FOE-DPF-01_Financing

The EiB: An effective implementing partner for European Development Policy

Over the decades, the EU’s development policies have been anchored in its partnership agreements with the African, Caribbean and Pacific (ACP) group of countries. These agreements defined the European Investment Bank’s lending policies to Africa. Specifically, under the first Yaounde convention of 1964-1975, the EIB focused on manufacturing and transport infrastructure. Under the 1975-2000 Lome agreement, the EIB targeted infrastructure for water and sustainable energy. The current Cotonou agreement, set to last until 2020, prioritises growth and poverty reduction through private sector development.

From modest beginnings, the EIB has become the world’s largest multilateral lender. Being the ‘EU Bank’, about 90% of its loans are concentrated in member states, but the EIB has also expanded its activities in Africa. In 2014, it provided more than €2.5bn for long-term investments in energy, water, transport and education, and supported private sector development across Africa. Besides funds, the EIB contributes expertise for project evaluation, especially in innovative financing.

  1. Achievements

As the only multilateral development bank (MDB) extending loans to both EU and African countries, the EIB is uniquely positioned to implement EU development policy in the area of investment. Financed by the European Development Fund, member state budgets and, equally importantly, EIB resources raised on international capital markets, the EIB in Africa – often in cooperation with the African Development Bank (AfDB) – focuses on growth and poverty reduction through private sector development as well as intra- and inter-regional infrastructure.

In Kenya, the Lake Turkana Wind Power project, a 365-turbine wind farm aiming to transform the supply of renewable energy in East Africa, is receiving €200m in EIB support – making it the single largest financier of the project. The African Development Bank is co-financing the project, which is the largest renewable energy project ever undertaken in sub-Saharan Africa, and expected to eventually generate around 20% of Kenya’s power.

In 2014, the EIB also provided support for upgrading energy infrastructure in Guinea. The EIB financed about 40% of the project, with additional funds coming from the government, the African Development Bank, the Islamic Development Bank and the World Bank. The investment plan aims at the re-development of four hydropower plants, raising Guinea’s electricity generation capacity from 75MW to 122MW. Distribution in some parts of the country will be also upgraded. The project is expected to positively impact medical treatment activities, though will not extend to the areas most affected by Ebola.

Besides large infrastructure projects, the EIB prioritises financial inclusion and supports entrepreneurship through the creation of regional micro-finance facilities such as the East African Community (EAC) Microfinance Global Authorisation. Similar to the AfDB, the EIB provides long-term local currency loans that allow financial intermediaries to on-lend to SMEs. In Kenya, for example, the EIB extended 15,000 long-term loans totalling €8m to entrepreneurs, almost half of whom were women, creating about 30,000 jobs.

  1. Moving Forward, Deepening EIB-AfDB Cooperation  

 

The EIB is currently launching new initiatives to address Europe’s stubbornly high youth unemployment. One of the main instruments of this initiative is the ‘youth guarantee’, which aims to provide those aged 25 and under with a high-quality offer for employment, continued education, an apprenticeship or traineeship within four months of leaving school or becoming unemployed. Loans to SMEs will complement this instrument. There will also be a focus on soft expenditures, supporting training, education for teachers and job search assistance.

Given Africa’s youthful population and the major challenge that youth unemployment presents for the continent, the AfDB and EIB could form a strategic partnership to share experiences and conduct joint investments in Africa. The initiative could, on a pilot basis, also facilitate the free flow of labour between Africa and Europe to encourage the circulation of knowledge and ideas.

The AfDB and EIB may also benefit from cooperating in support of innovation and technology. The EIB’s flagship initiative for financing innovators, InnovFin, which offers financing options tailored to both European SMEs and larger enterprises, could be a good starting point for this joint endeavour. Africa also has its own experiences to share, with East Africa a global leader in mobile banking and the uptake of mobile technologies more broadly.

Africa is facing major financing and human capital gaps, which constrain it from reaching its full potential. Given the continent’s rapid growth and the fiscal challenges faced by advanced economies, official development assistance can no longer effectively address Africa’s needs alone. New and innovative sources of financing, increasingly involving the private sector or at least public-private partnerships (PPPs), will need to be found and incentivised for investing in Africa. The actions of MDBs such as the EIB and the AfDB, especially if in partnership, can facilitate private sector funding by providing seed funds and mitigating risks through partial credit or risk guarantees. While investing in Africa is indeed riskier than in advanced economies, perceptions that deter potential investors often far exceed the reality.

IMAGE CREDITS: CC / FLICKR – USAID U.S. Agency for International Development