Despite a controversial track record in its investments outside of Europe, the European Investment Bank (EIB) is still planning to expand its development operations by creating a dedicated subsidiary for lending outside of the EU.
Back in November 2020, Bankwatch and Counter Balance published a damning report on the development impacts of the EIB’s development operations. Our conclusions were clear: the EIB is not equipped to act as a genuine development bank and actually contributes to human rights violations around the world. Recent findings about the lack of compliance of an EIB-funded project in Nepal with the bank’s environmental and social standards demonstrate further these structural flaws. Therefore, there are serious concerns about the EIB moving forward with its plans to create a development subsidiary.
Why would the EIB step up its development profile?
The EIB is the largest multilateral lender in the world. As the financial arm of the EU, the bank is best known for its role in financing projects and corporations all across Europe. But what remains unknown to most citizens is that the EIB is also a major player in the development field and a central piece in the EU’s development toolbox.
In the last decade, around 10% of its lending has taken place outside of Europe in support of European development policies in more than 140 countries. From 2010 to 2019, a total of €69.6 billion was invested, mostly in Africa, the Balkans, the Middle East and Europe’s Eastern Neighbourhood. In 2020 alone, new financing outside of Europe was worth €9.3 billion.
The EIB focuses on investing in projects that promote sustainable and inclusive growth in support of the EU’s external policy objectives. The European institutions have tasked the EIB with implementing various mandates for loans and financial instruments to complement European development aid. These operations are in theory based on the general principles guiding EU external action as set forth in the EU treaties, such as supporting democracy and the rule of law, human rights and fundamental freedoms.
The EIB is already an important development player, but it plans to do even more. Indeed, the EIB is now aiming to become the “EU Development Bank”.
This plan dates back to 2017, when the EIB President Werner Hoyer first mentioned the possibility of creating a subsidiary dedicated to development. The idea was later flagged to the European governments, but did not gather significant support at the time. Then, in 2018, a joint French-German initiative got the debate back on the table: in the Meseberg Declaration, both governments committed “[t]o set up swiftly a High level group of ‘wise persons’ on the European Financial architecture for development (especially regarding the respective roles of EIB and EBRD), in order to make proposals for the European Council”. Subsequently, the Council set up the High-Level Group of Wise Persons on the European financial architecture for development. The group published a report in October 2019 that identified three options for the future of European development finance:
1/ Setting up a new institution from scratch: the “EU Development Bank”
2/ Building on the structure of the EIB to create the “EU Development Bank”
3/ Building on the structure of the European Bank for Reconstruction and Development (EBRD) to create the “EU Development Bank”
Creating a brand new institution was quickly discarded by the European governments. The views of European finance ministers however diverged significantly on whether the EIB or the EBRD should be in the driver’s seat. As a result, the Council agreed that it would take a decision based on independent feasibility studies that were ultimately published early 2021.
In May 2021, the Council is set to take a final decision on the matter. Now it looks clear that Member States will decide to not choose between the two banks, instead favouring a so-called “Status Quo +” under which the European Commission, the EIB, the EBRD and national public banks are called to enhance cooperation and reinforce synergies between their operations.
But that’s not where the story ends. Indeed, the EIB used the opportunity offered by the High-Level Group report and the discussion in the Council to get back to its idea of setting up a subsidiary for its operations outside of Europe.
On 20 April 2021, the media reported that the EIB Management had introduced to its shareholders its broad plans to step up its development operations. Ultimately, the EIB is planning to get back with a more detailed proposal to its shareholders around September 2021. The operations of the new development subsidiary could start as of January 2022.
For the time being, the EIB shareholders - the 27 EU Member States - are still to decide on the matter.
A development bank for what, for whom?
Our analysis is that this move is primarily driven by the willingness to reinforce the EIB’s political profile as a global player, in a context where numerous public banks are competing in the field of development finance. The EIB is presenting its plans as a tool for the EU to strengthen its strategic autonomy at a time when multilateralism has been under serious threat, especially during the mandate of Mr Trump in the USA. A reinforced development profile for the EIB could also, in the long run, increase its access to funding from the EU budget to support its development operations.
Still, it raises crucial questions. One relates to the ability of the EIB to truly operate as a responsible lender, especially in the more fragile countries and contexts. Our findings are clear: the bank has a dismal track record on human rights, supports a development model at odds with favouring domestic resource development, and lacks willingness and capacity to properly enforce its social and environmental standards. As a result, the EIB ends up supporting projects that have a devastating impact on people and environment, while often failing to guarantee meaningful community participation. Therefore, in our view the EIB would need to undergo a set of fundamental reforms before it steps up its development role.
In particular, it is high time for the EIB to clean up its act and to adopt a new overarching human rights framework to ensure that specific risks and impacts are considered, mitigated and prevented at all stages of its investments. This is a prerequisite if the EIB wants to play a pivotal role in building a more resilient and sustainable world.
In this context, a worrying part of the EIB’s proposal for a development subsidiary is that a set of policies and procedures which are separate from the regular EIB ones would guide its development activities in the future. This bears a significant risk of creating double standards, and for EIB operations outside of Europe to bring lighter environmental and social requirements than the EIB operations within the EU. In order to avoid reputational damage for a new flagship development institution at EU level, this major issue should be clarified from the outset.
Another issue relates to the broader role that the EIB will play. By portraying itself as a prominent tool of “strategic autonomy” for the European Union, the EIB risks becoming a channel mainly for economic diplomacy, backing the strategic interests - or at least the perceived ones - of the EU. There are clear risks that the EIB hence ends up being subordinated to EU policies that run counter to its role as a responsible lender.
One such area is migration. Given the problematic approach of the EU and many of its Member States in the field, it is likely that a more “geopolitical” EIB will be asked to step up its operations around border management, or at least in support to the EU migration policies, with its lending further conditioned on foreign governments implementing the EU policies in the field.
One other major concern is that the EIB could also be pushed to finance companies and projects linked to “strategic partners” of the EU. There are already similar examples of such situations, for instance when the EIB was heavily drawn into financing the various sections of the Southern Gas Corridor, a major gas pipeline that should deliver gas from Azerbaijan to the European market via Italy. Despite the project blatantly breaching the EIB’s environmental and social standards, the political pressure on the bank was so high that it ended up financing the project. The fact that this pipeline is massively supported by authoritarian regimes in Azerbaijan and Turkey only appeared to be a side issue.
We are concerned that, in a similar manner, the EIB ends up increasing its support to large infrastructure projects that are central to the government plans of “strategic partners” of the EU with disastrous track records in the field of human rights.
There are a lot of unresolved issues around how concretely this new EIB development subsidiary would operate. For instance, its governance structure is not clear yet. There are two main options on the table:
1/ Set up a development branch within the EIB
2/ Create an independent subsidiary within the EIB Group.
A key question remains: Who would be the shareholders of the new subsidiary, and what would be its governance structure? The High-Level Group recommended that the EIB should only be a minority shareholder in this new structure, but it is likely that the EIB would want to play a stronger role and be in the driver’s seat of this subsidiary. Tough negotiations would take place between potential shareholders (the European Commission, EU Member States, national development banks and potentially recipient countries) to determine how much control each shareholder would exert on the new governance structure. A governance structure providing more ownership to countries of operations could help align the EIB operations with their development strategies. Ultimately, this could demonstrate if the main goal of the new subsidiary will be to contribute to inequalities reduction and sustainable development, or securing the European interests only.
As a watchdog civil society organisation whose mission is to make European public finance a key driver of the transition towards socially and environmentally sustainable and equitable societies, our position is that, independently from the details of a potential subsidiary, the EIB top management and its shareholders should focus on making the EIB a more responsible lender. An agenda of fundamental reforms for the EIB to enhance its contribution to the sustainable development of EU partner countries is necessary, and it is high time for this question to become the main one on the negotiations table.