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When two elephants fight, it is the grass that gets trampled: US budget cuts and the impact on African energy infrastructure development

Claire Wilby

Lack of available energy is one of the biggest problems facing Africa. This problem needs a solution. History to date has shown that inward investment is needed to create solutions to this problem. At a time where global instability is making Africa an attractive investment, the new US administration is proposing funding cuts that could significantly hinder US private sector investment in Africa.

Established by Nixon in 1971, the Overseas Private Investment Corporation (OPIC) offers a financing platform for US investors looking to high risk markets. OPIC offers debt financing, political risk insurance and support for private equity funds looking to solve critical development challenges in emerging and post crisis markets. This offering enables private investors to access markets that would not attract the support of conventional lenders. Although OPIC’s geographical remit is global, many African countries are the type of markets that OPIC targets. Its’ involvement in Power Africa is a prime example of this.

The Power Africa project, launched in 2013 under the Obama administration, aims to add 30,000 megawatts of electricity by 2030. See our previous blogs on Power Africa here. Although progress has been slower than envisaged, OPIC has committed US$2.1 billion towards over twenty Power Africa projects. Once these projects go live, they will have the capacity to generate more than 1,700 megawatts of electricity across the African continent.

In March 2017, the Trump administration published the Budget Blueprint to make America Great Again in which funding for OPIC (as well as other organisations that fund critical development in emerging markets such as the US Trade and Development Agency and the African Development Foundation) could be at risk.

Although, at this time, it is not certain that these changes will follow through, market players are paying close attention to the developments. The fact that OPIC was there to fill a gap that most commercial lenders could not or were not prepared to fill, indicates that a void will be left where important and strategic investments were being made.

Will Chinese investors and lenders take over and fill this gap? Based on China’s recent increased and successful investment across Africa through Chinese multilateral development banks already active in the market, China may indeed be in a position to further secure its position in the African market.

The ultimate goal is to solve the lack of energy problem across the African continent, which could indeed be achieved through Chinese investment as an alternative. Some commentators are however expressing concerns that the levels of  environmental, social and governance standards required by OPIC and other US development agencies may not be continued and could have effects on the longer term viability of projects.

Will commercial banks step up with products to fill the gap? For US investors, OPIC provided support where commercial banks and conventional lenders have not had sufficient appetite for risk. OPIC has made a profitable venture out of its investments: in 2016 OPIC is reported to have achieved revenues of $263 million, with a budget of only US$63 million. Where there is risk there is opportunity, and only time will tell if commercial lenders rise to the challenge of this opportunity.

As per the Kenyan proverb ‘When two elephants fight, it is the grass that gets trampled’, here it is the much needed inward investment in Africa and support from the US that is at risk of being trampled by politics, as a result of the uncertainly brought about by the planned cuts in the US budget with potentially longer term consequence on development if the cuts materialise. 

Inside Africa would like to thank Nishant Singh, Trainee, for his contribution to this blog post.

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Africa is as dynamic a market as it is diverse. We understand that changes impacting your business can arise rapidly and vary significantly across the continent.

Our understanding of Africa’s markets stems from extensive experience on the ground. Through our Inside Africa blog, we aim to apply this insight to provide you with timely commentary on the latest developments across Africa, as well as insight into the many nations that make up this vast continent.

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