EU development aid is moving in a new direction by involving the private sector

Context

I hereby give the account of an interesting conference that took place in Brussels Marriott Hotel on 6/20/2019 and was organized by the permanent representations of France and Spain to the EU. The theme was “Private sector participation modes in EU External Action financing and their evolution”.

The EU and its member states are the largest provider of development funds in the world. In 2018 they invested € 74.4 billion in development cooperation. In recent years, development cooperation has evolved dramatically from assisting third countries in budgetary resources and specific projects to financing major themes that represent the values and objectives of the EU and oblige countries to take this into account if they are to receive further investment. This merger of development cooperation and policies focuses on strengthening governance, the rule of law, assistance in creating a favorable business climate and contract enforcement.

Blending as a means to achieve development goals

Studies have shown that if the assisted countries are to reach the UN development goals by 2030, the EU will have to rely on external investments from the private sector for a minimum of € 5 billion. The search for external investments has been on the agenda for a number of years. The blending methodology is used. The EU is already providing a € 1.5 billion guarantee fund to allow third parties to take up loans without using too much collateral for this.

Whereas in 2016 the blending instruments such as guarantees (3%), risk capital (5%) and interest rate subsidy (16%) represented only a small part of the entire EU funding envelope, they will be privileged and substantially increased in the future.

In the near future, a very large proportion of financial resources will be added in the context of the External Investment Plan (EIP), which was approved by the European Parliament in September 2017. This External Investment Plan will consist of three parts:

a. EFSD: The European Fund for Sustainable Development. It will include additional guarantees, EU grants combined with third-party investments coming from development banks and an investment platform for the Balkan, Eastern Alliance and Southern neighbouring countries. It will benefit the local private sector in Africa and the neighbouring countries as a key factor for sustainable growth and employment. In order to also reduce drastically the motives of immigration to Europe.

b. technical assistance for local authorities and companies to impart their expertise and to improve the investment climate for the private sector

c. increasing the investment climate by offering market intelligence and analytics to foreign companies to better estimate investment risks and by encouraging national governments to simplify investment procedures. In the Balkan countries, the Eastern Alliance countries and the MEDA countries, the EU mainly cooperates with the EU Chambers of Commerce, that play a leading role in virtually all countries as intermediaries between government and (European) businesses. In Africa, the instrument that the EU has created to establish a policy dialogue is the Africa-EU Alliance Communication. Various platforms were also created to give private companies the opportunity to know the projects that the EU wishes to have carried out and under which policy. There is the Africa Investment Platform and the EU Neighbourhood Platform.

The way in which funds from this External Investment Plan are allocated is rather cumbersome. A strategic document is prepared by the Directorates-General responsible for development: DEVCO[1] and its EEAS[2]as well as DG NEAR[3]. This document is the result of the proposals from the various managements in collaboration with the EUDs[4]. They also prepare an annual action plan, which is integrated into the overall annual action plan of the European Commission, to be approved by government leaders and the EU parliament. Only then can financial agreements be concluded with beneficiary member states and privileged partners such as EIB[5], EBRD[6]and national development banks such as AECID[7], AFD[8], AfDB[9], CDP[10], KfW[11], EDFI[12] and World Bank group.

The funds made available by the EU consist of 2 parts: public procurement and grants. Public procurement are funds that fund services, works and supplies to states. They are done on the basis of a “call for tenders”, an assignment that has been drawn up by a government and that contains the job to be done as well as the way to evaluate the tender from suppliers. The suppliers who subscribe to this are in most cases private companies with a profit objective. Grants are funds that are made available to finance an action proposed by a potential beneficiary (a ministry, a bank, an NGO, etc.) or the project of an entity. The action or project must be compatible with the major EU development goals. The 5 major EU objectives are often quoted are sustainable energy, development of the private sector, digitization of government and economy, sustainable cities and development of agriculture. The projects and actions are submitted on the basis of a “call for proposals” made by non-profit organizations. In most cases this concerns co-financing, meaning that only a percentage of the proven and spent salaries and costs are reimbursed by the EU grant. In addition to these funds that the EU manages itself in cooperation with the aforementioned partners, it also contributes to around 80 Trust Funds. They are funds that collect money from multiple donors and are managed by an international institution, such as UNDP. The EU itself also manages trust funds, which are then called EUTF.            

The NDICI[13]

The EU administration now proposes to bundle the entire budget for development cooperation in 1 instrument: the NDICI, the Neighbourhood, Development and International Cooperation Instrument. The instrument will channel the biggest share of external action funds, with a budget or € 89.2 billion in the next 5 years. It will be the EU’s main tool to contribute to eradicating poverty and promoting sustainable development, prosperity, peace and stability. The advantage of the NDICI is that the amount is budgeted and is part of the EU’s entire “Neighbourhood and the World” budget that amounts to 123.002 billion euros and also includes: Instrument for Pre-accession assistance (IPA) (€ 14.5 billion) , humanitarian aid (€ 11 billion), common foreign and security policy (3 billion), European Instrument for Nuclear Safety (0.3 billion).

In the European Commission proposal for the next long-term budget 2021-2027 of the European Union (EU), the proposed Neighbourhood, Development and International Cooperation Instrument (NDICI) Regulation introduces an innovative unified financial architecture to crowd in private sector investment outside the EU, based on three pillars: the European Fund for Sustainable Development-plus (EFSD+), a unified budgetary guarantee – the External Action Guarantee (EAG), and financial assistance.

The EFSD+ is conceived as a flexible mechanism, but some of its features remain too sketchy. These features could be not only much better specified but also better connected to a range of important issues, such as climate objectives, gender equality and women’s empowerment principles, youth focus, linkages to business environment, geographical balance, targeting of fragile and poorer countries, specification of investment windows, provision of grievance mechanisms, and addressing tax governance issues. The governance of the EFSD+ could also be much more elaborated. The current proposal delegates great power to the European Commission on shaping these questions during the implementation of the EFSD+. [14]

The private sector within the European Investment Plan (EIP)

The remark made by the private companies present was that the procedures for participating in such call for tenders or call for proposals were very cumbersome and required a great deal of preparation, so that most of the companies that subscribed to it were by 99% the usual suspects who have developed an information network. Innovation within this network is hardly conceivable, creating the impression that a solid favouritism policy is being pursued.

The reply of the panel members was that the EU is making every effort to bring investors, suppliers and partner organizations closer together through a one-stop-shop in the various beneficiary countries and in EU countries, thereby increasing transparency, efficiency and accessibility. She also recommends contacting the international development banks (IFIs, see above) to also monitor their range of assignments.

Louis Delcart, board member EAR-AER www.ear-aer.eu


[1] Directorate General International Cooperation and Development

[2] European External Action Service

[3] Directorate-General for Neighbourhood and Enlargement Negotiations

[4] EU Delegations in the various countries

[5] European Investment Bank, based in Luxembourg

[6] European Bank for Reconstruction and Development, based in London

[7] Agencia Española de Cooperación Internacional para el Desarrollo, Spanish Agency for International Development Cooperation

[8] Agence française de Développement, the French Development Agency

[9] African Development Bank

[10] Cassa Depositi e Prestiti, the Italian development Bank

[11] Kreditanstalt für Wiederaufbau, the German Development Bank

[12] European Development Financial Institutions, the Association of bilateral European Development Finance Institutions, founded in 1992 and currently representing 15 member institutions from Belgium, UK, Spain, Germany, Finland, the Netherlands, Denmark, Norway, Austria, France, Switzerland, Sweden, Italy and Portugal

[13] https://ec.europa.eu/commission/sites/beta-political/files/budget-may2018-neighbourhood-development-cooperation_en.pdf

[14] https://ecdpm.org/publications/leveraging-the-next-eu-budget-for-sustainable-development-finance-the-european-fund-for-sustainable-development-plus-efsd/