With aid budgets shrinking and development finance under pressure, African governments and development banks are increasingly turning to debt guarantees to attract private capital into infrastructure projects.
Guarantees are designed to reduce risks for investors by promising compensation if a project fails, a borrower defaults or political events such as coups or asset expropriation disrupt an investment, while for borrowers they can help secure the required credit ratings, longer-term financing and better pricing.
“Africans, especially the (development banks), decided that we need to take our future and our destiny into our own hands,” said Banji Fehintola, head of financial services at the Africa Finance Corporation. “That’s really why there’s a lot of value in thinking of guarantees as the next thing for us to crowd in capital at scale.”
Fehintola and others say guarantees can be designed to draw in hundreds of billions from pension and insurance funds, including those in Africa, that currently view African infrastructure as too risky.
“We’re talking very material sums,” said Felipe Berliner, co-founder of investment firm Gemcorp Capital, adding that if insurance companies had access to highly rated infrastructure projects, they would gladly park tens of billions of dollars there.
The push for guarantees comes as development aid from Western nations declines and African institutions seek to mobilise the continent’s own savings — estimated at $4 trillion — to fill an annual infrastructure funding gap of $100 billion, potentially reshaping how the continent finances everything from railways to ports.
GUARANTEES GAIN MOMENTUM
African leaders have worked for years to bridge the funding gap. This year, new African Development Bank President Sidi Ould Tah launched the New African Financial Architecture for Development, with guarantees taking a central role in this effort.
“De-risking the opportunities using guarantees…unlocks domestic capital, and domestic capital leads the way for global capital to come in,” Fehintola said.
AFC estimates up to $4 trillion in Africa’s own domestic capital in pension, insurance and sovereign wealth funds could flow to infrastructure – if projects had better credit ratings.
Interest in guarantees has accelerated amid shrinking development and aid finance.
“There’s been a perfect storm brewing that aligns a lot of these various parts of the ecosystem to come together in a way that I haven’t seen before,” said Philippe Valahu, CEO of the donor-backed Private Infrastructure Development Group that helps mobilise private money into infrastructure projects.
The World Bank’s Multilateral Investment Guarantee Agency (MIGA), whose guarantee issuance has more than doubled over the past five years to $9.5 billion, is best known for political risk guarantees, but it also offers credit guarantees that cover part of lenders’ losses if projects run into trouble.
Fehintola said African multilateral development banks are focused on guarantees that can raise a project’s credit rating to investment grade — the level needed to attract the biggest investors — including African pension and insurance funds. Guarantees, investors say, could supercharge the amount of money coming into — or staying on — the continent.
PUSH FOR PROJECTS
Gemcorp’s Berliner and other investors, including Martijn Proos, co-head of Emerging Market Alternative Credit at Ninety One, are already channeling billions into African infrastructure.
Proos said their active portfolio across emerging markets of $1.7 billion is growing at a rate of 10% to 15% annually.
But both said there is huge appetite for projects — if they can get the right rating.
“European or American investors into Africa would need an (investment-grade)-rated product, and without any form of credit enhancement or insurance, you wouldn’t get to the IG rating,” Proos said, adding that if governments or other entities can design such projects, the funding will come.
Fehintola said this is exactly what the African multilateral development banks are aiming to do: identify projects, structure them in a way that can earn guarantees and enable banks to come together to pool guarantees.
Valahu, whose company has launched local-currency guarantee firms in Kenya, Nigeria and Pakistan, said an Africa-based platform enabling different banks to pool guarantees could protect the fast-growing market from fragmentation that diverts money, time and expertise.
Fehintola said the moment is right — with investors rethinking risk amid rising global turmoil, highly rated African projects could even draw money otherwise going to U.S. Treasuries or long-dated government bonds.
“We need to start talking about projects that are in the billions, or hundreds of millions of dollars to get the right attention,” he said.
