & natural gas projects and is projected at around 5.5% while the GDP growth rate for Northern and Southern Africa is projected below 4.5%. This suggests that the Western African

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countries have sound macroeconomic fundamentals along with rich deposits of oil and minerals as compared to the Eastern and Central countries. The top 5 countries in terms of GDP growth rate were Libya, Sierra Leone, Chad, Congo Republic and Ghana. (Regional Economic Outlook, Sub Saharan Africa).

The fiscal balances as a percentage of GDP are projected to be in surplus for Western African countries while for the rest of the African regions fiscal balances are expected to be in deficit with North African countries accumulating largest fiscal deficits in the continent. On the contrary, current account balance (as percentage of GDP) for these North African countries is positive and projected to be at 3.1 in 2014 with East African countries like Ethiopia, Zimbabwe, Mozambique and Sudan having the largest deficit levels of close to -8.7 (Investment Climate in Africa program – Comparative Report). Risks of currency volatility and sovereign defaults are high in these countries.

High consumer price levels (percent change) for countries like Ghana (11.1), Angola (8.8), Malawi (27.1), and Guinea (12) will hamper sustainability of business. Risks for countries that have depended on international capital flows to compensate for high current account deficit levels and primary deficit levels Ghana and Zambia are high due to risk of sudden capital flow reversals. Countries like Ghana and Zambia are extremely vulnerable to external shocks (African Economic Outlook, 2014).

The African economy continues to show high degree of resilience against turbulences in world economy. (OECD, African Development Bank, United Nations Development Programme – 2013). The countries with strong linkages to world economy, especially the oil-producing counties are relatively more vulnerable and the growth momentum has eased in countries with political and social tensions. Prudent selection

with keeping all these factors in mind is critical in selection of preferred investment destination.

Evaluating future growth and its impact on power sector

The African continent is endowed with many natural resources which can be used to promote industrial growth in agricultural, industry and service sectors. Africa has about 12 per cent of the world’s oil reserves, 42 per cent of its gold, 80–90 per cent of chromium and platinum group metals and 60 per cent of arable land in addition to vast timber resources (Economic Report on Africa, 2013).

With such abundance and the rising global demand for raw materials, the African governments are forging new partnerships and boosting infrastructure investments.

The demand for electricity in Ghana is predicted to exceed 5,000MW by 2016, primarily as a result of the Ministry of Energy’s objective of becoming a major exporter of electricity into the West Africa Power Pool, coupled with an increase in demand domestically, as the government seeks to increase the electrification rate to 80 per cent by 2016. Around 65 per cent of Ghana’s installed capacity is currently provided by the large-scale Akosombo and Kpong hydropower projects. Biomass also makes a significant contribution to the energy mix. The government is targeting to increase the contribution of wind and solar power to 10 per cent of the country’s capacity by 2020 and has recently enacted the Renewable Energy Law to support this objective. The Government recognises the importance of IPPs to the achievement of these international and domestic expansion objectives. (Norton Rose Fulbright, 2013).

Kenya is the 7th most populated country in Africa with an estimated population of 44 million and an electrification rate of only 16 per cent. The

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total installed generating capacity in Kenya is 1,429MW, but the peak load is projected to grow to about 2,500MW by 2015 and 15,000MW by 2030. To meet this demand, Kenya’s Vision 2030 requires that installed capacity increases gradually to 15,000MW by 2030 (Norton Rose Fulbright, 2013). After the discovery of commercial oil deposits in March 2012, the IMF believes that Kenya will begin producing commercial quantities of oil in 6-7 years. On Nov. 28, 2013 President Uhuru Kenyatta inaugurated the commencement of construction of a rail project that will link Kenya's coast town of Mombasa to Kampala (Uganda), Kigali (Rwanda), and Juba (South Sudan). With an average GDP growth rate of 6.2% between 2012 & 2017 and the positive growth trajectory, the demand for electricity is going to drastically increase in the coming years (Africa Infrastructure Investment, PWC, 2013).

Mozambique has seen an average annual growth rate of 7% and is expected to grow at similar or higher rates in the coming years as substantial coal and gas reserves are developed. In 2012, four of the five largest oil and gas discoveries were made offshore Mozambique. Its estimated gas reserves of 160TCF mean that it has the fourth largest gas reserves in the world. Various petroleum companies like Anadarko, Mitsui, Bharat Petro Resources Limited, Videocon, PTT and the Mozambican national oil company Empresa Nacional de Hidrocarbonetos (ENH), China’s CNPC, GalpEnergia and KOGAS are developing these off-shores. According to estimates, they will be able to export LNG by 2018. Power projects worth an anticipated US$12 billion are understood to be in the pipeline to support these projects. The electrification rate in Mozambique is approximately 12 per cent, which is well below the average for Sub- Saharan Africa (30.5% according to World Energy Outlook 2011) indicating that substantial growth in electrification is possible. The Government of

Mozambique is targeting 20 per cent electrification by 2020, which will still fall well short of the regional average (Norton Rose Fulbright, 2013).

Namibia currently has a peak demand of 511MW, of which 64 per cent is met by imported power, predominantly from the Southern African Power Pool (SAPP). Mining accounts for 8% of Namibia’s GDP and 50% forex earnings (CIA World Factbook, 2014). The ground-breaking ceremony for the Swakop Uranium Husab mine was held on 18 April 2013, which is set to become the world’s second largest producer of uranium oxide. The construction of the mine remains on track and is scheduled to commence production in early 2016 with ramp up to full production in 2017. Further inaugurations of the Otjikoto gold mine on 26 April 2013 and Tschudi copper mine on 8 November promise a great future for the Namibian Mining Industry (Chambers of Mine, 2014). They development of the mining industry puts an added pressure on the underdeveloped power sector of Namibia. The increasing demand of the Namibian mining sector forecasts a power deficit of 430MW by 2015(Norton Rose Fulbright, 2013).

Nigeria is world’s 10th largest producer of oil. The sector contributed 14.8 and 13.8 percent to GDP in 2011 and 2012, respectively. The largest oil producers are Shell Petroleum Development Company Limited, Mobil Producing Nigeria Unlimited, Chevron Nigeria Limited, and Texaco Overseas Nigeria Petroleum Company Unlimited (Industrial development and growth in Nigeria, WIDER Working Paper, 2014/019). The Nigerian Association of Petroleum researchers say that the country has the capacity to meet the 40 billion barrels oil reserves as projected by the Federal Government. For this purpose the Federal Government of Nigeria aims to increase generating capacity of the country to 40GW by 2020 (Norton Rose Fulbright, 2013).

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The availability of a secure and reliable gas supply is a key ingredient in the successful development of Tanzania’s power sector. Exploratory gas drilling in Tanzania has been highly successful. Recoverable natural gas reserves are estimated to be 33 trillion cubic feet, with gas revenues that are estimated to be US$70bn as a base case. Current predictions are that Tanzania could become the world’s third largest gas exporter. BG Group, in partnership with Ophir Energy, has discovered more than 7 trillion cubic feet in recoverable reserves from three offshore blocks. Statoil in partnership with Exxon-Mobil has so far discovered 9 trillion cubic feet. Statoil has announced plans to work with BG on the development of a US$14 billion liquefied natural gas facility, to facilitate the export of LNG to the Asian markets. The power requirement for these projects is estimated to be around 630 MW. Such developments in the gas industry will put a huge pressure on the inefficient power sector of Tanzania which has an installed capacity of just 1041 MW and where only 10.5% of the population has access to electricity (Norton Rose Fulbright, 2013). The leather industry of Ethiopia is currently witnessing a boom due to its abundant and available raw material, highly disciplined work forces and cheap prices. Ethiopia has the largest livestock production in Africa and the 10th largest in the world. Ethiopia currently produces 2.7 million hides, 8.1 million sheepskins and 7.5 million goatskins annually. This advantage is further underlined by the fact that the costs of raw hides and skins constitute on average 55-60% of the production of semi-processed leather (Investing in Ethiopia: Leather and leather goods). UK based Pittard, who has been trading in Ethiopia since 1920, now has ambitious plans to grow its Ethiopian operations. At present its Addis Ababa-based factories and tannery to the south of the city employ about 1,200 locals, a

number expected to grow to about 5,000 within five years.

The development of new mines and the rapid growth of the Zambian economy after the year 2000 saw a 36% demand increase for power between 2001 and 2005. From 2005 to date, the demand growth has been in line with ZESCO’s 2006–16 projection of a further 100MW per annum. The power shortfall means that 26% of the country is now affected by load shedding at peak times and, to bridge the shortfall, Zambia relies on imports with 100MW of power coming from the South African grid. By the second week of February 2012, Zambia had already imported 100MW of power from Mozambique to offset the deficit. According to Hanson Sindowe, Chairman of Copperbelt Energy Corporation (a distributor of power to Zambia’s mining industry), the country will require an additional US$12 billion of electricity investment or 4,400 additional megawatts by 2030 (Zambian Country Guide, 2013).

DISCUSSION

In our literature review we looked at the African continent from a number of different perspectives like the investor friendly policies, business friendly tax laws, demand-supply gap, availability of natural resources, the macro-economic scenario and the future business potential.

When comparing the demand supply gap in the African continent, we compared the installed electricity capacity in various countries with the potential future demands. We looked at the existing production and consumption gaps and identified countries with shortage of crude oil, natural gas and lack of electricity (IRENA, 2013).

The availability of natural resources in the various African countries told us the potential of more industries being set up in those countries. As the industrial boom will occur the power consumption in these countries will naturally

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rise further widening the demand supply gap. This increasing gap will act as a motivator to set up more PPPs and IPPs (African Infrastructure Report, 2013).

Further we decided to compare the macro-economic scenario and the business & investor laws prevalent in various African countries. Lack of business policies and a weak legal framework always act as deterrent for foreign businesses. An integrated power policy, the bank lending rates, suitable regulations, an investor friendly environment and a reliable distribution network are certain parameters every major power player will look at before entering into any country (Norton Rose Fulbright, 2013).

Thus we decided to compare the various African countries on all these parameters and came up with a list of countries. The next section explains how and why we have selected these countries as a good option to invest in.

MANAGERIAL IMPLICATION

Our client is looking for investment opportunities in the power sector in the African continent.

The research conducted above has revealed some interesting possibilities for investment opportunities in Africa.

The shortage of refined petroleum along with the expanding leather industry, especially the expanding operations of UK based Pittard, is going to put a lot of pressure on Ethiopia’s power sector. Ethiopia is ranked 12 in Africa as per the investor friendly policies (World Bank Report, 2013). In terms of business friendly tax laws and regulations, it is ranked 7th and it is 2nd

in power transmission efficiency (World Bank Report, 2013).

With only 10.5% electrification and a booming natural gas industry, their electricity demand is only set to grow. Tanzania is currently the 3rd

largest exporter of oil in the world. Tanzania ranks 8th in the investor friendly policies and 10th

as per the business friendly tax laws and regulations. In terms of lending rate they are ranked 5th which is going to be a huge attraction for Industries which are going to be set up (World Bank Report, 2013).

Ghana’s established oil industry would have an electricity requirement of more than 5000MW by 2016 (Africa Infrastructure Investment, PWC, 2013). Ghana ranks 1st, 3rd and 7th in Africa in terms of investor friendly policy, business friendly tax laws and power transmission efficiency respectively (World Bank Report, 2013).

The discovery of new mines coupled with the shortage of crude oil has forced Zambia into becoming a major importer. In 2013, they imported 100MW from the South African grid (Africa Infrastructure Investment, PWC, 2013). Zambia would require an investment of US $2 billion (4400 MW) by 2030 (Norton Rose Fulbright, 2013). In terms of lending rates, Zambia is 2nd in the African continent. This would give a huge boost to their industrial development. They are ranked 4th in terms of business friendly regulations and 7th in terms of investor friendly policies. Zambia is ranked a little lower at the 10th position in power transmission efficiency (World Bank Report, 2013).

Namibia has a severe lack of electricity with 64% of it being imported (Africa Infrastructure Investment, PWC, 2013). The high mining activities are only going to put further pressure on their power sector. Ranked at 1st place in both lending rates and business friendly tax laws, Namibia can expect a huge industrial boom in the future (World Bank Report, 2013).

With only 16% electrification, Kenya has a huge shortage of electricity. The large oil deposits found in Kenya (Regional Economic Outlook, Sub

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Saharan Africa), will lead to commercial set ups and further affect the power deficit. Kenya has ranked 6th in both business friendly tax laws and power transmission efficiency. With a rank of 7 and 8 in investor friendly policy and lending rates respectively, Kenya will prove to be a promising option for industries to set up (World Bank Report, 2013).

With the discovery of 4-5 oil gas reserves (Norton Rose Fulbright, 2013), Mozambique now has the 4th largest gas reserve in the world. It has thus become a target for many power plants (Africa Infrastructure Investment, PWC, 2013). Ranked 2nd at investor friendly policy and 3rd at lending rates, Mozambique is attracting a number of foreign industries (Africa Infrastructure Investment, PWC, 2013).

Nigeria is currently the 10th largest producer of oil in the world with a 14% contribution to its GDP. Nigeria is expected to have a 40GW energy requirement of 2020 (Africa Infrastructure Investment, PWC, 2013). In terms of power transmission efficiency, Nigeria is ranked 1st in the sub Saharan countries. It is also well ranked at 3rd in terms of investor friendly policies and 6th in terms of lending rates. Its strong rank of 5 in business friendly tax laws makes it an interesting option for other companies Africa Infrastructure Investment, PWC, 2013).

RESEARCH LIMITATIONS

After our preliminary secondary research, we decided to look at the African continents from the four major perspectives discussed above. We chose these approaches as we felt they were the most relevant to the African continent.

We would suggest our client to also look at the African continent from the point of view of the investment required in various countries and the possible return on investment. We would also suggest our client to research on the time required to reach break-even point.

All these approaches would enable our client to make a more informed decision.

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Bhorat et al. (2014), Foresight Africa, Africa Growth Initiative

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APPENDIX

List of tables:

Table 1: PROJECTED SHARE OF URBAN POPULATION FOR DIFFERNT AFRICAN REGIONS.

Table 2

Source: O. Rosnes, H. Vennemo / Energy Economics (34) pg 1321

Table 3 SHARE OF POPULATION WITHOUT ELECTRICITY ACCESS( IN %)

Table 4 Per Capita GDP per annum of richest African countries (in US $)

Table 5: SUB SAHARAN AFRICAN COUNTRIES: AVERAGE COST OF POWER GENEARTION (US CENTS A kWh)

Table 4 (In USD)

Table 4: Per capita GDP per annum of richest African countries(in $US)

Table 5

Table 5: sub Saharan African countries: average cost of power generation(in US cents a kWh)

Table 6: Ranking of sub-Saharan countries on investor friendly policies as per World Bank Report, 2013.

Economy RankGhana 34Mozambique 52Nigeria 68Angola 80Malawi 80Namibia 80Zambia 80Kenya 98Tanzania 98Congo, Dem. Rep. 147Côte d'Ivoire 157Ethiopia 157Guinea 178

Table 7: Relative ranking of sub-Saharan counties based on lending rates as per World Bank Report, 2013.

Country Name Relative rank

Namibia 1Zambia 2Mozambique 3Angola 4Tanzania 5Nigeria 6Kenya 7Congo, Dem. Rep. 8Malawi 9

Table 8: Relative ranking of sub-Saharan countries on business friendly tax laws & regulations as per World Bank Report, 2013.

Economy Relative rankNamibia 1Malawi 2Ghana 3Zambia 4Nigeria 5Kenya 6Ethiopia 7Mozambique 8Guinea 9Tanzania 10Côte d'Ivoire 11Angola 12Congo, Dem. Rep. 13

Table 9: Relative ranks of sub-Saharan countries on power transmission efficiency as per World Bank Report, 2013.

Country Name Relative ranksNigeria 1Ethiopia 2Angola 3Congo, Dem. Rep. 4Mozambique 5Kenya 6Ghana 7Tanzania 8Cote d'Ivoire 9Zambia 10Namibia 11

3_evaluation 3_investment Opportunity in the Power Sector in Africa

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