Q. Tell us about the SAARC Development Fund’s strategy? What is its current portfolio mix and the future plans?
A. The SAARC Development Fund (SDF) is an Umbrella Financial Institution which aims to facilitate development in the SAARC region (South Asia). Like all multilateral developmental financial institutions, the SDF also takes a balanced approach towards funding a development project by keeping in mind SAARC’s development goals as well as the returns from the project.
We have three investment segments, or what we refer to as windows, i.e. economic, infrastructure and social funding windows. The social window has been active since the SDF’s inception. The infrastructure window has been activated recently. Projects in the power, transport and other infrastructure sectors would be typically long gestation, and SDF may explore co-financing such projects that facilitate infrastructure creation in the region. Lastly, we are in process of activating potential bankable projects under the economic window.
As part of its social window, SDF is also in process of launching the Social Enterprise Development Programme. This will be implemented in all the SAARC member countries, and will identify and build social enterprises by using a mix of grants and concessional returnable capital. The programme intends to fund ~80 enterprises across all member countries annually.
In terms of project mix, SDF is currently implementing 12 regional projects with more than 70 implementing and lead-implementing agencies under the social window. These cover all the eight member countries. As of date, the commitment under the social window projects is USD 74 million, of which USD 47 million has been disbursed. Recently, under the infrastructure window, we have in-principle approved two energy infrastructure projects in the region with a commitment of USD 30 million. We have potential regional connectivity projects in the member countries under active consideration for co-financing.
In the days to come, SDF would act as a catalyst in infrastructure funding by co-financing projects by forming consortium of funding agencies. It would mobilize new funds for on-lending to various projects being implemented in the SAARC member countries. It would also build a strong credit portfolio comprising of projects and programmes under all the three funding windows.
Q. What is the rough IRR your projects are generating? What is the average ticket size invested per project?
A. It may be difficult to share the IRR of a project at this time. As far as average ticket size is concerned, the SDF can currently co-finance upto USD 15 million in a single project.
Q. SDF plans a MSME programme too. Apart from credit, MSMEs face several challenges (like compliances, talent, etc.) which constrain their growth. How can they overcome these challenges so that it creates a win-win situation for both SDF and the MSMEs?
A. As per a 2017 report by the United Nations Development Programme, MSMEs (Micro, Small & Medium enterprises) are said to serve as the backbone of all the sectors of the economy and are an important catalyst of employment and poverty reduction. They play an important role in promoting spatially-balanced inclusive growth and in ensuring more equitable distribution outcomes.
Given the importance of MSMEs in the development process across South Asian countries, SDF is planning a MSME programme. Under this, SDF proposes to provide them with a line of credit. It proposes to co-finance projects that facilitate shared industrial-cluster development, shared industrial-cluster upgradation, product development, research and development and technology upgradation in the SAARC member countries. This access to finance can, in turn, boost job creation and incomes, reduce vulnerability and increase investments in human capital.
This is likely to create a win-win situation because the other challenges which you mentioned should likely be overcome through the sharing of resources, including infrastructure. Co-financing such initiatives should provide an enabling environment for South Asia-based MSMEs, making them more competitive globally.
Q. SDF has a partnership conference coming up in India. In that context, what sort of funding institutions are you working with for co-financing partnerships? Which funding institutions are you looking out for in terms of future partnerships? What support do you need to bridge that gap and cement those relationships?
A. The broader mandate of the SDF Partnership Conclave is to promote regional cooperation and integration amongst the stakeholders and bridge the gap in trade and investment in the region. For us, the entire South Asia region is important and we aim for inclusive growth across the region.
This is an important event for cooperation and partnership in the region. SDF envisages itself in the role of a catalyst in regional infrastructure funding by co-financing projects by forming consortium of funding agencies. Given the enormous infrastructure funding gap the region faces, it will need a mix of infrastructure investment from both the government and private sector. While the region faces a huge demand for infrastructure coupled with limited available financial resources, it is important for all development partners to join hands to close this infrastructure funding gap.
In this event, we have participation from multilateral development financial institutions like ADB, AFD, AIIB, NDB and World Bank, UN bodies like UNEP, UNIDO, UNCDF, UN Women, UN WFP, ILO and IOM, regional financial institutions, Chambers of Commerce and Export Promotion Councils like FICCI, CII, ASSOCHAM, PHD, EEPC, FIEO and Asia Foundation, scheduled commercial banks like DFCC Sri Lanka, Ceylon Bank, BRAC Bank Bangladesh, City Bank Bangladesh, SBI Capital India and SREI India, public sector enterprises, infrastructure development agencies like BIFFL Bangladesh, HDFC Maldives and NIB Nepal, Department of Science and Technology India, donor agencies, civil society organizations and senior officials from the Finance Ministries of the SAARC member countries.
Q. Tell us about your interactions with regional businesses. What are they looking for?
I have continuous dialogue with business people from all the South Asian countries, and have also addressed various Chambers of Commerce across the South Asia region. My inference is that these business people are very supportive of economic integration across South Asia that would enable them to source commodities, products and services at competitive prices; sell their products across these countries, diversify their sourcing mix from across the region, and diversify their sales mix across this region. These would, in the process, enable them to tackle the global forces of competition more confidently.
The South Asian region is rich in natural resources, and has a vast pool of talented and skilled human capital. Having a unified approach towards South Asia would help leverage this human capital and natural resources, develop shared infrastructure to manage costs, pool resources, develop key industries and their associated supply-chains, and develop sourcing from within the region to cut operational costs. This would also require investment in infrastructure. All these measures are likely to push economic integration further, as well as the achievement of the SAARC development goals.
Q. You have worked with entrepreneurs across the region. Entrepreneurs focus on different things to build their competitive edge, say talent, products, branding, etc.? What is your view on the one thing regional entrepreneurs should really focus on?
A. From the point of view of entrepreneurs, all these factors like talent, product or brands that you speak of are important; but the most important factor would be innovation and never to shy away from failure. Having worked with various entrepreneurs in this region, I find that the common challenges faced by young entrepreneurs in South Asia are fundamental in nature. These include the need to develop knowledge and capacity building, softening of government procedures and guidelines and elimination of barriers. These need to be addressed with appropriate attention by the relevant authorities.
Q. The South Asian countries are touted as amongst the fastest-growing economies today. However, the countries of no other region are probably as disconnected from each other as South Asia is. What are the main challenges this region faces? To what extent has this been a constraining factor for SDF’s work?
A. As you have rightly pointed out, South Asia is one of the fastest growing regions with a GDP growth rate of over 5% in FY16 and FY17. Moreover, it is now well integrated with the global economy.
However, the key challenges that continue to impede this growth-story from reaching its true potential are limited integration within the region, relative lack of intraregional trade and investment and the fact that the region is yet to harness the benefits of common cultural affinity and locational proximity.
The SDF is working, and will continue to work, on the philosophies of regional integration through project collaboration and investment, supporting cross-border projects that facilitate intraregional trade and investment, and achieving the SAARC development goals. You would notice that the theme of our upcoming partnership Conclave is also Regional Integration through Project Collaboration and Investments.
See further details of the upcoming SDF Partnership Conclave here