References

5. Although this role is vacant, the head of compliance performs this function. 6. According to an unpublished december 2018 Infrastructure Fund Investment Compliance

Report provided by NIF management.

REFERENCES

NIPC (Nigerian Investment Promotion Commission). 2017. “NSIA Outlines Strategic

Investment Plans for Nigeria Commodity Exchange.” https://www.nipc.gov.ng/2017/01/13 /nsia-outlines-strategic-investment-plans-nigerian-commodity-exchange/. NSIA (Nigeria Sovereign Investment Authority). 2017. “NSIA & GuarantCo Establish the

Infrastructure Credit Enhancement Facility (InfraCredit).” Press release, January 17, 2017. NSIA (Nigeria Sovereign Investment Authority). 2018a. “NEC Approves $650m Seed Funding as FG Establishes Presidential Infrastructure development Fund.” Press release, may 17, 2018. https://nsia.com.ng/~nsia/sites/default/files/press-release/NEC%20Approves%20

Press%20Release.pdf. NSIA (Nigeria Sovereign Investment Authority). 2018b. “NSIA Announces Audited Financial

Results for 2017 Financial Year.” Press release, June 8, 2018. https://nsia.com.ng/~nsia/sites /default/files/press-release/Press%20Release%20-%202017%20Financial%20Statement _Updated_08062018_Final%20version.pdf. NSIA (Nigeria Sovereign Investment Authority). 2019. “Infrastructure Fund Investment Policy

Statement as Approved on April 6, 2019.” NSIA, Abuja. https://nsia.com.ng/~nsia/sites /default/files/downloads/Nigeria%20Infrastructure%20Fund%20Investment%20

Policy%20Statement%20-%20April%2016%202018_0.pdf. NSIA (Nigeria Sovereign Investment Authority) and Old mutual Investment Group. 2016.

“NSIA and Old mutual Investment Group Announce Partnership Agreement for Investments in Real Estate and Agriculture.” Press release, August 12, 2016. https://nsia.com.ng/~nsia /sites/default/files/press-release/Press-Release-NSIA-Announces-Partnership-with -OmIG.pdf. Old mutual. 2016. “Old mutual Partners with Nigeria’s Sovereign Wealth Fund.” Press release,

September 2016. http://ww2.oldmutual.co.za/old-mutual-partners-with-nigeria -s-sovereign-wealth-fund.

APPENDIX A

Thematic Reviews

THEMATIC REVIEW 1. SIFS’ STRATEGIES TO ATTRACT DOMESTIC INSTITUTIONAL CAPITAL TO INFRASTRUCTURE FINANCE: THE EXAMPLE OF INFRACREDIT IN NIGERIA*

This topical review examines an interesting example of how strategic investment funds (SIFs), in partnership with development institutions, can attract domestic institutional capital to infrastructure finance and, at the same time, contribute to a country’s capital market development.

In 2017, the Nigeria Sovereign Investment Authority’s Nigeria Infrastructure Fund (NSIA-NIF) partnered with GuarantCo to launch InfraCredit, an independent, for-profit guarantor of long-term, local currency bonds issued to finance infrastructure projects in Nigeria. NSIA-NIF—described in detail in the NSIANIF case study in appendix A—is a US$650 million infrastructure SIF wholly capitalized by the Nigerian state. GuarantCo is the credit enhancement unit of the Private Infrastructure Development Group (PIDG), an infrastructure development and finance organization funded by several bilateral and multilateral institutions. GuarantCo provides local currency contingent credit solutions, including guarantees to banks and bond investors. It received US$310 million in funding from PIDG backers and, as of the end of 2017, had US$886 million in total outstanding commitments.1 Unlike other providers of credit guarantees, GuarantCo expressly aims to run out of business by enabling developing countries to set up and operate their own local, independent guarantee providers. By doing so, it aims to promote local capital market development.

NSIA and GuarantCo’s initiative responded to a double objective:

1. Expanding the supply of debt for Nigerian infrastructure projects. Banks are the main providers of credit to the Nigerian economy. Loans, however, are generally short-dated and therefore unsuitable to finance infrastructure projects, which require tenors of 10 years or more. The local currency corporate bond market, which in developed economies contributes to filling the gap for long-term infrastructure finance, was in its infancy at the time of InfraCredit’s launch.

* This thematic review was completed in 2020 on the basis of information collected from 2018 to 2019. It reflects the situation at that time.

2. Tapping into a large and growing domestic institutional capital pool and promoting capital market development. At the time of writing, GuarantCo estimated the pool of pension fund capital in Nigeria at US$20 billion. This amount is expected to grow fast, in line with Nigeria’s economic development and also as a result of the introduction of automatic pension fund enrollment schemes. Institutional investors in Nigeria primarily invest in domestic sovereign bonds. They are eager to find additional avenues to deploy their capital—particularly in long-dated, local-currency bonds—but have limited understanding and track records of investing in corporate bonds.

The two partners started analyzing the opportunity in 2014. Conversations were facilitated by GuarantCo’s prior knowledge of the Nigerian market and NSIA’s realization that, alone, it did not have the expertise to start a guarantee company from scratch. GuarantCo had started investigating direct guarantee opportunities in the country in 2009, providing its first local currency guarantee in 2011 for a bond issued by an aluminum producer. In that context, it provided training to Nigerian pension funds on the credit analysis of infrastructure bonds.

In January 2017, NSIA and GuarantCo announced the launch of InfraCredit, capitalizing it with equity and second-loss contingent capital, respectively. InfraCredit is set up as a private limited liability company under Nigerian corporate law. NSIA provided the first US$25 million of equity capital. Although other potential investors (including development finance institutions, DFIs) were initially approached, NSIA was the only one willing to invest in what was then an unproven business model. In December 2018, another US$25 million in equity was provided by the Africa Finance Corporation, a pan-African DFI set up in 2007 to bridge’s Africa’s infrastructure finance gap. GuarantCo provided US$50 million in second-loss contingent capital, bringing the total balance sheet to US$100 million. NSIA and GuarantCo plan to double the balance sheet to US$200 million by sourcing another US$50 million in equity and US$50 million in contingent capital. GuarantCo will act as lead arranger for the additional contingent capital, which it expects to come from international DFIs with high investment grade ratings (NSIA 2017).

In order to secure a AAA credit rating from Nigerian rating agencies, which is essential to its standing as a guarantor, InfraCredit agreed to limit its underwriting commitments to a maximum notional of five times its total capital, or US$1 billion once the capital-raising plan is fully executed.

The backing from a well-known guarantee provider such as GuarantCo, with a high investment grade rating of AA–/A1, was also critical to obtain a AAA rating at the inception of the operations and before InfraCredit’s having underwritten any deals. With the start of underwriting activities, the quality and diversification of InfraCredit’s portfolio, diversification of its sources of capital, and quality of the management team are crucial to maintaining a AAA rating.

InfraCredit is the only provider of local currency guarantees focused on the Nigerian infrastructure sector and has an explicit, for-profit mandate. Although other local currency guarantee providers exist, they focus on different sectors, such as small and medium enterprise lending and mortgages.

InfraCredit prices its guarantees at commercial levels, on the basis of project-specific credit risk assessments. It guarantees long-dated bonds, allowing for financing tenors beyond those of commercial bank loans but with comparable interest rates. It issued its first guarantee in 2017, for a N10 billion

(about US$28 million)2 bond issued by viathan, a power generation company in Lagos state. As of late 2018, it expected its pipeline to increase by another N25 billion (on two deals) that year and targeted additional guarantees of N60 billion in 2019. Although its guarantees are priced commercially, nothing prevents InfraCredit from being involved in deals that may have a concessional component, such as a technical assistance facility or other layers of the capital structure that are concessional (for example, a concessional loan from a development bank in addition to the commercial bond guaranteed by InfraCredit).

As its main business challenge, InfraCredit mentioned sourcing of a pipeline of deals that suit its underwriting criteria. Part of the challenge stems from InfraCredit’s exclusive focus on brownfield infrastructure and unwillingness to take greenfield risk.

InfraCredit operates in full independence from NSIA. This independence was also essential to securing a AAA rating, mitigating the rating agencies’ concerns over potential political interference on underwriting decisions. InfraCredit’s independence manifests itself in several ways.

• NSIA acts as a passive shareholder, and its relationship with InfraCredit is on an arm’s-length basis. NSIA holds two out of six seats on InfraCredit’s board.

Two more seats are allocated to Africa Finance Corporation representatives, one seat to a GuarantCo representative, and one seat to InfraCredit’s chief executive officer. At the time of writing, InfraCredit’s credit committee, responsible for all underwriting decisions, comprised two NSIA representatives, one GuarantCo representative, and one independent member; its composition, however, was expected to change with the entry of new equity investors, diluting NSIA’s representation. • Clear conflict of interest procedures exist. InfraCredit has, in principle, the ability to guarantee deals in which NSIA is involved as an investor (although it had not done so at the time of writing). Should such circumstance arise,

NSIA representatives on InfraCredit’s credit committee would not be allowed to participate in the underwriting decision. • InfraCredit is fully responsible for deal origination and has the staffing and capacity to execute this task. Of InfraCredit’s 13 staff members, 5 are exclusively devoted to deal sourcing. InfraCredit can leverage NSIA’s network to originate deals, but all underwriting decisions are made on an arm’s-length basis. InfraCredit also receives solicitations from banks looking to refinance their exposures to infrastructure projects. • Because InfraCredit is a for-profit entity, its shareholders are focused on value creation and may look to exit their investment in the future. Although still in the early stages, InfraCredit’s management mentioned an initial public offering as a possible future strategic direction.

In addition to contingent capital, GuarantCo provided InfraCredit with technical assistance and capacity-building support, in line with its objective to enable InfraCredit to become an independent provider of guarantees in Nigeria. GuarantCo’s support—costing approximately US$1 million and funded through PIDG’s Technical Assistance Facility—included

• Funding the production of a feasibility study and business plan for InfraCredit, before its launch; • Funding some of InfraCredit’s setup costs; • Appointing GuarantCo’s chief credit officer on InfraCredit’s credit committee;

• Training of and knowledge exchange with InfraCredit’s staff, including sharing GuarantCo’s best underwriting practices and visits to GuarantCo’s offices; and • Sharing best practices with regard to governance, reporting, and environmental, social, and governance (eSG) standards.

In addition, with the objective of promoting local capital market development, GuarantCo and InfraCredit have been actively involved in training Nigerian pension funds on all aspects of investing in infrastructure bonds. Capacity building included not just deal evaluation but also compliance with eSG standards. InfraCredit believes an ongoing investment will be required to continue these market promotion activities and may seek additional technical assistance funding from donors.

GuarantCo believes the InfraCredit model is replicable, with necessary variations in other emerging market and developing countries, and is evaluating opportunities to launch similar initiatives.

THEMATIC REVIEW 2. COOPERATING WITH SIFS: THE PERSPECTIVE OF INFRASTRUCTURE PRIVATE EQUITY FUNDS*

This topical review discusses the value added of cooperating with a SIF, from the perspective of an infrastructure private equity fund that invests directly at the project level. This topic is relevant in light of one of the key objectives of SIFs, namely mobilizing additional private capital. The following discussion is based on feedback from meridiam, a global infrastructure fund manager headquartered in Paris. meridiam has €6.2 billion of assets under management across seven funds, targeting Africa, europe, and North America. Its Africa fund has €205 million in assets under management and invests in infrastructure projects that facilitate access to essential, affordable services in the energy, water, waste, and transport sectors.3

As part of its strategy, meridiam partners with local public investors, including SIFs, in many of the countries where it invests. In Africa, meridiam entered into partnership agreements with SIFs in Gabon (Fonds Gabonais d’Investissements Strategiques), Ghana (Ghana Infrastructure Investment Fund), and Senegal (Fonds Souverain d’Investissements Stratégiques [FONSIS]).4 The relationship with FONSIS started as a joint development agreement on a specific transaction (the solar power project Senergy) but evolved into a broad partnership agreement under which the two parties openly share pipeline opportunities while retaining full discretion over investment decisions. meridiam also partners with public investors in high-income economies, such as the state-controlled financial institution Caisse des Dépôts et Consignations in France, and a public pension fund in the US state of Texas. meridiam believes that cooperating with SIFs can bring several advantages to infrastructure funds, especially in developing countries.

• Sharing project pipeline. especially in countries where they have not invested before, infrastructure funds can benefit from pipeline sharing agreements

* This thematic review was completed in 2020 on the basis of information collected from 2018 to 2019. It reflects the situation at that time.

with SIFs. meridiam had identified Senegal as a priority market for its Africa fund but had no prior experience investing there. Its partnership agreement with FONSIS calls for both parties to share pipeline transparently, potentially opening new investment opportunities; the agreement does not include any obligation to co-invest, leaving flexibility to both parties. • Increasing the probability of success of early-stage development projects. From the perspective of a fund such as meridiam, governments’ infrastructure agendas in developing countries are good at identifying the infrastructure needs of a country. The pathway from agenda to project execution, however, is often lengthy and unpredictable. Because of their access to government decision-makers, SIFs can increase the probability of projects being kickstarted, and shorten the time required to go from concept to execution.

Transaction costs may also decrease to some extent as a result of shorter project timelines—although infrastructure funds will still want to go through thorough project preparation and incur the associated transaction costs (due diligence, legal, and so on). In addition, better prospects of deal execution will act as an incentive for infrastructure funds to get involved. • Building trust in the infrastructure fund. A partnership with a SIF can highlight the infrastructure fund’s long-term commitment to the country and sector, and solidify the private fund’s standing as a serious counterpart (for instance, when it comes to negotiating offtake agreements with utilities). This effect will play out if the SIF itself is perceived as a player trusted and empowered by the government. A positive investment track record in the country and strong management team will further enhance the private infrastructure fund’s credibility. • Facilitating the dialogue with government decision-makers and navigating political change in the long term, when the infrastructure asset is operational.

Political risk is ever present in infrastructure projects in developing countries. Governments, especially newly appointed ones, may want to revisit the commercial terms of an infrastructure concession. Although cooperating with SIFs is no substitute for contractual protection (for example, political risk insurance), meridiam believes it helps to have open communication with the government, especially at times of leadership change. As a long-term investor, sometimes for up to 25 years, meridiam values a stable partner that can help it navigate this political change. A SIF co-investor, for instance, can provide to the government all the evidence needed to show that existing concession terms are fair to both the private investor and infrastructure users. • Participating in project codevelopment. meridiam and similar infrastructure funds typically play the role of lead project developers. A SIF co-investor, even in a minority position, is expected to be actively involved and supportive in all project phases, from due diligence and design to negotiation and financial close. For instance, in energy infrastructure projects a SIF can support negotiations of power offtake agreements with national utilities. A SIF co-investor also has an inherent interest in being actively involved, because the design and financial structure of a project affect the potential returns of the private fund and SIF alike. • Making introductions to local banks and DFIs. SIFs can help infrastructure funds source deal funding from local capital providers, such as domestic commercial banks or national DFIs. Although such sourcing may not be necessary in all deals, greater funding flexibility is usually appreciated by infrastructure funds.

Compared with the preceding advantages, the size of a SIF co-investment in a deal is less crucial, in meridiam’s view. In practice, SIFs in many developing countries have limited financial resources and are able to participate only with small tickets in deals. meridiam, however, still values the cooperation with a SIF, regardless of co-investment ticket size, because of the qualitative factors described above. meridiam believes that, in order to effectively bridge the gap between infrastructure funds and governments, SIFs should be staffed with a balanced mix of international investment professionals and local professionals. The international staff, often coming from the diaspora and from sectors such as investment banking or fund management, can bring global technical expertise and best practices. Domestic staff, especially if from a civil servant background, will be best positioned to foster an open dialogue with government stakeholders.

Infrastructure funds, for their part, can also benefit SIFs by sharing international best practices. In the partnership approach, meridiam emphasized the importance of the infrastructure fund’s proactive sharing of information with SIFs, involvement in decision-making, and support of the learning process.

THEMATIC REVIEW 3. MEASURING DEVELOPMENT IMPACT FROM THE DOUBLE BOTTOM LINE: THE EXAMPLE OF IFC’S ANTICIPATED IMPACT MEASUREMENT AND MONITORING FRAMEWORK*

One of the key distinguishing factors of a SIF is the economic or development component of the double bottom line. Therefore, the measurement of this economic impact is critical to assessing the success of the SIF. most SIFs, however, focus on measuring financial returns rather than measuring the less easily quantifiable socioeconomic impact of their investments.

This thematic review covers how the International Finance Corporation (IFC) measures the development impact of its investments through its Anticipated Impact measurement and monitoring (AImm) framework. The AImm system is a tool for IFC to demonstrate its development impact to shareholders that want more clarity on the development agenda and, internally, to adjust or rebalance the portfolio accordingly. The AImm framework provides a structure to identify and measure a project’s relevant impact components ex ante during the investment decision-making process before the project is submitted for board approval. The AImm system complies with the Operating Principles for Impact management, adopted by nearly 100 public and private asset owners and managers.5

The crux of the framework is an AImm rating that delivers an ex ante score from 10 to 100. This AImm score signals a project’s potential contribution to development and provides a link between ex ante impact claims and the realization of those claims in supervision.

* This thematic review was completed in 2020 on the basis of information collected from 2018 to 2019. It reflects the situation at that time.

The AImm rating achieves multiple purposes:

• It drives project selection and design ex ante, thus deepening IFC’s ability to maximize impact. • It provides an operational framework for setting impact ambitions. • It strengthens IFC’s capacity to deliver the appropriate mix of projects that generate impact alongside adequate financial returns. • It gives the World Bank Group board more visibility on the development intentions of IFC projects.

The AImm rating process is managed by IFC’s Sector economics and Development Impact department, which has over 50 results measurement specialists, who work with IFC investment teams. The process is as follows:

1. IFC investment teams identify new potential projects and engage with an

AImm team assigned to each project during the concept stage to form a development impact thesis for IFC’s intervention. 2. The AImm team advises the deal team on the development potential of a project, including how impact potential could be maximized with changes in project design. 3. During the appraisal stage, the investment team works with the potential investee on the terms of the investment and targets to be achieved upon exit, and collects data for further analysis. 4. The investment team then provides the AImm team with baseline data from the prospective investee or borrower for each of the AImm indicators that will be tracked, as well as target metrics established for the prospective investee to meet.6 5. The AImm team establishes an AImm score by weighing the data from the potential project against benchmarks established from project-, sector-, and country-specific data sets (see box A.1 on the composition of the score).7 6. The AImm team submits its initial score to a Sector economics and

Development Impact industry manager for validation, after which a final score is assigned to the potential project. Projects proposing “strong” market potential are validated instead by an AImm Panel comprising senior-level

IFC staff and expert consultants. 7. The AImm score (and other documentation) is presented at an Investment review in which IFC senior management judges each potential project holistically (that is, not just development impact) and determines whether to send it to IFC’s board for approval. 8. If the project clears that stage, then it is submitted to the IFC board for final approval and subsequent investment/disbursal.

A “low” or “satisfactory” (as opposed to “good” or “excellent”) AImm score is not always a bad result, because the IFC board must take a portfolio approach to balance its development mission with its requirement to maintain financial sustainability. AImm scores are audited every year by an external auditor, and an aggregate summary of impact for all projects is given in IFC’s annual report.