Moving Past the Barriers: Investing in Energy Infrastructure in Africa
DescriptionTo generate ideas to expand energy infrastructure investment in the region, the Milken Institute, in collaboration with the U.S. Agency for International Development, convened experts from the public and private sectors for a Financial Innovations Lab in October 2014. The Lab, titled “Moving Past the Barriers: Investing in Energy Infrastructure in Africa,” included senior leaders in private-sector energy investments, multi- and bilateral organizations, and corporations, along with representatives of financial institutions. Exploring ways to improve efficiency in transaction management and widen access to capital, they produced concrete solutions Africa can pursue now to close the significant funding gap.
Lab participants identified a number of barriers to private investment in energy infrastructure, including:
- A shortage of technical competence. Investments currently require intensive expertise in the infrastructure sector in Africa as well as the financial environment in each country. Since structuring bankable deals requires great effort, it takes seven years, on average, to close a project in sub-Saharan Africa
- Lack of robust pipeline with appropriate risk/return pricing
- Absence of track record and history of successful deals. As a result, many deals require a sovereign guarantee or credit enhancement
- High currency/FX risk. Many investors cannot take liquid currency risk in Africa. Typically, hedging is either expensive or unavailable and therefore projects may be unbankable
- High political and regulatory risk. There is no assurance of government continuity or regulatory predictability
The Institute’s report outlines strategies for alleviating the major risks addressed at the Lab and expanding the financial tools to engage the largest pools of institutional investor capital. Among them:
- Developing an independent credit rating agency to provide more security and standardization of infrastructure investment projects
- Identify investors for each level of risk and assemble a portfolio of projects for investors
- Address investors’ concerns regarding technical expertise in infrastructure by creating familiar financial structures
- To address the challenge of investments requiring sovereign guarantees, private-sector investors will work with public agencies to create a guarantee or funding mechanism to reduce credit risk
Results from the Lab, including recommended next steps for implementation, will be published soon. For information, contact Caitlin MacLean, associate director of Financial Innovations Labs, at email@example.com.