Private
finance
Debt
Tax
justice
Aid
Financial
architecture

European Parliament examines aid, but debate remains focused on the wrong issues

By María José Romero and Stéphanie Colin

On 30 May, Eurodad gave evidence to a European Parliament hearing nominally on how the EU can deliver better aid, but in reality focused on the controversial trend towards ‘blending’ aid to subsidise or support private sector investments in developing countries. In the context of the current work of the EU Platform for blending in external cooperation, set up to review and further enhancing the use of blending mechanisms, Eurodad argued that stakeholders involved should remain extremely cautious about the current mainstreaming of private sector blending as an instrument for development purposes.

Blending mechanisms: leveraging and development concerns

One of the main issues raised during the parliamentary hearing was “leveraging” private sector finance by using diminishing aid budgets. According the European Commission representative, blending mechanisms have been successful in pursing financial, non-financial and policy leverage. However, he had to admit that so far, most blending has been about subsidizing loans to public bodies, and the agenda to use aid to subsidise or incentivize private sector loans was an ambition rather than a reality in most cases. Financial leverage refers to the ability to attract “additional public and private resources for stronger development impact”. In their evidence, The European Commission and European Investment Bank (EIB) highlighted very different multiplier effect of blending facilities ranging from 8 times the EU-budget contribution, in the case of the EIB, to 30 times in the case of the Commission, mostly referring to public leverage. However, questions remain regarding the development implications of these seemingly impressive leverage ratios, as previous Eurodad research has pointed out.

Eurodad' s evidence challenged several of the assumptions behind using public money to leverage additional financing, particularly private finance, echoing many of the concerns raised by civil society organisations:

    • Private finance follows market trends leading to a concentration of resources, including focussing financing operations in middle-income countries, and in already favoured sectors, such as extractives and finance. The representative of the Latin American Association of Development Organisations (ALOP) argued that there is a high risk that financial returns will outweigh development objectives. 
    • It is difficult to assess whether additional financial and development benefits are delivered by such mechanisms, or whether they merely replace other sources of private finance. Overseas Development Institute (ODI), who also gave evidence, noted that “leverage ratios do not have a one-to-one relationship with additionality.” An overarching question concerns whether grants leverage other resources, or vice versa. Private investors have profit-making objectives, so it is always important to ask who sets the overall goals and strategic direction.
    • There is a high opportunity cost of investing scarce public money in this kind of instrument, particularly at a time when, as Eurodad research has shown, there is an urgent need for more public finance for investment in basic services.
    • There is also insufficient attention to transparency and accountability. As confirmed by CSO and think tank research reports, the decision making process is done behind closed doors without clear criteria for project selection and limited information available to ensure efficient public participation and scrutiny.
    • By increasingly leveraging debt based finance, there is potential debt risk for developing countries. This element has not been taken into account sufficiently. As the European Parliament rightly pointed out in its briefing note for this hearing, “care must be taken to ensure that the use of debt instruments does not reduce the focus on the poorest or increase developing countries’ debt burdens to unsustainable levels.”

It is also worth noting the valuable focus on donor cooperation and coordination as one of the main objective of the existing blending facilities. While donor coordination is an important element of the aid effectiveness agenda, Members of the European Parliament attending the hearing challenged the European Commission argument by mentioning that efforts towards greater coordination and harmonisation of donor practices should be pursued irrespectively of blending facilities, as it is in fact a binding requirement for EU Member States in the Lisbon Treaty (art.210).

Support to domestic resource mobilization is key

The Eurodad evidence also pointed to the huge need for traditional public resources to meet global poverty and environmental challenges. A recent Eurodad paper assessing financial resources available to developing countries includes the most comprehensive coverage. In 2011, the UN’s World Economic and Social Survey  “estimated additional investment needs of developing countries for sustainable development, including for climate change mitigation and adaptation, and for ensuring access to clean energy for all, sustainable food production and forest resource management, at about $1 trillion per year in the coming decades.” 

According to Eurodad research, domestic resources far outweigh private financial inflows, which suffer from problems of volatility and pro-cyclicality and can have widely varying development impacts. Thus, maximizing the value of domestic resources, including the use of aid to support domestic industries through, for example, procuring goods and services locally, while effectively plugging the leaks that allow illicit financial outflows would be a better place to focus development efforts and the debate about delivering better aid.

Watch the video recording of the event