Report to EU leaders proposes new European Climate and Sustainable Development Bank

BRUSSELS — Earlier this year, EU governments asked nine experts how to make European development finance more coherent and effective. On Tuesday, the group issued its report, setting out three long-term options for how to create a European Climate and Sustainable Development Bank to replace the “fragmentation,” “overlaps, gaps and inefficiencies” in the current system.

However, the high-level group of wise persons stopped short of offering a view on which institution among the feuding European Investment Bank, European Bank for Reconstruction and Development, and European Commission, should take the lead under the new regime.

Instead, the experts called for feasibility studies of three options: elevating EBRD, allowing it to take over the EIB’s activities outside the EU; creating a mixed-ownership bank with EIB, EBRD, member states and commission as shareholders; or tasking EIB with creating a subsidiary for its activity outside the EU, which it would then participate in as a minority shareholder along with EU states, the commission, and national development banks.

The expert group, balanced with ex-officials from the major EU development institutions being scrutinized, assessed the strengths and weaknesses of each of the actors, who all spun the findings in their favor Tuesday.

Overall, the report found that European development finance institutions have “a good level of presence on the ground, including sub-Saharan Africa, collectively wide sectoral coverage and good development and risk-related expertise.” However, “there are varying levels of transparency and inclusiveness in their governance structures and decision-making processes, room for improvement in evaluating the development impact of their operations, and a need for better cooperation with other development actors.”

It said the commission “lacks extensive experience in dealing with the private sector and has limited banking and risk-management knowledge,” though its global presence through EU delegations was found to be an advantage.

The commission told Devex in a statement that its priority remains the new single funding instrument for development — the Neighbourhood, Development and International Cooperation Instrument — which is still being negotiated. “We should continue to build on established and efficient EU instruments, adapting them where necessary,” the statement added.

For EBRD, the experts said, “it is unclear whether its good record in delivering impact in mostly middle-income countries can easily be extended to countries with significant institutional fragilities and particular challenges related to private- and public-sector activities and in development areas different from those involved in transition strategies (e.g. social policies).”

The London-based bank said Tuesday that it “welcomes the conclusion of the report with its recognition of the effectiveness of the Bank’s model which focuses on developing the private sector,” and “stands ready to continue delivering and is poised to do even more.”

And EIB “has the instruments, balance sheet and expertise to have a good risk-taking capacity. Its adoption of best banking practices is useful in the EIB's traditional business within the EU but implies an institutional culture prone to risk aversion, partly due to guarantee requirements,” according to the report.

EIB President Werner Hoyer said the report “confirms the important role the EIB Group is playing in delivering EU policies outside the Union” and “highlights the fact that establishing a development subsidiary at the EIB is politically and financially the most feasible option to address systemic gaps in the European development finance architecture.”

Jeroen Kwakkenbos, senior aid policy and development finance advisor at Oxfam EU, told Devex that the report “outlines many valid reasons for why the EBRD and EIB are not fit for the development and climate challenges presented in the 21st century.”

For Kwakkenbos, however, “the cost of reforming the EBRD and the EIB would probably be too high, for just [a] little more money that would go into development. Instead of building a whole new institution, EU governments should rather drastically scale up their development aid to finally reach the goal of spending 0.7% of their gross national income for aid.” The bloc’s collective official development assistance hit 0.5% in 2017, or €75.7 billion.

EU finance ministers will discuss the report Thursday, though the experts wrote that “reflection is needed at the highest political level on the preferred way forward.” EU heads of state are expected to discuss the report by the end of the year.

In the meantime, the experts identified short-term steps, such as stronger ownership of EU development policy by member states; a “branding and narrative” for the bloc’s global development strategy, along the lines of China's Belt and Road Initiative, the experts suggested; and boosting financial know-how inside the commission “to a level corresponding to its fiduciary responsibility.”

San Bilal, head of programme at the think tank ECDPM told Devex that the report is a useful contribution to the current problems with EU efforts to support Africa and green finance. But he said it failed to make a compelling case for why the EU should add a new institution to an already crowded field.

“The EU should avoid a beauty contest between its development finance institutions,” Bilal said, warning that some of the options would likely encounter too many political obstacles. “It should now focus on how to rapidly adopt an effective institutional structure, with mixed ownership, building on the strength of EIB, EBRD and other financial institutions.”