Evaluation Report 1/2003

Ministry of Foreign Af fairs

Evaluation of theNorwegian Investment Fund for Developing Countries (Norfund)

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Evaluation of the Norwegian Investment Fund for Developing Countries (Norfund)

A report prepared by

Fafo, Institute for Labour and Social Researchand

Nordic Consulting Group

Bjørne Grimsrud (team leader)Jens ClaussenStein Hansen

Torunn Kvinge

Responsibility for the contents and presentation of findings and recommendations rests with the evaluation team. The views and opinions expressed in the report do not necessarily correspond with

those of the Ministry of Foreign Affairs.

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Table of Contents

Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Fact Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2 Capital, Technology and Know-how Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . 132.1 Capital, a bottleneck for development? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.2 Foreign direct investment impacts on domestic industry . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.3. Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.4 Development Finance Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

3 Description and Assessment of Norfund’s Operations . . . . . . . . . . . . . . . . . . . . 19 3.1 Risk profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.2 Making capital available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.3 Investments in Least Developed Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.4. Development impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.5. Environmental, social and ethical standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343.6. Organisational efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.1. Relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394.2. Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404.3. Development effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414.4. Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

5 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Appendix I Terms of Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Appendix II Persons Met . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Appendix III References and Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

List of FiguresFigure 2.1 Types and product range of some Development Finance Institutions . . . . . . . . . 18Figure 3.1 Funds invested as of December 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Figure 3.2 Norfund’s area of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Figure 3.3 Investments and planned investments in LDCs . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Figure 3.4 Aureos African exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

List of Boxes Box 2.1 Risk and required rate of return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Box 3.1 The Minco fund in Mozambique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Box 3.2 Example of currency risk mitigating instrument . . . . . . . . . . . . . . . . . . . . . . . . . . 26Box 3.3 Swedfund exit study. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

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Abbreviations

AAIF African Infrastructure Fund CDC Commonwealth Development Cooperation DAC Development Aid CommitteeDFI Development Finance InstitutionsEDFI European Development Finance InstitutorsFDI Foreign Direct Investments FIRR Financial internal rate of returnFMO Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden n.v.IFC International Finance Cooperation IFU Industrialisation Fund for Developing Countries (Denmark)IØ Investment Fund for Central and Eastern Europe (Denmark)LDC Least Developed Country (49 low-income countries defined by the UN)LIC Low Income Country (see technical note)LMIC Lower middle income country (se technical note)MFA Ministry of Foreign Affairs, NorwayNHO Næringslivets Hovedorganisasjon (Confederation of Norwegian Business and

Industry)NORAD Norwegian Agency for Development CooperationNORFUND Norwegian Investment Fund for Developing CountriesOECD Organisation Economic Cooperation and Development ODA Official Development AssistancePSD Private sector development SME Small and medium size enterprises SN Power Statkraft Norfund Power InvestTNC Trans National Companies ToR Terms of ReferenceUNCTAD United Nations Conference for Trade and DevelopmentUMIC Upper middle income country (see technical note)

Technical noteClassifications of countries in Income groups:

Low income countries (LICs), $760 or lessLower middle income countries (LMICs), $761 – $3,030;Upper middle income countries (UMICs), $3,031 – $9,360; and High income countries, $9,361 or moreThe threshold for World Bank Loan Eligibility: US$ 5,280

All figures are from 1998 and were in use up to the end of 2002.From 1 January 2003 these figures and rankings are slightly changed.

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The Norwegian Investment Fund forDeveloping Countries (Norfund) was estab-lished by law 12 December 1996 and had itsfirst full year of operation in 1998. Norfundoperates as an integrated fund and fund man-agement company.

Norfund’s purpose is to help establish sustain-able, viable ventures in developing countriesthat otherwise would not have been establisheddue to perceptions of the risk involved.According to the Norfund Act (1996–97),Norfund shall provide loans and risk capital inthe form of equity or quasi equity without sub-sidy to profitable and viable private enterprisesin development countries and in this way pro-mote business development in these markets.

Norfund is governed by the Norfund Act(1996–97) and directives issued by theNorwegian Ministry of Foreign Affairs. A boardof 5 directors, one of whom represents theMinistry, and two deputy directors areappointed by the Norwegian Government.

The four main areas of operation are: directinvestments; investments in funds; investmentsin fund management companies; and invest-ment in a private Norwegian-based investment

company for the energy sector (StatkraftNorfund Power Invest). Through the establish-ment of Aureos fund management companytogether with Commonwealth DevelopmentCooperation (CDC) from Britain, a network ofdeveloping country-based fund managementcompanies was linked to the Norfund structure.

As of 2002, Norfund has 22 employees, two ofwhom are seconded to Aureos and SN Powerand two to the field (Angola and CentralAmerica).

From total assets of NOK 231 million in 1998,the fund grew to NOK 1.2 billion in 2002through capitalisation from the NorwegianGovernment. The fund will further increase toNOK 1.7 billion in 2003, given the additionalcapitalisation agreed in the Government’s 2003budget. In addition to this comes the value ofthe loans taken over from NORAD, which mayadd to more than NOK 300 million to the fundin the years to come.

The fund is eligible for ODA registration wheninvested, based on an anticipated risk of lossequal to the required minimum grant elementsof 25 per cent for such registration.

Fact Sheet

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The Norwegian Investment Fund forDeveloping Countries (Norfund) was estab-lished by law on 12 December 1996 and com-pleted its first full year of operation in 1998. Theestablishment of Norfund added a new instru-ment to Norway’s development policy. Fromtotal assets of NOK 231 million in 1998, the fundgrew to NOK 1.2 billion in 2002 through capital-isation from the Norwegian Government. Thefund is eligible for ODA registration wheninvested, based on an anticipated risk of lossequal to the required minimum grant elementsof 25 per cent for such registration.

As of 2002, Norfund has 22 employees and oper-ates as an integrated fund and fund managementcompany. The four main areas of operation are:direct investments; investments in funds; invest-ments in fund management companies; andinvestment in a private Norwegian based invest-ment company for the energy sector (StatkraftNorfund Power Invest). The establishment ofAureos fund management company, togetherwith the UK’s Commonwealth DevelopmentCooperation (CDC), provides access to a net-work of developing country-based fund manage-ment companies.

Norfund’s purpose is to help establish sustain-able, viable ventures that otherwise would nothave been established due to perceptions of therisk involved. According to the Norfund Act(1996–97), Norfund shall provide loans and riskcapital in the form of equity or quasi equitywithout subsidy to profitable and viable privateenterprises in development countries and inthis way promote business development inthese markets. As of 1 January 2002 Norfund isno longer obliged to tie investments withNorwegian companies. From the same dateNorfund came under an obligation to invest athird of the capital in Least DevelopedCountries (LDCs). This had always been one ofNorfund’s targets , however.

This evaluation was undertaken by FafoInstitute for Labour and Social Research (Fafo)

and Nordic Consulting Group (NCG), between1 September and 17 December 2002.

The evaluation takes place after only five yearsof operation and the majority of investmentshave only been undertaken over the last coupleof years. The effects we were asked to measurewill generally therefore not be fully apparentuntil a later stage. Accordingly, the evaluationhas focused on the framework for investmentsset up through Norfund and the differentrationales followed by Norfund when undertak-ing investment decisions.

It can be concluded that Norfund has been andremains a conducive mechanism for chan-nelling development funds to promote privatesector development. Though its direct and indi-rect investments in developing countries thefund has been instrumental in establishingand/or expanding private enterprises therebycreating an attractive environment for privateinvestors. Within the guidelines set out by theMinistry of Foreign Affairs, Norfund has shownan ability to develop a viable organisation ableto act on business opportunities like Aureosand Statkraft Norfund Power Invest (SNPower). The investments have in general beenassociated with the transfer of know-how andhave adhered to high social and environmentalstandards. Norfund has focused more thanother similar Development Finance Institutions(DFIs) on investing in the Least DevelopedCountries (LDCs). However, Norfund hasfound it difficult to invest a third of the capital inLDCs, as required. This evaluation attempts toprovide some guidance as to how Norfundoperations could be adjusted to enhance furtherits already positive development impact as wellas how to adjust the guidelines in order tofurther increase the relevance of Norfundwithin the Norwegian Development Strategy.

Strategy and guidelines

An investment in a developing country maycome in two forms, portfolio management anddirect involvement.

Executive Summary

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Following a portfolio management strategy, onetakes the performance of an individual com-pany for given, and focuses on mitigating riskby investing in different companies. Generally,it is possible for a portfolio manager to diversifyaway from all so-called unsystematic risks(risks associated with the project as such) andmost of the benefits of diversification can proba-bly be achieved with fewer than 15 investments,distributed over different sectors and/or coun-tries. What is left is the systematic risk, which isrelated to high levels of corruption, politicalinstability, exchange rate unpredictability, etc.in several of the least developed countries.

Direct involvement implies operational controlwith the investment target and expected cashflow. In other words, where the portfolio man-ager scans for viable projects, the directinvestor creates them.

Norfund operates through a combination ofportfolio management and direct involvementin more than 30 countries in Africa, South EastEurope, Latin America and Asia. The directinvolvement varies; the engagements are geo-graphically spread in markets were Norfundhas variable market knowledge as well asacross several different industries.

The investment strategy seems to be motivatedby a need for risk mitigation through diversifi-cation. The rationale behind Norfund’s choiceof strategy is likely the guidelines, includingMFA’s long-term requirement that Norfundshall operate on own returns. This creates aneed for Norfund to alleviate the systematicrisk of investing in developing countries. Theresult is investments in countries, includingupper middle-income countries, not reflectingNorwegian development strategies and repre-senting a wider geographical spread. It has alsoprobably hindered Norfund from reaching theinvestment target of a third of its capital in LeastDeveloped Countries.

It is difficult to see why MFA imposed theseconditions on Norfund. MFA guidelines shouldbe amended, preferably calling for Norfund tomaximise cash flow in its establishments in the

low and lower-medium income countries (LICand LMIC) while the systematic risk of operat-ing in these countries should be taken by theMFA. This means that if investments in thisgroup of developing countries continue to per-form poorly in ten years’ time, Norfund willmost likely not be yielding an expected returnin NOK to replenish its capital base and simul-taneously cover its operational costs. On theother hand, if these countries or a group ofthem managed to improve their economic per-formance, Norfund should (if otherwise invest-ing wisely) perform well. In other words, wewould recommend differentiating between thesystematic, political risk and the non-systematicproject risk. It is therefore recommended thatMFA redefine the geographical area of opera-tions and long-term return requirements placedon Norfund. As a part of a stronger geographi-cal concentration Norfund would be advised toinvest solely in low and lower middle-incomecountries.

Operations

Norfund is a young organisation that has grownquickly. It has, in this respect, proved its abilityto expand and enter into new businesses bygradually building up knowledge of the marketopportunities. By building partnerships andinvesting in investment funds to share riskexposure Norfund has become more compe-tent without exposing itself to dangerously highrisks in terms of investments. The organisationis expected to have investment skills, countryand market know-how and also knowledge ofpotential Norwegian investors. In addition, itshould be able to make investments with a max-imum development impact while maintainingan acceptable level of profitability in high-riskcountry environments. All these considerationshave required a gradual approach to new mar-kets and investments. The Aureos engagementrepresented an important step forward inacquiring country and market knowledge.

In order to meet the obligation of investing athird of the capital in LDCs, Norfund needshowever to adjust its operations. The difficultiesinvolved in achieving this under the presentguidelines should be acknowledged. Further,

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Norfund’s investment structure implies thatbodies other than Norfund itself generallyundertake end-user investment decisions (i.e.,SN Power board, the different Aureos FundInvestment Committees etc.). Since Norfundhas committed itself both financially and opera-tionally to the SN Power and Aureos systems inthe coming years, it would have been advanta-geous had it more explicitly set out the strategicconsequences involved.

Rather than providing equity to companiesseeking financial partnerships, Norfund shouldbe more active in scanning possibilities fordevelopment in the actual country and thensearch for domestic and/or international part-ners. That would require greater geographicaland thematic concentration, of course. Norfundshould therefore try to reduce the number ofcountries in which it operates directly or indi-rectly – through, for example, Aureos – whilecontinuing to decentralise management struc-tures outwards to the remaining markets inorder to focus market knowledge and reducetransaction costs.

The internal risk management system ofNorfund does not currently differentiate exante between LDCs and other countries when itcomes to willingness to take risks. TheNorwegian Parliament has explicitly called forsuch a split in ex ante risk assessments ofNorfund’s portfolio by setting aside 50 per centof the fund capital foreseen for LDC invest-ments in a loss account, and 25 per cent for therest of the fund portfolio. Norfund should fol-low this up by establishing a system where, inthe ex ante risk assessment, higher risks aretaken for projects in LDCs. Norfund could man-age the fund as one for the LDCs and one forthe other countries with different profiles of cal-culated net loss.

Development effects

It is too early to pass judgement on Norfund’sdevelopment effects. What is important at thisstage, however, is that the funds are invested inthe right markets (as elaborated above), in theright projects which maximise the transferenceof know-how and good business practices.

Important technical assistance has been givenand business knowledge transferred in severalof the investments, even though the portfolio isa mixed bag in this regard. This may be oneeffect of the widespread strategy chosen byNorfund.

Development indicators are included inNorfund’s pre-project screening. It is suggestedthat this approach should be expanded furtherto include net foreign exchange earning’s sav-ings and certification effects. In addition, theassessments of development impact should bedeveloped further and be given a stronger sayin the strategy and investment decisions.“Number of jobs created” is not alone a veryuseful measure of Norfund’s developmentimpact.

With regard to its commitment to follow inter-national minimum environmental and socialstandards and to observe high ethical stan-dards, Norfund has undertaken substantialwork and developed internal guidelines.Improvements could and should be made insome areas, however. For instance, AureosBusiness Practices (code of conduct) are under-cutting the minimum requirements with regardto such central issues as child labour and thefreedom of association. We recommend embed-ding the work on social and environmental stan-dards more firmly within the organisation andmake it a condition for engaging in other fundsand investment companies. Aureos’ businesspractices should immediately be upgraded tomeet international minimum standards.Generally the standards should be a tool forcreating more viable businesses and not prima-rily a threshold for investments. This impliesthat investments may be undertaken in enter-prises that at the time of the investment do notcomply with all standards, but which will behelped to do so through the engagement fromNorfund’s side.

Partners

Investments, particularly in LDCs, are helpedby parallel aid injections. To facilitate suchinjections the Ministry of Foreign Affairs hasgiven Norfund grants in the form of trust funds.

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The guidelines regulating the use of thesefunds are, however, unclear and they have beenused to finance activities more of the nature ofNorfund’s regular operations. We therefore rec-ommend that consideration be given to movingthe administration of the trust fund fromNorfund to NORAD. It should remain ear-marked as technical assistance to Norfund andbe given a new and more precise set of guide-lines. Trust fund spending should be moredirectly linked to projects for activities withpositive externalities.

In general, stronger links should be developedbetween Norfund’s activities and NORAD’swork for creating a good business environment.NORAD could finance technical support of akind that not only benefits the companiesNorfund invests in, but also has positive exter-nalities for the business climate at large.

Norfund is not and should not be required toinvest together with Norwegian companies.However, as an Oslo-based investment fund,Norfund should have good local knowledge ofthe expertise found in Norwegian companiesand should use this knowledge to facilitatecooperation with those companies. In order toattract more Norwegian companies to invest,closer contact at an earlier stage of the invest-ment process should be established. This couldbe practically done by establishing advisorynetworks among Norwegian industrialists inrelevant sectors. These networks could be usedto source useful information in the first screen-ing process, as, for example, the local Aureosinvestment process and SN Power’s investmentprocess.

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The establishment of Norfund in 1997 added anew instrument to Norway’s developmentpolicy. According to the Norfund Act (1996–97),Norfund shall provide loans and risk capital inthe form of equity or quasi equity without sub-sidy to profitable and viable private enterprisesin developing countries and in this way promotebusiness development in these markets.Norfund’s purpose is to establish sustainable,viable ventures that otherwise would not havebeen established due to perceptions of the riskinvolved. As of 1 January 2000 Norfund is nolonger tied to investments with Norwegiancompanies. On the other side, the 2002 BudgetActs placed Norfund under an obligation toinvest a third of its capital in Least DevelopedCountries (LDCs).

From total assets of NOK 231 million in 1998,the fund grew to NOK 1.2 billion in 2002, andwill grow further to NOK 1.7 billion in 2003,given the additional capitalisation agreed in theGovernment’s 2003 budget. In addition to thiscomes the value of the loans taken over fromNORAD, which may add more than NOK 300million to the fund in the years to come.

This evaluation covers Norfund from start-up tothe end of 2002. The principal objectives of theevaluation given by the Norwegian Ministry ofForeign Affairs (MFA) are to assess:

• the extent to which Norfund adds valueto central Norwegian development strate-gies, such as private sector developmentin developing countries and the goal ofpoverty reduction

• the extent to which Norfund contributesto private sector development in thecountries the fund is involved in

• the extent to which Norfund contributesto key factors in development impact,such as employment, import substitution,export, technology transfer and tax basein the countries the fund is involved in.

It follows that the main thrust of this evaluationshould lie in the assessment of relevance, effec-tiveness and development impacts. In addition,the Terms of Reference (see Appendix 1)request that the measures taken by Norfund toensure sustainability and efficiency shall alsobe assessed.

Norwegian development strategy is stronglyfocused on poverty reduction and hencetowards Least Developed Countries. It is alsogeared at fostering long-term sustainable devel-opment enabling people to take responsibilityfor their own development. Here, developingthe private sector is seen as a central measure.These aims have remained the same through-out Norfund’s lifetime, but are given evenstronger emphasis today than was the case in1997 (cf. the Strategy for Norwegian support ofprivate sector development in developing coun-tries, 1999; the Norwegian Government’sAction Plan for Combating Poverty in theSouth, 2002).

Two possible investment strategies are open forNorfund. One is a portfolio management strat-egy where sufficient diversification of theinvestments help reduce the risk and securethe return to the capital. The other is the directinvolvement strategy where active involvementin the companies invested in help boosts theirincome earning opportunities. This evaluationexamines Norfund based on these two options.

Norfund must be seen and evaluated as an inde-pendent but integrated instrument. Integratedin the sense that it represents an added elementin Norway’s development strategy. Norfundwas not created to invest in viable projects yield-ing a high return outside Norway’s develop-ment strategy. For such financially motivatedinvestments the Norwegian Government hasother instruments.

The evaluation of Norfund had to overcomeseveral methodological challenges, two ofwhich should be mentioned here. The first,

1 Introduction

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assessing the relevance, efficiency and develop-ment effects features special challenges giventhat Norfund represents only one of many simi-lar and supplementary players where theresults materialise through their commonefforts. Since an analysis of the total effects ofForeign Direct Investment (FDI) on the receiv-ing economies is beyond the scope of thisevaluation, the methodological answer to thischallenge was therefore to assess FDI theoryand studies in general and DevelopmentFinance Institutions (DFIs) in particular, and goon to assess Norfund in that context.

The second challenge concerns the fact thatNorfund has been in operation for 5 years whilethe majority of investments have only beenundertaken over the last couple of years. Theeffects we were asked to measure will thereforegenerally not appear until a later stage. This nat-urally led the evaluation to focus on the frame-work for investments set up through Norfundand the different rationales followed byNorfund when undertaking investment deci-sions as stated above.

The evaluation was conducted during theperiod 1 September – 17 December 2002 byFafo Institute for Labour and Social Research(Fafo), and Nordic Consulting Group (NCG).The evaluation team consisted of Mr BjørneGrimsrud, Fafo (team leader), Mr JensClaussen, NCG, Mr Stein Hansen, NCG, andMs Torunn Kvinge, Fafo. In addition, Mr SergioIC Chitara, CTA Confederation of BusinessAssociations (Mozambique), Mr IfekharHossain, ACNABIN & Co (Bangladesh), andMs Myrna Moncada, NCG (Nicaragua) joinedthe evaluation team when undertaking the fieldstudies.

A number of stakeholders representing publicand private sector institutions in Norway andthe three selected countries for field studies(Bangladesh, Mozambique and Nicaragua)were interviewed. Visits were made to Aureos

in London and Norfund’s sister organisations –Industrialisation Fund for DevelopingCountries (IFU) in Denmark, Swedfund inSweden and Commonwealth DevelopmentCooperation (CDC) in Britain, as well as therespective development authorities. Four work-shops were held, one in each of the countriesselected for field studies and one in Norway.Stakeholders provided important feedback atthese workshops. The terms of referencedefined the three countries where field studiesshould take place, based on recommendationsfrom Norfund. It may have been more prudentto leave the selection of countries to the con-sultant in charge of the evaluation. However,the three chosen countries did secure a widegeographical coverage and examples of themain modes of operation.

To underline the phase of development inwhich Norfund as an organisation finds itself,we should mention that its largest investment todate (comprising 25 per cent of its capital) wasmade between the time the tender was sent outby the Ministry of Foreign Affairs (MFA) andthe evaluation started. Examination of thisimportant investment, in Statkraft NorfundPower Invest (SN Power), was thereforeincluded in the evaluation remit with the under-standing of the MFA Evaluation Unit.

The ToR are appended together with lists ofpersons met and documents consulted. In addi-tion to this come the interviews made withNorfund staff at all levels and search inNorfund’s archives.

The evaluation team would like to express itsappreciation of the forthcoming manner inwhich Norfund staff at all levels met this evalua-tion. The team would also like to thank every-one we consulted for their contributions andsupport, including MFA in Oslo and Norway’sembassies, NHO for co-hosting the Norwegianstakeholder seminar, NORAD, Aureos and SNPower.

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Most of the capital, probably as much as ninetyper cent, invested in developing countries isdomestic capital. Nevertheless, attracting for-eign capital is important for most developingcountries, and it is through its function of mak-ing foreign capital available that Norfund is sup-posed to add value to central Norwegiandevelopment strategies (cf. White Paper,Odelstingsproposisjon 13, 1996–97). The firsttask will therefore be to assess whether thistype of development investment fund consti-tutes a relevant instrument for private sectordevelopment.

2.1 Capital, a bottleneck for development?

The question can be addressed through at leastthree ways. First, through macroeconomicanalysis. The estimates from this analysis showthat capital is in short supply (see below). A sec-ond method is to ask the opinions of entrepre-neurs; they tend to cite lack of capital as one of acouple of main obstacles to growth. Lastly onecould ask investors for their views; they tend toreport an excess of capital and competition forfinancing the few viable projects.

According to national statistics, a wide gapexists between domestic savings and invest-ment needs in most developing countries, andin Africa in particular. At present growth andsaving rates, the annual net need for externalfinancing for developing countries is estimatedto be US$ 141 billion. Assuming that the millen-nium goals of reducing poverty by a halfbetween 1990 and 2015 are met, Africa alonewill need external financing equal to 12 per centof the region’s gross domestic product (GDP)or US$ 86 billion annually, rather than US$ 27billion at the present growth level (Gottschalk,2000).1 One leading cause is low domestic sav-ings and the interest paid on external debt.This, however, is not the full story. According toHernando de Soto (2001) this capital shortage

does not cause low domestic savings, it is theabsence of reliable and legally enforceableproperty rights (collateral) through which sav-ings can be turned into usable capital. A thirdsignificant factor is the large amount of unregis-tered savings transferred from developingcountries to overseas accounts. After confer-ring with the businesses themselves in develop-ing countries, the World Bank (2001) was led tounderstand that the top five constraints forexpansion are: corruption, inflation, financing,political instability and infrastructure. Thefinance providers, both national and interna-tional, take a different view, however. Accordingto the CDC it is not a lack of investment fundingthat is the problem in Africa but a shortage ofopportunities (European Commission 2002).The same views were reported by the domesticinvestors interviewed for this evaluation, i.e.,that capital in the form of foreign direct invest-ment (FDI) or domestic private capital per se isnot the bottleneck for investments, but rather acombination of a lack of promising projects(often linked to lack of entrepreneurial andmanagement skills), an insecure business en-vironment (unstable currency, inefficient andunpredictable legal systems and regulationsand lack of land registers etc. making it im-possible to establish necessary collateral) and alack/the cost of capital. From the field studieswe learned, for example, that at first sight itmight seem as if investments are low inBangladesh because there are not enough“good” projects available for funding there.After closer enquiries it becomes clear that thereason for the capital drought to otherwiseprofitable and viable projects in Bangladesh is alack of adequate infrastructure compounded bya lack of good governance – as widespreadcorruption and failing legal and order institu-tions testify.

So rather than talking about capital as a bottle-neck for development, we have three elementsaffecting each other: an insufficient legal

2 Capital, Technology and Know-how Transfer

1) According to Gottschalk, in Africa growth alone will not be sufficient to reduce poverty.

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environment, a lack of viable business projects;and a shortage of capital. Development FinanceInstitutions (DFIs) need to be made relevant byaddressing all three aspects directly or throughcoordination with other development institu-tions.

2.2 Foreign direct investment impacts ondomestic industry

A priori, there is very little one can say ingeneral terms about the impact of ForeignDirect Investments (FDIs) in the growth of adeveloping country. Impact will vary signifi-cantly between countries, depending on the setof domestic policies that facilitate industrialgrowth, the kind of FDI that enters the country,and how competitive existing domestic indus-try is. Sometimes the outcome is the “crowdingout” of domestic industry and loss of jobs; inother cases it is the “crowding in” and creationof new jobs and enhanced growth.

The conditions that are likely to result in thelatter development can be summarised asfollows: FDIs that introduce new goods andservices are more likely to generate a netgrowth in the domestic capital stock than FDIsthat take over the production of goods alreadybeing made locally. In the latter case, the“crowding out” effect can cancel out the FDIcontribution, and result in zero net investmentand job creation. Empirical studies of AfricanFDIs from 1970 to 1996 show such a cancellingout to have happened, while in Asia FDIs stimu-lated capital formation during that period, andin Latin America, resulted in a net “crowdingout” impact.

A sector specific analysis is always neededbefore any substantive conclusions can bemade regarding the growth and developmentimpacts of greenfield2 and take-over FDIsrespectively. Such analysis must always be real-istic as to the baseline scenario, or the alterna-tive to a proposed capital intensive FDI. Arealistic baseline could well be that labour

intensive domestic producers will have to closedown regardless, due to international competi-tion, and in those cases, “crowding out” FDIsmust be revisited in a somewhat altered light.Even buyouts, where many employees aremade redundant, could be developmentenhancing with an FDI if the alternative is com-plete shutdown of the plant in question. If theFDIs were to “crowd out” a home market pro-ducer and they are not put in, the baseline couldbe the continued use of the old supplier’sgoods, at higher prices and poor quality, ascould have been the case in the Bangladeshcement industry if it had not opened up forforeign investments.

For export companies, the conclusion is morestraightforward: FDIs have created lots of newformal sector jobs both directly and indirectly.By upgrading skills and labour productivity,FDI paves the way for higher paid jobs andpoverty reduction. Even where FDIs settle inexport processing free zones and pay below thelegal minimum wage, the alternative is ofteneven worse.

Trans-national subsidiaries generally providefor more and better skills upgrading and train-ing than local counterparts, and the trans-national companies (TNC) trained staff aremore mobile and thus spread the knowledgemore widely throughout the economy. Whetheran FDI brings in the latest technology or sec-ond-hand equipment is not a major concern.What is important for successful technologytransfer is the recipient’s ability, capacity andcapability to install, maintain and use what isbrought into the country, and this should deter-mine which vintage of technology is the mostappropriate.

The most attractive feature linked to FDI, seenfrom a home country perspective, is hence thepotential know-how and technical knowledgetransfer following such investments. This isdone trough introducing new goods and serv-

2) A greenfield project is one that is developed and run from scratch, in contrast to, for example, taking over an already existingproject.

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ices and upgrading production systems at alllevels.

2.3 Risk

An investment may come in two forms, port-folio management and direct involvement.Following a portfolio management strategy, onetakes the performance of an individual com-pany for given, and focuses on mitigating riskby investing in different companies oftenthrough the stock market. Generally, it is possi-ble for a portfolio manager to diversify away allunsystematic risk, and most of the benefits ofdiversification can be achieved with fewer than15 stocks, distributed over different sectorsand/or countries. What is left is the systematicrisk, which is connected to high levels of cor-ruption, political instability, exchange rateunpredictability, etc. in several of the leastdeveloped countries, hereafter called “politicalrisk”. The aim for the portfolio manager is tocorrectly estimate the quantity of the relevantrisk factors allowing a calculation of therequired rate of return and the net presentvalue of a project, the resulting information pro-viding a basis for investment decisions. If theexpected cash flow is relatively low and thepolitical risk fairly high in developing countries,it may be difficult to find projects showing posi-tive net present value, so-called viable projects.In addition to the relevant risk, the requiredrate of return on any asset will depend on thesize of the risk-free rate of return and on theexpected rate of return on the market portfolio,which are market-determined variables andbeyond the control of a single investor (see Box2.1).

Part of the hesitation of private investors toinvest in developing countries derives from anatural slowness in entering into new marketsand from risk anticipation exceeding actualrisk. DFIs may in this respect (through bothportfolio management and direct involvement)act as frontrunners by having more knowledgeof the market, thereby reducing the gapbetween perceived and actual risk and reducingthe time for making investment decisions.

Direct involvement implies operational controlwith the investment target. When calculatingthe net present value of a project in a foreigncountry, one method is to mark up the requiredrate of return to cover the political risk. Anothermethod is to reduce expected cash flow inaccordance with the chances of expropriationsor additional unwanted actions by the govern-ment. However, with direct involvement – whenthe investor is familiar with cultural and otherrelevant factors as well as the actual industry –there is also the possibility to influence the pro-duction process and thereby expected cashflow. In other words, while the portfolio man-ager scans for viable projects, the directinvestor creates them. Furthermore, the directinvestor may also influence the actual politicalrisk by virtue of being an important economicactor (for an overview of relevant methods, seefor instance, Brealey and Myers 1991).

A venture fund may be interpreted as a mixtureof portfolio management and direct investment.These funds provide equity to establishmentswhen it is of special interest that the investorsor owners have knowledge about the produc-tion process. In industrialised countries venturecapital is mostly associated with investments inresearch and development or newly inventedproducts. To reduce the substantial risk con-nected with these types of projects the investorsoften either employ existing or try to acquire in-depth market and industrial knowledge in therelevant niche. This competence can flow intothe project and will anyway make it easier forthe investor to calculate expected cash flowfrom the venture.

In developing countries production is more of atraditional kind. Here the role of venture capi-talists is to gain knowledge about how toachieve highest possible productivity givenlocal input factors and how to cope with the spe-cific country-related risk.

To sum up, foreign as well as domestic invest-ments in developing countries are relativelyrare because high political risk requires com-paratively high rates of return. A project inBangladesh may, for instance, have the same

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expected cash flow as a project in Oslo.However, where the Norwegian firm is evalu-ated as viable, the Bangladeshi is not due to thehigher risk premium. To reduce anticipatedrisk, Norfund should have knowledge about

Bangladesh as well as the sector the fund isinvesting in. To improve the expected rate ofreturn Norfund should act as a direct investorhelping to create increased earnings for theinvestment.

Box 2.1 Risk and required rate of return

In accordance with the so-called capital asset pricing model the required rate of return on any asset for which futurecash flows are not known with certainty is like the risk-free rate of return plus a risk premium. Furthermore, the totalrisk can be portioned into systematic risk and unsystematic risk. Systematic risk is connected to macroeconomicconditions or the risk of the economy as a whole while unsystematic risk is specific for each firm or sector. It is possibleto diversify away all unsystematic risk and most of the benefits of diversification can be achieved with fewer than 15stocks (see for instance Copeland and Weston 1988). Examples of unsystematic risk are local strikes in an enterprise oran industry, the competence and ability of the management and acceptance of a firm’s new product in the market.Examples of systematic risk are general strikes, wars, climate disasters, etc. When various countries have dissimilarmacroeconomic conditions some of the country-specific systematic risk turns into an unsystematic risk as soon as it ispossible to diversify the portfolio over these countries.

The contribution of a single asset to market risk is its covariance with the market (eventual world market) portfolio andthis is the only risk that an investor would pay a premium to avoid. Although individual investors may not hold well-diversified portfolios the covariance risk is the appropriate measure of systematic risk for a single asset. The riskpremium is like the price of risk multiplied with the quantity of risk. The price of risk is the difference between theexpected rate of return on the market portfolio and the risk-free rate of return while the quantity of risk is thecovariance between returns on the risky asset and the return on the market portfolio, divided by the variance of themarket portfolio.

International investments are connected with exchange risk and political risk. There are two types of phenomena toconsider in the area of exchange risk, inflation risk and relative price risk. The risk to an agent in a world of pure inflationrisk is entirely nominal and can be eliminated by the appropriate indexation of contracts in real terms. (To the extent itis not done it reflects information costs or transaction costs of doing so.) However, exchange rate changes due torelative price movements (which in turn reflect changes in demand and supply conditions) represent real risk that canbe hedged only at a cost. Political risk is connected with the threat that the foreign government will change the rules ofthe game after the investment is made. There are different ways for enterprises operating across boarders to reducepolitical risk, see for instance Brealey and Myers (1991). Exchange rate risk as well as political risk can be minimizedthrough diversifying investments over countries.

2.4 Development Finance Institutions

Norfund is one of several Development FinanceInstitutions (DFIs). Most OECD DevelopmentAid Committee members have establishedsome sort of Development Finance Institution.Norfund is a relative latecomer. Together withexport credit agencies (ECAs), DFIs make upwhat is known as the International FinanceInstitution (IFI). This includes both multilateraland bilateral organisations and is characterisedby financing and guaranteeing long-term invest-ments in private sector enterprises in develop-ing countries. Approximately 20 per cent oflong-term foreign debt flowing to the privatesector in developing countries is provided orguaranteed by IFIs (IFC, 2002). The figures forsub-Saharan Africa are even higher, especiallydue to DFI investments. This shows that DFIs

are significant in mobilising FDIs to developingcountries. In addition, IFI financing/guaranteesoften leverage other international and domesticfinance.

IFI financing/guarantees frequently run over alonger term and are accessible to a broaderrange of companies than other typical long-termforeign debts. The total IFI financing to the pri-vate sector in developing countries in 2000 wasabout US$ 25 billion, of which bilateral DFIssupplied about US$ 2.5 billion and IFC 2.7billion. The top three bilateral DFIs in 2000were OPIC (USA), CDC (UK) and FMO (theNetherlands) (IFC, 2002).

The International Finance Corporation (IFC)represents a very special DFI, both by its size

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and by being a part of the World Bank Group.Established in 1956, IFC is the largest multilat-eral source of loan and equity financing for pri-vate sector projects in the developing world. Itpromotes sustainable private sector develop-ment primarily by:

• financing private sector projects locatedin the developing world

• helping private companies in the deve-loping world to mobilise financing ininternational financial markets

• providing advice and technical assistanceto businesses and governments

IFC is to a much larger extent than bilateralDFIs linked to development cooperationthrough close operational links with the rest ofthe World Bank system and through havingaccess to trust funds. In its recent new strategy,which also forms an integrated part of the newWorld Bank strategy for private sector develop-ment, IFC will shift its focus towards a moreinnovative approach, taking the lead in invest-ments in sectors and rural areas that can pro-mote a stronger impact on poverty alleviation.This is in contrast to previous policy, which hasfrequently consisted more of takeovers andinvestments with profitability as the mainobjective.

In this evaluation, Norfund will in particular bebenchmarked against other Nordic DFIs suchas IFU (Denmark) and Swedfund (Sweden) inaddition to CDC (UK). These are all membersof the Association of European DevelopmentFinance Institutions (EDFI). EDFI comprisesall the DFIs in the EU countries plus Norway.IFU has been in operation for 35 years,Swedfund for 25 years, CDC for more than 50years, whereas Norfund has only been inoperation for 5 years.

IFU in Denmark is an independent, self-govern-ing entity limited in its liability to the extent ofits net worth. It was created in 1967 for thepurpose of promoting economic activity indeveloping countries, by means of investmentsin these countries in collaboration with Danishtrade and industry. For the first ten years of

operations (until 1976) it was financed with ear-marked revenue from the “Coffee Tax”. Thiswas meant as a means of providing for thegradual return to poor countries of some of thetaxes and duties levied on imports from them,but equally important, it was meant as compen-sation to Danish companies willing to take therisk of investing in developing countries. TheIFU funds are therefore tied to investments byDanish companies. IFU participates as a part-ner with capital in the form of equity and loansand through board membership in joint ventureenterprises in eligible developing countries.They include large and small investments aswell as pilot projects, and cover greenfield,expansion of existing projects and privatisationof state-owned enterprises. At the end of 2001,IFU had experience from 449 projects in 71countries, and a total equity capital of DKK1.872 million.

Swedfund International AB was established in1978 and offers risk capital and competence forinvestments in Africa, Asia, Latin America andCentral and Eastern Europe. The clients areprimarily Swedish companies planning to estab-lish or expand their business to Swedfund’sinvestment countries, and require a partnerwith whom to share the risk. Outside LDCs,Swedfund is committed to tie investments withSwedish companies. Swedfund offers a broadspectrum of financial solutions including equity,loans and leasing. In some cases, Swedfund canalso assist the financing of a venture throughthe provision of guarantees.

CDC was established in 1948 and by 2001 hadinvested US$ 1.6 billion in 400 businesses inover 50 developing countries. Following anattempt to privatise CDC in 1997, a reorganisa-tion led to a concentration of the engagementsin four areas. They aim to make fully commer-cial returns on their investments. CDC aims topromote the expansion of the business base inthese countries and improve the competi-tiveness of the underlying economies. CDCgenerally provides finance for expansion capi-tal, management buyouts, management buy-insand privatisations.

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The different DFIs have been given differentmandates from their governments. Some focusonly on developing countries, while otherscombine this with funds for other emergingmarkets, especially Central and EasternEurope. The funds are also from differentsources: a few, like FMO, have substantial pri-vate funds, but the majority are dependent onpublic funds. For the DFIs dependent on publicfunds, new funds have been made availablefrom time to time. CDC has experienced a

change, having been notified that no new publicfund can be expected.

The types of products offered are also different.Providing equity for direct investments is themost common product. Loans and a combina-tion of loans and equity are also common.Norfund has a stronger focus on investments inSME funds and in SME fund management thanother DFIs and has less direct investmentstogether with home country industry.

Organisation Investments 2000 Geographical Product focus Tied/untiedin US$ mill. area

CDC 400 50% to Africa Equity and Untiedand South Asia, 70% fund management

in LMIC and LIC

FMO 339 Equity, loans Untiedand guarantees

IFU 60 Up to LMIC Equity, loans Tiedand guarantees

Swedfund 12 Up to LMIC Equity and loans LDC untied

Norfund 20 33% in LDC, up to World Equity, SME funds UntiedBank loan threshold and fund management.

EDFI total 2 000 (approx.) * * *

IFC 2 709 Global, including UMIC Equity and loans Untied

DFI total 10 418 * * *

Figure 2.1 Types and product range of some Development Finance Institutions

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Norfund, Norwegian Investment Fund for Deve-loping Countries, was established by law on 12December 1996 and completed its first full yearof operation in 1998. This chapter will analysehow effective Norfund is as a DevelopmentFinance Institution.

Norfund shall provide loans and risk capital inthe form of equity or quasi equity without sub-sidy to profitable and viable private enterprisesin development countries and in this way pro-mote business development in these markets.Norfund’s purpose is to establish sustainable,viable ventures that otherwise would not havebeen established due to perceptions of the riskinvolved. From 2002 Norfund was no longerobliged to tie investments together withNorwegian companies. From the same dateNorfund came under an obligation to invest atleast a third of its capital in Least DevelopedCountries.

The fund size was NOK 1.2 billion in 2002, andwill further increase to NOK 1.7 billion in 2003,given the additional capitalisation agreed in theGovernment’s 2003 budget. In addition comesthe value of the loans taken over from NORAD,which may add more than NOK 300 million tothe fund in the years to come. From the estab-lishment of Norfund, and most recentlyrepeated in the 2003 Budget Act, the capitalisa-tion of the fund was said to be a temporaryarrangement. At some future point in time yetto be decided, Norfund is supposed to operatebased on the return of the fund. This statementincorporate, as the evaluation team sees it, theprime guideline given to Norfund by its owner.To operate in the long term based on the returnon the fund forms the basis of Norfund’sstrategy and investments.

It will take approximately ten years from start-up in 1997 before a critical mass of wanted exitshas taken place, enabling Norfund to start toreinvest its funds. Prior to that, Norfund willremain, with or without new capitalisation, in anestablishing phase. With the existing account-

ing standards, only future potential losses maybe accounted for during this period while futurepotential gains will not affect the present bal-ance. This implies that during the first years ofoperation the books will almost inevitably showa negative return on invested capital.Nevertheless, Norfund showed a positivebalance in 2002 thanks to the income fromloans taken over from NORAD and interestearned on as yet uninvested funds.

Norfund is governed by the Norfund Act(1996–97) and MFA’s directives. A board of 5directors, one of whom represents MFA, andtwo deputy directors, is appointed by theNorwegian Government. Further to this,Norfund reports to the MFA through annualreports, tertiary financial reports, minutes fromthe board and biannual meetings.

As of 2002, Norfund has 22 employees, two ofwhom are seconded to Aureos and SN Powerand two to the field (Angola and CentralAmerica). The organisational structure ofNorfund, including its investments in Aureosand SN Power, is designed to enable largeroperations in the future. As described below,the engagement in SN Power and Aureos pointstowards a fund size in 2007 of about NOK 5billion. Norfund anticipates growth of the fundto exceed the growth of the organisation.

A key strategic question both for Norfund andits owner concerns when and at which level thefund should close. I.e., how many years shouldthe Government continue to capitalise the fund,and how much might it reasonably be expectedto inject? While it is beyond the scope of thisevaluation to address these questions in detail,it is important that Norfund and the Govern-ment keep them in mind. Assumptions arebeing made by Norfund today concerningfuture capitalisation from the Government andhow to achieve self-financing in the longerterm.

3 Description and Assessment of Norfund’s Operations

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Defending and planning for steady state opera-tions include other considerations, as addres-sed below. It is important to bear in mind thedistinction between the fund and the fund man-agement operations. The fund could be closedand operated with a lower or higher risk andpredicted return. The fund could, however,expand to handle other funds with otherconditions attached, including, for example,capital raised through the private market.Several other DFIs operate funds in this way.FMO in the Netherlands is an example of a fundmanager that raises funds in the private capitalmarket.

Areas of operation

Norfund’s organisation and project portfoliohave expanded rapidly and in several directionssince start-up in 1997. It started to invest inexisting funds and identify Norwegian partnersfor direct investments. The strategy seems tohave been a mix of portfolio management anddirect involvement, with an edge on diversifica-tion strategy rather than involvement strategy.In other words, viable projects have beenlooked for more than created, resulting in awidespread portfolio. Over the last year, thisapproach has partly been changed and somestrategic areas have been developed, one ofwhich is Energy through SN Power, andanother is fund management of SME fundsthrough Aureos. At this point, Norfund isinvolved directly or indirectly in more than 30countries in Africa, Asia, Latin America andSouth East Europe.

Norfund activities can be divided into four mainareas:

• direct investments• investments in national venture funds• investments in national venture fund

management companies• partner in private investment companies

(Statkraft Norfund Power Invest)

Micro finance and leasing projects are foundboth in the direct investment and venture fundportfolio. These types of investment are hencenot singled out here but included in theirrespective category of direct and indirectinvestments. In 2000, after a Parliamentaryvote, Norfund was given responsibility formanaging NORAD’s loan portfolio – around 40loans – as this private sector development toolhad been terminated. This represented amanagement task for Norfund and a potentialsource of income as the portfolio was takenover at a cost of NOK 1. As mentioned above,the interest and repayment of loans have andwill continue to make up a substantial part ofNorfund’s income in its first year. It is not,however, an active instrument or a strategicengagement for Norfund and hence is notevaluated as such. With the exception of themanagement of NORAD’s former loans, loanand guarantee provisions constitute a small partof Norfund’s portfolio. Figure 3.1 shows therelative size of four areas in terms of totalinvested capital as of December 2002.

Figure 3.1 Funds invested as of December 2002

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Initially Norfund had an upper investment limitto Low Middle Income countries (BNP lowerthan US$ 3.030 per capita in 1998). It wasexpanded to include countries eligible forWorld Bank loans (BNP lower than US$ 5,280per capita in 1998). Norfund’s strategy hasalways been that a third of its capital should beinvested in Least Developed Countries (LDCs).As mentioned above, the Budget Act of 2002turned this aspiration into a condition.

Direct investments

Direct investments are direct part-finance for theestablishment of new business schemes, or forrestructuring existing businesses. Norfund mayfinance up to 49 per cent of the investment. Until2001, direct investments had to be made jointlywith Norwegian companies, and may or may nothave had a domestic partner. As of 1 January2002, Norfund is no longer required to tie invest-ments to Norwegian businesses, but may enterinto partnerships with any business or companywilling to invest. The investments are normally inthe form of equity, but are also given as a loan ora combination of equity and loan.

Norfund has on record more than 300 requestsfrom potential partners. Of these, approxi-mately 50 projects have been screened moreclosely. These 50 projects originate from threemajor groups of partners:

• developing-country-based companieslooking for investors

• Norwegian-based SMEs at an early stageof investment or outsource planning

• large and small professional (Norwegian-based) companies well on the way to real-ising a project, looking for partners toshare risk or available (low cost) equityor loan

Of the 50 projects, as of October 2002, 18 haveled to a commitment from Norfund to invest.Norfund has invested or partly invested in 12 ofthese (two of which were exited by the end of2002 due to performance problems). The 12projects comprised investments mainly in

industrial production for domestic or regionalmarkets. Around 80 per cent are with large orsmall professional players (group 3 above). Ofthe 12 direct investments that have taken place,one is in an LDC country (Bangladesh). Thisinvestment, however, accounts for approxi-mately 30 per cent of the capital invested indirect investments. Of the six new committedinvestments, as of October 2002 two are in LDCcountries (Nepal and Zambia) and one partly inLDC (Southern Africa).

Funds

A second strategy has been to invest in nationalventure funds. Investments in a total of 15 fundsare undertaken and four more are committed,of which three are through Aureos. Besides thefunds linked to the Aureos system, two of theother funds are linked to the US-based fundmanager Small Enterprise Assistance Fund(SEAF), which is the other large manager ofSME funds.3 Of the 15 funds, two have madeinvestments only in LDCs (MINCO inMozambique and FEDHA in Tanzania) and twopartly in LDCs (African Infrastructure Fund[AAIF] and Indian Ocean II fund). Of the com-mitted funds, all are directed wholly or partlytowards LDC investments (Aureos Africa fundsand the Angola fund).

The first generation of funds Norfund investedin were often set up locally in one country. Theresults were mixed in terms of returns in US$.For the new Aureos funds the strategy haschanged. The funds have been made regionalfunds (in US$ and registered offshore).Widening the investment horizon, eases cur-rency and country risks At the same time, theinvestment profile has changed from mainlystart-ups and restructuring to capital expansionin promising existing firms, which reduces theoperational risks.

Norfund gives high priority to investments vianational and regional capital venture funds.This is an effective way to invest throughinvestors with first hand knowledge of thenational markets. Additional reasons are the

3) SEAF focuses on providing equity capital and technical assistance to small and medium-sized private enterprises (SMEs).

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potential for links between projects identifiedby the domestic investors in the SME funds andNorwegian industry and the lack of identifieddirect investment opportunities. If Norfund hadlimited its investments in funds only withoutengaging in fund management, those invest-ments could have be seen as mainly portfolioinvestments. The Danida representatives in IFUwere of the opinion that indirect investmentmanagement via national venture fund manage-ment companies reduces the opportunity toinfluence and monitor projects considerably.Return on the investments relies very much onthe quality of the fund management companies.

Fund management

Norfund have to larger extent than other DFIentered into management of funds and two fundmanagement investments have been made. Themajor investments are in Aureos.

For several years now, CDC in the UK has oper-ated the companies comprising Aureos today.In 1997, the British Government started prepar-ing for a privatisation of CDC, but this turnedout not to be feasible given the current inte-grated structure of CDC’s global activities. Arestructuring process was hence started,whereby one of the first measures was to singleout the SME venture capital fund manage-ment’s structure for possible sale. Norfundcontacted CDC in this respect and this resultedin the setting up of the new management com-pany Aureos were CDC and Norfund owns halfeach. In addition, CDC has restructured andconcentrated its reaming activities in oneinvestment fund and three operational areas ormanagement companies: Africa, India andPower. In so doing, the British Government hasopened up for other funds and development orcommercial interests to either invest in some ofthe four areas or take a stake in some of themanagement companies, as in the case ofNorfund in Aureos. The African and Indianmanagement companies will concentrate onlarger deals (over US$ 4 million), while Aureoswill concentrate on the SME deals. However,Aureos will have to compete with the other fundmanagement companies in the new CDCstructure for investments from the CDC

Investment fund. Norfund was also invited totake a share in the Power management com-pany but decided to go with Statkraft instead.Cooperation between this CDC company,known as Globeleq, and SN Power is, however,taking place.

Aureos Capital will take forward, build and man-age an existing family of 14 country funds.Aureos is registered in Mauritius but has head-quarters in London. Of the 11 national fund man-agement companies, three are in LDC(Mozambique, Tanzania and Zambia). As ofSeptember 2002, the committed capital of Aureosfunds is US$ 202 million and the Aureos compa-nies employ a total of approximately 80 persons.

One is a small investment in Lafise InvestmentManagement (LIM), a company incorporated inthe Bahamas with its main office in Managua,Nicaragua. LIM is a joint venture between theNicaraguan financial consortium Lafise, ofwhich Norfund holds a 20 per cent share, andNorfund. LIM manages the Central AmericanSmall Enterprise Investment Fund (CASEIF),in which Norfund has invested US$ 5 million

In addition to the fund management companies,a small investment has been made in theAfrican Management Services Company(AMSCO), which supplies experienced man-agers and technical personnel to small andmedium-sized private companies in Africa.Customised training services to local managersand staff are offered to upgrade their skills andimprove performance and productivity of theircompany. Currently, AMSCO has placedaround 300 managers under contract at 110African companies. More than 9,000 employeeshave been trained. In a recent survey, 70 percent of AMSCO clients reported a positiveimpact on AMSCO managers and training.Based in Amsterdam, AMSCO has offices inHarare, Abidjan, Nairobi, Port Louis, Lagos,and Accra.

Partner in private investment company: Statkraft

Norfund Power Invest

In June 2002, Statkraft and Norfund jointlyestablished Statkraft Norfund Power Invest AS

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(SN Power), on a 50/50 basis. The company’sobjective is to invest in, develop and operatehydro power projects in emerging markets. Infunction, this investment does not differ muchfrom the direct investments, but in form andsize it represents something new and therebynaturally forms an area of operations in itself.

SN Power’s business concept is to own andoperate hydro power plants on a commercialbasis. To start with, SN Power will concentrateon projects in Asia and Latin America. SNPower will prioritise projects with a goodreturn. The company will exercise activeownership with stakes of at least 20–50 per centin relevant energy projects. On the one hand,the business concept is based on this need forenergy for development and the call (mostrecently by the UN Johannesburg summit) forstepping up the use of renewable energysources, and, on the other hand, the idea offocusing on areas were Norway could con-tribute wide-ranging industrial knowledge. Inaddition, many existing energy companiesrecognise the need for technical upgrading andconsolidation of ownership structures, and areopen to possible takeovers. The crisis in theAmerican energy sector, in particular, hasresulted in several operators downscaling theirengagement in developing countries. This hasled to a situation were the price of takeover is,in many cases, far less than the cost of buildingnew. SN Power will therefore start withtakeovers rather than greenfield projects. Thiswill also imply a lower risk for SN Power in itsestablishing phase. Given the long planninghorizon for greenfield projects, however, SNPower will start identifying potential in suchprojects.

As its first engagement, SN Power will take overthe management and eventually the ownershipof two hydro power plants from Statkraft,located in Laos and Nepal. Furthermore, SNPower is preparing its first investment in Peru.The intention is that the company shall have acapital base of NOK 5 billion within four to fiveyears. In the longer term, it is expected that thecompany will be listed on the stock exchange. Itis expected that Norfund will represent both

risk capital and knowledge on investing in andoperating companies in developing countries.As is normal in this industry, SN Power has avery long-term investment horizon – often 20years or more. It is not in the business to buycompanies, turn them around and then sellthem again. Norfund’s interest here is not thatextensive, concentrating rather on fosteringthis type of developing country investment byNorwegian companies. Norfund’s exit option inSN Power, therefore, lies in the possibility ofselling out to other investors through, forexample, a stock market introduction.

As of December 2002, Norfund had investedNOK 300 million and committed an additionalNOK 200 million to the new joint venture withStatkraft. With the foreseen additional fundsfrom MFA in 2003, Norfund will reach itsprimary investment target of NOK 500 million.More than 25 per cent of Norfund’s capital willthen be invested in SN Power. This is equal to a50 per cent ownership in SN Power.

3.1 Risk profile

Norfund operates as a mixture of portfoliomanagement and direct involvement. Theinvestment strategy seems to be motivated by aneed for diversification and risk mitigationfamiliar to portfolio managers. The directinvolvement varies very much based on the factthat the engagements are many, geographicallyspread and in many different industries. Theengagement in Aureos and the investment inSN Power will effect changes to this picture.

The reason for Norfund’s choice of strategy islikely MFA’s requirement that Norfund shouldeventually start operating on the returns on itsown investments. This creates a need forNorfund to mitigate against systematic risks ofinvesting in developing countries as far as possi-ble. The result has been several investments inthe group of upper middle-income countries notso relevant from a Norwegian developmentstrategy point of view, and representing a fur-ther geographical spread out.

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It is difficult to see the rationale behind MFA’sconditions on Norfund. Norfund should beresponsible for maximising cash flow in itsengagements in the LDC, LIC and LMIC whilethe systematic risk of operating in these groupsof countries should be taken by the MFA. Thismeans that if ten years from now developingcountries in the above mentioned group stillperform poorly in general, Norfund would notbe yielding an expected healthy return in NOK.

But if these countries or a group of them man-aged to improve their economic performance inline with, for example, the MillenniumDevelopment Goals, Norfund should (if other-wise investing wisely) perform well.

Norfund should therefore focus more stronglythan today on fewer markets and on creatingviable projects through direct involvement andby bringing in industrial partners.

Norfund direct invest-ment approved by Oct2002

Norfund fund invest-ments approved by Oct2002 (main countries ofoperation)

Upper middle incomecountries (UMIC)

CroatiaTurkey (As of 2003,Turkey is regarded aLMIC)

Gabon, Mauritius andPanama

Lower middle incomecountries (LMIC)

Bosnia, China, Ecuador,Paraguay, Philippinesand Sri Lanka

Algeria, Bosnia, BoliviaChina, Costa Rica,Ecuador, Egypt, ElSalvador, Guatemala,Papua New Guinea,Peru, Sri Lanka, SouthAfrica, Thailand

Low income countries(LIC)

Kenya and Nicaragua

Honduras andNicaragua

Least developedcountries (LDC)

Bangladesh and Nepal

Congo, Mozambique,Madagascar andTanzania.

(Angola yet to beapproved)

Figure 3.2 Norfund’s area of investments

Norfund shall invest in both greenfield projectsand restructuring. The greenfield requirementis based on the fact that these types of invest-ments may represent a higher added value informs of capital, knowledge transfer andemployment creations than takeovers.Takeovers, on the other side, are less risky andmay generate higher returns on the investedcapital. Attracting private capital is a long-termobjective of both SN Power and the Aureosfunds. Such long-term objectives have immedi-ate consequences on investment strategy. SNPower will concentrate on buying existinghydro power stations either from other interna-tional companies or in conjunction with the pri-vatisation process in developing countries.Aureos has decided to reduce the number ofgreenfield investments and focus on expansion,restructuring and trade sale of companies. Forthe direct investments, the deals in the pipelineare also restructuring rather than greenfieldprojects.

Part of the calculation of project risks concernscurrency depreciation . There are two types ofphenomena to consider in the area of exchangerisk, inflation risk and relative price risk. Therisk to an agent in a world of pure inflation riskis entirely nominal and can be eliminated by theappropriate indexation of contracts in realterms. (To the extent it is not done it reflectsthe information costs or transaction costs ofdoing so.) However, exchange rate changes dueto relative price movements (which in turnreflect changes in demand and supply condi-tions and different productivity developments)represent real risk that can be hedged only at acost. This can explain why the return on invest-ments in Ghana, for example, has been accept-able in local currency but poor in US$ andhence even poorer in NOK.

It should be mentioned that a time horizon of 5to 7 years, normally considered as optimal forventure capital investments in industrial coun-

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tries, is often far too short for investments indeveloping countries. This is partly taken intoconsideration by extending the lifetime of thefunds by up to 8 to 10 years. There is, however,a clear gap between the expectations from theinvestors in terms of rapid exits and the experi-ence in the field organisation of the fundmanagers on the right time to exit.

As to whether Norfund should be less a port-folio manager and more a direct investor is adebated issue throughout the organisation andamong its stakeholders. Comments made in theworkshops in Nicaragua, Mozambique andBangladesh indicated clearly that there areseveral feasible projects in these countries,given the involvement of a competent investor.

Box 3.1 The Minco fund in Mozambique

It is a clear signal of commitment to the financial sector and industry locally and abroad when DFIs like IFC, CDC,Swedfund, and Norfund announce investments in local equity funds like Minco, and Minco commits funds toshareholding in local enterprises with an explicit exit strategy. It attracts local investors to participate even in a capitalmarket where returns to safe government bonds are extremely high. In this respect, each foreign investor, Norfund andothers alike, help considerably in mobilising additional capital well beyond its own contribution to help the countrygrow, create new or better paid jobs, and thus fight poverty. Perhaps most important in this context are the signals thatlocal potential investors receive from such decisions.

However, Minco has so far been careful and clearly risk averse, and turned down nearly all investment opportunitiespresented for consideration. Even so, given the extremely fragile and uncertain investment climate, and immatureprivate enterprise sector in Mozambique, one cannot exclude the possibility that Minco in fact has been operating at,or near the risk frontier.

One strategy is to co-invest with multinationalcompanies in a region. However, in these kindsof investments, DFIs probably mainly operateas a portfolio investor as it is the multinationalcompany that provides the necessaryknowledge about production methods, etc.Multinational enterprises must be assumed tohave an expected positive rate of return (cor-rected for risk) when investing in developingcountries. Such co-investments by DFIs do notenhance risk-reduction or the transfer ofknowledge except in cases where no invest-

ments would have taken place without the DFIsco-financing.

The risk taken in the SN Power investments is of a special nature in relation to the rest of the Norfund portfolio. An investment by SNPower will be followed by a so-called PowerPurchasing Agreement with the host Govern-ment. The peculiarity of this agreement is thatpart of the project risk is transferred from theinvestor to the host country through a commit-ment by the host country to buy the power pro-duced at some agreed price formulary.

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3.2 Making capital available

As described in the previous chapter, FDIs ofthe type provided by Norfund can at best act tocrowd in other sources of capital such as privateforeign direct investments and private and pub-lic domestic investments. There is, however, adanger that the capital only replaces other typesof capital and hence does not add value. Thoughparticipating in funds and direct investments,Norfund aims to contribute to mobilising addi-tional capital. In the cases of the direct invest-ments and SN Power, at least half of the capitalinvested is private FDIs.

For international investors – but also for domes-tic investors – the development of well-managedventure funds represents an additional invest-ment opportunity. Many domestic investorsprefer offshore investment nowadays. ForAfrica, it is estimated that more than 40 per centof the private capital owned by Africans isplaced offshore. However, bringing only a frac-tion of the offshore or domestically savedcapital into work in viable businesses wouldmake this type of venture fund very attractivefor private sector development.

From the Mozambique field study we learnedthat it certainly sends a clear signal of commit-

ment to the financial sector and industry locallyand abroad when Norfund announces invest-ments, as in national equity funds like Minco(see box 3.1). This was also a popular viewamong our informants in Bangladesh. Invest-ments by a multinational company or by aninternational fund improve the general climatefor investments. As stated by one informant,“The best guarantee for a foreign investor isanother foreign investor already present in thecountry.”

Norfund has also played a role in Nicaragua,together with its financial partners in theregional investment funds, as a “certifier ofviable investments” bringing additional invest-ments into the projects invested in. This “certifi-cation effect” has reduced the perceived risk ofother potential investors when assessing themarket in Nicaragua. One of the main charac-teristics of the financial market in Nicaragua isthe limited financial services available to smalland medium-sized investors, Norfund’s coretarget group according to its policy and strat-egy. The capital market in Nicaragua can bedescribed as highly risk averse since the recentrestructuring of the financial sector on the tailof the banking crisis following the previousGovernment. Only short-term lending is insupply combined with difficulties in establishing

Box 3.2 Example of a currency risk mitigating instrument

The Mobile Telephone Network in Uganda (MTNU) can serve to illustrate one possible currency stabilizationarrangement. MTNU and its shareholders have assumed the bulk of the project construction risk, the physical andfinancial completion risk, and all the operating and financial risks except for the currency valuation risk, which happensto be substantial. Having assessed the various liquidity and customer credit risks to be manageable, MTNU’s mainconcern is currency value risk arising from a large proportion of its equity capital and long-term funding costs being inforeign currency while its revenues and variable operating costs are in Uganda Shillings (USH). Its capital value riskexposure on long-term debt increases continuously at a high speed as a result of steady USH depreciation, a situationvery similar to that faced by similar investments in Mozambique, for instance. MTNU therefore decided to manage itscurrency value risk by shifting its funding from US$ and Euro to USH. However, it is constrained by the availability oflong-term USH funds and the unwillingness of domestic institutions to lend without credible counterpart guarantees.

The solution in this case has been the Sida guarantee that covers insolvency risk. This guarantee has overcome theaforementioned constraint and opened the door to domestic funding that reduces the MTNU’s currency value riskdramatically, making it possible for MTNU to remove its currency value risk on 70 per cent of its long-term debt. Theresult has been that local currency domestic resources have funded 50 per cent of the projects’ total capital costs eventhough more than 90 per cent of those costs have been for foreign currency capital imports. This approach could proveto be promising for mobilising available domestic capital that has remained dormant in bank accounts or invested insafe high-yielding government bonds, to domestic infrastructure projects and thus reduce the domestic rate of returnrequirements and accelerate the rate of much needed investments.

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collateral. There are no known national venturecapital funds. In this setting Norfund has,directly and indirectly, played a role in supply-ing medium-term risk capital through a smallnumber of investments to help expansion andthe financial deepening of the market. Theinvestments are in the regional investmentfunds, of which one represents an innovativeapproach to commercial investments in microfinance institutions.

In the former CDC funds Aureos took over themanagement of, domestic finance institutionshave contributed 22 per cent of the capital andinternational private institutions 3 per cent. Theremainder is DFI capital. No national financeinstitutions or international private investorshave so far invested in the one fund launchedafter the establishment of Aureos (the CentralAmerican fund). This is worrying and shouldbe addressed. Attracting local capital in directinvestments and funds is one measure ofNorfund’s success.

With regard to the potential danger of onlyreplacing other capital – which gives no valueadded effects to Norfund’s investments – someof the other investors have indicated that theinvestments would have been carried out with-out Norfund. Norfund was however a preferredpartner because of their experience of investingin developing countries and being owned by theNorwegian Government. Some projects turneddown by Norfund have also found other inven-tors, including other DFIs. In other investmentsNorfund’s contributions have been instrumen-tal in realising the project. No general conclu-sions can be drawn based on Norfund’sportfolio alone. The overview of FDI flows todeveloping countries does allow us to say, how-ever, that DFIs like Norfund add an importantamount of capital for investment in developingcountries.

Direct foreign investments have the specificfeatures of capital inflow (investments) withcapital outflow (dividends) during the lifetimeof the investment. Accordingly, the net benefitin economic terms from a national economicperspective is not necessarily reflected in the

commercial profitability of the investment. Ahigh level of foreign ownership and return maysignify a low level of national value added. Toactually determine the extent to which an FDIlike a Norfund investment can be justified aspromoting private sector development and mak-ing a contribution to GDP growth, net foreignexchange earnings at efficiency prices need tobe assessed or, even more sophisticated, a fullyfledged social cost benefit analysis of the invest-ments needs to be conducted.

There seem to be conflicting objectives con-cerning sustainability and substitution. On theone hand, Norfund shall invest in projectswhich are viable in economic terms. On theother, Norfund shall avoid entering intoprojects that may obtain sufficient financialsupport from other sources. In addition, to com-pensate for systematic political risk in develop-ing countries (that is risk which cannot bereduced through diversifying), projects musthave relatively high expected returns. Such“super-normal” returns can be achievedthrough investments in concentrated industrieswith minor competition or in industries whichare exploiting not-replaceable resources, forinstance. Therefore, the ambition to compen-sate for systematic political risk may, to someextent, also be incompatible with supporting ahealthy economic development.

3.3 Investments in Least DevelopedCountries

As mentioned above, Norfund is obliged toinvest at least a third of its capital in LeastDeveloped Countries (LDCs). For direct invest-ments and funds operating only in one countryit is not difficult to calculate actual or plannedinvestments in LDCs. For Norfund thisincludes investments in Bangladesh, Tanzaniaand Mozambique and approved investments inNepal, Zambia and Angola (by October 2002).For funds covering regions including LDCs andinvestments in Norwegian-based companies,assessment is more difficult. In the below figurethe percentage of Norfund’s portfolio investedin LDCs as of October 2002 has been chosen.This might change over time. Most important

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in this respect will be the takeover fromStatkraft to SN Power of the ownership of thehydropower companies in Nepal and Laos. Thisis expected to happen in a couple of year’s timeand might raise the LDC investments in SNPower from zero to 15–25 per cent dependingon the agreed price. For internal Norfund fundarrangements like Norfund Growth Facilities itis natural to only calculate LDC investments asthey are approved case by case.

Figure 3.3 shows the percentage of the invest-ments and approved investments, excluding SNPower and fund management investments,devoted to LDC’s by April and October 2002. Ascan be seen, the amount of approved funds hasincreased during the last half of 2002, due toapprovals of new direct investments and theAngola Venture Capital Facility Fund.

Figure 3.3 Investments and planned investments in LDCs

The percentage of approved investments inLDCs is expected to increase further in theshort run when the Aureos Africa Funds areapproved. However, based on Norfund’s place-ments, future investment and exit plans, in themedium term (2003–4) the percentage ofapproved investments in LDCs is more likely tofall than rise. The amount of capital actuallyinvested in LDCs is hence not likely to risesubstantially in the medium term.

If we include SN Power, and the fact that nofunds have been reinvested as yet, the approvedinvestments in LDC by October 2002 will beeven lower.

In order to comply with its obligations to investa third of its capital in LDCs, the value ofapproved projects in LDCs would probably haveto be even higher than one third. In thatNorfund has committed itself to investing muchof its capital in SN Power and Aureos, where noLDC investment requirements exists, the onlyinstrument remaining over which Norfund

exercise full control is direct investments,which could make fulfilment of the requirementmuch harder.

Compared with other EDFIs, Norfund has astronger commitment to invest in LDC coun-tries. Neither Swedfund nor IFU, nor CDC,have declared LDC investment goals. IFU hashad very few projects in LDCs (52 projects outof 449) over the 35 years the fund has existed,and only approximately 12 per cent of its capitalhas been invested in LDCs (compared withNorfund’s 20 per cent). IFU has, however, adeclared goal of investing more in Africa, andwas granted DKK 750 million in 1997 over afive-year period, each disbursement being con-ditional on the previous year’s investments ofthe same amount located to poor (but not LDC)countries in Africa and elsewhere. CDC has acommitment of investing at least 70 per cent ofits funds in Africa or South Asia (no LDCrequirements), an objective which the organisa-tion presently exceeds. One of Swedfund’sobjectives is to invest half of its capital in low

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income or lower-medium income countries. Inregard to LDC’s Swedfund has less than 7 percent of its investments in LDCs, or 14 per centof its development country portfolio. The factthat Norfund operates with as high an expectedreturn on investments as Swedfund and IFUunderlines Norfund’s stronger LDC focus.

3.4. Development impact

As laid down in White Paper no. 13 (1996–97) tothe Odelsting and the Norwegian Ministry ofForeign Affairs’ instructions, Norfund shall workto: create employment; generate national exportand substitution of import; establish a taxationbase; encourage uses of national resources; nur-ture capital building; and create positive spin-offsto other ventures and industrial clusters. In itsown investment guidelines Norfund lists threeareas of development impact when screeningpotential projects: geographical coverage; localdevelopment effects; and environmental andsocial standards. The local development effectscomprise an analysis of potential export earn-ings; direct job creation; transfers of knowledge;and funds invested through FDIs.

Measuring the impact of development coopera-tion is difficult and debated among researchers.Dengbol-Martinussen and Engberg-Pedersen(1999) conclude that it is almost impossible toseparate the effects of development cooperationfrom the effects arising from other international(private capital) and national (state and privatesector) bodies working in conjunction with theaid. Swedfund, IFU, CDC and Aureos recordsconfirm this view. But some indicators can beidentified. The first indicator on any list will bethe long-term viability of the project, which canbe measured by the value added over the timeof the production (the sum of profit, wages andtaxes paid). It is important to note that prof-itability only makes up one of three elements.The long-term viability of an investment shouldbe the first development measure to look for.For the purpose of this evaluation, however, it isnot a useful measure as the relevant projectsare relatively young.

Knowledge transfer

A second, but very important candidate for themeasurement of development impact is knowl-edge transfer. Publicly supported foreign directinvestment (FDI) incentives (such as Norfund)can be justified by reference to capital marketimperfections, but the strongest arguments arebased on the prospects for knowledge spillover(Kokko, 2002). According to the World Bank,the knowledge gap between developed anddeveloping countries is as significant as thesavings gap or the foreign exchange gap (WorldBank, 2002). Regardless of the form of owner-ship, FDI has been found to contribute signifi-cantly to technology transfer and more effectivetechnology utilisation in developing countries,and it happens in one or more of the followingways:

• FDI can introduce technology that is newto the country, and this can lead to pro-duction and use of new commodities;

• FDI with technological componentsnormally demands development of newskills and experience; i.e. human capitalupgrading; and

• The degree and volume of domestic inno-vation depends on the number of newideas accessible; thus a new ideaincreases the stock of ideas which in turnstimulates domestic innovation.

As technology and know-how are to someextent public goods, foreign investments canresult in benefits for the host country. Forinstance, domestic firms may be able toimprove their productivity as a result of forwardor backward linkages to the foreign-ownedfirm. This diffusion of know-how might alsotake place through workers and managementtraining in the foreign-owned company. Addedto this come the effects of a country adapting toan investment-friendly environment whereenforcement of law, accounting standards,transparency etc., represent improvementsbenefiting not only the foreign firms but thebusiness community at large. In addition, capi-tal inflows of this type raise the domestic invest-ments almost one to one. The effects arestrongest for those countries least integrated

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with international financial markets, like manyAfrican countries (World Bank 2001).Venturecapital funds, such as Norfund, should con-tribute by bringing in relevant industrial part-ners and by virtue of their own knowledge ofestablishing operating businesses in developingcountries and helping to transfer industrialknowledge. Norfund’s direct investments haveproduced a mixed bag of experiences. Allinvestments have included some knowledgetransfer from Norfund and its investment part-ners. However, in some cases knowledge hasproved difficult to adapt to new environments.In other cases the Norwegian co-investorlacked the financial strength or managerialcapacity to successfully survive a longer ormore costly start-up period than anticipated.

With regard to the investments in the funds, itseems as if Norfund’s role as an active ownerwith a seat on boards of directors, as is the casewith Minco, and acting through Aureos, indi-rectly contributes business and managementknowledge to Minco’s investments. However,the other foreign owners obviously adhere tohigh professional standards as well and repre-sent investors with similar experiences to thoseof Norfund. There will be occasions whenNorfund happens to have niche expertise avail-able from a Norwegian company, just as one ofthe other owners may have the technical, busi-ness and management skills needed to do thejob successfully.

Businesses primarily learn from each other inthe market place. Operating on commercialterms and in conjunction with private compa-nies is therefore a form of knowledge transfer,and in this environment Norfund is germane ina way that public institutions such as NORADand the World Bank cannot be. In Nicaragua,Norfund has improved the financial disciplineand stricter commercial orientation of theinvestments made through active board repre-sentation in the companies as well as byemploying financial controllers and providingmanagement advisory services and counsellingto the companies. The approach in Angolamight develop into an example of innovativeways of breaking new ground in this particular

country. However, the approaches in bothNicaragua and Angola have a high cost com-pared to the current and planned size of theportfolio. Some of the costs are not evenreflected in Norfund’s accounts since they arebeing covered by grants from NORAD andMFA.

The industrial knowledge transfer will normallybe in the form of an industrial co-investor. As anexample, the challenges to Norfund or similarinternational venture development financingorganisations in the funding of economic activi-ties in a developing country are (a) to identifythe sector that will have the maximum catalytic(or triggering) effect, and then (b) to identifythe company in which to invest. Situated inOslo, Norfund should have a competitive edgein bringing Norwegian industrial partners onboard, given the existence of such relevant part-ners. Transaction costs could be loweredthrough collaborative ties between Norfundand Norwegian enterprises thanks to a com-mon language, cultural factors etc. Joint ven-tures with such enterprises could be in sectorsin which Norway has advanced expertise(energy, petroleum, fish hatcheries, telecom-munication and other infra-structural sectors)and which have a great need for investment inthe actual developing country. By lowering therisk to the Norwegian partners and by provid-ing partners with additional knowledge aboutthe concrete venture, investments that other-wise would not have taken place could berealised.

In summary, a combination of three inputsshould be requested from Norfund. The firstbeing investor skills. Here Norfund, as an activeowner, should be able to contribute – and itseems as if it has – to the development of thecompanies in which it has invested. The widegeographical and industrial diversification has,however, lowered efficiency and raised costs inthis area. The second is local knowledge of themarkets in which the companies operate. Thisis particularly important where this is not heldby, for example, a Norwegian co-investor.Norfund has room for improvement in regardsto this form of competence, but through Aureos

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the access to such capability has increased con-siderably. The last input should be knowledgeof relevant Norwegian and other industrial part-ners. Here Norfund is working systematicallyto establish connections with potentialNorwegian partners, but the number of co-investments and the success of industrialknowledge transfer are such that a strongerfocus here would be beneficial.

In the case of SN Power, two of the threeelements are very much in place: the invest-ment skills and the knowledge of Norwegianindustry. Norfund could help bring in the thirdelement of knowledge, that of the investmentclimate and opportunities in the countryconcerned.

Employment

Besides the financial information, the onlyquantifiable information collected by Norfundon development effects is the number of jobs inthe enterprise invested in. By the end of 2002,more than 2,600 people were said to beemployed in enterprises in which Norfund hadinvested. The total employment figure in allenterprises in which the Aureos funds hadinvested was said to be 55,000. Number ofemployees is not a very valuable piece of infor-mation in itself. First, the information has notbeen collected over time. Second, there is nodirect link between rises in employment ratesand development effects. The number of jobscan be used as an indicator of the size of theinvestment fund’s activities. However, the waythese figures are collected today by Norfund,and others, does not tell us very much of thedevelopment impact.

The role of Norfund with regard to direct jobcreation has probably so far been marginal andone should not expect radical changes here asthe portfolio matures. Examples can be foundfor both the creation of new jobs and the loss ofjobs as Norfund enters into a company. AtCETA (Mozambican Construction Company),in Mozambique, staffing levels fell by two-thirdsupon the entry of Norfund. Generally speaking,this is because many of the direct and indirectinvestments are takeovers and restructuring of

existing business. However, indirect job cre-ation through domestic demand of goods inputand services created by these well-operatedenterprises probably is important.

Generating national export, substitution of import

and encouragement in the uses of domestic

resources

It is too early to draw firm conclusions on theeffect of Norfund’s investments in generatingnational export, substitution of import orencouragement in the uses of domesticresources. However the analysis of and weightgiven to these objectives in the early investmentphase indicate room for improvement. A com-mon framework for answering this type of ques-tions is to assess the net foreign exchangeearning’s savings of a project. It is measured bythe export value or import substitution value ofthe product or services produced, subtractedimport value of inputs and exported dividends.This measure will capture the benefits of en-gaging domestic capital and other inputs intothe project. Distribution of returns on invest-ments to foreign owners may have negativeconsequences for the balance of payments. Thisis a widely debated issue. If backward linkagesare established within the country, for instancein the form of national production of machineryand equipment, it would have positive implica-tions for the internal knowledge developmentas well as for the current account.

In Nicaragua, the manufacture of plywood byPlywood de Nicaragua, S.A. (PLYNIC) is basedon domestic resources. The company facesimport competition as well as competition inexport markets (partly due to the overvaluedexchange rate pegged to the dollar with anannual adjustment of only 6 per cent). Eventhough profitability is low, it does not fullyreflect the economic viability of the company. Itis the only employment and income opportunityfor the more than 200 households in the area.From a development perspective, it could proveto be one of the most viable investments madeby Norfund in Nicaragua. The conclusiondrawn from the Bangladesh field study is that,until now, Norfund’s commitment probably didnot contribute much in the way of private sector

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progress or to facilitating other key factors ofdevelopment growth. With regard to SN Power,it is questionable whether it will yield substan-tial net foreign income-earning savings in itsinitial phase, except where the energyproduced is exported. The reason lies in thebusiness concept practised by SN Power, wherehydro power stations will be bought from otherforeign investors. Further to this, while thePower Purchasing Agreements associated withthese takeovers secure dividends to be takenout of the country they also transfer part of therisk to the host country government. A specialcase is the investment in Future and Hope. Thisis an initiative outside the mainstream Norfundactivities which focuses on export to Norway.The enterprise itself is registered in Norway,but the activities bring about increased exportopportunities for developing-country-basedenterprises. Knowledge of production, proces-ses and designs are transferred to the produc-ers in developing countries. In Bangladesh, oneof the topics brought forward in the workshopwas the need for assistance in design andmarketing in handicraft industry.

Creation of positive spin-off to other ventures and

industrial clusters

Returning to the fact that Norfund’s invest-ments are in their initial stages, one cannotexpect to capture the full potential of spin-offs.Looking at Norfund’s own strategy and priori-ties, the two activities can be said to be promis-ing with regard to potential spin-offs.

First, the establishment of Aureos representsan good opportunity for Norfund to acquire anetwork of national investors and influence thepolicy of a fund attracting capital from severalDFIs. The establishment of, and support to,national venture funds and fund managementcompanies may also be seen as an importantstep in establishing industrial clusters wheresuch investment banking and active ownershipshould be an integrated part. Aureos bearscomparison in this respect to several initiativeshatched by organisations such as Norfund. Themost important achievement so far is theincreased focus on Africa (see figure 3.4).There are, however, plans at Aureos to enter

new geographical areas not least SouthAmerica. It means of course an even wider geo-graphical spread, i.e. the opposite of the recom-mended concentration. There already exists alarge engagement by DFIs in South Americaand the value added by Aureos will therefore beless than in other geographical areas.

Second, Norfund is focusing on what could becalled the commercial micro finance market.This market, which includes leasing, is directedtowards small businesses, often in the processof growing out of the informal economy andinto the formal economy. The investments arelabelled micro finance, although several areactually financial services to micro, small andmedium-scale enterprises.

The demand for micro finance is brisk inMozambique, to mention just one country. Thereare tens of thousands of potential micro financecandidates in the formal and informal sectors.The demand is for anything from very short-termloans (a week or two for US$ 25) for day-to-dayoperations, to larger investment loans of perhapsUS$ 2–3000. The field study revealed that mostclients in this market are so dependent on thelenders that they do whatever it takes to properlyservice their loans. Loan recovery is thereforemuch higher than that experienced for largeindustrial loans from the commercial banks, evenif interest rates on small loans are very high. Asmicro credit cooperatives (Tchuma) and spe-cialised micro credit institutions (GAPI, Socremoand UGC) have developed very effective systemsfor client assessment and loan monitoring, theyappear as immediately interesting candidates forNorfund to discuss working with under itsadopted strategic dimension called micro credit.The extremely difficult capital market inMozambique – in particular, the virtual impossi-bility of producing collateral for SMEs and infor-mal sector participants – has resulted in agrowing leasing market, which appears to carrylow risk and good returns even if the leasing leg-islation and tax regime have yet to be properlydeveloped. The present leasing companies (ULC,BIM and BCI) are interested in collaboratingwith Norfund to expand the supply of services inthe leasing market.

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Country Income level Office Existing funds Planned funds

Angola LDC Southern Africa Fund On hold

Benin LDC West Africa Fund Optional

Botswana UMIC Southern Africa Fund Optional

Ethiopia LDC East Africa Fund Optional

Gambia LDC West Africa Fund Optional

Ghana LIC Accra GVCF US$ 5.8 m West Africa Fund

Cote d’Ivoire LIC West Africa Fund On hold

Kenya LIC Nairobi Acacia US$ 19.6 m East Africa Fund

Madagascar LDC IORF app. US$ 10 m On hold

Mali LDC West Africa Fund Optional

Mauritius UMIC Port Louis MVCF US$ 7.5 m Southern Africa Fund OptionalIORF US$ 18 m

Mozambique LDC Maputo MINCO US$ 14 m Southern Africa Fund

Namibia LMIC Southern Africa fund Optional

Nigeria LIC West Africa Fund

Rwanda LDC East Africa Fund Optional

Senegal LDC West Africa Fund

Seychelles UMIC IORF

South Africa LMIC Southern Africa Fund

Tanzania LDC Dar-es-Salaam Feda US$ 13 m East Africa Fund

Togo LDC West Africa Fund Optional

Uganda LDC East Africa Fund

Zambia LDC Lusaka ZVCF US$ 12.5 m Southern Africa Fund

Zimbabwe LIC Harare Takura US$ 6.4 m Southern Africa Fund On hold

Figure 3.4 Aureos African exposure

In the case of FINDESA in Nicaragua, microcredit is one area where development goals canbe combined with the Norfund risk profile.FINDESA, a financial company targeting microand small companies, arranges credits in therange of US$ 150 to a current limit of US$37,500 with an average of US$ 1,600. Thecredits may be term loans or line credit throughmicro finance NGOs. FINDESA is one of themost profitable investments of the Lacif port-folio of nine micro finance institutions in LatinAmerica despite being one of the smallest insti-tutions (still limited economy of scale), with aportfolio yield of 16.8 per cent as of September2002. As an institution that provides financialservices unavailable to clients through regularbanks, FINDESA is obviously contributing tothe development of the financial market andfinancial deepening. With a number of non-regulated micro finance institutions in the

market, it may face competition from con-cessional finance and donor supported microfinance projects, however; the latter occasio-nally cause non-sustainable market develop-ments, however, in contrast to FINDESA. Eventhough a detailed portfolio assessment has notbeen made, FINDESA we rate as a viable andfavourable investment in private sector develop-ment for the promotion of micro and small-scaleenterprises.

Norfund has already contributed to the devel-opment of the commercial micro credit marketthrough financial contributions, and can con-tinue to do so. However, it should do so throughcooperation with the leading operators in thisfield.4 Strategic use of micro credit as a privatesector development instrument requires specialdevelopment competence not held, and notlikely to be acquired, by Norfund. In this

4) It was noted in the workshop in Bangladesh that Norfund could be of use in providing venture capital to small firms with goodideas. Scandinavian countries have a market for handicrafts. Norfund could support marketing, which would add value to projectsfinanced through micro credits.

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respect, as in the case of business environmentbuilding, Norfund should be a part of a widernetwork including IFC and NORAD. Norfundhas an understanding of bottlenecks in privatesector development in the market place which it

could channel to NORAD and the World Bank,who could help translate the knowledge intostrategies for improving the businessenvironment.

Box 3.3 Swedfund exit study

In an assessment of the development effects of 37 of Swedfund’s direct investments some years after Swedfund hadexited these companies, it was found that 70 per cent were still running. Domestic capital had replaced Swedfund inmost cases. The original business idea in half of the enterprises remained, but most had diversified. The tendency wasto orientate more towards domestic markets and to make more use of local input in production after Swedfund’s exit.Generally speaking, the new owners had reduced the requirements for return on capital.

The jobs covered by the 37 investments altogether fell from 8,000 to 4,000 in the remaining 70 per cent of thesurviving enterprises. The survey concludes that technology transfer had been the most important development effectover time. New technology was brought into the host country in 31 of 37 investments. The human capital wasupgraded through training programmes in 29 cases. (Source Andante Consulting, 1997).

3.5. Environmental, social and ethicalstandards

Setting and implementing standards are diffi-cult tasks. The added value lies in bringingenterprises up to international standards, notonly entering into enterprises already adheringto these standards. In a development perspec-tive, a very active approach therefore needs tobe adapted to standards. A clear reference tostandards should be set and understoodthroughout the organisations. The day-to-daywork should focus on how to implement thesestandards in organisations (where they make adifference), and not to punish those who needassistance.

It is positive to note that Norfund has formu-lated guidelines for environmental issues,human rights, ethical issues and workers’health issues related to HIV/AIDS. They canfunction both as guidelines for upgrading busi-ness organisations in which Norfund investsdirectly and the general business environment.For the Aureos funds, Norfund has been activeboth in extending existing standards to environ-mental and health and safety concerns, as wellas in training investors to adhere to standardsin the field.

In some cases, these efforts leave visible traces,as seen in the countries visited. One example is

Minco in Mozambique, which is careful todetermine the social standards adhered to incompanies it considers investing in. Minco willnot invest where children are systematicallyemployed, and it requires active recognition ofworkers’ rights. Minco is also actively involvedin a wide set of activities beyond the pure busi-ness strategic aspects. The most importantrelate to awareness-building and mitigationmeasures aimed at reducing the spread ofHIV/AIDS and how to deal with occurrences ofHIV/AIDS among staff members in companieswhere Minco is a shareholder. Here Mincopractices follow Norfund’s action plan for com-bating HIV/AIDS, but it appears that Norfund’sapproach and standards add little to whatMinco is already doing in this area. In the caseof CETA, for example, it is quite clear that giventhe strict labour protection provided for in thelegislation, it is simply good business practiceto have an active and respectful policy and prac-tices with regard to the HIV/AIDS problem,and CETA has pioneered such work inMozambique, which appears to have a lot to dowith the views of CETA’s managing director.

However, in other prominent cases the aware-ness of setting and working with standardscould have been better. Aureos BusinessPractices (code of conduct) undercut minimumrequirements in the core labour with regard to

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such central issues as child labour and the free-dom of association, for instance. In the fundsoutside Aureos, Norfund has not been particu-larly active in helping to upgrade standardswhere these fall short of Norfund’s own stan-dards, as is often the case with regard to corelabour standards.5 In the Nicaraguan portfolio,for example, development tasks and standardsappear to be addressed by the regional fundsusing an admixture of parameters taken fromtheir various financial partners, and arereflected in one or two paragraphs in agree-ments. There are no further actions in thisregard. Taking into account the emphasisNorfund places on social and environmentalconcerns, the limited attention and measuresthat have been taken up to now seem to warranta more serious approach. When Norfund setsout to co-invest with multinational enterprises,conditions concerning labour and environmen-tal standards should be present in the contract.

The overall picture is one of high environmentaland social standards. This does, however,reflect the fact that, with regard to the directinvestments, many of the industrial co-investorshave their own sets of standards (such asScansem and ABB) which are generally at leastequal to Norfund’s standards. With regard tofunds, other DFIs have their standards again. Itis therefore difficult to claim that Norfund hasadded value in any significant and measurableway along such dimensions. What can be said isthat by adhering to its principles Norfundprovides important moral and ethical supportfor local leaders who have pioneered work onstandards in poor countries. By applyingprinciples as investment conditions, Norfundcould use funds or direct investments to influ-ence other companies to take such matters tothe board and incorporate them into the strat-egy and mainstream of operational activities.

Taxation base and transparency

In the cases where Norfund investments lead tohigher profits and more and better paid jobs,taxation bases grow through the tax on employ-

ees’ wage incomes and the tax on profit.Norfund’s internal ethical guidelines require anopen and orderly attitude towards taxation. Itimplies that the companies must be registeredand report properly to national tax authorities.

The funds in which Norfund is investing usetaxation planning to reduce tax revenues, justas private sector enterprises would do in thesame situation. The dividends are often exemptfrom national tax under foreign investment taxholiday programmes. The funds and manage-ment companies (Aureos and others) are gener-ally registered offshore in places such asMauritius (in the case of all Aureos funds), theBritish Virgin Islands, the Bahamas, andCayman Island. This secures better legal pro-tection for the investors and may not thereforebe primarily for reducing taxes. However it alsoreduces the amount of information available forthe host country of the investment, and as suchis an unwanted practice. The development ofoffshore banking is a problem for developingcountries to the extent it contributes to makingillegal and harmful financial transactions easier,but at the same time reflects the poor businessenvironment in the same countries.

Given that this practice is necessary for legalprotection and political risk reduction, Norwaycould help reduce the negative transparencyeffects by requesting that Norfund and Aureosonly use offshore locations with taxation agree-ments with Norway and the country where theinvestments are undertaken, or help establishsuch agreements. Such information sharingwould be in line with the OECD initiativesaimed at allaying harmful tax competition(OECD, 1998 and 2000).

3.6. Organisational efficiency

As of 2002, Norfund is very much still undercreation. From the above analysis, we see thatthe organisation is expected to possess invest-ment skills, country and market knowledge and

5) A wide gap has prevailed until recently between many of the European DFIs and many TNCs, on the one hand, and the IFC onthe other with regard to including the core labour standards into business practices. Which might explain why Aureos is not meet-ing these standards, although both CDC and Norfund adhere to them.

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knowledge of potential Norwegian industrialinvestors. In addition, it should be able to makeinvestments with maximum developmentimpact and, at the same time, maintain anacceptable level of profitability in high-riskcountry environments. The experience of otherventure capital firms and DFIs underline theimportance of a minimum of industry knowl-edge although its provision is primarily theresponsibility of the industrial partners.

Widespread

The types of instruments used differ from otherDFIs but are not more diversified. However,Norfund has a wide geographical and industrialcoverage in its portfolio.

The present structure of Norfund’s investmentsimplies that bodies other than Norfund itselfmainly undertake end user investment deci-sions, causing several difficulties. One con-cerns the ability to invest a third of the capital inLDCs, as stipulated. The target is only partlycarried over to the bodies making the concreteinvestment decisions (such as SN Power board,the different Aureos Fund InvestmentCommittees etc.).

Investments are made in SN Power and Aureoson the basis of the continued inflow of funds toNorfund and the ability to mobilise additionalcapital including private capital. The equity cap-ital in SN Power is supposed to grow to NOK 5billion in 2006.6 In the Aureos system, newfunds will have to be established in all theoperational regions in the next couple of yearsin order for the management companies tobreak even. Overall, the Aureos funds will atleast need to exceed NOK 1 billion, of whichNorfund plans to contribute in the region ofNOK 250 million plus. Thus, both financiallyand operationally, Norfund needs to concen-trate on the SN Power and Aureos systems inthe coming years, and less on directinvestments. It would have been advantageoushad the strategic consequences involved beenmore explicitly set out.

Development assessment

As detailed above, despite many good attempts,more should be done to integrate the work onstandards and development impact into thedaily investment activities of Norfund. BothNorfund and Aureos have engaged develop-ment specialists in addition to their financialand fund manager specialists. While it is neces-sary to make sure that standards and develop-ment thinking are mainstreamed in theorganisation, there will be limitations concern-ing the type of competence Norfund or Aureosneeds. Where more special knowledge will beneeded when designing effective micro financeschemes or programmes for technical coopera-tion or fighting AIDS in the workplace, tomention three examples, it might be more effi-cient to tackle these issues in cooperation withothers. That said, it must be stressed that it isNorfund itself that should integrate andmeasure the development effects of itsactivities.

Local market knowledge

A key requirement is in-depth knowledge of themarkets in which to invest. Our field work inBangladesh showed how important and howdemanding this can be. The establishment ofAureos was a major step forward for Norfund inthis respect, linking Norfund to an organisationof 80 national investors working out of 14offices in developing countries with years ofexperience under CDC management. An inte-grated Norfund and Aureos should provide anorganisational structure which reduces the riskof investing in developing countries and thetransaction costs of linking up Norwegian andother industrial partners. Taking over an exist-ing organisation also has its down sides interms of flexibility losses. The organisationalready has offices in places outside the priori-tised areas of Norfund, it requires, as men-tioned, new funds to operate and it isheadquartered in London, which may meanoverlapping responsibilities with Norfund’s inOslo. An alternative strategy which Norfund isalready pursuing to an extent, could have beento invest directly in national management

6) This includes funds from potential new investors, making Norfund a minority shareholder.

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companies. On the other hand, however, oneshould expect synergy effects from bringingthe national management companies into aninternational organisation such as Aureos. It isof significance that Aureos, through its opera-tions, will manifest these effects.

Norfund, for example, has made a significantinvestment in building up institutional capacityand market experience in Nicaragua (andCentral America). The approach to invest infund management companies and having repre-sentation in the region, has boosted quality andadded value to Norfund investments enablingthem to avoid several of the problems faced byinvestments in other regions. There is anincreasing number of investment opportunitiesin Nicaragua (as well as Central America),within the SME segment as well, but each ofthese opportunities are too small to warrant thetransaction costs of pursuing them. However,the high cost of maintaining active participationand needed presence in the region in order tomaintain quality of investments has a trade offin costs. To reduce the relative size of the trans-action cost, the portfolio needs to be expanded.

There are challenges concerning the flow ofinformation from a multinational enterprise toNorfund as a minority stakeholder. Multi-national enterprises often have mergers andacquisitions on the agenda. The restructuringof a company is mostly surrounded by secre-tiveness in the first phases of the process to pre-vent actions from competitors or influencingstock market prices. It may be difficult forNorfund to get sufficient information duringcertain periods, as was the case in one of theprojects studied in this report.

Especially in countries where corruption is asevere problem, it is important to build up net-works and understand the workings of the mar-kets. One way of achieving this would be todraw on the knowledge held by NORAD andthe Norwegian embassies.

Loan portfolio

As mentioned in the introduction, the NORADloan portfolio has not been subjected to a

special evaluation. Through managing this port-folio, however, Norfund gains increased knowl-edge of Norwegian firms operating indeveloping countries and the operations them-selves. This represents positive learning effectsfor the Norfund organisation. It might also rep-resent a challenge in the cases were Norfund isengaged through some of its other instrumentsin, for example, competing companies.

Norfund’s trust fund

A general trust fund and a Balkan trust fundwere established in 2000 with the objective ofcovering expenditures above normal operatingcosts for initiatives taken to stimulate invest-ments in developing countries and to secure thesuccess of investments. The funds may not beused to subsidise a project as such, but to con-tribute to real risk mitigation, increased know-how through consultant and leadershiptraining, and implementation of managementsystems.

All in all, NOK 27 million has been committedto these funds by MFA over the years from theprivate sector development item in the aidbudget. In addition, funds have also been madeavailable from NORAD for concrete projects in2000 and 2001. In the guidelines issued byMFA, it is anticipated that the Norfund staff arethe applicants and that Norfund managementmakes the decisions on the disbursement of thefund.

Norfund needs access to the type of “softmoney” that the trust funds represent. The run-ning of the trust funds, however, seems to betoo interlinked with daily operations. The activi-ties supported by the trust funds are often of avery general nature, such as “General followingup of direct investments”, or they are closelylinked to ongoing activities, such as the costs ofestablishing Aureos (London office andMauritius holding company). These funds arenot included in the accounted running costs ofthe different activities since they are supposedto cover extraordinary activities. The activitiessponsored by the trust funds are, in manycases, difficult to distinguish from the ordinaryNorfund activities, which causes real

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administration costs to be underestimated andless developmental added value in the use ofthe trust funds. The operating costs of Norfundfor 2002 was NOK 33 million, while the use oftrust funds was NOK 5.6 million.

Cooperation with other development institutions

While there is a close collaboration and coordi-nation between the World Bank and IFC asregards private sector development work, thisdoes not appear to be the situation with regardto European DFIs. For instance, the BritishDepartment of International Development(DFID) reported that contact with CDC couldhave been better, as did the Swedish andDanish development authorities with regard toSwedfund and IFU. The same lack of close col-laboration can be found between Norfund andNORAD. This is in contrast to IFC/World Bank,where typically Country Assistance Strategiesare prepared by the World Bank Group as awhole, including IFC as field mission partici-pants. IFC activities are often accompanied bypiggy-back World Bank technical assistance forcapacity and competence-building to make itmore attractive for other investors to join in.There does not seem to be any similar countryassistance strategic coordination betweenNORAD and Norfund, and not very much com-munication between the two either locally or athead office. While it is understandable thatNorfund needed time to establish as anautonomous entity following the history ofNORAD’s private sector lending arrangements,it should by now be possible to work moreclosely together to generate synergies and pro-ductive joint initiatives, in a similar manner tothat of the World Bank and IFC.

Financial efficiency

Measuring the financial efficiency of Norfund isnot straightforward. The use of trust funds tofinance activities, which other DFIs take fromtheir regular budgets, makes comparison withother similar organisations difficult. Apart fromthis any comparison would require an analysisof the tasks each organisation is set to accom-plish. Norfund is supposed to partly focus onLDCs, which is relatively difficult and hencemore costly. Furthermore, Norfund is a smallfund with a relatively high number of small andmedium deals (also with regard to direct invest-ments), which again is more expensive thanlarger deals per unit of capital invested.Norfund has also been committed to servingNorwegian industry, which in general lacksexperience in investing in developing countries.Since few Norwegian enterprises have beeninterested in foreign investments, even with theassistance of Norfund, the fund has tended toaddress every serious deal regardless ofgeographical location or industry. Norfundestimates its own operating costs at 2.7 per centof the total fund capital, which might be slightlyless than Swedfund’s but more than IFU’s.However, as emphasised above, these adminis-trative cost shares are not really comparableamong EDFIs because of the different trustfund accounting practices and variations inareas of priority and types of product.

Norfund is a young organisation and the poten-tial for improving efficiency is identifiable hereas in most organisations. However, the messagemust be that the route to higher efficiency isprimarily linked to how Norfund views its tasksrather than how it performs them. A morefocused approach would be the most importantmeasure with regard to efficiency.

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It is as a Development Finance Institution thatNorfund is supposed to add value to centralNorwegian development strategies. In thisevaluation Norfund is assessed on four levels:

• relevance shall state to what extentNorfund is a relevant and valuable instru-ment against the background ofNorwegian development strategies

• effectiveness shall indicate to whatextent Norfund has achieved the statedobjectives in terms of private sectordevelopment

• development impacts shall indicateNorfund performance with regard to aset of indicators listed in the ToR under“Scope”

• efficiency shall state whether theresources spent are reasonable in com-parison with outputs achieved and withother schemes and financing institutions.

As detailed in chapter 1 under methodology,most investments undertaken by Norfund arein their initial stages and their full effects canonly be anticipated. This naturally led the evalu-ation to focus on the framework for investmentsset up through Norfund and the differentrationales followed by Norfund when under-taking investment decisions.

4.1. Relevance

Our review of the development studies litera-ture and our fieldwork made it clear that capitalper se is not a limiting factor for private sectordevelopment in most developing countries.Instead there exists a mutual connectionbetween lack of capital, lack of good projectsand lack of a proper business environment. Inorder to be relevant, DFIs need to address allthese aspects directly or in coordination withother development institutions. Non-commer-cial development institutions will not on theirown in the same way as a commercial DFI beable to address these questions, given that

much of the learning and development processwill have to take place in the marketplace.

Furthermore, market imperfections existwhere private investors are generally riskaverse towards investing in developingcountries. Risk-taking DFIs with strong localknowledge and experience in investing in devel-oping countries can thus act as frontrunners,creating signal effects to the private sector anddeveloping the domestic finance market andbusiness environment through their operations.

Venture capital funds operating as portfoliomovement but with an in-depth knowledge ofinvesting in developing countries is hence arelevant instrument. Even more relevant will bea venture fund directly engaged in the projects.Where the portfolio manager scans for viableprojects, the direct investor creates them

Looking at the relevance for setting up aNorwegian DFI, there has not been a strongdemand for a financial partner to share riskswith Norwegian companies. The number ofdirect joint investments with Norwegian compa-nies were fewer than anticipated by Norfund.Important exceptions can, however, be identi-fied in Norfund’s portfolio. Although acting as arisk sharer through equity may not seem to beparticularly important, this type of co-financingcould be made more attractive by combining itwith technical support. Norwegian businessesgenerally lack experience of developing coun-try engagements. Business activities abroadinvolve higher transaction costs than at homedue to the need to acquire country-specificknowledge in the shape of policy and legalframeworks, business opportunities, etc.Norfund should focus on enhancing servicesfor potential Norwegian investors by offeringeven more extensive investment and manage-ment skills and developing country marketknowledge on their behalf.

The general contribution of DFIs to private sec-tor development and the emphasis put on pri-

4 Conclusions

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vate sector development by Norwegian devel-opment authorities give Norfund relevance,independent of its relevance for Norwegianindustry.

4.2. Effectiveness

Norfund’s aim is to achieve a healthy return oninvested capital7 within the areas of operationlaid down in the Norfund Act and instructionsgiven by Parliament and/or Ministry of ForeignAffairs.

In addition Norfund is planning to operate with-out additional capitalisation in the future. It hasalways been the intention to supply new fundsonly during a limited running-in phase, afterwhich Norfund should operate on the basis ofreturns on investments. This was reiteratedmost recently in the 2003 Budget Act. Naturally,it has had a strong effect on project decisionsinvestment strategies, portfolio diversificationetc.

The implication of requiring Norfund to operateon investment returns is equal to relocating therisk away from the Norwegian Government toNorfund. Norfund is diversifying its portfolioamong several countries and industries in orderto reduce risk, but at the expense of a focus ondirect involvement in the LDCs and otherNorwegian development country partners.

It has also probably resulted in a more conser-vative attitude towards risk than historically hasbeen the case in Swedfund and CDC, forinstance. Norfund tends therefore to look forprojects promising relatively high expectedcash flows, limited currency risks, and involv-ing larger companies within the SME area andsectors where host countries take much of theproject risk (hydro power). Further, expandingexisting firms is preferred to start-ups. Finally,Norfund diversifies investments in upper mid-dle-income countries. Since CDC faced similarconstraints on future funding, strategy realign-ments were undertaken as described above.

Given that Norfund is supposed to shoulder allrisk from investing in developing countries itsresponse is to diversify its portfolio and invest-ing in countries and regions that those madepriority in Norwegian development strategy. Itwould be a more effective use of resources ifMFA took over some of the risk and reined inNorfund’s area of operations. In practical termsit would mean MFA requiring Norfund to investa third of the capital in LDCs, as it is obliged todo, and that the upper country limit should bereduced from World Bank loan threshold tolower middle-income countries. Norfundshould further, as today, be required not toinvest in projects that can attract sufficientprivate capital, and/or are based on monopolyprofit or rent seeking. Within these limitsNorfund should operate on commercial termsand try to make as high a return as possible. Ifcapital is lost due to systematic risks in theshape of downturns in economic growth in thedeveloping world, more capital should be madeavailable to Norfund. But if capital is lost due topoor fund management other measures shouldbe taken. Norfund should not subsidise individ-ual projects or engage in projects where the out-come is more likely to damage domestic andother capital rather than promoting develop-ment.8

For Norfund this would mean a significantreduction in portfolio diversification, becausethe anticipated risk differs systematicallybetween LDCs, lower middle-income and uppermiddle-income countries. Greater concentra-tion should, on the other hand, raise the incomepotential of its engagements.

The introduction in 2002 Budget Act of a higherloss fund for LDCs indicates in any case thatNorfund should manage the portfolio as one forthe LDCs and one for the other countries withdifferent profiles of calculated net loss. Forinvestments in LDCs, 50 per cent of the capitalis assumed to be covered against loss, forinvestments in other LICs and above, theequivalent rate is 25 per cent. Measures should

7) Norfund’s guidelines recommend a gross annual return on projects of more than 15 per cent in NOK.8) However, writing off invested capital is not directly equal to capital losses if new businesses are benefiting from existingproduction facilities or know-how.

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be taken to distinguish between risk in LDCsand LICs and LMICs. Norfund should conceiveof them as two separate funds with separate riskprofiles. It would enable the organisation tobetter differentiate ex ante risk-taking andcontribute to achieving the investment of athird of the capital in LDCs while openingmarkets at the risk frontier to additional FDI by“certifying” viable investments.

Norfund present investment structure allowsother bodies (such as SN Power board, thedifferent Aureos Fund Investment Committeesetc.) to make end user investment decisions.This represents a challenge for Norfund inorder to undertake the necessary adjustmentsfor adhering to the LDC investment conditions.Both financially and operationally, Norfund willhave to concentrate on SN Power and Aureos inthe coming years. It would have beenadvantageous had Norfund set out the strategicconsequences involved more explicitly.

On the operational side it is particularly thecurrency risk not due to inflation (which cannotbe avoided through swaps and other financialinstruments) that needs to be examined closer.Currency risk is a part of the project risk but itsorigin rests in national policy frameworksrather than the projects themselves (projectswith hard currency income could be seen as amitigation of the currency risk). In generalterms there are strong arguments against sub-sidising currency risks, focus should be onimproving business environments rather thanreducing the eventual negative impact on theexchange rate through subsidies which couldsend the wrong signals to national decision-makers in developing countries and encouragewhat is called “moral hazard” by reducing thecosts of inefficient policy decisions.

Nevertheless, currency risks could be a point ofdeparture for scaling up investments in devel-oping countries because, as described earlier,some of the costs associated with currencyrisks are higher for foreign than domestic

investors. As Norfund’s portfolio shows, someprojects have yielded healthy returns in localcurrencies but without reaching an acceptablereturn in NOK due to currency rate deprecia-tion. That said, viable enterprises have beenestablished and co-investors have beenrewarded with a healthy return in the localcurrency.9 Norfund’s investments would notrepresent an incentive for “moral hazard” in anyhost country.

Creating viable projects (and not simplyscanning for them) requires a strategy for evenstronger geographical and industrial concentra-tion. One might look to the priorities made inthe private sector development strategy and totry to achieve a higher degree of cooperationwith NORAD. The foregoing suggests also thatNorfund in the future mainly should focus onbuilding up human resource capacity inmanagement companies in the regions close tothe market.

Reducing the upper limit for investments fromWorld Bank loan threshold (US$ 5,280 percapita income in 1998) to lower income coun-tries (US$ 3,030 per capita income in 1998) willreduce investment opportunities in EasternEurope. Given the need to concentrateresources in Norfund, engagement in EasternEurope would not necessarily represent aninteresting option or a critical value added toNorwegian development strategy and shouldbe considered ended.

4.3. Development effects

Having established that Development FinanceInstitutions are a) relevant instruments forprivate sector development; that b) Norfund assuch is contributing to development; but c) thatits approach (eventual self-financed operations)and operations (market and industry knowl-edge) are more risk averse than other DFIshistorically; what are the development effects?

9) The extent to which this situation can and will occur depends on the scope of the national capital market in the host country.The more open the capital market the more interest rates would reflect currency risks and hence the less difference betweenNorfund’s return requirements and the return requirements of the domestic capital.

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Despite its risk mitigating strategy, Norfundstimulates FDIs in developing countries.Although some projects may have found alter-native investors, others have definitely not. Thecapital investment contributed by Norfund is,however, only marginal in the capital markets itoperates. The “certification” effects and abilityto attract private funding into its investments, asdocumented in this evaluation, are most likelymore important.

Important technical assistance has been givenand business knowledge transferred in severalof the investments, even though the portfolio isa mixed bag in this regard. This may be oneeffect of Norfund’s wide-ranging investmenthorizon, of course. Most projects need indus-trial knowledge that Norfund does not have,nor is supposed to have. Norfund has to drawon industrial and local market know-how. Astronger industrial network is needed both inNorway and in the countries where investmentsare undertaken, implying a stronger geographi-cal and industrial focus. Access to a network ofnational fund managers through Aureos may beone answer here.

Norfund reports on the number of employeesin the enterprise invested in. While this sayssomething about the size of the portfolio it sayslittle about the development effects. Morebenchmarks are included in Norfund’s pre-proj-ect screening where three development impactareas of potential projects are given: geographi-cal coverage; local development effect; andenvironmental and social standards. The localdevelopment effects are comprised of an analy-sis of the potential export earnings, direct jobcreation, transfers of knowledge and the FDIsinvested. It is suggested that this approachshould be expanded to include a focus on netforeign exchange earnings’ savings and certifi-cation effects as a comprehensive measure ofactual contribution to development.

The net foreign exchange earnings’ savings arethe export value or import substitution value ofthe product or services produced, minus theimport value of inputs and exported dividends.This measure captures the benefits of engaging

domestic capital and other input into a projectand is hence a much wider indicator thanexport earnings alone.

Certification effects include the signals sent toprivate sector investors that investments in aparticular project or in a certain country ingeneral can be viable. Clearly, first hand knowl-edge of the investment climate in the concretecountry and the ability to pick and/or makewinners are vital here involving undertaking anactive ownership role while continuously focus-ing on financial and operations managementand enforcing high social and environmentalstandards. Operating with reasonable successin difficult markets such as Mozambique andAngola are examples of strong certificationeffects.

With regard to its commitment to follow inter-national minimum environmental social stan-dards and to observe high ethical standards,Norfund has undertaken substantial work notleast in the area of HIV/AIDS, and developedinternal guidelines. The overall picture is one ofhigh environmental and social standards. Thisdoes, however, reflect the fact that many of theindustrial co-investors and other DFIs havetheir own set of standards. That said, improve-ments could and should be made. For instance,Aureos should not be allowed to uphold itsBusiness Practices (code of conduct) whichundercut minimum requirements in respect ofchild labour and the freedom of association.With regard to standards, it is important toinitiate a process whereby standards are set andunderstood by the organisation. Investmentsshould be evaluated not on present perform-ance but on whether Norfund believes they canbe developed to adhere to the relevantstandards.

Norfund should work more systematically tointernalise development effects and standardsin its assessments, decisions and actions at alllevels of the organisation. It is important thatthe development effects are assessed morethoroughly and are given a larger say in theinvestment decision process, both with regardto the direct investments and the investments

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made through the funds. Generally the stan-dards should be a tool for creating more viablebusinesses and not primarily a threshold forinvestments. This implies that investments maybe undertaken in enterprises that at the time ofthe investment do not comply with all stan-dards, but which will be helped to do sothrough the engagement from Norfund's side.

4.4. Efficiency

Norfund is a young, rapidly developing organi-sation. It has, in this respect, shown an ability toemploy a variety of instruments and work indifferent geographical locations. Investment inregional and national investment funds,together with other DFIs, have been a goodapproach to building up know-how and portfo-lios in markets which from the outset have beennew to Norfund, allowing it to draw onexpertise from the more experienced bilateraland multilateral DFIs with a significantly longertrack record than Norfund. It has also served asan opportunity to establish long-term relation-ships with partner DFIs (such as CDC).

The more dispersed activities, the greater thecosts of getting adequate country and industryknowledge. It seems that Norfund had limitedknowledge of Bangladesh, for example, as atarget for investments, and of actual industrieswithin this country. Rather than providingequity to companies seeking any type of finan-cial partner, Norfund should be more active inscanning possibilities for development in theactual country and then take up the search fordomestic and/or international partners.

It is evident that investments, in particular inLDCs, could be helped by parallel grant aid tosupport the development of the businessenvironment of these enterprises, such asmanagement skills and marketing with regardto venture capital funds. Some of the technicalassistance that accompanies investments is also

more of a public service than actual help toenterprises or investment funds and justifiesbeing supported by grant aid without distortingthe commerciality of the operation. Norfundhas received such grants in the form of trustfunds from the Ministry of Foreign Affairs. Theguidelines for these MFA funds are, however,unclear and they have been used to financewhat could be seen as ordinary Norfund activi-ties. Their real operational costs and viabilityare thus obscured. The trust fund should belinked more directly to projects, to activitieswith positive externalities and for enhancingimmediate business environments, and couldalso be organised differently in order toenhance Norfund-NORAD cooperation.

Norfund should adjust its current institutionalstrategy towards a greater presence in coremarkets. Being closer to the markets will beNorfund’s main comparative advantage overprivate investors. Market and the businessclimate know-how in the countries is the mostimportant factor for Norfund to maintain aviable portfolio. Sector and sub-sector know-ledge should be acquired through technical andfinancial partnerships with private investors.

Working with other DFIs has proven to be apractical approach to safeguarding againstlimited knowledge and experience in the firstyears of operation. However, now that thisknowledge has been internalised withinNorfund, concentrating on the core marketsand decentralising management to thesemarkets would boost market knowledge,reduce transaction costs (costly headquarterssuch as Norfund in Oslo and Aureos in London)and improve monitoring and management ofthe equity participation significantly. Likewise,Norfund should not spread beyond fund man-agement. Within the core activities, however,currency risk management and internal strate-gies for following up social and environmentalstandards should be strengthened. A long-termgoal for Norfund should be to operate the fundin a way that makes the organisation competi-tive in the private fund sector.

44

By improving the integration of its key compe-tence of financial investment skills within theoverall Norwegian strategy for private sectordevelopment, Norfund could maintain andincrease its relevance and added value to theoverall development objective of poverty reduc-tion. The following recommendations are madebased on this evaluation:

• Time has come to start planning the con-solidation of Norfund. This processshould start with MFA being morespecific with regard to making capitalavailable for Norfund. It needs to bemore precise in guiding Norfund in whatis meant by “being at the risk frontier”.Further, MFA should adjust Norfund’soperating specifications by taking thesystematic risk of investing within theframes given by the priorities laid downin Norwegian development policies.

• In order to be able to invest a third of thecapital in LDCs, Norfund needs to adjustits present investment strategy. Thedifficulties in achieving this should beacknowledged, especially if doing so isconditional on a healthy return in NOK.Systematic risk associated with this typeof conditioned concentration of theportfolio should be taken by MFA andnot by Norfund.

• Norfund should be instructed not toinvest in upper middle-income countries.Systematic risk associated with this typeof conditioned concentration of the port-folio should be taken by MFA not byNorfund

• In order to achieve a higher percentageof investments in LDCs and LICs,Norfund needs to increase its knowledgeof these markets. Rather than provideequity to companies seeking any type offinancial partner, Norfund should bemore active in scanning possibilities for

development in the actual country andthen search for domestic and/or interna-tional partners. This will require geo-graphical and thematic concentration.Norfund should try to reduce thenumber of countries in which it operatesparallel to decentralising its managementstructures within the remaining marketsin order to increase market knowledge,reduce transaction costs and buildstronger sector knowledge. This shouldbe in coordination with Aureos. Astronger Norfund focus combined with aNorwegian private sector developmentstrategy would strengthen both parties.

• The internal risk management system ofNorfund does not currently differentiateex ante between LDCs and othercountries when it comes to willingness totake risks. Norway’s Parliament hasexplicitly called for such a split in ex anterisk assessment of Norfund’s portfolio bysetting aside 50 per cent of the fundcapital foreseen for LDC investments in aloss account, and with 25 per cent for therest of the fund portfolio. Norfund shouldfollow this up by establishing a systemwhere, in the ex ante risk assessment,higher risks are systematically taken forprojects in LDCs. Norfund could managethe fund as one for the LDCs and one forthe other countries with different profilesof calculated net loss.

• The currency risk should be givenspecial attention in the investmentprocess. New currency risk mitigatinginstruments could be developed byNorfund and other relevant Norwegiandevelopment institutions. This shouldnot, however, compromise Norfund’scommerciality and demand for healthyreturns on its capital in local currency.

• The development indicators should befurther elaborated and allowed to

5 Recommendations

45

influence strategy and investmentdecisions more than has been the casethus far. The stand-alone number of jobscreated is not a very useful measure ofNorfund’s development effects.

• The work on social and environmentalstandards must be better embedded inthe organisation and made a condition forengaging in other funds and investmentcompanies. Aureos’ business practicesshould be upgraded to meet internationalminimum standards on child labour andfreedom of association. The standardsshould be a tool for creating more viablebusinesses and should not primarily be athreshold for investments. This impliesthat investments may be undertaken inenterprises that at the time of the invest-ment do not comply with all standards,but which will be helped to do so byNorfund directly or indirectly.

• Stronger links should be developedbetween Norfund and NORAD’s work tocreate good business environments.

NORAD could finance technical supportthat not only benefits the companiesNorfund invests in but also has positiveexternalities.

• It is recommended that the administra-tion of the trust fund established by MFAfor Norfund be moved from Norfund toNORAD. It should remain earmarked fortechnical assistance to Norfund with anew and more precise set of guidelines.The trust fund should be used moredirectly to projects and to activities withpositive externalities.

• In order to attract more Norwegian com-panies to invest, connections at an earlierstage in the investment process shouldbe established. This could be practicallydone by establishing advisory networksamong Norwegian industrialists in rele-vant sectors . These networks could beused to give advice in the first screeningprocess. The local Aureos investmentprocess and SN Power’s investmentprocess are two obvious cases.

47

The establishment of a Norwegian investmentfund was first suggested in the report of theCommission on North-South and Aid Policies,Official Norwegian Report (NOU 1995:5). Thisinitiative was followed up in Stortinget’sRecommendation S. no. 229 (1995–1996).

Norfund, Norwegian Investment Fund forDeveloping Countries, was established by lawthe 12th of December 1996. In line with its man-date, the Storting has expressed an interest inevaluating Norfund’s operations and its aims.

The total assets of the fund are presently 1,4billion NOK.10 In 2002, the annual capital inflowis 395 mill. NOK. Owned by the NorwegianGovernment the fund is headed by agovernment appointed board of five members,three representing the private sector.

According to the Norfund Act (1996–97),Norfund shall provide loans and risk capital inthe form of equity or quasi equity without sub-sidy to profitable and viable private enterprisesin development countries and in this way pro-mote business development in these markets.Norfund shall invest in countries with a lowerBNP than 5295 USD per. inhabitant.11 Norfund’spurpose is to establish sustainable, viableventures that otherwise would not have beenestablished due to perceptions of high risk.With the exception of the management ofNORAD’s former loans, loan and guaranteeprovisions constitute a small part of Norfund’senterprise. Direct investments and indirectinvestments represent the main force of itsactivity.

According to the Proposition no. 13 (1996–97)to the Odelsting describing the background andjustification for Norfund and the NorwegianMinistry of Foreign Affairs’ instructions toNorfund, it is foreseen that private sectordevelopment may serve to create the following

objectives: to create employment, generatelocal export and substitution of import, theestablishment of a taxation base, to encourageuses of local resources, nurture capitalbuilding, as well as create positive spin-off onother ventures and industrial clusters.Simplified, investments may for exampleprovide jobs, create income, and generate taxrevenues, which again can provide the basis fordeveloping countries’ own efforts within areassuch as health and education.

Direct investments have up until now beenmade jointly with Norwegian companies, andmay or may not have a local partner. Here,Norfund may finance up to 49 percent of theinvestment. Direct investments are utilised topart-finance the establishment of new businessschemes, or as part of a restructuring of exist-ing business activity. Direct investments aremade in joint ventures with local partners. Upuntil this year, Norfund has co-invested withNorwegian businesses. As a consequence ofthe OECD/DAC Recommendations on UntyingOfficial Development Assistance to the LeastDeveloped Countries as of 1.1.2002, Norfund isno longer restricted to Norwegian businesses,but can now enter into partnerships with anybusiness or company willing to invest.

Norfund also supports local entrepreneursindirectly through investment in andmanagement of local venture funds. Indirectinvestments imply that capital is placed in localventure funds enabling these to further financelocal business activities. Norfund invests single-handedly, or in cooperation with similarinstitutions, such as the CommonwealthDevelopment Corporation (CDC) and theInternational Finance Corporation (IFC) andthe Inter-American Development Bank.Norfund and CDC have formalised their coop-eration by establishing a fund managementcorporation for local funds aimed at small and

Appendix I Terms of Reference

10) 1,01 bill. NOK, pluss loan portfolio increase.11) The WB’s and the IMF’s threshold.

48

medium-scale local enterprises, Aureos Capital.Aureos manages what were previously CDC’sfund management schemes for 14 separatefunds with a capital of 175 million dollars US.

According to Norfund’s overall objectives,investments in Least Developed Countries(LDC) should represent approximately onethird of the fund’s portfolio and a quarter of itsoverall investments. In some LDCs as well assome Low Income Countries (LICs), Norfundengages in particular private sector schemes,such as indirect investment in microfinanceinstitutions, and leasing.

Through its emphasis on corporate socialresponsibility Norfund incorporates otherdevelopment factors than those directlyconnected to economy. Norfund projects aimsto emphasise favourable impact upon genderdimensions, job safety aspects, as well asrespect for international labour conventions.Norfund has formulated guidelines for environ-mental issues, human rights, ethical issues andworkers health issues related to HIV/AIDS.These issues are to be raised locally throughrepresentation on local executive committees,through choices of projects and throughadvocacy of the business-related implications ofsuch issues.

In 1998 the fund’s total assets were 231 mill.NOK. This first year Norfund made directinvestments worth 61.3 million NOK, and indi-rect investments for 57.4 mill. NOK. Bycategories, its investments were 7% loans, 45%local investment funds and 48% direct invest-ments. In 1999 loans were 3%, while the per-centages of direct and indirect investmentswere almost balanced. In 2000 there were noloans altogether, direct investments were 35%while investment funds were 65% of total assets.Norfund however, emphasises that these num-bers change rapidly. At the end of 2001 the totalof Norfund’s investments were 31 investments,half of these were direct investments in partner-ships with Norwegian companies. At this point,Norfund is involved in Africa, Asia, LatinAmerica, the Middle East and South EastEurope.

Major objectives.

The principal objectives of the evaluation will beto assess:

• The extent to which Norfund adds valueto central Norwegian development strate-gies, such as private sector developmentin developing countries and the goals ofpoverty reduction.

• The extent to which Norfund contributesto private sector development in thecountries the fund is involved in.

• The extent to which Norfund contributesto key factors for development impact,such as employment, export or importsubstitution, technology transfer and taxbase in the countries the fund is involvedin.

Scope.

The evaluation will include, but not necessarilyconfine itself to, the following items.

• The evaluation should include a compari-son between Norfund and other past andpresent private sector developmentschemes, comparable to Norfund, both inNorway and abroad (such as CDC, IFC,Swedfund and IFU). What are theadvantages/disadvantages of Norfundcompared to previous/other private sectordevelopment schemes? Have previouslymade experiences been taken into accountin the development of Norfund and itsstrategies?

• How effective is Norfund in fulfilling itspurpose? To which extent has Norfundpromoted private sector development indeveloping countries, and to whichextent is it expected that it will do so. Towhich extent does Norfund establish ven-tures that otherwise would not have beenestablished due to high perceptions ofrisk? The evaluation should make anoverall assessment of Norfund’s presentpractices and its main activities of directand indirect investments, and formulaterecommendations as to how it couldimprove its performance.

• Could other business activities be addedto Norfund’s modus operandi thatsignificantly would improve its function?

49

Should Norfund to a greater extent directresources to lending operations? To whatextent would such a practice affect theoverall objective of the fund?

• How does Norfund ensure its own sus-tainability and efficiency as a financinginstitution?

• What are relevant Norwegian busines-ses’ experiences of Norfund? The evalua-tion should explore the relationshipbetween Norfund and relevant Nor-wegian businesses. In the last years therehas been a reduction in the share ofNorfund’s direct investments. This is so,although an increase in direct invest-ments is emphasised both by Norfunditself as well as by the Minister ofInternational Development. To whatextent are relevant Norwegian busi-nesses aware of the opportunities offeredto them by Norfund? If relevant busi-nesses are aware of the opportunitiesoffered, why is it that such opportunitiesare not taken advantage of?

• The Minister of International Develop-ment has encouraged Norfund toincrease its attention to LDCs. What isthe distribution of the investments,geographically and in DAC/IBRD coun-try categories. What developments in theLDC investment-portfolio have beenmade? To what extent have theseinvestments been successful?

• The Proposition to the Odelsting no. 13(1996–97), the MFA’s instructions toNorfund, and Norfund itself list a num-ber of objectives and effects of employingprivate sector schemes as a developmentstrategy (page 1–2). Focusing on specificNorfund projects what are their primaryand secondary effects? How do the differ-ent Norfund activities (direct invest-ments, indirect investment and fundmanagement) conduce these objectives?What are the advantages/disadvantagesof these various activities?

• What are the effects of Norfund’s involve-ment upon local economies – formal aswell as informal?

• How does Norfund ensure that its socialand environmental standards, such asbasic workers’ rights, basic humanrights, are respected? With a focus onparticular Norfund projects, whatmechanisms have proved efficient incontributing to the implementation ofthese standards?

• Does the close corporation withCommonwealth Development Corpora-tion improve or limit the possibilities ofNorfund to realise its own objectives?Does Norfund provide added value toexisting international institutions, and ifso, is it cost effective?

• Recently, the Minister of InternationalDevelopment launched “FightingPoverty, the Action plan 2015 forCombating Poverty in the South”. In thisplan, private sector development waspresented as a valued initiative in thefight against world poverty. The evalua-tion of Norfund represents an opportu-nity to illustrate connections betweenbusiness sector development and povertyreduction. Using examples from fieldvisits, the evaluation should illustrate thecausal connections between the differentNorfund activities and poverty reduction.

• How is Norfund’s relation to NMFA andNORAD? To what extent are Norfund’soverall objectives and strategies depend-ent upon coordination, cooperation andcoherence with UD/NORAD policies andpractices? How could this be improved?

Methodology.

The study will comprise:• Literature study: Evaluations of other

private sector schemes, both multilateraland bilateral. Literature should alsoinclude country strategy reports, moni-toring reports, policy formulations etc.

• Statistical overviews: National statisticsof relevant countries, Norfund statistics,CDC statistics, relevant statistics frommultilateral institutions, such as the UNand the Bretton Woods institutions.

• Interviews with relevant stakeholders inthe Norfund scheme: ministries, multilat-

50

eral and bilateral agencies, Norwegiancompanies, businesses and funds investedin, relevant embassies and authorities incountries invested in, relevant organisa-tions (NGOs) in countries invested in,local people affected by such investmentsetc.

• Case-studies from 3 countries: Nicaragua,Bangladesh and Mozambique, whichencompasses both macro and microanalysis, including network studies, to asfar as possible determine the effect andefficiency of the various business activi-ties in different contexts. The choice ofcountries is made in cooperation withNorfund, to represent a selection ofNorfund activities that has existed for aperiod of time.

Evaluation team.

The evaluation will be conducted by a team ofthree to five professionals possessing docu-mented expertise in the following fields:

• Theories of social and economic develop-ment, or development economics.

• Business economics analysis, includingan understanding of venture fund invest-ments and commercial investments indevelopment countries.

• Norwegian and international develop-ment cooperation policies and strategies.

• Relevant country competence.• Excellent language skills in English

(both oral and written). • Fieldwork and evaluation experience.

Time frame and reporting.

The results of the study will be presented in areport of 40 pages. The team will be responsiblefor the validity of the data included, for theanalysis and for the quality of the report. Thereport will contain all major findings, and willinclude recommendations and models for possi-ble future changes.

The Study will commence August the 1st, 2002.An inception report will be submitted for dis-cussion with the Ministry (to a time agreedupon). Debriefing and discussions will also takeplace during the consultants’ visits to Norfundand other relevant institutions. A draft reportwill be submitted no later than the 15th ofNovember 2002. Relevant parties will commenton the draft report before the final version isproduced. The technical quality of the finalreport will be such that it can be printed withoutany further rewriting or editing.

To ensure that relevant parties learn and other-wise benefit from the evaluation and its recom-mendations, the consultants will during theirwork hold workshops in Norway, and in theselected countries. A presentation of the finalreport shall be made to the ministry andincluded in the work of the consultants.

Budget.

Tenders should include budgets with estimatesof staff time, including preparation, drafting andfinalisation of the evaluation, and travel costs.The budget should not exceed 1.4 mill. NOK.

51

Norway

Ministry of Foreign Affairs

Hilde Frafjord Johnson, Minister of International Development Olav Kjørven, State SecretaryBjørn Skogmo , Deputy Secretary General Nils Haugstveit, Director GeneralInga Magistad, Special AdviserIne Måreng, AdviserBjørg Leite, Senior Adviser

NORAD

Else Berit Eikeland, Director GeneralTore Selvig, Special AdviserJan Dag Andersen, Special Adviser

Norfund board of directors

Arve JonsenGrete FaremoErik Århus

Enterprises

Per Olav Olsen, Mustad og SønOle Hillestad, ABBJannike Berg, NeraOla Schippert, Scancem International ANS/OsloØistein Andersen, CEO SN PowerJon Vea, Director General NHO

Bangladesh

Enterprises

Mr. Naser Ejaz Bijoy, Head of Corporate and Network Banking, Standard Chartered Grindlays Bank Mr. Graham, Vice President Operations, Scancement International Ltd, HeidelbergerMr. Rao, Production Manager, Bell Scancement Factory, Rupjanj Mr. Moyeenul, Plant Manager, Scancement Factory, Rupjanj Mill Supervisor, Mr. Ismail Hossain, Heidelberg Scancement Factory, Rupjanj Mr. Mahbubul Alam, Chief Financial Officer, Cement Group, Scancement International Ltd,Chittagong Cement Clinker Grinding Co. Ltd., Mr Mohammad M. Rahman, Meghna Senior Executive Director Cement Mills Ltd (BasundharaGroup)Mr. Lasker, Company Secretary, Industrial Development Company Ltd (IDCOL), Mr. Zahidul Islam Khan Mahmud, Manager Finance, Holcim (Bangladesh) Ltd

Organisations

Mr. Md. Azizur Rahman, Secretary Bangladesh Cement Manufacturers AssociationMr. Farhad Ahmed Chowdhury, Metropolitan Chamber of Commerce and Industry Mr. Hafizuddin Ahmed, International Finance Corporation (IFC), Country Manager

Appendix II Persons Met

52

Mr. G.M. Khurshid Alam, World Bank Dhaka Office, Sr. Private Sector Development Specialist,Dr. Debapriya Bhattachharya, Executive Director, Centre for Policy DialogueMr. Nazrul Islam, Executive Director and CEO, Infrastructure Investment Facilitation Center (IIFC),Ms. Parveen Karma-Sahayak, Deputy Managing Director, Foundation (PKSF)

Norwegian Embassy

Ms. Gerd Wahlstrøm, Ambassador Ms. Lena Hasle, First Secretary, Development AffairsMr. Arup K. Biswas, Adviser Development Affairs

Ministry of Finance

Ms. Nasrin Sultana Palli, Economic Relations Division, Deputy Chief

Denmark

IFU

Morten Christiansen, Department Director for Investment Management

Ministry of Foreign Affairs

Bent Dahl-Olsen, Minister Counsellor

Mozambique

Investment funds

Ainadin Cader, Minco, CEODr Ricardo Mendes, BIM Leasing CEONuno Maposse CPI, Head of Investment Promotion and Facilitation DivisionIssufo Caba, Business Development Advisor IFC/ Apdf

Norwegian Embassy

Jan Arne Munkeby, Ambassador Lars Ekmann, First Secretary

Enterprises

UGC, Mr ProsperinoPoDE, Mariamo Carimo, DirectorSocremo, Geronimo C. Binda, Director GeneralTechno Serve, Carlos Costa, Director AdjuntoCTA, Dr Carvalho Neves, consultantGCI/BCI , Antonio F. Munguambe, Executive Director GCI/BCI, Ana P. F. Santos, Financial AnalystMADAL and Minco Investment Board, Antonio Branco, CEO and ChairmanBIM Investment, Nuno Santos, Managing DirectorULC, Victor Viseu, Director GeneralTchuma, Dna CatarinaGAPI, Antonio Souto PCA, Adolfo A. Muholove, Director Formacao, Anabela Mucavele, DirectorCETA, Romeu Rodrguez, Director General CETA, Luis L. Soeiro, Financial Director

53

Nicaragua

Investment funds and enterprises

Jorge Vidaurre, Director General CASEIF-LIMAMehraz Rafat, Asesor Ejecutivo CASEIF-LIMAdolfo McGregor, Presidente FINARCAHugo Paguagua, Gerente General FINARCAJohn Wyss, Presidente IBWMarisol Delgadillo, Vicegerente General IBWReidar SundetJairo Hernandez, Presidente NICAFISHGerente NICAFISHEnrique Zamora, Gerente General LAFISEMarta Zamora, Gerente Finanzas CorporativasGabriel Solórzano, Presidente FINDESADavid Senna, Gerente General NICANORJulio Cárdenas, Director Ejecutivo BANCENTRORóger Arteaga, Director General de IngresosMarcos Narváez, Gerente General FNI, SAJohanna Reyes, Asesora GerenciaMargarita Rocha, Gestión de Recursos FNI,SA General FNI, SAHarold Rocha, Director Ejecutivo INPYMEEduardo Bolaños, Dir.Gral. Fomento Empresarial MIFICJuan Peters, Asesor Técnico MIFICPatricia Campbell, Directora Específica MINREXSalvador Mayorga Sacasa,Gerente General PLYNICFernando Lucano, Director Ejecutivo CYRANO

Ministries

Eduardo Montealegre, Ministro de Hacienda y Crédito Público.Danilo Núñez, Jefe de Departamento Inversiones MIFICNoy Bernheim, Dir.Gral Promoción Inversiones MINREX

Norwegian embassy

Reidun Roald, ConsejeraFelipe Rios, Asesor

Sweden

Ministry of Foreign Affairs

Rut Jakoby, Secretary General Lennarth Hjemåker, Director GeneralStefan Isaksson, deputy director

Swedfund

Olle Arefalk, Managing Director

United Kingdom

Aureos

Thorbjørn Gaarder, Manging DirectorMichael Ellen, Director General Noah Beckwith, Development Economist Satyam Rammauth, fund manager, Mauritius

54

Raj Morjania, fund manager TanzaniaErik Peterson, fund manager Central America

CDC

Andrew Reicher, Managing Director

DIFD

David Stanton, Chief Enterprise Development ManagerGavin McGillivray, Special Advisor Gary Jenkins, Special Advisor

Workshop Oslo Norway, 31 October 2002

Ole Hillestad, ABBMargaretha Gøransson, Future and HopeRagnhild Hammer, Max HavelaarEinar Risa, Management and FinanceJørn Høystad, Norplan ASOlav Hansen, ScansemJan Dybfest, MFAKnut-Are Okstad, MFAEli Moen, NORADHege Gulli, NORADErik Strømsøe, NORADElse Berit Eikeland, NORADPer Emile Lundøe, NorfundKjartan Stigen, NorfundChristopher Christensen-Røed, NorfundBirgitte Bøgh-Olsen, Foreningen for Internasjonale Vann- og Skogstudier (FIVAS)Øystein Gudim, LOJon Vea, NHO

Workshop Dhaka, Bangladesh 26 September 2002

Arup K. Biswas, Royal Norwegian Embassy (Adviser Development Affairs)Lena Hasle, Royal Norwegian Embassy (1st Secretary Development Affairs)Zahidul Islam Khan, Holcim Ltd (Manager Finance)Parveen Mahmud, Palli Karma-Sahayak Foundation (Deputy Managing Director)Nasrin Sultana, Ministry of Finance (Deputy Chief)

Workshop Maputo, Mozambique 3 October 2002

Pedro Chaves, AECA/ProforgeJamu Hassan, AIOPARomeu Rodrigues, CETAMario Ussene CACMAmade Camal, SIR MotorsAmbasse Baca, Hoteis de InhambaneIssufo Caba, APDF- IFCNhundzawane, Bila APEBAurelio Dimande, CTA

55

Martins Langa, PEMACSamuel Chissico, AgrariusAbdul Hamide, TechnoServe Carlos Costa, TechnoServeMustak Ally, Raujee DELTA TradingFelisberto Manuel, AMAPICFernando Antonio Souto, GAPIJulio N Maela, FrutisulMartin Sphar, LFS- Financial Systems- SOCREMOJerónimo C Binda, SocremoSimao Sevene, AJAM

Workshop Managua, Nicaragua, 17 October 2002

Mario R. España, PROCOMPE/MIFIC, Cluster ManufacturaJudith Acevedo, PROCOPE/MIFIC, Cluster TurismoJohanna Reyes, FNI, S.A., Gestión de FondosHugo Paguaga, FINARCA, Gerente GeneralAdolfo McGregor, FINARCA, PresidenteJohn A. Wyss, IBW, PresidenteJean Yves Bugna, CANTUR, PresidenteFelipe Ríos, Asesor, Norwegian Embassy, Managua Mario Faria, PROCOMPE/MIFIC, Ofic. ClustersErick Lagos, CASEIF/LIM, Oficial de InversionesJorge Vidaurre, CASEIF/LIM, Director GeneralReidar Sundet, NICAFISH, PresidenteJulio Cárdenas, Robleto BANCENTRO, Director EjecutivoMaritza Moncada, Congr.Muj.Empresarias, Coordinadora ManaguaGabriel Solórzano, FINDESA, PresidenteXimena Ramírez, Congr. Mujeres Empres, PresidentaMehraz Rafat, CASEI/LIM, Asesor Ejecutivo

57

Field Reports

Bangladesh Field Report (2002) IfekharHossain, ACNABIN & Co and TorunnKvinge, Fafo

Mozambique Field Report (2002) Sergio ICChitara, CTA and Stein Hansen, NCG,

Nicaragua Field Report (2002) MyrnaMoncada, NCG and Jens Claussen, NCG

Reference list

Andante Consulting (1997) Vad Händer efterforsaljing eller likvidation? En gjennomgangav utveklingseffekter av Sweedfund’savslutade samriskprojekt, Stockholm

Brealey, R. A. and Myers, S. C. (1991) Principlesof Corporate Finance. Fourth edition.McGraw-Hill

Bøhren, Ø. and Michalsen, D. (1994) Finansielløkonomi, Skarvet forlag

Bøgh-Olsen, Birgitte (2002) Utenlandske direk-teinvesteringer i Ecuador, en casestudie av etnorskeid selskaps påvirkning på palme-oljenæringen, Institutt for sosiologi og sam-funnsgeografi, Universitetet i Oslo

Copeland, T. E. and Weston, J. F. (1988)Financial Theory and Corporate Policy.Third edition. Addison-Wesley

ECON (2000) Norske Investeringsordninger,Rapport nr. 19, Oslo

European Commission (2002) Equity invest-ments and overview of the experience ofmajor initiatives, Brussels

Degnbol-Martinussen, John and Engberg-Pedersen, Paul (1999) Bistand Utviklingeller afvikling, en analyse af internationalt

bistandssamarbeijde, MellomfolkeligtSamvirke, København

Gottschalk, Ricardo (2000) Growth and PovertyReduction in Developing Countries: Howmuch external financing will be needed in thenew century? Paper, Institute ofDevelopment Studies, University of Sussex,www.ids.ac.uk/ids

IFC (2002) The private sector financing activitiesof international finance institutions,International Financing InstituteWashington

Kokko, Ari (2002) Globalisation and FDIIncentives, Paper presented at the ABCDEConference Oslo, June

Meier, Gerald and Stiglitz, Joseph E. (eds.)(2001), Frontiers of DevelopmentEconomics. The Future in Perspective,Oxford University Press

Ministry of Foreign Affairs (1999) Strategy forNorwegian support of private sector develop-ment in developing countries, Oslo

Ministry of Foreign Affairs (2002) TheNorwegian Government’s Action Plan forCombating Poverty in the South, March,Oslo

Norfund (2002) Project Manual, Operationalguidelines related to direct investment activi-ties in Norfund, Oslo

Norfund (2002) Lønnsomme investeringerskaper utvikling, Norfunds erfaringer etterfem år, Oslo

NOU (1995) Norsk sør-politikk for en verden iendring, nr 5 Oslo

OECD (1998) Harmful tax competition, anemerging global issue, Paris

Appendix III References and Documentation

58

OECD (2000) Towards Global Tax Co-operation,Report to the 2000 ministerial council meet-ing and recommendations by the commit-tee on fiscal affairs, Paris

Odelstingsproposisjon nr. 13 (1996–97) Om Lovom Statens investeringsfond for næringsvirk-somhet i utviklingsland, Oslo

Oxford Policy Management (2002) FinancingRequirements of Private Enterprises inDeveloping Countries, Oxford

UNCTAD (2002) The Least Developed CountriesReport 2002, Escaping the Poverty Trap,New York

UNCTAD (2002) Trade and Development report2002, developing countries in world trade,New York

World Bank (2001) Global DevelopmentFinance, Building Coalitions for EffectiveDevelopment Finance, Washington D.C.

World Bank (2002) Perspectives onDevelopment, Washington D.C

World Bank (2002b) Global DevelopmentFinance 2002, Vol II, p 22 Washington D.C.

World Bank (2002) Private Sector DevelopmentStrategy. Washington

EVALUATION REPORTS

1.91 Hjelp til Selvhjelp og Levedyktig Utvikling2.91 Diploma Courses at the Norwegian Institute of Technology3.91 The Women’s Grant in Bilateral Assistance4.91 Hambantota Integrated Rural Development Programme,

Sri Lanka5.91 The Special Grant for Environment and Development

1.92 NGOs as Partners in Health Care, Zambia2.92 The Sahel-Sudan-Ethiopia Programme3.92 De Private Organisasjonene som Kanal for Norsk Bistand,

Fase l

1.93 Internal Learning from Evaluations and Reviews2.93 Macroeconomic Impacts of Import Support to Tanzania3.93 Garantiordning for Investeringer i og Eksport til Utviklingsland4.93 Capacity-Building in Development Cooperation Towards

Integration and Recipient Responsibility

1.94 Evaluation of World Food Programme2.94 Evaluation of the Norwegian Junior Expert Programme with

UN Organisations

1.95 Technical Cooperation in Transition2.95 Evaluering av FN-sambandet i Norge3.95 NGOs as a Channel in Development aid

3A.95 Rapport fra Presentasjonsmøte av «Evalueringen av deFrivillige Organisasjoner»

4.95 Rural Development and Local Govemment in Tanzania5.95 Integration of Environmental Concerns into Norwegian

Bilateral Development Assistance: Policies and Performance

1.96 NORAD’s Support of the Remote Area DevelopmentProgramme (RADP) in Botswana

2.96 Norwegian Development Aid Experiences. A Review ofEvaluation Studies 1986–92

3.96 The Norwegian People’s Aid Mine Clearance Project inCambodia

4.96 Democratic Global Civil Governance Report of the 1995Benchmark Survey of NGOs

5.96 Evaluation of the Yearbook “Human Rights in DevelopingCountries”

1.97 Evaluation of Norwegian Assistance to Prevent and ControlHIV/AIDS

2.97 «Kultursjokk og Korrektiv» – Evaluering av UD/NORADsStudiereiser for Lærere

3.97 Evaluation of Decentralisation and Development4.97 Evaluation of Norwegian Assistance to Peace, Reconciliation

and Rehabilitation in Mozambique5.97 Aid to Basic Education in Africa – Opportunities and

Constraints6.97 Norwegian Church Aid’s Humanitarian and Peace-Making

Work in Mali7.97 Aid as a Tool for Promotion of Human Rights and Democracy:

What can Norway do?8.97 Evaluation of the Nordic Africa Institute, Uppsala9.97 Evaluation of Norwegian Assistance to Worldview International

Foundation10.97 Review of Norwegian Assistance to IPS11.97 Evaluation of Norwegian Humanitarian Assistance to the Sudan12.97 Cooperation for Health Development

WHO’s Support to Programmes at Country Level

1.98 “Twinning for Development”. Institutional Cooperationbetween Public Institutions in Norway and the South

2.98 Institutional Cooperation between Sokoine and NorwegianAgricultural Universities

3.98 Development through Institutions? Institutional DevelopmentPromoted by Norwegian Private Companies and ConsultingFirms

4.98 Development through Institutions? Institutional DevelopmentPromoted by Norwegian Non-Governmental Organisations

5.98 Development through Institutions? Institutional Developmentin Norwegian Bilateral Assistance. Synthesis Report

6.98 Managing Good Fortune – Macroeconomic Management andthe Role of Aid in Botswana

7.98 The World Bank and Poverty in Africa

8.98 Evaluation of the Norwegian Program for Indigenous Peoples9.98 Evaluering av Informasjonsstøtten til RORGene

10.98 Strategy for Assistance to Children in Norwegian DevelopmentCooperation

11.98 Norwegian Assistance to Countries in Conflict12.98 Evaluation of the Development Cooperation between Norway

and Nicaragua13.98 UNICEF-komiteen i Norge14.98 Relief Work in Complex Emergencies

1.99 WlD/Gender Units and the Experience of GenderMainstreaming in Multilateral Organisations

2.99 International Planned Parenthood Federation – Policy andEffectiveness at Country and Regional Levels

3.99 Evaluation of Norwegian Support to Psycho-Social Projects inBosnia-Herzegovina and the Caucasus

4.99 Evaluation of the Tanzania-Norway Development Cooperation1994–1997

5.99 Building African Consulting Capacity6.99 Aid and Conditionality7.99 Policies and Strategies for Poverty Reduction in Norwegian

Development Aid8.99 Aid Coordination and Aid Effectiveness9.99 Evaluation of the United Nations Capital Development Fund

(UNCDF)10.99 Evaluation of AWEPA, The Association of European

Parliamentarians for Africa, and AEI, The African EuropeanInstitute

1.00 Review of Norwegian Health-related Development Cooperation1988–1997

2.00 Norwegian Support to the Education Sector. Overview ofPolicies and Trends 1988–1998

3.00 The Project “Training for Peace in Southern Africa”4.00 En kartlegging av erfaringer med norsk bistand gjennom

frivillige organisasjoner 1987–19995.00 Evaluation of the NUFU programme6.00 Making Government Smaller and More Efficient.

The Botswana Case7.00 Evaluation of the Norwegian Plan of Action for Nuclear Safety

Priorities, Organisation, Implementation8.00 Evaluation of the Norwegian Mixed Credits Programme9.00 “Norwegians? Who needs Norwegians?” Explaining the Oslo

Back Channel: Norway’s Political Past in the Middle East10.00 Taken for Granted? An Evaluation of Norway's Special Grant

for the Environment

1.01 Evaluation of the Norwegian Human Rights Fund2.01 Economic Impacts on the Least Developed Countries of the

Elimination of Import Tariffs on their Products3.01 Evaluation of the Public Support to the Norwegian NGOs

Working in Nicaragua 1994–19993A.01 Evaluación del Apoyo Público a las ONGs Noruegas que

Trabajan en Nicaragua 1994–19994.01 The International Monetary Fund and the World Bank

Cooperation on Poverty Reduction5.01 Evaluation of Development Co-operation between Bangladesh

and Norway, 1995–20006.01 Can democratisation prevent conflicts? Lessons from

sub-Saharan Africa7.01 Reconciliation Among Young People in the Balkans

An Evaluation of the Post Pessimist Network

1.02 Evaluation of the Norwegian Resource Bank for Democracyand Human Rights (NORDEM)

2.02 Evaluation of the International Humanitarian Assistance of theNorwegian Red Cross

3.02 Evaluation of ACOPAM An ILO program for “Cooperative and Organizational Supportto Grassroots Initiatives” in Western Africa 1978 – 1999

3A.02 Évaluation du programme ACOPAM Un programme du BIT sur l’« Appui associatif et coopératifaux Initiatives de Développement à la Base » en Afrique del'Ouest de 1978 à 1999

4.02 Legal Aid Against the Odds Evaluation of the Civil Rights Project (CRP) of theNorwegian Refugee Council in former Yugoslavia

1.03 Evaluation of the Norwegian Investment Fund for DevelopingCountries (Norfund)

Published byThe Royal Norwegian Ministry of Foreign Affairs7. juniplassen 1/Victoria TerrasseP.O. Box 8114 Dep., 0032 OsloNORWAY

Available on the Internet:http://odin.dep.no/ud/engelsk/publ/rapporter/032091-990133/

Evaluation reports may be ordered from:E-mail: eval@mfa.noFax: +47 22 24 35 40Tel: +47 22 24 33 54