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How to support NDBs in attracting long-term capital: Lessons from experience in Africa

How to support NDBs in attracting long-term capital: Lessons from experience in Africa. Gilles Genre-Grandpierre Proparco Head, Banking & Capital Markets www.proparco.fr e-mail: genregrandpierreg@afd.fr. New-York, 1 December 2005.

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How to support NDBs in attracting long-term capital: Lessons from experience in Africa

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  1. How to support NDBs in attracting long-term capital: Lessons from experience in Africa Gilles Genre-Grandpierre Proparco Head, Banking & Capital Markets www.proparco.fr e-mail: genregrandpierreg@afd.fr New-York, 1 December 2005

  2. Proparco is a French Development Finance Institution (DFI), member of the European Development Finance Institutions (EDFI) network • Agence Française de Développement is its majority (68%) shareholder • Other shareholders include major private French and international banks and companies, which makes it unique among DFIs • Operations in 60 countries in Africa, the Middle-East, Asia and the Carribean

  3. Proparco combines long-term developmental objectives with private sector profitability requirements • It offers the full spectrum of financial services and products, similar to investment and merchant banks • Proparco’s shareholding structure allows it to operate on longer maturities with riskier products in difficult environments (additionality principle) • 50% of the EUR800 million portfolio invested in Africa, half of which in the banking and financial sector

  4. To determine appropriate support to NDBs in order to mobilize private capital: • We carried out internal research on Proparco’s NDB portfolio - equity and credit - since 1998 (average # of NDBs in portfolio: 10) • Objective of research: What are the criteria that distinguish successful NDBs from others in attracting private capital? • Internal criteria investigated, as well as external ones (sophistication of local banking & financial markets) • Successful NDBs in mobilizing private capital defined as being financially sustainable and additional in filling market gaps (instrument, maturity, objective, etc.)

  5. Morocco West Africa Gabon Uganda South Africa Swaziland • Portfolio of NDBs in the following countries:

  6. First conclusions: • Successful NDBs operate in «conflicting» environments, whether internal (mixed shareholding structure, such as DFCU in Uganda), or external (competitive environment, such as DBSA and IDC in South Africa) • NDBs operating in «conflicting» environments are more efficient at attracting private capital. Good governance and sound risk management are a consequence of external pressure, rather than a cause of sustainability • External environment is key in determining appropriate support to NDBs to mobilize private capital: 3 groups of countries defined

  7. Importance of economic cycles and systemic risk, number of uncertainty factors Sophistication of banking & financial market (depth) + + Group III (emerging markets) Group II (some LICs and most MICs) Group I (mostly LICs) - - • The 3 groups of countries

  8. The 3 groups of countries • Group I: Economic sphere is the problem, no long maturities, no hierarchy of risks on long-term, no long-term private capital • Group II: economic growth, beginning of financial development and hierarchy of risks, longer maturities, some private long-term capital on big projects • Group III: emerging markets, cyclical economies, more depth of financial markets and hierarchy of risks, long maturities, presence of long-term private capital

  9. Key findings for successful NDBs: • Are able to manage internal or external conflicts • Fill only an incremental - but determining - gap in the market: They lead the pack in incremental risk-taking (eg, DBSA’s securitization of municipal finance portfolio in South Africa) • Avoid market distortions and crowding-out effects on private sector players • Remove abnormal risks between perceived and real risks: Successful NDBs are not a substitute for the market, they just help the market go the extra mile

  10. Zone of legitimacy for NDBs Cost of funds «Perceived» risk curve The extra mile for NDBs to attract private capital «Normal» yield curve Time 30 3 5 15

  11. DBSA’s securitization of municipal finance portfolio IDC’s provision of equity on BEE new ventures Risk sharing and mitigation MARKET GAP Long-term funding of NDBs and private banks New shareholding of DFCU in Uganda Maturity and instruments Long-term funding of BOAD in West Africa Maturity • Appropriate levels of support for NDBs to be successful in attracting private capital: • The existing banking and financial sophistication of a market is key in determining relevant market gaps and appropriate levels of support: The «next step» principle NEXT STEP

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