Q&A: EIB’s new development branch

This week, the European Investment Bank’s board of directors endorsed management’s proposal to create a new development branch for work beyond the European Union. Despite lending €10.2 billion — 13% of its total financing — outside the bloc last year, EIB has long been criticized in development circles for being too risk-averse, having too few staff outside Luxembourg, and insufficiently consulting the European Commission in Brussels. This week’s move is an attempt to address that, after three years of often bruising expert reports on the so-called European Financial Architecture for Development. That process ended in June, with guidance from EU states to the wholly-EU-owned EIB and the mixed-ownership European Bank for Reconstruction and Development to “maximize their development impact” without any additional costs. Attempting to strike that balance, EIB announced in a press release Wednesday that it would “reorganise its activities outside the European Union and increase its presence on the ground, developing more targeted strategies and services in close cooperation with partners.” If we increase the local presence ... it is very likely that some of these very complicated projects that we finance will pick up faster. --— Markus Berndt, strategy group director, European Investment Bank A first regional hub in Nairobi, Kenya, and an advisory group on the bank’s operations outside the EU were also mentioned, though details remain scarce. To find out more, we spoke to Markus Berndt, director of the bank’s strategy group. This conversation has been edited for length and clarity. What is this new branch and what is it not? By setting up a branch we provide for dedicated financials to this business line of the EIB. Currently, we have [the] capital for everything we do, we have costs that enable us to do everything we do, we have expectations with regards to what we do, KPIs, etc. And the defining thing of the branch is that we say, “look, there is a different business model that we need outside the EU, we need different objectives.” But in order to do that we need to separate the two a bit, because the crucial point, and rightly so, for the finance ministers that represent the member states in this bank, is, of course, to make sure that whatever we do outside the EU is not causing problems for what we do inside the EU. How is that different from a subsidiary? There is a significant difference, which is that a branch is not a legal entity. The EIB board continues to have the role to make sure that the branch doesn't all of a sudden start taking up all the bank’s resources. It has to ensure that this allocation of resources between EU objectives inside the EU and outside the EU is in line with the strategic guidance of the EIB board. How much will it cost? It won’t cost anything to the EU taxpayer, nor will it cost anything to the EIB’s operations inside the EU. What it will cost will be covered by the revenues it will generate. So the net costs are zero. That's what promotional banking does, right? It costs you to put money into the capital of the banks, but then you have a business model that allows you to generate revenues that cover the cost of the banking itself. If we increase the local presence — and that’s one of the parts that we discussed with the board, this is one of the crucial elements in the changed business model — it is very likely that some of these very complicated projects that we finance will pick up faster. If you have people on the ground that can work with the promoters, whatever the project is, and make sure that it is progressing faster, we will disburse faster and if we disburse faster that means that we get interest payments faster, and overall it will increase our revenues. “That’s why it’s so important that we have this dedicated branch, so we know what is outside and what's inside the EU, and that then gives comfort to the rest of the organization.” --— Markus Berndt, strategy group director, European Investment Bank These are things that were very difficult to adjust inside the EU, that make a lot of sense outside the EU and will generate more revenues with which we can then finance the extra costs. Not taxpayer costs, but costs for example for local staff in partner countries. If you've still got the same amount of money for external work, and then you do more development-friendly investments, does that imply you're going to do fewer but riskier projects? Of course, you can have dedicated incentives and dedicated performance indicators and these could then be used to deviate from our EU operations. We could for example say we want to maximize the development impact in this particular area and therefore that might entail incentives and guidance that would lead to higher risk taking in return for lower volumes. The overall risk capacity that you have will stay the same because that is the resources that the EU in its own bank has dedicated to non-EU activity. But hopefully, you would only do that if the higher-risk financial instrument of lower volume has a higher impact than the high-volume low-risk. That’s why it’s so important that we have this dedicated branch, so we know what is outside and what's inside the EU, and that then gives comfort to the rest of the organization. Some areas, such as private sector support, are inherently more risky than others … Yes, absolutely. And if we think that private sector support is more valuable to our objectives, and more in line with what the priorities are of the European Union, the branch enables us to do precisely that. How will the new advisory group work? The proposal is to have a group in our governance, in the approval process for projects, in the process that defines policy strategies, advising the board — like we have a similar group for EU operations. This is a really integral part of the governance and that's why we have to come back in the coming months to have these nitty-gritty discussions about what are the terms of reference, and what information goes where, when, etc. One of the key suggestions in the EFAD process was that we should somehow find a way to have more direct interaction with those policymakers in the EU — member states, European Commission, European External Action Service — who really care about the development side of what the EIB does. How will the EU delegation be involved? As a policy, wherever we could or was physically possible, we have our local presence co-located with the EU delegations. We have found over the years with the offices that we have that this is working extremely well. In the latest offices that we opened, these were all in the EU delegation and that's what we plan to do going forward, including in the hub in Nairobi. That’s where [work with European national DFIs] is happening as well. Most importantly, it ensures on the ground that policy alignment is there from the first second and not only after Brussels and Luxembourg have figured out what our policy is in that country. How many staff are involved? Right now we have around 900 staff working on non-EU things across the entire organization. That doesn't mean that all these people will move to the branch because we do not want to lose at any point in time the great synergies that we have with the EU business. There will be some people moving. I don't want to mention a number before we have that clearly approved by the relevant people. We must be able to talk about a ballpark though because you can't show that something is financially sustainable without giving a ballpark figure for how many people it involves, right? The ballpark figure is such that the revenues will cover the costs. I can give you one example: We do not fully use local agents, like other development finance institutions, who often can bridge between the local market knowledge and our expertise that we bring. And there we are thinking about a ballpark figure where we would almost double that staff. So this is not like a marginal 1% or 2%, it's a real increase of local presence. If you are trying to cover a project in Burkina Faso from Nairobi you are still not ‘on the ground,’ so how do you see this working and being rolled out across other regions? We have approval of the concept and approval of the fact that we start in Nairobi as a pilot, and then roll it out. I don't think we can name the following hubs already. But I think the fact that it’s an East Africa hub gives you an idea that there will be other regions of Africa, which has been a priority continent, that will need to be covered. What about Asia, given the Indo-Pacific tilt of the European Commission at the moment? I would probably think that given the EU’s priorities — not ours but the EU’s — that there could be a higher push to go to the EU’s eastern neighborhood once you leave Africa. What happens now? The proposal that was endorsed was that we will set up a branch on the first of January next year. So if we want to give ourselves a bit of a Christmas break, we have three months to implement what we have proposed.