Official Development Assistance (ODA) budgets are under pressure – but never fear, the private sector is here to fill the gap. In short, that’s the EU’s answer to declining ODA budgets in times of crisis. How does this work? One word: “blending”.
By Berber Verpoest, Counter Balance and María José Romero, Eurodad
Mixing grants and loans – or “blending” – is not something new. It has been done by the European Investment Bank and other bilateral development finance institutions for several years, but for the first time it is becoming a real trend put forward as an alternative to traditional ODA. So what do we really know about how blending works? Can it provide a valid alternative to ODA, with similar effects on poverty eradication? And if it is meant to leverage private sector resources, who really benefits from it?
In a courageous attempt to find some answers to these questions, Eurodad, ALOP, Counter Balance and other development groups set up a debate in the European Parliament to discuss the issue with MEPs, representatives of the European Commission and stakeholders from civil society at large. The debate, co-hosted by five MEPs from different political groups, focused on the Latin American Investment Facility (LAIF), a particular blending facility set up by the European Commission to channel development cooperation to the region. Given the relevance of this topic, the conference room was, unsurprisingly, full of people eager to clarify some of the issues.
Hot issues around blending
The MEPs Gay Mitchell, Thijs Berman and Ska Keller opened the discussion by sharing their opinion that the shift towards the private sector should not deter from the EU objectives of focusing on poverty eradication. According to Mitchell, the LAIF is better equipped to make the private sector more competitive and this in turn could increase the efficiency of public services. Berman, on the other hand, presented the LAIF as a tool to strengthen much-needed public control over these financial flows, also from the private sector. Keller questioned whether this is really the case: “Is the focus on large infrastructure not mainly benefiting large EU companies and what about the missing link of local ownership?” The difference in expectations and the questions raised are clear indicators of how blurry blending still is.
María José Romero from Eurodad tried to bring some more clarity: “The question is, who is leveraging who,” she asked. “Does blending leverage private money for development or does it leverage development money for the private sector?”
Eurodad research pointed out a number of problems related to the development impact of Development Financial Institutions (DFIs), which provide the loan element in the blending facilities. The following are just two striking figures:
- Only 25% of all companies supported by the European Investment Bank (EIB) and the International Finance Corporation (IFC) of the World Bank, between 2006 and 2010, were domiciled in developing countries;
- Almost half of these institutions’ portfolios go to support companies based in Organisation for Economic Co-operation and Development (OECD) countries and tax havens.
Moreover, DFIs expect a return on their investments. This means that money does not necessarily go where it is most needed but where it generates a certain profit, putting the additionality principle under pressure.
Romero also warned against the problems of measuring financial and development additionality, the lack of local ownership and the question of who really benefits, which may also affect the effectiveness of blending facilities. Additional obscurities related to transparency, accountability, monitoring and evaluation and the potential risk of indebtedness need to be addressed first before developing blending mechanisms any further, she argued.
Torsten Ewebeck from the European Commission (DG Devco) attempted to address the concerns raised: “Leveraging additional finance is a main objective of blending mechanisms,” he said. Currently a technical group is revising existing blending facilities, as part of the work of the newly created EU Platform for Blending in External Cooperation. However, as Eurodad pointed out, involvement of different stakeholders in this platform is lacking. The European Parliament only received observer status and non-governmental organisations (NGOs) are currently not represented at all. Ewebeck’s reply to issues concerning local ownership was disappointing. “Regional EU delegations are responsible for establishing contact on the ground,” he said. Considering the contributions of local stakeholders later in the discussion, those contacts have not amounted to much.
“No prior free informed consent was given to local communities in Mexico suffering from a windmill project financed by the facility,” said Bettina Cruz, representing the affected communities. Antonio Tricarico of Counter Balance continued in the same vein: “The Mexico case shows how potentially positive technology could lead to serious violations and problems on the ground if implemented by actors without development expertise – a fundamental problem of many DFIs”.
Tricarico is also concerned that, rather than attracting private money for public purposes, blending will increase private influence over public money. “This is a trend we need to fight in the broader context of the financialisation of development finance. We need to tackle the problems we are facing outside of a market logic instead of enforcing this logic through the answers that are provided,” he concluded.
Blending as an answer to decreasing ODA is an insufficient solution, according to many participants in the debate. Many factors related to issues such as transparency, beneficiaries and ownership are too unclear to assess its true development impact. “We need precise indicators and harmonised measurement systems in order to assess the development impacts of facilities such as the LAIF,” said MEP Berman.
In summary, blending remains too blurry to be a viable alternative to ODA. On behalf of the Commission, Ewebeck acknowledged the need for more debates, discussions and public information. Let’s hope this will materialise soon – with sound support from the European Parliament – and move beyond an attempt to convince us all of the unproven benefits of blending for development.
- Joint press release: “Who is benefiting from the new European development cooperation policy?”
- EBX News – Interview with Julieta Gonzalez, APRODEV, and Anna Cavazzini, Policy Adviser of Green MEP Ska Keller
- Aid for a green development: the Latin American Investment Facility (LAIF) in the making, by ALOP and APRODEV
- Counter Balance, Eurodad and Green Alternative Georgia: Submission to the consultation on the EU blending platform