European Development Financing in Africa

Last week this column focused on the Fourth Europe-Africa Summit which took place in Brussels during 3-4 April. I would like to extend the reflections to EU development financing in Africa, a subject that is not much understood by people working in finance and banking.

There is much hype about China and the BRICS in Africa. Through the framework of the Tokyo International Conference on African Development (TICAD), Japan is also an important player in African financing. However, Europe remains by far the largest ODA financier on the continent of Africa, providing in excess of US$ 4 billion annually to the continent. What is even more remarkable is that most of it – over 90 percent – is by way of grants. Indeed, for countries such as Ghana, Uganda, Tanzania and Mozambique, Europe accounts for nearly 50% of their budgetary revenues through its budget support mechanism. No other financier comes remotely close.

The European Development Fund (EDF) has been the main institutional vehicle for EU financing to Africa, the Caribbean and the Pacific (ACP) group of countries. EU financial assistance under the 9th EDF amounted €13. 5 billion in grants, in addition to €1.7 billion in the form of loans by the European Investment Bank (EIB) made from its own resources covering the period 2000 – 2007. This is on top of reimbursable loans, risk capital and guarantees that are provided through the European Investment Bank (EIB), an organisation whose net assets surpass those of the World Bank. Total resources made available under the 10th EDF to cover the six year period 2008 – 2013 amounted to €22.682 billion, of which 6.8% was committed to the investment facility managed by the EIB. During year’s end 2011, the EU Council agreed an additional €31.5 billion for the EDF-11 funding cycle covering the years 2014—2020.

In response to the impact of the global financial crisis, the EU Commission allocated some allocated €500 million under its Vulnerability FLEX mechanism. The mechanism works pre-emptively based on forecasts of fiscal losses and other vulnerability criteria, providing rapid and targeted grants that is complimentary to loan-based assistance from the Bretton Woods institutions and the Regional Development Banks. The VFLEX mechanism comes on top of the €1 billion Food Facility which supplements the €200 million from EDF-10 resources that have been committed to food security.

The ACP Investment Facility (ACPIF) is a € 2.2 billion financing window created by the EIB to promote the private sector and fight poverty in the ACP countries. The Facility has been established within the Framework of the Cotonou Agreement and is being managed by the EIB as a fund, in parallel with a renewed commitment by the Bank to provide an additional EUR 1.7 billion in long-term loans from its own resources. Funds for the Investment Facility come from the resources of the EU Member states and loans from the Facility are guaranteed by the Member States. The ACPIF supports private sector and commercially run public sector projects with loans, guarantees and a series of risk sharing instruments.

Over the past four decades, the EIB has channeled some €10 billion into African countries. To manage the business generated by the Facility, the EIB also announced the opening of three new regional offices in Dakar, Nairobi and Pretoria to assure its permanent presence in Western, Eastern and Southern Africa and to service the respective business communities in the surrounding group of countries. The ACPIF provides risk sharing financing instruments for investment projects in most sectors of the economy. This includes projects in the commercially run public sector and in the infrastructure sector which are key to the development of the private sector, as well as the financial sector. Support is provided through debt finance, guarantees, equity-type financing, and acting as an investor in private equity funds. All projects funded by the IF must be economically, financially, technically and environmentally viable.

Another important mechanism is the €1 billion Africa Infrastructure Trust Fund (AITF), established within the framework of the EU’s response to the 2005 Gleneagles Declaration of commitment to support infrastructure projects with a cross-border or regional impact in sub-Saharan Africa. The AITF blends grants from the European Commission and EU Member States with the lending and technical capacities of the EIB and other EU development financiers. The Trust Fund supports energy, transport, water and telecommunications projects through interest rate subsidies, technical assistance, grants for social or environmental components of projects and grants covering early-stage premiums on risk mitigation insurance. The AITF aims to increase EU investments in regional infrastructure in Africa, working together with other initiatives, actors and instruments, and on the basis of African ownership.

Funding support for eligible projects can take four different forms: (i) interest rate subsidies; (ii) technical assistance; (iii) direct grants for project components with substantial, demonstrable social or environmental benefits; and (iv) insurance premiums against all forms of risk, thereby fulfilling an important catalytic role in mobilising finance for projects. To be eligible, infrastructure projects must be trans-border, or have to be national projects with a regional impact on two or more countries. Eligible sectors are: (i) energy; (ii) transport (rail, road, air, maritime and inland waterways); (iii) water; and (iv) information technology, including telecommunications infrastructure.

Although Nigeria is not a major aid recipient as compared to many other developing countries, the EU does view Nigeria as a country of strategic importance for its engagement with Africa. Nigeria’s vast population is a potentially attractive market for EU investors. But Nigeria also has many poor people, a fact that poses a challenge to European development efforts. During the 2008—2013 period, EU grants to Nigeria stood at €677 million. This figure is likely to substantially increase as we finalise the programming process under the EDF-11 funding cycle. Federal and State Governments have opportunity to access some of these resources. Our commercial banks and industrial companies also need to engage more with the EIB for lines of credit, loans and other facilities to boost their businesses.

OBADIAH MAILAFIA