How has ICIEC helped export credit agencies and banks support sustainable growth across Sub Sahara Africa, enabling projects that will benefit local communities? Guarantees from international export credit agencies and insurers are often the first step for doing business in Africa. A partnership model is an important way forward. This article outlines progress.
Supporting sustainable economic growth in Sub Saharan Africa has never been more important amid the pandemic, global geopolitical issues and climate change. Africa’s infrastructure needs are large but putting too much pressure on sovereigns with rising debt burdens that cannot be matched by GDP growth is a risk that lenders need to be very conscious of. Importantly, though, as Africa generally is short on equity financing, taking debt and its allocation needs to be smarter to support effective resource mobilisation.
ICIEC has been working in partnership with banks and export credit agencies (ECAs) to support their work in healthcare, renewables, sustainable transport, water, and power grids, and modernisation of electricity systems. ICIEC provides insurance and guarantees in general to support resource mobilisation. “We’ve provided insurance support to banks so that they can finance African sovereign states with some degree of comfort,” says Raphaël Fofana, Sovereign Underwriter Africa & CIS at ICIEC.
Timely support in Côte d’Ivoire: Underpinning SDGs
One case in point has been in Côte d’Ivoire, where ICIEC has supported the construction of hospitals and medical facilities. “That project was timely as we closed it just before the pandemic started. We did the due diligence two months before. And then the project itself started with all the challenges of the lockdowns, etc. But the project has been a success because they met the construction deadlines,” says Fofana. “These are the types of projects we support in Africa, socially driven ones that are also commercially driven. We tend to encourage those projects because we believe that this is where revenues can be generated which can mitigate some of the increasing debt levels.”
ICIEC is a developmental institution. “Our first mandate is to support developmental projects,” Fofana says. “So there must be at least two or three UN Sustainable Development Goals (SDG) in a project for it to be able to benefit from ICIEC’s insurance. We’ve supported a lot of projects such as the construction of those two regional hospitals and five medical units throughout Côte d’Ivoire. In the beneficiary communities, the closest hospital was more than 30 kilometers away.
Along with many other developmental agencies and export credit agencies, supporting environmentally sustainable projects is important. “On E&S (Environmental and Social Impact Assessment), our approach is to try and conform to the international performance standards such as the IFC’s, etc., and we follow the laws and regulations of the host country in our underwriting process.
“This year, Dr Muhammad Sulaiman Al Jasser, the President of the IsDB, came up with the motto, “let’s go green”. Right now we are doing our best to support all projects, not only in the ‘green’ sector, but also in all othESG-relatedted ones, for example, in water supply management, wastewater collector pipes, etc.. We’ve done projects in Senegal, in Côte d’Ivoire, in Benin, in Egypt among others, where we have supported developmentally impactful projects in terms of sustainability and economic development.”
Sustainability-linked lending? ICIEC is already there
In terms of international finance, Sub-Sahara Africa is yet to benefit, on a grand scale, from sustainability-linked loans, which have been recently popular with some international bank issuers. That means that when projects in specific sectors meet pre-agreed targets/milestones after a specific time (such as measurable improvements in water access, education, etc) the terms of the loans can be modified in favour of the borrower. However, ICIEC is already pursuing some of these types of incentives in its insurance support to project lending. “All the loans that we support naturally must have this element,” says Fofana.”
Credit substitution affect benefits
“Everything that we do in ICIEC is to provide relief to our Member States among which are the African countries. We noticed that when we go, for example, on missions in some of our member states, there is a misperception about the role of insurance providers. They perceive insurance as an additional cost, whereas in reality, it is not. Right now, many of them have a better appreciation of the mechanics and positive contributions of a guarantee/insurance. Normally if a guarantee is provided by a multilateral insurance company, then the overall cost of financing should be lower.
This is what we should experience with the loan insurance. When we insure a loan, we achieve (to some extent) credit substitution. This means, for example, a country that is rated B [by Fitch] can benefit from the promotion in international capital/loan markets of a B-rated country paper being supported by ICIEC’s Aa3 rating.
This enables savings to be made. “What we’ve calculated so far is that countries can achieve between 200-300 basis points in savings for longer maturities,” says Fofana.
And in an environment of rising debt levels, the IMF has warned that a careful watch should be made on risks presented by elevated public debt (asserting that low-income countries were already reaching 50% debt as a percentage of GDP (and emerging economies 65%) in 2021, and many countries are already higher than that).
“Knowing this, these types of structures should be really encouraged,” Fofana asserts. For example, there are other interesting funding projects being undertaken in Sub Sahara Africa such as the African Development Bank (AfDB)’s ‘Room2Run’ securitisation (which was issued in 2018). This is a synthetic securitisation Risk Protection Agreement related to a $1 billion portfolio of seasoned African non-sovereign loans held by the AfDB. The securitisation has freed up space for the AfDB to make more than $650 million in additional loans, without needing further capital from its shareholders.
“AfDB has done a great job which enabled them to unlock some additional funding to finance additional socially driven projects in Africa,” says Fofana. “I believe that African decision makers already know what they can do to improve their sustainability and their growth and are better placed to understand what is good for them. From the lenders’ and insurer’s perspective, instead of giving lessons, we should develop structures that are interesting and that will decrease the overall cost of financing, that for example will encourage PPP (public-private partnership) types of transactions.”
A call for more concerted action
In an ideal world, the most straightforward answer to improving infrastructure finance would be that projects that are commercially driven, that are generating cash flows, should be financed by international commercial banks, and projects that are socially driven should be financed by multilaterals with grants and concessional financing. However, that has not been the case in Africa, but with more cooperation, ECAs, DFIs, MDBs and commercial banks should also come up with some solutions to foster those types of complex structures like PPP to enable a balance to be struck for a more sustainable Africa.
ICIEC is not yet providing a guarantee for commercial banks against non-payment of project companies (non-recourse Special Purpose Companies) in PPPs, which is what international commercial banks are searching for, as there are complications for disputes and arbitration. Nonetheless, there should be ways for multilateral development banks (MDBs) and developmental financial institutions (DFIs) to step up and fill the void. In the G20 Eminent Persons Group (EPG) Report, there was a call for a switch from direct lending to more unfunded types of structures. At the moment, MDBs in Africa barely provide an estimated 5% of the financing needs of the continent.
“If you tap into the funding of institutional investors, international commercial banks, etc., we can do a lot more than 5%. Our role is to really provide some solutions to these African countries, some structured solutions with MDBs that can take the risk that some international commercial banks wouldn’t want to take. And this is the role of the MDB, because they understand the risk in these countries,” says Fofana.
All that speaks well for the good cooperation opportunities within the community of ECAs, DFIs and international banks.
This is a digest of ICIEC’s contribution to a prestigious panel of representatives from the Swedish Export Credit Agency, EKN, Deutsche Bank, and SERV Swiss Export Risk Insurance at TXF’s Middle East and Africa conference in Dubai in March 2022. Here they discussed, among other issues, the role of those organisations’ development of Ghana Western Railway amid Ghana’s high (78%) debt to GDP ratio, and ICIEC’s involvement in healthcare in Côte d’Ivoire stimulating the local job environment and ensuring new and timely treatment of healthcare.
