Blended Knowledge - Enabling local currency solutions in addressing the infrastructure financing gap

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Enabling local currency solutions in addressing the infrastructure financing gap

Lower income countries continue to face a growing financing gap between infrastructure investments needed and the public sector financial resources available for them. In Sub-Saharan Africa alone, the annual gap of finance for infrastructure has been estimated by the African Development Bank to range between USD 68 – 108 billion.

And where funding is available, it continues to be sourced largely from multilateral or development finance backed resources which are invariably in hard currency. Therefore, despite the 11 percent increase in Africa’s Foreign Direct Investment (FDI) to USD 46 billion in 2018, this still leaves a significant gap – one that can only be closed through the increased participation of local and regional institutional sources of capital. In order to effectively mobilise these, private sector local currency financing solutions should be placed at the forefront of infrastructure investing across developing Africa and Asia.

In addressing this, any solution promoting long- term local currency financing needs to prioritise capacity building across local capital markets. This is crucial in order to solve the largely unaddressed challenges of tenor and local currency provider risk appetite. Infrastructure projects by nature are longer term investments that affect multiple stakeholders in any region or country. Their reliance therefore on long term revenue in local currencies across low-income countries, creates a significant mismatch when funded almost entirely in hard currency. The foreign exchange risk associated with this, which more recently has presented significant fiscal concerns across some sub-Saharan African economies, can only ultimately be eliminated when financing costs across infrastructure investments are also payable in local currency. Furthermore, local currency solutions are also better placed to overcome the regulatory hurdles faced by local institutional investors, such as pension funds, which in many cases prevent them from participating in hard currency financing structures.

One solution to this comes from risk mitigation solutions such as guarantees. Guarantees provide an important catalyst and multiplier effect on expanding local bank, pension fund and institutional investor participation in offering local currency financing to capital intensive industries such as infrastructure – where longer maturity profiles are a necessity. Guarantees encourage this by offering credit enhancing attributes that improve the risk profile and rating of local currency credit, thus providing local currency investors facing regulatory restrictions, a permissible framework in enabling them to participate in providing longer term financing.

GuarantCo, the guarantee arm of the Private Infrastructure Development Group, has championed and placed local currency guarantees at the forefront of its work across Africa and Asia. GuarantCo has pioneered innovative products such as liquidity and tenor extension products, which have been crucial in enabling important regional infrastructure investments; and have allowed local banks to offer longer maturity profiles and address the liquidity and short-term lending restrictions many of them currently face.

An example of this can be seen in 2019, when GuarantCo provided a XOF 14.2 billion (USD 23.8 million equivalent) Liquidity Extension Guarantee (LEG) to enable local commercial banks in Togo to provide a 14 year tenor loan to the Kekeli Efficient Power project – a 65MW natural gas-fired thermal plant and related infrastructure in the port area of Lomé, the capital of Togo. This power plant is extremely important in expanding Togo’s base load electricity generation, which is crucial in allowing the government to upscale domestic generation with sustainable and renewable energy generation going forward. An example of which, in the same region, can be seen in the 2017 guarantee provided by GuarantCo for Mali’s first large-scale solar plant, the 50MW Akua Kita Solar project.

More recently, GuarantCo provided a partial credit guarantee to investors in Acorn Holding’s KES 4.3 billion (USD 43 million equivalent) note programme, covering 50 percent of principal and interest due to fund the construction of accommodation for 5,000 students in Nairobi. The note programme is the first ever to achieve green certification in Kenya, ensuring the programme genuinely contributes to reducing carbon emissions. Moreover, it has also been distinguished as having achieved a number of other firsts in the regional market. These include being rated B1 by Moody’s (higher than the sovereign bond rating); recognition as the first deferred draw-down project loan note in Kenya; the first non-governmental green bond rated by Moody’s in Africa; the first corporate green bond to be listed on the Nairobi Securities Exchange; and the first local currency corporate bond from Kenya to list on the International Securities Market (ISM) of the London Stock Exchange.

Guarantees are therefore strongly positioned to act as a critical component in scaling up risk mitigation in low income countries and allowing the growth of local currency financing. In the face of the debilitating finance gap in low income countries, providing comfort and avenues to local pension fund and private institutional investors is crucial in growing long- term local currency financing and addressing the challenge of closing the infrastructure financing gap across Sub-Saharan Africa.

About GuarantCo

GuarantCo mobilises private sector local currency investment for infrastructure projects and supports the development of financial markets in lower income countries across Africa and Asia. GuarantCo is part of the Private Infrastructure Development Group (PIDG) and is funded by the governments of the United Kingdom, Switzerland, Australia and Sweden, through PIDG, and the Netherlands, through FMO and PIDG. GuarantCo is rated AA- by Fitch and A1 by Moody’s. GuarantCo’s activities are managed by GuarantCo Management Company which is part of Cardano Development.