AFESD Activities
Contributions to Capital
Main Goals
By contributing to the capital of qualified enterprises, the Arab Fund aims to achieve two complementary goals, first: developing the private sector in Member States so that it plays an effective role in economic development at the local and regional levels, and secondly: achieving a profitable return on its investments in the capital of beneficiary enterprises.
Standard for Equity Participation
When considering proposals to subscribe to the capital of any establishment, the Fund takes into account the following considerations: the soundness of the capital structure of the concerned establishment and the seriousness of its management, the expectations of investment profitability and its effective contribution to the economic development of the concerned member state, the existence of an appropriate investment climate and an appropriate legal system and a regulatory framework in the country under whose laws the entity is established, and the existence of an appropriate mechanism for the timely and remunerative disposal of the shares subscribed by the Fund.
Limits on Capital Contribution
The Fund’s contribution to the capital of any qualified entity may not exceed the equivalent of ten million Kuwaiti Dinars, or the equivalent of 25% of the establishment’s subscribed capital, whichever is less, except in special cases approved by the Fund’s Board of Directors provided that the Fund does not own the largest amount of shares in the establishment’s capital or essential control of its management. In the case of a combination of a contribution to the capital of an enterprise and a loan to finance a project owned by the same enterprise, the total contribution of the Fund may not exceed the equivalent of ten million Kuwaiti Dinars or the equivalent of 35% of the net assets of the beneficiary enterprise, whichever is less.
Circulating of the Fund's Investments
Once the primary purpose of the financing is achieved and the concerned entity succeeds, the Fund will seek to dispose of its ownership of the entity by selling its shares, enabling it to circulate its invested resources and expand its base of activity, provided that this does not lead to harming the interest of the Fund or the interest of the concerned entity.
- Operations' Cycle
- Capital Contribution
- Contribution Procedure
The operations’ cycle, with regard to the Fund’s contributions to the capital of companies, begins when the Fund receives a request in this regard from the owners (or promoters) of the project. The Fund, then, studies the request from the technical and financial aspects, in addition to reviewing its market study, to determine whether the project is suitable for the Fund to contribute to the capital of the company that will implement it, the expected return from the project, and the potential risks, either during its construction phase or during its operation, in addition to the completion of the project’s financing plan, and that the amount required to be contributed by the Fund lies within the limits authorized by the Fund’s Board of Directors, in order to comply with the Policy Guidelines and Rules for Private Sector Operations.
In the event that the Fund agrees, in principle, to consider studying the funding request, the Fund asks the requesting entity to send the Fund a list of data and documents required for the initial and desk evaluation of the project.
Usually, several correspondences take place between the Fund and the owners (promoters) of the project before receiving all the required data and documents. Once this process is completed, the Fund then dispatches a field mission to evaluate the project, before presenting the matter to its Board of Directors. The tasks of the members of evaluation mission include reviewing the assumptions made in the feasibility and market studies, visiting the project site to verify the accuracy of the technical and financial matters mentioned in the contribution request, and agreeing with the project’s promoters on the necessary steps to launch the work included in it, such as forming the board of directors of the company that will supervise the implementation of the project, its operation and maintenance after its entry into the service, and the content of the agreement that will be signed between the various shareholders to protect the rights of the small shareholders (Shareholders’ Agreement).
Upon their return to the office, the members of the evaluation mission prepare a project evaluation report and a Director General’s report, to be presented to the Fund’s Board of Directors, seeking its approval to subscribe to the capital of the company that will execute and manage the project. After receiving the Board’s approval to contribute to the financing of the project, the Fund sends a letter to the Governor of the Arab Fund representing the country in which the project will be constructed to obtain his/her no-objection to the Fund’s contribution to it. Upon receipt of the no-objection letter from the Governor, or the expiry of the specified period for objecting to the contribution to the project, the Fund then negotiates with the project owner(s) about the amount of the contribution and the content of the Shareholders’ Agreement. After the Shareholders’ Agreement is drafted and signed by all shareholders, the Fund declares that the requirements for transferring its contribution to the project have been met.
Eligible Establishments and Projects
The Nature of the Entity
The entity to be financed shall have an independent legal personality, have sound financial and administrative status, conduct its activities on purely commercial basis, aim to contribute to the development of the economy of one or more member states, and fulfill the investment criteria set forth in the Arab Fund’s Policy Guidelines and Rules for Private Sector Operations.Types of Eligible Establishments
- Enterprises eligible to benefit from the Fund’s contribution to their capital, and to finance their projects, include production and service establishments and intermediary financial institutions that meet the eligibility requirements mentioned above.
- Priority in financing is given to public shareholding companies with shares listed on the stock market in the member state in which they were established. The Fund may, in suitable cases, contribute to the capital of other companies and institutions including closed joint stock companies, provided that an agreement has been made in advance, with other shareholders, and that there are adequate arrangements and an appropriate mechanism to ensure that the Fund can dispose of its shares by selling them at a profitable price in a timely manner.
- The Fund may contribute to the entities that are being established, provided that those establishments fulfill the eligibility conditions stipulated in the above mentioned guidelines, and that an agreement is reached with the founders of the concerned establishment to list its shares, within a specified period of time, in the stock market of the member state in which it was established or in any other suitable stock market.
Ownership of the Entity
- The Fund may provide financing to any institution established, or being established, in accordance with the laws of any member state, and that meets all the criteria set forth in these guidelines, and is owned by nationals of that country, or by nationals of member states, for the equivalent of no less than 51% of its issued capital.
- The Fund may provide financing to mixed enterprises where the public sector in the member state and private sector investors contributed to its capital, provided that they have full legal, administrative, financial and operational independence, that they are managed on a purely commercial basis, and that they meet all the criteria mentioned in the General Policy and Guidelines for Private Sector Operations.
- The Fund may provide financing to any entity established, or to be established, in accordance with the laws of a non-member state and owned by nationals of a member state or by nationals of member states equivalent to no less than 51% of its issued capital, and they have substantial control over its management, in accordance with the conditions set forth in the General Policy and Guidelines for Private Sector Operations.
- The Fund may provide financing to any entity that is established within the framework of the privatization of a public production establishment or a general services establishment provided by the state, where a member state (or one or more of institutions) contributed to its capital with any amount of shares, as long as an agreement is reached regarding arrangements, acceptable to the Fund, assuring that the private investor, at the appropriate time and in a general manner, owns a portion of the shares representing no less than 51% of the companys’ issued capital.
Objectives of the Establishment or Project
The establishments and projects for which financing is provided should aim at meeting the basic needs of the citizens of member states and contributing to achieving an added value to the economy of the member state in whose territory the project is established, or in which the entity is established. This is accomplished through:- Exploitation of natural resources and local raw materials.
- Creating local or regional employment opportunities.
- Increasing productivity and optimal use of capital and labor.
- Transferring of appropriate technology or localization of modern technologies in member states.
- Generating or providing foreign currency.
- Providing essential services, including marketing services and modern management methods.
- Generating new opportunities for export and marketing.
Required Information, Data and Documents
Introduction to the Project
- The goal of the Project.
- Project Description.
- The Need for the Project.
Information about the Promoters and the Company to Implement the Project
It includes the financial solvency of the promoters and the general perception of the company (existing or to be established).
Feasibility Study
It includes a technical and economic feasibility study for the project and a recent
market study for it.
Project Costs
The basic elements of the project, working capital, interests during implementation, and reserves (quantities and prices).
Financing Plan
The financing plan includes the distribution of costs between founders and financiers, on the one hand, and the distribution of financing between loans and equity, on the other.
The most Suitable Alternative
The alternatives that have been studied and is the proposed alternative the best available one.
Contribution Procedure
Funding for private sector projects is usually provided through two sources of financing, either from shareholders (equity) or through borrowing from banks (debt). It is customary for the shareholders to contribute about 30-40% of the financing and to borrow the rest from the banks (from 60% to 70% of the amount required for the project).
Sometimes banks require that the shareholders transfer their entire equity contributions before the company can utilize the proceeds of the bank loans. At other times, the banks agree that their participation in covering the costs of the project proceed along the same pace as the contributions of the shareholders, each in proportion to its share in the financing of the project.
Transferring the Fund's Contributions to the Capital of Companies
Upon the registration and formation of the company that will manage the project, each shareholder designates its member(s) to the company’s Board of Directors (BOD). The members of the Board then select the Chairman of the Board and the Chief Executive Officer (CEO). The CEO undertakes the executive management of the company, and the Board of Directors supervises his/her work.
Usually, the following steps are taken for the Arab Fund to transfer its contributions to the capital of the companies in which it contributes:
- The CEO prepares a budget for the company that includes the capital and operational expenses required to enable the company to perform its work and implement the project for which it was established.
- The budget also includes the resources required each year, the sources of obtaining them (capital contributions and loans), and the timing of their availability to meet the company’s contractual obligations.
- The budget is then presented to the BOD for their approval.
- The CEO of the company then addresses the Arab Fund and the rest of the shareholders requesting that each of them transfer its share of the required contribution, while attaching a copy of the minutes of meeting of the company’s Board of Directors in which the Board agreed to recall part or all the company’s capital.
This process is repeated every time the company needs to draw from its capital to meet the construction/ operational financial requirements.