Investment will continue despite US aid cuts: infrastructure boss

The decision by the US and other Western nations to curtail development aid represents a major setback for Africa. Numerous projects that heavily rely on foreign assistance in critical sectors such as education, healthcare, and infrastructure have been halted in the wake of these funding cuts, rendering thousands jobless and impeding the delivery of much-needed development.

Adding to the strain is the fact that, under the Trump administration, the US is less inclined to support climate initiatives in Africa and around the world. While these events have fuelled widespread pessimism about Africa’s development prospects, Philippe Valahu, CEO of Private Infrastructure Development Group (PIDG), tells African Business that he is “more optimistic than most.” He concedes that there are “concerns about some of the headlines coming out of the US” but stresses that development on the continent “will continue in one shape or another.”

Founded in 2002 as a multi-donor initiative, PIDG focuses on leveraging aid to mobilise private sector investment for critical infrastructure projects in developing nations. Between 2002 and 2023, the group allocated the majority of its financial commitments to energy (34%), followed by digital communications infrastructure (15%) and transportation (14%). During this period, the group successfully supported 233 projects to reach financial close.

“Over the years, we have mobilised over $40bn for projects, of which $26bn was from the private sector,” Valahu says, noting that 70% of projects supported since inception have been in Africa and the balance in Asia.

He argues that the current debate on the implications of aid reduction on Africa is inordinately focused on the short-term risks instead of the untapped long-term opportunities in sectors such as energy.

“I know where the opportunity is: the energy sector, the 600m people in Africa without electricity. For me that’s an opportunity, and it is an opportunity for many developers,” he says.

Betting on renewables

“Demand for renewables – solar, hydro, wind, and other forms – that doesn’t go away. The opportunity continues to be there,” Valahu emphasises, revealing that PIDG took a strategic decision six years ago to focus on renewables, in line with its commitment to climate action.

He says that this decision paved the way for increased investments in the distributed renewable energy (DRE) space, where PIDG has emerged as a consequential developer on the continent. DRE refers to small-scale, localised energy solutions that operate independently of national grids and rely on renewable energy sources like solar, wind or hydro. DRE solutions are particularly effective in reaching remote areas that are poorly served by national electricity transmission and distribution infrastructure.

“Africa still obviously needs the large IPPs (independent power producers) and the large baseload power plants, but typically those are able to attract funding from the African Development Bank, the IFC, and large MDBs (multilateral development banks),” Valahu explains. 

“These institutions have a lot of trouble and difficulty funding the smaller renewable energy projects within the distributed renewable energy space. Very often there is not a lot of risk appetite. When we were set up, it was deliberately to take risks and go to places where others were shying away from,” he says.

“We’re the second or third largest developer of distributed renewable energy solutions in Africa. It’s been quite a journey over the past few years and one that we will continue to be very actively involved in.”

Crowding in private investment

Valahu maintains that what sets PIDG apart is its ability to leverage every dollar of aid that it commits to a project to attract additional investments from the private sector. He attributes this to the group’s multi-faceted efforts to de-risk infrastructure assets in Africa.

“We come in to develop a project and take it to financial close. We stay with it through construction, and then post-construction once the project is operational, we can stay a couple of years. The ultimate aim is to show that a project is de-risked, that commercially it operates efficiently and therefore it is ripe to attract private investment,” he expounds.

He cites a recent example from Malawi, where PIDG company InfraCo Africa agreed to sell its 25% stake in Golomoti JCM Solar Corporation to Old Mutual Infrastructure Investment Trust Fund (Malawi), a subsidiary of Old Mutual. The deal, announced in February and set to be finalised in August, involves a 20MW solar plant with a 5MW Battery Energy Storage System (BESS).

Valahu notes that local currency guarantees are another key tool that PIDG uses to de-risk projects and mobilise private investment from domestic commercial banks. 

“A few years back in Togo, we were looking at a large power project that had a significant local currency tranche. Domestic banks could only do five-year lending as per the regulations in Togo. What we provided is a guarantee to the Togolese banks, allowing them to go ten years and participate in the financing of infrastructure assets in their own country.”

PIDG also offers credit enhancement investments to help project sponsors issue domestic corporate bonds in local currency and tap into domestic institutional capital. This has achieved interesting results in Nigeria, Valahu points out.

“If you look a few years ago the (Nigerian) pension funds and insurance companies were not investing in infrastructure. Working with regulators, working with the Nigerian Sovereign Investments Authority, we helped change that so that they can invest in the infrastructure asset class.”

“You’re mobilising domestic institutional capital. There’s a huge amount of domestic institutional capital sitting in the African continent which is not being used very efficiently.”

Valahu stresses that PIDG’s technical assistance, which totaled $37m last year, is another unique offering that helps de-risk projects. Technical assistance is available throughout the life cycle of an infrastructure asset– not just during the development and construction phases.

Technical assistance is particularly helpful for operational projects looking to improve health and safety standards, Valahu reveals. “For a lot of our projects, post-construction during the operation we may make some technical assistance available to the company to enhance their health and safety skills. It could be training, it could be hiring an individual, it could be hosting a workshop with like minded health and safety specialists in a number of companies that we’ve invested in or developed.”

Financial sustainability key

Looking forward, Valahu says that PIDG will remain focused on delivering development impact in a way that is financially sustainable. Delivering value for money to its owners – the UK, the Netherlands, Switzerland, Australia, Sweden, Germany and (most recently) Canada – is key to securing continued financial support.

“We have a good relationship with our members. We delivered last year the best year we ever had in 23 years. We’ve been able to demonstrate very strong results in infrastructure and impact on people and that gives confidence to our owners to continue funding,” he said.

He says that PIDG will intensify efforts to diversify its funding sources, given recent moves by western nations to slash international aid.  “We’ve been able to bring private capital into the mix and there are discussions with philanthropies. If we fast forward five years, our capital sources will be considerably more diversified than in the past.”

“A number of European countries have indicated either they’re cutting back on aid or that future aid will be linked to national interests,” Valahu says, noting that the broader pullback in western aid to Africa raises pertinent political questions.

“The political question remains – and I’ll leave that to the politicians –  but does it mean that if certain parties move away from the aid space, then you are opening up for countries like China to come in?”