Africa must prevent collapse of energy sector
ENERGY companies are critical to the economy because they invest a lot of capital, provide critical economic services, and employ a significant number of people.
This sector is considered too big to fail and poses a significant systemic risk to African economies. These economies are primarily involved in primary and secondary production and rely heavily on the energy sector.
A typical example is Kenya, which is not a profound oil producer, but most sectors rely on oil for energy.
About a third of the energy mix is accounted for by fossil fuels, and thus any country’s growth prospects will fall along the same lines. A substantial shock to the energy industry will result in the collapse of the economy.
In the business environment, three key influential elements: legal, social and political aspects have to be considered. Mergers bring rejuvenation to under-performing companies in most instances.
The aftermath of mergers involves related social settlements such as massive job cuts that may occur due to streamlined activities.
For energy firms to benefit from economies of scale, digitising processes will be vital in reducing operational costs. This downside to mergers is a significant concern as they continuously increase while the continent continues to record higher unemployment rates.
However, the negative impacts of mergers in the energy sector also affect the respective parties in the deal.
These may include financial partners, shareholders, and even regulatory authorities. Post-transaction litigation risks are common, and these arise when there are legal breaches by the parties involved or their stakeholders.
Most of the energy sector investors are from prosperous developed economies and as such protectionism policies may come into play.
Other typical litigation risks include environmental policy breaches in relation to resource over-exploitation as well as excessive pollution.
The result for most of these litigations is incurring unplanned high legal fees and extremes such as the business being forced to close after infrastructure had been established.
As mergers and acquisitions are increasing in Africa, a cautious approach has to be taken by the respective governments.
Protection of national sovereignty, sustainable exploitation of resources and a balance between the capital and social motives by the corporate players.
Having considered a balanced view of mergers in Africa, mergers can help overcome some of the energy sector’s structural issues.
The continent needs more capital injection to realise its Agenda 2063.
Mergers can streamline and improve the use of capital in the industry charting a path towards the fulfilment of Sustainable Development Goal Seven on affordable and sustainable energy.
Further Africa