This text was sponsored by Africa Finance Company
Africa is in contrast to some other continent with regards to international internet zero – and we want a blueprint for a typical negotiating stance that displays this,” says Samaila Zubairu, president and CEO of Africa Finance Company (AFC). The organisation is enjoying a number one function in constructing capability and elevating finance to drive the continent’s power transition whereas sustaining a realistic view of how one can leverage international locations’ current sources for financial development. However additionally it is going through the problem of coping with priorities outlined by a number of the largest international emitters situated in different areas, that are setting the principles for targets and methods.
Africa’s expertise is exclusive, says AFC in its white paper launched final yr, Roadmap to Africa’s COP: A Pragmatic Path to Web Zero. “It has borne the brunt of probably the most devastating impacts of local weather change – from frequent floods to droughts and extreme heatwaves, costing lives and livelihoods. Against this, the continent contributes lower than 4% of greenhouse gasoline emissions, reflecting Africa’s crippling power deficit.”
Zubaira argues that the continent wants to steer and chart a brand new growth path. Africa must undertake new financing fashions, to “finnovate”, because it says within the white paper, in order that it could unlock native capital from sources reminiscent of its pension and insurance coverage funds.
This may be achieved by means of modern options reminiscent of de-risking mechanisms, first-loss ensures and credit score enhancement instruments. AFC has used these instruments to encourage native investments and make institutional buyers snug sufficient to take calculated dangers. AFC has achieved this to nice impact, nevertheless it must be achieved at a lot higher scale throughout our continent.
Zubaira believes that to scale up impression, there must be a lot stronger partnerships between private and non-private sector. Knowledge is essential. Higher information helps de-risk tasks and can encourage higher investments.
He says that we have to change our mindset when it comes to how we method worth chains at a continental degree. Batteries and electrical autos present a novel alternative for the continent to assume otherwise about worth chains and creating and capturing huge wealth in a sustainable method on the African continent. However this may solely occur by means of concerted efforts and deliberate insurance policies. For this reason AFC has financed feasibility research on this area which have demonstrated a transparent aggressive benefit to its friends.
Defining a simply transition
Zubairu argues that the continent must harness its sources to generate the power for growth. He maintains that Africa’s local weather challenges put the continent’s GDP in danger by as much as 35%, a quantity that can continue to grow so long as the area lacks infrastructure that’s resilient to the impression of local weather change. However there’s additionally a chance for the continent to grab the second and construct ecosystem of adaptation, he says.
“The simply transition for us is entry to power that’s inexpensive and doesn’t compromise financial growth, and power entry that permits for the important thing challenges round financing and adaptation to be resolved similtaneously financial growth.
“Once we have a look at tasks and alternatives, we try to see how we will construct an ecosystem alongside worth chains that permit for carbon neutrality as we go alongside. However the focus is on financial growth.”
The pan-African organisation, headquartered in Lagos, has referred to as on African leaders to interact in a unified narrative with the remainder of the world to outline the continent’s function in combating international warming. This engagement has moved centre stage because the world strikes in direction of the COP28 assembly to be held in Dubai earlier than the tip of 2023.
A 3-pronged method
AFC, by means of its investments and venture advisory operate, has a three-pronged method to local weather change assist for Africa.
It’s localising manufacturing to minimise emissions from delivery and different types of transport; rebuilding infrastructure in a approach that will probably be resilient to altering local weather circumstances and that anticipates, prepares for, and adapts to local weather danger; and utilizing monetary innovation to crowd-in funding to assist every thing from reforestation to renewable energy crops.
AFC is shifting shortly to develop renewable sources, boosting its footprint with the acquisition, with its companions, of Africa’s largest renewable firm, Lekela, and it has a pipeline of 10 GW of latest tasks. Whereas renewable sources are the last word aim, Africa wants to maneuver ahead with the sources it has, says Sanjeev Gupta, AFC’s Govt Director for Monetary Providers.
The continent’s ambition to make use of its huge gasoline reserves as a transitional supply of power to assist industrialisation has been given impetus by the European Fee’s resolution to categorise pure gasoline as a type of inexperienced power and as an important transition gas within the path in direction of decarbonisation.
On condition that vital swathes of Africa are already at internet zero, industrial growth utilizing pure gasoline could be achieved with out substantial contributions to international carbon emissions, the AFC white paper states.
Nonetheless, says Sanjeev Gupta, the acceptance of gasoline as a transitional gas isn’t universally accepted and this may have an effect on funding for tasks involving this useful resource.
“We’re doing what we will to develop renewable power in international locations that don’t have oil and gasoline, thereby serving to to scale back their import payments. With oil and gasoline, the talk is extra sophisticated,” he mentioned.
The inexperienced technique
Sameh Shenouda, Govt Director and Chief Funding Officer of AFC, says that whereas the Company has funded power tasks that pundits might not see as inexperienced tasks at face worth, it really works to a broader technique on this regard. One instance is the deployment of $300m of senior debt to Dangote Industries Restricted to part-finance the development of its 650,000 barrel per day crude oil refinery. “African international locations have completely different sources, and we have a look at what’s on the bottom and what it is smart for the nation to spend money on. The place there’s ample solar and wind, renewable power is smart.” However, he says, there are alternative ways of this situation. “The west coast of Africa is gasoline wealthy so there isn’t any good cause to not spend money on gasoline. Nigeria is wealthy in oil and gasoline, so it is smart to spend money on these sources and we have now invested in constructing refining capability.”
For Nigeria to refine its personal gas somewhat than exporting the crude oil and importing gas saves vital emissions from delivery,
Equally, AFC backed the $335m Cabinda oil refinery in Angola, partnering with Gemcorp and Afreximbank. Angola additionally exports crude oil and imports gas. Backing the refinery will considerably cut back these imports, saving each arduous forex and delivery emissions.
Says Zubairu, “Import substitution is an efficient approach to cut back greenhouse emissions related to delivery and it permits extra jobs to be created within the native economic system. It additionally creates a chance to scale up so as to meet not simply native demand however that of its neighbours.”
The oil refinery offers are one facet of this. Transport is one other. The Lobito rail venture, through which AFC is the lead developer, goals to supply a direct route from Zambia’s copper mining space to Lobito’s port in Angola. It is going to allow the motion of exports to the US instantly west to the Atlantic Ocean somewhat than east to the Indian Ocean earlier than being routed round Southern Africa.
Disrupting Africa’s typical commerce patterns – uncooked supplies out and manufactured merchandise in – can also be on AFC’s radar. Altering this may require growing native industries by placing processing and manufacturing on the centre of sustainable round economies.
Presently, not even 20% of Africa’s meals manufacturing is processed earlier than being exported. AFC is backing particular financial zones in numerous African international locations to spice up worth addition to African commodities earlier than export.
Says Shenouda, “In brief, we’re discovering probably the most applicable useful resource of every nation and in search of non-traditional, adaptive and artistic methods to handle carbon emissions.
“We’re in a position to do that as we all know the terrain, what’s required, and the potential in addition to the restrictions of every nation. We’re on the bottom and perceive Africa.
Derisking tasks
AFC is ready to derisk its tasks by utilizing its personal fairness capital upfront for tasks, in search of debt funding as soon as the venture is commercially viable.
Says Shenouda, “It takes a very long time to undergo the venture finance course of, and it could take greater than a yr to lift debt. It’s arduous simply to convey three or 4 banks right into a room for a gathering. So it’s faster to convey our fairness upfront at first to get tasks shifting.” He makes use of the instance of AFC’s 60 MW Djibouti wind venture, inaugurated in October 2023, the place AFC did an all-equity deal.
As soon as the venture had reached industrial operations, it went to the market to lift debt finance. Now lenders are queuing as much as convey capital into this de-risked operational asset.
Gupta says, nonetheless, that borrowing from the market places the establishment underneath stress to fulfill the expectations of economic lenders. This requires adhering to accepted coverage path and regulatory compliance and dwelling as much as environmental, social, and company governance (ESG) requirements.
He mentioned the truth that AFC has 42 member states underneath its umbrella provides it preferential entry to these markets nevertheless it nonetheless has to make sure that tasks are structured in methods which might be politically untouchable and the place coverage is constant. “In any other case we’d not be capable of function.”
AFC’s steadiness as a public non-public partnership is a crucial assemble. Whereas any growth finance establishment wants public sector assist, it additionally relies on non-public sector rigour, he maintains.
Nonetheless, elevating capital stays difficult due to perceptions of excessive danger in Africa. Says Shenouda, “It might be actually useful if worldwide sovereign funds and pension and insurance coverage funds would put ahead even 1% of their sources into Africa. That’s not occurring. Even African funds will not be doing so.
One cause is a lack of expertise in regards to the continent, and undue perceptions of danger, which reduces the urge for food for funding for Africa’s growth, he maintains. AFC, then again, understands the place there’s danger in Africa and is ready to keep away from or mitigate it. “From the surface, it’s simple to say one thing is just too dangerous. And we’re cautious about which sectors we spend money on.”
