Ensuring a development focus in the EIB and EU blending mechanisms

New methods of funding EU development policies were debated last Thursday at a joint Counter Balance, Eurodad and Alop event at the European Parliament. Officials from the EU institutions, CSOs and specialists in the field of finance came together to discuss emerging tools for development finance and assess whether they are fit for purpose to achieve development objectives.

The session entitled “The EU Development Agenda: The external lending mandate of the European Investment Bank and the rise of blending mechanisms”, addressed these issues in two panels. The first panel facilitated a timely debate on the role of the EIB outside Europe and its External Lending Mandate (ELM). The second panel addressed the launch of a new Eurodad report A dangerous blend?, which delves into the EU’s blending mechanisms and the implications of an increased role of the private sector in development financing.

The first panel demonstrated that there is still no common vision about whether the EIB should act as a development bank when investing outside Europe. Although parts of the European Commission’s ELM proposal emphasise the need for the bank to be orientated towards development, there is no clear agreement from the EU institutions about whether poverty eradication should be at the core of its operations.

However, the argument that the EIB is an investment bank and not a development bank – which was stated during the roundtable debate – cannot stand any longer, as Ivailo Kalfin – the rapporteur on the mandate for the European Parliament – rightly pointed out. Since the ruling of the European Court of Justice in 2008 and the enforcement of the Lisbon Treaty, the EIB has a development mandate as defined in both Article 21 and 208 of the EU treaties. Counter Balance believes the bank fails to fully recognise its development mandate, with obvious consequences for the kind of projects it lends to. Economic growth is the bank’s main priority, while redistribution of wealth and eradication of poverty are only indirect aims.

The current review of the ELM is an opportunity to ensure the EIB delivers on its development mandate and improves the quality of its lending. However, a representative from the EIB argued that the bank is already operating in a very regulated and stringent framework through the mandate – which is not the case of other international financial institutions (IFIs) – so putting additional requirements on the bank would be detrimental to the mission of the EIB.

A key challenge is to fill the gap between binding EU legislation and the reality of the EIB’s operations on the ground, which are often not in sync and lack transparency. This gap can only be filled by ambitious reforms to EU external cooperation and development policies in order to secure major changes in the institutional culture and practice of the EIB. These reforms would be beneficial for affected communities and countries, and the bank itself.

Eurodad’s report, A Dangerous Blend?,explores the relatively new trend in the EU of blending grants with loans from public institutions and private lenders to fund projects in partner countries. The report finds that the current mechanisms lack transparency and accountability and that there is no reliable evidence that blending mechanisms meet development objectives. As the EC is determined to increase the use of blending mechanisms to attract private sector resources, the question of ‘who is leveraging who’ between the public institutions and the private sector was hotly debated.

The Eurodad report was welcomed by most speakers, including MEPs Ska Keller, Thijs Berman and representatives from the EEAS, EIB and AFD, as it brings to the forefront questions and challenges that should be addressed. The EC representative was defensive in relation to the findings of the report and argued in favour of increasing the use of blending mechanisms as “it is a good way to leverage much-needed private finance.”

All of the speakers agreed that transparency and accountability are key to ensuring the mechanisms are understood and that they do their intended job of benefitting recipient communities.

María José Romero, author of the report, specifically noted that the report does not argue against working with the private sector, but before pushing this mechanism forward there must be a radical improvement in accountability and transparency. All stakeholders, and particularly affected communities, must have access to information on how decisions are made on projects financed and who the final beneficiaries are. The message was clear: development objectives should be the primary consideration for projects supported by blending instruments.

Keller pointed out that the European Parliament has already challenged the EC‘s blending agenda. In June 2013 a resolution on financing for development called for a proper evaluation “particularly in terms of development and financial additionality, transparency and accountability, local ownership and debt risk – before continuing to develop blending loans and grants.”

Eurodad’s report is calling for a full and independent review of the effectiveness of blending mechanisms focusing on their development impacts, including whether they are suitable vehicles for ODA. We await the EU platform for blending in external cooperation’s report due in late December, which must address the key challenges of transparency, accountability and effectiveness of the mechanisms to be really meaningful.

For more information:

– Article: “The EIB loan to BNDES, learning lessons for the external lending mandate of the bank”

– Blogpost: “The EIB and development, a chance to clean up the bank’s act”

– Article: “The danger of using EU aid to subsidise private finance” published in the EU observer