Export credit can bridge infrastructure funding gap

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In sub-Saharan Africa alone, infrastructure spending is set to grow by 10% per annum for the next decade and exceed $180bn by 2025, according to research by PwC.

Yet the avalanche of new lenders, equity and institutional investors, some of whom are considering the risks of doing business in Africa for the first time, need help 'on the ground' in conducting due diligence, issuing guarantees and negotiating with local authorities.

The role of export credit agencies (ECAs) and development finance institutions (DFIs), such as the African Development Bank, in this regard cannot be underestimated.

Whilst commercial banks account for the largest portion of lending on African energy and infrastructure financings, the lending volumes of non-bank institutions such as ECAs and DFIs have been on an upward trend over the past few years, rising by more than $15bn and $10bn respectively in 2013.

Important role

Many people might not even be aware of the existence of such non-bank institutions, but they play a disproportionately important role in funding smaller projects and facilitating long-term investment by larger institutions.

DFIs are often the only lenders on smaller infrastructure deals, without whose support many projects would not be completed. And the balance sheets of ECAs make them increasingly important to major deals, as structured products backed by ECA guarantees long-term cash flows, decrease risk and encourage long-term funding by institutional lenders. Increased issuance volumes for ECA-backed bonds are likely as institutional investors seek low-risk ways to support African infrastructure.

For example, EKF, the Danish ECA, and two DFIs - the European Investment Bank and the African Development Bank - had to provide a package of guarantees on the $523m financing for the 300MW Lake Turkana wind farm in Kenya, which was signed in March 2014. The 95MW Tobene IPP in Senegal needed similar DFI backing, this time from the World Bank, to proceed to financial close.

Power Africa Initiative

Similarly, for the US Power Africa Initiative, announced by President Obama in August 2014, over the next five years the Export-Import Bank of the United States (the official US export credit agency) will lend around $3bn and the World Bank $5bn as part of the initiative.

According to the Baker & McKenzie report, South Africa is the most developed country in sub-Saharan Africa in terms of existing infrastructure, a track record of project development, and a sophisticated local banking sector.

But outside banks struggle to participate in this increasingly vibrant market because of currency risk. The South African government requires power purchase agreements to be denominated in local currency, although there are some suggestions that it may soften this stance over the next few years.