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Prominence of ECAs in Africa’s infrastructure projects

23rd August 2013

By: Creamer Media Reporter

  

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By: Tsediso Disenyana

There is near-universal agreement that sub-Saharan Africa offers the greatest overall investment potential of frontier markets globally. This sentiment follows on the heels of a decade of strong economic and investment performance. Growth averaged more than 5% a year between 2002 and 2012, while foreign direct investment (FDI) inflows grew from $15-billion in 2002 to $50-billion in 2012. The subcontinent is forecast to grow on average by 6% a year over the next ten years, owing to rising FDI – which the World Bank projects to reach $77.5-billion in 2015.

Despite the projected rosy economic trajectory, constraints posed by poor infrastructure stand in the way of transforming sub-Saharan African economies into rapidly growing and internationally competitive markets. Inadequate and costly infrastructure is cited by most Africa-based enterprises as the single biggest obstacle to doing business in the region. For example, businesses in many countries endure power outages on more than half the days they work each year. Similarly, road freight charges are far higher in the region than elsewhere. The World Economic Forum’s ‘Africa Competitive- ness Report’ posits that, if countries close the infrastructure gap, the region will add two percentage points to its gross domestic product.

The World Bank asserts that the region’s infrastructure needs require funding of $93- billion a year to 2020. These needs are clearly urgent, so innovative and bold approaches are required.

In the present market environment, governments are constrained by their fiscus, and the overall appetite of the commercial banking sector to take and hold large project loan assets has evaporated owing to squeezed balance sheets and post-financial-crisis regulation. Without adequate finance, international trade and cross-border investments would be threatened. This is exacerbated for sub-Saharan Africa, which relies heavily on trade finance and is often peripheral to many large banks’ mainstream activities. In addition, some emerging countries in sub-Saharan Africa have suffered violent conflicts and political and economic fragility, which makes it particularly difficult to attract investment and debt financing for infrastructure projects. These countries require special tools for addressing their pressing infrastructure challenges.

A new, innovative template for infrastructure financing is emerging and involves a combination of public–private partnerships, specialist infrastructure funds, equity financing for private infrastructure developments, public bonds placements and sovereign wealth funds. These instruments cannot, however, provide an inexhaustible supply of funding for new projects.

A group of State-owned export credit agencies (ECAs) also look set to be the driving forces of infrastructure funding. ECAs are public agencies that provide State backing for large-scale business transactions for private corporations from their home country to do business abroad, particularly in financially and politi- cally risky countries. Because most of these projects are high risk, most would not progress without the financial backing of ECAs.

Through their risk mitigation instruments and guarantees, ECAs catalyse private investments in infrastructure, raising the total available finance and sharing in project risks. ECA involvement in infrastructure financing is not, of course, a new phenomenon. Their products have been deployed successfully in infrastructure developments in Asia, Latin America and some sub-Saharan African countries, including Mozambique’s aluminium smelting plant, Tanzania’s road, rail, rural electrification and water infrastructure projects, and Zimbabwe’s rehabilitation of the Harare–Bulawayo–Plumtree national highway.

These projects managed to attract private investment owing to funding and risk guarantees from ECAs like the Export Credit Insurance Corporation of South Africa and the African Trade Insurance Agency. Similarly, in Asia, mega infrastructure projects, such as Nam Theun 2 hydropower project, in Laos; the East–West Economic Corridor, in the Greater Mekong subregion; and the Ferrari Experience Theme Park, in Abu Dhabi, would not have taken off without the financial guarantee of ECAs like Nippon Export & Investment Insurance, China Export & Credit Insurance Corporation, India Exim Bank and Korea Export Insurance Corporation.

In the aftermath of the 2008 global financial crisis, ECAs have stepped up to close the funding gap and are pushing out the boundaries of their traditional mandates and products. The Berne Union reports that ECAs accounted for over $1.8-trillion worth of ‘medium- and long-term transactions’ in 2012 (up from $1.5-trillion in 2008), representing 10% of global cross-border trade. The ECAs did not only go beyond their mandate to issue direct lending – a considerable number of these agencies have increased the level of innova- tion in terms of their products to help exporters obtain finance for their medium- to long-term transactions business, where banks’ capacity is highly constrained. Such innovative products have included, besides others, working capital cover for banks, local currency financing cover, guaranteeing of Sharia-compliant financing structures, cover for advance payment bonds, guarantees for capital market issuances, supply chain interruptions cover and cover against cyber risk.

Despite their global prominence since the onset of the global financial crisis, ECAs have had a low profile in sub-Saharan Africa. According to the Berne Union, medium- and long-term transactions insurance issuance reached $9-billion in sub-Saharan African countries in 2012, representing only 0.5% of global medium- to long-term transactions. Regarding providers, the medium- to long-term segment is still relatively small and underpene- trated, with only a few countries operating significant ECA schemes, including South Africa. In addition, users of medium- to long-term credit insurance in sub-Saharan Africa tend to be large companies or subsidiaries of foreign insurance multinationals. There is, thus, much room for growth in the small to medium-sized enterprise segment.

As the competition for multibillion-dollar infrastructure projects intensifies, sub-Saharan African governments need to acknowledge that the lion’s share of capital will not come from the traditional sources of taxes, government borrowing and aid or commercial banks. The scale of the infrastructure drive planned under the aegis of the Programme for Infrastructure Development in Africa, the New Partnership for Africa’s Development Infrastructure Champion Initiative and the Infrastructure Consortium for Africa means that sub-Saharan African governments will need partners such as ECAs to help them catalyse additional private investment if their development targets are to be met. More importantly, as companies in sub- Saharan Africa become more and more aware of the uncertainty of the global and regional market, they too will surely value the necessity of using the services of ECAs.

 

  • Disenyana is senior economist at the Export Credit Insurance Corporation of South Africa. he holds a master's degree in economics (policy studies and public finance) - tdisenyana@ecic.co.za

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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