Africa faces a vast financing challenge if it is to meet its development and sustainability ambitions. The continent needs hundreds of billions of dollars in investment each year to build and modernise critical infrastructure.
The African Development Bank estimates that Africa’s infrastructure financing shortfall alone is between US$68bn and US$108bn a year. At the same time, the financing required to achieve the UN Sustainable Development Goals outstrips public resources, with many governments facing rising debt burdens.
Emerging economies may need to mobilise 6.5% of GDP for climate goals
‘There is a widening structural investment gap that is becoming more acute as concessional public flows contract,’ says Matthew Hurworth at Climate Policy Initiative (CPI), an analysis and advisory organisation.
Against this backdrop, blended finance – which combines public, private and philanthropic capital – has emerged as a promising tool for mobilising capital to enable projects that might otherwise be deemed too risky or unprofitable to secure finance.
‘At its core, blended finance involves combining public or development finance with traditional banking and private sector capital to unlock outcomes that would not be possible without that mix,’ says Johan Greyling, infrastructure leader at Deloitte Africa.
A growing opportunity
In 2018, CPI identified Sub-Saharan Africa and South and East Asia as the top regions for blended finance. It estimated that eight countries – including South Africa, Kenya, Uganda, Rwanda and Mozambique – would offer US$360bn in clean energy investment potential by 2030.
Nearly a decade on, Africa’s financing challenge has intensified. CPI’s latest climate finance research shows that while global climate finance reached a record US$2 trillion in 2024, emerging and developing economies still face a substantial funding shortfall.
Hurworth notes that CPI research indicates an average of US$8.6 trillion in annual climate finance will be needed between 2024 and 2050 to avoid the worst impacts of climate change. Emerging and developing economies may need to mobilise up to 6.5% of their GDP annually by 2030 to meet climate goals.
It is being asked to do more of the work previously done by grants
With foreign aid declining and bilateral climate finance contracting further, Hurworth says ‘blended finance structures are being asked to do more of the mobilisation work previously done by grants and concessional pipelines. Persistent barriers to private capital mobilisation remain largely intact, and blended finance continues to be one of the few mechanisms capable of bridging it.’
Proof of concept
Innovative vehicles continue to emerge as governments across Africa increasingly experiment with blended approaches.
Hurworth says CPI’s research ‘identifies four categories of instruments that are demonstrating clear proof of concept in the African context’:
- full lifecycle financing facilities
- results-based finance and carbon finance
- guarantee facilities designed to reduce investor risk
- structured finance.
Rwanda’s recently announced €213m (US$244m) financing package with the International Development Association, the World Bank Group Guarantee Platform and the Multilateral Investment Guarantee Agency demonstrates how guarantees and risk-sharing mechanisms can help governments access longer-term funding.
Other innovative financial instruments include Melanin Kapital’s Carbon Neobank, which uses carbon credits to unlock affordable SME finance. Then there’s the P-REC Aggregation Facility, backed by the African Development Bank and Nordic Development Fund, which links mini-grid developers with corporate sustainability buyers.
‘It should be seen as part of a broader toolkit rather than a fix-all’
Currency risk
Despite its increasing prominence, blended finance is not a universal solution to Africa’s infrastructure funding challenges.
‘It should be seen as part of a broader toolkit rather than a fix-all,’ Greyling says. ‘Even when financing is secured – blended or otherwise – there are still multiple challenges to address.’
Large-scale infrastructure projects are often financed in US dollars due to the limited availability of long-term local currency funding. However, many of these projects, particularly in sectors such as energy and water, generate revenues in local currencies. This creates a currency mismatch that can significantly impact project viability when local currencies depreciate against the dollar over time.
‘In effect, you are importing the exchange rate differential between the local currency and the dollar,’ Greyling points out. ‘In many African markets, that differential tends to move unfavourably over time.’
‘The scarcest resource in the market is bankable transactions’
CPI identifies currency and macroeconomic risk as some of the most significant constraints on scaling blended finance across sub-Saharan Africa. ‘That is a problem because it is precisely political instability and currency depreciation that tend to deter private investors from sub-investment-grade African markets in the first place,’ Hurworth says.
Bankability challenge
Another constraint is the lack of investment-ready projects. ‘The scarcest resource in the market is bankable transactions,’ Greyling says. ‘Bringing infrastructure projects to a bankable stage requires considerable expertise and sustained effort, and is inherently complex.’
While capital may be available from development finance institutions, export credit agencies and private investors, aligning the interests of all stakeholders remains challenging. Legal complexity, risk allocation, environmental requirements and governance standards can increase costs and extend timelines.
‘These issues are not straightforward to resolve,’ Greyling says. ‘Often, additional layers of protection are required, which can further drive up the cost and complexity of large infrastructure transactions.’
Hurworth echoes this concern. He highlights the ‘acceleration gap’ – the period between a project’s proof of concept and its ability to attract institutional-scale investment. ‘Many blended finance instruments stall between the pilot stage and bankable scale because the working capital needed to hire advisers, structure legal documents and engage institutional investors simply is not there,’ he says.
Accounting demand
For accountants, blended finance presents growing opportunities. As governments, development finance institutions and private investors seek to structure more sophisticated financing arrangements, demand is increasing for expertise in financial modelling, risk assessment, impact measurement and governance.
Hurworth argues that it is vital to understand the specific risks being addressed. ‘The most common structuring error is applying a standard instrument to a non-standard risk profile,’ he says. ‘Blending capital layers does not by itself address off-taker risk, currency risk or policy instability. It only adjusts the cost of capital.’
‘Investor appetite is not the primary constraint’
Guarantees, for example, may be appropriate for political or credit risk, while first-loss capital may help address construction or development risk. Currency hedging facilities address foreign exchange exposure. Successful structures recognise these distinctions and allocate capital accordingly.
Greyling emphasises that investor appetite is not the primary constraint when projects are well structured. ‘I am not concerned about the availability of private capital – that will come,’ he says. ‘The key is ensuring the right risk mitigation measures are in place, achieving the appropriate blend of financing, and structuring deals that work for all parties while adequately addressing risk.’
