‘Blending’ grant aid with public loans to provide cheaper finance for private investments in developing countries was the flavour of the month among European officials at their gargantuan talk-shop known as the European Development Days, which took place in Brussels this week. However, as
has shown, official enthusiasm for these blending mechanisms is based largely on assertions and assumptions, concrete evidence is hard to find. Eurodad is concerned that this hard sell on blending mechanisms obscures more important issues for financing the post-2015 development agenda.
is that no worthwhile global goals can be met without fundamental changes to the international financial and economic system. This entails key things such as putting an end to corporate secrecy, shadow systems and tax havens, supporting national development strategies and domestic resource mobilisation, insisting on responsible financing standards and overhauling the economic governance system. On top of this, pledges to increase aid
and improve its quality must be honoured. Although some of these things were mentioned in the closing session, there is no clarity on how ambitious the new goals will be or how they are going to be enforced.
Financing beyond ODA: How to go beyond blending?
During the EDDs there were several sessions that discussed the future of ODA. At an EU level , discussions on the future all feature blending mechanisms as the key to financing development, as one instrument in the current and future “tool box of EU external policy.” Eurodad sat on one of these panels, entitled ‘Financing beyond ODA’
One of the main arguments in favour of blending, put forward by Bernhard Ziller, Senior Economic Advisor at the European Investment Bank (EIB), is that it responds to the need to “use ODA in a more strategic way” in order to attract additional public and private resources to support development projects. An additional element was added by Henry de Cazotte, Advisor to the Strategy Executive Director of AFD, who mentioned “an historical turning point with the stagnation of public resources and the exponential rise in demand.”
While most of the institutions involved are proud of the ‘leverage’ capacity of the instrument to attract private sector resources, Eurodad’s recent report
raises important issues about this strong focus. The EU experience so far has been in blending aid with public loans provided by European publicly owned institutions, such as the EIB, the AFD from France, KfW from Germany and others, rather than securing additional resources from the private sector. So, this is an untested practice for the European Commission.
Eurodad’s concerns on the level of transparency and accountability were shared by the AFD representative, who called to continue the dialogue with CSOs on this issue. Eurodad called for the highest standards possible before promoting this instrument further, which in practice means:
- Redesign the governance structures to ensure recipient governments can take leadership roles and CSOs and parliaments in recipient countries are properly engaged.
- Create genuine transparency based on a true presumption of disclosure. This would include all the information about projects, project pipelines, social and environmental impact assessments, contracts, subcontracts, investments and partnership agreements.
- Set up independent complaint mechanisms with a mandate to carry out independent investigations of financed projects.
When it comes to increasing the use of the instrument to support the private sector and to use private sector resources to finance development projects, the implications of this agenda are not clear enough from a development perspective
. It was unfortunate that the EC representative could not attend the session to give his perspective in this timely debate.
It is also worth noting that in a session titled “financing beyond ODA” the discussion was focused on new financing instruments that would use ODA. There was no attention paid to structural issues such as mitigating the volatility of capital inflows
and preventing illicit capital flight
or mobilising domestic resources which could provide financing that is beyond ODA.
Blending as a catalyser for private financing?
The EC organised a session called “blending as a catalyser for private financing,” in which development finance institutions and private investors’ representatives participated. The main focus was on how to use ODA to reduce the risk profile of investment in developing countries and make them acceptable to private financiers, who want to take returns with the least possible risk. As a result, it was clear that assessing real additionality is key, as there is a risk that public ODA will end up subsidising private companies
to undertake investments that they would have made anyway. Thus, the value of ODA will be reduced to support private sector profits.
It seems that the EC is determined to find innovative financial instruments to use ODA to address market and/or institutional failures, such as guarantees, equity and risk sharing instruments for infrastructure projects and SMEs and local currency instruments. There are reasons to question the development of these instruments, rather than channelling the funding through existing institutions. These instruments are also not suitable for all countries - such as some low income countries – in which they could do more harm than good.
As some participants highlighted, ODA to the private sector should be used with care, but not just for market distortion reasons. There are concerns that ODA resources could be wasted if we do not get positive development results.
As we look towards a post-2015 world, it is vital that there is greater transparency and accountability around these funding mechanisms. In less than one month the EU platform for blending in external cooperation
will celebrate one year of work. In the interest of transparency and accountability, Eurodad is expecting to see concrete results and increased involvement of relevant stakeholders in future work.