A Proposal for an African Investment Guarantee Agency (AIGA) and the Valuation of Associated Instruments

Abstract

The paper calls for the creation of an African Investment Guarantee Agency (AIGA) to support and strengthen the financing of development projects, including infrastructure projects. The main objective of AIGA would be to provide noncommercial 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 paper derives the cost of AIGA’s guarantees and the associated implied risk premium. Using infrastructure-linked bonds as an example, the paper indicates that 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.