African Energy: The Unrecognized Consequences of Underinvestment

By Jeremy Gaines and Christian Hiller von Gaertringen

By Jeremy Gaines and Christian Hiller von Gaertringen

Underinvestment in Africa’s energy sector is one of the central constraints on the continent’s economic development. It affects productivity, industrialization, fiscal stability, urbanization, and ultimately the credibility of the “African growth story.”

Manufacturing will be difficult, as competitiveness depends on stable power, affordable energy, and predictable supply chains. Without a reliable power supply, African factories will operate below capacity, and productivity is set to remain below the international norm.

This hurts above all small and medium-sized enterprises (SMEs), which are the backbone of any sustainable economy and the driver of job creation: They have to cover a large share of operating costs deriving from diesel fuel, generators, repairs, energy redundancy, and they also lose a lot of time for handling the supply with power for their activity. The lack in power suppresses entrepreneurship and expansion into the formal sector.

An unreliable power sector is the Achilles heel of many African economies and the main reason why many remain heavily dependent on exports of raw materials, non-processed agricultural produce, and low-productivity services. Indeed, it is sadly fair to say that many African firms operate under conditions that would be considered extraordinary elsewhere.

They have to face:

• daily outages,

• voltage instability,

• fuel shortages,

• and self-generation through expensive backup systems.

• Some countries (first and foremost Kenya and Morocco, to name but two) have succeeded in modernizing their power sectors and reliably stabilizing the supply.

• But in other economic leaders such as Nigeria, South Africa or Ghana, large businesses often spend heavily on diesel generation simply to maintain continuity. This is inefficient and brings productivity of the manufacturing sector down.

In our view, Africa’s undersupply of reliable and affordable electricity is one of the greatest threats to African growth. Energy is at the same time one of the top investment opportunities in the world, if investors do it right.

What awaits you behind the paywall:

• The threat of the energy production gap.

• Why African governments are overwhelmed.

• How investors can truly contribute to the solution.