Annual Report 2015

PIDG FACILITIES

 

Telling PIDG’s story

Keith Palmer is Special Advisor to PIDG’s Supervisory Board.

PIDG is a simple idea.

When businesses in developing countries can access affordable electricity supply or reliable telecommunications systems or usable roads they can compete and grow. The outcome is more jobs created, higher incomes and less poverty.

In the early 2000s it became clear that there was a major problem. There was far too little capital being invested in low income developing countries to build the infrastructure needed for these countries to prosper.

The private sector was not interested because of real concerns about political risk and regulatory uncertainty and the DFIs also showed little interest in financing infrastructure in these riskier countries.

PIDG was created to address this problem.

In the early years the need was to mobilise more medium and long term debt for early stage (‘greenfield’) infrastructure investment in these countries.

For this reason PIDG’s first Facility Emerging Africa Infrastructure Fund (EAIF) was established in 2002 as an infrastructure debt fund focused exclusively on investment in lower income countries in sub-Saharan Africa. It has a novel, tiered capital structure which initially mobilised within the fund $2m of private capital for every $1m of donor capital. Within four years of start-up, as it became clear that the model was working, EAIF was able to further increase private sector leverage within the fund, mobilising $4m of private capital for each $1m of donor capital.

The fund structure generated leverage at the project and fund levels enabling more than $10m of infrastructure finance to be mobilised for every $1m of PIDG capital invested.

Soon after PIDG was created it became clear that there was also a need to provide support for local-currency denominated loans to finance infrastructure. In response, GuarantCo, a local currency guarantee facility, was created in 2004.

The importance of GuarantCo is that it reduces the risk of a mismatch between local currency denominated revenue streams and foreign-currency denominated debt service if exchange rates depreciate. Neither private sector credit enhancement institutions nor development finance institutions had much appetite for providing guarantees against this risk. GuarantCo provided a novel and important contribution to solving the problem – another instance of PIDG filling an important gap in the infrastructure finance ‘space’.

At about the same time PIDG donors became aware that finance was not the only constraint deterring infrastructure investment. In many cases the problem was a deficiency of investment-ready opportunities at financial close. Private investors that would be willing to invest at financial close found it too risky to take on the very early stage development work such as gaining the necessary land rights and government consents and negotiating long-term offtake agreements.

Once again the PIDG donors took the initiative and created InfraCo, a donor-funded project development company whose aim is to reduce the costs and risks of project development pre-financial close, thereby mobilising at financial close private capital that would not have been invested without InfraCo’s investment.

The InfraCo model was a first for PIDG. Now that it has proven to be successful not only have PIDG donors agreed to expand it and increase its reach in low income countries to parts of Asia as well as in sub-Saharan Africa but other development institutions have used the model to create their own project development vehicles.

The infrastructure finance landscape evolves over time. By the end of the 2000s, private sector lenders and DFIs had shown much greater willingness than at the start of the decade to provide debt finance for infrastructure investment in low-income countries. Accordingly the PIDG donors reviewed and refocused extra PIDG resources so as to maintain its position on the infrastructure finance ‘frontier’.

In keeping with this philosophy PIDG has developed several new initiatives aimed at filling financing ‘gaps’.

In response to the climate change challenge it has increased support for private investment in renewable energy.

Lately it has become apparent that the appetite of the equity market to invest in ‘greenfield’ infrastructure had not kept pace with the debt markets. For this reason PIDG has committed to further increase donor funding for investment in equity at financial close in projects where there is a demonstrable need for public funding to fill a financing gap.

PIDG is also exploring new ways of providing enhanced support to help improve the policy environment in host countries, so as to accelerate the rate of private investment in infrastructure.

Filling in the gaps on the financial canvas as they appear so as to provide better development outcomes for low-income countries is what makes PIDG special.

Cape Verde | Cabeólica wind power project | TAF and InfraCo Africa with Cabeólica