African countries are clamouring to follow the lead of Ivory Coast’s recent debt-for-development swap, according to one of the landmark World Bank-backed deal’s new money lenders.

“The same logic can be replicated to another jurisdiction, focusing on a sector that's a priority for them,” said Ankit Khandelwal, head of Africa for sovereigns, development finance institutions and blended finance at MUFG, citing healthcare as one possible alternative to Ivory Coast’s commitment to use some of its DFD savings for education.

Khandelwal reports engaging with “multiple” African sovereigns on potential DFD deals, with some requesting case studies. “There is a lot of interest. That approach gives the ability to a country to actually lock in some of the savings using the power of a partial World Bank guarantee and channel those savings into an area that is priority for that country.”

The groundbreaking new Gaia blended finance platform – which MUFG has been instrumental in bringing to market – may also be integrated into DFD structures. "If the underlying project is aligned with the goals of Gaia, then absolutely,“ he said, noting that Gaia can also provide competitive financing in local currency. 

The climate adaptation-focused platform, which will become operational shortly, should provide complementary capacity to the Japanese bank’s existing blended finance efforts. 

"One of the key reasons for us getting involved in Gaia is to look at some of those smaller but essential projects,” said Khandelwal. He said MUFG is "already engaged” with African sovereigns to identify projects that could be financed under Gaia.

Nine of Gaia’s 25 targeted sovereigns are in Africa. 

Gaia has also been a catalyst for efforts by MUFG to involve philanthropic investors in its blended finance deals. 

"We are getting into that space. We are in conversation with some of them on specific transactions," Khandelwal said.

Middle East expansion

MUFG is expanding its blended finance effort to emerging Middle East economies such as Jordan and Iraq, according to Khandelwal, who recently relocated to Dubai from London to facilitate the new push. He expects to retain the bank’s existing focus on all types of infrastructure financing, including roads, rail, airports, ports, hospitals and schools – “the whole spectrum of social infrastructure”.

MUFG’s “slightly unique” approach also sees it focus on the long tenor end of the spectrum of the debt financing requirements. That "is where the blended finance product really comes through and provides the added advantage for the borrowers”, according to Khandelwal. With capital requirements limiting bank appetite in this area, it emphasises mobilising non-bank liquidity from life insurers and pension funds globally.

This also requires working closely with providers of credit enhancement, including multilateral development banks, export credit agencies and newer entities such as the Green Guarantee Company.  

Investor demand for well rated infrastructure debt in emerging markets remains strong, Khandelwal said. “When investors are confident the deals are being structured [well], there is definitely demand there.”

This in turn can drive blended finance pricing to competitive levels, though not to the concessional levels provided by donors. The recent lowering of western aid has made this financing rarer, however, and has forced some African sovereigns to seek alternative sources.

Against this background, Khandelwal expects public/private PPP structures to grow as a way of delivering infrastructure “without leveraging government balance sheets any further", citing the Lobito Corridor rail project in west Africa. 

Source: IFR