Why EU bank puts focus on private sector growth
Sunday, November 25, 2018 22:39
By CHARLES MWANIKI
The European Investment Bank (EIB) vice-president, Ambroise Fayolle, was in Nairobi at the weekend during which he presided over the signing of a number of financing agreements with private firms and the government. The Business Daily talked to him about the bank’s mandate as well as its activities in East Africa. Here are the excerpts.
WHAT IS THE MISSION OR MANDATE OF EIB WITHIN THE LARGER EU ARCHITECTURE?
EIB is an EU institution that is owned by EU member states. The bank’s mission is to create employment and support sustainable growth through financing of projects that are in line with EU policies, both inside and outside the EU. The projects range from roads to large infrastructure and innovative small companies such as those in renewable energy projects.
HOW MUCH INVESTMENT CAPITAL IS AVAILABLE TO EIB TO DO BUSINESS AROUND THE WORLD, AND ESPECIALLY IN KENYA OR EAST AFRICA?
EIB’s lending volumes change every year. Last year, for instance, the bank invested over Sh7 trillion in 450 projects in 160 countries. However, as a rule of thumb you could say that 90 per cent of our business is within the EU itself. Of the remaining 10 per cent there is no fixed budget for any specific region. In 2017 alone, however, some Sh300 billion was deployed across Africa. Our signed commitments in East Africa are worth Sh47 billion, a substantive share of which has come to Kenya. We plan to add over Sh30 billion of regional facilities or investments in East Africa.
WHAT ARE SOME OF THE INVESTMENTS YOU HAVE MADE IN KENYA, AND HOW MUCH HAVE YOU PUT IN?
The EIB has invested nearly EUR 1.37 billion — equivalent to over Sh150 billion in Kenya — since our first project in 1976. Key projects we have financed – and are extremely proud of — include the Lake Turkana Wind Farm, which has recently been connected to the national grid with a capacity of 315 MW, the Olkaria geothermal projects with KenGen as well as roadworks and credit lines for SMEs. And let me also mention our equity portfolio, that is, investments in venture capital and other funds supporting small and often innovative enterprises such as D-light, which provides solar home appliances such as solar lanterns at very affordable prices to low-income households. D-Light started with a small equity investment by Energy Access Ventures, an impact fund in which EIB is a core investor. This initial support was critical to enable D-Light to develop its business and expand its market base. Its runaway success has enabled the EIB to directly invest $25 million in the venture early this year.
DOES EIB HAVE A PREFERENCE FOR ANY SECTORS OF THE ECONOMY WHEN DECIDING WHAT TO INVEST IN?
All investments are in the end based on a loan request. We do not decide ourselves where to invest. A proposal is made to the bank, its bankability is assessed and a decision made. Obviously, there are priority areas, such as manufacturing, strategic infrastructure and sustainable industrialisation. These are areas where EIB has longstanding expertise and where we can add value. We also focus on entrepreneurship, with special support to female entrepreneurs. This is driven by our belief that the private sector is the key driver of the Kenyan economy.
ARE EIB INVESTMENTS MOSTLY THROUGH OR IN PARTNERSHIP WITH THE PRIVATE SECTOR OR WITH THE GOVERNMENT? KINDLY OFFER SOME JUSTIFICATION FOR ANY PREFERENCE.
EIB can fund both public and private sector projects — we have a wide range of instruments at our disposal. Our mandate focuses on private sector development but you need to have the infrastructure in place — such as road, energy, etc – to enable private sector to grow. In Kenya, we work with both public and private sector and use instruments adapted to the needs of each project. When working with the government we provide concessional debt for critical social infrastructure, such as water supply in Kisumu or electricity distribution under the Last Mile Connectivity project. Concessionality can also be achieved by combining EIB (and other development finance institutions) loans with grant money from the European Union under the so-called blending mechanism. This is quite a powerful mechanism we have successfully used for a number of projects in the region and in Kenya.
WE HAVE SEEN THAT IMPACT OR POTENTIAL IMPACT IS A BIG DEAL FOR YOU WHEN MAKING INVESTMENTS. HOW DO YOU MEASURE YOUR SUCCESS AFTER MAKING AN INVESTMENT?
Part of this is put in place at the due diligence phase, before the investment. The EIB has a large department with engineers, social economists, environmental experts and the like. So we’re not only bankers. These colleagues shine their light on each proposal before we take a decision on it. We have developed a methodology that enables us to assess the expected impact and determine which KPIs should be used to measure success. Then, also based on the information received from our counterparts, we will monitor implementation, including how the project delivers on these KPIs identified at the outset. We want to make sure things are being implemented as agreed in order to get expected results.
WHAT IS YOUR TAKE ON THE PERFORMANCE OF PREVIOUS FINANCING ARRANGEMENTS? DID THE INVESTMENT MEET THE OBJECTIVES YOU HAD SET WHEN YOU SIGNED?
So far, nearly everything has worked out pretty well. Overall, on a worldwide level, the bank has an extremely low default ratio due to its cautious investment strategy. A lot of our investments are still running, like the credit lines benefiting SMEs we signed with Equity Bank Group last year. But as I said, we are the EU’s long-term investment body, we’re not in it for the short term or quick money. Since we don’t have to make a profit, but only cover our costs, we can usually offer very advantageous lending conditions.
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