Shop talk: EIB ups impact finance ingenuity
Guido Clary, head of Slovenia and Western Balkans unit at EIB, outlines the DFI’s response to the Covid-19 crisis and explains how its new impact financing initiative, a gender-tied project loan facility via UniCredit Serbia, works.
Uxolo: What new initiatives has the EIB introduced as a result of the Covid-19 crisis?
Guido Clary (GC): The response of the EIB Group to the crisis has been bold and rapid. A genuinely European response working with both the European Union and our partner countries around the globe. This includes the €25 billion ($28 billion) pan-European Guarantee Fund, the €6 billion in the Healthcare and Research and Development projects pipeline, €5.2 billion for countries outside the EU and the €1.7 billion for the Western Balkans.
As an EU sponsored Bank, we are included in the €540 billion package proposed by the Eurogroup and endorsed by the European Council. The Guarantee Fund package focuses on three pillars: the labour market, to support governments, and to support companies and the real economy. Its measures demonstrate European solidarity by combining and coordinating national and EU measures which can be implemented by building upon existing structures and regulations.
The EIB is the best place to support and provide solutions that fall under the third pillar – this is where we are most active. We have proposed a €25 billion pan-European Guarantee Fund intended to generate financing for the real economy on a scale of 1.5% of the EU GDP. This fund aims to allow the EIB Group, in partnership with commercial banks and national promotional institutions, to provide up to €200 billion, to primarily support small and medium-sized companies (SMEs).
The EIB has also shifted more of its focus towards its Covid-19 response by accelerating its support towards its treatment as well as for the development of a vaccine. We have an existing pipeline consisting of various healthcare and research and development projects aimed at further supporting planned investments in critical health infrastructure and equipment in addition to what I had mentioned before.
Some examples of the measures we have taken include the signing of a €50 million investment with biomedical company Pluristem, as well as another with the WHO that specifically targeted urgent aid to ten African countries. As a latest example, the EIB signed a €50 million investment with the biomedical company Pluristem. We also participated in the EU-led international pledging conference which ran at the end of last month.
In response to the needs of our partner countries outside the EU, the EIB Group is contributing €5.2 billion as part of the “Team Europe” approach led by the European Commission. With Member State contributions, this Global EU Response to Covid-19 effort amounts to €20 billion.
The EIB Group will also provide €1.7 billion to support the social and economic recovery of the Western Balkans from the Covid-19 pandemic, as part of a €3.3 billion financial support package for the region announced on 29 April by the European Commission.
Uxolo: Can you discuss which sectors have been most impacted by the coronavirus crisis, particularly in the Balkans?
GC: The Western Balkans are not immune to the impact of coronavirus pandemic and the state of the region’s healthcare is a cause for concern. Covid-19 hit the Western Balkans with a lag compared to Western Europe and the spread has been relatively more contained. Nevertheless, the total number of cases may be underestimated, due to limited testing capacity.
The entire region suffers from structural bottlenecks in the system as a result of government spending on the health sector being lower when compared to more advanced economies. The number of doctors and nurses per capita is around half of the Western Europe. Moreover, migrants and Roma communities are especially vulnerable in the face of Covid-19, as they have less access to healthcare and sanitation.
We can expect recession in 2020, with exports and tourism being hit the hardest. The relatively high level of trade integration of the Western Balkans with the EU, and in particular with Italy and Germany, has caused a halt of industrial production in the region. Moreover, lockdowns are hurting labour-intensive services sectors, specifically those dealing with tourism and its related services, resulting in higher levels of unemployment and remittances.
We are expecting a GDP contraction between 3-5% for 2020, although worst-case scenario predictions state a 10% contraction is possible. The deterioration of fiscal and external balances amid a GDP contraction may increase the likelihood of sovereign downgrades. Countries with larger external debt burdens tend to be most vulnerable in these situations.
Uxolo: The EIB has inked €1.7 billion to the EU’s Covid-19 response package for the Western Balkans, which parties will benefit most in the short-term and what long-term initiatives will be implemented?
GC: We have strategically invested with aims for recovery, mainly into SME, mid-caps and micro enterprises. Our Covid-19 financial package along with our existing credit lines can be used to inject capital into the market and to help retain jobs and sustain businesses.
We view furthering FDIs, green transition, digitalisation, and competitiveness of the economy as the keys for the successful recovery of the Western Balkans. The Bank will continue its support to the region as it always has done.
We have invested over €8 billion in the region between 2008 and 2019. The breakdown of investment is as follows: Over €2 billion in transport infrastructure and over €1 billion for digital and energy projects. We have also invested €365 million in healthcare which impacted over 5 million citizens, in addition to financing 20 hospitals and helped reconstruct and equip 5 clinical centres. With regards to SMEs, we invested over €3 billion, supported 28,400 companies, and retained 500,000 jobs in the process.
TXF: Can the EIB - and other DFIs - stretch to combating climate change and Covid-19 around the world?
GC: The key words here are cooperation and coordination. The EIB has a unique range of expertise and knowledge designed to support the European Union in its objectives around the world. As a policy bank of the Union we have been cooperating with different organisations to maximize the impact around the globe.
The EIB recently invested €11 million in water infrastructure in the town of Gjilan in Kosovo. The project is our first investment in wastewater and environmental protection in Kosovo, improving its affordability and accessibility to more than 90,000 inhabitants in the town. In the long-run, it will improve sanitation infrastructure and increase socio-economic resilience to crises such as Covid-19.
To maximise its impact, we collaborated with the EBRD by financing €10 million of the project. Furthermore, the project benefited from a €3.1 million EU grant from the Western Balkans Investment Framework (WBIF) supporting the project’s preparation and implementation. This is a prime example of how collaboration and coordination from financing to expertise and technical assistance can benefit the region and further the reach of our activities.
Uxolo: Can you explain how the EIB’s gender-tied project loan facility set to sign with UniCredit Serbia works? This sounds like an innovative operation of impact finance - is this the first of its kind from a DFI?
GC: Our €30 million loan with UniCredit Bank Serbia is a leading example of how joint efforts can maximise results. By blending EU grants, EIB and private sector resources, both UniCredit and EIB have delivered an innovative financial product to Serbia, designed to support local SMEs and mid-caps while also improving their social impact. With this loan, companies will expand their business, vulnerable groups will have an easier job market access, and will strengthen the local banking sector in Serbia.
We signed the first tranche of this loan worth €15 million at the end of last month. With it we created an innovative credit line for Serbian small, medium and Mid-Cap companies interested in improving the social impact of their businesses in areas such as gender equality, youth employment and social inclusion.
EU grant funds that complement this loan will reward those companies who meet specific targets to groups that often face additional barriers to entry in the job market. Some of the targets include fostering women’s employment and entrepreneurship, youth employment and professional development as well as social inclusion of underserved or vulnerable demographic groups (e.g. minorities, people with disabilities, refugees, etc.). As these groups often face additional barriers to entry in the job market, this loan will remove some of them through cooperation between the EIB, UniCredit, EU and the real economy.
This is the first EIB private sector loan under the ERI in the Western Balkans. It promotes sustainable growth and supports economic resilience. To help achieve the intended social impact objectives, the EIB will also provide technical support in preparation and implementation of the projects.
Uxolo: How does the EIB, or do the intermediaries banks on-lending your funds, assess the KPIs of small and mid-cap private companies benefiting from impact finance deals? Do they submit performance reports or do you use external ESG rating agencies?
GC: Companies who apply for the loans under this credit line must agree on a set of social impact goals. This means that the company will agree to specific, tailor–made impact KPIs at the signing of the sub-loan contract with UCBS. They will receive financial incentives if they meet these impact KPIs. An independent assessor will evaluate the KPIs met at the end of the sub-loan’s life.
The extent of the financial incentive will match the level of the progress achieved under each KPI in the form of a calculated rebate based as a percentage of the sub-loan amount. This encourages the final beneficiaries to focus on the longer-term impact of the outlined KPIs, ultimately achieving results that will go beyond their business activities for the good of wider society.
In addition, a technical assistance package of €1 million will be available to help UCBS and the final beneficiaries implement the agreed scheme and achieve the intended impact objectives through the achievement of KPIs. This will make sure that the maximum number of companies achieve their KPIs despite the potential obstacles.
This system encourages further inclusion and support to employees from more vulnerable backgrounds, ensuring their training and long-term retention. The innovative structure of this project will also encourage the financial intermediary to offer a new financial product to Serbian SMEs and Mid-Caps, particularly to those that provide opportunities for more vulnerable segments of society.
Uxolo: Can we expect to see further support to SMEs across Europe from the EIB, or any more collaborations? Are there specific sectors the bank intends to target its support?
GC: Yes. On top of our ongoing Covid-19 support mechanisms, as the EU Climate Bank, we have ambitious plans to support the transition of the EU economy to become carbon-neutral by 2050. We will follow our plans to attract up to €1 trillion investment in de-carbonisation of the EU by 2030 alone.
Uxolo: Does the EIB have any big project financings or innovative funding packages in the pipeline?
GC: With regards to the Western Balkans, we are in contact with our partners in the public and private sector to assess their needs and establish a list of the most important and urgent investments. The aim is to define plans and priorities for each country individually. Our intention is to remain one of the biggest investors in the region, as we have invested over €8 billion in the Western Balkans between 2008-2019 alone.
We’re ready to help the health sector, SMEs, entrepreneurs and the “real economy” to overcome the liquidity problems caused by the Covid-19 pandemic. The EIB is looking forward to receiving proposals in the education, transport, infrastructure and industry sectors where we have already had major involvement. Our assistance package will also include technical and advisory expertise to make sure any new investments are prepared as quickly as possible.
Regarding the healthcare sector, we are keen on contributing further to ensure we are modern and efficient. Our pipeline includes additional Covid-19-related expenditures with total financing of €424.5 million in Bosnia Herzegovina, North Macedonia, Kosovo and Montenegro. As of 2008, we have invested €365 million in different regional healthcare projects including the modernisation of hospitals in North Macedonia., Serbia and Montenegro.
On another note, the EIB Group is a leading investor in regional connectivity projects. For the post-Covid-19 phase, the EIB intends to accelerate investments in existing and new infrastructure projects, strengthening resilience against any new potential health crisis and to support socio-economic progress throughout the region. Other sectors that are high on our agenda are digitalisation and climate action. Projects included in our digitalisation pipeline include the rehabilitation and construction of roads in Bosnia Herzegovina, Serbia and Kosovo along with railway lines in Serbia, North Macedonia, Bosnia Herzegovina, Montenegro and Albania. We are also evaluating potential investments in river ports in Serbia and an urban transport project in Sarajevo.
These initiatives will form a part of our great project pipeline estimated at €2.3 billion, advancing the EU’s commitment to the region.