Financing the ecological transition in Sub-Saharan Africa

February 05, 2024 Transition énergétique

In Africa, one of the factors moderating the enthusiasm that followed the final declaration of COP 28 is the uncertainty on the ability of the continent to cover the costs of the energy transition combined with those required to cover the need to improve access to electricity. The continent's countries are highly heterogeneous in terms of people's ability to pay, diversification of energy sources, institutional characteristics, political stability, and economic growth potential. There are also major inequalities in access to private and public sources of financing, and in the ability to bear the burden of debt over the long term.


Estimating financial requirements

The African Union's Agenda 2063 for the future of Africa (published in 2020) defends a vision of sustainable development specific to each country, anchored in a common regional perspective. Despite this strong political commitment, the difficulty of finding funding to combat climate risks remains underestimated.

It is difficult to put a precise figure on needs because not only do information sources differ in terms of specific objectives, growth assumptions, technology or speed of implementation, but they also rarely use the same estimation methods. The least dispersed assessment is that of investment needs in Sub-Saharan Africa (S-SA) to achieve universal access to modern energy by 2030, or more prosaically, to give households access to electricity. The figures range from 25 to 30 billion US dollars ($US) per year, or 1.2% to 1.6% of median GDP, depending on growth projections and the foreseeable evolution of technologies. To this must be added the cost of investment to meet non-residential demand on a rapidly growing continent. These additional costs would be in the order of US$50-60 billion per year, but these estimates are more uncertain. In all, we are already talking about more than 3.5% of median GDP per year to meet projected demand.

When we look at the cost of the ecological transition, the figures are more uncertain. According to various international organizations, annual adaptation costs could reach US$50 billion by 2050, and mitigation costs could reach US$190 billion by at least 2030. This represents more than 10% of the region's median GDP per year, in addition to the aforementioned demand costs and the often underestimated investment maintenance costs. Finally, we need to add a minimum amount of US$100 billion per year from now until at least 2030, to compensate for losses and damage linked to climate change in S-SA (around 5% of GDP each year for this period).

The total annual bill would therefore be at least US$400 billion (close to 20% of S-SA's projected median annual GDP). Although there is certainly some double-counting, the orders of magnitude are sufficient to demonstrate the need for a global co-financing effort to meet Sub-Saharan Africa's needs.


Untraceable sums

Despite the political rhetoric, the difficulties of raising the necessary funds are enormous. They are similar to those encountered in financing the Sustainable Development Goals (SDGs), such as access to clean and affordable energy (SDG7) and measures to combat climate change (SDG13). In terms of financing, the COP 28 commitments compete with some of those linked to the SDGs (e.g. sanitation, education and health), which donors are (often) not prepared to acknowledge in public. In the current economic (slower growth) and geopolitical (war in Ukraine and the Middle East) context, the trend for funding development aid is downwards, and away from the target of 0.7% of rich countries' GDP.

Unfortunately, there is no alternative to global co-financing for a region with very limited capacity to generate fiscal resources and sectoral income from public services. All the more so as the region is under pressure from its creditors, who are demanding debt service payments on an average stock of debt in excess of 70% of GDP. The local constraint does not seem to have been fully internalized by global players at COP 28. Participants spoke of rapid changes in financing rules. But details of these changes are still awaited.


The necessary changes in the financing of COPs commitments

While the need for greater compatibility between the financing of economic development and that of the climate emergency is now recognized, we are still left with promises that are insufficiently anchored in robust estimates of the contributions required. The figures remain vague and disappointing, and no new model is emerging capable of attracting private financing to offset the constraints of public sources.

At COP 28, the world's richest countries pledged to support the raising of the US$400 billion a year needed, i.e. a doubling of what Africa as a whole receives annually from all sources and sectors. The amounts currently committed globally (and not just for S-SA) are insufficient to enable the global financing pledges to be met. For Africa as a whole, we're talking about a commitment of 10-20% of needs at this stage.  What's more, the commitment is skewed in favor of adaptation efforts, to the detriment of residential and non-residential energy demand. At best, these amounts are levers to attract other financing.

The list of other potential sources is long and equally poorly quantified. Sovereign debts could be restructured, and future contracts refined to include more generous terms linked to climate debt and sustainable development. Other avenues include redirecting the IMF's special drawing rights. Still others are betting on the creativity of private and public international financial players and their willingness to take risks outside their usual bounds, while internalizing the limits to the cost of private capital that S-SA countries can bear. Ideally, change should promote local capacity to contribute to the necessary transformations, for example, by developing the possibility of relying on local currency debt at rates affordable to local players.

Moreover, for such financing to be useful, sectoral policies that block the rapid use of resources will also need to be modified. For example, public procurement rules imposed by international organizations and energy market regulations are often biased against small local companies. Yet these are very much present, often thanks to NGOs, with technologies that can react more quickly than the big traditional players in the sector. They are essential to the development of mini-grids based on renewable energies, which are quicker to install and often less costly to maintain.


Risk perception and treatment

The reforms will require some experimentation to test their effectiveness in attracting new global and local players. In the case of public procurement, these experiments will need to test new contract-awarding techniques that enable the inclusion of small players, who can quickly become operational in a context of weak governance. In terms of regulation, changes in pricing policies that send clear signals to investors while protecting consumers will need to be evaluated in terms of their effectiveness in raising global and local financing in the shortest possible timeframe.

Without such changes, the dream of universal access to electricity generated with clean technologies will not be realized on schedule. The trade-off between financial viability, whatever the technology, and consumers' willingness to pay will slow down the energy transformation. Analyzing reform options and the details of their implementation is part of the risk management needed to reduce the trade-offs that delay financing. Without awareness of the need for reforms to reduce risk perception, capital flows to S-SA will remain unattainable dreams, as is always the case for financing the SDGs.


Published in La Tribune
Photo: UNclimatechange - Photo by COP28 / Christopher Pike