Africa has long suffered from a risk perception gap – one of the main factors contributing to the continent’s estimated $200 billion trade and investment financing gap. More recently, the world has been hit with the Covid-19 pandemic, the war in Ukraine and the resultant global food and energy instability, coupled with soaring interest rates and debt sustainability tensions for African countries. These occurrences have exacerbated the negative perception of investment risk in Africa.
As the saying goes, “when the world sneezes, Africa catches a cold.” This perception remains, although reports indicate that Africa has performed as well as or even better than other emerging market regions regarding non-performing loans, insurance claims and recoveries.
Launched at the inaugural Africa Investment Forum in 2018, the Africa Co-Guarantee Platform (CGP) brings together the African Development Bank, Afreximbank, Africa Trade Insurance Agency, AUDA-NEPAD, GuarantCo, and the Islamic Development Bank’s ICIEC, in a concerted effort to reverse/change this risk perception. It is doing so through more efficient and effective deployment of risk mitigation.
Like the AIF, the CGP is a transaction-based partnership launched by the partners to support specific trade and investment transactions across the continent. Together, CGP Partners hold a direct mitigation capacity of more than $10 billion – and, given their strong international credit ratings and preferred creditor status, they can leverage far above that amount from others, including the insurance market and institutional investors. The African Development Bank promotes and hosts the CGP secretariat.
During the signing of the memorandum of understanding which launched the CGP, African Development Bank President Akinwumi Adesina articulated the rationale for joint guarantee and insurance arrangements: “There are many guarantee providers that can offer various types of credit enhancement and risk mitigation instruments in Africa, but cooperation among them has been either non-existent or on an ad hoc basis. Hence the need for a more formal collaboration among guarantee providers to maximize the use of their products in Africa.”
Four years into working together, CGP partners have noted that the challenges have become greater, highlighting the importance of the initiative. First, the Covid-19 pandemic-induced economic distortions hit most African economies very hard – and slowed the flow of foreign direct investment. Further, the food and fertilizer shortages and price increases resulting from the Russia-Ukraine war have strained government budgets and private sector solvency, leading to some African countries’ credit ratings being downgraded or put on “negative” outlook – resulting in even higher financing costs.
The members of the CGP met in September 2022 to reaffirm their commitment to de-risking trade and investment projects across Africa. They agreed to give it a broader mandate that addresses not just current transactions – which will continue to be the anchor of the Platform – but also two other important upstream areas related to project de-risking.
First, the Platform will establish itself as a financial products incubator responding to market failures where the current guarantee and insurance offerings remain inadequate or ill-designed to fit the continent’s needs. Possible focus areas are the current food and fertilizer crises; regional, integrated infrastructure projects; institutional investor mobilization; and supporting projects in transition and fragile states.
Additionally, the CGP will, in the medium term, introduce targeted institutional capacity building, particularly for project preparation. This is designed to answer a critical need of project structuring, driven from Africa, for African projects. Under this pillar, the CGP will work with governments and project sponsors to enhance bankability by the early inclusion of appropriate risk mitigation instruments in project structuring. Throughout, CGP will remain directly tied to transactions, with the other two pillars driving business development where the specific value addition of the CGP’s intervention is clear.
AIF 2022 market days provide a prime opportunity to showcase how the CGP and its partners can support complex projects. The current CGP pipeline includes 20 projects worth more than $12 billion in key sectors such as energy (generation and transmission), infrastructure (ports and roads), agribusiness, and regional trade. The partners are working together to backstop African government sovereign bond issuances and other resource mobilization efforts, to extend tenors and substantially improve the price those governments would pay. AUDA-NEPAD is contributing its vast pipeline of transformative regional and continental infrastructure projects. More than 20 of these projects have been pre-identified for potential support from the Platform. For many of these, the CGP will be a key element in unlocking the financing needed to make them a reality.
CGP Platform members offer a multitude of instruments to support transactions, including derivatives and hedging instruments, local currency financing, insurance and reinsurance products, and political risk or commercial risk guarantees.