metadata: authors: 0: author: Probst,Benedict Sebastian
1: author: Holcroft,Richard
2: author: Huenteler,Joern Thorsten
3: author: Balabanyan,Ani
4: author: Tipping,Andrew
5: author: Robinson,Peter
count: Africa
docna: 0: docna: Attracting Private Solutions and
            Participation in the Power Sector in Sub-Saharan Africa --
            Findings from a Survey of Investors and Financiers
docty: Policy Research Working Paper
subtopic: Energy and Mining,Energy and Environment,Energy Demand,Energy Policies & Economics,Renewable Energy,Rural and Renewable Energy,Energy Sector Regulation,Business Environment
teratopic: Private Sector Development,Rural Development,Energy
abstracts: cdata!: This paper develops a classification of
            investor risks and surveys 51 private investors and
            financiers in the power sector in Sub-Saharan Africa. The
            paper aims for a better understanding of what can be done to
            attract private solutions to fill the investment gap. It
            finds that the average investor assigns more weight to power
            sector policy and regulatory framework risks than to the
            wider sector and country context risks. And, despite many
            challenges, investors perceive three segments as ready for
            private solutions in Sub-Saharan Africa: power generation,
            off-grid electrification, and mini-grids. Investors see
            lower readiness in distribution, transmission, and retail.
            The paper finds that the average investor is
            forward-looking, as neither the track record of the power
            sector nor the firm’s personal track record is as important
            as the growth potential in the market. The paper uses the
            findings to reality-check data-based measures of regulatory
            readiness, namely the Regulatory Indicators for Sustainable
            Energy and Power Sector Reform Index and analyzes which
            elements correlate best with investor sentiment to optimize
            and streamline these indexes accordingly. The results
            provide important lessons for governments and development
            partners to devise appropriate de-risking instruments
            tailored to the risks that matter most to investors.
repnme: repnme: Attracting Private Solutions and
            Participation in the Power Sector in Sub-Saharan Africa --
            Findings from a Survey of Investors and Financiers
display_title: Attracting Private Solutions and
            Participation in the Power Sector in Sub-Saharan Africa --
            Findings from a Survey of Investors and Financiers
listing_relative_url: /research/2020/06/32168481/attracting-private-solutions-participation-power-sector-sub-saharan-africa-findings-survey-investors-financiers
topicv3: Renewable Energy m1326170 525,Investment Climate m1326293 405,Energy and Extractives m1326595 507,Power and Electricity Sector m1327094 515,Power Sector Reform m1503425 3937
publishtoextweb_dt: 2020-06-24T00:00:00Z
historic_topic: Private Sector Development,Rural Development,Energy
origu: Infra AFR Energy 1 (IAEE1)
no_of_pages: 39
author_keys: 0: author_key: 1806645
1: author_key: 1413868
2: author_key: 639986
3: author_key: 583234
model_extractions: Policy Research Working Paper 9299 Attracting Private Solutions and Participation in the Power Sector in Sub-Saharan Africa Findings from a Survey of Investors and Financiers _Benedict Probst Richard Holcroft Joern Huenteler Ani Balabanyan Andrew Tipping Peter Robinson_ Energy and Extractives Global Practice June 2020
Policy Research Working Paper 9299

# **Abstract**

This paper develops a classification of investor risks and surveys 51 private investors and financiers in the power sector in Sub-Saharan Africa. The paper aims for a better understanding of what can be done to attract private solutions to fill the investment gap. It finds that the average investor assigns more weight to power sector policy and regulatory framework risks than to the wider sector and country context risks. And, despite many challenges, investors perceive three segments as ready for private solutions in Sub-Saharan Africa: power generation, off-grid electrification, and mini-grids. Investors see lower readiness in distribution, transmission, and retail. The paper finds that the average investor is forward-looking, as neither the track record of the power sector nor the firm’s personal track record is as important as the growth potential in the market. The paper uses the findings to reality-check data-based measures of regulatory readiness, namely the Regulatory Indicators for Sustainable Energy and Power Sector Reform Index and analyzes which elements correlate best with investor sentiment to optimize and streamline these indexes accordingly. The results provide important lessons for governments and development partners to devise appropriate de-risking instruments tailored to the risks that matter most to investors.

This paper is a product of the Energy and Extractives Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at jhuenteler@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Attracting Private Solutions and Participation in the Power Sector in**

# **Sub-Saharan Africa — Findings from a Survey of Investors and Financiers**<sup>**1**</sup>

Benedict Probst<sup>1</sup> , Richard Holcroft<sup>2</sup> , Joern Huenteler<sup>1,3*</sup> , Ani Balabanyan<sup>3</sup> , Andrew Tipping<sup>2</sup> , Peter Robinson<sup>2</sup> 1University of Cambridge 2Economic Consulting Associates 3The World Bank, Energy & Extractives

*Corresponding author: jhuenteler@worldbank.org; +1 202 458 8646.

**Keywords:** Private investment; investment risks; electricity; financial viability; developing countries; emerging markets

**JEL codes:** F21, L94, L98

1 Any views presented here are the authors alone and should not be attributed to the World Bank or any other person or institution. The authors are very grateful for financial support from the Energy Sector Management Assistance Program (ESMAP). The team is grateful for peer review comments from [Vivien Foster, Arnaud Braud, and Sudeshna Banerjee]. Any shortcomings are the sole responsibility of the authors.
# **1. Introduction**

Sub-Saharan Africa faces investment needs in the hundreds of billions to achieve affordable, reliable, sustainable, and modern energy for all by 2030. Fifty-seven percent of the population—around 600 million people—do not have access to electricity, and continuous power outages constrain the economic performance of those already connected to the grid (IEA, 2018; Blimpo and Cosgrove-Davies, 2019). Tax revenue and development finance are unlikely to be sufficient to close this investment gap, and rising concerns about debt distress in the developing world limit the scope to take on more public debt (Gaspar _et al._ , 2019).

It is widely understood that private solutions—defined here as private sector participation in service delivery or private financing—can contribute to filling the resulting investment gap, if appropriately structured to minimize sovereign obligations and contingent liabilities to governments (Eberhard _et al._ , 2016). For example, a well-established literature shows that privately-run utilities score higher on corporate governance<sup>2</sup> than public utilities, which in turn is correlated positively with service delivery (Foster and Rana, 2019). Apart from private service delivery, private finance also plays an important role in the power sector, often making use of different funding instruments that underpin the capital structure of power projects,<sup>3</sup> including equity, debt and hybrid instruments (with both debt and equity) (IRENA, 2016).

What is less widely understood is what constitutes suitable conditions for attracting private solutions in the power sector, including the relative importance of different risk factors related to the policy and regulatory framework, the sector context, and the country context (Waissbein _et al._ , 2013). Yet, understanding the relative importance of these risk factors to private investors and financiers is critical to devise public instruments that can effectively and efficiently attract private sector solutions in the power sector.

Existing studies that investigate the factors that allow countries to attract private capital into their power sector commonly focus primarily on investors from industrialized countries, even though it is well documented in the literature that investors from developing and emerging economies have been playing an increasingly important role in providing finance and service delivery (see Table 1 for an overview of the literature). Furthermore, existing

> 2 This could be partly, as Foster and Rana (2019; p.12) underscore, because “boards of private utilities enjoy almost complete decision-making autonomy, whereas those of public utilities have limited freedom on critical matters of finance and human resources—particularly with respect to raising capital and appointing the chief executive officer. Public utilities also suffer considerable interference in the appointment and removal of board members. Overall, public utilities tend to be less rigorous in staff hiring, with more limited use of standard good practices, such as advertising, shortlisting, interviewing, and checking of references.”

> 3 These often take the form of independent power producers, which are defined as: “power projects that are, in the main, privately developed, constructed, operated and owned; have a significant proportion of private finance; and have long-term power purchase agreements with a utility or another off-taker”(Eberhard et al., 2017; p. 391). Yet, private finance also features prominently in publicly-owned companies, either through pure lending instruments or acquiring a stake in the public power project or company (e.g., public-private partnerships).

2
studies commonly do not distinguish between domestic<sup>4</sup> and international investors when investigating the relative importance of risk factors. Yet, their risk preferences might differ due to the exposure and sensitivity to different risk classes. In terms of power sector segments, there is limited research investigating the differences between the different segments (generation, transmission, distribution, retail, off-grid, and mini-grid), even though there are likely differences between segments. With the increasing importance of index data to track power sector liberalization efforts, there is a growing need to ground-proof data and provide weighting of different factors (i.e., what is most important to actors in the power sector) (RISE, 2019). Lastly, there is a wide array of risk categories used across studies, increasing the need for a standardized risk assessment approach that can be easily replicated across different countries and regions.

This paper contributes to filling the existing gaps in the literature by first condensing the wide array of existing risk categories into a comprehensive and coherent framework. We then used this framework to survey 51 equity investors and lenders in the power sector in SubSaharan Africa between January and May 2019. We used a risk factor-based framework to structure the survey, which is described in detail in Section 3 (Waissbein _et al._ , 2013). This framework distinguished 10 risk factors, grouped into three categories, to evaluate the attractiveness of investment environments in the power sector. The survey focused on three sets of questions: (1) How important are different risks when evaluating a new power sector investment? (2) How ready are different segments of the power sector for private solutions? (3) How are different countries in Sub-Saharan Africa perceived in terms of past investment experience and prospects for new investments?

This paper is organized as follows. After reviewing the existing literature in Section 2, in Section 3 we introduce the aforementioned framework, sample and survey methodology, and Section 4 presents the results. Section 6 then ‘reality-checks’ the existing, data based assessments of countries’ readiness for investment by comparing it to the results from the investor survey. Section 6 provides a summary and lessons for policy.

> 4 A further challenge is the definition of what constitutes a ‘domestic’ investor. For our purposes, we define domestic investors as those investors that are incorporated on the African continent.

3
# **2. Literature Review**

# **2.1. What Are the Factors That Make a Sector Attractive for Private Solutions?**

Existing studies emphasize several risk-factors that influence the provision of private sector solutions in the power sector. Table 1 provides an overview of the coverage, time frame, sector, methodological approach and main findings of the 16 reviewed studies, grouped by methodological choices (with each section presented in chronological order).

Most studies emphasize the importance of adequate **power sector policy and regulation** . For instance, Lamech and Saeed (2003) survey 48 international equity investors and find that the rule of law, a respect for the rights of investors, and a fair and transparent regulatory framework are the most important factors when investing in the power sector of a given country. High-level econometric studies point to similar factors. Banerjee, Oetzel and Ranganathan (2006) provide evidence from 40 developing economies in private participation in infrastructure that institutional quality and property rights are predictive of investment.

The literature also points out the importance of **the track record of the power sector** (such as past experience of the company, current size and growth prospects) and the wider **country-context.** For example, Singh (2007), investigating power sector policy and regulatory reforms in Argentina, Brazil, India, Mexico, China and Thailand, underscores that macroeconomic stability played a key feature in the reform process and its ability to attract foreign investment. Similar findings emerge from studies on African countries, such as Ghana and Kenya (Pueyo, 2018).

This paper fills three gaps in the existing literature. First, relatively few studies focus on the peculiarities of countries at lower levels of income. Most existing studies that investigate the factors that allow countries to attract private capital into their power sector commonly focus on investors from industrialized countries, even though it is well documented in the literature that investors from developing and emerging economies are playing a greater role (Ettinger, Dellacha and Hahn, 2005). There is also hardly any research that distinguishes between domestic and international investors, even though their risk preferences might differ due to differing competitive advantages (i.e., domestic investors might be better placed to assess country risk). Second, there is little research investigating the differences between the different segments of the power sector, with most existing research focusing on power generation, even though there are likely differences between on-grid, off-grid and other segments. Third, with the increasing prominence of publicly available indices to track the power sector, there is a need to ground-proof the data and provide weighting of different factors (i.e., what is most important to actors in the power sector).

4
**Table 1: Overview of Study, Coverage, Time, Sector, Methodological Approach and Main Findings of the Respective Studies**

|**#**|**Study**|**Coverage**|**Time**|**Sector**|**Methodologic**<br>**al approach**|**Main determinants of investment**|
|---|---|---|---|---|---|---|
|1|Eberhard et<br>al (2017)|Overview SSA and<br>comparative evaluation of<br>Kenya, Nigeria, South<br>Africa, Tanzania, and<br>Uganda|1994-2013|Power|**Country case**<br>**studies**|<br>Quality (not just existence) of independent regulator<br><br>Adequate power sector expansion planning by an<br>independent system administrator<br><br>Risk mitigation against key risks (i.e., off-taker risk)|
|2|Singh (2007)|Comparative evaluation of<br>policy and regulatory<br>reforms in Argentina,<br>Brazil, India, Mexico, China<br>and Thailand.|1993-2003|Power|**Country case**<br>**studies**| Macro-economic stability<br> Pace and sequencing of reforms<br> Independent regulator|
|3|Ahlborg and<br>Hammar(<br>2014)|National and international<br>power sector actors in<br>Tanzania and Mozambique|2011|Power|**Country case**<br>**study**| Access to human capital<br> Adequate planning<br> Access to donor funding<br> Low profitability deters greater private sector<br>involvement|
|4|Pueyo<br>(2018)|20 interviews with<br>investors and other<br>stakeholders in Kenya and<br>Ghana|2015|Power|**Country case**<br>**studies**|Ghana<br> Off-taker risk<br> Macroeconomic imbalances<br> Quality of regulation<br> Access to finance<br>Kenya<br> Power demand<br> Quality of distribution and transmission infrastructure<br> Social acceptance|
|6|Bhamidipati<br>et al (2019)|31 interviews with<br>government, private firms,<br>and development actors|2017|Power|**Country case**<br>**study**|<br>Appropriate off-grid institutional framework<br><br>New financing mechanisms (pay-as-you-go frameworks)|

5
|7|Banerjee,<br>Oetzel and<br>Ranganatha<br>n (2006)|40 developing economies<br>across Latin America,<br>Europe, Africa and Asia|1990-2000|Power, natural gas,<br>telecommunications,<br>transport, and water<br>supply and sanitation|**Econometrics**<br>_(Pooled OLS)_|<br>Property rights<br><br>Bureaucratic quality|
|---|---|---|---|---|---|---|
|8|Lüthi and<br>Wüstenhage<br>n (2012)|63 European photovoltaic<br>developers investing in<br>Europe and abroad|2008|Power|**_Econometrics_**<br>_(Choice_<br>_experiment)_|<br>Duration of administrative process,<br><br>Feed-in tariff level and price cap|
|9|Mengistu (<br>2013)|PPI deals from 133 low-<br>and middle-income<br>countries|1995-2008|Power,<br>telecommunications,<br>water and sanitation|**Econometrics**<br>(Cross-country<br>panel)|<br>Size of the service sector is most important predictor for<br>PPI<br><br>SSA countries with common law origins substantially<br>more likely to get PPI (likely, due to more developed<br>financial markets and property rights)|
|||48 international equity|||||
||Lamech and|investors from mainly||||<br>Overall regulatory quality (rule of law, respect for rights|
|10|Saeed<br>(2003)|industrialized countries<br>investing in developing<br>countries|2000-2003|Power|**Survey**|of investors and judicial processes free of political<br>interference)|
|11|Noel and<br>Brzeski (<br>2005)|8 equity investors<br>investing in Europe and<br>Central Asia|2003-2004|Power, water and<br>other local<br>infrastructure (_not_<br>_specified_)|**Survey**<br>(_informal_<br>_survey)_|<br>Adequate cash flow<br><br>Adequate contractual framework<br><br>Policy risk<br><br>Exit possibility for first-round equity investors|
|12|Akampurira,<br>Root and<br>Shakantu(<br>2009)|28 responses (19<br>government entities, 9<br>private sector) in Uganda|2007|Power|**Survey**|<br>Regulatory and legal framework<br><br>Access to finance<br><br>Swift approval process,<br><br>Social acceptance|
|13|Bürer and<br>Wüstenhage<br>n (2009)|60 venture capital and<br>private equity funds<br>mainly from North<br>America and Europe|2007|Power|**Survey**|<br>Security of cash flow|

6
|14<br>Masini and<br>Menichetti<br>(2013)|93 European from various<br>investor types (Venture<br>Capitalists, Investment<br>Funds etc.).|2009|Power|**Survey**|<br>Technological risk|
|---|---|---|---|---|---|
|15<br>Kruger,<br>Stritzke and<br>Trotter<br>(2019)|6 solar PV developers and<br>investors in South Africa<br>and Zambia|2017-2018|Power|**Survey**|<br>Site-specific risks|
|Mahbub and|25 private companies|||||
|16<br>Jongwanich|conducting FDI in|2015-2016|Power|**Survey**|<br>Regulatory quality|
|(2019)|Bangladesh|||||

7
# **2.2. How Can Risk Factors Be Organized into Analytical Frameworks?**

Several frameworks have been developed to synthesize various sources of investors’ risk and their role in determining the attractiveness for private investment in the power sector. The risk frameworks analyzed in this study can be found in Table 2. The frameworks contain between 7-9 major risk categories, which in turn are divided into 13-27 underlying barriers.

Liebreich and Young (2005) use different stages of power project development to identify risks specific to the phase, ranging from planning to the eventual decommissioning of the project. This makes their framework particularly appropriate for project developers, but less applicable for wider power sector risks and actors not directly involved in developing projects (e.g., financiers). In turn, Waissbein et al. (2013) use different stakeholder groups, such as policy makers, end-users, and project developers to identify risks that are specific – and therefore, they argue, independent – to each of the stakeholder groups. This stands in contrast to other approaches, such as Akampurira, Root and Shakantu (2009) that feature overlapping and non-mutually exclusive risk categories. Yet, overlapping risk categories are particularly problematic if frameworks are used to survey participants, as strongly correlated risk categories undermine the frameworks’ quantification process.

**Table 2: Background, Composition, and Operationalization of Different Frameworks to Capture Investors’ Risk**

|<br>|**Framework**<br>**background**||**Framework composition**|**Fra**<br>**operati**|**mework**<br>**onalization**|
|---|---|---|---|---|---|
|#|Source|Framework<br>components|Specific risk categories|Survey<br>method|Survey<br>participants|
|1|Lamech and<br>Saeed<br>(2003)<sup>5</sup>|9 major risk<br>categories and<br>27 underlying<br>barriers|1. Government and legislative process<br>2. Economy<br>3. Sector’s current status<br>4. Political economy<br>5. Investment process and support<br>6. Revenue factors<br>7. Operational factors<br>8. Regulatory factors<br>9. Government support and performance|Rating<br>(1-4)|48|
|2|Liebreich<br>and Young<br>(2005)|4 major risk<br>categories and<br>14 underlying<br>risks|1. Planning and permitting<br>2. Construction<br>3. Operating<br>4. Decommissioning/Repowering|NA<sup>6</sup>|NA|
|3|Akampurira,<br>Root and|23 underlying<br>barriers|No specific aggregation of underlying<br>barriers into risk categories|Rating<br>(1-5)|28|

5 First, firms were first asked to rank categories 1-5 in decision to invest in a developing country. Second, each firm was asked to rank categories 6-9 for best and worst investment experience. Each factor could be ranked from 1-4.

> 6 Merely conceptual article without empirical grounding.

8
||Shakantu<br>(2009)|||||
|---|---|---|---|---|---|
|4|Waissbein<br>et al. (2013)|9 major risk<br>categories and<br>20 underlying<br>barriers|1. Power market risk<br>2. Permit risk<br>3. Social acceptance risk<br>4. Resource and technology risk<br>5. Grid/transmission risk<br>6. Counterparty risk<br>7. Financial sector risk<br>8. Political risk<br>9. Currency macro-economic risk|Rating<br>(1-5)|35<sup>7</sup>|
|5|Gatzert and<br>Kosub,<br>(2016)<sup>8</sup>|7 risk categories<br>and 13<br>underlying<br>barriers|1. Strategic/business risk<br>2. Transport/construction/completion<br>3. Operation/maintenance<br>4. Liability/legal risks<br>5. Market/sales risk<br>6. Counterparty risk<br>7. Political, policy, regulatory risk|NA|NA|

In terms of the operationalization of the framework, some of the frameworks have been developed without directly using the structure of the framework to survey investors (denoted as NA in Table 2). For those frameworks that have been directly applied, all existing studies use rating methodologies, which allows the surveyed participants to rate each item from 1 to x (where x commonly is the highest possible ranking that can be given). Ranking survey methodologies stand in contrast to ranking methodologies, which presuppose an implicit order of importance between categories, which can be elicited. The average number of participants ranges from 28 – 48.

Section 3 combines relevant parts of the frameworks discussed above and develops a framework to evaluate different risk categories, while also containing non-overlapping categories that allow for a robust quantification of the framework.

> 7 The report by Waissbein et al. (2013) states that for the assessment of the risk environment 14 informal interviews and 21 structured interviews were conducted for four case studies used in the report to illustrate the framework.

> 8 Specific focus on risks in off-shore wind.

9
# **3. Framework to Evaluate Investment Environments in the Power Sector**

We use a risk-based framework to approximate the factors that investors employ when making decisions. As many developing and emerging economies are constrained to take on more debt, and the financial situation of many utilities is troubling, understanding effective ways to mitigate risk is crucial (Waissbein _et al._ , 2013; Polzin _et al._ , 2019).

In order to arrive at a framework to survey the investors, we rely on a twofold strategy: top-down and bottom up. From the literature review in Section 2.1, we identify three main over-arching risk categories that are most commonly found in the literature. Through this topdown approach we settle on: 1) policy and regulatory framework, 2) power sector context risk, and 3) country-context risk. For the bottom-up approach, we collect all possible barriers to private sector investment and group them into 10 risk mutually exclusive and collectively exhaustive (MECE)<sup>9</sup> risk factors. Then we allocate these 10 risk factors to three risk categories identified via the top-down approach.

> 9 We are of course aware that a completely MECE framework is difficult to achieve.

10
<!-- Start of picture text --> Risk factor Explanation<br>Risks related to licensing, procurement<br>= 1. Ease of market entry tendering, and general legal framework/<br>5 affecting investors’ ability to enter the market<br>o=<br>So Risks related to government plans for<br>oS 2. Clarity of investment priorities electrification, generation, and transmission<br>3 e expansion and required technical standards<br>as<br>> Risks related to recovery of costs and<br>2 3. Certainty of cash flow investment returns, ability to enforce payment<br>discipline, and government support<br>Risks related to past experiences / lack of<br>a 4. Sectoral track record track record in the power sector, such as<br>2 no/few IPPs and low investment volumes<br>gs<br>® x Risks related to market size and prospective<br>5 2 5. Sectoral growth demand growth in the power sector, such as<br>= low electrification rates and population growth<br>es<br>8 6. . Firm’s personal track record Risks related to the firm’s lack of experience in<br>CLGd P the power sector of a given country, such as<br>GISPEES) no/imited access to relevant decisionmakers<br>Risks related to high political instability, poor<br>7. Governance and political risk governance, poor rule of law, and poor<br>institutions<br>® Risks related to the country’s integration into<br>Zo£5 ie} 8 . BusiBusiness environmeni t theaccesse in tternationalto internationaltional economy,financingas i ndicatedndicatedbby<br>°°<br>e¢<br>=x Risks related to economic growth, currency<br>FA 2 9. Macro-economic framework convertibility and transferability risk, fiscal<br>rs) discipline, and sovereign debt rating<br>Risks related to the efficiency, depth, and track<br>10. Banking and capital markets record of local banking and capital markets,<br>such access to local debt and equity finance<br><!-- End of picture text -->
The survey was issued to 70 entities that are active investors in the power sector of SSA. 51 surveys were completed by individuals at 48 of these entities, resulting in a response rate of 69%. It contains four sections: 1) Investor details: Participants provided contact details, their area of work within the power sector, and their favored segment of the supply chain. 2) Investor experience: Participants listed countries in which they have invested in the power sector, the segment of the supply chain they invested in, and their overall investment experience (positive, mixed, negative) in each case, 3) Investor perceptions: Participants rated the readiness of the regulatory arrangements of each segment of the supply chain in SSA and of countries in SSA (positive, mixed, negative). 4) Importance of risks to investors: For each risk category, participants ranked constraints according to how important they are when making an investment. They also ranked the three risk categories.

Aggregate data were collected from various public sources, including Aisenman et al’s (2010), Kojima and Trimble’s (2016) and the World Bank’s _RISE_ and _WDI_ indicators. Data were also collected from internal World Bank documents. Using the survey data, we produce the following statistics on investors’ priorities when making an investment decision: First: Overall risk category score (between 0-10) to answer the question whether – on the highest level of risk aggregation – policy and regulatory risk, power sector context risk, or country context risk is the most important risk category. Second: Risk factor scores – disaggregating the three risk categories into the 10 underlying risk factors – to further understand what drives the importance of risk category scores (e.g., whether the importance of the policy and regulatory environment to investors is driven by concerns around the ease of market entry, clarity of investment priorities or the certainty of cash flow). Third, risk constraints – on the lowest level of aggregation – which describe for each risk factor, the underlying investment constraints (e.g., are worries surrounding the certainty of cash flow driven by a lack of a government support mechanism or insufficient tariff-setting guidelines?). Hence, these three sets of statistics allow us to provide a high-level picture, while drilling into the driving factors behind each aggregate result.

Using the survey data, we produce the following statistics on investors’ priorities when making an investment decision: 1) Constraint scores: Within each risk category of our framework, a score is allocated to each constraint for each survey participant (between 0 and 10, where 10 is the most important constraint to the investor). 2) Risk scores: Within each risk category, a score is allocated to each risk for each survey participant (between 0 and 10). 3) Risk-category scores: A score is allocated to each risk category for each survey participant (between 0 and 10). We then use the risk category score to weigh each risk and constraint score, as we assume that the relative importance of each risk and constraint score is determined by the overall importance of the specific risk category score.

The sample covered all segments of the power sector: power generation, transmission, distribution, off-grid and mini-grids and both international and local investors (see Figure 2). Half of the survey respondents are incorporated in Africa, which reflects the increasing importance of investors of developing and emerging economies in the power sector (Ettinger, 12
Dellacha and Hahn, 2005). The majority of surveyed investors are active in the generation and off/mini-grid sector, but around 25% were active in distribution, transmission and retail. As the majority of the literature has focused on equity investors (see Section 4), our research also includes debt providers. Yet, these constitute only 7 of 51 surveyed investors, as development finance institutions (DFIs)<sup>10</sup> still provide a substantial part of financing for power projects in SSA (Eberhard _et al._ , 2017).

**Figure 2: Overview of Characteristics of Participants**

<!-- Start of picture text --> a) Half of survey respondents are b) Participants are mainly active in<br>incorporated in Africa generation and off/mini-grid<br>Middle East<br>Retail<br>Asia Unknown Generation<br>1 Transmission 6<br>2 1<br>Americas 12<br>5 34<br>16<br>51 survey 26 Africa Distribution 51 survey<br>participants participants*<br>16<br>Europe 24 25<br>Mini-grid Off-grid<br>c) Most participants are equity investors<br>Financiers<br>7<br>51 survey<br>participants<br>44<br>Equity investors<br><!-- End of picture text -->

*Investors can be in multiple categories so total adds up to more than 51

In rating the readiness of each country and supply-chain segment, participants could choose which countries and segments to rate. The reasoning was that participants may be uninformed on the readiness of some countries or segments. While this ensures participants do not provide inaccurate data, there is a potential for selection bias. For example, participants might only provide their opinion for the most extreme cases. However, our

> 10 DFIs were not included in the survey as they are not fully commercial.

13
results indicate that the willingness of an investor to rate a country is not correlated with its perceived or experienced readiness.

# **4. Results**

This section provides the main results from our investor survey. This section is structured along the three main research questions set out in the introduction. Section 4.1 therefore sets out the importance of different risk factors when evaluating power sector investments, whereas Section 4.2 gives an overview of the readiness of different segments of the power sector for private solutions. Section 4.3 then reviews the results in terms of the readiness of different countries.

# **4.1. Ranking of Risk Factors When Evaluating Power Sector Investments**

Investors and financiers assign the greatest importance to policy and regulatory risks (average (avg.) 6.8), followed by country context risks (avg. 4.6) and risks related to the wider power sector context (avg. 4.0). Among power sector policy and regulatory risks, the certainty of cash flow (avg. 7.4) is the most important for investors, with ease of market entry (avg. 6.6) and clarity of investment priorities (avg. 6.5) following closely behind. In the category overall power sector context risks, investors see the sectoral growth potential as the most important (avg. 4.7), whereas neither the sectoral track record nor the investors’ own track record are as important (avg. 3.6 and 3.7, respectively). In terms of country context risks, governance and political risks are the most critical for investors (avg. 6.7), followed by the general business environment (avg. 5.6), and the macro-economic framework (avg. 4.3). Risks related to domestic banking and capital markets are not considered important (avg. 1.7).

These results underscore that even in difficult country and sector contexts, policy makers have the power to attract private solutions, by putting in place policy and regulatory frameworks that make projects attractive for private solutions. By far the most important risk category score is the certainty of cash flow, which relates to the investors’ ability to recover its costs and investment returns, enforce payment discipline of the off-taker or customer, and the kind of government and possibly multilateral support that is provided to secure investors’ cash flows. Yet, governance and political risk also feature prominently for investors, likely because changes in that domain can have substantial consequences for the certainty of cash flow. Least importance to investors are domestic banking and capital markets, which suggest that investors largely rely on external sources of capital and there is still a long way to go for the development of local markets for infrastructure financing, which will certainly be needed as the market matures and scales up.

14
<!-- Start of picture text --> Risk Importance of risk (0 = lowest, 10 highest)<br>5S A. Policy and regulatory risk<br>= 3 B. Power sector context risk 4.0 -——<br>8£3s C. Country context risk. 4.6 -—<br>+ = 1. Ease of market entry 6.6 —<br>33 2. Clarity of investment priorities 6.5 HH<br>a o 3. Certainty of cash flow<br>Hi 4. Sectoral track record 3.6 KH<br>a » 8 6. Firm's personal track record 3.7 KH<br>: § 2 5. Sectoral growth a<br>7. Governance and political risk<br>£% 8. Business environment 5.6 -—<br>3 9 9. Macro-economic framework 4.3 rH<br>10. Banking and capital markets 1.7<br>0 1 2 3 4 5 6 7 8 9 10<br><!-- End of picture text -->
<!-- Start of picture text --> Deal breaker Most important factor,<br>Risk (0-100%) %<br>B @ A. Policy and regulatory risk 49%<br>3 ) B. Power sector context risk 24% 32%<br>é % C. Country context risk 31% 40%<br>+> 5ot 1. Ease of market entry | 30% | 935%<br>= 3 2. Clarity of investment priorities 17% 16%<br>a 2 3. Certainty of cash flow 51%<br>Fs5 3is} § x° 5 4.6 . SectoralSectoralFirm’s pers grtrack o nalwth recordtrack record ‘17%an[19% | 25%37%<br>7. Governance and political risk re, 70%<br>£3 8. Business environment 35% 16%<br>8 8 9. Macro-economic framework [18% 6%<br>10. Banking and capital markets 7% 4%<br>0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%<br><!-- End of picture text -->
<!-- Start of picture text --> Risk Importanceof risk (0 = lowest, 10 highest)<br>1. Ease of market entry 6.6 -—<br>i. Segment is unbundled 3.7 H—<br>ii. No legal restrictions 7.9 -——I<br>iii. Rules on entry and exit 8.2 a<br>2. Clarity of investment priorities 6.5 -<br>¥<br>i. Clarity of stakeholder roles 5.4 -—<br>+ ‘2<br>> ii. Service level + tech. standards 5.7 -—<br>2 3 ii. Stakeholder support 7.0 -—<br>© iv. National plan for segment 7.9 SS<br>3. Certainty of cash flow<br>i. Track record of payment 6.9 =<br>ii. Mechanism to enforce payment 7.0 —<br>iii. Government support mechanism 78 i<br>iv. Tariff-setting guidelines 8.0 re<br>0 1 2 3 4 5 6 7 8 9 10<br><!-- End of picture text -->
<!-- Start of picture text --> Risk Importance of risk (0 = lowest, 10 highest)<br>4. Sectoral track record 3.6 r<br>i. Tot. private investment past 10y 2.9 HH<br>B ii. Private sector presence 4.2 ——<br>S& i. Growth rate power demand p.a. 45 -<br>8§ 5.ii. SectoralCurrent power growth market size —4.8 a<br>oO<br>Mm 6. Firms personal track record 3.7 HH<br>Fs i. Prior investment in country 3.6 HH<br>ii. Personal network in country 3},0/ rH<br>iii. Access to decisionmakers 3.9 _<br>0 1 2 3 4 5 6 7 8 9 10<br><!-- End of picture text -->
Risk Importance of risk (0 = lowest, 10 highest) <!-- Start of picture text --> 7. Governance and political risk<br>i. Government effectiveness 5.8 rH<br>ii. Regulatory quality 6.2 -<br>iii. Control of corruption 6.1 aL<br>iv. Political stability 7.6 HH<br>v. Rule oflaw 7.9 EH<br>3 8. Business environment | 5.6 KH<br>9 i. Access to IFI financing | 5.6 -—<br>2<br>=<br>8 9. Macro-economic framework 4.3 -—H<br>i. Level domestic inflation 3.6 HK<br>ii. Fiscal discipline 3.8 HH<br>ii. Economic growth 4.7 rH<br>iv. Foreign exchange risk 5.2 =<br>10. Banking and capital markets 1.7 FU<br>i. Local equity financing 1.5-—<br>ii. Local debt financing 1.9 4<br>0 1 2 3 4 5 6 7 8 9 10<br><!-- End of picture text -->
These findings indicate that the risk factors can be put into three categories – analogous to findings from psychology<sup>11</sup> – which are: ‘hygiene factors’ that investors require to consider a market place – such as no legal restrictions on private sector involvement in the power sector – but once in place, the attention of investors shift to other risk factors such as certainty of cash flow. The latter category is ‘motivating factors’, which propel investors to actually enter a marketplace. There are other risk factors for the surveyed investors – that might be considered ‘non-factors’ in the current market set-up – such as domestic debt and equity markets, which only 7% of investors consider to be a deal breaker (the second lowest scores, only after segment is unbundled, which 4% of investors consider a deal breaker) and only 2% ranked as the most important factor (likely those that do not have international sources of financing).

> 11 Herzberg’s motivation-hygiene theory proposes that there are certain factors in the workplace, which cause satisfaction (so-called ‘motivators’) and those that cause dissatisfaction (so-called ‘hygiene’ factors). While hygiene factors need to be in place, they are not sufficient by itself.

20
<!-- Start of picture text --> Risk Deal breaker Most important factor,<br>(0-100 %) %<br>=x Ww<br>2 A. Policy and regulatory risk 72% 49%<br>E ? B. Power sector contextrisk 32% 24%<br>6 8 C. Country context risk 40% 31%<br>1. Ease of market entry 30% + 12%+<br>i. ii .i. SegmentNoRules legal reson enis tr unbundledictionsy and exit ast35%4% sect2%8%<br>x<br>i 2. Clarity of investment priorities 47%} 4% +<br>2 i. Clarity of stakeholder roles 8% 2%<br>© iii. Stakeholder support 25% 2%<br>3ua(2) ii.iv. ServiceNational levelplan +for tech. segment standard 24%=f 10%S|<br>© 3. Certainty of cash flow 33 13%<br>i. Track record of payment 31% 12%<br>ii. Payment enforcement 31% 12%<br>iii. Gov. support mechanism 50% 16%<br>iv. Tariff-setting guidelines 37% 12%<br>4. Sectoral track record 17% + 13%+<br>x i. Private investment past 10y eee web<br>= ii. Private sector presence 16% 24%<br>rs 5. Sectoral growth 37, 19%<br>2© i.ii. GrowthCurrent powerpower demand market sizep.a. soe35% ee18%<br>o<br>=<br>= 6.i. FirmsPrior investment personal trackin country record 1 09 % + 1 32 %<br>Q iii.ii. AccessPersonalto networkdecisionmakers in country 27%a 24%a<br>7. Governance and political 37% 15%+<br>i. Government effectiveness 22% 2%<br>ii. Regulatory quality 25% 6%<br>iii. Control of corruption 39% 10%<br>iv. Political stability 49% 33%<br>v. Rule of law 51% 24%<br>* 8. Business environment 35% 16%<br>S i. Access to IFI financing 35% 16% F<br>Oo<br>3 i. Level domestic inflation 14% 2%<br>O ji. Fiscal discipline 14% 0%<br>£ 9. i iiv . MacrEcon miForeign o -eexchange c ongr wth o mic frameworkrisk s3114 % 4|1 % {<br>10. Banking and capital markets 7% 2%+<br>ii.i. LocalLocal equitydebt financing financing 7%met 2%el<br>0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%<br><!-- End of picture text -->
# Importance of risk (0 = lowest, 10 highest)

||Risk|Lender|Sponsor|On-Grid|Off-Grid|Domestic|Internat.|
|---|---|---|---|---|---|---|---|
|<x<br>Ww<br>2 @A.<br>|Policyandregulatoryrisk|6.5|6.6|5.6*||i7.5|75|6.2|
|<br>=o<br>© ><br>B. <br><br>|<br> Power sector context risk<br>|5.0<br>|3.6<br>|<br>6.2**<br>|<br>*<br>2.8<br><br>|4.0<br>|4.0<br>|
|Ow<br>6 © C.|Country context risk|4.0|5.3|4.1||<br>4.8|3.8|5.4|
|><br>+<br>6<br>1.<br><br>~|Ease ofmarket entry|6.0|6.5|6.0|7.1|7.0|6.2|
|~<br><br>232.|Clarityofinvestmentpriorities|4.6**|6.4|9.1TM|78|73|5.7|
|<br>Fi¥4.|<br>Sectoraltrackrecord|6.0|29|49|27|39|3.2|
|<br>=5<br>5.|<br>Sectoralgrowth|46|42|7.3|3.2|46|48|
|<br><br>% ©<br>6.<br>o|<br>Firm's personal track record|8.9]|3.7|6.3|2.5|3.6|4.0|
|7.<br><br> <br>|Governance and political risk<br>|7.4*<br>|7.1<br>|5.5<br>|7.5<br>|5.7<br>|7.7<br>|
|><br>=5<br>8. <br><br>|Business environment|3.9|6.8|5.7**|5.3|4.2|7.0|
|Cc<br>3<sup>9</sup><br>9.|Macro-economicframework|3.5**|5.2|4.1|4.6|3.7|5.1|
|<br><br>10|<br>.Bankingandcapitalmarkets|1.2|2.1|1.2|2.0|1.6|1.8|

Statistical significance of difference in means between two groups calculated using a two-tailed t-test: ***p < 0.01, **p <0.05, *p < 0.1. Comparison between lenders and sponsors, off-grid and on-grid, and domestic vs. international. For the sake of readability, the stars are only shown for one of the groups, although the star show the result of the test whetherthe difference in means between two groups (e.g., the importance of the power sector context risk between on-grid and off-grid) is statistically different.
|||Lend|er|Spo|nsor|On-|Grid|Off-|Grid|
|---|---|---|---|---|---|---|---|---|---|
||Risk|Dom.|Int.|Dom.|Int.|Dom.|Int.|Dom.|Int.|
|B 3 A. <br>|Policy and regulatory risk<br>|7.5 <br>|| 25<br>|7.1<br>|6.3<br>|5.0<br>|5.8<br>|8.2<br>|6.5<br>|
|F:&B.|Powersectorcontextrisk]|4.4|7.5|3.8|3.5|6.0|6.3|3.4|1.9|
|<br>6©<br>C.|<br>Countrycontextrisk|3.8|5.0|4.2|6.0|4.0|4.2|3.7|6.5|
# Deal breaker (%)

|Risk|Lender|Sponsor|On-Grid|Off-Grid|Domestic|Internat.|
|---|---|---|---|---|---|---|
|% 8 Average|53|41|48|39|46|43|
|ras,A.Policyandregulatoryrisk|70|62|72|58|13|60|
|<br>QS<br>B.Powersectorcontextrisk<br><br>|40<br>|24<br>|34<br>|21<br>|35<br>|24<br>|
|<br> <br>°<br>C.Countrycontextrisk|50|38|38|37|31|44|
segments, while only few report experiences in transmission, distribution, or retail supply, but there is no substantial difference in the evaluation of the different segments (Figure 12a). In fact, the highest share of positive assessments of past experiences are recorded in distribution and retail supply (54 percent positive), transmission (50 percent), and off-grid (49 percent). However, it should be underscored that survey responses for distribution and retail supply and transmission are limited as only few investors have experience in these sectors (Figure 12a), likely due to their low perceived readiness (Figure 12b).

Looking forward, the survey suggests that the ‘readiness’ for private sector solution in the power sector differs substantially between power sector segments. Grid generation, offgrid, and mini-grids are rated more ‘ready’ than retail supply, distribution and transmission (see Figure 9b). It should be noted that the positive prospective perception may partly be driven by the retrospective evaluation of the investment, and it is therefore likely biased upwards (except for transmission and distribution).

**Figure 12: Readiness for Investment of Different Power Sector Segments in Sub-Saharan Africa in terms of a) retrospective evaluation of investment experience, and b) prospective perception of investment readiness**

<!-- Start of picture text --> a) Retrospective evaluation of investment b) Prospective perception of investment<br>experience readiness<br>Off-grid Generation<br>Generation Off-grid<br>Mini-grid MixedMini-grid Mixed<br>Negative Negative<br>Retail Retail<br>Positive Positive<br>Transmission Distribution<br>Distribution Transmission<br>-40 -20 0 20 40 60 -40 -20 0 20 40<br>Rated by 46 participants. Rated by 51 participants.<br><!-- End of picture text --> Yet, the assessment can further be refined: Over the last decade, several countries in Sub-Saharan Africa have attracted substantial private investments in their power sector. We asked investors to evaluate their experiences in countries they have invested in. Respondents report ‘positive’ or ‘very positive’ experiences in six countries: Kenya, Namibia, Nigeria, Senegal, South Africa, and Tanzania (Figure 13a). In the power-sector policy and regulatory framework, investors called for better de-facto regulatory independence (e.g. end arbitrary regulatory decisions in Sierra Leone), improvements to government support mechanisms and payment enforcement mechanisms (e.g. in Zambia and Tanzania), and improvements to entry and exit (e.g. speed up the regulatory process in Kenya and South Africa, improve license 25
<!-- Start of picture text --> a) Retrospective evaluation of b) Prospective perception of<br>investment experience investment readiness<br>we : Legend: a ,<br>GD Positive<br>* (9) somewhat positive °<br>1) Neutral<br>yy Somewhat negative<br>Ey Negative<br>No data per<br><!-- End of picture text -->
# **Figure 14: Retrospective Investment Experience and Prospective Readiness in Sub-Saharan Africa**

|**a) Retrospect**|**ive evaluation of investment**|**b) Prospectiv**|**e perception of investment**|
|---|---|---|---|
||**experience**||**readiness**|
|<br>Tanzania||Kenya||
|South Africa||Uganda||
|Nigeria||Rwanda<br>||
|Kenya||South Africa||
|Senegal||Nigeria||
|Namibia||Côte d'Ivoire||
|Zambia||Zambia||
|Uganda||Senegal||
|Rwanda<br>||Mozambique||
|Ghana||Ethiopia||
|Togo||Ghana||
|Somalia||Cameroon||
|Mozambique<br>||Benin||
|Mauritius<br>|Mixed|Namibia||
|Mali|Negative|Malawi||
|Guinea<br>Madagascar|Positive|Sierra Leone<br>Madagascar||
|||Gabon||
|Ethiopia||||
|Burkina Faso<br>||Togo||
|Zimbabwe||Mauritius<br>Tanzania||
|South Sudan||Guinea<br>||
|Sierra Leone||Botswana<br>||
|Niger||South Sudan||
|Malawi||Shll|Mid|
|Côte d'Ivoire||The Gambia<br>eycees|xe<br>|
|Cameroon||Lesotho<br>|Negative|
|Burundi||Guinea-Bissau|Positive|
|Benin||C Vd||
|||ape ere||
|||Burkina Faso||
|-10|-5<br>0<br>5<br>10|Réunion<br>||
|||Djibouti||
|||C<br>||
|||<br>Angola<br>omoros||
|||Western Sahara||
|||Sao Tome and...||
|||Niger||
|||Liberia||
|||Equatorial Guinea||
|||Zimbabwe<br>||
|||Sudan||
|||Mauritania||
|||Mali<br>||
|||eSwatini||
|||Eritrea||
|||Cono||
|||Chad<br>g...||
|||Burundi<br>||
|||Somalia||
|||Congo (Republic)||
|||Central African...||
|||-20|-10<br>0<br>10<br>20<br>30|

27
# **5. How Well Do Survey Results Correspond to Data-Based Assessments?**

Besides understanding investors’ and financiers’ risk perception, a second motivation for the survey was to ‘reality-check’ existing, data-based assessments of countries’ readiness for investment. Figure 13a below shows that survey respondents’ perception of countries’ readiness correlates very well with Regulatory Indicators for Sustainable Energy<sup>16</sup> (RISE) 2017 scores (R<sup>2</sup> of 0.47 for a sample of 35 countries). Ghana, South Africa, and Zimbabwe score much better on the RISE index than their perception is by investors, while the opposite is true for Madagascar, Mozambique, and Nigeria. But these are outliers, and overall, the strong correlation suggests that the RISE framework corresponds well with the private sector’s priorities. The Power Sector Reform Index (PSRI) also shows a substantial correlation with the survey data, albeit the correlation is slightly lower (R2 of 0.37 for a sample of 35 countries). It should be noted that RISE is intended to be a normative index of investment readiness, whereas the PSRI is a descriptive index that shows the extent to which the 1990s reform model has been adopted within a jurisdiction. Hence, it is therefore not surprising that overall, the RISE index shows a higher correlation with our survey results.

> 16 The Regulatory Indicators for Sustainable Energy (RISE) index measures countries’ regulatory readiness for Sustainable Energy across three different domains: 1) Renewable Energy, 2) Energy Efficiency, and 3) Energy Access. We therefore disaggregate the RISE index to more closely correlate it with the sub-components that are relevant to our survey data.

28
<!-- Start of picture text --> a) Correlation of RISE 2017 and Perceived Readiness from Survey Data<br><!-- End of picture text --> <!-- Start of picture text --> 90<br>80<br>@ South Africa<br>70 R? = 0.4741<br>2 -~7<br>° @ Ghana -<br>Pr 60 _- - Kenya<br>5 cameron @ Cote d’lvoire -o -<br>be Ethiopia<br>é~ 50 Zimbabwe @ Burkinaur S F asog . co oeAbia” ~ “eoRwanda “Uganda<br>o 40 Congo a eon ® senegal<br>N Niger @ Tanzania yo» fe law 8<br>Ww -<br>no Sudan g ew” | . a<br>2 30 B urun diio € DRC- Bw:eit AngolaGuinea® Sierra Leone @ Nigeria<br>20 ~~ Mali®@ e<br>——~Chad @ Mauritaniaeo @ Liberia @ SouthMadagascarSudan @ Mozambique<br>Central African Republic<br>@ Somalia<br>0<br>-8 6 4 -2 0 2 4 6 8 10 12 14 16 18 20<br>Perceived Readiness (Net Positive Score)<br>b) Correlation of Power Sector Reform Index and Perceived Readiness from Survey Data<br>90<br>cy 80 @ Nigeria @ Uganda<br>8 R? = 0.3684<br>”<br>”<br>£ 70 @ Ghana - -7<br>iS -~<br>wr 60 e Cameroon ” -<br>$ Angola e @ @Coted’lvoire we na K<br>3 Senegal ” enya<br>: 50 uo?<br>5 Mauritania piers fear Mozavepiaue<br>‘wo 40 T a oe Zambia<br>© Zimbabwe @ ; og -” *<e e<br>5 Mali @ Burkina Faso 8- ° South Africa® Rwanda<br>* 30 . e - Madagascar<br>8 Burundi {Sudan<br>” = ® Bt ” Tanzania ® ® Benin<br>5 20 Congo ~a~_Niger Malawi<br>> - - Central African Republic<br>[o}<br>o e @ Chad<br>10 somalia<br>South Sudan<br>0 Eritrea DRC Liberia Guinea<br>8 6 4 -2 0 2 4 6 8 10 12 14 16 18 20<br>Perceived Readiness (Net Positive Score)<br><!-- End of picture text -->
The RISE data can further be disaggregated into renewable energy (mostly on-grid) and energy access. We therefore correlate these two measures with investors that are active in the respective aforementioned sector. It should be mentioned that for some countries there are few data points, which reduces the overall correlation coefficient. Figure 16a shows that there is a positive correlation between the assessment of the grid investors and the RISE renewable energy data (R<sup>2</sup> of 0.13 for a sample of 35 countries). For countries with data points the assessment of the investor is spread around the trend line on both sides in equal fashion, indicating that overall, the index is correlated well the investors’ perception. The off-grid RISE data tend to be more positive about countries than the investors’ perception (as many countries are above the trend line) and also exhibit slightly lower correlation (R<sup>2</sup> of 0.11 for a sample of 35 countries).

30
<!-- Start of picture text --> a) Correlation of RISE Renewable Energy and Perceived Grid Readiness from Survey Data<br><!-- End of picture text --> <!-- Start of picture text --> 90<br>o 80 @ Ghana South Africa<br>8<br>nw 7/0<br>> R? = 0.1268<br>><br>@ 60<br>Ww » , 8 eo. @ Kenya<br>o Cote d'Ivoire ‘Malawi 8 Uganda -_-"7 -<br>we}FA© 50 Cameroon; Ethiopia fwand\ Zambia - ~- -~-<br>5 Zimbabwe @ a <7”<br>a& 40 NigerDRCOO BiersTogo (sone«= _ Le -- Tanzania/<br>o 3 [Burundi » §— Fritrea @ Nigeria<br>ty Soc<br>MO r) Angola” CON8° \iozambique<br>a 20 liberia ChagudanGuinea @ Madagascar @ Mali<br>Mauritania<br>10 Central African Republic<br>@ South Sudan<br>0 @ Somalia<br>1.0 0.5 00 05 10 15 2.0 25 30 35 40 45 50 5.5 6.0<br><!-- End of picture text --> <!-- Start of picture text --> Perceived Grid Readiness (Generation, Distribution, Transmission) (Net Positive Score)<br><!-- End of picture text --> b) Correlation of RISE Off-Grid and Perceived Off-Grid Readiness from Survey Data <!-- Start of picture text --> 90<br>80 Ethiopia<br>South Africa Ne e<br>o $ ; @ Kenya @ Uganda R2 =0.11<br>fa Rwanda C<br>re) 70 ameroon » --<br>3 Céte d'Ivoire@ @ Ghana @ Togo Tanzania a ”<br>o ; @ Benin e oo -<br>ao 60 Zimbabwe @ ; e Zambia, -<br>o Burkina Faso =o<br>9 Niger —<br>o Sudan e~ ”<br><t 50 Angola “wo<br>a oe \ @ Senegal<br>° @ Malawie TM Guinea<br>ui 40 nn as a un Nigeria<br>s -” A DRC Mauritania @ Mali<br>o 30 Sierra Leone<br>N Eritrea<br>Ww 8 Mozambique<br>o=a 20 LiberiaCongo @“Mada gascar<br>e<br>10 Chad @<br>South Sudan Central African Republic<br>@ Somalia<br>0<br>1.0 0.5 00 05 10 15 20 25 30 35 40 45 50 5.5 6.0<br>Perceived Off- and Mini-grid Readiness (Net<br>Positive Score)<br><!-- End of picture text -->
Correlation of perceived grid readiness* with RISE 2017 renewable energy indicators, Correlation coefficient (where -1 is perfectly inversely correlated and 1 perfectly correlated) <!-- Start of picture text --> PQ Am<br>9 mm<br>0.8—@_ Se A<br>0.7. —7—ccc3rcjjje_c“—<br>0.6<br>ob1<br>_ to}<br>2. TT<br>i Pot<br>0.2 z= se 18<br>-—eeee eo<br>0.0<br>Network Carbon Incentives. Planning for Legal Financial Counterparty—<br>connection Pricing and and renewable framework and risk<br>anduse Monitoring regulatory energy for regualtoy<br>support for expansion renewable _ incentives<br>renewable energy<br>energy<br><!-- End of picture text -->

*Note: Grid readiness summarises the investors’ assessment of all grid-related investments, which include grid-connected generation assets, and investments in the distribution and generation network (n = 51). 95% confidence interval calculated using Fisher transformation.
Correlation of perceived off-grid readiness* with RISE 2017 energy access indicators, Correlation coefficient (where -1 is perfectly inversely correlated and 1 perfectly correlated) <!-- Start of picture text --> o_o<br>1.0.@_—< SS<br>0.9. —<br>08 ——<br>a<br>0.6<br>Oa ers a<br>03 | ops}, —<br>0201 |i am i hehi —°:,—<br>00 nm HH HE EF<br>-0.1 — —<br>0.200.17 —<br>Existence of Consumer Framework Framework Framework Transparency Scope of Utility<br>electrification affordability forstand- forminigrids for grid and electrification | Credit-<br>plan of electricity alone electrification Monitoring plan worthiness<br>systems<br><!-- End of picture text -->

*Note: Off-grid readiness summarises the investors’ assessment ofall off-grid related investments (n = 51). 95% confidence interval calculated using Fisher transformation.
Correlation of perceived overall readiness* with Power Sector Reform Index 2017, Correlation coefficient (where -1 is perfectly inversely correlated and 1 perfectly correlated) <!-- Start of picture text -->
1.0._§ NN.<br>0.9.@ AS<br><!-- End of picture text -->

0.8 <!-- Start of picture text --> 0.7 ———_0.44-——--<br>0.6 —<br>0 pS<br>03 —<br>02 ee a a<br>01 ae ae a<br>0.0 | a a<br>Competition Restructuring Regulation Private Sector<br>Participation<br><!-- End of picture text -->

*Note: Overall readiness summarises the investors’ assessment of all off-grid and grid-related investments (n = 51). 95% confidence interval calculated using Fisher transformation.
Second, important differences exist between investor types. For all investor classes – apart from on-grid – policy and regulatory risk is the most important risk category. For ongrid investors, in turn, power sector context risk is the most important risk category, potentially because the future expansion of the power sector determines to a large extent the investment opportunities that arise and retroactive changes to expansion plans may pose a substantial risk. International investors assign more weight to country-context risk than domestic investors, potentially due to better local connections.

Third, there are striking differences between segments of the power sector. Investors perceive three segments as ‘ready’ for private solutions in Sub-Saharan Africa: power generation, off-grid electrification, and mini-grids. And when asked about the most attractive markets for investments over a three-year time horizon, respondents ranked nine countries as ‘positive’ on average: Côte d’Ivoire, Kenya, Mozambique, Nigeria, Rwanda, Senegal, South Africa, Uganda, and Zambia.

Fourth, besides understanding investors’ and financiers’ risk perception, a central motivation for the survey was to ‘reality-check’ existing, data-based assessments of countries’ readiness for investment. We find that survey respondents’ perception of countries’ readiness correlates very well with RISE 2017 scores (R2 of 0.47 for a sample of 35 countries). A similar picture emerges for the Power Sector Reform Index (R2 of 0.37 for a sample of 35 countries). Further disaggregating the RISE scores into its grid and off-grid components shows that they also correlate well with the assessment of the respective investor classes. Particularly the following components of the index show a high correlation with the subjective experience of off-grid investors: existence of an electrification plan, consumer affordability of electricity, and the existence of a framework for stand-alone systems. For grid-connected renewable energy particularly clear network connection procedures, carbon pricing and regulatory support for renewable energy are well corelated with the perception of investors.

In sum, despite many challenges, the survey underscores that past experience of power sector investments in Sub-Saharan Africa has been more positive than negative, and many of the surveyed equity investors and financiers plan to invest in the region in the next three years. Addressing the key concerns of investors – such as the certainty of cash flow, ease of entry and exit of the market, and clear investment priorities – can substantially increase the readiness of countries. Investors particularly assess positively those countries that have seen substantial power sector reform efforts, often over a decade or more, to provide adequate policy and regulatory frameworks for investment.

35