Kenya inks deal to de-risk energy investments

From the newsletter

The Kenyan government has signed a deal with Africa Specialty Risks (ASR), a leading global underwriter, to de-risk foreign capital. The deal could unlock over $2bn in investments in critical sectors, including energy. The goal is to make Kenya a more attractive destination for global investors who have been wary of political, economic or regulatory volatility.

• Risk perceptions have severely impacted project progress in the past, with some, like the Grand Inga Dam in DR Congo, stalling for decades. 

• Some African governments are improving policy and regulatory frameworks, including streamlining licensing procedures. But perceptions are hard to change.

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• The deal will transfer the risk to ASR, which is better equipped to manage and absorb them. This could lead to an influx of private equity, sovereign wealth, and institutional funds that had previously stayed on the sidelines. It is also expected to catalyse growth in Kenya's local (re)insurance markets, which have traditionally been underdeveloped.

• Africa is generally perceived by investors as a high-risk market. They often view the continent as unstable, with frequent policy shifts, changes in government, or even civil unrest in some instances. This perceived risk directly translates into higher borrowing costs and a demand for elevated returns, making projects less economically viable and blocking private capital.

• There have been developments in the policy and regulatory frameworks to streamline the sector and reduce investment risks. Countries like Zambia have recently reduced project approval timelines to just two days. Ghana has opened up the solar market for competitive procurement, and Egypt has welcomed private-to-private power generation to enable heavy consumers to self-generate their power. Kenya itself has rolled out several policies, including net metering, mini-grid regulations, and open electricity access markets.

• In the financing space, we've had an array of international and regional organisations, development banks, and private entities channelling significant funds to derisk the energy sector. The World Bank and the AfDB are leading the "Mission 300" initiative, which aims to connect 300 million people to electricity by 2030. The World Bank is leveraging over $30 billion in IDA resources by 2030 for energy access. For instance, it is providing $750 million to Nigeria to support the Nigeria Distributed Access through Renewable Energy Scale-up (DARES) project.

• Blended finance is another powerful tool being widely deployed. This approach combines low-interest loans or grants from public or philanthropic sources with commercial capital from private investors. By absorbing some of the initial risks or providing a financial cushion, blended finance helps to lower the overall cost of capital and encourages private sector participation in projects that might otherwise be deemed too risky.

• The impact of these de-risking efforts is becoming increasingly evident. Countries like Kenya have successfully attracted significant investments in renewable energy, including its largest wind farm with 310 MW capacity. In Uganda, the Bujagali Hydropower Project stands as a prime example. It secured a $115 million IDA Partial Risk Guarantee (PRG) and a $120 million MIGA Political Risk Insurance (PRI), enabling it to attract private capital investments.

Our take

• Africa's perceived risk is often overstated. While some countries face high political risks, this shouldn't define the entire continent's attractiveness. A country-by-country analysis reveals diverse market realities. Investors should prioritise combined market intelligence for better-informed decisions, moving beyond outdated generalisations.

• Development financial institutions and multilateral banks need to step up to provide more capital to de-risk the sector. While this has been effective so far, it has been concentrated in a few major economies and needs to spread out and increase in ticket size for a greater impact.

• For Kenya, this funding arrives at a crucial moment given the economic and political situation. With risks now mitigated, investors should move swiftly to develop projects and meet Kenya's growing power deficit.