Financial sector development - Sida

• Equity investments involve a substantial commitment to the company. It may, for
example, become necessary to make additional capital investments, should the
company expand or experience solidity or liquidity problems.
• As referred to in the previous section, an active owner and board member may acquire
substantial influence in the company. Conversely, this influence may lead to a
responsibility for the company which goes far beyond the financial responsibility.
• Equity ownership necessitates a high degree of flexibility and a capability to make quick
decisions. The question is whether a donor agency can meet these requirements.
• The responsibility for the company’s business also implies making and defending
unpopular decisions which might be discussed publicly. This could lead to negative
publicity for the donor and also to other kinds of pressure or bad will.
• If the management of the recipient institution is weak, there is a risk that the donor will
have to assume management responsibilities, which would be unfortunate from the
donor’s perspective. In order to relinquish this responsibility, the donor may have to
undertake the time-consuming task to build a competent management that could
resume responsibility for the company.
• It becomes increasingly difficult to be a neutral actor on the market the more active the
donor is or the larger portion of the company the donor owns. The donor should
generally be interested in the development of the capital market as a whole and not
only in the development of particular companies. Conflicts can therefore arise within
different projects or in relation to other companies in the market. From the perspective
of other companies, the donor’s credibility can be damaged if he is both owner and a
contributor to the development of the sector as a whole. This may create conflicts in
relation to other development projects and in relation to other market actors.
9.4.3 How to organise ownership
It has implicitly been assumed above that equity investments would be made in a donor
agency`s/Sida’s name. It would however, for different reasons, be preferable not to make
equity investments in Sida’s name. First the Swedish Government has established
Swedfund International as its principal instrument for equity investments in developing
countries (albeit the main role of Swedfund is not to undertake financial sector operations
but to take equity positions in joint venture companies with Swedish partners). Second it
has to be possible for Sida to run different projects within a country’s capital market.
Equity investments could, as was previously mentioned, lead to conflicts of interest and
create difficulties as the donor no longer is or is at least not perceived as a neutral actor.
Third Sida as a Swedish Government agency should refrain from taking a direct ownership
role in investment companies according to general Government guidelines.
The principal way to enable Sida to take part in the development of equity markets at a
project level would be to continue the present arrangement with Swedfund. It implies that
Sida backs Swedfund up with conditional loans in order to refinance some of Swedfund’s
equity investments in the financial sector. Needless to say such investments are made
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