22 November 2012

Africa: Interview - Rupert Soames

analysis

Rupert Soames, CEO of temporary power provider Aggreko, outlines Africa's power sector deficit and what should be done about it

Power reform measures are afoot across Africa to encourage greater private investment and deepen the penetration of energy in urban and rural locales. But the pace is too slow to meet the growing demands of populations. Economic growth has raised public expectations and needs, and governments should be wise to the perils of falling behind, says Rupert Soames, CEO of Aggreko, the temporary power generation company.

"Power is like a drug. When all you've got in your life is a 40 watt bulb that's on two hours a day, when it goes out you don't really miss it. But actually, when you've got a semi-reliable power supply, when you've got a fridge, you've got a fan, you've got your mobile phone, people get much more irritated by lack of power than ever they used to. It's politically a much hotter potato."

Mr Soames believes the quality of personnel running African energy ministries has "shot up" in recent years to respond to the issue. "First of all, there are a lot of very well educated people coming back to Africa. They are now very committed to helping their countries. Specifically in energy and power, it has become such a vastly more important political issue.

Most of the countries in Africa are democracies, almost all have elections, and one of the main ways that people judge the efficacy and efficiency of a government is by whether they can keep the lights on," he says.

But population growth and rising incomes mean demand is rapidly outstripping new and installed supply, even in the face of mega-projects. "Power demand is increasing 8 to 10 percent a year. Because they have not invested enormously enough in the maintenance of existing capacity, something like 25 percent of rated capacity is not working.

In some countries it's more than that. The other 75 percent is having to work much harder. Which means in turn it is breaking down more often." Aggreko itself makes its money as a provider of the stop-gap: diesel- and gas-fired generators. It has delivered 1000 megawatts of new capacity in sub-Saharan capacity over the last decade.

In the face of rising demand, energy ministries feel they are on a "terrible hamster wheel", he says, with new mega-projects not delivering a transformative change but merely catching up on a deficit. "The entire output of one Ugandan power station, Bujagali, which took eight years to build, only offset the rise in demand over a mere 24 months."

Mr Soames predicts a milestone moment in the next five or 10 years when power shortages in Africa will become so crippling that they will generate sufficient political will to put in place cost-reflective tariffs, which he believes to be at the heart of the investment crisis. "Many African countries are keeping tariffs artificially low, which is thought to be an advantage but in fact, it misdirects resources."

He cites the waste of light in African cities. "Nobody turns the lights off. Why? Because it's so cheap. Why bother? One of the things that's got to happen is that tariffs have got to go up."

But with African services and manufacturing struggling to compete with output from other regions, might increasing energy costs hamper competitiveness? "There is a view among some that if companies are charged a realistic cost for energy, it will make their existing businesses non-competitive," says Mr Soames.

"Frankly, the only countries in the world that can rely on energy cost as a competitive advantage are going to be countries that have massive amounts of energy. Either they have massive amounts of hydro, or shale. Most countries can't possibly. There is no way that countries in Africa can.

None of them have actually got enough energy, with the possible exception of Mozambique, to subsidise their level to the point where they are going to use that as a competitive advantage."

A better option, he claims, is to use low cost and high quality labour, and infrastructure, to give a cost-competitive edge.

The sums work in favour of cost-reflective energy in the long-run. "The cost of running a small petrol generator outside somebody's business is $1.25 an hour. The difference of cost between everyone providing their own little generator as opposed to using a common grid is enormous.

If you went and collected up the money that all those businesses have spent over the last 10 years putting their own little generators at the back of their business and had re-invested that into grids and generation, then the countries would have enormously good grids and generators and people would not be spending what they are spending to run their own generators."

When power is functioning, consumers might pay 20 cents per kilowatt hour, and when it fails they are paying a dollar to run their own generator. "If they were to pay 30 cents per kilowatt hour they wouldn't have to pay the dollar for the rest of it," he says.

Looking around at best practice models on the issue of pricing, Mr Soames believes Kenya is leading the way. "When Kenya has an issue with its hydropower, and tariffs need to go up to reflect that, they go along to the Chambers of Commerce, and say: 'What's your choice: 12 hours a day of load shedding, or do you want to pay 30 percent more on the tariff and we'll go and bring in some extra power?'

And - down to the last person - they say: 'Ok we don't like it but we'll pay 30 percent more on the tariff'. Those are the sorts of decisions that people need to come to, getting the realisation that life without electricity is nasty, brutish and short."

While donors are playing a role, Mr Soames believes they are marginal. "The only pool of capital that is remotely capable of catering to Africa's needs is private capital. The World Bank don't have anywhere near enough money. They can seed it, they can do different things to help, but they don't have money, like real money. They don't have the $48bn a year that needs to be invested."

That $48bn deficit is a worry, says Mr Soames, because while there is much talk of Africa as a frontier investment market, when it comes in infrastructure, there is a massive backlog of spending in the West.

"All the rich countries have left it late to do their re-investment. The UK needs $320bn. Germany has just decided it doesn't want nuclear power so it's going to need $200bn. One of the cruel ironies for Africa is that when it really needs investment in energy infrastructure, there is going to be a great big sucking noise as developed countries drain the capital markets of investment capacity to meet their own needs."

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