Over the past decade, governments across Africa have been working towards transitioning their countries into developed economic status. This development race is characterized by increased investment in transport and energy infrastructure; as well as other public utilities such as hospitals, schools, waste management systems, and public recreation facilities. However, funding for these mega projects across the continent has not been forthcoming at the rate at which it is needed. Most governments in Africa run perennial national budget deficits, hence development and private sector funding play a key role in infrastructure financing across the continent.
Climate Finance Gap In Africa
Climate action adds a new twist to the financing gap for infrastructure projects in Africa. It is estimated that between 2020 to 2030; Africa needs USD 250 billion annually in climate finance to meet its Nationally Determined Contributions (NDCs). In 2020, only USD 29.5 billion in climate finance was mobilized for Africa; a partly 11% of the total amount required. With about a 90% shortfall in funding required to finance climate-resilient development in Africa bold, and urgent actions need to be taken to mobilize the required funding from the public, private, and philanthropy coffers.
To meet its climate mitigation targets under its 2021 updated NDC, Kenya will need USD 17.7 billion between 2020 and 2030. Kenya commits to foot 21% of the total budget from domestic sources (both public & private sector sources); while the remaining 79% will be sourced from international sources. Under the climate adaptation segment, it is estimated that Kenya will need USD 43.9 billion for the period between 2020 and 2030. Kenya commits to source only 10% of this funding requirement locally; while 90% of the budget will be funded from international sources.
The ratio between local and international funding for NDCs across Africa mirrors the Kenyan averages. This portrays the large financing gap that countries in Africa must find innovative ways to bridge; if they are to meet their set climate adaptation and mitigation targets by 2030. From our analysis, over-dependence on international support from developed economies to fund 90% of NDC budgets in Africa will only derail climate action across the continent.
Article 9 of the Paris Agreement stipulates developed economies’ commitment in 2015 to provide financial resources to developing countries to help them meet their climate adaptation and mitigation targets. However, the USD 100 billion annual commitment has not been met yet; and the developed economies do not seem to have strong intentions to meet their end of the bargain. Therefore, African governments must consider alternative mechanisms to finance their climate-resilient infrastructure to meet their NDCs by 2030.
The Private & Sovereign Funds Climate Finance Opportunity
With pubic funding commitments for climate action not trickling in at the desired rate and amounts, the private sector provides a viable alternative to financing climate-resilient development in Africa. Riding on the “moving from aid to trade” buzz; Africa should find ways to attract private capital to the continent to fund its infrastructure priorities.
The global wealth management industry had more than USD 137 trillion in liquid assets as of 2021. The figure is expected to grow by an additional USD 90 trillion by 2030 to reach an all-time high of USD 229 trillion. The cumulative NDC budget for Africa by 2030 is USD 2.5 trillion; which is about 1% of the liquid assets that will be held by the global wealth management industry by then. Tapping into this large pool of private sector and sovereign funds could just be the magic wand to meet NDC budgets for African countries. This requires a shift from the donor-dependency mindset by policymakers in African countries; to an investment approach to resource mobilization for development.
Africa just like other developing economies is deemed to be a high-risk continent by investors. To attract investments in the large ticket sizes needed to meet climate adaptation and mitigations by 2030; the continent has to develop and strengthen its capital markets. This will provide safe financial platforms for international investors to deploy their capital in the continent, as well as repatriate their returns without the current existing bureaucracies. In addition, African countries will have to strengthen their judicial systems in order to instill confidence in international investors that the rule of law will be upheld in case of litigations.
With its youthful and growing population, Africa presents a lucrative long-term investment opportunity for both local and international investors. The continent is on an accelerated upward economic growth trajectory, and therefore it is the best market to float long-term green bonds and other sustainability-linked financial instruments. To achieve this climate finance milestone for Africa, three things must be true: changed mindset to embrace investment approach to development, developed capital markets, and strengthened judicial systems.
Author: Jeremy Riro