Private
finance
Debt
Tax
justice
Aid
Financial
architecture

European Commission 2012 financing for development report: right topics, wrong commitments

Added 13/Jul/12

By Jesse Griffiths, Oygunn Brynildsen, Alex Marriage and Jeroen Kwakkenbos 

On 7 July, the European Commission released the latest in its annual series of Accountability Reports on financing for development (until 2010 called the “Monterrey Survey”), and issued a Communication setting out proposed follow up actions. While adopting welcome rhetoric that supports the importance of domestic resource mobilisation, long emphasised by Eurodad and members, the report makes pretty grim reading, with few concrete actions promised in key areas.  Here’s Eurodad’s analysis of the main points and the crucial items which are missing :                                                                               

Aid: 25 years behind target

OECD DAC figures had already told us that EU aid decreased in 2011 from €53.5 billion to €53.1 billion – or from 0.44% GNI to 0.42% GNI, a reduction of €342 million. Based on the current figures the report notes that by 2015 EU ODA “is expected to increase to 0.44% by 2015”. This means that the EU continues to be way off track on its commitment to meet 0.7% by 2015, having already failed to meet its pledge to get to 0.56% by 2010. The picture gets worse when you consider that much of the money counted as ‘aid’ is questionable – the recent EU AidWatch report estimates that the real ODA figure should be lower as “in 2011 at least €7.35 billion (or 14%) of EU ODA was not invested in developing countries.”

Though in June the European Council “reaffirmed its commitment to achieve development assistance targets by 2015”, the accountability report underlines the scale of the EU’s broken promises, noting dryly that there is “a delay equivalent to about 25 years on the path to 0.7%”.

Rather than proposing ways to get EU governments to meet their commitments, the communication raises the prospect of using dubious accounting methods to further inflate ODA figures, asking the OECD DAC to develop “a clearer understanding of how the concessional character of loans is determined in accounting for ODA”.

Aid effectiveness

More EU member states have committed to using country systems and, as the report points out, the May Council conclusionsemphasise the commitment by the EU to use budget support to strengthen country systems.” The communication, however, makes no mention of this. Instead, it focuses on country led results frameworks which have yet to be effectively implemented but may be promising, and notes that these frameworks should be used in the context of commitments made in Busan on usage of country systems and capacity development. The proposed new actions are desultory however, focusing on donor mapping.  No mention is made in the Communication of how to deal with the issue of use of aid for domestic purposes highlighted in the Aidwatch report.

Debt: Problem fully identified, but solutions are partial

Importantly, the report expresses concern about new vulnerabilities and risks regarding developing countries’ debt sustainability. The Commission also rightly highlights developing countries’ increased vulnerability to external shocks, rising lending from new private and public creditors and more frequent use of lending mechanisms as key challenges to debt sustainability in developing countries. However the Communication presents solutions that do not fully respond to the problems.

One positive aspect is the continued emphasis on the need for responsible lending and borrowing practises, highlighting two key areas that Eurodad cover: “including in blending and in export-credit operations”. Now the rhetoric needs to be followed with action: the Commission should use the following two opportunities to put their continued commitments to responsible lending into practice: the development of the EU Platform for External Cooperation and Development and the implementation of new EU regulations under which the European Commission will make its first report on Export Credit Agencies’ activities. Policy Coherence for Development will be taken into account in the report, due out this year. The Eurodad charter for responsible financing and the report Exporting goods or exporting debts? suggest concrete measures for  the implementation of robust standards.

However, the Communication has little to say about how to cope with any future crises. While the report rightly stresses that developing countries now engage a wider range of private and public creditors and that this broad creditor base creates challenges in terms of efficient debt workout once a crisis hits, its proposal to, “push for the participation of non-Paris Club members in debt workout settlements” does not promise any lasting or efficient solution. Any fair and efficient solution would need to gather all creditors in one single debt workout process where decision making is independent of the creditors: Eurodad has developed 10 principles that should form the basis for such a procedure.

Eurodad members have been pushing for all EU states to adopt strong laws against vulture funds who have preyed on developing countries – a demand picked up by the Commission, which calls for member states to “take national action to restrict litigation against developing countries by distressed-debt funds.”

Tax: Continued commitment, but no strong regulatory measures

Again, some of the rhetoric is welcome, particularly the view that “domestic revenues tend to be the most important source of development finance directly available to governments” and the continued acknowledgement of the crucial role of good tax systems and tax collection capacities in domestic revenue mobilisation. It is encouraging that the Communication also points to the devastating development impacts of illicit capital flight.

However, while developing countries must enact solid tax systems and regulatory measures, it is crucial not to ignore the EU and Member States’ responsibility to allow developing countries the necessary policy space to do so, and to create solid regulatory frameworks to close the many loopholes that allow EU business to dodge taxes in developing countries. In this context it is disappointing that the action points do not include any regulatory measures and fail to make any strong statement on key opportunities.

The EU should use ongoing legislative procedures to match their words with action: The EU Transparency and Accounting Directives are a vital opportunity to introduce full country by country reporting for all companies and the ongoing review of the Anti-Money Laundering Directive should make handling the proceeds of tax evasion an automatic money laundering offence and require that financial institutions make sure they know who they are doing business with.

Leveraging private finance

Building on the EU’s controversial Agenda for Change, the trend towards using development finance to support private investment continues, a recent Eurodad report has analysed this trend. There is continued pressure for the relevant measures from the Agenda for Change to be formalised through a new blending platform, an idea Eurodad has critiqued.The suggestion that the EU “make greater use of risk-sharing mechanisms such as guarantees that can unlock investments and … promote investments through instruments that entail improved risk management and equity participation in structured funds” brings us further down the road towards linking development finance to international capital markets, which Eurodad members and partners have warned against. 

Support for FTT – for selfish ends?

The Commission continues to push the Council to adopt a financial transaction tax (FTT) – though recent Council conclusions indicate that an EU-wide FTT is unlikely, they gave permission for a coalition of the willing to go ahead anyway, something Eurodad members and partners had pushed strongly.  However, they repeat their move to capture all FTT revenues for the Commission itself – not share them between development, international environment and domestic revenue, as proponents, including the Robin Hood tax campaign have long demanded. Their argument that this could free up other resources “which could in turn make it easier for Member States to mobilise funding required for meeting aid targets and tackling other global challenges” is unlikely to cut much ice with campaigners.

Discussions about reform of the international financial architecture are notably absent from the Communication, though there is a brief overview of existing limited reforms in the background report.

See Eurodad analysis of the 2011 report here.