Unlocking Institutional Investment in Africa’s Infrastructure
The financing required by African governments for delivering on Africa’s infrastructure is estimated at over USD120 billion a year. The need for significant amounts of institutional investment is magnified by the reduced amount of available public funding and reduced bank finance available in today’s global infrastructure market.
Institutional investors (pension funds, sovereign wealth funds, insurance companies) are interested in increasing investments in infrastructure to meet financial performance requirements, as they are faced with low interest rate environments. Infrastructure assets can potentially provide institutional investors with predictable inflation-adjusted cash flows that have low correlations with existing investment returns.
Institutional investors, now holding over USD500 billion in assets under management (AUM), are increasingly seeking to partner with African governments through the 5% Agenda’s Institutional Investor Public Partnerships (IIPP), a framework proposed by African pension and sovereign wealth funds to increase its allocations in African infrastructure investments to 5% of total AUM. The 5% Agenda IIPP, endorsed by African Heads of State and Governments, is the basis for the new partnership with institutional investors to increase participation and allocations to African infrastructure as an investable asset class.
Risk mitigation instruments and credit enhancements have been identified as an essential feature of the IIPP framework for institutional investors to meet fiduciary investment requirements, and mitigate real and perceived risks, related to infrastructure development and construction, credit, currency, liquidity, and political interference.
The use of guarantees and credit enhancements have proved to be a critical success factor in unlocking access to institutional investment worldwide. Therefore, to scale institutional investment, there is the concurrent need to scale global African risk mitigation to address these perceived and real risks of African infrastructure.
In response to African institutional investors calls for additional African risk mitigation, the African Union (AU), and its implementing Agency for trans-boundary infrastructure AUDA-NEPAD, are advocating for the establishment of an “African Infrastructure Guarantee Mechanism” (AIGM) that can enable the immediate scaling up of institutional investment in Africa’s infrastructure.
A strong need exists to engage all the providers of risk mitigation and credit enhancement (from Development Finance Institutions (DFI), development partners, private sector) with the aim of having frank and open discussions on the establishment of an aggregated guarantee mechanism, that will tap into all the efforts currently being undertaken through existing risk mitigation instruments and initiatives.
The ultimate goal will be for Africa to establish a “Big Infrastructure Guarantee Mechanism”, which will provide for significant financial guarantees as required for institutional investors to invest in Africa’s infrastructure and trans-boundary infrastructure projects.
Based on demands from African pension and sovereign wealth fund investors, infrastructure investment professionals, and global investment guarantee and insurance specialists, AIGM is aimed at mitigating the key risks preventing African and international institutional investors from investing in African infrastructure.
AIGM will catalyze an African market in specialist infrastructure risk mitigation syndications, scaling the commercial use of guarantees and credit enhancements, which meet the strict investment requirements of institutional investors.
The approach would create a market aggregating the sources of demand (infrastructure assets) and supply (providers of risk mitigation), crowding in existing providers of risk mitigation, global investment insurers, and credit enhancement leaders and instruments from private and public sector institutions.
AIGM will be managed by highly experienced infrastructure risk mitigation experts and brokers supported by advisory committees, consisting of institutional investors, providers of risk mitigation, African government PPP professionals, commercial project developers, and providers of project preparation support.
The next steps will be to discuss possible agreements and solutions that address the risk mitigation coverage gap with risk mitigation providers, and then work with African governments and commercial project developers on a series of pilot projects, as proofs of concept, demonstrating the value of the AIGM approach and informing its scaled implementation.
The African Union Commission (AUC) and AUDA-NEPAD invite providers of risk mitigation and investment insurers to discuss participation in the initiative.
The Working Group will be coordinated by the CBN Secretariat, with updates and outputs routinely being presented to the CBN Council for review, endorsement and implementation.
The Working Group’s Policy Statement and Roadmap, will be the guiding instrument for the CBN Council’s engagement with public sector stakeholders and leaders on the CBN’s work in the Healthcare sector.