European Investment BankEuropean Investment Bank

In AfricaIn Africa

Presentation StructurePresentation Structure

The Cotonou Agreement and the Investment FacilityThe Cotonou Agreement and the Investment Facility

HISTORICAL BACKGROUND

EIB set up in 1958 primarily to assist development in poorer regions of

Europe.

Europe still it’s main role – but the Bank now works in 140 other

countries, under EU cooperation agreements.

Biggest group of countries are the ACP – African, Caribbean & Pacific

countries. EIB working in some of them for over 40 years.

In the ACP, the EIB has channelled EUR 10 billion to investment.

EUR 3.0 billion + since 2000.

DIFFERENT FRAMEWORKS

In the 60’s – 70’s

Yaoundé Conventions – limited;

In the 70’s – 2003

Four Lomé Conventions – broadened out; lot of State sector

projects;

From 2003

The ACP – EU Cotonou Partnership Agreement, which has set up

a specific “Investment Facility” for the ACP, run by the EIB –

special focus on private sector.

CHANGE OF EMPHASIS

Emphasis WAS on public sector as driver of development

Led to inefficiencies, poor utilisation of resourcesImmune to signals from the marketCreativity stifled

Under Cotonou Agreement, emphasis IS on the private sector

to encourage ideas, creativity and entrepreneurship;but with discipline of the market

(but private sector development is not a panacea!)

FINANCING FOR THE ACPs UNDER COTONOU

European Commission

EUR 11.3bn

Grant aid for long-term

development (national and

regional programmes)

European Investment Bank

EUR 2.2 bn

Investment Facility

Loans/equity/

guarantees

for investment projects

EUR 1.7bn

EIB’s own resources

Loans for investment

projects

European Development Fund

+EUR 1.0 bn

THE ROLE OF THE DIFFERENT INSTITUTIONS

The European Commission supports governance, regulatory and judicial improvements through the NIP

The CDE supports entrepreneurs and private sector organisations

The EIB offers long-term resources for investment

(Not rigid – some overlaps in practice )

The IF: a revolving fund

managed along commercial principles to be financially

sustainable

re-flows to be invested in new projects

Terms and conditions more closely aligned with market practice

Risk-sharing instruments, local currency loans and guarantees

THE EIB MANDATE UNDER COTONOU (1)

Subsidies (limited) available for public sector projects, to support

environmental or social components or for project-related technical

assistance

Special conditions to lower cost of finance to State or State

agencies, utilities in HIPC – Heavily Indebted Poor Countries

Complementarities sought with operations/ instruments of EU, bilateral or multilateral institutions

Play a catalytic role in mobilising local resources and encouraging foreign lending and investment

THE EIB MANDATE UNDER COTONOU (2)

INVESTMENT FACILITY - THE OBJECTIVES

Private Sector Development

Enhance Local Private Sector

Support Foreign Direct Investment

Development of Local Financial Sector

Support for Commercially Viable Public Enterprises

INVESTMENT FACILITY - THE CONSTRAINTS

Small markets, hence limited investment opportunities

Limited access to skills and technology

Shortage of finance through local savings / capital

Weak regulatory and judicial framework, bureaucracy

For foreign investors

High risk perceptionHigh cost of information

Hence : insufficient foreign direct investment

Private entrepreneurs and commercially viable public

sector enterprises

ACP and international entrepreneurs

Large enterprises and SMEs

WHO ARE THE POTENTIAL BENEFICIARIES?

Almost all sectors are eligible – examples:

Industry

Transport (revenue earning)

Infrastructure: e.g. power, telecoms, water supply and sewerage

Mining

Tourism

Health and education (revenue earning)

Exceptions are:

Real estate and housing

Arms

Drugs and tobacco

Casinos

SECTORS OF INTERVENTION

Projects must be viable:

Technically

Financially

Economically

Environmentally

Significant financial contribution from promoter

Co-financiers (EIB maximum 50% of project cost)

Procurement must be in line with EIB guidelines

PROJECT REQUIREMENTS

The EIB has two modes of intervention

Direct financing – for large projects, typically a project cost of

at least EUR 15-20 million with a minimum financing

requirement from the EIB of EUR 5-10 million.

Indirect financing, through financial intermediaries – any

project smaller than the above limits.

EIB aims to have financial intermediaries active throughout

the ACP countries.

DIRECT AND INDIRECT OPERATIONS

INDIRECT OPERATIONS - DETAILS

Global loans = Lines of Credit to:

Local dfi:s

Local commercial banks

Other local financial intermediaries

Due diligence, credit risk and credit decision LOCAL

EIB funds => tenor

Senior debt:

EIB’s own resources Investment Facility

Pricing: EIB reference rate.

Security: 1st class or prime-quality

security (with possibility of political risk

carve-out).

Currency: EUR, USD, GBP and ZAR.

Pricing: EIB reference rate + mark-up.

Security: guarantee (international or

local) or project security.

Currency: EUR (possibility of other hard

or local currencies).

Junior/subordinated

debt:

- Pricing: EIB reference rate + mark-up.

Security: project guarantee or other

covenants.

Currency: EUR (possibility of other hard

or local currencies).

Quasi equity:

participating or

conditional loans:

- Pricing: variable remuneration as a

function of performance.

Security: usually unsecured or junior

status with covenants.

Currency: EUR (possibility of other hard

or local currencies).

Equity participation: - Pricing: dividends / capital gains.

Security: none.

Currency:local currency.

Guarantees Of loans, bond issues, commercial paper

RANGE OF FINANCIAL INSTRUMENTS AVAILABLE

Guarantees will be priced to reflect

The characteristics of the operations

The risks insured

Operations can be

Guarantee of local currency loans/bond issues

Guarantee of local bank portfolios

TERMS AND CONDITIONS – GUARANTEES

Launched mid - 2003

Up to end 2005 financial year, EUR 830 million for about 50 projects

+ EUR 250 million from the EIB’s own resources

Accelerating : in 2005:

Signed EUR 350 million from IF

EUR 150 million from EIB own resources

THE INVESTMENT FACILITY

27%

17%

29%

1%

4%

9%1%12%

Fisheries

Infrastructure

Energy

Global Loans

Industry

Services

Transports

Water, sew erage

ACP – IF SIGNATURES IN 2005 BY SECTOR

Almost EUR 270 million of which

EUR 183 million IF in Madagascar, Mauritius,

Mozambique and Zambia

EUR 85 million in RSA.

2005 : IN SADC REGION

Botswana Flower Farm EUR 2m

Madagascar Aquaculture EUR 5m

Hotels & Tourism EUR 11.1m

Global Loan for SMEs EUR 20m

Container Terminal EUR 14m

Titanium Production EUR 57m

Natural Gas Development EUR 45m

Zambia Copper Mining & Processing EUR 72m

Mauritius

Mozambique

SADC : EXAMPLE PROJECTS

OTHER EXAMPLES, SIGNED IN 2005

Kenya Geothermal Power Station EUR 32m

Senegal Ferry Boat EUR 10 m

Chad Sugar Plantation / Processing EUR 11.8 m

Nigeria Cement EUR 33 m

Ethiopia Hydro-Power EUR 50 m

Market related terms

In foreign currency

• rate close to EIB rate for loans in Europe, plus

• markup to cover perceived risks

In local currency (whenever feasible)

• at local market rate if adequate benchmark available, plus

• markup to cover perceived risks

In some cases, an interest rate subsidy can be granted, if

its justification is clearly demonstrable

TERMS AND CONDITIONS - LOANS

Ex: convertible bonds, participating loans, conditional

loans, etc.

The remuneration is linked to the financial return of the

project.

It is normally composed of a fixed interest rate of not more than 3% and a variable component related to the project performance.

TERMS AND CONDITIONS – QUASI-EQUITY

The EIB is a large institution financially, but small in staff structure –

keeps costs down!

It cannot handle requests for finances from SMEs: would mean a

considerable increase in bureaucracy and costs.

EIB seeks to cooperate with local financial sector (banks, DFIs,

leasing companies), to channel funds through them. IF currently

works with almost 100 of them in the ACP.

LARGE INVESTMENTS ONLY ?

Significant change in the nature of the Bank’s operations in

ACP

Public Private sector

Different risk profile

Competitiveness

Market related terms

Longer project cycle

Need to reach a balance between development objectives

of Cotonou and financial sustainability

EXPERIENCE TO DATE AND ISSUES ARISING

IF = risk bearing instrument that should operate wherever risk perception is high and in as many as ACP countries as possible

=> need for a flexible risk approach

=> need for sufficient concessionality for public sector in HIPC countries

« Market related terms » in ACP countries

What are the benchmarks (e.g. financial sector)?

EXPERIENCE TO DATE AND ISSUES ARISING

20 year partnership between EU & ACP. So far 45% increase in

ACP staff by EIB

Resource and Business Development and Portfolio Management

and Policy divisions supporting the geographical staff

Opening of three regional representations in Africa in October

2005 and this year in the Caribbean and Pacific

HEAVY COMMITTMENT FOR COTONOU

Taking account of issues mentioned above, it is difficult to

establish a precise business plan;

Moreover, appraisal process is often time consuming and

complex and private sector’s demand for funds highly variable;

HOWEVER, growing rhythm of operations and good pipeline. On

a prudent base case scenario, total approvals should exceed the

IF initial endowment by the end of 2007.

Already agreed that there will be extra funds for the IF.

HORIZON

SOUTH AFRICA (1)

Different mandates.

EIB to assist balanced development in RSA;

Bank authorised to lend

EUR 300 m (1995 – 1997)

EUR 375 m (1998 – 2000)

EUR 825 m (2000 – 2006)

Total amount lent :

Approaching EUR 1 400 m

SOUTH AFRICA (2)

In terms of contracts

40 % of funds has gone to private sector

60 % to public sector

In terms of final beneficiaries

60 % to private or mixed private/public sector

40 % to public sector

SOUTH AFRICA (3)

Main sectors

Municipal infrastructure

Gas/electricity

Water supply

Telecoms

Small & medium-scale enterprises

In 2005: EUR 60m for municipal infrastructure in Tshwane

& Ethekwini

EUR 85m for Vaal Water resource & development.

SOUTH AFRICA (4)

In addition to lending from our funds,

EIB co-manages with IDC

EUR 55 m of EU budgetary funds in a ‘Risk Capital Facility’

for SMEs to enhance Black Economic Empowerment and to create jobs

This has just been renewed – fresh EUR 50m

SOUTH AFRICA (5)

www.eib.org

Contact:

Head of Regional Representation, David White

d.white@eib.org

+27 12 425 0460