AFC asserts that Africa is pivotal to the global energy transition.

While maintaining a pragmatic perspective on how to leverage countries’ existing resources for economic development, the organization is at the forefront of efforts to build capacity and raise capital to propelled the continent’s energy transition. Nonetheless, it must also contend with priorities established by some of the world’s largest emitters in other regions, which dictate the parameters for objectives and approaches.

According to the white paper Roadmap to Africa’s COP: A Pragmatic Path to Net Zero, which AFC published last year, Africa has a unique experience. “Frequent flooding, severe heatwaves, and droughts, among others, have besieged this region, causing fatalities and substantial economic losses.” On the contrary, Africa’s energy deficit is so severe that its contribution to greenhouse gas emissions is negligible, amounting to less than 4%.

The continent, according to Zubaira, must take the initiative and set a new course for development. Africa should embrace novel financing models, or “innovate,” as the white paper puts it, in order to access domestic capital from pension and insurance funds, among others.

Innovative solutions, including de-risking mechanisms, first-loss guarantees, and credit enhancement tools, can accomplish this. By utilizing these instruments, AFC has inspired institutional investors to make calculated risks and promote local investment. The AFC has successfully implemented this strategy; however, it is imperative that a much broader implementation occur throughout our continent.

Zubaira believes that in order to increase impact, public-private partnerships must be significantly more robust. Data is vital. Better data facilitates the reduction of project risk and will inspire increased investment.

Concerning our approach to value chains on a continental scale, he asserts that a mentality shift is necessary. Batteries and electric vehicles present a distinctive prospect for the African continent to reassess value chains and generate and amass substantial wealth in a sustainable fashion. However, this is only possible via concerted efforts and intentional policies. For this reason, AFC has funded feasibility studies in this industry, which have provided it with a distinct competitive edge over its rivals.

How to define a just transition

The continent, according to Zubairu, must utilize its resources to produce the energy necessary for progress. According to him, Africa’s climate challenges pose a threat to the continent’s gross domestic product of up to 35%; this figure will continue to rise so long as the region does not develop climate-resilient infrastructure. However, he adds that the continent also has the chance to capitalize on the situation and establish an ecosystem of adaptation.

“Access to energy that is affordable and does not impede economic development, as well as energy access that permits the resolution of critical challenges pertaining to financing and adaptation concurrently with economic development, is what we consider to be a just transition.”

“When evaluating opportunities and initiatives, we attempt to construct an ecosystem along value chains that facilitates carbon neutrality over time.” The emphasis, however, is on economic development.”

The pan-African organization, which is based in Lagos, has urged African leaders to define the continent’s role in combating global warming through a unified narrative with the rest of the world. The global community is focusing on this engagement in anticipation of the COP28 conference, which is scheduled to take place in Dubai prior to the conclusion of 2023.

A three-pronged strategy

By means of its investments and project advisory division, AFC approaches climate change assistance for Africa from three angles.

It is implementing measures to reduce emissions from shipping and other modes of transportation by localizing production; reconstructing infrastructure to ensure its resilience to climate change and to attract investments that support renewable energy plants and reforestation; and utilizing financial innovation to mobilize funds for these initiatives.

AFC is advancing rapidly in the development of renewable resources, expanding its presence with the acquisition of Africa’s largest renewable company, Lekela, in partnership with other entities. The company presently has a portfolio of 10 GW of new projects. While renewable energy sources are the long-term objective, Sanjeev Gupta, the Executive Director for Financial Services at AFC, asserts that Africa must progress with the resources it presently possesses.

The European Commission’s declaration that natural gas is a form of green energy and an essential transition fuel in the process of decarbonization has bolstered the continent’s aspiration to utilize its vast gas reserves as a transitional energy source to support industrialization.

The AFC white paper asserts that industrial development powered by natural gas can be carried out without significantly contributing to global carbon emissions, considering that substantial portions of Africa have already achieved net zero emissions.

However, not everyone accepts gas as a transitional fuel, according to Sanjeev Gupta, and this can have repercussions on the funding of initiatives utilizing this resource.

“By assisting nations without access to oil and gas in the development of renewable energy, we are contributing to the reduction of their import costs.” “The debate surrounding energy and gas is more complicated,” he stated.

Environmental strategy

According to Sameh Shenouda, Executive Director and Chief Investment Officer of AFC, the organization has provided financial support for energy initiatives that some may not initially perceive as environmentally friendly, but it adheres to a more comprehensive approach in this matter.

The provision of $300 million in senior debt to Dangote Industries Limited to partially finance the construction of its 650,000 barrel per day petroleum oil refinery is one example. “Because African nations possess a variety of resources, we evaluate which investments are prudent for the continent based on the conditions on the ground.” Wind and solar energy are abundant in areas where renewable energy is logical. However, he asserts that alternative perspectives exist regarding this matter.

“Gas is abundant along the west coast of Africa; therefore, there is no valid reason not to invest in gas.” It is logical to allocate investments towards Nigeria’s abundant oil and gas reserves; in this regard, we have undertaken the construction of refining capacity.

By refining its own fuel instead of exporting crude oil and importing fuel, Nigeria can effectively mitigate substantial emissions associated with shipping.

Similarly, AFC, in partnership with Gemcorp and Afreximbank, supported the Cabinda oil refinery in Angola, which cost $335 million. In addition to fuel imports and crude oil exports, Angola. Supporting the refinery will result in a substantial decrease in these imports, leading to financial savings as well as reduced shipping emissions.

“Import substitution is an effective method for reducing greenhouse gas emissions associated with shipping and it enables the creation of more employment in the local economy,” asserts Zubairu. It also presents an opportunity to expand operations to satisfy the demand of neighboring regions as well as the local community.

Deals involving oil refineries are one facet of this. Transportation is an additional factor. AFC is the main developer of the Lobito rail project, which intends to construct a direct line between the copper-rich region of Zambia and Lobito’s port in Angola. This will facilitate the direct transportation of goods to the United States via the Atlantic Ocean, bypassing the current route via the Indian Ocean and Southern Africa.

AFC is also concerned with upsetting Africa’s customary trade patterns, which trade in manufactured goods and export unprocessed materials. By integrating processing and manufacturing into sustainable circular economies, it will be possible to transform this by fostering the growth of local industries.

At present, the proportion of Africa’s food production that undergoes processing prior to export stands at a mere 20%. AFC supports special economic zones in a number of African nations in an effort to increase the value-added content of African commodities prior to export.

“In brief,” Shenouda explains, “we are identifying the most suitable resource in each nation and seeking innovative, non-traditional, and adaptable approaches to combating carbon emissions.”

“We are capable of accomplishing this due to our comprehensive understanding of the terrain, necessary conditions, potential, and constraints of each country. We have experience and a solid grasp of Africa.

Derisking endeavors

By delegating project-related risks to its own equity capital in the beginning and pursuing debt financing when the venture becomes commercially viable, AFC effectively mitigates project risk.

“Debt financing can take over a year to complete, and the project finance procedure can be lengthy,” says Shenouda. Merely convening a meeting with three to four institutions can be a formidable task. Therefore, bringing our equity forward in the outset expedites the initiation of projects.” He provides the October 2023 inauguration of AFC’s 60 MW Djibouti wind project, for which the company executed an all-equity transaction.

After the enterprise commenced commercial operations, it sought debt financing through the market. Lenders are currently forming a queue in order to inject capital into this operational asset that has been de-risked.

However, according to Gupta, market financing places the institution in a position where it must satisfy the demands of commercial lenders. This necessitates compliance with established policy guidelines and regulatory requirements, as well as adherence to environmental, social, and corporate governance (ESG) principles.

According to him, the preferential access to those markets is a result of AFC’s membership in 42 states; however, the organization must still ensure that initiatives are structured in a policy-consistent and politically untouchable manner. “Without that, it would be impossible for us to function.”

It is crucial to maintain AFC’s equilibrium as a public-private partnership. He asserts that while development finance institutions require public sector support, their success is also contingent on the rigor of the private sector.

However, capital-raising in Africa continues to be difficult due to the region’s reputation for high risk. “International sovereign funds, pension funds, and insurance funds allocating even 1% of their resources into Africa would be extraordinarily beneficial,” says Shenouda. That is not taking place. Not even funds from Africa are doing so.

He contends that a dearth of understanding regarding the continent and erroneous risk perceptions are factors that diminish the desire for financial support for Africa’s development. AFC, on the other hand, is capable of identifying and mitigating potential dangers in Africa. “From the outside, it is simple to determine whether or not an activity is excessively hazardous. In addition, we exercise prudence when selecting sectors to invest in.