The new U.S. administration must double down on – not shy away from – engagements with African energy opportunities by facilitating U.S. private sector investment in natural gas and renewables and eschewing a return to aid-driven diplomacy
THUR 21 JAN, 2021-theGBJournal- On Wednesday, U.S. President Joe Biden was sworn into office, ushering in a new administration, new foreign policy and a new approach to U.S. trade and investment in Africa.
For its part, the Trump administration had not been short on growing U.S. private sector involvement in Africa, specifically under its trademark initiative, Prosper Africa. Designed to strengthen bilateral trade and investment, the initiative was launched in 2019 and supported by the Better Utilization of Investments Leading to Development (BUILD) Act. Signed by former President Trump in 2018, the BUILD Act consolidated the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority into the U.S. International Development Finance Corporation (DFC), doubling the limit on investments from $29 billion under OPIC to $60 billion under the DFC.
Serving as a critical instrument of American foreign policy, the DFC aims to mobilize private investment in emerging markets and generate returns for American taxpayers. Out of the $29.9 billion in active commitments globally, $8 billion has been directed to Africa alone, making it the second-largest recipient of investment following Latin America. With a rapidly growing, increasingly urbanized population – and associated needs for energy and infrastructure development – the African continent should be at the forefront of a U.S. investment agenda, in terms of developing a mutually beneficial, long-term relationship characterized by sustainable energy development and cooperation.
Advocating for Natural Gas Abroad
The African natural gas value chain represents a critical avenue for foreign investment and export opportunities, including the creation of onshore U.S. manufacturing jobs. The Total-operated Mozambique Liquified Natural Gas (LNG) project, for example, secured its largest share of senior debt financing from the U.S. Export-Import Bank, which aims to support U.S. exports for the development and construction of the LNG plant and create an estimated 16,700 American jobs over its five-year construction period. In terms of U.S. LNG exports, the relative proximity of certain sub-Saharan markets to North America renders the cost of transporting U.S. LNG to the continent as 20-40 percent less than transporting it to North Asia. As a result, the export market potential for U.S. companies looking to sell excess LNG supply to Africa – as a result of the country’s recent major investments in new liquefaction capacity – is substantial, coupled with Africa’s own large-scale energy needs.
As part of the Democratic Party platform, President Biden has targeted the elimination of billion-dollar oil and gas subsidies in the U.S. and called on other developed countries to do the same. While the proposition is unlikely to pass U.S. Congress, it suggests that the Biden Administration may follow the likes of Europe, in terms of restricting fossil fuel investment and signaling its commitment to climate change action. To date, U.S. oil majors (ExxonMobil, Chevron) have been less radical in their commitment to reducing carbon emissions and retooling investment strategies than their European counterparts (Total, Shell). If the U.S. can continue to lend support to gas development abroad – particularly in Africa, in which gas is positioned as a relatively clean burning fossil fuel able to deliver energy to scale – then it can cement its role as a leading provider of finance, infrastructure and technology to Africa’s energy transition.
Facilitating a Mutual Energy Transition
President Biden has been expectedly liberal in his stance toward a U.S. energy transition: in addition to once again committing the country to the Paris Agreement, he has pledged to transition the national economy to net-zero emissions by 2050, utilizing the revenues retained from subsidy cuts to fund a two-trillion-dollar climate action plan. That said, U.S. support of renewables should not be limited to the domestic market, and if the country plans to increase its fund allocation toward stimulating green business, then Africa represents a worthwhile recipient. The energy sector is already considered an investment priority by the DFC, attracting $10 billion in commitments to date.
In sub-Saharan Africa, total investment in power project development available to U.S. companies is estimated by Power Africa at $175 million. Meanwhile, universal electricity access by 2030 will require the construction of more than 210,000 mini-grids, mostly solar hybrids, connecting 490 million people at an investment cost of almost $220 billion, according to the World Bank’s Energy Sector Management Assistance Program. U.S. renewable-focused firms are well-equipped to meet African demand for renewable investment, offering an influx of technology, flexible capital and technical expertise, coupled with a free-market competition approach and reduced barriers to entry.
In addition to attracting external investment to reach continent-wide clean electrification goals, Africa is rich in minerals needed to fast-track the U.S. along its own energy transition. The Democratic Republic of the Congo, for example, is estimated to contain one million tons of lithium resources and is a global leader in the production of cobalt, copper, tantalum and tin. Such minerals are required to meet growing market demand for ‘green’ batteries that have the capacity to fuel U.S. clean energy by powering carbon-free grids, electric vehicles and green technologies.
Countering Chinese Influence
In terms of foreign policy, enhanced U.S. presence in Africa represents a strategic counter to Chinese influence, in the midst of an ongoing trade war between the two economic superpowers. The DFC offers a dynamic alternative to China’s Belt and Road Initiative, which has faced criticism due to its debt-heavy approach targeting government-to-government financing, along with its procurement to Chinese – and not African – firms and state-owned enterprises for the development of large-scale infrastructure projects. Criticism aside, China has been able to successfully extend its influence across the Global South because of the financial backing it receives from its government. Public sector support serves to alleviate perceived risk by providing a governmental vote of confidence – which the DFC has sought to do through reinsurance models that boost underwriting capacities and guarantees on behalf of American exports and contractors. Political risk insurance also seeks to protect U.S. investments against risk associated with currency exchange, expropriation, foreign government interference and breach of contract.
As it stands, bilateral trade between the U.S. and Africa is – for lack of a better word – underwhelming, decreasing from $31.3 billion in the first six months of 2019 to a paltry $12.7 billion over the same period in 2020. Last July, the U.S. began negotiations with Kenya over a free trade agreement targeting duty-free access for Kenyan goods to the U.S. market. If an agreement is reached – and it appears unlikely, given President Biden’s proclivity for multilateralism and his anticipated prioritization of the African Continental Free Trade Area – it could serve as a trading model for other sub-Saharan countries and to enhance commercial engagements. In short, the pieces of the puzzle for U.S. private sector-led growth in Africa are there; it is now up to the Biden Administration to put them together.
This article is courtesy Africa Oil & Power Conference