analysisBy Vicky B. McPherson
Washington, DC — Power Africa is the U.S. Government's initiative to help increase access to power on the African continent by encouraging government and private sector partnerships. The initiative is focused on adding more than 10,000 megawatts (MW) of clean, efficient electricity generation capacity in six countries at this stage — Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. However, as with any new initiative, potential Power Africa participants should take a proactive approach in identifying the key elements that will enable them to be successful in their new venture.
Below we look in detail at what can be considered the "ABCs" of doing business through Power Africa: Agility, Bankability and Capacity. These are the basic considerations for companies that are not already working in Africa, but are considering taking advantage of the initiative. There is an entire value chain of goods and services that are likely to benefit from projects to increase power and the development that will be sparked by such increase in power generation.
However, there is not one single method that will work for every opportunity, although those who have been successfully operating on the African continent may have a list of key factors they can identify. There is no single answer to that question, not one single set of rules. The following are a few points to consider.
Agility is something most may not admittedly associate with doing business, but it is the first essential element. This involves more than just being adaptable; it involves being able to move quickly and adjust plans when necessary. In some markets, where the government still has a great deal of involvement with the private sector and is the central main driver of growth, it is important to recognize that doing business there is not the same as doing business in markets such as Washington, DC; New York; London; or Shanghai.
The other consideration for those looking to get involved in Power Africa is that power is necessarily a matter of national importance and therefore, will involve interaction with the government. Thus, being prepared to navigate and build in time for dealing with bureaucracy is a necessary part of project planning.
One must keep in mind that the government's motivations or ultimate goals may not be perfectly aligned with the private sector interests. The local or national African government's interest in job creation or skills transfer often dictates certain aspects of a project, such as location of a facility or the ratio of local workers to foreign workers. For example, if a contractor includes expatriates from the United States or Europe in its budget at $1,000 a day per worker for a 2 year project for 30 employees versus local salaries of a $1,000 per month in the budget, this results in additional project costs incurred by the sponsoring government or local partner of over $10 million. These additional costs may not be acceptable.
Listen to input from the government and respond accordingly. This will not necessarily change the return for project, but it is important to be able adjust the modus operandi whenever the time and situation requires. This may require more plane time and flexibility than one is accustomed to, but it is an essential element. It does not change the fact that at the end of the day, the project must be bankable.
This is why Bankability is another essential element. There is an overwhelming need for investment in the infrastructure sector in the vast majority of African countries. There is undoubtedly no disagreement that there is NOT enough aid available to solve all of the infrastructure needs on the continent. This is not due to a lack of understanding of how to solve these problems. But, there is often a disconnect between the project developers and the financing community on how to make these projects bankable.
The Power Africa countries were selected because of the belief that these countries have the foundations required to actually move bankable projects from conception to reality. In many circles, the project sponsors may assert that there financing is not available on reasonable terms and the bankers may assert that there are not enough projects that will meet the conditions of their executive committees.
The question is how to turn more of these projects – mid-size or off-grid energy projects for example – into bankable projects? What type of financing support is available to do this?
The U.S. government agencies identified as part of the Power Africa roll-out serve an important role in this dialogue. A key component of the Power Africa initiative is the commitment to funding the early stage of projects when technical assistance through pre-feasibility and feasibility studies is critical. Another is fostering innovation in clean energy infrastructure.
Supporting "sustainable development through green growth" was the theme of the United States African Growth and Opportunity Act summit held in Addis Ababa, Ethiopia in August 2013. I would describe "sustainable development through green growth" as "developing initiatives to create an enabling environment that will continue to foster and facilitate commerce that has financial, social and developmental returns, while limiting harmful environmental impacts to meet the needs of all people."
Recently the U.S. Trade and Development Agency announced its funding to pay for an owner's engineer to provide the developer with comprehensive on-and-off site engineering services and oversee the work performed by the EPC contractor in connection with a Tanzanian solar power project. This type of technical assistance to support such development is critical.
Arguably one of the biggest challenges to achieving sustainable development through green growth is not ultimately financing, but rather the lack of clear, national policy with corresponding market incentives. Other challenges include the following:
Lack of regional integrationAbsence of a developed legal framework – nationally and regionallyShort-term planning/gainsSanctity of contracts
As many of you consider how to get involved in the Power Africa value chain, I would offer the following for your consideration to determine if the market is right for your company:
Ask if there is:
- Rational policy in place that is developed with long-term benefits in mind - this doesn't mean the governments have to wait for projects before the markets get structured / rationalized
- Legal framework that is responsive to the national policy
- Credible regulatory bodies which establish an appropriate tariff for end users if you are directly within the power delivery chain
- Functional judicial system and due process of law
- Consumer education- commercial and residential regarding the tariffs
- Incentives rewarding innovation
After you have determined that you have the Agility to adapt and the project is Bankable, the third essential element of doing business in Africa is Capacity. Capacity goes to the question of the human capacity on the ground to complete certain projects and to operate them following project completion.
One important way to expand capacity is to partner locally. If your company provides products and you are looking for a local distributor or agent, some important considerations are whether the arrangement is exclusive or non-exclusive for them, the covered territory, the period of your initial relationship, how your intellectual property is protected, any particular performance requirements they must meet, and limitations on termination of the relationship based on local law (e.g. some agents may be treated like employees).
Another way to build capacity is through joint ventures. If your company is able to create a joint venture with local partners to develop projects, you will likely be eligible for benefits from the U.S. and local governments. In addition to building your capacity to operate, you should be interested in building the Capacity locally. Skills transfer should be an essential element of any foreign direct investment into a Power Africa destination country.
Capacity is also about the ability to bring innovative technology to these markets to solve problems efficiently. In many ways, U.S. companies can play a leading role to solve this capacity problem, but have yet to do so.
Power Africa is the latest and arguably the most directed effort by the U.S. Government to encourage the commercial relationship between the United States and the African Continent. The potential profits for U.S. companies that decide to take advantage of the opportunities presented by Power Africa, or any other incentives to encourage export of U.S. goods and services, are not overstated.
However, ultimate success will be based upon that company's ability to be agile in the market, develop bankable projects and build capacity to implement their plans or projects.
Vicky Beasley McPherson is a Shareholder in the Africa Practice Group at international law firm Greenberg Traurig. McPherson focuses her practice on corporate transactions, with an emphasis on mergers and acquisitions and project finance. She represents clients from around the world, including those located in Africa, Eastern Europe, Asia and South America. She can be reached at email@example.com. This article is issued for informational purposes only and is not intended to be construed or used as general legal advice nor as a solicitation of any type. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer's legal qualifications and experience.