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25 Feb 20

Blended finance – the key to bridging Sub-Saharan Africa’s infrastructure gap?

Blended finance – the key to bridging Sub-Saharan Africa’s infrastructure gap?

Blended finance transactions targeting SSA by sector

Figure 1: Blended finance transactions targeting SSA by sector

Convergence's latest Data Brief explores how blended finance approaches have been deployed in Sub-Saharan Africa (SSA) to date. According to the Convergence database, there have been 216 blended finance transactions targeting one or more countries in SSA, representing an aggregate volume of up to $45 billion invested in full or in part in the region. Energy is the most commonly targeted sector in SSA, accounting for 30% of all transactions. Overall, the Brief finds that 41% of blended finance transactions targeting SSA have been in energy or in (non-energy) infrastructure. Since energy infrastructure accounts for 72% of blended finance transactions focused on infrastructure globally, Convergence captures energy as a separate sector.

Infrastructure financing is a priority

SSA’s development challenges are well known and are especially acute when considering the region’s infrastructure needs. Up to 600 million people in SSA still lack access to electricity, with the continent facing an annual infrastructure financing gap of $68-108 billion, and an urban population of 472 million people set to double over the next 25 years. At the same time, SSA is among the regions that are most vulnerable to climate change-induced poverty, with annual adaptation costs across the continent potentially reaching $100 billion in a worst-case mid-century scenario of a 4 °C global warming.

However, the region’s ability to attract global commercial financing to tackle these challenges is hampered by the high perceived risks of investing and a shortage of investable opportunities of scale. The region’s infrastructure gap is largely greenfield, and thus suffers from higher perceived risk, being relatively unattractive to institutional investors who prefer the stable yield and inflation-hedge of brownfield infrastructure assets.

Bridging the infrastructure gap with blended finance

MDBs and DFIs should lead the way in financing and de-risking the earlier stages of large infrastructure projects in SSA and, where needed, using blended finance instruments (such as concessional capital, guarantees and risk insurance, technical assistance funds, and design-stage grants) to make infrastructure assets’ risk-return ratios more attractive to private investors.

In other words, blended finance can make unattractive greenfield projects investable and guide commercial capital towards sectors like transport, water and sanitation, information and communication technology, and clean energy.

There is increasing awareness of blended finance’s potential to address the region’s infrastructure gap. For example, the UK recently partnered with five African countries to design a new project development facility focused on developing sustainable infrastructure projects across Africa that will ultimately be commercially investable.

However, blended finance is not a panacea. As with the case of the Emerging Africa Infrastructure Fund, a blended multi-donor fund with an 18-year history of providing financing to private infrastructure projects across Africa, mobilizing institutional investors can take time and largely hinges upon the patient establishment of a track record. Indeed, blended finance should be complemented by reforms that strengthen the investment climate, while deepening local capital markets.

A need for local investors

To date, International Finance Corporation (IFC), the Netherlands Development Finance Company (FMO), and the African Development Bank (AfDB) have been the most frequent investors in blended finance transactions targeting SSA. Local investors have not been as active as their foreign counterparts in SSA.

Investors in blended finance transactions targeting SSA by number of investments Figure 2: Investors in blended finance transactions targeting SSA by number of investments

Increased activity from local DFIs could mobilize more local investors in SSA. These local investors could then play an important role in catalyzing further investment in the region by providing not just the financing to bridge SSA’s infrastructure gap, but also a reassuring presence to foreign investors.

SSA-domiciled investors in blended finance transactions targeting SSA by number of investments Figure 3: SSA-domiciled investors in blended finance transactions targeting SSA by number of investments

As blended finance continues to build its track record in the region, strategically developing scalable, de-risked opportunities for both local and international investors, it has great potential to play a critical role in boosting financing for infrastructure in SSA.

Become a member and read the full brief.

About the Author
Andrew Apampa, CFA

As a Senior Associate, Andrew is responsible for developing Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions and developing blended finance trends analysis and benchmarks. Prior to joining Convergence, Andrew worked at the African Private Equity & Venture Capital Association (AVCA) as a Research Associate. While there, Andrew inaugurated the Special Report series, publishing in-depth studies on thematic issues within African private equity, such as political and currency risk in African PE, and the rise of the private credit industry in Africa. Prior to joining AVCA, Andrew worked at HSBC as an Emerging Markets Equity Strategist, where he published reports focused on investing in frontier equity markets. During his time at HSBC, he also worked on the European Equity Strategy team and the Global Research Marketing team. Prior to his time at HSBC, Andrew was at the University of Cambridge, where he completed his master’s thesis on protest and mobilization in Sub-Saharan Africa. He is a CFA charterholder.

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