Mitigating Investor Risk in Sub-Saharan Africa

Mitigating Investor Risk in Sub-Saharan Africa

August 30, 2012- Sub-Saharan Africa is becoming a more attractive and hospitable destination for investors, especially those willing to take on risk in order to achieve higher rewards in challenging but potentially lucrative markets. The subcontinent has registered historically high and consistent growth in recent years, with estimates indicating an expansion of 5 percent in 2012, following another expansion of 4.7 percent in 2011. While the extractives industry has been a significant driver behind rising foreign direct investment (FDI), investment in non-extractive industries has also been rising thanks to improvements in regulatory frameworks, governance, and the overall ease of doing business in the region.  A growing middle class is also particularly attractive to investors seeking new markets.

MIGA posted very strong results in sub-Saharan Africa in fiscal year 2012. This suggests that investors are seeking out opportunities there, but proceeding with caution by using formal risk-mitigation tools such as political risk insurance (PRI). The 17 projects supported by MIGA spanned 13 countries across a variety of sectors, including several groundbreaking infrastructure investments that the continent urgently needs to establish itself as a viable place to do business. Many of these investments used innovative financing mechanisms and involved public sector institutions to help mobilize resources in a time of diminished aid flows and constrained commercial lending.

Rebuilding Côte d’Ivoire’s Transportation Infrastructure

The West African nation of Côte d’Ivoire is rebuilding after a prolonged civil conflict. A long-standing plan to construct and operate a toll bridge over Abidjan’s Ebrié Lagoon had been shelved for over 10 years, but is now moving forward. MIGA is providing $145 million in guarantees covering the equity investor and all of the project’s private sector lenders as well as FMO, the development finance institution of the Netherlands. The African Development Bank is also providing financing for this public-private partnership, the country’s first since the civil conflict.

The construction of the bridge is a high priority for the government, as Abidjan’s existing bridges and infrastructure are under severe strain and unable to manage the city's growing traffic. Once completed, the new bridge will significantly reduce travel times, improve overall mobility, and alleviate chronic traffic congestion. The project will also provide important demonstration effects for further private sector initiatives in the country.

Boosting Power Generation in Kenya

In Kenya, where only 25 percent of the population has access to electricity, the World Bank Group is supporting the government’s Least Cost Power Development Plan, which calls for an increase in the number of independent power producers (IPPs) and a more diversified energy mix. The program is benefitting from a combination of partial risk guarantees from the International Development Association, financing from the International Finance Corporation, and MIGA guarantees. These instruments are playing an important role in increasing investor confidence and mobilizing the long-term financing needed to construct power plants. This year, MIGA provided guarantees of $61.5 million for Thika Power Ltd., an 87-megawatt heavy fuel oil plant outside of Nairobi. The MIGA guarantees complement an IDA partial risk guarantee of $35 million and IFC financing of €28.1 million.

MIGA has also been supporting Kenya’s first geothermal IPP, OrPower 4, since 2000, and provided additional coverage this year for the plant’s expansion to 84 megawatts. The expansion also benefits from an IDA partial risk guarantee of $31 million. Additional IPPs are expected to move forward with the backing of World Bank Group private sector instruments in the near term.

Frontier Market, Frontier Technology

The MIGA-supported KivuWatt power project in Rwanda involves extraction and separation of methane gas from the bottom of Lake Kivu, and will generate 25 megawatts of power in its first phase. Rwanda currently has one of the highest electricity tariffs in Africa due to limited generation capacity, so the project was a high priority for the government. In addition to providing 20-year PRI cover for the transaction, MIGA led the environmental and social due diligence work for this highly complex project.

The lake, which borders Rwanda and the Democratic Republic of Congo, is currently estimated to contain extensive amounts of carbon dioxide and methane in its lower density layers. While the methane gas provides a potential energy source, it could also cause the lake to erupt, with disastrous consequences. An eruption at Lake Nyos in Cameroon in 1986 suffocated 1,700 people and more than 3,000 livestock. This grave risk, and the perceived political risks in this relatively untested market, led equity investor ContourGlobal to MIGA after other insurers turned the project down.

After MIGA conducted thorough environmental and social due diligence, including hiring of independent experts to assess lake stability, resource management, and community health and safety and impacts, MIGA and FMO of the Netherlands were comfortable to move forward with the project. A critical outcome of this due diligence was the decision to implement the project in phases. Based on a successful implementation of the first phase, phase two will include three new gas-extraction barges and three more power-production blocks with an additional 75 megawatts capacity resulting in a total 100 megawatts of power generation.

Looking Ahead

MIGA has a strong pipeline of infrastructure investments in sub-Saharan Africa, many of them involving financing from multilaterals and development finance institutions. “What we’re seeing is that these organizations have really stepped up to help mobilize private capital into very challenging projects during difficult times," says MIGA Executive Vice President Izumi Kobayashi. “The nature of the projects where investors are seeking MIGA’s cover really speaks to our core strategic priorities – supporting investments in complex projects, the world’s poorest countries, and countries affected by conflict."