South Africa: The Wealth That Lies Beneath African Soil

Last Updated: 14 April 2013
Article by Happy Masondo

The numerous renewable energy, economic and infrastructure developments on the African continent make it an attractive investment destination. All that is required to take successful African economies to the next level is the appropriate harnessing of the wealth that lies beneath its soil.

A new minimum wage of R105 per day was introduced in the Government Gazette No 36115 on 5 February 2013 ("the new minimum wage"). The Gazette also amended the minimum wage provisions contained within Sectoral Determination 13, Farm Workers Sector, South Africa ("the sectoral determination") of the Basic Conditions of Employment Act 75 of 1997 (as amended) ("the BCEA").

ENERGY RESOURCES REMAIN UNTAPPED

According to a report1 by the World Bank on "Energy in Africa", 25 African countries face an energy crisis, while the African continent is well endowed with energy resources that remain untapped. According to the United Nations Industrial Development Organization (UNIDO), Session of Heads of States and Governments of the African Union2, Africa continues to face critical challenges related to its energy sector, characterised by a lack of modern energy services (particularly in rural areas), poor infrastructure, low purchasing power, low investments and an overdependence on traditional biomass to meet basic energy needs.

At the recent Africa Energy Indaba Conference, hosted at the Sandton Convention Centre from 18 to 21 January 2013, one of the panel discussions had a debate on whether regional integration could be a key step towards the ability of African countries to import and export electricity amongst each other.

In its most basic form, regional integration is a means by which states enter into regional agreements to enhance regional cooperation through regional institutions. There are numerous examples of these cooperative agreements in African including the Southern African Development Community (SADC), the Economic Community of West African States (ECOWAS), the Intergovernmental Authority on Development (IGAD) and the Economic Community of Central African States (CEMAC).

Most industry experts assert that the solution to the African energy crisis lies in harnessing cross-border electricity trade, improving existing utility companies, improving access to electricity on a large scale and the deployment of large scale renewable energy systems. The UNIDO report asserts that, in view of their modular nature and availability at local level, renewable energy technologies can contribute to sustainable development in Africa.

According to a report published in an online power journal, South Africa's energy generation capacity will need to grow by more than 40,000 MW over the next 20 years, and will have to be twice as much as what is available today3. Asset manager Futuregrowth Asset Management ("FAM") furthermore believes that renewable resources could make up nearly 18 GW, or 42% of new generation capacity if the government sticks to targets set out in the Integrated Resource Plan (IRP). It is a 20- year plan to add additional megawatt capacity to the grid4. The asset manager has provided R2.5 billion in debt funding so far which offers investment opportunities in new solar and wind projects for clients' funds under management5.

Paul Semple, portfolio manager at FAM, says renewable energy projects funded by private sector capital can play a major role in meeting the urgent need for new generation capacity to alleviate the current energy constraints6. "Investing in renewables is a growing asset theme in South African capital markets, offering a unique opportunity for our clients to access a pool of assets not normally available to institutional investors," he says.

There are numerous examples of a failure to harness the abundance of African energy resources. A recent study and report by Nottingham Trent University has shown that Libya could generate enough renewable power to meet its own demand and a significant part of the world energy demand by exporting electricity. There is currently minimal interstate energy trade between African countries despite the existence of the regional agreements referred to above. Similarly, Frost& Sullivan have conducted an analysis showing that Namibia currently imports over half of its total electricity needs while Namibia's Kudu gas fields remain untapped.

The managing director of the Namibia national power utility, NamPower, Paulinus Shilamba, recently confirmed in a report that the thinly populated southern African country generates only 46% of its own electricity. The remaining 54% has to be imported from elsewhere. The Zambia Electricity Supply Corporation (ZESCO) supplies 10% of Namibia's electricity requirements and another 23% comes from South Africa's national electricity utility Eskom whilst a further 21% is imported from the Zimbabwe Electricity Supply Authority (ZESA).

The inter dependence of Namibia is probably a good example of SADC countries working together towards desired ends of regional integration and the objectives of SADC. At the same time Namibia should in fact be self reliant for its electricity needs and able to export a bulk of its produced energy to other shores. Namibia would in fact be completely self reliant and an exporter of energy if the country's gas fields had been explored.

AFRICA'S WEALTH

According to a report in the Economist10, in the Copperbelt, a day's drive south-west of the Tanzanian border, copper has been mined since 1895. National copper production recently broke a four-decade-old record, generating enough revenue for the government to announce the building of two new power plants and three new universities. Government income from mining levies increased by 25% in 2012 and commodities are estimated to generate one-third of Africa's GDP growth, not counting indirect benefits. Once again, this illustrates the extent to which the wealth beneath, when appropriately harnessed, can go far in ensuring that African countries have sufficient power supply.

Furthermore and according to the abovementioned report11, in Zambia all eyes are currently on copper, which makes up 80% of the country's exports. One Canadian mining company, First Quantum, generates 15% of the country's tax take. Zimbabwe's economy has collapsed and the country's GDP is pretty much the same as it was three decades ago, despite extraordinary mineral wealth. The ground is full of bauxite, coal, diamonds, gold, platinum and nickel and mining is still on-going, but is of little benefit to ordinary people.12

Although Africa has been immeasurably enriched, its countries are still unable to sufficiently provide for their economies and communities through generating their own power. Regional integration could very well be the solution to the detrimental inability to effectively utilize what has been referred to as "the wealth beneath".

OVERCOMING CHALLENGES TO REGIONAL INTEGRATION

As advised by Gabriel Nahimana (Nahimana),13 who is an economic affairs officer for the United Nations Economic Commission for Africa, Southern Africa's leading economies must make every effort to promote regional integration. Removing all trade barriers, as called for by the SADC's plan, would enable them to take full advantage of the region's abundant natural resources and point the way towards deeper global integration for all of Africa.

One of the trade barriers Nahimana highlights is macro-economic policy harmonisation, which is needed to ensure that changes in one SADC member's country do not adversely affect economic activity elsewhere. The new initiative calls for all member states to harmonise their economic, fiscal, and monetary policies completely, beginning with currency convertibility and followed by exchange-rate unification and, finally, a common currency. This issue is applicable not just in the SADC region but across the whole of Africa if regional integration is to be economically practical and beneficial.

Another significant challenge in Africa is the lack of quality infrastructure. The growth of the energy and mining sectors provide much opportunity for growth and expansion on the continent, however, according to Hennie Heymans ("Heymans"), managing director of DHL Express South Africa, the lack of infrastructure proves to be a challenge for these industries14. He explains that as a result of the limited infrastructure, all materials, ranging from raw building materials to high end engineering type of equipment, need to be imported in certain regions, which results in inflated prices15.

Heymans says that Africa's contribution to the world's energy needs, specifically oil and gas, will continue to increase given all the new energy finds on the continent. It is therefore an area of massive growth and opportunity16. Heymans further says that conventional forecasts see the African oil supply growth continuing over the next 25 years, with forecasted ranges of growth over the period of between 0.5 million and 2.0 million barrels per day17. "Africa will need to adapt to keep up with the demand as well as the evolving trends, especially when it comes to logistics and transportation of goods on the continent". He explains that the closest airport or seaport are often days away in transit terms, which all adds to the cost of such investments .

The proper selection of renewable energy technologies to suit the requisite needs together with the appropriate market development conducive for private sector participation are critical ingredients in untapping the overwhelming resources found in countries such as Libya and Namibia. In order to harness an abundance of energy resources, regional economic relationships should promote flexible financing mechanisms and flexible policy making to upscale renewable energy technologies. The regulatory environment should make renewable energy projects attractive to potential investors while policy decisions will facilitate ease of entry into the African renewable energy sector

According to Jean Marc Darboux, president of Schneider Electric International, "Africa is capable of unrivalled technological progress. Some Africans have never owned telephone landlines but today own two mobile phones. Similarly, every new town, every new district should benefit from the latest smart grid technologies. And every rural village should have access to renewable off-grid energy without having to wait for conventional solutions to be provided."19

Other commentators have pointed out that "the expansion of mines in Southern African countries such as Namibia, Botswana and Zambia are set to trigger an increased need for electricity generation capacity, which will in turn will fuel the development of the transmission and distribution market in the region."20

RECENT STEPS IN THE RIGHT DIRECTION

According to a report in an online power journal21, the government of Liberia and the European Investment Bank recently agreed to a US$ 65 million loan deal as part of a financing arrangement for the Mount Coffee hydroelectric power plant rehabilitation. Liberia has put the total financing cost of the project at US$ 242. It is providing US$ 47.1 million of this, while its European partners are contributing US$ 195 million. Norway and Germany have already committed their support. It is therefore possible to break investment barriers in order to fund projects that will facilitate the generation of power in Africa, thereby paving the way for regional integration.

Aggreko CEO, Rupert Soames stated in a report22, that his company has signed power purchase agreements with Elictricidade de Mozambique (EDM), the Mozambique power utility, and its Namibian counterpart, NamPower. "Mozambique essentially is becoming an energy hub for Africa and we are working with the country, and now Namibia, to bring power to people in Africa"23, Soames is quoted as saying.

The Ressano Garcia plant is part of a project which made Aggreko the first cross-border, interim Independent Power Producer (IPP) in the Southern African Power Pool (SAPP). Under the first phase of the project, which started production in July 2012, Aggreko and its jointventure partner Shanduka supplied power to EDM for energy requirements in Mozambique. It also generated power for Eskom. "For now, it works for us power producers to complement one another," Soames said. "We could compete on different projects in the future".24 The success of the initial project, which was providing 110MW of power to EDM and Eskom, enabled Aggreko to offer additional power to other members of the SAPP. The power pool links electricity networks of nine countries in Southern Africa.

Mozambique's deputy minister of energy, Jaime Himede (Himede) addressed the opening meeting of the SAPP held in Maputo. Himedi is stated to have said that the SADC region has an electricity demand which is increasing at 3% per annum. In the light of this high electricity demand, Himede is of the view that the SADC region "will require the capacity to generate an additional 20 000MW over the next five years."25

CONCLUSION

Though there are huge challenges to overcome, it will be hugely beneficial if African countries can start working together for the common good of the continent at large. If one takes into account the wealth that still remains untapped beneath African soil, regional integration may very well hold the answer to sustainable energy supply on the continent.

Footnotes

1 “The World Bank: Energy in Africa” - web.worldbank.org; June 2012.

2 UNIDO: “Scaling Up Renewable Energy in Africa”, 12th Ordinary Session of Heads of States and Governments of the African Union, Addis Ababa, Ethiopia, February 2010.

3 “SA asset manager pushes renewables theme” - www.esi-africa.com, March 26th, 2013.

4 Ibid.

5 Ibid.

6 Ibid.

7 Ibid.

8 Solar Power Mooted for Libya – www.esi-africa.com; March 8th, 2013.

9 “More than half of Namibia’s electricity requirements imported” - www.esi-africa.com; March 15th, 2013.

10 “The Wealth Beneath” The Economist Special Report: Africa; March 2nd, 2013.

11 Ibid.

12 “Commodities are potentially the biggest threat to Africa’s future wealth” The Economist Special Report: Aspiring Africa; March 2nd, 2013.

13 “Can Regional Integration Save Africa?” Project Syndicate; March 20th, 2013.

14 “Infrastructure shortfalls must be tackled to continue Africa’s energy sector growth” - www.esi-africa.com; March 26th, 2013.

15 Ibid.

16 Ibid.

17 Ibid.

18 Ibid.

19 “Electrification of Pitti Gare village in Cameroon” - www.esi-africa.com; March 19th,2013.

20 “Mining Sector to help grow Southern Africa T&D Market,” - www.esi-africa.com; March 22nd, 2013.

21 “Kenya to fund renewables projects” - www.esi-africa.com; March 14th, 2013.

22 Alistair Anderson; “Aggreko to increase power delivery in Mozambique”, Business Day Live, March 15th, 2013.

23 Ibid.

24 Ibid.

25 “SADC requires 20GW over the next five years” - www.esi-africa.com, March 25th, 2013.

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