Akinwumi A. Adesina : “60 years of making a difference”

By Akinwumi A. Adesina*

Dear Governors,

I wish to welcome you to the 2024 Annual Meetings of the African Development Bank Group. I am especially delighted to speak with you today at our Governors Dialogue. You, our Governors, are the best supporters of the African Development Bank Group.

Your insights, guidance, oversight, and support have continued to propel the Bank to greater heights, in our drive and efforts to advance our collective ambition: the development of Africa.

I have always cherished the Governors’ Dialogues. They are a high point during our meetings. That is why this year, we have devoted 6 hours to the Dialogues, in two separate sessions. We value your views and perspectives as they always help us to do better.

The theme of the Annual Meetings, “Africa’s economic transformation: African Development Bank and the Reform of the Global Financial Architecture”, is timely. Recently, the UN Secretary General sounded the alarm that the world is off course in delivering on the Sustainable Development Goals. The financing gap for achieving the SDGs has increased from $2.5 trillion to $4 trillion annually. Africa alone will need $1.3 trillion annually to achieve the SDGs.

As the world traverses multiple challenges, including geo-political tensions, unabating global inflation, a rise in food and energy prices, and climate change, the fact is, the resources of governments alone will never be enough to meet Africa’s development needs.

The private sector must therefore play a critical role, whether it is dealing with climate change, expanding the access of countries to global capital markets, supporting financing for businesses, or delivering more cost-efficient infrastructure through public-private partnerships.

That is why the theme of this year’s Governors’ Dialogue is “African Development Bank: Mobilizing the private sector to accelerate Africa’s transformation”.

And you can understand why this Dialogue is so important.

Today, assets under management globally stand close to $120 trillion. Africa has over $2.5 trillion of assets under management by pension funds, sovereign wealth funds, insurance companies and collective savings. Creatively leveraging these funds into development can be transformational.

One of the pivotal development roles of the private sector is driving Africa’s structural transformation in tandem with the private sector.  Industrialization, one of the High5 priorities of the Bank, is key in this regard. The contribution of Africa’s manufacturing sector is low and has remained stagnant at 10%. As a result, the sector accounts for less than 10% of total employment.

The Bank is making a difference.

Since the establishment of our Industrialize Africa strategy in 2016, the Bank has approved industrial projects worth $14.22 billion. Last year alone, our approvals for Industrialize Africa were $2.89 billion, a 37% increase from 2022.

We provided a $100 million corporate loan to Indorama Fertilizer & Chemical company in Nigeria to expand its urea fertilizer production from 2.8 to 4.2 million tons per year at a cost of $1.25 billion. The Bank also provided a $400 million corporate loan to the Dangote Group as part of an investment to establish the largest single-train petroleum refinery in the world, as well as one the world’s largest urea fertilizer plants. In total, the Bank has supported non-sovereign industrial projects with more than $1 billion, including the Mozambique LNG project, the OCP Jorf phosphate hub expansion program in Morocco, the Guinea Alumina Corporation in Guinea to produce bauxite, the BUA cement plant in Nigeria and the Tekcim cement plant in Morocco.

Our support is not limited to large corporations alone. Agri-SMEs for instance, are critical for the transformation of agriculture in Africa but face an annual financing gap of $96 billion. As such, we strongly support small and medium sized agri-businesses. For example, access to seeds and fertilizers is critical for smallholder farmers to raise productivity and achieve food security. To ensure this is private sector driven, the Bank provides trade credit guarantees to fertilizer suppliers, using the Africa Fertilizer Financing Mechanism.

The use of trade credit guarantees in Tanzania, Nigeria, Ghana and Cote d’Ivoire has produced impressive results, with $11 million of trade credit guarantees leveraged 4.5 times by the private sector to supply fertilizers to over 661,000 farmers.

New trade credit guarantees for Uganda, Kenya, Tanzania and Mozambique will allow private sector input dealers to reach over 1.4 million farmers with seeds and fertilizers by 2026.

The Bank is also working with the USAID and through Norway’s $100 million agricultural first loss guaranty for SMEs, as well as the $85 million Canadian Ag-SME Catalytic Financing Mechanism, to deploy risk-taking concessional capital and grants for blended finance to leverage agribusinesses to support smallholder farmers.

To mobilize private sector at scale into processing and value addition, and the development of agricultural value chains, the Bank is supporting Special Agro-Industrial Processing Zones in 11 countries. These special agro-industrial processing zones, enabled with critical infrastructure allow private food and agricultural processing companies to locate close to areas of production, and to establish competitive industrial value chains. Today in Benin, thanks to these zones, its cotton is no longer exported as cotton fiber but processed into textile and garments. Likewise, its cashew nuts are processed in the country, with no export of raw cashew nuts.

To spur greater mobilization of private sector financing, the Bank supports the establishment of scalable private equity vehicles.

For example, to mobilize private sector financing for infrastructure, the Bank established Africa50, as a private equity vehicle to develop infrastructure with market rates of return. Today, Africa50 has invested in portfolio infrastructure companies worth over $3 billion.

We invested $20 million in equity in Africa50’s Infrastructure Acceleration Fund, which is mobilizing $500 million in private capital for investments in infrastructure. The Fund reached first financial close at $250 million in 2023 and was able to attract investments from 16 institutional investors across Africa—a first on the continent. This illustrates the catalytical power of the Bank’s equity investment in leveraging the private sector.

To accelerate private sector investments in green infrastructure in Africa, the African Development Bank, Africa50 and the African Union established the Alliance for Green Infrastructure in Africa (AGIA) to mobilize $500 million for project preparation and project development, and to leverage $10 billion in capital from the private sector into renewable energy, green hydrogen, climate resilient infrastructure, e-mobility solutions, solar and hybrid energy for heavy industries, among others.

AGIA has received investment pledges from Italy, France, Germany and Japan, as well as from Africa-focused development financing institutions (the West African Development Bank, the Arab Bank for Economic Development in Africa) and U.S.-based philanthropies (Rockefeller Foundation, Three Cairns Group). We are also in discussions with the United Kingdom and the United States and are hopeful for their support. We welcome support from other countries and partners.

AGIA expects to reach first financial close of $250–300 million by September 2024.

The Bank is leveraging the private sector to provide insurance for countries to cope with the effects of climate change. The Africa Disaster Risk Financing Program pays climate insurance premiums to countries to pool insurance companies into disaster risk payments. Through the Africa Disaster Risk Financing Program Multi-donor Trust Fund (with support from the UK, the U.S., Canada, Norway, Switzerland), insurance premiums are supported for vulnerable countries. The vehicle has supported 16 African countries with sovereign insurance premiums, protected the livelihoods of over 5 million people and crowded in private insurance companies. We are now working with national and regional re-insurance companies to expand markets for reinsuring risks of countries with private re-insurance companies globally.

The outstanding portfolio balance of the Bank’s non-sovereign operations stands at $5.4 billion, of which 76% is deployed in lending (including loans and lines of credit). The balance of our outstanding portfolio comprises 74 private equity funds and 46 direct equity investments. The current debt-to-equity ratio of 3:1 reflects the risk appetite of the Bank that sets a limit on risk capital allocated to equity investments.

A major challenge for private sector investments is risk—especially market risks, counterparty risks, exchange rate risks and political risks. To mitigate these, the Bank deploys partial risk guarantees and partial credit guarantees. These are working very well and have become a significant part of our business.

Since 2019, the Bank Group has approved 16 partial credit and partial risk guarantees valued at over $2 billion, to mobilize $5 billion for the continent to raise financing from commercial creditors and private capital markets.

For example, our EUR 195 million partial credit guarantee allowed the Republic of Benin to raise EUR 350 million from international banks and international investors, lengthening maturity from 10 to 12.5 years, at low interest and around 290 basis points below the Eurobond yield curve for similar maturities.

The Bank’s partial credit guarantee of $345 million allowed Egypt to access private capital markets, by issuing a $500 million Panda bond, the first ever Panda bond issued in China by an African Sovereign. The bond issue, with 100% guarantee by the African Development Bank and the Asian Infrastructure Investment Bank, won the Sovereign, Supra and Agency bond deal of the year at the 2024 Bonds, Loans and ESG Capital Markets Awards.

The Bank’s EUR 400 million partial credit guarantee supported Cote d’Ivoire to secure $533 million ESG loans from private investors from commercial banks and institutional investors.

Partial Credit Guarantees are being used successfully to crowd in private investors into projects with governments. The Bank is using $400 million to mobilize $3.2 billion, leveraging Export Credit Agencies, private insurers, and institutional investors to finance the Standard Gauge Railway connecting Tanzania, DRC and Burundi.

A major challenge facing the private sector is foreign currency exchange risks, which arise due to mismatches between foreign currency denominated loans or equity investments and local currency earnings of companies or counterparties.

The Bank provides loans in eleven local currencies and deploys local currency products. In addition, the Bank also uses a range of instruments to support local currency lending, including synthetic local currency loans and the use of private sector FX hedging institutions such as TCX.

The African Development Bank also uses local currency guarantees, where the Bank leverages the liquidity of local commercial banks to finance private sector borrowers, while assuming the risks of the banks. We are currently exploring the use of this instrument to support private investors in South Africa and Zambia.

Additionally, the Bank issues local currency bonds in African domestic capital markets, with proceeds used to finance private sector entities in local currencies, with successes in Uganda and Nigeria.

Portfolio managers of global institutional investors tend to shy away from allocations to Africa, for multiple reasons, but primarily high-risk perceptions. African countries therefore suffer from high-risk premiums, with the cost of accessing capital on the continent being at least 3 times that of other emerging markets and developing regions.

This “Africa risk-premium” therefore leads to underinvestment by Africa’s private sector.

But perception is not reality.

Moody’s Analytics conducted a 14-year survey on cumulative default rates on infrastructure loans in various regions of the world. The results show that default rate in Africa was 1.9%, while default rates in North America was 6.6%; Latin America, 10%; Eastern Europe, 12%; and Western Asia, 4.3%.

The Africa Investment Forum is helping to address this issue, providing a transparent platform for investors interested in Africa to meet, assess projects, evaluate risks, seek risk mitigants, as well as address political risks to investors. Since the establishment of the Africa Investment Forum in 2018, it has attracted investor interests to Africa worth over $180 billion.

Clearly, the private sector cannot close a deal for which it has not expressed interest. By providing comfort to investors, the AIF provides an unmatched platform to support investors to progress from investment interests to commitments, and to consider taking risks on investments in Africa. The AIF has so far closed projects worth over $10 billion. This year, the Bank and its co-founding AIF partners will be exploring a synthetic securitization investment platform to increase lending to the private sector, and to fast-track the closure of deals.

The AIF is indispensable to the African Development Bank in its efforts to mobilize greater private sector financing. It is in the Bank’s best interest to grow and support it, to enable it to continue playing a leading role in mobilizing private sector financing to Africa. Our Founding Partners—Africa50, Afreximbank, Africa Finance Corporation, Development Bank of Southern Africa, Trade and Development Bank, Islamic Development Bank and the European Investment Bank—fully concurred with this at a Special Partners Meeting held just two days ago, right here in Nairobi.

In closing, to further mobilize private sector to accelerate Africa’s transformation, five areas deserve attention by the African Development Bank Group.

First, is the preparation of bankable projects that can attract investments, which calls for aggregating and scaling up the currently disparate project preparation facilities on the continent.

Second, the Bank needs to aggregate all its partial risk and partial credit guarantees and provide risk mitigation at scale for investors into a standalone Guarantee Platform for Africa (GPA).

Third, there is need for an independent African Credit Rating Agency to provide fair assessments of risks in Africa, and to act as a counterfactual instrument to the current biases in credit ratings of African sovereigns and non-sovereigns.

Fourth, strengthen the Africa Investment Forum, to continue to play a significant and strategic role as a marketplace for investors, and supporting its financial sustainability, either within the Bank or placement outside of the Bank.

Fifth, the African Development Bank plans to scale up its financing to the private sector by tripling non-sovereign financing operations to $7.5 billion annually, over the next decade. This will require serious consideration of the Bank’s business model to do this, allowing it to take on more risks, while decoupling the risks from the balance sheet of the Bank.  

To effectively respond to the calls on the multilateral development banks to leverage more private sector financing, we will need to review our risk appetite statement as a Bank Group.  We will need to move from risk-avoidance to informed risk taking on and off the balance sheet of the Bank. This will require restructuring the Bank itself to be able to do more private sector mobilization, including considering options of either a standalone private sector entity in the Bank Group, or a structure similar to IDB-Invest of the Inter-American Development Bank, which from all indications is working very well.

We are mobilizing resources from the private sector, but to do so at a scale needed for Africa’s transformation requires structural reforms of the African Development Bank Group.

We must take a hard look at ourselves if we want to do more with the private sector.

If you ask the private sector, they will say we are too slow. That is true, because we still operate largely as a public-sector institution, with public-sector systems and processes.

We need to be nimble, faster, and responsible.

Furthermore, our current pricing for private sector debt offerings disadvantages us, when compared to our peers, especially the private sector focused European Investment Bank and the European Bank for Reconstruction and Development, which have now expanded operations to Africa. That’s because we do not have enough concessional resources and grants to do blended finance at more competitive terms.

Also, our approval systems and risk appetite are not fit-for-purpose for the private sector.

Let me at this point thank our Boards of Directors for the great job they are doing against all odds in supporting private sector operations. Our Boards’ capacity to further support the scaling of private sector financing for Africa’s transformation can be significantly enhanced with having more private sector experience on the Boards of Directors.

We should also consider the establishment of an independent Private Sector Advisory Group, similar to what the World Bank Group has just done.

At the end of the day, we must significantly scale up private sector capacity within the Bank itself, and that will require changing the incentive systems to be able to hire and retain top-notch private sector experts. 

The most important change must be shifting from being a largely public-sector driven financial institution to a more-private sector driven institution. That will require changing instruments and processes to become more nimble and more appropriate for the private sector.

Essentially, the African Development Bank must re-invent itself.

It must become a fit for purpose solutions bank for scaling up private sector financing.

Only then can the African Development Bank Group really help transform Africa through the private sector.

Thank you for your attention.

It’s now time for me to listen to and hear your thoughts and suggestions.

Thank you very much.

Merci beaucoup.

Shukran.

Asante Sana.

*Opening Keynote Address by Dr. Akinwumi A. Adesina President, African Development Bank Group – 2024 Bank Group Annual Meetings – Nairobi, Kenya 28 May 2024 – Governors’ Dialogue

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