Investment droughts in energy generate conflict and misery in the Global South and fuel a flood of migration while impairing bids for sustainability. Prashant Vaze calls on advanced economies to finance power projects in the poorest countries where renewable resources are rich.
India has abundant sunshine, making solar PV cheaper than fossil fuels. Its remote off-grid villages are desperate for reliable, affordable power. However, what India and other countries in the Global South lack is affordable finance. Domestic bank rates in India are 4-5% higher than rates in advanced economies (AEs). If solar developers borrow from foreign banks, they have to repay in hard currency, but the cost of access cancels the advantage of low rates.
The UN estimates that emerging markets and developing countries (EMDEs) need an additional $4 trillion per year to meet SDG goals. Half of this is for clean energy. Current investment by EMDEs is too little and unequally allocated (see box, The rich stay rich).
Most investment in clean energy goes to countries that are already well served. The only EMDE successfully transitioning to renewables is China. The contrast between China and Africa is stark. China spent $551 billion in 2022, while Africa spent just $32 billion—a fifth of its needs.
The contrast between China and Africa is stark. China spent $551 billion in 2022, while Africa spent just $32 billion—a fifth of its needs.
Western Europe, the US, and Canada, whose combined population is smaller than Africa’s, already have abundant energy infrastructure, invest $500 billion a year. Current financial flows exacerbate developmental inequality between EMDEs. Faster-growing emerging market countries have good access to lending, while the poorest countries are denied the finances to improve their lives and environments.
The sums EMDEs need for the energy transition are far greater than current aid and development finance flows. In 2022, overseas development assistance to EMDEs amounted to $210 billion. AE governments are opposed to increasing grants or soft loans. They are wrestling with large government deficits and have eye-watering levels of debt. Instead, AE governments are urging multilateral development banks (MDBs) to use their balance sheets more creatively, be less risk averse and work with private capital. In 2022, $61 billion flowed from MDBs like the World Bank Group. Most MDB funds are long-term loans, and the poorest 80 countries get subsidised interest rates. MDBs receive grants from AEs and also borrow from global capital markets.
Creating a fair and sustainable world means redeploying savings from AE households into the EMDEs. This means accessing the pool of savings managed by AE pension funds, insurers and banks. Countless reports have been written about clever financial instruments to increase money flow. The Glasgow Financial Alliance for Net Zero was launched during COP26, establishing a platform for green-minded private finance. Policymakers are asking MDBs to team up with private finance. This fusion of public and private financing – “blended finance” – is supposed to convert “billions” to “trillions”. MDBs are needed because of their experience with EMDE governments, preferred creditor status, and undoubted expertise in assessing and managing viable projects in EMDE countries. But ‘blended finance’ flows are miniscule. The think-tank Convergence records just 1,123 transactions, investing some USD15 billion/yr.
Private finance’s reluctance has nothing to do with the economics or riskiness of the underlying projects.
Hundreds of trillions sit in advanced economy pension funds and insurance companies. Why does so little of this flow into EMDEs? Private finance’s reluctance has nothing to do with the economics or riskiness of the underlying projects. Refinancing already up-and-running solar photovoltaic projects in sunny countries is a commercial no-brainer, especially if expensive, cranky diesel generators are being displaced.
There are many reasons international investors don’t invest in low-income economies. Rational difficulties include a lack of local staff, worries that courts might be ineffective if they litigate to recover investments and high transaction costs. Regulations and market practices get in the way: banks must set aside large amounts of capital when lending to countries with poor credit ratings. The investments are illiquid, making it slow to repatriate revenue. Investors demand high returns on their investments and only offer short terms, making the whole exercise unattractive to borrowers.
One way to break this stalemate is for EMDE governments to undertake the projects themselves, assuming the construction risks (perhaps delivered by the local private sector) and only refinancing when the cash flows have been demonstrated. In India, these structures are called InvITs—infrastructure development trusts. This works for some middle-income EMDEs. For low-income countries, there is no domestic pool of capital to speak of. Grants are the only real option.
The current system for funding SDG investment in EMDE’s is not working. Resources still go from poor to rich countries through high interest rates, large debt mountains, and illicit transfers. It’s not ideal for AEs, either. Rules introduced after the Great Financial Crash (GFC) oblige banks and insurers to buy government debt and mortgage-backed securities. These fund government deficits and house price bubbles and starve the real economy of resources. This is unhealthy for AEs and EMDEs. It postpones the necessary tax reforms and makes property unaffordable for youngsters.
It is hard to remember how readily Western banks lent to developing countries in the 1970s when they were flush with petrodollars.
Perhaps the AEs’ biggest contribution could be reigning in their fiscal deficits and removing regulations that discourage investment in emerging markets. The AEs also need to tackle illicit financial flows from EMDEs into the West, often via tax havens.
It is hard to remember how readily Western banks lent to developing countries in the 1970s when they were flush with petrodollars. Since the GFC, the tide has reversed, and ‘prudential’ banking practices are starving useful projects of finance. This conceptualisation of ‘prudence’ is short-sighted. The world operates as a system, and the consequence of denying poor countries the opportunity to enhance their lives promotes conflict and unliveable environments. Migration from Africa and Latin America will only increase, especially as climate change makes the regions less habitable.
