Banks clash as EU seeks 'political return' on development finance

BRUSSELS — The European Union and its member states are the world’s biggest development donors, and they want you to know it. “Development is not charity; development is strategy,” Werner Hoyer, president of the European Investment Bank, told EU development ministers in Brussels this week at a session on the financial architecture for development. “The EU must become stronger, smarter and more visible in development to strengthen its economic and strategic autonomy.” The discussion came on the back of a report published last month that provided recommendations on how to make the bloc’s development finance system more coherent and prominent, particularly in Africa, where officials fear China is winning the battle for influence. “We need to maximize sustainable development results through quality investments,” Federica Mogherini, EU’s foreign policy chief, told ministers Monday. “But we are also interested in the leverage, visibility, and ultimately a political return to the European Union.” It is the debate over how to do that, however, that has reopened the rivalry between the European Bank for Reconstruction and Development and EIB. This week’s session provided an opportunity for a variety of stakeholders to layout their take on the so-called Wise Persons Group report, which proposed three long-term options to establish a European Climate and Sustainable Development Bank. Option 1: Build on EBRD. Option 2: Create a new mixed-ownership institution. And Option 3: Use a subsidiary of EIB. Sense and feasibility Since the report’s publication, EIB and EBRD have each claimed it vindicates their work, while lobbying to come out on top under the new architecture, which will ultimately be decided — though likely not anytime soon — by EU heads of state. Thomas Wieser, former chair of the working group that led the Wise Persons Group, told ministers Monday that option 2 — a new institution — was the best choice in theory. However, he said time and money, plus the uncertainty it would create for EIB and EBRD, made it unlikely. EBRD is preferable from a development perspective, Wieser said, but complicated by the fact that after Brexit, the EU will make up only around 55% of the bank’s shareholders, which also include the United States and Japan. EIB is the politically easier option because it is wholly owned by EU member states, Wieser said, but added that it would need a “rewiring” of its risk appetite and more presence in low-income countries. The presidents of both banks defended their institutions this week. “It’s not [the case] that we need to invent development [work] at EIB. We have been doing this for 62 years,” Hoyer said, adding that its risk appetite is a result of decisions by its EU shareholders. Hoyer also cited EIB’s recent decision to end fossil fuel lending by 2022 as an example of how it helps the EU lead an ambitious global agenda. “I’ve seen very clearly just a month ago in Washington how our fellow [multilateral development banks] are held back by some of their strong non-European shareholders ... So here, and I’m sorry to say this, I fundamentally disagree with this aspect of the report, which mixes up the essence of EBRD and EIB,” Hoyer said. By contrast, EBRD President Suma Chakrabarti sought to make a virtue of the EBRD’s mixed ownership. “We must not become blinded by geopolitical power politics,” he said, adding that Europe was well placed to fight the “forces of isolationism” through partnerships with other regional and global players. At the same time, he said, “we do need institutions with the right know-how, the right risk appetite and a proven business model in order to deliver. That cannot be built and staffed overnight.” In a letter to EBRD shareholders after the report’s release last month, seen by Devex, Chakrabarti wrote that they should be fully aware of the “serious risks” that options 2 and 3 pose to the bank. “In this vein, I think it is crucial to build on and reinforce the existing actors in the system, leveraging strengths that already exist,” Chakrabarti wrote. EU states are expected to agree their position on the report at a meeting of finance ministers on Dec. 5. Following Monday’s discussion, and a meeting of finance ministers last month, it appears likely ministers will endorse the report’s short-term recommendations — such as greater collaboration and better “branding” of EU development, overseen by the commission — while seeking feasibility studies on the long-term structural options. Not everyone favors more studies however. In his October letter to shareholders, Chakrabarti wrote that the bank’s current strategic planning already underway, which includes whether or not to work in sub-Saharan Africa, “is all the technical analysis that is needed.” Once the results of that work are sent to shareholders next month, he wrote, “what will then be needed are political decisions.” On Monday, he said if further feasibility studies were deemed necessary on option 1 of the report favoring EBRD, he hoped these would be “swift”. “The decision about a European Climate and Sustainable Development Bank is going to be a political one, to also serve political objectives of the EU,” San Bilal, head of program trade, investment, and finance at the European Centre for Development Policy Management, told Devex. “This should be recognized, and reduces the merit of conducting in-depth feasibility studies on technical grounds only.” Jeroen Kwakkenbos, senior aid policy and development finance advisor at Oxfam EU, meanwhile, lamented that the issue had been reduced to a “branding exercise.” Team EIB EIB came in for the most criticism in the wake of the report, including from members of the Wise Persons panel. Ahead of this week’s meeting, however, Portugal, Luxembourg, and Greece penned a non-paper, seen by Devex, arguing that “with the right risk profile and business model endorsed and supported by member states as shareholders, the EIB has the capacity to deliver.” Mikaela Gavas, co-director of Development Cooperation in Europe at the Center for Global Development, told Devex that the paper clearly supports the idea of option 3 — an EIB subsidiary. "Implicit in the non-paper is the idea that the EBRD governance model is problematic because of its non-EU shareholders, while the EIB, with its current exposure to fragile states and transition towards a green bank, is seen as best placed to become the EU bank,” she said. However, Erik Berglöf, a former EBRD chief economist who sat on the expert panel, told Devex that the lack of EU control over EBRD is a “red herring” because “there is no meaningful example where the EBRD didn’t implement an agreed EU policy.”