I am delighted to be able to address you today on behalf of the EU, at the first EAVCA conference to be held in Uganda, and share insights on the EU actions in terms of private sector support and capital mobilisation for the private sector.
I would like to start with a question: Why is the European Union, representing TeamEurope, the largest development cooperation actor in the world, in this room, at a gathering of Private Capital players?
The answer is simple: we are here because we need your help and want to partner with you in order to achieve the Sustainable Development Goals!
Mobilizing private capital from yourselves and others is essential to bridge the financing gap, estimated at USD2.5 trillion annually for developing countries. This gap highlights the immense scale of resources required to address critical areas such as poverty alleviation, health, education, infrastructure, and climate change mitigation.
The International Labour Organization (ILO) estimates that MSMEs represent over 70% of global jobs and 50% of global output (GDP). They should be at the heart of closing the labour market gap in Africa. The entrepreneurial spirit is ever-present in Africa, and East Africa in particular. 1 in 5 working-age Africans starts their own businesses at some point. Some do so out of sheer necessity, but many do so because they have the drive to launch and grow a business and contribute to the growth of their society. These enterprises often do not receive the right type of financial solutions to grow (a financing gap of USD 106 billion has been estimated, b) they are usually too large to receive financing from microfinance institutions, but simultaneously below the radar for classic local commercial banks, DFls and impact investors. This is what is commonly referred to as the “missing middle” challenge.
Therefore, the EU uses all the instruments in its toolbox to help and entice the financial sector to turn towards this missing middle. One of the solutions is to pool public and private funding in structured blended finance vehicles that offer flexible, risk-tolerant capital solutions to SMEs that are otherwise, as explained, overlooked by existing funds or financiers.
I would like to give some examples⏤ first at the global level:
Inside Uganda’s Property Market: Broll Uganda’s Moses Lutalo on Sector Realities and the Signals Investors Can’t Ignore- The European Fund for Sustainable Development+ provides financial guarantees, blended finance and technical assistance to help de-risk and mobilise private investment. The guarantees are being deployed through eligible DFls, which can then invest or on-guarantee banks and funds so that they can go the extra mile. The EFSD+ will offer up to 53.4 bn EUR in External Action Guarantee Capacity and will have global coverage. It is expected that the new instrument will have a 10x leverage.
- The EU has invested through different European DFls into three blended funds active in the agricultural sector (Agri-Business Capital ABC Fund, Huruma Fund and African Agriculture and Trade Investment Fund) and has also set up two global blending facilities: AgriFI, for the agricultural sector, and ElectriFI for the energy sector. In Uganda, AgriFI Invested In INUA capital, the first gender lens impact investment fund in Uganda and the second fund to domicile in Uganda. ElectriFI invested in GOGO, formerly known as BodaWerk, an e-mobility company.
- Investing In Young Business In Africa is a TEI which really targets the missing middle. It looks at the whole ecosystem of organisations that support entrepreneurs and early-stage businesses. These range from business Incubators to impact Investment funds. The initiative comprises financial instruments such as financial guarantees and blended finance that lower the risk of Investing in young businesses and it offers technical assistance in the form of business skills, mentoring and networking.
- All three types of support are part of our Global Gateway, the new European strategy, which stands for sustainable connections that work for people and the planet to tackle the most pressing global challenges, from climate change and protecting the environment to improving health security and boosting competitiveness and global supply chains.
So, what are we doing in terms of private sector development and access to finance for SMEs in the Ugandan context? We are doing quite a lot, again using all the different instruments in our toolbox:
- Through the Sustainable Business for Uganda (SB4U) platform, the EU has taken a leading role in improving investment flows and promoting a partnership of equals by bringing together the Ugandan and EU private sectors with Ugandan, EU and EU Member State public actors. The initiative aims to identify and overcome obstacles to investments and private sector development and facilitate concrete technical cooperation between the Ugandan and European private sectors. SB4U actively addresses three priority bottlenecks: (i) inadequate workforce skills as compared to the needs of the private sector, (ii) corruption linked to economic activities and (iii) limited access to finance for the private sector. This is supported through business-to-business events, including the regularly organised Uganda-EU Business Fora, by other leading initiatives for the private sector such as the new Access to Finance information portal, and by the development programmes aimed at growing Ugandan businesses.
- The EU-funded private sector development programmes focus on the agribusiness and green economy sectors, as well as tourism. They aim to: 1) improve entrepreneurs’ skills in driving the growth of their businesses and their capacity to access capital; 2) support the financial institutions and investors to better understand the MSME clients and better cater for their needs; 3) facilitate access to capital by linking them to sources of capital or providing the capital needed for business growth; 4) support the businesses in their post-investment phase to utilise the funds received.
- iii.Some facilities focus on the banking sector: For example, the Uganda Green Enterprise Finance Accelerator (UGEFA) focuses on facilitating access to commercial bank loans for green SMEs in need of 10,000-100,000 EUR. They have a pipeline of 200 worthy companies. The Support to Agricultural Revitalisation and Transformation (START) Facility focuses on value-adding agribusinesses and links them to partner banks. They have a pipeline of around SO businesses from phase 1 and are currently working on linking 300 value-adding SMEs to capital. Similarly, the EU invested in the Agricultural Business Initiative (aBi), both the Development and the Finance arms, and collaborates with UDB In the tourism sector providing soft loans to the value chain players.
Whilst others focus on alternative financing, and I believe are of more interest to you, such as the Deal Flow Facility (DFF), which targets businesses in need of more than EUR 0.5 million and links them with alternative sources of financing. Therefore, if you want to see what is available on the market, please contact them.
The EU has also spearheaded the creation of the Yield Fund, 10 years ago. I would like to take some time to speak about the YF. The YF is the first impact investment fund to be domiciled in Uganda. It focused on agribusiness SMEs. This is the only such project globally in our development cooperation, making it very innovative. The Yield Fund is managed by Pearl Capital Partners (PCP) as the fund manager. The EU channelled its capital contribution to the fund (EUR10 million) through the International Fund for Agricultural Development (IFAD), which manages our investment in the Yield Fund. IFAD manages the Business Development Services Facility (EUR 3 million ) on our behalf, which is used to support the investee companies based on their needs. The EU’s capital investment also acts as a guarantee for the other investors in the fund: NSSF, FCA Investments, and Open Society Foundation ensuring that the EU capital will bear the brunt of any losses. This guarantee has been crucial in attracting other investors to what was perceived as a highly risky endeavour. I would like to thank them once again for coming on this journey with us.
The fund invested in 15 agribusiness SMEs and is now fully invested. The investments were driven obviously by the value proposition, but also by the potential impact they could have on the lives of the supplying farmers, the employees of the companies, the distribution channels or the ecosystem. With investors such as the EU, IFAD and others, impact monitoring has been at the forefront and the Fund Manager will be able to give you more details on how much he had to work on that with the investee companies. The Yield Fund has announced a successful exit. I would like to publicly congratulate them. This just goes to show that it is possible to successfully exit an investment in Uganda and that it is possible to do good whilst doing well! You just need to put in the effort and I invite you all to also give it a try!
The Yield Fund journey, as the first fund to ever domicile in Uganda, also served as a case study in terms of regulatory and fiscal challenges when it comes to fund domiciliation in the country. With the Yield Fund, we discovered that Uganda’s legal and regulatory framework for the domiciliation of private equity and venture capital funds remains unfavourable mainly due to the lack of flexible fund structuring options. Several amendments to the Partnership Act are required and I know EAVCA and the industry have been at the forefront of the advocacy efforts on this topic, which will also be discussed today. Furthermore, Amendments to the fiscal policy to provide further incentives for local fund domiciliation beyond fund structuring vehicles, such as an independent tax regime for LLPs and further tax incentives at the investor level, fund level and investee level. The EU has supported the first studies on these issues and is currently supporting a tax impact assessment which will hopefully convince the Government and the legislators that this type of tax incentive will certainly pay off in the medium term through its spillover effects.
To conclude, I would like to thank EAVCA for the excellent organisation and the invitation and to encourage everyone to learn from each other today, I am certainly excited to do that!
