Africa is well-positioned to capitalize on climate-focused investments. The continent’s industrial landscape is diversifying beyond traditional sectors like extractives, embracing sustainable agribusiness and renewable energy (EY, 2020). With a young and rapidly growing population, there is an increasing drive to address major issues, such as limited energy access, water scarcity, and severe food insecurity, among others.
This means there is a huge potential to translate Africa’s infrastructure needs into investment opportunities. However, real and perceived risks continue to dampen investor confidence and limit the expansion of investment (Africa NDC Hub, 2021).
These risks include:
Volatile currency fluctuations
Development finance institutions (DFIs) have traditionally lent to businesses in Africa and other emerging markets in major “hard” currencies, like the U.S. Dollar and Euro. This approach works well when local currency exchange rates are stable, as it minimizes the risks associated with borrowing in these hard currencies.
However, during periods of economic volatility and uncertainty, as seen recently on a global scale, exchange rates can fluctuate dramatically. These fluctuations create foreign exchange risks that can be burdensome for borrowers. Furthermore, some countries face additional hurdles when converting local currency into foreign currency due to complicated administrative processes and limited availability of hard currencies, which can hamper business operations.
This currency market volatility presents a significant risk for African businesses borrowing in hard currencies. As a result, there’s a growing demand for local currency financing across the continent. This type of financing is often the preferred choice for many entrepreneurs, especially those generating revenue in local currencies, as it helps them safeguard their investments from currency-related risks.
Local currency financing not only shields businesses from these risks but also acts as a driver for investment. Organizations like the International Finance Corporation (IFC) play a crucial role in promoting sustainable private sector growth in Africa by offering local currency financing solutions and supporting the development of local capital markets.
Regulatory challenges and governance issues
Historically, entrepreneurs attempting to trade across African borders have encountered significant barriers. This issue has long persisted, with African nations trading more with distant foreign countries than their neighbours due to various business impediments, creating substantial disincentives.
For financiers, entering new markets requires certainty. They seek cooperative and transparent systems, standardised processes, and clear accountability timelines, allowing for effective planning and resource allocation. However, regulatory and governance frameworks in Africa are far from consistent. Neighbouring countries, and even regions within the same country, can vary greatly, adding complexities that raise costs and hinder competitiveness.
The African Continental Free Trade Agreement (AfCFTA) is one of the world’s largest free-trade zones. Before the agreement’s inception in 2018, only 17 percent of African trade occurred within the continent. For AfCFTA to reach its full potential, individual governments must effectively implement its provisions to create a seamless single market.
Creating a supportive environment that fosters climate finance flows within Africa remains a significant challenge. Although AfCFTA trading officially commenced on January 1, 2021, the UN Economic Commission for Africa’s 2022 Country Business Index highlighted various barriers and bottlenecks to be addressed to improve the business climate across the continent.
Relying solely on legislation, policy, and government communication strategies is insufficient. More efforts are needed to dismantle tariff and non-tariff barriers while fostering deeper engagement with the private sector and business associations. Entrepreneurial innovation in markets and systems will drive the necessary progress to overcome these barriers.
Insufficient pipeline of investment-ready projects
In Africa, it’s evident that the shortage of climate investments is about more than just policy and governance reforms. The primary issue isn’t merely a lack of funding, as many experts note; instead, it’s the scarcity of well-prepared, bankable projects. This highlights the need for improved project preparation and packaging.
For years, government officials, development specialists, and donor representatives have sought to address Africa’s financing challenges. The scale of the issue is significant: Africa lags behind other developing regions in access to essential infrastructure like water, transportation, energy, and telecommunications. While investment opportunities abound, the difficulty lies in bringing projects to financial closure, with 80 percent of infrastructure initiatives stalling at the feasibility and business plan stages.
Many projects rely on outdated engineering studies and lack comprehensive analysis or preparation. Effective project preparation, while costly and risky, is essential for success. Private sector operators and commercial lenders typically conduct their due diligence once a project’s bankability is reasonably assured, but they often lack resources for preliminary bankability assessments.
A project’s bankability depends on its feasibility across several dimensions – social, economic, financial, technical, environmental, and administrative. Project development usually requires feasibility and pre-feasibility studies to evaluate these aspects. However, conceptualisation, consensus-building on a project’s goals and design, and detailed action plans are crucial preliminary steps. These are opportunities for entrepreneurs to collaborate with governments and drive progress.
Entrepreneurs may need to commit more resources early in the project development cycle to ensure feasibility and solid preparation. Such investments can yield robust feasibility studies and commercial plans, which in turn provide governments and investors with greater confidence in the technical and commercial viability of large-scale projects.
Conclusion:
Climate finance in Africa is heavily concentrated in just a handful of countries, with ten out of 54 – Egypt, Morocco, Nigeria, Kenya, Ethiopia, South Africa, Mozambique, Côte d’Ivoire, Tunisia, and Ghana (in order of highest to lowest) – attracting over half of all investment. To broaden the reach of climate funding across the continent and boost it within these nations, entrepreneurs must prioritise mitigating key risks. This involves mitigating currency risks, pushing for supportive green investment policies, and developing a pipeline of viable, bankable projects to attract financiers.
