For three days last week, from June 1 to 3, 2021, the African Development Bank (ADB) and the Association of African Development Finance Institutions (AADFI) hosted a webinar aimed at enlightening stakeholders on the challenges and opportunities facing development finance in Africa. Some of the issues discussed include foreign direct investment, blended finance, as well as an increase in grants and the need for more development finance institutions (DFIs) to start considering more blended finance solutions instead. existing solutions.
Financing for development in general terms, it is the financing of development projects in developing countries, usually by foreign investors and even governments of nations through DFIs. They are often aligned with the specific goals and objectives of the host country. In this case, discussions during the webinar focused on developments that mitigate the impact of climate change on countries. As a result, many projects are oriented towards renewable energies and sustainable projects. Mainly solar power for irrigation and solar powered cold storage facilities across Africa.
General trends in development finance
One of the trends in recent years has been the decrease in funds available to developing countries. Funding available to Africa has declined to $ 45 billion in 2020, down 10% from 2019 according to the World Investment Report 2020. This is expected to decline further due to the impact of the COVID-pandemic- 19 on companies around the world.
Most of the available capital is geared towards green financing and ESG activities. Among these, sustainability and economic resilience are essential. Most business and development activities typically involve some degree of environmental degradation, which sustainability aims to address.
Environmental resilience, on the other hand, arises from the deployment of technologies and economic models that promote a reduced impact on the environment and climate of a region allowing the said region to reach or maintain similar production levels while at the same time limiting the negative impact on the climate. This is mainly achieved through the use of technologies such as renewable energy, recycling and other green initiatives.
As most of the funding on the continent is in need of replacement or nearing the end of its viability, one of the main concerns is how to attract additional funding. These are challenges to which the AfDB and AADFI are particularly well placed to offer solutions.
Just as the world has shown an evolution towards sustainability. Funding for these projects has been a source of concern for stakeholders. Policy makers have expressed concern about the need to replace the funding available to partner organizations. These projects aim to ensure food security, by providing agricultural inputs such as renewable energy – mainly solar grids, irrigation projects and cold storage facilities.
One of the challenges limiting foreign direct investment is the perceived lack of equity capital by local actors who seem to insist on pitching these projects mainly on the grounds of being able to access development funds. To combat this, most DFIs have aligned their strategies on supporting projects that are SDG-compliant and considered bankable while representing an equity contribution from the proposing organizations and being part of the agency’s development program. sponsorship.
Restructuring of the financial component
It is interesting to note that a major challenge in the field of financing concerns the way in which funds are structured or composed. Usually, development finance is a combination of grants, loans, guarantees and foreign direct investment. The challenge stems from a reduction in philanthropic contributions. The WIR 2020 (World Investment Report) also reinforces the fact that donations or philanthropic contributions alone cannot support development in target communities.
In this regard, Stanislaus Deh of ACFA, mentioned the following factors as being responsible for the failure to attract funding:
- Present projects outside the operational scope of DFIs.
- Recommend technology that has not been proven or lacks technical know-how and expertise to manage technologies intended to be deployed for projects.
- Fail to follow approval guidelines.
- Fail to gain buy-in from destination government and national partner organizations.
- Fail to obtain equity contributions from local investors and philanthropic organizations.
Admittedly, these challenges strengthen the position of most DFIs, especially given the decline in IDE during the last years. According to WIR 2020, this trend is expected to reverse after 2021 and increase in 2022.
The case of blended finance
Mixed financing is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development. This type of financing structure allows investors to reduce risk and effectively reduce the cost of projects while ensuring a return on investment for all parties involved. The structure of these agreements also allows for concessions to be granted, allowing access to finance at below-market rates, ensuring that all parties can commit to finance the specified goals and achieve their interest goals. or impact. This also ties in with SDG 13 focused on mitigating the impact of climate change.
The ability of such a structure to reduce the risk of the investments made makes it inherently more attractive to foreign investors who partner with local actors, philanthropic organizations and development banks such as the AfDB to ensure that these projects are properly capitalized and indexed. As such, efforts have been made to measure and monitor these developments over time.
Africa currently receives less than Asia in terms of funding, but it remains a region where the focus has been on development. Most of these efforts focus on renewable energy, climate change and environmental resilience.
Written by Ogodilieze Osaji-Ugo