Power engagement is a matter of approach

The business waters in Africa await testing by those who are courageous

Chinese companies are taking the wrong approach when they become involved in Africa's power industry, content to supply equipment when they should be looking for other avenues of investment, a development expert says.

"It seems to us that Chinese companies are more interested in supplying equipment or acting as contractors," says Diallo Kodeidja Malle, director of the private sector department of the African Development Bank, which provides funding to companies willing to take risks and to stick with projects longer.

"From a development point of view, investing has a bigger impact on a country's growth than building and maintaining assets," Malle says. "We encourage Chinese companies to invest, build and stay longer in projects in Africa to ensure the results are sustainable."

There is a gaping lack of infrastructure in Africa, she says. The African Development Bank reckons that funds that ought to be flowing into the continent's infrastructure building are short by $93 billion a year, and $41 billion of that missing money should be earmarked for power.

The power industry in Africa is dogged by inefficiencies, including with governance and quality of service, she says, and lacks the public financing needed to expand capacity.

That could be done through public-private partnerships, thus efficiently providing the continent with affordable and reliable energy, she says.

The bank is working with the Obama Power Africa initiative, launched when the US President Barack Obama was in Tanzania in July last year. The bank has committed more than $1.65 billion in energy infrastructure funding to six of what are called Power Africa priority countries over the five years to 2018.

Malle says Western companies have a long tradition of being involved with power projects in Africa and sometimes have a language in common with the country in which they are working. All this helps build and maintain relationships with Africa, he says.

"China is a relative newcomer in the power sector and is considered as bringing more financial resources as Western companies face financial constraints."

China was the largest lender to African infrastructure projects in 2012, committing about $13.4 billion, or 64 percent, of financing through the Export-Import Bank of China-Africa Development Fund. But a message widely peddled in the West is that China is chiefly interested in exploiting Africa's natural resources.

Chinese companies typically want to become involved with power infrastructure in Africa when it is being built and in maintaining it once it has been put into service, Malle says.

"But they don't want to be involved at the start of the chain. If you want to apply to be involved in such projects you really need to be there right from the start, not just at the middle and the end."

That makes it difficult to get good returns, she says.

"Western companies do not get involved in the same way. Some prefer to get in on the financing, and then have a say in operations. It's a different philosophy."

But things are changing, and Chinese companies are now diversifying their investments, putting money into manufacturing and banking in Africa, she says.

It is very encouraging to see more and more Chinese companies are targeting Africa or increasing their operations there, Malle says, and the bank sent a group of people to the African Infrastructure and Power Forum in Beijing recently to meet Chinese investors.

Chinese investors and technology providers have indicated that the hurdles to infrastructure financing in Africa are: a lack of knowledge about African countries; political instability and changing laws and regulations; huge gaps in financing; lack of project development funds; high credit risks at country and project level; and unfamiliarity with countries' environmental and social policies and procedures.

Malle says the African Development Bank has 50 years' experience and strong membership support from all 54 African countries, making it an honest broker. It not only provides financing but also advisory services to public and private sectors. The bank also provides budget and institutional support to the 54 countries to improve legal frameworks to create the conditions for private sector participation.

The strong support the bank has worldwide is reflected in its AAA credit rating and its wide range of financial instruments that can help bridge the financing gaps that Chinese investors face, she says.

The Fund for African Private Sector Assistance and Africa would provide project development facilities to help bring projects to completion. In addition, the African Development Bank offers partial risk guarantee and partial credit guarantee to reduce political risk exposure and reduce commercial risks that potential Chinese investors can feel comfortable with.

The African Development Bank can help Chinese project developers adopt international best practice with the environmental and social aspects of projects to improve their effectiveness in the long term.

Africa can learn a lot from China, which 30 years ago was at the same level of development as many African countries now, Malle says. African countries will learn what they need to do to transform themselves into emerging economies, including the types of reform that need to be put into place if their power industries are to be on the same footing as those in China. China has many competitive advantages in building solar and hydropower projects, and the involvement of Chinese companies will help countries well-endowed with hydro resources fully harness the potential and increase their generation capacity, she says.

Chinese companies also need to be more courageous and test the investment waters in Africa, she says.

"When people see Africa, they always see war, diseases, all these things, but they don't see Africa in terms of potential, because the Africa that is in news is not the Africa that is on the ground. There are several Africas; there are developed parts and undeveloped parts, everything, so unless you go and test the waters, put your foot in them, you are never going to know how risky or unrisky it is. So it is all a matter of being engaged and try. If you don't try then you will never know."

chenyingqun@chinadaily.com.cn

(China Daily Africa Weekly 11/14/2014 page8)