Turn African Energy Utilities into Grid Marketplaces, Only 2 out of 39 Utilities Profitable

Turn African Energy Utilities into Grid Marketplaces, Only 2 out of 39 Utilities Profitable

In a state in Nigeria, water rates were last reviewed in 1987. Yet, the same state is looking for investors. When I explained that it was impossible to find one without updating water rates since projects must be structured to be investment-appealing, the politicians put the projects in a cooler. Simply, no politician would want consumers in Nigeria to pay more under his regime. You need votes and you do not mess up with the free stuff.

Yet, they want investors even when they do not have the boldness to allow market prices to rule. Investors then ask for (loan) guarantees to cover themselves. That is why when a government does not have the capacity to offer guarantees to investors, projects die. Interestingly, government guarantees are not scalable: if you guarantee $1 million to build a water plant, and I have additional water demands, and you are unable to offer more guarantees, nothing happens. That lack of scalability is why we do not have electricity and clean water across African communities.

Africa at Night (Source: NASA)

The broad argument across sectors in Africa is that keeping costs (of services from utilities) low is one way of helping poor people. Unfortunately, that is a very faulty argument because the people that benefit from cheap water rates are usually the people living in cities [the middle class and rich people]. The poorest citizens in villages do not have any access to government-funded water systems. The same goes in electricity where those in cities have access whereas government is still making a case that affordability is necessary to help the poor citizens. The poorest Africans do not have access to grid-provided electricity as where they live there is no grid infrastructure to start with. So, at the end, we are left with low-pricing of the services (mandated by regulation), creating underperforming utilities: only two out of 39 African utilities studied by World Bank are profitable.

The problem is that across Africa, the vast majority of the power utilities are effectively bankrupt. Another World Bank study (pdf) on African Utilities shows that only two of the 39 African utilities surveyed, in the Seychelles and Uganda, were able to generate enough cash to cover both their operating costs and capital expenditures necessary to invest in the maintenance and expansion of the grid. In fact, only 19 of the 39 companies were able to generate enough cash to cover their day-to-day operating costs. It means the rest were not even able to pay everyday costs, like salaries, in full.

It is very unfortunate when you visit places like Ikenegbu Layout (Owerri) and see people waste water because water is largely free. Yet, people living there are some of the most affluent in Imo State. But government wants to give them “poor” people water rates. The poorer citizens who live outside Owerri do not have water systems in any form.  The Ikenegbu experience is how it is across Nigeria and African continent: rich people’s lives are subsidized by governments on the pretence of helping the poor who do not even have access to those subsidized services.

Any government that tells you that electricity and water rates have to be affordable because they have to support the poorer citizens is not telling the whole truth: the poor people do not live where water boards and grid-infrastructures function. Largely, government is subsidizing the lifestyles of middle-class and rich citizens at scale.

These points are articulated in a nice piece by former African Finance Corporation CEO on Quartz where he concluded thus: make the utilities marketplaces so that any solution provider can connect and help in fixing energy and water frictions.

Perhaps, grids will one day become marketplaces allowing people to sell excess power from their solar installations to those who have a need for power at that time. Prices can be set dynamically to allow supply to match demand.

 


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