Taking development finance private

The European Investment Bank has become one of the major players in development finance. [Steintec/ Flickr]

The EU’s External Investment Plan (EIP) is the latest addition to the increasingly cluttered landscape of public-private development finance.

Modelled on the so-called Juncker Plan, the EIP currently relies on €4.1 billion of guarantees from the EU budget, which the Commission says will generate more than €44 billion of investments by 2020.

Although the plan has only been operational since last autumn, the Commission is poised to expand the EIP’s funding and remit as part of its proposals for the EU’s next seven-year budget from 2021-2027.

What the EIP will look like, and the role it can play, was one of the hot topics at the European Development Days on 5-6 June.

Aid not the only agenda

At the UN Financing for Development summit in Addis Ababa in July 2015, donor countries were clear that conventional development aid was not going to see a rapid increase.

The figures bear that out. Total foreign aid from official donors stood at $146.6 billion in 2017, a fall of 0.6% in real terms on 2016, according to the annual report by the Development Assistance Committee (DAC) at the Paris-based Organisation for Economic Cooperation and Development.

Average aid spending among EU countries, meanwhile, sits at just over 0.4% of gross national income, well below the 0.7% of GNI target agreed at UN level.

But policy-makers say that increasing aid is not the only priority since it will never be sufficient, on its own, to eradicate extreme poverty.

Instead, the international community is looking towards a larger role for the private sector.

“Blended finance instruments including PPPs serve to lower investment-specific risks and incentivise additional private sector finance across key development sectors,” leaders agreed in the Addis communique, adding that it was vital to “unlocking the transformative potential of people and the private sector”.

This means more public-private partnerships and a bigger role for the European Investment Bank, World Bank and other development finance institutions.

“It’s interesting to see how blending has increased,” said Anja Langenbucher, Europe Director of the Gates Foundation, at the European Development Days.

“A stronger push for innovative instruments will be an increasing part of our development financing,” a Commission official told EURACTIV.

But it is not entirely new. One of the provisions of the Cotonou agreement signed between the EU and African countries in 2000, is that European development finance institutions directly support domestic private sectors and provide funding for infrastructure projects that will help develop business opportunities.

The Luxembourg-based European Investment Bank, which was one of the most active and visible delegations at the European Development Days, has also mooted the prospect of a new EU development finance institution.

The EU is not the only player to be expanding its development finance initiatives.

At its annual meeting in South Korea in late-May, Akinwumi Adesina, the president of the African Development Bank, called for shareholders to increase the bank’s capital so it can dramatically increase the number of projects it can finance.

“Africa can’t become a museum of poverty,” Adesina told delegates.

No country left behind

But blended finance and public-private partnerships are not popular with everyone. Many development NGOs argue that blending projects are often opaque, with unclear lines of accountability. That makes it difficult to track the progress of projects and hard for lawmakers to maintain local control, they say.

“So far there is not enough evidence to suggest that relying on private investments is the best way of reducing poverty or inequality,” says Maria-Jose Romero of Eurodad.

Others argue that involving the profit-motive means that the lion’s share of blending projects tend to go to middle-income countries rather than the nations that are most in need of private sector development.

However, the Commission insists that the EIP will not leave the poorest countries behind and that a significant portion of the EIP will be allocated to leveraging the private sector in the poorest countries rather than targeting the easiest markets.

“Commitments to least developed countries (LDCs) must be there and will be there on 14 June,” a senior Commission official told EURACTIV.

He said there has already been “huge interest from financial actors” in obtaining project finance from the EIP. “More than the budget will allow,” the official added.

Transformative

Policy-makers are clear that programmes like the EIP can only be part of the answer.

“Without education, health, nutrition and economic empowerment programmes there is a limit to how much countries can grow,” said Langenbucher.

“Some of these programmes can only be addressed through grants rather than blended finance,” she added.

But at the EDDs, there was still plenty of enthusiasm for what the EIP can deliver.

“The EIP has the potential to be truly transformative,” one civil society leader told EURACTIV.

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