10 February 2018

East Africa: International Funders Cautious About Risk in Energy Investment in East Africa

East Africa's appetite for energy infrastructure remains high, but international financiers are cautious about the region's political, economic and environmental risk factors.

This was the conclusion from the February 6 to 8 East Africa Energy and Infrastructure Summit (EAEIS) held at the Serena Kampala Hotel.

Attilio Pacifici, head of the European Union Delegation to Uganda, announced that, with mitigated risks, the bloc has financing instruments under its External Investment Plan (EIP) that targets Africa, with sustainable energy being one of its five priority sectors.

"Despite the rapidly rising cost-competitiveness of renewable energy technologies, financing of projects is still difficult in many parts of the world. Transformation of the energy sector requires ambitious policy measures, as well as unlocking capital from private and institutional investors, notably through mitigation of investment risk," said Mr Pacifici.

The EIP is built around three pillars to support areas, sectors and regions where private investment would otherwise not be directed.

Under the first pillar, the EU has two instruments, which include a guarantee fund of €1.5 billion ($1.84 billion) and a regional investment platform with an indicative budget of €2.6 billion ($3.2 billion).

"These instruments together are expected to leverage more than €44 billion ($54 billion) of investments in Africa and in the EU neighbourhood in the next two to three years," Mr Pacifici said.

DBSA

Development banks also consider the perceived risks in East Africa when looking at projects to finance, according to Lungile Mashele, energy specialist at the Development Bank of Southern Africa (DBSA).

The DBSA, which has funded 21 projects, contributing a total of 2512MW to South Africa's national grid, is now looking at projects in Rwanda and Ethiopia because "these are politically stable, and have also been posting impressive growth figures for the past 10 years.

"As a bank we have the mandate to go where no one wants to go, but there is a risk to that. We may pay the price for political risk if elections are not held on time. Then there is economic risk, like unstable currencies, which means there is the possibility that we may not get our money out," Ms Mashele told The EastAfrican on the sidelines of the EAEIS.

The DBSA provides funding in the form of senior debt, mezzanine debt, BEE funding, project bonds, project guarantees and project preparation funding.

According to the bank's annual financial statement dated March 2017, DBSA financed projects to the tune of $1.03 billion out of its total infrastructure financing target of $1.37 billion.

However, DBSA is cautious about funding projects that have the risk of war or putting money into projects where there are long delays in completion, such as lack of transmission lines.

DBSA has also been considering funding energy projects in Kenya, Tanzania and Djibouti; its focus in these countries is currently limited to off-grid solutions.

The bank has discussed funding for six transmission lines of the Kenya Electricity Transmission Company, which are still at preparation stage and yet to undergo social, environmental and legal assessments, Ms Mashele said.

Officials say that under the EIP, there are guarantees against the actual and perceived risks, including those associated with the credibility of the power offtakers.

The risks to be mitigated in the energy sector to create conditions for mobilising private funding and to develop the local capital market include commercial (payment risk, offtaker payment not honoured or offtaker bankruptcy), political and country, legal, and regulatory (change in law, cancellation of licenses, nationalisation, tariff adjustments).

Others are currency risks linked to volatility of local units against the international currencies, as well as climate change and environmental risks associated with droughts, extreme weather and rising temperatures.

Under its second pillar, the EIP offers technical support to local authorities and companies to develop bankable projects, and support to partner countries to improve the regulatory and policy environment.

The third pillar focuses on improving the business and investment climate by supporting structural reforms, good governance and dialogue between public and private partners.

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