This article is part of our special report The promises and challenges of repayable EU structural funds.
Increasing the role of loans and guarantees utilised to narrow the disparities between European regions may help combat the misuse of EU funds but cannot replace the role of accountability, transparency and sound domestic institutions.
Besides making credit cheaper, a study conducted by European Commission officials published last year underlined the possible indirect benefits of using repayable assistance, as it may attract, or “crowd-in,” private investment, lead to higher productivity in supported projects and introduce behavioural changes among beneficiaries.
One recent study suggested that integrating fewer grants and more market-based solutions in future cohesion policy may both alleviate some of the internal conflict between more fiscally conservative member states and the net beneficiaries of structural investments while simultaneously tackling the problem of corruption.
“A grant versus a loan is a very different beast,” Mihály Fazekas, a researcher at the Central European University said, pointing out that a recipient’s approach to loans or guarantees may be “different because it knows it has to pay back.”
Fazekas added that the size of the grant mattered.
“If you flood the recipient with a lot of easily available cash for discretionary spending like projects you inadvertently increase risk because the organisation cannot spend all that money, but there’s a pressure to spend it.”
The researcher pointed out that the perception of EU funds in recipient countries also mattered.
“There is a perception among a lot of people, especially voters, that it’s not really our money,” Fazekas said.
Yet one could argue that additional support comes with strings attached, such as bureaucratic controls in the forms of reporting and transparency requirements that might decrease graft risks.
However, Fazekas’s research that analysed all EU-27 countries except Malta, as well as 100,000 public procurement contracts in Czechia and Hungary found that, by and large, EU funds increase corruption risks, with graft spilling over to the recipient organisations.
Fazekas found that aspects of procurement that are tightly monitored by Brussels, like open bidding and transparency, may reduce graft risks.
On the other hand, benchmarks that are harder to observe, like length of eligibility criteria or numerous modifications of calls for tenders, as well as suspicious bidding outcomes – like single-bidder outcomes – are associated with more corruption risk.
“This is telling me that there’s a story of bureaucratic controls, which are very heavily the main toolkit in EU funds, that act as market entry barriers,” Fazekas told EURACTIV.
“Companies just say, you know, I’m not going to go for these grants because bureaucracy is just taking all my time, I cannot do the actual work,” which makes it easier to organise corruption rings, Fazekas added.
Channelling money through loans and guarantees may reduce some of these risks, especially if the final recipients are accountable to private entities interested in seeing a return on their investments.
Even then, the big question of who controls the distribution of the EU funds to be channelled to final beneficiaries remains.
Other big development aid institutions such as the World Bank or the European Bank for Reconstruction and Development (EBRD), which often operate in environments where they cannot trust domestic institutions to control graft, maintain a tight grip on the disbursement of funds.
In contrast, the management of EU structural fund aid is shared between the Commission and national authorities, who choose the final recipients.
One analysis conducted by the Brussels think-tank Bruegel on how to improve cohesion policy suggested that corruption risk should affect the share of programme costs national governments have to bear, the so-called national co-financing rates.
Another solution may be to rebalance the share of funds meant for cohesion and directly managed by EU institutions and those ultimately disbursed by national authorities to favour repayable assistance channelled through multinational lender institutions.
For example, 75% of the new InvestEU fund that will unite all bloc-level investments from the ‘Juncker plan’ era under one umbrella will primarily be implemented by the European Investment Bank (EIB), and the rest by other national and multilateral development banks.
Nevertheless, according to Fazekas, the EIB would have to look at country-level, recipient-level and project-level risk, for which it has currently neither the mandate nor the capacity.
Moreover, even though loans have to be paid back, time horizons will matter and who will ultimately bear the financial burden of repayment.
“Who’s paying it back? If it’s future taxpayers 10 years down the line [and not you], what’s your motivation to steal the money today? It is the same as if it was a grant because, in effect for you, it is a grant,” Fazekas said.
[Edited by Benjamin Fox]