Feature

The Power Behind Investment Moving North

An ambitious and well managed independent power producer programme is helping to restore investor confidence in South Africa and driving similar activity in neighbouring countries, say Johannesburg partners Jason van der Poel and Allen Leuta.

 

A slow down in economic growth; highly unreliable power supplies; political concerns around investments in key sectors, notably mining and labour unrest – the headlines have not made comfortable reading for investors in South Africa in recent years.

But an ambitious set of independent power producer (IPP) procurement programmes – which are looking to procure new renewable, coal, cogeneration, natural gas and hydro power assets and which are widely regarded as very well managed – may be beginning to change those perceptions.

Since the Renewable Energy IPP Procurement Programme was launched by the South African government in 2011, some 7,000MW of renewable power have been contracted with international investors queuing up to become part of the programme.

While it is fair to say the renewables programme is something of a bubble in an otherwise subdued environment for foreign investment, all the signs are that the wider energy programme could provide a major, long-term boost to investor confidence.

And the programme is significant. By 2030 the government aims to secure a total of 17,800MW of renewable power and its integrated resources plan, published in 2010, has set clear IPP procurement targets for the other generation sources, including 6,250MW of coal, 2,370MW from closed cycle gas turbines, 7,330MW from open cycle gas turbines, 800MW of cogeneration and 9,600MW of nuclear power. These allocations may change, with greater emphases expected to be placed on renewables and natural gas, should the Updated Integrated Resources Plan, 2013, be approved by the Cabinet.

The coal-based part of the programme was launched in December 2014 and we are advising the lenders on a major project. A gas-to-power request for information was issued to international investors in May 2015 on how they would bring LNG to the country and pipe gas to proposed power stations for the procurement of 3126MW of baseload and mid-merit energy generation capacity in South Africa. The Department of Energy received a large number of responses from interested private sector participants on 20 July 2015, and the Department is using these responses to design a request for proposals to be released this year.

The government appears to have abandoned plans to restructure the state run power industry, which has struggled to keep the lights on in recent years. This puts an even stronger emphasis on the procurement of power from IPPs in solving the power crisis. And it is also driving activity in other neighbouring countries, as Jason van der Poel explains.

“South Africa used to export power to neighbouring states but, because of the energy crisis here and the rolling power cuts, it can no longer do that. As a result, many neighbouring countries are starting their own power procurement programmes, including Namibia, Zimbabwe, Mozambique, Botswana and Zambia.”

Allen Leuta agrees. “Investment in power and infrastructure assets is part of a significant trend across many African economies – and it’s quite necessary,” he says. Gas finds off the coast of Mozambique, with major developments forecast to come on stream by 2020, have the potential to fundamentally transform that economy and lead to further projects in power and infrastructure. Tanzania’s own gas programme is underway, although seemingly at a slower pace.

“Investment in the power and infrastructure sector is critical for sustained economic growth and development. In some respects it is also being driven in some countries by a growing middle class that is demanding that governments deliver reliable power supply and infrastructure. We are perfectly placed to make a contribution in this space,” says Allen.

Jason points out that rising demand is becoming more broad-based, as seen with the massive growth in mobile telephony across the continent and an upsurge in investment in the consumer sector. “It’s not confined to energy and infrastructure, but they serve as a facilitator to unlock growth in other areas.”

Our newly opened Johannesburg office has a particular focus on banking, finance and projects, with a strategy to support clients within South Africa or those using South Africa as a base to pursue cross-border investments across Africa. But the strength of both the Johannesburg and Casablanca offices as African hubs lies in the fact that they are closely integrated into A&O’s global network, says Allen.

“We’ve got a coordinated way of bringing our experts, across sectors, together and that is one of the things that helps us to not only identify opportunities but also to bring the right resources and market-leading expertise to support our clients across the continent.”

As Jason puts it: “Our overall strategy is to have one very powerful, integrated offering that will provide best value for clients no matter where they are active in Africa.”

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