Belgian DFI doubling in size, aims to stay focused on SMEs

WASHINGTON — Belgium’s development finance institution, the Belgian Investment Company for Developing Countries, or BIO, is in the process of doubling its investments, in part as a response to the growing role of private capital in addressing development challenges. The agency will soon have a total of $1 billion in investments, and as it grows in size, BIO is trying to maintain its focus on supporting small- and medium-sized enterprises in least-developed countries, BIO CEO Luuk Zonneveld, told Devex in an interview. Zonneveld said he has seen a shift in the past five years in the “recognition and appreciation” of development finance as a key part of social and economic development. Even though many DFIs existed for years before the adoption of the Sustainable Development Goals and the 2015 Addis Ababa financing summit, they were “all of a sudden catapulted to the forefront of attention,” he said. The SDGs and the Addis Ababa Agreement placed greater emphasis on the role of the private sector and private capital in achieving development aims than before. The result is not only that the Belgian government, a BIO shareholder, decided to increase BIO’s capital, but that the organization is regularly being asked to participate in fora and is leading task forces in the political arena, he said. “It all indicates a strong interest and a bigger role of investment in general in what the world is trying to achieve,” Zonneveld said. BIO is focused on supporting SMEs, investing both directly and indirectly through funds, with an emphasis on businesses in low- and lower-middle-income countries. About 80% of BIO’s lending is in least-developed countries and post-conflict states, and it typically invests between $1 million and $10 million, Zonneveld said. Many DFIs are being pushed to do more work in LDCs, and there are a few factors that enable BIO to invest in lower-income, more challenging environments. One factor is deal size, as BIO lends smaller amounts than some other DFIs. What also gives BIO more flexibility than other DFIs is that it doesn’t have high return expectations, enabling it to take greater risk. BIO’s net level return in the last five years is about 2.5%, which is acceptable in part because it is linked to market interest on 10-year state bonds which currently have negative interest rates, Zonneveld said. BIO provides technical assistance alongside its investments when necessary, but in any technical assistance project, the client or borrower is required to contribute as well. Often that means they are bearing 50% of the costs of the assistance, though that could drop to as low as 15% depending on the need, Zonneveld said. “We have a very hands-on approach when we do investment analysis within our framework,” he said, adding that those relationships and deep knowledge of the situation in countries such as the Democratic Republic of the Congo — where BIO has its biggest portfolio — helps the agency be aware what is happening and actively manage investments. “If you look at technical assistance it’s less about the amount of money but the time we spend with clients to do these different types of projects,” he said. The challenge for BIO today is not to change its basic focus on supporting SMEs in least developed countries and post-conflict states, despite having significantly more capital to deploy, Zonneveld said. “The question rather is will we be able to develop sufficient internal resources to continue to take this approach despite the fact assets are growing so strongly,” he said. As a relatively small DFI, BIO does partner and co-invest with other larger DFIs, in part because those deals require less staff time and allow the team to spend more time on the direct investments it makes, Zonneveld said. And while efforts have been made through the Association of European Development Finance Institutions, EDFI, to work on standards and procedures that have allowed the agency to be more effective and cost-efficient, there is a “dire need for us to harmonize much more.” Harmonizing development impact indicators and reporting will make things easier for BIO because it will be able to consolidate some of its metrics, which Zonneveld said would be a “major step forward.” “In general the DFI industry is adolescent in the way it works, it will benefit from further steps to increase efficiency and cooperation,” he said.