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International Finance Institutions and Private Sector Development by Diogo Gomes de AraĂşjo

Building the Africa-Europe Partnership: What Next?

Lisbon 14 December 2012


Index I. Impact of Private Sector on… different aspects of Development II. Role of IFIs in Private Sector Development A. Private Sector Gaps B. IFIs’ Role in Filling the Gaps C. Results

III. Conclusions 2


I. Impact of Private Sector on… … Growth • Growth is essential for poverty reduction, as it provides the wealth that can lead to income growth for the poor • Higher GDP per capita growth rates are linked with greater poverty reduction

Source: DFID Growth Report

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I. Impact of Private Sector on… … Growth • Government provides the environment, but it is the private sector that invests and creates wealth for the people •Economies with a higher weight of Private Sector investment on GDP grow faster Source: Paths Out of Poverty

4


I. Impact of Private Sector on… … Jobs

• More advanced economies have a higher ‘Ratio of Private to Public Job Creation’

Source: Paths Out of Poverty

5


I. Impact of Private Sector on… … Inclusion • Research indicates inequality of income, opportunities, assets, and access to services can hinder the ability of poor people to benefit from economic growth1. • Geographic and sectoral patterns of growth (e.g. where poor people live and sectors where they work) is likely to provide greater opportunities for the poor to benefit from economic growth. • Growing recognition that private businesses play an important role in creating opportunities, in increasing options for employment, service provision, and entrepreneurship for the poor. (1) Ravallion 2004, “Pro-Poor Growth: A Primer”; OECD 2004, “Accelerating Pro-Poor Growth through Support for Private Sector Development”

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I. Impact of Private Sector on… … Access to Services Commercial Banks Coverage by Income Level (median)

2,000

30

1,800 25

Accounts Per Thousand Adults

1,600

Number of Branches Per 100,000 Adults (RHS)

1,400

20

1,200 1,000

15

800 10

600 400

5

• Private Sector is crucial in providing access to financial services…

200 0

0 UMIC

LMIC

LIC

Source: Financial Access 2010

… as well as better access to communications, energy, transport and water and sewerage.

Private Participation in Infrastructure by Sector (% GDP) 0.8% 0.7%

0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% -0.1%

Telecom

Energy Transport Water and sewerage

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

HIC

Source: PPI database

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Index I. Impact of Private Sector on… different aspects of Development II. Role of IFIs in Private Sector Development A. Private Sector Gaps B. IFIs’ Role in Filling the Gaps C. Results

III. Conclusions 8


II. Role of IFIs in Private Sector Development A. Private Sector Gaps Firms Indicating Top Obstacles to Operation and Growth: Energy and Finance (%)

Source: World Bank Enterprise Surveys

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II. Role of IFIs in Private Sector Development A. Private Sector Gaps Firms Viewing Access to Finance as a Major Obstacle (%) 50 40

43 38 33

32 27

30

23 17

20

14

11

10 0 Low Income Small (<20)

Middle Income Medium (20-99)

High Income Large (100 and over)

Source: World Bank Enterprise Surveys

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Index I. Impact of Private Sector on… different aspects of Development II. Role of IFIs in Private Sector Development A. Private Sector Gaps B. IFIs’ Role in Filling the Gaps C. Results

III. Conclusions 11


II. Role of IFIs in Private Sector Development B. IFIsâ&#x20AC;&#x2122; Role in Filling the Gap

Indicative Amounts Per Year:

More than $100 Billion

$50-100 Billion

$42 Billion

Source: EDFI/Dalberg Report. Aid and Development Bank numbers are from Global Monitoring Report 2010. Development Bank numbers are for commitments.

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II. Role of IFIs in Private Sector Development B. IFIs’ Role in Filling the Gap • Providing finance to private companies that lack sufficient access to private capital and finance (debt, equity, guarantees): USD 42,000 million (2009) • Providing related advisory products to bring in scarce knowledge essential to facilitate effective investments: • • • •

Improve the investment climate Improve project performance and impact on development Foster private sector involvement and competition Enhance environmental, social and corporate governance – ESG effectiveness

• Providing comfort in difficult environments to bring in other investors • Demonstrating the viability of private solutions in difficult or new areas, leading to further investments 13


II. Role of IFIs in Private Sector Development B. IFIs’ Role in Filling the Gap IFI Government Shareholders

IFI Capital: €1 IFI Borrowing: €2

Revenues

Indicative Numbers

Project

Host Government

IFI Investment: €3

Tax/government payments €1-3* per year

Other Investment: €9

Total Investment: €12

14 *Tax payments are estimated based on payments tracked by EDFI and IFC (EDFI/Dalberg Report and IFC 2010 Annual Report).

• • •

A euro of IFI capital can leverage as much as EUR 12 of project investment The projects also generate revenues for shareholders to reinvest in development Projects also contribute to host country finances, at least EUR 3 per year for every euro of IFI shareholder capital


II. Role of IFIs in Private Sector Development B. IFIs’ Role in Filling the Gap IFI Commitments to the Private Sector and Global Gross Flows to the Private Sector

• IFI involvement is countercyclical.

$Billions

$Billions

50

1400

All IFIs (Left Scale)

45

1200 40

• While Global Flows to the Private Sector go down, IFIs are called to increase commitments to the Private Sector.

1000

35 30

Global Flows (Right Scale)

25

800

600

20 15

400

10 200 5 0

0 2005

2006

2007

2008

2009

Source: IFI private sector database, Global Development Finance

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II. Role of IFIs in Private Sector Development B. IFIsâ&#x20AC;&#x2122; Role in Filling the Gap Performance of IFIs versus Commercial Banks for Private Sector Clients Environmental, social issues input Global Knowledge Government relationships - access to govt, policy influence Ability to mobilize capital from additional sources Ability to provide financing not readily available elsewhere Perceived stamp of approval overall The maturity of the financing provided Technical expertise of staff Financial structuring and innovation Competitiveness of funding package Speed of Processing Local presence

-10% Source: IFC Survey

0%

10%

20%

30%

40%

50%

Percent of clients rating IFI performance above average or high compared to commercial bank rating

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II. Role of IFIs in Private Sector Development B. IFIs’ Role in Filling the Gap • IFIs explicitly target the higher risk/complexity countries and sectors in their private sector operations • Examples: – EBRD: tracks percentage in low/medium transition economies – FMO: lower income country focus (50% in 2009) – DEG tracks percentage of investments in low income or high risk countries – Proparco: growth in Africa is one of four focus areas – IFC: targets percent projects in IDA (50%) and targets higher risk projects in Middle Income Countries – SOFID: targets investments promoted by Portuguese SME (min 20% stake), most of which are in Sub-Saharan Africa Sources: IFI Annual Reports

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Index I. Impact of Private Sector on… different aspects of Development II. Role of IFIs in Private Sector Development A. Private Sector Gaps B. IFIs’ Role in Filling the Gaps C. Results

III. Conclusions 18


II. Role of IFIs in Private Sector Development C. Results IFI Additional Mobilization (USD billion)

IFI Private Sector Commitment Volumes to Developing Countries (1991-2009) 45

Institution

2005

2006

2007

2008

2009

40

EBRD1

US$ Billion

35 30

AsDB

25

IFC2

20

IDB

15

Total

2.6

4.0

4.2

2.4

5.1

0

0.3

0.2

0.4

0.3

2.8

3.9

4.7

4.0

5.4

2.1

0.7 12

10 All data is for syndications except where noted. 1EBRD includes B loans, parallel loans, IFI participations, official co-financing 2IFC includes syndications, structured finance, special initiatives, AMC. Sources: IFI Annual Reports

5 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 IFC

EBRD

EIB

OPIC

EDFI

Other MDBs

Source: IFI private sector database, largely from Annual Reports

â&#x20AC;˘ IFI Financial commitments to private sector have grown significantly â&#x20AC;˘ Mobilisation of additional resources is a key strong point 19


II. Role of IFIs in Private Sector Development C. Results • IFIs have developed systems that track development outcome success rates for private sector projects with good results • IFI development outcome success measurements typically are based on items such as financial, economic, environment and social outcomes, and private sector development. • Development outcome results systems are not yet harmonized, but results generally show 70-85% of mature projects exceeding targeted benchmarks1. • Some IFIs also look at “win-win” outcomes with both high development outcomes and high IFI financial returns, showing that development outcome and IFI financial outcome tend to go together2. 1. 2.

Based on DEG, FMO, Proparco, IFC, EBRD, CDC Annual Reports and/or Development Reports, and EDFI/Dalberg report. Based on FMO, Proparco, DEG and IFC

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II. Role of IFIs in Private Sector Development C. Results • EDFI – the European Development Finance Institutions show, for the average of € 5,000 million in new private sector projects committed each year, the following were generated per annum (20062008) 1: – 81,000 new jobs created over 422,000 direct jobs provided – 1.3 million indirect jobs procured through value chains and sub-borrowers – EUR 1,700 million in annual government revenues 1. Dalberg/EDFI report, “The Growing role of the Development finance Institutions in International Development Policy,”

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II. Role of IFIs in Private Sector Development C. Results IFIs’ Role in…: … Private Investments: power, roads, telecom, ports, water with total commitments of about USD 9,000 million per year … SME: IFIs have an important demonstration effect acting via financial intermediaries or through direct investments … Financial Sector: IFIs support banks and others (finance and advice) when many companies face major constraints … Agribusiness: support investments along the supply chain from growing, storing, producing and distributing … ESG (Environment, Social and Governance): IFIs lead in helping firms establish strong ESG standards, targeting the poor and involving local communities … Innovation: IFIs help transfer knowledge and support innovative approaches in water, IT, PPPs, energy efficiency, toll roads, software and 22 pharmaceuticals


Index I. Impact of Private Sector on… different aspects of Development II. Role of IFIs in Private Sector Development A. Private Sector Gaps B. IFIs’ Role in Filling the Gaps C. Results

III. Conclusions 23


II. Conclusions • • • •

Poverty reduction requires a vibrant private sector Private sector involvement benefits from IFIs standards IFIs fills private sector gaps in finance and knowledge IFIs are recognised as having reached a significant scale in global private sector finance • IFIs continue to improve and are reaching towards the next level in helping with development • Together with aid and public sector development banks (blending and public/private coordination) more can be achieved… after all… 24


â&#x20AC;Ś None of us is as smart as all of us. Ken Blanchard Management Author (1939)


Thank you Diogo Gomes de Araújo www.sofid.pt • sofid@sofid.pt www.developmentandtheprivatesector.org

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