High risk, high return: How private financiers see development

OECD Observer

Private capital flows can add much to what countries put into their development efforts. But these flows are concentrated in fewer than 20 developing countries. Can private investors do more? Observer special correspondant, Lynn Selhat, asks three financial experts.

While official sector capital investments into developing countries only rose from $30 billion to $80 billion over the last 20 years, private sector investment rocketed from $45 billion to peak at $300 billion during the same period. Clearly, developing nations are fertile ground for private investors. But flows tend not to go to many of the world’s neediest countries. While there are opportunities for high returns in developing countries, doing business there is also fraught with risk. Developing nations, with the help of bilateral and multilateral organisations, need to create favourable conditions for private investors if they are to continue attracting long term investments from overseas.

Marie-Christine Crosnier, sovereign risk manager for SocGen in Paris, weighs the potential gains and risks with business acumen. Is the country economically stable and politically reliable? Is corruption a factor and is there a risk of capital flight? Will finance ministers from the country be prepared to signal early should they have difficulty repaying? For Ms Crosnier, who participated in debt restructuring programmes under the Baker Initiative in the mid-1980s and the Brady Initiative in 1990, the answers to these questions are often strong predictors of the success of a deal.

Now private sector debt is four times higher than multilateral and official debt, and many loans frequently have to be restructured or refinanced. That means banks must work with the country’s finance minister to find a solution for repayment or partial payment. And banks have taken some huge discounts in issuing debt to developing countries over the past 20 years. In Ms Crosnier’s view, Latin America has dealt efficiently with private banks, keeping communication open during its debt negotiations.

Indeed, Chile was among the first countries to use debt-equity instruments, an initiative that was helped by privatisation. And Mexico, under the guidance of José Ángel Gurría, its former minister of finance and public credit, succeeded in rescheduling its private debt during the late 1980s and early 1990s.

What we learned during this period is that we have to treat every country as a specific case”, says Ms Crosnier. So while the Latin American countries came forward early, and actively participated in creating a process for debt repayment, relationships with some African countries were not as straightforward. There are a few exemplary countries, but rather than talk about a repayment problem, there was often silence. “It’s a bit like waiting until you’re really sick to see a doctor”, muses Ms Crosnier.

Along with working closely with banks to renegotiate the terms of their loans, countries in Latin America have made great strides toward creating more transparency in their banking systems. That Argentina, Brazil, and Chile are now borrowing at cheaper rates than a decade ago is partly proof of this strategy’s success, although low world interest rates are also a factor.

Harlan Zimmerman of Foreign & Colonial Emerging Markets of the United Kingdom is also impressed with Latin America’s performance, and in particular Brazil’s. Enacting reforms to make its system more transparent and working to fight endemic corruption, Brazil has made itself very attractive to the London-based asset management firm, which has $5 billion invested in emerging markets.

Asia’s banking crisis a few years ago explains why transparency is so critical to private investors. “Developing Asia was a huge boomer until a few years ago”, explains Mr Zimmerman. But the system was not transparent or friendly to foreign investors. As a result many private investors were blindsided when the banking system began spinning into crisis.

Old and new 

Countries with no stock market, or an unstable one, pose different problems. Blakeney Management, one of the world’s few remaining African fund managers, takes an active role in the management of a company when necessary. “When you can’t rely on a stock market to unlock the value, you have to go in, get your hands dirty and help the company grow”, says Blakeney’s James Graham-Maw. A quarter of Blakeney’s portfolio is made up of companies they have direct equity in, allowing them to have some control over the management of the company. In these cases, Blakeney buys enough of the company to have several seats on the board, where they can try to effect change.

One of Blakeney’s success stories is African Lakes, which trades on the London stock exchange. Several years ago Blakeney identified the company (a holding company), which was capitalised at “next to nothing” and trading in old economy industries like plantations, motor sales and mining. “We didn’t envision continuing in these traditional areas, but felt we could work with the management to enter new markets”, says Mr Graham-Maw. A 14 year wait for telephone service in Nigeria and a seven year wait in Zimbabwe pointed to massive opportunity in the telephony sector. “The yawning gap left by the inefficiency of the public sector is where we see real opportunity”, says Mr Graham-Maw. Today African Lakes is the sub-Sahara’s largest Internet Service Provider (outside of South Africa) and Blakeney has seen a 1000% increase on its investment. Huge margins for growth like this are the main draw for private investment into developing countries.

Mobile power

We don’t believe Africa is going to follow the same route as many of the post-war industrialisers like Germany, Japan and Korea. An export-driven manufacturing base is not going to be their future”, predicts Mr Graham-Maw. “Instead, we see the real opportunity in ‘growth in income per head’, which we are already seeing on the continent and we predict will continue”. When incomes start to grow, people join the formal economy; they open bank accounts, start saving, begin buying consumer goods, and eventually the tax net widens.

For poor countries with few resources or those heavily dependent on commodities, information systems and communications may just be the way to a better economy and a more equitable society.

Mr Graham-Maw points to Econet, Zimbabwe’s successful mobile telecommunications outfit. Blakeney was an early investor in the company’s stock. Mobile phones are having a powerful influence, says Mr Graham-Maw, so much so that one controversial political leader blamed Econet’s SMS messaging service for losing him a referendum last spring. They are a real asset in countries “where the government-controlled fixed-line network is notoriously inefficient”.

Information is clearly a powerful weapon against the corruption and poor governance that plagues so many African countries.

Mr Graham-Maw goes on to complain that the media, when covering developing countries, tends to focus too much on topics like natural disasters, war and disease. A new business start-up does not make headlines. Nonetheless, he is encouraged. “When we go to Africa, we meet with business men and women who are eager to move forward, and we see countries that are moving in the right direction.

Mr Graham-Maw is not alone in his optimism. According to Jean-Louis Terrier, Chairman of there are good reasons to be “Afro-positive”. He sees per capita GDP rising sharply between now and 2015. [OECD Observer, April 2000]

But is this optimism well founded? What of the obstacles on the way? One of the greatest barriers to private investment in developing economies is inadequate protection for minority shareholders. “It would be money well-spent if NGOs and western governments put resources toward legal and regulatory reforms that would encourage greater transparency of banking systems and greater protection for minority shareholders”, says Mr Zimmerman.

Private and public unite 

Another problem to overcome is perceptions, which are at least partly responsible for keeping private investors away from some poorer countries. Improving these perceptions is an area where organisations like the International Finance Corporation (IFC) and the Bretton Woods Institutions more generally can have great impact.

As “catalytic investors”, these international organisations provide desperately needed capital, and at the same time communicate a perception of confidence in a region, which private investors then follow. That’s not to say these organisations are needed for every project, nor should they have free rein over any project in a developing nation, says Foreign & Colonial’s Mr Zimmerman. “Their role is best suited to laying the groundwork for private capital, such as restructuring sectors of economies, or to investing in sectors that are important but typically the last to attract foreign capital, such as long-term infrastructure investments”. If the objective of an NGO is to use limited capital resources to act as a catalyst for economic development, says Mr Zimmerman, then anytime someone else is available to provide capital, the NGO should step back and invest the capital some place else.

As for A Better World for All, the response was one of measured enthusiasm. “The goals in the report are laudable, and who would oppose them,” asks SocGen’s Ms Crosnier, but she stresses that the means to achieving them are more important; these have to be identified and agreed upon. That may be the hard part.

Perhaps resolving it would be easier if private bankers and multilateral institutions understood one another better: “In an ideal world, private bankers would spend time in multilateral institutions, and vice versa, allowing for an exchange of ideas”. But Ms Crosnier recognises that the relationships between banks and international organisations have greatly improved, that the main institutions are seeking out the views of private bankers more earnestly: “Even this interview with the OECD Observer is a positive sign. ” 


• Terrier, Jean-Louis, “Will this be Africa’s century?” OECD Observer, No 220, April 2000.

Note: The OECD Observer would like to thank Brian Hammond of OECD for his help in co-ordinating this Spotlight.

The Spotlight on Development is available in pdf format. Contact observer@oecd.org

©OECD Observer No 223, October 2000

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