Supporting private sector investment in energy sector will improve energy situation in East Africa

East Africa is going through one of the worst power crises in its history with the latest victim, Kenya, frantically making calls for increased investments in alternative power sources.

The crisis, which hit Uganda hard in 2006, appears to be spreading like a wildfire across the region with fears that it could further make the region less competitive in terms of the cost of doing business.

The regional already has some of the highest power tariffs and any further tariff increments will simply drive high the cost of doing business. Power tariffs in East Africa are 5 to 10 times higher than in Egypt or South Africa.

This coupled with high transport costs for land locked countries such as Uganda, Rwanda, and Burundi, the current power shortage threatens to reverse the gains made through trade liberalization.

Ugandans, for instance, have always relied on Kenya for the bulk of manufactured products since the collapse of Uganda’s manufacturing sector in the 1970s. Even when electricity tariffs rose to unprecedented levels, prices for manufactured goods were kept at bay thanks to imports from Kenya where tariffs were still relatively low.

However, recent changes in Kenya are likely to have further ramification on Ugandan consumers।

There are fears that with reduced power supply, Kenya might be forced to venture into expensive alternative sources of energy with drastic increase in tariffs.
Even as the region struggles to meet the ever-increasing demand, investments in the energy sector are still dominated by the public sector that often struggles to meet the required demand.

So why has private sector investment into the energy sector remained dismal despite spiraling demand for electricity? First, energy projects require huge capital requirements with long-term return on investment। This makes investing in the sector unattractive for medium-scale investors. It then leaves such investments in the hands of large investors who often demand certainty in terms of prices and market for power they produce. Certainty in a sense that, a private company is investing in a mass consumption good where the government is bound to intervene any time to protect its “citizens’ interests”.

Unfortunately such policies predictable that can guarantee return on investment are rare in East Africa. As such, investments in the energy sector remain highly risky.

It is therefore important that governments in the region revise their energy policies to reflect policy predictability and guaranteed return on investment।

For instance, Aggreko and Electromax have made huge investment into Uganda’s thermal power production simply because of attractive power purchase agreements where the government of Uganda offered a guaranteed return on investment and a predictable project wind-up.

If such policies are extended to other areas of the sector, they will go a long way in promoting private sector investments in the energy sector। There, for instance, a number of alternative energy projects that the private sector may be interested in provided government’s guarantee purchase of power produced.

In June, participants at the East African Energy Conference organized by the East African Business Council in Dar es Salaam, Tanzania asked governments to develop model Power Purchase Agreements for small projects to reduce time spent negotiating with regulators and policy makers in an effort to sell power to national grids।

As East Africa continues to grapple with power shortage a meaningful public-private partnership that goes beyond just catering for the interests of large investors and premised on good return for the private sector will perhaps solve the current conundrum।