The African Development Bank’s vision for private sector development in Africa provides a link between entrepreneurship and poverty alleviation and sustainable development.
This vision is based on two fundamental principles: first, entrepreneurs come in all shapes and sizes – from the micro-entrepreneur selling handicrafts to the mega-entrepreneur promoting a major infrastructure project; second, that they all play a vital role in creating jobs and boosting sustainable economic growth.
Supporting and catalysing private sector development and investment is a core priority of the African Development Bank (AfDB).
Over the past five years, the AfDB has translated this strategic objective into reality by dramatically increasing its annual financing volumes for the private sector; these have now reached close to $2bn.
Private sector development and finance is one of the four strategic focuses of the AfBD. The other three are: infrastructure development, governance, and higher education, technology and vocational training.
The bank has a unique comparative advantage as it finances projects and enterprises that cannot obtain adequate financing at reasonable terms. It sets out to demonstrate, by example, that private investment in Africa can be commercially successful.
Without access to finance and sound financial institutions, entrepreneurship cannot be developed nor can there be economic growth. This is why one of the main mandates of the AfDB’s Private Sector Operations is to promote the development of the financial sector in Africa.
To achieve this objective, the AfDB supports private and regional development finance institutions as well as public financial institutions that are able to borrow on the strength of their own balance sheet without recourse to sovereign guarantees.
AfDB Private Sector Operations: instruments and financing modalities
The AfDB Private Sector Operations provides a wide range of instruments and technical assistance to enhance the African financial market and promote access to finance – and support to private entities from SMEs to regional financial institutions and commercial banks.
Debt: a financial instrument for corporate and project finance
The AfDB offers non-sovereign guaranteed financing to private corporations, financial institutions, or state-owned enterprises, and often in partnership with other development-orientated institutions.
The AfDB may also finance private sector entities – where entity refers to an enterprise or project that is privately owned and managed, meaning that more than 50% of its voting shares must be in private hands. This includes enterprises that have undergone partial privatisation, joint ventures, and public-private partnerships.
Priority is given to the infrastructure sectors involving key national and regional projects in transport, energy and ICT. In instances where it is appropriate for the AfDB to be directly involved in individual transactions, lending products are usually structured on a limited recourse project finance basis. In such cases, the lenders’ recourse, in the event of default, is limited to the assets and cash flows of a ring-fenced project.
The AfDB provides both senior and subordinated debt instruments, in accordance with the specific needs of the project.
Lines of credit: a tool for African SME finance
Lines of credits are non-project-specific loan facilities that are extended to intermediaries, which in turn, on-lend the proceeds to individual enterprises.
In most instances, the broad parameters upon which such facilities will be on-lent (usually to support small and medium enterprises, specific sector focus, etc) will be agreed upon by the AfDB and the borrower. These can include ministries and regional or sub-regional institutions, but also private funds or entities.
Recently, to face the financial instability generated by the Arab Spring, the AfDB approved a line of credit of $50m to the Republic of Tunisia to support the country’s SMEs. This line of credit will support between 200 and 250 commercially viable small- and medium-scale Tunisian enterprises which have suffered from the recent events. Moreover, it is expected that about 30% of these resources will be directed to underserved areas of the country. From an employment perspective, this will allow existing jobs to be maintained and up to 6,000 new jobs to be created over the next five years of which at least 700 will be for women.
How the AfDB promotes the African private equity industry
AfDB also invests in funds whose scope is in Africa and are domiciled in the continent. The bank is a leading investor in the African private equity sector, as it views this industry as an important pillar supporting private sector development.
It pursues a diversification strategy in terms of geography, sector, development stage and fund manager experience. While the AfDB supports experienced fund managers, it also considers first-time fund managers after appraising their significant skills, individual track records and strength of pipelines.
AfDB’s support to the private equity industry strengthens the profile of the PE industry amongst African and foreign investors and encourages the flow of additional capital to the African private sector. In addition to achieving a positive development impact, AfDB is developing a portfolio whose financial performance should act as an incentive to sources of private capital.
The African private equity industry is growth oriented and its activities are, consequently, very well aligned with the AfDB’s development agenda:
• Capital investment is an important pillar for strengthening private sector development and thereby boosting overall economic development and poverty reduction in Africa.
• Growing private companies create jobs and opportunities for other companies, develop their human capital, increase foreign currency earnings and regional trade and contribute tax revenues.
• The African PE industry is poised for significant growth as a result of growing private equity investor interest in Africa.
• Constructing a successful private equity investment portfolio will catalyse the flow of further investment into the African private equity industry.
B-loans and syndicated loans
AfDB, in common with other international financial institutions, is afforded certain privileges, often referred to “Preferred Creditor Status”, under the terms of its establishment. These mitigate certain country risks, for example by providing immunity from the rescheduling of private sector debt obligations where the borrower’s inability to service its debt is due to a general foreign exchange shortage in the borrower’s country.
The benefits of this Preferred Creditor Status are passed on to investors in B-loans, and are reflected in their terms. Investors are typically asked to extend the tenor beyond which they would usually lend under a conventional facility.
A/B-loans can be used in all AfDB’s countries of operation with no restrictions on size or sector. The Bank seeks to co-finance with commercial investors whenever possible, and to maximise the mobilisation of external resources in parallel with its own.
Virtually all commercial investors, bank and non-bank, are eligible B-loan co-financiers. However, export credit agencies, other development finance and governmental institutions, and parties directly related to the project’s shareholders and sponsors are ineligible. The other major preclusion is on investors from the country of the borrower: the B-loan mitigates country risk, but it would be inappropriate to do this against a lender’s legislators and regulators.
The bank sees the fostering of a strong and liquid intra-African investment market as highly conducive to development, and is looking to roll out the co-financing product to investors across the continent.