EU institutions cross swords over future of development finance

The European Investment Bank headquarters. Photo by: EIB

BRUSSELS — A call from the European Commission for better “coordination” in how the European Union boosts investment in developing countries is the latest episode in its battle with the European Investment Bank over the future of the bloc’s approach to aid.

Both institutions want to run a “platform” made up of European development actors, such as the European Bank for Reconstruction and Development, the French development agency Agence Française de Développement, and the German KfW Group. For the EC, it is a chance to provide a stronger policy steer, while EIB argues its role as the EU bank and a track record supporting projects outside the bloc mean it should take the lead.

The EC policy document, released last Wednesday to coincide with European Commission President Jean-Claude Juncker’s State of the Union speech, proposes “bringing together all actors benefiting from EU budget guarantees for external investment under a new single framework.” That would include EIB.

But at the end of last year, the Luxembourg-based bank presented EU finance ministers with its own idea for a subsidiary — tentatively called the EU Bank for International Partnership, EIB’s Brussels chief Mikołaj Dowgielewicz told Devex in July — that would invest in projects outside the EU. This week, Dowgielewicz said the idea is to provide a “mechanism or a platform for cooperation with national development agencies.”

‘Running the show’

The rival proposals appear similar, both emphasizing the need for development banks to better coordinate their efforts. The difference is who is in charge. “The EIB is saying … ‘we are the EU bank, we want to run the show,’” a senior commission official, authorized to speak anonymously, told Devex last week.

However the EC, under pressure from NGOs and the European Parliament to show that using EU money to de-risk private investment can help achieve the Sustainable Development Goals, wants more of a say.

“We don’t want to finance the air conditioning for the five-star hotel in Cairo,” the official said. “We want to finance the small entrepreneur who went on a perilous journey to Italy, goes back to Ghana, gets a microcredit and starts up a small business.”

Guarantees are designed to encourage private investment by partially covering investors’ losses if projects in areas such as energy, agriculture or microfinance fail. By hopefully turning billions in aid into trillions in private investment, including in risky investment environments such as sub-Saharan Africa, the aim is to improve local economies and dissuade people from migrating to Europe.

At the moment, EIB, which is owned by the EU’s 28 member states and does most of its lending within the bloc, uses guarantees under its External Lending Mandate (ELM) in countries in the EU neighborhood and beyond, and in Africa, the Caribbean, and the Pacific through the ACP Investment Facility.

At the same time, the commission’s External Investment Plan, proposed in 2016, allocates €1.5 billion ($1.76 billion) for guarantees through the European Fund for Sustainable Development in Africa and the EU neighborhood. The first batch of EFSD projects proposed earlier this year by development banks, including EIB, has been selected, though these are yet to be rolled out.

The setting for the current fight is the EU’s next long-term budget, the Multiannual Financial Framework for 2021-2027, currently being negotiated. In May, the EC proposed expanding the EFSD to merge all existing guarantees, including those run by EIB, into one worldwide instrument with €60 billion of guarantees at its disposal.

But as the senior EC official noted, under this EFSD+, “EIB loses exclusive control of the ELM and the ACP Investment Facility. And that, of course, they don’t like.”

By contrast, “the EIB subsidiary idea is that the EIB takes over de facto the entire management of the external guarantee, so a monopoly model,” the official said. “It would be a separate bank but under the guidance of the EIB group, and the commission would have to pay capital into that subsidiary.”

The EC is not convinced. “The EIB is focused on inside the EU and has a triple-A rating, which they want to maintain,” the official said. “They have little expertise and few staff on the ground in developing countries.”

More to come

After the EC’s announcement last week, Dowgielewicz said EIB President Werner Hoyer raised the issue with EU development ministers at a meeting in Brussels. “You can expect more from us on this in October,” Dowgielewicz added. “I don’t want to go into the details now, but I can tell you we will be coming up with some proposals.”

Despite its proposed expansion under the next budget, Dowgielewicz said in July it was too early to tell whether the original EFSD would be successful in meeting its sustainable development objectives, pointing out that a first evaluation is due next year. By contrast, he said this week that EIB’s ELM should be extended, as it has proved “a very valuable and solid instrument.”

“The EU treaties give a clear role to EIB as implementer of EU development policy, so we are not proposing something original,” Dowgielewicz added. “The commission is there to set the policy, to make sure that the EU budget is properly implemented and monitored. But we are there as a banking institution, so the commission should not try to replace the EIB in its role.”

At a press conference Friday, European Commissioner Jyrki Katainen insisted, “we don’t aim and do not have the capacity to become a bank.” He added that “implementing partners are the ones who do the business and do the banking decisions. Our role is to [ensure] that EU taxpayers’ money is used for the policy objectives, which the commission together with member states have decided.”

For now, the commission wants a short- to medium-term solution to facilitate the EFSD+ under the next budget. Last week’s communication flagged a meeting of relevant actors in October with a view to “operationalizing [its priorities] as rapidly as possible.”

In June, France and Germany agreed to set up a “high-level group of ‘wise persons’ on the European financial architecture for development (especially regarding the respective roles of EIB and EBRD)” to make proposals for EU leaders in December.

“We don't need new institutions or wise men groups to meet our goals,” Juncker said in a statement last Wednesday. “We need wise decisions, taken swiftly by relying on our existing structures and partners.”

“In the long-term, of course you could go to completely different reflections,” the senior commission official said. “A new institution, merging EIB and EBRD, would be one option. Is it feasible? Will the non-European partners go along? We don’t know. Where do you put it? Do you put it in Paris or wherever? Do you create a completely new European Development Bank or do you create it as a subsidiary of the EIB? But then you would need capital input from the commission. This is more complex and will require more preparation."

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    Vince Chadwick

    Vince Chadwick is the Brussels Correspondent for Devex. He covers the EU institutions, member states, and European civil society. A law graduate from Melbourne, Australia, he was social affairs reporter for The Age newspaper, before moving to Europe in 2013. He covered breaking news, the arts and public policy across the continent, including as a reporter and editor at POLITICO Europe.