In his 2023 state of the nation address (Sona) President Cyril Ramaphosa said that the biggest hurdle to infrastructure investment in the country was “lack of technical skills and project management capacity”. While this rings true, many would say that securing appropriate funding is also a hurdle.
When it comes to other African markets, building infrastructure using export credit agency (ECA) mechanisms is common practice. However, SA has not fully embraced this financing option for much needed infrastructure projects, despite the potential advantages it could offer. So, why are ECAs not considered when funding in-country infrastructure and more importantly, should they be?
Essentially, an ECA is an entity that offers financing solutions and credit as well as risk insurance for companies, aiming to export or import products. ECAs differ from banks and insurance companies in that these agencies are willing to take on the risk of international trade — a nonnegotiable when it comes to the importation of necessary infrastructure components such as wind turbines or solar panels for renewable energy projects, for example.
Going straight to the source
The reality is that SA is blessed with deep domestic markets, enhancing the country’s ability to fund its own projects. That said, by doing this it may not be affording itself the opportunity to tap into other sources of liquidity such as ECAs. Not only is this type of financing an alternative (and viable) option, but it can also help navigate cyclical liquidity obstacles by providing solid indemnity (essentially securing commercial bank lending further down the line) as well as direct lending.
What’s more, ECAs have played a critical role in expanding the continent’s agricultural, education, water, healthcare and green energy sectors. While they provide vital funding, they also assist in promoting positive environmental and social effects, including good governance principles, through industry-leading monitoring and measurement systems.
Grey matter(s)
Given these beneficial aspects, what else is preventing ECAs from being involved in SA’s infrastructure development? Lack of investor confidence would certainly be an obvious answer. The country’s current political and economic instability as well as its greylisting by the Financial Action Task Force for falling short of certain international standards for the combating of money laundering and other serious financial crimes, cannot be discounted as prime additions to SA’s “risk bucket”. This status is not only detrimental to price but also compounds nonparticipation from investment players.
Though commercial lenders have adequate liquidity, their risk appetite may have diminished, resulting in a shift towards state-owned entities (SOEs) through their ECAs, negatively affecting potential growth because these entities usually support or drive big projects across the country (especially those that require technical exports). Another reason for ECAs being relegated is the continued preference for rent nominations, to address foreign exchange and other risks.
Under a rent nomination arrangement the project company agrees to pay the lender a fixed percentage or amount of the project’s revenue as debt service. Of course, lenders benefit from lower risk and predictable cash flow, providing a higher level of certainty when it comes to repayments. At the same time, borrowers gain through greater payment flexibility and preferential debt structuring, combined with improved credit ratings.
Calculated risks?
While increased risk and reluctance to invest in SA are pertinent factors, ECAs do have a deep understanding of risk mitigation, related to funding decisions. This means being able to identify and address exposures by looking at two vital risk metrics. The first is the probability of default (the likelihood that a borrower will fail to pay back a certain debt) and the loss given default, the estimated amount of money the lender loses when a borrower defaults on a loan. These assessments will be even more enhanced when real alignment within the sector has been achieved — that is, all lenders interpreting regulations in the same way.
At the fifth SA Investment Conference held in April, the president set a target to mobilise more than R2-trillion in new investment by 2028. Is this figure even achievable? Perhaps, but SA will need to realise these are potential stakeholders, combined with countries keen to deploy their technology. While we can debate how much debt the country can place on its balance sheet, SA does have an opportunity to start embracing export credit finance methods as part of its infrastructure rollout in addition to the traditional methods, ensuring that debt is placed in productive assets that can actually generate revenue.
What will it take to unlock the power of ECAs and improve the financing options available for infrastructure projects in SA, and as a result increase sustainable employment and economic growth? Understanding the wide spectrum of benefits they can offer, including enhanced socioeconomic effects and compliance, and leveraging their robust risk mitigation approaches to each project’s advantage.
In simple terms: for infrastructure rollout to be successful, SA must be determined and decisive.
This hardhatNEWS was written for the Business Day by Sekete Mokgethe the head of export credit finance at Nedbank CIB 
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