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30 July, 2018

European Commission issues €800 million in guarantees for blended finance projects

European Commission issues €800 million in guarantees for blended finance projects

Earlier this month, the European Commission announced the first 12 guarantees issued under its new External Investment Plan (EIP). Together they represent €800 million in guarantees that aim to attract an impressive €8-9 billion of private and public investment. What makes this announcement even more significant is the fact that the guarantees issued are for a range of innovative blended finance structures, which signals that the Commission is making a critical shift towards private capital mobilization.

The EIP was launched in September 2017 with €4.1 billion from the EU to promote sustainable development in Africa and the EU neighborhood. To do this, it has been equipped with two financing tools: a €1.5 billion guarantee fund and €2.6 billion in blending facilities.

The blending facilities enable development financial institutions (DFIs) to blend Commission grants with their loans, decreasing costs for end borrowers and enabling institutions to finance higher risk projects. The Commission disburses funding through assessed DFIs - mostly European development banks, but also institutions like the African Development Bank (AfDB).

The EIP will focus on a number of themes, including small business financing, sustainable cities, sustainable energy, internet access, and agribusiness.

The Commission should be commended for this innovative program and its rapid implementation, as well as its shift to private capital mobilization. The Commission’s blending programs have historically focused on providing grants to partner DFIs to blend with their own balance sheet, thus catalyzing investment from public institutions. While the EIP leverages similar blending mechanisms - channeling funding through partner DFIs - the EIP is also focused explicitly on catalyzing private investment with that funding. The guarantees were announced less than a year after the EIP was officially launched, and build off the €1.6 billion that has already been issued under the blending facilities.

At Convergence, we were excited to see many of our members and one of our grantees included in the first 12 guarantees. Some highlights include:

  • Africa GreenCo, a grantee under our Design Funding program, will receive a guarantee of €28 million and technical assistance of €0.9 million. France’s AFD is the sponsor financial institution for the project. Africa GreenCo represents a paradigm shift for the renewable energy sector in Sub-Saharan, aiming to act as a creditworthy intermediary between independent power projects and state utilities, allowing projects to attract commercial finance. Africa GreenCo will first launch in Zambia. They have also already received funding from the Rockefeller Foundation and the Development Bank of Southern Africa.

  • The Africa Local Currency Bond Fund, with Germany’s KfW as lead financial institution, will receive a guarantee up to €100 million and technical assistance of €2 million. We wrote a case study on the fund recently, which anchors local currency bond issuance in several African countries, and has catalyzed local institutional capital. We also hosted a workshop last year with the Commission, the OECD, and others, on foreign currency risk in emerging markets, and the need to scale up local currency financing.

  • AfDB, a Convergence member, received support for two projects. AfDB will receive a guarantee up to €50 million and technical assistance up to €6 million for their financing program focused on distributed energy companies, which provides pay-as-you-go solar power systems for household use. AfDB will also receive a guarantee of up to €50 million for their Room2Run securitization structure, which will allow AfDB to finance more sustainable renewable energy projects in Sub-Saharan Africa while enabling private investors to invest in AfDB projects by taking credit risk on a defined tranche of the portfolio.

The Commission has been, and will continue to be, one of the most important and catalytic funders in the blended finance space, and we are excited to see the next set of projects approved under the EIP.

About the Author
Dean Segell

Dean Segell is Head of Product Development at Convergence. He is responsible for Convergence’s technology platform as well as the organization's data and insight offerings. Prior to Convergence, Dean was a consultant at Dalberg Global Development Advisors in the firm’s Johannesburg and New York offices. At Dalberg, Dean worked on projects across a variety of sectors, including financing for development, agriculture, employment, and SME development. Dean’s clients included MasterCard, JP Morgan, the Gates Foundation, the Rockefeller Foundation, and the Government of Canada. Dean was also on the Dalberg team that designed and launched Convergence. Dean started his career in investment banking in South Africa, where he was part of Nedbank Capital’s equity option sales and trading team. Dean is from South Africa and studied at the University of Cape Town.

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