The need for concessional finance in Africa post-COVID-19 and what can be done by export credit agencies
April 2022 | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE
Financier Worldwide Magazine
April 2022 Issue
The coronavirus (COVID-19) pandemic has had a severe impact on the continent of Africa, impacting both economic growth and the health of nations.
Many commentators have raised the concern that the effects of the COVID-19 pandemic are likely to endure in many African countries far longer than in other, developed, countries. Likewise, there is a fear that as developed countries recover from the pandemic, many of the developing countries of Africa will be left behind. Notwithstanding the efforts of the International Monetary Fund (IMF) and external creditors through various initiatives (which have included extensive debt service relief), African governments have very limited financial resources to move forward.
All this is on top of the challenges posed by climate change and Africa’s pre-existing infrastructure gap. To finance the United Nation’s (UN’s) sustainable development goals (SDGs), the finance gap for Africa is estimated to be in the region of $200bn annually, with estimates of the cost of recovery from the pandemic also at $200bn.
Across Africa there is now a ‘perfect storm’ made up of the need to meet SDGs, the need to address the impact of COVID-19, increasing global interest rates, rising global inflation, stretched government budgets and tightening access to external financing. With global economic uncertainty caused by the Russia/Ukraine crisis, these pressures are likely to worsen. The situation is fragile and unprecedented.
Financing resources were not sufficient before COVID-19 – post pandemic, the situation is even worse.
In a recent blog by Nimrod Zalk, adjunct associate professor at the University of Cape Town, it is argued that “there is a moral case for international provision of large-scale concessional funding to Africa”.
What is concessional finance?
‘Concessional finance’ does not represent a single mechanism or type of financing. While concessional finance is made available on terms more generous than commercial, non-concessional finance, the form of the financing may differ from one project to another.
Concessional finance will typically have one or more of the following elements: below market rates of interest, longer tenors for the repayment of principal, longer grace periods until the start of the payment of interest and/or principal, and grants. So, for example, one could have concessional finance made up of a low interest loan with an extended repayment period, or you could use a grant to pay the premium on an Export Credit Agency (ECA) guaranteed loan.
In providing this much needed concessional funding, ECAs have an important role to play.
What do ECAs do?
ECAs provide government-backed support for national exporters. Such support can be in the form of ‘official financing support’, such as direct loans to foreign public or private buyers or ‘pure cover support’, such as guarantees or insurance for loans provided by private financial institutions.
The International Chamber of Commerce’s (ICC’s) September 2021 White Paper – ‘Sustainability in Export Finance’ – made clear the critical importance of ECAs in financing infrastructure “in countries and sectors where private capital does not naturally flow”.
In recent years ECAs have played a key role in financing critical infrastructure across Africa. ECAs have been particularly active in the agriculture, water infrastructure, green energy and education sectors, as well as those sectors such as critical healthcare where the COVID-19 pandemic has had a severe impact.
Not only are ECAs key to mobilising much-needed investment, they can be particularly effective in ensuring good governance as well as monitoring and minimising environmental and adverse social impacts.
Bringing ECAs and concessional finance together
While there may be a ‘moral case’ for large scale concessional finance, not all ECAs offer concessional finance. Some, such as Austria’s OeKB, do offer ECA support on concessional terms. Others, such as UK Export Finance, do not.
It is clear that exporters and buyers would like ECAs to do more when it comes to concessional finance. In the House of Commons International Trade Committee report on UKEF (September 2021) it was reported that “businesses and their representatives said they would value a concessional lending export finance product for developing countries from UKEF”.
Looking ahead
It is unfortunate that, post pandemic, many projects will not go ahead without concessional finance. As Mr Zalk has highlighted, “African countries cannot afford to tread water”.
Targeted concessional finance in sectors such as healthcare, agriculture and green energy, can kick start future development. Investment in each of these sectors will help leverage recovery from the COVID-19 pandemic. ECAs are well placed to provide this concessional support.
It is not just the least-developed countries which would benefit from access to concessional finance from ECAs, and it is not just about recovering from the pandemic. For many SDG and climate-related projects, middle income countries such as South Africa would also benefit.
The absence of critical infrastructure creates barriers at local, regional and national levels. ECAs that provide such concessional finance are perfectly placed to finance these projects with their sector and in-country experience, coupled with their focus on good governance and transparency.
While it is crucially important to ensure the debt sustainability of host governments, many projects which could be supported by ECAs using concessional finance are likely to have a significant impact. Once up and running, projects supported with concessional finance can act as a catalyst and stimulus for economic growth. Concessional finance does not just bridge the gaps, it can accelerate transition. Often the project that needs concessional financing is holding back wider commercial ventures.
Given the crisis caused by the COVID-19 pandemic, it is clear that there is a need for concessional finance and that ECAs have an important role to play. Targeted concessional finance can be highly effective. What the COVID-19 pandemic has made clear is that the role of ECAs in the provision of concession finance needs to evolve.
Mark Norris is a partner at Sullivan & Worcester UK LLP. He can be contacted on +44 (0)20 7448 1003 or by email: mnorris@sullivanlaw.com.
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Mark Norris
Sullivan & Worcester UK LLP
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