In this interview, Mark Napier, CEO of FSD Africa, explains the organisation’s role in strengthening financial markets across Africa to support entrepreneurship, job creation and sustainable growth. Based in Nairobi and operating continent-wide, FSD Africa focuses on improving regulation, developing new financial products and intermediaries, building infrastructure, and mobilising domestic private capital.
Napier also highlights key challenges, including high costs of capital driven by government debt, external misperceptions of African risk, fragmented markets and weak pipelines of investable projects. He emphasises the importance of knowledge sharing and systemic approaches tailored to local contexts. On the green economy, Napier identifies renewable energy—particularly solar—as the largest opportunity for mobilising private capital and creating jobs, while also stressing the growing potential of climate adaptation sectors such as water and waste. At Africa’s Green Economy Summit, FSD Africa aims to spotlight financing pathways for green skills and green jobs, positioning these as essential to long-term, inclusive growth.
FSD Africa is a reasonably large financial sector development programme. We’re based in Nairobi, and we have around about 110 people working across the entire African continent, including in North Africa. And really our job is to deepen financial markets. And just to explain what we mean by deepening, it’s really about developing markets such that they have better policies and regulation in place; there are new products, new intermediaries, new infrastructure, and generally creating a much more supportive environment for entrepreneurship and job creation.
And there’s a really important aspect of all of this, which is that it’s important that people across this very fragmented continent get opportunities to understand what’s going on in other parts of the continent so that they can learn and perhaps replicate and even do better than the projects that are already taking place. So there’s a strong knowledge sharing component to what we do. But fundamentally, we look to do those things: new products, new intermediaries and new infrastructure, in order that we can then capitalise, that we can raise more capital, particularly domestic, private capital, in order that that capital can find its way to the projects that we care about.
Some of the projects that we are involved in, for example, we invest in funds and guarantees. One example would be the African Local Currency Bond Fund, where we’ve invested around £16 million. And that fund, alongside KfW Development Bank, that fund has invested in USD 453m million worth of bonds and has crowded in local capital from domestic African pension funds and other institutions to the tune of almost USD4 billion. We’ve invested in specific projects like guarantees, for example, where we’re looking to support existing guarantee companies like Infracredit in Nigeria to help develop a pipeline around infrastructure projects.
We are also supporting the development of the insurance sector through the Nairobi Declaration on Sustainable Insurance. What’s important here is that we adopt a systemic view of how we should drive financial market development, because it’s all well and good to focus on one part of the system. But unless you really think about how this whole integrated system hangs together, then it’s going to be a struggle to get everything to work at the right time. So I feel that each country is very context specific. Each project is very context specific. And our job is really to find the right solution that makes the difference to that particular project.
Financial market development has many challenges at the moment, and obviously we hear a lot about the cost of capital that makes it very difficult for projects to return money to investors at a profit. And there are many reasons why the cost of capital is very high. A particularly prominent reason is the fact that many African governments are highly in debt.
And so they are forever crowding out the private sector. What happens when governments are heavily borrowed is that they absorb the free capital that there is in the market. So the banks and the pension funds put money into government securities instead of into real projects. And competition for that money pushes the price up. It means that private capital for private project developers is scarcer, and it’s more expensive. And so that’s a really important reason why the cost of capital for private projects is very high.
At the same time, there is an argument that says that African countries suffer from an external perception bias of the level of risk in African markets so that governments are rated as a worse credit risk than their comparators in other parts of the world. That is a challengeable assumption, but it is certainly the case that people don’t understand well enough the true level of risk that there is in African markets, which if you look at the recent release of the GEMs data from the MDBs and the DFIs, it shows that actually Africa risk is quite in line with other regions of the world. In fact, in some cases, Africa performs better than other global regions. Anyway, all of that conspires to push up the cost of capital, and that’s a problem.
Another very important reason why we’re not getting as much investment as we need to is the lack of an investable project pipeline. And there are many sort of issues to this. It’s not that there aren’t enough projects to back. There are plenty of projects. But we’re often not very good at presenting those in the way that investors want to see them. And so also we don’t always appreciate how international investors in particular want to see their information packaged. It’s very expensive to pull complex investment proposals together. And so a lot of the time, because projects are quite small, it’s just not very cost effective to invest the hundreds of thousands of dollars and more in developing prospectuses that international investors can respond to. So an investable project pipeline is a very significant thing.
And I think part of the problem here also is that we don’t have as entrepreneurial an intermediary sector as we would like. What I mean is the brokers and the investment bankers who in developed markets are used to developing speculative project proposals up to a pretty high standard. That doesn’t happen in many of the markets in Africa. That’s partly, I think, because of the crowding out of the fact of government securities. And so what happens is that we don’t have professional financiers investing time and effort in creating investable project pipelines. So that’s another reason why we struggle sometimes to get the projects together that we would really want.
There are many challenges. I think fragmentation is a very big one as well. We have 54 countries in Africa, and each of those markets individually is quite small. And so, for large-scale investors, and we must remember that some of these large international investors have trillions under management, many multiples of the GDP of some African countries, investing and they have minimum ticket sizes of USD250 million and above. And so it’s very difficult for a small market to present investable projects that have the scale that is needed.
And as I’ve said before, I think knowledge sharing across the continent is also quite difficult. It means that we also operate with many different sets of regulations. And so you have that kind of complexity that comes from fragmentation, which is a major problem.
When it comes to the opportunities in the green economy, FSD Africa is a big believer that investing in the green economy and creating the conditions that allow for capital to flow into the green economy is a really important opportunity, because we think it’s going to deliver faster growth, better quality growth and ultimately produce more jobs.
But when we think about where should we allocate resources, I think undoubtedly the energy sector is where the biggest wins can be derived. All the data shows that the energy sector is the one where probably 75–80%, perhaps even 90% of the private capital that is to be mobilised, including from domestic sources, will go into the renewable energy section. The reason for that is simply that investors now know how to invest in renewable energy. It’s been an asset class for a couple of decades already. And so it is something that investors have come to appreciate. And also I think in the donor community, I think there’s a real appreciation for the developmental benefit that comes from investing in renewable energy. So there is credit risk mitigation available for projects like that, and I think that’s a very significant opportunity. We think that if you look at the solar sector, for example, that’s going to be capable of producing a lot of jobs. Our data show that energy and power are expected to generate up to 2M jobs over the next 5 years, with nearly 60% of those jobs coming from solar. So I think that that’s a very important opportunity.
On the other hand, I think we must also think about adaptation. And this is the area of financing, which I think many people recognise as being of particular importance to Africa, which is obviously very climate vulnerable. And what’s been very useful recently is an appreciation that private capital can make a return out of adaptation financing. So sectors like water, sectors like waste, I think in the urban context, and remember we have very rapidly growing cities, those kinds of sectors I think are going to be significant opportunities in the future. And what’s needed there is for PPP frameworks to become very effective so that it is possible for private investors to quite quickly get to a project that is actually investable. There are frameworks in place that allow people to understand how the city authorities or the local government authorities are able to play in that space. So I think water and waste to energy and sectors like that, I think are going to be very important for adaptation financing in the future.
Our message for AGES is that we need to continue to work together to develop a much better understanding of the pathways for getting investment into the green economy. I think a very important message that we would particularly like to emphasise is that we need to develop an understanding of how we create the green jobs and the green skills that will allow for the green growth to ensue.
Job creation itself is a very difficult thing. And green jobs, we’re dealing in some areas with quite new markets, and to capture the real opportunity in the green economy, I think we do also need as governments, as donors and other interested impact investors, we do need to be quite strategic about how we allocate resources in order to create those green jobs and the green skills in order to drive the growth. So we hope as FSD Africa we’ll be able to create a genuine interest around how we finance the development of green skills in the future.
One of the reasons why we were interested in supporting AGES on this is that we don’t believe that AGES, which I think is an important convener for this kind of discussion, has had a particular focus in the past on green jobs. And so we particularly wanted to work with AGES to integrate this message around green jobs and the green economy into this important platform. So, we’re very happy to be doing this. We don’t sponsor events very likely, we are very careful about who we sponsor with, but we felt that AGES was the right partner for this particular message.
Africa's Green Economy Summit connects industry professionals and organisations to information and each other in a carefully curated live environment. Its purpose is to support in mobilising investments for green projects to scale up and industrialisation, which will have a significant impact on environmental sustainability and economic growth.
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