ENERGY AND POVERTY IN SUBSAHARAN AFRICAN ECONOMIES: SUPPLY SIDE ISSUES

1
ENERGY AND POVERTY IN SUB-SAHARAN AFRICAN
ECONOMIES SUPPLY SIDE ISSUES

• Akin Iwayemi
• Department of Economics
• University of Ibadan
• Ibadan
• akiniwayemi_at_hotmail.com

2
Outline of Presentation

• Introduction
• Main Questions and Issues
• Key Messages
• Energy and the Economy in SSA Stylized Facts
• Emerging Issues and Policy Challenges
• Getting There from Here
• Concluding Remarks

3
1. Introduction and Problem Overview

• Sub-Sahara African (SSA) economies, with the
  exception of South Africa, Botswana and
  Mauritius, are characterized by low income and
  energy consumption per capita among other human
  development indicators.
• A key question why most SSA countries are poor,
  partly captured by low comparative income and
  energy indicators, when they should be rich?
• Paradoxically, low income and energy poor Africa
  currently finds itself entangled in another major
  global economic and energy development largely
  defined by higher energy and food price trends.
• The coincidence of higher world energy and food
  prices has significantly eroded the recent
  hard-earned economic and social gains of recent
  economic and social reforms in the region, and
  exacerbated the fragile economic and energy
  conditions in the region.
• Eliminating the income and the related energy
  poverty conditions has arguably posed enduring
  economic and political challenges for SSA
  countries.
• substantial evidence that, expanded energy
  access, propelled by relatively inexpensive
  energy supply played a significant role in the
  large gains in productivity and rapid economic
  growth and poverty reduction witnessed in the
  world economy in the last century

4
1. Introduction and Problem Overview (contd.)

• a strong correlation between energy consumption
  per capita on the one hand and economic growth
  and living standards on the other used to be
  conventional wisdom.
• Though correlation does not imply causality,
  significant expansion in supply and access to
  adequate and reliable energy services is
  fundamental to the quest of SSA economies to
  achieve rapid and sustained economic growth,
  significant poverty (income) reduction,
  noticeable improvement in living standards and
  sustainable development, as embodied in the
  Millennium Development Goals (MDGs).
• Successful and widespread adoption of appropriate
  mechanized technologies that should underpin the
  significant increase in productivity growth that
  small scale industries and the informal sector
  need to generate large output growth to minimize
  income and energy poverty is contingent on
  expanded access to adequate and reliable energy
  supply.
• Notably, small scale industries and the informal
  sector activities provide livelihoods for the
  bulk of the population, and dynamic output and
  income changes in these sectors will impact
  positively poverty in the region.

5
1. Introduction and Problem Overview (contd.)

• The dramatic increases in world energy market
  prices since 1999 have made Africas drive to
  achieve affordable and expanded access to energy
  and sustainable development as embodied in the
  MDG more difficult.
• In no other regions of the world are the adverse
  effects of higher world energy prices on domestic
  energy supply, access, economic growth and
  sustainable development more severe.
• Given the low human development indicators that
  characterize the SSA region, the adverse impact
  of higher energy prices on economic growth,
  improved living standards and economic wellbeing
  is self-evident.
• Poor access to modern energy services constitutes
  a major constraint on the exploitation of
  economic opportunities, and consequently
  sustained economic growth and achievement of
  higher living standards, in most African
  countries.
• The weak though steadily improving economic
  conditions in most SSA countries in recent years
  implies that the region has limited degrees of
  freedom in taking offsetting actions to mitigate
  the impact of higher energy prices.
• The additional challenges posed by the
  requirements of economic globalization for the
  poor in the region.

6
1. Introduction and Problem Overview (contd.)

• SSA energy supply-demand outlook and
  socio-economic overall development prospects
  present significant policy challenges, given the
  current low level of regional energy consumption
  by global development standards.
• For most African countries, whose population is
  largely impoverished with limited access to
  adequate quantity and quality of modern energy
  services, the issue of increased supply and
  expanded access assumes great urgency in the
  context of the MDGs
• The degree of success of the strategies adopted
  will determine the extent to which Africa will
  share in the gains from increasing material
  prosperity associated with globalization, and

7
2 Key Questions and Issues

• The key question we address in this study is
• How can Africa achieve expanded energy access and
  oil and gas wealth sustainability efficiently and
  effectively within a generation?
• The current poor energy and income conditions in
  SSA raise several subsidiary questions in
  Africas quest for achieving expanded access to
  affordable energy in Africa. Among these are
• What do we know and what have we learnt about
  patterns, trend and characteristics of SSA energy
  supply and demand?
• Can Africa achieve the objective of expanded
  energy supply and access and elimination of
  duality in the energy economy which should drive
  its sustainable energy and development?
• How can energy supply capacity be increased in
  the context of sustainable energy and human
  development future?
• What are the technical, financial, manpower
  challenges to a reliable and adequate energy
  supply to meet Africas energy needs for economic
  growth and development?

8
2 Key Questions and Issues (contd.)

• What are the policy and institutional
  requirements for overcoming the persistent energy
  and income poverty and the establishment of
  efficient and sustainable energy supply?
• What is the role of efficient government
  institutions and property rights in the growth
  and development process?
• How can the decay in energy infrastructure be
  reversed to have sustainable economic and social
  development?
• What is the role of markets and incentives in
  these developments?
• What opportunities and challenges do energy and
  income poverty pose for the political economy of
  the region?
• The nature of these and related questions
  illustrates the multifaceted nature of the
  issues. We shall illuminate some of these
  issues, albeit in a limited manner given its
  scope.
• This paper seeks to illuminate some of the issues
  embodied in these questions albeit in a
  generalized manner given its limited scope,
  primarily to highlight the key supply side issues
  in the quest for a viable energy industry.

9
3. Key Messages

• The main message is that Africa can eliminate the
  substandard state of modern energy services and
  ensure the supply of the large investment
  required to support sustainable energy
  development that underpins significant reduction
  in poverty.
• However, sustainable energy development that
  underpins significant reduction in poverty is
  contingent on several conditions.
• There must be a strengthening of the
  institutional infrastructure, governance
  structure and accountability to support
  allocative and technical efficiency, restrain
  arbitrary rent seeking government interventions
  in the economy. In addition, the creation and
  sustenance of an incentive-based competitive
  market system underpinned by market responsive
  energy pricing that guarantees adequate
  risk-adjusted rate of return for investors but
  that minimizes deadweight loss associated with
  market monopoly power is of utmost importance.
• The establishment of a well-targeted support
  system (partly in the form of subsidies) to drive
  expanded supply of clean energy based on
  renewable energy resources is a key policy issue.
  Finally, there is need to foster a strategic
  public-private partnership to drive a new energy
  paradigm that is anchored on renewable energy
  sources that will minimize carbon emission and
  climate change.
• The emergence of sustainable energy and human
  development in SSA goes beyond delivering
  adequate and reliable energy services to
  end-users. It also involves giving the population
  wide accessibility to environmentally friendly
  and reliable energy supply.
• Sustainable energy supply involve a multifaceted
  set of economic, social, political,
  environmental, engineering, scientific, strategic
  and legal issues.

10
3. Key Messages (contd.)

• Energy development must be integrated into
  sustainable development in which sustained
  improvement in the general well being of the
  people and enlarging their social choices are key
  elements.
• The enlargement of social and economic
  opportunities based on energy resource wealth
  must take cognizance of the natural and social
  environment of the wealth creation. The
  environmental consequences of extracting and
  using energy should be incorporated in economic
  planning and public policy.
• The well being of the poor and disadvantaged
  people is of utmost importance and must be
  explicitly factored into the process of
  development of energy resources.
• Africas energy question is not only complex
  and difficult, but also politically controversial
  as it involves a set of economic, social,
  political and environmental goals that are not
  necessarily mutually reinforcing.
• Sustainable development is also about economic,
  social and political freedom.
• Just as it about a better world for all citizens
  underpinned by advances in skills, knowledge,
  capability and choice. Africas energy wealth
  must be used to achieve rising income per capita,
  better education, better health, higher life
  expectancy, full employment and social stability
  achievable in the shortest time possible.

11
3. Key Messages (contd.)

• Massive investment in energy and social
  infrastructure
• Strengthening the emerging widespread peace and
  stability across the region.
• Credibility and reputation in the design, choice
  and implementation of policy.
• The political will to make the right decisions
  and take the appropriate actions will shape the
  economic development of these countries.
• Africa faces immense multi-dimensional challenges
  in achieving a sustainable energy and economic
  future embodied in the twin objectives of
  elimination of income and energy poverty and
  expanded energy access. However, the alternatives
  are few considering the current development
  divide that Africa has to bridge.
• The key message is that success or failure
  depends critically on the political will of the
  leadership to permanently erase the ghost of
  economic and political marginalization that has
  characterized the region in the past.
• The ADB and AU aided by international financial
  institutions such as the OPEC Fund have
  complementary strategic roles to play in making a
  success of Africas energy and development
  future.

12
4. The Economic and Energy Context of the Problem

• Key Patterns and Trends in African Economy and
  Energy.
• Africa is well endowed with energy resources
  including oil and gas. 9.5 of global crude oil
  reserves and 8 of gas reserves are in Africa.
• In 2005, 12 of global production came from
  Africa, but the region only consumes 3.4 of
  global oil. Africas share of global production
  and only 2 of consumption.
• Oil and gas resources are concentrated in a
  relatively small number of countries and
  sub-regions (North and Western Africa).
• In SSA Nigeria, Angola, Sudan, Equatorial Guinea,
  Congo Republic, Chad, Gabon, and Cameroon.
• There are noticeable changes in the geography of
  oil and gas supply in Africa in the last fifteen
  years. Notable among the new producing countries
  are Sudan, Equatorial Guinea and Chad.

13
4. The Economic and Energy Context of the Problem

• The poor development indicators include low per
  capita income,
• Low life expectancy and
• High mortality rate evident in the data is
  compelling.
• Data on energy per capita and income per capita
  for selected developed and developing countries
  show African countries feature mostly at the
  lower end of the ladder. They are characterized
  by low energy and income per capita.
• The low energy consumption-economy relationship
  in African countries by global development
  standards reveals some dimensions of the scope of
  the quantum increase in oil and gas consumption
  per capita required to catch-up with the newly
  industrializing economies of Asia and Latin
  America.
• Achieving vastly improved access to modern energy
  services on a sustainable basis in the short to
  medium term is fundamental to sustained and rapid
  growth in income and a marked increase in the
  well being of the population.

14
4. The Economic and Energy Context of the Problem

• Electricity consumption and production data
  reveal another dimension of SSA energy
  conditions. Tables 4 and 5 present useful
  information to highlight the low level of energy
  consumption in SSA.
• The low level of electricity consumption per
  capita is an indicator of energy poverty in the
  region
• Most African countries exhibit poor access to
  electricity. Access is less than 25 for the
  total population for the period 2000 to 2004.
• The problem of modern energy supply and access is
  more acute in rural areas than in the urban area
  in SSA
• Most African countries are net energy importers
  and the sharp increase in the cost of energy
  imports coupled with the increasingly scarce
  sources of traditional energy due to rapid
  depletion have created a double energy squeeze.
• The severe economic impact of higher energy and
  food prices has eroded some of the gains in
  economic reforms in recent years and exerted
  strong pressure on macroeconomic stability and
  economic growth.

15
4. The Economic and Energy Context of the Problem

• The final indicator of energy poverty is share of
  biomass energy in total energy consumption in the
  region. It is more than two-thirds in most
  countries reaching over 90 in some countries. It
  is the highest in the world.
• There is a strong correlation between the level
  of economic development and the share of biomass
  in energy production and demand.

16
5. Emerging Policy Issues and Challenges

• Figure provides an overview of the interlocking
  nature and complexity of the issues associated
  with transforming energy resources into
  sustainable development in the economies of SSA.
• For the purpose of this discussion we shall
  categorize the issues and challenges into three
  sets.
• Set A denotes complex energy issues that need
  specialized analysis by experts. Widely
  acceptable solutions can be found for such
  issues.
• Set B encompasses difficult issues where there is
  wide divergence of objectives and premises on
  which decisions are made.
• Set C consists of politically controversial
  issues. These are issues which are politically
  sensitive.
• The intersection of Sets A, B and C as occurs in
  the subset labeled VII in figure 3 demonstrates
  the complex, difficult and controversial nature
  of the interaction between politics, economics,
  law, environment and engineering associated with
  tackling the energy question.

17
5. Emerging Policy Issues and Challenges

• First, is the shift to a new institutional
  arrangement where much of modern energy service
  would be driven by the private sector is apparent
  in recent reforms. However, meeting the
  challenges of providing adequate, reliable and
  widely accessible energy service involves more
  than summing up numbers (the mega-watts, barrels,
  cubic metres and investment figures) and getting
  other technical issues right.
• Second, there is the investment challenge has
  several dimensions, namely, size, source, plant
  mix, security of investment and input supply,
  human resource requirements, investor/ producer
  incentives e.g. electricity tariff level and
  structure, regulatory framework and macroeconomic
  environment. The investment challenge must be
  appropriately situated in the context of a
  constrained multi-objective incentive compatible
  regional optimization problem.
• The mobilization of the financial resources to
  support transforming these natural resources to
  energize the economy on its path of sustainable
  human development is a major issue that would
  pose significant challenge. A dramatic scaling up
  of investment in energy infrastructure capacity
  is required in the next three decades. The amount
  of investment to meet the regions energy system
  expansion could exceed US 1 trillion in the next
  few decades.

18
5. Emerging Policy Issues and Challenges

• This financing requirement will be huge by
  regional standards. Besides, the capital
  requirement must be situated within the context
  of the global capital market competitiveness and
  risks in the industry. This investment is
  enormous given the antecedent of the industry in
  the past several decades. While the investment
  scale is daunting it is not insurmountable. The
  right institutional framework, policy
  consistency, appropriate incentive structure and
  security of investment and input would guarantee
  the flow of required investment.
• The example of the telecommunication industry
  provides strong support for this position. The
  success achieved in turning around moribund
  public telecommunication systems to a vibrant
  industry with one of the fastest system growth
  rates in the world has been due to the
  combination of right institutional framework,
  policy consistency and appropriate incentive
  structure.
• Both domestic and foreign investors and producers
  have important roles to play in achieving
  sustainable energy future in SSA. A supply system
  underpinned by full deregulation and
  privatization and anchored on price competition
  is now the conventional wisdom.
• A public-private sector mix can also be a viable
  option. This may be particularly pertinent in the
  development of pro-poor and environmentally clean
  renewable energy resources such as solar, wind,
  wave and other clean energy forms.

19
5. Emerging Policy Issues and Challenges

• Pricing of energy services, especially, oil and
  gas and electricity from both conventional and
  non-conventional sources. There has been a
  tendency for Independent Power Producers (IPP)
  which are mostly private sector owned to lock in
  high tariff into their power purchase agreement
  (PPA) for unnecessarily long periods
  notwithstanding production from more efficient
  plants in the future. They prey on the difficult
  domestic environment to extract high monopoly
  profits from PPA.
• The key principle should be energy pricing that
  guarantees attractive rate of return to investors
  adjusted for industry risk and security of
  investment.
• Risks associated with investment to strengthen
  energy supply. There are in four dimensions
  economic, socio-political, technological and
  environmental (methane leaks, post-Kyoto protocol
  requirements and climate change compatibility,
  nuclear accidents spills).

20
5. Emerging Policy Issues and Challenges

• Optimal sharing of these risks among the three
  principal actors in the electricity market,
  namely, consumers, investor/producers and the
  government is essential efficient allocation of
  resources in the industry sustainable energy
  future in SSA.
• The human resource requirements of robust and
  reliable energy supply system which is
  fundamental to sustainable electricity future in
  SSA. The demand on local and foreign skilled
  workers will be immense. However, as in the
  telecom industry, having the appropriate
  incentive structure is answer.
• The economic and political environment must be
  conducive to make the goal of sustainable and
  secure electricity future affordable.
  Market-responsive pricing of energy services is
  central to securing sustainable energy future in
  SSA.
• Energy sector reforms based on market
  competitiveness should provide sufficient new
  opportunities for domestic and foreign investors
  who should align their investment objectives to
  the needs of Africa.

21
6. Action Plan

• Short Term
• Establishment of appropriate institutional
  infrastructure to support the mobilization of
  financial, human and institutional resources that
  will help to mitigate the short term impact of
  energy price shocks.
• Establishment of quick disbursing funds to
  provide disadvantaged countries relief through
  grants and loans to purchase oil imports as
  emergency strategy to mitigate the adverse
  balance of payment effects of price shocks. We
  propose an African Energy Fund. This Fund would
  be a central element of the strategy to mitigate
  the short term impact of energy price shocks in
  African energy supply.
• Promoting the use of financial market instruments
  through the spot and futures markets to hedge
  against price volatility and its impact on supply
  which occur from time to time. Developing the
  capacity to use this sophisticated instrument
  demands resource pooling possibly on a
  sub-regional basis.
• Promoting price-shock mitigating mechanisms that
  will minimize the moral hazard problem associated
  with providing financial resources for countries
  that are severely affected by higher oil and gas
  prices. This will help to promote and strengthen
  the incentives for such countries to take the
  necessary policy for the emergence of a more
  efficient domestic energy market that helps to
  reduce their vulnerability to oil price shocks.

22
6. Action Plan

• Medium to Long Term
• Establishment of appropriate institutional
  infrastructure to support the medium term
  dimensions of expanded energy supply and access
  and their sustainability
• Development of human resources and institutional
  and financial assistance to support a viable and
  competitive energy industry
• Encouraging extensive sharing of knowledge and
  technology on upstream and downstream activities
  in the energy industry in the region
• Promoting the harmonization of economic and
  energy policies with sustainable energy future
  integrated into the development processes and
  policies at the country, sub-regional and
  regional levels
• Promoting the fast-tracking and strengthening of
  energy integration initiatives to create dynamic
  inter and intra regional markets for energy and
  other energy goods
• Revamping of policies and practices in the
  production, procurement, trade and distribution
  of imported energy
• Promoting the rationalization of the supply and
  distribution of oil products at country and
  sub-regional levels to ensure industry
  revitalization in contrast to the current
  industry state characterized by poorly maintained
  and utilized production capacity producing
  sub-optimal product mix

23
6. Action Plan

• Elimination of the fragmentation in energy
  markets across countries and regions in Africa
  with the focus on the establishment of a
  competitive African energy market
• Adding more value to energy resources in Africa
  through expansion of production and export of
  refined oil and gas products and petrochemicals
  to meet domestic, regional and export demand
• Sustaining improved governance in the energy
  industry especially the hydrocarbon industry
  based on openness and transparency further
  strengthening the current Extractive Industry
  Transparency Initiative (EITI) to which many oil
  producing countries have subscribed to. This will
  help to minimize transaction costs in domestic,
  sub-regional and regional energy markets
• Creation of an environment where doing business
  will be attractive in contrast to the current
  situation where the region is identified as among
  the most difficult for business to operate
• Alignment of the fiscal and legal framework for
  energy market operations and regulations at the
  sub-regional and eventually at the regional
  level
• Promoting price-shock mitigating and other
  mechanisms that will help to promote and
  strengthen the incentives for the emergence of a
  more efficient domestic energy market that helps
  to reduce their vulnerability to external oil
  market shocks
• Promoting an environmentally responsible
  development of energy resources

24
6. Action Plan

• Promoting research and information collection and
  dissemination required on energy demand and
  supply by end use, prices, costs, inventory
  movement management, investment and regional and
  international energy trade flows on timely and
  consistent basis. The economics of the downstream
  segment of the oil and gas industry needs
  in-depth analysis and
• Promoting the development of alternative energy
  with focus on renewable energy including
  bio-fuels.
• Certainly, a new partnership between the public
  and private sectors would have to be forged to
  meet these challenges. In any case, the
  substantial reduction in public sector resource
  availability forecloses a high profile government
  participation in the provision of the economic
  infrastructure services. Half-hearted policy
  measures can only compound the enormous problems
  in the sector at escalating social cost.

25
7. Concluding Remarks

• Understandingly, efficient and effective
  management of SSA energy resources to underpin
  the drive to achieve sustainable economic freedom
  and livelihoods in an environment currently
  characterized by environmental degradation,
  poverty and low living standards, large scale
  unemployment and numerous social conflicts, will
  be the prime challenge of the coming decades.
• In conclusion, a number of observations are
  necessary.
• First, energy development must be integrated into
  sustainable development in which sustained
  improvement in the general wellbeing of the
  people and enlarging their social choices are key
  elements.
• Second, the enlarging of social and economic
  opportunities based on energy resources must take
  cognizance of the natural and social environment
  of the wealth creation. The environmental
  consequences of extracting and using energy
  resources should be incorporated in economic
  planning and public policy.
• Third, sustainable development is also about
  economic, social and political freedom.

26
7. Concluding Remarks (contd.)

• I will like to close this presentation with the
  following quote
• Knowing is not enough We must apply.
  Willing is not enough We must do. (Goethe, the
  German Philosopher).

27
END

• Thank You for your attention.
• Akin Iwayemi
• Professor of Economics
• Department of Economics
• University of Ibadan
• Ibadan, NIGERIA
• Mobile [phone]
• akiniwayemi_at_hotmail.com