Why do we need the EU External Investment Plan?
Some of the main challenges for developing countries remain achieving inclusive and sustainable growth and creating jobs. The investment climate and the overall policy environment in the EU Neighbourhood and in Africa are not always supportive of private sector investment. This is particularly evident in fragile, conflict- and violence-affected countries, some of which are important countries from where irregular migrants originate.
Foreign Direct Investment (FDI) and other private financial flows have declined across developing countries since the 2008 financial crisis. In 2012, only 6% (€ 34.6 billion) of total global FDI to developing countries went to countries on the fragile states list. This was an average investment of €27 per capita compared to an average of €128 per capita in other developing countries. Among those on the fragile states list, the majority of FDI is attracted by resources-rich countries, with 72% concentrated in ten countries in 2012. This clearly marks a gap in investment and the added-value targeted action by the European Union can have.
What is new about the European External Investment Plan (EIP) and how does it add value?
The EIP sets out a coherent and consistent approach and its implementation will allow the EU to lead by example in developing more effective partnerships, with partner countries and at the same time implementing international commitments on financing for development. Grants remain essential but we need to go beyond classical development assistance, using guarantees and innovative financial instruments to support investment, trade, domestic resource mobilisation and good governance and multiply the impact on the ground. The EIP will improve the way in which public funds are used and the way public authorities and private investors work together on investment projects. The EIP provides, for the first time, a coherent overall framework to improve investment in Africa and the Neighbourhood, in order to promote sustainable investment and tackle some of the root causes of migration. It will do so by leveraging funds from the EU, its Member States, other donors, financial institutions and the private sector.
Furthermore, it offers a guarantee to the private sector to invest in contexts that are politically more risky than others, and it addresses the key factors that enable crowding-in private investment where investors would not otherwise go.
Investments will mainly be targeted to improve social and economic infrastructure, for example municipal infrastructure and proximity services, and on providing support to SMEs, microfinance and job creation projects.
What is already happening today, and is the EU drawing on lessons learnt?
The European Commission is drawing on the experience with existing investment programmes at EU level, for example, through the current EU blending framework. Blending is the use of a limited amount of EU money (grants) to mobilise additional support, for instance in the form of loans, from financial institutions and from the private sector to strengthen the development impact of investment projects. This way, the European Union already supports investments in modern infrastructure and access to finance for Micro Small and Medium Enterprises (MSMEs) in partner countries. The EIP will draw on these lessons and enable the EU, international financial institutions, donors, public authorities and the private sector to cooperate fully in a coordinated way.
The External Investment Plan also builds on the experience gained with the very successful Investment Plan for Europe. Its European Fund for Strategic Investments (EFSI) mobilised close to EUR 116 billion across 26 Member States in less than a year. During the same period, more than 200,000 SMEs have already benefitted from the EFSI.
How does the EIP work?
The EIP will be based on three pillars:
- Pillar 1: a new investment fund, the European Fund for Sustainable Development (EFSD), which blending activities with a new guarantee to address and unblock bottlenecks to private investment.
- The EFSD will include two Regional Investment Platforms (Africa and EU Neighbourhood). They will combine existing blending instruments and will operate as a one-stop-shop to receive proposals from financial institutions and other public and private investors.
- The EFSD will also provide for a new guarantee, which will be passed on to intermediary financing institutions, which in turn will lend support, via loans, guarantees, equity or similar products, to final beneficiaries. The objective is to leverage additional financing, in particular from the private sector, as the EFSD guarantee will reduce the risk for private investment and absorb potential losses incurred by eligible counterparts, for example public financing institutions and private sector investors.
- Pillar 2: technical assistance for broader policy environment to help local authorities and companies develop a higher number of sustainable projects and attract investors, in order to further engage the private sector. The instruments available under the EFSD will be accessible to all investors through the provision of integrated services, offered by one-stop-shop.
- Pillar 3: a range of dedicated thematic, national and regional EU development cooperation programmes, combined with structured political dialogue targeted at improving the investment climate and the overall policy environment in the countries concerned.
In addition, the European Investment Bank (EIB)'s lending operations form an integral part of the EIP. For this purpose, the Commission will expand the EU budget guarantee under the EIB External Lending Mandate by a total of EUR 5.3 billion. This includes a EUR 3.7 billion EU guarantee in support of the EIB Resilience Initiative in the Southern Neighbourhood and Western Balkans, which aims to mobilise additional financing in support of sustainable growth, vital infrastructure and social cohesion in Southern Neighbourhood and Western Balkan countries. Like the EIP itself, the EIB has developed the Resilience Initiative in response to a call by the European Council.
Including these new resources, the EIB will be able to lend up to EUR 32.3 billion under the EU guarantee between 2014 and 2020.
How will Member States contribute?
Contributions from the Member States will benefit from the overall advantages of the new Investment Plan including coherence between actions on access to finance, technical assistance and business environment. In addition, there will be specific advantages for Member States' contributions. They do not have to take the form of cash payments, but could also be provided as second-loss guarantees. In that case, they would be relied upon only in a second stage after use of the EU guarantee. Furthermore, Member States could earmark their contributions for particular regions or sectors.
What role will the European Investment Bank (EIB) play in the EIP?
As the EU Bank, the EIB plays a key role in the EIP, notably via its implementation of the Resilience Initiative in the Southern Neighbourhood and Western Balkans (see above), the EIB External Lending Mandate and the EIB's operations in Africa under the ACP Investment Facility.
For the EFSD, the EIB, in addition to being one of the key implementing financial institutions, will provide an advisory role to further strengthen the quality and impact of the investment strategy. The EIB will also support the EIP by financing investments eligible under the EFSD and catalysing other sources of finance, in particular from the private sector.
The launch of the new EFSD proposal alongside changes to the ELM to facilitate further EIB lending, as part of a package, will ensure coherence between EU and other actors in the field of external investment to maximise effectiveness of available funding.
Who will be eligible to receive support through the EIP?
Public and private sector bodies are eligible counterparts and may submit investment proposals under the investment windows and sign guarantee agreements with the Commission, subject to the relevant financial assessments being carried out by by external, independent experts, for the Commission.
What will be the key criteria for investment proposals in order to get support through the EIP?
The investment proposals will have to:
- contribute to economic and social development, with a focus on sustainability and job creation, particularly for youth and women, and dealing with addressing the root causes of irregular migration;
- target socio-economic sectors (for example, infrastructure including energy, water, transport, ICT, environment, social infrastructure, human capital) and finance in favour of micro, small and medium-sized enterprises. Particular focus will be on private sector development;
- maximise private sector leverage by addressing bottlenecks to investment;
- be additional to the market and other instruments, in particular instruments funded by EU and Member State budgets, including EIB existing facilities and mandates;
- support the objectives of EU policies and with the relevant policy and political dialogues with partner countries, regional and multilateral fora as well as be aligned with partner countries' policies.
Which countries are targeted by the EIP?
As a start, African and EU Neighbourhood countries are eligible and can be supported, with the objective of addressing investment bottlenecks and contributing to sustainable development and job creation.
Where will the money come from?
The funding which will be used to finance and attract investments from other sources will come from the EU budget and other sources, including the European Development Fund. It will consist of EU funds totalling EUR 3.35 billion until 2020.
Additional funds could from Member States and other partners. If Member States match the EU contribution to the guarantee, this would bring the total investment volume to EUR 62 billion. If they also match the EU contribution to the blending, it would generate total investments of up to EUR 88 billion.
Can you give examples of types of projects that might in the future benefit from this new type of financing?
EU development cooperation already supports initiatives to enhance private sector engagement with a focus on blending. For example:
The Electrification Financing Initiative (ElectriFI), elaborated in close cooperation with representatives of the private sector and financing institutions, is a flexible tool aiming to support investments to facilitate access to reliable, affordable and sustainable electricity and energy services for populations in rural, underserved areas as well as in areas affected by unreliable power supply.
The SANAD Fund for MSMEs was established in August 2011 as a response to the Arab Spring. As MSMEs account for 60 % of GDP and 70 % of employment in the Middle East and North Africa, they are crucial to a vibrant economy and job market. SANAD provides financial instruments such as loans, subordinated debt, guarantees and equity to local partner financial institutions, but is not only limited to financial assistance. In addition, a Technical Facility, which is co-financed by the EU with €2 million, offers capacity building and support to PFIs, hence increasing the sustainability of the overall approach.
More information on the first results of the implementation of the blending facilities can be found in the Annual reports prepared for every blending framework: https://ec.europa.eu/europeaid/policies/innovative-financial-instruments-blending_en
What is an "investment window" and what are possible thematic/sectorial/geographical investment windows?
An investment window is a targeted area for intervention in specific regions and/or partner countries, in specific sectors, in specific projects and/or for specific final beneficiaries. The targeted area is to be funded by specific eligible instruments to be covered by the EU Guarantee up to a fixed amount.
It will be crucial to identify if there is a specific market demand for or failure preventing certain investments, and also to assess if necessary markets can be created, which would not be developed without the access to the Guarantee.
Examples of investment windows could be:
An employment window in a region: to support industrial parks for increased employment creation in demand-driven markets;
An agriculture window: to increase agricultural productivity in areas with potential for high growth and exports;
An infrastructure window: to support transport infrastructure to connect areas of high agricultural productivity to local, regional and international markets, or to bring communications means to remote locations.
How will European companies benefit?
The Commission will consider appropriate project-based partnerships with private sector actors and increased visibility of investment opportunities outside the EU, in cooperation with partner countries. Defined investment windows under the EIP will provide for a closer and more targeted identification of priority areas in which private sector investors could tailor investment proposals; while the guarantee allows for risk-sharing.
New funding opportunities together with targeted work to improve the business environment and investment climate (under pillar 3 of the EIP) in the partner countries will create a "win-win" situation: for the local private sector to become more active and EU companies who wish to expand into developing countries.
Direct interaction with companies and their sectorial associations will also be sought through sector-level dialogue mechanisms to encourage more private sector engagement and market-based solutions in sustainable agriculture and agribusiness, sustainable energy, infrastructure and social sectors.
How can an International Financing Institution (IFI) propose a project?
The IFI verifies with the Secretariat of the Fund, managed by the European Commission, that the suggested portfolio would fit under an existing investment window. If not, the IFI may adapt it and re-submit. If it does correspond to an existing investment window, the IFI will develop a full proposal, indicating all the relevant modalities, including the additionality of the portfolio, the suggested guarantee conditions, etc.).
On the basis of an assessment made by external, independent experts, the Commission forms an opinion on the proposal regarding its financial aspects, taking into consideration the due diligence of prospective partners, the risks involved, pricing, etc. Moreover, the Commission assesses the political and general coordination aspects after relevant consultations.
In technical assessment meetings, a number of portfolios or projects submitted by different IFIs will be analysed. In the case of a positive assessment from the technical meeting, the portfolio is brought to the Operational Board, where EU Member States are represented.
After the Operational Board has given its opinion, the European Commission and the IFI sign an agreement, which will allow the IFI to contract all individual projects to be guaranteed under the portfolio. All actors involved will aim at an as smooth and efficient process as possible, in order to ensure short handling times and rapid certainty for all actors involved.
How can an individual company submit a project?
Through the EIP-Web portal, that will be established, the interested company can request a guarantee for an investment project.
Should the project not qualify for the EFSD Guarantee and since in general the guarantee would be passed through a finance institution, the Secretariat will suggest to the company a list of relevant financial institutions, which are active in the respective region of interest. The company can thus contact the financial institutions concerned for possible funding outside of the EU Guarantee coverage.
In case the project qualifies for the EFSD Guarantee and an investment window for the proposed project type exists (in terms of policy objectives, risk and pricing), the Secretariat will put the company in contact with the International Financing Institution (IFI) managing that window. The IFI will be able to accept or refuse, being however obliged to report their decision as well as the reasons to the Secretariat.
If there is no investment window, the Secretariat will issue a call for interest to all IFIs to identify whether any IFI is interested to either establish a new investment window or simply to support the project presented by that company.
Once an agreement is reached between the company and the IFI, the two together will fully develop the project and submit the project proposal to the Secretariat. For this, the procedure described above will apply.
How are you going to make sure that it makes a difference in people's lives, i.e that the efforts will actually translate into jobs and growth? How will you communicate the results of the efforts?
The Commission will closely monitor the progress of the EIP as we monitor the progress that the EU as a whole makes on its collective commitments on financing for development. The European Commission will report annually to the European Parliament and the Council on the activities related to this Plan. The Commission will also publish an annual activity report providing an overview of the financed projects. In addition, for each operation, a communication plan will be prepared by the selected eligible financiers to present the projects and results.
For more information:
The Communication: "Strengthening European Investments for jobs and growth: Towards a second phase of the European Fund for Strategic Investments and a new European External Investment Plan" is available here
For more information about the proposal for a European External Investment Plan, see this Press Release
A factsheet on the proposal for a European External Investment Plan is available here