How French development bank Proparco plans to expand in South America

French financial institution Proparco is planning to expand its operations in Brazil and other South American countries in the coming years.

The institution, which is the private sector financing arm of Agence Française de Développement, is active in financing companies and initiatives linked with the fight against climate change, supporting sustainable agriculture practices, and promoting social inclusion through investments in sectors such as health and education. 

In this email interview, Philippe Serres, regional director for South America, talks with BNamericas about Proparco’s future plans for Brazil and the wider region.

BNamericas: How is Proparco structured and what is the institution’s trajectory in Brazil so far?

Serres: Proparco is the French development bank dedicated to supporting the private sector in emerging markets, with the ultimate goal of reaching sustainable development goals. We are a subsidiary of AFD [Agence Française de Développement], and we are registered as a regulated financial institution in France. 

We also have minority investors such as French private banks and corporates, other development finance institutions, such as CAF and DEG, and philanthropic investors. At the end of the day, this mixed capital structure leads to a very original public-private partnership. As of end of 2021, we have a total portfolio of almost 7bn Euros [US$6.8bn]. Overtime, we have become one of the largest European DFIs [development finance institutions].

In Brazil, we have experienced impressive growth, reflecting the dynamism and diversity of the economy. Our presence here is relatively recent. While Proparco as an institution is 45 years old, in 2022 we are celebrating our 15th year of presence in Brazil. Yet, in such a short time, Brazil has become the largest country in Proparco’s portfolio.

BNamericas: How many professionals do you have that are dedicated to Brazil and how much funding have you provided to projects and companies in Latin America's largest economy?

Serres: Our office in São Paulo has seven full-time professionals. This office is dedicated to originating operations all over South America, and is supported by another office based in Colombia for the Andean region. 

However, Brazil represents around 45% of our total commitment in the region. In total, we have already committed more than US$1.3bn in Brazil and our outstanding portfolio stands currently at around US$470mn.

BNamericas: Looking to 2023 and the coming years, what are the plans for Brazil in terms of financing volumes? And what is the projected volume of loans for this year as a basis of comparison?

Serres:  Brazil will remain a major country for us going forward. For Proparco, it is fundamental to continue growing its portfolio in the largest economy of Latin America, with plenty of opportunities but also facing various challenges aligned with our mandate, which is fighting against climate change, supporting sustainable agriculture practices, promoting social inclusion through investments in sectors such as health and education. 

For 2022, we expect to reach a total commitment of around US$230mn. In 2023 we should be committing to Brazil more than US$300mn.

BNamericas: What is Proparco average loan ticket per operation in Brazil?

Serres: All over the world, our minimum ticket size stands at US$10mn and we can go up to US$100mn on a standalone basis. We can of course rely on trusted partners such as other European and multilaterals DFIs to propose larger syndicated facilities. Having said that, our average ticket size in Brazil stands at US$27mn. This is for all type of financial instruments, but generally, our tickets are much higher in debt than in equity.

BNamericas: Which sectors do you currently finance in Brazil and what is the share of each of these sectors in your loan portfolio?

Serres: The businesses we have supported in Brazil reflect quite well our mandate, which is to support the private sector in reaching sustainable development goals, in particular related to social inclusion and climate change mitigation. 

Around 70% of Proparco’s commitments in Brazil had a direct or partial climate change mitigation impact.

46% of our commitments are invested in the financial sector, which comprises both financial institutions and private equity funds that invest in our priority sectors. For instance, we have provided credit lines to BTG Pactual and Banco ABC with the commitment to use the funds to invest in climate change mitigation activities such as cogeneration, energy efficiency, renewable energy, etc. Likewise, we are investors since this year in the third Latam fund of GEF Capital, oriented towards financing cleantech and sustainable solutions.

18% of our commitments were directed towards the agribusiness sector, which is very dynamic in Brazil. More specifically, we have financed sugar and ethanol players such as Tereos and Biosev in their sustainability efforts, cogeneration, production of ethanol, production and sale of biogas out of sugar cane bagasse.

15% of our commitments were invested in the energy sector, generally renewable energy plants or renewable energy developers who use our funds to invest in their own projects. We do not lend to oil and gas. 

For instance, we are an equity investor in Voltalia, the French renewable energy developer, with a strong presence in Brazil both in solar and wind energy plants. We also financed a very large solar plant of Enel in the Northeast, which was at that time the largest in Latam.

The balance of our commitments were invested in key sectors such as water and sanitation, with companies like Aegea, healthcare, such as HCor, Rede d’Or and manufacturing.

Overall, since 2018, Proparco has contributed to maintain or generate 150,000 jobs, and has allowed access to basic services or goods to some 110,000 beneficiaries.

BNamericas: Still talking about sectors, are there any where you are currently not active but are interested in financing? If so, which ones and why?

Serres: We have the chance to be present in almost all the sectors related to sustainable development and social inclusion. 

However, there are a few emerging sectors where we are not still operating and that represent a real opportunity. 

One of them is green hydrogen, where we are seeing models evolve from prototype to economic sustainability.  

We believe Brazil has all the characteristics to become a powerhouse of green hydrogen in Latin America, given the size of its renewable energy industry. 

Another sector we have not been able to finance yet in Brazil is public transportation and electric mobility. Brazil is one of the first countries in the world to implement BRTs in cities like Curitiba. There are also various new metro projects and privatizations where the private sector will play a key role. In that sense, we would love to support projects of public, clean transportation.

BNamericas: In relation to South America, which other countries are you working in?

Serres: In the region we are active, in addition to Brazil, in Argentina, Paraguay, Bolivia, Peru, Ecuador, and Colombia. We are not authorized to offer new financings in Uruguay and Chile since they are not eligible anymore to overseas development aid, but we still have portfolios there. In total we have committed more than US$2.9bn to the entire South American region.   

BNamericas: Which countries in the region are you most interested in offering loans in the coming years? And in which sectors?

Serres: We have appetite to offer loans and equity in the entire region, it’s our mission. However, in general terms, we are more active in the largest economies since they have a stronger absorption capacity. As such, we believe we will be very active in the coming years in Brazil of course, but also in Colombia and Peru. 

In addition, we have always been quite present in Ecuador due to its dynamic banking sector. Finally, we expect to see operations increase in Argentina in 2023, based on a gradual stabilization of the macroeconomic situation.  

The sectors really depend on the specificities of each country and on the market niches where Proparco is recognized.

For instance, in Colombia we have been able to develop a real expertise in financing electric bus concessions, favored by a very conducive market environment. In Ecuador and Peru we are very present in the banking sector, but also in microfinance, due to the existence of quite strong and regulated microfinance institutions in those countries. 

In Argentina, we believe the renewable energy sector is very interesting, thanks to a legal set up that protects international lenders and different mechanisms that mitigate the exposure to sovereign risk. Finally, we believe the next big sector for us in Brazil will be water and sanitation, where the new regulatory framework is already leading to a massive increase in investments in order to reach universalization goals.

BNamericas: ESG aspects have gained importance in the valuation of assets by investors and also among project financers. Do you see political leaders and companies in Brazil and South America being committed to advancing ESG practices? And where is further progress on this agenda needed?

Serres: ESG is not a new thing for us, it is part of our DNA. However, it is indeed gaining traction among private and institutional investors, and companies are taking it seriously. To be frank I have been impressed by the level at which the Brazilian private sector, banks, corporates, or infrastructure and energy players, are integrating the ESG agenda in their operations. 

Most of them are doing it without a regulatory obligation, but as a real corporate decision. In addition, investors are demanding to see evidence of implementation of ESG practices, in particular international ones. For instance, we have seen more and more issuances of sustainability-linked loans and bonds, or just of green bonds, which have become a real asset class.

What may be missing still is a more demanding legal framework to include environmental and social standards in the private sector, and regulations more conducive to the development of ESG-linked financial products. So far, most of the standards are industry-led, and not infused by the regulator.

In addition, if investors are asking for ESG, they are still not all paying for it. Strong efforts on the ESG front should lead to significantly better financial conditions for the borrowers. This is happening, but still in very small proportions and not among all investors.

BNamericas: 2023 is likely to be a year of economic challenges for the world’s largest economies. Given this scenario, could the available financing for developing countries from multilateral institutions and development institutions suffer any impact?

Serres: The main fear for 2023 is the interest rates environment. Both USD and EUR rates are reaching very high levels and we do not seem to see the end of it. In some countries, like Brazil, this hike in interest rates is also very clear as the central bank is fighting against inflation. But in others, like Bolivia, for various reasons the international interest rate increases are not being transferred to the economy, creating a lack of competitiveness for international investors.

In such a scenario, one of the possibilities is that companies decide to postpone or cancel investment projects, leading to less credit demand. This is something we are monitoring closely. However, we still see opportunities emerging.

On our own liability side, we do not expect that the resources available for investing will suffer any impact. The challenge will rather be the cost of those resources for our clients. On the other side this may be a good moment to increase the equity base of companies and banks, at a moment where the cost of debt is getting closer to the cost of capital.