EIB and European Commission clash over 'extra' €1B for development

BRUSSELS — If you want to start a debate in European Union development circles these days, just say “reflows.” That’s the byword for the latest flashpoint between the European Investment Bank and the European Commission over how the former funds its lending to the private sector outside the EU. On Nov. 10, the European Parliament and Germany — which currently holds the rotating role representing EU states — presented a €16 billion ($19 billion) top up to the bloc’s €1.8 trillion budget for the next seven years, including what was pitched as a further €1 billion for development. Anti-poverty campaigners at the ONE Campaign welcomed the “much-needed funds”, which would take the 2021-2027 development instrument to €71.8 billion. And the European Parliament claimed the money would “increase flexibility to address future needs and crises.” But there was a catch. The joint declaration, which still needs to be confirmed by member states, called for the €1 billion to come from the repayments, or “reflows,” that currently go into the EIB-managed ACP Investment Facility. Intended for high-impact, high-risk loans to the private sector in 79 African, Caribbean, and Pacific states, the longstanding facility contains, once the U.K. contribution is deducted, an endowment of €3.2 billion from EU member states. As a revolving fund financed directly by EU states the facility is not on the EIB’s balance sheet. That allows the bank to use the interest and loan repayments it receives from it not only for fresh loans under the facility, but also as collateral for roughly €1.5 billion in lending to governments of low-income countries outside Europe. If governments fail to reimburse those loans, EIB can cover the potential losses with reflow money from the ACP facility. Yet for that to work, the bank says, the reflows must stay sitting in the facility in case they need to be called. November’s joint declaration was a mix between two previous options on what to do with the ACP Investment Facility now that its original source, the European Development Fund — paid into by member states outside the EU’s general budget — is being rolled into the EU’s main budget. In September, the commission proposed to member states that all of the expected €3.2 billion in reflows over the coming years should go to the EU’s new overarching development budget instrument. And the commission told member states it had “informed the EIB of the content of this proposal.” However, that did not mean the Luxembourg-based lender, which is wholly owned by EU countries, agreed. In documents to member states, seen by Devex, the bank explained that the commission’s September proposal would leave EIB unable to issue new loans under the facility, while the reflows would also have to sit inactive in an EIB account until as late as 2028, depending on the performance of the loans in the facility, as collateral against outstanding sovereign loans. To continue supporting the private sector, the bank said it would therefore need an extra €4 billion to €7 billion in guarantees from the EU budget. That’s on top of the €26.7 billion in dedicated guarantee windows it has already negotiated for its global lending for 2021-2027, and represents money that “it could otherwise leverage without any new resources if the [existing revolving facility] had been continued,” the bank wrote. Instead, EIB has been arguing since March that the facility could continue, with its governance transferred to the commission’s new development budget instrument and steered more toward riskier operations in LDCs and fragile states. EIB President Werner Hoyer told EU development ministers Monday, instead of it being wound down, he wants to “beef-up” the facility, describing it as “a well-tested model, fit for the bigger challenges ahead.” But EU Commissioner for International Partnerships Jutta Urpilainen told the same meeting that the commission understands the €1 billion “top up” envisaged on Nov. 10 will be “operationalized through the commission’s [September] proposal for a decision on the ACP Investment Facility reflows,” adding that this still needs to be adopted by member states. As for the remaining €2.2 billion, an EIB source told Devex that EIB and the commission agree that it is not clear how to interpret the Nov. 10 decision. The source explained that the commission and the bank are working on a joint proposal to not leave the ACP facility money unused while strengthening the EU development budget instrument. Under the November option, EIB would transfer “up to” €1 billion from the facility into the 2021-2027 budget — though the bank warned member states that this money would only be available from 2026 at the earliest. In one compromise scenario, the EIB told member states that it could keep the remaining roughly €2 billion of reflows in a “successor revolving facility within EIB” so that it can keep investing in the ACP region in 2021, “albeit at a reduced level.” What looks like a technical discussion is deeply political. The commission is trying to gain greater say over EU investments abroad while ensuring an open architecture for other European and international development finance institutions to access the EU development budget. The ACP facility has received mixed reviews. In 2015, the European Court of Auditors found it had had a “catalytic effect,” though in March this year consultants argued that despite fulfilling its mandate, “development objectives received less attention than [the] financial sustainability” of the fund. San Bilal, head of the economic transformation and trade program at the ECDPM think tank, told Devex by email Tuesday that rather than curtailing the ACP facility to fit its plans for more budget guarantees, the EU should build on its innovative characteristics as an off-balance-sheet revolving fund and expand it. Bilal wrote that this could mean “opening opportunities for joint-investments and capital participation by other DFIs and development investors, and [extending] its geographical coverage beyond the ACP,” all while linking its governance to the commission’s budget instrument. One national source told Devex Tuesday that the tussle over the future of the ACP facility was a “powerplay” by the commission which despite being critical of EIB, “can’t offer a better track record itself.” That’s a reference to the recent auditors report which found little more than “hopes and expectations” three years after the commission began trying to manage budget guarantees itself in an attempt to spur riskier investments by DFIs. And the same source pointed out that the money member states contributed to the ACP facility under the then-off-budget European Development Fund belongs to them, not the commission, with the result that some now feel as if they have been “pickpocketed” by the German presidency under the Nov. 10 arrangement. But the clock is ticking. The facility’s legal mandate expires at the end of the year, after which the reflows would in principle return to member states. “We need a unanimous decision by the Council by the end of this year,” a second member state source told Devex. “So there is considerable time pressure.” “This really needs to be sorted out,” the first source said. “We’re paralyzing ourselves.”