Letters of credit (L/Cs) could play a key role bridging Africa's infrastructure gap according to an Africa-based executive of a US-headquartered multinational institutional investment company, National Standard Finance (NSF).

Michael Tichareva, managing director and principal of NSF Africa, is specifically recommending the use of credit enhanced infrastructure finance backed by standby L/Cs.

Funding model

According to Tichareva, a common funding model uses credit enhancement products to reduce credit risk and subsequently obtain more attractive financing terms and interest rates.

For example, he says that in Nigeria a properly structured transaction with a sound credit enhancement can reduce the loan interest rate by 50% or more.

In such a case, the typical form of security is a guarantee from an investment grade rated corporate or sovereign entity sponsoring the project or other third party guarantees.

Cost savings

In some cases, such a guarantee could be an L/C issued or confirmed by highly rated international banks to provide liquidity and assurance that payments are not missed or delayed.

A bank L/C normally costs between 0.75% and 2% per annum depending on the risk associated with the project and sponsors' financial strength according to Tichareva.

Infrastructure gap

Africa's infrastructure gap is widest in terms of power. The World Bank says that the 48 countries of sub-Saharan Africa (with a combined population of 800 million) generate roughly the same amount of power as Spain (with a population of 45 million).

Only one-third of Africans living in rural areas are within two kilometres of an all-season road, compared with two-thirds of the population in other developing regions.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.