Madagascar: A Reason for Optimism?
February 9, 2015
The Economist has called Africa “The China of Tomorrow” and “The New India,” and the term “The African Century” is familiar with MBA students from ETON to Ivey. And so far, the numbers support this position. Over the last 10 years, the average real wealth per person has increased 30% and Foreign Direct Investment (FDI) has gone from 15 billion in 2002 to 46 billion in 2012. GDP growth is expected to reach 6% annually over the next decade, not necessarily China-in-early-2000s numbers, but certainly legitimate reason for excitement. Not wanting to miss the cresting wave of economic growth and investment is the island nation of Madagascar. This country is the world’s fourth-largest island and it boasts a population of over 22 million, yet it has faced challenges creating an environment conducive to foreign investment in the past. Investors have come and gone due to political instability, weak institutions, and ever shifting points of contact.
The country still supplies the world with vanilla and has a number of operating mines that accompany terrific rain forests and indigenous birds. However, investment dollars are still needed. A projected 3% increase in annual growth (the IMF forecast) in 2014 has come up short due primarily to the issues noted above.
This island country faces concerns that are similar to all developing nations i.e. maintaining a reliable power grid and eliminating waste/pollution and the myriad health issues that come with it. It recently recorded an outbreak of plague with seasonal tropical storms, and rodent-borne epidemics are a constant risk. The costs associated with power can be as high as 50-cents per kilowatt, which obviously affects access to connectivity. Roughly 75% of the population are not connected. Old systems that have not been maintained or that have suffered neglect and a lack of capital re-investment result in power that is not reliable or constant. In households, coal is still burned with open flames; houses make use of kerosene to generate light meaning that noxious emissions fill the air and books cannot be read – a terrible combination for all ages, and one that limits life expectancy and personal growth. When foreign investors do make a commitment to the country, they must bring their own power. This increases the costs and may mitigate the opportunities; and if a given project does not go ahead, the State is denied a constant flow of revenue.
In addition, the country faces a plague of locusts. This has now placed 40% of the island’s crops at risk, and with $28.8 million spent to date, another $10.6 million is required, as noted by the United Nation’s Food and Agricultural Organization (FAO).
With all of these issues in mind, the government has decided that the issues of energy and pollution have to be addressed and fixed immediately in order for Madagascar to capitalize on the hype and excitement around investing in Africa. So President Hery Rajaonarimampianina and his energy minister have turned to a “two birds with one stone solution” – a hand-up, not a hand out – to address fixing these issues and the institutions involved. Eco8 Inc., a Canada-based renewable energy supplier and project integrator has been brought on board to deliver that solution.
The first phase of the fully funded, turn-key project is to generate constant and reliable energy to the people of both the rural and urban areas. Although not meeting the complete needs of the island immediately, the plan includes deploying leading edge “waste-to-energy” technology in the two cities of Toamasina and Antananarivo. In the former, riots have taken place leading to deaths, all triggered by unmet demand for electricity. To ensure a proper supply of ‘feedstock’ or waste, Eco8 has confirmed agreements with the leaders of both cities to provide full waste management systems, including an organized pick-up solution for residential, commercial, and industrial users.
In rural areas, Eco8’s strategic plan calls for the generation of power locally, making use of renewable sources including wind, solar, hydrogen, and storage capabilities to create a micro-grid in these regions. In every case the project will not meet all of the demand immediately, but provide a scalable solution that can continue to be enhanced to assist in delivering increased power to attract investment and provide vital services to local communities. The project has been defined by the words: “let there be light.”
The project makes use of a sovereign guarantee, though that is not always enough to entice the investor. Long-term contracts offer some remedy to revenue, however there is no ability to ensure success. This is where the World Bank assists in providing the necessary underwriting under very specific conditions that allow for a reduction of the risk profile of the project. In Madagascar, this was achieved under the creation of specific financial tools to support all of Eco8’s ambitious plans. Another requirement was that the overall solution had to meet the robust requirements of the environmental marketplace. For these deployments, all will qualify to meet the stringent rules of the methodologies underpinning the Clean Development Mechanism. In other words, carbon offsets can be quantified and funds generated. Both the waste-to-energy and all facets of the waste management program, including vehicles, will be evaluated to ensure that ‘additionality’ (a key requirement of the carbon markets defined by executing a technology, process, or procedure that otherwise would not be undertaken) has been achieved. Funds generated will be directed back to the Clean Air for Kids initiative defined in the project, and will be used to support pediatric care in local hospitals.
To achieve the overall plan, Eco8 has created a team that includes some of the top environmental, energy, and infrastructure development companies in the world, most of which are based in Canada but operating globally. Their commitment was necessary to generate the financial model that has been agreed to and is currently releasing funds. Complimenting these actions was the determined effort of the government of Madagascar to assist in meeting both short and long term needs to meet the project’s overall objectives. To that end, the president has clearly demonstrated his intent by establishing a technical committee that will fast-track these types of deployments and provide transparency throughout the process.
The historic nature of this venture has caught the eye of the international media as a means for countries like Madagascar to improve the lives and opportunities of its people. It is also the subject of documentary that will show the efforts and effects in the country, and that will hopefully mark the beginning of a new era for the Malagasy people.