1 GPR Ex-ante analysis of BIO commitments 2009 Summary report for BIO Final report
2 Table of Contents 1 EXECUTIVE SUMMARY... 3 2 CORPORATE-POLICY QUALITY OF NEW COMMITMENTS 2009... 4 2.1 GPR STRUCTURE OF NEW COMMITMENTS 2009... 4 2.2 REGIONAL DISTRIBUTION OF NEW COMMITMENTS 2009... 4 2.3 LIC/LDC-FINANCING AND FINANCING IN SUB SAHARA AFRICA... 5 2.4 SME FINANCING... 5 3 DEVELOPMENT QUALITY OF THE PORTFOLIO PROJECTS... 6 3.1 EMPLOYMENT EFFECTS... 6 3.2 GENDER EFFECTS... 7 3.3 TRAINING EFFECTS... 7 3.4 SPECIFIC DEVELOPMENT EFFECTS OF PRODUCTIVE COMPANIES/SMES... 7 3.4.1 CONTRIBUTION TO GOVERNMENT REVENUES... 7 3.4.2 NET FOREIGN CURRENCY EFFECTS... 7 3.4.3 TECHNOLOGY TRANSFER... 7 3.4.4 MARKET/STRUCTURAL EFFECTS... 8 3.4.5 INFRASTRUCTURE EFFECTS... 8 3.4.6 SOCIAL EFFECTS/CORPORATE SOCIAL RESPONSIBILITY... 8 3.4.7 ENVIRONMENTAL STANDARDS... 9 3.5 SPECIFIC DEVELOPMENT EFFECTS OF FINANCIAL INSTITUTIONS (FS)/PRIVATE EQUITY FUNDS (PEF)... 9 3.5.1 MOBILISATION OF SAVINGS /INVESTMENT CAPITAL... 9 3.5.2 DIVERSIFICATION OF THE FINANCIAL SECTOR... 9 3.5.3 DIVERSIFICATION OF CREDIT/CAPITAL ALLOCATION... 9 3.5.4 CONTRIBUTION TO INSTITUTION BUILDING... 9 3.5.5 CONTRIBUTION TO LOCAL COMPANY DEVELOPMENT... 9 3.6 SPECIFIC DEVELOPMENT EFFECTS OF INFRASTRUCTURE PROJECTS (IR)... 10 3.6.1 REGULAR GOVERNMENT REVENUES FROM THE PROJECT... 10 3.6.2 TECHNOLOGY AND KNOW-HOW TRANSFER... 10 3.6.3 CONTRIBUTION TO THE COUNTRY S SUPPLY SITUATION... 10 3.6.4 PERFORMANCE INCREASE DUE TO PRIVATIZATION... 10 3.6.5 ENVIRONMENTAL STANDARDS... 10 4 STRATEGIC ROLE OF BIO IN THE PROJECTS... 11 4.1 ATTAINMENT OF SHAREHOLDERS STRATEGIC GOALS... 11 4.2 SUBSIDIARITY/ADDITIONALITY OF BIO IN THE PROJECT... 11 4.3 CONSULTING BY BIO... 11 4.4 MOBILISATION OF THIRD-PARTY CAPITAL BY BIO... 11
3 1 Executive summary Based on a GPR s ex-ante assessment, BIO s 28 1 new commitments in 2009 have a good development quality (average GPR grade 2.5). The average ex-ante grade for development effects is 2.7 2 - a slight deterioration against the year 2008 (average grade: 2.4). The most important development effects of the new commitments in productive companies/ SMEs are: (1) Social effects, (2) Training effects and (3) Structural effects. The most important development effects of financial institutions/banks are: (1) Training effects, (2) Mobilization of savings and (3) Diversification of credit allocation. The most important development effects of private equity funds are: (1) Employment effects, (2) Diversification of credit allocation, and (3) Mobilization of savings. The most important development effects of infrastructure projects are: (1) Improvements of the supply situation, (2) Performance increase due to privatization, and (3) Technology transfer. 93% of BIO projects make a contribution (directly or indirectly via financial institutions) to the financing of small and medium sized enterprises (SME) a very good level compared to other bi- and multilateral DFIs. The assessment of BIO s strategic role in the projects shows: Additionality is proven in all projects and all projects provide long term finance in developing countries which would not be available on comparable terms and conditions elsewhere. The majority of BIO s new projects is located in Africa (50% of new projects, 34% of commitment value) and in Least Developed or Low Income Countries (50% of new projects. 42% of commitment value). The present report includes 21 ex-ante GPRs for (i) Productive companies/sme (2 GPRs), (ii) financial institutions (11 GPRs), (iii) private equity funds (5 GPRs) and (iv) infrastructure projects (3 GPRs). Together with the project sponsors, other investors and local banks, BIO s finance is expected to contribute to the following macroeconomic effects: Contribution to government revenues: Net government revenues of about 8.0 million EUR p. a. (an increase of 43% compared to 2008: 5.6 million EUR) Net Foreign Currency effects: Net effects of 10 million EUR p. a. (a slight reduction to the 2008 level: 13 million EUR). Employment effects: A total of approximately 31,000 jobs (2008: 33,300 jobs 3 ). In the project companies, about 9,400 people are directly employed (2008: 8,500 jobs). Through indirect jobs created by productive companies through supplier linkages, by financial institutions at sub-borrower-level and by private equity funds at investee company level, roughly 22,000 people are expected to be employed indirectly. The GPR rating tool and software were licensed by DEG to BIO under a separate service agreement. 1 For the year 2009, there are 28 new commitments/projects but the analysis is based on 21 GPRs. This was due to an agreement that the 8 commitments under the SME fund should because of their relatively small financing volume be rated as a single project in order to allow for adequate comparability with other projects. 2 GPR and development quality group definition of grades: Grade 1 = very good, 2 = good, 3 = fully satisfactory, 4 = still satisfactory, 5 = unsatisfactory, needs specific justification; 6 = obviously insufficient. 3 37,5 % of the employment effects in 2008 can mainly be attributed to one project one PEF accounted for over 37% of the employment effects (around 12,500 out of a total of 33,300 jobs)
4 2 Corporate-policy quality of new commitments 2009 2.1 GPR structure of new commitments 2009 The corporate-policy quality of the new commitments 2009 based on the two benchmarks (i) development effects and (ii) strategic role of BIO - is at an average grade of GPR-2 (= good quality; 147 average GPR index points) 4. This represents a slight deterioration from the previous year (2008) when the average GPR index points were 157, but the average grade is a stable GPR-2 (= good quality). On an ex-ante basis, 95% of the new commitments were categorized in GPR groups 1 to 3 ( very good/good/fully satisfactory projects). Only one project (5%) was categorized in the GPR group 4 ( still satisfactory ). 5 Graph 1: The following graphic shows the GPR-quality of BIO s new commitments 2009 2.2 Regional distribution of new commitments 2009 In the year 2009, Africa has remained the most important investment region for BIO. Out of the 28 projects evaluated, 50% account for Africa (14 of 28 new projects), 29% for Latin America (8 projects), 14% for Asia (4 projects), and 7% for multi-regional projects (2 new projects). The highest commitment volume was also achieved in Africa (21.8 million EUR = 34% of total commitments), followed by Asia (26%), Latin America (21%), and Multi-regional projects (19%). Out of the African projects, 13 of 14 are located in Sub-Saharan Africa, where the private sector is still at low scale and the investment climate is especially challenging. 4 The GPR global index is based on two benchmarks: (i) development effects and (ii) strategic role of BIO. 5 Percentage figures refer to the number of projects if not stated otherwise.
No. of projects BIO commitments (x 1,000 EUR) 5 Graph 2: The following graphic shows the regional distribution of BIO s new commitments 2009 Regional distribution of new commitments 2009 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Africa Asia Latin America Multi-Regional 25.000 20.000 15.000 10.000 5.000 0 No. of projects BIO commitments 2.3 LIC/LDC-Financing and Financing in Sub Sahara Africa As for projects in Sub-Saharan Africa, financing projects in Low Income Countries (LIC)/Least Developed Countries (LDC) in general is a banking challenge for development finance institutions. Moreover, from a development point of view, these countries are of special importance to fight poverty. BIO s financing is expected to result in an increase of investors confidence in the economies of LICs/LDCs, which will help them attract further investment (signaling function for the capital markets). Out of BIO s new 2009 commitments, 46% (13 out of 28; 2008: 76%) are investments in LIC/LDCs (e.g. Burundi, Democratic Republic of Congo, Ivory Coast, Nigeria, Tanzania, Uganda, Zambia). 2.4 SME financing SME financing is of importance to enhance competition and entrepreneurship, to create jobs and to transfer know-how. Altogether, SME financing 6 (direct and indirect) is provided by 93% of all new BIO commitments in 2009 a very high percentage compared to the DFI peer group. 8 of the 9 productive companies and 2 of the 3 infrastructure projects financed by BIO are SMEs themselves, while the 11 financial institutions and the 5 private equity funds indirectly contribute to SME development by providing financial services and support to SMEs. 6 SME definition (EU): project companies with maximum 250 employees, and either turnover EUR 40 million, or total assets EUR 27 million.
100% EPOL-Group 1-3 (ex ante) 100% EPOL-Group 1-3 (ex ante) 100% EPOL-Group 1-3 (ex ante) 100% EPOL-Group 1-3 (ex ante) 100% EPOL-Group 1-3 (ex ante) 100% EPOL-Group 1-3 (ex ante) 6 3 Development quality of the portfolio projects Overall, BIO s new commitments display a good development quality. Four (4) projects have been rated in the highest development group 1 (EPOL-Group 1 = very good ), eleven (11) projects have been classified in development group 2 (EPOL-2 = good ) and six (6) projects in development group 3 (EPOL-3 = fully satisfactory ) 7. The average EPOL-score for all 21 projects is 85 points 8 (grade: 2.7; EPOL-2 = good ). Graph 3: The following graphic shows the development quality of BIO s new commitments 2009 Development quality of new commitments 100% 80% 7% 5% 23% 9% 13% 29% 60% 40% 65% 63% 47% 64% 67% 52% Group 6 Group 5 Group 4 Group 3 Group 2 Group 1 20% 32% 28% 29% 27% 20% 19% 0% 2007 (volume) 2008 (volume) 2009 (volume) 2007 (number) 2008 (number) 2009 (number) Percentage (investment volume) Percentage (No. of projects) n (2007) = 11 n (2008) = 15 n (2009) = 21 3.1 Employment effects Employment effects are relevant from the development point of view as the income effects associated with them tend to contribute to direct poverty reduction. Worldwide, more than one billion people are living below the poverty line therefore the creation of jobs is a priority of private sector investment promotion. Together with the project sponsors, other investors and local banks, BIO s financing activities in 2009 are expected to contribute to the following employment effects: In the project companies about 9,400 people are directly employed (2008: 8,600). About 1,900 new jobs are expected to be created (2008: 1,300). Through indirect jobs created by productive companies through supplier linkages, by financial institutions at sub-borrower-level and by private equity funds at investee company level, roughly 22,000 people are expected to be employed indirectly (slight reduction compared to 2008: 24,800). 7 The GPR rating system for development effects rates projects according to six groups from EPOL-1 ( very good ) to EPOL-6 ( obviously insufficient ). 8 The maximum GPR-score for development effects is 150.
7 3.2 Gender effects The review of the Millennium Development Goals has shown that gender equality (MDG No. 3) continues to be a major challenge. 70% of those living in poverty worldwide are women and girls. Women mainly work in the informal sector, which is safe neither from a legal nor from a social point of view. This is why women empowerment and gender equality can be assessed as positive from a development point of view. Three of BIO s projects (11%) are rated to have positive effects on gender equality within the respective sector which is nearly the same as 2008 (12%). 3.3 Training effects Companies are eventually as good as their staff, i.e. as the human resources they stand for. Basic and advanced training services offered to employees in the project company result in the creation of human capital - one of the most important factors for economic success. Training measures tend to increase workers productivity as well as the employees individual income, thereby directly contributing to poverty reduction. In conclusion, training effects are considered as paramount from both a development and an economic point of view. On the company level, training for employees is mostly provided through training on the job in company-owned training facilities. Partly, training services are offered by external specialists (e. g. training by suppliers of systems or installations). 88% of BIO s projects offer basic training services ( best practice -standards) for its employees or management (2008: 88%). All of the productive companies and SMEs financed by BIO offer basic and advanced training measures including e. g. training by expatriates/the parent company, seminars for external personnel, etc. 3.4 Specific development effects of Productive companies/smes 3.4.1 Contribution to Government revenues Profitable enterprises generate income for a country, which can be invested in education, health or critical infrastructure. Thus, ensuring portfolio companies contribution to government revenue through taxes is an important issue for DFI s financing activities. BIO s 9 new commitments in productive companies will create net government revenues of around 3.8 million EUR p. a., which is positive from a development point of view, considering that most of BIO s productive companies investments are in countries with a negative budget balance (78% of investment countries). 3.4.2 Net Foreign Currency effects In many developing countries large deficits of trade and current accounts create difficulties for the country s foreign currency reserves, debt service capacity as well as devaluation risks for the local currency. Thus, positive net currency effects are relevant from a development perspective because they render a contribution towards both securing the partner country's ability to meet its financial obligations and stabilizing the exchange rate. In this regard, BIO s new commitments will create around 10 million EUR p. a. in net foreign currency, both through project companies export revenues and through the substitution of imports. Compared to 2008 s net foreign currency effects, this is a reduction of 23%, resulting from a decline in exports of the SME, while the substitution of imports remained at last year s high level. Those data show that 2009 projects included a higher percentage of productive companies that are oriented towards the local markets (with reduced export activities). However, the creation of net foreign currency effects remains a significant contribution from a development point of view, most of the countries the Enterprise department invests in have a negative current account balance (56% of investment countries). 3.4.3 Technology Transfer Recent publications in the area of development economics stress the crucial importance of technology transfer for a country s development process and poverty reduction. Typically, technology and know-how transfer occur if a modern company from an industrialised country establishes a project company/joint-venture in a developing country or if a local company
8 acquires state-of-the-art technology and trains its local employees on modern machinery (technical know-how transfer). 9 A corresponding know-how transfer may occur at different levels of the organisation, e. g. by introducing an efficient accounting system or an innovative marketing instrument. In the end, technology is the basis of improved productivity, which in turn contributes to sustainable poverty reduction by means of growth. In this respect, all of BIO s new commitments in productive companies (9 of 9) will contribute to a transfer of technology in the area of (i) Management (6), (ii) Corporate organization (2), (iii) Marketing (2), (iv) Production technology (2) or (v) Other areas (1) (e. g. R&D activities). 3.4.4 Market/structural effects Market and structural effects of a productive company can result from the introduction of new products, from the improvement of product quality, as well as from sectoral and regional diversification. From the development point of view, market and structural effects are significant because they create a modern and through effects of diversification a less crisis-prone economy. 89% of BIO s new commitments (8 of 9) will create positive structural/market effects through (i) the introduction of new products (3), (ii) improvement in the product quality (7), (iii) strengthening of competition (3), (iv) strengthening of the export sector (5), (v) contribution to regional or sectoral diversification (5 each) or (vi) by creating local business linkages (backward/forward) (3), which tend to foster the integration of local companies into the global value chain. 3.4.5 Infrastructure effects In almost all developing countries, deficits in the country s economic infrastructure (e. g. roads, energy, water supply, waste disposal, etc.) and social infrastructure (e. g. nursery schools, schools, medical facilities, hospitals) may pose a serious impediment to private-sector development. This is why the establishment of new companies often requires investments into new infrastructure as well. These activities are sometimes realised by the local authorities or the state. At times, the respective companies themselves realise infrastructure investments. Such infrastructure improvements provided that they are open and accessible to the public create positive development effects in the local communities and the enlarged project company s environment. 56% of BIO s new commitments in productive companies (5 of 9) are making a notable contribution to local infrastructure with respect to the improvement of roads (4) and the communication system (1) as well as the supply of water and energy (1 each). 3.4.6 Social effects/corporate Social Responsibility The long-term success of a company cannot be ensured without considering the social dimension of its business activities. Enterprises have a social responsibility for their employees, e. g. by complying with international core labour standards, payment of adequate wages and securing health and safety at work. In developing countries, those issues are of particular importance as adverse general conditions can prevent employees from achieving their best possible professional performance (housing conditions, non-availability of public transport to get to work, lack of working clothes, etc.). To remedy such difficulties, companies in developing countries frequently grant their employees voluntary social benefits which go way beyond legal requirements, i. e. they assume a Corporate Social Responsibility (CSR). 100% of BIO s new commitments (i.e. 9 of 9 productive companies projects) offer CSR activities/social benefits to their staff though the (i) compliance with ILO core labour standards (7), (ii) higher wages than the customary in the region (7), (iii) housing programme (4), (iv) preventive measures against HIV/AIDS and other chronic diseases (4), (v) compliance with international standards on healthy and safety at work (6) and (vi) others (4). 9 The term technology transfer has expanded over the past few years because of increasingly occurring South-South cooperations, where modern companies from developing countries implement state-of-the-art technologies in other developing countries.
9 3.4.7 Environmental standards In developing and emerging market countries, economic growth is often paralleled by environmental degradation and disregard for issues such as biodiversity protection and pollution prevention. For this reason, fostering project companies adherence to high environmental standards is an important issue for development finance institutions. From BIO s 2009 commitments in productive companies, four comply with World Bank/IFC environmental standards; two comply with standards below World Bank/IFC standards but above local standards and the remaining three commitments comply with local standards. It should be noted that compliance with international standards is a particular challenge in the SME sector since some measures, e. g. the introduction of an environmental and social management system (ESMS) are costly and time-consuming to implement. 3.5 Specific development effects of financial institutions (FS)/Private equity funds (PEF) 3.5.1 Mobilisation of savings /investment capital 100% of BIO s FS/PEF projects contribute to the development of local capital markets by mobilisation of savings and investment capital in the respective countries. 12 out of 16 projects are actively mobilising funding and investments by local investors. This is important from the development point of view because local savings are a precondition for locally financed investments (i. e. no foreign debt required). Investments, in turn, are the basis for further growth, employment and poverty reduction. 3.5.2 Diversification of the financial sector 50% of BIO s FS/PEF projects contribute to the diversification of the financial sector in the country/region because of the unavailability of sufficiently developed comparable institutes to date (broadening of the financial sector). From a development point of view, the diversification of the financial sector is important because the existence of a modern/efficient financial sector strongly correlates with a country s economic growth. In this regard, five projects finance a novel type of institute while five projects also provide new and innovative financial products in their respective country/region. 3.5.3 Diversification of credit/capital allocation All of BIO s FS/PEF projects contribute to the diversification of capital allocation and thereby to the deepening of the financial sector. The projects provide finance to business segments which have so far not or only insufficiently been serviced by the existing finance institutes (e. g. because the segment has so far been categorised as "unbankable", because of unclear collateral, lot size too small, etc.). 13 of 16 of the finance institutes/private equity funds transfer the BIO funds to SMEs, and 10 of 16 of them provide funds as well to microenterprises and start-ups. 3.5.4 Contribution to Institution Building BIO s long term finance has a signaling effect within the financial sector in all projects, i. e. showing that the finance institutes/private equity funds adhere to prudent banking principles. All projects are given access to needed long-term finance. In 44% of the projects BIO supports the scaling up of organizational and management capacities within the institutions, while in 38% of the projects information and control systems are being improved. In 31% of the projects BIO contributes to an implementation of an Environmental and Social Monitoring System at the financial institutions-/fund-management-level. 3.5.5 Contribution to local company development 94% of BIO s FS/PEF projects contribute to local company development. They give consultancy and technical advice resulting in: (i) an upgrading of companies (31% of projects), (ii) improvement of corporate governance (31% of projects), (iii) an introduction of environmental and social standards (56% of projects) and (iv) an improvement of accounting & reporting standards within the end-borrower- and investee companies (80% of private equity funds).
10 3.6 Specific development effects of infrastructure projects (IR) 3.6.1 Regular government revenues from the project BIO s three new commitments in the infrastructure sector will create net government revenues of around 4.3 million EUR p. a., which is positive from a development point of view, considering that all infrastructure investments are in countries with a negative budget balance (3 of 3). 3.6.2 Technology and know-how Transfer In this respect, all of BIO s new commitments in the infrastructure sector (3 of 3) will contribute to a transfer of technology in the area of (i) Management (2), (ii) Corporate organization (1), (iii) Marketing (1), (iv) Production technology (3) or (v) Other areas (2) (e. g. R&D activities). 3.6.3 Contribution to the country s supply situation The relevant infrastructure is typically supplied and operated by the government. Inadequate operation and maintenance of infrastructure often leads to supply bottlenecks, e.g. power cuts, unreliable telecommunication, damaged road systems, etc. All of BIO s new commitments in the infrastructure sector (3 of 3) will contribute to the reduction of supply bottlenecks in the country through (i) Network extension (3); serving (ii) New areas (3), (iii) New groups (2), or (iv) Major economic sectors (3); and reducing barriers for (v) direct investments (3) and (vi) Export trade (2). 3.6.4 Performance increase due to privatization Through a private operator, the quality and performance of infrastructure provision, which public ownership in developing countries frequently lacks, can be raised considerably. As the private operation is founded on the basis of efficiency, processes and equipment can typically be improved and costs of provision to the user can be lowered. In fact, all of BIO s new commitments in the infrastructure sector (3 of 3) contribute to implementing (i) cost-oriented tariffs and (ii) lower user charges, (iii) improved operation and maintenance, and (iv) a more reliable supply. In one case, also an (v) economically more rational organization of the company will be implemented (1). 3.6.5 Environmental standards From BIO s 2009 commitments in the infrastructure sector, all of them comply with World Bank/IFC environmental standards.
11 4 Strategic role of BIO in the projects 4.1 Attainment of shareholders strategic goals LIC/LDC: 48% of BIO s commitments in 2009 (13 of 28 projects; 2008: 76%) are investments located exclusively in Low-Income or Least Developed Countries. Partner country: 50% of BIO s commitments in 2009 (14 of 28 projects; 2008: 48%) are situated in partner countries of the Belgian Development Cooperation. Among the partner countries are five African partner countries (Burundi, Democratic Republic of Congo, Morocco, Tanzania and Uganda) and two Latin American partner country (Ecuador and Peru). Respect of human rights: 64% of BIO s commitments in 2009 (18 of 28 projects; 2008: 52%) are situated in countries which obtain an acceptable human rights rating (index value from 1-4). 10 Environmental performance: 89% of BIO s commitments in 2009 (25 of 28 projects; 2008: 68%) are situated in countries which obtain an acceptable environmental performance rating (index value above 51.6). 4.2 Subsidiarity/Additionality of BIO in the project In all of the 2009 commitments (28 of 28), BIO s financing is expected to be additional to the product offered by the local banking sector. In all projects BIO provides long term finance in developing countries that is not available in comparable terms and conditions elsewhere in the country. In 11 of 28 projects (39%) BIO offers local currency finance, a stable trend compared to 2008, where 9 out of 25 projects (36%) were financed in local currency. 4.3 Consulting by BIO In 32% of the 2009 commitments (9 of 28; 2008: 44%), BIO delivers valuable consultancy work to the project companies, amongst others through the use of technical assistance (TA) and studies. In 50% of the financial sector/private equity projects (8 of 16; 2008: 42%), BIO assumes an active part on the board of directors and thereby contributes added value to those institutions and its investee companies. 4.4 Mobilisation of third-party capital by BIO In 11% of new commitments (3 of 28; 2008: 24%) BIO s finance generates additional leverage effects through an active mobilisation of third-party capital of another DFI or private investor. 10 Human Rights Index ranging from 1 (= best rating) to 7 (= worst rating).