Like many other public banks, the European Investment Bank (EIB) leverages its own means by acting as a catalyst for private investment through various financial mechanisms. Too often, though, attempts to attract private capital result in unpredictable risks and higher-than projected costs for the public coffer, write Xavier Sol and Fabio De Masi.
Xavier Sol is the director of Counter Balance – a coalition of European civil society organisations with experience in monitoring public investment banks.
Fabio De Masi is German Member of the European Parliament for the United European Left / Nordic Green Left group and is full member of the parliamentary committees for economic and monetary affairs (ECON) as well as for investigations into tax rulings and other measures similar in nature or effect (TAXE).
Banks are like magicians: they can perform economic miracles by creating money out of thin air, funding long-term investment and generating income for enterprises and workers. Or they can cause massive destruction by fuelling speculation and promoting bad investments, leading taxpayers to foot the bill when the bubbles burst.
The European Investment Bank (EIB) has a vast potential to revive European economies and steer them towards social and ecological change by funding smart public investment. Such a New Deal is much needed after the financial crisis and disastrous austerity have killed investment appetite through depression and negative economic expectations. To live up to its potential, however, the EIB has to alter its course in a number of areas.
In 2014, the EIB lent EUR 78bn, of which 90% were directed towards EU countries. Helped by a capital increase of EUR 10bn in 2012, its role has been significantly scaled-up since 2008. Most importantly, it will be the main implementer of the upcoming EUR 315bn Investment Plan designed by Jean-Claude Juncker and the European Commission, making it one of the biggest investors in Europe. Much of this massive business happens however outside the control of European citizens. This is one of the reasons why EIB operations underperform in terms of public value and most of its potential remains untapped.
A public bank needs public scrutiny
Given its significance and scale, it is crucial to make the EIB more democratically accountable and transparent. It needs further scrutiny from the European Court of Auditors and more powers from the European Parliament to have a say about its strategic direction. At the time being, the Parliament has only limited prerogatives to guide the bank and ensure that its operations are in line with key European policy objectives.
Direct accountability towards European citizens also has to be enhanced. Currently the EIB is one of the worst performers on the Aid Transparency Index. Its recently adopted revised transparency policy contains further exceptions to its information disclosure obligations. A more independent complaints mechanism – accessible to any citizen affected by the bank’s operations – should be part of the picture. Recently, the European Ombudsman has publicly underlined structural problems at the EIB via critical remarks and “maladministration” rulings over cases linked to public procurement and access to information.
Risk-sharing the wrong way: socialising losses and privatising profits
Like many other public banks, the EIB leverages its own means by acting as a catalyst for private investment through various financial mechanisms. Too often, though, attempts to attract private capital result in unpredictable risks and higher-than projected costs for the public coffer.
Through its Project Bond Initiative, for instance, the EIB has funded projects like the Castor gas storage project in Spain which proved unsustainable and burdened the Spanish government with debts exceeding EUR 1.4bn. Ultimately, this debt has been transferred to the gas bills of Spanish citizens for the next decades.
The Juncker-Plan promises more of the same. In fact, its massive multiplier of EUR 18 of private investment for each Euro of public guarantee is entirely based on financial mechanisms where private investors are attracted through publicly secured profits. According to the EIB, the European Fund for Strategic Investments (EFSI) should be “project bonds on steroids” and could even be rolled-out to other sectors such as education and health.
This strategy is lucrative for large corporations and institutional investors like pension funds, strained by the low-interest environment. But it is taxpayers that will be left with the short end of the stick: higher costs and often higher risks. The EIB should instead fund genuine public investment with democratic scrutiny.
This is better economics since the returns on those investments and the long-term assets they create, such as solid infrastructure, directly accrue to the public instead of staffing the deep pockets of private Investors. Via own bond issuance it could recycle the ample liquidity on financial markets and channel those funds into the productive economy. Alternatively, the European Central Bank (ECB) could lend cheaply to the EIB, in line with EU treaties. Both would yield immediate tangible investments at nearly zero-cost with real benefits for citizens rather than speculative gains for the financial industry. Beneficiaries of those investments should be involved in decision-making right from the start in order to avoid mistakes of the past such as the financing of useless infrastructure against citizens’ actual needs.
Supporting a new culture of tax justice
European citizens lose up to EUR 1trn per year due to tax evasion and tax avoidance, mostly by multinational corporations’ profit shifting activities. Any policy initiative to tackle this problem is only credible and effective if European institutions like the EIB lead the way in their own operations and through their leverage on other actors. Unfortunately that goal still seems quite distant.
As a new report of Counter Balance which was launched today (21 April) shows, the EIB is still implicated in financing companies and funds registered in offshore financial centres. A prime example is the EUR 450m equity financing to Qalaa private fund for reinvestment in the Egyptian Refining Company (ERC) which is itself controlled by an entity registered in the British Virgin Islands – a notorious tax haven. So far, the EIB has made little effort to improve its track record and keeps relying on the limited set of international standards enacted by the OECD Global Forum. In order to address the structural weaknesses of its current tax havens policies, we call on the EIB to adopt a broad Responsible Taxation Policy in 2015.
This should entail best practices such as country-by-country reporting for beneficiaries of EIB financing to disclose information on economic activity and taxation for each country they operate in, allowing public scrutiny of their tax record. In addition the EIB should shed light on who owns and operates companies and financial institutions it does business with, for instance through the public disclosure of the ultimate beneficial ownership structures.
EU institutions and governments should reckon that economic transformation is not just a matter of throwing money at a problem. It rather requires good governance, responsible finance, fair taxation and a sustainable vision for the future. It is therefore their responsibility to enhance the democratisation of the European Investment Bank so that it truly benefits European citizens.