NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, June 16, 2015

If you find yourself bored at a business conference in Africa, try playing bingo with the words ‘leapfrog’ and ‘telecoms’. The story of how Africa went straight to mobile phones, never building a vast network of copper wire for its telephone infrastructure is told and retold. It is now a cliché in African business. Like most clichés, it is tiresome, but is also instructive. Africa need not follow the same path to growth as other industrialized countries. It can skip long detours into redundant technology and accelerate the pace of growth.

And Africa is growing. In the next two years the World Bank expects Africa’s GDP to rise at an annual rate of around 5%–double the rate of the OECD. The rising African Lion is the new Asian Tiger.

But the Lion lacks energy. Electricity, a fundamental necessity for growth, is expensive and unreliable in Africa. In sub-Saharan Africa today, almost 600 million people remain without electricity. Businesses experience an average of 8 power outages per month, each lasting almost 5 hours. The economic impact of this is severe. Businesses that experience outages lose more than 7% of annual sales as a direct result. To maintain productivity, 48% of businesses are forced to rely on expensive, and dirty, diesel power to supplement their grid supply.

For investors, these challenges also represent opportunities. McKinsey estimates that $835 billion of investment is needed to meet sub-Saharan Africa’s energy needs by 2040.

The near-trillion dollar question is: what kind of power infrastructure should Africa build? Should it replicate the large-scale electricity grids of the developed world, or is there a shorter path to electrifying Africa?