US government programs to promote construction of new power projects in Africa face an uncertain future after the US elections. President Trump said little about Africa during the campaign. He suggested in his inaugural address that US arrangements with other countries will be judged in the future in terms of what benefits they bring to the United States. The best advice is to “wait and see.”

Power Africa?

Congress passed an Electrify Africa Act in 2016 that directs US government agencies to prioritize loans, grants and technical support for power generation and transmission projects in Sub-Saharan African countries. The Electrify Africa Act builds on a Power Africa initiative launched by the Obama administration in 2013 with the goal of doubling access to electricity across sub-Saharan Africa.

No one knows yet whether President Trump will continue with the existing policies toward Africa or attempt to change them.

However, at least three changes seem likely.

First, US agencies stopped financing coal-fired power plants during the Obama administration. The Trump Administration is much more likely to support financing of coal plants in Africa.

Second, there will be personnel changes. People who run the Africa-directed programs for the US government are generally driven by two motivations. There is a developmental goal: many people in Africa still lack electricity and basic housing, and there is a desire to help them. There is also a commercial goal, which is that it is good business to invest in the bottom billion people on the planet. It is possible for personnel changes to affect the priority given to one or the other of these goals.

Third, the Power Africa initiative was given a statutory basis last year as part of the Electrify Africa Act. While the future of the program under Trump is unclear, at a minimum, a myth attached to it is dead. There has been a myth that Power Africa is basically an ATM machine with unlimited funds funded by US taxpayers and if you have a project in Africa, you just stand in line and get as much money as you need. That was never what Power Africa was about.

The reality is that Power Africa is a US government initiative to provide 30,000 megawatts of new electricity generation in Africa and to provide electricity to 60 million new customers. President Obama was not the first US president to try to help. President George W. Bush was also interested in Africa.

Power Africa focuses on two things. One is to pull together and organize existing US resources — no new money, just existing US resources — so that African projects can be funded in a cohesive fashion. There is a marketing element to it which is to come out with a comprehensive method to sell the opportunity in Africa to US investors. It is also a logistics tool. What delays African projects sometimes is not really lack of funds but the local bureaucracy. Projects take a long time to be approved. If you want to do a power project, you go to the ministry of energy for approvals, and then go to the ministry of finance also to get the project approved, and the approvals may not stop there. Power Africa essentially gives a red phone to developers. It says to US developers with stalled African projects, here is the phone number of US government official that you can call to help with the process.

The Power Africa initiative was essentially a pet project of the White House. It did not have a statutory basis. The concern among stakeholders that Power Africa would not survive a new administration led to codification in 2016 as part of the Electrify Africa Act. Thus, it will take another act of Congress to repeal it. The Electrify Africa Act passed with unanimous support, but there is a reason: no new appropriations were required to fund it.

Broader Challenges

Moving more broadly to the challenges ahead, Africa is facing three macro issues.

Currencies all across the continent are losing value. For example, in Nigeria, the naira (NGN) is currently trading at 315 NGN to the US dollar. That is the official rate, but usually you have to get it in the black market, and the naira is trading in the black market at 500 NGN to the dollar. In early 2016, the exchange rate was 199 NGN to the dollar. Ghana and South Africa are also experiencing depreciating currencies. This is a significant problem for investors in power projects who borrow in hard currency — for example, US dollars or euros — and who are ultimately selling electricity to customers who pay in local currencies.

Currency devaluations come in cycles. There was a cycle in the mid-1980s when African countries implemented structural adjustment programs that devalued their currencies. To stick with Nigeria, the naira-dollar exchange rate has been fairly consistent for the past five years before the most recent decline.

The market to hedge local currency risk in Africa is not well developed. A few banks, like Standard Bank, have limited products. To mitigate, sponsors could shift the currency risk to the host government since the government is better placed than a developer to manage currency devaluation. Sponsors could also explore incorporating a local currency tranche to the extent equipment or services are sourced locally to match local currency revenues to the local payment obligation. In addition, limited currency risk could be passed on to the EPC contractor in return for a higher upfront payment. This works if the contractor will also operate the project and expects to have significant continuing local currency expenses.

Another macro issue is an inadequate transmission grid. More investments are expected in renewable energy, but the sites with good insolation or steady winds tend to be in remote areas, and a new transmission network is needed to move the power from the generating source to the high-density urban areas where the demand is. It is extremely challenging to finance construction of new transmission networks across the continent.

Another fundamental issue is the weak balance sheets of the local utilities and host countries. Because of the decline in commodity prices, especially oil prices, and because of the devaluation in currencies, some African countries are in a recession and the balance sheets of the utilities are not as good as they were just a couple years ago. All deals require careful credit enhancement as a result.

Practical Advice

This is probably one of the best times ever to invest in Africa, but it is important to be cautious. Focus on a particular sector. Figure out the preferred technology. Understand that the opportunities and challenges differ from one country to the next. After picking the right country, find a good local partner who understands the market and can help share the risk.

Diversify your lender sources as much as you can. For instance, if you are doing a project and you have the option of getting US lending, European lending and local lending, seriously consider all three because each lender brought into the syndicate lets the project tap into different networks that can help if there are problems.

Where are the best opportunities?

One is LNG. There is an oversupply of LNG in the world today because of the historic low natural gas prices, but Africa has few intake facilities. There is an opportunity to build intake facilities that would take in LNG and store, re-gasify and supply it to local plants. For instance, South Africa recently announced a procurement for 3,000 megawatts of LNG-to-power.

Three different kinds of opportunities exist for investment in renewable energy. One is utility-scale projects that sell to the grid, another is inside-the-fence projects that sell directly to mines or factories with high demand, and another is smaller distribution generation like micro-grids or rooftop solar. Interest in distributed generation is exploding in Africa. There is a real competition today to sign up solar customers. (For more information about the emerging business models in the rooftop solar sector, see Off the Grid in Africa in this issue.)

There are also opportunities to finance projects. Just as in the developed countries, there is a serious shortage of financing for early-stage development.

Many Africans are worried about the potential impact of the Trump administration. The best advice is to wait and see. While the near-term future of US support for development in the power sector is unpredictable, Republicans, like President Bush, provided massive funding for HIV and AIDS work in Africa, so interest in Africa can cross party lines.