Africa Focus: Autumn 2018

Africa has a chance to be a true innovator for the Islamic finance industry

Although Islamic finance assets still represent less than 1 percent of global financial assets, and growth slowed somewhat in 2017, the global Islamic asset base grew from approximately US$200 billion in 2003 to an estimated US$2 trillion at the end of 2016. It is projected by some industry experts to surpass the US$3 trillion mark by 2020.¹

Unsurprisingly, Islamic banking and finance assets have concentrated historically in the Middle East and Malaysia. These markets currently account for more than 80 percent of industry assets. In the past five years though, stakeholders from traditionally non-Islamic majority jurisdictions—including Europe and East Asia—have also entered the Islamic finance market or indicated their intention to participate in Islamic finance transactions.

Africa, in particular, is a region in which Islamic finance could and, indeed, should thrive. The continent has a Muslim population of approximately 636 million, representing almost 53 percent of Africans.² The Muslim population in sub-Saharan Africa is projected to grow by nearly 60 percent from 242.5 million in 2010 to 385.9 million in 2030.³  Furthermore, a vast infrastructure development deficit creates financing needs, towards which Islamic finance could make a significant contribution.

Some African countries have already started taking steps to support the local uptake of this financing mechanism.

Among others, South Africa, Nigeria, Kenya, Senegal, Djibouti, Uganda and Morocco have all introduced legal and regulatory frameworks to promote the development of Islamic finance products in their respective jurisdictions. Examples include recent changes to Kenya's stamp duty and VAT regulation to create a more level playing field between Shari'ah-compliant and conventional products. Nigeria, Tunisia and South Africa are now home to Islamic banks and takaful (Islamic insurance) companies. Several traditional banks across the continent have also started to offer Shari'ah-compliant banking products through "Islamic windows."

Also, in the public sector, regional governments have either started issuing international or domestic sukuk or "Islamic bonds" (such as South Africa, Senegal, Nigeria, Côte d'Ivoire and Togo) or have at least commenced preparatory work for their debut sovereign sukuk issuances (such as Tunisia and Morocco).

These developments are also encouraging from a macro-economic perspective generally. Islamic finance presents African nations with a unique and (to date) relatively underutilized mechanism to help address two of the most prevalent development issues pervading the continent: the needs to increase financial inclusion among the domestic population and to bridge the funding gap required for needed infrastructure (Figure 1).

Regarding financial inclusion, The European Investment Bank estimates that in 2017, as many as 350 million Africans did not have formal bank accounts.⁴ Therefore, the development of Islamic finance products—both together with and as an alternative to conventional banking and insurance offerings— could significantly increase Africa's financially underserved population's access to finance. That members of Africa's Muslim communities may be reluctant to accept financial services provided by conventional banks, on religious grounds, makes the need for Shari'ah-compliant financial products even more pressing.

Regarding Africa's infrastructure gap, foreign and domestic investments through Islamic finance provide significant opportunities to diversify the sources of funds to meet the African Development Bank's projected requirement of US$130-170 billion per year until 2025.⁵  Sukuk issuances tied to tangible assets and projects— such as roads, bridges, water and sanitation works and hospitals— provide cost-efficient means for African governments to address this infrastructure development demand. As can be seen in Figure 2, Islamic Finance is essential for unlocking investment from the Middle East but it also attracts investors from other parts of the world.

They also increase these governments' ability to tap the significant pools of liquidity held by Islamic investors based in the Gulf Cooperation Council (GCC) countries and Asia who are looking for viable investment opportunities in Africa.

Despite the above legislative and practical steps taken towards growing Islamic finance in Africa and the relatively untapped macroeconomic opportunity it represents, Islamic finance is still some way from being a mainstream form of finance across Africa. Here are some of the underlying structural issues that pose challenges to Islamic finance in Africa. These are not country-specific, but rather permeate the entire continent's markets, to a greater or lesser degree.

_21%
The share of sub-Saharan African adults with a mobile money account by the end of 2017
World Bank

REGULATORY GAP

The existing laws of most African countries were not designed to cater to interest-free financings based on the sharing of economic risks and rewards, and achieving returns by reference to the performance of Shari'ah-compliant assets. These principles are fundamental to Islamic finance.

The need to create economically viable structures that do not rely on interest makes Islamic finance arrangements more complex than their conventional/non-Islamic equivalents, and they tend not to fit neatly within existing civil or common law frameworks. For example, while African governments may regularly issue local currency treasury instruments, these are typically conventional interest-bearing instruments. Structural amendments required to make these instruments acceptable to Islamic institutions and investors need to be carefully designed to avoid conflict with domestic tax rules and to maintain equality with traditional treasury instruments.

Similarly, general considerations for unsecured sukuk financings (which do not arise in conventional unsecured bond issuances) include:

• How the laws of the relevant jurisdiction (including any foreign ownership restrictions) treat asset transfers, especially where onshore assets are to be contractually sold to foreign special-purpose vehicles
• Whether the tax code (and any exemptions and reliefs laid out therein) of the relevant jurisdiction applies to sukuk issuances in the same way it does to bonds
• If the tax code does not apply to sukuk issuances in the same way it does to bonds, how the regulatory treatment of sukuk (or other Islamic finance products for that matter) can be afforded equivalence to its conventional/non-Islamic counterparts under the applicable laws

Without amendments to existing tax codes, the asset-based nature of Islamic finance may trigger various tax payment obligations from country to country that are not involved in conventional financings. These could include registration tax/stamp duty land tax, VAT, capital gains tax and withholding tax. Regulatory consideration is required to harmonize these issues.

Clarity is crucial regarding the legal enforceability of Islamic finance products. And the increased costs of funding due to taxes need to be mitigated.

Without these, it will likely prove difficult to reach the critical mass necessary for Islamic finance to flourish. Public sectors will continue to borrow using traditional debt products. Commercial banks will find the legal risk and potential additional costs of Islamic finance unappealing. The establishment of specialist Islamic banks and other financial institutions will not be viable.

Overcoming these challenges requires that African governments continue to promote change in their regulatory systems to facilitate Islamic finance products and enhance their attractiveness to domestic and international stakeholders alike.

KNOWLEDGE GAP

Islamic finance remains poorly understood across many markets, not only in Africa. With some validity, it is frequently considered to be more challenging to implement than conventional/non-Islamic finance techniques. Traditional aspects of modern commercial banking and capital markets practices have existed for many decades, but modern Islamic finance is—in relative terms—very new and niche. It comes as no surprise that potential end-users of Islamic finance, both in the public and private sectors, when given a choice, will often favor conventional over Islamic financing, just because it is more familiar.

Knowledge gaps are often a consequence of the applicable regulatory framework (or lack thereof) in the relevant jurisdiction.

So, they can be bridged by the introduction of the relevant regulations, as certain African governments are now doing.

Standardization of products, documentation, business practices and the question of what is and is not Shari'ah-compliant will also inevitably improve awareness of Shari'ah-compliant products and also increase the efficiency with which they can be deployed to meet public and private sector funding needs. This type of standardization is already present in other regions where Islamic finance is more widely used, such as the Gulf Cooperative Council states and Malaysia. To some degree, it will be a natural byproduct and facilitator of the growth of Islamic finance in Africa.

ACCESS TO BANKING

The relatively low penetration of formal banking services across Africa represents a barrier to entry for conventional and Islamic financial institutions offering Shari'ah-compliant banking products—such as Shari'ah-compliant personal loans, mortgages and takaful.

Much of Africa's population is accustomed to informal arrangements (such as loans from friends and family) and may be uninterested in or even actively resistant to transitioning to banking with formal financial institutions.

On the other hand, this limited financial penetration in Africa might present a tremendous opportunity for innovation in the sector. Africa is already well known as a hotbed for pioneering microfinance products and non-banking financial institutions. For example, M-Pesa is a mobile phone-based microfinance provider launched by Vodafone and Kenya's Safaricom in 2007 in Kenya and Tanzania, which has since then expanded to South Africa, Afghanistan, India, Romania and Albania and is currently used by more than 30 million customers globally.

Sub-Saharan Africa, in particular, exemplifies mobile money's potential to foster financial inclusion. According to the World Bank, while the share of adults in sub-Saharan Africa with a formal financial institution account barely moved between 2014 and 2017, the share of adults with a mobile money account almost doubled to reach 21 percent by the end of 2017 (in every other region, mobile money penetration is lower than 10 percent).⁶

It stands to reason then, as Islamic finance products and institutions become increasingly mainstream across the continent, that Shari'ah-compliant African microfinance products and institutions will also be developed to service unbanked (or underbanked) Muslim communities.

Already, Gulf African Bank and Safaricom have announced the launch of M-Sharia, a Shari'ah-compliant banking service through M-Pesa. Moreover, it is possible that such Shari'ah-compliant microfinance products and providers will, in turn, extend their reach from Africa into other jurisdictions, such as Southeast Asian countries, with large Muslim populations that cannot access the formal banking system due to low and irregular household incomes or poor credit records.

In this context, Africa has a chance to be a true innovator for the Islamic finance industry.

The above challenges are not new. The lack of access to banking may be considered a uniquely African problem only in terms of scale. Lessons from how this and other challenges were overcome in other parts of the world—from the United Kingdom to Hong Kong to the Middle East—are profoundly applicable in Africa.

Regulatory and knowledge gaps in Africa will take time to address, but positive trends are already evident.

Shari'ah-compliant regulatory frameworks are emerging in more and more African countries. African policymakers and end-users have also engaged with more developed Islamic finance markets to help them up the learning curve.

Some African financial institutions and government-related entities (such as the Kenyan Capital Markets Authority) have become members of the Islamic Financial Services Board (IFSB), a multilateral body based in Kuala Lumpur. Among other things, the IFSB issues, and facilitates the implementation of, global prudential and supervisory standards and other initiatives that foster knowledge sharing and cooperation among its members. For instance, since 2008, Bank Negara Malaysia has run more than 300 Islamic finance programs and study visits⁷ for more than 25 African countries, including Nigeria, Sudan, Tanzania and Kenya.

The Islamic Corporation for the Development of the Private Sector (ICD)—the private sector arm of Islamic Development Bank (IDB) and the largest Shari'ah-compliant multilateral development bank in the world—also continues to play a role in developing Islamic finance in Africa by arranging local sovereign sukuk issuances.

How governments, organs of state and the people of Africa respond to the challenges of Islamic finance and the extent to which they adopt Islamic finance as a financing tool could have a significant impact on the macroeconomic development of the continent in the foreseeable future.

Raising stakeholders' awareness and understanding of Islamic finance products and practices and the additional financing options they present can spur public and private sector demand for Islamic finance and the regulatory reforms required to meet this demand.

Bridging the regulatory gap can, in turn, help address Africa's financial inclusion deficit by encouraging the growth of—and innovation in—Shari'ah-compliant products, thus increasing the range of financial institutions, products and services available to the populace and, accordingly, increasing financial inclusion.

Moreover, providing African governments, companies and individuals with greater access to finance can play a major role in bridging Africa's infrastructure gap and promoting economic growth and social prosperity across the continent. Considerable work is still required to overcome the challenges standing in the way of Islamic finance flourishing in Africa, but clearly, the rewards will outweigh the effort.

FULL MAGAZINE
Africa Focus: Autumn 2018

¹ World Economic Forum (2017). Islamic finance could be the answer to Africa's growth problems. Accessed at https://www.weforum.org/agenda/2017/10/islamic-finance-could-be-the-answer-to-africas-growth-problems/ on 14 August 2018.
² http://www.muslimpopulation.com/africa/ 
³ European Investment Bank (2017). Banking in sub-Saharan Africa. Interim Report on Digital Financial Inclusion. Accessed at http://www.eib.org/attachments/efs/economic_report_banking_africa_interim_2017_en.pdf on 14 August 2018.
⁴ European Investment Bank (2017). Banking in sub-Saharan Africa. Interim Report on Digital Financial Inclusion. Accessed at http://www.eib.org/attachments/efs/economic_report_banking_africa_interim_2017_en.pdf on 14 August 2018.
⁵ African Development Bank (2018). African Economic Outlook, 2018. Accessed at https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/African_Economic_Outlook_2018_-_EN.pdf on 14 August 2018.
⁶ World Bank (2018). The Global Findex Database 2017. Measuring Financial Inclusion and the Fintech Revolution. World Bank Group.
⁷ Bank Negara Malaysia (2017). Islamic Finance in Africa: Impetus for Growth. www.mifc.com.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

52%
Mozambique's coal and natural gas resources accounted for approximately 52 percent of the value of its total domestic export trade in 2017
ITC Trade Map

Economists have long recognized infrastructure development projects to be one of the most potent levers for economic growth.¹  Infrastructure built to support development of a country's natural resources can provide access to previously inaccessible areas and open trade routes, and generate investment into new sectors. Where that infrastructure crosses national borders, as is the case with several of Mozambique's current portfolio of development projects, it can also promote regional socio-political integration, economic growth and diversity.

Against the backdrop of Mozambique's improved economic outlook starting from 2018, this article focuses on how the country's opening of its mining logistics infrastructure can drive diversification of Mozambique's economy and its regional integration with landlocked neighboring countries that can use Mozambique as an import and export route. Especially in cross-border and regional infrastructure projects, investors can combine traditional and more creative treaty mechanisms to assist infrastructure financing and development.

In this context, Mozambique has been willing to support cross-border projects through intergovernmental agreements, and is now participating in its first two investment arbitration cases. These are positive indications that the country understands investors' need for wider stakeholders' engagement and risk management tools, which make projects viable.

POSITIVE OUTLOOK IN THE MINING SPACE

After a challenging 2017, with the country's total indebtedness expected to reach 113.1 percent of its GDP (the highest in sub-Saharan Africa), Mozambique's economy is showing positive signs in 2018. Mozambique is stabilizing its currency and lowering inflation, suggesting a more optimistic economic cycle ahead. Mozambique's real GDP grew by 3.3 percent in 2017 and the IMF projects it to grow on average 2.5 percent per annum in nominal US dollars until 2022, then to climb to 9.9 percent in 2023 (Figure 1). Measured in Meticals, the local currency, economic research firm BMI forecasts that the Mozambique economy will grow on average 6.6 percent per annum over the next ten years.²

Mozambique's coal and natural gas resources accounted for approximately 52 percent of the value of its total domestic export trade in 2017.³

An increase in coal production is expected to result in an average growth of 10.1 percent in the value of its exports between 2017 and 2021.⁴

This increase will likely come from Mozambique's coal reserves of about 1.8 billion tons,⁵ most of which is high-quality coking coal, with primary deposits in the Tete province. To achieve its forecast growth, Mozambique will need infrastructure to support exploration and development of its reserves in the Moatize, Lower Zambezi and Mucanha-Vusi basins, as well as the deposits in Changara, Cahora Bassa and Magoe districts.

The country has already taken some positive steps to attract the investment required.

In recent years, the Government of Mozambique has made concerted efforts to enhance the country's business environment and thus attract trade and investment, particularly into the mining sector. Current mining legislation aims to ensure greater competitiveness and transparency, defining clear obligations and protecting national interests, while also protecting the rights of mining companies. Law No. 20/2014 (Legislação Mineira) and Decree No. 31/2015, for example, introduced clear rules for mining prospecting, research operations, development and exploration.

Some external market factors are likely to play an important role in raising foreign investors' interest in Mozambique's mining sector. Strong and sustained demand for coking coal in India, the uncertain socio-economic environment in Zimbabwe and the expected cost increase of mining in South Africa all place Mozambique at a regional competitive advantage.⁶  Mozambique's large coal reserves, high-quality product and strategic location relative to Asian markets create the potential for the country to become a key player in global coal markets.

Notwithstanding these positive factors, Mozambique needs to invest heavily in infrastructure to achieve its forecast growth, in particular roads, railways and ports, so several planned projects become viable and existing projects are optimized.

OPENING MOZAMBIQUE'S LOGISTICS INFRASTRUCTURE

Most of Mozambique's civil infrastructure was built during the country's colonial period. In 1931, the colonial state created the industry entity Portos e Caminhos de Ferro de Moçambique (CFM) to centralize the management of railways and ports in Mozambique.

Independence in 1975 was followed by a period of civil war that destroyed most of the country's transport network. By the restoration of peace in 1992, Mozambique faced financial difficulties and was unable to invest in rebuilding and expanding its infrastructure. The country was unable to cope with the needs of the growing coal export demand, yet the capital derived from coal sales was pivotal to national building following the civil war.⁷

In the 1990s, the Government of Mozambique approved the participation of private capital in the rehabilitation, exploitation, and management of rail and port infrastructure and services, ceasing the exclusivity regime of the operation of the railways and ports to state-owned entities.

In 2011, with the promulgation of Law No. 15/2011, the guidelines were established for contracting, implementing and monitoring public-private partnerships (PPPs), large-scale projects (LSPs) and business concessions (BCs). Under Law No. 15/2011, PPPs, LSPs and BCs are defined as:

• PPPs – All projects that involve an agreement between public entities in Mozambique and private entities under which the latter contracts to implement and manage public interest projects, services and activities, bearing some or all of the financial and other risk involved
• LSPs – All investment projects authorized or contracted by the Government of Mozambique, the value of which exceeds 12,500 million meticals at value date January 1, 2009 (roughly US$500 million at prevailing exchange rates at the time)
• BCs – Projects carried out under contracts aimed at prospecting, exploring, extracting or exploiting natural or other resources or other assets belonging to the state

The enactment of this law was a landmark in Mozambique's quest to attract private investment and promote efficiency and transparency with these types of projects.

Notwithstanding these trends toward a broader participation of the private sector, CFM continues to play an important role in Mozambique's infrastructure development. It continues to control the management of some principal railways and ports. These include the Sena-Beira railway, which is used for the transportation of coal produced in the Tete province to the coast, and the Beira port, which is an important export exit for the country's interior and landlocked Zimbabwe, Zambia and Malawi.

CFM's portfolio of development initiative includes infrastructure and logistics projects across a range of industries, such as the reconstruction of the Machipanda railway connecting the Beira port to Zimbabwe, creating opportunities around the transport of fertilizers, wheat, rice, granite and fuel, and the development of a new coal terminal in Beira (Figure 2).

The Sena-Beira railway is not sufficient for the export of the volumes of coal being produced in the Moatize area. This has forced larger mining companies to look for more efficient alternative routes and integrated logistics solutions to transport coal from the inland basins to seaports for export.

The need for a more efficient solution underpinned the landmark project for the connection of brownfield and greenfield railways in Mozambique and Malawi sponsored by Vale S. A., the Brazilian mining company, and the Japanese company Mitsui & Co., which also included the construction of a new deep sea coal terminal in Nacala-a-Velha in Mozambique (the Nacala Project).

CROSS-COUNTRY PROJECTS AND REGIONAL DEVELOPMENT

The infrastructure needed for Mozambique's growth in coal production can have a much wider economic, political and social impact and be more attractive to investors if it is developed based on a regional strategy, bearing in mind the country's many landlocked neighbors.

Infrastructure development projects that cross national borders can result in stronger regional economic growth and integration. Economic connectivity reduces the likelihood of conflict between countries, fosters the increase of GDP per capita and enhances education levels in the workforce, creating a virtuous cycle of economic growth, stability and socio-economic development.

In the case of Mozambique, cross-border infrastructure is vital for the integration of landlocked economies and the facilitation of trade in goods and services. Cross-border road and rail infrastructure can help address logistics bottlenecks to regional integration and facilitate economic transformation of Mozambique and those economies, because local and foreign investors can look at opportunities from a regional perspective.

The Nacala Project is a good example of this type of cross-jurisdictional project. It starts in the Moatize area in the western part of Mozambique, crosses Malawi and terminates in two seaports: one for general cargo and one for coal in Mozambique's Nacala-a-Velha. The project enables landlocked Malawi to use the railway to import goods and export its production of cotton, tobacco, pigeon peas, sugar and other products. Importantly, it also improves the transport of passengers between the two countries, giving the project a much wider base of stakeholders.

TRADITIONAL AND NEW INVESTMENT PROTECTION MEASURES

Cross-border projects naturally give rise to investment protection issues, usually covered by bilateral investment treaties (BITs), and to legal issues relating to the different and often conflicting jurisdictions where two or more countries are involved.

Mozambique is party to 27 BITs. But with the exceptions of South Africa and Zimbabwe (in which BITs have been signed, but are not yet in force), the country has no such treaties with neighboring countries, all of which have their own and differing regulations. This requires tailor-made solutions to manage typical investors' risks specific to the countries involved in a particular project.

In the case of the Nacala Project, there was no Mozambique-Malawi BIT, and differing rail infrastructure regulations meant that the countries had to find specific solutions to enable cooperation. A key part of the solution was to establish an intergovernmental agreement (IGA), setting out guidelines for the interaction of both countries during the operation of the project. In the IGA, the countries recognized the need for adequate and efficient routes for regional and international trade and the desire to promote good neighborliness and peaceful cooperation for the benefit of their people. Interestingly from the investors' point of view, Mozambique and Malawi were prepared to amend an initial IGA when the Nacala Project was project financed.

Similar opportunities exist in several other parts of southern Africa and in other parts of the continent, where infrastructure projects could benefit from similar legal hybrid structures, incorporating innovative instruments such as IGAs to provide comfort for sponsors and lenders that local legal specificities will be carefully thought through and addressed in advance, thus reducing project risks for investors and host states.

In Mozambique, there is clearly further opportunity for the country to offer its landlocked neighbors—such as Zambia, Zimbabwe, Malawi and Botswana—export and import routes via its railways and seaports.

For example, Botswana has an estimated 200 billion tons of coal reserves in the east side of the country in the Selebi Phikwe coal region. Botswana also benefits from good political and economic stability, and the government is eager to finance construction of trans-regional highways and railways to create capacity to transport general cargo, minerals, fuel and passengers through Zimbabwe to a Mozambican port in the south of the country.

MOZAMBIQUE'S INVESTMENT PROTECTION MECHANISMS TESTED FOR THE FIRST TIME

The spring 2018 edition of Africa Focus described Mozambique's well-developed investor protection landscape, which is generally available to investors from countries that have a BIT in force with Mozambique. Mozambique's BIT system is being tested for the first time in two investor-state disputes: Oded Besserglik v Republic of Mozambique, concerning investments in the fishing sector, and Cementisti CMC Di Ravenna SOC Coop v Republic of Mozambique, concerning road construction projects in Mozambique.

The first BIT case ever filed against Mozambique was brought pursuant to the Mozambique-South Africa BIT 1997.¹⁰  The claimant, a South African national with investments in shrimp fishing and trading operations in Mozambique, claimed that the indirect expropriation of prawn-fishing quotas adversely affected its investment in a fishing operation. Although there is limited publicly available information on the dispute, Mozambique seems to have contested jurisdiction on the grounds that the BIT is not yet in force, pending ratification by both houses of parliament in South Africa.¹¹ While this first case is well advanced, there were no jurisdiction or merits awards issued at the time of publication of this article.

The second BIT case filed against Mozambique commenced in July 2017, pursuant to the Italy-Mozambique BIT 1998.¹² The claimant is an Italian construction company, which has been involved in large-scale highway construction and other infrastructure projects in Mozambique.¹³  The proceedings are still in their initial phase and will take a number of years to be concluded.

Mozambique's participation in those two proceedings demonstrates that the country is engaging with the systems in place to protect foreign investment.

Mozambique's engagement in BIT disputes, combined with its potential willingness to assist cross-border investments through the signing of IGAs, is good news for investors who wish to invest in the country's infrastructure and have regional aspirations.

RESOURCES INFRASTRUCTURE AS LEVERS TO ECONOMY DIVERSIFICATION AND INTEGRATION

While the short- to mid-term economic development of Mozambique and many other African countries remains linked to exploration of natural resources, the development of infrastructure to exploit those resources will remain a crucial enabler of that development, economy diversification and regional integration.

Infrastructure projects associated with exploration and extraction of mining resources can promote economic and social impacts for the countries involved. In addition to traditional project documentation, BITs and other well-known treaties and conventions, investors in cross-border or regional projects could also look into creative structures such as IGAs, which place their projects in the context of a wider cooperation between two or more states.

In some cases, these creative structures will make the difference between whether a project can proceed or not.

FULL MAGAZINE
Africa Focus: Autumn 2018

¹ World Development Report 1994: Infrastructure for Development.
² BMI research, Mozambique Country Risk Report, Q2 2018.
³ ITC Trade Map.
⁴ BMI research, Mozambique Country Risk Report, Q2 2018.
⁵ BMI research, Mozambique Mining Report, Q3 2018.
⁶ BMI research, Mozambique Country Risk Report, Q2 2018.
⁷ BMI research, Mozambique Country Risk Report, Q2 2018.
⁸ http://sharemap.org/jkan/railway/Railways_in_Mozambique.
⁹ http://www.cfm.co.mz/index.php/pt/sobre-o-cfm/cfm-na-regiao.
¹⁰ Oded Besserglik v Republic of Mozambique (ICSID Case No. ARB(AF)/14/2).
¹¹ ‘Businessman sues SA too', The Citizen, 3 February 2018.
¹² Cementisti CMC Di Ravenna SOC Coop, CMC MuratoriCementisti CMC Di Ravenna SOC Coop ARL Maputo Branch and CMC Africa, and CMC Africa Austral, LDA v Republic of Mozambique (ICSID Case No. ARB/17/23).
¹³ Z. Williams, ‘Mozambique faces another investment treaty arbitration', IA Reporter, 17 July 2017.

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP

Africa has a significant supply of wind, sunshine, hydropower and even geothermal resources

Concerns about carbon emissions from traditional coal-fired power stations coupled with a projected tripling in African energy demand by 2030¹ make renewable energy essential to power generation on the continent. Lack of access to electricity is only one challenge that Africa faces, but it is one of the most significant obstacles to socio-economic development.

Africa currently accounts for one-sixth of the world's population. However, it generates only 4 percent of the world's electricity. Furthermore, South Africa and the countries north of the Sahara account for three-quarters of the continent's energy consumption. Close to 600 million Africans have no access to electricity, and 780 million rely on traditional solid biomass for cooking (mainly fuelwood and agricultural waste). Nearly 80 percent of those lacking access to power across sub-Saharan Africa live in rural areas.²

<1%
Africa's share of global renewable energy investment.
miningreview.com

With its good supply of wind, sunshine, hydropower and even geothermal resources, Africa offers great potential for renewable energy deployment and investment.

Enhancing access to power generally across the continent is a core objective of both the African Union's Agenda 2063 and the national development plans of nearly all African nations. Clearly, renewable energy technology has a crucial role to play in achieving these objectives.

A study by the University of California, Berkeley mapping out the location and energy potential of renewable energy sources in eastern and southern Africa shows that, although the energy generation resources are vast, they are not evenly distributed. The study indicates significant possibilities for wind, solar PV and solar CSP technology.

Hydro-electricity offers viable solutions for up to one-third of the African nations. In a continent where many regions are plagued by frequent and severe drought, though, the use of rivers for power generation can be controversial. Environmental and socio-economic impacts of inundating large catchment areas also mitigate against large hydropower projects where other viable options exist. As with other models of centralized power generation, distribution networks associated with large hydropower projects are expensive to construct and maintain. They also represent security risks in parts of the continent where social unrest exists.

Smaller, micro-hydro projects and other regional and local renewable power generation projects—including wind, solar and geothermal—present alternatives that may become more prominent in African power generation planning in the future.

Climate change is now at the forefront of discussions globally and widely recognized as a problem demanding coordinated global action. Concern has mounted as its effects have become more evident across the northern hemisphere, with parts of Europe and North America experiencing some of the warmest summers on record and traditionally cold regions like Siberia experiencing unprecedented heatwaves. In many parts of the world, including Africa, movements promoting environmental sustainability and environmental consciousness are gaining momentum.

With many parts of the continent already arid, the implications of global warming for Africa are especially dire. The gradual yet dramatic disappearance of the glaciers on Mount Kilimanjaro is a highly visible, symbolic manifestation of climate change in Africa. According to the United Nation's Intergovernmental Panel on Climate Change,³ an estimated 82 percent of the ice that capped Mount Kilimanjaro when first recorded in 1912 had already disappeared by the year 2000.

Africa, as a continent, clearly needs to contribute to mitigating the impact of climate change, too. Key to this is switching, wherever possible, from coal-fired generation to renewable energy generation.

As of July 2018, all but three African countries (Algeria, Angola and South Sudan) had ratified the Paris Agreement within the United Nations Framework Convention on Climate Change (UNFCCC).

The Paris Agreement deals with greenhouse-gas-emissions mitigation, adaptation and finance, starting in the year 2020. It requires that each country determine, plan and regularly report on the contribution that it will make to mitigate global warming. Although no mechanism exists to compel nations to set specific targets by a particular date, the expectation is that targets should exceed those previously established.

Driven by the Paris Agreement and also general concern about the impact of climate change on the continent, African renewable energy initiatives are gaining momentum.

South Africa's Renewable Energy Independent Power Program (REIPPP), viewed as a major success for renewable energy procurement globally, has been an influencing and guiding factor for other African countries in their development of similar renewable energy programs.

Ninety-five projects have been initiated by independent power producers (IPPs) since the commencement of the REIPPP. Existing projects concluded under the earlier bid rounds are now fully operational, with a new tranche of projects under Round 4 now heading toward financial closure. A report by the South African National Energy Regulator indicates that these projects will have an achieved capacity of 3271.25 MWs when they are fully operational.⁴

In Uganda, the GET FiT Uganda initiative aims to achieve an installed capacity of 158 MWs of clean renewable energy added to their national grid through the implementation of 17 projects under this initiative. To date, Uganda has commissioned six of the 17 projects, three of which are hydro-power plants with a total installed capacity of 18.1 MWs, two grid-connected solar PV projects totaling 20 MWs and a 20 MW Kakira co-generation plant.⁵

The main objective of the GET FiT Program is to assist East African nations in pursuing a climate-resilient low-carbon development path to promote growth, reduce poverty and assist in the best way possible with climate change mitigation. GET FiT Zambia was adopted by the Zambian government in October 2017 with the aim of procuring 200 MWs of renewable energy projects within the next three years. The Interim Renewable Energy Feed-In Tariff Program was introduced in Nambia in 2015 and has attracted investment mainly in solar generation rather than other sources of renewable energy.

The Batoka Gorge hydroelectric power project is just one way in which partnerships by African states are emerging in the renewables space. This US$4.5 billion hydroelectric project on the Zambezi River that borders Zambia and Zimbabwe is expected to generate 1,600 MWs of electricity, to be shared in equal portions among both states.⁶  The Zimbabwe Electricity Supply Authority's (ZESA) generation capacity was measured in February 2016 as producing at only 845 MWs, against a projected national demand of 2,200 MWs and an installed capacity of approximately 1,940 MWs.⁷  Projects like the US$1.5 billion Hwange Power Station and the Kariba South expansion venture will add around 900 MWs to the Zimbabwean national grid.⁸  Once Batoka Gorge comes online, Zimbabwe is optimistic that sufficient generation capacity will exist to sell power to neighboring countries, too.

Ethiopia's main source of electricity generation is from hydroelectric power stations. Once completed, The Grand Ethiopian Renaissance Dam will be able to generate 6,450 MWs, being one of the largest hydropower dams in Africa.⁹

Botswana imports a large percentage of its energy from the Southern African Power Pool. With the Southern African region now experiencing a power deficit, the initiative to get Botswana to internally generate its own electricity is now more prominent. Private sector participation in electricity generation was enabled by the amendment to the Electricity Supply Act during 2016. Conversely, Mozambique has an installed generation capacity of around 2,905.45 MWs from a combination of hydro, solar, gas, wind, geothermal and coal sources, though only a quarter of the population has access to electricity.¹⁰

Morocco has targeted increasing electricity generation from renewable energy sources to 52 percent of total generation capacity by 2030. Kenya's renewable energy sector is well established and accounts for about 77 percent of the electricity purchased. Geothermal and hydro-power contribute the bulk of Kenya's renewable energy production.¹¹

As recently as June 2018, Gigawatt Global Cooperatief signed a deal with the 15-nation Economic Community of West African States to build US$1 billion worth of renewable energy projects in the region, with installation of 800 MWs of solar and wind farms in West Africa beginning with Burkina Faso, Senegal, Mali, Nigeria and the Gambia.

Africa's adoption of renewable energy projects is accelerating

INVESTING IN AFRICAN RENEWABLE ENERGY PROJECTS

Aligning with the 2030 vision to energize and "light up" Africa and the African Union's Agenda 2063, more renewable energy sources are being actively explored. Driven by their own concerns of corporate governance as well as the proven economic viability of renewable resources, funders are proving less inclined to finance coal-fired power stations.

Consequently, Africa's adoption of renewable energy projects is accelerating.

The World Bank has estimated that US$43 billion per year of investment is required for infrastructure in the power sector,¹² while the African Development Bank and the United Nations Environment Programme (UNEP) estimate a need for a package of US$41 billion per year to finance the development of the energy sector in Africa.¹³

US$1 trillion
Needed over the next 20 years to meet Africa's power demand.
mining review.com

So how does Africa secure these funds?

Development finance institutions have expressed great interest in addressing the renewed urgency to light up and power the continent. Energy is at the core of the African Development Bank's economic transformation agenda, and the Bank has more than US$12 billion worth of investment commitments to the sector between 2016 and 2020.¹⁴  The World Bank's implementation of the Africa Climate Business Plan includes a plan to apply US$16 billion towards renewable energy projects in Africa.¹⁵

Angola's 2025 goal is to provide modern electricity to about 60 percent of its population and the country has about US$18 billion of renewable energy investments underway as part of that strategy.¹⁶  The new Angolan government is taking steps to enhance the country's attractiveness for foreign direct investment, including reform of the legislative framework to attract funding from the International Monetary Fund and other multilateral investment organizations. Mapping studies completed by the Ministry of Energy and Water in June 2014 identified potential for 55 GWs of solar power, 3 GWs of wind power and 18 GWs in hydropower throughout the country.¹⁷

Coupled with current legislative reforms under way, potential exists for investors to invest in renewable energy technologies in Angola.

Morocco is another example of an African country that is taking active steps to enhance investment in renewable energy projects. Morocco is liberalizing its renewables sector, including by increasing the minimum threshold for hydro-power plants from 12 MWs to 30 MWs and by establishing the Moroccan Agency for Solar Energy to carry out programs for solar energy generation for up to 2,000 MWs.

Investor confidence is recovering in Zimbabwe, with the new administration under President Mnangagwa. Opportunities exist in many industry sectors for both developers and financiers, particularly in renewable energy. Care needs to be taken to minimize investment risks, especially where regulatory reform is at an early stage. And more attention to marketing investment opportunities in African renewable energy is key to mobilizing these projects.

African governments also need to continue to improve their ability to attract financing for these crucial projects by improving their regulatory and political frameworks, affording funding institutions and investors a stable environment to undertake projects, and becoming more environmentally sustainable in the long run.

Despite the number of projects being commissioned around the African continent and the number of project initiatives that are currently underway across Africa, the continent is still nowhere near bridging its generation deficit. As current demands are met, demand for electricity across the continent continues to grow.

With African states recognizing their renewable energy generation capacity, and in so doing taking action to implement the necessary reforms to make foreign investment possible, opportunities for investment in Africa will continue to expand. Progressive regulatory reform, especially around the establishment of independent power producer (IPP) programs, would accelerate that momentum. Attractive returns on investment, coupled with steadily improving risk, suggest that Africa will continue to attract investment into its renewable energy sector in the coming years.

FULL MAGAZINE
Africa Focus: Autumn 2018

¹ Wu, G.C., Deshmukh, R., Ndhlukula, K., Radojicic, T., Reilly-Moman, J., Phadke, A. Kammen, D.M. and Callaway, D.S. (2017). Strategic siting and regional grid interconnections key to low-carbon futures in African countries. PNAS April 11, 2017. 114 (15) E3004-E3012; published ahead of print March 27, 2017.
² International Energy Agency (2017). Energy Access Outlook 2017. Accessed at https://www.iea.org/access2017/ on 17 August 2018.
³ Boko, M., I. Niang, A. Nyong, C. Vogel, A. Githeko, M. Medany, B. Osman-Elasha, R. Tabo and P. Yanda, (2007). Africa: Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson, Eds., Cambridge University Press, Cambridge UK, 433-467.
⁴ National Energy Regulator of South Africa (2017). Monitoring renewable energy performance of power plants. Progress in the first half of 2017 (Issue 10) September 2017. Accessed at http://www.nersa.org.za/Admin/Document/Editor/file/Electricity/SustainableEnergy/Monitoring%20Report%20Oct2017_No2.pdf on 17 August 2018.
⁵ GET FiT Uganda (2016) Annual Report: Kakira Cogeneration. Accessed at https://www.getfit-reports.com/2016/projects/kakira/ on 17 August 2018.
⁶ AfrElec - Africa Power Monitor (2018). Zimbabwe To Push Ahead With Batoka Gorge HPP. 18 July 2018, Week 28, Issue 163. Accessed at https://newsbase.com/topstories/zimbabwe-push-ahead-batoka-gorge-hpp on 17 August 2018.
⁷ Africa-EU Renewable Energy Cooperation Programme (2017) Zimbabwe Energy Sector. Accessed at https://www.africa-eu-renewables.org/market-information/zimbabwe/energy-sector/ on 17 August 2018.
⁸ Kazunga, O. (2018) Hwange power station expansion contractor on site. Chronicle, Zimbabwe, May 1, 2018. Accessed at http://www.chronicle.co.zw/hwange-power-station-expansion-contractor-on-site/ on 17 August 2018.
⁹ International Hydropower Association (Undated) Ethiopia - Grand Ethiopian Renaissance Dam (GERD) Accessed at https://www.hydropower.org/case-studies/ethiopia-grand-ethiopian-renaissance-dam-gerd on 17 August 2018.
¹⁰ Africa EU Renewable Energy Cooperation Porgramme (2017). Renewables in Mozambique – National Status Report / October 2017. Second Edition.
¹¹ Aglionby, J. (2017). Kenya shows renewables scope to plug Africa's power supply gaps. Financial Times, 23 may 2017. Accessed at https://www.ft.com/content/aa11cc7e-3567-11e7-99bd-13beb0903fa3 on 17 August 2018.
¹² Kaluba, D.C. (2018). Financing Renewable Energy in Africa in the SDG Era. International Centre for Trade and Sustainable Development. 24 April 2018. Accessed at https://www.ictsd.org/bridges-news/bridges-africa/news/financing-renewable-energy-in-africa-in-the-sdg-era on 17 August 2018.
¹³ World Bank (2017) Africa Infrastructure Country Diagnostic. Accessed at http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_factsheet_energy.pdf on 17 August 2018.
¹⁴ African Development Bank (2018). T he New Deal on Energy for Africa: A transformative partnership to light up and power Africa by 2025.
¹⁵ World Bank (2015). A Plan to Spur Climate Resilient Infrastructure in Africa. Accessed at http://www.worldbank.org/en/news/feature/2015/12/09/a-plan-to-spur-climate-resilient-infrastructure-in-africa on 17 August 2018.
¹⁶ Sector briefing: Doing business in Angola 2018. Accessed at http://www.angola.doingbusinessguide.co.uk/the-guide/sector-briefings/ on 18 August 2018.
¹⁷ Export.gov (2017). Angola Country Commercial Guide: Energy. Accessed at https://www.export.gov/article?id=Angola-Electric-Power-Generation on 18 August 2018.

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