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This article is part of a series produced in collaboration with the African Development Bank in light of its sixtieth anniversary. Please visit our dedicated portal to read about the Bank’s history and its activities on the continent.
With thirty African countries formally endorsing Mission 300 at the recent Africa Energy Summit in Tanzania, the race is now on to provide energy access to 300m Africans by 2030. The success of this ambitious initiative – which is backed by the African Development Bank, the World Bank, the Rockefeller Foundation, and other development partners – hinges on how effectively African governments can collaborate with the private sector to transform the power sector.
Partnerships with the private sector are essential not only for securing financing but also for bringing in the technology and expertise required for a transformation of this scale. This underlines the vital need for policymakers in Africa’s power sector to intensify efforts to de-risk the sector and make it more attractive to investors.
Reforms to promote financial sustainability
According to Wale Shonibare, the African Development Bank’s director of energy financial solutions, policy, and regulation, the endemic “lack of financial sustainability” facing most African public utilities is one of the major issues that policymakers need to urgently tackle in their power sector reforms. This will help reduce the sector’s reliance on unaffordable subsidies.
“Most of Africa’s public utilities are in financial distress – they struggle to cover their operating costs and cannot finance the required capital expenditure to maintain their operations, thus forcing them to rely on public subsidies,” he stated.
Shonibare also highlighted the need for reforms aimed at ending political interference in Africa’s energy sector. “Regulatory authorities are subject to political interference in most African countries, which affects their decision-making and ability to implement policies that support long-term sector development,” he pointed out.
Innovative financing key
According to Shonibare, development partners also have a crucial role to play in mobilising private capital. Multilateral development banks and philanthropic entities, he said, can catalyze private capital for the energy sector through targeted financing instruments, risk mitigation tools, technical assistance, and policy advocacy.
He stressed that innovative instruments to mitigate currency risks will be particularly instrumental in attracting additional private investments in Africa’s energy sector. Foreign currency volatility and convertibility risks usually undermine the affordability of privately financed power projects.
“Most of the financing available for energy projects today is in hard currency, which is not always sustainable because energy services are paid for by local populations in local currencies, thus resulting in a currency mismatch occasioned by the volatility of local currencies against international hard currencies,” he noted.
Leveraging critical minerals
A study by the African Development Bank and KPMG South Africa found that the continent can leverage its abundant reserves of critical minerals to decisively address currency volatility risks. Launched at the Africa Energy Summit, the study noted that African countries can overcome foreign currency volatility and convertibility risks by pooling their mineral resources into a “non-circulating currency” backed by a diversified basket of Africa’s critical commodities.
“Africa’s green energy future depends on unlocking innovative financial solutions that empower the continent to harness its vast mineral wealth. The proposed currency convertibility mechanism will play a crucial role in stabilising investment flows and accelerating sustainable development,” Shonibare said.
“The demand for critical minerals will continue to grow exponentially over the next 30 years, and Africa’s role in the global energy transition cannot be overstated,” said Auguste Claude-Nguetsop, partner and head of financial services at KPMG Southern Africa.
“By leveraging Africa’s resource wealth, we can create an environment that attracts investment at lower costs and accelerate infrastructure development,” he added.
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