Europe is at last fully converted to the merits of boosting investment in order to achieve sustainable growth. The EU is doing so with an internal investment plan (commonly referred to as the Juncker Plan or as the European Fund for Strategic Investments (EFSI), writes San Bilal.
San Bilal is the Head of the European Centre for Development Policy Management (ECDPM) Economic Transformation and Trade Programme.
In his State of the Union address, European Commission President Jean-Claude Juncker announced the doubling of its duration and its amount, to at least €500 billion.
Complementary to this initiative, the European Commission (EC) has proposed a parallel European External Investment Plan (EEIP).
Focused on the EU’s neighbourhood countries and Africa, the EC proposes that the European Union (EU) dedicate €3.35 billion from its budget and the European Development Fund (EDF) to the EEIP by 2020 in the hope of leveraging €44 billion from development finance institutions, institutional and private financiers. That may go up to €88 billion if EU member states agree to chip in.
As part of the new Partnership Framework with third countries under the European Agenda of Migration, the official aim of the EEIP is to address the root causes of migration and to promote sustainable investments in the neighbourhood and Africa.
Addressing the root causes of migration’ seems to have become the catchphrase of almost any development policy since the launch of the EU Emergency Trust Fund for Africa at the Valletta Summit last year.
Irrespective of whether root causes of migration are to be found in poverty pockets – evidence suggests that migration tends to initially increase as income rises in very poor countries, independent of conflicts – the intentions are laudable.
Like EFSI, EEIP recognises the central place of private sector investment in job creation, economic growth and wider transformation endeavours, and seeks to leverage private finance. The EEIP will also be embedded in the 2030 Agenda for Sustainable Development, including a focus on decent and sustainable work in poor and fragile countries.
How does the EEIP work?
This new EU framework for external investment will be articulated around three pillars:
1. The European Fund for Sustainable Development (EFSD) – comprising a Neighbourhood Investment Platform and an African Investment Platform – will use development assistance funds in financing instruments such as risk capital, investment grants, interest subsidies, guarantees and technical assistance, to leverage financial institutions and private sector financing;
2. Technical assistance, focused on advisory services and capacity building, to help local authorities and companies stimulate sustainable investment; and
3. A third pillar focused on improving the business environment in Neighbourhood and African countries, stimulating political and economic dialogues and reforms.
Part of this new EU initiative concerns the repackaging of existing instruments and programmes. The EU already provides substantial technical support for economic governance and reforms. The ‘new’ regional investment platforms are also a re-branding of the current blending investment facilities (the Neighbourhood Investment Facility and the African Investment Facility, which recently replaced the Africa Infrastructure Trust Fund).
So, what is new, and more importantly, what are the new opportunities, and potential challenges?
The first, and perhaps main dimension, if long lasting, is the EU ambition to establish one single coherent framework. The EU investment support had already been significant but conducted in a rather uncoordinated and segmented manner so far. The EIP is presented as a one-stop shop, bringing the EU’s Directorate-General for Neighbourhood and Enlargement Negotiations (DG NEAR), Directorate-General for International Cooperation and Development (DEVCO) and the European External Action Service (EEAS) together with EU member states and development finance institutions, seeking greater efficiency under a stronger political drive to stimulate sustainable investment. The task is ambitious, but if successful, could significantly increase the ability of the EU to crowd-in private finance and stimulate reforms towards more decent and sustainable jobs and economic activities.
Its main innovation? The EFSD Guarantee
The most technical, yet most significant new development is the new emphasis on guarantee mechanisms. Investment is often perceived (sometimes wrongly) as riskier in African and Neighbourhood countries, in particular in the more fragile ones. The EU has overall been ill-equipped to address this issue, failing to develop a comprehensive approach, and relying on patchy initiatives. The European Fund for Sustainable Development (EFSD) Guarantee will provide a single portal to access risk mitigation and risk-sharing instruments, such as risk capital, first-loss guarantees and small and medium-sized enterprises (SME) loan guarantees. It is thus a most needed development. Combined with the other two pillars of the EEIP, and in particular, with the third one on investment environment reforms, the EEIP has the potential to effectively de-risk some of the sustainable investment much needed in developing countries.
While the overall architecture of the new EEIP is promising, the main challenges will come in finalising the design, and in its implementation. Discussions in Brussels will continue for a few weeks, focusing on the institutional set up – composition of the boards and their role, management responsibilities, etc. EU institutions, like most governments, are characterised by competition and rivalry among departments and political leaders. Turf wars within the Commission, with the EEAS and EU member states, should be no surprise – and we should expect the European Parliament to join in. The resulting balance of power and responsibilities will matter if coherence and efficiency are to be achieved.
The link between internal and external action also has to be strengthened. Where are the EU’s DG GROW (Internal Market, Industry, Entrepreneurship and SMEs) and DG Trade in this setting for instance? Tensions with and among financial institutions will also have to be addressed. The EEIP aims at increasing competition among them to stimulate innovation and effectiveness. How best to also stimulate cooperation among them and with the EC? What will be the role of the European Investment Bank (EIB), so prominent in the EFSI? How to build on EFSI’s experience in boosting sustainable investment and providing guarantees, and how to further enhance its strong development potential? And what about the linkages with Neighbourhood and African actors, including financial institutions?
Last, but not least, success will only be measured by results. How to avoid business as usual? How to better monitor the sustainability of outcomes, demonstrate maximisation of effective additionality and leveraging, and identify developmental reforms dynamics? The main tasks lie ahead. ECDPM will also further strengthen its efforts to contribute to it.