A Yemeni vendor uses a lantern to light his shop at a market in the capital Sanaa in 2015. Photo by Mohammed Huwais/AFP via Getty Images.

How diaspora investment can finance energy access in fragile settings

Blog Energy, State, energy access, development finance and State Fragility initiative

Improving energy access in fragile settings is fundamental for achieving universal access to affordable, reliable, and sustainable energy. Blended finance offers a mechanism for investments to flow into the market, pioneering off-grid solutions in these settings. However, more research is required to understand the different types of private finance that are appropriate for blended structures in fragile settings. Specifically, investment from the diaspora community is expected to have added value and benefits with regards to technical assistance, productive capital, and improving non-diaspora investor confidence.

Between 2010 and 2018, the share of the world population with access to electricity rose from 83% to 90%, representing over 400 million new connections. Although this signals good progress towards advancing energy access, attention is still needed to craft energy access solutions for fragile settings. An estimated 86% of people without access to electricity live in countries characterised as ‘fragile’. Distributed renewable energy (DRE) is increasingly being recognised as an important solution for addressing energy access in fragile settings. However, as highlighted in IGC’s Call to Action, financial commitments are needed to catalyse energy investment in fragile settings. Currently, energy investment in fragile settings is below 1% of global investments for electricity.

Blended finance in frontier markets

Blended finance is a mechanism combining concessional public finance with non-concessional private finance. Essentially, it enables public and private financing initiatives to work in a joint manner, harnessing private finance as an agent for the global public good.

Blended finance was born out of the market’s inability to align risk-adjusted returns to investors with social preferences. It focusses on filling the funding gap associated with delivering the SDGs. It also has potential for progressing investment to support market pioneering DRE ventures in fragile settings.

In addition to allowing different organisations with varying objectives to co-finance projects, they are also able to pursue independent goals. There are three key characteristics of blended finance:

  • Leverage: Utilising humanitarian or development finance to attract commercial finance into projects
  • Impact: Investments that drive development, social, environmental, or humanitarian progress
  • Returns: Financial returns for private investors in line with market expectations, based on real and perceived risks

Fragile settings have frontier risks associated with investments, such as perceived low capacity, untested environments, and institutions that struggle to ensure predictability of government action. Therefore, aggregate market level blended finance approaches may not be effective due to an inability to be flexible and adapt contextually. Instead, blended finance in fragile settings should have a tailored project-by-project-based approach which helps enable the entry of market pioneering projects. Attention must thus be given to enabling blended finance to catalytic sectors in fragile settings, such as DRE ventures, where markets do not necessarily exist. There is also a greater need for pioneering efforts to create markets and high impact in these sectors. Successful transactions can also pave the way for future lower-risk entrants through information building, which has potential to decrease the risk premium.

For example, EDFI ElectriFi is a blended investment facility funded by the European Union. It focusses on ensuring energy access in local markets in poorer economies by effectively combining technical assistance and risk capital. This allows EDFI to take on greater risks than other investors. The facility invested EUR 1.5 million in Sunkofa Energy, a company providing energy services through smart mini grids in Benin. The funding went towards construction costs for further mini grid development in Benin and is expected to play a significant role in developing the mini grid sector, mobilising private finance, and providing strong additionality due to the early stage of the company and market.

Harnessing investment through the diaspora

Diaspora are important stakeholders in the sustainable growth of their home countries. People from fragile settings who reside abroad have an important and untapped potential to invest in their countries of origin and create impact, especially those with specific business, sector, and professional expertise.

Early-stage technical assistance (TA) and capability building is fundamental within frontier blended finance to support project development and preparation of projects to achieve bankability. Diaspora have the potential to add value in this area, as they are a channel for not only the financial flows but also the much-needed tacit knowledge. This brings in potential sources of opportunities for trade, further investment, innovation, and professional networks.

Diaspora finance is expected to have impact on development by scaling up investment, which offers multiple benefits to the recipient country, including

  1. providing additional private resources to finance development
  2. expanding and enabling access to patient long-term credit
  3. encouraging greater non-diaspora investor confidence
  4. providing a reliable flow of resources in growing global uncertainty

For instance, in 2019, total remittance flows were estimated at US$ 714 billion, which was larger than FDI in the same period. Although remittance flows have significant impact at both household and macro levels, remittances are often utilised as subsistence consumption rather than investment. A recent study showed 83% of diaspora interviewed were interested and had the resources to invest in their country of origin yet faced a range of challenges, including lack of credible projects, reliable data, and information.

Given this high potential of impactful capital from the diaspora, it is important to build a stronger understanding of how private resources can be mobilised to be invested in off-grid projects in fragile settings as part of blended finance efforts. It is also important to generate evidence around the expected added benefits. A growing number of governments and development partners have turned their attention to fostering more conducive enabling environments for diaspora investments. For example, in 2020, the Kenyan Capital Markets Authority granted the first licence of its kind to allow Kenya’s diaspora to make investment through the ADAM investment fund – in turn providing a safe and regulated investing body for Kenyans living overseas.

A collaborative approach is needed

For DRE investments to progress in fragile settings, collaborative efforts are needed from all stakeholders, including DFIs, private sector actors, and international investors. Off-grid energy has numerous catalytic benefits and is a sector that can offer diaspora investors impact and commercial returns as part of a blended model.

As focus now turns to low income and fragile settings, it is important to adopt a more tailored approach to blended finance in these setting. Generalised approaches run the risk of not creating the desired impact or of ineffective allocation of aid. Tailoring blended finance includes building an understanding of how to include diaspora financing as a private investment tool. It also includes generating evidence on the value added in doing so. Policymakers must also turn their attention to fostering more conducive enabling environments for diaspora investments, which includes action around:

  1. institutional engagement with diasporas
  2. extending rights and recognising diasporas’ contributions
  3. establishing an economic enabling environment and financial incentives
  4. supporting greater systematic data and information for diaspora investment flows
  5. promoting investment incentives
  6. setting up initiatives to leverage and mobilise resources

Editor's note: This article is part of our Escaping the fragility trap series.