Difficult times sometimes call for firm measures. With investor appetite curbed during the pandemic, development financial institutions and multilateral agencies are stepping into the breach.
They offer guarantees worth millions of dollars that are helping overcome remaining hesitance from international investors and local financial institutions alike.
Guarantees to protect against myriad of risks
In April of this year, the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) issued guarantees worth up to $37.1mn to African Infrastructure Investment Managers’ (AIIM) African Infrastructure Investment Fund 3.
The MIGA guarantees provide protection against the risks of currency inconvertibility and transfer restriction, expropriation, and war and civil disturbance.
This helped AIIM to cover its investment in solar home system (SHS) company Bboxx’s operations in the Democratic Republic of Congo (DRC), Kenya, and Rwanda for up to ten years.
A further five-year $5.9mn guarantee was provided to the Facility for Energy Inclusion’s Off-grid Energy Access Fund (FEI-OGEF). FEI-OGEF fund manager Harry Guinness said the history of volatility in Bboxx DRC's core markets meant instability was a crucial consideration for its investment.
The guarantee support provided the confidence FEI-OGEDF needed to finalise its negotiations with Bboxx, according to Vuyo Ntoi, Co-Managing Director of AIIM. “By catalysing more investments into Bboxx, MIGA is helping to reduce one of the key business risks off-grid solar companies face – access to capital,” he said.
First-loss facility to support local financial institutions
Another significant new guarantee product expected to be launched by 2022 is the Green4Access First Loss Facility, a funding and risk-sharing mechanism to accelerate off-grid solar financing in sub-Saharan Africa.
Devised by GreenMax Capital, a group of international clean energy consulting firms, the G4A First Loss Facility is a ‘cushion’ reflecting the amount of underperformance the originator agrees to cover before investors see losses.
The aim is to develop a fund to scale up investment in African-owned small to medium renewable energy businesses. This will support financial institutions in accelerating local currency lending to energy access enterprises in Sub-Saharan Africa via a cash deposit product.
“At G4A we’ve been able to come up with a product that provides good risk mitigation to the financial institutions , so that they will be able to lower the perceived risk, Sunkanmi Olowo, Director G4A told Impact Investor. “Using a first-loss cash reserve will provide support to the banks so that the risk is substantially reduced.”
These products show the stress on forming innovative de-risking strategies, as the level of interest and size of investments in the off-grid space develops.
Building up local capacity
Netherlands-headquartered social impact investor and worldwide cooperative Oikocredit has also helped finance solar installations across Africa’s off-grid solar market.
Oikocredit invests in small and medium-sized renewable energy projects, choosing the projects for their social impact and the benefit Oikocredit can bring.
“Facilities like Green4 Access are exactly what the off-grid sector needs, in terms of building up the local banking infrastructure and environment, whilst de-risking the sector to facilitate the entrance or scale-up of energy access loans by local financial institutions,” James Todd, Renewable Energy Investment Officer at Oikocredit, told Impact Investor.
Todd’s mission is to build up local capacity. That means providing support to certain companies for a period of time and making sure that the sector gets to a level of maturity where we start to see more local and institutional players come in, he says.
Guarantee-like instruments to cover origination activities
“The only way we're really going to achieve certain UN Sustainable Development Goals is if we empower the growth of companies started and owned by local entrepreneurs, supported by local banks, and stimulate that investing environment so that it is self-sufficient,” Todd said.
“Thereafter investors like ourselves should be looking to advance to other development sectors where we can encourage the same type of impact,” he said.
The way capital has been allocated to date has resulted in a concentration of funding in specific types of companies, drawing opportunities away from the start-up ecosystem and locally owned businesses and entrepreneurs.
“Many of these companies have spun off their portfolios, and often de-risking instruments and guarantees are then provided on those portfolios," Todd said.
"As well-established players likely to have best lending practices, it is arguable whether guarantee-like instruments wouldn’t be better served covering the origination activities of promising earlier-stage local enterprises,” the investment officer said.
The most favourable end result would be one in which the need for guarantees is removed, and local capacity takes up the slack.
“If you can facilitate strong development of the local lending environment, then you do away with the majority of the needs for guarantee facilities covering transfer & convertibility risk for hard currency loans,” said Todd.
“If the local banks are providing the local currency loans to African owned enterprises, then obviously at a certain point in time, they will offer them at a much lower interest rate, with much lower collateral requirements than international funders.”
The space looks set to be an active one. Todd confirms that he is “busier now he’s ever been” and that there are enormous opportunities to contribute to the sector’s growth.
“Whether that's down to existing investors looking to focus on supporting their existing portfolio companies to navigate the impact of COVID-19, or whether it's generally that the industry is starting to mature, there are a wide variety of financing needs,” he said.
“What goes hand in hand with this, is having de-risking instruments in place to help investors bring their prospects to fruition and contribute to delivering meaningful impact.”