How data reforms will drive investment in Africa’s energy

Private-sector funding is needed to help meet Africa’s electricity needs, but local governments can do their part by pursuing reforms that improve the investment climate.

African entrepreneurs are taking the lead in addressing their power needs, both on and off the grid. But they can’t close the gap alone, with about two-thirds of the population of Sub-Saharan Africa — or about 600 million — living without electricity. African countries need to attract foreign investment to fund infrastructure development, says Dana J. Hyde, CEO of the Millennium Challenge Corporation, a U.S. government agency focused on reducing global poverty through economic growth.

Closing Africa’s energy gap is necessary in the fight against poverty, says Hyde, so the U.S. and its partners are working all the levers to spur foreign investment.

“Africa has experienced extraordinary growth over the last decade, demand is growing, the business climate is improving, and countries are looking for partners to help meet the demand,” she says. “So I’d tell investors that there are opportunities across Africa that I encourage you to consider.”

But local governments have to do their part by taking the lead on finding solutions and ensuring good governance, says Hyde in an interview:

To address Africa’s electricity gap, how important will it be to leverage not only government resources, but also to spur private-sector investment?

Africa’s electricity deficit can’t be eliminated with official development aid alone — the needs are simply too high. That’s why private-sector investment, which represents a much larger resource for development, will be key to expanding access to electricity.

I attended the Conference on Financing for Development in Ethiopia last month, and it was encouraging to hear widespread consensus that moving forward, government aid must increasingly catalyze other resources to finance development and help alleviate poverty.

In particular, public-private partnerships can be crucial for getting large-scale infrastructure projects off the ground. But governments in developing countries often don’t have the funding or expertise to enter into partnerships with private companies. And the private sector can be reluctant to engage in developing countries without the right investment climate. So that’s one area where MCC, and government aid in general, can bridge the gap and bring governments and the private sector together.

The MCC has made good governance a key component of its aid criteria. What are some key reforms governments need to implement in order to attract investment in the power sector and ensure sustainable economic growth?

Companies looking to invest overseas will look at a country’s track record on rule of law, control of corruption, protection of property rights and enforceability of contracts. MCC, for example, only works with countries that perform well in these areas in relation to their peers, and many companies have told us that they see our presence in a country as a stamp of approval.

But we know that firms considering investing in the energy sector are also looking for business-friendly, transparent procurement policies. So in addition to investing in hard infrastructure, MCC works with partner countries to provide technical expertise and help to develop policy reforms that also encourage the private sector to invest.

Our country partners and the private sector tell me that MCC’s ability to leverage systemic reforms is as important — if not more important — than the dollars we bring to the table. Because while the dollars go away after five years, the policy reforms endure.

What advice do you have for governments to implement the reforms? What types of reforms are usually most effective, and do you have any examples of success stories?

Reforms can take different forms — policy, legal, regulatory or institutional — but they can all help unlock private-sector investment. And that’s critical for economic development, because the public sector alone simply cannot meet the global demand for infrastructure services such as power, water and roads.

There’s no one-size-fits-all reform program — reforms are specific to the country, sector and context. But at MCC, we have found that the most effective reforms are those that are grounded in data and owned by the country and its stakeholders.

At the heart of our compact with Ghana, for example, is a strong commitment from the Government of Ghana to implement reforms needed to transform its power sector and put it on a path to solvency and sustainability. The compact will help create a financially viable power sector that meets the needs of businesses and households. Most importantly, we expect our Ghana compact to catalyze about $4 billion in new private investment and activity in the coming years.

This article is published in collaboration with Ideas Lab. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Dana J. Hyde is CEO of the Millennium Challenge Corporation. 

Image: A technician works an electrical line. REUTERS/Carlo Allegri.