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Five issues for the EBRD to consider in its expansion to sub-Saharan Africa

Expert Comment

Written by Mandeep Bains, Annalisa Prizzon

Image credit:Benjamin le Roux Image license:Unsplash

Last month, the governors of the European Bank for Reconstruction and Development (EBRD) gave in-principle approval to expand the bank’s operations to sub-Saharan Africa (SSA) and Iraq. The ‘limited and incremental’ expansion to SSA would come with the proviso that it does not impair the bank’s financial standing or its ability to support existing members. Moreover, the bank’s current priority is supporting Ukraine and other countries of operation in dealing with the devastating consequences of the war. As such, we understand that in an initial phase EBRD’s expansion to SSA would involve a handful of countries at most and a limited investment volume.

While the in-principle decision to expand to SSA may be implemented more slowly than might have been expected before the Covid-19 pandemic and the war in Ukraine, it still represents a fundamental development for the EBRD. Every geography is unique, but for the EBRD, SSA presents more challenges than any of the other regions to which it has expanded. Operating in SSA will require tailoring or adapting existing EBRD strategies, financing instruments and skillsets – as currently deployed in Central and Eastern Europe, Central Asia and North Africa – to the challenges and demands of countries in the region.

In this insight, we discuss why the expansion of EBRD operations is welcome news for the countries of SSA. Second, we take stock of the experiences of other development actors in SSA, particularly other multilateral development banks (MDBs), highlighting some key issues for consideration as the EBRD plans its operations in the region.

Why the arrival of the EBRD matters for SSA

The crisis triggered by the Covid-19 pandemic meant that progress towards the Sustainable Development Goals slowed down considerably in most SSA countries. The spike in food and energy prices, the uncertainty associated with the knock-on effects of the war in Ukraine and the tightening of US monetary policy will make it even harder for African countries to get back to pre-pandemic growth trajectories and make up for lost ground. Estimates of financing needs in SSA were substantially revised upwards, even before the latest commodity price shock hit.

As such, a new development actor and one that invests primarily in the private sector should be welcome news for the region. Indeed, in recent years, the development strategies of SSA countries have increasingly stressed the growth of the market economy and the private sector as the way forward. Here, the EBRD can deploy its experience of loan and equity investments in the private sector and of supporting the development of domestic financial and capital markets, combined with the relevant technical, legal and policy advice and support.

Furthermore, investment in the green economy in the region is still limited. SSA countries are not the major contributors to rising global temperatures but they suffer disproportionately from the consequences of the climate crisis. It is important that the region adapts to this reality, particularly through building climate-resilient infrastructure, diversifying economies and creating new job opportunities. A pressing concern for policymakers in the region is expanding access to energy – investment in clean and renewable energy should therefore be in high demand.

While the EBRD’s expansion in SSA will lead to a welcome injection of funds to help fill a growing financing gap, the bank’s longstanding expertise in private sector development and green economy transition – including in energy access and climate-resilient infrastructure – could prove to be particularly useful for development in the region.

Sub-Saharan Africa: a new geography and new challenges

Since its creation in 1991, the EBRD has gradually expanded its region of operations by incorporating countries as diverse as Mongolia and Cyprus. Its business model appears to work in different contexts and not just in former command economies.

However, no two geographies – or countries – are the same. SSA countries can generally be characterised as having greater financing needs, larger gaps in infrastructure and technical capacity, a smaller private sector, less developed financial sectors and more restricted access to international capital markets than the EBRD’s existing countries of operation. The SSA region is also home to the largest number of countries defined as fragile or in conflict situations.

How, therefore, should the EBRD adapt its model to respond to the challenges and demands of SSA countries? Below, we outline five issues for consideration based on the operations of other MDBs and development actors in the region.

1. Operations in the region will necessitate a shift in the business model with even greater risk appetite and risk mitigation tools, especially in fragile countries. They may also require a higher share of public sector lending.

The EBRD is recognised as having greater risk appetite than its comparators. However, operating in SSA means greater macroeconomic risks, lower financial returns and higher exit risks than in other regions where the EBRD operates. These are all factors that deter domestic and international private investment and will naturally have to be factored into the design and delivery of EBRD projects in many countries.

When it comes to infrastructure investment, the IMF indicates that 95% of projects in SSA are carried out by public entities (either governments or state-owned enterprises). Investment in infrastructure projects with private sector participation is falling in the region; it is concentrated in a handful of countries and has received relatively little financing by MDBs. For the EBRD to advance infrastructure development in the region – including green infrastructure – it may have to accept a higher share of public sector lending than it considers ideal. However, this is already the case in some existing countries of operation (such as those in the Western Balkans).

2. Greater investment in policy advice to national governments and technical assistance programmes will be required.

Broad policy engagement will be necessary in most SSA countries to improve policy and regulatory frameworks in various sectors as well as the overall business environment. In recent years, the EBRD has been strengthening its policy engagement with governments to deepen and widen its impact in partner countries.

Such policy engagement will need to be provided alongside a more intensive programme of technical assistance than traditionally offered by the EBRD. Specific enhanced support may also be needed to strengthen project pipelines for infrastructure projects; the EBRD’s Infrastructure Project Pipeline Facility will therefore need to be deployed more extensively in SSA. A recent ODI survey found that client countries in the region do value such technical cooperation, especially the availability of grant financing for project preparation.

3. More grants and concessional resources will need to be mobilised.

If the EBRD is to provide more technical assistance and policy advice in SSA than it does in other regions, it will have to mobilise and use more grants. Most technical assistance in the region, including by other MDBs, is funded through grants rather than loans.

Furthermore, where the EBRD is working with the public sector it may face the reality of having to combine more of its loans with investment grants or with the concessional finance offered by other development partners. This is because all SSA countries are now classified as at moderate risk of debt distress and many of these countries receive part of their country allocation from other MDBs as grants for sovereign operations (up to 50% in the case of the African Development Fund countries) rather than loans.

Unlike the World Bank, the International Finance Corporation and the African Development Bank, the EBRD does not have access to a concessional window. Nevertheless, the EBRD has been increasingly successful in securing grant funding from the EU and bilateral donors in recent years, reflecting the scaling up of its activities in more grant-intensive regions such as Central Asia and the Western Balkans. Not only will shareholders have to accept a heavier use of grants in SSA countries, but the EBRD will also need to be creative in sourcing these grants or concessional funding to blend with its public sector lending.

4. The EBRD should roll out its existing model of heavy country presence.

The EBRD already has a more extensive country presence than any other MDB. In many EBRD countries of operation, there is more than one office. For example, the EBRD has seven offices in Kazakhstan: two large offices in the political and business capitals and five in the regions serving small and medium enterprises. The EBRD should apply a similar approach in its SSA operations, particularly as client countries in the region strongly value the presence of a country office.

5. There should be greater coordination with other MDBs and national stakeholders. Joint projects with other MDBs should also be set up in the initial phase.

In SSA, the EBRD will join other MDBs that already support the region’s countries: the African Development Bank, the European Investment Bank, the World Bank Group (particularly the International Finance Corporation), and several sub-regional development banks such as the Trade and Development Bank in East Africa. This presents the opportunity for cooperation between MDBs, leveraging different business models and expertise across the system of MDBs and the region to collaborate ‘as a system’. The co-location of the EBRD’s country offices with those of other MDBs should also be considered, while co-financing with other MDBs is a good way to get to know new countries and development partners, as demonstrated by the experience of the Asian Infrastructure Investment Bank in its first years.

Conclusion

The decision in principle to further expand the EBRD geography is recognition that its business model has succeeded in different contexts and could have a similar impact in SSA, the region that is arguably most in need of fresh financing and approaches. The way in which the EBRD deploys its existing capabilities for its first phase of involvement, combined with the choice of countries and private-sector partners, will ultimately be critical to its success. Initial engagement in a handful of countries seems a sensible way for the EBRD to adapt its operations and business model to the challenges and opportunities of a new region.