Last week I was speaking in a webinar hosted by the African Development Bank on funding of the National Determined Contribution (NDC) by the private sector in Africa. In 2015, the Paris Agreement required all signatory countries to keep global warming below 2°C through the submission of NDCs. The estimated cost for the 54 African countries to meet their NDC is about $1.2 trillion by 2030. More than 75% of this budget will have to come from the private sector which requires the guidance of private sector players towards opportunities for bankable and green investments on the continent.
Private sector is a key pillar in supporting the implementation of NDCs in the African continent through investment in sectors such as agribusiness, commercial forestry, transport and infrastructure, construction sector and services sectors. Other sectors that present tangible results will be renewable energy and energy efficiency, waste and water management, waste and irrigation, sanitation and finance sectors.
There has been some traction in the recent years where NDC-aligned projects are being implemented in different sectors and regions of Africa by large private companies, Small and Medium-sized Enterprises (SMEs) and start-ups. Unfortunately, there is still insufficient access to climate funds where a vast majority of private companies in Africa have had little success in accessing dedicated climate funds and concessional green loans.
The procedures and requirements to access these funds remain a big challenge and in turn limit private sector involvement and financing of NDC implementation. Another challenge is lack of knowledge and limited skills on climate change within the private sector. Boards and top managers do not have in-depth knowledge of accessing the opportunities as well as de-risking smart investment and financial instruments to support the continent’s resilience and transition towards low carbon economy.
According to the AFDB, the top recipients of climate finance include Morocco for North Africa, South Africa for Southern Africa, Democratic Republic of Congo for Central Africa, Tanzania for East Africa and Niger for West Africa. The successful mobilization of climate finance in Africa is partly attributed to national leadership on climate politics and policies, dedicated agencies that support private sector green investments and the presence of established financial institutions that are capable of directly accessing climate funds.
Governments across Africa will need to provide the private sector with an enabling environment which will cushion them from business, political and economic shocks which in turn discourage private sector actors to invest in long-term green projects. There is also the need to integrarate the private sector in climate planning processes when it comes to the implementation of the NDCs, national green strategies, policies and climate investment plans.
There is need to revisit many of the countries policies and regulations as some of them are currently obsolete and do not promote climate adaptation and mitigation actions and investments. African countries can learn from the developed world when it comes to climate smart policies in areas such as transportation, energy and water management among others. The borrowed policies will however need some customization to be fit for the African countries.
There is need for governments to identify and showcase successfully implemented low-carbon and/or climate resilient, green projects especially under the Public-Private Partnerships (PPPs) model. This is to build confidence in the minds of the private sector firms and hence encourage them to step in and invest. The PPPs model is a great way to realise mega climate-resilient and low-carbon projects in different sectors and should be capitalized on.
To arrive to a win-win objective between profit-making by the private sector and combating climate change, African governments need to recognise that the engagement of the private sector in NDC implementation must be backed by returns on their investments.
For the SMEs where access to finance to back green projects is still a challenge, a solution around the credit guarantee scheme for climate change projects might be a way to alleviate collateral constraints. This will support green lending to SMEs without putting financial stability at risk and at the same time assisting countries to achieve their NDC commitments.
SMEs are very crucial to the development of climate resilient sub-Saharan African economies. Governments and key stakeholders should therefore support their operations to ensure long term sustainability. The interventions that may be of help will include policy and regulatory provisions, governance systems, financing models and provision of technical support and facilities.
The development of blended finance and other SME-friendly financing mechanisms will go a long way in providing a solution for the financing problems that is faced by the African SMEs. The provision of the above services will see more of these entities transition to green SMEs in Africa and hence become a solution to the climate change challenge.