Why is trade and business investment in Africa considerably low despite the continent’s potential for huge returns across almost every sector? At the risk of being wrong, the single reason that is deterring investment in Africa is a four-letter word, risk or rather, the lack of risk mitigation.
Risk creates fear for investment in Africa, fear for security, political stability, energy assurance, and policy change…the list of fears goes on.
Investment risk is at the forefront of Africa not reaching its investment potential despite having a wealth of resources.
- Africa’s annual trade and investment gap is estimated at US$200 billion
- Joint effort needed to mitigate development project risks
- Africa Co-Guarantee Platform to increase risk mitigation for infrastructure development
To mitigate the investment risk in Africa, most companies opt to buy raw materials and quickly ship them out for processing in more stable parts of the world.
That being the case, African nations would do much better to invest in risk mitigation if they are to attract investors. Investment risk in Africa can be mitigated in a number of ways, starting with policy assurance.
When investors are reassured that favourable policies will stay unchanged long-term, investment risk is averted. However, when policy changes with each change of presidency or even cabinet shift, then investment risk is high, and that scares investors.
For Africa, risk mitigation starts at the government level. As pointed out, if governments can reassure stakeholders that favourable policies will not be changed just because there is a change in leadership or a cabinet seat, then Africa is bound to see increased investment.
Another risk mitigation avenue for Africa is security. When it comes to risk mitigation, safety is a top priority for any investor. Actually, security comes before favourable policies when we talk of risk mitigation.
If a country is stable, no rebel factions, no civil strife, and where the rule of law prevails, risk mitigation becomes a matter of numbers, which means investment.
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Risk mitigation: The Africa Co-Guarantee Platform
When the other fear factors are addressed, then the only risk mitigation factor left on the table is value for money. This is where insurance comes in.
However, when we are talking of multibillion-dollar projects, what insurance company can withstand the risk? Acting alone, then no single insurance company can write a policy for these mega projects.
That is where large, joint guarantors come in. One such entity is the Africa Co-Guarantee Platform to which the Africa Development Bank (AfDB) is a member.
The Africa Co-Guarantee Platform is a collaborative mechanism designed to mitigate these huge financial risks.
By providing the needed insurance, the Africa Co-Guarantee Platform allows access to finance for mega development projects in Africa.
The Africa Co-Guarantee Platform was formed in 2018 by bringing together major guarantee and insurance providers.
In their description of how they operate, the Africa Co-Guarantee Platform asserts, “The Platform works by scaling up and standardizing risk mitigation instruments across multiple guarantee providers to reduce client transaction costs and shorten lead times to financial close.”
Working with several multifaceted partners, the Africa Co-Guarantee Platform also provides guarantees and insurance for trade and investment.
Without such entities, then, even stable countries like Tanzania, a country that has not had a civil war or any type of conflict, still fall short of meeting their investment potential. In fact, Africa’s annual trade and investment gap is estimated to be a shocking US$200 billion.
That is a huge deficit, so huge that the $10 billion worth of guarantees and insurance that the Platform provides for trade and investment annually is but a drop in the ocean. Much more needs to be done to mitigate financial risk if Africa is to close this gap.
With ever more investment opportunities opening up, especially in renewable energies, the need for instruments to de-risk investment across Africa is at its peak. Partners to the Africa Co-Guarantee Platform have pledged to extend direct transaction support for infrastructure development by sharing risk amongst themselves.
That is the level of commitment that is needed to bridge the financial investment gap that Africa is facing. Insurers and guarantors like the Africa Co–Guarantee Platform (CGP) must be more innovative and develop new products that cover intra-regional trade, food and fertilizer shortages and even for fragile political situations as well.
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As pointed out earlier, no single entity can mitigate the risks involved in such huge projects on such a vast continent with a long history of a long list of risks. It is joint entities such as the Africa Co–Guarantee Platform that, by working together, can reassure stakeholders and build capacity to strengthen project preparation and bankability.
“We look forward to supporting the development of institutional partnerships to address Africa’s infrastructure challenges at a greater scale. Collectively, we hope to continue building local capacity to enable greater use of innovative credit mitigation solutions to unlock critical infrastructure financing,” commented Ben Storrs, the Associate Director at GuarantCo.
GuarantCo is one of the six partners that make up the Africa Co-Guarantee Platform. Others are the African Development Bank, African Trade Insurance Agency (ATI), African Union Development Agency (AUDA-NEPAD), GuarantCo (part of PIDG, the Private Infrastructure Development Group), the Islamic Corporation for the Insurance of Investment and Export Credit Insurance (ICIEC), and Afreximbank.
Speaking recently at the Platform’s Steering Committee Meeting, Afreximbank’s Director of Guarantees and Specialized Finance Kofi Asumadu-Addo, said, “…this is a critical moment, and the CGP is needed more than ever.”
He went on to point out that the Covid-19 pandemic, and the Ukraine crisis have resulted in macroeconomic challenges that require urgent action and it is only by working with large organs like the AfDB that action can be taken.
“Collectively, we have the capacity among the Platform partners to respond adequately and appropriately to help de-risk and attract investments into and across Africa…in order to reduce the trade and investment financing gap,” he appealed to the stakeholders.
The CPG sets precedence for the kind of insurance and risk mitigation that is needed if Africa is to close the huge investment financial gap that it is currently facing. This can only be achieved by working together, insurance instruments such as the members of the CPG working together to provide coverage that mitigates risks for large projects.
As ATI’s Chief Underwriting Officer, Benjamin Mugisha pointed out said; “The Co-Guarantee Platform has a unique opportunity to leverage each member’s strengths to provide proactive solutions to address the needs of the continent.”
No one said it better than Ibrah Wahabou, AUDA-NEPAD’s Head of Infrastructure and Connectivity who asserted that the Co-Guarantee Platform is Africa’s bold response to deal with the exaggerated, unjustified perception of Africa as a risky place for investors.
“Together, through the CGP, we are changing the narrative based on concrete deals,” he reassured stakeholders.