April 2014

The US government set a goal in June 2013 to double access to electricity in sub-Saharan Africa within five years. More than nine months have passed. A panel of seven industry experts assessed how the effort is going at the 3rd annual Chadbourne emerging markets conference in Washington in late March.

The panelists are Megan Rapp, an investment officer with the Development Credit Authority, a bank within the US Agency for International Development, the coordinating agency for the Obama Power Africa Initiative, Astri Kimball, a senior advisor to the president and CEO of the Overseas Private Investment Corporation, John Schuster, vice president for project and structured finance at the US Export-Import Bank, Justin DeAngelis, a director of Denham Capital, a private equity fund and owner of three power development companies that are active in Africa — Endeavor Energy, which focuses on large thermal and hydro power, BioTherm Energy, which focuses on wind and solar, and Fotowatio Renewable Ventures, a solar company with Africa as one of its target regions — Lida Fitts, acting regional director for Africa for the US Trade and Development Agency, Jamie Fergusson, principal investment officer and global sector lead for renewable energy at the International Finance Corporation, and Paul Hinks, CEO of Symbion Power, an independent power developer focused on Africa, and chairman of the Corporate Council on Africa. The moderator is Ken Hansen with Chadbourne in Washington.



MR. HANSEN: I am guessing some of you have seen the TV show Revolution. There is a massive deterioration of the quality of modern life thanks to blockage of access to power. I expect all of you have had the pleasure of power outages of substantial length and, notwithstanding the fond memories of romantic candlelit dinners until the lights came back on, I suspect mostly it disrupted the quality of your life, professionally and personally.

World Bank data tells us that two thirds of the population of sub-Saharan Africa does not have access to reliable, affordable electricity. Most people with access live in urban areas. As you move out to the rural areas, the same database suggests that the percentage without access rises to 85%.

On the other hand, International Monetary Fund data from 2012 says that of the 10 fastest growing economies on the planet, seven are in sub-Saharan Africa. One could ask the question, if there was not such a broad-based power shortage in the continent, what would the growth rates be?

Roughly that question was being asked a little less than a year ago by the National Security Council staff in the White House, I understand by Mike Froman, then the relevant international economic person on the National Security Council staff. What came out of it was the announcement last June 30 by the president during his tour of sub-Saharan Africa of the Power Africa Initiative.

The initiative declared a number of things. As is the want of this administration, the targets are all to be met in five years, or the remaining term of this administration plus one. Within five years, we are to double the percentage of the population that has access to power in sub-Saharan Africa. We are going to do that initially with a focus on six countries: Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. Two more countries, Uganda and Mozambique, are pulled in by a footnote of sorts for purposes of developing their recently-discovered natural gas resources.

The tool to reach that goal is a partnering of $7 billion of US government money with $9 billion of private sector money to develop power projects: generation, transmission, distribution, whatever it is that is the bottleneck in sub-Saharan Africa to achieve the goal of doubling access in five years.

We are nine months in today, or about 15% of the way through the five years, so how are we doing?

That's the question I want this panel to answer ultimately, but tell us first how each of you is involved in Africa, Megan Rapp, starting with you. Each of you represents an agency or company engaged in the region.

US Efforts

MS. RAPP: USAID is playing the role of the secretariat in the Power Africa Initiative. Our lead coordinator is based in Nairobi, Kenya. USAID has a plethora of tools and programs that can be deployed.

There are five main tools that we are using for Power Africa, one of which is my shop, the Development Credit Authority.

First, we have Power Africa transaction advisors who are out in the field in all six Power Africa focus countries. Their job is to try to close transactions. They are people with significant power sector backgrounds. They are the boots on the ground for us.

Second, USAID has also been contributing money to various funds in Africa. Some are focused on geothermal, some are focused on legal support and some are focused on clean energy. These are Pan-African funds.

The third piece of support is we have ramped up our technical assistance in the six target countries. Technical assistance can range from embedding lawyers in the bulk trading company in Nigeria to providing technical staff to Tanesco in Tanzania.

The fourth piece is we have been making grants to help pay for clean energy projects for agriculture, which is a way to merge some of our development priorities in agriculture with the new priorities of power and energy.

The fifth piece is loan guarantees that are provided through my office. Loan guarantees are provided by a number of US government agencies, including by some of my colleagues here at the table, and USAID loan guarantees are handled by the Development Credit Authority or DCA.

The DCA portfolio is a little over $3 billion globally and about $300 million of that to date is in energy, so energy is currently a small part of what we typically do. Most existing loan guarantees are in aid of agriculture, health and general small and medium enterprise development. We are trying with the Power Africa Initiative to expand our portfolio in the power sector.

MR. HANSEN: Astri Kimball, what is OPIC's role in the Africa effort?

MS. KIMBALL: The Overseas Private Investment Corporation is the US government’s development finance institution. OPIC has committed $1.5 billion in support for energy projects across sub-Saharan Africa as part of President Obama’s Power Africa Initiative. The OPIC commitment is not limited to the six countries you mentioned at the start. The commitment is across our three business lines which are investment funds, political risk insurance and long-term loans or loan guarantees. The loans can go up to $250 million.

We expect to meet and possibly to exceed the $1.5 billion commitment. We have about $1.7 billion in projects in our pipeline currently at OPIC. Our biggest portfolio is in Ghana followed by Nigeria. OPIC has been active in Africa for more than 40 years. Our African portfolio there has grown five fold since 2007.

What is new about Power Africa is the interagency coordination to support US investors in the region.

Let me give four examples of the increasing level of activity we see, and how Power Africa has helped US investors in sub-Saharan Africa. First, we are seeing new investors go to Africa with whom we have worked with in other places, like Denham Capital and SunEdison. Another example is the growing number of transaction advisors that the US has embedded with African governments. In Tanzania, for example, the USAID transaction advisor worked very closely with the energy regulator to standardize power purchase agreements. We had a solar deal in Tanzania and were able to work with the transaction advisor and the Tanzanian government on behalf of our borrower to extend the term of the power purchase agreement to 25 years. This is exactly the kind of transaction driven-policy change that Power Africa envisions. This policy change will benefit all investors in Tanzania, and one specific OPIC deal helped get that change over the finish line.

Third, Ethiopia is a place where OPIC has not been doing business for a variety of reasons, but we are seeing it open to business. We are looking at two projects in Ethiopia, geothermal and energy efficiency, and USAID and the African Development Bank are both providing legal support to the government to help advance the projects. Finally, the projects cover an enormous range of activity: big, small, off-grid, mini-grid, on the grid.

The capital needs are immense. Our CEO and president, Elizabeth Littlefield, was just in Rwanda and Malawi where the combined grid capacity is 350 megawatts, which is a fifth of the normalized capacity of Rhode Island, the smallest US state. The needs are incredible, and we are here to work with US capital to meet them.

MR. HANSEN: John Schuster, has OPIC left US Export-Import Bank anything to do?

MR. SCHUSTER: When I raised my hand at the beginning, it was not to say hi, but to signal that we have $5 billion under the Power Africa Initiative. The reason why the president could dedicate so many Ex-Im resources to Power Africa is the bank has no country or project limits on how much that we can lend.

We have one project as large as $5 billion. We have one country in our portfolio where I think our outstanding exposure is approximately $10 billion. Indeed, there is the potential for Ex-Im Bank to do a lot. We are open for business in about 75% of the African continent.

We make direct loans and also provide 100% guarantees. We can offer stable, low-interest debt because the money can come directly from the US Treasury. The ability to offer full loan guarantees means we have the lowest spreads on our interest rates of any export credit agency in the world.

We have a total loan and guarantee portfolio in Africa of $60 billion. About two thirds of that is within the last four years. Obviously, we are lending lots of money. About $1 billion of that is in sub-Saharan Africa and most of that is in South Africa. We are keen to do more south of the Sahara.

MR. HANSEN: The fourth leg of the table of the US Trade and Development Agency. Lida Fitts, why are you here?

MS. FITTS: The US Trade Development Agency has worked in Africa for more than three decades and it has always worked in energy. As a consequence of Power Africa, we have really ramped up our activity.

TDA operates at a very early level of project planning. We prep projects so that they can be eligible for Ex-Im and OPIC financing. We help with feasibility studies and pilot projects, and then move projects to implementation through bankable documents. We look at potential regulatory reforms. We host reverse trade missions and conferences that bring people together to introduce the players and try to make deals happen.

Since Power Africa started, we went from about a third of our portfolio in energy to over two thirds in the first year, and the percentage may increase further. Our overall budget has increased 60% with the entire increase being devoted to energy projects across the subcontinent. We have expanded the number of countries where we work. We had prioritized Kenya, Nigeria, Ghana and South Africa, but under this initiative, we are looking not only at the focus countries under Power Africa, but also at interesting opportunities in places like Malawi, Angola and Namibia. We are looking in a lot of places where we had not really been open before.

Multilteral Lending Agencies

MR. HANSEN: Jamie Fergusson from the IFC, what is your role?

MR. FERGUSSON: Africa is our traditional stomping ground, and all elements of the World Bank Group are active in the power sector. Two parts of the World Bank called the IBRD and IDA make direct loans to governments for public sector projects, provide technical assistance to governments, promote regulatory reforms and offer political risk guarantees. The Multilateral Investment Guaranty Agency, or MIGA, is our insurance arm for political risk coverage. The IFC, for which I work, is focused purely on the private sector, providing direct loans, mezzanine debt and equity. Our business in the power sector has been growing rapidly. Last year, we committed $1.2 billion to power in Africa.

Although we are not part of the US government, we participate in regular coordination meetings with Power Africa, both at the program level and at the country level in the six selected countries that are the initial targets for Power Africa.

Working in Africa involves coordination at multiple levels: in addition to the US government and the World Bank Group, there is the African Development Bank, there are donors, there are other development finance institutions, and there are the recipient governments. The countries we are helping have limited ability to coordinate such efforts on their own.

MR. HANSEN: Let's move to the private sector. Justin DeAngelis, what are you doing in Africa, why are you doing it and is this flurry of public sector support relevant?

MR. DEANGELIS: Yes. Denham is a global private equity fund focused on mining, oil and gas and power generation. I focus on power generation.

We have three companies in Africa with a partial to exclusive focus on developing power generation assets in wind, solar, hydro, coal, gas — really all the different generation technologies except geothermal and nuclear.

There is a dire need for power in Africa. The cost of power is also quite high, so many different types of power generation can help relieve the need.

There are pluses and minuses to each form of generation. I can build a solar project in six months. It does not require 100 or 200 kilometers of transmission lines. I can build it close to load. But solar is a relatively intermittent resource that will not provide electricity steadily through the day and night. It is part of the solution but not the whole solution.

Africa is the region where we probably have the most focus. We are there to stay. It is a region with great opportunity. Our capital is going into the development of power projects, not just projects that are ready for financial close. We are taking early-stage risk to bring real projects together.

We are an $8 billion private equity fund. We have the capital to support both development and construction of power projects. When we go talk to agencies like OPIC, OPIC knows us and knows that we can actually deliver.

Developer Feedback

MR. HANSEN: Paul Hinks, what is your view of Power Africa as a private developer?

MR. HINKS: Power Africa is the public and private sectors combining resources to work together.

It is good not only for Africa, but also for America. There are projects with which we are involved where we are making the whole project come out of the United States, from the selection of consultants to do feasibility studies to engineering and procurement. We are buying steel for the first time for transmission towers for a project in Tanzania from US suppliers rather than India, China or Turkey where we would normally get our steel because there is the possibility of getting Ex-Im Bank support.

Power Africa is a fantastic initiative. It will take time to see results. The public and private sectors are strange bedfellows. People have had to get used to working together.

The governments in Africa are getting used to it as well. It takes time to ramp up. I spent almost the entire last three months in Africa. People at utilities ask me: what is Power Africa? How do we participate in it? Africa is used to the World Bank model where the bank lends $500 million to build a hydroelectric dam. The dam is put out for bid, and the job is won by a Chinese company.

The notion that the private sector will develop a project from a grassroots idea or from a utility master plan is alien to them.

Andy Herscowitz, who is the Power Africa coordinator in Nairobi and who everybody who is interested in Power Africa should get to know, is doing a fantastic job. All of the agencies are doing a fantastic job. There are six Power Africa transaction advisors, all high-quality men and women.

Power Africa is much more than a big wad of money. It is also about facilitating projects. Power Africa transaction advisors are working on the government side helping utilities deal with things like power purchase agreements. They have moved the Ethiopian utility from being anti-independent power producer to signing the first power purchase agreement.

It will take a few more months before we start to see tangible results coming out, but they are there. I know many of the projects that are underway. I think within this year you will see Power Africa become something really valuable.

MR. HANSEN: You are optimistic.

MR HINKS: Yes, but I am also realistic. It is not easy working in Africa, and it is not for the faint hearted, but given the amount of support that Power Africa is bringing to the table, if you know how to make that work and how to navigate your way around it, there are so many opportunities. Power Africa is literally creating the land of opportunity for the private sector.

US Ex-Im Reach

MR. HANSEN: That is a terrific transition. I want to ask everybody to identify a favorite challenge or two standing in the way of success.

John Schuster, let's start with you. Some of the challenges can be internal. The Ex-Im Bank by its statute can only do transactions with a reasonable assurance of repayment. There needs to be adequate credit quality. Unless you get a call from the Secretary of State, you are supposed to think about just commercial things. If you had projects in Africa that met the reasonable-assurance-of-repayment standard, you would have more than a $1 billion portfolio in sub-Saharan Africa. How will Power Africa change things?

MR. SCHUSTER: One thing I left out in terms of what the Ex-Im Bank does is that as an export credit agency, our financing is tied to US content. You need to have US turbines, steel or other equipment from the US.

It is pretty rare to get a call from the Secretary of State.

The biggest issue by far is underlying credit quality within Africa. There are many countries where, in spite of our being open for business, there are huge credit, debt and other types of issues. Only 8% of Africa is investment grade or a little below investment grade.

We follow the private sector. We will have the best chance of success where companies have sales and business opportunities that are supporting our exporters and where there are good developers looking at projects in some of those better-off countries. I hope people forgive us for cherry picking.

The other thing that must be done in countries like Nigeria, which has enormous wealth but also enormous problems, is the government must be very, very serious about reform to make things more creditworthy. The commitment must be from the country and not from us.

MR. HANSEN: I want to give you a little extra credit on one point. I had occasion to work at the Ex-Im Bank a few years ago for a few years, and I was fascinated when I arrived looking at the country limitation schedule, which is the chart of where Ex-Im is and is not open. There was not much doing in Africa. If you look at it today, there has been significant progress.

But I was confused that some of the biggest projects the bank was doing were in countries where the bank was closed. How is this possible? Well, if John Schuster's group, the project finance group, can structure a transaction in a way that meets the credit standards, then that deal gets done. There is a wonderful little footnote in the country limitations schedule that basically says for well-structured transactions that somehow overcome the otherwise unsatisfactory domestic environment, those deals can be done.

A power project with credit enhancement behind the power purchase agreement — I am just guessing — is the kind of thing where your division will be able to make some things happen.

MR. SCHUSTER: I really don't want to say that the moderator who used to be the general counsel of the bank has misinterpreted footnote 13.

MR. HANSEN: Which he drafted.

MR. SCHUSTER: And it actually used to state more of what you just said about a well-structured transaction —

MR. HANSEN: My God, they changed it?

MR. SCHUSTER: That is the way it was drafted. The way that it is drafted now is the project needs to externalize the risk from the country. For example, the project needs to sell something to another market with the cash going into another bank account so that we can rely on the credit of that other area. Oil and gas projects in a number of countries use this approach.

Power is hard. You can take projects if the electricity can be wheeled to another area that is a good market, so wheeling power into South Africa or Botswana would be a way of using footnote 13. It is challenging to do.

Biggest Challenges

MR. HANSEN: Astri Kimball, what do you see as the big challenges for OPIC?

MS. KIMBALL: There are two, one of which is externalized and the other has to do with our own tools.

The first is the country capacity. It is important to have a good solid energy strategy covering everything from cost-reflective tariffs to power purchase agreements, proper risk allocation, a strong independent regulator, consumers who can pay and a commitment from the government.

For example, we financed and provided insurance to a tri-fuel power plant in Togo, along with the IFC, that tripled that country's electric generating capacity. The president was personally involved in convening meetings and pushing the deal through.

We worked with the staff of an energy minister in one country who held onto the PPA for months and finally said they did not know what to do with it.

The internal challenge is that OPIC's products are ideal for power projects in Africa. We provide long-term debt. These are long-term projects. But we lack some tools as a lender: the ability to make grants and put in the earlier-stage capital. We are now collaborating closely with other agencies. There is a particular facility called ACEF, for African Clean Energy Facility, that combines our debt with USTDA's grant and early-stage project preparation support. With the help of this new partnership, we are supporting all kinds of projects that we could not have helped before.

One more point: like the Ex-Im bank, we are demand driven. Finding investors who plan to be in the investment for the long term is what we need. I think that is a constraint.

MR. HANSEN: Lida Fitts, you were just mentioned. What are your biggest challenges?

MS. FITTS: The excitement of this new initiative brings a lot of new players to the table. Those new players take time to ramp up, familiarize themselves with the politics, technologies that are available and the requirements for getting financing. Things have been a little slower than we would like.

This initiative is trying to address that in a couple ways. One is by having the transaction advisors on the ground. Having someone knowledgeable in the country to help project sponsors speeds things up. We have also tried to put some of our early investment into reverse trade missions that bring people to the US to look at best practices and how things are done here.

MR. HANSEN: Megan Rapp, what stands in the way of success?

MS. RAPP: I focus mostly on debt, so let me focus on constraints I have seen to raising debt for power projects. There are too few project finance specialty shops locally in African banks, so often they end up pulling in their experts from London or New York or the Middle East.

Local currency debt is extremely expensive. You have high collateral requirements across the board. The large banks in Nigeria and South Africa have power sector exposure limits and single borrower limits. These add up to a serious constraint on the supply side of debt. Then on the demand side, you have a project pipeline that is often opaque, fragmented and unpredictable. You often have an uncreditworthy offtaker. We could go on and on with the challenges.

However, the Power Africa Initiative is focused on problem solving. We can write reports and talk about all the problems, but the real impetus of doing this differently is using transactions as the driver in problem solving, and we are seeing that approach put to the test in most of the countries already.

MR. HANSEN: Jamie Fergusson, what do you see as the big challenges?

MR. FERGUSSON: As mentioned by others, creditworthy offtakers and suitable regulation are essential. There must be regulation to open up these markets to private capital. If there is no room or legal capacity for independent power producers, then the deal will be hard to structure

However, one issue not yet addressed by other speakers is the small scale of some of these markets, which is a serious challenge in itself. Go to West Africa: these countries are tiny, which means that the right incremental addition of generation for the expected growth in the demand is small. It is painful, but perhaps okay, to spend five years on negotiating a bankable structure for a 300-megawatt hydroelectric project that takes six years to build. Doing the same thing for a 10-megawatt PV project that takes three months to build does not make sense at all. So complexity and transaction costs are another challenge and regional interconnection and creation of larger markets is important.

What is really changing now in Africa is that, unlike a decade ago, there are a lot of developers. The developers need standardization, scale and a suitable regulatory environment.

Success Rate

MR. DEANGELIS: Our pipeline is huge, but probably only 5% of that pipeline can actually get done.

I think Power Africa can be helpful in two ways. One is by relieving some of the bureaucratic logjams in countries. For example, the energy minister wants to get a project done, but the incumbent utility disagrees and it has enough power to stop things from happening. It is a country where the lights are flickering, but the institutions have competing interests.

Two, these are emerging markets. The projects need help to become bankable. I will put my private capital into developing the projects, but there will have to be credit enhancements for projects to be bankable. It is a short-term need. It has to happen to get eventually to a functioning market.

There is a tremendous amount of capital ready to invest in good projects. There is an immense need. The key is the execution in the middle, and that is where we think our companies can help get things done and where Power Africa can help the most.

MR. HANSEN: That is a good segue to Paul Hinks, who is a bridge builder. You were present at the beginning of this initiative. You get the last word.

MR. HINKS: President Obama said, when he spoke in Tanzania about Power Africa, that there is a need for speed.

What I see as the biggest challenge to the success of Power Africa is getting the governments and the utilities to understand that concept of speed. People get fed up when they spend extended periods on the ground in Africa trying to develop a project that makes lots of sense and that the president says is fantastic, but then the permanent secretary or the commissioner of energy just cannot seem to get the various government agencies to sign the necessary pieces of paper.

The biggest challenge is making host governments react. Power Africa is already making a difference because of the transaction advisors who are on the ground and are getting to know the government officials.

I can only speak from my own experience working with the transaction advisers. We are in contact often. They go out of their way to help us. We could not ask for more.

MR. HANSEN: Are there questions from the audience?

MR. HOYT: Edward Hoyt with Nexant. What criteria were used for selecting the six countries that are the initial targets, and what is the process for adding new countries?

MS. RAPP: The selection of the countries was a long process. USAID is working in the power and energy sectors outside of those six countries. In addition to the six countries, we have a focus on Uganda and Mozambique. Outside of Power Africa, I see efforts in the energy sector in Zambia and South Africa. The six countries are not limited to USAID’s work in the energy space per se. We set an initial goal under the Power Africa Initiative of adding 10,000 megawatts and bringing electricity to 20 million households in those six countries, but that does not prevent us as USAID from working in other places.

What is the process for adding new countries? The focus is on trying to do things well in these six before we try to bring others on board, but if there are countries where you are interested in working, come talk to us.

MR. SCHUSTER: From the Ex-Im Bank's perspective, the six countries are not really our focus. Our focus is sub-Saharan Africa.


Currency Risk

MR. HUFFAKER: John Huffaker with OCI Solar Power. These countries have repatriation issues, political risk, expropriation risk and foreign currency risk. As a group of experts covering some of the riskiest countries in the world, do you have any suggestions for how to address these exposures?

MR. DEANGELIS: Focusing on currency, we are invested in South Africa whose currency is the rand. We put on hedges to mitigate the currency risk when we invested in some of the first renewable energy projects there a couple years ago. Those hedges are in the money right now, so it was a good move.

Outside of South Africa, many of the power contracts are in dollars, so there is convertibility risk from local currency to dollars, but explicit currency risk does not exist. There is implicit risk, and we have to watch that very carefully.

MR. SCHUSTER: The Ex-Im Bank has a foreign currency guarantee program. In South Africa where you could have rand lenders go out to a reasonable term, you can do a rand guarantee and that is something that I strongly recommend. Otherwise you can look at currency hedges in some of the markets. Currency exposure is one of the biggest single risks.

MR. HINKS: Word to the wise — do not take currency risk on any project in Africa. You do it dollar-based and the most you do is link the local currency to the dollar so that you are taking no financial exposure because you could wake up in the morning in any of these places and their currencies have been devalued and you are in deep trouble.

MR. HANSEN: As we all learned in Indonesia during the Asian financial crisis, the mere fact that you have revenues that are pegged to dollars means with devaluation, the deal the local government thought it struck just became radically more expensive and the likelihood that it will perform goes down. Pegging to the dollar does not really totally hedge your risk.

MR. HINKS: No, no. We actually do everything in dollars. We don't even take the local currency. Don't peg it to the dollar. We have a fixed exchange rate.

MR. HANSEN: My point is that if they promise to pay you in dollars —

MR. HINKS: No, they have to promise to pay the dollar amount.

MR. HANSEN: Correct, but the more expensive that becomes for them as the local currency depreciates, the greater the likelihood that they will welch on that deal.

MR. HINKS: Agreed.

MR. SCHUSTER: It is a sustainability issue. There is no real running away from foreign currency risk. I would definitely say that in almost all of these markets, you have to put the contracts in dollars. You cannot take foreign currency and expect to be able to exchange that currency elsewhere. We are not going to do that. But even if you have done what is required, you will still have the issue that Ken Hansen identified.

MR. BESTANI: I'm Bob Bestani from the Department of Energy. Mine is not so much a question as a comment. The president has asked Secretary Moniz of the Department of Energy to make his own trip to Africa this year. We are having a Pan-African energy ministerial meeting on June 3 and 4. We are inviting most if not all of the countries of Africa to come. We certainly want the private sector to come and be an integral part of the meetings as well. We are doing as much outreach as we can.