Message from the Director
On the eve of last December’s U.S.-Africa Leaders Summit, USTDA hosted 13 of Africa’s preeminent finance institutions to discuss the future of infrastructure finance on the continent.
One of the areas of agreement was the need for scaling project preparation efforts to facilitate the bankability of Africa’s infrastructure priorities. We also agreed to sustain and enhance our two-way project referral practices.
USTDA benefits from these institutions’ deep and nuanced understanding of Africa’s markets. In return, USTDA offers a highly flexible and customizable grant-based project preparation toolkit. These partnerships are key for mobilizing financing for Africa’s infrastructure priorities. They are also at the heart of U.S. foreign policy priorities such as the Partnership for Global Infrastructure and Investment.
For this edition of TradePosts, USTDA’s Sarah Whitten explores why one of our partnerships in Nigeria has become so effective.
Partnering on Infrastructure Bankability
By Sarah Whitten, USTDA Regional Manager for Financing and Implementation, Sub-Saharan Africa
Development finance institutions are eager for bankable infrastructure projects. Over the past several years, USTDA has accelerated its efforts to align its program with the needs of funders that want to invest in impactful projects in sectors such as clean energy and digital infrastructure, especially in sub-Saharan Africa. Our partnerships are yielding success. Here’s how.
Every project has its own set of risks. Fortunately, there are financial institutions that specialize in mitigating certain types of risks so that emerging economy infrastructure projects can meet the threshold for bankability.
For example, blended finance structures are imperative for projects deemed as higher risk by investors, such as those based in sub-investment grade markets or where there are affordability hurdles with the end-user. Blended finance reduces risk by utilizing a combination of public sector, donor, and development financing to mobilize private capital from commercial banks and institutional investors that rely on traditional risk-versus-reward calculations.
Impact investors play a key role, as they balance the importance of developmental impacts with financial returns in their decision making. Equally important are risk mitigation mechanisms offered by some financial institutions, such as political risk insurance or credit guarantees. These tools offset key transaction concerns so that projects fall within an acceptable risk threshold for traditional lenders.
One such guarantor is Nigeria’s Infrastructure Credit Guarantee Company Limited. “InfraCredit” provides guarantees that allow local project sponsors to finance their infrastructure using Nigerian Naira.
This is critical for several reasons.
International lenders often prefer to finance longer-term infrastructure investments in the most stable currencies, such as the U.S. dollar. Infrastructure projects, however, typically generate revenue in the local currency. This creates a currency mismatch for repayment.
Another complication is the market-wide shortage of U.S. dollars in Nigeria. Financiers will not lend in dollars if their borrowers cannot access the currency to repay their loans. This has necessitated Naira-based infrastructure financing, which comes at much higher double-digit interest rates.
The good news is that these challenges are surmountable. By leveraging each other’s resources, tools and capabilities, USTDA and InfraCredit are helping to unlock finance for Nigeria’s critical infrastructure in creative ways.
USTDA’s grant-based funding for project preparation defines the technical requirements and financing strategies for infrastructure projects. U.S. companies carry out our assistance, offering our partners the best of American technology and innovation. USTDA refers these projects to financier partners such as InfraCredit to structure appropriate funding solutions. For us, InfraCredit is an important partner in attracting financing for our projects in Nigeria through its local currency guarantees, which mitigate risk for financiers and bring down the interest rates charged to borrowers.
Here are a few recent examples.
In June 2021, USTDA awarded a grant to Hotspot Network Limited for a feasibility study that assessed the deployment of up to 2,000 solar-powered mobile network base stations in rural communities across Nigeria. An InfraCredit guarantee allowed the company to secure local currency financing from domestic institutional investors, enabling a first-phase rollout of 120 base stations. Hotspot intends to implement subsequent phases of the rollout through financing secured through additional funding rounds.
In the renewables sector, USTDA funded a feasibility study for Darway Coast Nigeria Limited that assessed pathways for generating up to 23 megawatts of solar power for communities in southern Nigeria through the deployment of more than 90 minigrids. The project drew institutional investors[1] through a creative blended financing arrangement that included an InfraCredit local currency guarantee and subordinated debt financing from the Climate Finance Blending Facility. This innovative structure enabled the project to obtain 7-year debt financing in Naira at a fixed rate. This project now holds the distinction as the first green-certified local currency debt issue for off-grid solar in Nigeria.
InfraCredit’s CEO, Chinua Azubike, tells us that “institutional investments in infrastructure cannot increase significantly unless there are improvements in the quality of infrastructure assets. Many projects are characterized by low technical capabilities, as well as limited financial resources being dedicated to developing feasibility studies and business plans. As a result, investors lack bankable project pipeline.”
USTDA’s tools address these investor concerns. The Agency’s assistance supports not only the technical and engineering considerations of a project, but also the financial modeling and bankability considerations that help bring critical infrastructure projects to financial close.
USTDA’s symbiotic relationship with financial institutions creates a virtuous circle that leverages their in-depth knowledge and expertise of local markets to enhance the Agency’s identification of potentially viable projects for its grant funding consideration.
Our partnership with InfraCredit is an effective approach toward addressing infrastructure needs in Nigeria, and it is a model of collaboration that USTDA has made a centerpiece of its strategy for closing the infrastructure gap across sub-Saharan Africa.
[1] Nigerian institutional investors that participated in the Darway transaction under this facility include: (i) Leadway Assurance (www.leadway.com); (ii) AIICO Insurance (www.aiicoplc.com); (iii) Linkage Assurance Plc (www.linkageassurance.com); and (iv) First Pension Custodian Limited (www.firstpensioncustodian.com).