“Alternative Sources of Finance”
Presented by Yukiko Omura
June 11, 2014

Current state of play•

Most of project finance projects have been done with loans from DFIs, ECAs andsome commercial banks.

•As a result of financial crisis, many traditional lenders have left or reduced theiractivities, partly due to capital requirements under Basel III.

•Financing available going to extractive industries and energy sector.

•Local currency funding limited in many countries and when available, tenors arelimited (5-7 years).

•Lack of depth of local capital markets, Limited access by small firms andhouseholds.

•

But needs are huge; infrastructure alone requires USD$50 billion a year (andthat does not include maintenance for existing assets).

•

Potential sources of finance include: bond financing, institutional investors,
diaspora bonds, climate finance, etc.

•But as well, need to improve domestic resource mobilization: strengthen tax
administration, better control of natural resources revenues, reduce illicit
financial flows.

Development assistance’s changing face
Private capital flows to sub-Saharan Africa—foreign direct investment (FDI), portfolio flows andloan flows— reached $67 billion in 2012, up from $14 billion in 2002. In comparison, ODA
increased to only $42.5 billion in 2012 from $18.1 billion in 2002.

• Multilateral development banks

TraditionalSources• Bilateral institutions, Government to Government• Brazil, Russia, India, China, South Africa, Saudi Arabia, Korea, Turkey…

New donors• Philanthropy: Bill and Melinda Gates Foundation, Ford Foundation• Social Impact investors: Shell Foundation, Acumen Fund

New private• Vertical funds: multi-stakeholder global programmes earmarked for asources
specific purpose

Local sources of finance
What we have:•In terms of banking depth, the financial systems are shallow.

•One in three African countries has an organized securities market.

•Insurance is highly variable across African countries, especially in thelife sector, with considerable potential for development.

•Varied role of different classes of institutions, e.g. savings banks,
cooperatives, microfinance institutions (often sponsored by NGOs).

What is missing:•Non bank financing sector generally lacking, e.g. capital markets withdebt and equity securities, and contractual savings institutions such as
insurance companies, pension funds and mutual funds.

•Specific financial products missing due to issues relating to regulatory
uncertainty, property rights, tax codes. These include leasing (a key
tool for SMEs), factoring,See ”Making Finance Work for Africa, The World Bank, 2007.

Alternative sources of capital (pension funds)
Pension funds,SWFs
Asset allocation
decision
Fixed income

Infrastructure

Equities

Private equity

Infrastructure
Debt FundProject Bonds
Corporate bonds

Unlisted EquityFundDirect equity

ListedInfrastructurecompanies

Unlisted equity
fund

Following financial crisis, investors need:• to invest in stable, resilient asset classes (e.g. infrastructure assets) over thelong term to cover cost of capital• an Investment strategy that generates scale• a high degree of confidence with respect to regulatory regime• financial structures with access to risk mitigation instruments

Source (for diagram): Pooling of institutional investors capital (April 2014), OECD

Type ofassets
invested intoAlternative sources of capital (Private equity)•Long term outlook for fund raising in the region looks strong.

•Renewed interest due to: growing economies, favourable demographics,increasing political stability, improved business environment.

•The landscape is changing fast as a number of global PE firms are looking toinvest in Africa; no longer just South Africa but other countries like Nigeria,Ghana, Kenya, Ethiopia, Uganda, Tanzania, Zambia, Angola.

•Increase in sector related funds, e.g. Agriculture, infrastructure, real estate,natural resources, health care and consumer products.
Given limited capital available from banks and public markets, privatecompanies find it difficult to raise capital to grow.
••PE can meet some of the capital needs to support SME growth
PE can bridge the funding gap

Microfinance•

It is estimated (in 2012) that there are 7.5 million active borrowers with agross loan portfolio of USD 7.9 billion.

•A majority of microfinance institutions are savings and credit cooperatives, withthe balance being NGOs, non bank financial institutions and banks.

•In terms of products, most provide both group and individual loan products andsavings facilities are generally offered.

•Benefits cited include: access to small amounts of credit; extending education,improved health and welfare, sustainability.

•Issues for consideration:
 Much of microfinance is led by private groups that want to fund initiatives
that are important to them: education, women’s health issues, watersanitation. Much needed but may not not use microfinance to its
maximum potential.
 With limited resources, should funds be channeled instead into SMEs
which are generally viewed as the engine of job creation?