Africa has immense, untapped potential to meet the energy needs of its people and yet, . One aspect of the energy story that is not often in the spotlight is the power transmission network. But to those who need it most. Building and maintaining reliable and extensive transmission infrastructure requires between $3.2 billion and $4.3 billion every year until 2040 – an investment goal the region’s electricity utilities, that are often state-run, cannot meet on their own.
Can the private sector help? We think so.
A new World Bank report entitled “Linking Up: Public-Private Partnerships in Power Transmission in Africa” suggests that privately financed electricity lines can help expand electricity coverage in Africa and ease financing constraints on the region’s utilities at the same time. The report draws on successful efforts in Latin America and Asia (the private financing model resulted in over 30% savings in project costs in Peru and helped build over 21,000 km of transmission lines in India). .
The report cites :
- Develop clear policies that support private investments in transmission infrastructure: Institutions such as the World Bank can help with this by providing technical expertise and advice from other developing countries that have tried and succeeded with this model.
- Craft legal and regulatory frameworks to support private investments in transmission infrastructure: In most countries, introducing private sector financing will require legislative and regulatory changes and the development of documents such as those outlining grid codes. Countries must also be prepared to adapt their legal framework over time.
- Start with pilot programs: Moving to a new model that has worked well elsewhere but not been tried domestically could be perceived as a risk for African countries. A good way to start is by trying a pilot program to understand the challenges associated with implementing it, and revising regulations and policies as needed.
- Introduce new models for concessional lending. Transmission projects are capital-intensive. African governments should engage with development finance institutions (DFIs) and develop models for DFIs to support transmission projects delivered by the private sector. African countries can also work with DFIs to ensure that their lending policies are not biased toward government ownership of transmission and do not impede the use of privately-financed transmission.
- Decide when transmission projects can be opened up for proposals: There are two broad choices here. Early-stage tenders allow for more innovation by bidders. However, they also expose them to risk on issues such as approvals and require a more complex evaluation. Late-stage tenders are for projects that are already well developed, in which the evaluation can focus on cost. Late-stage tenders are likely to be the best approach for starting off trials of privately financed transmission projects. They are simpler to evaluate, and are based on the price offered by different bidders to build and operate a line according to a single detailed design. By contrast, early-stage tenders lead to offers with different designs and require more assessment of the viability of the proposed solutions.
- Determine payments to private investors based on availability. African governments will need to develop key performance indicators to gauge private sector investors’ efficacy, keeping in mind this will be a sensitive issue for them. They must also ensure that their approach follows models that have successfully attracted independent private investment in the sector.
- Ensure adequate revenue and credit enhancement where needed: Private investors need confidence that they will receive their payments on time and as specified in their contract, through the use of escrow accounts, for example, if the sector as a whole is not profitable. Countries must also be prepared to use either government or multilateral guarantees to back payment obligations when needed.
- Tailor projects to attract international investors. African governments that want to attract private investments in their transmission sector should ensure that bids are of sufficient size, and have taken environmental concerns into account. They should also be large enough to justify transaction costs for investors. In some cases, this may mean bundling several projects into a single tender.
- Prepare to implement transactions: To do this, governments will need to identify transaction advisers, prepare service agreements and bid documents, define eligible bidders, and conduct a market evaluation in advance.
- Run competitive tenders. The final step will be to run a tender, evaluate bids, and award a contract.