Export credit agencies play a vital role in Africa’s social infrastructure development, but could they boost their activity further? Sizeable debt issues are spurring calls for innovative solutions and a reform of the OECD Arrangement rules. Felix Thompson reports.
Across the length and breadth of Sub-Saharan Africa, there is an urgent need for social infrastructure.
Hospitals, schools and water sanitation facilities must all be built to meet the demands of a growing population, which according to UN estimates is expected to rise from 1.4 billion today to 2.4 billion by 2050.
Health and education outcomes are already poor, with about half of children reaching adolescence without achieving literacy or numeracy, the African Development Bank (AfDB) says.
According to the World Health Organization, Sub-Saharan Africa remains the region with the lowest average life expectancy.
But despite overwhelming demand, financing remains a key hurdle for many African governments seeking to kickstart development.
“The total volume of infrastructure finance globally in 2023 was about US$1.7tn. Within that, project financing was about US$670bn,” says Alper Kilic, global head of project and export finance at Standard Chartered.
“In both categories, Sub-Saharan Africa’s allocation was about 1%, which is quite telling. This figure is miniscule,” he tells GTR. “Ultimately, social infrastructure probably gets the smallest allocation. It is predominantly energy and power, and then transportation, and afterwards social. The need is huge, but allocations are small.”
For African governments, the challenges are multi-faceted. Mounting debt is a key issue, squeezing fiscal headroom.
The cost of servicing debt, in a high interest rate environment, is only exacerbating problems.
According to the AfDB, Africa’s total external debt rose by US$300mn last year, reaching US$1.15tn, and the cost of servicing these debts is forecast to cost Africa about US$163bn in 2024.
“The growing burden of debt repayments has the potential to threaten achievement of the [UN] Sustainable Development Goals (SDGs) on the continent, particularly in health, education and infrastructure,” the AfDB says.
Yet there are some positive signs for Africa’s social infrastructure sector. After years of slowed activity in the wake of the Covid-19 pandemic, export credit agencies (ECAs) and insurers are working to boost their activities in the region.
In its annual State of the Industry Report, the Berne Union reveals that its members – which include ECAs, commercial underwriters and multilateral institutions – recorded US$23bn in new medium and long-term (MLT) business in Sub-Saharan Africa last year.
This was a notable rise from the US$12bn in fresh MLT commitments reported in 2022, and US$14bn the year prior.
“The recovery of new business to Sub-Saharan Africa in 2023 was driven by contributions of all member types but predominantly an increase in business from ECAs and multilaterals,” the Berne Union says.
“Sub-Saharan Africa is experiencing a renewed focus, with infrastructure projects receiving a significant boost,” it adds.
ESG and China
As ECAs and insurers boost their business in Sub-Saharan Africa, they are eyeing opportunities in the social infrastructure sector.
In December last year, UK Export Finance (UKEF) issued a guarantee for a €415mn water infrastructure deal in Angola, billed as its largest ever sovereign transaction in Sub-Saharan Africa.
UKEF’s cover will back various projects aimed at improving the country’s supply of potable water, stormwater channels, drainage networks, sanitation and public lighting in a region vulnerable to flooding.
Over the past decade, there have been two major flash flood events in Angola’s Benguela province, one of which killed over 60 people. The government believes the project will help protect residents from future flooding events.
Simon Bunckenburg, head of infrastructure and construction at UKEF, says the deal supports the agency’s efforts to finance projects with a positive impact on overseas communities and this is now one of its “core” business objectives.
“Through our international network, we identify projects and supply chains with positive SDG-related impacts that we can support,” he adds.
China’s apparent scaling back of long-term financing on the continent is another key factor driving activity amongst western ECAs.
Chinese development finance slumped significantly in 2020 and 2021, research published last year by Boston University’s Global Development Policy (GDP) Center found.
According to the report, the China Development Bank and the Export-Import Bank of China committed a combined US$10.5bn across both years – in 2018 alone, they provided US$22.1bn.
“The needs are enormous and given China is backing off a bit, it is an opportunity for European countries to step in again in Africa,” says Janusz Władyczak, chief executive of Kuke, Poland’s ECA.
Kuke, a relatively new player in Africa, is now striking deals both as a primary and secondary insurer.
Last year it approved cover for a US$73mn social loan led by Standard Chartered to expand a university in Angola.
And in the coming 18 months, Kuke expects to boost its overall exposures on the continent to €5bn, in turn supporting Polish exports worth up to €1.5bn to the continent.
“While traditional [export credit agencies] need to cope with high exposure to African entities, new entrants like Kuke have capacity to offer financing,” Władyczak tells GTR. “Hence our western counterparties quite often propose to share risk directly or to reinsure their deals.”
In terms of markets, Angola, Tanzania and Guinea are “the hottest spots” for activity, he says.
Regional players
Middle Eastern ECAs are also set to become significant backers of social infrastructure development in Africa, amid a wider push by the Gulf states to forge closer economic ties with the region.
The Gulf Cooperation Council (GCC) states are “already major investors” across the African continent and “appear intent” on increasing their exposures, as detailed in a May report from the Economist Intelligence Unit.
In 2023, GCC members – including Saudi Arabia, the UAE and Qatar – announced greenfield foreign direct investments of US$53bn in Africa, “which far outstrip” the US$35.5bn made by Chinese firms, the report says.
However, much of the investment has been made into Africa’s oil and gas sector, as well as mining and agriculture.
According to the report, Middle Eastern countries are also “consolidating” their strong position in transport infrastructure and logistics services, and expanding into renewable energy, digital infrastructure, manufacturing ventures and financial services.
“Gulf states [have] replaced China as expansionist players on the continent,” says Kuke’s Władyczak.
But he tells GTR that Middle Eastern governments are also boosting finance for social projects such as hospitals and schools, which can act as a “door opener” and a way to build relationships in Africa.
“They are doing it wisely. It’s sometimes about providing money in the form of grants,” Władyczak says.
Saudi Arabia, in particular, has been a major provider of concessional finance in Africa over the past year.
In November 2023, the Saudi Fund for Development signed over a dozen agreements worth US$580mn with African countries.
This included a US$158mn deal with Mozambique’s finance ministry for new infrastructure including hospitals and a dam; a US$75mn development loan for the construction and equipping of a mother and child referral hospital in Guinea; as well as US$50mn for a hospital in Sierra Leone.
The fund also approved US$28mn for the construction of a girls’ boarding school in Niger.
Władyczak predicts that ECAs from the Middle East will “soon start” to be involved in African infrastructure.
“We are closely in touch and discussing certain ideas with them. Especially if it’s infrastructure or a project involving construction, or heavy industry, it is an opportunity to include Polish goods and services in these supply chains,” he says. “The Gulf region may not be the biggest producer of certain items. We are trying to convince them that we are here, ready to provide support.”
At the same time, multilateral insurers are becoming vital sources of liquidity, experts say.
There has been “increased activity” from the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) in Sub-Saharan Africa, Kilic says. “They are showing credit appetite, flexibility; they are improving and increasing limits.”
In April, the ICIEC signed a deal with Deutsche Bank, agreeing to cover non-payment risks on a €161.4mn loan to the government of Côte d’Ivoire for hospitals in the cities of Kong and Odienné.
Months earlier, the ICIEC said it would insure nearly half of a €400mn partial credit guarantee issued by AfDB, which itself underpinned a €533mn loan from Standard Chartered to Côte d’Ivoire’s government.
The deal supports projects in a range of sectors including renewable energy, education, biodiversity conservation and health infrastructure, as well as sustainable use of water and wastewater management.
Down payment
To boost financing for Africa’s social infrastructure, ECAs say they are adopting greater flexibility for sovereign borrowers.
Members of the OECD Arrangement – which includes ECAs from across Europe, North America, as well as Japan, Korea and Australia – approved a long-awaited modernisation package in 2023.
In one key reform, participants agreed to extend repayment terms for most projects from 10 to 15 years.
“We see last year’s changes in OECD rules as stimuli for development of massive infrastructure projects in Africa. Governments of many countries on the continent find these changes an opportunity to speed up development of infrastructure in their respective countries,” says Kuke’s Władyczak.
ECAs and international banks also tout the benefits of an OECD down payment rule change, first introduced in late 2021 in response to pandemic-related market failures.
Since then, African state borrowers have only been required to provide a down payment of 5% of the export contract value, down from the previous 15%. Although the rule is set to expire in November, there are hopes of a further renewal.
ECAs such as UKEF are making use of the down payment and tenor flexibility, Bunckenburg tells GTR. “These tools are important for unlocking social infrastructure projects in low-and middle-income countries.”
There are calls within the export finance industry for the 5% down payment to be permanently adopted in high-risk markets, amid fears Africa’s infrastructure sector could be acutely hit by a rule reversal.
In May, Gabriel Buck, founder of boutique advisory firm GKB Ventures, wrote to UKEF urging the down payment rule to be introduced permanently by OECD Arrangement members as a “social, economic and moral necessity”.
“The infrastructure gap across Africa is well documented and is growing… Reverting to 85% facilities will cause African governments to either delay, scale down or to abandon much needed projects – whether they be in water, health, power, education,” Buck said in the letter.
He further noted the down payment flexibility has been useful for ECAs and African sovereign borrowers, with Germany’s Euler Hermes signing 13 projects – all in Africa – under the 5% down payment rule in 2023.
GTR understands that talks are ongoing within the OECD Arrangement over how members could better support social infrastructure, as part of which the possibility of a down payment change is being considered.
Some have questioned the ongoing necessity of the down payment rule, however.
Chris Mitman, managing partner at Acre Impact Capital, argues there is sufficient capacity in the private market for down payment financing among African banks, insurers and emerging funds such as his own.
Meanwhile, local African banks have voiced concerns about the OECD Arrangement change since its introduction in 2021, warning it risks crowding out local institutions from financing ECA projects.
In late 2023, Sekete Mokgehle, co-head of Nedbank CIB’s infrastructure division, said his bank is seeing “limited opportunities” in the down payment sector.
“The OECD and the banks installed this 5% down rule and the likes of Angola – on the back of high oil prices – have been paying the down payment themselves,” Mokgehle said in December.
Debt problems
Even so, there are calls for ECAs to lower their cost of debt further in a bid to drive social infrastructure activity in Africa.
There has been progress in efforts by the G20 group of nations to restructure debt in Africa’s hardest-hit markets.
In March, Zambia’s government struck a deal with bondholders and became the first country to successfully emerge from default – after three years – through the G20’s Common Framework mechanism.
Yet experts warn Africa’s long-term borrowing habits must shift away from expensive, short-term loans.
“Long-term development cannot be based on short-term loans,” said US economist, academic and public policy analyst, Jeffrey Sachs, at an AfDB event in February. “The loans granted to Africa should have at least a 25-year term, or longer. Short-term borrowing is dangerous.”
Within the export finance industry, there are similar demands for longer tenors and lower premiums for African infrastructure.
In November 2023, industry lobby group Business at the OECD (BIAC) published a paper that largely praised the modernisation package and said it would help agencies – and their exporters – better compete globally.
However, it also raised the possibility of special incentives for social infrastructure in emerging markets, such as Africa.
BIAC said the scope of the OECD agreement remains “outdated” and that it would be “more comprehensive” if it allowed for the combination of export credits with development aid products.
BIAC said it would like to “start a discussion” on a separate sector understanding for affordable public social infrastructure, such as healthcare, to drive ECA-backed financing in emerging markets.
“Social infrastructure projects are partly revenue and partly non-revenue generating (unlike for instance green power generation projects), and therefore longer repayment terms – in line with what is contemplated for the climate change sector understanding – and other useful incentives such as a premium reduction would be very much appreciated by our business partners in emerging economies,” BIAC said in its paper.
“The participants may consider defining sectors and criteria that would also include social projects.”
Acre Impact Capital’s Mitman also serves as the co-chair of the ICC export finance sustainability working group, which has long been advocating for the conversation to move forward from “purely focusing on green, to also include social”, he says.
He argues that it is crucial the export finance industry develops specific criteria for what constitutes a social project, and whether a transaction should receive benefits, such as an extended tenor.
Mitman suggests a “reasonably achievable target” would be to have selected sectors – such as healthcare – included within the OECD Arrangement’s existing Climate Change Sector Understanding.
“The danger is, of course, we all get accused of social washing,” Mitman says.
“We don’t want to fall down rabbit holes like some in the asset management industry have, in the US in particular, for mislabelling.”
However, as one senior export finance figure tells GTR, reforms can take years to finalise.
“Unfortunately, the OECD is not making amendments very often… the world is changing quickly and they are making changes once a decade.”
