Rethinking infrastructure bankability in emerging markets

For decades, sovereign guarantees have been the primary instrument used by emerging markets to attract private capital into infrastructure. In sectors such as power, transport and utilities, governments have often acted as de facto co-signers, underwriting payment obligations to make projects bankable. This approach has unlocked critical assets. But it has also accumulated a growing […]

For decades, sovereign guarantees have been the primary instrument used by emerging markets to attract private capital into infrastructure. In sectors such as power, transport and utilities, governments have often acted as de facto co-signers, underwriting payment obligations to make projects bankable.

This approach has unlocked critical assets. But it has also accumulated a growing stock of contingent liabilities that sit quietly behind national balance sheets.

In Nigeria, public debt is projected to rise further in the coming years, while debt servicing already absorbs a significant share of federal revenue. In that context, continuing to rely on sovereign guarantees (SGs) as the default credit enhancement tool is fiscally unsustainable. The question is no longer whether guarantees work. It is whether they are the right long-term strategy for building resilient infrastructure systems.

Part of the challenge lies in the way emerging markets are priced in global capital markets. In a February 16, 2026 op-ed in the Financial Times, President Bola Tinubu argued that African countries face an unjust “Africa Premium” – elevated borrowing costs driven by external risk assessments that may not fully capture domestic reform efforts or structural economic fundamentals.

The launch of the African Credit Rating Agency (AfCRA) in 2026 signals an attempt to address this imbalance. By incorporating deeper local context such as Nigeria’s large internal market and recent subsidy reforms, AfCRA seeks to improve how sovereign and project risks are assessed.

Fairer risk pricing could gradually reduce the pressure on governments to provide blanket sovereign guarantees simply to satisfy external credit models. But rating reform alone will not solve the problem. Structural solutions must operate at the project level.

Nigeria has already begun experimenting with alternatives. InfraCredit, a domestic credit enhancement institution, provides Naira-denominated guarantees that elevate infrastructure bonds to investment-grade levels. This allows pension funds and insurance companies to deploy long-term capital into local projects.

As of early 2026, InfraCredit has mobilised over N327 billion in institutional investment across renewable energy, transport and logistics. Crucially, the model mitigates currency mismatch risk by supporting local currency financing, reducing exposure to the devaluation shocks that have historically destabilised infrastructure projects.

Rather than placing risk directly on the sovereign balance sheet, this structure reallocates credit enhancement to a ring-fenced, professionally managed platform backed by institutional capital. It represents a shift from sovereign underwriting to institutional intermediation.

Yet even this is only part of the solution.

The most sustainable path forward lies in strengthening contractual architecture rather than expanding sovereign backstops. A robust infrastructure framework can substitute blunt credit guarantees with disciplined risk allocation across three key instruments.

First, Implementation Agreements can protect investors against non-commercial risks such as change in law, political force majeure or discriminatory regulatory action. These agreements provide stability without guaranteeing repayment.

Second, well-structured Power Purchase Agreements, particularly those incorporating take-or-pay mechanisms provide revenue certainty by obligating the off-taker to pay for capacity irrespective of dispatch levels. This addresses demand and cashflow volatility at its source.

Third, direct agreements between lenders and government counterparties grant step-in rights, allowing financiers to replace underperforming sponsors and restore operational stability. This protects the asset and the public interest without immediate recourse to the treasury.

Together, these instruments create a performance-led model of infrastructure delivery. They align incentives, enforce accountability and ensure that risks are truly borne by the parties best positioned to manage them.

Nigeria’s Azura-Edo Independent Power Project offers an instructive example. Instead of issuing a traditional sovereign guarantee, the government entered into a Put and Call Option Agreement (PCOA), providing termination payment protections triggered only under defined circumstances.

Lenders supplemented this structure with Political Risk Insurance from the Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group. The result was a layered synthetic guarantee framework that reduced immediate fiscal exposure while reinforcing contractual discipline. Future projects can build on this model by making multilateral backstops a secondary safeguard rather than the primary foundation of bankability.

Emerging markets do not need to abandon sovereign support entirely. In frontier or first-of-kind projects, calibrated backing may remain necessary. But overreliance on guarantees Towards Sovereign Design creates moral hazard, weakens project discipline and strains public finances.

The more sustainable objective is sovereign design, building infrastructure systems that are bankable because of sound institutions, credible contracts and local capital mobilisation.

Nigeria faces an estimated $14.2 billion annual infrastructure gap. Closing it will require capital, but also confidence. By strengthening domestic credit institutions, improving risk assessment frameworks and prioritising contractual excellence over sovereign cheques, emerging markets can reposition themselves not as high-risk borrowers, but as credible long-term partners. Infrastructure resilience ultimately depends not on guarantees, but on governance.

 

Ajakaiye, a construction lawyer, and can be reached at [email protected]