Factors influencing the use of credit enhancement instruments in the financing of independent power projects in Kenya and Malawi

Abstract

To drive economic development in sub-Saharan Africa, investments in infrastructure, particularly energy access, are vital. However, fiscal constraints, exacerbated by high debt levels, limit African governments' capacity to fund such investments. This study examines how credit enhancement instruments can bridge the funding gap by attracting private sector financing for renewable energy projects. Grounded in the Market Failure and Financial Intermediation theories, the research explores four specific objectives: analysing the effects of credit enhancement instruments’ availability; pricing; adequacy of cover; and claims history on their utilization by Independent Power Producers (IPPs) in Kenya and Malawi. A mixed-methods approach was used, incorporating quantitative and qualitative data. Data collection involved interviews with experts, questionnaires, database reviews, and analysis of publications. The study population included IPPs, financiers, policymakers, and insurers, with a sample of 68 respondents drawn from experts with experience in Kenya and Malawi. Case studies of renewable energy projects in these countries provided contextual insights. The findings reveal that credit enhancement instruments are pivotal for IPPs to obtain financing and achieve financial close; the availability of such instruments and the adequacy of cover provided being the influential factors. Conversely, factors like pricing, and the claims history are less significant. These findings extend existing literature by presenting case studies that highlight the nuanced applications of credit enhancement in climate financing. The research offers valuable insights for stakeholders, including governments, multilaterals, insurers, and investors, on strategies to attract foreign direct investment in sustainable projects. It emphasizes the importance of designing flexible credit enhancement instruments tailored to the unique challenges of climate financing in sub-Saharan Africa. The study’s contributions have broader implications for fostering economic development, with potential applications beyond the energy sector to other critical infrastructure areas.