Asterisk: You have a long history in development, including as a USAID mission director in Ecuador, chief development officer at the U.S. International Development Finance Corporation, and now executive director at the think tank ODI. But your longest tenure was as the coordinator of Power Africa, the U.S. government’s program for expanding electricity access through public-private partnerships. So let’s start there. 

What does Power Africa do and how did it come to exist? What’s the story?

Andrew Herscowitz: Power Africa was started around 2012, after representatives from the Obama administration and some bipartisan congressional delegations had done separate trips to Africa. At the time, six out of 10 of the fastest-growing economies in the world were based in Africa, and they wanted to understand these growth stories. The question was how to keep them on this trajectory. 

Everybody concluded that the key constraint was electricity. You visit, for example, these garment factories in Kenya and see the power goes out frequently, and suddenly those factories are forced to switch to dirty diesel backup generators. That’s not sustainable. It’s expensive. It’s dirty. And it makes them noncompetitive.

That’s where the idea was born. The conclusion, from the first meetings, was that what everyone’s been doing for the last 50 or 60 years — whether USAID or the World Bank — just hasn’t been working. Aid agencies go into countries thinking they’re going to fix the enabling environment, throw money at these projects, and then assume the private sector will roll in. But they don’t.

So someone said, “Let’s take a transactional approach instead. Let’s take a big carrot and put it on the table for a country and say, for example: ‘You need power. We’ve got a company that’s willing to build out 100 megawatts of electricity power generation. But here’s what’s stopping them from doing it, and here are the things that you, as a government, need to do to change that.’” 

What that approach does is force the true obstacles to creating an enabling environment to rise to the top. So, for example, in Tanzania, one of the reasons that a power project wasn’t moving forward was that the government would only grant a contract for 15 years. And in order for a company to make a return, they needed a 20-year contract. Power Africa went in and explained to the government why they needed to do this to make the financing work. And then that project could get funding. And then you realize that once you break through one obstacle, it’s what had been preventing other deals from moving forward. 

What was unique about Power Africa was that it drew on tools from multiple agencies, governments, and other actors, then put that all into a one stop shop catering to what the private sector needs. A business could knock on one door, tell us what the problem was, and then we would figure out which agency would help them out.

A: Power Africa lives inside USAID. But unlike most of USAID, which offers grants, it finances private power companies. How unusual was that inside USAID and the broader aid ecosystem? And was there friction in taking that approach? 

AH: There’s always friction in any entity where people are territorial and are afraid you’re taking their money. But inside USAID was the right place to be for a couple of reasons. 

Because it was an interagency effort, there were cases where USAID provided some financing through its loan guarantee program, but the Overseas Private Investment Corporation, which is the U.S.’s development finance institution, or another agency could provide financing as well. 

For example, in Kenya, OPIC was financing the Kipeto Wind Power Project, which had gotten stuck because of last-minute concerns for a migratory bird species. We had partnerships with the companies involved, and so someone came to me for help. I had a couple of ideas. The first was to pay for the mitigation study at a cost of a few hundred thousand dollars. It’s often challenging for private equity firms from the U.S. or elsewhere when a situation like this comes up. It can spook their shareholders and investors. So I have no problem with using a little bit of government money to get huge institutional investors and private equity firms to invest in Africa, because otherwise they’re just going to invest in the U.S. or Europe. We’re talking about spending $500,000 to get someone else to invest $100 million. So that money helped unstick the project. 

The second thing we did was to introduce NatureVest, the venture capital arm of The Nature Conservancy, to the project developers. I said, “Look, if you’re going to have some environmental issues, it’s good to bring a reputable organization into the deal.” And NatureVest ended up buying into the transaction as well — so we helped to bring in some extra equity. 

So you’re talking about connections. We were connectors. We were aware of every deal and tracking them so we could figure out who could help solve the problems. 

A: How well did it work? Twelve years on, how would you evaluate the success of the initiative?

AH: It exceeded my expectations. It’s fizzled a little bit, but they’re getting back on track.

By the time I left we had helped 120 power projects through the whole partnership. Each financial close doesn’t mean USAID did it exclusively, it meant one of our partners did — but with substantive help from Power Africa. Almost 200 million people have gotten access to electricity because of it. 

Now, one year in, we realized that just building big power plants doesn’t mean that people get access to electricity. It just means that electricity is getting pumped into the power grid. We realized we had to create something that focuses on energy access as well, which we called Beyond the Grid. We set goals for both electrical connections and for new power that would be generated. And that was doing really well — maybe a little too well in a couple of countries, which created problems. See, in the beginning we took the attitude of if we build it, they will come. But then countries like Kenya and Ghana signed up too many projects and didn’t have enough demand. Our transaction advisors were warning us about this, and I think we probably didn’t heed their warnings. Then these countries were getting stuck with these huge contractual commitments to build out power projects but didn’t have the demand to pay for it. 

A: Like the Lake Turkana Wind Power Station in Kenya.

AH: The issue that you’re referring to is that the power project was done, but the transmission infrastructure wasn’t complete yet. So the government was on the hook to pay for two years before they could begin generating revenue. We helped support that, and now nobody questions whether Turkana was a Power Africa project — we just didn’t start it. 

Related to that, one of the biggest criticisms of Power Africa is that it took credit for what other people did. And to this day, I will say to people, “That is exactly what we do.” 

The idea is that we are all trying to work together. I called it making a giant pot of stone soup. You start with nothing, and then say, well, we could use a little bit of celery. And someone has celery. Need a little meat? Someone else has meat. That’s what we did. We got everybody to work together. And at the end of the day, you have this huge pot of stone soup that everybody can enjoy. 

We broke down the barriers of agencies that didn’t talk to one another, governments that didn’t talk to one another. For example, we gave International Finance Corporation’s Scaling Solar program (which has been a little bit controversial) $5 million. 

Why should USAID invent its own solar procurement program if IFC has already put all this effort into it? Well, we wanted to see how it went. And also, by giving them $5 million, it gave me the right to audit the program and see what worked and what didn’t work. And it was a really valuable evaluation that we all learned from. 

But we’re not doing that anymore. Everybody says, with every new presidential initiative, we want it to be like Power Africa. But nobody has set it up like Power Africa. They’ve gone back to doing things the way that they’ve always done it. The greatest success
of Power Africa is you had 12 U.S. government agencies, 20 bilateral or multilateral partners, and something like 150 companies all working seamlessly together.

A: And to make that happen, it sounds like the magic trick is to give them resources they need, and not be so territorial about it.

AH: Totally. We had a whole team of people whose job was to be on the phone with every one of those 170 partners on a regular basis. 

The other thing that made it work was that I completely opened up our books. I showed a working group our budget every year, told them our high-level goals, and asked how they could help. Then people competed for it. 

I also held back about 10 percent of our budget every year and called it the Opportunity Fund. If there was a deal that needed help getting across the finish line, we had money available to grease the wheels to move the transaction forward. 

A: One criticism of Power Africa is that you measured your success by the number of new electrical connections of any kind, no matter where that power was coming from — but the vast majority of these connections are solar home systems or microgrids, largely in rural areas, as opposed to connecting houses to the grid. What was the internal logic behind the decision to focus on those projects?

AH: We focused on all types of connections. Everything from a solar lantern to these small solar home systems that will let you charge your mobile phone, watch a little bit of television, and provide you lighting. Then you start moving into mini grids, which can support more consumers, and eventually you get up to a true national grid. 

The criticism that we got in that regard was fair and came from me as well. Ideally, yes, you want people to get grid connections if possible. But so many people live in rural areas that realistically, it may be another generation before those wires get out to them.

One of the challenges we found is that so many of the utilities in Africa had no idea how many customers they had. Because of that lack of data, we didn’t have an adequate baseline to figure out what impact our assistance actually had on connections. 

We did other things to support utilities. In Nigeria, for example, we sent teams in to help them reduce losses from people who were stealing power. That included military bases. We had people climbing up over walls to disconnect a military base that was stealing power from the grid. And we helped them improve their connections in a matter of months by something like 116 million. 

But the one that got me was solar lanterns. We had good data there because we could ask our partners how many they sold. But if you use World Bank methodology, there’s an assumption that there are five people per household. And I realized, “Wait, are you telling me that if a family buys two solar lanterns that we’re counting five, maybe 10 people as having received electricity?” 

A: That’s such a literal example of the drunkard’s fallacy — looking where the light is better. 

AH: Right! There’s still value in it. But at that point I asked how many we were at, and it was 11 million. So I said, we’re done counting solar lanterns. And we came up with a discount methodology that wasn’t five to one. And then we capped counting there. 

Solar home systems give people the electricity that they need for basic tasks in their house. But you can’t generally cook with them. It takes 700 watts of electricity to boil a single liter of water. Most solar home systems are between 30 watts and 80 watts. So if you give up on the grid or other higher levels of electricity for people in these places, you’re still going to have 3 billion people who continue to burn wood and charcoal for cooking. We’ve got to give people enough energy for a truly modern household. 

A: As you said at the beginning, one major impetus for Power Africa came from wanting to provide power for businesses. Solar systems are cleaner, but they’re often unreliable for business needs. So how much of the power that Power Africa ended up providing ultimately served that function of helping businesses have reliable power access?

AH: Most of it. All of the projects were basically to help pump power into the grid. And then there’s some distributed renewable energy projects as well that are focused on commercial and industrial uses, because a lot of people think that mini grids are the solution to everything. But the reality is that the cost of electricity on a mini grid is the highest there is. 

I got really excited about mini grids for a while because I thought it would allow people to do more energy-intensive tasks like cooking, compared to the solar home systems. But then one of our partners who tried this in Tanzania found that people ended up, for example, ironing their clothes and spending more money doing one hour of ironing than they spent on lighting their house, charging their phone, or watching TV for an entire week. And so they went back to charcoal. 

Heat uses are way more energy intensive. With mini grids in rural areas, you still have to figure out how you’re going to keep them commercially viable, because often people who live in rural areas also lack the ability to pay for electricity. Like in Kenya, the World Bank built out power lines to connect three million people, but quickly discovered that of those three million, only about one million could actually pay. So it’s this huge infrastructure investment without an adequate revenue stream. You just have to accept that certain things that you do are going to require significant subsidy from the public sector.

A: This is the chicken-and-egg problem when it comes to electricity distribution. Electricity distribution companies struggle financially because governments don’t always allow them to charge for the cost of producing the power. And then consumers are not viewed as financially attractive to those companies. How do you address that? 

AH: Yeah, I used to call it a death spiral. A lot of utilities are under pressure by the government to connect everyone, including rural customers who can’t pay, so they’re already losing money. And then people are stealing electricity. A lot of companies lack adequate information about who their customers are, so they’re not able to do great collections. And then the final nail in the coffin is that a lot of the large commercial and industrial businesses — the best-paying customers — are then able to start producing their own power.

In South Africa, they’ve deregulated and now allow companies to produce up to 100 megawatts of their own electricity — but there needs to be a benefit to the overall system. I had this vision of a move toward the “uberization” of the utilities, where the utilities aren’t necessarily the ones owning and producing the power, or even responsible for it, but they’re almost serving like a power traffic cop.

For example, a company that can produce energy for $0.08 a kilowatt-hour, compared to buying it for $0.14, should be allowed. But then they’re required to pay the utility $0.02 a kilowatt-hour. I think that becomes more feasible with software and AI, so you can help manage where the power is coming from, develop more flexible pricing according to time, etc. 

A: So after Power Africa, you were the chief development director at the Development Finance Corporation. What does DFC do? And how did the lessons that you learned from Power Africa translate into what you did there? 

AH: A lot of the same people who had worked on Power Africa liked this model, and asked what we could learn from it. How can we get the US government to work better together across multiple sectors?

That was one of the key ideas behind the DFC. They wanted to take what had been OPIC and the Development Credit Authority (USAID’s loan guarantee program), and combine them. One of the major changes was in priorities, specifically, in addition to advancing development, advancing US foreign policy imperatives — like countering China’s Belt and Road Initiative. 

They made DFC different from any other development finance institution in the world, in that DFC does not need to earn a return on an individual-deal basis. That’s extremely powerful. It meant it was viewing the DFC as a development institution that happens to use financing as a tool, as opposed to one that has to make a return. 

Frankly, I think every multilateral development bank and every development finance institution should be restructured that way. I feel very strongly about this. 

DFIs worked well for a long time, when we were trying to, for example, rebuild Europe. But for a lot of the countries in the global south you need a different model. And that means giving a little bit more of a boost with blended finance and pricing deals done in a way that countries can actually pay them back. 

I think it was Mia Mottley, President of Barbados, who said something like: “If you give us financing at a 15 year variable rate, which we’re going to have to renegotiate later — and pay lawyers millions of dollars to renegotiate — why don’t you just lower the interest rates up front and not give the money to the lawyers?” 

Does it make sense to finance a power project for 20 years in a country like Ghana in U.S. dollars, when you know that people are going to be paying for their electricity in Ghanaian cedi? What happens when the Ghanaian cedi depreciates 70 percent against the dollar over 20 years? That means that you’re going to have to raise the cost of electricity locally by 70 percent. So if your goal is to help them have inexpensive, reliable energy, why not structure the deals in a way that you know they’re going to be able to pay it back? 

That means having a grant component that provides the type of financing that they need to maximize their development impact, as opposed to maximizing what their return is going to be.

A: Part of the idea behind DFC, when it absorbed OPIC and the DCA, was that it would streamline the various orgs to become a more nimble and flexible organization. We’re curious, in your experience, how much success that had. It seems like the DFC has a lot of restrictions on what sort of projects it can finance, and especially where it can finance them.  

AH: Though it was meant to be a merger between OPIC and the DCA, the DCA’s staff were about one-tenth what OPIC’s were, they moved into the OPIC building, and so a lot of people just viewed it as OPIC — business as usual. Part of my role there was to try to push for cultural change. And I think DFC has come a long way in that respect, not because of me. 

But to think differently about how you source projects is challenging, and we also have to educate stakeholders — such as members of Congress — that it’s not legally required for DFC to make back investments. 

DFC is an opportunity to take limited development aid and leverage it to 10 to 50 times the amount of private sector capital. An example: 

When COVID-19 hit, Congress gave the U.S. government extra money to give out, and agencies competed for how to do so. USAID was going to have $5 million to give as cash transfer to people in Pakistan as small grants. But if you had given DFC that $5 million, it could have turned into $50 million in small loans when combined with private financing. Not everyone needed a straight-up grant. Most people would have paid back that money. So I see money that goes out from DFC as just being a way more efficient use of trying to achieve much larger development goals and foreign policy goals.

A: Should we talk about those foreign policy goals? Part of the impetus was to counter foreign influence from China’s Belt and Road Initiative. To what extent do you see those goals as being in tension, and to what extent are they complementary? 

AH: You can do both. A lot of deals fulfill both goals. So we’ve just got to get past that.

The issue goes back to what the expected return is going to be. DFC gets a $1 billion appropriation from Congress every year. That means they can use that money to structure deals to maximize development impact or foreign policy impact over return. So for example, let’s say there’s an opportunity for a U.S. company to bid on construction and management of a port in a strategic country, and they’re competing against a Chinese company.

DFC and the U.S. government could put their thumb on that scale and give a $50 million grant to help that company outcompete the Chinese company. And I would argue that spending $50 million today to help make sure that that port is not in the control of a Chinese or a Russian company is a very small investment to make when there’s a conflict and our $2 billion aircraft carrier can’t make it into that port. 

But Congress needs to get past the idea that DFC needs to earn a return for the U.S. taxpayer, and they need to jump on the idea that DFC is one of the best ways to leverage taxpayer money to have a significant development in foreign policy impact in that regard. 

Consider this: I was in Nigeria, watching a range of projects stall because the president was expected to float the currency, which meant that the value of contracts could plummet overnight, which meant everyone was hanging out on the sidelines. But all these Chinese projects were moving forward. I asked why, and someone said, “Oh, it’s Sinosure, China’s state-owned enterprise, which finances projects.” Companies pay seven percent to this agency and that gives them coverage on things like currency risk. Sinosure has a global portfolio of over $1 trillion. Compare that to DFC, which is something like $40 billion. And Sinosure’s total margins on that $1 trillion is something like $100 million. It’s tiny!

Imagine what DFC could do if Congress just said to them, “Don’t worry about getting us back the money. Do the deals that you think make sense. That’s what we’re here for.” Imagine how we could grow. Just get rid of the limits. Let’s see what we can do. Unleash the DFC. 

A: This ties into my next question, which is that DFC is only deploying about half of its budget, mostly because of the challenges of finding projects that it can bank. What are the barriers there? 

AH: Staffing. There are plenty of bankable projects out there. They’re just hard to find. It’s a challenge if you don’t have the people on the ground. And you need staff who are willing to do deals. A lot of these are going to be smaller, especially in lower-income countries and fragile areas. People all want to work on bigger transactions, as if you’re more successful if you processed a $500 million deal than if you worked on a $5 million deal. 

But to be honest, growing the portfolio isn’t the ultimate goal of any of these development finance institutions. They should actually be working to put themselves out of business.