Africa's chronic power problems have escalated in recent years into a crisis affecting 30 countries, taking a heavy toll on economic growth and productivity. The region has inadequate generation capacity, limited electrification, low power consumption, unreliable services, and high costs. It also faces a power sector financing gap on the order of $21 billion a year. It spends only about a quarter of what it needs to spend on power, much of this on operating expenditure required to run the continent's high-cost power systems, leaving little for the huge investments needed to provide a long-term solution.
Further development of regional power trade would allow Africa to harness larger scale more cost-effective energy sources, reducing energy system costs by $2 billion a year and saving 70 million tons of carbon emissions annually. Economic returns to investments in cross-border transmission are particularly high. But reaping the promise of regional trade depends on a handful of major exporting countries raising the large volumes of finance needed to develop generation capacity for export. It would also require political will in a large number of importing countries that could potentially meet more than half their power demand through trade.
Power sector inefficiencies are high, deterring investment in new capacity and electrification. There are three types of sector inefficiencies. First, there are utility inefficiencies, which include system losses, under-collection of revenue and over-manning. These result in a major waste of resources adding up to $4.40 billion a year. Under-collection is the largest component of utility inefficiencies amounting to $1.73 billion, following by system losses at $1.48 billion and by over-manning at $1.15 billion. The second type of sector inefficiency is under-pricing of power. By setting tariffs below the levels needed to cover the actual costs, SSA countries forego revenues of $3.62 billion a year.
The third type of inefficiency is poor budget execution. Only 66% of the capital budgets allocated to power are actually spent, with about $258 million in public investment earmarked for the power sector being diverted elsewhere in the budget.
Full cost recovery tariffs would already be affordable in countries with efficient large scale hydro or coal-based systems, but not in those relying on small scale oil-based plants. Once regional power trade comes into play, generation costs will fall, and full cost recovery tariffs could be affordable in much of Africa.
One of the key policy challenges is to strengthen sector planning capabilities, too often overlooked in today's hybrid markets. A serious recommitment to reforming state-owned enterprises should emphasize improvements in corporate governance more than purely technical fixes. Improving cost recovery is essential for sustaining investments in electrification and regional power generation projects. Closing the huge financing gap will require improving the creditworthiness of utilities and sustaining the recent upswing in external finance to the sector.
This book is based on extensive data collection undertaken between 2006 and 2008 by the Africa Country Infrastructure Country Diagnostic, an initiative of the Infrastructure Consortium for Africa delegated to the World Bank under the guidance of the African Union, African Development Bank and other multi-lateral and bilateral development institutions.