Africa's Time to Shine

Growing energy demand, regulatory and social reforms, and infrastructure investment have seen Africa become one of the world’s top energy investment destinations.

According to our recent Africa attractiveness survey, capital allocated to infrastructure projects reached more than US$700b by the end of 2012, with the power sector accounting for 24.9%, or US$176b, of this investment.

The survey revealed that those respondents already doing business on the continent cited “improving transport, power and logistics infrastructure” as the single biggest factor for dealing with and enhancing the ease of doing business.

Renewables in focus

The high growth in renewable energy development in the sub-Saharan region is a key target for private and foreign players attracted by long-term growth prospects in wind, solar and geothermal projects. Hydroelectric power generation offers vast and relatively untapped potential.

In 2012, South Africa secured the largest share of the region’s clean energy investment — US$5.7b — with Kenya and Morocco receiving US$2.9b between them.

Other countries such as Ghana are attracting investors through incentives such as feed-in tariff mechanisms and assurance of grid connection for renewable energy projects.

Seeking Local Partnerships

Partnerships are key to success in Africa. This was highlighted during Nigeria’s recent US$2.5b privatization process where local firms — in consortia with foreign players including Siemens, Manila Electric, Symbion Power and KEPCO — emerged as winners of most projects. As the country moves to privatize 10 gas-fired power plants, expect to see more foreign investors on the lookout for M&A opportunities.

Companies including General Electric, Sinohydro Corporation, and South Korean High Quality and Marketing Company have also announced long-term Greenfield investment plans for Nigeria.

While the long-term viability of these projects has yet to be seen — at least one-third of Africa’s power projects are still in the conceptual stages, while half of all capital is also locked in the planning stages — we expect companies with strong capex management programs and thorough due diligence to do well.

China Dominates

The importance of partnerships is also reflected in China’s dominance of African inbound foreign direct investment. China is Africa’s single largest country trading partner, while Africa is a major import source for China and the second-largest market for Chinese overseas construction project contracts.

Other major economies, including the US, Japan and India, have gained substantial interests in the resource-rich continent, especially in manufacturing, resource and infrastructure activities. Japan recently pledged US$2b for direct loans, underwriting debt and equity stakes in projects covering crude oil, natural gas, coal and minerals over the next five years.

The US has committed more than US$7b of public funds in Africa over the same period, while the country’s private sector has pledged another US$9b to help develop an initial 10GW of new electricity generation in the sub-Saharan region.

Target of 250GW by 2030

Africa is estimated to need 250GW of additional generation capacity by 2030. While this translates into significant opportunities for foreign and domestic industry players, success will depend upon strengthening partnerships across government, private businesses and communities, especially in robust long-term planning of public-private partnership (PPP) projects.

A key starting point is to identify projects that meet the PPP criteria and offer long-term stable cash flows and the right local partners to execute the projects. Project financing is still at a nascent stage in Africa, and it may take time for the sector to evolve.

Despite its challenges, a higher-than-global-average rate of economic growth and sweeping regulatory reforms means we expect Africa’s utilities sector to emerge as an investment destination of choice.

Culled from Ernst & Young Global  http://www.ey.com/GL/en/Industries/Power---Utilities/Plug-in---Africas-time-to-shine#.UpRvWdKko08