Political risk: the key constraint to SSA power projects?

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Despite the sheer size, variety and largely untapped potential for power generation in sub-Saharan Africa, households and industry in the region remain significantly undersupplied. Almost half of the people in the world living without access to electricity live in one of the 48 sub-Saharan African countries.

According to Aon, political risk could be the key factor limiting the sector’s development.

This is the suggestion of the recently released whitepaper from Aon Risk Solutions, Political Risks in Sub-Saharan Africa – a view from the Power Sector. Arguing that energy is the ‘oxygen’ of economic growth, the paper examines the effects of political risk on key power projects.

“It is an undisputed fact that the power sector in SSA is attracting massive domestic and foreign investment from countries such as China and the USA (Power Africa), among others. Huge untapped potential abounds, with many companies and African governments investing in solar energy, wind power and coal power in SSA, with others like Kenya, for example, also entering discussions around nuclear power generation,” notes Sammy Muthui, chief operating officer at Aon Kenya.

“The potential for hydroelectricity generation alone is enough to power the entire African continent. Natural gas and petroleum discoveries are taking place every other day in addition to the great potential for geothermal capabilities along the East African Rift (EAR) Valley,” he adds.

However, “The risks inherent in the power sector are complex and are further complicated by the political environment in many African countries,” says Muthui. “It is crucial for investors in the sector to effectively navigate all these aspects in their risk assessments.”

Risky realities

Projects in the region face various political risks underpinned by various political tensions fuelled by poverty, ideology or ethics, the paper states. “These may be driven by scheduled or unscheduled elections, general civil unrest in the border regions of the respective countries, hostilities between the different religious or ethical groups or fights regarding various commodities and resources.”

“[Political risk] used to be an ancillary cover, but it is now often the ‘make or break’ cover for a power project in the region,” comments Gemma Avey, strategic development manager for the Aon Global Power Specialty. “Interviews with key decision makers in the market revealed that political risk cover is still complex depending on the type of project, the region and crucially, the ownership structure of these projects.”

“Each project is scrutinised on its own merits and different markets such as the export credit agencies (ECA), the private political risk insurers (PRI-market) or the multilaterals have partially different underwriting approaches. It is vital to engage them as early as possible. A deal breaker for cover could be if the project is not deemed sustainable for the host country, the lack of experience of certain project parties or if certain guarantees are not obtained by the government,” notes Silja-Leena Stawikowski, head of political and special risks at Aon Credit International in Germany.

Tenor trouble

Werner Richter, regional head of credit, surety and special risk of Kiln Europe S.A. (KILN), explains in the paper that there is a discrepancy between the long-term investments needed for power projects versus the short time frames in which the political landscapes can change.

“There are many ambitious projects envisaged for the region, but while there is political volatility here investments are not secure without the appropriate political risk cover. Political situations can escalate rapidly as we have seen in countries such as Ukraine that were deemed stable,” Stawikowski explains.

Underwriters are cautious to give long tenors for political risk cover under these circumstances. “A lot of analysis goes into this (tenor of policy) and careful consideration goes into the tenor of political regimes but you cannot predict if these might be forcibly changed. During election times this becomes challenging, so we try to tailor the tenor of the insurance policy to a manageable period. There would be a maximum tenor of 10 years but we have taken an active decision to moderate the tenor to three to five years in most cases,” Richter says.

“We observed that multilaterals play a huge role in making projects in this region come to life, particularly by being able to offer longer tenures or sometimes cover without certain ministry guarantees that the commercial market would need,” notes Avey.

“What we do lack on the reef are proper risk management solutions that are growing and adapting in tandem with the growth in the sector,” says Muthui.

The monitoring challenge

The majority of underwriters interviewed for the paper stated that while some major multinational companies have the means to monitor political risk – smaller and maybe less experienced companies do not. This means that it is even more vital for the small and mid-sized companies to engage experts to understand the exposure to political risks and how negligence can have critical impacts on any size of project.

The whitepaper aims to share the challenges, concerns and advice of leaders in the market, to provide insights to companies investing in or owning a power generation or transmission asset in this region. Access the full report here.

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