Green lending has grown at a phenomenal rate over the past few years. Despite this, there is still a large infrastructure gap in some regions in Africa where the cost of risk has deterred investment. Inadequate infrastructure and lack of financing remains a major obstacle towards these regions achieving full economic growth potential. Many regions in Africa are resultantly facing housing shortages. For example, Kenya’s housing deficit is estimated at falling at 2 million short of what is needed to house the country’s population.
By 2100 most of the world’s biggest cities will be concentrated in Africa. This presents a unique opportunity for growth, but also a challenge. We must enhance the climate resilience of these assets and mitigate the impacts of climate change.
So what does it take to increase the bankability of infrastructure developments? How do we decrease the risk profiles or projects in Africa? What do investors look for when financing building and construction?
These were some of the key questions we explored during our recent webinar. Moderated by our Co-Founder, Eleni Polychroniadou, the panel consisted of speakers from World Green Building Council, Standard Chartered, Bank of Africa UK and IFC. With direct experience in financing these projects, the speakers provided valuable insights into financing infrastructure projects and the key to unlocking growth within the region.
Let’s take a look at how both public and private sectors can support the development of bankable infrastructure projects.
Improving the regulatory environment
To increase the bankability of projects in Africa we need to improve the regulatory environment around buildings and contracts.
What we know is that within Africa, the opportunity is enormous but the supply of funding resources is finite. It is important then that we look at the commercial viability of projects and understand what actually works and what needs to work better. With different projects come different risks due to the asset class. Every asset class will have a nuance.
We also need a better mitigating structure to put facilities in place and improve the quality of contracts. Quality contracts will protect the lenders and attract investment.
Many African countries also lack mandatory building codes. Forcing developers to adhere to mandatory regulations will assure lenders that the quality of the building work is up to standard.
Getting money into Africa
We need to increase the international capital flow into Africa and make it easier for international lenders to fund projects. It is currently very challenging to finance a local party or developer as they want their source of payment to be in local currency. This comes at a risk, however, for the international bank. Many countries across the continent, including Nigeria and Ghana, for example, have a widespread foreign exchange issue against the US dollar. The volatility of the currency increases the risk significantly for international lenders.
One option is for developers to get finance locally for a project. The challenge is that local balance sheets are a lot smaller than international banks. There needs to be greater assistance to local banks from international finance and the ability for international finance to come in is key to increase capital flows. For this to happen there needs to be better collaboration between public and private sectors to move capital efficiently. Instruments such as blended finance can help reduce the risk and spread the capital to where it matters most.
Education is key
If lenders and borrowers don’t know about green buildings, it will be nearly impossible to increase the number of green buildings financed in the continent. Banks have a big role to play in sharing successful case studies and encouraging developers to integrate sustainability into their developments. Standard Chartered, for example, has put together an ESG advisory team to speak to clients about what do they need to do at each stage of the development.
But the onus is not just on financiers. We need a whole system approach to improve access to information about green buildings and help address some of the challenges. This means going back to basics and incorporating climate risk and resilience into education. There is a perception that implementing green building structures is complex, costly and time consuming. Debunking the misconceptions around building green will help accelerate the uptake of green buildings and facilitate the green finance into the sector.
Green building certification can attract capital
Green building certification can unlock financing opportunities. Lenders look for projects that have international, credible certifications. Financial institutions are interested in green buildings but they are not experts in sustainable infrastructure. Providing a bank with a certification that shows the developer’s sustainability credentials improves investor confidence in the project. Banks want to see that a developer is committed to climate resilience and demonstrates an understanding that the market is rapidly moving towards sustainable infrastructure as the standard.
“We need to see developers with skin the game. With large scale projects, if we’re asking the client to pay for a technical advisor to look at the feasibility study or the certification and the client refuses it already gives me a feeling that something is up and maybe there is something they don’t want us to discover,” said Bunmi Otoki, Head of Loan Solutions and Syndications, Bank of Africa UK
Whilst the current infrastructure gap remains an issue throughout Africa, there is a way to overcome the challenges faced. Many projects across the continent have successfully accessed international finance. What we must do is take the lessons learned and use a collaborative approach to break down the barriers identified and accelerate the development of sustainable infrastructure projects.
“The future is bright in terms of green financing. Nature is forcing us to come to the table and realise it’s not an option to build green; whatever investment we do in real estate has to be green. There is convergence and realisation by everyone that this is not an option but is the only way to do business.”
Godfrey Tapela, Senior Investment Officer, IFC
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