Powering Africa: Unlocking Funding for Power Sector Investments

In this decade, ambitious goals have been set and forecasts have been made about Africa’s energy access. In fact, the African Development Bank is currently championing Africa’s 2030 Universal Electricity Access Goal, focused on annually connecting 90 million Africans to electricity for the next 7 years, towards achieving full electrification (AfDB, 2023). While the energy infrastructure gap presents investment opportunities on the continent, full electrification in Africa means substantial capital investments. According to the UN’s International Institute for Sustainable Development (IISD) (2019), Africa has an almost $110 billion annual financing gap. Amidst a global tightening of monetary policies which has contributed to what the IMF describes as ‘The Big Funding Squeeze’ (IMF Regional Economic Outlook, 2023), how do African governments, private sector actors, and other stakeholders, unlock the vast capital needed to fund electricity access goals across the continent??

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Financing Investments in Africa

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Historically, internal power sector investment trends on the continent revolve around government financing, usually accounted for in annual budgets. In 2017, African governments contributed up to 42% of total infrastructural funding (McKinsey, 2023). By 2018, when African infrastructural funding crossed the $100 billion mark for the first time (ICA Report, 2018), commitments from African governments rose to 45%, with energy sector commitments accounting for over 40% of the total investment. However, in terms of GDP, African governments have been investing an average of 3.5% on infrastructural investments since 2000. The IEA (Energy Outlook 2022), notes that this will need to almost double for Africa to meet its enormous infrastructural needs and by extension, close its energy gap by 2030. Consequently, African governments have had to look beyond their coffers to source for Investment Project Financing (IPF) via development assistance from international financiers like the World Bank; and regional financiers like the AfDB. According to the World Bank Regional Report (2022), 30% of its overall lending commitments in Africa are directed at infrastructural investments; of which energy investment is part.

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African infrastructure has also attracted institutional investments from private sources like pension and sovereign wealth funds. And since 2007, about 21 African countries have explored funding options on international private markets, issuing medium-term financial instruments like Eurobonds, currently amounting to a total value of about $140 billion (IMF, 2021). But over the years, private sector investments have mostly been within the context of Public-Private Partnerships (PPPs), which have been on a steady rise. According to the AfDB (2022), in 2020, Africa saw the highest proportion of private sector infrastructure investments since 2016?(at $19 billion). And when it comes to infrastructure investments in the power sector, PPPs potentially create a win-win situation where governments access project funding and private partners generate profit from user-generated fees, which largely contributes to derisking the investment by providing a definite revenue generation model for providing returns to investors. Another funding source that has seen a steady rise, especially in the last 2 decades, is bilateral lending, especially from China which has become an important economic partner of many African countries. Between 2000 to 2019, almost 1,150 loan commitments were signed between Chinese and African governments, amounting to $150 billion (Carnegie, 2021), with rising interest in the energy sector. According to the Infrastructure Consortium for Africa report?(ICA, 2018), ‘from 2017 to 2018, Chinese commitments in Africa energy investments doubled from $9 billion to $ 18 billion.’

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In spite of the availability of these financing options, several challenges limit the capacity of African governments and other private actors to adequately access or maximize these options; more so in 2023.

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In terms of mobilizing domestic resources, many African economies have experienced a steady decline in internal revenue generation from taxation, which hurts their budgetary capacity to adequately support infrastructural investments. Where the global tax-to-GDP ratio is 15% on average (World Bank, 2021) 20 African countries (mostly in Sub-Saharan Africa) collect 13% (Ernst & Young 2020). External borrowing, which is an important source of shoring up domestic resources, has also become increasingly challenging. Double-digit inflation rates in almost half of the Sub-Saharan African countries (IMF, 2023) and globally tighter monetary policies have led to rising borrowing costs. In effect, many African countries struggle with debt-to-GDP ratios of over 60% (IMF, 2023).

Closely linked to borrowing constraints is the role of global credit rating agencies which have been accused of giving low ratings that negatively impact the creditworthiness of some African economies. According to a UN Regional Bureau for Africa Report (April 2023), ‘subjective rankings (of global credit rating agencies) are costing 21 African countries a combined $74billion a year in excess interest payments and lost financing.’ The attendant macroeconomic imbalances have caused some countries to default on Eurobond payments, contributing to a general decline of Eurobond issuances between 2021 and 2022. In December 2022, Ghana announced the suspension of external debts, including Eurobond payments, following poor ratings by agencies like Moody and Fitch.

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These recent developments, which have been further exacerbated by a decline in aid budgets and a decline in China’s lending portfolio since 2020 (Chatham House, 2022), point to one thing: a deterioration of funding options on the continent, described as the ‘Big Funding Squeeze,’ according to the Regional Economic Outlook Report (IMF, 2023).

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Navigating The Big Funding Squeeze

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This implies that in the coming months, African governments may likely face increased challenges with accessing financing for infrastructural projects, especially from previously viable options. But the continent still has infrastructural needs to meet and electricity access goals remain. Given the constraints, African governments must actively find ways to effectively manage public finances through adequate revenue mobilization which may contribute to boosting credit ratings. Again,?attracting PPPs is another important way to access attract much-needed financing for investments. However, in Africa, private actors and stakeholders are often constrained by a range of barriers, notable of which is the tendency for projects to span beyond the estimated time scale and sometimes, not proceed beyond the planning stages. In fact, only 10% of infrastructure projects in Africa reach financial close (McKinsey, 2020); a situation that heightens PPP investor risks. Consequently, positioning to attract PPP investments will involve mitigating risks that may impact project viability.

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Tidiani Jeff Tall is CEO of Lidera Green Power, a renewable energy independent power producer (IPP) based in Madagascar. He previously held transformational leadership roles at KONE (elevators & escalators), and Lafarge (building materials), after starting his career in debt capital markets at Morgan Stanley, and strategy consulting at Roland Berger. Jeff is a graduate of Ecole Polytechnique Paris and Institut Fran?ais du Pétrole (IFP School), as well as a participant in the first session of the Emerging Leaders Program at Harvard Kennedy School.