Revisiting Financing for African Development

In financing Africa’s development especially in the energy sector which is a catalyst for the entire continent’s development, two proverbs come to mind— “a single bracelet does not jingle” and “a single stick may smoke, but it will not burn”.

With an estimated 621 million Africans without electricity and the gap expanding, Africa’s energy poverty is high— impacting socioeconomic growth adversely, amidst an unmatched renewable energy potential globally. For example, with the best solar resource globally, where a mere 0.3% of the sunlight that shines in Africa is equivalent to nearly all of Europe’s energy needs, about 10 million medium-sized enterprises lack access to electricity. Available electricity costs 3 times more than that in the USA and Europe and is compounded by frequent shortages. Cumulatively, this costs African economies 1 – 4% in lost GDP annually. In a region whose economic productivity is 20 times or 2000% less that of developed regions yet needs to create the most jobs— with over 300 million joining the labour markets in the next 15 years, bridging the energy gap in a way that creates jobs is an urgent imperative for a secure, inclusive Africa.

Regardless of this great need, the region faces a gaping financing divide, coupled with declining inflows from traditional sources. While a minimum of $25 billion is needed annually to bridge Africa’s energy gap, traditional international sources have declined. Official development assistance (ODA) has dropped to a mere 1% of all capital inflows into the continent. ODA now accounts for only 3% of continental GDP. The implication is that Africa needs to leap-frog from traditional financing approaches and embrace additional, more innovative and market driven approaches. In recent times, crowdfunding has been proposed as a valid means to finance development in Africa— including in energy but the question that begs us all is whether this is the needed panacea for the continent.

Crowd funding— a panacea for energy finance in Africa?

As stakeholders continue to consider crowdfunding to finance Africa’s energy development, two issues come to light.  First off, energy development needs to be considered as an accelerator of socioeconomic development and job creation in Africa. This means developments in energy sectors need to be tagged with enhancing productivity in labour intensive areas especially agriculture, to power value addition.

Secondly, while crown funding has been used to finance a myriad of social objectives globally, to ensure sustainability, a business case for such finances has to be in place, especially for causes such as clean energy, where amounts needed are significant— a minimum of $25 billion. With such amounts, classical crowd sourcing alone may not be a sustainable approach.

While crown funding has been used to finance a myriad of social objectives globally, to ensure sustainability, a business case for such finances has to be in place, especially for causes such as clean energy, where amounts needed are significant

In combating climate change and financing inclusive growth in Africa, where upscaling clean energy is a priority strategy, the need for a more sustainable financing model is underscored by high level continental and global strategies. Continentally, the 2^nd Africa Adaptation Gap Report notes that Africa can raise up to $3billion annually domestically. Internationally, the Inquiry Report into sustainable financing and the Addis Ababa Action Agenda for sustainable financing all underscore the urgent need to combine domestic & international sources. The underpinning of such sustainable financing is a blended financing model combining public & private, domestic & internationally sourced finances. It is within this framework that crowd funding for energy should be premised & contextualized.

Africa holds 65% of the world’s arable land and investing in agriculture will guarantee sustainable economic growth

Risk sharing facilities, an Innovative Financing model to accelerate Africa’s socioeconomic transformation

To actualize this sustainable finance model and premise energy for accelerated socioeconomic development, the UN environment facilitated, country-driven Ecosystems Based Adaptation for Food Security Assembly (EBAFOSA) policy implementation framework is supporting countries established at risk. Additionally, another highlight is sharing facilities aimed at indemnifying enterprises based on the catalytic areas of clean energy & Ecosystems Based Adaptation (EBA) driven agriculture towards establishing sustainable agriculture led, clean energy powered agro-industrial zones.

The approach is to mobilize finances which are then used as cash guarantees in a de-risking facility aimed at incentivizing affordable private sector financing to upscale enterprises along the entire sustainable agriculture-led, clean energy powered industrialization continuum. Targeting for-profit enterprises means funds are dispersed to target businesses cable of repayment to make the fund sustainable. Targeting enterprises along the entire continuum diversifies default risk as the various enterprises have varied risk profiles. This in turn lowers the interest payable to enhance affordability of loans. In addition, targeting clean energy systems capable of powering processing (beyond classical approaches that target domestic energy options) encourages growth of agro-based industries. These have higher returns on the overall economy in terms of raising labour productivity above the current dismal score of 2000% lower, creating jobs for millions of youth and generating more revenue.

As can be deduced from the above, these risk sharing facilities move beyond social funding to prioritize investment financing targeted at enterprises that are run as for profits to provide financial returns as well as provide social benefits of food security, create jobs, build climate resilience & mitigate carbon. These risk sharing facilities build on the concept behind the Nigeria Incentive Based Risk Sharing Facility for Agricultural Lending (NIRSAL), but are dedicated to finance enterprises along the entire EBA driven agriculture led clean energy powered industrialization continuum to simultaneously finance climate adaptation, mitigation, energy development and socioeconomic developments of food security & creation of income opportunities.

These risk sharing facilities move beyond social funding to prioritize investment financing targeted at enterprises that are run as for profits to provide financial returns

The risk facility comprises a financial deposit drawn from public funds which is then used as a cash deposit to securitize commercial loans valued at up to 10 times the cash deposit to indemnifying defaulters. The securitized loans are dedicated to finance for profit enterprises along this EBAFOSA continuum of EBA, clean energy agro-industrialization with ICT for market & supply chain linkages. Ensuring socioeconomic & climate objectives are simultaneously actualized.

Drawing from the NIRSAL model, an investment of ₦45billion unlocked up to ₦450billion in private finance and similar returns are expected of the EBAFOSA risk sharing facilities. Extrapolating this across Africa, with domestic climate finance alone as the source of investment, the region already spends 20% of its GDP equivalent to $3billion on climate action. This in addition to the $3billion that can be raised domestically, means up to $6billion can be mobilized for investment in these risk sharing facilities. These will in-turn potentially incentivize up to $60billion in private sources.

Such funds can then be invested in scaling enterprise models already proving viable. For example, in Cameroon, EBAFOSA is integrating off-grid small hydro directly to power sustainable EBA produced cassava and Irish potato processing into varied product lines in rural areas, coupled with linking the same to markets using ICT. This is creating numerous socioeconomic opportunities while simultaneously meeting Cameroon climate priorities of scaling clean energy. The combination of diverse enterprises, clean energy, on-farm level businesses and ICT means that while clean energy is financed, the overall risk of the facility is diversified to ensure lower more affordable finance that scales clean energy more sustainably.

Simultaneously, on the economic front, this integrated approach is diversifying income opportunities along the entire agro-value chain & ancillary supply chains of clean energy & ICT. A total of 10 youth groups engaging in ICT, clean energy marketing marketing have been engaged, creating green jobs for approximately 100 young people. Over 500 women now have access to value addition services and as a result have cut their postharvest losses (PHLs) to enhance their income stability & community food security. Through EBAFOSA, this integrated paradigm will be replicated across all the 40 African countries where EBAFOSA is established.

It is projected that an optimized agro-industrial sector can create as many as 17million jobs in Africa, in agriculture and in intervening areas and inject up to $1trillion in Africa’s economy by 2030. So risk sharing facilities that convert socially aligned funds into investment financing targeted at catalytic areas is the way to go to sustainably finance climate resilience, energy uptake & socioeconomic transformation in Africa. It is in such facilities that crowd funded resources should be put to develop a mixed, low risk financing portfolio for Africa’s energy development. This also ensures that energy contributes directly to economic productivity and job creation, both urgent priorities for Africa.

“If ten cents does not go out, it does not bring in one thousand dollars”. This favorite saying in Ghana sums up the principle behind risk sharing facilities that Africa should urgently embrace to finance her development and accelerate transformational change. Henceforth, the approach should be moving beyond socially designed fundraising to investment financing capable of financial returns. Where whatever amount regardless of how small, mobilized from whatever source, including crowd sourced, is put for multiplication & to fetch both a social & financial return on investment. The time to act is now! It is Possible