On the Mbei river, about 85km east of the Gabonese capital of Libreville, plans are well advanced for a 34MW “run-of-the-river” hydroelectric plant.

Unlike bigger hydroelectric stations that depend on a dam, Kinguele Aval will have a modest reservoir that should, at least in theory, minimise environmental destruction. It is expected to generate enough electricity for one in six residents of Libreville, a city of about 700,000 people.

The $205m plant will be owned by a joint venture between Gabon’s sovereign wealth fund and Meridiam Infrastructure Africa Fund — a French investor that has 14 projects on the continent, including a biomass plant in Ivory Coast, a geothermal station in Ethiopia and a port in Nouakchott, Mauritania.

Sinohydro, a Chinese state-owned hydropower company, will build the Gabonese plant, which is being financed by institutions including the International Finance Corporation, the African Development Bank, the Development Bank of Southern Africa, and the Islamic Development Bank. Gabon’s state utility company will buy all the electricity for the 30 years of the concession — in effect, providing a sovereign guarantee.

“These projects are new and quite complex,” says Akim Daouda, chief executive of Gabon’s sovereign wealth fund, referring to the long planning and many participants involved. After a drop in the oil price, even relatively wealthy Gabon cannot pay for all its infrastructure needs and has sought alternative financing models.

The complexity is typical of projects in the continent. But investors say funding African infrastructure is less risky than commonly perceived, even if disputes do arise — such as in 2018, when the Gabonese government seized 35 sites operated by Veolia, a French utility. According to Moody’s, default rates, at less than 6 per cent, are half those of Latin America.

A lot of that is down to the complex structure of deals designed to de-risk investments before the first shovel breaks ground.

“Because there’s this misperception of risk, projects tend to be even more tightly structured than they would be in more developed markets,” says Vuyo Ntoi, joint managing director of AIIM, a private equity investor in African infrastructure. “This is a market that’s not played by many, so the returns are still relatively attractive.”

That risk perception has led to what Kannan Lakmeeharan at consultant McKinsey calls “Africa’s infrastructure paradox”. Although there is a need for road, rail, power and water projects — not to mention internet, schools and hospitals — there is a big funding gap because of a lack of projects that meet investors’ criteria.

“The infrastructural needs are there and there’s a gap in the fundraising ability of some countries,” says Andrew Dawes, chief executive of Arise Ports & Logistics, which operates two ports in Gabon and another in Ivory Coast. Still, he is optimistic about Africa’s future, citing its latent demand, rising populations and political momentum from the 54-nation African Continental Free Trade Area.

“We see opportunity and we’re ready to partner,” says Dawes. Arise, in which AP Moller Capital recently bought a 43 per cent stake, is looking for investments in west Africa.

In the continent as a whole, at least until Covid-19 struck, investment in infrastructure has been rising. A 2018 report by the Infrastructure Consortium for Africa found average annual funding between 2013 and 2017 was $77bn, double the annual average in the first six years of the century.

But that still leaves a funding gap of about $70bn, according to most estimates. It is a shortfall that may prove hard to fill as countries’ debt levels mount to build roads, rail and airports. Debt concerns may explain signs that Chinese construction companies and their financiers, which dominate the provision of infrastructure on the continent, may be reining in their ambitions.

“Lending didn’t dry up completely, but it shrank considerably to the countries where they’ve run into problems,” says Deborah Bräutigam, director of the China-Africa Research Initiative at Johns Hopkins University.

However, Kai Zhu, principal for the China-Africa trade corridor at Absa, a South African bank, is not convinced Chinese companies are pulling in their horns: “They are graduating to investing in equity as majority or even minority partners,” he says. “They have never done that before,” he adds, mentioning a $4bn hydropower project jointly planned in Zambia and Zimbabwe by General Electric and Power Construction Corporation of China.

The need for transport links, as well as power, remains huge as anyone lurching along a road in Madagascar or seeking to fly between close neighbours in west Africa can testify. In Lagos, operators say it costs more than $4,000 to truck a container 20km to Nigeria’s mainland from the ports of Apapa and Tin Can Island, almost as much as shipping it from China.

In many countries, businesses must also rely on back-up generators or dedicated power plants, raising the cost of energy to formidable levels. For the 600m Africans not connected to the grid, a lack of electricity can make it harder for schoolchildren to study at night, let alone charge the devices needed to access the internet. Even wealthy South Africa has a plan to spend $15bn over 20 years on “powerships” at ports, to supplement its faltering electricity supply.

Internet and mobile phone coverage has expanded rapidly, yet many people still have old-fashioned handsets and less than 1 per cent of global data capacity is in Africa.

Vivek Mittal, chief executive of the Africa Infrastructure Development Association, which represents project developers, says the private sector can do more to fill the gap. “Pretty much anything can be privately financed,” he says. “We’ve got small companies distributing solar home-lighting systems on a commercial basis to people in the middle of nowhere in countries with no credit history at all.”

Off-grid solutions, such as solar panels, are also becoming more attractive to institutions whose sustainability pledges to shareholders are nudging them towards greener investments. Law firm Linklaters calculates that nearly $35bn was invested in renewable energy projects in Africa in the decade to 2021, mostly in solar.

Rémy Rioux, chief executive of French development agency AFD, says: “All the projects we are backing have climate benefits, or at least do no harm.” Like many institutions, the AFD will not fund coal plants and has “nearly stopped financing fossil fuel projects altogether”. In Ivory Coast, it has backed Africa’s first floating solar power plants on lagoons north of Abidjan.

This emphasis on green investment poses a dilemma for African governments, though — particularly in oil- and gas-rich nations, which may be reluctant to embrace a net-zero emissions agenda driven mostly by the west.

Still, Rioux is certain that African countries can accelerate their energy transition and develop in ways distinct from the pollute-first, clean-up-later industrialisation models of today’s wealthy nations.

“The question is really about trajectory,” he says. “I’m convinced that leapfrogging is possible on the continent.”

​Letter in response to this article:

Africa’s project finance model is stuck in the 1990s​ / ​From Anshul Rai, Chief Executive, Nigeria Infrastructure Debt Fund, Lagos, Nigeria