European Money for Africa Could Point the Way for Lucrative Investment

 | Jul 28, 2017 | 9:00 AM EDT
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Lost in the noise of Brexit, political bickering in Washington and major geopolitical concerns about North Korea was a piece of good news that could turn out to be quite important: European Union lawmakers agreed on a big investment program for Africa.

This plan could improve the continent's fortunes and tackle the root causes of immigration. In time, it also could prove a lucrative opportunity for investors who are interested enough to follow the program's admittedly tortuous journey from concept to implementation.

Early this month, European lawmakers approved a plan to raise billions of euros to invest in African countries in order to reduce poverty by creating jobs, investing in small and midsize companies, and tackling climate change.

The program was proposed almost a year ago and follows the Investment Plan for Europe, which helped boost investment in poor areas of Europe after the financial crisis. The EU's investment bank, the European Investment Bank (EIB), mobilized around $116 billion across 26 member states in less than a year under that plan. More than 200,000 small and midsize companies already have benefited from the funds.

The EU plan for Africa will offer a combination of grants, loans and financial guarantees totaling €3.3 billion, which could attract as much as €44 billion ($51.5 billion) in private investment. If enough companies take the opportunity to invest in the region along with the EU, it could turn out to be a game changer for African countries.

Such investment has been successfully tested elsewhere. Immediately after the fall of communist regimes in Eastern Europe in the 1990s, the newly created European Bank for Reconstruction and Development (EBRD) invested billions in the region alongside private-sector participants. In some countries in the region, the EBRD was the biggest foreign investor and acted as a massive pull factor for other big investors, which boosted growth and jobs.

The strict conditions attached to EBRD investment meant the development bank also acted as an educational force by insisting on corporate governance and strong institutions across the region. A similar institution already exists in Africa in the form of the African Development Bank (AfDB), a multilateral development bank owned by 80 countries that has invested more than $135 billion in the region since 1967.

The European initiative would add to that investment in the hope of creating a positive ripple effect in the continent's economies. Projects that normally would seem too risky for private investors would be able to find the financing that could turn them into lucrative businesses.

The EU program also will offer technical assistance to promote economically viable projects and will seek to improve economic governance and promote a better business environment in the African countries in which it will operate. If the experience in Eastern Europe is anything to go by, developing countries that receive these types of funds should see rapid economic growth. African countries, with their young populations and underutilized resources, should benefit greatly from the EU's plan. Investors should follow the European money; early entrants usually reap the best rewards.

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