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EIP looks to bring investment to Africa's more fragile states, but some warn that the plan may miss its target, writes Finbarr Toesland.

Only 4% of global FDI currently goes to Africa, with a mere 6% of FDI to developing countries going to nations considered to be 'fragile states', according to fDi Markets. Late in 2017, the EU launched the European External Investment Plan (EIP), the largest ever investment programme for Africa, in an effort to encourage FDI to projects and countries that otherwise would prove to be too risky for private investment.

The EIP has received €4.1bn from the European Commission and is partnering with private sector firms in Europe to find investment opportunities that meet sustainable development goals and support Agenda 2030 in both Africa and the EU Neighbourhood. Depending on the contributions from EU member states and other countries, the EIP is expected to raise between €44bn and €88bn in private investment by 2020.

Two of the EIP’s three pillars are traditional in nature with one focusing on offering comprehensive technical assistance to local authorities and SMEs, and another pillar committing to improving public and private sector dialogue around issues constraining investment. 

However, the most notable aspect of the EIP is found in its innovative first pillar that established the European Fund for Sustainable Development (EFSD). The EFSD utilises a range of financial instruments, including blended finance, financial guarantees and other risk-sharing tools, aimed at attracting investment for development from the private sector.

“The EFSD guarantee is so significant because it can de-risk investments against a guarantee from the EU budget in very difficult environments that would otherwise not happen. This is absolutely new and can really be a game changer and change maker for investors in difficult markets,” said Carlos Martin Ruiz De Gordejuela, European Commission spokesperson for international cooperation and development.

For example, if a public utility agrees to purchase a specific number of megawatts of renewable energy but is unable to pay at the completion of the project, the EIP would cover the financial shortfall faced by the private investor. Although a central pillar of the EIP concentrates on improving the business environment, including enhancing economic governance and strengthening legal systems, these aims are long term and many private businesses are unlikely to invest before significant progress has been made towards these targets.

Another aim of the EIP is to reduce the flow of migrants to EU countries by generating jobs and improving economic conditions in their home countries, yet this approach has its critics. According to a recent report from think tank Center for Global Development, sending aid and investing in poorer countries is unlikely to deter migration in any meaningful way and might even lead to more migrants making the journey to Europe.

In addition to this, María José Romero, policy and advocacy manager from the European Network on Debt and Development, does not believe that guarantees to private companies constitute a silver bullet to make them invest in riskier projects with a higher development impact. The evidence shows that blended finance mostly goes where a private financier is willing to invest; which usually requires rule of law, functioning public institutions and infrastructure. As a result, blending incentivises the routing of aid to middle-income countries with attractive investment climates and risks reducing the funding available for low-income countries,” she said.

This article is sourced from fDi Magazine
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