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Thursday, 17 January 2019

PIDG – Key to unlocking Africa's infrastructure

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Related images

  • Figure 1 - How PIDG companies support the infrastructure development cycle
  • Coc San hydro power plant in Lao Cai province, Vietnam, which PIDG company InfraCo Asia took from distressed project to successful divestment, allowing for re-investment in other projects.

The Private Infrastructure Development Group (PIDG) has been filling a gap in emerging infrastructure markets, entering risky and unbankable projects and making them viable. The organisation is a pathfinder for private investors and, following a corporate restructure earlier this year, is looking to make an even bigger impact. ByPeter Collins.

At the end of October, Akuo Energy reached financial close on the 50MW Kita solar farm in Mali with a mix of institutional and multilateral debt.

The French developer raised €54m in senior debt as well as €8m of mezzanine debt from Green Africa Power (GAP). Once completed late next year, the landmark project will be the largest solar farm in West Africa.

Two groups, the Emerging Africa Infrastructure Fund (EAIF) and GuarantCo, provided crucial backing to the project. EAIF acted as joint MLA and provided €17m on a 15-year tenor, while GuarantCo supplied a €2.3m debt service reserve account (DSRA) guarantee.

Kita was only the second Malian project to have benefited from their involvement. In June 2017, the Albatros Energy Mali (AEM) IPP, a 90MW heavy fuel oil thermal power station, reached financial close. EAIF again featured in the senior lending consortium and GuarantCo committed a US$4m DSRA guarantee to help the project company repay its loans over a longer period and maintain electricity price levels.

Both companies are arms of the Private Infrastructure Development Group (PIDG), an organisation that specialises in mobilising private sector investment to deliver infrastructure projects in emerging markets.

By working with projects in emerging markets, the PIDG companies help to de-risk them and make them bankable. This helps to stimulate private sector interest in infrastructure markets in countries that would otherwise be avoided.

This autumn, one PIDG company – InfraCo – helped secure the first commercial-scale power purchase agreements in Chad and Malawi for solar projects, owned by Aldwych Africa Developments and JCM Clean Power Development Fund, respectively.

Grant funding from the very beginning helps small-time developers get through the planning stages, while the ability to provide technical and financial expertise at all stages means that, whatever the issue facing a project, one of the PIDG teams will be able to intervene and find solutions.

Structure and funding

PIDG is funded to different extents by the World Bank; the Austrian Development Agency (ACA); the UK’s Department for International Development (DFID); the Netherlands’ Ministry of Foreign Affairs (DGIS); KfW Entwicklungsbank; the Swedish International Development Cooperation Agency (SIDA); and Australia’s Department of Foreign Affairs and Trade (DFAT).

The strength of PIDG lies in its six subsidiaries, which each provide a different service along the project lifecycle.

The subsidiaries are the Technical Assistance Facility (TAF), which provides technical grants to early-stage or planned projects to overcome development obstacles; DevCo, which funds advisory services to governments on PPPs through the World Bank’s IFC; InfraCo’s African and Asian branches, which provide risk capital, and its own expertise to help make early-stage infrastructure projects bankable; EAIF, a US$365m debt fund, which provides long-term foreign currency loans to projects in sub-Saharan Africa; and GuarantCo, which provides them with local currency guarantees.

The latter two are managed by Investec Asset Management and Cardano Development, respectively, replacing Frontier Markets Fund Managers – which managed both companies – in May 2016.

This synergistic approach allows PIDG to allocate its companies to projects at whatever stage they are needed and help bring them across the line.

While there is frequent collaboration between each company, their specific responsibilities are well defined and allow the most relevant teams to attend to individual projects.

Naturally, with a focus on emerging markets, these projects are often lacking in technical and financial expertise and will at times carry significant risk profiles.

Panel members at the recent Infrastructure Africa Business Investment Forum in Johannesburg agreed that there were not enough bankable projects in the continent to meet its growing requirements. In addition, Herbert Smith Freehill’s Brigette Baillie pointed to the deficit between the growing number of road, rail, ports and power projects being developed versus the lack of attention on sewerage, water and schools.

The issue of project bankability is, in the eyes of many, the single greatest barrier to infrastructure deployment in Africa.

“We know that capital is available; the issue is where the bankable projects are,” said Philippe Valahu, CEO of PIDG. The group, which seeks out risky projects that would otherwise fail, thus fulfils a vital role in ensuring that much needed infrastructure projects are carried through.

Earlier this year, a structural overhaul of the group brought each company under one roof in London, with a topco board, committee and executive team.

“There’s a difference between the PIDG of yesterday and the PIDG of today,” said Valahu.

As the companies have grown and evolved, the emphasis has been on closer cooperation and the ability to work all the way through a project’s lifecycle if it has a particularly elevated risk profile.

Lasitha Perera, CEO of GuarantCo, told PFI that “PIDG is strengthening the power of the proposition [of PIDG groups collaborating at all project stages]. The restructure will enhance and facilitate greater collaboration across its six companies.”

The corporate restructure has made it easier to fulfil these ambitions, and is being supported by a significant new funding commitment from its investors by year end.

“We’re in a good place,” said Valahu, although he forewarned of a future scarcity of available funds from development finance institutions (DFIs) and governments. As such, he said there was a need to reassess the funding structure and look at sovereign wealth funds, private equity firms and impact investors.

Currently, most of the fundraising is done at an individual company level, with the likes of EAIF and GuarantCo raising up to €250m each from select members of the investor pool. In future, PIDG intends to attract funding at pitch level, which Valahu said is “logical” and consistent with the restructure.

“We have the scope to attract more investors,” he added.

Strategy

PIDG focuses on emerging markets in Africa and Asia, with InfraCo splitting into InfraCo Africa and InfraCo Asia in 2009. Approximately 60% of its activity is in conflict or post-conflict areas.

A majority of its projects are in the power sectors, with an estimated 75% of its projects falling into the category.

Valahu summarised PIDG’s strategy as “trying to make the market” – showing it is possible to make a project bankable in risky markets, and act as a pathfinder for the private sector to then step in.

While previously active in Africa’s telecommunications sector, PIDG has seen its role there decline as private investors have stepped in. PIDG is not there to compete with the private sector, merely to show them the light.

“Our intent is to no longer be needed,” explained Valahu.

This sentiment was echoed by Perera, who said that “we’ve done our job when we don’t have a job”.

The guarantee arm of PIDG provides local currency guarantees to infrastructure projects, which are frequently dollar-denominated with local currency returns.

“We’re pushing the envelope – demonstrating that the risks are not always as high as people perceive them to be,” said Perera. “If we see the need for guarantees reducing, it means we’re doing our job.”

Even then, GuarantCo will usually only enter projects at the last minute when all other avenues have been exhausted. Deals that do not rely on guarantees generally save on costs and complexity, so sponsors and financial advisers will seek to close without them if possible.

“That’s how it should be,” said Perera.

GuarantCo, upon entry into a project, will analyse why the capital structure in its present form isn’t working, identify the bottlenecks, and subsequently look to change the equation.

In addition, the company is active in promoting bond markets across its target regions and has been involved in a number of “firsts” in the sector.

This summer, it signed a deal with Singapore-based renewables developer Sindicatum Renewable Energy Company for US$60m in Green bonds with Indian rupee and Philippine peso tranches both rated A1 by Moody’s.

The synthetic local currency tranches are to be issued and settled in US dollars, while GuarantCo’s guarantees – of US$15m over five years (rupees), US$25m over seven years (pesos) and US$20m over 10 years (pesos) – are denominated in the original currencies. This was the first offshore corporate entity to issue local currency bonds from Singapore.

In Africa, it was involved in the first corporate bonds to be issued by a non-financial institution in Ghana for Quantum Terminals and supported two Nigerian affordable housing projects with a locally denominated bond guarantee.

“We’re a champion for local capital market development,” explained Perera.

As part of PIDG’s new five-year strategy, the role of InfraCo is set to increase, with additional funding and expansions. The company enters projects as an equity partner at an early stage to de-risk them and make them bankable. It performs its role either as lead developer or as partner to the lead developer, and takes an active role in arranging the financing.

InfraCo’s mission was, until recently, to sell its stake in the assets pre-construction, once all financing had been secured. However, it has recently chosen to stay on in certain projects, usually retaining around 25% in long-term equity.

In November, InfraCo Asia finally divested its shares in the 29.7MW Coc San hydro power project, after having entered the project in its planning stage to derisk it and ultimately staying on all the way through to its commissioning.

Alex Katon, InfraCo’s CEO, summarised the company’s priorities as investing early-stage equity as risk capital; providing expertise on technical, regulatory and financial aspects; and “meeting the highest standards” of project development.

This third point consists, for example, of ensuring proper health and safety protocol and focusing on anti-corruption. InfraCo was in fact recently accredited with ISO 37001, the management standard for anti-bribery.

Corruption and bribery are some of the biggest risks in these types of projects. As a result, “projects developed by InfraCo have a stamp of approval”, said Katon.

Other common issues are related to land acquisition laws, which can change drastically between countries; security and political risk in the event of a recent election or conflict; and incomplete or sometimes completely lacking regulatory frameworks. InfraCo has frequently worked with regulators in establishing a comprehensive framework, stopping just short of physically drafting the legislation themselves.

Sometimes, this results in the company committing to a project for much longer than anticipated. But Katon said the team is generally happy to persevere for as long as needed.

“I like to call it ‘patient’ risk capital,” he said.

Crucially, InfraCo’s relationship to the other PIDG companies does not affect its decision-making in relation to what is best for the project. While EAIF’s offices are but a short walk down the hall of their London headquarters, its involvement in a project is contingent on a lack of lender appetite from other sources.

Indeed, PIDG’s strategy is very much about maintaining discipline – not competing with private investors, stepping aside when cheaper financing is available, and not chasing additional profit.

“Once the job is done, we’re out,” said Valahu.

To see the digital version of this yearbook, please click here .

To purchase printed copies or a PDF of this report, please email gloria.balbastro@refintitiv.com

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