The African Development Bank has estimated that the financing gap for African infrastructure falls between $130 and $170 billion a year. Investment in infrastructure lies at the heart of many of the challenges facing Africa’s development and growth agenda. New road and rail links will help increase trade flows within the continent. Africa’s cities need significant investment into public infrastructure if they are to support over 2 billion extra inhabitants by 2020. And, with only a 43% access rate to electricity, massive investment into power projects is a priority.
Invest Africa members, Emilio Cattaneo, Executive Director of the Emerging Africa Infrastructure Fund (EAIF), and Gilles Vaes, CEO of InfraCo Africa, spoke to us about how their umbrella organisation, the Private Infrastructure Development Group (PIDG), develops investable and impactful infrastructure projects in Africa.
“The problem with developing infrastructure is it requires a lot of expertise and a lot of money.”
PIDG was created by four governments in 2002, with two more following later, to address the financing and development gap in the African infrastructure market. The challenge of developing infrastructure is that it “requires a lot of money and a lot of expertise”, Vaes points out. By bringing together technical assistance, credit solutions and developers, PIDG addresses both the financing and capacity gap in African infrastructure projects.
At the beginning of a project cycle, the Technical Assistance Facility (TAF) and DevCo provide grants to developers and governments for projects that are still in preliminary stages. InfraCo Africa and InfraCo Asia then provide early stage funding to move projects into development.
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Meanwhile, the two PIDG credit solutions businesses, EAIF and GuarantCo, build financial solutions for emerging markets. EAIF does so by providing long term project finance and corporate finance to infrastructure projects principally on a senior secured basis. GuarantCo offers guarantees to local currency providers, allowing them to benefit from the company’s A+ rating. “One of the things that differentiates PIDG from the other development finance institutions (DFIs)”, says Cattaneo, “is the availability of the different products and facilities that take a project from being an entrepreneur’s idea to being an asset”.
“It can cost $5-$10 million just to get an infrastructure project to a point where its de-risked and structured enough that a large industrial or strategic investor will want to look at it,” explains Vaes. Central to PIDG’s mission statement is to “use donor money to mobilise far larger amounts of private capital”. For every US dollar of PIDG money that goes into a project, eight to twelve US dollars of private capital follow. Over the last few years, development finance’s role as pathfinders for private capital has been accentuated. The initial investment to develop Africa’s core sectors, including energy, transport and agriculture, will need to come from sources willing and able to accept lower returns on their investments and longer project cycles. “We’re not in there to make anybody rich” says InfraCo’s CEO, “the acid test is ultimately that we can step out of a project and a private investor will be able to accept the risk profile of that project.”
“Somebody has to do it first”
One of the reasons PIDG companies can accept these complex risk profiles is that their stakeholders demand high-impact projects and accept the accompanying risks. There is also more need for PIDG products in higher-risk markets. PIDG leaders believe that one of the reasons that this model has proved successful is that “in infrastructure development, success breeds success…but somebody has to do it first.” The blended finance options PIDG offers are of most use in markets with underdeveloped financing ecosystems. Through replicable development and funding models, DFIs like PIDG have a key role to play in developing healthy business eco-systems in emerging markets. GuarantCo, for example, supports domestic capital markets and is able to provide joint listings with London Stock Exchange. “The need for us to be in a market like Kenya is less perhaps than the need to be in Mozambique or Ethiopia,” admits Cattaneo.
This business model puts PIDG companies in a unique position – when they are most successful, they make themselves redundant. Where most investors look for market stability and developed financial services to determine which markets they are prepared to enter, these are signs that PIDG may be ready to pull out. “We have already pulled out of some markets, notably South Africa, which we would have looked at in the very early days”. A few markets, such as the Central African Republic and Somalia, continue to present security and corruption concerns that cannot be overlooked but, Vaes points out, the number of countries in this category is decreasing rapidly.
“You need to put economics around water”
Similarly, as more private capital flows into conventional and renewable power projects in Africa, PIDG is having to rethink its sectors of focus. The power sector has led the way for the Private Public Partnership (PPP) and Independent Power Producer (IPP) models and these are now fairly developed across the continent. Huge gaps remain, however, in power penetration, developing grids and mini-grids, in housing, transport and, crucially, water. “You need to put economics around water”, the pair highlight, “unfortunately, it is going to become a scarce commodity that needs to be developed and priced rationally”. InfraCo have already begun moving into this space with an investment into solar-powered water pumps in Senegal, and EAIF will follow soon.
“Climate is at the heart of any project design”
Central to all projects is their environmental impact, another reason for diversifying the PIDG portfolio. Successful business models need to prove that they are sustainable in the long term. This is especially true of development finance. The key question for PIDG is how to balance old polluting assets with sufficiently green assets. This means not only developing renewable power projects but introducing green practices to all infrastructure projects. For example, EAIF and GuarantCo recently joined forces to issue Kenya’s first green bond as part of an investment into affordable student housing.
However, introducing environmental criteria to portfolios can be a challenge as the objectives of many African governments, particularly those with ample natural resources, often do not align with these priorities. There is some debate amongst DFIs about whether and how to fund such projects. For a country like Mozambique, for example, natural resources are a key economic sector. InfraCo’s Memorandum of Understanding with the Gambia Ports Authority (GPA) to develop the country’s port and river infrastructure provides an example of infrastructure development which offsets some negative environmental impacts whilst aligning with government development objectives. Water transport emits far less Co2 than road transport and, at the same time, the project addressed other core objectives, notably boosting trade through improved logistics. This is the sort of realistic and impactful change, Vaes says, that developers should be looking at.
Bringing money, expertise and patient capital
For emerging markets, DFIs like PIDG play a catalytic role in economic development through their ability to leverage relatively small investments to mobilise often as much as 10 times their value in private capital. Such funding models will continue to play a key role in developing Africa’s core sectors into sustainable and economically viable markets. Ultimately, Vaes concludes, “we bring money, expertise, and, perhaps most importantly, patient capital”.