Are political risks depriving Sub-Saharan Africa of the key ingredient for economic growth?

Aon Risk Solutions, the global risk management business of Aon plc (NYSE: AON) has released its whitepaper entitled ‘Political Risks in Sub-Saharan Africa – a view from the Power Sector’ which argues that energy is the ‘oxygen’ of an economy, and examines the effects of political risk on key power projects.

The Aon Global Power Specialty teamed up with the Aon Credit International Insurance Broker in Germany to gain insight into the opinions of some of the most experienced underwriters on this topic.  The whitepaper aims to share the challenges, concerns and advice of leaders in the market to provide insights to companies investing in or owning a power generation or transmission asset in this region.

Over the last centuries the world has witnessed economic progress that has materially improved the lives of many, especially in emerging markets. Yet almost half the people in the world without access to electricity live in the 48 Sub-Saharan African countries.  Whilst this is not a ground-breaking revelation, many of the economic ambitions in the region are harder to achieve in reality and can often lead to turbulence and political volatility. In economies where the growth rate is very high the security of power becomes critical.

Sammy Muthui, Chief Operating Officer at Aon Kenya, says:  “It is an undisputed fact that the power sector in SSA is attracting massive domestic & foreign investment from countries such as China and the USA (Power Africa), among others.   Huge untapped potential abounds with many companies and African governments investing in solar energy, wind power and coal power in SSA, with others like Kenya, for example, also entering discussions around nuclear power generation.  The potential for hydroelectricity generation alone is enough to power the entire African continent.  Natural gas and petroleum discoveries are taking place every other day in addition to the great potential for geothermal capabilities along the East African Rift (EAR) Valley.”

Despite the sheer size, variety and largely untapped potential for power generation in SSA, very few households have electricity in the region and there is significant insufficient supply to industry too.  “The gap can however be bridged by means of foreign investment in alternative energy from both a renewable and non-renewable perspective.  There is also a skills gap in this sector and current energy generation efforts are not adequate, making the injection of foreign expertise absolutely crucial in maximising the potential for energy generation in SSA.  What we do lack on the reef are proper risk management solutions that are growing and adapting in tandem with the growth in the sector. The risks inherent in the power sector are complex and are further complicated by the political environment in many African countries.  It is crucial for investors in the sector to effectively navigate all these aspects in their risk assessments,” says Muthui.

Gemma Avey, strategic development manager for the Aon Global Power Specialty, comments: “We have witnessed an increased demand for political risk cover for power projects in this region. Whilst this used to be an ancillary cover it is now often the ‘make or break’ cover for a Power project in the region. Whilst demand is high, by interviewing key decision makers in the market we were able to understand that political risk cover is still complex depending on the type of project, the region and crucially the ownership structure of these projects.“

Avey also states: “We observed that multilaterals play a huge role in making projects in this region come to life particularly by being able to offer longer tenures or sometimes cover without certain ministry guarantees that the commercial market would need.”

Silja-Leena Stawikowski, head of political & special risks at Aon Credit International in Germany comments: "Each project is scrutinised on its own merits and different markets such as the export credit agencies (ECAs), the private political risk insurers (PRI-market) or the multilaterals have partially different underwriting approaches, it is vital to engage them as early as possible. A deal breaker for cover could be if the project is not deemed sustainable for the host country, the lack of experience of certain project parties or if certain guarantees are not obtained by the government.”

“There are many ambitious projects envisaged for the region, but whilst there is political volatility here investments are not secure without the appropriate political risk cover. Political situations can escalate rapidly as we have seen in countries such as Ukraine that were deemed stable.“

The majority of underwriters interviewed stated that whilst some major multinational companies have the means to monitor political risk – smaller and maybe less experienced companies do not. This means that it is even more vital for the small and mid-sized companies to engage experts to understand the exposure to political risks and how negligence can have critical impacts on any size of project.

Click here to access the report.