The infrastructure sector is chronically underfunded in developing countries. Barriers to infrastructure investment include unstable investment and regulatory environments, underdeveloped local capital markets, and a lack of investible deals.
The Private Infrastructure Development Group (‘PIDG’) is an innovative infrastructure project developer and investor delivering pioneering, sustainable, and affordable infrastructure in the poorest and most fragile countries in Sub-Saharan Africa and South and Southeast Asia. PIDG has a deliberate focus on financing infrastructure projects through local capital and credit markets, building capacity and resilience in frontier markets across these regions.
PIDG has evolved significantly since its inception. As PIDG enters its 20th year, and sets new sights to create investment-ready, bankable infrastructure opportunities across Sub-Saharan Africa and Southeast Asia, we connected with Philippe Valahu, CEO of the PIDG Group, to learn more about PIDG’s evolution, investment mindset, and vision for blended finance and infrastructure development.
What led to PIDG’s establishment? Could you walk us through PIDG’s evolution to date?
PIDG exists to enable sustainable infrastructure projects in some of the most challenging jurisdictions in the world, and started out as a pilot, and as one entity – our debt fund, the Emerging Africa Infrastructure Fund (EAIF). EAIF was created due to a lack of long-term commercial debt (15–20-year money) to fund infrastructure projects. Over the years, as EAIF proved its purpose and established a track record, other ideas emerged, and other entities were brought on to the PIDG platform to complement EAIF. Today, PIDG has five entities: the debt fund (EAIF), GuarantCo (the local currency credit solutions arm, set up 15 years ago), InfraCo Africa and Asia, which are two early-stage project development companies, and our technical assistance arms: The PIDG Technical Assistance and DevCo. DevCo sits within the International Finance Corporation (IFC) but is managed by PIDG. Each entity was set up as a response to gaps in the market to develop, finance, and take infrastructure projects to successful financial closure and construction.
How do the various PIDG entities come together to support a project across its lifecycle and capital structure?
Since the establishment of PIDG Limited (PIDG Group) in April 2018, which has its own Board of Directors, there has been improved governance, which has helped us overturn barriers or operational limitations we once faced.
What does this mean in practice? If there is a transaction in the solar energy space in a country like Chad, that project needs a few things: it needs early-stage project development (equity), debt, and technical assistance. For projects of this nature, there are times where it is necessary to bring in all our entities to give everything that project needs to reach financial close and break ground to generate tangible impact on human lives. However, we do not always do so, because that would crowd out other players in the market.
How do you know when to pull in other participants and when to keep business within PIDG?
In these difficult markets, we find out quite early in the process. Consider the example above. On the project development side, we would be on a wild goose chase to find a project developer willing to place USD 5-6 million in equity to develop the project and take it towards financial close. In such cases, we know we must rely on one or two players that are linked to the African Development Bank (AFDB) or the IFC, as private sector investors are not willing/positioned to do this unless they team up with a multinational development bank or us (InfraCo). On the debt side, no commercial investor is willing to commit 15-20-year money in such a difficult market.
With that said, there is no simple model to assess which entities from the group need to be involved. We lean on our due diligence to assure our role is additional.
How does PIDG use blended finance structures and archetypes to de-risk projects for commercial investors? What are some of these risks that the various offerings help mitigate?
Here, it is worth highlighting the Kigali Bulk Water Supply Project, the first bulk surface water supply project in Sub-Saharan Africa using a public-private partnership (PPP) model. It was developed by Kigali Water Limited (KWL), a fully owned subsidiary of Metito, which is a global provider of intelligent water management solutions based out of Dubai. This project reached financial close in 2017, however, what is more noteworthy is that it reached its Commercial Operations Date (COD) in January this year, which means potable water is now being delivered to the population in Kigali. This is a remarkable accomplishment, given much of the construction and monitoring by the lenders, including EAIF, took place during 2020, 9 months of which were plagued by the COVID-19 pandemic.
Convergence’s Case Study on EAIF details this project well. Essentially, EAIF and AFDB provided USD 40.6 million of the capital cost: USD 38 million of senior debt and USD 2.6 million of junior debt, with all loans on 18-year terms. Metito provided the balance in equity finance.
DevCo did the upstream work to advise the government on the regulatory framework required to allow a water sector PPP. It did the tender and earned the support of a private sector operator and concessionaire (Metito) in a very difficult sector with a 27-year concession. At one stage, what Metito and others in the deal realized was that an element of grant funding was needed to make the model work. Through our technical assistance offering, PIDG put in place a viability gap funding (VGF) package of USD 6.5 million dollars to make the project bankable. This is one of the few examples of a water PPP getting off the ground using a blended finance structure and grant capital to create an investible transaction to improve water connections, to get fresh, clean water to communities that would otherwise not be able to afford this type of access. This is how blended finance should be used.
In 2019, PIDG set a 5-year strategy to continue to overcome investment barriers in developing countries. Can you tell us more about this strategy and its implementation to date?
Two key tenets of our strategy are to achieve scalability and replicability. We are focused on creating economies of scale, given capital for early-stage project development can be scarce. The area that is giving us a lot hope is the off-grid sector: micro-grids and mini-grids. The sector itself is designed for scale and adoption, so there is a lot of room to show that these solutions are affordable across different income levels, and there is demand for getting sustainable electricity to communities that have historically had to rely on high-cost energy solutions that are more damaging to human health and the environment.
How does GuarantCo help advance long-term infrastructure financing in local currency and domestic resource mobilization?
This is an area where we are doing what very few others are. GuarantCo is as much about infrastructure as it is about capital market development – developing local currency markets. GuarantCo approached Nigeria as a testing ground and executed several transactions in Nigeria to familiarize itself with the market. Once it knew the market and developed adequate awareness for its product, it began to work with the Nigerian Sovereign Investment Authority (NSIA) to set up InfraCredit Nigeria, offering credit enhancement for domestic bond issuances in Naira (NGN) for the financing of brownfield and greenfield infrastructure projects.
InfraCredit Nigeria did its first transaction soon after it was set up. The first deal (~USD 40 million) attracted 13 domestic pension funds and six domestic insurance companies, who for the first time were investing in the infrastructure asset class. Before this deal, that had not happened before. To make this happen, GuarantCo worked with NSIA to build up InfraCredit Nigeria, coordinated with regulators to create an infrastructure asset class to attract institutional investors like pension funds and insurance companies, and provided training to these investors to better understand this asset class and the associated risks. As a result, there is some issuance taking place in NGN where institutional investors no longer need credit enhancement. Now, the challenge is a lack of pipeline of bankable transactions of this nature.
What does success mean to PIDG? What are some of the metrics you use to measure success?
Overall, we articulate our impact in terms of outcomes for people – with focus on end users and jobs, wider economy, mobilizing local investors and transforming markets through demonstration that enables future finance flows to infrastructure. So, success looks different based on the rationale behind each project. This is best illustrated when looking at projects like the Kalangala Infrastructure Services (KIS), established to support the residents of Bugala Island, situated on Lake Victoria in Uganda’s Kalangala District. Prior to KIS, Kalangala was identified as one of Uganda’s poorest districts, lacking safe regular access to the mainland, reliable electricity, and clean water. KIS was initially set up to put in place a private ferry service to bridge access between the island and mainland Uganda. If you are familiar with Uganda, every year without fail, hundreds of people lose their lives due to overcrowding and a lack of life vests on these ferry boats. It is devastating. The introduction of this private ferry now delivers a dependable service that allows residents to travel safely from Bugala to the mainland to sell their produce.
Some of PIDG’s owners, including the Australian Government and Government of Sweden, are interested in gender equality. How does PIDG apply a gender lens?
Today, within PIDG we have a gender taskforce to identify actions to further empower women through our investments, and to deliver on PIDG’s Gender Equity Action Plan, which is based on (i) safeguarding women and girls, (ii) gender lens investing, and (iii) gender equity within PIDG.
In the past 2 years, PIDG put both climate and gender considerations at the core of its investment approach. At the Group level we introduced climate and gender KPIs for each company. At the level of investment decision making, compliance with PIDG Climate Change Standards and Gender Ambition Policy are two of only three minimum compliance thresholds for any deal to be considered (the other being additionality). The development impact rating of each deal is heavily influenced by its expected outcomes for the planet and for women. Deals that directly empower women and demonstrate innovative climate solutions receive bonus ratings and benefit from increased credit limit and higher risk appetite. Conversely, analysis of climate and gender related risks is prioritized.
The PIDG Gender Ambition Policy broadly aligns with the 2X Challenge and we have tailored the approach to infrastructure projects. We screen all projects for both gender risks and potential for positive gender outcomes against five gender lens domains: company and project governance, workforce, supply chain, consumer market (products and services) and community. The approach is showing some results in bringing about innovative solutions that demonstrate gender lens in infrastructure.
Some examples of PIDG projects that have applied a gender lens and consequently empowered women include the Zimbabwe Border Crossing Project, to stimulate trade and dependable transit – with a dedicated focus on women traders, safeguarding and women in the workforce, and Net1, delivering broadband access in underserved regions of rural Indonesia, focusing on the supply chains by enabling women to open Wi-Fi kiosks for internet access to boost their income.
PIDG is approaching its 20-year anniversary. How is the team reflecting on the past 20 years, and if you had to look 20 years ahead, what does the future look like for PIDG and blended finance?
On the one hand, the future sometimes looks depressing. On the other, it is filled with hope.
On the depressing note, the reasons and rationale that led to the establishment of EAIF are just as valid today as they were two decades ago. So, it begs the question: has the needle not moved? In some areas, no. Today, if you look at the market in Sub-Saharan Africa or South and Southeast Asia, there are, maybe, at best, three commercial investors that can provide 15-20-year money; and they usually require some sort of guarantee or insurance. Others have retrenched after the 2008 financial crisis and due to the new regulations to curb risk. On the other hand, if you look at the work GuarantCo is doing today and had told me 5 years ago we would have set up an entity like InfraCredit, I would have laughed. But that has happened because we have coordinated with regulators and pension funds. We have demonstrated it can be done in difficult markets. I find that hopeful.
Right now, in development finance, everyone wants to talk about the ‘Billions to Trillions’ agenda. For us, interest in this discussion is expiring, because we know what is needed to get to where we need to be. What we should be asking is how do we generate a pipeline of bankable transactions that are risk adjusted for institutional investors to come in? And how do we mobilize domestic savings in Africa and Southeast Asia like the InfraCredits of the world? And how do we focus all these efforts on low carbon, climate resilient and inclusive infrastructure that enables a just transition towards net zero, with the greatest socio-economic needs and aspirations?
Blended finance, more specifically, is having a moment in the spotlight. Everyone wants to talk about it, everyone is saying they are doing it, but few are really thinking about what it is. That is somewhat frustrating for us, but perhaps more frustrating for organizations like Convergence. In 20 years, I would hope we achieve:
- wider recognition of what blended finance is and is not; and it is certainly not a means to prop up investor return or indirectly provide grant funding to a government;
- improvements in our tender process and our ability to offer more flexible options (e.g., VGF); and
- greater sophistication in our understanding and interpretation of investment risk associated to Sub-Saharan Africa and South and Southeast Asia
As for PIDG, in 20 years, I really hope it has put itself out of business. We dare to dream!
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By Namrata Narayan, former Communications Lead (Interim) at Convergence