Funding Quality Infrastructure in Frontier Markets

LSEG’s Group Head of Sustainability Jane Goodland speaks to Andy Bainbridge, Private Infrastructure Development Group Chair, to discuss the roadmap towards net zero, and the critical role that infrastructure finance has to play in delivering climate action.

The conversation also highlights the positive impact that the industry is having on quality infrastructure in frontier markets, and how credit enhancement and guarantees are enabling investors to take the first step towards funding a growing pipeline of long-term, climate-friendly projects.

The Net Zero Conversations series was filmed at the Net Zero Delivery Summit, hosted by the City of London Corporation in association with the COP 26 UK Presidency 2022 and the Glasgow Financial Alliance for Net Zero (GFANZ).

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Andy, welcome and thank you for joiningus on Net Zero Conversations.Well, thank you.So you are the Chair ofthe Private Infrastructure Development Group?Yeah. Let's call it PIDG. It's much easier.Okay. Let's call it PIDG.Can you tell us more about that group andparticularly the interest in climate transition?So the Private Infrastructure Development Group isa group of companies thatdoes early-stage project development,does credit enhancement and guaranteesand does long-term debt finance for infrastructure finance,predominantly aimed at a pro poor infrastructurein Africa and emergingAsia. We are funded by the governments of the UK,Switzerland, Sweden, the Netherlands and Australia.And, next week is our 20th anniversary.We started out 20 years ago withthe Emerging Africa Infrastructure Fundthat was there to prove thatthere was a business case to be made forlong-term finance for infrastructure projects in Africa,doing 15-year money at a time when others did not,and now lots of others do. GuarantCo camealong five years later,which is about using guarantees tobring in the private sector and alsoto mobilise domestic capital.And maybe we'll talk a bit more aboutthat if that's of interest.And then the InfraCos developed early-stage project pipelines,which we think is a critical partof solving some of the challenges.Getting to net zero is obviously massively importantto all of us individually in terms of ourselves,our families and our futures.But also we think, for emerging markets,helping them to build infrastructurethat is climate friendly.And you're not transitioningexisting infrastructure in many of these markets you'reactually building at the moment. It isreally important to giveequality of opportunity to people.So it's off-grid is critical to us,it's operating in frontier markets.And we believe that actually if you providegood quality infrastructure to the poorest in society,you give them opportunities,but you also get more peacefulsocieties as a consequence.I mean, I think those sorts of marketshave often been perceived asless risky or less attractive by private investors.How do we start to change that perception?How do we get that money flowing a bit more?Well, I think you're right, many ofthese markets have been seen as highly risky.We operate in what we call frontier markets.So DAG 1 to 3 markets, in UN parlance.And I think the only way that youreally get the money flowing to some ofthese markets is by proving that the risk is overstated.Banking and finance is really all about risk and reward.And I think in many of these markets,the risk is mispriced.So consequently, you can make sustainable profits yearafter year by backingprojects in these marketsbecause you earn a higher margin.So the Emerging Africa Infrastructure Fund,which, as I say, has been going for 20 years now,is sustainably profitable. It makes money.We get debt facilities now provided to itby certain banks andinsurance companies and others in the marketplace who,who see it as a bankable prospect.So we have projects in places likeMali and Burkina Faso and Malawi.But we tend to find that everynow and then you have a stress project.There's normally a way to work it through.And the loss record is actually much,much better than, than people think from the outside.And what that's done is it's transformedthat perception over time.So people will, will now gointo some of these projects without us.Now the other thing that you do in some of these markets,that is importantand that we think is really important,is using the credit enhancement capabilities,using the first loss capabilities of GuarantCo,which is also part of the PIDG group,to encourage people totake the step they otherwise might not be able to.We've seen it work particularly well inmarkets where we've mobilised local debt capital markets,but also where we've had peoplecome into markets purely becausethey know they've been able to rely uponour guarantee in the event something goes wrong.So if we're successful in scaling upthe finance that's going to these emerging economies.Is there the pipeline of projects to the receivethis capital or is that another area thatwe need to focus on?That's definitely an area we need to focus on.So some years ago, my predecessors atPIDG saw the shortage of projects inthe pipeline and setupthe InfraCos, which are part of the PIDG group aswell, to do early stage project developmentto take that early-stage risk,which was really important and has done well.And similarly, the IFC has a similar venture.We think more is needed.We've been saying that for some time.What's really pleasing to me as an outcome of COP26,we saw the G7 report oninfrastructure going to the UK government in DecemberI think it was, that specifically said there aretwo things that we should bethinking about and doing more about,and one is early-stage project preparation,and the second one is the use ofblended finance and credit enhancements,such as guarantees tobring in private sector more actively.The dialogue is really starting to change.I think what that means is that governments are thinkingabout, "How do we get that early stage project preparation?How do we do that without wasting money?"Because obviously it's easy to throwmoney at a problem without solving it.Now, two years ago, no one was talking aboutthis. Today at today's conference,I've heard Secretary of State Kerry talk about it.I've heard Alok Sharma talk about it.It's really exciting to hear this beinga mainstream dialogue there. Absolutely. Andit sounds like there needs to be dialoguebetween governments as well fromemerging countries that obviously need to scale upthe projects, versus wherethe finance arguably may be coming from.So I think with that kind of policy lens,can you touch on some ofthe key things that you think that governmentsaround the world need to be doing inprioritising in order to get this working better?Well, I think a lot of the early stage project preparationis not really around governments.Sometimes there's a bit of apolicy tweak required here or there,but I don't think that's huge.This is about providing enough money to pumpprime, a portfolio of projects in emerging markets.And that can be private sector ledwith some public sector finance in it.It can be private sector led,supported by the likes of the InfraCosor InfraVentures from the IFC.I don't think there's a major political stumbling block there.We look back to COP26,it's not that long ago, but itfeels like a lifetime sometimes.I'm just wondering, in your view,have we progressed far enoughfast enough or are we on a journey?That's an impossible questionto answer satisfactorily, isn't it?I think like everyone else in this space, arenaturally impatient and the answer is always going to be,we haven't come far enough, we haven't come.or we haven't progressed fast enough. In reality,if you look at some of the pledges from COP26,there are large amounts,there are large commitments.So financially, it takes time to work out how to effectivelyspend money and how towork in a broad coalition to achieve it.If you look at some of the commitmentsaround deforestation, et cetera,it will take some time tovalidate that those have all been held,but certainly around some of the financial commitments.I know there are serious conversations going on anda serious sensible collaborativedialogue is taking place.If we look at some of the smaller commitments.So one of the UK government commitments wasthat one of the PIDG companies would entera 200 million guarantee facility withAxis Bank in India asa concrete example of something that we've done,that has been done. Obviously 200 million is,is not big in the scheme of things,but what is enabled us to do is it's enabled us to puttogether how that facility works.So it's an umbrella facilitycovering a number of projects,align our risk processes behind it,and that's now replicable.So we can do it again in a matterof weeks rather than months, withanother bank and another bank and another bank,subject to capital being available.I think that's the, the answer to a lot of this.You'll, you'll have some big blockbuster numbers,but what you've got to have underpinning allthat is you've got the replicability of projects.Absolutely. So looking ahead to COP27,the big question is, is really, you know,if it's going to be a success,What's the one or two things thatreally need to happen in order to do that?I think a lot of people for COP27 will want to lookback at COP26 and see there is real action.So whilst I said a minute ago,that it takes time to do some of these things.We've had six months,we've got six months more,but I think a lot of people are looking very hard to say,"Show me the proof that this is real.Show me the disbursement that istraditionally in this field lagged the promises."So disbursement needs to startcatching up to the promises made.And that's the critical thing. Otherwise, Ithink we lose credibility.I was about to say that the sector,the sector's reputationreally kind of hangs on this, right? AbsolutelyPeople are watching. The world is watching. Yeah, absolutely agree.So people have to be able to seetangible changes have taken place by the time of COP27.The other thing I'd really like tosee is I'd like to see usshowcasing more the opportunitiesaround this transition. Because there are somefantastic opportunities out there.I mean, I am super privileged to be part ofPIDG, because you get to support some of our colleagues,with some of the things they are doing out there.But we're seeing entrepreneurs inKenya starting electric taxi companies. In Uganda,doing electric bikes to transport people around on.I've got a friend over in West Africadoing solar as a service to corporates.And these, these are people whoall see it as an opportunity.They will all make good returns out of this.So really highlighting that actually, you can dowell and do good atthe same time is really important to bring others out.Absolutely. Thank you.It's been a delight to talk to you.Thank you so much for your time today.Well, thank you. Pleasure is mine. Thank you very much.

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