The European Fund for Sustainable Development: What's it all about?

The European Union flags outside the Berlaymont in Brussels, Belgium. Photo by: Kevin White / CC BY-NC-ND

BRUSSELS — At the end of September, the European Union launched its new European Fund for Sustainable Development, an instrument worth several billion euros to support investment in Africa and in the countries around Europe’s borders.

While one lawmaker has dubbed the fund “the best EU initiative ever,” with the potential to “encourage massive investments into the electrification of the African continent,” NGOs remain cautious of the bloc’s latest plan to boost these regions by shoring up private sector investments. Targeting areas seen as key origins or transit zones for migration to Europe, they also insist the focus of the instrument must remain on development rather than on stemming migration.

Devex takes a look at the fund, how it will work, and the debates surrounding it.

What is the European Fund for Sustainable Development?

The EFSD is one of three pillars in the European External Investment Plan, which was announced by European Commission President Jean-Claude Juncker in September 2016 as part of the EU’s response to the arrival of high numbers of migrants and refugees. The idea is to use “public funding as a guarantee to attract public and private investment to create real jobs,” as Juncker said at the time.

The EFSD will support those investments through a guarantee, as well as through two existing programs that use EU funds to attract greater investment in development projects — a process known as “blending.”

The EFSD Guarantee will underwrite loans, guarantees, or “any other form of funding or credit enhancement” offered by certain trusted institutions, such as development banks, to governments or private companies investing in development projects in Africa or countries in the EU’s southern and eastern neighborhood. Local or foreign firms — including micro, small, and medium-sized businesses — may all seek support under the fund through these trusted institutions, provided they can show their projects meet a set of public-interest criteria.

Unlike the World Bank’s Multilateral Investment Guarantee Agency, the EFSD Guarantee will cover a wide range of commercial risks, and not just political ones. For example, according to an EU source, the European Commission could ensure that a wind farm investor would get the guaranteed part of their money back, regardless of the electricity distribution company going bankrupt, or changes in the law or energy prices.

A representative of the commission also told Devex it would continue using trusted institutions such as the European Bank for Reconstruction and Development and the European Investment Bank, alongside member states’ bilateral development banks, but that it was open to working directly with private finance institutions under certain conditions in the future.

The guarantee is just one aspect of the EFSD, which will also take over the running of the pre-existing Neighbourhood Investment Facility and Africa Investment Facility. These facilities use blended finance. Depending on the project, this can mean an investment grant (money given to a company or government to cover part of the cost of a project); interest rate subsidy (money paid to a development bank so it will lend to a company or government at a lower rate); technical assistance (such as paying to send experts to assess the viability of a project and suggest improvements); risk capital (buying a stake in a company working on a project with the aim of helping it attract more funding); or a guarantee (promising to pay a development bank back if a project fails for the reasons covered by the guarantee, leaving a company or government unable to pay back the loan).

As an example, under a previous blending operation, the EU contributed 45 million euros of grants and technical support to the WATSAN sanitation project around Lake Victoria. This reduced the cost for the financial institutions behind the project, including the EIB and German (KfW) and French (AfD) development banks, which invested a total of 404 million euros.

The EFSD’s governing regulation envisages the fund working as a “one-stop-shop, receiving financing proposals from financial institutions and public or private investors, and delivering a wide range of financial support.”

It is accompanied by two other pillars in the External Investment Plan: technical assistance to help partner countries attract investors; and policy dialogue to foster a conducive business environment.

How much money will be channeled through the fund, and where is it coming from?

The EFSD allows for a contribution of up to 4.1 billion euros until 2020, drawn from the EU budget and the European Development Fund, with which the commission expects to generate around 44 billion euros in investment. The commission arrived at this figure based on its experience in the EU and abroad over the past decade of blending operations.

Of that 4.1 billion euro potential contribution, the EFSD Guarantee accounts for up to 1.5 billion euros, protected by a fund of 750 million euros to be used when a guaranteed project defaults. Should more than half of projects default — which the commission considers highly unlikely given it will carry out risk assessments beforehand — the difference will be covered through EU budget reserves in agreement with member states. This marks the first time the commission, under its own management, has opted for a guarantee higher than the funds used to cover it, for investments outside Europe. The EIB’s external lending mandate is protected by a fund that is 9 percent the amount of the guarantee.

The rest of the money — 2.6 billion euros — will go to the Neighbourhood Investment Facility and Africa Investment Facility.

The commission estimates that if member state contributions match Brussels’ 4.1 billion euro input, the EFSD could mobilize a total of 88 billion euros in investment. Member states can earmark their contributions either in cash or state guarantees for projects in certain countries or sectors.

What kind of work will the fund be used for?

Different financial institutions, including the EIB, will oversee different topic areas — known as “investment windows” — with a commission-run secretariat directing applicants to the appropriate institution. (The secretariat’s website is not yet live.)

The EFSD regulation stipulates that support to projects should follow internationally agreed aid effectiveness principles, fulfil the criteria for official development assistance, and not lead to reduced funding for other development objectives. Further, the EFSD will seek to maximize additionality — targeting projects that wouldn't succeed without the fund's backing.

In line with a similar commitment from the World Bank, at least 28 percent of financing supported by the EFSD Guarantee should also go toward meeting the EU’s global commitments to fight climate change.

To meet these requirements, the fund will be overseen by a strategic board, which convened for the first time in Brussels on September 28. That meeting identified five broad areas of initial investment for the fund: sustainable energy and sustainable connectivity; micro, small, and medium enterprises financing; sustainable agriculture, rural entrepreneurs, and agro-industry; sustainable cities; and digitalization for sustainable development.

How will it be overseen?

The strategic board will involve both members and observers. Attendees at the first meeting of the board included EU Neighbourhood Commissioner Johannes Hahn; and chair of the European Parliament’s development committee, Linda McAvan. The meeting was moderated by Roberto Ridolfi, a director at DEVCO — the EU’s development branch — while Jean-Christophe Laloux, director-general of the EIB (which is envisaged to play an important advisory role), also spoke. An EU source told Devex the minutes would be made public quickly — something NGOs view as an early test of transparency.

The commission will report annually to the two other EU institutions — the European Parliament and the Council of the European Union — on the fund’s financing and investment operations, in addition to project monitoring by lending institutions themselves and the commission. McAvan said the parliament will use its observer role on the board to ensure the fund keeps its promise to support projects in the least-developed countries and fragile states, as well as climate-friendly initiatives. Representatives from partner countries will also be invited to join as observers.

Civil society organizations were omitted from those holding observer status on the board, but told Devex they would be watching closely for transparent decision-making, and a balanced support of different kinds of projects.

The fund will prioritize support for businesses that disclose information related to environment, social, and corporate governance criteria, a move welcomed by Oxfam’s EU Development Policy Adviser Hilary Jeune.

“This is key and needs to be highlighted in all future engagements with the commission to ensure compliance,” she said. “If the money goes to European companies, they need to comply with these criteria.”

Meanwhile, members of the European Parliament claimed a win in the inclusion of a complaints procedure for third parties affected by projects supported by the guarantee.

What’s the link with the EU's migration agenda?

The issue of migration has become increasingly central to EU development cooperation, which has been controversial among activists and civil society. Announcing the external investment strategy in September 2016, as the EU was roiled by the politics of how to handle increased migrant flows, Juncker said it would “complement our development aid and help address one of the root causes of migration … The new plan will offer lifelines for those who would otherwise be pushed to take dangerous journeys in search of a better life.”

In the end, the regulation explains the EFSD should help reach the Sustainable Development Goals, while investments should also “contribute towards addressing migratory pressures stemming from poverty, conflict, instability, underdevelopment, inequality, human rights violations, demographic growth, and the lack of employment and economic opportunities, as well as from climate change.”

McAvan said that “some wanted the EFSD to be more a migration management tool,” but “we achieved our main goal of making sure it is a development instrument.”

What to watch

For many civil society groups, concerns over the role of the private sector are key. Jeune remains concerned, as she said in June, that “when development money is used to subsidise private investors, European companies are actually more likely to profit than are the domestic businesses who contribute most to poverty alleviation.”

According to the commission, since the creation of the first EU blending facilities in 2007, 3.4 billion euros of EU grants have helped generate 26 billion euros of loans and total investment in partner countries of around 57 billion euros.

Maria José Romero, policy and advocacy manager from the NGO network Eurodad, said she did not contest those figures, but questioned the development impact of the supported projects.

Pointing to a recent EU evaluation of blending, she said, “we are still concerned that the EFSD represents another attempt to move forward with a strategy — using ODA to leverage private finance — that is unproven in terms of its impact."

Nils Behrndt, chief of staff to European Commissioner for Development Cooperation Neven Mimica, defended the EIP during an event with NGOs in Brussels on October 17, saying: "We don't want to finance the air conditioning in a four-star hotel in a developing country."

But on the same day, CONCORD warned in its Aid Watch 2017 report, that blending instruments are “better suited to the economic and institutional environment of middle-income countries.” The NGO confederation expressed concern that greater reliance on blended finance could see less funding for the least-developed countries, concluding that “close monitoring and public scrutiny will be paramount in comparing the reality with the stated objectives and purpose of the EIP.”

Watch out for more Devex coverage of the European Fund for Sustainable Development, including how organizations can get involved in its work.

About the author

  • 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.