Auditor says EU's guarantee experiment still just 'hopes and expectations'

BRUSSELS — Three years after its launch, it is still too early to conclude “almost anything” about the European Commission’s attempt to use budget guarantees to prompt high-risk investments in lower-income countries, according to the author of a recent opinion by the European Court of Auditors. The warning comes as the EU prepares to pump billions more into the scheme. Hannu Takkula, the reporting member from ECA, an independent oversight body without legal powers, told Devex that “there are a lot of hopes and expectations” on the European Fund for Sustainable Development, of which the guarantees form a part. “But [will] they come through? We will see that after some time,” he said. From the commission’s viewpoint, EFSD is an innovative tool to make €1.55 billion ($1.8 billion) from European Union taxpayers available to mostly European development banks to cover their potential losses in projects in Africa and countries neighboring the bloc. But for NGOs and some members of the European Parliament, it is an unproven gamble, putting too much faith in private sector-driven development at the expense of traditional methods, such as grants. The debate over the efficacy of the guarantees is being watched closely as the model is set to be greatly expanded under the EU’s 2021-2027 development budget, now in interinstitutional negotiations. Pointing to the ECA’s finding that it is impossible to assess EFSD’s contribution to its original aims of sustainable development and climate action, Erik Marquardt, a German Greens MEP, told Devex by email that “Europe cannot blindly finance a faulty tool that has not proved its worth.” The EU executive claims that “implementation is on track” for the initial EFSD, citing the fact that it has allocated the full €1.55 billion. However, a report by external consultants, submitted in January and publicly released in June, found that anti-fraud concerns, a lack of synchronization with the project cycles of the banks benefiting from the guarantees, and poor financial expertise at the commission have led to significant delays. Some 28 guarantee agreements have been approved by the commission and a spokesperson said that nine have been signed with development finance institutions so far. “More signatures are to follow,” the spokesperson wrote by email, “with possible refocusing in order to contribute to a robust and targeted EU response to support partner countries' efforts in tackling the coronavirus pandemic.” However, Takkula’s report — which analyzed the commission’s June response to the external evaluation — pointed out that once a guarantee agreement is signed the banks have up to four years to conclude co-financing with partners, followed by “several years” for project implementation. Takkula told Devex that “even though I try to do a lot of sport,” he is not sure he will live long enough to see the outcome of the initiative. His report noted that the commission’s leverage figure of 10.04, used as an indicator of the EFSD’s capacity to mobilize additional investments, is “insufficiently reliable, and could be overestimated.” And he pulled up the commission on a misinterpretation of the external consultants’ findings. The commission wrote that “at policy level, there are examples where EFSD supported to, or reinforced a policy change.” But, Takkula writes, the consultants reported only that “[t]here are some examples where policy additionality should also be achieved [...] i.e. where the project will lead to, or reinforce, or give expression to, a policy change.” “This is not evidence of policy changes occurring in reality as a result of the EFSD,” Takkula wrote. The commission spokesperson wrote by mail that it had “carefully assessed” the auditors’ opinion. “As the Court has recognised itself, we need more time to draw conclusions about the results of the EFSD, because projects are still at an early phase. A full evaluation will be conducted once we can measure the impact of projects on the ground in line with the provisions of the EFSD Regulations,” the spokesperson wrote. “The Commission is planning to carry out such an evaluation in 2022. However, we first need the results of projects on the ground. Otherwise the evaluation would not be credible. The Court’s report mentions the need for a more advanced state of implementation. A full evaluation at this stage clearly is not possible, merely two and a half years after the entry into force of the EFSD Regulation.”