In this paper we assess the extent to which power outages affect the sales of firms across different African economies. We address the potential endogeneity concerns endemic in much of the existing literature by constructing an instrument for power outages based on the varying share of electricity produced by hydro-power as a result of variation in the local climate conditions. Using firm-level data for 14 countries from the World Bank Enterprise Surveys, we find evidence of a negative relationship between an unreliable electricity supply and firms’ sales, with a stronger effect for firms that do not own a generator. We find that reducing average outage levels to those of South Africa would increase overall sales of firms in Sub-Saharan Africa by 85.1%, rising to 117.4% for firms without a generator.

Introduction

The prospects for the continued development of many African economies are significantly better today than they were at the beginning of the century. The gross domestic product (GDP) of the region has doubled since 2000 with an average growth rate for the period 2008-2015 of around 5%. However, a number of hurdles will need to be overcome if Africa is to continue to develop at this rate. One particular concern is the relatively poor state of the electricity network which causes considerable disruption to the power supply of many of Africa’s largest cities as a results of generation, transmission and distribution losses. The overall cost of such disruption across sub-Saharan Africa (SSA) is estimated to be as much as 2.1% of GDP with total sales of African firms estimated to be 4.9% lower than they would be if electricity supplies were dependable (Eberhard et al. 2011 and IEA 2014). Not surprisingly, firms have identified the unreliability of the electricity supply as one of their main obstacles to expansion. As a result the last two decades have seen an increase in the demand for relatively expensive back-up electricity generation to the extent that firm-owned electricity generators now represent a significant share of the installed capacity in all SSA regions. Since such generators are expensive to operate and, for many SSA firms, are prohibitively expensive to purchase, power outages have the potential to impose significant costs on firms whether or not they own generators. It is therefore important for academics and policymakers to gain a greater understanding of the relationship between the reliability of power supplies and firm performance. A major concern with previous studies of the impact of electricity outages on firm performance is how to deal with potential endogeneity problems that arise when power outages are used as a determinant of firm performance. Endogeneity may occur if governments deliberately target investment in energy infrastructure close to large, high performing firms in order to support their operations. Similarly, government policies may simultaneously affect firm performance and outage levels. For example, government investment in infrastructure more generally (roads and rail) may improve the reliability of the electricity supply (power lines can then be more easily fixed) but should also help firms to get products to market more quickly.1 The contribution of this paper is to quantity the impact of power outages on the total sales of manufacturing firms in SSA taking endogeneity concerns into account by constructing an instrument that is correlated with the incidence of power outages but not with firms’ performance. The construction of our instrument relies of the availability of water for electricity generation which varies across hydropower plants and across countries. Put simply, everything else equal, a decrease in the streamflow to a river that serves a hydropower plant will lead to a reduction in the amount of electricity produced by that plant which in turn will increase the incidence of power outages in areas served by that plant.2 However, this reduction in stream flow should not have any effect on the demand for electricity from any given country. Our choice of instrument is motivated by the observation that hydropower plays a prominent role in the portfolio of generation capacity throughout SSA. For example, hydropower accounts for more than 75% of installed capacity in Burundi, Malawi, Mozambique, Uganda, Lesotho, DRC and Zambia (and for more than 90% in the last three). By combining our instrument, derived from the Geospatial Streamflow Model (GeoSFM) for the whole of Africa, with the World Bank firm level survey (WBES) we are able to investigate the impact of power outages on 14 African countries covering the period 2005 to 2013.