Development Financial Institutions (DFIs) saw their role in development finance increase significantly in recent years. However, their contribution to sustainable development is far from clear. A thorough assessment of their past operations is vital before governments decide to increase their role any further. This is especially the case for the European Investment Bank which is expected to play a central role in the future EU development framework that is currently being designed.

Better equipped to do more at lower cost and to leverage money from the private sector, DFIs became an attractive instrument in times of budget constraints. Unlike traditional aid agencies, DFIs typically lend or invest their money on which they expect a financial return.

Additionally due to their way of operating, DFIs are considered better capable of targeting the private sector and provide access to capital in regions where this is problematic. They do this by financing through financial intermediaries such as commercial banks or private equity funds. These intermediaries lend or invest big amounts from DFIs (possibly combined with resources from institutional or private investors) further on in smaller pieces to the final beneficiaries often small and medium sized enterprises (SMEs).

This is also how the Belgian DFI, the Belgian Investment Fund for Developing Countries (BIO), operates. BIO, founded in 2001, saw its budget and operations steadily rise. Typically, its focus is on the private sector and it invests mainly through intermediary structures. Financial means accorded to BIO don’t need to be taken into account in the national budget as they are expected to be recovered automatically.

However, BIO’s ability to deliver sustainable development was seriously called into question in a critical 11.11.11 report which was covered in MO*’s March issue. BIO’s investments appeared to run through tax havens, lack transparency, and focus on high financial returns rather than on delivering sustainable development.

While we should be careful with generalising as differences certainly exists among different DFIs, it is remarkable that a lot of them face the same weak points. In this article we will focus on the European Investment Bank (EIB), an institution we have been monitoring for quite some years. The EIB operates similarly to BIO and is likely to play a pivotal role in the future EU development architecture.

The EIB – the so called EU bank – is by nature an investment bank but is mandated to deliver sustainable development when operating outside of the EU[1]. This ingrained banking mentality however tends to direct investments to where they have the safest and highest financial returns rather than to where their development impact is highest.

Claims that investments don’t go to where they are most needed and that they lack ownership – important to improve aid effectiveness – are confirmed by a Eurodad research[2] which found that only one forth of EIB loans in ACP countries goes to the least developed countries. Moreover 35% of the projects are owned by companies in OECD countries, only 25% are owned by a company in the countries where the project was based and 25% of the companies are based in tax havens.

Also on the other aid effectiveness principles[3] the EIB performs poorly. Less than a month ago, in a resolution on the bank’s annual report, the European parliament explicitly said that “the EIB’s role should be more focused, selective, effective and results-oriented”.

The EIB also fails to align its operations with the broader aid agenda. In Zambia for example the EIB ignores development priorities jointly listed by the EU and Zambia in the country strategy paper (CSP). Over 80% of its investments in the country in the last decade went in support of the mining sector. This while the CSP focuses on transport, infrastructure and human development and makes no mention of mining.

The mining sector – almost exclusively in the hands of foreign multinationals – is currently under fire in Zambia for its harmful impact on the environment, low labour standards and tax evasion. The EIB’s investments also received fierce critique from several MEPs which demanded a moratorium on public financing for the mining sector until adequate standards are in place.[4]

Despite EIB’s questionable role in delivering development, politicians can’t resist to increase the mandate of the bank time and again. In the Arab region aid from the European Commission is ought to come with conditions now. More reforms mean more money and the other way around. This conditionality is not applied to the EU house bank.

Without any assessment of its past operations in the region the EU reacted to the Arab spring by increasing the EIB’s mandate for the region. The bank’s lack of legitimacy as a perceived ally of the former regimes and because of promoting contested neo-liberal policies, was not taken into account. A few months later the EIB found itself operating under a military junta in Egypt oppressing its population equally violently.

Despite numerous calls by MEPs to improve transparency and green energy lending, in the European parliament’s resolution on the EIB’s above mentioned annual report, MEPs equally suggested a capital increase. Demanding better performance standards and a narrower focus and at the same time suggesting the bank should do more is the kind of contradictive sign the bank has received too often and which undermines incentives for improvement.

And Europe is about to make the same mistake again. A new platform for external cooperation and development is currently under construction at EU level. Its aim in principle is to improve cooperation and coordination among the different EU financial instruments and institutions, to avoid proliferation and increase effectiveness.

Increased alignment and monitoring ought to be positive. However, the focus seems to be on developing more and new financial instruments combining loans, grants, technical assistance, private sector investment, etc. – the so called blending mechanisms. The EIB is already operating quite some of them today but again without decent assessment of the existing regional instruments more are being developed.

Blinded by prospects of returns on investments rather than budget costs and the ease of relatively autonomously operating institutions providing easily quantifiable achievements, Northern governments lost sight of the million dollar question: does it contribute to sustainable development?

Without a doubt a difficult one but not enough efforts have been put into answering this question in a well founded way. DFI’s should demonstrate clear financial and development additionality, their investments should be directed to those people and places most in need and aligned with developing countries priorities, transparency should prevail over commercial considerations and tax havens should be a no go.

Governments have the duty to ask high standards and tangible qualitative results before engaging in new adventures. They have the duty to prove that their policy choices go beyond opportunistic and ideological considerations and are truly evidence based. More for more is a legitimate demand, also for the EIB. Otherwise less for less for less should be the consequence.

Desislava Stoyanova is the co-ordinator for Counter Balance and the EIB project co-ordinator for CEE Bankwatch Network