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Monica_55905 Jul 21

How COVID-19 Has Fundamentally Changed Investment Strategies and Bilateral Partnerships

How COVID-19 Has Fundamentally Changed Investment Strategies and Bilateral Partnerships image
This opening panel set the stage for aef 2.0 as it looked at how the pandemic will impact on investment into energy in Africa in the short, medium and long-term.
AfDB spoke about the current changes being seen across the continent - countries being downgraded, national accounts being under a significant amount of pressure, significant devaluations of currency across a number of countries – particularly oil-producing countries – and how these are impacting on countries’ spending. However, DFIs are ramping up investment significantly - AfDB has launched a $10 billion COVID-19 response facility to help the countries shore up their fiscal buffers so that they are able to maintain critical services such as power and healthcare services. DFIs are also looking at the impact on the private sector – a number of utilities have issued force majeure notices to IPPs as they may not be able to meet some of their obligations so might require debt restructuring. They also have a liquidity facility component. 

Over the medium-term household energy usage has increased while commercial and industrial usage has decreased, although the latter is likely to get back to previous levels by next year so for overall levels to start increasing again. The continent continues to be energy deficient and faces challenges in providing the power that is needed. Before the pandemic, more private capital had gone into generation compared to distribution, transmission and delivery which was causing bottlenecks in being able to deliver that capacity. Therefore there is a need to strengthen distribution and transmission systems and deal with the issue of energy access by finding more efficient ways to deliver energy. This has been exacerbated by the pandemic.

There was discussion around local currency and panellists felt that a lot of the projects that we will see coming up in the next year or two will need a significant amount of local currency capital. There is an expectation that deals will get smaller in the mid-term and perhaps move towards more aggregation of opportunities. It was commented that debt is going to be a big issue over the next few years in a lot of affected countries and painful adjustments may have to be made while capacity for debt relief may become more challenging – the debt landscape has become a lot more complex and more fiscal prudence will come into play. There are partial steps which can be taken to build confidence with investors about local currency financing initiatives

Control Risks commented that before the pandemic many African countries were already playing catch up in terms of demand, transmission infrastructure and this won’t change. However, at the start of the year before COVID-19 hit, they were upbeat about the prospects for 2020, there was a sense of positive investor sentiment. The health response has been remarkably swift in Africa, the continent has really come together in terms of imposing controls and taking quite painful decisions early on. However, the impact will probably be felt for longer than in Europe due to less support available for recovery and less control possible.  What we are yet to see is any political risk or consequences due to economic downturn, and economic recovery is likely to be quite slow. It was commented that smaller more distributed projects with a more distributed customer base should remain resilient and bankable. Also, projects that can stand on their own commercially should stay resilient in the coming one to two years. 

Poll: Audience members voted whether they thought that in 2020 (compared to 2019) new FDI flows into Africa energy projects will a)  increase, b) decrease by less than 10% or c) decrease by 10% or more. 30% felt that new FDI flows would increase, 50% thought that it would decrease by less than 10% and 20% believed that it would decrease by 10% or more.

Takeaways: 

 
  • Although many African governments have shown encouraging signs of dealing well with COVID-19 through collective demands and centralised procurement, in the short-term countries are struggling to provide services. DFIs are trying to fill this gap with emergency funding facilities – they are actively engaged and play a critical role now to move projects forward during the pandemic.
  • While many African countries started the year with optimistic indicators of 3.5% GDP growth the pandemic has resulted in an expected 3.5% contraction instead. However there is a fairly optimistic view for energy projects and growth over the longer-term.
  • The pandemic is not having a severe impact on closing projects that are far advanced as virtual means are fairly practical, the challenge is for projects earlier in their gestation period where they require more personal interface. Deals are still being closed and players are adopting new technologies to run processes virtually.