BRUSSELS — The European Commission has revealed a dozen guarantee tools to boost private investment in Africa and the European Union’s neighborhood. However, a review of proposals to support agriculture has been postponed as officials acknowledged they were not sufficiently “mature.”
The strategic board of the European Fund for Sustainable Development this week allocated €800 million ($930 million) of the €1.5 billion available for guarantees under the fund, designed to cover certain potential losses in countries and sectors often deemed too risky by the private sector.
“There are still many unknowns related to where project funding will end up, which private sector actors will participate, and who the beneficiaries of projects financed due to the EFSD guarantees will be,” said Erik Lundsgaarde, senior researcher at the Danish Institute for International Studies, who has previously written on the EFSD.
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“This next phase of implementation will reveal the balance that the EFSD strikes between a donor-driven and demand-driven development cooperation approach.”
The commission said it expects to sign the first contracts for guarantee agreements in the second half of this year, with financial institutions starting to rollout projects in early 2019.
One model developed with the Bill & Melinda Gates Foundation and the European Investment Bank and unveiled Wednesday, aims to encourage private providers of digitized medical testing services to contract with governments in low-income countries. Up to €80 million of the EFSD Guarantee will be available to cover the risk that the government does not pay. This will be combined with up to €12.5 million of technical assistance.
Other tools announced this week involve plans to offer banks and microfinance institutions portfolio guarantees containing loans to displaced and underserved entrepreneurs in sub-Saharan Africa and the EU neighborhood; the promise to avoid losses if national utilities do not pay for renewable energy sold by a new power intermediary in Southern Africa; and lowering the risk for private investors in urban infrastructure projects, such as on sewerage, street lights, and clean water.
EFSD, with its guarantees and blending operations combining grants and loans, constitutes the first pillar of the EU External Investment Plan. The second pillar is technical assistance, followed by policy dialogue, aimed at creating a conducive business environment.
The commission estimates, based on its experience with blended finance since 2007, that its initial investment of up to €4.1 billion under the EIP should generate €44 billion in private investment by 2020. Brussels also wants EU member states to match its contribution, but so far none have joined the scheme, prompting a scolding reminder from Commission President Jean-Claude Juncker at the European Development Days last month.
Lundsgaarde said that while EFSD builds on the EU’s existing blending experience, the test is whether it can meet expectations on encouraging investments in riskier settings. This week’s report on blending operations in 2017 showed the EU contributed €900 million to 30 projects in sub-Saharan Africa to leverage investment, almost half of which — 47.9 percent — went toward supporting transport infrastructure. A further 36.2 percent went to energy projects.
The guarantee component of the investment plan is designed to see trusted financial institutions, such as the Agence Française de Développement and EIB, use the guarantee through projects financed with private investors and companies, local banks in partner countries, and institutional investors. They will pay a fee to the commission for the guarantee, which goes back into the fund, and which will be lower for those operating in least-developed and fragile countries.
The financial institutions had prepared proposals to access the guarantee under five windows: Sustainable energy and connectivity; financing for micro, small and medium enterprises; sustainable agriculture, rural entrepreneurs, and agroindustry; sustainable cities; and digitalization.
However, despite elements of agriculture appearing in plans to support small businesses, the commission said proposals targeted at agriculture will now be reviewed after the summer.
"Proposals for guarantee programs in the agricultural window were not completely mature yet and needed some further elaboration,” an EU source said. “We are confident that among the revised proposals to be presented in the autumn, there will also be some targeting the agricultural window."
“For some sectors the [financial institutions] were better prepared than for others,” Linda McAvan, chair of the European Parliament’s development committee, which has observer status on the fund’s strategic board, told Devex. “It is yet too early to say whether this is a problem for the future or just for the start.”
Hanna Saarinen, policy adviser at Oxfam EU, said that the agribusiness window had failed to attract enough interest: “They were reserving a lot of funding for that and they would be able to put a lot of financial resources into it, but simply there is not enough traction within the financial institutions to propose projects.”
She added that this highlighted civil society’s critique of the entire EIP, reflected in an open letter that a dozen NGOs, including CARE International, World Vision, and ActionAid wrote to the commission in May.
“The theory of change that they have simply doesn’t work for blending and private sector cooperation in development,” Saarinen said, citing corruption and a lack of legal certainty as major barriers for companies.
“Even if the EU is willing to put in some de-risking funding it still doesn’t mean the private companies would want to go and invest,” she said.
Saarinen added that the larger development banks will not be the ones operating at country level: “They will also need to find their partners, which are often the local development banks or often the local commercial banks,” arguing that none of these players are as “risk-tolerant” as the commission would like.
Investment in agriculture is particularly treacherous, Saarinen said, citing low productivity in many African countries, the vicissitudes of climate change, and limited access to infrastructure and technology.
As a result, she warned, the EIP is unlikely to reach those most in need, but rather “the farmers who are already a little bit tapped into regional markets, who already have some investment capacity, who already are a little bit better equipped. But then the most marginalized who don’t have secure land rights or the market access or the financial access will be left behind even more.”
McAvan told Devex: “From what we have learned more than half of the guarantee will be used for sub-Saharan Africa, which is more than what is required by the EFSD regulation. To what extent those projects will be in the least-developed countries of sub-Saharan Africa remains to be seen and we do believe the commission will provide more details on this than it has so far.”
In their letter, the NGOs called for an impact assessment of the EIP, before it is expanded as the commission has proposed under the EU’s 2021-2027 budget, currently being negotiated between the EU institutions.
“So far, no contract to award any EIP guarantee has even been signed,” said María José Romero, policy and advocacy manager at the European Network on Debt and Development.
“The EU should only carry out this expansion in the next budget if there is proof that its approach genuinely contributes to Agenda 2030’s core objective of leaving no one behind."
NGOs also argued that sectors such as health and education should be excluded from the EIP “because of the risk of eroding universal access by privatizing essential public services.”
Yet, Lucia Conti, EU focal point for the AVSI Foundation, said that is not a ubiquitous view and was one of the reasons her organization did not sign the NGOs’ letter. She said AVSI’s experience led it to believe the private sector, in partnership with civil society organizations, can play an important role in poverty reduction.
The European Commission did not respond to the NGOs’ concerns prior to publication.