Powering up capital flows for Asian infrastructure

PIDG Facility Feature: GuarantCo

/Insights InfraCoAsia/GCo_logo_1GuarantCo encourages infrastructure development in low-income countries through the provision of credit guarantees that enable infrastructure projects to raise debt finance. Chris Vermont is the Managing Director, GuarantCo at Frontier Markets Fund Managers. GuarantCo is a facility of the London-based Private Infrastructure Development Group (PIDG).

Each of PIDG’s nine facilities and technical assistance funds are skilled at dealing with complexity. All have mandates focused on facilitating infrastructure investment and development in low-income regions throughout the world.

For GuarantCo, its challenge and purpose is not simply providing bespoke guarantees to support projects and companies in diverse locations. It is to create relationships and transfer skills that will enable banking sectors to grow in sophistication and provide more sustainable streams of finance for the future. Its approach continues to be unique in a changing multilateral development finance sector.

London-based Chris Vermont has been Managing Director, GuarantCo since 2007. Prior to that, he worked with ANZ Banking Group in the UK and India, focusing on emerging markets in the Middle East and Asia. He is no stranger to the financing models traditionally available to countries trying to stimulate development.

Nations eligible for GuarantCo’s assistance include all lower income Development Assistance Committee (DAC) I, II and III countries in Africa, Latin and Central America, the Caribbean and Asia. It is in South and South East Asia that GuarantCo’s work has intersected with InfraCo Asia’s, and both companies have a major focus on projects in the energy sector.

“One of the biggest themes for us at the moment is expansion into energy infrastructure, to help maximise the development taking place in this sphere,” Chris says.

Essel Clean Solu Hydropower Ltd (ECS), which won a tender to develop the 82MW Lower Solu run-of-the-river hydropower project in Nepal, offers a prime example of the difference GuarantCo is making in the energy space.

“The hydro power sector in Nepal has tremendous potential, but for various reasons, nothing significant had come from efforts to attract investments into Nepal in the last few decades. It’s a very challenging finance environment,” Chris says.

And just as InfraCo Asia’s work revolves around a unique and nimble co-investment model and co-developer model, GuarantCo’s model is all about partnerships with the financial institutions of the countries where it works. It provides crucial local currency guarantees to banks and bond investors, and in the process, it sets in motion an extremely positive exchange of ideas, knowledge and trust building.

“When the Nepal Government revised its Hydro electricity strategy around five years ago, it decided to move away from paying for electricity in (US) dollars. It did not want to be locked in to 20 + years of payments linked to USD, so it set tariffs as a mix of both dollars and rupees,” Chris explains.

When Dutch development bank FMO was awarded the mandate to raise financing for the Lower Solu hydropower project, the ensuing challenge was that it could only raise funds offshore and lacked the ability to raise rupees to match the local currency element of the tariff. GuarantCo ended up partially guaranteeing loan repayments to five local Nepali Banks totaling  the equivalent of US$30 million in rupees.

“We managed to successfully integrate this with offshore financing, guaranteeing project loans with 17-year tenors,” Chris says. “Such tenors might not be unusual in developed markets, but in terms of lending in Nepal, it’s almost unheard of,” he explains. “It is very important to enable affordable power, and the costs passed through to Nepalese consumers through servicing a shorter tenor loan would have been much higher.”

Chris says wherever GuarantCo steps in to help, there is a healthy flow of communication with the local lenders, and as much assistance as they require.

“We engage with local banks who may not have experienced this model of financing before. We are always very sensitive to the requests they have. Ultimately we want them to evolve this expertise to be able to apply it for future projects. It’s good for the country”

GuarantCo applies its guarantees differently depending on the needs of the country in which it is operating, taking a truly customised approach. Chris jokes that it is not such a bad result if GuarantCo finds it has ultimately put itself out of business in a country because the banks learn to operate without GuarantCo’s support.

“We have had banks with absolutely no knowledge around certain structures who have needed our guarantee. However, when the next transaction comes along they have told us they’re ready to test the market themselves with a smaller guarantee or no guarantee at all.”

Indeed this is an important legacy of the company’s work.

“Traditional development finance usually involve outsiders entering countries to finance directly, and this has been happening for years,” he says.

“But that hasn’t cracked the problem. What we try and do is empower local markets to solve problems for themselves in the future. We want them to be equipped to tackle these challenges directly, rather than relying on external expertise.”

/Insights InfraCoAsia/GuarantCo_day_with_Napeali_bankers_in_Sing_via_TAFIn 2015, GuarantCo was able to support the 5 Nepali banks thanks to assistance from PIDG’s Technical Assistance Facility (TAF). TAF provided the funds required to bring representatives of the banks working with GuarantCo, to Singapore, where InfraCo Asia is also headquartered. These bankers attended workshops with lawyers and specialist project financiers from a global bank, and were able to expand their financing expertise with the practical case study of the Lower Solu project fresh in their minds.

“We also make an effort to create skills transfer (with TAF support) for ordinary people living in the region where a project has been started. The construction of a hydropower project, for example, involves both skilled and unskilled work but usually local people only get the most unskilled roles. In Nepal, we are investing in a program to enable local people  to develop skills that can open up semi skilled jobs and, once Lower Solu has been constructed, they can find work with other hydro projects.

“We have the luxury and privilege of access to funds that can drive not just investment, but empowerment,” Chris says.

So far collaboration with other PIDG facilities has been specific but important.

“We have worked with InfraCo Asia on its Sri Lanka Kotte Waste to Energy Project. And as InfraCo increases its activities in Myanmar, we are already looking at how we may be able to come in and support transactions. The overlap in geography and sectors mean we’ll be able to offer very strategic support.”

Chris believes that the impact each PIDG entity is able to have in its focal regions is significant.

“The footprint of our combined work is growing, and we’re only just getting started. There are always processes to improve. It’s a challenge, but there’s so much to be gained.”