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Investing for Development Tag INVESTING FOR DEVELOPMENT TAG Norfund Investing for Development Head office Oslo,Norway Visiting address Støperigata2,AkerBrygge, 0250Oslo,Norway Postal address POBox1280Vika. No-0111Oslo,Norway Phone +4722019393 Fax +4722019394 E-mail [email protected] Internet www.norfund.no Design & production Dinamo E-mail [email protected] Repro Dinamo Editing SimonGoudie Print RolfOttesen 2 NORFUND | INVESTING FOR DEVELOPMENT TABLE OF CONTENTS TABLE OF CONTENTS Foreword 4 Finance 50 Finance for development 52 Increasing financial inclusion 54 Investing for development 6 DFIs – closing the investment gap 56 Growth, jobs and poverty reduction 8 Norfund – investing in financial institutions and 57 A new global agenda for development 10 SME funds The new architecture of aid 11 Case study: Hattha Kaksekar Limited 61 Case study: Fanisi and Haltons Pharmacy 64 Norfund’s approach 14 Agriculture 66 Norfund’s mandate 16 The importance of agriculture in Africa 68 Norfund’s strategy 18 Realising the potential of agriculture 70 DFIs - closing the investment gap 72 Comment on smallholders – by Kari Helene Partapuoli 73 Development effects 20 Norfund – investing in the food and agricultural 74 Reporting practice 22 value chain Sustainable enterprises 24 Case study: Agrivision 76 Jobs and tax revenues 26 Macro-economic impact 28 Norfund’s investment process 80 Identification 82 Drivers of development 30 Due diligence 83 Energy 32 Investment 85 The importance of energy 34 Active ownership 86 Realising the potential of the energy sector in 36 Exit 87 Sub- Saharan Africa Comment on electrification – by Ørnulf Strøm 39 DFIs – closing the investment gap 40 References 88 Comment on renewable energy investments – by 41 Marius Holm Acronyms and abbreviations 91 Norfund – investing in clean energy supply 42 Case study: Bio2Watt 47 INVESTING FOR DEVELOPMENT | NORFUND 3 FOREWORD AMESSAGEFROM KJELL ROLAND FOREWORD Managing Director The number of people living in extreme poverty has declined by more than 50 percent since 1990, and sus- tained economic growth has been the main driver of this change. Nine out of ten jobs in low- and middle-income countries are provided by the private sector. Efforts to re- duce obstacles to private sector growth will therefore be crucial to improving the lives of the 700 million people still trapped in poverty and to creating new employment opportunities. The Sustainable Development Goals adopted by the UN in September 2015 highlight the importance of the private sector for creating economic growth and com- bating poverty. Private financiers are expected to support economic growth and development, but many lack the competencies and risk appetite needed for investing in the poorest countries. Norfund – the Norwegian Investment Fund for Developing Countries – was established in 1997 by the Norwegian Parliament. Norfund is Norway´s most im- portant instrument for private sector development in low- and middle-income countries. The resources we provide are additional to those provided by the regular market and help to catalyse further investment from other private investors. We contribute to the develop- ment of sustainable companies that provide jobs, gener- ate government revenues and provide useful goods and services. Norfund´s portfolio is growing steadily. Our annual capital contribution from the Norwegian Ministry of Foreign Affairs has increased from NOK 175 million in 1998 to NOK 1,480 million in 2015. Norfund now manages an active portfolio of NOK 15 billion in approxi mately 700 companies. 4 NORFUND | INVESTING FOR DEVELOPMENT FOREWORD The portfolio of investments by European Development Norfund’s strategy is to concentrate our investments in Finance Institutions (EDFIs) has also grown rapidly, three sectors that are particularly important in driving more than tripling in size since 2005. In 2015, the total development: energy, finance and agriculture. Chapter 4 EDFI portfolio was worth EUR 36 billion. If this trend explains the development rationale for investing in these continues, European DFIs may be able to mobilise new sectors, Norfund’s strategy, and presents case studies investments in developing countries at a level compara- from our portfolio. ble to European Official Development Assistance within the next ten years. Norfund contributes to development by investing in potentially profitable businesses and focuses on the In 2014, Norad initiated an evaluation of Norfund to poorest countries. We ensure that our investments are better understand the fund’s role as an instrument of additional and adhere to strict environmental and social Norwegian development assistance policy. The findings standards. Many stakeholders want to learn more about of the evaluation conducted by Gaia Consulting Ltd our contribution to development. We hope this report were very positive: Norfund has been successful in will give you better insight into what we do, how we do ful filling its mandate. The instruments used, and our it, and the developmental effects of our investments! focus on specific sectors and geographies have generally matched the objectives of Norwegian development policy. The report, published in 2015, highlighted Nor- fund’s success in active ownership, the efficiency of our project cycle, the additional value of Norfund’s invest- ments, and our ability to leverage capital. The evaluators identified both quantitative and qualita- tive development effects of Norfund investments. They Kjell Roland noted, however, that Norfund produces less external Managing Director information about its contribution to development, compared to many other DFIs. The report recommended therefore that we further develop the monitoring, doc- umentation, and reporting of our development effects, for instance by conducting in-depth assessments of selected investments. The evaluators also indicated that they would welcome more analysis of the effects of DFI investments at the macroeconomic level. This report is a first response to the recommendations made. It describes the role of DFIs such as Norfund in the new architecture of global aid in which the role of the private sector is central. It also presents Norfund´s man- date and strategy and explains how DFI investments con- tribute to development. It summarises recent findings on the macro-economic impact of DFI investments, and explains the channels through which Norfund’s invest- ments contribute to job creation and poverty reduction. INVESTING FOR DEVELOPMENT | NORFUND 5 TAG CHAPTER 1 Investing for development 6 NORFUND | INVESTING FOR DEVELOPMENT TAG KEY MESSAGES The number of people living in extreme poverty has declined by more than 50 percent since 1990. Sustained economic growth that involves a large part of the labour force has been the main driver of poverty reduction. Nine out of ten jobs in low- and middle-income countries are provided by the private sector. Removing obstacles to the growth of the private sector is necessary to create jobs and reduce poverty. The UN’s Sustainable Development Goal agenda for the next 15 years places increased emphasis on the role of the private sector in supporting sustainable growth. Donor countries are increasing their allocations to Development Finance Institutions investing in private sector projects INVESTING FOR DEVELOPMENT | NORFUND 7 INVESTING FOR DEVELOPMENT GROWTH, JOBS AND POVERTY REDUCTION Economicgrowththatprovidesjobshasbeenthemaindriverofpovertyreductionoverthepast25 years.Theprivatesectorplaysacriticalroleinjobcreation. Figure The number of PROGRESS AGAINST POVERTY countries showing that between 66 and 90 percent people living below USD 1.9 a day has declined World Bank and IMF data show that the global pov- of the reduction in absolute poverty could be ex- erty rate has declined dramatically over the past 25 plained by growth in average incomes2. Similarly, 2000 years and reached 9.6 percent in 2015. Progress has the UK Department for International Development been particularly substantial in East Asia where the (DFID) found overwhelming evidence in a review 1500 extreme poverty rate has dropped from 61 percent of cross-country research and country case studies, in 1990 to only 4 percent in 2015, and in South Asia that rapid and sustained growth is critical for where it decreased from 51 percent to 14 percent poverty reduction. DFID estimates that a 10 percent 1000 over the same period1. These major achievements are increase in a country’s average income will typically due mainly to high and sustained economic growth reduce a country’s poverty rate by between 20 and 500 in China and India. 30 percent3. Number of people, millions people, Number of 0 1990 2015 At the end of 2015, approximately 700 million Rapid economic growth is possible and is influenced people were living on less than USD 1.9 a day. Half of by the ability of a state to enact policies enhancing World excl. SSA this group resides in Sub-Saharan Africa. growth and promoting increases in productivity. Sub-Saharan Africa Evidence from countries such as South Korea and Source:WorldBankGroup ECONOMIC GROWTH REDUCES POVERTY Singapore has shown that even countries lacking (2016) The importance of economic growth to poverty significant natural resources can graduate from be- reduction is illustrated by many cross-country ing among the poorest to the richest in fewer than 50 analyses. In 2004, for example, Kraay published a years if the political context is supportive and invest- study of a large sample of low- and middle-income ment levels are high. Figure Sustained growth is
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