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How can grant funding be used to support blended finance initiatives?
As a Private Infrastructure Development Group (PIDG) company, GuarantCo has access to grant funding through PIDG Technical Assistance (PIDG TA) that can be used to meet a range of needs that support and align with GuarantCo’s development objectives.
GuarantCo is a guarantor of credit risk for infrastructure projects in lower income countries across Africa and Asia. In addition to guarantees, GuarantCo works with PIDG TA to use grant funding to build local market capacity working with our clients and key stakeholders. This includes capacity building events, COVID related grants, and strategic initiatives beyond its own focussed remit such as those described below.
GuarantCo’s aim is that by guaranteeing precedent-setting transactions, perceived risk reduces in the eyes of the market, achieving a ‘demonstration effect’ whereby other market actors can then replicate our transactions. A differentiated way in which GuarantCo seeks to achieve this objective is to support initiatives that fulfil elements of GuarantCo’s mission but as commercially viable and entirely separate businesses.
So how are GuarantCo and PIDG TA using returnable technical assistance grants to help such companies come into being and fill important functional gaps in the market? GuarantCo has supported initiatives in this way using grants typically up to USD 1.5 million. The process starts when GuarantCo identifies or becomes aware of a market gap and a potential viable solution, then tests the idea internally within GuarantCo and PIDG and with local market actors. If the opportunity is deemed viable, then GuarantCo seeks approval for a start-up investment from PIDG TA.
Returnable technical assistance grants are a versatile tool that can address the risks in new, uncertain products, initiatives or markets. GuarantCo uses grant funding for such initiatives where there is a perceived absence of a risk-return that enables private sector capital to play the start-up role but GuarantCo’s analysis demonstrates strong potential for commercial viability. The risk of such grants is something akin to venture capital. Establishing a first-of-a-kind company in a new market involves piloting new business models, newly formed management teams, and building a new brand in the market, all of which are risks to the grant being returned. On the other hand, the true return on investment may only be realisable over quite a long period of time. Even though the investment can generally be returned with a premium, returns are capped at below venture capital levels to create an incentive for future private sector participation.
Why do PIDG and GuarantCo support strategic initiatives through grants?
It is worth starting by highlighting that PIDG’s own history is one of using grant funding to test new concepts in infrastructure investment including the genesis of GuarantCo. PIDG companies all started small, then attracted larger funding amounts as they showed they can create value. The initial seed funding and associated testing and refining of the concept was how it all started.
Fast forward 19 years since PIDG’s creation in 2002 and we are now seeing an interesting evolution as PIDG is now applying that same philosophy to help build other champions in its markets. A PIDG company may encounter a gap that it cannot bridge directly but by supporting the creation of a company that can, PIDG can strive for high development impact with relatively small amounts of initial capital.
PIDG companies are only free to do this if there exists a directly related commercial opportunity. This brings discipline and internal challenge to the process. It requires grantees comply with all the required safeguards that PIDG would apply to a full-blown larger scale commercial transaction. It also necessitates a clear commercial rationale for each initiative. There are many issues to address in the markets in which PIDG operates, however PIDG companies 1 can only engage when they can play a commercial role in the solution.
Example: InfraCredit Nigeria
Nigeria, as featured in a previous Blended Knowledge Bulletin, was GuarantCo’s first and defining use of PIDG TA funding for the strategic initiative of establishing a new external entity. InfraCredit was a bold solution to the challenge at hand; an opportunity for repeat business in a growing market but an absence of market players ready to step up and fulfil the role.
Once the feasibility stage was complete, GuarantCo partnered with PIDG TA in 2016 to provide a returnable grant of USD 0.9 million to co-finance the set-up costs for InfraCredit. This involved building a local iteration of GuarantCo in Nigeria from scratch as a separate company, with Nigerian capital, Nigerian staff and CEO, and with its entire capacity dedicated to Naira infrastructure bonds.
GuarantCo not only supported the creation of InfraCredit with grant funding but also helped to hire and train key staff members. The interim CEO’s early involvement was a key ingredient to the success of InfraCredit. Chinua Azubike, who remains CEO of InfraCredit today, spent time with GuarantCo early on understanding the business and co-led the company development. NSIA and AFC invested in InfraCredit’s leadership team, the business model and the institutional support from PIDG, its owners, and Cardano Development as GuarantCo’s fund manager.
Follow-on investment opportunity for GuarantCo came in the form of a callable capital facility provided to InfraCredit. The amount utilised under the grant funding was fully repaid to PIDG TA with a seed capital return. Subsequent PIDG investment has also followed in the form of USD 27 million equity investment by InfraCo Africa, another PIDG company.
Example: Acre Impact Capital
A more recent example is Acre Impact Capital. Rather than replicating GuarantCo’s product, this initiative seeks to fill another gap in the market. In this case, creating a fund for smaller and impactful infrastructure debt to be provided without any credit guarantees, for loans made alongside export credit agencies (ECAs).
While this gap in the market is relatively well-known to those involved in the ECA market, PIDG transactions historically have not involved ECAs. Support to Acre Impact Capital therefore provides a potential new avenue for sourcing transactions. GuarantCo has worked with PIDG Technical Assistance to lend alongside The Rockefeller Foundation’s Innovative Finance Programme to cover the setup costs for the new fund and fund manager. This transaction was closed in April 2021.
Structure of returnable grant as seed funding
These examples use grant funding as a loan to a new business as it is being set up. If the new business succeeds, the funds must be returned with a premium. The recipient entity is therefore a company without any existing revenues, licenses, or contracts that generate income, but with a clear business model and development team.
Once there is a business plan, a leadership team in place, and a line of sight to revenue, the development and leadership team can then raise larger amounts of capital for the new entity to operate commercially. It is from this commercial capital raise that the loan or ‘returnable grant’ is typically returned.
1 PIDG Technical Assistance, DevCo, InfraCo Africa, InfraCo Asia, The Emerging Africa Infrastructure Fund (EAIF) and GuarantCo