Study finds EU guarantees rich in potential but low on proof

BRUSSELS — The European Commission last week released the first assessment of its plan to use billions of taxpayer euros to partially cover investors' losses in development-friendly projects. The verdict? The European Fund for Sustainable Development Guarantee is an innovative tool, but it suffers from monitoring and operational challenges and is not yet ready to be fully assessed. Launched in 2017, the EFSD combines €2.6 billion in blended finance with €1.54 billion in budget guarantees that are designed to incentivize private investment in areas such as renewable energy and loans to small businesses in Africa and countries neighboring the European Union. The commission touts the guarantees as its foray into innovative development finance, and the consultants behind the report, released Thursday, lauded the EU as a “new generation donor.” Søren Andreasen, general manager of the Association of Bilateral European Development Finance Institutions, told Devex by email that EFSD “represents exactly this kind of increased collaboration between development finance actors that will be necessary to achieve the SDGs,” referring to the United Nations’ Sustainable Development Goals. The commission wants to expand the current EFSD by €1 billion as part of its COVID-19 response, and with the use of guarantees set to skyrocket under the EU’s 2021-2027 budget by tens of billions of euros, the bloc’s executive is under pressure to show that its favored approach can trigger new, high-impact investments. According to the consultants’ report, it is still too early to say. Together, the words “potential” and “potentially” appear 30 times in the report, which was initially due by the end of last year. However, by April 2020, just seven of 28 planned guarantees had been signed with the development banks that oversee the scheme, leaving little to assess. As a result, the report’s authors reiterated that their findings were an “assessment” rather than an evaluation. Their 85-page study identified a number of shortcomings. “Unrealistic expectations” had been placed on EFSD’s monitoring framework, the authors wrote, citing a lack of common indicators across projects and a double burden on the development banks overseeing the guarantee scheme to comply with EU monitoring rules as well as their own, increasing costs. “[EFSD’s] potential for success is entirely speculative as there is nothing to base that success on.” --— Jeroen Kwakkenbos, senior aid policy and development finance adviser, Oxfam EU office Other issues include “unresolved tensions” and a lack of coordination between the way guarantees are decided and the work of EU delegations in partner countries. The failure to connect EFSD projects with local policy dialogues is described as a “missed opportunity.” Prospective private sector partners were also left frustrated when their early expressions of interest were not followed up. And with a growing focus in Brussels on the need to increase the visibility of Europe’s development efforts, more reflection is required on the EU’s “brand.” “Even if it was known that the EFSD provided an investment grant for a hydro-power plant, and risk capital for a structured fund, and a guarantee for micro-lending to refugees, the question remains what ‘message’ or ‘image’ this adds up to for stakeholders and other audiences?” the authors wrote. After speaking with staff from the EU and development banks, the authors also found that at an operational level, “there is an impression that there are various problems.” These include overly complex procedures, confusion between the roles of headquarters and EU delegations, and a lack of technical financial knowledge at the commission. “Five out of seven FIs [financial institutions] interviewed raised capacity issues – that there are too few banking and contract specialists at the Commission – and that therefore processes take too long especially for the new guarantee programmes,” the consultants found. Responding to the findings in its own 14-page summary of the report — which it published two days ahead of the full assessment — the commission wrote that the operational issues reflected a “learning curve,” citing ongoing staff training and secondment of experts from development banks. The commission wrote that it would pursue the consultants’ recommendation to create risk reduction packages targeting certain groups, such as European pension funds, that have the right risk appetite for SDG investments. For now, Mikaela Gavas, senior policy fellow at the Center for Global Development, told Devex in an email that by issuing the guarantees through five broad thematic windows, the commission had allowed the development banks “maximum flexibility to propose investment programmes that suit their objectives, specialisation, and lower appetite for risk.” The commission accepted the need to focus more on the likes of digitalization and sustainable cities and agriculture after the consultants pointed out that the lion’s share of guarantees and blending had so far gone to energy and private sector development. On measuring impact, the commission wrote that “the work on harmonisation of reporting on the results is ongoing.” Niels Keijzer and Benedikt Erforth from the German Development Institute, a think tank, questioned the wisdom of trying to assess EFSD’s sustainability and impact at such an early stage. And they were not the only ones to note that all of those interviewed for the report worked either for a European institution or a development bank. Jeroen Kwakkenbos, senior aid policy and development finance adviser at Oxfam’s EU office, told Devex that with no interviewees from the private sector, partner countries, or civil society, it was not surprising that the report had honed in on weaknesses in “areas that make civil servants’ life more difficult, such as reporting criteria.” Overall, Kwakkenbos wrote, the fund’s “potential for success is entirely speculative as there is nothing to base that success on, and the report says there may never be as the monitoring and evaluation criteria is flawed.” The European Court of Auditors is now required to analyze and provide its opinion on the commission evaluation. A publication date is yet to be set.