Syndication, in the banking sense, means a joint venture between a number of financial institutions to both raise capital and to share the risk of investing in a particular project. This might also be termed co-financing, but syndicated loans are very common in commercial banking practices. Yet, for some reason, this has not been the case with the various development finance institutions (DFIs) that operate in Africa, even if this is changing thanks to the African Financing Partnership (AFP) initiative.
As Simon Jackson, the African Development Bank's (AfDB) Head of Syndication & Co-Financing explains: "The AfDB has gradually been establishing a range of activities, rather than just a purely lending presence, on the African continent. There is liquidity to finance projects in Africa, but we can always do with widening and deepening the pool of potential co-financing partners.
"For those institutions that are already active on the continent, we want to help them to lend more in different countries for longer tenors, and maybe start to branch into industries that are essentially domestic, perhaps investing in infrastructure rather than straight-forward export projects. And then there are obviously other institutions around the edge of the pool that one is seeking to encourage to get their feet wet. To dip their toe into the investment pool."
The classic syndication model, as practised by commercial banks, provides an element of comfort to the individual institutions that make up the syndicate as the risk is split between them. So, rather than a bank, for example, making one $5oom loan that might go horribly astray, it makes more sense to make five sworn loans with five syndicates.
Recognising that this model of investing would also be beneficial to DFIs, the AFP was initiated. It is based on the partnership strategy set out in the Strategy Update for the Bank's Private Sector Operations, approved by the AfDB Board of Directors in January 2008.
They concluded that there is an evident need for partnerships, including with external development finance institutions, to enhance the effectiveness and efficiency of financing in Africa.
An AFP memorandum-of-understanding was signed between the core group of eight DFIs: the AfDB; Deutsche Investitions Und Entwicklungsgesellschaft MBH (DEG); the Development Bank of Southern Africa Ltd. (DBSA); European Investment Bank (EIB); Industrial Development Corporation of South Africa Ltd. (IDC); International Finance Corporation (IFC); Nederlandse Financierings Maatschappij Voor Ontwikkelingslanden N.V. (FM0); and Societe de Promotion et de Participation pour la Cooperation Economique (PROPARCO).
However, from the outset it was determined that the AFP would expand to include other DFIs, and commercial financial institutions' partners as AFP Participating Partners.
"The value-added is in establishing a syndication partnership," Jackson says. "There are two sides. Our co-investing partners tend to be either commercial investors or public lenders. In terms of the commercial investors, the established investor base for Africa is actually smaller than that for Eastern Europe. There are fewer institutions for which Africa represents a core business, and obviously in the years since the financial crisis, it has been less easy to persuade investors to move away from their core markets.
"So that is a part of our strategy: To get more investors in, and those investors may be banks or non-banks. There is great scope in the African market for funds, for pension funds and potentially for sovereign wealth funds. …