How to support NDBs in attracting long-term capital: Lessons from experience in Africa New-York, 1 December 2005 Gilles Genre-Grandpierre Proparco Head, Banking & Capital Markets

Proparco is a French Development Finance Institution (DFI), member of the European Development Finance Institutions (EDFI) network Proparco is a French Development Finance Institution (DFI), member of the European Development Finance Institutions (EDFI) network Agence Française de Développement is its majority (68%) shareholder Agence Française de Développement is its majority (68%) shareholder Other shareholders include major private French and international banks and companies, which makes it unique among DFIs Other shareholders include major private French and international banks and companies, which makes it unique among DFIs Operations in 60 countries in Africa, the Middle- East, Asia and the Carribean Operations in 60 countries in Africa, the Middle- East, Asia and the Carribean

Proparco combines long-term developmental objectives with private sector profitability requirements Proparco combines long-term developmental objectives with private sector profitability requirements It offers the full spectrum of financial services and products, similar to investment and merchant banks It offers the full spectrum of financial services and products, similar to investment and merchant banks Proparco’s shareholding structure allows it to operate on longer maturities with riskier products in difficult environments (additionality principle) Proparco’s shareholding structure allows it to operate on longer maturities with riskier products in difficult environments (additionality principle) 50% of the EUR800 million portfolio invested in Africa, half of which in the banking and financial sector 50% of the EUR800 million portfolio invested in Africa, half of which in the banking and financial sector

To determine appropriate support to NDBs in order to mobilize private capital: To determine appropriate support to NDBs in order to mobilize private capital:  W e carried out internal research on Proparco’s NDB portfolio - equity and credit - since 1998 (average # of NDBs in portfolio: 10)  Objective of research: What are the criteria that distinguish successful NDBs from others in attracting private capital?  Internal criteria investigated, as well as external ones (sophistication of local banking & financial markets)  Successful NDBs in mobilizing private capital defined as being financially sustainable and additional in filling market gaps (instrument, maturity, objective, etc.)

Portfolio of NDBs in the following countries: Portfolio of NDBs in the following countries:Morocco West Africa Gabon Uganda Swaziland South Africa

First conclusions: First conclusions:  Successful NDBs operate in «conflicting» environments, whether internal (mixed shareholding structure, such as DFCU in Uganda), or external (competitive environment, such as DBSA and IDC in South Africa)  NDBs operating in «conflicting» environments are more efficient at attracting private capital. Good governance and sound risk management are a consequence of external pressure, rather than a cause of sustainability  External environment is key in determining appropriate support to NDBs to mobilize private capital: 3 groups of countries defined

The 3 groups of countries The 3 groups of countries Group I (mostly LICs) Group II (some LICs and most MICs) Group III (emerging markets) Importance of economic cycles and systemic risk, number of uncertainty factors Sophistication of banking & financial market (depth)

The 3 groups of countries The 3 groups of countries í Group I: Economic sphere is the problem, no long maturities, no hierarchy of risks on long-term, no long- term private capital í Group II: economic growth, beginning of financial development and hierarchy of risks, longer maturities, some private long-term capital on big projects í Group III: emerging markets, cyclical economies, more depth of financial markets and hierarchy of risks, long maturities, presence of long-term private capital

Key findings for successful NDBs: Key findings for successful NDBs:  Are able to manage internal or external conflicts  Fill only an incremental - but determining - gap in the market: They lead the pack in incremental risk-taking (eg, DBSA’s securitization of municipal finance portfolio in South Africa)  Avoid market distortions and crowding-out effects on private sector players  Remove abnormal risks between perceived and real risks: Successful NDBs are not a substitute for the market, they just help the market go the extra mile

Time Cost of funds «Perceived» risk curve «Normal» yield curve The extra mile for NDBs to attract private capital Zone of legitimacy for NDBs

Appropriate levels of support for NDBs to be successful in attracting private capital: Appropriate levels of support for NDBs to be successful in attracting private capital:  The existing banking and financial sophistication of a market is key in determining relevant market gaps and appropriate levels of support: The «next step» principle NEXT STEP Maturity Maturity and instruments Risk sharing and mitigation MARKET GAP DBSA’s securitization of municipal finance portfolio IDC’s provision of equity on BEE new ventures Long-term funding of NDBs and private banks New shareholding of DFCU in Uganda Long-term funding of BOAD in West Africa