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The 6% Africa climate premium that hurts everyone

Green capital is irrationally expensive on the continent. Financiers seem to be losing sight of what the real risks are when lending – or not lending – in Africa

Hello – sometimes numbers capture what many feel in their bones. Africa has an unusually hard time borrowing on international financial markets. It has long been so. 

But how much riskier is investing in Africa really compared to other developing regions? Not, according to the world’s ratings agencies, as we report below. 

And yet, interest rates can be up to 6% higher than in countries with similar risk profiles. 

Why? The answer has become a key issue for climate action. What was previously just unfair for Africa, now stands in the way of planetary goals. 

Without investment in African carbon sinks et al., bankers in New York, London, Dubai and Singapore (all situated at sea level) may end up with wet feet.  

Today’s reading time: 4 mins

LOGISTICS UPDATE | Thursday 6 June

EVENTS…

📆 Electric mobility equipment webinar (June 13)

📆 Nigeria hosts Climate Action Africa Forum (June 19

📆 Solar & Storage event to be held in Cape Town (August 27)

AND JOBS…

💼 BasiGo seeks a material flow & inventory supervisor (Kenya)

💼 CI looks for a project analyst in conservation finance (South Africa)

💼 SNV is recruiting a grants & compliance advisor (Rwanda)

1.🚁 Heli view: How mispriced risk keeps investors out of African climate ventures

Funding climate-related ventures on the continent is not only critical but also unusually complex, hampering clear decision-making. 

  • Which is why it’s so refreshing that research from BCG, a global consulting firm, lays out topline numbers and what’s at stake. 

Starting point: While climate funding is growing overall, Africa still receives a low level.

  • The continent requires $2.4 trillion to combat climate change by 2030. 

  • But only 12% ($214 billion) has been availed.

Stumbling block: The origin and nature of green capital in Africa explains this in part. 

  • Many green sectors are capital intensive and have long investment horizons (10+ years). 

  • They need patient capital – yet the wider capital markets can be highly volatile.

Global dimension: Many African ventures rely on foreign direct investment (FDI) to grow. But African FDI has declined in the past decade.

  • The trend is clearly downwards from $57 billion in FDI in 2012 to $45 billion in 2022. 

Search for explanations: It seems paradoxical that Africa is becoming more relevant to the global economy yet losing ground in capital markets.

  • Some analysts blame US monetary tightening and the Covid pandemic, which coincided with FDI drops of 20% and 10% respectively. 

  • Others point to a failure of local private capital to step in as has happened elsewhere. African money seems unusually shy. 

  • Private climate finance accounts for 14% in Africa, 36% in South Asia and 48% in Latin America. 

Zooming out: To explain a systemic trend though all this seems insufficient. Foreign capital is rational and available but surprisingly little reaches Africa. Why?

  • Market failures usually show up in pricing, at least in the long run. 

  • For capital markets that means interest rates. 

Killer number: Financing costs for green projects in Africa can be significantly higher than in similar emerging markets, according to a report by BCG, 

  • The cost of debt for climate projects in South Africa is 20% compared to Paraguay’s 15%, even though their sovereign ratings are the same (BB) as well as their GDP per head.

  • The BCG study found consistent evidence for a mismatch of capital costs and credit ratings when comparing African and non-African countries of similar size & ratings.

  • The worse the rating, the greater the mismatch. For B-rated countries such as Uganda, Tanzania and Nigeria, the Africa premium is up to 6%. 

The wrinkle: An anomaly in African borrowing may explain part of this. Expected losses for private debt are in line with global averages. But how African borrowers get there is different.

  • Initial losses in Africa are higher (4.9%) than globally (2.7%). Yet they’re balanced out by unusually high recovery rates (83% compared to 75%). 

  • This jumpy journey seems to irk some lenders.

Other risks: Explaining high premiums, lenders also cite a weak exit climate (62%), currency risk (56%), unattractive returns (35%), political risk (35%), and unfavourable regulatory environments (32%). 

  • But all the same could be said for parts of Asia and Latin America.

Beyond return: Structural factors unrelated to financial payback may have an impact too. 

  • Africa has smaller deal sizes — and the global trend is towards bigger deals. 

  • Ever more burdensome "know your customer" rules make Africa trickier for lenders since customers may be less well known. 

Seeking solutions: All of which could explain part of the Africa premium. But 6% compared to other small, distant and unstable emerging markets? 

  • Erasing the mismatch between capital costs and credit ratings in Africa is clearly a thorny undertaking.

  • And green ventures cannot wait until the financial landscape has changed. So now what? 

Action stations: Whatever the reasons for high costs of capital, new solutions are needed.

  • The most likely are innovative finance mechanisms to grow green investment within existing market structures. 

  • "We need to start deploying more smart de-risking instruments for Africa's green industries," said Katie Hill, a BCG partner. Some are listed below.

2. Cheat sheet: Five novel tools to de-risk investments 

Green bonds are already pretty well-known, and so are insurance policies and guarantees against losses, as well as capping returns to maximise impact. But they haven’t done the trick. Here are more ambitious instruments one could use:

(i) Debt for climate swaps: Reducing sovereign debts to improve credit ratings and thereby indirectly boost climate investments

(ii) Contracts for Difference (CfD): A mechanism to hedge against price volatility

(iii) Carbon credits as collateral: Providing future security for current borrowing

(iv) Investment readiness support: Improving project feasibility, structuring & aggregation

(v) FX guarantees: Currency hedging to protect against foreign exchange fluctuations

3. Number of the week

… is the proportion of the world's agricultural land that is located in Africa. According to the UN Food and Agriculture Organisation (FAO), out of the 4.7 billion hectares of land available for agriculture globally, approximately 1.7 billion hectares are in Africa.

4. Network corner

👉 A number of players in Africa’s green economy have been featured on the TIME 100 list of the most influential companies in the world, including Burn Manufacturing, Spiro and M-Kopa. Congrats!

  • Greening cities: The Senegalese capital Dakar inaugurated a 100% electric bus network, a first in Africa, promising a radical transformation of urban mobility. The $700 cost million is supported by the World Bank, European Investment Bank and UN Green Climate Fund. The move is expected to save 60,000 tonnes of CO2 per year.

  • Lorry launch: Daimler is introducing a line of heavy-duty electric vehicles in South Africa. Businesses on the continent have been slow to adopt EVs for haulage, focusing more on electric two-wheelers for last-mile delivery. But this year has seen a number of lorry makers entering the African market. 

  • Reforestation: 41 million trees have been planted in Ghana since 2021. The initiative was started by president Akufo Addo and the trees so far have a 70% survival rate. The country is targeting to plant another 10 million trees this year.

  • Electrification: Aptech Africa inaugurated eleven mini-grids across five provinces in Burundi. They include substantial battery storage and low voltage distribution lines.

Don’t have time to read 100+ media sources and reports every day? We’ve done the reading for you. Check out our full monitoring here.  

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