Investment in sectors that matter

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The European Investment Bank (EIB), Europe’s long-term lending institution, formally opened the bank’s first permanent representation in Ethiopia in 2016. The office leads engagement by the EIB, both to support long-term infrastructure and private sector investment in Ethiopia and to manage relations with the African Union Commission and other international organizations based in Addis Ababa. The Bank’s Ethiopia office Head Christophe Litt spoke to Capital about some of the projects in their pipeline.

 

Capital: Tell us about some of your current projects.

Christophe Litt: If we look at the public sector projects, we are currently appraising two strategic projects. One is called a Jobs Compact; the initial idea was to build three industrial parks which would be expected to  create about 100,000 jobs and 30 percent of those jobs would go to refugees based in the country. So, the idea is really to better  integrate refugees who have been here for many years.

This was announced by the Ethiopian Prime Minister in New York at the Obama Refugee  Summit in 2016, during that time the Prime Minister met with the Bank’s president, representatives of the World Bank, European Union and DFID, and with all those institutions we confirmed our interest in financing the so-called Jobs Compact project.

A lot has happened since then. There was a pre-appraisal or pre-feasibility study carried out by McKinsey to identify the best sectors that could be developed in each of these parks given their location but also taking into account all the existing initiatives in the country. A so-called refugees skills survey was also undertaken. We also tried to determine what kind of institutional setting would be appropriate for each of the parks; what kind of governance, what kind of partnership; public private, or exclusively public or private and so on.

When it comes to EIB, what we will do, at least initially, is to finance Dire Dawa phase two which is will focus on the electrical appliances sector, so it will not be textile, it could be automotive, it could be all kinds of electrical equipments. Now we are entering the phase of the feasibility study, and  the environmental and social impact assessments. We will also have to look at some of the associated infrastructures such as housing, transport, energy; to determine the perimeter of our intervention.

Our partners would follow a budgetary support approach which means the financing would not directly be linked with the construction of the park but to some objectives that need to be reached by the government to make the Jobs Compact concept a success. For example, to improve investment climate, jobs productivity, job creation, refugee status; all those aspects will be taken into account .

So, our approaches are fully complimentary. EIB is more of a project based organization; we really look at projects and it is more difficult for us to influence those more high-level topics which will be key for for the success of our financing of Dire Dawa Phase II; if the investment climate is better and productivity is better, you can attract more investors and can be more successful, etc.

Capital: The Dire Dawa phase two projects will focus on electrical appliances. Why was that particular sector chosen?

Litt: McKinsey did a very comprehensive study on all the existing projects currently being developed in the country or that will be developed, they looked at all potential sectors given the competitive advantages that can be offered by the country; Dire Dawa is close to Djibouti, and there is a lot of textile projects already. They had interviews with foreign companies to see what they were looking for, what kind of competitive advantages that place may offer and that was the proposal.

Capital: Do you have other projects in the public sector?christophe-litt

Litt: There is another that I really find interesting; because it is focusing on an existing industry in the country which has a lot of know how and has a big potential but needs some support. It is the Mojo Leather City project. The idea is to build an industrial park in Mojo focusing on the leather industry. There will be a state of the art water treatment facility; it is a very polluting industry, using lots of chemicals. I have been to Mojo to visit some of the tanneries and they would clearly benefit from such a project. So, the idea is to build a new park based on the so-called one stop shop concept. The cost is still to be determined but it could be around 100 million Euros and in such a case EIB would provide 50 million; half of the cost.

The EU has approved already, a 15 million Euro grant to finance some components; one is all the studies and  environmental impact and social assessments,. The second thing is to work on the value chain; improve the raw material/ leather and third to focus on social aspects.

Capital: So, the financing for this project has already been acquired?

Litt: We are talking about the pipeline, so for those two projects, we are currently appraising them , doing a full due diligence with the help of our technical team and sector specialists and when all the studies will be finalized we will prepare what is called an investment proposal that will be submitted to the management committee of the Bank and its board of directors. Then we will be in a position to sign the financing of these projects in the form of a long term loan at concessional rate. Usually it takes 9 to 12 months to get through all these processes. But it will all depend of course on when the studies are available.

Capital: When you invest in these kinds of projects, is it at the recommendation of the Ethiopian government; do they give you lists of areas to focus on?

Litt: They don’t exactly give us directions, of course this is a public project and we lend to the government; the government is the borrower, so it has to be approved by the government. It is more a formal step, but we also receive a financing request which confirms the interest of the government for an EIB financing for a specific project.  We are in regular contact and have weekly discussion with the Ministry of Finance  to discuss with them  potential projects and make sure we provide the right support given the overall economic strategy of the government.

Capital: For the Jobs Compact project, you said 30 percent of the jobs created will go to refugees. Where did that idea come from?

Litt: The project was initiated by DfID, there is a similar project in Jordan. I think that there is a strong desire from the Ethiopian government to better integrate refugees in general. But there are of course several  factors to be taken into account, such as the skill and profile of refugees compared to the needs of investors. It is something that we will see in time. But the idea is that at least 30 thousand refugees should benefit from this project to get the possibility to have a job at the end of the process.

Capital: What about the private sector, what is the Bank’s engagement in that sector?

Litt: For the private sector, we also have quite a few leads. We have two types of instruments; the first is what we call corporate loan, whereby we provide senior debt  of maximum 50 percent of the cost of a project to a corporate that invests in the country.

We are following various projects such as  investment to build malt houses in the country and aluminum cans. We also had contacts with breweries who are looking at extending their operations.

Then we also have project finance instrument which is a loan that we make to an SPV (Special purpose Vehicle), a company that is being set up for a specific purpose, and all the cash flows from the project will be used to pay back the loan. For that instrument, we are also looking at various projects such as the Corbetti geothermal project. For Corbetti the idea is to provide 50 percent of the senior debt necessary for the first 60 or 70 megawatts. The project has been a bit delayed, but we already had a team going on site and starting appraisal, a few years ago. Now the promoter has  signed the power purchase agreement (PPA) and we expect that the project will move forward.

We are also looking at the so-called “scaling solar” projects that are being launched by the World Bank. All this is of course private lending; so we lend to a private company although there is a public private partnership, as the electricity is purchased by the State for the term of the project and based on pre-agreed tariff..

We are also in discussions with OCP, the fertilizer company which is building a plant in Dire Dawa. It is a USD 2.5 billion project for phase one..

We also have  two other interesting projects that we are also appraising at the moment. The first one is called Women Entrepreneurship Development Program (WEDP), which was set up a few years ago by the World Bank and the idea for EIB would be to provide  a concessional loan to the Ethiopian Development Bank which then will on-lend to selected micro finance institutions who will then provide financing to women who have existing businesses and are looking to expand it. Appraisal for that project has already started. The objective will also be for EIB to provide Technical Assistance where needed for example in the form of capacity building or training of some of the stakeholders. So basically this will take the form of a grant alongside our the loan to make the project more robust.

The other project that is a bit similar but  is at a very early stage is in the honey sector. We had preliminary discussions with the Agricultural Transformation Agency who is working on the honey value chain. Ethiopia is the 10th producer but is definitely not the 10th exporter, so there is a big potential there and we are trying to see how we can cooperate for example through the financing of small farmers or beekeepers using a facility that EIB has developed specifically for such beneficiaries, also through microfinance institutions .

Capital: How do you assess the capacities of micro finance institutions in this country?

Litt: The first thing is that our loan for the above projects would be to the Development Bank so the risk that we take in the end is on the Ethiopian government. But of course we want to make sure that our financing go to the micro finance institutions that are sustainable. So, a full due diligence of these institutions will be carried out by our sector specialists.

Capital: What about the startup sector in the country that is growing, do you have interests in financing?

Litt: It is difficult for us to directly invest in startups; it takes a lot of human resources and the potential amount to invest is a bit too small for us, given that we invest about EUR 3bn a year in Africa. We have done it with M-Birr, it is an exception because we found the potential impact of this investment quite unique.

One way for EIB to reach start-ups is to invest in venture capital funds; these funds will then  invest in innovative companies, particularly startups. These are also usually funds that are a bit small in size and have a lot of risks.

This why we have set up a program called Boost Africa with the African Development Bank and the EU. The idea is to de-risk our investment in venture capital funds by using  a so-called First Loss Tranche. Let’s say that we have identified a good venture capital fund in Ethiopia but it is a bit too risky, so the EU would co-invest in the fund, but its investment will be a First Loss Tranche, which means that if the fund does not perform as expected the losses will first be absorbed by this tranche. And then EIB and the other private investors would be senior to this tranche. The idea is really to reduce the level of risk of such projects so that it reaches a level that is acceptable to EIB and to private investors.