Rüttgers, H. 2016. Catalysing investment in the most fragile countries. GREAT Insights Magazine, Volume 5, Issue 1. February 2016.
The European Investment Bank supports EU policies around the world, something which is extended to those fragile countries that need investment the most. The Bank takes a proactive approach to its projects, showing adaptability and flexibility in the financial products it offers, but also devising new instruments such as the Impact Financing Envelope to reach further than ever before. The Sustainable Development Goals adopted in September 2015 by the United Nations set ambitious targets, and we are matching those ambitions.
Sub-Saharan Africa has huge potential, its rapid economic growth rates springing forth from its burgeoning youthful populations and middle-classes, and its abundant natural resources both in materials and renewable energies, facilitated by its ever developing communication and transport networks. And yet this development is not uniform and not without systemic challenges. Wars, civil conflicts, political instability, migration, climate change, extreme weather events and disease are obstacles that the countries in the region must hurdle. The EIB plays a specific role in Africa, by providing the financial input and knowledge to catalyse private and public investment to enhance sustainable economic growth.
Violent conflict, within or between societies, results in loss of life and the destruction of assets, contributes to social and economic disintegration, and undermines public and private investments. On the one hand, economic recovery is one of the key pillars of peacebuilding and on the other hand, economic and social stability are important parameters for effective and efficient public and private investment. Therefore, the Bank includes a conflict sensitive investment lens in its operations, necessary to effectively implement investment projects promoting sustainable economic and social development in conflict-prone and affected countries.
The aims of applying such a conflict sensitive investment lens are to reduce the risk of a conflict derailing the project; to mitigate and manage the risk of conflict being unintentionally exacerbated by the project; and/or whenever possible and depending on context, to maximise the project’s potential contribution to conflict prevention, structural stability and peacebuilding. The Bank does not shy away from investing in such countries, and in 2014, for example, had operations in 39 countries out of the 51 included in the OECD’s list of fragile states.
Liberia is one of the world’s poorest countries, still recovering from the civil war that ended with a peace agreement in 2003. In 2008, the EIB supported the economic development of the country by being one of the founding shareholders of Access Bank Liberia, playing the role of a catalyst investor. Access Bank is the first Liberian bank serving the micro and small businesses, and has generated exceptional development impacts in a very difficult environment. The Ebola crisis however challenged this success.
Having claimed well over 10,000 lives in Sierra Leone, Liberia and Guinea, the Ebola outbreak appears to be over. For these countries, the priority now is to get back onto solid ground and sustainable growth and job creation. Throughout the epidemic, the EIB was assisting with this, helping to lay the foundations for further development by signing loans in the affected West African countries.
On the ground, the EIB continues to work closely with Access Bank Liberia to help them with technical assistance and to recapitalise following the epidemic. This is essential as Access Bank serves primarily a low-income client base, the people who need access to finance the most, but also the people who find themselves furthest away from it. We have invested in an emergency project to rehabilitate the runaway and airside safety features at Monrovia’s Roberts International Airport in Liberia allowing the airport to continue operating.
Vital infrastructure is also required, and the EIB has invested in interconnecting, upgrading and extending electricity production and distribution networks in Guinea, Sierra Leone and Côte d’Ivoire. While Guinea bore the brunt of its own Ebola outbreak, the EIB provided flexibility in terms of the loan tenor so that the project could be speeded up once Ebola came under control. Côte d’Ivoire has been no stranger to conflict, but as the country has its development plan, which includes a notable drive to peace and stability, the EIB is ready to act as a catalyst for further investment.
This is the role we play, providing long-term finance, but the EIB can also react quickly, and our aims are to improve this further by enhancing our sensitivity and effectiveness when it comes to specific challenges posed by investing in conflict-affected and fragile nations and economies. After Madagascar was hit by three cyclones in quick succession in 2015, the country suffered significant damage to infrastructure and flood defences, this coming barely two years after it could start to look forward thanks to the end of a decade of political struggle.
The country requires huge investment after several years of political sanctions, but at the same time weather systems are only likely to become more volatile as the effects of climate change hit. The Bank is investing in Madagascar’s reconstruction programme for this necessary protection of homes and livelihoods. Once these are in place, Madagascar can create the environments needed to encourage investment.
In 2015, the EIB formally gave the Caribbean and Pacific Impact Financing Facility (CPIFF) the green light. This €40 million investment has significance beyond financial figures. Economies in the Caribbean and Pacific tend to present higher risks than some other regions. Investment climates are not always favourable and their comparative small sizes mean they struggle to attract funding. Under the CPIFF, the EIB can now get involved in financing where it is most needed, supporting small businesses, community organisations and households in local currencies like in the Dominican Republic for Haitian immigrants.
The EIB was able to invest in the CPIFF thanks to the Impact Financing Envelope (IFE), the €500 million suite of financial instruments which enables the Bank to support projects which make a real difference on the ground and improve people’s lives in particularly challenging environments struck by wars or natural disasters, with the ultimate goal of alleviating poverty. It is also through the IFE that we intend to support Access Bank Liberia, as mentioned above. The IFE sits alongside the ACP Investment Facility, the revolving fund managed by the EIB, but takes in projects that would traditionally carry unacceptable levels of risk. The IFE brings about higher benefits.
The ACP Investment Facility is used by the Bank to invest in private sector operations in the region. In line with the EU Agenda for Change, this is the most effective way to create jobs and improve standards of living in the developing world. A core aspect of operations under the banner of the Investment Facility is the financial sector. Lines of credit are extended to financial institutions to stimulate investment in local businesses.
The IFE allows the Bank to go deeper than ever before in countries where operations are challenging, and with counterparts who represent a higher risk profile, all with the aim of providing these economies with the kick start they need. Under the CPIFF, for example, ten countries have been identified as having the most potential for impact. These are Dominica, the Dominican Republic, Guyana, Haiti, Jamaica and Suriname in the Caribbean and East Timor, Fiji, Papua New Guinea and Samoa in the Pacific.
The Impact Financing Envelope is additional to the traditional lending, but with a different dynamic and a different ethos: higher risk for higher development impact. It is comprised of four separate instruments: social impact funds loans to financial intermediaries, risk sharing facilitating instruments and direct financing. Each of these goes beyond mere financing, and includes advice and technical assistance.
Using the IFE, new opportunities open up. Institutions that would not qualify under the Investment Facility may qualify for IFE funding, notably microfinance organisations, local banks and credit unions. Local currency loans can then be provided to smallholder farmers, community organisations, microenterprises and SMEs. This applies to those countries with the most fragile economies: these are also the countries whose need for investment is greatest, but also the ones who would benefit most from technical assistance and advisory services.
Past experience is there to be learned from, and sub-Saharan Africa, the Caribbean and the Pacific have some of the most underdeveloped economies in the world. There can be myriad reasons for this, from civil wars and unrest, through to remoteness and epidemics such as the Ebola crisis. What is a common factor is that the EIB can apply current best practices to help kick start these economies, and offer them avenues to follow and foundations upon which sustainable growth and opportunities can be built.
In these cases, planning and frameworks are essential. The Sustainable Development Goals give such a framework to the world, while regional and national initiatives are also a boon to development, offering encouragement to financial institutions such as the EIB to get involved, and as a consequence giving legitimacy and catalysing further investment, building capacity and resilience.
This applies across all countries and all sectors, from the largest green power plants through energy efficiency schemes and sustainable transport links, and from investment in large corporates seeking to innovate right down to small businesses and start-ups who are looking for relatively smaller sums to get their own innovative idea from the drawing board to the public. The common thread is a thirst for investment where worthy projects cannot get off the ground for want of financing.
The most advanced economies will stagnate once they reach a certain point, and then diversification and innovation are the right paths to take to keep things moving. Less developed ones can get trapped in a vicious circle before reaching this stage, pushing citizens into poverty, unless they receive the injection they need. Investment needs in the developing world are huge. The EIB cannot do it alone and nor would we ever seek to. Our role, and that of other financial institutions and development banks, is to provide the means to expand private sectors and make financial sectors both more sophisticated and more active.
For over a decade, the ACP Investment Facility has allowed us to do just that in sub-Saharan Africa, the Caribbean and the Pacific, providing long-term financing in local currency. This is something that sets the EIB apart from other institutions, and in real terms is something that is demanded on the ground and benefits the final beneficiaries of our funding. With the Impact Financing Envelope, we can then expand our offer across new frontiers, in terms of sectors and nations, notably the more fragile ones.
The instruments presented here can support initiatives beyond the EIB’s traditional scope, and really make an even greater impact on the ground. From now until 2020, we can be sure there is a lot more to come and the EIB will play a bigger role in improving the lives of millions of people across the ACP countries, making its contribution to creating conditions for peace and long-term stability and prosperity.
Sectors that were previously challenging can now be supported more easily, not least agriculture and food security. The EIB can get closer to the ground than ever before, and we are excited to see what the coming years bring.
About the author
Heike Rüttgers is head of the division responsible for managing the ACP Investment Facility at the European Investment Bank.
Photo: Rebuilding Madagascar with the help of EIB investment. (Photo: Images History, flikr)
This article was published in GREAT Insights Volume 5, Issue 1 (February 2016).