Alliances, Risks and Investment Trends in Africa

Jason B. Parker, Partner and Project Development Lawyer, Hunton Andrews Kurth.

Energy Capital & Power spoke with Jason B. Parker about the recent Alliance for Green Infrastructure in Africa, global investment trends in the modern context and how Africa can reduce the perception of risk .

How will the European Union’s (EU) increased focus on Africa have a tangible impact on infrastructure development and investment?

First by increasing competition for investment in infrastructure projects. European countries are already largely active in infrastructure projects across the continent, but have collectively been overtaken by Chinese investment. With China expected to withdraw its investments in Africa, increased attention from the EU could fill the void. It depends on what happens in Ukraine, which potentially changes the dynamic. This is mainly due to the fact that Russia supplies large volumes of gas to Europe. If this were to be reduced as a result of the war, then what we might expect is that Europe will refocus its energy – pun intended – on finding alternative sources of gas. What does this mean for Africa? Does this mean that places like Mozambique will attract more interest? Could other places like Zambia and Zimbabwe see renewed EU interest in commodities? The EU’s focus on infrastructure may be limited to gas and possibly LNG export terminals.

What role will global alliances and programs such as the Alliance for Green Infrastructure in Africa play on the continent?

A great one, as they have been doing for over 20 years. What is important in 2022 is that these alliances are supported by African institutions. They are formalized, conceptualized and executed by African institutions, inviting European allies to the table to contribute resources, time, energy, in exchange for what will hopefully be a beneficial return for those allies.

With regard to the EU’s decision to label certain gas projects as green, will more attention be paid to the development of Africa’s gas industry, or will renewables continue to offer attractive returns? for green investors?

Given the war in Ukraine and Russia’s role as a major gas supplier to Europe, the focus will be on alternative sources of gas. I anticipate there will be continued investment in oil and gas and even coal, despite efforts to redirect all routes from carbon-emitting technologies to renewables. Nevertheless, we will see a more diversified portfolio with green projects and renewable energy for a higher percentage of the overall investment. I don’t know if calling the gas green will have an impact in Africa. I think global LNG and commodity markets will have a bigger impact than anything else.

What large-scale green infrastructure projects are currently underway in Africa?

What stands out are the many solar projects across the continent. Solar power plants between 5 MW and 50 MW are being built as fast as they can. What also stands out is South Africa’s trend towards building concentrated solar power (CSP) projects. These CSP projects – being technically complicated – are not currently being built in large volumes globally, but South Africa has had some success in this area. South Africa’s projects, how they were funded and where they were built provide a model for other high radiation (i.e. very sunny) locations.

What are some of the challenges that international investors may face in terms of project start-up and resilience?

You have to consider the perception premium (not a term I coined). We always say that projects in Africa are high risk, that it is a difficult and risky environment, but that is a perception more than a reality. Yes, there have been civil wars and changes of government, but that does not mean that Europe and the States have not experienced the same thing. America just had an unprecedented challenge to change of government, Brexit happened, the invasion of Ukraine, there’s a litany of politically risky events happening all over the world. But Africa, in particular, is penalized for its infrastructure investments because of political risk. When I work on deals, to be considered bankable, they have to be structured to be politically risk-proof, going so far that when a developer defaults they walk away with their equity and the country has to buy the remains of the project. The perception that default risk and political risk are higher in Africa only adds to the complication of structuring deals, making them difficult to get off the drawing board.

How can African actors change this perception?

First, discuss credit ratings and how credit ratings are assessed. There should be more regulatory oversight in Africa to ensure debt is rated fairly and without a collection premium. Second, use more money from within Africa. Available pensions that should be deployable in countries, subject to appropriate prudential and other safeguards. Third, information about the success and failure of projects is very useful. Project information has improved dramatically over the past 10 years, but there is still room to grow.

What role will international companies play in Africa?

There is no way out in dealing with a globalized society and economy – from financing to equipment to training and technology transfer. All of this is essential for building pipelines and long-term projects. This is global and also applies from Cleveland to Kampala. Frankly, African countries can do a better job of leveraging the relationships sought by the EU, China, Japan, US, etc., and creating investment pipelines on their terms.

How can African countries ensure that they are both attractive and competitive for increased participation by international companies?

One of the ways in which African countries can improve the attractiveness of investments is to ensure that there is clear communication in terms of what the government wants to achieve and how the plans achieve this, in terms of investments in infrastructure. Public-private partnerships (PPPs) are on the rise, as they should be. When a government establishes clear PPP regulations and policies regarding the deployment of PPPs, and communicates with investors and entrepreneurs, and then those governments stick to the plans, PPP projects will have a better chance of being funded and to materialize. Continuity and communication are what make a country attractive and competitive and what will make certain countries stand out.

What is your outlook for 2022 regarding the green energy landscape in Africa? Do you foresee an influx of new developments in the wake of the energy transition?

If you had asked me the question five months ago, I would have had a clear answer. But everything has changed in the last two years. Between COVID-19, government balance sheets, inflation, shipping costs and war, it’s hard to say what the landscape for green energy in Africa (or anyone) will be like. I can say that gas will be predominant in the coming year despite the existential threat of climate change. Europe will have to fill a supply gap before next winter. Next year will be difficult to predict.