Brussels weighs giving private sector direct access to EU budget guarantee

BRUSSELS — The European Commission is considering offering budget guarantees directly to the private sector in order to boost investment in Africa and countries neighboring the European Union, senior officials have told Devex. Sources said the possible move, which would mean circumventing the development banks that have had privileged access to the guarantee under the European Fund for Sustainable Development until now, has been discussed internally in recent months but that a final decision will be left for the new leadership of the bloc’s executive body, which begins its five-year term Nov. 1. Under EFSD, launched as part of the EU’s External Investment Plan in 2017, the commission has allocated €1.54 billion in guarantees for projects in areas such as renewable energy and small business loans in aid of the Sustainable Development Goals. The idea is to incentivize projects — proposed and overseen by development finance institutions under the current arrangement — in countries and sectors often deemed too risky by investors. The riskier the proposed program, the less the DFI pays the commission to take advantage of the guarantee from the EU budget, which covers part of the first loss should projects fail. Now, the commission’s development arm, DEVCO, is considering offering the guarantee to players other than DFIs. “At the moment we are working more with financial intermediaries — EIB, EBRD, KfW, etc. — but, in theory, you could also open it directly to companies,” a senior commission official, who spoke anonymously under commission rules, told Devex. “It could totally change the dynamic, but also it could bring totally different policy priorities into the picture. Therefore, that is something which I think the new commissioner will have to look into very carefully.” Jutta Urpilainen, a former Finnish finance minister, will take up the role of European commissioner for international partnerships on Nov. 1, provided she is confirmed by the European Parliament. In nominating Urpilainen, incoming European Commission President Ursula von der Leyen wrote that she wanted her to “ensure that we use the full potential of the External Investment Plan to unlock private capital and investment in both the current and the future Multiannual Financial Framework,” referring to the EU’s 2021-2027 budget now under negotiation. Commission officials were keen to point out that the possibility of working directly with the private sector already exists under the 2017 EFSD regulation. “Legally speaking, our instrument is already open,” the official said. “The way we have been using the EFSD has been exclusively through financial partners, not through individual companies. But obviously we are now preparing the rolling out of the future External Investment Plan under the future MFF, and there, this question has come up again.” Under the 2021-2027 budget plan, the commission has proposed greatly increasing its use of guarantees, through the so-called EFSD+, to €60 billion. That has raised eyebrows among commentators and the EIB, however, who say the jury is still out on whether the EFSD is the best model for stimulating SDG-friendly investments. In June, DEVCO officials admitted that negotiations with DFIs over the guarantees were taking longer than expected. Acknowledging that the private sector includes many different actors, a second senior official said the most likely candidates to be targeted under the next call for proposals were private banks. However, San Bilal from the think tank ECDPM told Devex that in order to benefit directly from EU funds, the likes of private banks, philanthropists, and investment funds must first pass an onerous financial assessment, which could act as a deterrent. The first commission official said the pillar assessment would likely mean only large private entities could take part. Bilal also questioned the added-value for the private sector in working directly through the commission. For private banks, “it’s easier to discuss with another banker, another financier, than to go and discuss with the commission, that are more administrative people who do not necessarily speak the same language as the banker,” he said. “If I had to advise a private financial institution I would say, ‘try to team up with a development finance institution.’” That sentiment was acknowledged by a third commission official, who told Devex that when it came to dealing directly with private financiers, for now; “We don’t know how to speak to them, and they don’t know how to speak to us.”