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Building a profitable green economy in Africa

Building a profitable green economy in Africa

Viewed from a dramatic granite formation jutting above the town, the central Ugandan settlement of Soroti doesn’t amount to much.

A series of low-rise rectangular buildings, drifting off into a featureless hinterland, it appears a regional administrative and commercial centre of little importance. Yet in December, European Union and Ugandan diplomats, wielding commemorative spears and greeted by brightly attired locals, gathered to cut the ribbon on a development that could put this backwater firmly on the map.

Soroti’s vast solar plant is the largest of its kind in East Africa, a sprawling site of over 32,000 photovoltaic panels that will add an initial 10MW of electricity generating capacity to the local area. Backed by development funds from European taxpayers and foreign private capital, the $19m project aims to power up to 40,000 homes, schools and hospitals, while kick-starting regional economic growth and delivering profits to its commercial backers.

It is one of hundreds of ambitious projects across the continent – including clean water, sustainable agriculture, wind and tidal energy – that are seeking private and public funds in a bid to profit from Africa’s “green economy” – defined by the United Nations as “an economy that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.”

There is an increasingly keen awareness among policymakers and businesses that delivering on this goal – previously dismissed as the preserve of well-meaning philanthropists – will be crucial to the continent’s economic future. The pivotal 2015 Paris Climate Agreement and its successor conference last year in Morocco helped to focus minds on the costs of global temperature rises, which scientists predict could endanger Africa’s fragile ecology and shave up to 3% off the continent’s annual GDP by 2030.

Yet if the fear of economic havoc wrought by unfettered climate change represents a stick for business, the opportunities afforded by Africa’s largely untapped green growth sectors offer a substantial carrot. The UN Environment Programme predicts that real GDP in Kenya under a green economy could exceed a business-as-usual senario by 12% by 2030, dragging 3.1m of its citizens out of poverty while boosting agricultural yields by 15%.

Investments in water ecosystems and biomass could add 737,000 new jobs in South Africa by the same year, while solar and wind power are expected to deliver 30,000 new jobs in Senegal. And as the costs of renewable energy technology continue to plunge – the price of solar panels has fallen by an average of 10% a year since 1980 – investors are increasingly drawn by the economic case for green investments.

 “If you look at the scale of the electricity being developed across the continent, in Morocco, Kenya, South Africa, Ghana and Ethiopia, I think we’re on the verge of seeing Africa move into the renewable energy economy not as a climate change response but principally driven by a very economic shortcut to energy access,” says Achim Steiner, a former executive director of the United Nations Environment Programme and now director of the Oxford Martin School.

Yet while Africa’s green industries may be an ever more attractive proposition for profit-hungry investors, familiar constraints slow the pace of change. From excessive start-up costs to a lack of bankable schemes, outdated regulatory systems and ignorance among policymakers, gaining exposure to the green economy remains a challenge to investors.

“It’s one thing to talk about what a green economy means and another to match it with finance and leverage it to the scale needed,” says Justine Leigh-Bell, director of market development at the Climate Bonds Initiative. “How is that getting packaged and being translated into something that investors can understand and put their money into? There’s still a significant amount of work that needs to be done on that.”

Paying for change

Just a year after putting pen to paper on the historic Paris Climate Agreement, the first truly global pact to tackle climate change, the world’s international negotiators decamped to Marrakech in November for the next round of hard-fought negotiations. Having agreed to the stringent Paris target of limiting global temperature rises to no more than 1.5°C above pre-industrial levels by 2100, the challenge for the Marrakech dignitaries – including the experienced African negotiating team – was making progress on who exactly should foot the bill. 

The issue of climate adaptation finance remains a crucial dividing line between the rich and poor worlds. While developing economies see large financial transfers as rightful compensation for the rich world’s historic emissions profligacy, modest pledges of $100bn a year until 2020 have gone largely unrealised. Without this support, says Seyni Nafo, head of the African group of negotiators in Marrakech, some of Africa’s green economy ambitions could prove unaffordable. 

 “The flow of adaptation finance in Africa in and of itself is very modest. The involvement of the private sector has been even more of a challenge, as adaptation does not automatically lend itself to profit generation … most African nations will need a certain amount of resources from the international community to be able to uphold their climate or sustainable development goals. The reality, because of poverty and demographics, is that the priority has to be slowed down or considered.”

According to the United Nations, the developing world could need up to 13 times current funding levels by 2030 if adaptation needs are to be met. With development finance institutions and foreign governments coming up short, attracting private capital to the green economy is vital for cash-strapped African governments facing the twin challenges of immediate climate change adaptation and mitigation.

“Governments need to make the case much stronger, because around financing we found that the private sector is quite risk averse. So governments need to provide incentives, and bringing the private sector to the conversation will make a difference,” says Mao Amis, executive director of the African Centre for a Green Economy.

Perhaps one of the most compelling responses to this challenge has emerged in the form of green bonds, traditional debt instruments that pool investments for green projects while offering institutional investors a reassuringly familiar product. The idea is finally catching on in some of Africa’s most developed financial centres – Nigeria is planning to raise some $63m in the first quarter of 2017, the first issuance of its kind in West Africa, while Kenya is also expected to debut on the market this year.

Both will follow in the footsteps of Morocco, which launched a $118m issue in November, and the city of Johannesburg, which launched its first green bond in 2014 to fund solar projects and a fleet of environmentally friendly buses. 

“They are a traditional investment which institutional investors understand, and they are safe investments. We need to mobilise trillions into the green economy, and green bonds are one tool in being able to shift huge amounts of capital,” says Leigh-Bell.

“The downside is that it still requires a significant amount of things in place – transparency, disclosure, bankable projects and assets. There’s a huge challenge with being able to provide investors with solid portfolios they can invest in but on the flipside, when challenges are met, it’s an easy way of connecting the two. It’s about being able to produce a risk profile acceptable to those putting money in.”

Leigh-Bell argues that the Paris Climate Agreement has changed the picture around green bonds, bringing multi-billion dollar pension funds, banks and other investors to a market in which the private sector was “nowhere to be found” just five years ago. Yet the bonds’ future success could depend on whether countries are willing to put in place the kind of safeguards which investors require – from clear-sighted development plans for bankable projects to easing the regulatory burden and investing in critical enabling infrastructure.

The omens in this area are not particularly good. In February, a World Bank report found that Africa continues to have the least developed power policy in the world, with over 70% of its least electrified nations having “barely begun” to implement a policy environment to boost generation, including from renewables.

Many governments have yet to develop a coherent pitch around green economy issues – a 2013 report from the German Corporation for International Cooperation found that workable green economy strategies were largely non-existent in Africa, while the political will to build up such capabilities was lacking. “Is the public policy and regulatory framework aligned with objectives one is declaring as worthy of priority?” asks Steiner. 

“In the renewable energy sector we have seen across Africa an almost overnight change in investment once the regulatory framework allows private power producers to feed into the grid … Kenya clearly demonstrates that once the government has put in place a clear regulatory system, remarkable investments begin to take place.”

Indeed, investors are showing an increasing appetite for Africa’s green economy in countries where government has shown a strong policy lead. In 2015, Africa and the Middle East accounted for $12.5bn of global clean energy investment, according to Bloomberg New Energy Finance, compared with just $1bn in 2004.

Investment was up 329% to $4.5bn in South Africa’s clean energy sector in 2015, the result of a successful renewables auction programme. Solar investments in Morocco, host nation of the Marrakech conference and a keen adopter of green technology, helped haul in some $2bn over the same year, while Kenya, Uganda and Ethiopia received investments of over $100m each. 

“Africa is often at a disadvantage when it has to turn to capital markets, but that’s beginning to change because many investors are seeing that renewable energy is in many ways low risk and high return – a proposition that is beginning to yield returns that are significant,” says Steiner.

Risks and return

That opportunity is driving not only the appetite of foreign investors but also the innovations of African entrepreneurs. In East Africa, M-Kopa Solar has pioneered the deployment of solar kits to individual households, connecting some 450,000 homes in Kenya, Tanzania and Uganda while creating some 2,500 jobs and reducing the dependence on dirty kerosene lightning.

Yet while renewable investments and local knowledge have undergone a remarkable upturn in fortunes in recent years, there is a danger that the sands could once again be shifting beneath investors’ feet. Interest in the green economy has largely been buoyed by waning investment in fossil fuels, partly the result of a plunging crude market from the middle of 2014 that saw prices more than halve and forced governments and investors to diversify.

Now that oil prices have begun a tentative recovery to over $50 a barrel, could investors be tempted to pile back into fossil fuels, urged on by the cash-strapped governments of Africa’s oil giants?

“Why not build renewable infrastructure with oil revenues so you can become fossil fuel independent?” asks Steiner. “A good example of wise leadership is not allowing a short-term bonanza to lead you to not invest in the long-term economy.”

Unfortunately, that’s not a pitch that has always proved attractive to African governments. Meanwhile, President Trump’s threats to pull out of the Paris Climate Agreement are further dampening the good news around renewables just as they appeared to be taking off on the continent.  

The solution may lie in a more flexible introduction of green economy issues, taking into account the circumstances and needs of individual nations. Seyni Nafo argues that the green economy has provoked consternation among countries fearful of onerous emissions targets and threats to their vital industries.

He argues that the UN’s Sustainable Development Goals and the Paris Climate Agreement already offer an agreed path to ‘greening’ and command the support of policymakers.

It may be that that this gradual approach – winning over businesses and government departments with rational long-term economic arguments, aided by a framework of multilateral agreements – is the best way to entrench sustainable green growth on the continent.

“When people talk of a green economy they box it into an environmental issue, but for me it’s a development framework, and every sector of the economy can transition, whether energy or extractives,” says Amis. Convincing governments that ecological awareness leads directly to growth remains the goal, says Steiner.

“I sometimes worry that the green economy is interpreted as some sort of parallel universe. What we are talking about is transition and transformation, and what we have seen in the uptake of green economy concepts is a fundamental realisation that Africa’s greatest assets are green assets […] there is an urgent priority to bring together an appreciation of the ecological foundations of Africa’s economies with the economic and financial analysis that drives development planning.”

David Thomas

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Written by David Thomas

David Thomas is chief features writer at African Business Magazine. He has also been published at the Financial Times, the Wall Street Journal and South Africa’s Cape Times.

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