Infrastructure and Development

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE    To be published as HC 607-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

International Development Committee

Infrastructure  and DEVELOPMENT

Wednesday 27 April 2011

PETER BIRD and ANDREW REICHER

Evidence heard in  Public Questions  46 - 82

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the  International Development Committee

on  Wednesday 27 April 2011

Members present:

 Mr Malcolm Bruce (Chair)

Hugh Bayley

Mr Sam Gyimah

Richard Harrington

 Jeremy Lefroy

Mr Michael McCann

Alison McGovern

Chris White

 ________________

 Examination of Witnesses

Witnesses:  Peter Bird, Co-director, InfraCo, and Andrew Reicher, Head, Programme Management Unit, Private Infrastructure Development Group, gave evidence.

Q46 Chair : Welcome and good morning. Thank you very much for coming in. Mr Bird, I appreciate that you are a late replacement for Professor Palmer, and we are very sorry to hear that he is ill with, I understand, pneumonia.

Peter Bird: I understand that he has recovered, and he is being discharged from hospital.

Chair : That is good news. What I was going to say was we are obviously sorry that he is unable to be here, but I hope you will give him our good wishes for his speedy recovery, and it is good to hear that that recovery is taking place. Having said that, I wonder if you could introduce yourselves for the record.

Andrew Reicher: Good morning. I am Andrew Reicher. I am the Programme Manager of the Private Infrastructure Development Group and have been for the last two years. Before that, I spent almost 10 years with CDC and then Actis. I was involved in running their infrastructure business as well as chairing their investment committees. I have a prior career in private equity in emerging markets and investment banking.

Peter Bird: My name is Peter Bird. I am here as a non-executive director of InfraCo, which is one of the PIDG facilities. In my full-time job, I am a Managing Director of the Rothschild Global Financial Advisory business.

Q47 Chair : Because of the Bank Holiday, it is Wednesday, rather than Tuesday, when we normally meet. We have Prime Minister’s Questions at noon, so we are going to try and finish just a few minutes before that. Please bear that in mind when you are engaged in providing answers, but do say what you feel we need to hear.

I think the issue that is concerning us is that the needs for infrastructure investment, especially in sub-Saharan Africa, seem to be huge, yet the delivery seems to be short. The suggestion that has been made by you and others is that it is an emergency, yet it is not perceived as such. Why do you think it is as bad as it is? Is it improving? What is it about Africa that makes it so difficult, when apparently it is not such a problem in Asia?

Andrew Reicher: On whether it is really as bad as we are making out, of the 800 million or so people who live in sub-Saharan Africa outside of South Africa, the World Bank says that three quarters or more do not have either electricity or power in their homes. That is a human disaster. It has dire consequences for quality of life and for health. If you are sending women and children, mainly girls, out for hours at a time to find firewood and water, they cannot be educated; if they are adults, they cannot work and it depresses incomes.

There is another dimension, which is that the World Bank says that the poor infrastructure results in African industry being uncompetitive. It estimates that small and medium-sized enterprises are up to 40% less productive than their competitors in Asia and Latin America. They simply cannot compete, and as a result the countries are stuck and unable to grow their way out of the problems. I think both from a human and economic dimension, this is an enormous ongoing catastrophe.

It is interesting that, just before the financial crisis, George W. Bush went on a tour of Africa accompanied by his Treasury Secretary, Henry Paulson. They were given these numbers and initially just could not believe them. They could not get their heads around them, and came back and said that something must be done. They started to put the weight of the American Government behind that in 2008. I went to a meeting at the US Treasury on the weekend that Lehman Brothers went bankrupt and obviously the eye went off the ball somewhat. Clearly health and education are more immediately compelling when you talk about maternal and infant mortality and lack of education. They are important. I do believe that infrastructure is equally vital. For the long term, it is going to be impossible for the poorest countries, particularly in sub-Saharan Africa, to grow their way out of the problems they have got and to build wealth without solving the infrastructure problem that is holding them back.

Q48 Chair: Before Mr Bird answers, I have a slightly cheeky question on the back of what you have just said. In the briefing material and the submissions we have, it says that infrastructure is pro-poor; it can, as you say, make the economies more competitive, and it would therefore generate the economic benefits that would fund public services, etc. This is a much better investment, you would have thought, than sub-prime mortgages in the southern states of America, and is probably more likely to deliver a return in the present climate. Having been badly burned, are financial investors more or less willing, and either way what is the role of the public sector in ensuring that the private sector steps up to the plate?

Peter Bird: The first point to make is obviously that one clearly does want to encourage the private sector to invest in Africa. The problem is that there are formidable burdens for a private-sector investment in an infrastructure sector such as the power sector. There are plenty of private power development companies in the world who will develop projects in Africa, Asia and Europe, but when they compare the opportunities for developing in Africa as opposed to in Europe, there are formidable burdens. Some of those burdens are at the front end, when it comes to negotiating with Governments, getting licences, buying land and so on. There are lots of barriers that they face due to the inefficient bureaucracies and ways of doing business. Those barriers are such that people will just not invest.

Chair: May I bring in Chris White?

Q49 Chris White: I do not want to interrupt your flow. My initial question was about why the private sector is so reluctant to invest, which I think you are well on the way to answering. The second part is: should DFID be playing a greater part in helping private-sector involvement in infrastructure projects, and how could it do that?

Peter Bird: Going to that point directly, and to a point that the Chairman also raised-in what way can the public sector and DFID help to address this?-one of the ways in which it is addressed is through the company of which I am the Director, InfraCo. The InfraCo model is that InfraCo is funded by the public sector; it is funded by DFID and other aid agencies in Europe. InfraCo effectively subsidises the early stage of infrastructure development. InfraCo goes out on its own and develops projects. It uses the public money to fund negotiations with Government, legal advice, and technical advice. In that way it helps to develop a project. The idea is that once that early work has been done, you then have a project that is attractive to the private sector, so at that stage you can then sell the project on-the private sector can then invest.

What happens is that InfraCo uses a small slab of the public sector money at the beginning, creates a viable project and then leverages that investment by bringing the private sector in to follow it. As to the sort of numbers that InfraCo is delivering, for every £1 of aid funding, we can bring in £20 of private sector capital. In that way, you get a very high bang for your buck, in terms of infrastructure developed in the private sector using just a small amount of public money. That is one of the ways that InfraCo and the other PIDG facilities help to deploy private sector funds using aid budgets.

Q50 Chris White: To go back to the Chairman’s point, what you say sounds a very attractive proposition. A 20-to-one return is not bad in anybody’s book. Over time-say in the next five years-how do you see this ramping up? Secondly, can you provide any examples of specific good practice?

Peter Bird: In terms of an example, I think one project that InfraCo has recently taken to financial close is a wind project in Cape Verde; the project’s name is Cabeolica. Cape Verde had been trying to develop wind power for some time. It had tried to do it in the public sector and it failed. InfraCo then sent in its specialist private sector developers. They developed a project and then they successfully sold that project on to the private sector. The benefit is that it is also delivering climate change goals as well, which is an additional benefit. That is essentially an example of a project.

As to the ways in which this can go forward, I think InfraCo so far has had a small budget. Obviously, if more money can be put into projects and companies like this, and more programmes along similar lines, instead of having a relatively small but positive impact, we can have a much bigger impact. DFID has obviously been a great supporter, and we have also had support from the other aid agencies in Europe, but obviously the more finance that can come in, the better.

Q51 Richard Harrington: Thank you for that. For us it clarifies not just the issue of private sector involvement in infrastructure, but also generally DFID’s policy on getting the private sector involved in nearly all of its activities; India is a very good example. I would just like to ask you-I am not sure which of your two hats I would like you to wear when answering this; possibly it is the Rothschild one-in summary, how do you perceive the private sector’s involvement? Is it either effectively providing, in a capital sense, what we would call the most risky equity slug in a project, in which case would that get the highest returns? Or secondly, is it as you have just described, more of effectively providing an incubator for a project, where the project is wholly started in the way that you have spoken by this organisation or others, and then it becomes a commercial thing for the private sector? Or can those two run together?

Peter Bird: I think ideally you want all three elements of that. You want the private sector at the beginning doing the development, because that gives the commercial urge and it acts as an incubator; it gets things done. The great thing about the private sector is it makes things happen in a way that the public sector organisations in African countries typically cannot. That is the first element. The second element is the equity itself. The third slug is the debt. Developing projects in the private sector, you want to get not only private sector equity but also private sector debt. You are deploying it at all three levels.

Q52 Mr Gyimah: This is probably a slightly basic question, but you said a number of times that InfraCo develops a project and then sells it on to the private sector. Could you just expand on that a bit, and in addition to that, do you think that is a precondition for getting private sector involvement?

Peter Bird: Let’s think about this project I mentioned in Cape Verde. When I talk about development, what I actually mean is at the beginning you have nothing. What the private sector developer does is he goes out, he identifies that there is a need for power, he will identify sites where there is a high wind speed, and he will pay engineers to do the testing and measure the wind over a period of time. He then establishes that there is sufficient wind to develop a wind-fired power plant. He will then negotiate with the host utility for a power sales agreement, which needs to be a long-term agreement over 20 to 25 years in order to provide the steady source of finance that will repay the debt to build the project. He will identify the site, make sure it is technically viable, he will pay the engineers to assess its viability, and he will pay lawyers to help him negotiate a power purchase agreement with the host utility company.

He will then go out to market and he will then run a competitive tender among wind-turbine manufacturers to actually build the power plant. He will run that tender in a private sector way, eliminating the opportunities for the corruption that typically plagues infrastructure projects in African countries. He will run that in a commercial way. He will then negotiate agreements with the manufacturer. He will then negotiate an operating agreement, so someone will operate the power plant.

At that stage, he has then got a project that we call bankable. In other words, it is going to generate sufficient returns, so lenders would be prepared to lend on a long-term basis because they know that they will get sufficient income to repay the debt. He will make sure the risk allocation is such that it is clear who is going to bear the risk of there not being enough wind or the risk of the plant failing. He will negotiate an operating contract with an operator who will make sure that the plant does not fail. He will negotiate a turnkey contract, so if there is a design defect, that is the responsibility of the manufacturer. In that way, as much of the risk is laid off to third parties who are best able to manage that risk. He will then take the project to market. He will then want to raise something like 50% to 80% of the cost of the project, to be financed by debt, and he will then put that debt package together. He will then take the equity out and sell the equity to a private sector investor. When that is done, the whole project can go forward. That is the value that the developer adds.

Q53 Mr Gyimah: Is that what InfraCo does?

Peter Bird: That is what InfraCo and any other PIDG facility does.

Andrew Reicher: I would like to come back, if I may, on your question, because as Peter has explained so eloquently, a lot of people think project development is just about the engineering, the building, the physical things. It has got so many dimensions. The example I sometimes use is that it is like being a film producer, because you have got to integrate all the different pieces: the physical engineering, the commercial contracts, the relations with Government, the environmental and social impact assessment. What it needs is expertise. The expertise comes from people who have spent many years doing it, and they cost money. Until they have done their work, you do not know whether you have got a project that is viable. It is only when you know you have got a project that is viable, when all the different pieces have been sorted out, that the investors will typically come in, in Africa.

If you go back to the question of what it takes to get the private sector involved, we need to say that they are there to make money, and it is a perception of whether they can make money. Very often the big companies will say, when faced with the possibility of a huge project in India or Brazil, "We would rather do that than a smaller project in Africa with, as we see it, much more uncertain prospects." We are not going to pay the salaries of the experts that Peter has talked about to get involved at the earlier stage, to bring it to the point where we will know whether it works or not. What InfraCo does is pick up a project at the point at which it looks as if it makes sense, but before the private sector, whether it is equity or debt, is willing to invest. We spend money; we spend DFID’s money on all of these processes: engineering, commerce, agreements with Government and finance.

Mr Gyimah: That answers my question. That is the nature of DFID’s role in the process.

Andrew Reicher: Then when it is ready-when it is at a point where we say it has been "de-risked" but where it looks like a runner-then the job and mandate of InfraCo is to bring the private sector in to recover the money, or as much as they can, and then to recycle it into developing other projects. We talk about the private sector as if it is some magical entity. Very often I think the problem we also talk about is the lack of capacity in the private sector. One of the big problems in Africa is lack of capacity in the African private sector. If you look at other developing regions, the private sector that has developed projects in Asia is Asian. It is Indian companies in India, it is Chinese entrepreneurs in China, and it is Brazilians in Brazil. In Africa it is so often outsiders. One of the big problems in Africa is how we can build capacity locally.

Q54 Jeremy Lefroy: Given that DFID money from the taxpayers is bringing it to an investable proposition, does the taxpayer get some of that back, or do you consider that as purely a grant?

Peter Bird: In the InfraCo model, what we look to do is to sell the project at a profit. In terms of the typical numbers, it might cost $1 million to $3 million to take a project from conception to the stage where you are ready to sell it into the private sector. Typically, what we hope to do is spend $2 million or $3 million and then sell it for $5 million to $10 million. That $5 million to $10 million can then be recycled into doing more projects. Obviously, not all projects are going to be successful. Just like all private sector developers, sometimes you will spend $2 million and eventually you will get nowhere because the barriers to developing the project are so big that the Government just will not agree to a power sales agreement, or it just proves to be technically unfeasible, or maybe you just discover there is not enough wind to make the project viable. That money will then obviously be lost. Typically the idea is to break even, and any profits you make are ploughed back into the development process.

Q55 Hugh Bayley: I am not sure whether you are breaking even or making 100% profit. If we look at the project as a whole over its lifetime, would the private sector investment attract the same rate of return as the public sector investment? Would both public and private sector expect broadly similar rates of return on their investment?

Peter Bird: When you talk about rates of return, it is quite difficult to compare the private with the public sector because the public sector will normally look at the return on a project basis, i.e. the return on the whole project, whereas the private sector will typically focus on the return on equity. For a typical infrastructure project in Africa, the private sector would be looking for a rate of return on its equity of around 20%, but that equity will be thin-slice. There will also be private sector debt that will be at a much lower rate. If you look at the average overall return on the project, that will typically be something in the region of 5% to 10%. That will typically still be higher than the public sector, but that reflects the fact that a lot of these risks are borne in the private sector rather than the public sector, and therefore the private sector needs to be paid to take those risks. Typically, the returns in the private sector will be higher than on a public sector project.

Q56 Hugh Bayley: That suggests that if this PIDG model is to do more, it will require continued levels of public sector finance from DFID and other development agencies.

Peter Bird: I think while Africa continues to be poor, that will be the case. Also, there is often need for other support, because the people, in a lot of cases, are not able to pay the costs of the infrastructure, and therefore you will often get other support, such as output-based aid, that actually makes the output of the project affordable to poor people. Sometimes the project will not be viable unless there is also additional volumes of support, either from within the host country or from outside.

Q57 Hugh Bayley: Is there the capacity to scale up PIDG if DFID, the Swiss, the Swedes, the World Bank and the others were to increase their funding for the PIDG group, if I can call it that? Is there the capacity to double the volume of investment that is funded in this way?

Peter Bird: Yes, there is, because the resources are basically people in the private sector who are experts in their field. There are lots of private sector companies out there doing the same thing. If you were to double the size of PIDG and all the facilities, you would just bring in people from other private sector organisations, and there is a vast pool of expertise out there that is currently being deployed in Europe, Asia and North America. A lot of that output could be diverted into Africa.

Q58 Hugh Bayley: How do you avoid the danger of being diverted towards higher-income countries, where there is greater likelihood of return and where you can therefore attract private sector partners more easily?

Andrew Reicher: That is a great question, because it essentially goes to the heart of where other interventions might have gone wrong. We have been talking so far about just one market failure, which is the lack of capacity in the private sector. PIDG has a number of different businesses in addition to InfraCo that attempt to fight against other forms of market failure, which we can visit if you would like. The history of other organisations is that they tend to gravitate towards the middle-income countries and the larger deals, because they become institutions that serve the interests of their own management.

PIDG does not have a management; it is a virtual organisation. It is a very bizarre organisation in some ways, because we have devised a model that looks complicated: we use private sector delivery, we use public money, and then in the middle between the two we have boards of directors consisting of people like Peter. The boards of directors’ job is to do precisely what you have said, which is to say to the private sector managers, "You can make money, but you can only do it in Cape Verde; you cannot go to Brazil." They are there to make sure that these are good business decisions that are made, which the donor agencies find difficult to do-they are not business people. They are also there to make sure that the donors’ pubic policy priorities for aid continue to be served. I think that is the essence of the power of the PIDG model. The big question is: if you double the size of it, can you retain that informality and that control? In my view, the thing you have got to try and do is stop it becoming an institution that serves its own interests but ensure that it remains firmly under the control of the donor agencies.

Q59 Richard Harrington: You just asked my first question, which was: how do we stop cherry-picking? As you know, in the internal argument here, for example, one of the political criticisms of what the Government are trying to do with the NHS is that private companies will cherry-pick. I think you answered that very well. The second question is this. Given that there is a huge anti-aid community out there that we have to deal with politically all the time in the media and with general constituents, one can just see the headlines: "Private companies making all this money off the back of public money." I think that is perhaps more of a statement than a question, but we are very conscious of that because we have to deal with it all the time. I had an hour’s blasting on an LBC phone-in on Saturday; there was not one person who phoned up and said, "I think your defence of our international aid programme is a good thing."

Chair : Isn’t it time you stopped going on there?

Richard Harrington: Yes, exactly. I do feel that this is something that the private sector has to consider. It is not just like an investment that people do well in.

Andrew Reicher: Yes. You said it was more of a statement than a question; one could throw it back and say it is essentially what lies behind the debate about PFIs and public-private partnerships here.

Richard Harrington: Very much so.

Andrew Reicher: It comes back to the fact that if private investors are going to bring their money, they are doing it because they want to make money on their money. Obviously, it is important to ensure that they do not make too much money. That is where the system, the method of an organisation like PIDG comes in-it sets the investment policies and makes the choice of directors, so that they share the philosophy. It is all very well having the right system, but if you do not have the right people operating it, it will go off the rails. Then you have to make your choice: if you want the private sector, you have got to let them make money, or they will go somewhere else.

Q60 Hugh Bayley: Generally speaking, PIDG got a very good rating in DFID’s Multilateral Aid Review. There were some criticisms about the lack of gender awareness, if I remember rightly, the lack of openness in terms of reporting on your investments, and perhaps most importantly, a lack of investment in fragile states, which takes the question, "How do you keep the focus on Africa rather than Brazil?" to another level. What will PIDG do to address these? Do you accept these shortcomings? Is this valid criticism from DFID, and what will you do to address these criticisms?

Andrew Reicher: The first point is that we do accept the shortcomings. We recognise we are not perfect. Clearly, we are an experiment. The organisation has been going for eight years, which in infrastructure terms is a very short period of time. We have written a detailed response to the review, which is now on the DFID website and our own website. We spent a couple of hours yesterday with DFID running through the concrete actions. There were eight specific criticisms of us, and we have got action plans for all eight. We particularly recognise the transparency point. We are moving in that direction. I can go into the detail if you would like me to. We very much intend to try and stay responsive to what our donor agencies are looking for from us, so we take the criticisms very seriously indeed.

Q61 Mr Gyimah: One of the points you made earlier on is that PIDG tries to correct market failure, picking up on the cherry-picking point. One of the criticisms, I understand, was the lack of presence in fragile states. Could you explain to us why? Is that criticism valid, for a start, and if it is, why?

Andrew Reicher: To some extent it is valid. We could cite examples where our various different facilities are working in Sierra Leone, in Liberia, in Guinea-Bissau. Kenya is on the list of some people’s fragile states. It is a constant balance, because for the very fragile states-let’s take the example of Somalia or Afghanistan-I think it is a forlorn hope to try and bring large-scale international private sector investment in. We have to make a judgment as to what is feasible. I believe that some places are too poor, too weak or just too dangerous for private sector contractors to be willing to go there.

One of the things we are going to do is conduct a significant strategy review of the organisation over the next year or so, and all the comments in the Multilateral Aid Review will go into the terms of reference. We will ask the people who are looking at us how we could do better. We will be writing as a secretariat to the boards of directors of all of our companies asking them to integrate the comment on fragile states into their business plans, and the same for women and girls: we are commissioning an exercise to go back and look at the data on our transactions, so we have some baseline information about our impact on women and girls. I think we will need to come back later and tell you what we have done to show that we are making a difference in respect of those comments.

Peter Bird: You mentioned cherry-picking. I think we do very expressly recognise that is a potential issue. Within InfraCo, as part of our management agreement, we mandate that the development team has to be working on a number of what we call high development-value projects, which are ones that are specifically not cherries but are crab apples. They are difficult projects and we insist that they have to develop a fixed number of those crab apples.

Q62 Jeremy Lefroy: We are moving on to talk about where PIDG goes from here. Professor Palmer has suggested the creation of an agricultural PIDG. We wondered whether you agreed with that and how it might work.

Andrew Reicher: This is the point about agriculture. Keith has also talked very eloquently about corridors. The example is the Beira Corridor in Mozambique, where there is wonderful potential for both industrial agriculture and for the development of out-growers to supply the processing hubs that are built within the commercial farms. It will not work without transport or power. There is a chicken and egg problem. If you build the infrastructure, then the incomes of the out-growers and of the workers within the industrial hubs will grow, but they cannot afford to pay the full cost at the start. You need a pot of money that is willing to wait until incomes rise and the users can afford to pay. It will have a dramatic effect on increasing incomes.

Keith is working on the creation of something called AgDevCo, which is rather like an agricultural InfraCo, but it also integrates his concept of patient capital, which is a willingness to invest and wait for a return in a way that the private sector would not. The intention is eventually to recover the money when the incomes of the users of the infrastructure are high enough to be able to pay.

Q63 Jeremy Lefroy: If I may just pick up on that a little bit, does that mean that the model that Mr Bird described earlier, where you would develop a concept that was then sellable to the private sector, would be slightly different? You would be developing a concept that would not necessarily have a private sector market, but you would have to find some other sort of secondary form of financing to take it until the users of that infrastructure could afford to pay for it.

Andrew Reicher: That is correct. In fact, part of our model is that, since what we are trying to do is experimental, we work out what we are going to do, we do it, and then we commission independent consultants to come and have a look and see how well we did. We have just had a review done of InfraCo that has said that InfraCo is doing pretty well, except that its financial targets have been difficult to achieve, because when it has done the high development-value projects that Peter has talked about, and it has got them to the starting block, the investors have not exactly flocked along to buy it. While we are selling some of the more commercial projects-the cherries, if you like-Peter’s crab apples are proving to be a more difficult proposition, and we are having to go back and put some patient capital in place for InfraCo itself.

Q64 Jeremy Lefroy: Would this perhaps be an instance-I do not want to impinge on my colleague coming next-where, for instance, an organisation like CDC could pick up some of the second-stage financing if it were to look at more patient capital than perhaps it does at the moment?

Andrew Reicher: Very definitely, yes, providing the owners of CDC decide that is what they want to do with it.

Q65 Jeremy Lefroy: Cleary, rural roads are a major problem, and it is that last 10 miles, or 10 kilometres, that people have spoken about that is often the most important. My own experience of seeing some rural road schemes is that they rapidly deteriorate because the provisions for maintenance and training to maintain them are not put in these projects. Have you got any examples where perhaps you have done these schemes before and you have been able to say, "We have built in post-construction maintenance and training to those programmes"?

Andrew Reicher: Roads on their own are extremely difficult to do, and I would like to pass the question to Peter to talk to you about a project in Uganda called Kalangala, where roads are combined with power, water and transport services, so that there is the income within the system to maintain the roads.

Peter Bird: That is exactly right. I think Andrew has described the Kalangala project, which is, just to expand on it, an island within Lake Victoria in Uganda, where we are putting in an infrastructure project that will be run by the private sector. It will provide a ferry, solar power, and roads within the island. We are setting up an infrastructure services company that will buy and own it. As part of it, they will obviously be charging, and those charges will be used in order to maintain the infrastructure. There are two elements to this. One is that because it is being developed in the private sector, the cost of operations has been considered at the same time as the capital, and because it is being financed by external money, we have got to make sure that it generates income. The income generated has to both pay the lenders and meet operational costs. The mere fact of it being developed as a private sector project means that, in order to be viable as a private sector project, you have to be able to demonstrate that you can maintain a project for the life of the loans. Therefore that private sector discipline is expressly addressing the concern that you raise.

Q66 Mr Gyimah: Picking up on the point about the CDC, I think currently the CDC invests about 8% in infrastructure. Andrew, I am aware that you were head of the infrastructure business as well. Do you think CDC should be investing more in infrastructure? If so, what area should be targeted?

Andrew Reicher: Personally, I do. When I joined CDC in 1999, I think approximately 30% of its investments were in infrastructure. Infrastructure has rather gone out of fashion for a period within the aid effort. We are infrastructure junkies here, for the reasons we explained. We think it is critically important. There is no doubt the CDC could use its influence and set itself a target of investing more in infrastructure, in funds like the investment facility for sub-Saharan Africa that InfraCo is putting up. To be absolutely fair to CDC, it is a cornerstone investor in that fund and it is not going to happen, or would not have happened, without its support for it. I want to pay tribute to it for its support, but I do think it could do more.

Q67 Mr Gyimah: Just touching on your point about CDC being a cornerstone of investment, which fund was it?

Andrew Reicher: This is what we call the InfraCo sub-Saharan investment facility. It does not exist yet, but CDC has committed to supporting it as and when it does. That is absolutely crucial in getting it off the ground.

Peter Bird: Just to elaborate, what InfraCo has identified is that obviously InfraCo focuses on addressing the lack of private sector developers, but also we need to say whether there is enough capital to invest in the projects. We have set up a separate fund, completely separate from InfraCo, which basically is designed to be invested in by private sector fund managers, and we then invest that money in the projects that InfraCo develops, and become a co-owner. This is a fund that InfraCo is setting up, and we are currently taking the fund out to the market, and CDC is a cornerstone investor in the fund.

Q68 Mr Gyimah: Should CDC be investing directly or indirectly? Which of those two approaches do you see as the ideal model, as far as investing in infrastructure is concerned?

Andrew Reicher: I think that is a much bigger question, because CDC has chosen this fund-of-funds model, so that it does not invest directly. I know the Committee has spent a lot of time on this in a previous inquiry. I think what CDC can do is to be influential in setting up pools of money that are providing investment that otherwise would not happen. The question of whether CDC should set up a direct investment capability as well is rather going back to the way it was before the restructuring. If you would not mind, I can give a personal view on that, but I am not sure that is particularly helpful.

Q69 Mr Gyimah: What about smaller players? We have talked about CDC, which is a large player. What role do you see for smaller players, who may not cherry-pick as much, but may target a specific region or areas of infrastructure? What role do you see for those sorts of smaller players in the market?

Andrew Reicher: As investors or as operators?

Mr Gyimah: As investors.

Andrew Reicher: There are infrastructure funds in Africa. There is the African Finance Corporation based in Nigeria, which is one of the investors in the Cape Verde project. There is the Pan-African Infrastructure Development Fund based in South Africa. There is Macquarie, which has a fund called African Infrastructure Investment Managers. There are pools of money that are coming.

I think the big issue is that the problem is so multi-dimensional; there are lots and lots of aspects of it that we have not talked about this morning. What the interaction of all the problems, in my view, brings about is one of the questions that that Chairman posed right at the beginning that we did not answer, which is: how quickly is the situation improving? it is. I think it would be much worse without the sort of things that CDC, PIDG, DFID and other donors have been doing. The problem is so vast that we are not doing anything like enough, anywhere near quickly enough. Infrastructure is taking far too long to deliver. On the Cape Verde project that Peter talked about, even InfraCo took four years to do the development work to get it to the point where it could start being built, and it will take another two years to build. This point about the crisis and the urgency-my view is it is not a question of any one factor. New thinking is required because business as usual is failing. The scale of the problem is utterly enormous.

Q70 Mr Gyimah: Do you think we should have closer links between PIDG and CDC, and what benefits would this bring, if any?

Andrew Reicher: CDC, as it is at the moment, is an equity investor. PIDG covers not just equity but, as we have discussed, building private sector capacity. We have not talked about any of the provision of debt finance facilities that the PIDG has-the Emerging Africa Infrastructure Fund, GuarantCo, the debt pool of the infrastructure crisis facility. I think certainly a closer relationship with CDC would be very welcome. That is not to say that we do not have quite good relationships with CDC. We know each other; it is a relatively small community. It has excellent people, very professional people. If DFID decides to direct CDC in the new investment policy to do more in infrastructure, we would obviously welcome that very much indeed, and we would work very hard to find opportunities for it to deploy its equity in whatever fashion it decided.

Q71 Chair : In the evidence submitted to us, there has been a lot of argument about the scale-the need for projects to be significant and substantial in size-yet the needs of the consumers are small. Their abilities to finance anything are perfectly small. Are these things mutually exclusive? I do not want to go back to Schumacher, but does everything have to be big to be attractive to the private sector? Is it not possible for a public-private partnership to deliver things on a smaller scale? Take energy, for example: a smaller scale, more local. I think there is a reference-I cannot remember whose evidence it was in-to the minimum being 200 MW. A lot of countries only require 60 MW in the short run. That seems to be rather old-fashioned thinking. We are talking about more micro-generation. Is there not a need to think a bit differently?

Peter Bird: I think we would completely agree with that, and I think we recognise that we should be developing small projects as well as big projects. Again, as part of what I said about the problem of cherry-picking, obviously it is attractive to develop large power plants, but again it is part of what I said about focusing on high development-value projects; a lot of the high development-value projects we focus on are specifically small projects. The problem is that development resources are more or less constant, regardless of whether it is a big project or a small project. Therefore it is relatively more expensive to develop a small project, because the fixed cost is the same and the benefits are small in size. It is because of that that we have to make sure that the management team does focus on the smaller projects. As part of going against cherry-picking, the issue is not only going for crab apples as well as cherries, but going for small crab apples as well as big crab apples. We recognise that we need to support small projects, particularly where the size alone represents a problem. To give just one example, one of the projects that we are currently in an early stage of developing is a mini-hydro project in Guinea. That is a 10 MW project.

Andrew Reicher: I think the problem is so great, and when you say new thinking is required, I agree completely. We are bringing models to Africa that are made in North America and in Europe. They are large-scale. If we go back to the 600 million people in Africa without energy or water, the problem is that conventional solutions can at best reach only about half of them. The other half are either too poor or too remote for conventional solutions to reach them-conventional large-scale power plants, and even 10 MW power plants. There are pilot schemes being run to provide solar systems on a small scale, and tiny mini-grids based on bio-digesters at the village level producing a few hundred kilowatts. Those are great; those are renewable technologies. If they could be scaled up, not just 10 or 20 times over, but thousands and thousands of times over, then we would have systems that might be able to do something serious about the access problems for the poor and the remote, and the un-served communities. That does require completely new thinking, completely different directions.

I would like to give another analogy. Personally, I feel terribly frustrated about the fact that we are the servants of the financial system. When Peter talks about financial close to be able to get a project into construction, that is because the banks want every single risk to be covered off before they are prepared to put forward the money to allow construction to start. We all spend time trying to get Government approvals and decisions out of Governments that really do not have the capacity to do that. When I was at CDC, we worked on two very similar electricity projects: one in Peru and one in Tanzania. The one in Peru took 30 months from start to producing 200 MW of electricity. The one in Tanzania took 13 years, and they were very similar technically. Projects need to be sped up. The project finance system is an obstacle to doing that.

I think that Keith Palmer’s idea of patient capital, to be able to cut through the need to have every t crossed and every i dotted before you can start building the project, is a great idea to explore. That leads on to the role of PIDG as a kind of laboratory where we can bring new ideas and experiment with creating new interventions. Every single PIDG intervention that has been created since 2002 has been an experiment. We now have five businesses up and running and delivering real projects on the ground that were not there before. We are only scratching the surface. What we do is tiny in relation to the need, but we aim to be a signpost. It is the point Mr Bayley made about whether we can scale it up and preserve this sense of experimentation and taking risk when we get bigger. That is really the challenge that we face as an organisation.

Q72 Chair : I cannot remember whether you put that in your evidence. You said you got the five businesses up and running.

Andrew Reicher: We have five businesses and two technical assistance facilities within PIDG.

Chair : Have you given us the details on that?

Andrew Reicher: Yes.

Chair : That is obviously good practical information.

Q73 Mr Gyimah: In addition to PIDG, which we have discussed in some detail today, DFID has a number of other facilities to boost private sector investment. I think the Global Partnership on Output-Based Aid is one of those. Which of these do you think deserves greater DFID support, in your view, and why?

Andrew Reicher: We work very closely with both the Public-Private Infrastructure Advisory Facility and the Global Partnership on Output-Based Aid. They are affiliated programmes of PIDG, and they are at different points on the spectrum of what is required to chop off the various heads of this hydra that we are fighting. We have talked about private sector capacity; the problem of public sector capacity; Governments being able effectively to be customers of the private sector, to set up rules and regulations to accommodate private sector investment, and to understand risks; and the economics of allowing the private sector to have the tariffs that allow them to make money.

The Public-Private Infrastructure Advisory Facility has done terrific work on the context in which we operate much earlier, dealing with what we call the enabling environment. Then the Global Partnership on Output-Based Aid has pioneered ways to deal with the affordability problem-this chicken and egg problem of if customers could afford to pay the connection charges to gas, electricity and water, then their lives would change, their incomes would rise, and they would be able to pay the ongoing user charges, but they cannot pay the connection charges. GPOBA has pioneered in a number of different areas that technique for bringing the two ends together, but it is on a different point in the spectrum and it is totally complementary. We are there to do projects, to get projects off the ground, but PPIAF and GPOBA do terrific work in the public sector capacity and the enabling environment.

Q74 Chair : In response to my earlier question and the issue I raised about poor people and their difficulty in paying charges, or the presumption about the difficulty, let me quote a couple of examples. We saw in Ghana and Ethiopia water projects that were funded by the development community, but nevertheless they were transferred to the community with a charge basis of so much a bucketful, or whatever it was in Ghana. There was something similar in Ethiopia. It seemed to be perfectly acceptable, and in fact people understood that by paying for their water: a) they would optimise its use, and b) they would provide an income that would help to maintain the supply if they were properly trained to do it. The implication there is that poor people do have the capacity and a willingness to pay, but that perhaps Governments are not very keen to support projects that will actually deliver the service. The net result is the public sector does not have the capacity, the politics does not allow the private sector to do it, and so it does not happen, though with exceptions.

Similarly with electricity, we saw a situation with DFID in Uganda. I happened to be there in a middle of an election and the lights were going off about every 20 minutes, yet the election focused entirely on who had lied about their school qualifications and who had pinched whose girlfriend in the past. The issue of the fact that the lights were going off did not even feature in the campaign. In Nigeria, even in downtown Lagos, the constant sound and smell is the hum of generators and the smell of diesel fumes, and there are power stations that actually exist but are not generating power. That perhaps is your first answer to my first question of why the private sector is reluctant to invest, but how do you tackle all those challenges, given that there are people out there who can pay and will pay small amounts of money-enough to make it viable-if they are allowed to do so? In the case of Nigeria, I am told that the cost of generating electricity is four times what it would be if delivered by the grid.

Andrew Reicher: We try to tackle them one at a time, because the point is that if we try to tackle them all at once, we will fail totally. We have chosen the points of pressure where we believe what we are trying to do can have the maximum impact. For example, InfraCo is aimed at the lack of private developer capacity, but it still works with all the other problems going on around it. The Emerging Africa Infrastructure Fund and GuarantCo deal with the provision of very long-term finance when it is not available from the local banks. They are dealing with all the other problems going on around them-getting one project done at a time and hopefully acting as a demonstration effect of what can be done to others. The World Bank estimates that in order to improve Africa’s infrastructure within 20 years-not to completely solve the deficiencies but to eliminate about half of them-about $90 billion to $100 billion a year needs to be invested. That is somewhere around 8% of the region’s GDP. That is almost double what is being spent today. As I keep saying, we are an experiment, we are meant to be a sort of signpost, but the problem is so vast that in my view what needs to be done is new ways, new thinking, new forms of intervention to get the really big players-the World Bank, the African Development Bank, the IFC-to keep doing what they are doing now, but to do more and do different things as well.

Q75 Chair : Does it perhaps involve training or building up procurement capacity within Governments? All of the things that you have explained to us, which I think we as a European audience perhaps understand-you explained the difference between Peru and Tanzania and those two projects-do not seem to be being grappled with by some of the key Governments. They need to be able to say, and maybe the development partnership needs to be saying, "What we have got to do is enable you to have the capacity to understand how these things work, and to ensure that you have people who are qualified and not corrupt who are able to work with the bank, donors and the private sector to pull it all together. If you do not have that, it is not going to happen."

Andrew Reicher: I agree, and I think it does come back to governance and political will in the countries concerned. One positive example is Kenya. The Kenyan Government have created a national plan, Vision 2030. Vision 2030 has elements for infrastructure and they have pushed that down to better regulation. They have deregulated the electricity sector, they have allowed the private sector in, and they have brought in the private sector for the state entities involved in the power sector. They have started to move things forward. They are doing a lot better than many other African countries, but it is political will, changes in regulation, a willingness to accommodate the private sector to allow it to make a fair but not excessive return, and to have the knowledge within the regulators to know what a fair but not excessive return is. That is something that requires political will here. I think DFID clearly understands that, and that is why it supports interventions like PPIAF. Unless the Governments themselves want it, it is going to be very difficulty for outsiders to make it happen.

Peter Bird: There is one other point to add to that. I agree with everything that Andrew says, but the one little way in which we can help is by setting up local project companies within the countries in which we invest; as the project goes forward you will be using local staff, you will be training them, and they will be acquiring the expertise. That expertise they acquire in the private sector can then in turn be transferred into the public sector in those countries. So you are building up some of that good governance in infrastructure by the example of the private sector.

Q76 Chair : You are creating an entrepreneurial class.

Peter Bird: Exactly, yes. You are creating an entrepreneurial class, but also one would hope that some of that spills over not just into the entrepreneurial class, but also into the governing class.

Q77 Hugh Bayley: Mr Bird, you have talked wind power, solar power, and small-scale hydro. You are pressing the right buttons, perhaps creating the right signposts to show that renewable energy is viable in Africa, but how commercially viable are renewable projects compared with fossil fuels projects, and do you feel that you are swimming against the tide of Government policy by setting up renewable investments?

Peter Bird: Two things. First, we do not only do renewable. One of our big projects is a power project in Ghana, and that is a fossil-fuel project. I think there is a recognition that the donor community is in favour of renewable projects. We do not have a prejudice in favour of renewable projects; we simply support projects that are going to add to value in the countries where they are. Some of these are fossil-fuel projects; some of them are renewable projects.

Andrew Reicher: I would like to break in and maybe bang the drum for something we are doing at the PIDG level, which is bringing in a new experiment; it would be a new PIDG business to support the adoption of renewable power in Africa. The point is renewable power is favoured in Europe, North America and other developed countries by feed-in tariffs, where the economic playing field is levelled by administrative decision. African Governments are reluctant to do that because of the affordability issue and the politics of asking consumers to pay a little more for renewables than for conventional power. That was supposed to be dealt with by the Kyoto protocol, and unfortunately the levels at which carbon credits are trading is too low to level the playing field at the moment, and the system also has disadvantages and inefficiencies.

We are looking at creating a new business using donor funds to, in effect, buy the carbon at the price that levels the playing field, and allow the private sector to invest in renewables systematically in Africa. That is going through the process of exploration, feasibility and hopefully being set up. We are being given great support for that by DFID. DFID is the lead donor to that initiative and we are hoping that, if it works, some time in the next 12 to 18 months we will be able to come back and tell you about the sixth PIDG business that is promoting the adoption of renewable power in Africa. It is called Green Africa Power, and we are very excited about it and working hard on the project.

Q78 Hugh Bayley: Overall, it seems to me that there are policy pressures pushing PIDG in two directions. You have got a development need for affordable power in Africa, which will produce some fossil-fuel generation and some renewable generation. Then you have got a political appetite that is not a preference for renewable power. How do you reconcile those different policies within the PIDG group?

Andrew Reicher: Again, that is a brilliant question because we are looking strategically at how we balance the competing priorities. How important is each market failure? We try and make sure that everything we do is as relevant as everything else that we do-that we are not spending too much time on things that are relatively less important. Clearly climate change and the energy deficiency can be accommodated well together. We can pursue both conventional power and renewable power. Africa needs so much power that, provided it is done right, whether it is conventional or renewable, it is helping. The strategic exercise that I mentioned earlier is going to look at how we systematically ensure that our experiments are fighting the market failures that need to be fought and are the biggest constraints to greater private sector involvement.

Q79 Hugh Bayley: It will vary from county to country, but in general, how good is the policy framework for power generation in African countries? I have a nagging doubt that you are doing some good innovative work, but when some of the BRICs come along and offer cheap and cheerful power, the temptation to the Government of Zambia, Malawi, Mozambique or Kenya is going to be enormous, and your good works could be just swept aside because money talks and power is so desperately needed.

Andrew Reicher: The policy framework is terrible. What I think is needed is a number of reforms. If the private sector is to come, we have talked about tariffs. One of the other big problems is very often power and water are state monopolies. If you build a power plant, it has to sell its output to the state electricity company, which will not pay for it and is bankrupt anyway. If you could allow the sorts of reforms we have brought in here in the UK-open access to the grid; the ability of power producers to sell on an open market, on a free supply and demand basis, not to small consumers but to industrial consumers-then you would have the conditions for a market.

I would comment, though, on what you said about cheap and cheerful power from India and China. I do not think their involvement is necessarily bad. The problem is so big that if you can create a policy framework that accommodates having the Chinese and the Indians there, as well as the local public sector, the donors, the local private sector, and the international private sector, then the more that can be brought in, the better.

Q80 Hugh Bayley: Mr Bird, when you are looking to sell a project, once it has been developed, to a private investor or investors, do you look for investors from China, India and Brazil as well as investors in the City?

Peter Bird: Yes. We will basically look for the best value. Obviously, we will want to make sure it is a reputable investor and the Government have obviously got an interest in who those investors are. When we come to the selling stage in the process, we typically will want to harvest as much as we can from the project so we can reinvest it in other projects. If there is interest from China, India or Brazil, obviously we would welcome that.

Q81 Hugh Bayley: Are there examples that? Of BRIC investors?

Peter Bird: There are not any examples to date, but do not forget-

Andrew Reicher: Envalor Biofuels? You are looking for Brazilian partners.

Peter Bird: Yes, at this stage. We have not yet brought enough projects to financial close and to the sale process for me to be able to say that we have a specific example of where we have sold a project to a BRIC investor. As Andrew says, we are clearly currently working with BRIC partners.

Q82 Chair : In DFID’s memorandum to us, it said that PIDG has supported 79 projects in over 35 counties, three quarters in low-income countries and half in fragile states, 58% in sub-Saharan Africa. Are you in a position to give us any detail on those projects? I do not know whether this is relevant or not, but the Committee is going to be visiting specifically Rwanda, Burundi and Eastern Congo. Are there any projects there that might be of interest to the Committee?

Andrew Reicher: Our website carries what we call our project chart, which is an up-to-date list of every single project we have worked on, the amount that we have invested, the amount the private sector has invested, the number of people with access to services from the project, and the fiscal benefit to the country concerned. We would be very happy to work with the Committee staff to help give you access to that project chart.

Chair : That is helpful. I am sure they will have a look at that and then maybe come back if there is anything in particular. I thank you both very much indeed for that very helpful and informative evidence session, as well as the members of the Committee involved. It is slightly techie, but it is extraordinarily important, and actually knowing how you overcome those technical and financial challenges is absolutely crucial. Can I also say that if, on reflection, there is anything that occurs to you that you think is of interest or relevant to point out to the Committee and that has not been raised, I hope you will feel completely free to do so? We are on a learning curve here, and would like to produce a useful and constructive report. Certainly your input today has helped us understand a bit more what the challenges are, and they are obviously very substantial, bearing in mind that ultimately what we have to do is recommend to DFID what it can do, additionally to what it is doing, that might help meet the challenge or contribute to meeting the challenge. Thank you both very much indeed.