NAIROBI, 3 April, 2012-Travel to any East African country these days and the most noticeable scene is one of skyscrapers under construction, earth movers, dump trucks and an array of other construction equipment dotting the horizon in any given country. The bottom line is countries are investing in infrastructure at an unprecedented rate. In our estimate this is a positive sign that indicates optimism and stability – two important criteria in sustaining investor confidence.
ATI’s 2011 indicative financial results bear out several key facts. And while our annual accounts will not be released until May, 2012 we are able to indicate some important trends specifically in East Africa.
Infrastructure development is among the biggest trends in East Africa, which in itself is a positive sign. However, the flip side to this trend is the increased perception of specific risks.
From what we’ve observed, developing economies reach a natural threshold in the evolutionary cycle, where they begin to invest in large, capital intensive infrastructure projects. These projects normally involve government agencies who may act as the project sponsor. Increased government involvement can lead to the perception of increased risks such as expropriation or non-honouring of financial commitments. Whether these crystalise isn’t the whole story. What counts in these instances is the possibility.
One of the products that directly supports companies that have entered into contracts with governments or government agencies is one that covers non-payment risks on a single entity. In 2011 demand for this product jumped by a dramatic 682% stemming from banks who sought protection against payment default on financing facilities and suppliers of goods and services from our African member countries and international markets.
Another trend deals with specific sectors. Here, energy-based projects take the lion’s share of financial resources. For economies interested in moving up the development ladder, access to reliable energy is key to building viable manufacturing and service-oriented industries. And with many countries relying on hydro-powered infrastructure for their energy, one unseasonably dry period can detract from economic gains through unscheduled price hikes and power cuts. In 2011, countries throughout East Africa including Burundi, Kenya, Tanzania and Uganda suffered the same fate as drought threatened to impact their individual GDP figures.
Sectors that fall within social infrastructure such as water are another area to watch. Here the inherent lack of access to clean and safe resources such as water – in addition to intermittent price hikes could impact on countries’ development as well as their political stability. In 2011 ATI covered transactions aimed at improving water infrastructure and increasing access particularly to under-serviced rural populations valued at over $20 million. In addition, over $50 million worth of other social infrastructure projects including supply of hospital equipment and pharmaceutical drugs and road reconstruction supported our member countries’ infrastructure development objectives.
Another potential cause of political instability stems from dramatic price as well as the lack of availability of fuel, and utilities, which caused mass demonstrations in some countries last year. Within the past three years, ATI has supported the governments of Malawi and Zambia to import fuel during periods of peak global prices. The transactions valued at $400 million covered financing facilities that allowed the governments the financial means to ensure that fuel continued to flow to its residents.
Demand for ATI’s products originates from local companies based in our African member countries along with multilateral financiers and commercial banks, which comprises the majority of our clients. Perhaps this speaks to a trend that reflects the first offshoots of regional integration initiatives. Through regional integration, African markets are themselves becoming viable destinations for African financiers, investors and companies seeking growth opportunities. For instance one African multilateral financier has supported a number of projects from fuel imports to the purchase of new aircraft, to the construction of a power plant.
Local companies have also reaped benefits. As a reflection of the increasing technical capacity within our member countries, local engineering firms, for instance have been winning bids for road reconstruction and other infrastructure-related projects throughout the region. Here, we have provided these companies with protection against possible non-honouring of contracts and other non-payment related risks.
Because the demand has proven to be fairly sizable on the non-payment risk side of the business, we are laying the ground work to introduce surety bonds, which will include bid bonds, performance bonds and advance payment bonds. From our perspective, there appears to be insufficient capacity in this area. The objective however is not to compete directly with the private market, but rather to complement and support existing players.
Our introduction of the Political Violence, Terrorism & Sabotage cover in 2008, provides a good example of where we stepped in to fill an existing capacity gap in the market. And the result is that today, in part because of ATI paving the way local insurers are now able to provide this cover on their own or through reinsurance from the international insurance market.
ATI’s 2011 results back these trends. Of the $3.5 billion worth of transactions that we covered in East and Southern Africa nearly $1 billion supported infrastructure projects and of this, 50% backed energy-related projects. And the overall volumes of business that ATI supported increased, in terms of transaction value, by 188% over 2010 results.
Internally we are setting up structures that will help us better manage this increasing demand. This includes the diversification of our investment portfolio in order to reduce concentration risks – a move that is seen to be particularly important now when global financial markets are in distress.
Overall, we remain bullish on the region. To bolster our reach into local markets, we are also working with governments in Southern Sudan and Ethiopia to bring these countries into membership. While this process may take several months, we are optimistic that the commitment demonstrated thus far will help us find ways to fast track the process.
Ultimately, we intend to continue moving our products closer to our clients with refined offerings that better meet their needs and through our representative offices. The launch of our most recent local office in Kigali, which also serves Burundi, marks the fourth representative office which combined serve six markets. These include Tanzania, Uganda and Zambia which also serves Malawi. With increased access to commercial and political risk insurance products, our member countries and prospective members will be well supported in reaching their development targets.
