Head of Unit Investment and Innovative Financing at European Commission
Kay Parplies is the Head of Unit Investment and Innovative Financing at European Commission (EC), Directorate-General for External Cooperation. Parplies has been with EC for more than 20 years – most of the time he’s been involved in economics and finance positions. Together with FMO Parplies worked on two pioneering guarantee programs under the European Fund for Sustainable Development (EFSD)*: NASIRA and the FMO Ventures Program.
There are literally trillions of euros in investable funds out there
“We see the private sector as a central element of developing an economy. You just cannot create a vibrant SME sector with traditional grant funding, by giving money to entrepreneurs. The business environment needs to grow and to be able to sustain itself: you need a good regulatory environment but also the ability for entrepreneurs to go to banks to borrow money. To get this environment going you need non-traditional banking products – like blended finance or guarantees - to create more opportunities, generate more investments and create markets in developing countries.”
“our role is to encourage it to go to markets that private investors perhaps consider as too risky.”
Why we guarantee
Through guarantee programs the EC can share risks with investors and private lenders. That means investors and lenders can get part of their money back if a loss occurs. The programs encourage investors to invest in areas of the economy which they would not have considered before and have a positive impact on people’s lives. It enables them to target people like refugees or women entrepreneurs that would normally be excluded from services like loans to small businesses. Parplies: “And there is only so much ODA funding*, but there's almost an infinite need for investment. With our public money and guarantees, we can encourage more private investors to put their money into these markets. That can potentially have a huge impact, because there’s literally a couple of 1,000 trillion euros in investable funds out there. If from this giant pool of investable funds, we manage to divert even a small fraction into developing countries, the impact can be much bigger than anything we do with ODA grants. There's lots of capital out there, so our role is to encourage it to go to markets that private investors perhaps consider as too risky.” What works well for the EC, is that our guarantee programs are unfunded. Parplies: “That is why our legislators allowed us to fund with 50 percent. Which means that for every euro that we put in, we can provide two euros and guarantees. And generally, we're not losing that much money. We are pretty confident that, most of the time, we’re dealing with perceived risk. The actual risk, even in Africa, even in the most difficult markets, tends to be a lot lower than what investors think.”
Parplies’ advice to investors working on guarantee programs
Think beyond first loss. Try to be creative what the bottleneck in the market might be, and how that can be addressed most efficiently. How can we create more than a tap that you turn on and off? How can you generate sustained change in a market?Co-design “We found it quite helpful to co-design our blended finance investment program with our delivery partner (FMO).
Think beyond ‘what is good for me’ (the investor or DFI). Think hard about what is helpful to develop a market.
The EC can be a difficult partner; you need to be willing to make an upfront investment. Parplies: “We can be a bit difficult or strict on what we call horizontal policy provisions like anti money laundering, tax avoidance and fraught protection. But I would say it is an investment worth making, since the payback is that we have sizable programs available.”
When you're trying to tackle the deforestation problem with help of private sector investment, make sure you engage with all key stakeholders.
Guarantee programs are innovative, new instruments to the world of development finance. The structure and working of these instruments is not that easy to understand. Parplies: “Only over the past two years have partners like FMO started to pilot our guarantee programs. It has taken them quite some effort to convince others (banks and businesses) to participate. It takes effort and willingness to get to know the product, especially for organisations that are used to “simple” grant funding, which is unremunerated and involves no difficult questions about risk.” Now that we have build-up experience under the EFSD guarantee fund programs, we learned a lot about metrics like risk, revenue and structures. We have a better idea of what works well and set up a suite of about eight to ten basic guarantee structures. In our next phase, EFSD+ will work based on these examples and products that we can replicate. We will be asking for new proposals later on this year, probably in October.”
It’s exciting that we have found this new approach to development cooperation. The last two years, and programs like NASIRA and FMO Ventures Program in particular, proved that scaling through guarantees really works. And that is why we can now transfer from EFSD to EFSD+ which is an even bigger guarantee program (€14 billion). That is a big endorsement from our legislators. It will also be interesting to push the concept of guarantees to new sectors -without privatizing things that should not be privatized - to see whether we can attract additional private sector money.
NASIRA is an SME guarantee program focused on covering the additional risk that local banks in emerging markets take from going into new customer groups, like women entrepreneurs, migrants, and businesses run by young people. Parplies: “Through NASIRA we're not just guaranteeing the exposure of the local bank, but also the incremental exposure that arises from going into new markets, new customer groups. Next to the structure being quite innovative, the NASIRA guarantee profile is right in the middle of the kind of risk that we as EC can take, which means that we could do almost any volume of NASIRA style guarantees. The challenge is that the product is complicated and a little bit more difficult to sell. Our impression has been that there’s a limitation in the absorption capacity of the local banks. On our side, again, we could do almost any quantity of this guarantee, which is which makes it really a nice guarantee in my view.”