Documents considered by the Committee on 6 January 2016 - European Scrutiny Contents


14   The ACP Investment Facility: does it provide added value?

Committee's assessment Politically important
Committee's decisionCleared from scrutiny; drawn to the attention of the International Development Committee
Document detailsCourt of Auditors' Special Report: The ACP Investment Facility: does it provide added value?
Legal base
DepartmentInternational Development
Document Number(37335), —

Summary and Committee's conclusions

14.1  This European Court of Auditors (ECA) report assesses whether the European Investment Bank's (EIB) Investment Facility (IF) has added value to EU development cooperation with African, Caribbean and Pacific (ACP) countries; whether IF operations have been coherent with other EU development aid provided to ACP countries; how successful the facility has been in providing long-term financing as well as loans in local currencies; and whether the IF's operations are catalytic.

14.2  The European Investment Bank (EIB) is the bank of the European Union. Although most of its operations take place within the EU, the EIB also has an important role to play in supporting the EU's external policy objectives. The IF is managed by the EIB, became operational in 2003, and was created to support EU objectives in the African, Caribbean and Pacific region (ACP). The IF provides medium-to-long term financing to support investments by private and public entities in all economic sectors of ACP countries.

14.3  Total EDF contributions to the IF stand at €3.685 billion (£2.595 billion). The IF operates as a revolving fund (any income and repayments from operations are used to finance new investments.) A new €500 million (£352 million) Impact Financing Envelope (IFE) was created in 2014 to take on higher risk in return for higher development impact.[97]

14.4  The report concludes that the IF's operations are coherent with other EU development measures targeting ACP countries. The IF's three main funding sources are also found to be coherent with EU development cooperation measures. Credit lines to financial intermediaries for on-lending to small and medium-sized enterprises (SMEs), equity investments and direct financing of infrastructure projects promote private sector development, employment and sustainable economic growth, and thus are consistent with EU development policy. Additionally, the IFE is identified as having significant potential to increase the development impact of the IF and hence further align IF operations with EU development cooperation measures. The report also determines that the EIB provides a significant amount of long-term financing, has greatly increased the amount of lending it undertakes in local currencies and generates a catalytic effect by attracting additional financing to fund investments.

14.5  Two recommendations are made: that the EIB ensures that financial intermediaries include a reference to the IF in all of their on-lending contracts so that end beneficiaries are informed about the source of the funding; and that the EIB, together with financial intermediaries, should ensure that end beneficiaries (typically SMEs) are fully aware and able to benefit from technical assistance offered by the EIB so as to maximise development impact.

14.6  The report concludes that the IF does add value to EU development cooperation with ACP countries. In particular, the IF is coherent with the EU's development policy with ACP countries, provides access to long term finance and loans in local currencies, as well as catalyses additional financing (see "Background" for further details).

14.7  The Parliamentary Under-Secretary of State at the Department for International Development (Baroness Verma) says that the EIB has agreed to implement the two recommendations referred to above, and that this is likely to have a relatively small, but positive, effect on the EIB's overall development impact. Overall, the Minister is "pleased that the report finds that the IF is well aligned with EU development policy and that a wide variety of financial instruments are used to facilitate a diversified portfolio of investments". The Minister notes that the Government works closely with the EIB on its external lending with the aim of continuing to increase the EIB's overall development impact and value for money, and "strongly supports the Impact Financing Envelope", which she considers "to be increasing the development impact of the EIB's work".

14.8  Subsequent Council Conclusions of 14 December 2015 underline the role of the private sector in development and thus, by providing long-term loans in local currency in ACP countries, the IF's contribution to eliminating exchange rate risk for borrowers, increasing access to finance and leveraging, additional funds both for public and private sector operations. The Council encourages the EIB to strengthen further the delivery of social, economic and environmental impact objectives, also in the areas of climate change and migration. The Council welcomes the increased potential for the Investment Facility to reach more private sector beneficiaries by providing long-term funding for financial intermediaries, thereby developing the local financial sector, and stimulating the financial intermediaries' on lending to SMEs. The Council encourages the EIB to explore methods to continue meeting the demand for loans in local currency from local enterprises that do not trade internationally, as being key to the promotion of SMEs and microenterprises. The Council also encourages the EIB to explore the IFE's potential further to increase coherence by focusing on projects that generate a strong development impact (see "Background" for further details, and the Council Conclusions at the Annex).

14.9  This is a "good news" story, which we draw to the attention of the House because of the degree of interest in development issues in general, and particularly in the role of the local private sector in development (c.f. the 2030 Agenda for Sustainable Development and the Addis Ababa Action Agenda[98]).

14.10  For the same reasons, we draw these developments to the attention of the International Development Committee.

14.11  We now clear the document.

Full details of the documents: Court of Auditors' Special Report No. 14/2015: The ACP Investment Facility: does it provide added value?: (37335), —.

Background

14.12  The European Court of Auditors' (ECA) special reports set out the results of its performance and compliance audits of specific budgetary areas or management topics. The ECA selects and designs these audit tasks to be of maximum impact by considering the risks to performance or compliance, the level of income or spending involved, forthcoming developments and political and public interest.[99]

Special Report No. 14/2015: The ACP Investment Facility: does it provide added value?

14.13  The ACP Investment Facility was set up under the Cotonou Agreement and began operation in 2003 for a period of 20 years. The Facility's objective is to support investments by private and commercially run public entities in all economic sectors. It provides medium- to long-term financing through various financial instruments and thereby aims at delivering sustainable economic, social and environmental benefits. Projects have to ensure high environmental and social standards. The primary focus is on the support of private- and commercially-run public entities. The Facility offers funding on market-based terms to help ensure than it does not crowd out local financing institutions.

14.14  The Facility obtains its capital from the 9th, 10th and 11th European Development Funds (EDFs).[100] It is managed by the European Investment Bank (EIB[101]). It is a risk-bearing revolving fund which is intended to be financially sustainable. Its total endowment is €3.685 billion (£2.595 billion). Capital contributions by the Member States are paid directly to the European Investment Bank.

14.15  This performance audit was produced by Audit Chamber III, which specialises in external actions spending areas. The auditors assessed:

·  whether the Investment Facility added value to EU development cooperation with the ACP countries;

·  whether the Investment Facility's operations were coherent with other EU development aid provided to ACP countries;

·  how successful the Facility had been in providing access to long-term financing as well as loans in local currencies; and

·  whether the Facility's operations had had a catalytic effect.

14.16  In publicising the report, the Court's main conclusion is that the Facility "adds value to the European Union's development efforts and fits in well with its policy objectives".

14.17  The Court noted that the Facility had approved €5.7 billion (£3 billion)[102] worth of development projects over the last decade.

14.18  The auditors looked at investment deals signed between 2011 and 2014 in Kenya, Tanzania, Uganda, Nigeria, Cameroon, Malawi, Mauritius and Haiti. The auditors found that the Facility adds value to EU development cooperation with ACP countries. At the end of 2014, credit lines represented 28% of the Facility's portfolio, compared with 14% at the end of 2010 — the increased share reflecting the ongoing importance of the long-term financing offered by the Facility. The Facility had also had a positive catalytic effect in that it attracted additional funding.

14.19  Klaus-Heiner Lehne, the ECA Member responsible for the report, said:

"Recent changes to the Facility offer enormous potential to tie in even better with other EU development activity by focusing on projects which generate impact and reduce poverty."

14.20  The Facility presently supports infrastructure projects in electricity supply and generation, telecommunications, water and sewerage, as well as transport, health and education. It is providing 25% of the financing of the €600 million (£428 million) Lake Turkana Wind Power Plant project, one of the largest single private investments ever made in Kenya and the largest wind farm in sub-Saharan Africa. The Facility also invested €5 million (£3.57 million) in a microfinance fund, targeting microfinance institutions and small producers active in fair trade throughout Africa; total capital raised was €22 million (£15.7 million); without support from the Facility, the auditors said, this project would most probably not have taken place.

14.21  The auditors did, however, note that the contractual obligation to inform end beneficiaries about Investment Facility (IF) funding had not always been followed and technical assistance did not always target SMEs; and made recommendations in their report on how to address these issues.[103]

14.22  In her Explanatory Memorandum of 10 December 2015, the Minister says that the EIB has agreed to implement these two recommendations; that this is likely to have a relatively small, but positive, effect on the EIB's overall development impact; and that she and her officials will "work with the EIB to ensure it is doing all it can to inform end beneficiaries of access to technical assistance".

The Government's view

14.23  The Minister goes on to profess herself "pleased that the report finds that the IF is well aligned with EU development policy and that a wide variety of financial instruments are used to facilitate a diversified portfolio of investments". The Minister "recognises the important role the EIB is playing in providing long term financing, loans in local currency and catalysing additional funding for investment in ACP countries" and, in particular, "strongly supports the Impact Financing Envelope, and considers it to be increasing the development impact of the EIB's work".

14.24  The Minister concludes thus:

"Overall this Court of Auditors report is line with the UK's assessment of the EIB's development work. The EIB has made progress over the last few years in generating clear development impact through its ACP lending, improving its reporting, and developing policy on key UK priorities such as gender mainstreaming and economic development. The UK works closely with the EIB on its external lending with the aim of continuing to increase the EIB's overall development impact and value for money."

14.25  The Minister notes that, although the report itself will not be adopted by Council, Conclusions on the report are set for discussion and adoption on 14 December 2015.

Previous Committee Reports

None.


97   The €500 million Impact Financing Envelope (IFE) is a dedicated window of the ACP Investment Facility, and targets projects with a higher developmental impact, but also higher risks, than traditional IF activities. IFE operations began in earnest in 2014, with the signature of a €8 million investment in Novastar Ventures East Africa Fund and the further approval of a €40 million investment in the Currency Exchange Fund (TCX). This was formally signed in 2015, along with the €40 million Caribbean and Pacific Impact Finance Facility. See Impact financing in Africa, the Caribbean and the Pacific regions. Back

98   See THE 2030 AGENDA FOR SUSTAINABLE DEVELOPMENT and Addis Ababa Action Agenda. SDG 9 is "Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation". The Addis Ababa Action Agenda includes a commitment to promote affordable and stable access to credit for smaller enterprises. Back

99   See EUROPEAN COURT OF AUDITORS for full background on the role and work of the European Court of Auditors. Back

100   The EDFs are the main instrument for providing European Union aid for development cooperation to the African, Caribbean and Pacific States and to overseas countries and territories. The partnership agreement signed in Cotonou on 23 June 2000 for a period of 20 years ('the Cotonou Agreement') is the current framework for the European Union's relations with these countries and territories. Its focus is on reducing and eventually eradicating poverty. Back

101   Under Article 309 TFEU, the EIB's principal task is to contribute to the development of the internal market. In addition, under the Cotonou Agreement, the Bank administers the ACP Investment Facility. Back

102   €1.4 to the £1. Back

103   See Investment Facility "adds value" in Africa. Back


 
previous page contents next page


© Parliamentary copyright 2016
Prepared 15 January 2016