Financing for the Grand Inga Dam Project Introduction “Africa has the largest energy poverty in the world, where more than two third of Africans are without access to energy […] businesses languish for lack of power, lives are at risks in our Hospitals and children underperform for lack of electricity, as over 90% of Africa’s primary schools lack electricity1”. With the world’s largest potential sets of dams, known as the Grand Inga Dam, Democratic Republic of Congo (DRC) could generate a 40,000MW. Proponents argue it could provide clean renewable energy with immense development outcomes for DRC, surrounding countries and all the way up to Egypt and thus achieving a number of sustainable development goals (see below).2 Currently, there are two hydroelectric dams, Inga I and II – completed in 1972 and 1982 - operating at a low output where the electricity goes to multinational companies in the mining industry. The Grand Inga dam is the fourth and largest proposed dam of the Inga dam (lower-center on the map). The project is currently on stand-by waiting on funding. Estimated costs are about $80 billion and the project is still in the feasibility study stage3 conducted by the World Bank and African Development Bank (AfDB).

1 Speech - Akinwumi A. Adesina, AfDB’s President, at the High-level Consultative Stakeholder Meeting on the New Deal on Energy for Africa, Abidjan, Cote d’Ivoire, 17/09/2015 http://www.afdb.org/en/news-and-events/article/speech-akinwumi-a-adesina-afdbs-president-at-the-high-level-consultative-stakeholder-meeting-on-the-new-deal-on-energy-for-africa-abidjan-cote-divoire-14689/ 2 DR Congo waits on funding for world's largest hydropower project, the Guardian (2013) http://www.theguardian.com/environment/2013/may/21/dr-congo-funding-world-largest-hydropower-dam 3 https://en.wikipedia.org/wiki/Grand_Inga_Dam#cite_note-AGN-2

Potential of 40GW of power capacity

Grand Inga DamEquivalents to the capacity of 20 large nuclear power plants

One of the ten top "Examplary Transformational Projects"

Map DRC and Inga Dam Site

Current dams and projected Grand Inga Dam (lower center)

Inga I Dam

However, skeptics highlight a number of issues;

The main question that arises here is as follows; How to finance the Grand Inga Dam project in a sustainable way which achieves development outcomes?

As this involves huge amounts of investments in public infrastructure, there is a strong role for the government and the private sector to play, as well as Official Development Aid (ODA) and Multilateral Development Banks (MDBs).

But before answering and going into details in further concepts, we first need to have some hard facts and information about DRC to better understand the context. Following is a quick snapshot of DRC in figures and facts;

• Loss of biodiversity• Flooding of local agricultural lands natural environments• Displacement of villages and people

Environmental • Huge risks of corruption• Tax evasion is rampant• Difficult environment to attract private investment• Weak institutional capacity

Political and economic• It is unclear how the poor communities will benefit from it•It is feared that it only benefits to extractive industriesDevelopmental

One of the poorest countries in the world…

Low Income Country: Poverty rate at 63% in 2012. with GDP/ capita = 487USD (2013) and ranks as 186th in the Human development index out of 187 countries4.

Since 2001, DRC has been slowly recovering from a decade of conflicts. DRC remains a fragile state with weak institutions and a tremendous need for reconstruction and a revival of economic growth.

To better understand the historical roots of poverty and conflicts in Congo, see DR Congo: Cursed by its natural wealth http://www.bbc.com/news/magazine-24396390

… With the potential to be one of the richest country on earth Vast natural resources, with high agricultural potential Ironically, the country reached a remarkable GDP growth at 9% (2014), driven by extractive

industries as the country is abundantly endowed in mineral and with the potential to become one of the main driver of African growth.

Ranks at 154 out of 175 countries in corruption perceptions index and scores 22/100.5

Ranks as 187th out of 189 countries in the Doing Business Report6

Electricity Access Rate of 11%7

4 UNDP (2014) hdr.undp.org/sites/all/themes/hdr_theme/country-notes/COD.pdf 5 Transparency international (2015) https://www.transparency.org/ 6 Doing Business Report (2015) http://www.doingbusiness.org/reports 7 Lightning Africa (2012) https://www.lightingafrica.org/

DRC at a glance

Financing For Grand Inga Dam Project

The role of ODA As DRC is a Low income and conflict-affected country most of the ODA inflowing is through grants and concessional loans. About $3 billion of ODA was disbursed for DRC in 2013 and constitutes, as for many LICs, the largest external contributor. According to the OECD, more than 90% of ODA inflows to DRC are grants, yet with only 12.4% going to Economic Infrastructure and services. Similarly, most of World Bank’s support is provided through International Development Association (IDA)8 which focuses on the poorest countries.

However, none of the Congolese public sector or the ODA will be able to meet the infrastructure needs of the country and finance the colossal Grand Inga Dam project alone. Rather, seeking support and finance from the private sector and MDBs seems more promising and has the potential to bridge the gap.

Strengthening Domestic Public Finance: DRC is one of the poorest economies in the world, with a fragile state. It is thus very unlikely that the public sector will finance the Grand Inga Dam to a large extent in the short term. However, DRC is extremely rich in terms of natural resources. Therefore, large potential domestic resources are untapped and need to be made available. It is widely said that domestic revenue is a reliable and sustainable source of development finance, reducing poverty and bridging the infrastructure gaps. Virtuous circle of Domestic Resource Mobilization The main obstacles in the way are pervasive corruption and lack of transparency. As many LICs, DRC’s taxation levels are below 15% per GDP ratio.9 Indeed, like many African countries, DRC is characterized by large informal sector, and tax evasion by extracting multinational companies. It is urgent therefore for DRC to build stronger institutional capacity in this area10.

8 http://www.aidflows.org/ 9 From Billions to Trillions: Transforming Development Finance, WBG joint with IMF and MDBs (2015) 10 Increased Domestic Resource Mobilization in Africa: A Priority for the Post-2015 Era, International Health Policies, 2015 (Blog Post)

This is exactly where ODA and especially MDBs like the African Development Bank & World Bank come into play. Indeed, billions of dollars in ODA can help unlock trillions through supporting activities such as:

- Better investment climates - Better tax collection - More efficient public

spending

Harnessing the potential of private investors The Grand Inga Dam is said to be feasible and already several companies are potential bidders, which means that this project is probably financially and commercially viable from a private sector point of view. So attracting investors is not the biggest challenge but rather how to allocate, manage and mitigate risks between the private and public sector. This is the key to effective and efficient infrastructure development. Commercial, currency and political risks are the most challenging issues here and are thus not

bore by the private sector. As they can be very expensive to cover, guarantee risks, as well as grants and loans by MDBs or ODA can be used here to mitigate them.11

The role of Multilateral Development Banks (MDBs) MDBs as well as the IMF are engines of financing for development. By investing one dollar, MDBs are able to commit 2 to 5 dollars in new financing every year, by catalyzing, mobilizing and crowding in. Indeed, they provide policy advice, technical assistance and capacity building to country. Their stamp of approval as “honest broker” can help build trust and partnership between the Congolese government and companies. They play a pivotal role here; on one hand they assist and support DRC government with grants, loans, technical assistance and capacity building, to build stronger institutions and enable better climate investments. On the other hand, they assist both the public and the private sectors in public

11 Infrastructure Finance: Setting A Plan, Overcoming Obstacles, and Attracting Private Investment With Richard Abadie (2015)

Domestic Resource Mobilization

Transparency-fight against corruption

Accountability

Efficient Public expenditures

Democratic Engagement

private partnership, by providing guarantees (e.g. through MIGA) and trust. For instance, the International Finance Corporation (IFC) is the private sector arm of the World Bank that can stimulate private investment in DRC through loans and equity grants.12

Conclusion: Main challenges and obstacles in financing the Grand Inga Dam project for development purposes are:

ODA levels are too low and insufficient Large existing natural resources that needs to be made available for public purposes Pervasive corruption and lack of transparency13 impedes the harnessing of large domestic

natural resources Illicit flows of money; mostly tax evasion and corruption in extractive industries

In order to overcome the obstacles, solutions include: Unlocking immense domestic resources through stronger administration capacity Fight against illicit flows of money, namely corruption and tax evasion Balance risks sharing through guarantees and loans between private and public sector

To do so, as DRC is a fragile state, MDBs and ODA support not only in financial terms but also in technical assistance, capacity building and guaranteeing risks for both government and private sector will be critical in financing ambitious energy infrastructure project like Grand Inga Dam. 12 The Financing Role of the Multilateral Development Banks: The Business Model of MDBs With Susan McAdams (2015) 13 Paying for Development: Domestic Resource Mobilization. Center for Strategic and International Studies (OpEd, 2 pages)

Better investment climate