Investing in infrastructure – Europe’s External Investment Plan two years on
Two years ago I blogged about the commencement of a new generation development strategy coming out of Europe: the EU’s External Investment Plan (“EIP”). The EIP was kick-started on 28 September 2017 with the opening of the European Fund for Sustainable Development (the “Fund”), and given a 2020 target of turning €4.1 billion of EU funds into a further €44 billion of private investment in infrastructure projects in Africa and the EU Neighbourhood. Two years on, and as 2020 approaches, I take a look at how the plan is measuring up.
Recap: Development through infrastructure (but with a twist!)
The goal of the EIP is to promote sustainable development in Africa and the EU Neighbourhood by increasing investment in infrastructure (i.e. the basic facilities required by society to function). Promoting development through infrastructure is of course nothing new; however, the EIP product is, and it is designed to substantially increase the resources going into infrastructure.
The EIP was initiated as part of the EU’s commitment to the UN’s 2016 Sustainable Development Goals, to assist developing countries to promote sustainable economic growth, and address issues such as poverty, gender inequality and climate change. These issues are accordingly embedded in the investment criteria of the EIP.
The EIP’s central premise is to use a limited amount of public funds to leverage significantly more private investment. The plan is to do this by, first, expanding the investment space by improving conditions in socio-economic sectors and fragile regions where investment is currently difficult or overlooked, and secondly, encouraging investment through a new generation of financial instruments.
" the EIP is a bold initiative to develop infrastructure in areas where there is both great need and great risk"
This premise and the structure of the EIP are based on the EU’s European Investment Plan (i.e. the “Juncker Plan”), which has been hugely successful in increasing infrastructure funding within the EU, resulting in a reported €360 billion of investment between November 2014 and November 2019. In particular, the EIP is based on an adapted version of the Juncker Plan’s three pillars, as follows:
- An EU fund offering a new generation of financial instruments (Pillar 1), consisting broadly of “guarantees” aimed at de-risking investment in projects (namely by providing various forms of guarantees to financial institutions and private companies investing in development projects), and “blending facilities” aimed at mobilising finance through a mix of instruments (principally grants and loans); and
- Technical assistance (Pillar 2) and structured dialogue (Pillar 3) to help partner countries develop financially viable projects and improve the investment climate.
Efforts under these three pillars are to be directed towards specific areas for investment called “investment windows”.
Shortly after my last blog on this subject, the European Commission set down its five “investment windows” as: (1) energy, (2) micro, small and medium enterprise financing, (3) agriculture, (4) cities, and (5) digitalisation.
In respect of these windows, and as of today, the European Commission reports that it is “on track” to achieve its 2020 target, having already allocated €3.7 billion from the Fund against which it expects to leverage around €37 billion in investment. Investment so far has included:
- €1.54 billion in over 28 guarantees, which are expected to leverage €17.5 billion in investment.
- €2.2 billion in blending facilities, against which the EU expects to leverage €19.5 billion of investment towards more than 90 projects.
Measure of success?
There has been a noticeable ramping up of physical progress under the EIP in the past 12 months, during which time the vast majority of current projects gained approval and commenced, an additional €500 million was pledged to the Fund, and, at least by the Commission’s projections, the EIP is set to achieve its target of €44 billion of private investment in infrastructure projects by 2020.
Whether the EIP is also achieving its stated development objectives is more controversial. Perhaps most notably, in mid-2018 a group of leading development NGOs petitioned the EU not to expand the EIP further, claiming that the EU’s development budget is being spent on private sector projects without sufficient evidence of their contribution to the EU’s development objectives.
Leaving broader development objectives to one side, the EIP is a bold initiative to develop infrastructure in areas where there is both great need and great risk. Clearly it isn’t fair to judge the EIP’s success against its big brother the Juncker Plan, and it will take some time to work out what infrastructure needs can be met under this model (and how), and what cannot (for instance, agriculture investment is proving a harder sell than renewables investment). However, the EIP is already achieving its targets for infrastructure investments, and from the standpoint of physical progress it should, so far, be viewed as a success.
As for the outlook, while the shadow of Brexit looms ever larger, so too does the scale of the task for infrastructure investment. The EU is showing no signs of stepping back its model of promoting infrastructure investment by leveraging private finance, whereas a phenomenal amount of new infrastructure investment will be needed to meet the EU’s own “climate neutral by 2050” target and to provide assistance externally with similar transitions (investment in renewable energy now makes up around 80% of global energy investment per year). For international construction firms then, full steam (figuratively speaking) ahead.