Foreign Direct Investment (FDI) has been a valuable financing mechanism for developing countries throughout Africa, particularly with regards to capital intensive projects such as Liquified Natural Gas (LNG) and cross-border pipeline developments. In addition to the supplementation of domestic investment, FDI has been a means for economy wide efficiency gains such as technology transfer, management knowledge and the increase in employment opportunities.
With FDI proving a major catalyst for energy sector growth and economic development, and the COVID-19 pandemic tightening the strings on global investment flows, African energy projects have had to focus on the competitiveness and appeal of their investments to capture the necessary FDI.
With global economic projections expected to recover in 2021, and developing countries re-directing their focus on diversifying energy mixes, expanding power generation utilities, and spurring economic growth through energy developments, governments are setting their sights on securing FDI in the energy industry.
Alleviating Risk
One of the primary inhibitors restricting international investment in developing countries is the associated risk, and thus, risk reduction becomes a critical role for governments in promoting private and international investment. Risk reduction not only creates an enabling environment for investors, but ensures more efficient and effective processes within a country’s energy sector. Therefore, the government’s role comprises market evaluation, least-cost planning, eliminating obstacles to equitable markets, and ensuring national energy planning. Additionally, through the enforcement of a productive regulatory framework, one with transparency and consistency at the forefront, the various political, economic, and legal risks can be appropriately mitigated and FDI effectively secured.
Also read: Investing in Africa: There is more than just FDI
Leadership that prioritizes the safety and security of operations, and supports the growth of the energy sector through risk reduction, can serve as a cornerstone and major attraction for FDI. Notably, Mozambique has been at the forefront of risk reduction through the emphasis of security of operations with regards to its budding LNG industry. Through the establishment of a joint security taskforce, and the training of security agents from international allies, Mozambique has made great stride in ensuring the security of operations and is, therefore, becoming a more attractive investment destination despite ongoing security threats.
Establishing an Enabling Environment
In addition to risk reduction measures, the government has a decisive role to play in creating an enabling environment, a proven key attraction for international investment. In order to unleash private sector dynamism in the market, and ensure a selected country is the preferred investment destination for international financiers, it is necessary to ensure a politically stable and attractive business environment, in which regulatory frameworks and policies serve to drive investment in the sector. Specifically, through the enforcement of a transparent regulatory framework, and the provision of tax incentives and favorable tariffs, government can invite further FDI.
Additionally, the success of capturing FDI has been attributed to the ease of doing business in a country. Mozambique, for example, has implemented several regulatory reforms to aid in the transformation and diversification of the sector, as well as increase ease of doing business. Consequently, the country has experienced an influx in FDI flows, and has even managed to secure the largest FDI in Africa, to date, for its Total-led LNG project. Through the increase in ease of doing business Mozambique has become a competitive destination for foreign capital.
Maximizing Positive Synergies
Government support and backing is often a key determinant for the securing of FDI by both small- and large-scale energy projects. The value of government participation becomes apparent – especially in Mozambique with the increase in public-private partnerships (PPP) and observable benefits – when considering the role that the government can play in facilitating effective PPPs and maximizing synergies among all facets of the energy sector. With the public sector generally able to mobilize capital on a much larger scale, especially now that the COVID-19 pandemic has significantly reduced capital expenditure in the global market, the integration and collaboration between the public and private sector is vital. Additionally, government collaboration with the private sector can enable faster project completion times, increased access to funds, and the assurance that investment is directed in a sustainable and mutually beneficial manner. The private sector cannot act alone in facilitating energy sector growth and expansion, but rather, through leadership that understands the benefits of a unified sector, in which public-private collaboration is at the forefront, developing countries can realize an increase in FDI flows.
