01 October 2013 - Peter Townshend
Our one source of energy; the ultimate discovery’ (OMD)
Readers of a certain age may fondly remember the new wave bands of the late 70s and early 80s. Some may still have LP collections, gathering dust in the garage, that feature albums from the synthpop band Orchestral Manoeuvres in the Dark (OMD). Best known for massive hits such as Enola Gay and Joan of Arc, it was their first single Electricity, released in 1978, that defined their sound and thrust them into the spotlight. For those of a younger generation, believe me, the best music had already all been made by the late 80s and a wonderful world of discovery still awaits you.
Africa throws up many challenges for businesses, many of which relate to infrastructure – crowded ports, terrible roads, crumbling railways and, perhaps most importantly, no power. A stable supply of cheap electricity is something most of the developed world takes for granted; and quite rightly so. It is the backbone of any industrialised, urbanised and developed society and without it, so much of what we take for granted, becomes either difficult, or very costly to sustain. Yet across most of Africa, if you want electricity, you must self-provide with diesel generators. And diesel power is very costly.
In South Africa, the average price for electricity supplied by Eskom is ±US$0.07/kWh. In Nigeria, users pay a similar rate, but power is seldom available from the grid so individuals and businesses must generate their own. Electricity sourced from diesel generators costs US$0.30 – 0.35/kWh, four to five times the price of grid power. Electricity is so cheap in most of the developed world that it is not a cost line that features in companies’ published accounts. And you could be forgiven for thinking that even a five times higher cost would still not make power generation a meaningful cost; but you would be wrong.
For banks in Nigeria, where every branch is diesel powered, electricity generation can make up 6% of operating costs. For telecommunication companies in Africa it is typically over 10% of operating costs. We do not know the precise figures for brewing companies, but management at one of Africa’s largest listed brewing companies recently suggested to us that energy makes up almost 15% of their costs. If this brewing company were able to secure reliable grid power, even at a rate of ±US$0.15/kWh, it would result in a more than 20% increase in earnings while, for our Nigerian bank holdings, earnings would increase by over 10%.
These are remarkable numbers and while we don’t build this into any of our valuations, we could conceivably see the change happening in the next five to ten years. Nigeria is slowly moving through the process of a comprehensive deregulation of its power sector, splitting generation from transmission and bringing in private sector players. The plans are ambitious, as are most grand plans in Nigeria – most of which fall flat. But in the country there is a real sense that this time it may be different and that in the foreseeable future, Nigerian citizens and businesses could slowly start seeing an amazing transformation as reliable and reasonably priced power becomes more widely available. We have seen the transformation happen in Uganda, which started deregulating and privatising some years ago, with remarkable success; and we are seeing similar steps across the continent.
A decade or two back, popular perception held that Africa was broken and ‘would the last man to leave please turn off the lights’. Now, there is a growing sense that the Dark Continent may finally be starting to power up.
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Notes to the editor:
Coronation Fund Managers Limited is one of southern Africa’s most successful third-party fund management companies. As a pure fund management business it provides individual and institutional investors with expertise across Developed Markets, Emerging Markets and Africa. Clients include some of the largest retirement funds, medical schemes and multi-manager companies in South Africa, many of the major banking and insurance groups, selected investment advisory businesses, prominent independent financial advisors, high-net worth individuals and direct unit trust accounts. We are 25% staff-owned, have offices in Cape Town, Johannesburg, Pretoria, Durban, Gaborone, Windhoek, London and Dublin and are listed on the Johannesburg Stock Exchange. As at the September 2013 quarter-end, assets under management total R492 billion.