The 2022 African Economic Conference, jointly organised in Mauritius by the African Development Bank Group, the United Nations Economic Commission for Africa (UNECA) and the UNDP, held a plenary session on 10 December exploring the theme “From National to Regional Blue Bonds: Attract Blue Impact Investing to Unleash the Potential of the African Blue Economy for Climate-smart Development in Africa.”
The moderator for the session, Dr Adam Elhiraika, Director, Macroeconomics and Governance Division, UNECA, highlighted that the session would focus on four questions: how to mobilise blue bonds; how these bonds can be used to meet sustainable development objectives; how a regional approach could scale up blue economy activities to the point that they have an impact on climate impact and how to leverage the AfCFTA framework to develop sustainable regional blue value-chains; and how to promote Africa’s efforts to “build forward better.”
The panel was composed of Dr. Hanan Morsy, Deputy Executive Secretary and Chief Economist, United Nations Economic Commission for Africa (UNECA), Yuvan Beejadhur, Senior Adviser to the Director-General, Office of the Director-General, World Trade Organization (WTO) and Kevin Njiraini, Regional Director, Southern Africa, International Finance Corporation (IFC).
How Africa can mobilise blue bonds
Opening the discussion on how African countries can mobilise blue bonds, Dr. Hanan Morsy saw that the topic was an important issue, noting that “the contribution of marine life to climate change and climate action is hugely understudied relative to other areas” and that much less was known about the mapping of the oceans. She saw that part of tapping into it would be through increasing knowledge and “using science and evidence to link the two, so that we would actually be able to mobilise and have credible Key Performance Indicators” of how the action would affect climate change, and engaging creditors early on in discussions to get their buy in, and then catalyse other creditors.
Countries that have managed to set up blue bonds such as Seychelles, Belize and Barbados, have benefitted to a large extent from the support of philanthropy, she noted, and to scale it there needed to be a more systemic approach to blue bonds. She saw that de-risking instruments were needed to bring it to scale, and there was a perception of risk when it was tied to a small island economy, for example. “When we expand that original instrument in a special purpose vehicle this can actually reduce that risk perception”. She summed up that these issues could go a long way in mobilising and tapping the huge potential for blue bonds.
Using blue bonds to meet Sustainable Development Goals
Sharing his perspective on how blue bonds could be used to meet the objectives set out in the Sustainable Development Goals (SDGs), Yuvan Beejadhur noted that there were only 8 years left to meet the SDGs, at a time when Africa’s population was rising dramatically, with more pressures on national assets. He noted that 60% of people live on the coast and that there was increasing pressure from climate change, disruption, diseases, droughts and flooding. “We are going to have to double, or triple, our support, advisory services, investments and capacity building on blue economy dimensions and the trade dimensions,” he explained, and wondered why SDG 14 (Life Below Water) is the least funded SDG. “Is it because of lack of political will? Contradictions in international development? Not having the finance needed? Is it because our coffers are empty? Is it because of debt distress? Is it because of other things?” he asked.
He described the situation worrying as Africa has the seas, the oceans and the blue economy potential to be harnessed. He asked how much of the World Bank’s research on the African Continental Free Trade Area’s potential was on the blue economy, and noted that some other work conducted by the World Bank had quantified that Mauritius could double its current share of the ocean economy from 12% to 25% with US$ 580 million of investment annually for 17 years.
He saw that there was potential and huge opportunities, but there was a need to get the right enabling environment in place to attract these kind of investments, as investors told them that there are risks in many parts of Africa. “There are risks to investments, risks to sectors, often times investors come in for one or two years and then they disappear. That is really bad. You don’t want that to happen. You want investors to come in for the longer term,” he underlined.
He also noted that Africa is trading very little among itself, at around 16 to 17%, which in his view was not enough, “we need to trade much more among ourselves” and bring down taxes and tariffs. He noted that bringing down taxes on green and renewable energy products could help the planet and mitigating carbon emissions. He said these points needed to be contextualised more before banks and investors come in.
How to issue and sell blue bonds
Offering his views on how to issue and sell blue bonds and to mobilise resources to finance SDG 14 (Life Below Water) and SDG 6 (Clean Water and Sanitation), Kevin Njiraini, Regional Director, Southern Africa, at the International Finance Corporation (IFC), pointed out that when the IFC issued guidance for blue finance in 2021, it ensured that there was alignment with green bond principles, and that they came up with a list of eligible proceeds. “What we have found in financing for the blue economy, drawing off the green side, is the need for blended finance, which means working very closely with donors,” he explained. He saw that there were requests from countries like South Africa, saying that ‘we can’t do this on our own’ and that a mix of lending and grant funding is critical, and he noted that the same would be required for the private sector. The question was “can we repurpose some of the funding that we made available for climate change and repurpose some of that specifically to blue finance?” he commented.
Mr Njiraini emphasised that there were two things that investors need, namely policy certainty and regulatory robustness. Policy certainty meant that “once a policy is put in place it will not change for the duration of the funding”. Regulatory robustness meant that “once the regulatory reforms are done, and the World Bank Group and others are willing to support changes in regulation so that we have best practice, then they will come on board”. He underlined the importance of risk sharing mechanisms, “whether it is taking the first loss, for example, on some of these riskier products or investments in blue finance, then we would attract more funding”. He concluded by predicting that, while the funding will come, “the more we can provide a cushion to investors, the more they will come to have a look at our continent”.
In the following Q&A session, the issue of blue bonds and debt swaps, risk, impact and scalability were raised by MPs from the Seychelles, the Hon. Clifford Andre and the Hon. Waven William, while questions from the audience were more broadly raised on the issue of risk sharing mechanisms and types of guarantee structures.
Dr. Hanan Morsy accepted that they were focusing on debt financing, which was a valid point, and she recalled that the financing needs of the continent are enormous, with US$ 3 trillion needed by 2030 to meet the SDGs, which did not negate the need for compensation for losses and damages that African countries face. She considered that the establishment of the Loss and Damage Fund that was achieved at COP27 at Sharm el-Sheikh was a historic milestone that can be operationalised going forward, and saw this would be a critical mechanism.
She explained that there is the swap by which you replace an expensive debt for a cheaper one, including some commitments to climate action or blue economy, and then there are new issuances of new debt but you are trying to have these new issuances at more affordable prices. “For blue bonds that are new issuances what we are trying to do is have the issuances at more affordable rates at through having well defined Key Performance Indicators related to the blue economy. That is the difference,” she pointed out.
Dr. Morsy noted that African economies pay a high premium relative to other countries with similar fundamentals, of 250 basis points on average, which raises the cost of borrowing for African countries, hence the issue of having de-risking tools and guarantees will be key. Yuvan Beejadhur highlighted that “everyone has a different definition of blue bonds” and there was a need to define sustainability and quantify it so when investors come in the job is done.
Sharing the experience of the Seychelles as the global pioneer in sovereign blue bonds
The Republic of Seychelles launched the world’s first sovereign blue bond in 2018, which was described as a pioneering financial instrument designed to support sustainable marine and fisheries projects. The bond, which raised US$15 million from international investors, was announced as demonstrating the potential for countries to harness capital markets for financing the sustainable use of marine resources.
Speaking to Platform Africa in the margins of the African Economic Conference, the Hon. Clifford Andre, Member of the National Assembly of Seychelles, sounded a note of caution, explaining that “the experience of Seychelles is that we have swapped the debt. This is where my question comes up – whether it is proper for us to swap a debt to take care of something, at our own expense afterwards, that was not even our fault to have committed such. The blue bonds are something that are interesting, but if it was being done without swapping something, that would have been the perfect solution in respect of our problems”.
In terms of his advice to other countries that may be exploring options to launch blue bonds, Hon. Andre added: “It is a good mechanism but I would advise that it is not swapped with respect to any debts. It is a mechanism that you get investors to invest in the country. That would be a perfect solution to the problem. How do you attend to it in not having another debt? It is like another debt is being put on you as you have to pay from your own account to attend to something. It means you are doing it on your own and you never caused the problem. It is a very good way of dealing with matters, but do it in a way so that you are not swapping anything, you are just having people investing in the country,” he emphasised.
The path ahead for Mauritius and other African nations
Speaking to Platform Africa about the path ahead for Mauritius and other African nations, Yuvan Beejadhur, Senior Adviser to the Director-General, Office of the Director-General, World Trade Organization (WTO), reiterated that “Africa is operating in a very difficult context” in the light of the war in Ukraine, the inflation dynamics and climate change that is “massively impacting Africa”.
“For Mauritius specifically, some of the work we did at the World Bank showed that over the next 40 years Mauritius is going to lose 7% of its GDP, and that is a lot for a small island. That means that Mauritius and other African countries are going to have to invest massively in ports, infrastructure, greening the sector, agriculture etc. and more importantly now, because of the supply chain disruptions, build new inventories around the region because countries are very likely going to trade more and more amongst friends,” he explained.
“So what does it mean for small countries, coastal nations that do not always make the headlines? They are going to have to look at new sources of production within the region. Getting the basics right is going to be super important: looking at your financial expenditure reviews, looking at your national strategies, the National Determined Contributions that Mauritius and others promulgated at the Paris Agreement. How do you revised these NDCs and embed more and more the blue economy, climate change, new sectors etc? There is quite a bit of work to be done in terms of looking at those pathways, making the necessary changes, because a lot of talks on the COP 27 on climate financing, blue financing, at today’s conference today on blue bonds. It is super important to get the necessary required financing needed internationally for that to translate, but even if you had all the financing needed it simply would not be enough if you did not have the right trade policies,” he underlined.
He noted that the pandemic had shown that “having all the money you need to buy vaccines is not going to be enough, because there are trade restrictions, there are prohibitions, there are national security clauses being used that prevents poorer nations from accessing global common goods. The vaccine is a global common good. Renewable energy, clean air that we breathe, water are all global public goods. These are becoming increasingly tradeable in these national markets, so countries need to be ready to make the required necessary changes in their regulatory regimes, their investment regimes and revise their laws so that they you can really try to access this financing and be much more attractive to the private sector. The private sector is looking for predictability, transparency, being able to trade without risks, and so if you did not have these things it is going to be difficult to get the money required,” he concluded.
The session can be replayed on YouTube here.
