Thursday, 21 August 2014

Will Ghana’s $498 Power Compact deal with the US be enough to bring about much needed transformation to its energy sector?

On 5th August 2014,  U.S. Secretary of State, John Kerry, and the President of Ghana, John Dramani Mahama, signed the second Millennium Challenge Corporation Compact (MCC), the Ghana Power Compact, worth $498 million.

As expressed in speeches by Mr. Kerry, President Mahama and the CEO of the MCC prior to the signing ceremony, this second compact is geared towards transforming Ghana’s power sector, that is:
  • investments in projects focused on distribution to make Ghana’s energy sector financially viable and capable of attracting private investment;
  • funding of initiatives supporting greater energy efficiency and cleaner renewable energy to enhance reliable electricity;
  • reform of critical policies and regulations.
Undertaking these measures within the compact should eventually bring about growth in the Ghanaian economy as they noted.

The signing of this second compact is timely for several reasons, but significant among them are the following.

Timely relief for Ghana’s energy-starved industry and consumers? 


First and foremost, Ghana’s power sub-sector has been hit by supply shortfall since 2012, culminating into one of the longest load shedding of electricity (or what is popularly called in Ghanaian parlance ‘dumsor, dumsor’) for the 72% of the population with access (PDF) as well industries.

This situation has affected adversely all end-users to varying degrees as well as the economy. In particular, a number of industries have suffered financially due to the prohibitive costs associated with the purchase and running of diesel/petrol generators in their day-to-day activities.

The signing of this second compact will signal a certain level of hope for all end-users of electricity in the country because of the possible improvement that will be witnessed on power supply reliability.

Opportunity to accelerate Ghana’s transition to a green economy


Secondly, Ghana has initiated measures that will ensure that her economic growth and development are along a low carbon path (PDF) to help tackle climate change mitigation and adaptation.

Credit: afh_hq - Flickr
(CC BY-NC-SA 2.0)
Although Ghana only contributes a minuscule percent (0.5 percent) to the total global Greenhouse Gas (GHG) (PDF) emissions, the impact of climate change on all the sectors in the economy and the very poor people is substantial.

Not only will the transformation of the power sector, especially the enhancement of renewable energy supply, help in the mitigation of GHG emissions, the spillover effect of abundant energy supply will also boost the activities of all sectors to result in the envisioned low carbon growth.

Thirdly and related to the second reason is Ghana’s pursuit of the transition to a Green Economy (PDF), which will serve as a vehicle for achieving sustainable development and poverty eradication.

With support from United Nations Environment Programme (UNEP), the country has already undertaken a Green Economy Scoping Study (PDF), which shows that sectors including agriculture (cocoa and fisheries), forestry and logging, energy (electricity), and industry (waste) present great opportunities for the transition to an inclusive green growth. While a full green economy assessment of these sectors is currently underway, the nation has already started mainstreaming green economy indicators into the next 3-year Medium-Term Development Policy Framework (2014-2017) – Ghana Shared Growth and Development Agenda (GSGDA) II after the expiration of the GSGDA I (2010-2013) (PDF).

Will the “carrot and stick” conditionalities approach work?


There is no doubt that this second compact agreement with the U.S.A is vital for the inclusive green growth agenda of Ghana. 

However, as many people including politicians observed immediately after the signing ceremony, many conditions have to be adhered to before the nation can access this fund. Some politicians have even doubted the country’s ability to access the fund as a result of these "carrot and stick" conditionalities. One, however, argues that they are important not only to get the leadership and institutions to act decisively and help usher in much needed reform in Ghana’s currently inefficiency-riddled power sector. As my colleague Ana Pueyo has observed, a number of constraints have prevented sufficient investments in electricity infrastructure in African countries, including weak regulatory framework, ineffective reforms, etc., and certain measures are needed to offset them.


Vital measures for ensuring the success of power sector development in Ghana


This second compact agreement is therefore a watershed in the power sector development of Ghana, but can only be realised if measures such as the following are given attention.

  • Strong leadership and good governance are very imperative. Particularly, the leadership of the country should be bold enough to take tough decisions that are right for this compact and not for politically expedient reasons. 
  • The leadership needs to pay attention to available scientific evidence to inform the policy decisions that will be taken. In this regard, research activities, findings and recommendations of various scientific studies such as the Green Growth Diagnostics for Africa Project that relate to the overarching goals of this compact are indispensable in shaping some of the policy options to adopt.
  • Greater stakeholder (private sector, civil society, academia, sector players) consultation is needed in order to build consensus around the measures to be adopted.

About the author

Simon Bawakyillenuo is a research at the Institute of Statistical, Social and Economic Research (ISSER) at the University of Ghana, Legon. His key research interests are renewable energy, environment, climate change and rural development.

Thursday, 14 August 2014

The Argentine debt affair: a threat to the international financial system

The decision by a New York District Court judge that blocked Argentina’s payments on its restructured debt to over 92% of its creditors because of opposition from the speculative hedge funds (the ‘vulture funds’) holding the rest of the debt is no doubt bad news for the Argentine government and the Argentine people. But it is also bad news for the international financial system as a whole and for international economic governance generally.

The point has by now been made by a number of weighty observers, ranging from Economics Nobel Prize laureate Joseph Stiglitz(1) to a Deputy Director of the IMF(2), to the United Nations Conference on Trade and Development(3) and the French government, which took the unusual step of filing an amicus curiae brief before the US Supreme Court urging it to reverse the decision.(4)

The French brief sets out neatly the adverse consequences of the decision for the global financial economy: it jeopardises the ability of sovereign debtors to achieve orderly and negotiated restructurings of their external debt; and it threatens sovereign lending, particularly development aid in the form of loans to developing countries.

None of this, of course, has made any difference to the outcome of the case so far; the US Appeals Court confirmed the sentence of the District Court and the Supreme Court refused to hear the case. And this is perhaps the most serious worry coming out of this episode: that complex and delicate international financial negotiations with an impact on the lives of millions of people be decided by domestic courts that have neither the required expertise to understand the technical questions involved nor the sensitivity to international development and social justice issues to put the legal arguments in perspective.

In these respects, the Argentine case is an extreme example. The judge in the suit, Thomas P. Griesa, lacks by all accounts the basic background in economics and finance to make sense of the issues. A New York Times report on one of the latest hearings states that ‘this week’s hearing made clear that he had not completely understood the bond transactions that he had been ruling on for years.’

The problem, however, goes beyond mere incompetence. It has to do with a mindset whereby sovereign debt is no different from ordinary individual debt. Judge Griesa kept on referring in his rulings to Argentina’s ‘obligations’ as if they should override any other considerations, in the way in which individual contractual obligations do. This runs contrary to well-established understandings in the sovereign bonds market; as Stiglitz puts it, ‘all investors in sovereign bonds know that there is a risk of default — that's why the bonds can pay a far higher interest rate than U.S. bonds.’ In fact in the Argentine case the bonds were purchased by the vulture funds in the secondary market at heavily discounted prices after Argentina had declared default in 2001.

To equate this situation with ‘obligations’ in a private loan contract is to miss the very essence of sovereign debt arrangements.

The way out of this conundrum lies in the setting up of an international system for the orderly restructuring of sovereign debt that takes the issue out of domestic courts and into specialist international jurisdiction. A proposal to this effect was already made by the IMF in 2003 and related work on Principles on Responsible Sovereign Lending and Borrowing is underway in UNCTAD. What is needed now is enough political will to implement.

Notes:
(1) Joseph Stiglitz, 'A Global System Is Needed for Debt Restructuring', The New York Times, Room for Debate, 1 August 2014.
(2) 'IMF Launches Discussion of Sovereign Debt Restructuring', IMF Survey Magazine, 23 May 2013.
(3) UNCTAD, Argentina's 'vulture fund' crisis threatens profound consequences for international financial system, 25 June 2014.
(4) Available at http://www.shearman.com/~/media/Files/Services/Argentine-Sovereign-Debt/2014/Arg48-Brief-for-Republic-of-France-as-Amicus-Curiae-in-Support-032514pdf.pdf.

By Carlos Fortin, Research Associate, Institute of Development Studies

Monday, 11 August 2014

U.S.-Africa Summit has promised big investments for African electricity but will it have any impact on the poor?

The US-Africa summit held in Washington last week brought some big promises for a continent in desperate need of electricity infrastructure.

New investment pledges for electrification by US private companies, the World Bank and the Swedish government increased commitments for the Power Africa initiative to more than $26 billion, having started as a $7 billion, five-year federal program in 2013.

These are big numbers.

Looking back, total committed US aid for electrification was $11billion over a much longer period (1990-2010) and for a much larger set of recipient countries. Sub-Saharan African countries received a total of $25 billion of aid for electrification during that same period, $18 billion if you exclude South Africa. Data on private participation in infrastructure show a total of $20 billion of private investments in electricity infrastructure for sub-Saharan Africa during between 1990 and 2013 .

So yes, if these pledges are actually disbursed, they can make a huge difference.

Africa needs this and more.

Why has investment in African electricity been so low up to this point?


Despite the fact that 48% of the world population without access to electricity lives in sub-Saharan Africa, the region only receives 12.61% of global foreign aid  and 2.3% of private investment for electrification in developing countries between 1990 and 2012.

Sub-Saharan Africa (excluding South Africa) has 36,500 MW of installed generation capacity to serve a population of more than 830 million. A similar capacity serves just 9 million people in Sweden or around 40 million in Poland or Argentina. Unreliability of supply costs Africa an average 2.1% of its GDP and most African companies point to the absence of reliable electricity supply as their biggest constraint to growth.

Africa is rich in renewable and non-renewable energy resources but economic, financial, political, institutional, human capital and geographic constraints have prevented sufficient investments in electricity infrastructure, for example:

  • Bad governance has acted as a major drag, with the public sector unable to guarantee adequate and reliable supply;
  • Ineffective power sector reform has resulted in hybrid power markets with unclear responsibilities for the state-owned utility and uncertain access to the market for private actors;
  • Regulation lacks the credibility which would sustain long-term investments;
  • Artificially low tariffs to meet political promises don’t allow for recovery of capital costs and subsidies delivered through electricity tariffs are highly regressive;
  • The cost of finance is high as a result of domestic capital scarcity and the requirement of high rates of return commensurate with high political, macroeconomic and regulatory risks.

The prevalence of back-up generators and the increasing use of leased emergency power are striking symptoms of dysfunctional African utilities. The cost of electricity provided by these generators can be three times higher than electricity from the grid, which shows that economic constraints are only one part of the picture.


Electrification programmes require careful planning if they hope to have any impact on the poor


At IDS we find the announcements of large investments in electricity infrastructure for Africa exhilarating. We are particularly interested in whether, and how, they can bring Africa closer to a path of green inclusive growth.

Firstly, to achieve a strong form of inclusive growth,  new investments in electricity need to lead to a rise in the relative incomes of the poor, so that growth also reduces inequality.

This effect cannot be presumed. Indeed, electrification projects often leave behind poor communities and even when the grid or off-grid systems reach a poor community, evidence shows that connection rates can stay low due to prohibitively expensive up-front costs. Our work has found that, when poor families eventually connect, unreliable service, low consumption and lack of productive uses limit positive impacts. In some cases, policies that are intended to benefit the poor, such as tariff subsidies, are poorly thought out and can end up benefiting the better-off and undermining the sustainability of the project. Electrification investments therefore require careful planning to specifically target the poor. Our recently published Policy Tool for the Maximisation of Benefits for the Poor of Investments in Renewable Electricity aims at guiding policymakers to achieve that.

Secondly, as regards greenness,  large investments in generation, transmission and distribution required in Africa could allow the continent to leapfrog towards a cleaner and more efficient electricity sector.

Given the large access gap in Africa, this would only be justified if cost-competitive clean generation technologies are targeted or if their extra costs as compared with fossil fuel alternatives are borne by external, developed-country parties. The good news is that many renewable generation technologies are already competitive with fossil fuel alternatives in sites with good resource availability. This is clearly the case for hydro power in Africa, but also for geothermal and wind power generation and  for a set of renewable sources, even solar, in most off-grid locations.

Our Green Growth Diagnostics for Africa project is looking at how to target electricity generation technologies that are green, inclusive and make economic and financial sense, with a particular focus in Ghana and Kenya, so we will be keeping a sharp eye on whether these big promises will deliver reliable, affordable and green electricity for Africa’s poorest communities.

About the author
Ana Pueyo is a Research Fellow at the Institute of Development Studies (IDS). She has been working in the fields of energy and climate change for over a decade. 

Other blogs by Ana Pueyo on Globalisation and Development: 

Friday, 1 August 2014

Social Enterprises – and why we must stop romanticising them

That we need to find alternatives to the current capitalist system does not come as a surprise to anyone. Bankers and multinationals are organising events like the recent ‘inclusive capitalism’ conference held in London a few months ago; economist Thomas Picketty is being compared to a ‘rock star’ because of the success of his latest book on inequality. In this current context, the idea of starting a company which main goal is to achieve social impact while being financially sustainable has gained recognition over the past 20 years…

Wait, what? A business that aims to create social value…?

When I mention the term ‘social enterprise’ reactions vary from total excitement to not having heard of it before, others reject the idea that ‘enterprise’ and ‘social’ could ever go together.

During the last few years, the term has acquired a lot of hype, being portrayed as a ‘one size fits all’ solution, which integrates non-profit organisation ideals, social change and business mindsets to develop sustainable solutions. The Skoll World Forum, a yearly event organised by the Skoll Foundation, praises social entrepreneurs and attracts more than 1,000 people from the social, finance, private and public sectors, including the World Bank, McKinsey or Citigroup as their partners. Others portray social entrepreneurs as heroes and enlightened human beings by telling their stories as ‘people that can change the world’.

Credit: Flickr 2014 014 Skoll World Forum

The problem with this type of narrative is that it creates an utopian idea about social enterprises, that shifts the conversation to a simple yes or no question, rather than creating the space to discuss the real opportunities and limitations that social enterprises offer.

This is why we have to stop idealising social enterprises, and start analysing them as a means to achieve a social goal, rather than as the goal itself. I have seen social enterprises offer platforms to reach goals, and the conversation should not stop here because few overhype them.

Social enterprise as a means and not a goal

I became familiar with social enterprises while living in the Philippines in 2009, where I co-organised a social business-training program for 30 female social entrepreneurs, together with the University of Asia & the Pacific. The social enterprises ranged from a local eco tourism company in Palawan to Microventures, a social enterprise that supplies sari-sari store owners** with products that offer social value to the community, such as health, water, solar and technology solutions.

There are many unanswered questions around the social enterprise model, and the act of balancing social and profit goals is not exempt of challenges. Nevertheless, from these and other initiatives, I have observed three common principles that successful social enterprises followed:
  1. ‘Bottom – up’ initiatives – understanding the root of the problem and building up the business model to address it; in order to create the systemic change sought, the social enterprise has to find its root cause, so it can address the problem rather than create a temporary fix.
  2. ‘Co-created’ and ‘Empowering’ - developing the social enterprise together with the potential customers or participants of the business (co-creating it), by including the voices of all stakeholders from the beginning, helping define the problems and build the solutions. Social enterprises that are ‘co-created’ with the community are more likely to be empowering, supported by the community and successful.  
  3. Financial stability - building a business model that searches for ways to generate income as the means to sustain the social goal in the long term.
These principles lay out a way social enterprises can be viable initiatives that look for sustainable, market-based solutions, grown from the communities that try to solve development issues previously unmet by other actors.

Still, they have limited capacity to achieve large-scale impact. So, how can other actors continue to support these interventions, taking into consideration their limitations?

Going Forward  

Governments can promote policies that demand accountability and transparency to social enterprises, so as to improve the metrics in the sector; they can also promote policies that encourage inclusive social enterprises, which leverage on the communities’ existing skills, as a way of providing sustainable livelihoods.

On the other hand, the private sector can benefit from the local knowledge of social enterprises by partnering or supporting them, as a way of entering markets already established by them, or as a way of having reliable suppliers. Moreover, social enterprises can be initiatives for businesses to achieve their CSR goals.

For development practitioners, social enterprises offer another tool to work with, in order to achieve their goals. Additionally, they can influence social enterprises to integrate best practices from the non-profit sector in their business model, such as participatory and inclusive methodologies or human development approaches. Support from other groups, such as impact investors or research centres, is also essential.

It is not an easy task, and, in the end, it will be up to each individual to decide their own agenda and limits of their support.

  ** A sari-sari is the smallest unit of retail in the Philippines, usually owned by women and of informal nature.

About the author
Maria del Mar Maestre Morales is a Research Assistant with the IDS Globalisation Team. She is currently working on a project examining 'Public Private Partnerships (PPPs) in Agriculture: Enabling Factors and Impact on the Rural Poor'

Thursday, 24 July 2014

How is China changing the international donor landscape?

With the establishment of the BRICS Bank, plans for which were being consolidated at the recent BRICS Summit, and the Asian Infrastructure Development Bank, South-South collaboration is changing the global development architecture.

At the same time, these new development banks will have a complementary role by providing additional loans to developing countries with enormous infrastructure investment needs. The creation of these institutions is can be seen one aspect of South-South cooperation, and also part of a wider process of fragmentation of development cooperation.

For emerging development partners, this form of engagement is distinctly different to  traditional donor-recipient relations, who often focus on the Paris Declaration, and emphasise issues such as the use of national systems and un-tying of aid.


Credit: GovernmentZA (CC BY-ND 2.0)
South-South cooperation focuses on a different set of principles, including equal partnerships, respect for national sovereignty, and non-interference in domestic affairs or recipient countries. Other characteristics of South-South cooperation are that aid should be mutually beneficial (which is often translated as “tied aid”), whereby development funds are channelled to domestic firms from donor countries.

China’s Growing Role in Africa


The expansion of South-South cooperation has provided additional development opportunities for Africa. Indeed, China has become a key driver of growth in Africa. Together with an improved policy environment in Africa, this has led to the branding of Africa as the “emerging continent” with an average growth rate of nearly 5 per cent in 2013 and possessing three of the ten fastest growth economies of the world.

China is not only investing in the extractive sectors, but Chinese SMEs are also becoming more active in African markets, which demonstrate the business opportunities on the continent. However, it should be emphasised that it is the responsibility of African governments to translate this growth into sustainable development and poverty reduction.

It is clear that there are clear complementarities between the development modalities of traditional donors and China, although this would require strong and effective leadership from aid recipient countries. One good example of how different aid modalities can be effective in building value chain production process and expanding the manufacturing base , which could be supported through infrastructure development financed by China, while overall competitiveness will be supported by policy reforms through a budget support operation by traditional development partners.

China, Africa and Triangular Development?


These kinds of complementarities are also reflected in the triangular development cooperation models, which aim to foster cooperation between traditional donors, emerging development partners and recipient countries. From the perspective of African recipients, triangular development cooperation also means opportunity to share best practices and learn lessons from other developing countries. For example, China high growth rates over the last three decades have reduced poverty in historical terms and this admired by many developing countries.

For fragile states, both China and traditional donors are complementary in reconstruction and peacebuilding process, although this can differ widely for individual African countries depending on the resource endowment and existing investment, trade and development cooperation relationships.

Credit: UN Photo (CC BY-NC-ND 2.0)
One recent trend is that China is moving beyond trade and investment opportunities, and increasingly is participating more widely in UN peacekeeping operations in Africa.

One of the conditions for this is that there is clear African mandate, as expressed by the African Union and other Regional Economic Communities.

This fits well with the Chinese win-win approach that respects the principles of national sovereignty and non-interference in the domestic affairs of a country.

The Capacity for Coordination


However, to ensure that these additional development financing opportunities provided by South-South cooperation are harnessed requires the capacity to align all development partners with the national development plan of Africa both at regional and national level. This is a challenge for many fragile states which, at least in the early phase of post conflict recovery, lack the capacity to coordinator donors.

Two policy options can be considered:

1.    All development partners could support fragile states by improving transparency of their interventions, thereby facilitating coordination of development cooperation.

2.    Fragile states can designate a lead development partner to support the coordination activities in the country, although once capacity is sufficient, this should be undertaken by Government itself. These approaches will support the successful transition from fragility to sustainable development.


Richard Schiere is Chief Results Officer in the Quality Assurance and Results Department of the African Development Bank Group. He authored the article entitled "The Impact of China on the Donor Landscape in African Fragile States' in the recently published IDS Bulletin, "China and International Development: Challenges and Opportunities". The findings, interpretations, and conclusions expressed in this article are entirely those of the author and do not necessarily represent the view of the African Development Bank, its Board of Directors, or the countries they represent.

Related blogs on Globalisation and Development: