Creating a sustainable Africa

Erratic and intermittent power supply, found across much of Sub-Saharan Africa, is one of the most acute infrastructural shortcomings that has contributed to the region’s underperforming economy.

In 2011, it was estimated by KPMG that the region, comprised of 49 countries with a total population of nearly 900 million, had an overall power capacity of 68 gigawatts (GW) – equivalent to the power generation capacity of Spain, a country of 40 million. And without South Africa, the region’s capacity falls to just 28 GW.

However, while this environment would deter most investors – a decade ago, before Africa emerged as one of the world’s fastest growing markets – the London-based energy company Aldwych International saw an opportunity.

In the African market, “We felt there was a niche we could play in to,” said Bob Chestnutt, project manager for Aldwych International. “We were familiar with working with development finance institutions, and we felt that we could bring a project pipeline, and we didn’t need to worry about the fact that we didn’t have money ourselves, because [the organisations] would provide the debt and equity, and we would figure out a way to make a profit.”

Aldwych was founded in 2004 by members of the African project team for the energy company AES, following the company’s decision to withdraw its investments from Sub-Saharan Africa.

With early funding from the Dutch development bank FMO, as well as a $250,000 capital grant from the Shell Foundation – the charitable wing of Royal Dutch Shell – Aldwych began bidding on a number of projects across Sub-Saharan Africa.

And in the eight years since it was founded, Aldwych has refinanced or fully financed 20 power installations world-wide, for an overall power capacity of 11,000 megawatts and representing $3.75 billion of investment.

Finding a project

Aldwych maintains extensive relationships with a number of development finance institutions, including the Pan African Infrastructure Development Fund – the company’s largest shareholder, says Chestnutt. Through these organizations, Aldwych learns about prospective projects.

“A lot of the time, a local developer starts a project, then runs out of expertise or money,” Chesnutt explained. “Then they would go to FMO, the Emerging Africa Infrastructure Fund, or another international financial institution, and say ‘we need some help with the project,’ and then the organisation would introduce the developer to Aldwych.”

However, Chestnutt says that Aldwych simply does not have the resources to partake in all the projects that are proposed, “So we look at things like the quality of the project, the quality of the local developer, as well as the country itself.”

The political and economic conditions in the country are particularly important when deciding on a project, explains Chestnutt. “Is the country safe? Does the regulatory regime work? Does the electricity work? Can we actually develop a successful project in that country?”

The government plays an essential role in making its country more attractive for investment, says Chestnutt. Most critically, a country must have an effective independent regulatory regime to establish clear and transparent regulations for the energy sector. A government must also have strong energy legislation that encourages private sector growth.

Kenya: the positives and negatives of business in Africa

Kenya, in Chestnutt’s view, is one of the countries in Sub-Saharan Africa best suited for investment.

During the late 1990s, the Kenyan government launched a series of comprehensive bills that worked to liberalise Kenya’s economy and also reduce the widespread corruption and nepotism that riddled other nations in the region.

This campaign, which included the establishment of the Kenya Anti-Corruption Authority in 1999, made Kenya one of the most appealing countries for investment in Sub-Saharan Africa moving into the 21st century.

“Kenya is a clear example of where it is possible to do business, relatively easily, compared to other African countries where governments have not taken the necessary steps to reform their economies,” said Chestnutt.

Beyond economic conditions, Chestnutt says that Kenya has strong human capital, which makes it much easier for Aldwych to execute one of the main tenets of its business model: involve the local partner as much as possible, unless a particular skill is missing.

“Kenya has a highly skilled workforce,” says Chestnutt. “It has very strong universities. You’ve got a great pool of young graduates. So, it’s only when you need, for example, skills for turbine construction – skills that aren’t readily available – that you need to bring people in from overseas.”

However, for all its strengths, Kenya also provides an example of what Chestnutt says is perhaps the most difficult aspect of conducting business in Africa: lengthy delays caused by political instability.

In 2006, Aldwych become involved in the development of the Rabai diesel power plant located 20 kilometres outside Mombasa, Kenya. During the initial stages of development in 2007, Kenya fell into a widespread political crisis, following the disputed results of the presidential election held in December of that year.

The turmoil, which left over a thousand dead and displaced hundreds of thousands more, caused DFIs to suspend their involvement until there was some sort of evidence that stability would return.

“There was a period of time when things were looking very shaky,” Mr Chestnutt recalled. “What the DFIs were waiting for was some indication that democracy would prevail.”

Ultimately, Chestnutt says the situation was resolved, the DFIs re-engaged in the project, and it was completed by 2009.

The shift towards renewables

Completing a project in the most cost-effective manner possible is one of Aldwych’s most defining qualities. While it will never sacrifice the quality of a development in order to limit expense, when approaching a project, Aldwych will work to ensure that it utilises the strengths of the host country.

“The technology used in a particular project is fairly driven by the geography of the site and the natural resources available in the country,” Chestnutt explained. “For example, if a country doesn’t have a good solar profile, or doesn’t have much by way of wind, but does have a lot of coal, then clean coal would be the best option for that country.”

After not finding a sensible opportunity to use renewable power for the first five years of business, Aldwych finally found an opportunity to engage in the development of a sustainable power project.

In 2010, the Dutch wind power firm KP&P approached Aldwych about becoming a partner in the development of a wind farm on the shores of Lake Turkana.

Located at a point on the shoreline renowned for its constant high winds, Chestnutt says the Lake Turkana Wind Power Project can transform Kenya’s power grid. The plant will have a potential power generating capacity of 310 MW – 20 per cent of Kenya’s current capacity. Scheduled to go on line by mid 2015, the plant represents the largest single private investment in Kenya’s history, according to the project’s website.

For Aldwych, this project represents the beginning of a new emphasis on renewable technology, Chestnutt says, one that shifts in response to market behaviour.

“There is a clear preference, from the development financing community, for renewable projects,” Mr Chestnutt said. “It’s easier to push through a renewable project than a thermal project, simply because you have the environmental advantages.”

By Milton Lindsay 2013