European Investment Bank European Investment Bank In Africa ...


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European Investment Bank European Investment Bank In Africa ...

  1. 1. European Investment Bank In Africa Presentation Structure The Cotonou Agreement and the Investment Facility
  2. 2. HISTORICAL BACKGROUND EIB set up in 1958 primarily to assist development in poorer regions of Europe. Europe still it’s main role – but the Bank now works in 140 other countries, under EU cooperation agreements. Biggest group of countries are the ACP – African, Caribbean & Pacific countries. EIB working in some of them for over 40 years. In the ACP, the EIB has channelled EUR 10 billion to investment. EUR 3.0 billion + since 2000.
  3. 3. DIFFERENT FRAMEWORKS In the 60’s – 70’s Yaoundé Conventions – limited; In the 70’s – 2003 Four Lomé Conventions – broadened out; lot of State sector projects; From 2003 The ACP – EU Cotonou Partnership Agreement, which has set up a specific “Investment Facility” for the ACP, run by the EIB – special focus on private sector. CHANGE OF EMPHASIS Emphasis WAS on public sector as driver of development Led to inefficiencies, poor utilisation of resources Immune to signals from the market Creativity stifled Under Cotonou Agreement, emphasis IS on the private sector to encourage ideas, creativity and entrepreneurship; but with discipline of the market (but private sector development is not a panacea!)
  4. 4. FINANCING FOR THE ACPs UNDER COTONOU European Development Fund European Commission European Investment Bank Grant aid for long-term Investment Facility EIB’s own resources development (national and Loans/equity/ Loans for investment regional programmes) guarantees projects for investment projects EUR 11.3bn EUR 2.2 bn EUR 1.7bn +EUR 1.0 bn THE ROLE OF THE DIFFERENT INSTITUTIONS The European Commission supports governance, regulatory and judicial improvements through the NIP The CDE supports entrepreneurs and private sector organisations The EIB offers long-term resources for investment (Not rigid – some overlaps in practice )
  5. 5. THE EIB MANDATE UNDER COTONOU (1) The IF: a revolving fund managed along commercial principles to be financially sustainable re-flows to be invested in new projects Terms and conditions more closely aligned with market practice Risk-sharing instruments, local currency loans and guarantees THE EIB MANDATE UNDER COTONOU (2) Subsidies (limited) available for public sector projects, to support environmental or social components or for project-related technical assistance Special conditions to lower cost of finance to State or State agencies, utilities in HIPC – Heavily Indebted Poor Countries Complementarities sought with operations/ instruments of EU, bilateral or multilateral institutions Play a catalytic role in mobilising local resources and encouraging foreign lending and investment
  6. 6. INVESTMENT FACILITY - THE OBJECTIVES Private Sector Development Enhance Local Private Sector Support Foreign Direct Investment Development of Local Financial Sector Support for Commercially Viable Public Enterprises INVESTMENT FACILITY - THE CONSTRAINTS Small markets, hence limited investment opportunities Limited access to skills and technology Shortage of finance through local savings / capital Weak regulatory and judicial framework, bureaucracy For foreign investors High risk perception High cost of information Hence : insufficient foreign direct investment
  7. 7. WHO ARE THE POTENTIAL BENEFICIARIES? Private entrepreneurs and commercially viable public sector enterprises ACP and international entrepreneurs Large enterprises and SMEs SECTORS OF INTERVENTION Almost all sectors are eligible – examples: Industry Transport (revenue earning) Infrastructure: e.g. power, telecoms, water supply and sewerage Mining Tourism Health and education (revenue earning) Exceptions are: Real estate and housing Arms Drugs and tobacco Casinos
  8. 8. PROJECT REQUIREMENTS Projects must be viable: Technically Financially Economically Environmentally Significant financial contribution from promoter Co-financiers (EIB maximum 50% of project cost) Procurement must be in line with EIB guidelines DIRECT AND INDIRECT OPERATIONS The EIB has two modes of intervention Direct financing – for large projects, typically a project cost of at least EUR 15-20 million with a minimum financing requirement from the EIB of EUR 5-10 million. Indirect financing, through financial intermediaries – any project smaller than the above limits. EIB aims to have financial intermediaries active throughout the ACP countries.
  9. 9. INDIRECT OPERATIONS - DETAILS Global loans = Lines of Credit to: Local dfi:s Local commercial banks Other local financial intermediaries Due diligence, credit risk and credit decision LOCAL EIB funds => tenor RANGE OF FINANCIAL INSTRUMENTS AVAILABLE EIB’s own resources Investment Facility Senior debt: Pricing: EIB reference rate. Pricing: EIB reference rate + mark-up. Security: 1st class or prime-quality Security: guarantee (international or security (with possibility of political risk local) or project security. carve-out). Currency: EUR, USD, GBP and ZAR. Currency: EUR (possibility of other hard or local currencies). Junior/subordinated - Pricing: EIB reference rate + mark-up. debt: Security: project guarantee or other covenants. Currency: EUR (possibility of other hard or local currencies). Quasi equity: - Pricing: variable remuneration as a participating or function of performance. conditional loans: Security: usually unsecured or junior status with covenants. Currency: EUR (possibility of other hard or local currencies). Equity participation: - Pricing: dividends / capital gains. Security: none. Currency:local currency. Guarantees Of loans, bond issues, commercial paper
  10. 10. TERMS AND CONDITIONS – GUARANTEES Guarantees will be priced to reflect The characteristics of the operations The risks insured Operations can be Guarantee of local currency loans/bond issues Guarantee of local bank portfolios THE INVESTMENT FACILITY Launched mid - 2003 Up to end 2005 financial year, EUR 830 million for about 50 projects + EUR 250 million from the EIB’s own resources Accelerating : in 2005: Signed EUR 350 million from IF EUR 150 million from EIB own resources
  11. 11. ACP – IF SIGNATURES IN 2005 BY SECTOR 12% 1% 9% 1% Fisheries 4% Infrastructure Energy Global Loans 27% Industry Services Transports 29% Water, sew erage 17% 2005 : IN SADC REGION Almost EUR 270 million of which EUR 183 million IF in Madagascar, Mauritius, Mozambique and Zambia EUR 85 million in RSA.
  12. 12. SADC : EXAMPLE PROJECTS Botswana Flower Farm EUR 2m Madagascar Aquaculture EUR 5m Hotels & Tourism EUR 11.1m Mauritius Global Loan for SMEs EUR 20m Container Terminal EUR 14m Titanium Production EUR 57m Mozambique Natural Gas Development EUR 45m Zambia Copper Mining & Processing EUR 72m OTHER EXAMPLES, SIGNED IN 2005 Kenya Geothermal Power Station EUR 32m Senegal Ferry Boat EUR 10 m Chad Sugar Plantation / Processing EUR 11.8 m Nigeria Cement EUR 33 m Ethiopia Hydro-Power EUR 50 m
  13. 13. TERMS AND CONDITIONS - LOANS Market related terms In foreign currency • rate close to EIB rate for loans in Europe, plus • markup to cover perceived risks In local currency (whenever feasible) • at local market rate if adequate benchmark available, plus • markup to cover perceived risks In some cases, an interest rate subsidy can be granted, if its justification is clearly demonstrable TERMS AND CONDITIONS – QUASI-EQUITY Ex: convertible bonds, participating loans, conditional loans, etc. The remuneration is linked to the financial return of the project. It is normally composed of a fixed interest rate of not more than 3% and a variable component related to the project performance.
  14. 14. LARGE INVESTMENTS ONLY ? The EIB is a large institution financially, but small in staff structure – keeps costs down! It cannot handle requests for finances from SMEs: would mean a considerable increase in bureaucracy and costs. EIB seeks to cooperate with local financial sector (banks, DFIs, leasing companies), to channel funds through them. IF currently works with almost 100 of them in the ACP. EXPERIENCE TO DATE AND ISSUES ARISING Significant change in the nature of the Bank’s operations in ACP Public Private sector Different risk profile Competitiveness Market related terms Longer project cycle Need to reach a balance between development objectives of Cotonou and financial sustainability
  15. 15. EXPERIENCE TO DATE AND ISSUES ARISING IF = risk bearing instrument that should operate wherever risk perception is high and in as many as ACP countries as possible => need for a flexible risk approach => need for sufficient concessionality for public sector in HIPC countries « Market related terms » in ACP countries What are the benchmarks (e.g. financial sector)? HEAVY COMMITTMENT FOR COTONOU 20 year partnership between EU & ACP. So far 45% increase in ACP staff by EIB Resource and Business Development and Portfolio Management and Policy divisions supporting the geographical staff Opening of three regional representations in Africa in October 2005 and this year in the Caribbean and Pacific
  16. 16. HORIZON Taking account of issues mentioned above, it is difficult to establish a precise business plan; Moreover, appraisal process is often time consuming and complex and private sector’s demand for funds highly variable; HOWEVER, growing rhythm of operations and good pipeline. On a prudent base case scenario, total approvals should exceed the IF initial endowment by the end of 2007. Already agreed that there will be extra funds for the IF. SOUTH AFRICA (1) Different mandates. EIB to assist balanced development in RSA; Bank authorised to lend EUR 300 m (1995 – 1997) EUR 375 m (1998 – 2000) EUR 825 m (2000 – 2006)
  17. 17. SOUTH AFRICA (2) Total amount lent : Approaching EUR 1 400 m SOUTH AFRICA (3) In terms of contracts 40 % of funds has gone to private sector 60 % to public sector In terms of final beneficiaries 60 % to private or mixed private/public sector 40 % to public sector
  18. 18. SOUTH AFRICA (4) Main sectors Municipal infrastructure Gas/electricity Water supply Telecoms Small & medium-scale enterprises In 2005: EUR 60m for municipal infrastructure in Tshwane & Ethekwini EUR 85m for Vaal Water resource & development. SOUTH AFRICA (5) In addition to lending from our funds, EIB co-manages with IDC EUR 55 m of EU budgetary funds in a ‘Risk Capital Facility’ for SMEs to enhance Black Economic Empowerment and to create jobs This has just been renewed – fresh EUR 50m
  19. 19. Contact: Head of Regional Representation, David White +27 12 425 0460