Out-Law News 3 min. read

Energy sector ‘key focus for impact investment in West Africa’, says report


West Africa is becoming an increasingly attractive regional market for “dynamic impact investing’’ on the continent, according to a new report.

The ‘Landscape for Impact Investing in West Africa’ (56-page / 1.62 MB PDF) report said the region is a “perfect example of a region where challenges and opportunities collide”.

The report by the Global Impact Investing Network and global development advisors Dalberg, supported by the UK Department for International Development’s ‘impact programme’, said energy, financial technologies and agriculture are key sectors for investment opportunities in the region.

A total of 46 impact investors are active in the region, including 14 development finance institutions (DFIs) and 32 other investors, the report said. Nigeria and Ghana accounts for more than half (54%) of all impact capital deployed in the region.

“As market failures in the provision of public goods, utilities, and financial access remain in the region, there are many opportunities for intervention by impact investors,” the report said. “Energy will remain a key focus for both DFIs and non-DFIs, with DFIs focusing on large projects underpinning national electrification and non-DFIs keenly interested in smaller scale, off-grid energy solutions.”

Investors are also becoming “increasingly interested in innovative combinations of technology and financial services (‘FinTech’) such as mobile money”, the report said.

West Africa is the second fastest-growing regional economy in Africa, after East Africa, with annual gross domestic product (GDP) growth of 6% in 2014, the report said. “The impact investing industry in West Africa is small, but growing”.

Direct impact investments in West Africa between 2005 and mid-2015 amounted to $6.8 billion, derived from 11 DFIs and 26 non-DFIs, the report said. “This is small relative to East Africa, the only other African region for which impact investment data is currently available, (which) received a total of $9.3bn in impact investment over a similar period, despite the region’s GDP being less than half that of West Africa.”

Energy, manufacturing, infrastructure, and financial services “have attracted the most impact investing capital” in West Africa, the report said. “DFIs have invested 65% of their portfolios in energy, manufacturing, and infrastructure. Non-DFIs have invested heavily in financial services, with most of this capital invested in microfinance institutions.”

The report said 84% of DFI capital and 60% of non-DFI capital is deployed through debt. “DFIs make roughly even use of equity and guarantees (6% and 7% of capital deployed, respectively) and use quasi-equity least (3% of capital deployed).” Non-DFIs make “significantly greater use of both equity and quasi-equity (23% and 13% of capital deployed, respectively)”, the report said.

Regulatory barriers in West Africa are “not the most serious concern for investors”, but the report said areas of concern include “high levels of policy uncertainty, inadequate bankruptcy regulation and restrictions on institutional investment into private equity”.

The “main perceived barriers” to impact investment include “a lack of investment readiness of companies, an unpredictable policy environment, difficulty raising capital for fund managers, and macroeconomic and political instability”, the report said. The term ‘impact investing’ in relation to West Africa is also regarded with “considerable scepticism”, because “many investors view it as a new of kind of philanthropy rather than as investing for financial return”, the report said.

However, West Africa still accounts for “a significant share of sub-Saharan Africa’s (SSA’s) foreign direct investment (FDI), attracting an average of 35% of FDI inflow in SSA between 2004 and 2013”, the report said. Nigeria attracted around half of the region’s FDI inflow and “is currently the third largest recipient of FDI in SSA”, behind South Africa and Mauritius.

The start of oil production in Ghana and Cote d’Ivoire, together with “continued political stability and security for Benin and Burkina Faso”, contribute to all four countries’ ability to increase FDI inflows “at a time of regional decline”, the report said.

Last April, the World Bank’s International Development Association announced $200 million of credit to finance a regional transmission network for electricity trading among the Western Africa nations of The Gambia, Guinea, Guinea-Bissau and Senegal. 

World Bank director of regional integration for Africa, Colin Bruce, said regional power trade is “critical in West Africa” and “essential for business development, job creation, income generation, and international competitiveness”.

In June, West African leaders launched an initiative to reform energy sector policies and create “a pipeline of bankable investment projects” to boost access to sustainable energy throughout the region.

China is among key international investors in the region and Africa as a whole. According to the World Bank, FDI from China to Africa in 2013 was estimated at $3.5bn (2-page / 108 KB PDF) and cumulative investment stock at more than $25bn.

Last year, Cote d'Ivoire started work on a major Chinese-backed project to expand the port in the country’s commercial capital of Abidjan. China, which is contributing 85% of the costs of the $1.12bn project, said the aim was to turn the port into a major maritime transport hub for West Africa.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.