Friday

21st Sep 2018

Analysis

Juncker plan is not new: How the EU fell in love with 'blending'

  • The EU hopes blending public and private money will pay for infrastructure projects (Photo: F H Mira)

It used to be that every European government had at least one public works project that it was responsible for.

Having roads, buildings and power stations named after them was one of the few tangible legacies that politicians could leave to prove that they did something more than simply pushing paper at their ministerial desks.

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  • Blending has roots in EU development financing (Photo: Andrew Willis)

The demand for investment certainly hasn’t gone away. But the appetite of governments across the world to fund such projects themselves has.

Instead, politicians have cooked up elaborate schemes under which they put up a small amount of public money in a grant or loan and get the private sector to cough up the rest.

EU Commission president Jean Claude Juncker’s €315 billion investment programme hopes to kick-start Europe’s stagnant economies by utilising around €20 billion of seed money to persuade pension and insurance funds, as well as private companies, to fund the roads and energy infrastructure that cash-strapped governments can’t pay for themselves.

The concept of using a small amount of public money to leverage private investment is relatively new to high-tax and spend Europe.

However, the principles are exactly the same as for "blending" - a financial model widely used in Africa over the past few years, and which now dominates the world of investment in developing countries.

Public projects, private money

Part of the rationale for blending is that it allows cash-strapped European governments, who want reduce the amount of aid they offer to developing countries, to support major projects without risking too much of their own money.

A government or EU institution puts up a small percentage of the total cost of a project, which the recipient government then takes to regional development banks to get the additional capital.

The argument is that this process enables governments to raise funds they would not otherwise be able to attract, either because their debt or budget deficit is too high, or because their financial sectors are not sophisticated enough.

At the moment, the EU has eight regional Blending Facilities, covering Africa, Latin America and Asia, co-ordinated by the EIB.

Since its creation in 2007, for example, the EU-Africa Infrastructure Trust Fund (ITF) has paid out 70 grants to infrastructure projects for a total value of more than €6.5 billion, and claims that each euro from the ITF has the potential to generate up to €12 in total investment - close to the 1:15 leverage ratio which the European Commission claims it will be able to generate through the Juncker plan.

At their last meeting towards the end of 2014, EU development ministers gave the green light for blending and private companies to have a larger role in development finance.

Blending is “an important tool to boost economic growth, innovation and job creation,” development ministers stated in a joint communique issued following their last meeting in December.

“Ministers were quite vocal on enhancing private investments and contributions to development goals,” the EU development commissioner, Neven Mimica, told reporters at a press conference following the meeting.

Pain-free blending?

But not everyone is convinced that blending is as effective or as pain-free as its advocates.

For its part, the European Court of Auditors (ECA), which monitors EU spending, is a sceptic. In a report published last October, the court found that almost half of the 40 projects it assessed would have gone ahead without the EU money.

“It is paramount that blending is only used when the commission can clearly demonstrate its added value,” said Karel Pinxton, the ECA member who drew up the report.

This is, in part, because the amounts of EU money involved in individual projects are so small as to be irrelevant.

“The bigger the leverage the less convincing the case for public money”, one commission official noted.

Meanwhile, other critics say that while blending instruments allow governments to get the new infrastructure they need without paying for it upfront, projects still have to be paid for and the recipient country may end up paying the bill decades later for an expensive and risky public-private investment.

“The EU must recognise that leveraging private finance and promoting public-private partnerships entails many risks,” Maria Jose Romero, a spokesperson for Eurodad, a coalition of European development NGOs, said in an interview in December. “A better policy would be to ask countries to test the development impacts of these new proposals".

Critics also claim that “blending’ tends to blur development objectives.

Unlike conventional development programmes, which are invariably targeted at the poorest or most needy communities, blending is more closely oriented to the profit motive as the judge of success.

Five or 10 years after the award of the development grant, the minister and civil servants responsible for it will have to be accountable for its success or failure in alleviating poverty or bringing essential services to those in need.

In contrast, institutions offering loans are inevitably going to be more preoccupied with the funds being repaid and the projects commercially viable than with traditional development goals.

The EU insists that blending will not completely replace conventional development aid.

“Official development assistance will remain at the core of our contribution,” commissioner Mimica told reporters back in December. But it has become the new alchemy both in and away from Brussels.

For the moment, blending will stay because it allows governments to build and fund much-needed infrastructure projects that they could not otherwise afford.

Whether it is sensible for the EU to put so many of its eggs in the blending basket remains an open question.

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