EU advances with investment guarantees as questions remain

BRUSSELS — At the end of their meeting last week, officials from the major institutions in European development finance raised a glass of champagne. The occasion? The signing of four new budget guarantees under the European Union’s External Investment Plan. The €216 million ($238 million) allocated by the EU may not seem much, but the low-key fête reflected the pressure the European Commission is under to prove that its plan to spark high-impact public and private investment in low-income countries by taking some of the risk itself, actually works. The commission claims the four guarantees signed Wednesday will help unlock €2 billion in investments in renewables, urban infrastructure, and start-ups in Africa and countries neighboring the EU. In all, the investment plan launched in 2017 allocated €1.54 billion for 28 guarantees that will partially compensate development banks and private investors should projects proposed in traditionally risky areas, including microfinance and digitalization, fail. Wednesday’s announcement backing investment plans from the European Bank for Reconstruction and Development, the European Investment Bank, Germany’s KfW, and Spain’s AECID brings the number of guarantees that have been signed under the plan to seven. Pierre Heilbronn, EBRD vice president, told officials at the public signing ceremony in Brussels that the new guarantees represent “a wonderful revolution” in development finance. Not everyone is convinced. The commission has a “communication problem,” one member state representative, who requested anonymity, told Devex. “[They] say that it is an emergency response to something that happened in 2015 [Europe’s migration crisis], and we decided it in 2017 to be implemented immediately, and we are now in 2020 and they are coming up with the first seven [guarantees] being signed.” A commission official, authorized to speak anonymously, told journalists that the delay was partly due to the commission’s insistence that it be able to track final beneficiaries, as well as stringent anti-fraud measures for the development finance institutions entrusted with overseeing investments backed by EU taxpayers. That made it impossible to meet the requirement under the initial regulation to conduct an evaluation of the scheme by the end of 2019. Instead, the commission says it will release an assessment early this year based on the three guarantees signed before the end of 2019. But even the guarantees signed so far only cover future projects. “So we have only a partial view of where [investors] are going,” the commission official acknowledged Wednesday. With private players like J.P. Morgan announcing big moves into development finance, the commission official said the added-value of the EU plan is to encourage investment in the most fragile countries. The riskier the setting, the less the financial institutions pay the commission to take advantage of the guarantee. “J.P. Morgan will go first into Kenya and Nigeria, which is great, but they will not go into Mali and Niger and Sierra Leone, where will be taking our partners — at least to a good proportion,” the official said. Jeroen Kwakkenbos, senior aid policy and development finance advisor at Oxfam EU, told Devex it will take at least five to 10 years to see whether the scheme can make good on its aspirations. “Much more evidence is needed to be able to say that [this] is a successful model,” said Maria José Romero, policy and advocacy manager at the European Network on Debt and Development. “The development and financial additionality of these guarantees is still to be proven and this won’t happen by evaluating just three guarantees.” Another challenge is that the amount of money available for similar plans from 2021-2027 needs to be decided now, as part of negotiations on the bloc’s next seven-year budget. Despite the plan still being in its infancy, the commission has proposed scaling up its use of guarantees under the next budget. “We have a bit of [a] question on … going from €1.5 billion in guarantees up to — if you make the right calculations — probably between €13 and €15 billion,” the member state representative said. “There is a huge financial risk involved that we are deciding on something which we don’t know where it will lead us.” As aid watchers continue to see how the experiment plays out, the watchword is additionality. Mikaela Gavas from the Center for Global Development told Devex that, under the current setup, development finance institutions can choose investment programs that suit their existing objectives, specialization, and risk-appetite. “It is extremely difficult to tell whether the [guarantee tool] is resulting in additional investments or just subsidizing investments that would have otherwise taken place,” she said. “There is nothing inherently wrong with these investments,” Kwakkenbos from Oxfam added. “If they achieve their objectives that’s a positive development. But if the EU is saying ‘we are all going to get rich’ or claims to expect few defaults then it’s probably not using ODA to its best effect.”