Philippe Valahu, CEO of the Private Infrastructure Development Group (PIDG), met with Jack Aldane to talk about the growing role of its subsidiary firms in achieving impact and how PIDG is encouraging investors to see infrastructure as a bankable asset class.
PIDG currently has funding resources of around US$2.4 billion, has supported around 170 infrastructure projects, mobilised US$22.8 billion from the private sector and is estimated to have benefitted more than 230 million people worldwide. Now, PIDG companies will take a more collaborative approach with commercial investors by investing at different stages in each project cycle. Could you outline how this will produce greater overall impact?
PIDG companies operate along the project development life cycle and across the capital structure, providing technical assistance, early stage project preparation (pre-feasibility, feasibility, environmental impact assessments), then take it to financial close and bring in capital (debt, equity, credit enhancements and other financial products). In the past, each of those companies, because of the way we were set up 15 years ago, grew independently under the PIDG umbrella. It wasn’t wired to work holistically – not that I love that word – though I think it describes nicely our intention to take a more coordinated approach. If you look at the 30-megawatt Coc San run of river hydro in Northern Vietnam we supported, that was a stranded asset that we were able to support at various stages of its development. It received a component of technical assistance from our designated arm, as well as near-financial close and viability gap funding to ensure that the economics would make sense. InfraCo Asia, the project preparation arm of PIDG, developed it from a stranded asset, to financial close, to commercial operation. It has now been operating for a couple of years. The utility has been making regular payments, so that asset is now ready to be sold to the private sector. The amount of interest is Asia-wide for that asset, because they know that PIDG’s involvement has meant adherence to International Finance Corporation (IFC) performance standards, transparent procurement practices and so forth.
Until recently, investors lacked the necessary metrics to create benchmarks that can monitor the risk-adjusted financial performance of private infrastructure debt and equity investments. The OECD is now doing work to give investors access to these. How big a step towards making infrastructure an investment-worthy asset class is this, in your view?
I think it’s significant. I attended the G20 event a couple of months ago, which was hosted by the UK Treasury and the government of Argentina. They’ve put infrastructure at the top of their agenda, so it’s no surprise that everyone is giving a little more attention to that. One of the big topics that day was the role of the OECD and others in attracting pension funds. As you know, we are committed to the ‘billions to trillions’ agenda, but that needs to be underpinned by concrete actions. The areas that were identified at the G20 Summit were project preparation, contractual terms and conditions, and an attempt to standardise. Pension funds want to understand that whether they’re working on a power asset in Vietnam or Rwanda, there are standard terms on which to do both. Then there are the metrics. For me, that’s critical. The thing that is still missing in this debate is mobilising domestic pension funds. Our predominantly local currency guarantee company GuarantCo deals with domestic capital markets, through which we provided credit enhancement on a 10-year corporate bond in Ghana a month ago (a first in that market). It’s small, but it was taken up by a Ghanaian pension fund in local currency. In Nigeria, we’ve set up an entity called InfraCredit to do credit enhancement on bond issuance. They did the first one two months ago with Viathan for US$32 million, another 10-year bond also in local currency (again a first, and taken up by Nigerian pension funds and insurance companies). We worked a lot with the regulators to ensure these entities had the right to invest in that asset class, as well as with the pension and insurance funds on the credit underwriting, because it’s a new asset class for them. So this has to be part of the debate as well.
Economic development is one of the UK government’s single biggest goals as part of an effort to secure national interests by strengthening the poorest economies. What has PIDG managed to achieve in this area in your time as CEO?
We can talk about concrete numbers here – PIDG helped 9.2 million people gain access to new or improved infrastructure last year and created more than 10,000 jobs – but they don’t tell the full story. PIDG’s infrastructure investments support economic development and combat poverty. Infrastructure is arguably the critical enabler of wider development. It underpins higher standards of living and the ability to work and do business. When you look at our portfolio and sector diversification, and the amount of work we’re doing in power and renewables, that means you’re able to provide off-grid solutions, which five years ago would not be possible. Today it’s a reality. When you’re able to deploy off-grid solutions to communities that will never see a transmission line in either their or their children’s lifetime, because governments simply don’t have the money for it, you’re transforming people’s lives. It also supports public services. Kids can suddenly go to school and businesses can flourish. In Tanzania, working with a partner, we have provided container models with solar modules, which light up school classes and so create a whole chain of economic development, which the UK and our other governmental shareholders aspire to facilitate.
PIDG’s Kigali Bulk Water Project in Rwanda’s capital, due for completion in 2020, is an example of how blended finance can work. Communication was important to its success, though could you say what worked well from a risk perspective?
This project benefited from the support of three PIDG companies. DevCo did initial work to structure the project and take it to competitive tender. Then the Emerging Africa Infrastructure Fund (EAIF), our long-term debt provider and mandated lead arranger for the project, came in with 18-year finance, which is a tough act in sub-Saharan Africa today. This was further supported by our Technical Assistance Facility, which provided viability gap funding of US$6.5 million to reduce up-front costs and allow the government to expand the number of people connected to a reliable water supply without raising tariffs. From a risk perspective, the project was initially delayed because when the concessionaire looked at the structure, it became clear in terms of the risks that achieving the water treatment, together with the distribution infrastructure, then the pumping stations to the households, would have been very difficult. The delay therefore led to additional discussions with the government, and that’s where communication was critical. An agreement was reached between developer Metito and the government to split the construction of the production and distribution infrastructure, delivering the latter through Rwanda’s water utility WASAC. This was supported by a separate financing package from the government of Rwanda and the African Development Bank (AfDB). By considering water production and distribution holistically and finding pragmatic financing solutions, the project retained key elements that are crucial to the lives of people in surrounding communities. I think it’s a good example of not being bound by the original terms of the concession and finding flexible solutions that maintain the transformative impact of new infrastructure.
To what extent do you find it a struggle to communicate your impact goals, given that infrastructure projects are highly technical, take many years to complete and don’t translate easily to stories about the human condition?
As I said, we are very proud of the overall impact we have had but the numbers alone don’t tell the human story. I think there are very clear examples of how we impact people’s lives. When you look one of our projects in particular, Kalangala Infrastructure Services on Uganda’s Bugala Island, there is a clear human impact story. That was a small transaction that started as a ferry service from the island to the mainland. You never used to know when you would be able to travel there because of the irregular services. If you had produce on the island that was likely to rot, that became a real problem. So the project began as a roll-on, roll-off service, but we also needed a road to cross the island as well as power, so both were added. There was therefore flexibility enough to be able to add those components, which means that people who were producing crops or fishing on the island could put their produce in refrigerator containers on the ferry, upload them to sell on the mainland, and then return the same evening. Then there are the specific human stories. We’ve heard from a woman called Jessica, who has been employed on the site of the EAIF-supported Tororo solar plant in Uganda. She can now improve her housing, and send her son to school. He now has opportunities that his mother simply did not have access to. Another is of a carpenter, Francis, who suffered from polio, who now has steady electricity to use with his tools. He’s actually been making cabinets and other furniture for the offices at the project site. The human impact is what we need to talk about more. We know it’s there, but if I simply tell you there were 10,000 jobs created last year, you’ll rightly want to know what kind of jobs and who is doing them. It’s only once you drill down to these types of examples that you see the unbelievable difference the infrastructure we support can make to people’s lives.