Power ambitions

Africa has a problem, and China has the solution, but many potential investors are shy about stepping in

Chinese companies are drawing on their country's vast reserves of experience gained over more than 30 years of domestic growth to invest in power projects in Africa as the continent struggles to upgrade its electricity services.

The push to do deals involving what in some places are highly unreliable power systems has been made all the more urgent with rapid growth and industrialization in the continent, and as more international companies do business here.

Wu Tianrong, of the China Electricity Council which has 1,083 member companies, says the country's power industry has grown rapidly over the past three decades and that growth is bound to continue. By 2020 China will generate 8.1 trillion kilowatt-hours of electricity a year.

However, the power industry in Africa is in such an obsolete state that you would need to turn the clock back 30 years to compare it with China. In those days, Wu says, electricity was in short supply in China and the power network was highly fragmented, imposing great hurdles to economic growth everywhere in the country.

"Chinese power companies have made great strides in building power stations, installing equipment and in planning, engineering and design, all of these being areas in which they can pass on know-how to Africa."

At the annual Africa Infrastructure and Power Forum held in Beijing recently, Teng Liliang, chief marketing officer of the China-Africa Development Fund, said: "There really is huge potential in Africa's power market. After years of growth, Chinese companies possess the capital, the technology and the wealth of experience that could help Africa eliminate its shortage of power, and more Chinese companies are putting in great efforts to do that.

"When we invest in Africa's thermal power, hydropower and new energy projects, we can cut labor costs and project times to just two-thirds those of Western companies. There is no doubt we can help African countries quickly solve their power shortages and at the same time create jobs locally and transfer power technology to them."

However, the gap between today's realities and those ambitions is large. Trade between China and Africa was worth about $210 billion last year, Teng says, and China's direct investment in the continent was worth about $20 billion, of which only about 1.8 percent came in the power sector. However, that percentage is growing at about 20 percent a year as more and more Chinese companies form business partnerships with African entities, he says.

Chinese electrical equipment can already be found across Africa, and Chinese companies have planned, built and developed some big projects. One such company is Shenzhen Energy Corporation, a state-owned company based in Guangdong province, which has invested more than $200 million in setting up a power station that generates one-sixth of the power used in Ghana.

African countries are keen to attract more investment from Chinese companies. This is clear from the presence at the recent forum of Tesfaye Yilma Sabo, deputy head of mission of the Ethiopian Embassy.

"Energy for Ethiopia is a fundamental priority," says Sabo, who attended forum to explain where his country's energy resources stand at present, and the way forward, including investment opportunities.

Another speaker, Eino Kai-tungwa of Zambia, says his country needs to import power, including from Zimbabwe and South Africa, but the country's demand is expected to double in less than four years on the back of heavy investment in mining.

Jon Marks, chairman of Cross-border Information, a think tank in London, who has done research on power projects in Africa for more than 30 years, was a moderator at the Beijing forum.

"China has the remarkable experience of pulling so many people out of poverty, putting electricity into isolated villages and working out those solutions, which is an experience that a lot of African countries would like to replicate," he says.

"So far the international community, private companies and African governments in many cases have failed to respond to those challenges."

Much is expected of Power Africa, a five-year initiative that US President Barack Obama launched in Tanzania in July last year. Its aim is to promote economic growth and development by increasing access to reliable, affordable and sustainable power in the continent.

The African Investment Bank estimates that Africa is laboring under an infrastructure deficit of $93 billion a year, and it is in the power sector where the need for more spending is the acutest. Forty-eight countries of Africa with a combined population of 800 million generate 68 gW of electricity a year, no more than Spain, with a population of just 45 million, the bank says. In addition, 30 countries in the continent are short of power, and $41 billion a year is needed to solve this, $27 billion for building and $14 billion for ongoing costs and maintenance, it says.

The International Energy Agency's 2014 World Energy Outlook says that more than 620 million people in sub-Saharan Africa have no electricity, and nearly 730 million rely on what the agency describes as dangerous and inefficient forms of cooking. The use of solid biomass, in the form of fuels such as fuel wood and charcoal, outweighs that of any other fuel combined.

However, it is difficult for Chinese companies to bring their expertise to Africa on a large scale, says Sun Hao, professor of the China Metallurgical Industry Planning and Research Institute.

"Chinese companies are very ambitious about getting into Africa's power sector, and some have been successful in doing so, but generally they have not grasped the skills well."

Yet Africa is immensely rich in energy resources. The International Energy Agency report says Africa accounted for almost 30 percent of global oil and gas discoveries made over the past five years and is home to several major energy producers, including Angola, Nigeria and South Africa. The continent is a trove of renewable energy, with huge potential for solar and hydro electricity, as well as lesser wind and geothermal opportunities.

These resources hold great promise for Chinese companies wanting to develop power projects, but the complexities of becoming involved may be acting as a deterrent, and most Chinese companies with ties to Africa's power industry simply export equipment and build power stations and networks, rather than investing directly in power projects, Sun says.

Fang Qi, assistant to the president of Dongfang Electric Corporation International, China's biggest power equipment maker, says its ties with Africa began more than 20 years ago, but it only exports equipment and constructs power projects, mainly in Ethiopia and Mozambique. It has annual turnover of about 10 billion yuan in Africa and has set up an office in South Africa, but says it has never seriously considered direct investment in power projects in the continent.

"Africa has rich energy resources and a huge market, but projects there are usually small and scattered, which does not suit big state-owned companies like us, because we have to go through complicated approval procedures if we want to invest and we prefer bigger projects," Fang says. "Perhaps it better suits private companies that are more flexible. "

More than 1,000 Chinese companies export power-related equipment to Africa or work in power project construction in the continent, but only a few invest directly in power stations or in building power networks, Fang says.

In Africa, as in many countries, the power industry is government owned and run, Sun says. Any company investing in the power industries of these countries has to deal with the diversity of their laws, industry standards and resources and a lack of international talent competent in the appropriate languages that is familiar with Africa and its markets and with expertise in overseas investment.

Chint Electric Co Ltd, of Yueqing, Zhejiang province, which says it is the largest manufacturer and seller of low-voltage electrical products in China, says it entered Africa in 2000, and its power transmission and distribution equipment has been sold to most African countries. The company has worked on power engineering projects involving engineering, procurement and construction in more than 10 countries, including the Democratic Republic of Congo, Ethiopia, Kenya, Tanzania, Zambia and Zimbabwe. It had revenue of more than 1 billion yuan in Africa last year, it says.

"Africa is very important for us," says Lin Bosheng, vice-president of Chint. "It now accounts for half of our international business, and the proportion will rise as the power market there grows. At the moment our equipment sales are growing 20 percent a year."

Chint has invested in a solar power station in South Africa and is considering investing elsewhere in the continent, he says. However, choosing projects likely to be profitable is extremely difficult, he says, given the wide variation in maturity between different economies, widely varying investment policies, varying degrees of security, local laws and regulations, and different cultures and social systems.

"In a way Africa is unlike anywhere else. In some countries there is a lack of transparency in prices of construction materials and even in taxes, and that is fraught with risks. In addition, as projects proceed in undeveloped markets there are likely to be unforeseen costs.

"If you are investing in power stations or power networks, you are going to have to pour a lot of money into them. It's not that secure at all, and to make money you have to be willing to wait a long time. If that's not enough, there are also exchange rates, costs, policy changes and other things. So we are very cautious about it all."

Sun says that because electricity prices are generally set by governments at very low levels instead of by the market, "making a profit is also a huge challenge".

To attract more Chinese companies to invest, African governments need to provide more incentives, Teng says. They should first be more open, adopting market access policies in infrastructure and the power sector, he says.

"There is a huge shortage of power in many African countries, yet some have put up very high hurdles for overseas investors wanting to gain access to the market, and that is a deterrent. We are looking for African countries to be more open in attracting overseas investors."

Given that power projects can take as long as 30 years to complete, with huge investment sums, Teng says, governments also need to think about how to ensure policy continuity so investors can be sure they are going to eventually see returns as Africa grows.

Jon Marks says that Power Africa and other major international initiatives, like the UN's Sustainable Energy for All, are promising much, but have to show they really can deliver on improving access to electricity across sub-Saharan Africa. To achieve this, Chinese companies and Western companies should work together to share risks as they invest in Africa's power market.

He told the Beijing forum: "One of the reasons that quite a lot of people are here is that they are looking for opportunities, but they are also looking for a way of sharing risk to explore the opportunities."

Chinese companies have know-how, they know how to drive a hard bargain, and are well acquainted with Africa, he says, but could benefit from the knowledge of Western companies that could help them deal with some complex issues found in difficult jurisdictions.

Sun Hao says one approach Chinese companies are looking at is investing in power stations in African countries in exchange for resources.

"We would invest in power stations and get local resources in return, which means a reduced cash outlay and reduced risks."

If Chinese companies are to invest in Africa's power industry, Lin Bosheng says, they also need to promote their country's power technology, and one important element of that is promoting its power industry standards.

"We have top-quality equipment that is cheaper than that of our Western counterparts and is well-known in many African countries, but at present Africans are unfamiliar with our industry standards, which is very unhelpful."

In some respects China's industry standards are higher than even international ones, he says, so they should be translated into English so that Africans can appreciate that China's industry standards are also entirely acceptable.

chenyingqun@chinadaily.com.cn

The Africa Infrastructure and Power Forum in Beijing drew experts from both China and Africa. Photos by Wang Zhuangfei / China Daily

Jon Marks, chairman of Cross-border Information, a London think tank.

Teng Liliang, chief marketing officer of the China-Africa Development Fund. Wang Zhuangfei / China Daily

(China Daily Africa Weekly 11/14/2014 page1)