Thierry Kangoye
Africa-Press – Botswana. Out of date rules, practices and perceptions are preventing Africa from getting the financial help it deserves.
Africa only receives a small portion of global foreign direct investment (FDI), despite having some of the fastest-growing economies and the richest natural resources in the world. About 3 per cent of global FDI flows go to the continent; this imbalance is due to investors’ perceptions of risk rather than the continent’s investment potential.
Africa offers some of the highest returns on investment in the world, but capital is still expensive and hard to get on the continent. This paradox has long been recognised. Despite their potential for expansion, African industries are still underfunded. Reducing the perception that they won’t see a return on their investments is the challenge, not merely raising more money.
Multilateral Development Banks (MDBs) are essential for this. But to achieve this, they must abandon their conventional roles as lenders of last resort and adopt a new mandate of catalysts and risk mitigators for private sector investment.
The investment paradox in Africa
The infrastructure funding gap on the continent is more than $100 billion a year. Africa must simultaneously industrialise quickly, generate employment for its young people, move towards economies that are climate resilient, and increase its involvement in global value chains.
However, Africa continues to be largely ignored as global capital looks for yield in a world with low interest rates. High sovereign risk premiums, currency volatility, and inadequate institutional or legal frameworks are all commonly mentioned by investors as major deterrents to investing in Africa. A few of these dangers are actual. However, a lot of them are overstated, misunderstood, or incorrectly priced. To put it briefly, Africa is experiencing a lack of confidence in addition to a lack of capital. MDBs are in a unique position to bridge this gap because of their technical depth, policy leverage, and preferred creditor status (meaning they are repaid before other creditors in the event of a country’s debt restructuring or default).
MDBs as agents of de-risking
De-risking is about reducing the real or perceived risks deterring private investment from development projects. A variety of instruments are already available to MDBs to do this. They can improve project design and preparation, offer guarantees or insurance to mitigate certain types of risk, or provide early-stage financing to make projects more viable. The underlying objective is to create a more conducive environment for investment by increasing predictability and reducing uncertainty, which will encourage capital flows into sectors and regions that are currently overlooked.
These tools aren’t used widely, though. Instead of financing that can attract private investment, the majority of MDB resources in Africa are still sovereign loans. A World Economic Forum study revealed that between 2001 and 2013, only 4.5 per cent of international finance institutions’ loans were to help secure additional private funding for projects.
MDBs have been sluggish to increase their involvement in emerging fields such as digital infrastructure, creative industries, and health logistics.
What holds MDBs back?
The following structural issues prevent MDBs from carrying out de-risking activities:
1. Risk aversion and strict mandates. MDBs operate under mandates that place a higher priority on preserving capital than raising capital. Their capacity to use adaptable tools is restricted by this conservatism, particularly in high-risk or delicate situations where they are most required.
2. Restrictions on their ability to accept losses. MDBs are penalised for taking on high-risk loans to the private sector. Their ability to stretch their balance sheets and increase the use of guarantees or equity investments is weakened as a result.
3. Inadequate coordination. Even though there are several MDBs on the continent, their work is frequently dispersed. Insufficient coordination leads to underfunded project preparation pipelines, redundant due diligence procedures, and lost co-investment opportunities.
4. Limited local collaborations. MDBs usually function independently of African institutional investors, including regional development finance organisations, sovereign wealth funds, and pension funds. The possibility of blended capital structures that more effectively share and distribute risk is thus constrained.
A novel approach to de-risking
MDBs need to refocus their strategy on public funding that encourages private investment to overcome these obstacles. This entails utilising their financial resources, expertise, and ability to partner with private finance to attract long-term investment funds rather than drive them away. The following would be included in a new de-risking playbook:
1. Expanding and streamlining access to insurance and guarantees. MDBs must make risk-sharing tools more accessible and usable for local business owners, regional banks, and small businesses in addition to big international investors. Facilities for risk-sharing ought to be made simpler, quicker to implement, and more tailored to the dispersed investment environment in Africa.
2. Making project preparation a priority. One significant bottleneck is the lack of projects that are attractive to investors. To create pipelines that satisfy investor standards, MDBs should increase their support for project preparation funding. They should do this by collaborating closely with African governments, investment promotion organisations, and public sector entities.
3. Modifying the requirements to maintain financial buffers. Given their preferred creditor status, MDBs should update their internal risk models to more accurately reflect actual default probabilities in accordance with the G20 independent review of the rules ensuring International Development Banks have enough financial resources. Without needing additional funding, this would enable more lending and guarantee capacity.
4. Increasing the involvement of local institutional investors. To create co-investment platforms and regional de-risking vehicles, MDBs ought to collaborate with African pension funds, sovereign wealth funds, and guarantee schemes. This would increase their instruments’ reach and foster local ownership.
5. Entering underfunded industries. To support industries like the creative economy, agribusiness, digital platforms, and energy transition—where market failures continue but developmental gains are substantial— MDBs must go beyond traditional infrastructure and sovereign lending.
6. Building better tools to understand and manage risk in Africa. To address long-standing concerns regarding bias and a lack of transparency in sovereign ratings from international credit rating agencies, MDBs should actively support the creation and legitimacy of the Africa Credit Rating Agency (AfCRA). MDBs can enhance the calibre of risk information accessible to investors by assisting in the institutionalisation of context-specific, transparent, and analytically rigorous credit assessments. This would free up funds for corporate and sovereign issuers throughout the continent and lessen the overpricing of African risk. MDBs can help by advocating for regulatory recognition of AfCRA ratings in international financial markets, providing technical assistance, and developing capacity.
Africa has a compelling investment case. Conviction, not financial resources, is what’s lacking. The time has come for multilateral development banks to become bold market shapers rather than just safe lenders. MDBs can assist in de-risking the future of African development by being more aggressive in leveraging their reputation to absorb initial losses, fill funding gaps, and enlist the support of additional financiers. Additionally, MDBs have the option to invest in long-term infrastructure, including local guarantee programs, project preparation facilities, and regional credit rating agencies.
This change requires a fundamental reassessment of the mandates of MDB, incentives, and risk appetites in addition to new tools. The tools are available, which is good news. To implement them at scale, MDBs and their shareholders now require leadership.
The international community must empower its most potent development institutions to take the lead in creating a more resilient and inclusive global economy. This means not only increasing lending but also empowering others to invest with assurance where the needs are greatest and the social, economic, and environmental returns are highest.
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