Interview: Paul Hinks

How can international firms best leverage the opportunities offered by the Power Africa initiative?

PAUL HINKS: Firms should first register themselves with USAID as a Power Africa partner, which requires them to map out potential investments or contributions to electrification across the continent for a five-year period. Power Africa is not just about the US government providing financing for projects – it’s about providing support for the private sector and creating an enabling environment so that the private sector is able to invest. This will lead to many new private and public sector projects. Interested companies may also consider joining the Power Africa working group at the Corporate Council on Africa which tracks Power Africa projects and energy opportunities in Africa. The old approach to power infrastructure development is not going to deliver the results Africans need. Only a paradigm shift in attitude and approach will see Africans with the power they have been denied for decades – this will define the future of Power Africa. We must find ways to reduce timelines so that more generation capacity is available and more transmission and distribution infrastructure is built.

What is required to bring more independent power projects (IPPs) onto the grid?

HINKS: More gas processing must be developed, more gas pipelines are needed and the transmission network needs urgent, major expansion. Nigeria is a gasproducing country, exporting 22m tonnes per year of liquefied natural gas. This translates to around 22,000 MW of potential power that is being shipped out of the country. In addition, there is stranded gas and flared gas and a large amount that has not yet been developed. The government took a major step in 2014 by increasing the domestic price of gas. This is supposed to encourage gas producers to invest in further exploration and extraction. In terms of cost, the country is moving towards export parity. The next piece of the puzzle is the improvement of gas supply agreements. We need to get to the point where there are serious penalties for non-production and non-delivery. This will have to take effect before the industry is financially viable. To date, the Nigerian Bulk Electricity Trader has only signed one new IPP, with the power developer Azura.

What are the greatest challenges with the takeover of poorly maintained power-generating assets?

HINKS: The challenge is the ability of the generators and distributors to provide large-scale equity and debt for the rehabilitation work. The acquisition of the assets was generally financed by the Nigerian commercial banking sector but Nigeria needs international development finance institutions (DFIs), export credit agencies (ECAs) and private equity to get involved so that the owners of these assets can push forward with development. Many have adopted a wait-and-see approach and some are expecting some sort of shakeout, with deals coming onto the table if assets become distressed. This approach is not helping Nigeria.

How important are investment guarantees?

HINKS: One major obstacle to getting IPPs financed is that the DFIs, the ECAs and most international commercial banks require African governments to provide sovereign guarantees to back commitments made within power purchase agreements (PPAs). However, the IMF discourages governments from issuing such guarantees for private sector investments.

Investments will be limited until African power utilities have a strong payment track record, allowing DFIs to provide funding without guarantees. This may well be the single biggest obstacle to powering Africa. When Nigeria builds a track record as a trusted counter party, the need for guarantees will be obviated. As privatisation is new, many developers and most financial institutions will require sovereign guarantees or another instrument that will provide adequate security. Nigeria is not prepared to issue sovereign guarantees and they are developing other ways of satisfying lenders, such as the inclusion of put and call options in PPAs.