Electrifying African firms for growth and development
On the urgent need to rethink the core goals of Mission 300
Thank you for being a regular reader of An Africanist Perspective. If you haven’t done so yet, please hit subscribe to receive timely updates along with over 29,000 other subscribers.
This is a follow up to earlier pieces that I wrote on development in an age of climate change; why (energy) poverty is not a viable climate strategy in the developing world; how to electrify African economies for growth and development, on the need to invest in growing the size and productivity of African firms, and why the World Bank and other IFIs should get serious about climate adaptation in low-income countries.
I: Electricity for economic growth and jobs
In ten years, what will we say about Mission 300 — the project that seeks to connect 300m Africans to electricity by 2030?
This question is motivated by this fantastic conversation between Moussa Blimpo (an Economist at Toronto University) and Andrew Debalen (Chief Economist for Africa region at the World Bank). I highly recommend following Debalen’s podcast if you don’t already do so.
In addition to emphasizing the promise of Mission 300 (e.g., positioning electricity as a top policy agenda), Blimpo also convincingly describes the myriad things that could go wrong with the project over the next decade. His basic claim is that if African governments merely adopt the externally-imposed goals in Mission 300 (of course inspired by SDG7), they will end up saddling themselves with even more external debt (amidst a global fiscal squeeze), fiscally unsustainable subsidies to retail power consumers, but without adequate investments in reliability and affordability in a manner that will enable African firms to grow, become globally competitive, and create more (formal sector) jobs.
The core goal of Mission 300 is to halve the number of people without access to electricity on the Continent, from 600m to 300m. Most of its critics (including yours truly) argue that given its potential to mobilize both financial resources and policy attention, a project of this magnitude should instead focus on strengthening African grids, improving efficiencies in national and regional power markets, and ensuring that the cost of power ceases to be an impediment to firm growth and productivity. Households would then be able to afford connectivity on their own (in part thanks to earnings from new jobs created by increased economic activity); or get connections as part of social programs financed by tax revenues generated by expanding economies.
To be blunt, the driving motivation of Mission 300 should be to power firms, not households.
On whether policy around the financing and policy attention unlocked by Mission 300 should prioritize electricity access to households or firms, Blimpo is squarely on team firms.
To reiterate for emphasis, the basic argument is that increasing the reliability and affordability of firms’ access to power will enable them grow, create jobs, and therefore empower households to afford power connectivity on their own. This approach will also have the added advantage of avoiding a potentially fiscally ruinous situation of ending up with unaffordable subsidies. Thereafter, the resulting growth driven by firms should create enough fiscal space to allow for public investments in rural electrification in order to address equity concerns. The whole discussion is worth a listen (and Debalen, being the excellent interviewer that he is, raises some important counterpoints as well).
I am firmly with Blimpo on this, for two reasons. First, the existing evidence so far on rural electrification drives across the Continent calls for more careful consideration of the economics of such projects than currently exists under Mission 300. A common feature across most of these projects is that lots of households remain unconnected “under the grid.” Typically this is because many cannot afford the connections or just don’t have use for electricity beyond lighting (for which they typically have cheaper options). For example, a study in Zambia found that the main predictor of connectivity was potential economic use of electricity:
Our study finds that the average effect of electrification on electricity adoption and usage is modest at best. This echoes the insights from the IGC’s research in Rwanda, which shows that up to ten years after grid arrival, only 51% of households in electrified communities are connected to it.
…. We find that most villages electrified […] fall into one of two categories: close to zero or almost full electricity adoption. Essentially, grid extension to a rural Zambian village either has a massive impact on electricity adoption or virtually none.
The figure above demonstrates the degree to which electrification of locations does not always equal effective access by households. Kenya’s experience corroborates these findings:
The leading interpretation of our empirical findings is that mass rural household electrification does not lead to greater social surplus in Kenya, according to standard criteria. The cost of electrifying households appears to be five times higher than what households are willing and able to pay for these connections, and consumer surplus appears lower than total costs even when attempting to address credit constraints or utilizing subsequent electricity consumption patterns among connected households. While per-household costs fall sharply with coverage, reflecting the economies of scale in the creation of local grid infrastructure, they appear to remain higher than demand, implying that social surplus falls with each additional subsidized connection. These results are also consistent with the evidence of negligible medium-run economic, health, and educational impacts 16 and 32 months after connection. Further evidence of the low demand for electricity comes from a nearby area in Kenya, where just 1% of rural households provided with a large cash transfer of $1,000 chose to connect to the electric grid (Egger et al. [25]).
Given the evidence, it’s worth remembering that underutilized grid extensions aren’t costless. When utilities and existing consumers are left holding the bag for failing credit-dependent projects (however well intentioned), everyone suffers. Costs go up. Maintenance and reliability suffers. More households and firms exit national grids, thereby driving per customer costs even higher. Plus evidence suggests that the information so generated about poor service delivery erodes government legitimacy and overall tax morale.
The point here is that Mission 300 must seriously consider the question of ongoing commercial viability of the 300m new connections target. Importantly, the hoped-for blooming of micro-entrepreneurship won’t cut it. The argument by Blimpo and others is that the best way forward would be to lock in the cross subsidy from successful large firms (both directly through wages and tax revenues to pay for electrification as a social investment).
The second reason I agree with Blimpo is with regard to the potential missed opportunity for delivering a massive boost to private sector growth on the Continent. Consider the findings in this paper by Justice Mensah (here’s an ungated version):
Results from the paper reveal that electricity shortages exert a substantial negative impact on employment rates in Africa. The evidence also shows three channels by which electricity shortages affect labor market participation. First, on the extensive margin, electricity shortages constrain the creation of new businesses through their negative effect on entrepreneurship. Second, in the intensive margin, electricity shortages reduce the output and productivity of existing firms, thereby causing them to reduce labor demand. Third, electricity shortages act as a distortion in the business climate, thereby reducing the trade and export competitiveness of African firms.
The favored economic justification for Mission 300 by its proponents largely focuses on the first impact of electricity shortages: a reduction in the creation of new (micro) businesses. It is also the one goal that excites the heads of the various organizations involved. Which is perfectly understandable. There’s warm glow in claiming to have conveyed millions of low-income people to power so that they can start lots of micro-enterprises (Forget that they’d most likely be selling the exact same goods/services as their neighbors and undercutting each others’ margins towards zero).
The case against this focus is simple. The goals we set determine the means we deploy to achieve them. If the goal of Mission 300 is 300m new connections by 2030, two things are likely to happen. First, politicians will jump on the idea and engineer lots of “one-bulb connections” without much economic impact within or outside the household. Second, there will be pressure to sidestep national grids in order to hit the target on time (2030 is only five years away). Distributed generation systems will proliferate, with the added transaction costs and complicated subsidy arrangements left to governments already stretched by other administrative demands. The off-grid solutions will likely to be costlier per customer in the long-run, and have relatively limited overall economic impact (compared to revamped grids). And so by 2030, the cost per customer to maintain grids will likely go up as many households and corporate clients go off grid. Deteriorating grids will force even more households and firms off-grid, and so on and so forth.
The resulting rising cost of power will negatively impact African economies’ ability to create jobs:
I find that outages reduce the probability of employment by about 13.5 percentage points (pp). The results of the country case studies in Ghana and Nigeria also show a negative effect of outages on employment that are economically and statistically significant, albeit with relatively low magnitudes. The estimates suggest that the ‘‘dumsor’’ power crisis in Ghana increased unemployment by 4.7 pp. Meanwhile, in Nigeria, outages are associated with a 5.7 pp increase in unemployment. Thus, overall, the estimates suggest that outages are associated with a 4.7 pp to 13.5 pp increase in unemployment in the region. Additionally, evidence from the paper suggests that the effects are largely concentrated in employment in non-agricultural sectors and skilled jobs. Employment of unskilled workers is unaffected by outages. Also, the job losses associated with outages are largely borne by private-sector workers, highlighting the response of private firms to unfavorable business conditions.
To be clear, this is not a case for rationing electricity access on the basis of the potential economic impact. That is a recipe for locking in spatial inequalities into the future — universal electricity access must remain as a policy goal. Plus electrification is the best way to lock in clean final consumption of energy into the future (the source of the electricity may be transitional in the meantime). The point here is that a project like Mission 300 would have a much bigger impact (including on the quality of rural electricity connectivity) if the focus was on massively increasing power generation, strengthening grids (including, in some markets, by injecting competition in the utility business), improving the operations of power markets, rationalizing the operations of utilities, and contributing to affordability and reliability of access for African firms.
II: Prioritizing donors’ warm glow over substantive impacts on growth and human development is bad
Over the last six months I’ve had conversations with lots of people in Africa’s energy space. Most of them have expressed a deep frustration at the prevailing misunderstanding of Africa’s energy challenges — especially on the twin questions of how to approach climate policies in a region bedeviled by energy poverty, and which needs rapid economic growth; and how to think about increasing energy access in the region.
The basic story goes as follows. A segment of African politicians and policymakers are extremely motivated to prioritize access to climate funds and other fungible financing for projects that can generate rents and quick political wins. Both goals are seldom aligned with individual countries’ objective long-term energy needs. Meanwhile, most of the donor community — which currently sets the agenda on global discourse on climate change and energy access — are intentionally oblivious to African countries’ energy needs. Coming from historical high-polluter countries, they tend to merely externalize their domestic decarbonization policies. Indeed, some go as far as preaching de-growth policies to energy-poor low-income countries; and then come up with all sorts of reasons why Africans — the perennial “conscience of the world” who are “one with nature” actually prefer to stay energy poor to save the planet. Not enough of these people take the region’s unconscionable energy poverty and its impacts on human development seriously.
Why do African policy elites buy this stuff? The problem, as many see it, is that a combination of cultures of policy extraversion, donor dependence (both by states and NGOs), and a reflexive deference to external ideas means that many African policymakers and climate activists rarely question the misguided ideas and projects that get foisted on them by external actors.
The net result is that African policymakers and climate/energy experts often waste time on unworkable ideas and policy commitments that are not credible in the long run. Many governments commit to climate policies that fail to survive first contact with the realities of their domestic distributive politics and/or policy implementation capacity.
Furthermore, the world of preference falsification so created has proven to be a fertile ground for all kinds of hucksters to flourish (especially in climate finance). And of course, reflexive policy extraversion makes African leaders and policymakers the perfect unwitting victims. Many fall for all kinds of schemes as long as they are presented by the right people.
This is the context in which Mission 300 is operating. There is a real risk that the amount of money involved, excitement over climate goals (distributed generation, with emphasis on renewables, gets a lot of airtime), and the headline KPI of 300m people will distract politicians, policymakers, and program managers from honestly assessing the relevant tradeoffs.
It would be a shame if the net effects of Mission 300 were higher government debt (from M300 loans and subsidies), cash-strapped utilities (because of subsidies and lack of resources for maintenance), ever more off-grid connections that rob national grids of paying customers (including for cross-subsidy purposes), and ever higher cost of doing business for firms.
Notice that those who share Blimpo’s position aren’t against electricity connectivity as a social investment. The argument is that the best way to use the window of opportunity created by Mission 300 is to fix national grids and increase the reliability and affordability of electricity connection for firms. The question of connectivity as a social policy ought to be litigated in the context of domestic politics. That’s the best way to ensure that governments fully internalize the costs of whatever rural electrification policies they end up adopting. It’s a dangerous thing for policymakers to believe that they can implement social policies designed and financed by external actors.
Soon enough the cash runs out and the specific policy champions in the involved organizations move on. And then what?
III: How to fix the core goals of Mission 300
The point of this post isn’t to gratuitously point fingers at any individual or organization. Turning ideas into projects, especially when multiple funders and stakeholders are involved, is hard. I get that, for the most part, people are doing their best given their intrinsic motivations and career incentives. Instead, it’s to remind us all that incentives matter.
What are the incentives of the champions of Mission 300 and the energy team at the World Bank? Is it to nudge policymakers in Africa to restructure their power sectors in the direction of affordability and reliability, or is it to move money out the door and race towards 300m new connections regardless of the types of connections or what happens the day after the deadline? What are the incentives of African policymakers and politicians? Is it to reform their power sectors as part of easing the cost of energy in order to make their firms globally competitive (and increase household connections while at it), or is it to paper over existing challenges with yet another shiny project with lots of opportunities for rents and ribbon cutting?
Regarding how to fix the core mission of Mission 300, I recommend the same 5 point agenda from this previous post:
Leverage Mission 300 funds to fix, as much as possible, the economics and politics of African power sectors.
Make a pro-growth agenda core to Mission 300’s DNA. Place African firms at the center of this agenda.
Don’t reinvent the wheel. Link new generation, distribution, and reforms to existing public and private sector operations.
Avoid the temptation to wish away politics. Listen to and learn from the World Bank country teams. Most of them get it.
Leverage Mission 300 to rationalize global conversations about climate change and economic development in low-income countries. Everyone must internalize the fact that poverty is not a viable climate strategy, and that energy poverty is really bad for people and the environment.
Back to the opening question, imagine if in a decade we were able to look back at Mission 300 as the initiative that, for example, solved the energy problem in specific regional markets/power pools. The initiative would have appreciably boosted power generation and distribution (load shedding sucks for households, on top of being very expensive for small firms); in addition to helping improve electricity policies and the management of utilities. Power would no longer be the millstone (in terms of price and reliability) that it currently is around the necks of firms. Rates of firm creation, productivity, and job creation would be trending upwards. And ever more households would be connected to the grid without facing constant rationing or outrages. This future is possible. And we shouldn’t give up on it for lack of ambition. We don’t have to settle for a world of expensive and unreliable power.
Well done.