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Why finance the private sector?

In conjunction with Official Development Assistance (ODA) for which AFD, PROPARCO’s parent company, is the main operator in France, private sector financing is an essential activity for the achievement of the Millennium Development Goals (MDGs).
Une femme et son mari dans leurs magasins
Companies (small, medium-sized and large) and financial institutions are one of the main drivers of economic growth in developing and emerging countries. They play an active role in job creation and income generation, including for government tax revenues.

Key actor in economic and human development

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By developing goods and services (transport, housing, energy…), they contribute to improving living conditions for populations. In addition, their involvement in environmental preservation and the fight against climate change is essential for developing production techniques and promoting consumption patterns that are less polluting and more energy efficient.

This role of the private sector in economic and social development is strengthened by the fact that the public sector in Southern countries cannot singlehandedly address the increase in needs for transport, electricity, housing, health and education. Furthermore, SMEs often account for the bulk of the economic base in developing countries. Their structure and flexibility allow them to play a decisive role in mitigating the impacts of economic and financial crises.

While the private sector plays an essential role in development, it cannot act alone and is also not intended to stand in for public action. The complementarity and synergies between these two sectors are prerequisites for their mutual effectiveness.

Difficulties to access credit, a barrier to development

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Private sector actors need medium and long-term capital (5 to 20 years) in order to ensure their own development and have a knock-on effect on economies in Southern countries. Yet in developing countries and a number of emerging countries, access to credit is one of the main barriers to maintaining and developing their activity – investors, first and foremost commercial banks, are often reluctant to get involved in activities and/or regions that they deem too risky.

This trend particularly affects SMEs, whose needs fall between the minimum amounts for the operations of traditional banks and the maximum credit limit offered by microfinance institutions.

Annual investment deficit of USD 2,500bn

According to a recent United Nations report , developing countries are faced with an annual investment deficit of USD 2,500bn in the key sustainable development sectors.

Bridging this deficit is not unrealistic: the participation of private investors in basic infrastructure (roads, rail, ports…), food security (agriculture and agroindustry) and climate change mitigation can be significantly scaled up. This is also the case for the private sector’s contribution to the achievement of the Sustainable Development Goals, through good corporate governance and responsible investments.

Proparco’s mandate is to help bridge this deficit by supporting profitable and economically viable private sector operations that do not find appropriate financing, and by attracting investors towards key activities for development.

Catalyst effect on investors

Un panoramma où on voit la pipeline pour l'eau

Proparco’s action provides a response to the difficulties encountered by private actors in the South to finance the development of their activity.

Proparco does not substitute for the product range of local or international commercial banks, but works in complementarity to them (principle of subsidiarity). It operates via loan allocations, equity investments (direct or indirect via financial intermediaries) in the capital of companies, the provision of solvency guarantees and technical assistance.

Proparco’s operations also have a knock-on (“catalyst”) effect on private and public investors: they demonstrate the economic and financial viability of private sector actors in the South in activities and/or regions that are a priori deemed unattractive.

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