The EU’s bank in Africa steps up the action

epa06000169 Cranes rise over a pile of freight containers waiting for transportation using the new Standard Gauge Railway (SGR) cargo train are seen at Port Reitz in Mombasa,

Whether or not Jean-Claude Juncker’s plans for a “partnership of equals” with Africa becomes reality any time soon, the Luxembourg-based European Investment Bank will have an ever-increasing role in the continent.

The External Investment Programme (EIP) promises to leverage €44 billion of investment, predominantly in Africa, by 2020, commitments that may now be stepped up following Juncker’s State of the Union speech last week.

The EIB has been steadily expanding its operations in East Africa in recent years, opening a bureau in Ethiopia’s Addis Ababa alongside its long-standing office in Kenya.

But while most talk in Brussels tends to focus on the amount of cash available, it is not only a question of having more money to lend but having the means to lend it, Catherine Collin, the EIB’s East Africa bureau chief in Nairobi, tells EURACTIV.

“In the region of East Africa, we signed just over €400 million of projects in 2017 compared to €100 million in the previous year. €400 million may not look huge but it’s not a bad amount for us outside the EU,” says Collin, pointing out that the vast majority of the bank’s activities are within the bloc.

EIB banking on new business in East Africa

Offering credit to East African banks might not be many people’s idea of traditional development aid. Yet promoting private small and medium enterprise, alongside funding for infrastructure projects that will help develop local businesses, lies at the heart of the new strategy for Africa.

Red tape and domestic political constraints

Collin suggests that domestic political constraints are the main block on financing. “A problem we have in the region and in Sub-Saharan Africa in general, is of very low absorptive capacity of the state,” she says.

“It varies but last year we signed a dozen deals, which is rather exceptional. If we can do on average five or six per year for the region that would be good, but it would be good if we could do more,” she adds.

“Overall, East Africa is a very vibrant region. But the trend is that things are getting more difficult. For instance, the financial sector in the region is now struggling” says Catherine Collin.

“Likewise, certain countries are more complex like Tanzania, where there is a lot of red-tape and private sector morale is quite low.”

In Kenya, meanwhile, a cap on bank interest rates has “really brought private sector lending to a standstill,” she says.

The cap, which limits the interest that banks can charge on loans at no more than 4 percentage points above the Central Bank Rate – currently 9% – intended to stop banks charging interest of well over 20% – a prohibitive rate for most local businesses and individuals. Instead, it has persuaded banks to lend to the state but dry up private sector lending.

Before the cap, which was introduced in September 2016, local banks often complained that they lacked the cash to lend. Now they have the liquidity but no will to lend.

“There have been quite a few bank failures in Kenya,  one of them affecting our portfolio – and non-performing loans have gone up,” says Collin.

“This means that it’s not as smooth as it used to be.”

Wanted: New forms of trade partnership with Africa

After several months of different European leaders beating a path to the African continent, Jean-Claude Juncker’s European Commission has got in on the act. But for the moment, Brussels is not offering anything new on either trade or investment.

Thematic lending

The Bank is now focusing more on thematic lending, for example in Kenya, by opening a new line of credit for the agriculture sector, blended with grants from the EU with the aimed of increasing access to finance to all actors of the value chain, including small-holders.

One project backed by the development finance institution (DFI) network that appears to have stalled seeks to create a rapid bus network in Nairobi, in a bid to reduce the number of cars on the capital’s already overcrowded roads. Kenyan President Uhuru Kenyatta wants to have a light version of the scheme operational by December but that looks like a pipedream.

“For us, this BRT project is a priority because it focuses on urban mobility and transport, and will help reduce pollution, a nice fit with our climate action agenda. Nobody questions the usefulness and the impact of this project, but we’ve had it in our pipeline for five years now,” says Collin.

A typical loan from the bank to a public sector project will last for 15 years, including a so-called four years grace period during which only interest is paid and ten years for private sector lending.

The EIB operates with a network of IFIs/DFIs including the World Bank, African Development Bank, Japan’s JICA as well as European bilateral institutions such as the French AFD and Proparco and the German KfW and DEG.

The Olkaria geothermal site has long been one of the EIB’s flagship investment projects in the region. Financing of an additional 70 megawatt unit at Olkaria was signed last year together with JICA and a €45 million to finance the construction of a new sewerage system and a wastewater project in Rwanda’s capital Kigali. Other projects include a $100 million loan to rehabilitate and upgrade berths of the Port of Mombasa on Kenya’s Indian Ocean coast, to be signed hopefully this year.

“Our mandate is very much a private sector mandate and we do not forget that.  But you need infrastructure to support the private sector. To generate economic activity and growth you need a port that functions, you need energy, so it is normal that we are still having that as our core métier,” says Collin.

“On the other hand, we have instruments to develop the private sector…and in this region there is potential.

China’s investment largesse may dwarf EU in Africa

When it comes to increasing investment in the African, Caribbean and Pacific countries covered by the Cotonou Agreement, the EU talks a good game. But it is facing stiff competition from China, armed with more cash and fewer concerns about democracy and the rule of law when it comes to investment.

Migration and post-conflict regions

In Ethiopia, the EIB is one of the investors in an industrial park aimed at creating jobs for refugees, and Collin says that she is also looking for ways for the Bank to support projects in the region’s numerous refugee camps which are home to over a million people in refugee camps, many of them fleeing war in South Sudan and Somalia.

“We would like to see what we can do in terms of migration/post-conflict. We are doing the groundwork to see if there’s something we can do in Somalia for instance.”

A study by the International Finance Corporation (IFC) released in May suggested that there is a huge amount of business activity in the Kakuma camp, which would benefit from investment.

“In Kakuma (a refugee camp in north-western Kenya with a near 200,000 population), we have met refugees who have been there 20 years. It is estimated that there is $57 million worth of business being done per year in this refugee camp,” says Collin.

“We want to see if we can invest, though we need to find the right channels and the right instruments.”

Juncker offers EU-Africa trade deal in new 'partnership of equals'

European Commission chief Jean-Claude Juncker held out the promise of an EU-Africa trade pact on Wednesday as part of a ‘partnership of equals’ between the two continents, signalling Europe’s stronger involvement in Africa, where Chinese influence is rapidly spreading.

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