UK aid budget could provide guarantees for investors, says AFC CEO Samaila Zubairu

By Kanika Saigal
Posted on Thursday, 28 July 2022 20:17, updated on Tuesday, 2 August 2022 14:31

Samaila Zubairu, CEO of the Africa Finance Corporation
Samaila Zubairu, CEO of the Africa Finance Corporation (rights reserved)

Samaila Zubairu, CEO of the Africa Finance Corporation (AFC), the UK should use its aid budget to derisk investment into the continent.

The Africa Debate, held in London in July, reinforced the UK government’s political narrative about its relationship with emerging markets – moving from aid to trade.

As the secretary of state for international trade, Anne Marie Trevelyan, said in her speech: “The UK’s strategy is about building a sustainable, enduring and productive partnership […] in which we use trade’s power to make dependable friends to strengthen the rules-based order.”

For Samaila Zubairu, CEO of the Africa Finance Corporation (AFC) – a multilateral finance institution with its headquarters in Nigeria – the UK’s aid budget could play an important part in supporting investment in Africa.

He says: “Rates of return are much higher in Africa and emerging markets, but at the same time, investors must grapple with currency risk, convertibility risk, project risk – whether perceived or real – which can influence whether or not they invest into the region.”

We must show people what Africa has to offer as well as make clear the benefits that the use of insurance and guarantees

“Perhaps, on an experimental basis, using 30% of the UK’s 2023 aid budget could be used to provide guarantees for UK investors to cover any losses incurred due to investing in Africa,” he says. “To bridge that gap – from aid to trade while the perceived risk is high – we must introduce products to make investors feel more comfortable with investing in the continent.”

Although there is nothing concrete yet around how institutions such as the AFC may be able to leverage the UK’s aid budget, discussions are taking place, says Zubairu. “I don’t know that we have traction yet, but I’m hoping – as a result of this forum – that we can agree on a process to pursue these initiatives.”

Insurance and guarantees

“We must show people what Africa has to offer as well as make clear the benefits that the use of insurance and guarantees – like repurposing aid budgets to provide guarantees for new investors – can have to support the transition. […] In fact, there is huge demand for these types of products because they provide security for investors,” says Zubairu.

Indeed, investment insurance programmes like this one, which redirects aid into a blended credit enhancement product, have the potential to double or triple the contribution of aid, says Zubairu.

Products such as A/B loans, parallel loans and partnership-loans allow the AFC to deploy new sources of capital into Africa, while bringing down the risk for first-time participants into Africa.

“It means that every £1bn ($1.2bn) in aid funding can potentially raise an additional £1bn or £2bn in private sector capital to develop vital segments of the economy in Africa,” he says.

It is not a panacea, says Zubairu, but it may encourage first-time investors and spur further flows into the region. “It’s not until people make the first move that they will get an accurate account of what’s happening on the ground,” he says. “This will help change perception.”

Combined threats

Perhaps one of the most well-known stats related to Africa’s development relates to the infrastructure deficit: According to the African Development Bank, the continent’s infrastructure financing needs may reach $170bn a year by 2025, with an estimated gap of around $100bn a year.

With the combined threat of climate change, energy scarcity and the lack of reliable infrastructure – all while the continent’s population continues to grow at a round 2.45% per year – Africa needs both private and public investment to fill in the infrastructure gap and future-proof its economic development.

Investors are reducing their exposure to emerging markets given rising interest rates in the US and elsewhere.

On the investment front, things are looking better on the continent. In 2021, foreign direct investment (FDI) flowing into Africa hit $83bn, more than double the $39bn of 2020. Africa accounted for 5.2% of global FDI, according to the World Investment Report by the United Nations Conference on Trade and Development.

Most of the increase, however, was due to a share exchange between Naspers and Prosus in the third quarter of 2021 in South Africa, without which the value would have only increased moderately, according to the report.

FDI Inflows in Africa, by subregion (billions of dollars)

Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics).

Although flows to Southern Africa, East Africa and West Africa rose in 2021, flows to Central Africa remained flat and North Africa declined. In North Africa, Egypt saw its FDI drop by 12% but was still the second-largest recipient of FDI on the continent. Pledges from Middle Eastern countries to invest around $22bn in various sectors in Egypt should boost FDI.

At the same time, investors are reducing their exposure to emerging markets given rising interest rates in the US and elsewhere.

Investment goals

There is still a long way to go in terms of meeting Africa’s investment goals, but perhaps one of the most important issues to focus on – to encourage investment to flow into the region – is education, explains Zubairu.

“We must step out of perception into the realm of reality,” he says. “It’s about education, having an open mind and looking at the facts as they are.”

The AFC has paid a dividend to investors every year for the past 11 years and has turned almost 50% of the invested capital back as dividends.

“We are profitable,” says Zubairu. “We know we can accelerate development at a return in Africa. Working with African development institutions like ours will provide investors with this insight.”

“People are saying all the right things, but there doesn’t seem to be much action, so how do we accelerate action? Insurances and guarantees are the way forward for now,” says Zubairu. “Painfully, progress takes time.”

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