The changing risk-reward equation

Farmers in northern Kenya receive payout from their livestock insurance. MIGA has seen a doubling of demand for political risk insurance products over the past five years, especially in sub-Saharan Africa. Photo by: Neil Palmer / CIAT / CC BY-SA

There’s a “scramble for Africa” underway as investors seek to share into the decadelong period of high returns on the continent.

For African governments, these investments are more than welcome in the face of dwindling aid to create jobs and help address the infrastructure deficits. Investors, however, are also becoming more mindful when it comes to the management of political risk. They are much more aware that when a government changes, odds increase that previously agreed contracts are questioned by the new government. News feeds vividly bring to European board rooms images of sectarian strife from Kenya, Nigeria and Iraq.

As a result, the Multilateral Investment Guarantee Agency has seen a doubling of global demand for political risk insurance products over the past five years. Sub-Saharan Africa is an important part of this growth, especially in infrastructure and energy where the continent is trying to catch up with needs, both in generation and distribution. For example, in Nigeria we have been working with the World Bank and the International Finance Corp. to support a series of groundbreaking generation projects to help bring a reliable, affordable and sustainable supply of power to the country. Another example of a transformational project that will involve the entire World Bank Group is the Banda gas project in Mauritania, which will provide energy not only to local consumers, but also to those located in neighboring Mali and Senegal.

Beyond public-private partnerships, governments are looking for new financing solutions to fund their critical public projects. Three years ago, MIGA started deploying a credit enhancement solution that can help guarantee the repayment of private loans for public projects. Last year, we deployed this new form of guarantee for lenders to the Cambambe hydropower dam in Angola, expected to increase the country's power capacity by 50 percent. The guarantee improved the tenor and price of the borrowing, and complemented export credit agencies to achieve financing for this transformational project.

Since MIGA is part of the World Bank Group — and enjoys a special relationship with governments — it is able to take risks that others cannot. It can attract other insurers through its reinsurance program and help catalyze investment that brings development in difficult jurisdictions, including in post-conflict countries. Our support to three major energy and transport projects over the past two years in the Ivory Coast were key to realize significant investments in power and transport that amounted to $2 billion.

We recently extended the availability of our credit enhancement product to the better rated municipalities and state-owned enterprises. As the continent's creditworthiness develops, there will be more and more entities that will be able to benefit from this product.

We expect the future will hold even more innovation as global investors, including from Europe, seek more prospects on a continent ripe with significant opportunity — but fraught with risks that institutions like MIGA can help manage.

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About the author

  • Michel wormser

    Michel Wormser

    Michel Wormser is vice president and COO at the Multilateral Investment Guarantee Agency, the World Bank's political risk insurance arm. Before joining MIGA in 2011, Wormser served in several leadership positions within the Washington, D.C.-based institution, including director of infrastructure and sustainable development for Africa, adviser to the executive vice president of the International Finance Corp. and vice president for private sector development.