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05/12/2016

Commission says blending of funds produces ‘huge’ results

Development Policy

Commission says blending of funds produces ‘huge’ results

Construction work in Addis Ababa.

[DFID/Flickr]

A senior European Commission official said that recent experience with the blending of funds, combining grant aid with non-grant resources, has shown results that are “too good”.

Fernando Frutuoso de Melo, Director General of DEVCO of the European Commission remarked that he almost feared speaking about the results of the mix.

Speaking at an event on Wednesday (30 September) organised by the European Policy Centre (EPC), de Melo said that “with something like €2 billion of grants”, the Commission had leveraged a little bit more than €19 billion from European and regional development investment banks, which have triggered investment of about €42 billion.

“This is excellent. We want to do more than this,” he said, adding, “We currently have a leverage effect of 20 times,” which de Melo stated was “huge”.

There are eight blending facilities managed by the Commission, in order to support public and private sector investment, which have reportedly received €2.2 billion in grants so far. These facilities get grant funding from the EU budget, the EDF, and member states, which are combined with loans from other financial institutions.

These facilities cover all the regions where the EU has development cooperation, and relate to specific regional and country-level strategies and partnerships, with the aim of supporting EU policy in those regions and countries.

Probably, de Melo said, a longer period was needed to make a more definitive assessment of the results of blended finance.

The European Commission official argued that the blending of funds can create hundreds of thousands of jobs, which in a continent like Africa, is extremely needed, in view of the demographic trends and the risks of mass immigration.

De Melo also said that the monitoring and follow up of the schemes was very important. The Commission is working with statistics, and research centres, to find a model for a monitoring system that could be shared with other partners, he added, commenting that this could be done fast thanks to digital technology.

“We probably should have done this earlier,” de Melo told the audience.

The first hedge fund for investment in Africa was created in London three months ago, the official noted, adding that this shows that “the opportunities are there”.

“Very huge” private investment was coming to many African countries, especially in manufacturing, and this was creating thousands of jobs. But those investing were Chinese, Indians, Koreans, and Turkish, de Melo pointed out, asking “Where are the European countries? What are they doing?”

The EU exective’s approach is that besides promoting the financing, it is very important to tackle the different elements that are required to create the possibility for investment, De Melo said, including by improving the legal environment and developing tools to support agriculture, energy, climate-related issues, and job creation.

In 2014, the Commission adopted a Communication calling for the private sector to play a major role in creating sustainable and inclusive growth for developing countries. De Melo said that in Africa, there was a less ideological approach towards the private sector than in the European Union itself.

Blending could be seen as part of a potential sea change for development finance, which effectively shifts Official Development Assistance (ODA) from the public to the private sector, while at the same time helping to replace ODA with private finance.

De Melo said that ODA was no longer seen as “THE solution” for the needs of developing countries, but rather as leverage for supporting policies that are important for their development.

But not all stakeholders are enthusiastic about the blending of funds. The European Network on Debt and Development (Eurodad), a network of 46 non-governmental organisations (NGOs) from 20 European countries working on issues related to debt, development finance and poverty reduction, recently published a report titled “A dangerous blend?” which raises many questions related to the innovative financing scheme.

Among other things, Eurodad fears that blending may be wasting scarce ODA resources, that the blending mechanisms lack transparency and are uaccountable, and that there is no evidence that they meet development objectives.

Asked to comment, Maria Jose Romero, Policy and Advocacy Manager at Eurodad, said that the Commission blending agenda raises serious concerns.

“In many cases of blended projects, it is not clear whether the grant was needed at all, meaning that there is high risk of subsidising projects that would have taken place anyway, thus wasting scarce ODA resources. The effectiveness of blending has even been called into question by the EU’s own Court of Auditors, who said that for the period 2007-2013, the need for a grant was demonstrated for “only half of the projects examined”, Romero said.

The European Parliament has also been pushing for the Commission to make sure that the blending mechanisms are more transparent and accountable, and actually have impact on sustainable development.

“The jury is definitely still out on this one,” the Eurodad representative concluded. 

Background

The development community, and the EU in particular, has recently put greater emphasis on the opportunities offered by blending, the of combining grant aid (usually channelled through a development finance institution) with non-grant resources. The new EU development policy, the Agenda for Change, includes a commitment to increase the share of EU aid through innovative financial instruments, including under facilities for blending grants and loans, and other risk-sharing mechanisms.

Although the European Commission has been increasing the use of these instruments since 2007, it is only since 2012 that there has been a substantial shift. A new EU platform for blending in external cooperation (the EU blending platform) was set up in December 2012, in order to facilitate the scaling up of these blended resources.

Blending could be seen as part of a potential sea change for development finance, which effectively shifts ODA from the public to the private sector, while at the same time helping to replace ODA with private finance.