The members of the executive board of OeEB, Andrea Hagmann and Michael Wancata, discuss why job creation is a core function of development banks and how it can be done sustainably.
Why is job creation so important to OeEB?
Michael Wancata: Our overriding goal is the reduction of poverty, and that is related closely to enough jobs being available. Just to keep steady at the current employment rate, an additional 600 million jobs have to be created worldwide over the next 15 years. At the same time, nearly 40% of the young people in developing countries are currently unemployed.
More jobs, less poverty - is it really that simple?
Andrea Hagmann: Not quite, what’s important is the quality of the jobs in developing countries. We take care that the jobs we create meet international standards - and count on our partners who comply with these standards to be role models for other companies in their respective regions. Furthermore, it is important to us that the public profits from economic development, not just the lucky few. For example, large mining companies are prospering in Mongolia – in return, our approach is to support SME in order to give this important sector some stability too.
Does OeEB have a goal with regard to the number of jobs it wants to create each year?
W: No. And there is a reason for that: It is easy to count jobs that have been created directly - and we do that - but it is difficult to measure the number of jobs created indirectly. If we finance a textile company, we can say with precision: soon there will be 120 new jobs. In contrast, only a few jobs are directly connected to a harbour project or a wind farm. However many jobs can be created in the surrounding area when the energy supply or transportation network has been improved.
H: We try to document and analyse the impact we have as well as possible. 5,500 people are employed in real sector projects that we have financed directly. However, hundreds of thousands of people profit from our work through the financial institutions that we co-finance, for example by providing earmarked credit lines.
How do the fields of activities of development cooperation in the private and the public sector complement each other?
W: The public sector must lay the foundation so that the private sector can grow: Infrastructure like water supply, hospitals or schools. It can only create a limited number of jobs, though.
H: From our own experience, we know that the four large obstacles to SME development are corruption, unclear tax law, poor supply of electricity, and lack of financing. As a development bank, we only have an indirect influence on the first two items, but we can have a direct influence on the third and fourth items.
Does OeEB concentrate its activities on industry, services, or agriculture?
W: That depends entirely on the challenges faced by the respective country. Our focus is on small and medium-sized enterprises in various sectors. For example, the credit line to the Kenyan Chase Bank covers a broad spectrum. The bank finances SME that are engaged in trade, companies in the tourism business, and also companies in the food and agriculture sectors. Furthermore, the attention we pay to the energy sector creates the basis for developing the economy and thus for the creation of job.
OeEB invests a lot in microfinance. Can just a handful of dollars really create new jobs?
H: Microfinance first creates micro-companies - sole proprietorships or family-owned businesses. That is important, too. Ideally, these companies grow and manage to hire employees. We have seen great things happen, when, for example, someone in Albania started alone as a baker and now has a bakery with several employees. But you have to remember: Not everyone is cut out to be an entrepreneur - and an economy cannot consist of sole proprietorships alone.
Now there are microcredits available in some regions, but not the somewhat larger loans that companies need to grow. Why is that and what can a development bank do to counteract that?
W: Sometimes local banks are slow to grant mid-sized loans because they do not know how to assess the creditworthiness of a company. We transfer know-how with our Advisory Programmes that accompany many projects - something that differentiates us from normal banks. Currently a project is being started up in Tajikistan that encourages local banks to give loans by having a credit guarantee fund take over some of the risk for the bank. That is a new model for development finance institutions to give the local capital market a boost.
H: However, we also see that some microfinance institutions keep growing with their customers and support growing companies, too. You must not forget that financing is not the only thing that SME need: Equity is even harder to come by. It is hard enough to get it here, and countries without developed capital markets lack many opportunities - such as bond issues. Since 2012, OeEB can provide equity, too. With every euro of equity a company can borrow an additional two.