50840 SEPTEMBER 2009 ABOUT THE AUTHOR JOHN HODGES Head of DFID Infrastructure dsas Approaches to Project Delivering the Goods: Multi-Donor Department until his retirement in 2002. Program Development and Funding Manager, Private Infrastruc- ture Development Group (PIDG) until June 2009. Getting a number of bilateral and multilateral donors to collaborate on the development and funding of partnerships with the private sector can be a daunting task. The IFC has, however, participated in such a partnership--the Private Infrastructure Development Group-- which has successfully delivered results on the ground. Background At the same time, PIDG donors retain control of overall policy in order to ensure maximum In 2000 the UK government, through the developmental value and to limit any "sub- Department for International Development sidy" element to the absolute minimum nec- (DFID), reached the conclusion that it made essary to mitigate risks that constrain pri- sense to use aid financing to help mitigate vate-sector investment. All donor members risks that constrained private-sector have a say on whether or not a new facility investment in badly needed infrastructure should be established under the PIDG um- development, improvement, and expansion brella, but those donors contributing to a in developing countries. In seeking to specific facility lead the more detailed oper- develop an approach, DFID decided to bring ational criteria for that facility. in as many like-minded donors as possible so as to provide a single interface for both The model that was developed was based on governments and potential private investors a standard commercial company approach, for the development and financing of with donors setting investment policy and infrastructure projects. country/sector limits and the company's board of directors making the decisions on As a result, the Private Infrastructure individual investments within these policy Development Group (PIDG) was launched in parameters. Company equity is held by a 2002. The World Bank Group has been a trust fund established by the PIDG specifically member since its inception, first through the IBRD window and, since 2007, through the IFC. Current members are Austria, Ireland, Sweden, Switzerland, The Netherlands, the UK, and the IFC. The Approach Realizing that the in-house capac- ity in the capital markets sector ranged from limited to nonexis- tent on the part of most of the PIDG members, an approach was adopted that sought to draw on available private-sector expertise and experience with project de- InfraCo Chanyanya Irrigation, Zambia velopment and investment. IFC SMARTLESSONS -- SEPTEMBER 2009 1 for this purpose, and board members are selected and Results appointed by a nominated committee representing participating donors. Project identification and day-to-day As of July 2009, the PIDG donors had jointly invested a total company management functions are contracted out to of $334 million in all the PIDG facilities and operations. commercial management companies recruited by open There were 30 projects to which loans/guarantees had been competition. issued by EAIF/GuarantCo, plus 15 projects developed by InfraCo and DevCo, which had been successfully concluded In order to have a single interface with which the board with private-sector investors. These projects have included could interact at the donor level and to ensure that all investment commitments of $9.5 billion by the private parties abide by the governing principles, the participating sector, i.e. approximately 30 times the expenditure to date donors convene biannually as a Governing Council, which is by the PIDG donors. (It also needs to be borne in mind that serviced by a program management unit tasked with day- most of the PIDG donors' investment is in the form of equity to-day management of the PIDG and the implementation through the PIDG trust fund, which is itself making a of council decisions. The diagram below illustrates the return.) overall approach. Lessons Learned Outcomes to Date Over the seven years since PIDG established its first company, Using the above-mentioned approach, the PIDG has to date a number of lessons have been learned as to what established three companies: The Emerging Africa approaches work in setting up donor-funded private Infrastructure Fund Limited (EAIF) to provide long-term companies to work in the development sector and the hard currency debt; GuarantCo Limited (to provide local pitfalls that await those seeking to establish similar multi- currency guarantees); and InfraCo Limited (a developer of donor mechanisms. greenfield investment opportunities). 1) Nominate a single donor with the responsibility for In addition, the PIDG provides direct grant funding support the development of a facility/company. to IFC's Infrastructure Advisory Services through a specially established trust fund at the IFC (the DevCo trust fund), EAIF was the first PIDG facility established (and therefore which is used to pay for consultants who develop and take would generally be expected to take longer to develop). forward IFC advisory mandates. The PIDG also has its own EAIF was initially developed and taken forward by DFID, technical assistance fund (TAF) for local capacity building with other interested donors "buying in" once the company for both the private and public sectors in association with was up and running. EAIF took two years to launch from PIDG projects. inception to full operation. In contrast, the next PIDG fa- cility to be developed (Guar- antCo) was initially devel- oped jointly by two PIDG donors. After three years, however, the joint develop- ment approach was aban- doned because working with two governments--each with different rules, regula- tions, and drivers--proved difficult. Guarantco was eventually taken forward by a single PIDG donor, with others "buying in" on com- pletion and was then fully operational within a year. 2) Manage donor expecta- tions with care: It's best to underpromise and overde- liver. In taking forward a new ini- tiative, the project officer has an understandable ten- dency to use the most opti- mistic assumptions (often without fully spelling-out 2 IFC SMARTLESSONS -- SEPTEMBER 2009 the potential downside) in order to gain in- was initially put in place under which all terest and investment from the donors. The projects being put to the companies' project officer is faced with the twin prob- investment committees would be submitted lems of needing to forecast tangible results to participating donors on a 10-day "no within the time scale of funding horizons objection" basis. This system soon became a (usually three years for bilateral donors) constraint to project development because while operating within what is practical for the donors felt compelled to ask detailed a complex, innovative, and often untested questions about each and every project if initiative. they were to give their approval, and the 10 days became many weeks. In the case of PIDG, the first initiative (EAIF) got off to a good start because of a backlog The donors were eventually persuaded to of projects seeking long-term debt but then abandon the 10-day consultation period and stalled from a predictable lack of suitable to trust the decisions on project selection bankable projects. EAIF made no new loans made by the boards, limiting donor for almost a year while efforts were made to (shareholder) inputs to holding the boards identify new investment opportunities. This accountable for complying with the led to donors' disillusionment, which was investment policy set by the donors. difficult to overcome once business picked up and further equity was required. In Much friction and many delays would have retrospect, it would probably have been been avoided if such a policy had been put better to highlight this potential problem in place from the outset. from the outset, but this was not done in order to encourage initial investment commitments. In the case of InfraCo, donors made it clear from the outset that they would be seeking high developmental returns from the initiative. In response, a concept was adopted that specifically targeted a number of projects that would generate high direct developmental returns (as opposed to indirect returns through increased growth). In practice, such projects have been difficult to develop, have taken longer than EAIF Safel Roofing Project, Kenya anticipated to bring to the point of sale, and are proving difficult to sell under current capital market constraints. The consequence Conclusion is that donors are loath to increase equity inputs to InfraCo at a time when this is sorely There are advantages to all concerned needed, saying that they want to see results (donors, developing countries, and the before making further investment. In private sector) by providing donor support retrospect, it would have been better to for the development and funding of private- have made it clear to donors that, in order to sector projects in infrastructure (and other) achieve some early wins and thus sectors in developing countries through DISCLAIMER demonstrate success, more straightforward multi-donor approaches such as the PIDG. IFC SmartLessons is an awards projects (which would demonstrably bring Bilateral donors, particularly those with program to share lessons learned in development-oriented advisory quicker returns to investors) would be smaller aid budgets, are able to participate services and investment appropriate during the early years of the in and guide multi-million dollar investment operations. The findings, new facility. programs; the IFC gains access to significant interpretations, and conclusions amounts of grant funding; and recipient- expressed in this paper are those 3) Make clear from the outset that it is the country governments and the private sector of the author(s) and do not necessarily reflect the views of IFC company's board and not the donors who have a single interface with an experienced or its partner organizations, the hold the responsibility for project investment professional and a quick, non- Executive Directors of The World selection. bureaucratic, decision on an investment Bank or the governments they request. represent. IFC does not assume any responsibility for the During the early days, PIDG was "feeling its completeness or accuracy of the way" with the donors trying to take forward information contained in this a concept (grant investment from aid donors document. Please see the terms in private development/investment compa- and conditions at www.ifc.org/ nies) that was completely new to all smartlessons or contact the program at smartlessons@ifc.org. involved. As a consequence, an arrangement IFC SMARTLESSONS -- SEPTEMBER 2009 3