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EC kickstarts €13bn emerging markets guarantee fund

This article was produced by IFR and originally published on Reuters.

The European Commission has invited development banks to bid for as much as €6bn of guarantees for sustainable infrastructure and other projects in emerging markets under a huge new fund. A clear response to China’s significant EM investments under its “Belt and Road Initiative”, the goal is for the European Union to seed major investments to spur developing countries’ energy transitions and sustainable development.

  1. The €6bn on offer represents the first bidding round under the new €13.1bn European Fund for Sustainable Development Plus (EFSD+).
  2. The fund, which will run to 2027, follows on from a €1.5bn pilot that began in 2018.
  3. The fund is being seen as a catalyst for private investment in emerging markets sustainable infrastructure.

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The move reflects major European institutions’ conclusion that traditional aid is insufficient to achieve the United Nations’ Sustainable Development Goals (SDGs) across the world.

“With the universality of the SDGs, the financing of the SDGs has become universal as well. ODA [official development assistance] is not going to cut it,” said a Commission official.

Accordingly, the Commission will use European taxpayer money to provide otherwise unavailable funding – what it calls “additionality” – that can catalyse private investment.

“We want to use this guarantee to tap into the total client assets available floating over the financial markets and attract at scale, if possible, institutional investors into more risky areas such as the least developed countries or micro, small and medium-sized enterprises that they would otherwise not invest in,” the official said.

At the same time, the institutions – the Commission, the EU member states, the European Investment Bank (EIB), the European Bank for Reconstruction and Development and others, which they term “Team Europe” – are aiming to make European support of sustainable development more visible globally.

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Global call

While the initial European Fund for Sustainable Development was focused on Sub-Saharan Africa, the far larger Plus version has a global reach. However, Sub-Saharan Africa still represents the biggest single target area, with nearly half of EFSD+ guarantees (an anticipated €2.8bn) allocated to the region.

The EU’s neighbouring countries and accession candidates, as well as countries in the Middle East, Asia-Pacific, Latin America and the Caribbean are eligible, too.

“EFSD+ has a global scope. So we are able now to receive programmes supporting investments in countries all over the world, as long as they are partner countries eligible for ODA,” said the official.

Projects should be in one of six areas. These comprise “connectivity” (sustainable energy, transport, digital); micro, small and medium enterprise financing; agriculture, biodiversity, forestry and water; sustainable cities; human development; and sustainable finance.

The first three are to account for two-thirds of the €6bn, though the Commission recognises that some projects will overlap between areas.

Open architecture

EFSD+ is the “open architecture” portion of nearly €40bn of EU guarantees, according to the Commission. The remainder is exclusive to EIB under a “dedicated window” in EU terminology.

The larger amount in turn forms the bulk of the EU’s €51.7bn External Action Guarantee initiative. This also includes nearly €12bn of loan guarantees under the EU’s Macro-Financial Assistance support of developing countries experiencing balance of payments crises, plus a far smaller volume (€300m) via the Euratom nuclear agency.

The Commission has invited more than 20 multilateral and national development banks to make proposals for co-investment under EFSD+.

These include the 11 institutions that participated in the original EFSD – among them Agence Francaise de Developpement, Italy’s Cassa Depositi e Prestiti, FMO of the Netherlands and KfW of Germany.

The broader range of potential participation in EFSD+ reflects a new shift to what the Commission calls the “European financing architecture for development”.

“A big discussion taking place within Europe, between member states and the Commission, together with the development banks, is on how we can strengthen our work together to deliver the Sustainable Development Goals in our partner countries,” said the official.

Limited first loss

The Commission expects to receive proposals from bidders in July and to announce the first co-investments late in the year after extensive review and due diligence. It is notably open on the structure of its participation, citing first, second and third-loss exposure, credit enhancement, junior equity, securitisation and specific risk cover (such as covering construction risk) among the options.

However, it will seek to spread its exposure.

“We cannot just receive from everyone a request for a first loss because that would consume our risk-taking capacity entirely. So it will need to be a mix. And we will clearly look at higher additionality when first loss is required or requested,” the official said.

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