Tag Archives: EIB

EU blending platform: must listen to Parliament and CSOs’ concerns

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By Maria José Romero

The European Commission (EC) is pushing ahead with its plan to increasingly ‘blend’ development aid with private finance, despite the fact that the Commission’s commitment to development seems weak and civil society groups and other important stakeholders are excluded from the process. 

In mid-December the EC set up an EU Platform for Blending in External Cooperation, which aims to “provide recommendations and guidance on the use of blending in the external cooperation of the European Union.” In practice this includes “a review of the existing blending mechanisms and the development of a common results based framework to measure impact.” These are both valuable tasks but Eurodad has followed the “blending” agenda closely, and it seems that they might not consider all the essential inputs or draw the right conclusions.

The process towards an EU blending platform

The EC “Agenda for Change” policy paper recommended new ways of using private finance to promote development, to reduce the burden on the public purse.  According to this document, supported by the Council in May 2012, “the EU will further develop blending mechanisms to boost financial resources for development,” a process that “should be supported by an EU platform for Cooperation and Development incorporating the Commission, Member States and European financial institutions.”

In the process of setting up such a platform the EC commissioned a Group of Experts, composed of EU Member States, the External Action Service, the European Investment Bank (EIB) and the European Parliament as an observer, to develop its proposal. In March last year, a public consultation was opened to gather different stakeholders’ views. Eurodad, Counter Balance and Green Alternative Georgia submitted a joint contribution which points out some concerns regarding the purpose and added value of the proposed platform and how blending mechanisms have been implemented. In particular,

  • the risk of financial incentives outweighing development principles;
  • insufficient attention to transparency and accountability;
  • unclear monitoring and evaluation methods;
  • opportunity costs may be high, but are not carefully considered; and
  • debt risks for developing countries of increasing lending.

As a result, there is now a new “EU Platform for Blending in External Cooperation,” where the word “development” is not even in the title anymore, perhaps because the initial title seemed to be broader and more ambitious, particularly in the current context of scarce public resources.

EU blending facilities: What is the best way to assess them?

Since 2007, the EC has set up eight regional blending facilities to link EU budget grants with loans from public finance institutions (i.e. international, regional and European bilateral public financial institutions) or commercial loans and investments from the private sector. Currently, they cover Africa, Latin America and the Caribbean, the EU-neighborhood region and Asia; so all areas covered by EU external cooperation. So far the allocation of funds has been limited, with €1.5 billion of grants from the EU budget and over 320 operations financed for the eight facilities. However, the EU’s rhetoric indicates that blending mechanisms will be used more extensively in the near future.

According to the EC statement, “the new EU Platform will act as a major forum to build on the successful experience so far in this area and look at how to improve the quality and efficiency of blending mechanisms.” The practical work will be taken forward by “technical groups including the European Commission, the EIB, other European bilateral and multilateral finance institutions and those finance institutions which participate in the EU blending mechanisms.” It is worth noting that civil society organisations are not directly involved in the work of the platform and so far there is no clear mechanism to include their concerns and expertise in the planned review.

In late October 2012, the European Parliament issued its own resolution on the future of EU development policy insisting that the implications of the blending platform need to be more carefully thought through, with parliament’s involvement. The EP resolution calls on the EC “to provide clear information on how this mechanism serves the purpose of a development policy based on ODA criteria and how the power of scrutiny of Parliament will be exercised.” This resolution is a welcome step, and confirms Eurodad and others’ concerns.

Additionally, some civil society organisations, such as ALOP, APRODEV and CEE Bankwatch, among others, are also investigating the actual facilities and projects financed to draw lessons about their impacts. Their main conclusions are in line with Eurodad concerns: “sustainable development and poverty reduction objectives are overshadowed by EU geopolitical and corporate interests.” Thus, “greater transparency in project selection criteria and accountability to civil society needs to be established.”

If the EC and platform members are committed to taking forward a comprehensive review of the existing facilities, inputs from the European Parliament and CSOs should be considered thoroughly throughout the process. If not, they will run the risk of undermining the legitimacy and effectiveness of the process.

PRESS RELEASE: Cashing in on climate change? New report lifts the lid on how rich nations use financial intermediaries to dodge climate change commitments to world’s poor

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BRUSSELS, 19 April, 2012: A new Eurodad report reveals how rich nations are using a complex web of private funds and financial intermediaries to wiggle out of pledges to provide $100 billion a year to help developing countries cope with the devastating effects of climate change.

“Overreliance on the private sector could spell disaster for the world’s poorest,” said Javier Pereira, who authored the report for Eurodad, the European Network on Debt and Development. “Leveraging money through financial intermediaries cannot be used as a substitute for providing sufficient public resources directly to countries who, through no fault of their own, are suffering most from global warming,” he added.

A commitment by the world’s richest nations, and biggest polluters, to mobilise $100 billion a year by 2020 was one of the few concrete achievements of the Copenhagen Climate Change summit in December 2009. Governments, however, have failed to meet their interim commitments and are now looking to use much smaller amounts of their own money in order to leverage private funding to make up the bulk of the $100billion.

The idea is that development banks and financial institutions, such as the European Investment Bank and the International Finance Corporation, use public money to invest in financial intermediaries working in developing countries to attract private investors. By investing in an African bank, for instance, they believe they can trigger flows up to ten times higher than the initial investment.

While Eurodad’s report acknowledges that supporting private-sector investments can have a useful, if limited, multiplier effect on public funds, it casts serious doubts on claims made about their leveraging potential and reveals that it is often impossible to know where the public money ends up.

“These tools only work with very large and mostly Northern companies and the investments are unlikely help those who are most in need,” Pereira added. “The average size of the loans provided by the IFC is above € 15 million and it’s just not possible to pretend that investments of this size will help smallholders in developing countries cope with climate change.”

Eurodad says that international development institutions should make sure financial intermediaries are more transparent and accountable; their investments have to be properly integrated into the national strategies of developing countries; and they must be used effectively to help those most at risk adapt to climate change, notably through support for small, local businesses, rather than Northern-based multinationals.

“We are not suggesting developed countries and international organisations should stop using financial intermediaries altogether, but given the evidence this should only be a small part of the solution,” said Eurodad’s Director Jesse Griffiths.

ENDS

The report, “Cashing in on climate change? Assessing whether private funds can be leveraged to help the poorest countries respond to climate challenges” is available at: http://eurodad.org/wp-content/uploads/2012/04/CF-report_final_web.pdf

For further details or comment, contact:

Javier Pereira, Eurodad policy and advocacy officer, on jpereira@eurodad.org or Tel: + 32 2 894 46 47; Mobile: +32 488 570 654; or

Jesse Griffiths, Eurodad director, on jgriffiths@eurodad.org or Mobile: +32 491 429 697 (in Washington DC).

Eurodad (the European Network on Debt and Development) unites 49 non-governmental organizations from 19 European nations working on issues related to debt development finance and poverty reduction.

EU law-making is on the line as the European Investment Bank comes out fighting against US financial regulation

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By Antonio Tricarico, Counterbalance and Eurodad member CRBM

You might think that, after the financial crisis of 2007-08, all major public institutions, and in particular those dealing with finance and monetary issues, would be focused on preventing such systemic crises happening again. Supporting the infant steps being made to regulate financial markets as well as shrinking their involvement in shadow-banking practices in the name of financial and social stability: you would think these, would be prudent goals for significant public financial institutions.

This, though, is not the case with one of the major European financial institutions: the European Investment Bank (EIB).

The EIB, the so-called ‘EU bank’ that primarily finances European infrastructure projects that are in line with EU policies, is engaged in a struggle to gain exemptions from new provisions under US law, in order to continue trading over-the counter financial derivatives in the US market. The new obligation to trade these type of derivates through central counterparties, where the trading has to be cleared by setting aside adequate margins and providing due reporting, appears to be too onerous for the EIB, according to recent press reports.

Eila Kreivi, the head of capital markets department at the EIB, has outlined the EIB’s case for being exempt, arguing that the bank is a sovereign institution and, thus, intrinsically provides financial stability. Following the default of one of its shareholders (Greece), the welter of speculative attacks against the eurozone and the resultant possibility of the EIB’s triple-A rating being downgraded, such beliefs no longer reflect the current financial reality, and should at least be nuanced. 

Such a tough, unambiguous stance from the EIB, now headed by a man –Werner Hoyer – who was previously a member of a German government that was tough on the need to regulate financial markets, raises several additional questions.

First off, why does the EIB have to be so heavily involved in derivatives trading? It is true that the bank lends and borrows in currencies other than the euro (including local currencies), but perhaps other mechanisms exist for a public institution to hedge its currency-exchange risk, such as a more prudent diversification of the EIB’s portfolio or subsidisation through European Commission grants for credits in local currencies. There is, though, very little transparency about the EIB’s trading book; more public scrutiny over these kind of EIB operations is clearly needed.

Second, why has the EIB chosen to complain directly to the US authorities, rather than leaving it to the EU’s member states (the EIB’s shareholders) or the presidency of the European Council to do so? The EIB consistently defines itself as being driven by EU policy; yet on this occasion, and on such an acute issue, it has chosen to break ranks very publicly, at the risk of contradicting its masters.

Finally, what exactly is the EIB’s problem with the strictures of the US’s Dodd-Frank Act? How much would the new US rules cost the EIB, at least in capital blocked for stability reasons? Perhaps not so much, though it is typical for bankers of any sort – public or private – to react badly when they are obliged to comply with new, more restrictive rules. Could it be that its current sensitivity about how it trades in derivatives is because, contrary to its public statements on the matter, the EIB is floating in some choppy financial waters?

The European Parliament is currently locking horns with European governments to bring about rigorous reform of derivatives markets by, as a minimum, aligning the EU regime to the new US provisions. It ought now to question the EIB about why it has stuck its head above the parapet so belligerently. The bank’s management seem to need a reminder that the EIB is indeed policy-driven, and that new European law on the issue is still in the making.

This article was published by the European Voice the 12 April 2011.

Cashing in on climate change? Assessing whether private funds can be leveraged to help the poorest countries respond to climate challenges

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The effects of climate change on developing countries have created a huge financial burden. Policymakers aim to limit global warming to a rise of 2°C in this century. In this scenario, the cost of adapting to and mitigating the impact of climate change would be in the range of USD 110-275 billion (€79-198 billion) per year for developing countries. Given their historical responsibility, accumulated climate debt and the principle of common but differentiated responsibility, developed countries will have to shoulder most of the cost.

Rich countries have pledged to make available USD 100 billion (€72 billion) per year by 2020, most of which will presumably be channelled through the Green Climate Fund. Although originally this money was expected to come from public sources, developed countries have begun to rely on mobilising large amounts of private money.

As the discussion about mobilising private resources is mainstreamed, financial intermediaries (FIs) are placing themselves at the forefront of the debate. They are receiving a great deal of attention due to their perceived ability to use public money to overcome the barriers to private investment in developing countries. Estimates suggest that through the use of FIs, it may be possible to raise in the range of USD 100-200 billion (€72-144 billion) per year of private flows from developed to developing countries.

While climate finance is vital for both mitigation and adaptation, this report focuses on the latter. It looks at some of the main instruments that can be used to leverage private climate finance through financial intermediaries and analyses data from some major development finance institutions (DFIs). It specifically assesses the role of financial intermediaries in low-income countries (LICs) and in supporting small and medium sized enterprises (SMEs) and looks into the main monitoring and accountability constraints when using financial intermediaries.

Eurodad’s report finds that:

  • Important gaps exist in the knowledge of how money is leveraged through financial intermediaries. These gaps should be filled before channelling any significant amounts of climate finance through FIs.
  • Financial intermediaries and existing investment instruments are very limited when it comes to targeting LICs and SMEs in sectors which are particularly vulnerable to climate change.
  • Developed countries are looking at financial intermediaries as isolated actors without paying attention to the policy and institutional environments in which they operate.
  • Monitoring financial intermediaries is extremely difficult and there are no mechanisms to ensure private climate finance is aligned with developing countries’ priorities.

These shortcomings underscore the importance of direct public finance. Leveraging money through financial intermediaries cannot be used as a substitute for directing sufficient public resources directly to the poorest. Given the gaps, a strong reliance on FIs and the private sector could spell disaster for many citizens in developing countries.

Read the full Eurodad report: “Cashing in on Climate Change?”