Alessandro Mariani, Ambassador of the European Union
Seminar on the Role of European Development Banks
in Zambia's Development
5 May 2016
Honourable Minister of Finance
Senior Officials of the Government of Zambia
Colleagues, Ambassadors of European Union Member States in Zambia
Representatives of the Private Sector
Representatives of the Media
Ladies and Gentlemen,
I am delighted to welcome you today to the seminar 'The Role of European Development Banks in Zambia's Development'. This seminar is part of the series of events organised in the framework of the first Europe Week in Zambia.
I wish to thank the Honourable Minister of Finance and his team, for their participation and help with the organisation of the seminar. I also want to extend my gratitude to the EIB "The EU bank", the AFD and KFW for having joined us to share their experiences in Zambia and other relevant experiences which may be of inspiration for similar operations in Zambia.
Objectives of the seminar
The topic before us today is the contribution that European Development banks present in Zambia have made so far to the development of the country and what the European Development banks and the European Union can do in close coordination for an increased impact on the ground.
The role of development banks in general
Development banks are public financial institutions with a dedicated developmental mission. They operate in the field of long-term finance and give priority to the financing of projects that yield substantial economic, social and environmental benefits. They also provide technical assistance to improve the quality of the projects and reduce the risks. Their performance is measured in terms of development benefits they can generate.
They are part of the economic policy toolkit for over-coming cyclical and structural difficulties in economies, complementing financial systems by improving their functioning and bolstering economic resilience. Interest in development banking to promote growth and boost investment has increased, especially in Europe of late.
Their contributions to the development of African countries, and of Zambia, are noteworthy; and deserve to be highlighted.
Examples of projects in Zambia
Let me offer you a few examples of projects financed with the support of the European Development banks here present, and also with other development banks the European Union works with; I am sure colleagues are going to elaborate on this later:
The EIB, the AFD and the EU have jointly provided the financial means for the Government of Zambia to invest in the rehabilitation of the Great East Road, from Luangwa Bridge to Mchinji at the border with Malawi. The African Development Bank also provides financing toward this programme. In total the investment is approx. 250 million Euro, of which more than 40 million Euro grants from the European Union. Those who have travelled to Chipata recently will have noticed the dramatic improvement of the road conditions. And once the road is completed it will have a major impact through improved road safety and reduced travelling time. This will in turn facilitate trade with neighbouring Malawi and Mozambique contributing to the improvement of the Nacala Corridor (1700 km from Lusaka to the port of Nacala)
The EIB and AFD jointly financed the 'Zambia water and sanitation project' for the rehabilitation and expansion of water and wastewater services of the Mulonga Water and Sewerage Company. This project signed in 2013, will increase the supply of clean water to previously unserved low-income areas (25.000 households) and improve treatment of waste water in the region. The EIB loan of 75 million euros is complemented by the 50 million euros from AFD. The European Union also contributed with a grant of 5 million Euros under the ACP-EU Water Facility Pooling Mechanism.
The World Bank, African Development Bank, Sweden and the EU jointly finance the rehabilitation of the Kariba Dam. The works are costed at 300 million USD of which 200 million are provided as concessional loans by the World Bank and the African Development while Sweden made a grant of USD 20 million available and the EU a grant of 64 million euros. I don't have to tell you how important it is that the dam can continue to be safely operated ensuring electricity generation for both Zambia and Zimbabwe in the long run.
The European Investment Bank has provided EUR 50m for the project that includes the construction of a hydropower plant at the existing Itezhi-Tezhi Dam and 291km transmission line to Lusaka that will connect the power station to the national grid and the Southern African Power Pool. The French Development Agency (AFD), African Development Bank, FMO, PROPARCO, Development Bank of Southern Africa, Republic of Zambia, TATA and the Government of India are partners in this same programme. The European Union provided interest rate subsidies as well as technical assistance via the EU-Africa Infrastructure Trust Fund. The programme is going to add 120 Mw to the grid. At the present time of electricity shortages, these investments are crucial for the Zambian economy.
How does the EU leverage these efforts?
As you have realised, I haven't chosen these examples randomly. These are projects which clearly demonstrate the efficient combination of EU grants and development banks' loans to respond to the increasing demand for investments.
In line with its development policy the European Union foresaw that a higher share of EU development assistance would be provided through innovative financial instruments, including under facilities for blending grants and loans. In selected sectors and countries, a higher percentage of EU development resources should be deployed through existing or new financial instruments, such as blending grants and loans and other risk-sharing mechanisms, in order to leverage additional financial resources and thus increase impact of our development cooperation.
Blending of grants and loans has been instrumental to:
secure long term financial resources, thus offering a leveraging effect which has allowed to achieve larger development objectives (for example the leverage effect of the EU-Africa Infrastructure Trust Fund is around 1:8 excluding technical assistance grants);
finance structural projects with a sizeable development benefit for the economy of the beneficiary country;
address climate change dimension (mitigation measures; adaptation measures) or an important environmental dimension in major infrastructure projects;
finance innovative projects which have a higher risk profile.
There are a number of different grant instruments that can be used as part of a blending operation such as for instance:
Technical assistance and studies. Such grants are made available to improve project preparation and to make projects "bankable". Such was the case of the 'Zambia water and sanitation project' mentioned;
Investment grants. Grants of this nature are used to cover specific social or environmental aspects of the project that are considered essential to its implementation;
Interest rate subsidies, which are made available help to bring down the costs of borrowing;
Loan guarantees. Typically grants of this nature offer to the lenders a guarantee in case of default from the beneficiary;
Equity is provided when the risk capital subscribed for the project has no possibilities to reach the necessary level for the project to be viable.
In addition to the above the European Union has recently added two new instruments to its toolbox dedicated to the energy and agriculture sectors which are very relevant to Zambia (ElectriFI & AgriFI).
Electrification Financing Initiative (ElectriFI) is the new European Union support scheme meant to bridge the gaps in structuring and financing electrification projects, stimulate the private sector, mobilise financiers, including the local banking sector, and have a catalytic impact on economic growth. ElectriFI will support renewable energy investments, with a focus on rural electrification, of a total budget above EUR 0.5 million. At early project stages or during the pilot phase, own capital is expected to be in the scale of 50%. At later project stages and in view of scaling up, own capital is expected to be in the scale of 15% with a senior debt financing at the scale of 60%. The total amount contributed by ElectriFI will not exceed EUR 10 million per project. The secondary debt repayment period could be between 10 and 20 years.
In the agricultural sector the desired increase in production and productivity will not happen without further private sector investment. Complementing the classical development approach, and in order to effectively contribute to foster private sector investment, the EU has designed a specific Agriculture Financing Initiative (AgriFI). AgriFI aims at financing those actions that have a clear development impact. The key feature of AgriFI is that the provision of EU support will mobilise additional public and private investment, in particular through the provision of risk capital, guarantees or other risk-sharing mechanisms. EU support will contribute to “de-risking” the investment and therefore to close a financing gap. AgriFI responds to the lack of financing mechanisms adapted to farmers and agri-entrepreneurs, particularly smallholders and agribusiness MSMEs.
I truly hope numerous Zambian entrepreneurs and public institutions will benefit from today's seminar enhancing their knowledge of the experiences and offers from European Development Banks.
I thank you for your attention; Zikomo Kwambiri