EBRD's sub-Saharan ambitions reveal appetite for expansion

Not content with pushing into North Africa, the EBRD has set its sights further south in a move that could see it potentially lend an extra €2.5bn-€3bn a year without needing to raise additional capital - taking total annual lending to over €12bn

  • By Elliot Wilson
  • 08 May 2018
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In the past, you knew where you were with development banks. The first big players, the World Bank and the IMF, were designed expressly to keep the world on an even keel, to lend to worthy projects in developing nations, and to aid sovereigns facing or enduring financial distress.

Then regional development banks - powerful in their own right, highly capitalised, and catering to a variety of more localised needs - began to emerge. The Inter-American Development Bank was founded in 1959 to serve Latin American states in need of money, leadership and supervision. Five years on, the African Development Bank was born, followed two years later by the Asian Development Bank. 

The relatively new kid on the block is the European Bank for Reconstruction and Development, perhaps the most curious case of them all. It is a regional development bank that cannot stop expanding into other regions, and a multilateral that becomes larger, better capitalised and more world-savvy and multi-layered with every passing year. 

Founded in 1991, shortly before the dissolution of the Soviet Union, the EBRD was at first a narrow institution. It focused on the needs of 15 post-Soviet states (including the now sanctions-hit Russia, once the bank's biggest market but now excluded from EBRD lending) and 15 central and eastern European (CEE) markets stretching from the Baltics to the Balkans. The bank unearthed private sector projects and invested in them both directly and via local lenders, with the aim of transforming state-heavy economies into open markets powered by private capital.

But everything changed in December 2010, when the self-immolation of a Tunisian stallholder, in reaction to his harsh treatment by public inspectors, led to an uprising that affected states stretching across the Maghreb to the Gulf. Some governments were toppled; others descended into civil war or faced serious civil unrest. Few were unaffected.

As the dust settled, Western political leaders found themselves with a decision to make. The sprawling affected area was in dire need of its own international financial institution to help glue it back together, but that would likely be a politically charged and costly process. The African Development Bank could hardly be asked to channel funding to states like Yemen, while the Islamic Development Bank lacked the deep institutional skills required to rebuild tattered countries and develop private-sector capabilities. 

So, in 2012, prodded by then-US president Barack Obama, the West turned to the EBRD for help. It was not an easy decision to make or to justify - indeed, many at the bank's headquarters in London wondered if it would work at all. 
In hindsight, 2012 was a landmark year for the EBRD. Out went the steady-but-dour German politician Thomas Mirow, and in came Sir Suma Chakrabarti, a buzzing-and-busy British civil servant and veteran of the development community.   
Under its new president, the EBRD bought in entirely to its new role. Egypt became a recipient country in 2012, along with Jordan and Tunisia, with Lebanon joining five years later. In March 2018, the bank made its first foray in West Bank and Gaza, its newest area of operation, when it extended a $5m loan to Cairo Amman Bank Palestine, to help channel more capital to smaller enterprises. The EBRD is set to invest around €2.2bn in projects in Middle Eastern and North African (MENA) states in 2018, on a par with last year's figure - taking the bank's outstanding capital commitments in the region to nearly €10bn ($12.2bn).

AFRICAN EXPANSION

Not content with managing a growing portfolio of staff, offices and investments in the northern half of Africa the EBRD is now looking to extend its presence into nations south of the Sahara. 

In April, Chakrabarti said the bank would "gradually" expand into sub-Saharan Africa states that were committed to market democracy. Insiders at the multilateral said the most likely route into new sub-Saharan markets would, in the near term, involve the EBRD working with and investing in regionally-based or focused private equity firms and funds.

Asked about the positive and negative challenges facing the institution in yet another new territory, the bank's president replied: "Every time the EBRD has been asked to go into a new place it has done so and really scaled up fast". He said sub-Saharan Africa was the "biggest gap" in the bank's geographic reach, adding that it could potentially lend an extra €2.5bn-€3bn each year without needing to raise additional capital, taking total annual lending to over €12bn. 

Is Chakrabarti's confidence misplaced? The fact that his comments garnered so little reaction in the international press, or on social media, is in itself telling. When the EBRD started to put down roots in North Africa and the Levant, many tipped it to fail, or at very least, to struggle to gain traction in a notoriously reform-resistant region. Others said the new southern strategy, with the bank now committed to virtually every market in a "Greater Mediterranean" region, would reduce its ability to lend to projects in its original stamping ground in Central Asia and the CEE. Another fear was that expansion would result in the dilution of its democracy-promoting mandate.

Neither concern came to pass, helping to explain why many in the development community assume the bank will do a good job if, or when, it decides to open branches in and extend capital to states and projects in sub-Saharan Africa.

Nor has the EBRD struggled for recognition or respect in the Maghreb and the Middle East. If anything, it was embraced by its new partners. "We arrived in 2012, at the most difficult time, when no one wanted to invest," says Janet Heckman, the Cairo-based head of the bank's Southern and Eastern Mediterranean (SEMED) region. "This gave a real sense of confidence to private sector investors looking to come in to the region. A number of regional central bank governors have thanked the bank for coming when no one else would." 

This attitude has clearly paid dividends. In Egypt, 80 EBRD projects have been approved since 2012, taking outstanding lending to €3.6bn, and making it the multilateral's second largest country of operation in 2017 behind Turkey.

"We have doubled our annual investment in Egypt to €1.4bn," says Heckman. "That has been possible because of how committed Egypt is to reform, from its $12bn IMF bailout, to floating its currency, to its focus on reforming its tariff policy. When countries are more reform-minded, you will always see inward investment accelerate." 

Indeed, the bank has been embraced across the region: 33 outstanding projects in Tunisia, with a cumulative investment of €677m; 38 projects worth €996m in Jordan; and in Morocco, 40 projects worth €1.54bn. The involvement of the EBRD and its triple-A credit rating, in a country and on a project, helps to draw in sources of private-sector capital that may be new to a market or to an entire region. Chakrabarti reckons every €1 of EBRD lending attracts an additional €2.30 in investment from external sources. 

If there is a criticism here, it relates to the relative lack of private capital in any given MENA-area project. In Jordan, the private-sector share of the bank's investment portfolio runs at an impressive 85%. But that number falls to 62% in Egypt, 60% in Tunisia, and just 49% in Morocco. They will undoubtedly improve, and the relatively low share is the result of focusing on major infrastructure projects that enjoy a mixture of private and public investment. But for now, they fare poorly in comparison to figures in more developed CEE states like Poland and Hungary (91%) or the Slovak Republic (100%). 

BACK TO THE FUTURE

The EBRD's greatest asset, which makes it well placed to continue to succeed in MENA, and to thrive in whichever markets it decides to invest in south of the Sahara, is its institutional memory. "Going into SEMED, we were able to take advantage of a quarter-century of experience operating across multiple post-Soviet states," says Heckman, who ran the bank's Kazakhstan operations before moving to Egypt.

She draws a comparison between emerging Europe and the bank's newer sphere of operations in the Greater Mediterranean. "It's amazing to see the similarities between the two regions. When it comes to growing the private sector, tackling government subsidies, and preparing companies for privatisation - this is very similar to the work we did early on in CEE states.

"The same is true in the financial space, where MENA countries are still dominated by state-owned banks. What we did in eastern Europe was to help move financial institutions out of state hands as they are big burden on the budget, and they result in too much lending to firms with state connections."

So what now? Chakrabarti's ambitions in sub-Saharan Africa are palpable, but any expansion will have to be signed off by the bank's 68 shareholders, with a decision possible as early as this week in Jordan, at the bank's annual meetings. 

The EBRD could open its first office south of the Sahara perhaps as soon as the end of this decade. The consensus is that the EBRD will be a success in yet another region crying out for the kind of expertise the bank possesses in spades - the ability to corral private sector capital and to then put it to work in energy, infrastructure, retail and logistics projects.

The only question that then remains for the EBRD, now a genuine pan-regional development bank with operations that may soon stretch from the Pacific Ocean to the Cape of Good Hope via the heart of Europe, is a simple one: what's next?
  • By Elliot Wilson
  • 08 May 2018

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