On the eve of the European Development ministers meeting in Florence as part of the Italian EU Presidency, Afronline.org publishes a dossier on a new EU development cooperation narrative that focuses on bringing the private sector to the centre of its development strategies. This silent revolution can be summarized in one word: blending. It is a silent revolution, yet irreversible, that started about seven years ago. We are on the eve of the subprime mortgage crisis and it feels as the EU had intuited the upcoming economic crisis and its consequences on Member States and their citizens, such as the risk of affecting one of its greatest achievements: development cooperation. Although the EU remains the world’s primary donor, OECD DAC statistics show that its official development aid decreased in 2010-2012, shifting from 0,46% of GDP to 0,42%. Despite positive signals registered in 2013, figures are still far from meeting the commitments made in 2005 on donating 0,7% of GDP, as stated in Millennium Development Goals. According to CONCORD, the European Confederation of Relief and Development NGOs “member States should mobilize additional €41 mln to reach the target”. It is an open secret, yet in Brussels everybody knows that public aid is not enough to eradicate poverty in developing countries. That is why new forms of financing come into play, that involve the private sector, in a word: blending.
Blending loans and grants
‘Blending’ is a mechanism that links a grant component from the EU budget, the European Development Fund (EDF) and Member States, with loans or equity from publicly owned institutions and private financiers, accredited by the EU. The European Commission strongly supports this mechanism as the EU grant contribution can leverage significant amounts of private financing, therefore reducing the EU budget for Development Cooperation and achieving EU external policy objectives, primarily the fight against poverty. This is in line with the so-called “to do more with less” strategy the EU was forced into due to budget cuts.
These funds are used by Financial institutions Groups (FIG) to carry out development projects proposed by private companies and developing countries governments. This, only after being assessed by a technical body composed by financial institutions (and chaired by the European Commission or Development Financial Institutions), and approved by the EU Commission and Member States in an operational board. At the top, a Strategic Board chaired by EC and Member States, provides policy direction on where grants should be allocated. The projects are regulated within 8 regional instruments – the so called “EU blending facilities”, covering the areas of the European external cooperation: Africa, Caribbean, Pacific, Asia, Central Asia, Latin America, Western Balkans and the EU’s Neighborhood countries.
EU grants can take the form of direct investments, interest rate subsidies (to reduce loans’ interest rates, mitigating the debt of beneficiary countries), or technical assistance, ensuring the quality, efficiency and sustainability of the projects. Supporters of blending consider grants as a tool to promote the access of private companies to risky markets – particularly small and medium enterprises – by covering capital risk.
Also, other arguments in favor of blending include a significant strengthening cooperation between donors and financial institutions, a better efficiency of the EU development aid and consequently the fight against poverty – the Commission’s final target. Blending is part of the Agenda for Change launched by the EC in 2011, which sets out a more strategic EU approach “to develop new ways of engaging with the private sector, notably with a view to leveraging private sector activity and resources for delivering public goods”. The EU “should explore up-front grant funding and risk-sharing mechanisms to catalyse public-private partnerships and private investment”.
More recently, the European Commission adopted a policy paper – so called “communication” – which confirms the new ambitions of EU with its partners countries. “The private sector provides some 90 per cent of jobs in developing countries, and is thus an essential partner in the fight against poverty”, underlines the paper. “It is also needed as an investor in sustainable agricultural production if the world is to meet the challenge of feeding 9 billion people by 2050. In many developing countries, the expansion of the private sector, notably micro-, small and medium-sized enterprises (MSMEs) is a powerful engine of economic growth and the main source of job creation”.
So far, grants channeled through blending have been used for direct investments (41% of funds between 2007 and 2012), technical assistance (32%), as well as interest rate subsidies (19%).In line with the Commission’s ambitions, a report published by the European Network on Debt and Development (EURODAD) says that “at the EU level, ODA money channeled through EC blending facilities has increased substantially in recent years, rising from €15 million in 2007 to €490 million in 2012” with over 300 projects approved between 2007 and 2013.”
The European Commission itself states that €1.2 billion grants from the EU budget, the European Development Fund (EDF) and Member States have leveraged more than €32 billion of loans by eligible finance institutions, unlocking project financing of over €45 billion. Blending is raising so much interest “that up to a third of EU ODA could be invested through blending mechanisms”, says to Afronline.org Florian Kratke, policy officer at the European Centre of Development Policy Management (ECDPM), an influent think-tank based in Brussels with a strong expertise in the field of development cooperation.
By Joshua Massarenti and Evelina C. Urgolo – Afronline.org