• APRIL 11, 2011

A boon to India's private sector

Private sector enterprises have transformed the world. It lit a fire of entrepreneurship in people like JRD Tata, Bill Gates, Sam Walton etc. They sensed an opportunity early on, and ran ahead with it. The companies they started are now making big bucks, expanding across the world.

Private enterprise is a key driver of innovation and technology. It has given us products like medicines, which help us survive healthier and longer. On the other hand it has also given us indulgent products like iPads, speedboats, etc. Without help from the private sector, a public sector may not even exist. Private enterprises are a major source of tax revenue for the government. Most are also the key innovators and market creators.

Private sector participation in an economy takes on an even more important role when it comes to developing counties like India, Brazil etc. Governments have their task cut out trying to manage billions of people, defending their countries from attacks, improving infrastructure etc. Poverty, illiteracy and inadequate sanitation are also major concerns. The quantum of financing required for the developing such countries are vast. Many governments cannot manage the same through their own sources of funds.

So where does the funding come from?

With ample liquidity and cheap credit available internationally, International Finance Corp. (IFC), a World Bank unit is able to mobilise capital from global financial markets. This is then channelised into developing economies. Its role is to help foster economic growth in countries like India. It does this by financing private sector development.

IFC believes that by financing private sector projects, it can help eradicate poverty, reduce wastage of resources, and increase people's standard of living. After all, its investments will help create jobs, and provide a livelihood to thousands. Its advisory services help reduce wastage and improve productivity.

One of IFCs major focus areas is South Asia, with India being a preferred destination. It states that out "of the 2.5 bn people in the world living on less than US$ 2 a day, a billion are in South Asia." Thus, a country like India, with its fantastic growth prospects and huge development needs, is hard to ignore. As you can see in the chart, India is one of the top funding priorities for IFC. It comes in much ahead of its emerging market peers.

Source: IFC's 2010 (June) annual report

India has been topping this list over the past few years. IFC recently announced plans to increase its footprint in the country even further. It initially started off by just proving debt funding. But, in financial year 2010, IFC invested 20% of its US$ 1.8 bn investment by way of equity funding. The percentage is expected to increase going forward. This shows IFCs commitment to the cause, by deploying more long term equity capital in the country.

Let us give you a few examples on how IFC is helping India:
  • It invested US$ 10 m in Azure Power a provider of solar energy. This will help increase Azure's supply of clean energy from 32 villages to a 100 villages in Punjab. This source of renewable energy is still in its nascent stage in the country.

  • It invested US$ 5 m in Snowman Frozen Foods. This Bangalore based company transports, stores, and distributes frozen foods. This investment is expected to help address supply chain bottlenecks and reduce wastages. Currently India only has the capacity to store 18% of its horticultural produce every year in temperature controlled facilities. A huge market opportunity!

  • It recently invested US$ 10-15 m in Aavishkaar India II (a micro venture capital (VC) fund). This VC fund is expected to have a total corpus of US$ 100-150 m. This fund's mission is to finance the initial stages of various enterprises targeting rural and semi urban India. Aavishkaar's investments will focus on healthcare, education, sanitation etc.
In fact, IFC has made a number of funding commitments into India since the beginning of 2011. These include investments in SEWA Bank, microfinance institution Bandhan, private equity fund Kaizen, Simran Power Projects, PTC India Financial Services, etc. It also plans to launch a US$ 1 bn global infra fund over the next 1-2 years which will also be investing in India.

To conclude

Let's finish with the old adage - "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime". By funding private enterprise in developing countries, IFC is showing companies how to become sustainable and profitable enterprises. We believe that simply throwing money at a problem usually does not work. This often leads to corruption, and misallocation of resources.

IFC's large funding commitments over the past few years show that India is an extremely attractive destination for investment. This is despite the fact that India has received flak for its red-tapism, corruption, bureaucracy, and implementation delays etc. Especially judging by the recent corruption scandals.

IFC has been able to work with all the challenges, and benefit local development. We hope that other firms, in India and abroad take some cues from IFC and invest more capital into India's private sector development. IFC itself states that the 'demonstration effect' is powerful. This means that our behavior often gets affected by the action of others, and the consequences of their actions. Especially so, if it proves successful. We believe this will lead to more sustainable GDP growth for India.

Source: IFC FY10 Annual Report, www.ifc.org

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