Africa’s estimated annual $100bn infrastructure development gap is increasingly being filled through the support of export credit agencies.
Africa requires power, water, hospitals, roads and other basic infrastructure. It also needs more renewable infrastructure to ensure a just energy transition. Enter export credit agencies in an expanded role.
At the most basic level, export credit agencies’ mandate is to promote the export of goods and services from their home country through the provision of insurance solutions and guarantees that reduce nonpayment risk faced by exporters or commercial banks providing financing to their buyers. Governmental or quasi-governmental institutions can cover risk strongly, regarded as sovereign risk.
Increasingly, export credit financing is used to facilitate long-term funding for infrastructure projects in Africa in conjunction with, or as an alternative to, more traditional project financing. It enables borrowers, and notably governments, to obtain long term — often cheaper — financing arrangements, which would otherwise be unobtainable or prohibitively expensive in the commercial marketplace.
Evidencing the growing interest of export credit agencies to follow their exporters on the African continent, a number of them are proactively engaging with African governments to identify priority infrastructure projects and promote the financing solutions they can offer for them so acting like development partners for these countries.
One of the challenges for Africa is that the appetite of most international banks, while growing as well, tends to be limited to a dozen or so of the “usual suspects” out of the 54 countries forming the continent. This is due to a variety of reasons, including higher perceived credit risk, compliance concerns or lack of sizeable opportunities. As a result, despite export credit agencies having available limits to cover transactions there, many countries in urgent need of funds are at risk of being “ignored” when it comes to infrastructure development.
Most of the funding flows benefiting from the support of export credit agencies are directed towards sovereign borrowers, whereas international banks and export credit agencies alike show some caution in taking long-term exposure to the private sector (aside from large project financing), which may have implications for the economic development of those countries in the long run.
Banks with long experience of doing business on the African continent are particularly well placed to step in and, with the support of export credit agencies, fill in the funding gap. They are also well placed to advise export credit agencies and exporters to help them get the comfort they need with respect to private counterparties involved in these infrastructure projects.
Most of the major export credit agencies are bound by a gentleman’s agreement known as the OECD arrangement. This provides rules to foster co-operation among export credit agencies from participating countries and ensure a level playing field among them.
Encouragingly for infrastructure projects in Africa, these guidelines have recently been modernised. One of the key developments is that the new rules will allow the possibility for export credit agencies to support longer tenors. These changes in the export credit agency rules were awaited eagerly and should contribute to boosting infrastructure investment in Africa by making financing more sustainable for governments.
For example, a hospital has a lifespan of about 50 years, and yet until recently export credit agency could only support financing with a 10 year maturity from commissioning. With repayment tenors extended to up to 15 years, debt servicing will be less onerous, freeing up capacity for additional infrastructure projects.
In this context, even with export credit agencies absorbing most of the credit risk associated with the financing of infrastructure projects it is to be seen if commercial banks will be in a position to fund those extra-long tenors. As such, one can expect that institutional investor money, for example from insurance companies, working on a longer time frame will increasingly be needed to provide longer term liquidity.
Export credit agencies, often more familiar with traditional banking partners, have shown in some instances an interest in reconsidering some of the terms of their cover to suit the requirements of those investors, which by deepening the pool of liquidity available to fund export credit agency covered facilities in Africa, will contribute to maintain the affordability of such financing for borrowers. This is all the more important in Africa, where alternative sources of long-term financing are often limited.
We believe export credit agencies, notably after the changes made to the OECD arrangement, will continue to be a major and powerful tool to foster the sustainable development of infrastructure in Africa, if used more extensively. To this effect banks will need to leverage the support of export credit agencies to explore opportunities beyond the cluster of fast-growing economies attracting most infrastructure interests.
Consideration must also be given by banks and export credit agencies collectively, to the development of additional distribution channels for those long-term financing to diversify the pool of affordable long-term liquidity available to fund Africa’s infrastructure investment gap.
Perrin-Guinot is Senior Transactor: Export Credit Agency Finance, at RMB London