Foreign aid 2.0: The rise of bilateral DFIs
Weighed down by budget pressures, bilateral donors are increasingly looking to their development finance institutions to complement their traditional aid flows. A Devex analysis.
By Lorenzo Piccio // 25 August 2014At the first-ever U.S.-Africa Leaders Summit in Washington earlier this month, U.S. President Barack Obama announced billions in new pledges for Power Africa, his presidential initiative to double access to energy across sub-Saharan Africa. Widely seen as Obama’s marquee development program, Power Africa has drawn comparisons with the U.S. President’s Emergency Plan for AIDS Relief, arguably a success story that has defined former President George W. Bush’s global development legacy. What is often overlooked, however, is that unlike PEPFAR, relatively little of the U.S. government money promised for Power Africa is slated to come in the form of traditional aid money or official development assistance. The Overseas Private Investment Corp., the U.S. government’s development finance institution, has pledged more than $1.5 billion in financing toward Power Africa through 2018 — five times the U.S. Agency for International Development’s $285 million commitment. For readers who might not be familiar with DFIs, these typically donor-backed institutions provide financing for private sector firms in search of capital that will allow them to do business in developing countries. The financing instruments used by DFIs vary but they include loans, guarantees, equity and insurance. Because DFIs expect a return on their investments, which is then used to finance new projects, they generally operate at no net cost. It is worth noting that DFIs are not limited to bilateral donors. There are multilateral DFIs as well, such as the World Bank’s International Finance Corp. Amid the surge in private sector interest in global development and the growing acceptance that they deserve a seat at the table, it’s thus easy to see why cash-strapped donors — the United States is only one of several — are increasingly looking to their DFIs to aggressively complement their traditional aid flows. That is especially true for sectors like energy or finance where there is intense private sector interest. Most major bilateral donors have operated DFIs for decades — the Netherlands’ FMO and the U.K. government’s CDC are some of the more prominent European ones — but they have long been overshadowed by traditional aid agencies and, at the same time, arguably underutilized. The U.K. government expanded CDC’s financing authorities in 2011 following a review of its portfolio; Obama is believed to be considering similar proposals for OPIC, including from his own global development council. DFI officials stress that they rigorously review and monitor their projects to ensure development impact. Unlike export credit agencies such as the U.S. Export-Import Bank — which accounts for the largest share of the U.S. government’s Power Africa portfolio — DFIs broadly operate under a development rather than commercial mandate. A corporate project rating tool that assesses development impact, pioneered by the German DFI DEG, is now being used by some of its peer agencies, including France’s PROPARCO. “I think it’s important to note that everything that OPIC does has development impact — we’re a development agency. We’re very proud of the fact that every deal we do is designed to have a positive impact,” OPIC President and CEO Elizabeth Littlefield told Devex last month. Below, Devex analyzes the portfolios and strategies of six of the largest and most prominent bilateral DFIs. Most critically, we found evidence that bilateral DFIs are indeed stepping up to the plate and helping fill the void left by sluggish ODA growth since the global financial crisis. Five of the six DFIs assessed have been seeing marked albeit uneven growth in their investments since 2009 — dwarfing the more modest increases in bilateral ODA over that period. At the same time, however, traditional aid flows from the bilateral donors still far exceed financing from DFIs. CDC, United Kingdom Wholly owned by the U.K. Department for International Development, CDC was founded back in 1948. Until a 2011 review of its portfolio, CDC’s financing was limited to equity, but the agency has since diversified its financial products to include loans and guarantees. Over the past five years, CDC’s portfolio has been extremely volatile — new commitments dropped markedly in both 2011 and 2012, but eventually rebounded with a staggering 260 percent increase in 2013. CDC’s new commitments in 2013 are nearly three times as much as 2009 levels, dwarfing the 60 percent increase in DfID’s ODA budget over that period. CDC concentrates its investment on sectors the agency has determined can create the most jobs in developing countries: agribusiness, construction, financial institutions, infrastructure, manufacturing, health and education. In 2013, infrastructure accounted for a quarter of CDC’s portfolio, followed by trade (13 percent), manufacturing (12 percent) and financial services (11 percent). CDC’s single-largest investment that year was a $200 million commitment to the Second India Infrastructure Fund, which provides long-term financing for construction and infrastructure projects in India. As a result of its 2011 portfolio review, CDC has begun to refocus its activities solely on the two regions where almost three-quarters of the world’s poor people live: Africa and South Asia. Within Africa, CDC’s investments are being concentrated on low- and lower-middle-income countries, while in India, CDC is directing its investments to the country’s eight poorest states. In 2013, Africa accounted for 51 percent of CDC’s investments, well ahead of South Asia’s 21 percent. Acknowledging the momentum for private sector involvement in global development, U.K. government officials have hinted that CDC could eventually displace DfID as the lead U.K. aid agency. Notably, in Kenya — a longstanding recipient of British foreign aid that is on the cusp of middle-income status — DfID’s operational plan suggests financing from CDC could replace ODA flows later in the decade. FMO, Netherlands Founded in 1970, the Dutch development bank FMO issues loans, equity and guarantees designed to catalyze private sector growth in three key sectors: finance, energy and agribusiness, and food and water. In 2013, FMO’s investments in financial institutions serving small and midsize enterprises — including commercial banks and microlenders — accounted for more than half of its commitments. In 2013, FMO’s largest commitments to financial institutions included a $15 million commitment to Bangladesh’s BRAC Bank and a $25 million loan to the Bank of Africa in Kenya. The bulk of FMO’s investments worldwide are directed to Africa and Asia, particularly to emerging economies in those regions. In 2013, India, Turkey, South Africa, Bangladesh and Nigeria were the largest recipients of FMO commitments. The Dutch development bank has pledged to invest at least 70 percent of its financing in low- and lower-middle-income countries, as well as at least 35 percent in the 55 poorest countries. FMO has also set an ambitious target of doubling its development impact and halving its climate footprint by 2020. FMO’s steadily expanding portfolio is in stark contrast with the Netherlands’ shrinking ODA budget, which has been hit hard by the Dutch government’s austerity measures. Since 2009, FMO’s annual investments have grown 14 percent each year on average, while annual Dutch ODA has fallen 4 percent on average. OPIC, United States The U.S. government’s development finance institution, OPIC was founded back in 1971. OPIC’s new loans, guarantees and political risk insurance commitments have grown by an average 4 percent over the past five years — compared with just 1 percent average growth in the U.S. foreign aid budget. In contrast to most of its peer DFIs, OPIC lacks equity authority and only finances projects in which U.S. private sector firms are substantially involved. While OPIC invests in a range of industries where the agency believes it can achieve development impact, the financial services sector accounts for the bulk of its portfolio. In 2013, the financial services sector accounted for 51 percent of OPIC’s finance and insurance exposure, while the power sector followed with 25 percent. OPIC’s investments in renewable power under the U.S. Global Climate Change Initiative seem to be the principal driver of growth in its portfolio. OPIC’s commitments to renewables approached $1.3 billion in 2013, compared with just $29 million in 2008. Even as Latin America and the Caribbean continued to garner the largest share (29 percent) of OPIC’s portfolio in 2013, the Bush and Obama administrations have been gradually refocusing the agency’s resources toward sub-Saharan Africa. The region’s share of OPIC’s portfolio has risen from 9 percent in 2002 to 22 percent in 2013 — a trend likely to be accelerated by the agency’s $1.5 billion commitment to Power Africa through 2018. In 2013, OPIC’s single-largest commitment to sub-Saharan Africa was a $150 million loan to Amethis Africa Finance Ltd., which was designed to mobilize long-term financing for African businesses. Despite being self-sustaining from its own revenues, OPIC has its fair share of critics among budget hawks in Washington who contend that the agency not only favors select U.S. businesses but also crowds out domestic investment. U.S. President Barack Obama’s fiscal reform commission made that case when it proposed eliminating OPIC back in 2010. Early in 2012, Obama himself sought authority from Congress to consolidate the federal government’s trade-related agencies — including OPIC — under a new department. Amid concerns that the reorganization would hinder OPIC’s autonomy and hamper its effectiveness, Obama has quietly shelved the proposal. Norfund, Norway Since it became operational in 1998, Norfund has steadily built a portfolio of loans, equity and guarantees in four sectors: renewable energy, finance, agriculture, and small and medium enterprises. Over the past five years, Norfund’s annual investments have increased by an average 15 percent each year — well above the 7 percent average increase in the aid budget managed by the country’s foreign ministry and the Norwegian Agency for Development Cooperation. Much like NORAD, Norfund has a heavy focus on renewable energy, which accounts for roughly half of its portfolio. In 2013, Norfund’s single-largest transaction was a $12 million equity investment in the 60-megawatt Kinangop Wind Park in central Kenya, which will become the first commercial wind park in the region when completed next year. In July, Norwegian Prime Minister Erna Solberg inaugurated a Norfund-financed solar power plant in Rwanda, East Africa’s first utility scale solar plant, which is expected to be completed his month. As part of its strategy to focus its resources on poorer countries where it can build in-country knowledge and achieve the greatest impact, Norfund limits its investments to four regions: Southern Africa, Eastern Africa, Southeast Asia and Central America. In 2013, Zimbabwe, Cambodia and Kenya were the largest recipients of Norfund financing. That same year, 68 percent of Norfund’s financing was invested in Africa, while 42 percent was invested in least developed countries. PROPARCO, France Partly owned by the French Development Agency, or AFD, PROPARCO has been operating as France’s development finance institution since 1990. PROPARCO’s new commitments in loans, equity and guarantees last year were largely flat when compared with 2009 levels, mirroring a similar trend in French ODA. The financial sector is topmost priority for PROPARCO’s financing. In 2013, the sector received 45 percent of PROPARCO’s commitments, compared with 29 percent for infrastructure. Last month, PROPARCO approved a new investment strategy for 2014-2019, which commits the agency to ensure that 30 percent of its projects produce co-benefits against climate change. As in the case of AFD, sub-Saharan Africa is the primary regional focus for PROPARCO financing. PROPARCO anticipates that it will contribute 3 billion euros ($4 billion) to French President Francois Hollande’s 20 billion euro financing pledge for sub-Saharan Africa through 2018. PROPARCO’S largest investments in the region include a $50 million loan agreement with Nigeria’s Zenith Bank and a 50 million euro loan to finance the Lake Turkana Wind Power Project in Kenya. Over the past decade, PROPARCO has expanded its engagement to emerging economies outside sub-Saharan Africa, including India, Brazil and China. In 2013, sub-Saharan Africa garnered 46 percent of PROPARCO commitments, well ahead of Latin America and the Caribbean (26 percent) and Asia (14 percent). PROPARCO’s 2014-2019 investment strategy commits the agency to direct 25 percent of its financing to fragile states. DEG, Germany Founded back in 1962, DEG is a subsidiary of the German government’s financial cooperation agency Kfw Entwicklungsbank. Over the past five years, DEG’s annual commitment of loans, equity and guarantees have grown by an average 10 percent, compared with the more modest 2 percent average growth in German ODA during that period. While DEG’s portfolio has a heavy focus on the financial sector, agribusiness, industry and infrastructure are also priorities for its financing. Last month, however, DEG launched a 150 million euro renewable energy fund for institutional investors, the latest indication that renewable energy is moving up DEG’s financing priorities. In 2013, the financial sector claimed the highest share (33 percent) of DEG’s portfolio, followed by industry which garnered 28 percent. DEG stresses that activities across its portfolio must not only produce positive development impacts, but should also be ecologically and socially sustainable. DEG operates in Africa, Asia, Latin America and Eastern Europe. In 2013, Asia garnered the largest share (32 percent) of DEG’s portfolio, followed by Latin America, which received 29 percent. While DEG openly acknowledges that the bulk of its financing is directed to higher-income countries, the agency also has sizable investments in poorer countries, including Ethiopia, Bangladesh and Uganda. China, Turkey, India, Bangladesh and Brazil were the largest recipients of DEG financing in 2013. 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At the first-ever U.S.-Africa Leaders Summit in Washington earlier this month, U.S. President Barack Obama announced billions in new pledges for Power Africa, his presidential initiative to double access to energy across sub-Saharan Africa. Widely seen as Obama’s marquee development program, Power Africa has drawn comparisons with the U.S. President’s Emergency Plan for AIDS Relief, arguably a success story that has defined former President George W. Bush’s global development legacy.
What is often overlooked, however, is that unlike PEPFAR, relatively little of the U.S. government money promised for Power Africa is slated to come in the form of traditional aid money or official development assistance. The Overseas Private Investment Corp., the U.S. government’s development finance institution, has pledged more than $1.5 billion in financing toward Power Africa through 2018 — five times the U.S. Agency for International Development’s $285 million commitment.
For readers who might not be familiar with DFIs, these typically donor-backed institutions provide financing for private sector firms in search of capital that will allow them to do business in developing countries. The financing instruments used by DFIs vary but they include loans, guarantees, equity and insurance. Because DFIs expect a return on their investments, which is then used to finance new projects, they generally operate at no net cost.
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Lorenzo is a former contributing analyst for Devex. Previously Devex's senior analyst for development finance in Manila.