As recognition grows at both domestic and international level of the gulf between the level of investment needed and the sums available through public budgets, understanding the role of the private sector in climate compatible development is increasingly important. Given the pressing need to drive private investment in low-carbon development in Africa, public policymakers must carefully consider how to create the conditions to accelerate this investment. In practice, creating the certainty that developers, investors, insurers and other private actors require to feel confident on return of investment can be extremely challenging.
Information as much a barrier as lack of regulation
A major barrier to the certainty required by investors relates to the provision and use of information by various public, private and civil society actors. In many African countries, policies aimed at encouraging private investment in low-carbon sectors (be they regulatory or economic) may be in place, but are either incoherently communicated to the private sector, or create confusion by conflicting with other policies or regulations.
Understanding these communication gaps requires analysis of what the policy incentives and barriers are. Are there tax breaks for ‘dirty’ but not low-carbon technologies, for example? Are there clear and well-enforced tariff-setting procedures for renewable energy production? Is there a conflict between price signals at national and sub-national levels? Providing credible analysis of the policy landscape in a sector or sub-sector is key to overcoming information barriers. The diagnostic tool for mapping incentives and investments developed by ODI is one mechanism for such analysis.
Kenya’s charcoal challenge and the role of private finance
A good example of where targeted research has driven private action is charcoal replacement in Kenya. Like many countries in sub-Saharan Africa, one of Kenya’s biggest development and mitigation challenges is in the use of charcoal as household fuel by the poorest and most vulnerable households – with major health, deforestation, greenhouse gas emissions, and socio-economic impacts. Alternative fuels such as liquid petroleum gas (LPG) and bioethanol exist, however to date neither has proven financially viable, with distribution costs prohibitively high. Historically, development funds have been available for stove technology, but no business model has yet overcome the fact that charcoal remains far cheaper than other fuels, primarily due to the high distribution costs (particularly ‘last mile distribution‘).
Meanwhile, conflicting domestic policies and regulations hinder potential for private investment in the sector. As an example, VAT is not applied to domestically produced bioethanol stoves, but is on domestically produced fuel, while both are taxed when imported.
Private-private partnerships – a solution?
A potential solution is manifested in a recent deal between Vivo Energy (a major subsidiary of Shell, and retailer of Shell-branded fuel products in 16 African countries) and engineering firm KOKO Networks to use existing liquid fuel distribution networks to distribute bioethanol, massively dropping fuel price and making it affordable to low-income communities. ‘V2.0 Smart Fuel ATM’ entails ‘dropping in’ on existing liquid fuels infrastructure, using customised hardware and software for last-mile distribution, and resulting in a 40% reduction in price (from $1.48 per litre to $0.85) for V2.0 bioethanol compared to ‘V1.0’.
While Kenya currently produces only 1.8 million litres of ‘technical’ ethanol per year for household use, scaling up of the local ethanol industry would lower the cost by eliminating the issue of import duties. It would also create rural jobs in the production from sugar-cane or corn (compensating for the inevitable job losses from the shrinking charcoal industry), lower GHG emissions, and reduce rates of illness and death as a result of indoor air pollution. Ensuring a balance between use of land for biofuel crops and food security for the poorest will be something the Kenyan government must prioritise.
The reason this deal is of note is that it was struck between two private actors not because of facilitation by the Kenyan government or direct international development support, but because analysis of the investment environment presented a mutually beneficial outcome for the two companies involved. In so doing, information barriers have been overcome, and private finance is now flowing into climate compatible development which will hopefully provide some of Kenya’s poorest people with access to cleaner domestic energy.
Some of this analysis was undertaken internally by the companies themselves, with additional research undertaken by Dalberg under a project of the German International Climate Initiative (IKI) run by SouthSouthNorth, ODI and others. Dalberg as a trusted private sector consultancy contracted through a (publicly funded) development institutions, provided KOKO with additional ‘external’ credibility – a useful commodity, in supporting KOKO’s business and investment mobilisation strategy. This approach may provide a useful model for future mobilisation of private sector investment in low-carbon, climate resilient development interventions.
Author: Leo Roberts, Operations and Partnerships Manager at ODI
The views expressed are those of the authors and not necessarily those of ETTG
Image courtesy of Penn State via Flickr