The EIB in Africa: How the Juncker plan might work

The EIB is expected to be the driving force behind European Commission President Jean-Claude Juncker’s plans to turn between €20 - €25 billion of seed money into a €315 billion infrastructure investment fund.

There are many questions about how the Juncker plan will work in practice - the bank’s work in east Africa could serve as a good example.

The sums involved in financing energy and transport programmes are too large for the EIB to fund alone. So it puts up a portion of the money in a loan with an attractive interest rate, while other development banks stump up the rest.

Infrastructure projects are the main jewels in the EIB’s East African crown. The EIB likes to highlight its role in the Olkaria geothermal power stations in Nakuru, about 100 kilometres north of the Kenyan capital Nairobi in the Rift Valley, and with a wind farm in the country’s Turkana province to which the EIB is the largest single lender to the tune of €200 million.

“We’re very happy to be part of this success story,” says Kurt Sorenson of the Olkaria power stations.

Sorenson, the EIB’s bureau chief in Nairobi, co-ordinates its activities in the region. He tells EUobserver that the latest tender for the fourth turbine at Olkaria was so competitive that not all of the EU’s available money was tapped. The bank will provide a €119 million loan to a programme meant to increase the capacity of the Kenyan electricity grid by 15 percent.

The EIB is also expected to stump up a €100 million loan as part of a highly ambitious project co-ordinated by the EU, World Bank and the Kenyan government to set up a €1 billion bus network in a bid to unblock an increasingly grid-locked Nairobi.

European taxpayers

Why is European taxpayers’ money being used in such ways?

Part of the rationale is that using EIB loans rather than grants can relieve the burden on cash-strapped governments in East Africa, but also on their counterparts in Europe, who are keen to reduce the amount of aid they offer to developing countries.

Another reason is that the projects reflect the EU’s priorities in the region and are a relatively cheap form of development financing. The EIB, with its triple-A credit rating, finds it very easy to borrow money on the markets, and only tends to invest in safe projects.

They are also filling a gap in the market since commercial banks do not tend to invest in infrastructure projects where the pay back will be over the long term and the profitability steady rather than spectacular.

In line with the Cotonou agreement signed between the EU and African countries in 2000, the EIB focuses its activities in the region on directly supporting the private sector and funding infrastructure projects that will help develop business opportunities.

The EIB is not the only European player in town. The German and French national development banks both have more people on the ground in the region, and regularly contribute funds to the same projects. The World Bank and the Japanese development bank are also frequent funding partners.

However, the EIB’s role in sub-Saharan Africa goes beyond investment in infrastructure. It also provides support for local banks, including around €700 million in support for Kenya’s growing financial sector over the past five years. Unlike most commercial banks in East Africa, the EIB offers local currency loans for twenty years and dollar and euro loans for up to ten years.

Largest project

Last month the EIB paired up with the region’s trade and development bank - known as PTA - to launch a €160 million investment facility, its largest business lending programme for businesses in East Africa so far.

Both banks will contribute €80 million to the fund, which can be tapped by agribusinesses, as well as firms operating in the energy, manufacturing and service sectors. At €80 million, the deal represents the largest single credit line the EU’s investment bank has ever signed off on in Africa.

Under the programme, which will be managed by PTA, firms operating in twelve countries in East Africa, including Kenya, Uganda, Tanzania, Rwanda and Burundi, will be able to access loans for up to fifteen years in dollars and euro, and for up to seven years in local currency - longer than the ten-year euro and dollar loans the EIB typically offers.

“It’s a very large facility for us by any standards,” said Patrick Walsh, the EIB’s director for lending in Africa. He added that the credit line was “the first step in what we hope will be a deeper relationship”.

“It allows us to make available lines of credit on exceptionally long term basis…which should be a great help to the small and medium sized businesses, and also mid-caps,” said Walsh. “We are finding in Europe that mid-caps are very important to job creation and opportunity.”

Speaking at the launch of the programme in Nairobi, PTA President Admassu Tadesse said it would “give a much needed boost to increased investment in the real economies of eastern and southern Africa.”

Doing more with less

There is clearly no plan to scale down the EIB’s work in sub-Saharan Africa. Sorenson says that the EIB plans to open offices in Cameroon within the next year.

Meanwhile, the recently created EU-Africa Infrastructure Trust Fund, which has paid out more than 70 grants to infrastructure projects for a total value of more than €6.5 billion, is a new way to generate private sector investment from public money. The fund combines grants from the European Commission and national governments with the EIB’s lending capacity.

As long as EU governments try to do more with less, and gradually replace development aid with loans, the EIB’s role in sub-Saharan Africa is unlikely to get any smaller.