Senegal continues to face major capacity shortages in its energy sector, but recent agreements with international donors as part of a nationwide plan to overhaul the sector should help boost electricity production in the medium term.

In July, the World Bank approved an ?68.5m loan to support several elements of Senegal?s energy reform strategy, Plan Takkal. The investment will be spread over five years and will help SENELEC, the state power utility company, to ?reduce technical and commercial losses and improve the reliability of electricity services?, according to a World Bank statement.

More specifically, the funds will be dedicated to modernising electricity distribution infrastructure and upgrading the company?s billing systems to tamp down on usage fraud. Much of SENELEC?s commercial losses are due to billing fraud; the installation of pre-pay modular meters and electronic Smart Meters, which can be read remotely, should bring equipment up to international standards for fraud prevention.

Funds under this agreement will also go toward supporting the production and distribution of energy-efficient light bulbs and providing consumer incentives to reduce electricity consumption in an effort to bring down energy costs. Senegal?s energy sector is one of the continent?s most costly and inefficient due to years of inadequate management and investment, and the government has committed to reforming the sector in the immediate future. The World Bank investment will reportedly be matched by an ?6.85m investment by the Senegalese government, for a total project cost of ?75.36m.

The country?s unreliable and expensive power supply has been a?restraint on economic growth?in recent years. In 2011, rolling blackouts lasted for up to 30 hours in some areas of the country, paralysing business operations and sparking widespread public protests. While SENELEC?s capacity totalled some 640 MW in 2010, the company has a constant shortfall of between 30 and 50 MW. Senegal saw just 2% GDP growth in 2011, slowed by energy sector inefficiencies as well as reduced agricultural output due to drought.

The Senegalese Ministry of Economy and Finances estimates that?GDP growth will climb?to 3.9% in 2012, though much of this improvement can be attributed to increased agricultural output. Improving the power supply will be critical to the government?s goal of boosting growth to meet the West Africa regional average, which is forecast to reach 4.5% in 2012.

The government?s commitment to invest in energy sector reform is a positive step in that direction but still risks weakening the economy in the short term. Senegal?s fiscal deficit stood at 6.7% in July 2012 but may climb as high as 8.2% by year-end, or roughly ?878.47m, if measures are not taken to moderate public spending in other areas. Senegal?s fiscal deficit climbed from ?493.18m in 2010 to ?693.64m in 2011, due in large part to state subsidies aimed at keeping consumer electricity costs down.

In a review of Senegal?s performance under its Policy Support Initiative, the IMF recognised that Senegal will need to incur higher spending levels in 2012 to improve the power supply but indicated that a fiscal deficit of around 8% would be unsustainable. Amadou Kane, the new minister of economy and finances, has highlighted the worrying fiscal debt level in the international press and has indicated that he hopes to bring debt servicing to a more sustainable level of 30% of public receipts, compared to the 37% currently registered.

International support, such as the World Bank loan, will be critical to support higher levels of public spending and get the power sector back on track without destabilising the economy. Earlier in 2012, the World Bank began consideration of a second loan of $55m, which would be set aside for budgetary support and could be eligible for renewal in the 2013/14 fiscal year. However, no decision has been announced thus far.

Senegal also concluded an agreement with the Korea Electric Power Corporation to construct a 250-MW coal-fired power station for a total estimated cost of ?457.35m. The plant will help to boost the power supply once it comes online in 2015.

The government effort to lead a top-to-bottom reform of the energy sector and SENELEC should help to support economic growth in the medium to long term. However, with already high levels of public spending, involvement from the private sector and support from international donors will be crucial to making these plans a reality.

 

Source: oxfordbusinessgroup

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