The use of blended finance as a tool to address risk perceptions and crowd in private investment to develop Africa and achieve the Sustainable Development Goals is on the rise, delegates at the recently concluded inaugural Africa Investment Forum agreed.
Many global investors are still reluctant to invest in the African continent, a major reason why the African Development Bank established the Africa Investment Forum - an innovative marketplace dedicated to advancing projects to bankable stages, raising capital, and accelerating the financial closure of deals.
The Africa Investment Forum took place at the Sandton Convention Centre in Johannesburg, South Africa from 7-9 November, 2018.
Speaking on the topic during one of the many sessions, Lade Araba, Africa Region Representative for Convergence Global Finance said the use of blended finance which has increased in the last five to ten years, now represents US$138 billion globally.
Blended finance employs limited concessional development finance and philanthropic funds to de-risk and mobilize large-scale private capital flows to emerging and frontier markets, resulting in positive financial, environmental and social impact for investors and communities.
This can be an important vehicle to raise capital for Africa's development, especially in financing the Bank's own High 5 priorities: Light up and Power Africa; Feed Africa; Industrialize Africa; Integrate Africa and Improve the quality of life for the people of Africa.
"Data shows that 42% of all of this financing is flowing into Sub-Saharan Africa. There is obviously a lot of appetite into this region but we do need to increase significantly the number of deals that are available," Araba said.
Despite Africa's attractive investment opportunities with high returns, attracting private investment from commercial banks and institutional investors is still a major hurdle. Blended finance has been used to address risk perceptions, create adequate risk-return profiles for investors and encourage investment in new geographies and sectors with limited historical performance data.
The African Development Bank is playing a crucial role in the blended finance space. It is an investor in blended finance structures such as in the African Guarantee Fund and the Africa Local Currency Bond Fund. It is also an arranger of blended finance funds, such as the Facility of Energy Inclusion (FEI) and the Facility for Agriculture Finance in Africa (FAFINA), and is blending concessional climate funds at project and program level to attract private investment, including from local investors.
Jan-Martin Witte, Director for Southern Africa of KfW Development Bank reminded participants that blended finance needs to be accompanied by ongoing reforms. "We need to continue to reform market fundamentals and create an attractive investment climate," Witte said.
Also speaking at the session, Sebastian Schroff, Global Head of Private Debt at Allianz Investment Management added: "We are looking to scale up our investments in Africa, but we need credit enhancement to be able to invest in new markets and technologies, for which blended finance can provide solutions."
This is exactly what carefully customized funds can achieve, according to Astrid Manroth, Director, Delivery and Impact and Chair of the Blended Finance Task Force at the African Development Bank.
"In the energy space, we have designed blended funds and programs with the EU, Nordic donors and philanthropy to provide debt finance for energy access companies, including distributed energy service companies. This also helps local banks to provide local currency loans to these companies," Manroth said.
In terms of instruments, guarantees can play an important role in mobilizing private finance for development. "SIDA has supported a range of blended finance structures through its flexible guarantee instrument" said Mattias Granquist, Manager at the Swedish International Development Agency SIDA. "Our blended finance capital structure allows us to provide guarantees to facilitate SME finance in Africa at affordable rates", added Felix Bikpo, CEO of the African Guarantee Fund.
Also at the Forum, two dedicated boardrooms for blended finance investment opportunities were held, meeting with strong interest from investors.
The Africa Investment Forum is an initiative of the African Development Bank organized in partnership with Africa Export-Import Bank, African Finance Corporation, Africa50, Development Bank of Southern Africa, European Investment Bank, Islamic Development Bank and Trade and Development Bank.