African banks bet on debt guarantees to lure private capital

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 "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.