Political and Regulatory Environment

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Source: Andrew Regan.  Licensed under Creative Commons Attribution Share-Alike 3.0 Unported.

Source: Andrew Regan. Licensed under Creative Commons Attribution Share-Alike 3.0 Unported.

Generally speaking, governments in sub-Saharan Africa (SSA) have welcomed the recent technological and entrepreneurial breakthroughs that are granting the base of the pyramid (BoP) access to cleaner household fuel sources and and renewable electricity.  However, there are still a number of regulatory, policy, and governance-related barriers that present a challenge to energy-sector social enterprises that are attempting to gain market entry in SSA.  On the flipside, there are also a number of opportunities to be taken advantage of that could enable an enterprise to achieve scale more quickly.

Regulatory environment

Regulatory reform is ongoing in SSA.  Generally speaking, the regulatory environment in SSA is tangled and complex, which makes it difficult and costly to conduct many routine business practices.  Procedures that are simple in developed regions may be a hassle in many countries in SSA.

However, the environment is improving, as a number of countries are instituting ongoing reforms to help make business incorporation and trade easier.  The World Bank and IFC’s Doing Business 2015 report found that sub-Saharan Africa implemented the largest number of reforms between 2013 and 2015 that streamlined and reduced the complexity of regulation.  For example, in Senegal, it took a full 27 days in 2005 to navigate all of the regulatory hurdles required to obtain a license to import goods from overseas.  As of 2014, that figure has been cut in half to approximately 14 days.  Other countries, such as Ethiopia, and Lesotho, have improved the environment for banking and investment by making credit reporting information easier to access and by establishing more legislative protections for investors respectively.  Many countries are also instituting quality control regulations to help combat market spoilage and promote the distribution of higher quality lighting and cookstove products.

In terms of environmental regulation and legislation, enforcement is inadequate.  Many governments lack the resources to enforce environmental statutes, especially when violation of the law is common and occurs over a very wide area, as in the cases of illegal deforestation and poaching.

Taxes, tariffs, and subsidies

Taxes and tariffs are a significant component of the cost structure of many products that are produced and distributed by social enterprises.  This is especially significant for products that are manufactured abroad and imported, as domestically manufactured products are by definition exempted from tariffs.  Many countries in SSA also have a value-added tax (VAT), which levies a tax on a product for whenever value is added to it throughout the value chain.  This type of tax affects both domestically produced and imported products.  VATs in SSA typically range between 15 and 20%, with Nigeria’s 5% rate being a notable exception.  Detailed information on VATs in Africa can be found here.  There are also a number of indirect taxes imposed on consumer products for the BoP, such as road tolls, fuel taxes, and taxes on financial transactions.  In countries such as Ghana, these taxes, tariffs, and fees accumulate enough to make up around 30% of the cost structure of imported lighting products.

Many countries in SSA also have kerosene subsidies, which significantly reduces the price of kerosene for BoP consumers.  Kerosene subsidies were originally implemented as an easy way of making lighting more affordable for the base of the pyramid.  Yet, kerosene usage, as mentioned before, is associated with a number of problems.  Fuel subsidies are implemented by over half of all countries in Africa, and in some countries fuel subsidies comprise more than 2% of GDP or more.  This is another disincentive for BoP customers to switch to safer and more efficient electric lighting products.

Government programs and incentives

Many governments in SSA have taken careful notice in the development of the clean offgrid electricity and improved cookstove markets, and have implemented a number of programs and economic incentives to encourage adoption.  These are incentives that energy sector social enterprises should take advantage of.

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Source: DIVatUSAID. Licensed under Creative Commons Attribution-Noncommercial-NoDerivs 2.0 Generic.

Many nations in SSA provide incentives for the adoption of renewable energy.  For example, Uganda’s Energy for Rural Transformation program subsidizes photovoltaic (PV) panels and all related solar equipment by 45% and provides grants for the installation of PV systems in communities, homes, and schools.  Tanzania launched its One Million Solar Homes initiative in early 2015.  A collaborative project between the Tanzanian government and Off Grid Electric, Ltd., it aims to provide solar power to a million Tanzanian households by 2017.

Some countries have also used market-based policy tools to encourage the adoption of renewables.  An example would be Kenya’s tax exemption for imported LED and solar power equipment.  Other countries, such as Zimbabwe, Uganda, and Botswana have implemented feed-in tariff programs, which provide an economic incentive for the installation of solar power.  Feed-in tariffs allow PV-generated electricity to be sold to the grid at a higher price than power produced by conventional means.  However, feed-in tariffs would only benefit households connected to the grid, and while this is great for energy-poor people who are living in urban areas, they would not have much of a benefit to rural villagers and subsistence farmers.

The Global Alliance for Clean Cookstoves (GACC) has partnered with a number of nations in SSA to implement projects and legislation designed to accelerate the adoption of cleaner cooking technologies.  In countries throughout Africa, they are working with national governments to establish a policy framework for clean cooking technologies that include impact assessment, fuel regulations, incentivization, and the development of quality control standards for clean cookstove products.  In Kenya, sales of certain types of stoves are already regulated in supermarkets, and the GACC aims to work with the Kenyan Government to develop a universal set of quality and environmental standards.  In Ghana, GACC is seeking to help the government adopt cookstove standards.  In order to make enforcement easier, GACC plans to build a cookstove testing facility to evaluate different cookstove products.  The results will be published online and shared with the Ghana Standards Authority, which would be responsible for enforcing these standards.

Corruption and its implications

There is no question that corruption is a very important challenge for many nations in SSA.  During the 1990s, it was estimated that corruption cost the African economy $148 billion dollars per year.  By comparison, approximately $78 billion in development assistance was given to Africa in 1995.  As of 2011, the BoP in SSA spends an estimated 2 to 3 percent of their yearly income on paying off bribes.

Corruption in SSA takes on many forms.  There have been plenty of instances of graft among high ranking officials, but much of the corruption occurs among local-level officials such as civil servicemen and police officers.  Generally speaking, high-level graft is much more costly for a country financially.  It can often lead to a feedback loop where officials try to buy votes or rig elections in an effort to retain their incumbency.  This can lead to political unrest, perpetuate cycles of poverty, and in some cases even lead to insurgencies.

However, widespread low-level corruption can be just as damaging.  It also has more of an effect on small to medium sized enterprises (SMEs) that are trying to conduct business in a region where low-level corruption is widespread.  Local officials often demand bribes from SMEs, and the paying of bribes may make things a bit easier in the short term, but in the long term it can hurt business.  If evidence former participation in corrupt practices or payment of bribes is uncovered, it can seriously hurt a business’ reputation.

International investors are also less inclined to make investments that they feel are risky due to corruption.  This problem has led to an international effort to fight corruption in Africa.  Significant progress has been made in countries such as Liberia, Rwanda, and Tanzania.  However, in other countries, the anti-corruption agencies that were established by this effort have been ineffective, sidelined, or forced out of the country altogether.  China’s increasing investment in Africa is a growing concern due to their no-strings-attached approach to investment, which oftentimes ignores the realities of pervasive corruption in certain regions.  Many Western investors are concerned that these aid and investment programs launched by China could undermine ongoing efforts to reduce corruption throughout all levels of government, and thus jeopardize both existing investments and make them wary to invest in certain countries in the future.

 

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