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Japan credit insurance and aid for Africa’s decarbonisation to counter China’s advances

Africa.

Japan appears to be stepping up its efforts to invest in Africa, which may be seen as a proxy for the west’s efforts to counter China’s Belt and Road Initiative (BRI). Differences between China and Japan’s approach in Africa may result in different outcomes for the continent.

Japan is expected to pledge $30 billion in African development aid at the Tokyo International Conference on African Development (TICAD) in Tunis. It will also set up an insurance and financing framework to provide assurances to private investors and attract investment in decarbonization.

Japan and China’s engagement in Africa differ chiefly in the size and nature of projects. While Japan has helped finance port development in the past, it has since moved to financing power and social projects, while China has been largely involved in large infrastructure projects like railways and roads.

In June 2022, the G-7 announced a $600 billion global initiative called “The Partnership for Global Infrastructure and Investment” (PGII), targeting investments in developing countries. While not explicitly stated, this plan clearly seeks to provide an alternative to China’s BRI.

Nippon Export and Investment Insurance (NEXI), the official export credit agency of Japan, will partner with Africa Export-Import Bank (Afreximbank) to develop a framework which will help mitigate the risk of doing business in Africa for private investors.

Most of the loans guaranteed by the framework will focus on the development of renewable energy and the energy transition projects on the continent, where the heightened need for decarbonisation has not been met with adequate funding commitments.

Capacity building more than throwing money at the problem

Providing a framework to de-risk direct investment will go a long way towards attracting private investors and companies, and can help build capabilities within African countries. Japanese companies have largely stayed away from the parts of Africa that need their support the most, citing political risk and financial instability, and a lack of connections with local companies as reasons for this.

Most of the Japanese companies operating in Africa have set up manufacturing presence there to cater to the local market, using largely local labour. Yet most of this investment has been in countries that have some of the best infrastructure and a larger educated population than many others where investment and development are needed most.

Since the launch of TICAD in 1993, Japan has focused on building schools, improving healthcare and supporting governance initiatives, in addition to also helping build infrastructure. TICAD has also informed and directed the actions of the Japan Policy and Human Resources Development (PHRD) Fund, which has contributed $3.4 billion for over 4,500 projects in 150 countries.

Despite these efforts, Japan has always been compared to China when it comes to Africa, which has become the continent’s largest trading partner over the last 15 years. While its activities continued unabated despite criticisms over the lack of use of local labour and poor quality of its projects, it has now begun to pursue soft diplomacy to improve its image.

Quality over quantity: addressing Africa’s sustainability needs

The NEXI framework will be set up to guarantee up to 90% of certain loans, and will apply to Japanese companies and African state-owned businesses. An area of focus will be the development of renewable energy sources, like solar, wind and geothermal power, as well as financing transition projects.

The need for decarbonization in Africa is being driven by anthropogenic activities, but it can also be viewed as a way to resolve its high dependence on fossil fuels, especially coal. Although local economies have not recovered since the pandemic, the need for energy is expected to rise by a third by 2030, according to the IEA.

TICAD has helped Japan evolve its role in Africa, from providing aid to actually engaging with it as a trading partner and market for investments. Examples of this include matching early stage Japanese companies with their African counterparts, developing intellectual property rights and general business training, and helping improve the food value chain.

While the lure of large sums of money to build large projects will be hard to resist for many African countries, Japan placing value on African ownership and participation will help sustain the goodwill that it has built up through TICAD over the last 20 years.

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