Africa: $250bn funding gap needed to meet Paris agreement, private sector can fill hole

By Musinguzi Blanshe
Posted on Tuesday, 4 October 2022 18:53

Protestors gather outside court as a court case gets underway concerning South Africa's failure to tackle toxic levels of air pollution produced by burning coal, in Pretoria, South Africa May 17, 2021. REUTERS/Tim Cocks

With the world racing to achieve the Paris climate agreement target of reducing global emissions by 45% before 2030, Africa is in dire need of financing, a study by Climate Policy Initiative says.

The continent’s funding requirement is estimated at $250bn yet it receives about $29.5bn. Experts say countries should create a regulatory environment that can entice the private sector to fund their climate agendas.

The study figures are a computation from nationally determined contributions that countries across the continent have come up with to cut emissions and adapt to climate impact as well as inflows from international financial institutions and internally generated funding on the continent.

For every dollar invested in climate on the continent, 80 cents come from international financial institutions, 14 cents from the private sector and about 4 cents from governments across the continent, whose contributions are hard to track due to data shortage.

The study focused on regional financing, revealing that the Southern African region bears the largest financing gap in absolute terms. “This is mainly attributed to the high climate finance needs identified by South Africa alone — $107bn annually, combined with one of the lowest regional levels of climate investment,” it says.

Countries in Central and East Africa face the largest climate investment gaps as a percentage of GDP (about 26% and 23% respectively), the study says, while North African countries face the lowest climate investment gaps of 3% of GDP. 60% of Africa’s climate financing is concentrated in 10 countries: Egypt, Morocco, Kenya, Nigeria, Ethiopia, South Africa, Côte d’Ivoire, Tunisia, Ghana and Mozambique. These countries get the lion’s share because they attracted nearly all private finance due to their “more developed financial markets.”

A better regulatory environment

Mark Napier, executive director of Financial Sector Deepening (FSD) Africa and a former investment banker, tells The Africa Report that there is a need for a better regulatory environment that can incentivise the private sector – both on the continent and internationally – to fund Africa’s climate agenda.

For instance, he points out that in regions, such as Asia and Latin Africa, private funding makes up almost 50% of climate financing. “Countries need to put in place regulations for issuing green bonds that would be a good way to demonstrate to the private sector that these countries are ready for investment,” he says.

Tax incentives need to be revisited in most countries to make them competitive or preferably advantageous to investment in renewable energy.

Napier says countries should also reform fiscal incentives to attract more green funding. For instance, he says, if an investor for renewable energy is looking for investment opportunities and finds that in a certain country, the tax system puts him at a massive disadvantage to investors who are importing heavy fuels, he will think twice before making any commitment.

“Tax incentives need to be revisited in most countries to make them competitive or preferably advantageous to investment in renewable energy,” he tells The Africa Report.

Rather than looking at commercial banks on the continent, Napier thinks there is also a need to tap into Africa’s pension and insurance fund for climate financing. RisCura, an investment firm, estimated sub-Saharan Africa’s pension fund at $350bn. “We must always remember that there is money in Africa and there is a growing pool of institutional capital in Africa,” he says.

Debt vs grants

More than a half of climate finance that was tracked is debt, the study says. With high debt levels among several African countries and concurrent crises, such as the Covid-19 pandemic, food insecurity, and exchange rate vulnerabilities, the study warns that many African countries will not be able to provide domestic public climate finance as had been estimated.

Thus, the study says, the $250bn funding gap for the continent “must largely come from international public sources and domestic and international private actors”.

African leaders have been making clarion calls to the developed world to fulfil pledges they made to help finance the continent’s climate needs. “At COP15 in Copenhagen, over 12 years ago, the world’s richest countries promised $100bn every year from 2020 to 2025 to help developing countries affected by climate change adapt,” Sameh Shoukry, Egypt’s foreign affairs minister and COP27 president designate, said recently. “The world has fallen short of these pledges.”

Napier tells The Africa Report that debt is an inevitable part of Africa’s climate financing equation. However, he says, debt financing that Africa is receiving is split almost evenly between concessional terms and debt that is priced at almost commercial rate.

It’s problematic, he says, when international development financial institutions and multilateral development banks that should be championing climate investment lend to the continent at near commercial rate for climate funding. “African govts are quite […] indebted. Is it right that multilateral banks should be continuing to support governments with that debt? They need to be careful not to overload African governments with more debts.”

A risky continent

Napier says international investors, including multilateral institutions, still regard Africa as a very risky environment. This, he says, requires more risk mitigation, partial guarantee structures as well as the use of blended  financing, especially for climate finance.

“Development finance institutions need to take much more risk in supporting investment in the green economy by agreeing to accept a much lower return on the money they are putting in,” he tells The Africa Report.

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