Thinking local to plug the funding gap

The UK government’s Foreign, Commonwealth & Development Office (FCDO) provision of a €106mn callable capital facility boosts local currency guarantor GuarantCo’s efforts to close the infrastructure financing gap in Africa and Asia.

Market in Dhaka, Bangladesh. In May 2021, GuarantCo provided Bangladesh’s PRAN Agro, the largest grower and processor of fruits and vegetables in Bangladesh, with a 100% guarantee of a BDT2.1bn (US$25mn) on-shore seven-year bond with a seven-year tenor to attract domestic institutional capital and support PRAN Agro’s expansion plans. Abaca Press / ANP

In short

  • London-based GuarantCo provides a range of guarantees in local currencies and capacity building support to local financial institutions and regulators.
  • It will will leverage three times its €106mn investment from the UK government
  • To date, it has enabled $5.8bn in investments in 22 countries.

With the new funding in place, London-headquartered GuarantCo can mobilise a portfolio of up to €317mn (£270mn) of guarantees by leveraging the initial public-sector investment, interim CEO Emily Bushby tells Impact Investor.

“Our mission is to crowd in private sector investments into infrastructure projects to make sure that we are building the infrastructure that really can make a difference to local people's lives in Africa and Asia. With every dollar invested by the private sector, we are able to leverage it three times,” says Bushby.

Part of the Private Infrastructure Development Group (PIDG), GuarantCo was established sixteen years ago to mobilise local currency credit solutions for infrastructure projects and to support the development of capital markets in lower-income countries in Africa and Asia.

GuarantCo provides a range of guarantees for partial credit, tenor extension, liquidity extension, and EPC (engineering, procurement and contract ) contractor guarantees, and portfolio guarantees.

It is funded by the governments of the UK, Switzerland, Australia and Sweden through the PIDG Trust, the Netherlands via FMO and the PIDG Trust, France through a standby facility, and Global Affairs Canada by means of a repayable facility.

Eliminating currency risks

The company’s latest funding, announced by the end of June, further advances GuarantCo’s agenda of focusing on local currency finance and developing local capital markets – a theme that resonates strongly in impact investing circles.

So far, through its guarantees, the company has enabled €4.9bn ($5.8bn) in investments via 57 transactions in 22 countries, giving 45 million people improved access to infrastructure.

“Many of the transactions we're working on are receiving their revenues in local currency,” Bushby says. This creates a currency risk because companies can mostly attract funding in foreign currency.

One recent example is a student housing developer in Nairobi, Kenya, called Acorn. “They will be receiving their revenues in Kenyan shilling.

A mismatch of their funding requirements, which are in hard currency, and fluctuation from local currency to the hard currency, can lead to volatility and uncertainty.

We see it as an obvious choice to make sure that they match their funding requirements to their revenue streams,” said Bushby.

Developing local capital markets

The focus on localising should not just be about the supply chains, Philippe Valahu, CEO of GuarantCo’s parent PIDG, tells Impact Investor; it’s also important to develop local credit markets.

That’s why, for example, GuarantCo provides capacity building support to regulators, because you need to change certain regulations to allow domestic capital from pension funds and insurance companies to get involved.

“Providing capacity building to these entities helps them understand and better assess risk as it relates to the infrastructure assets,” he says. This in turn delivers wider benefits in fostering a more supportive investment climate.

“We’re providing capacity to the issuers,” says Valahu. “If they want to be issuing a green bond and be EDGE certified (a green building certification standard), and they want to do a listing in an African country with a dual listing in London for example, they need to understand the company’s documentation. All of a sudden, we are able to support the whole ecosystem around the capital markets and local financing solutions that weren't there before.”

Pension funds’ reluctance to invest

But the PIDG CEO is realistic about the scale of the challenge. Progress remains uneven. “Local currency solutions are not being advanced fast enough in my mind,” Valahu says.

He senses a general hesitancy among development and international finance institutions to engage with local bond issuance because they are wary of the risks involved and the hard groundwork needed to assess local issuers.

“If you look at recent credit enhancement on a bond issuance in Bangladesh, the development finance and international finance institutions weren’t able to look at it. When the first green bond in East Africa was being issued, the development finance institutions looked at it but couldn’t find a way to unlock it.”

In May 2021, GuarantCo provided Bangladesh’s PRAN Agro, the largest grower and processor of fruits and vegetables in Bangladesh, with a 100% guarantee of a BDT2.1bn (US$25mn) on-shore bond with a seven-year tenor to attract domestic institutional capital from Bangladesh and support PRAN Agro’s expansion plans.

Valahu also highlights the erroneous assumption – reflected in some views of the World Bank’s ‘billions to trillions’ agenda – that pension funds in Europe and America are eager to come and invest in the countries where it operates, such as Chad, Guinea and Kenya to name a few. “We know that's not the case,” he said.

Instead of focusing on those illusory trillions, Valahu urges a focus on the pension funds and insurance companies that are already active in Nigeria and Kenya, Cote d'Ivoire and elsewhere, and to mobilise these.

Fixing holes

Meanwhile, GuarantCo’s strategy is to remain innovative and focus on its core strategy. “We look to find a solution to why particular projects cannot get financed,” says Bushby.

One recent example is in Togo, West Africa, where GuarantCo identified power plants in need of liquidity support.

“We worked on a specific product to support Eranov’s Kékeli Efficient Power where we can ensure that when the tenor of the loan comes to an end, we will be there to refinance if that tenor cannot get extended,” says Bushby.

When the Covid-19 pandemic struck in early 2020, GuarantCo mobilised additional technical assistance funds to support local entities.

One example is a project called Kacific, a satellite provider in Asia and the Pacific Islands. “We mobilised about $500,000 for them in order to improve the satellite communications in rural outposts to ensure good health provision in areas that wouldn't ordinarily get it,” says Bushby.

Three impact lenses

GuarantCo, like all PIDG companies, is systematic in measuring its impact. The focus is on three broad areas: people's lives, the planet, and market transformation. “Everything that we look at will be viewed through those lenses,” says Valahu.

“At PIDG, we have now put in place a framework of KPIs and scorecards, which is leading the way for others. We have other DFIs coming to us, looking for guidance as to how we use this to implement the SDGs,” says Valahu.

The benefits go beyond the theoretical. “Take gender for example,” says Valahu. “We are discussing support for an electric mobility start-up in Africa where motorcycles are the main means of transportation.

One of the things that the investor is looking to implement is to make it safer for women passengers. So, when people ask me how we do gender and infrastructure, there’re plenty of examples of how it can work if you put your mind to it.”