Electricity for all in Africa: Possible?

By Bakary Traoré, Economist, Sébastien Markley, Statistician, and Ines Zebdi, Research Assistant, OECD Development Centre 1 


Explore the 2017 African Economic Outlook: Entrepreneurship and Industrialisation in Africa for more on this subject


Electricity-in-Africa-shutterstock_563620138For decades, access to electricity has been a serious challenge in Africa. It still is. 600 million Africans are not connected to an electrical network. African businesses cite electricity amongst the two most severe constraints on their operations (Enterprise Surveys, 2016). Twenty-five of the 54 countries in Africa, including Nigeria, South Africa, Ghana and Senegal, deal with frequent power crises characterised by outages, irregular supply and surging electricity costs. These are symptoms of insufficient generation capacity and a lack of infrastructure.

Despite these sobering facts, a number of recent initiatives signal that major improvements may be underway. The impetus to act is driven by the benefits Africa can reap by investing in electrification. Such benefits go far beyond direct job creation in energy infrastructure, as important as that is. Several pieces of evidence (Jimenez [2017], Torero [2014], van de Walle et al. [2013]) suggest that household electrification also increases job opportunities by carving out more time for work and enabling rural micro-entrepreneurship. We see three reasons for hope that Africa is on the path to greater electrification – provided certain conditions are met.

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Broadening financing options for infrastructure in Emerging Asia

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By Kensuke Tanaka, Head of Asia Desk, and Prasiwi Ibrahim, Economist at Asia Desk, OECD Development Centre 


Learn more about this timely topic at the upcoming
1st International Economic Forum on Asia
Register today to attend on 14 April 2017!


Kensuke-Prasiwi-AsiaForumAgreeing on the need for new infrastructure is one thing; finding a sustainable way to finance it is another. According to the ADB, an estimated USD 26 trillion (or USD 1.7 trillion per year) will need to be invested in infrastructure in its developing member countries1  between 2016 and 2030 if these economies are to maintain their growth momentum, eradicate poverty and respond to climate change2  .Given the scale of investment needed, countries in the region will not have sufficient funds to meet demand. Indeed, financing infrastructure investment has been a considerable challenge for the region. Political factors can further complicate financing when they lead to the inefficient allocation of public funds. How best to finance infrastructure is, therefore, a key concern for policy makers in the region.
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How China’s Rebalancing Affects Africa’s Development Finance … and More

By Helmut Reisen of Shifting Wealth Consulting and former Head of Research at the OECD Development Centre

 

Africa-globe2015 has been a challenging year for Africa. Average growth of African economies weakened in 2015 to 3.6%, down from an average annual 5% enjoyed since 2000. Total financial flows have decreased 12.8% to USD 188.8 billion, including UNCTAD estimates for foreign direct investment. Africa´s tax-GDP ratio tumbled to 17.9%, down from 18.7% in 2014.

Three core factors have underpinned Africa’s good economic performance since the turn of the century: high commodity prices, high external financial flows, and improved policies and institutions. Now, China´s decline in investment and rebalanced growth is depressing commodity prices and producing headwinds for Africa. Such macroeconomic headwinds for net commodity exporters also imply that Africa’s second pillar of past performance — external financial inflows — have suffered as well.

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How will the world raise the $4 trillion needed to pay for the SDGs and can philanthropy help?

By Sam Parker, Director, Shell Foundation – an independent charity

If the global community doesn’t find a way of increasing available finance by a factor of ten, reaching the Sustainable Development Goals (SDGs) remains a pipedream. Philanthropy is well placed to make a critical contribution by helping to trigger the massive increase in private capital. This is more critical than ever, now that the world has made such a fanfare about achieving the SDGs by 2030.

Meeting the SDGs will cost $3-$4 trillion a year of public and private money over the next 15 years. That is roughly 15% of annual global savings, or 4% of world GDP. Western governments promise to provide 0.7% of GDP in aid, and in fact deliver a third of that. Current annual SDG-related investment is around $1.4 trillion, implying a shortfall of $1.6-$2.6 trillion. In power alone, annual investment is around $260 billion, compared to the $630-$960 billion needed. Discussing deployment of funds that do not exist is fantasy.

It is now recognised that the shortfall must come largely from the private sector. In 2015, I heard senior UN officials, presidents and leaders of monetary financial institutions all concede that government funds are clearly insufficient, and that private capital must be mobilised if we are to stand a chance of reaching the goals. This is a shift in thinking. At the Millennium Development Goals planning meetings in 2000, there was little mention of the private sector and virtually none of philanthropy.

For new enterprises, we are seeing the first signs of material scale. Shell Foundation – an independent charity – has several partners, for example, who are now exceeding $50 million in annual revenues. However, for start-up enterprises to make a difference to the SDGs, we need to learn how to facilitate the growth of multiple enterprises simultaneously, whilst catalysing demand growth. In other words, we need to learn the art of market building. No plane will take off without a clear runway; no business will grow without a supportive market environment. Few demonstrated approaches to market building exist, and this remains a key challenge for philanthropy today.

So how should the finance gap be filled? Whilst the system has a lot of money, it is generally not the right sort of finance for stimulating the private sector.

For start-up social enterprises, there is an acute lack of early stage patient capital. According to the 2014 Global Impact Investment Network survey, of the $10 billion of impact investment, a mere 9% was seed stage. The CEOs we support spend two-thirds of their time on fundraising, rather than on other aspects of their business, like marketing, staff development, systems, finance controls and governance. Building start-ups needs plenty of early-stage grant funding. It is curious why social enterprises are expected to become profitable so quickly without the grant-support that most new commercial businesses enjoy.

While building new enterprises will ensure the pace of innovation, larger companies have the ability to take proven models to scale quickly and therefore have an equally critical role to play. For large multi-national companies (MNCs), it is often difficult to secure support from public institutions that are nervous about being perceived as benefitting private interests. I believe the untapped opportunity is huge to better leverage the power of MNCs through public-private joint ventures to accelerate progress towards the SDGs.

Philanthropy has a key role to play in building the new generation of financial products that are needed. We have seen promising results already from our portfolio. An innovative tiered capital structure has allowed small – and medium – enterprises (SME) financier Grofin, a Shell Foundation partner, to include different funders with different risk return appetites in a single fund for African SMEs. We have used a range of grants, convertible debt, loans, first-loss guarantees and equity at different stages of growth with companies like d.light, M-KOPA, Intellegrow and Envirofit.

Increasing the availability of all categories of finance is needed. Financial institutions with a mandate to contribute towards the SDGs need to offer the full range – not just the lower risk end. We won’t reach the SDGs if big money only invests in de-risked opportunities. How many planes would take off if passengers were only willing to pay for the latter stages of the flight?

More early-stage grants for start-ups, more grants for building supportive market environments, more mezzanine debt for mid–sized companies with limited track records, consumer finance targeting low income customers, more use of public funds in joint ventures with large corporations, tax incentives for critical technology and components, and government guarantees to local banks offering commercial credit to local entrepreneurs are needed. This is the transformation that is needed.


 

This article should not be reported as representing the official views of the OECD, the OECD Development Centre or of their member countries. The opinions expressed and arguments employed are those of the author.

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