Bridging Africa’s Climate Finance Gap: The Urgent Need for Blended Finance

Africa’s legendary climate finance gap has been a persistent topic of climate change discussions for as long as most of us can remember. Despite a financing need exceeding $3 trillion by 2030, the continent receives merely about a 10th of its climate finance need, representing less than 5.5% of the total global climate finance. This gap is felt especially keenly in countries like Uganda, which, despite being one of the many African countries committed to Nationally Determined Contributions (NDCs), experiences a distinct lack of climate funding.

Inequity in Climate Finance Distribution

Notably, the distribution of climate finance that Africa does receive is highly uneven. About 60% of all climate financing is concentrated in just 10 countries, and Uganda is not among them. This disparity is in stark contrast to the region’s level of commitment; up to 98% of African countries have ratified their NDCs, and over 80% have submitted updated NDCs, making Africa among the most compliant regions to the NDCs process.

In Uganda, the financing gap is glaringly apparent. Despite ratifying its NDCs and submitting updated commitments, the country receives only about 3.9% of the estimated $28.1 billion it needs to implement its NDCs.

The Imperative for Blended Finance

Addressing the urgency to bridge the financing gap requires a comprehensive understanding of the current financing profile. International public finance dominates, contributing 80 cents for every $1 invested in climate finance across Africa. The private sector contributes 14 cents, with only about 4 cents coming from the national government. This distribution is mirrored in Uganda, where global climate finance flows are significant compared to domestic sources.

The implications are clear. First, Africa, and Uganda in particular, need to increase the share of private sector financing, including from local private sources. Second, attracting these private sources necessitates prioritizing credit support or credit guarantee schemes to de-risk the climate finance landscape. Lastly, there is a need to clearly define the investment opportunity inherent in the NDCs, with only 28% of African countries currently having a well-developed NDC with an associated investment plan.

The Role of Innovative Blended Finance

Blended finance, which combines public and private capital, presents a critical solution to bridge the finance gap. It can help de-risk investments, attract additional private sources, and operationalize costed NDCs with the help of innovative investment plans.

An innovative blended finance tool for operationalizing the NDCs investment plan is being developed. It draws its “innovativeness” from the diverse components that work in complementarity towards de-risking and operationalizing NDCs investments. This includes training for various stakeholders, insurance to cover market risk, enhanced market access for products developed from the NDCs, cash guarantees, and effective traceability and accountability for timely progress monitoring.

Key Takeaways

1. De-risking involves more than just fiscal resources; it includes training, targeted policies like fiscal incentives, and other elements that lower the risk of investment failure.
2. The innovative blended finance tool being developed goes beyond a traditional blended finance facility, incorporating multiple components that work together to de-risk and operationalize NDCs investments.
3. Different stakeholders need to be engaged based on their expertise and comparative advantage to operationalize the tool.
4. Financing NDCs implementation must target vulnerable groups like youth and the informal sector to be effective.
5. The innovative blended finance tool is a public good, intended to be implemented by all stakeholders, not the government alone.
6. The tool is a subset of the entire NDCs investment plan and is applicable to a variety of NDC priority areas as they ascend the hierarchy of national priorities.
7. Capitalization of cash guarantees and financing different aspects of implementation can draw from both the exchequer, bilateral/multilateral sources, and the private sector.
8. High interest rates make the majority of cooperatives inaccessible. Addressing these rates calls for actions on two levels: application of cash guarantees to cover repayment defaults and central bank intervention through policy and regulation to bring interest rates down.
9. The tool being developed is a compendium of recommendations and guidelines, designed to be implemented by the different players needed to achieve de-risked financing for the implementation of the investment plan.
10. The climate finance unit is developing a strategy to integrate this innovative tool, which is seen as a subset of the entire NDCs investment plan.
11. The blended finance tool is poised to address not only the initial focus areas – agroforestry, solar dryers, solar irrigation – but also other NDCs priorities as they ascend the hierarchy of national priorities.

In conclusion, bridging Africa’s climate finance gap is an urgent task that demands a multifaceted approach. The innovative use of blended finance provides a promising solution, offering a way to leverage both public and private capital, de-risk investments, and operationalize NDCs.

As we continue to refine and implement this tool, there’s hope that we can catalyze a shift towards a more equitable and sustainable climate finance landscape in Africa.

By Dr. Richard Munang, Head of Global Environment Monitoring Systems and Early Warning for the Environment Unit, UNEP