An African Type “MIGA” and Infrastructure-indexed Bonds: Potential Means for Financing Africa’s Infrastructure Agenda

Joseph Atta-Mensah, UNECA

The paper examines two ways of financing Africa’s infrastructure. The first is the potential role of financing Africa’s infrastructure projects with bonds indexed to the project. The second is a call for the creation of an African Investment Guarantee Agency (AIGA) to support and strengthen the financing of infrastructure projects. The main objective of AIGA would be to provide non-commercial investment guarantees to African and non-African investors, private or public who are desirous of investing in Africa but do not have the appetite for the above non-commercial risks. Using option-pricing techniques, the author shows that an infrastructure indexed bond is equivalent to a regular bond and a short position on an European put option. The cost of AIGA’s guarantees and the associated implied risk premium are also derived. The results of the paper suggest that the value of the infrastructure indexed bond increases monotonically as the value of the project it is financing rises. In addition, the market value of the infrastructure-indexed bonds falls as the value of the project becomes more volatile. The rise in the dividend rate on the project is observed to have an adverse effect on the value of infrastructure-indexed bonds. Lastly, the risk premium embedded in an infrastructure-indexed bond contract is seen as a function of the ratio of the cost of the infrastructure-indexed bond guarantee and the present value of the promised payment.