Innovating in International Cooperation

Transcription

1 Innovating in International Cooperation ESADEgeo Position Paper 4 November 2010 Javier Santiso Professor of Economics, ESADE Business School. Academic Director, ESADE Center for Global Economy and Geopolitics (ESADEgeo)

2 ABSTRACT International cooperation stands at a crossroads and many people now take for granted that the Millennium Goals will go unfulfilled. In this area too, it will be imperative to innovate: in this respect, bilateral development funds offer a unique opportunity. Spain could equip itself with a fund of funds of this sort with capacity to promote investment in venture capital funds in developing countries. Innovating in International Cooperation Innovation is spreading beyond the business framework. Not only is it to be found in start-ups and the R&D departments of global multinationals. Also in state spheres we are witnessing important changes and disruptive innovations. One area in which interesting changes are taking place is that of international cooperation, with the emergence in recent years of investment vehicles designed to encourage business start-up and development in emerging and frontier markets in Asia, Africa and Latin America. The so-called European Development Finance Institutions (EDFI) have been making progress for decades, but they are now taking on a higher profile. These vehicles are intended to promote and invest in businesses and projects that have development impact but also financial viability. They move, then, in a different area from that of more traditional development aid models providing support or subsistence, and aim to foster business start-up and innovation, employment and added value. Today there are some 15 institutions of this type, accounting for an investment portfolio of over 18.5 thousand million, according to the consultancy firm Dalberg. Each year the portfolio of new investments 2

3 adds another 4 thousand million. Unfortunately, these amounts are modest in comparison with the total for official development assistance: they represent barely 6% of total bilateral aid. In other words, there is still plenty of room for improvement. In this respect, Spain could also adopt an innovative position, dedicating funds and creating institutional density in this area. In fact, one of the EDFIs is the Spanish COFIDES. However, its portfolio is modest: at the end of 2009 it stood at just under 500 million, and that year its new investments totalled just over 150 million. We are still a long way off the amounts handled, for example, by the British CDC Group, with a portfolio of more than 3,300 million at the end of 2009 and new investments approaching 600 million. Of course the former was set up only two decades ago, while the latter (the oldest of all of them) has been operating for over 70 years. But nothing is stopping Spain from being more ambitious in this area. This would require not so much not only increasing the relative volume dedicated to aid but rather increasing its efficiency and setting its sights on this type of investment vehicle, particularly those involving private equity. It would mean, in short, creating and strengthening the institutional ecosystem. How could this be done? The path followed by CDC, a landmark in this matter, may be a source of inspiration. In 2004 this institution was transformed into a fund of funds, that is, it concentrated its efforts on encouraging private equity investors to create funds dedicated to investing in developing countries (such as Actis and Aureos, for example, which operate from London and have subsidiaries in developing countries). In this way the institution has sought to induce an institutional overflow, by acting as an accelerator, not only in the country of origin but especially in the receiver country. Furthermore, this formula has the virtue that the private sector also channels resources into the funds or management companies that are set up, thus multiplying the amounts dedicated to developing countries. The most notable example of this type of cooperation is probably Norfund, the Norwegian public funding agency, which created an investment vehicle in conjunction with the country s world-leading hydropower industry. In 2000, the British, together with the Swedish and the Dutch, and 3

4 private banks, also set up an infrastructure fund for Africa, another interesting example. For a country like Spain, which possesses a significant core of major companies operating on a large scale in emerging countries, especially Latin America, this formula could likewise lead to the multiplication of public money, in combination with private contributions, for the creation of private equity funds or management companies. In the financial industries, in construction and engineering, in energy, and in telecommunications services and new technologies, Spain has enterprises that could take a share in regional and/or sectoral funds or management companies, in particular channelling resources towards Latin America, a region in which Spain has converging interests in the public and the private sector alike. And above all it is a region from which both the EDFIs and international cooperation are withdrawing except for notable exceptions such as is precisely the case of Spain. Official development aid is being channelled massively towards Africa. Quite rightly so: it is the poorest continent and has the most pressing needs. But at the same time it is being withdrawn from middle-income countries, thus particularly afflicting Latin America, a region where there are still needs, poverty and inequality, in addition to lack of funding for developing businesses, generators of jobs, activity, growth, in short, economic and social development. If we take the EDFIs we see this trend at work. The portfolios of these institutions are not focused on Latin America. According to the Dalberg report mentioned earlier, Latin America accounted for barely 7% of the portfolio of the British CDC in 2009, and the aim is to bring this figure down to below 5% in the future. The same can be said of the Belgian agency BIO, which plans to reduce its Latin-American portfolio from 17% to 12%. For its part, Finnfund, the Finnish agency, is to cut its Latin-American portfolio from 15% to 5% of its total. For some, like the Danish IFU, Latin America no longer existed, and will soon exist even less: the portfolio is scheduled to shrink from 4% to under 1% of the total. Others, like the Norwegian Norfund, which had a strong presence and activity in and with Latin America, are also moving in this direction, reducing the Latin- American portfolio from 36% to 18% of the total. 4

5 It is true that the region has not disappeared off the radar altogether. The German DEG, a subsidiary of the giant KfW, still keeps Latin America at around 20% of the total of the portfolio (its consolidated portfolio is one of the largest, reaching 4,700 million at the end of 2009). Some are even increasing the investments made in the region; this is the case of the French Proparco (9% of the total in 2009, whereas the region accounted for 4% in the total consolidated portfolio) and the Swiss SIFEM (16% of investments in 2009, as opposed to 13% in the total consolidated portfolio). FMO, the investment branch of the Dutch cooperation system, with a total portfolio in 2010 of over 4.6 thousand million, still has a part invested in private equity. Its Latin-American portfolio represents around 23% ( 200 million) of the total of the more than 1,100 million dedicated to private equity investments. Nevertheless, as of 2009 some countries in the region (namely Brazil, Chile and Mexico), have ceased to be potential receivers. Future investments are concentrated in Colombia, Peru and Central America. But for the majority, Latin America is indeed disappearing off the radar, and the trend with OECD governments is to shift attention towards Africa and Asia. Here too, Spain could stand out and innovate, not only by increasing the volume dedicated to private equity, for example through a fund of funds, thus helping to densify the institutional ecosystem, but also by opting massively for a region from which aid is being withdrawn. The strategy would therefore be to concentrate, focus, instead of dispersing resources. International cooperation players and EDFI operations abound in Africa and Asia, yet they are becoming thin on the ground in Latin America. Moreover, this focusing strategy would be in keeping with the efficiency goals promoted by the OECD and the members of the donor club, the DAC. Too much dispersion and fragmentation of aid is increasing wastage, losses and disruption in receiver countries 1. 1 In this respect, see the papers we have written at the OECD: Frot, Emmanuel and Javier Santiso (2008), Development Aid and Portfolio Funds: Trends, Volatility and Fragmentation, OECD Development Centre, Working Paper No. 275; Frot, Emmanuel and Javier Santiso (2010), Crushed Aid: Fragmentation in Sectoral Aid, OECD Development Centre, Working Paper, No

6 Furthermore, Spanish international cooperation might find influential allies here to give structure to funds and specialist management companies by issues (e.g., water, health, nutrition) or by industries (e.g., infrastructures, energy, telecommunications and new technologies). Here too innovation would work with public-private partnerships like the ones between Norfund and the Norwegian hydropower industry. Additionally, this would take some of the sting out of the budget cut in official development aid, decided in 2010, of around 600 million (approximately 10% of the total). Nothing here is stopping Spain from innovating, joining the front ranks, and winning the World Cup in this sphere too. Nothing except ourselves. 6

7 For further information about ESADEgeo s Position Papers, please feel free to contact: Irene García García Jr. Research Fellow ESADE Center for Global Economy and Geopolitics Av. Pedralbes 60-62, Barcelona, Spain irene.garcia2@esade.edu Ext