The EIB loan to BNDES: Learning lessons for the next external mandate of the Bank

In 2011, the European Investment Bank (EIB) announced it would provide a €500 million Climate Change Framework Loan (CCFL) to the Brazilian Development Bank (BNDES), mainly for projects in the renewable energy sector supporting climate change mitigation.

In a report published after a mission on the ground in 2012, Anouk Franck of Both Ends alerted about the choice of BNDES to invest in climate-friendly projects. Indeed, BNDES’ track record of supporting a number of highly controversial hydropower projects in the Amazon, combined with its support for polluting energy companies like PetroBras, put civil society organisations in Europe and Brazil, as well as parliamentarians, on alert. The question was: is BNDES the right vehicle for European public money to fight climate change?

In addition, the report highlighted the lack of transparency related to this loan. Indeed, attempts to obtain more information on the type of projects to be supported by the loan and the safeguards to be applied were not fruitful due to BNDES’ refusal to disclose any information or engage with civil society organisations.

Although the contract was signed in 2011, two years later the money had not yet been disbursed. BNDES declared it has not yet requested the disbursement, without giving further explanation. The bank affirms it will file the request for disbursement when ’the time is appropriate’.

The European Investment Bank publicly confirmed that the loan is still open and that no money has been disbursed yet due to a pending issue with procurement. The EIB stated that it has adopted a cautious stance regarding this loan, but that the EIB continues to work with BNDES to look for eligible projects.

Although Both ENDS and Counter Balance only received very limited official information from either EIB or BNDES about the use of this loan, we gathered from discussions with informed parties that there are several reasons for those 500m euros to remain unallocated and not disbursed:

– A central reason for this is the difficulty to find Climate Change Projects selected by BNDES that comply with EIB’s procurement rules, as was confirmed by the EIB in front of the Development committee of the European Parliament on 28^th August 2013.

– Another underlying issue seems to be that the choice of lending to BNDES was a political choice, driven by geopolitical interests in the context of growing international role of Brazilian diplomacy. Despite the negative track record of BNDES on environmental issues, the EIB could not refuse a loan to its giant Brazilian counterpart and engaged in a relationship very likely to end up in a situation of non-disbursing the funds.

If the situation remains unchanged and no suitable climate change projects are identified by BNDES, it is likely that the EIB will have to cancel the overall operation in the coming months. This raises several questions:

1/ How does the EIB choose its partners and the financial intermediaries it uses to reach out to small scale projects? In the case of BNDES, we see that geopolitical horse-trading has been prominent and that the issue of the negative track record of BNDES in climate-friendly finance has been largely ignored.

2/ It is welcomed that the EIB followed carefully its due diligence procedure in making sure not to finance projects not in compliance with EU standards from this loan. Nevertheless, this case shows that the EIB did not anticipate at all the low quality of climate change projects proposed by BNDES for co-financing and did not have quality projects in the pipeline when signing the contract with BNDES.

3/ At a time when public financial resources are under pressure and when there are plenty of climate projects expecting financing opportunities, is the choice of this loan to BNDES really in line with EU climate change objectives?

The current review of the EIB mandate for lending outside of the EU (ELM) brings some of the pitfalls of the bank’s development lending to the fore and offers a chance for improvements. The European Parliament (EP) is discussing this document which sets out the guidelines and priorities for the bank when lending outside of the EU. Therefore, the parliamentarians will have the opportunity in the coming month to ensure that unviable loans like the one to BNDES are not repeated under the future mandate for 2014-2020. Action is needed in several areas:

• More stringent requirements regarding intermediated lending

The EIB needs to ensure strong levels of transparency and accountability of intermediaries. Indeed, much is still to be done by the bank in terms of environmental evaluation of its global and framework loans, especially since those loans are mostly monitored by operational staff and not so much by the projects directorate of the bank, where the Environment, Climate and Social Office of the EIB is located.

The EIB shall not cooperate with financial intermediaries with negative track record in terms of transparency, fraud, corruption and environmental and social impacts. The loan to BNDES illustrates the lack of consideration given to the track record of the financial intermediaries the EIB is working with. Hence, a stringent list of criteria for selection of financial intermediaries shall be established by the EIB jointly with the Commission and be publicly available. In addition, an exclusion list based on the model of the one created by the World Bank, could be a necessary step forward.

• Tightening the geographical scope of the external mandate of the EIB

Counter Balance advocates for a modification of the geographical scope of the EIB mandate. In its impact assessment of the current ELM, the EC states that one objective of the future ELM for 2014-2020 is to ensure that the geographical scope of the mandate focuses “on less creditworthy beneficiaries where the use of the guarantee would display the highest added value”. Nevertheless, this objective is not being operationalised in the current proposal from the European Commission, since the list of eligible countries is still wide open to all middle-income countries which are not in greatest need of EIB loans. Therefore, we see as most important to focus on Least Developed Countries (LDCs) and the EU neighbourhood, where the EIB has a clear competitive advantage. Indeed, so far, when lending in Asia and Latin America, the EIB has mainly financed projects in emerging economies or middle-income countries: Brazil, Mexico and Panama in Latin America, India and China and Asia. Focusing on LDCs, while diminishing the number of countries eligible, would increase the added-value of the EIB, increasing its expertise and mobilizing resources around few key beneficiary countries’ priorities, while allocating its financial resources and staff time to countries where most help is needed.

• Reinforcing the sustainability of EIB operations

We welcome EIB’s portfolio shift in favour of renewable energy sources in recent years and its’ recent decision to significantly restrict its lending to the coal sector. However, the introduction of a requirement to direct at least 25% of total EIB financing operations under the ELM to climate change mitigation and adaptation is hardly to be seen as a step forward for the EIB, since it already reports using more than 20% of the EU guarantee for climate action. A key concern lies in the criteria used by the Bank for a project to qualify under climate action. The eligibility framework for Climate Action needs to be reassessed: we think the current criteria are too vague, and the Parliament should take responsibility and not only leave the EIB developing such crucial selection mechanism.

The EIB, which was required by the current mandate to publish a “strategy on how to gradually and steadily increase the percentage of projects promoting the reduction of CO2 emissions and phase out financing projects detrimental to the achievement of EU’s climate objectives”, partly neglected this requirement from EU policy-makers. Indeed, the document produced in December 2012 was not a strategy per se and largely ignored the calls from the Parliament to phase out lending to fossil fuel lending, therefore only focusing on the “positive agenda” of the EIB’s climate portfolio. There was no public consultation on such key strategy – this should be addressed through a broader discussion soon after the new mandate gets into operation.

The case of the loan to BNDES shows that the EIB is still not fully aligning with EU policies but part of the traditional EU political horse-trading. What about the due diligence of the EIB, the high standards of financial intermediaries selected by the bank and the insufficient level of transparency and accountability of the bank when asked about this loan? One could expect from the “EU Bank” to show leadership on those key issues and therefore ensure the added-value of its loans. As a European bank, it has to follow European rules and ensure that international norms concerning participation, transparency, accountability and social and environmental criteria are met in the projects it funds.

To conclude, it seems that the new external mandate of the bank is an opportunity to ensure that high environmental and social standards are applied in all EIB operations, focusing more on quality than quantity and volumes of EIB operations. Strengthening public participation (of beneficiary countries, affected communities and civil society) and information disclosure requirements will be crucial in this regard. The European Parliament is a key body to hold the EIB to account, and with the ELM it has an important tool at hand to significantly improve the way the bank will operate in the coming 7 years.