Sunday

23rd Sep 2018

Investigation

The discreet banker of Africa development

  • The Luxembourg-based European Investment Bank. It is owned by EU member states and has discretely grown into the largest multilateral borrower and lender in the world, with capital of €275 billion. (Photo: Adriana Homolova)

There is a cold wind whistling a tune through the flagpoles that stand at the entrance of the headquarters of the European Investment Bank (EIB). Accompanied by the quiet humming rhythms of the Grand Duchy of Luxembourg’s traffic, the glass building does its best to look unassuming.

After all, discretion has always been a highly-prized quality of the Luxembourg financial industry.

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  • Werner Hoyer is president of the EIB and chairman of its board of directors since 2012. He has been a member of the German Bundestag for the liberal FDP and also served as deputy foreign minister. (Photo: Council of European Union)

And it seems that, over the last decades, it has perfectly suited how the EIB wants to appear: a quiet financial institution few people know about, “hidden in the Luxembourg woods”, as some of the oldest staff members described it.

Today, the bank is not so hidden anymore.

Past the building's glass facade, visitors can see an endless flow of busy, young employees rushing through the corridors. With its corporate touch, the bank doesn’t look much like an average member of the tightly-knit development community, but rather it shows all the signs of a fund management business.

Nevertheless, €3 billion in European taxpayers’ money has been channelled through this glass building into the poorest countries in Africa and the Caribbean.

Sub-Saharan investments

For the first time, a small team of international data and financial journalists dug deep into the financial mechanisms of the EIB's investments in Sub-Saharan countries, analysing a mix of public and internal data provided by the bank.

We worked together with local journalists from Kenya, Cameroon and Madagascar, who conducted interviews with dozens of witnesses impacted by EIB-funded projects.

Our findings show that in several cases, large infrastructure projects, such as power plants and mines, have an adverse effect on the inhabitants of these countries. Insufficient scrutiny from the European institutions results in only a partial overview of the bank's activities and a lack of transparency around the projects.

The main tool for those loans is the Investment Facility (IF). This is a €2.9 billion revolving fund (as of the end of 2016), designed to spur private sector involvement in development.

Its management has been entrusted to the EIB by the European Union, following the implementation in 2003 of the Cotonou agreement between African, Caribbean, Pacific (ACP) countries and the European Union.

The IF is financed by public money, part of the huge European Development Fund envelope, still outside of the European budget and largely beyond the scrutiny of the European Parliament and the European Court of Auditors – the guardians of the EU's finances.

The money from member states is topped off by the EIB's own resources, which are funds that have been raised on the international markets.

Transparency games

Over the years, not everyone has been pleased with this silent arrangement.

The ACP Group, which represents the recipient countries, has repeatedly complained of being left out of the process.

“Once the decision was taken, we merely lost control over these funds, although according to the Cotonou agreement, development funds are supposed to be co-managed”, said Viwanou Gnassounou, assistant secretary general of the ACP Group, in charge of economic development and trade, when in an interview in his office earlier this year.

But it is not as if the EIB isn't playing the transparency game.

Every year, the ACP ambassadors make their way to Luxembourg to attend a day of presentations on the financed projects.

Representatives from the EU parliament encounter the same sense of openness. Eider Gardiazabal Rubial, a member of the European Parliament’s budget committee, said that "the EIB has improved considerably in its transparency, access to information and communication with the European Parliament." Still, in its yearly report on the EIB activity, the EU parliament repeatedly asks for more transparency.

But the institutions in Brussels, in their complexity, have not been very useful for monitoring the bank.

The European Commission sits in the EIB's board of directors, alongside the 28 finance ministers, and is officially consulted on every IF project, whereas the ACP Group role is merely advisory.

Who is really in charge?

Who really is in charge is anyone's guess: it didn’t take long before Xavier Sol – director of the Brussels-based NGO Counter Balance and one of the rare experts on the EIB – noticed a “game between the European Commission and the EIB.”

“The EIB says it has a stringent mandate, that it is controlled by the European Commission and that it is fully in line with that mandate, while the commission rather says that it tries to give instructions and the EIB ultimately acts as it wants. We think the truth is in the middle,” he says.

Over the years, the EIB has certainly built an impressive loans portfolio in ACP countries.

Its participation has already proved valuable in several areas, such as in access to clean water projects. In the last ten years, 23 percent of the EIB projects were aimed at job creation by providing credit lines to local financial institutions.

Results on the ground

But what is the result on the ground for the places where the EIB investments go?

Our team's interviews and the data tell the story of the ambitious fight to channel money into the private sector to spur developing economies, but sometimes this comes with a painful environmental and human cost. This is partly due to the bank’s biggest projects.

The EIB itself recognises that it has been associated with big infrastructure projects.

Last year, half of the programmes signed in ACP countries – amounting to an envelope of €378 million – concerned eight of these large-scale projects.

The problem is that quite a lot of those types of projects require resettlements, a complex process that not only involves physically moving people’s homes, but also changing living standards and inevitably interfering with their cultural heritage.

Although compensation – most often financial or in the form of new settlements – makes up a part of the project design, issues regarding land valuation, property deeds, or new settlement facilities often lead to disputes.

Resettlement of thousands

After reviewing public registry documents for projects signed by the EIB over the last decade in ACP countries, we found that at least one quarter of projects that receive direct loans had triggered the resettlement of inhabitants.

Some projects have even displaced – physically or economically – thousands of people. Most projects involving resettlement took place in, Uganda and Kenya – three per country.

“I wouldn’t underwrite the idea that all our energy projects require resettlement and, when they do, we have very high requirements in terms of what needs to be achieved with the resettlement action plan”, says Heike Rüttgers, the EIB development and impact finance head of division.

But in several countries, the EIB is walking a slippery path.

“From a social perspective, resettlements are always problematic. Always. Even if you put more resources into it, you can do so many things wrongly, so people are later on very often worse-off than before,” notes Jeanne Schade, a researcher at the University of Bielefelds’ sociology department.

Schade closely monitored a dispute between displaced people and the promoter of an energy-related project, which was co-financed by the EIB in Kenya.

In northwest of Kenya's capital, Nairobi, lies the edge of the Great Rift Valley – a massive continental fault system where geothermal resources have been harvested since 1981. Geothermal power plants were built on the traditional territory of the Maasai, a local ethnic group.

The 20,000-strong Olkaria Maasai community and KenGen, the company developing the Olkaria I and IV geothermal plants, are at odds over the compensation package.

The resettlement process has left the community divided and the EIB had to set up a mediation process, which is still being contested by some of the parties involved.

Short on staff

Over the years, the EIB loans portfolio has been growing much faster than its resources to manage it, and that is a dilemma for the institution. Despite recent hirings, the bank remains very tight in terms of staff.

“The EIB lends twice more than the World Bank with three or four times fewer staff”, says Sol.

This results in arrangements where the EIB “relies heavily on the clients to ensure that their standards which are part of the financial contract are really implemented”, says Schade.

The approach is common in development finance but would call for more scrutiny than the EIB can afford.

Project promoters, the ones who borrow the money and are the customers of the bank, are hardly neutral parties. They hire their own experts and, since they pay for the resettlement compensation packages, they tend to sideline social and environmental issues.

The EIB can interfere in the process, but there is a risk that when it finally does, pollution will have already occurred and communities have been left divided.

In Madagascar, the EIB helped finance Ambatovy, a huge mining project with five components impacting 200 square kilometres of land and involving several multinational corporations. Since operations started in 2007, the inhabitants have complained of the negative effects of the projects on the surrounding environment.

“Erosion has ruined the paddy fields and the forest, the water streams have dried up and the project has a negative impact on our health”, Abel, a local inhabitant told us.

No loans recalled

In those extreme cases, the EIB is often left to manage the negative effects of a project with not much more than the ultimate weapon of suspending or recalling loans. But in recent years of IF-funded projects, no instances of this happening could be found among information published by the bank.

Meanwhile, fragile communities feel excluded. In Kribri, Cameroon, the EIB co-financed a gas-fired power plant, with the aim of reducing the electricity shortage crisis in the region. The inhabitants now complain of noise, water pollution and criticise the resettlement plan for having ignored those risks.

“They should take our opinion into account”, complained an inhabitant when we visited Kribi.

Recently there have been voices inside the EIB that suggest something similar: the bank should make sure that projects don’t fail because communities are divided about the compensation package.

As observed in Olkaria: “there is an urgent need to find appropriate ways, during project preparation and as early as possible, to deal with and try to resolve the existing conflicts between the communities, between the community and the government, and between the communities and the company involved,” says Felismino Alcarpe, the head of the EIB Complaints Mechanism.

Migration gives new sense of urgency

Will the EIB management take the time to listen to its critics?

There are signs of openings: the institution, through a newly established Impact Facility Envelope, is moving in the direction of agriculture investments and particularly, smaller loans – a long-standing request from the ACP group.

But at the same time, the sword of Damocles – in the form of massive influxes of migrants – causes panic in the EU and gives the EIB development financing mandate a new sense of emergency.

The EU commission is now working on an ambitious new External Investment Plan, which could be as high as €88 billion. This new framework – which aims to mobilise investments, step up technical assistance and improve the business environment in developing countries – is likely to increase the financing capacities of the EIB.

The institution will fight hard to expand its role as Africa’s banker and this raises some issues, notes Dutch Green MEP Bas Eickhout: “We need to pay more attention to the EIB. While the World Bank changed under pressure, the EIB is still too much under the radar. Such a big player shouldn’t be unknown”.

The question is: who will be the one to challenge this “invisible bank”?

Adriana Homolova is Dutch data journalist, Laurence Soustras is a French freelance journalist specialised in development and international finance, specifically in Africa while David Tarazona is a freelance journalist working from Bogotá, Colombia. Their investigation was financed by Journalismfund.eu.

WHAT IS THE EIB?

The bank presents itself as the “European Union’s bank”, not managing monetary policy like the European Central Bank (ECB), but rather providing “finance and expertise for sustainable investment projects that contribute to EU policy objectives.”

After the Second World War, the then modest bank started out issuing loans to projects that would rebuild Europe.

By 2014, the institution had grown into the largest multilateral borrower and lender in the world with a capital of €275 billion, funding projects from its own resources, mainly by debt issuance and managing facilities entrusted by European institutions, such as the Investment Facility for ACP countries.

Last year, EIB financing was €76 billion and it raised €66.4 billion in the global bonds market. It approved €794.2 million in new projects under the Investment Facility. 10% of the EIB portfolio is outside Europe.

The institution currently employs 3,300 people.

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