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03/12/2016

New EU private sector aid criteria under the microscope

Development Policy

New EU private sector aid criteria under the microscope

Development aid in Haiti.jpg

The European Commission has published the first set of guidelines for involving private sector players in delivering overseas aid, a long-standing practice that has generated controversy with some NGOs for its claimed lack of transparency, accountability and potential for corporate profit-taking.

The EU’s Communication lists six criteria for using public funds to leverage private sector engagement, covering factors such as the developmental impact and ‘additionality’ of projects, the disbursement procedures and adherence to social, environmental and fiscal norms.

But the communication lacks specific information on how the criteria will be monitored, graded or what penalties will apply if they are violated.

Hilary Jeune, Oxfam’s EU policy advisor, told EurActiv that the Commission was taking money from scarce overseas aid budgets to boost the private sector, “but it fails to set up transparent and accountable structures that ensure these interventions tackle poverty, economic inequality and ultimately help improve the lives of the poorest and most vulnerable”.

In full, the criteria for giving private sector actors access to public funds as a way of seeding or leveraging support for a project are that:

  • It has a measurable development impact, although the criteria for measurement are not listed
  • It is additional to what would have happened otherwise
  • The aid is neutral, temporary, transparent, disbursed through fair bidding processes and non-market distorting
  • The project is cost-effective and the risks are fairly shared between public and private sectors
  • It demonstrably catalyses market development by ‘crowding in’ other private sector actors
  • It adheres to undefined social, environmental and fiscal standards, such as respect for human and indigenous rights and good corporate governance

Woolly, vague and open to abuse?

Commission sources speaking on condition of anonymity rejected the NGO analysis that the guidelines were woolly, vague and open to abuse, characterising the new guidelines as a starting point from which member states would develop the rules further, and apply them in their own bilateral trade agreements.

Such criteria were usually applied ex-ante in assessing whether ‘blended’ public-private projects qualified, “but there is still a lot of work to be done in developing an appropriate monitoring and impact measurement framework to assess the impact of the private sector in public-private collaboration”, a Commission official said.

“Companies are used to measuring their financial performance,” he added. “It is more difficult for them to measure their socio-economic impact.”

One fertiliser and crop nutrition company that has worked with the European Commission in Public-Private Partnerships (PPPs) in the past, Yara, welcomed the new guidelines for recognising the way in which private sector finance could augment traditional aid programmes.

“This new strategy is very timely as we approach the date for MDG (Millennium Development Goal) compliance and the launch of the post-2015 development agenda,” Natalia Federighi, Yara’s director of public affairs told EurActiv.

“The EU now has a broader basis for taking on new catalyst, brokerage and facilitation roles, as well as fostering the implementation of innovative, catalytic and patient financing mechanisms for SME development. We believe this reinforces and amplifies development through the eradication of poverty at its source.”

Reporting requirements

But critics in the development community say that in the past, in other Commission departments, companies have often declared themselves unable to comply with country-by-country reporting requirements because doing so could advantage their economic competitors.

The Commission denies a parallel, but accepts that its capacity for monitoring private sector performance is not yet optimal.

“Company self-reporting is always a second best solution but as long as it is difficult to assess the adherence to certain criteria from the outside we have to rely on self-reporting by companies,” the source said. “That is the minimum requirement we can make. We try to find other ways to monitor these criteria but company reporting is always part of the project and in some cases the company’s reports are actually certified by external auditors.”

The possibility that the Commission could unleash an external audit was something that every company had to be prepared for, the official qualified.

While he could give no percentages for the amount of external audits that actually take place, “to the extent that clear violations are detected, we will certainly take measures not to continue a project – or at least not to follow up with a particular company on future support”, he said.

‘Dangerous emphasis’ on health privatisation

More broadly, several NGOs have questioned a passage in the new guidelines advocating, “easier access to markets, finance, infrastructure and social services”, for its potential to open up education and health to the private sector in developing countries.

María José Romero, a policy manager at the Eurodad network noted, “a dangerous emphasis on using EU power to push change in the developing world” in the Commission’s plans.

“Using public resources to ‘leverage’ private finance is of great concern due to the high risk of profit-making motives outweighing poverty reduction objectives,” she said. 

The Commission said that it sees the potential for the private sector to play a role in providing social services in some countries, but only under certain conditions.

“It will depend on the development strategy of our partner country, whether they want it, and whether they have the right regulatory framework in place for private provision of social services,” a source said. “They will also need to ensure that social services remain affordable to poor people even when a private company is involved in their provision.”

Positions

Ad Ooms, the chair of the Concord NGO coalition’s taskforce on Private Sector and Development, said: “The EU needs to ensure that private European companies operating on the ground do no harm, behave in a sustainable way and pay their fair share of taxes. Economic growth and job creation alone is not enough. Human rights and public interest must be safeguarded when using development aid to leverage private finance, including public private partnerships.”

Background

Since 1997, aid to developing countries constantly increased until its peak in 2010, according to statistics published by the OECD’s Development Assistance Committee (DAC).

Official development aid decreased between 2010 and 2012, victim of many governments’ austerity measures.

The bounce back of aid budgets in 2013 was so strong, that even if the five new countries that joined the DAC (Iceland, Poland, Czech Republic, Slovakia and Slovenia) are not taken into account, 2013 was a new record year, with almost €100 billion dedicated to development aid.

Timeline

  • 2015: Deadline for Millennium Development Goals to be met, and for rich world to contribute 0.7% of Gross National Income as overseas aid

Further Reading