Denmark’s development policy is a central and integrated part of the country’s foreign and security policy in 2016. As part of the Ministry of Foreign Affairs (MFA), the Department for Danish International Development Assistance (Danida) is responsible for planning and implementing Denmark’s cooperation programmes with developing countries, while assuring the quality of the assistance. It falls under the responsibility of the Minister for Development Cooperation. Danida is the name of Denmark’s development cooperation since 1963.
The Danish DFI is IFU, the Investment Fund for Developing Countries, an independent government-owned fund established by the Danish Government in 1967. IFU provides risk capital in the form of equity, loans or guarantees for project companies established by Danish companies in one of the about 150 countries eligible for IFU investments. IFU can co-finance projects in developing countries with a per capita income below USD 6,138 (in 2012). 50% of IFU’s yearly investment must be made, however, in countries with a per capital income below USD 3.180. IFU provides advisory services combined with investments in the form of share capital participation, loans and guarantees on commercial terms for investments in manufacturing or service companies.
SMEs make up a large part of the Danish business, but companies often lack the necessary resources to make investments in difficult markets. Danish SME’s often possess advanced knowledge and technologies that can open up for new business opportunities in emerging markets, and thereby contribute to economic growth and job creation – in the host countries as well as in Denmark. However, development and implementation of investments with SMEs is associated with relatively higher risks than investments undertaken together with larger partner companies. The SME promoters often lack resources – managerial and financial – in preparing for, implementing and starting up their projects.
Recent policy changes
Denmark’s Act on International Development Cooperation dating back to 1971 has been revised in 2012. The act presents an enhanced focus upon human rights and sustainable growth which henceforward constitute the foundation for Denmark’s development cooperation. Furthermore, the act states that Danish development cooperation aims to fight poverty, promote human rights, democracy, sustainable development, peace and stability in accordance with the UN treaty.
The Ministry of Foreign Affairs of Denmark 2011 strategy Development Cooperation “The Right to a Better Life” seeks to fight poverty with human rights and economic growth. It sets the basis for an effective cooperation that aims to combat poverty and promote human rights. The strategy’s objectives are advanced through a human rights-based approach, with a specific focus on women’s rights, on the basis of flexible and mutually accountable partnerships (both with the public and the private sector), multilateral systems, civil society and new development partners and global foundations. Denmark aims to systematically strengthen capacity of public authorities, civil societies and rights holders, and work to strengthen the participation of least developed countries in the development of the international legal order. Green Growth is one of four long-term strategic priority areas in combatting poverty and promoting human rights.
|Framework for Growth and Employment (2011-2015)|
The Minister for Foreign Affairs Kristian Jensen announced in December 2015 to cut aid and focus more on areas of trade and investment. Among other areas that Denmark is targeting its support include reforms to improve the business environment and reduce barriers to trade and investment, sustainable investments and green growth.
The Government’s Priorities for the Danish Development Cooperation 2016-2019 try to focus the development engagements where the poverty is significant, where we have strategic interests and where Denmark best can make a difference. Denmark will contribute to combating poverty through economic freedom, that is, development based on property law, free trade and private investments. Moreover, Denmark will promote market-based sustainable growth and employment in the developing countries. In total, approximately DKK 545 million will be allocated to supporting sustainable growth in the priority countries in 2016. According to the recent Government’s Priorities, an integration of Danish trade and development initiatives is necessary, and Denmark’s strong private sector competences shall be incorporated into the development cooperation to a larger extent.
|Quotes from The Government’s Priorities for the Danish Development Cooperation 2016-2019|
|· Sustainable growth, investments and trade are the road to development
· The government will work towards meeting the developing countries’ demands for trade, investments and technology in order to promote economic growth. It is about advancing the countries’ regulatory framework and fostering a sustainable business environment that can create employment and economic progress.
· The development cooperation cannot combat poverty alone. An active engagement from the private sector is crucial in solving the global challenges.
· The private sector must be engaged to a greater extent – not just through investments, but also by bringing the strong competences of the Danish private sector more into play, for instance in areas like water, energy, food production, and green growth. The development cooperation shall motivate and mobilize private sector investments. Using the Investment Fund for Developing Countries as a starting point, the government wishes to increase investments in development and create greater development results within sustainable growth and employment.
· Stable business structures based on the rule of law and transparency are key to achieving sustainable growth, trade and private sector development.
· This also increases the foreign direct investments in the country. The governments in the developing countries are responsible for building responsible regulatory frameworks for the business community. However, Denmark will contribute to improving the regulatory frameworks through cooperation with local public authorities among others. We will request that our priority countries promote good governance and increase investments in social and economic infrastructure.
· The business instruments in the development cooperation must promote Danish companies’ engagements in development countries to the benefit of both the Danish companies and the private sector in the developing countries. The goal is to ensure that the strong Danish competences come into play and promote market-driven development. The government will enter into a dialogue with Danish businesses, civil society, financial institutions and philanthropic foundations in order to adjust and improve the business instruments.
Results of Evaluations
In 2014, the Danish Ministry of Foreign Affairs carried out an evaluation of the former business instrument Business to Business Programme (B2B). The evaluation by NCG/Devfin Advisers AB (2014) concluded that B2B and its successor Danida Business Partnerships have contributed to technology transfer and have been levering Danish companies to engage commercially in growth and developing countries, but that the facilities in an overall perspective have not had sufficient impact on employment and sustainable growth in the countries. The evaluation also questioned the instrument’s compatibility with the EU state aid rules. Against this background it was decided in November 2014 to put the Danida Business Partnerships facility on hold. The Evaluation concerns Danida’s Business-to-Business programme (B2B), which was implemented from 2006 to 2011. The B2B programme provided grant support of up to DKK 5 million to 445 partnerships between Danish companies in 19 countries. The total approved financial allocation for the B2B programme from 2006 to 2011 for the 19 countries was DKK 1,088 million.
The B2B Programme facilitated transfer of knowledge and technology to the local companies through well-functioning partnerships, resulting in improved performance as regards company management, productivity, turnover, environmental management, and working environment. Generation of employment in the local companies – as well as upstream and downstream employment – was less than planned for. While the majority of B2B supported local companies achieved satisfactory results, the spill over effects to their surrounding local communities did not materialise to any significant extent – except in a very few cases – in consequence of less employment generated and limited diffusion of technology and knowhow. The socio-economic benefits to the local communities were thus less than anticipated and correspondingly the contribution to poverty reduction was less than warranted.
An evaluation study conducted by Hansen & Rand (2014) from University of Copenhagen for the Danish Ministry of Foreign Affairs and Danida, presents an economic analysis of Danish exports to 144 countries over the period from 1981 to 2010. The main result of the study is that Danish bilateral aid has a positive and statistically significant impact on Danish exports to the recipient countries. The authors use a common structural econometric model to demonstrate the knock-on effect in the form of increased export from Denmark to the partner countries. These formulations indicate that the estimated return in terms of dollars of increased exports per dollar of additional aid varies over time and across countries, and it also implies that the dollar return is small for Denmark’s main development cooperation partner countries simply because Danish export to these countries is small at the outset as they are poor and distant from Denmark. The overall estimated average export return is about 30 cent per aid dollar, which is surprisingly close to the 29 cent estimated for the Netherlands and quite far from the 1.4 dollar estimated for Germany. The results of this Evaluation Study are however not useful as tools for country selection in the aid allocation decision. Second, although the export return is positive it is difficult to give a precise estimate of the size, both for individual countries and for country groups.
The Ministry of Foreign Affairs of Denmark/Danida (2016) commissioned a study on private capital for sustainable development. Reviewing experience with funds and investment vehicles in the fields of innovative finance and impact investing, the study is intended to inform the future engagement of Danida and other bilateral donor agencies in these fields. The main finding of the study is that more is known than ever before about how donors and DFIs can mobilise private sector investment for sustainable development. In particular, structured funds, result-based financing and guarantees, and early-stage and innovation funding all are being used to mitigate risks, structure deals and achieve stronger impacts at substantial scale with the capital of private equity funds, banks, insurance companies, foundations, pension funds, family offices, high-net-worth individuals, and corporations. Layered, structured funds, especially, can aggregate capital for larger-scale investments, using a ‘waterfall’ structure to offer opportunities for private and public investors with different risk, return and exit requirements.
New Danida private sector instruments
The government will further develop the specific Danida business programmes, to which DKK 100 million are allocated in 2016.
|Set of Danida Business instruments in 2016|
|· Danida Business Finance offers subsidised loans to infrastructure projects in Danida priority countries.
· IFU SME Facility to promote small and medium-sized Danish enterprises in developing countries.
· Danida Business Explorer provides financial support to Danish companies interested in investigating a specific business opportunity in a developing country in Africa, Asia and Latin America, in order to meet development needs in the developing country.
· Danida Business Contracts provides contract opportunities for private actors in relation to the implementation of the Danish Development Cooperation.
Danida Business Finance
Danida Business Finance (DBF) funds major infrastructure projects which cannot be financed on market terms. This is done by offering interest-free loans, where interest and other financial costs are covered by development funds. The programme facilitates investment in crucial infrastructure, such as energy supply, and aims to contribute to creating a more enabling environment for sustainable growth and employment. Funding of climate-friendly and cleaner technology is a future priority. DB Finance is the successor of the mixed credit scheme. There were no significant chances to these instruments.
|What Danida Business Finance offers|
|Danida Business Finance (DBF) offers subsidised loans to infrastructure projects in Danida priority countries. The projects must contribute to sustainable and development in the recipient country.
A typical loan has 10 years’ maturity and is issued in USD or EUR. The DBF-subsidy consists of up to three elements (see figure below):
The buyer/borrower repays the loan in equal, semi-annual instalments, normally starting six months after the commissioning of the project. The borrower will pay only a commitment and a management fee.
DBF offers support to three different types of projects:
Danida has issued 15 guiding principles for fund structures in October 2015. The set comprise some of the main issues that should be addressed during the preparation and implementation of the fund structure interventions. Danida is to an increasing extent allocating development assistance through global, regional and national funds which directly or indirectly provide funding in the form of equity, loans, guarantees, and grants to specific purposes such as climate, infrastructure, health, agribusiness, Small and Medium Enterprises (SME) etc. Most of these funds – often referred to as challenge, impact and investment funds – are established to leverage donor capital with private capital to facilitate access to finance and address capital requiring global challenges. There are indications that this trend will continue in the future, and that Danida will be involved in an increasing number of fund structure arrangements in cooperation with other donors, Development Finance Institutions (DFI) and the private sector in order to promote specific investment activities in developing countries.
IFU SMV Faciliteten
Denmark’s Ministry of Foreign Affairs established this SME Facility to promote small and medium-sized Danish enterprises in developing countries. IFU manages this facility in cooperation with Danida. It is operational from 1 March 2015 and thus has not submitted an Annual Report yet. The Evaluation is due in 2018.
The government wants the Danish SMEs contribute more to sustainable growth and employment in developing countries and has therefore granted of 60 million DKK (8 mn EUR) over three years to promote the quality and sustainability of SME investment in developing countries.
The IFU SME Facility to support individual companies’ preparation and implementation of projects so that companies can get the necessary professional sparring and assistance in the early stages of the project. The facility serves as an integral part of IFU’s work with investment in developing countries, and Danish SMEs wishing to make use of the aid must therefore advance could be approved IFU’s normal appraisal procedures.
IFU SMV Faciliteten can support the individual Danisch company in the preparation and implementation of projects in developing countries. The support will complement the company’s own investment in commercially viable projects and can cover up to 50 percent of special expenses incurred within a maximum amount of 1.5 million DKK. . The support is granted as a supplement to the company’s own investment and can only cover up to 50 per cent of the actual costs and 25 per cent of the total investment.
The advisory support and the hand-held guidance will target and strengthening the following, dividing the life-cycle of a project into two stages:
|Project Phase:||Focused support and assistance (such as, but not limited to):|
|Phase 1: Project development and appraisal
|– Definition of the company’s strategic goals
– Mapping of comparative advantages/risks
– Improvement of business plans/feasibility studies and
check of critical assumptions – definition of “must win battles”
– Financial exposure under various scenarios
– Organisational and managerial requirements/competences needed (for f.ex. marketing, communication, production/technical skills, finance, legal, HR, strategic management a.o.)
– Double check of important assumptions and conditions
– Determination and verification of “bank-ability”
– Definition of CSR initiatives
|Phase 2: Initial start-up and operation||– Recruitment of management and other key personnel
– Required approvals, permissions, licenses, and other – Environmental requirements, unions, OHS issues
– Training plans for know-how transfer
– Implementation of CSR initiatives
– Implementation of systems for reporting re. management
information, accounting, budgets, CSR status, and other
– Procedures for board work
– Identification of relevant Board members
– Reporting and monitoring of operations, accounts, CSR, etc.
– Strategic plans for further development
– Management of crisis and unforeseen events
Each project shall be appraised individually and the need for support will vary from case to case, and is dependent on the current life-cycle stage reached. Assistance may be provided partly by IFU, partly by external professionals.
The financial support eligible under the IFU SME Facility will come as follows:
|IFU SME Facility||Support per SME project max. DKK 1.5m (in two phases)|
|Phase 1||Max. DKK 750,000 – covering costs during project
development and appraisal
|Phase 2||Max. DKK 750,000 – covering costs during initial start-up and operations|
|Cost coverage such as- salaries (long-term postings of external staff (internal salaries only in exceptional cases))
– consulting services – including management support
– travel and accommodation costs
– CSR initiatives
– legal consultancy and assistance
– audit consultancy and assistance for a hands-on approach to call on resources for improving the preparation steps, operational management, strategic development, CSR initiatives, financial management, corporate governance a.o. during Phase 1 and 2.
|Limits of the SME Facility support||Max. 25% of the total investment of the project
Max. 50% of IFU’s investment in the project (share
capital and/or loan)
Coverage: max. 50% of eligible costs (se Chapter 4 – incl. auditor’s verification of incurred costs, reimbursement following completion of the actions supported)
Only activities started after approval of the SME grant can receive support
It is a condition that the project proposal must be IFU eligible. Approval of support under Phase 1 cannot take place until the project proposal and the Danish SME partner have received a Clearance in Principle (CIP) from IFU. Approval of support under Phase 2 cannot take place until a signed investment agreement (share capital, loan, guarantee) has been entered into with IFU.
The following criteria for support apply:
|IFU eligibility||The IFU SME Facility is eligible for IFU’s investments according to its general investment mandate.|
|SME definition||The definition of SMEs eligible for support follows the EU definition.|
|Eligible host countries||Eligible host countries must be on the OECD’s DAC list of development aid recipients.|
|Eligible partnerships||Eligible partnerships for the IFU SME Facility must as a minimum include one Danish SME. The investment target is the legal entity incorporated in the host country, for example being a subsidiary of the Danish partner or a joint venture between Danish and a local partner, either as an acquisition of an existing company, a turn-around or as a green field project.|
|Eligible sectors||SMEs working in all sectors – except hard liquor, gambling, tobacco, weapons and others following the IFU/EDFI’s exclusion list – can be supported.|
|Eligible applicants||The Danish SME partner and/or the project company|
|Decision forum||Based on applications (Phase 1 and 2 respectively) the appraisal of the support will be presented for approval to IFU’s Investment Committee (according to IFU’s normal governance structure).|
|Conflicting support||Conflicting Applicants receiving support from other programmes – such as f.ex. Danida support Business Explorer, NOPEF a.o. – covering the same objectives, scope and activities are not eligible for IFU SME Facility support.|
|Time limits||(due to the facility being a pilot project)
Approval for Phase 1 and 2 applications: Not later than December 2017
Disbursement: Not later than December 2018
The new facility is a reaction to the EU de minimis “state aid” regulations (Commission Regulation 1407/2013, OJ L352/1, 24.12.2013: http://ec.europa.eu/competition/state_aid/legislation/de_minimis_regulation_en.pdf), that were introduced in 2014. According to EU de minimis rules support for the following sectors are limited: 1) Primary production of agricultural products (max. EUR 15,000), 2) fisheries and aquaculture (max. EUR 30,000) and 3) road freight transport (max. EUR 100,000). According to IFU, these rules are binding, but seen as difficult limitations, as many Danish business projects are in primary production.
Other trade-related instruments and partnerships
The Global Green Growth Forum 3GF http://3gf.dk initiative has been established in Copenhagen as part of a ‘bottom-up’ movement and is a unique dialogue forum where new types of public-private partnerships can be developed. The purpose of 3GF is to contribute to and accelerate the transition to a green global economy by highlighting the potential for growth. 3GF has been set up as a global public-private partnership involving participants from the governments of Denmark, South Korea and Mexico, as well as a series of multinational corporations and international organisations. The Forum is a Danish initiative and not open for other European countries to join in.
The Trade Council of Ministry of Foreign Affairs of Denmark assists Danish companies through a number of free of charge services, custom-made solutions and subsidised programmes. In the Danish Embassies, it assists Danish companies in starting up and/or expanding their presence. The Trade Council has approximately 300 employees abroad located at embassies, consulates general and trade commissions in 60 countries around the globe, among them Vietnam. In 2013, Denmark became the first Nordic country to have a comprehensive partnership agreement with Vietnam.
The Danish Water Forum was established in 2002 by a broad range of stakeholders related to the Danish water sector with the aim to share knowledge among all actors in the Danish water sector. Furthermore the aim is promoting and expanding the role of the Danish water sector at the international scene with an aim to promote Danish water expertise globally. DWF is open to all Danish organizations within water and related sectors such as environment, agriculture, and health.
|Statement of the Danish Water Forum as example for business partnerships|
|Knowledge, research and visibility of Danish solutions
Danish Water Forum works to promote Danish and international research, development and innovation in the water sector. Our aim is to strengthen the Danish water agenda by contributing to Danish knowledge and skills in international water organizations and in international and European initiatives on water.
We promote knowledge sharing on water and international exposure of Danish water knowledge, promoting cooperation in research, development and innovation among stakeholders in the Danish water sector and by contributing to the visibility of the Danish water efforts as a mark of quality and efficiency.
Danish Water Forum is a network of Danish water organizations aiming at highlighting Danish water expertise and knowledge and facilitating concerted actions. DWF represents:
· Contractors and manufacturers
· Water companies and consultants
· Research institutions
· Organisations and Government authorities
With our activities we aim at:
· Strengthening Danish and international efforts in research, development and innovation
· Promoting knowledge sharing on national and global water challenges and solutions
· Strengthening the visibility of the Danish competence – a trademark of quality and efficiency.
Denmark makes a radical policy shift towards more business-driven development cooperation. The private sector is seen as a partner for policy-making, not as a beneficiary. There seems to be a broad consensus for the policy shift, which civil society, trade union and other interest groups support. The Government seeks actively the dialogue with all actors on the new policy.
The changes build on a tendency that Denmark had already in the past decade. The business focus has been set before, the shift from aid to trade was guided smoothly also in the partner countries. The abrupt change now is the budget cuts, which put an additional focus on private sector.
The new Danish private sector instruments are streamlined, but not all new. The mixed financing for infrastructure projects continues. The guiding principles for fund structures and for special funds are interesting, as they consider safeguard mechanisms.
Also the new study on impact investing and innovative finance is important for financial options for the Sustainable Development Goals. The nexus of impact investing and blended finance holds considerable promise for mobilising and deploying private capital for sustainable development and for contributing in significant ways toward the achievement of the Sustainable Development Goals. While there are limits and complexities at this convergence point, there are also innovations and early successes that demonstrate not just potential but real, tangible results.
The IFU SME Facility is in the early pilot phase. It links SME partnerships with the perspective of upgrading their business to larger development finance cases. It implies a clear decision to concentrate on a few larger business cases, not on many small ones.
|DANIDA/IFU, Small and Medium Enterprises Investment Facility, Guidelines and Conditions for Support October 2015,|
|Danish Government, the Government’s Priorities for the Danish Development Cooperation 2016. Overview of the Development Cooperation Budget 2016 – 2019, September 2015, http://danida-publikationer.dk/upload/microsites/um/ebooks/udviklingsprioriteter_uk.pdf|
|Germany BMZ, Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung (2011). Aid for Trade in German Development Policy. (T. a. I. Division Globalization, Trans.). Bonn / Berlin|
|Hansen, H. & Rand, J. (2014) Danish Exports and Danish Bilateral Aid. 2 udg. Copenhagen : Ministry of Foreign Affairs of Denmark. Danida, 2014. 46 s. (Evaluation Study; Nr. 2, Vol. 2014), http://development.ku.dk/newslist/usek-news/trade-aid/Danish_exports_and_Danish_bilateral_aid_report.pdf|
|Kröger, A. and P. Voionmaa (2015), Aid for Trade, Policies and Strategies in German Development Cooperation, German Institute for Development Evaluation (DEval), Bonn, http://www.deval.org/files/content/Dateien/Evaluierung/Berichte/DEval_Desk%20Study%20AFT_final.pdf|
|Ministry of Foreign Affairs of Denmark/Danida (2011) The Right to a Better Life. Strategy for Denmark’s Development Cooperation, Copenhagen, http://um.dk/en/~/media/UM/English-site/Documents/Danida/Goals/Strategy/13287_DANIDA_strategiformidling_UK_web%20NY.pdf|
|Ministry of Foreign Affairs of Denmark/Danida (2014a) Department for Green Growth, Concept Note, IFU Small and Medium Enterprises Investment Facility, 15 May 2014 File No. 104.X.90|
|Ministry of Foreign Affairs of Denmark/Danida (2014b) Green Growth Guidance Note, English version, Published June 2014, http://amg.um.dk/en/~/media/amg/Documents/Technical%20Guidelines/Green%20Growth%20Guidance%20and%20Screening%20Note/Green%20Growth%20Guidance%20Noteword%20rev%2020150511.docx|
|Ministry of Foreign Affairs of Denmark/Danida (2014c) Strategy Paper. Denmark’s multilateral Aid for Trade 2014. http://um.dk/en/~/media/UM/English-site/Documents/Danida/About-Danida/Danida%20transparency/Consultations/2014/Aid%20for%20Trade%20Strategy%20Paper.pdf|
|Ministry of Foreign Affairs of Denmark/Danida (2014d), Evaluation of Danida Business-to-Business Programme 2006-2011, Evaluation 2014.05 http://www.netpublikationer.dk/um/14_danida_btb_programme_2006_2011/Pdf/danida_btb_programme_2006_2011.pdf|
|Ministry of Foreign Affairs of Denmark/Danida (2015a), Danida support to fund structures, Guiding principles, 21 September 2015, http://amg.um.dk/en/Technical-guidelines/fund-structures/|
|Ministry of Foreign Affairs of Denmark/Danida (2015b), Danish Agribusiness Fund, Danida, File No. 104.X.90 – 2014-18978|
|Ministry of Foreign Affairs of Denmark/Danida (2015c), Guiding principles for special initiative funds, September 2015, http://amg.um.dk/~/media/amg/Documents/Technical%20Guidelines/Guiding%20principles%20for%20special%20initiative%20funds/Initiativpuljer%20Kvalitetssikring%20og%20administration%2024092015.pdf|
|Ministry of Foreign Affairs of Denmark/Danida (2016) Evaluation Study. Private Capital for Sustainable Development: Concepts, Issues and Options for Engagement in Impact Investing and Innovative Finance, by E.T. Jackson and Associates Ltd., Social Impact Markets, February 2016.|
|Nordic Consulting Group/Devfin Advisers AB (2014) Evaluation Report for the Business-to-Business Programme 2006-2011, Danida ref 2014.05 http://www.netpublikationer.dk/um/14_danida_btb_programme_2006_2011/Pdf/danida_btb_programme_2006_2011.pdf|
|Sunil Sinha, Johan Holmberg and Mark Thomas (2013) What works for market development: A review of the evidence, Sida- UTV Working Paper, Commissioned by Sida UTV, http://www.sida.se/contentassets/e470dbe2fc58413588a0c4a185f2c969/what-works-for-market-development-a-review-of-the-evidence_3702.pdf|