by Diogo Gomes de Araújo

Lisbon 14 December 2012

International Finance Institutions

and Private Sector Development

Building the Africa-Europe Partnership: What Next?

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

3 Source: DFID Growth Report

• 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

I. Impact of Private Sector on… … Growth

4 Source: Paths Out of Poverty

• 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

I. Impact of Private Sector on… … Growth

5 Source: Paths Out of Poverty

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

I. Impact of Private Sector on… … Jobs

• 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.

6

(1) Ravallion 2004, “Pro-Poor Growth: A Primer”; OECD 2004, “Accelerating Pro-Poor Growth through Support for Private Sector Development”

I. Impact of Private Sector on… … Inclusion

Energy

Telecom

TransportWater and sewerage

-0.1%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Private Participation in Infrastructure by Sector(% GDP)

Source: PPI database 7

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

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

0

5

10

15

20

25

30

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

HIC UMIC LMIC LIC

Commercial Banks Coverage by Income Level(median)

Accounts Per Thousand Adults

Number of Branches Per 100,000 Adults (RHS)

Source: Financial Access 2010

I. Impact of Private Sector on… … Access to Services

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

9

Firms Indicating Top Obstacles to Operation and Growth: Energy and Finance (%)

Source: World Bank Enterprise Surveys

II. Role of IFIs in Private Sector Development A. Private Sector Gaps

43

32

17

38

27

14

33

23

11

0

10

20

30

40

50

Low Income Middle Income High Income

Small (<20) Medium (20-99) Large (100 and over)

10

Firms Viewing Access to Finance as a Major Obstacle (%)

Source: World Bank Enterprise Surveys

II. Role of IFIs in Private Sector Development A. Private Sector Gaps

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

12

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.

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

13

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

IFI Capital: €1

IFI Borrowing: €2

IFI Investment: €3

Other Investment: €9

IFI Project

Revenues

Government Shareholders

Host Government

Tax/government payments €1-3* per year

Total Investment: €12

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

Indicative Numbers

14

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

• 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

15

0

5

10

15

20

25

30

35

40

45

50

2005 2006 2007 2008 2009

0

200

400

600

800

1000

1200

1400

$Billions $Billions

All IFIs (Left Scale)

Global Flows (Right Scale)

IFI Commitments to the Private Sector and Global Gross Flows to the Private Sector

Source: IFI private sector database, Global Development Finance

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

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

-10% 0% 10% 20% 30% 40% 50%

Local presence

Speed of Processing

Competitiveness of funding package

Financial structuring and innovation

Technical expertise of staff

The maturity of the financing provided

Perceived stamp of approval overall

Ability to provide financing not readily available elsewhere

Ability to mobilize capital from additional sources

Government relationships - access to govt, policy influence

Global Knowledge

Environmental, social issues input

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

16

Performance of IFIs versus Commercial Banks for Private Sector Clients

Source: IFC Survey

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

17 Sources: IFI Annual Reports

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

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

• IFI Financial commitments to private sector have grown significantly

• Mobilisation of additional resources is a key strong point

0

5

10

15

20

25

30

35

40

45

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

US$

Bill

ion

IFC EBRD EIB OPIC EDFI Other MDBs

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

IFI Additional Mobilization (USD billion)

Institution 2005 2006 2007 2008 2009

EBRD1 2.6 4.0 4.2 2.4 5.1

AsDB 0 0.3 0.2 0.4 0.3

IFC2 2.8 3.9 4.7 4.0 5.4

IDB 2.1 0.7

Total 12

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

Source: IFI private sector database, largely from Annual Reports

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. Based on DEG, FMO, Proparco, IFC, EBRD, CDC Annual Reports and/or Development Reports, and EDFI/Dalberg report. 2. Based on FMO, Proparco, DEG and IFC 20

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 (2006-2008) 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,” 21

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 pharmaceuticals

22

II. Role of IFIs in Private Sector Development C. Results

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

• 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

II. Conclusions

… 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