As part of a series of articles looking at Sustainable Finance, here we explore some of the key themes in Sustainable Financings in Africa, and the challenges to be overcome on transactions.
Sustainable finance aims to incorporate sustainability criteria into investment decisions, and enables investors to tailor their investments to projects which take account of environmental, social, and governance (ESG) factors. As a result, it is an important tool through which funders and investors can leverage their capital to maximise social impact.
Part of our wider series of articles looking at Sustainable Finance, this article briefly explores some of the key themes we encounter in Sustainable Financings in Africa, and the challenges to be overcome on transactions.
Sustainable Finance in Africa: behind the global curve?
The growing appreciation of the importance of ESG factors among market participants has resulted in the rapid global growth of sustainable finance, with a particular emphasis on financing the transition to environmentally friendly technologies (so-called "transition finance"). The International Energy Agency recently announced that this year, investment in solar energy is expected to exceed investment in oil for the first time ever. This statistic is undoubtedly indicative of a mood change amongst investors.
However, to-date, sustainable finance has predominantly been a feature of developed economies, with deal volume in developing markets significantly lower than Europe or America. Perhaps nowhere is this more acutely felt than Africa, which is home to 33 of the 46 countries which the UN classifies as "least developed countries". The International Energy Agency estimates that more than 40% of Africa's population lacks access to electricity, and whilst Africa holds 60% of the world's most attractive solar resources, Africa has only received 2% of global investment in renewable energy (despite the vast increase in the pace and scale of solar financings noted above).
There are a number of reasons for this discrepancy. Perhaps one such reason is the desire to refer to "Africa" as a potential jurisdiction for foreign direct investment. To think of "Africa" as a jurisdiction is to miss the point. Africa, which is formed of 54 countries speaking at least 2,000 distinct languages and trading in at least 42 separate local currencies, is complex.
Obstacles to Sustainable Finance in Africa
Burges Salmon's Energy and Infrastructure Finance team has advised on many sustainable finance transactions across Africa. We have observed that lenders and investors face a number of challenges when looking to deploy their capital in Sustainable Financings in Africa:
- Political and Regulatory risk: the legal systems in many African countries, particularly developing markets in sub-Saharan Africa, have tended to adopt protectionist policies. Local content requirements pose obstacles to international would-be investors, and foreign exchange control regulations complicate the process for paying interest on loans received from overseas.
- Macroeconomic headwinds: economies tend to thrive when debt is readily available on favourable terms. Stubborn inflation has led the US Federal Bank, the Bank of England, and the European Central Bank to raise interest rates meaning that international debt has become comparatively more expensive. African Central Banks have increased rates even further than their Western counterparts, dampening liquidity and increasing Borrower-side demand for sustainable finance capital.
- Execution risk: finally, a theme which was discussed extensively at the Africa Energy Forum in Nairobi earlier this year, was the number of deals which never make it to financial close (the transaction "attrition rate"). Recent research from McKinsey Company estimates that approximately 80% of infrastructure projects in Africa never proceed beyond early-stage planning.
However, none of these issues is insurmountable, and we remain optimistic for the future of sustainable finance in Africa. We have successfully advised many clients (from Development Finance Institutions (DFIs) and Infrastructure Debt Funds, to some of the world's largest International Banks and Sovereign Wealth Funds) on their key strategic and innovative transactions in the sustainable finance space across the continent of Africa.
One innovative technology which has featured prevalently in Africa in recent years is the solar mini-grid, which features small-scale solar electricity generation connected to a local distribution network (often combined with energy storage). The solar mini-grid is a low-cost solution capable of providing high-quality uninterrupted electricity to unpowered or underserved communities, particularly in rural or off-grid areas. The World Bank estimates that solar mini-grids could provide power to approximately 500 million people by 2030. Riccardo Puliti, Infrastructure Vice President at the World Bank commented that "solar mini-grids are a core solution for closing the energy access gap".
Burges Salmon has advised on a number of the most high-profile and complex mini-grid transactions in Africa to-date. Last year we advised the EU-funded Electrification Financing Initiative (EDFI ElectriFI, administered by the EDFI Management Company) and the UK Government-funded Renewable Energy Performance Platform (REPP, administered by Camco Clean Energy) as joint lenders on their LSL 150,000,000 financing to "OnePower", which was Africa's second largest solar mini-grid portfolio project-financing. Earlier this year we advised The Facility for Energy Inclusion on its first solar mini-grid portfolio financing, a USD 7,500,000 of senior debt financing to MySol Grid Zambia (formerly PowerCorner Zambia) to fund the construction of 60 solar mini-grid projects in Zambia, which will see more than 40,000 people connected to electricity in off-grid rural areas.
This article was written by banking and finance associate Luke Addison.
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