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Energizing Ethiopia’s development

Energizing Ethiopia’s development

Sergio Pimenta is vice president of the International Finance Corporation (IFC) in charge of operations in the Middle East and Africa. IFC, a private sector arm of the World Bank Group, stands as a primary development financial institution. Leading the operations of IFC with a staff of 600 experts in the region, Pimenta oversees a committed portfolio of USD 20 billion including all advisory and investment missions. Prior to his appointment to the current position, Pimenta was the director and global head of Industry, Manufacturing, Agribusiness and Services. Before joining the WBG, Pimenta worked for the Treasury Department of the French Ministry of Finance and served at the Banque Nationale de Paris (BNP). Pimenta spent a few days in Ethiopia last week to discuss ways the country could utilize a new financing window of USD two billion. He was in town to meet authorities, private sector actors, IFC Ethiopia colleagues and the WBG staff. Birhanu Fikade of The Reporter sat down with Sergio Pimenta to talk about the IFC’s planned investment in Ethiopia especially in the energy sector. Excerpts:

The Reporter: What was the focus of your recent visit to Ethiopia?

Segio Pamenta: For me, Ethiopia is an important country. When you look at the continent and what’s happening across the continent in terms of development; there are strong pockets where the opportunity to help development is wide. In this regard, Ethiopia comes first. Hence, I wanted to come and meet the authorities, meet with the private sector and meet with development partners and meet my colleagues here. It is not only to support  but make sure that we are all mutually connected and understand what issues need to be dealt with and how can IFC support Ethiopia in its transformation agenda.  That is why I came.

You mentioned the transformation process, how is the World Bank Group involved in assisting this dynamic?

The authorities have already announced the directions they want to follow with regards to the development of the country. What the authorities want from the World Bank Group is support in developing the country further. What they specifically want from the IFC is expertise and tools related to the private sector. This private sector needs more support. The private sector has a long way to go even to catch up with public sector. It is not a problem unique to Ethiopia. When you look at other developing economies, you see very often that governments don’t have the resources needed for development. They clearly need the private sector to be a bigger agent of change and development. That is becoming an issue across the world; the the private sector has a key role to play in development. In countries where the private sector is less active, the opportunities are big and this is something you can see happening in Ethiopia today.

The government of Ethiopia is pushing the Private Public Partnership (PPP) forward, could that be one of the priority areas for the IFC?

There are many ways the private sector can support the country and PPP is indeed a very powerful solution in the sense that you actually bring all the actors to the table and everyone brings their expertise and knowledge in areas where they have competitive advantages. In the IFC we are very active in promoting PPP models that are successful across the world. Together with friends in the World Bank Group we have been advising governments on how to structure PPP systems. We help governments answer questions like how the PPP works and what it requires. From the IFC side, we come in and help on the transactions. For instance, let’s say the government wants to execute a certain project with the involvements of the private sector, and then we will structure the transactions in way that would help to attract quality companies from the private sector; companies which have a proven track record of best practice. The PPP model is instrumental to attract both foreign and domestic partners.

Recently, the government has announced USD 6.5 billion energy and road projects which are earmarked for PPP. Were you approached either by private or government companies for help with financing of any of these projects?   

Energy is an interesting sector in many respects. When we look at many countries, we see the private sector playing an active role in the generation of power. This usually is the first level of engagement by the private sector. In some cases, we also have strong involvement of the private sector in the management of the distribution and transmission of power. In many countries you can also have the coexistence of the private and the public sector in the energy sector, and for that you need to have a strong public sector regulator that makes sure that everybody is bringing the best values needed to the country. Ethiopia has a great future in the renewable energy subsector. But, there is a significant part of the population which doesn’t have access to electricity. How can we help to reach this section of the population? Energy provision is an issue that requires significant investment. For that, we need to look at the optimum solution. We need to see whether it is private or public sector investment which is required. IFC has financed many energy projects across Africa with private and PPP solutions. Our friends and colleagues at the WBG are working with us in projects of this nature as well.

Could we expect any change in terms of the rules and regulation of the IFC with regards to accessing financial services it provides?

We have engaged with the government and we have engaged with our partners here; our intention is to step up our interventions and to do more. We have been in this country for long and we have done a lot in the past. With the changes that are coming, we really want to step up and do more here. We don’t come in with a program or with certain volume but we will offer all-round support so that the needed investments are made in this country. I might not have anything to announce today, but I am very happy with the dialogue I had with members of the private sector and government authorities. There are a lot of opportunities for all of us to work together and bring private sector solutions that would help create jobs in Ethiopia. One of the key challenges this country faces is job creation; Ethiopia needs jobs since it needs to employ the youth, women and the working population and for that you have to create economic activities that could create meaningful jobs.

It seems that the Ethiopian private sector is shy in terms of accessing finance or technical supports from the IFC. And in Africa, the Ethiopian private sector looks to be the least in terms of accessing the financing opportunities that exist with IFC. Are there any new tools and approaches to help ease these challenges?

I doubt if I fully agree with your assessment. We have done a certain number of interesting operations here. The private sector in Ethiopia has worked with us in many aspects. Few companies have interesting portfolios with us and I am more excited about the future and to do more. I think you have asked the right question about new tools and approaches. Yes, we do have new tools. Since last year we have developed a new instrument called “the private sector window of the International Development Association (IDA)”. IDA is the development arm of the World Bank which provides funds for poor countries. IDA has provided USD two billion for the private sector in Ethiopia to be disbursed via the IFC. This private sector window provides opportunities countries such as Ethiopia can benefit from. One of the purposes of my visit to Ethiopia was to talk to different players on how to best deploy this window. We can use the funds here to de-risk projects and make them more attractive. We have more impact even in sectors where the risks are perceived to be much higher.

Could we expect any private companies in Ethiopia accessing the USD two billion availed through this “window”?

I hope so. In fact, we are still at the early stages of deliberating on how we could make use of these funds. But, we think we could deploy the funds in the agri-business sector. We think we could channel the funds in the export-oriented manufacturing sector where government priority currently lies. We think we could use the window for these types of projects in Ethiopia.

How much of the USD two billion funding could be channeled to Ethiopia?

The total funding is for all IDA eligible countries. We don’t have a country specific allocation. But, I encourage Ethiopia to utilize the window as much as possible so that we can deploy the largest portion of the fund here.

Let take you back to the issue of PPP. We know that the WBG has been involved in the process of structuring the PPP system. Could you tell us some specifics regarding the roles IFC has played?

At this stage we haven’t done any specific transactions in Ethiopia with respect to PPP. The WB has been helping the government in the broader regulatory aspects and on how to launch PPP, set out the PPP unit and that kind of work. The government has now announced that in certain sectors they would like to see certain number of companies participate. We are very keen on looking at those specific sectors and on how the IFC could come in to help. Once the government is interested to involve the private sector to some sectors then we could help to define how the private sector could come in, what they could do and which part of the risks they could take, and how the government can generate revenue out of the activities in the PPP projects. Our team is engaging the government in identifying which projects we could help.

Some local experts see the PPP as an approach which ultimately burdens the final consumer. For instance, companies who have interest to join the energy sector are looking for tariff adjustments that would have implications on retail prices of electricity. Those companies interested to involve in the Independent Power Purchase (IPP) arrangements were saying electricity tariffs are way below the production margins? Do you see PPP a potential burdensome system to the final consumer?

It doesn’t have to and it shouldn’t be. In reality, if you structure the PPP in a proper way, what happens when you bring in the private sector is that you are bringing more discipline, expertise and knowledge, which allows significant reduction in costs of productions. When energy tariff is very low because the public sector is subsiding the sector it always the case that someone has to pay that price. The consumer might not notice that in her/his bills but they would probably see it in their tax payments because they will be required to pay more as energy consumption gets more subsidies. Creating the PPP and letting the private sector chip in the investment helps to reduce prices and look at solutions that are more cost effective. We have been very active in the energy sector with a program called “scaling solar” and we are about to implement that program in Ethiopia. Scaling solar is a program that we do together with the WB. We help to minimize the risk of certain structures so that the private sector could come in with the form of IPP since the risk is lower. Since the WBG is bringing the standards to the documentations and other related processes, all the players have a level playing field to participate in the bid process. The bidders would come and say they are ready to produce electricity with low prices paid to them. We did this type of project first in Zambia. We came out to have solar energy with prices of USD 6 cents per kilowatt hour (kWh). We did it further down in Senegal with USD 5 cents per kWh. These are very low prices. Everywhere you find the prices with scaling solar program being very low. Who benefits from the prices, the consumer then the electricity is sold to the power company which is going to distribute it. When you bring a private sector solution, it is well structured, you can lower the price and make electricity more affordable to people.

The question with regard to PPP and local authorities perhaps has to do with their capacities to negotiate when they contract certain projects with private companies. How do you see that shaping up in Ethiopia?

The question for us relates to the capacity building aspect. You have strong institutions and we are happy to help them more in their activities. We are a development institution and we are here to help the development of Ethiopia. We come and we engage with the companies that wants to know how PPP units do. It is not that they negotiate with the companies but they will help the government in the negotiation process. The companies might have various requirements and might seek overstretched incentives in their negotiation documents. We would advise the government on the accepted standards and we give benchmarks applied globally. We provide a capacity building facilities to the contracting authorities to have a transparent, fair and a better efficiency in the system during the negotiation process.

Talking of the solar program, I think I saw some four projects the government has announced for PPP. Is IFC involved in those projects in Ethiopia?

IFC has launched scaling solar in Ethiopia. The project’s total scale arrays is up to 500 megawatts (MW) and the first phase is 250MW. Once completed, the solar project is going to be the largest in Africa. It is not final yet but it is moving in a good pace. Currently, it’s on a request for proposal stage. We have done all the required work and we are reaching to the bidding process. We hope we will come up with very competitive prices to the Ethiopian economy and the country’s population. If you don’t get affordable energy you can’t help small companies to grow and you can’t help individuals create their own businesses or you can’t have hospitals, schools and factories functioning. Access to energy is a very important basic service need to support. When I look at the figures that indicate the access to electricity in Ethiopia, I think we have the means to work together for solutions that will allow electrify the country in a much brighter ways.