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By David Lawrence and Egidio Germanetti
PARIS—At a meeting in Oxford, England, last year, a group of leaders from Development Finance Institutions wrestled with a problem that has hampered private sector development for decades: Even with enough capital to invest, there were not enough bankable projects in the poorest countries—especially in fragile ones.
The group, known as DFIs in development circles, had often worked together in the past—particularly on syndication opportunities—but also found themselves competing for projects. The leaders decided to be more proactive and initiated DFI Country Pilots, through which they agreed to work across institutions at a country level to develop more projects with greater impact. They chose seven pilot countries: The Democratic Republic of Congo (DRC), Ethiopia, Haiti, Lebanon, Madagascar, Nepal, and Sierra Leone.
Now, following joint exploration trips by some of the institutions to a few African countries, the teams are working on ways forward—including developing common standards and operating principles, sharing information, and leveraging the areas of expertise different DFIs bring to the table.
“The initiative to work on pilots in fragile countries is also helping other DFIs work together, to know each other better, and show that we are all looking for the same impact,” said Sébastien Fleury, Director at Proparco. “In these countries, we need to join forces instead of competing for transactions globally.”
Sébastien Fleury. Photo courtesy: Proparco
Some of the earliest initiatives involve IFC and Proparco, the private arm of the French Development Agency (AFD), which are together looking at co-investment opportunities in the DRC.
The CDC Group, the United Kingdom’s development finance institution, is taking the lead on the Ethiopia pilot. The Swiss Investment Fund for Emerging Markets is taking the lead on Nepal, the African Development Bank on Madagascar, and the Africa Finance Corporation on Sierra Leone.
“The big problem for project finance in developing countries is not a lack of investors or investment money, but a lack of projects,” said Colin Buckley, General Counsel and Head of External Affairs of the CDC Group. “In the past, we’ve all been making investments and acting in a commercial manner, often waiting for others to prepare ‘bankable’ deals. Increasingly, we’re looking at partnerships as a way to be creative, generate deals, and to come up with new ways for attacking age-old development problems.”
In addition, a push toward greater efficiency and development impact is leading to new approaches for collaborating, accelerated by this growing need to create a pipeline of new private sector projects in low-income and fragile countries. During the COVID-19 crisis, DFI leaders say that it’s imperative that their organizations coordinate to help countries dealing with health and economic challenges.
Ousseynou Nakoulima, IFC’s Regional Director for Western Europe, said that DFI shareholders and clients are driving the move toward closer collaboration.
“Our shareholders have high expectations for development institutions,” he said. “They want more bang for their buck, more impact. And one way to do that is to have DFIs work together and create more synergies among themselves. And our clients want DFIs to join forces to reduce transaction costs, for example, in terms of feasibility studies, due diligence, or reporting.”
Working together will allow DFIs to prioritize private sector solutions to developmental challenges in countries such as Haiti. © Dominic Chavez/World Bank (2012)
Complementing Upstream Strategies
Nakoulima, echoing his Proparco and CDC peers, pointed out that solid investment opportunities in low-income and fragile countries are limited. IFC’s strategy in such markets— shared by many DFIs—is to put greater emphasis on creating conditions that lead to investments. This approach, known as working Upstream, consists of pre-investment work such as preparing project pipelines, improving legislative and regulatory environments, and building capacity where it is lacking, in order to create the bankable projects aligned with a country’s development priorities.
Upstream work is expensive, and the DFI collaboration is intended to help spread those costs.
Although progress in the seven pilots has not been uniform—in part because of the disruption caused by COVID-19—the foundation for collaboration is being put in place. In pilot countries, DFIs with deep local or sectoral knowledge are taking the lead. The result is a community of practice where, with a DFI country lead, financial institutions share diagnostics, agree on what approach to take in a given country or sector, and develop a strategy for attracting investment.
Complementing the DFI Pilots are Joint Collaboration Framework Agreements, or JCFAs, which broadly facilitate coordination among IFC and DFIs to create markets, mobilize private investors, and then co-finance projects based on shared standards, especially when using blended finance. The framework agreements have become even more important in supporting the economic recovery in developing countries following the COVID-19 pandemic. Proparco, and DEG, Germany’s development finance institution, are the first signatories to the agreements.
“These types of agreements will codify common principles and how we act together, not just in a given country, but more broadly,” said Simon Andrews, Senior Manager for Partnerships & Multilateral Engagement at IFC. “Particularly in fragile settings and lower-income countries, a lot of effort and Upstream work is needed to develop projects that are sustainable and bankable. The JCFAs provide a framework for coordinating Upstream work and crowding others in to promote and develop private sector solutions.”
In Haiti, a DFI Pilot, only 45 percent of people can access electricity. © Dominic Chavez/World Bank (2012)
Partnerships in Action
IFC has a long history with Proparco, the French DFI focused on private sector development. Proparco’s portfolio as of December 2018 was €5 billion—nearly $200 million of it committed in joint projects, mainly in Africa.
In DRC, IFC and Proparco conducted a joint mission to the country last December and agreed to work on the energy sector.
CDC Group is the United Kingdom’s development finance institution with a total portfolio value of £5.8 billion. This year, CDC will invest over $1.5 billion of its total portfolio value in companies in Africa and Asia with a focus on fighting climate change, empowering women, and creating new jobs and opportunities for millions of people.
As the United Kingdom’s first impact investor, CDC provides flexible capital in all its forms, including equity, debt, mezzanine, and guarantees, to meet businesses’ needs. It can invest across all sectors but prioritizes those that help further development, such as infrastructure, financial institutions, manufacturing, and construction.
Under the DFI Pilots, participating groups agreed on a number of principles, including the use of published diagnostics, such as the World Bank Group’s Country Private Sector Diagnostic studies, to identify what issues are holding back investment in key sectors in a given country. Also important, under the agreement, is the commitment to prioritize private sector solutions to developmental challenges, and follow a framework for using concessional and blended finance and harmonizing environmental and social standards.
Doing so, Andrews argues, makes DFIs more efficient with resources, avoids duplication of effort, and allows DFIs to build on each other’s experience and knowledge. The DFIs best positioned to tackle specific challenges take the lead in activities such as addressing regulatory obstacles, strengthening institutions, building capacity at the firm level, or determining investment needs.
“We are trying to slowly shift from a transaction focus to an enabling one via Upstream work,” said Fleury. “Both Proparco and IFC are focused on delivering impact in Africa and in fragile countries, which is really important. We have common goals, and this should lead us to collaborate more in the future; we must have a complementary approach to working together.”
Published in June 2020