There is a huge infrastructure deficit in Africa – more than $45bn per annum, according to the World Bank – and the current rapid economic growth is unsustainable without very large increases in infrastructure investment. But there is no way that state-owned utilities can mobilise more than a small fraction of the capital needed to fill this massive gap.
Nor will donors have the resources to do so. If the infrastructure is to be built, there must be large-scale mobilisation of private sector capital – and that is easier said than done.
There are big hurdles to overcome before private sector capital can flow at the required rate. First, there are issues around the creditworthiness of public sector utilities, upon which many private infrastructure investments depend. Second, there are political and regulatory risks which reduce the supply of private capital and increase its cost. Third, there are exchange rate risks associated with assets that generate local currency revenue with dollar-denominated debt. Fourth, there is an acute shortage of investment-ready infrastructure opportunities, as well as a shortage of developers able and willing to make projects investment-ready.
A novel public private partnership – the Private Infrastructure Development Group (PIDG) – has been created to overcome these hurdles. The PIDG mission is to reduce poverty by extending and improving access to infrastructure in low income developing countries. The approach is to use donor funds in a catalytic way – inducing additional private sector infrastructure investments many times greater than the donors’ own investment. To achieve this PIDG has created a number of facilities, each designed to address specific constraints on private capital flows for infrastructure investment.
The Emerging Africa Infrastructure Fund (EAIF) is a $600m debt fund which makes dollar-denominated loans to support infrastructure investment in sub-Saharan Africa. Many of its loans support early-stage – and therefore relatively high risk – infrastructure investments, such as the SeaCom cable in East Africa. Despite this relatively high risk portfolio, all of its loans are performing and the fund is profitable.
GuarantCo is a credit guarantee facility which provides partial risk guarantees to support local currency loans, and capital market issues to finance infrastructure investment in low-income developing countries – including to sub-Saharan Africa. The availability of the GuarantCo credit guarantee increases the supply and improves the terms of local currency loans for infrastructure investment in these countries.
InfraCo Africa is a project development company which invests PIDG funds in very early stage development to bring a greater number of infrastructure investments to financial close. It plays a pure catalytic role investing as principal to reduce front-end costs and risks, mobilise debt finance and sell infrastructure businesses to private sector equity investors at financial close. It achieves high financial leverage, mobilising more than 20 times its own investment from private capital markets and DFIs, and recovers its costs from proceeds of sales at financial close to reinvest in new project development.
EAIF and GuarantCo have in common a tiered capital structure with a deeply subordinated tier of low-cost patient capital provided by donors. Since senior lenders can benefit from the risk cushion provided by the patient capital, they are willing to invest more at lower cost. The schemes have mobilised more than $1bn of capital for investing in profitable infrastructure opportunities on the back of just $200m invested by donors as patient capital.
All three PIDG facilities respond to identified constraints on private investment in infrastructure. EAIF and GuarantCo increase the supply and reduce the cost of dollar-denominated and local currency debt respectively.
InfraCo Africa increases the supply of financeable infrastructure opportunities at financial close.
The PIDG facilities exemplify a new successful approach to development assistance. They are catalytic, using limited taxpayer funds to stimulate much greater capital from the private sector; and use private sector professionals to deliver the dual mandate of poverty reduction and viable infrastructure investments. The PIDG approach has proven to be highly effective in overcoming the constraints on private investment in infrastructure, and has real potential in other sectors, notably agriculture. At a time of increasing pressure on public sector budgets and demands to demonstrate aid budget effectiveness, there is a strong case for expanding and broadening the scope of the PIDG approach.