AVCA Sanjeev Gupta

AFRICA VENTURE CAPITAL ASSOCIATION: 

AFRICA VENTURE CAPITAL ASSOCIATION The case for Domestic Savings as a Vital Ingredient for Sustainable Growth SANJEEV GUPTA, GROUP EXECUTIVE – FUND MANAGEMENT

Quote from Julius Nyerere- ex President of Tanzania …: 

Quote from Julius Nyerere- ex President of Tanzania … Africa`s problems are: Poverty Ignorance Disease

The IMF & WORLD BANK wants African states to: 

The IMF & WORLD BANK wants African states to EMBRACE A 3 PRONGED PROGRAMME DIRECTED AT: Privatization Liberalization Financial Market Development

My personal view is: 

My personal view is Africa needs a blend of: Economic Reforms- YES Market Driven Economics- YES Labour Reforms- YES Property Rights- YES

But it also needs desperately….: 

But it also needs desperately…. A SAVINGS CULTURE A MENTORING PROGRAMME If there is to be a sustainable growth Change has to come from within….

Africa has been plagued by:: 

Africa has been plagued by: Disease Illiteracy Conflict Segregation Bias Exploitation Hunger You name it….

Yet- we must not think so much about the past that we forget the future: 

Yet- we must not think so much about the past that we forget the future WHY? Because if we don’t carve our own destiny- who will??

Private Equity: 

Private Equity A perspective on the role it does play in Africa …..

Private Equity- what does it do?: 

Private Equity- what does it do? Provide Capital Provide mentoring Develop Managers Removes the `cracks` in a financial system Brings outside investors into a market Helps with diversification And In Africa- does not merely `complement` existing capital markets- but actually helps to mobilise capital in the `FIRST` place…

Private Equity- what it does NOT do?: 

Private Equity- what it does NOT do? Solve structural problems Mobilise Reinvestment of Profits, etc Develop Financial Markets Create Jobs Remove Economic Imbalances Create Economic Sustenance

What then do we need?: 

What then do we need? 2 things SAVINGS- DOMESTIC DEPLOYMENT of those Savings INTO DOMESTIC CAPITAL

WHERE THEN ARE WE…: 

WHERE THEN ARE WE… In terms of Savings & Domestic Capital?

Where is Africa ? : 

Where is Africa ? Individual Discretionary Savings Low or Non Existent Contractual Savings state owned Government Savings Zero or misused Corporate Savings ``exported``

Why is Discretionary Savings low?: 

Why is Discretionary Savings low? History of Low employment or ``disguised`` Employment Real wages has not kept with Inflation Faith in financial products ZERO Access to Banking & Insurance limited

Where are the Contractual savings?: 

Where are the Contractual savings? Formal employment largely State & Public Sector Pension/Life Funds Largely in State hands Utilized to fund Government Deficits Private Sector funds small or `exported` Asset allocation restrictions a constraint to development

Where are the Government Savings?: 

Where are the Government Savings? Not there- abused or wasted Directed toward `populist` spending Project Implementation concerns Not an efficient allocator of Capital

What about the Corporates: 

What about the Corporates MNCs dominate Mining & Service Industries Corporate Profits not Reinvested Royalty payment, fees, etc means little left `Tokenism` through small community projects.

Can this be resolved?: 

Can this be resolved? Yes- through DFIs Global funds AID Governments But a temporary solution?

Why Temporary?: 

Why Temporary? Because.. DFIs need exit Focus on local issues limited Informal sector suffers Profits don’t remain for reinvestment Creates a culture of entitlement AND–……

Why Temporary?: 

Why Temporary? Because DFIS, Global funders, Aid CAN keep us away from Hell- but will not take us to Heaven

Where is the Solution?: 

Where is the Solution? SIMPLE Develop Domestic Savings Encourage active asset allocations (ala PIC) Deploy Domestic Savings into Capital Difficult ? No

Generate Domestic Savings- how?: 

Generate Domestic Savings- how? Informal Markets- Access to Banking & Insurance- MUST Tax Incentives Privatize State Schemes Corporates-Profit retention & reinvestment incentives Redirect Government spending

Active Asset Allocation- what?: 

Active Asset Allocation- what? Encourage to invest Pension & Life schemes into Private Equity, Property Infrastructure funds Local focus- into SMME Long term horizons

Deployment of Savings into Capital: 

Deployment of Savings into Capital Through active allocations Co- invest with Global agencies Mobilize Bank (debt) markets Market availability to Businesses

Savings as a CATALYST: 

Savings as a CATALYST WHERE ARE WE???

Is it all Gloom & Doom?: 

Is it all Gloom & Doom? Not really- remember: There is approximately USD 150 Mln available in Pension funds already Governments (eg: Nigeria) have large pools of Reserves There is Informal Sector Savings- not in the financial system yet There are increasing Pension Reforms

So why do we need to worry?: 

So why do we need to worry? Because— Pace of change less than impressive Myopic Policies distort the issues Prudential asset allocation guidelines restrictive- better suited for Developed Mkts

The Savings Issue- why solutions are obvious but not easy: 

The Savings Issue- why solutions are obvious but not easy Case Studies Of 2 EXTREME EXAMPLES

Case Study 1- Botswana: 

Case Study 1- Botswana FACTS Developed Contractual Savings No poor legacies Discretionary savings low Government are the major Financiers- net saver Financial Markets small OPPORTUNITIES PPPs Diversification possible into Mining, Tourism, Infrastructure Regional Investments and reduce reliance (eg: Power) Job Creation FDI --- (I)deas- not (I)nvestment

Case Study 1- Botswana(contd): 

Case Study 1- Botswana(contd) PROBLEMS No Government urge to involve private Sector High Unemployment Prudential guidelines not encouraging High yielding T Bills Generous (70%) Offshore EFFECTS No long term capital available No local entrepreneurs Expensive Bank Debt main source Economy dependent on Government spending Continues as a 1 product – vulnerable economy

Case Study 2- Zambia: 

Case Study 2- Zambia FACTS Poor legacies- long term savings Unemployment chronic Discretionary savings low Investment opportunities abound- Tourism, Agriculture, Services OPPORTUNITIES Attract FDIs Attract DFIs Invest in local opportunities Privatise pension schemes Fiscal stimulus to save

Case Study- Zambia (contd): 

Case Study- Zambia (contd) PROBLEMS State Schemes still state held Private Schemes small No incentive to save Poor Banking & Life Insurance Access Limited DFI play EFFECT: Much vaunted `Privatisation` ended up in Giant Trust No Domestic Capacity No capital markets No economic upturn

WHAT DO THEY HIGLIGHT?: 

WHAT DO THEY HIGLIGHT? Savings available but not utilised well Savings can be made to work for you Sequenced approach to Forex, Tax, Asset allocation, etc missing Investments available but no Capital Regional focus- ZERO at this stage Reliance on AID continues FDI sporadic- and concentrated Portfolio flows erratic – or non existent Domestic Capacity not developed- Vulnerable Government domination continues Private Sector growth vital but missing

What does the Case Study Prove?: 

What does the Case Study Prove? In essence- Savings either nor being made to work- or for that matter not being encouraged- means continued dependence Or increased demographic pressures

The Africa Renaissance: 

The Africa Renaissance HOW CAN IT HAPPEN WITHOUT THE ``VIRTUOUS`` CYCLE? The Virtuous Cycle Savings >>> Capital>>>Investments >>>Economic>>>Development>>> Diversification>>>Employment>>> Consumption>>>Savings

What happens if we do not Focus on Domestic Savings?: 

What happens if we do not Focus on Domestic Savings? Privatisation process will flounder Jobs will not be created Diversification challenges will remain Dependence will continue Global PE flows will dry up with exit concerns People talk about DONOR fatigue- I am tired of DONATION fatigue

Conclusion: 

Conclusion Remember- Nothing is as Powerful- as an Idea whose time has Come Let us as a continent stop `meddling` and trying out the same things- and wait for different results- That is INSANITY