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An African type " miga" and infrastructure indexed bonds: potential means for financing Africa's infrastructure agenda

Abstract: 

The paper examines the potential role of financing Africa's infrastructure projects with bonds indexed to the project. The paper also calls 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 a 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.

Corporate Author: 
Getnet Alemu & [et.al.]. & Ethiopian Economic Association/Ethiopian Economic Policy Research Institute
Publisher: 
Ethiopian Economic Association (EEA)
Primary Descriptors: 

Financing infrastructure project; Commodity-Linked Bonds

Secondary Descriptor: 

LDCs' Debt Crises

Geographic Descriptors: 
Africa
Cataloge Date: 
02/27/2013
Broad Subject heading: 
Growth and Development
Call Number: 
330.963 PRO 2006
Serial Key Title: 
Proceedings of the Third International Conference on the Ethiopian Economy
Publication catagory: 
Content type: 
Volume: 
I
Publication date: 
2013-05-27 23:06:00
Forum or Discussion date: 
2013-02-27 15:02:02
Place of publication: 
Addis Ababa, Ethiopia
Type of material: 
Book
Current frequency: 
Annualy