22nd Jan 2021


The danger of using EU aid to subsidise private finance

  • Blending private and public money is part of a potential sea change in development finace (Photo: UNited Nations Photo)

The EU is gearing up to increase the involvement of the private sector in development aid - both as beneficiaries as well as financiers.

This would happen through "blending" mechanisms, which link official development assistance (ODA) with loans from public institutions or commercial lenders to finance projects in partner countries.

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Months of research into the EU’s blending mechanisms have shown that the focus is not always kept on development. The jury is out on whether blending mechanisms are the right tool to make the most of ever scarcer ODA and achieve the best development results.

A new report by Eurodad - A Dangerous Blend? - recently launched at the European Parliament, is calling for a halt to the practice of using aid grants to subsidise or "leverage" public and private loans until there is a radical improvement in accountability and transparency - two key problems in the way blended finance is being implemented.

The problem is that blending seems to be part of a potential sea change for development finance, which effectively shifts ODA from the public to the private sector, while at the same time gradually replacing ODA with private finance.

It is noticeable that the blending boom started at a time when aid budgets are being cut all over Europe.

Following the financial crisis, the EU seems to be increasingly focused on bringing private finance to the centre of its development agenda.

This provides a convenient excuse for European donor governments to give less ODA, and an opportunity for these countries to channel finance to their own domestic companies.

An EU platform for blending in external cooperation (EUBEC) was set up in December 2012 to scale up and enhance the use of blended finance.

This represents a concerted political push by the European Commission, involving member states and development finance institutions, to ensure that there is a significant increase in ODA being devoted to private sector blending in the near future.

This may not come as a surprise.

The development agenda has turned to the private sector in many different ways since the launch of the commission's Agenda for Change in October 2011.

However, the growing trend of private blending still raises serious concerns. The EU experience so far has been in blending aid with other public loans, so attracting private finance is an untested practice.

In addition to the issue of whether we should use public money to mobilise private finance - when there is already desperate need for public funds in the poorest countries - there is the crucial issue of how it should be done in order to serve development objectives in an accountable and transparent manner.

The model that the existing EU blending facilities put forward suggests that, at present, the mechanisms are not fit for this purpose.

It is manifestly unclear how these development resources will be used and what the criteria are for selecting the projects to be financed.

There are no appropriate mechanisms to involve a wide range of developing countries’ stakeholders - including parliaments and civil society organisations - in both the pre-approval phase and the monitoring and evaluation of financed projects.

This could undermine country ownership, which is a vital condition for the success of any development efforts.

Thus, there is a risk of wasting public money that has been allocated to international development aid - grants that are already under threat from budget cuts.

The appointment of Fernando Frutuoso de Melo as the new director general of EuropeAid, the commission's development policy branch, this week offers a new opportunity to debate the implications of what many are now calling the "EU’s private blending agenda."

Development practitioners should beware that the existing mechanisms may become the norm if no one speaks up now.

The writer is an advocate at Eurodad, a Brussels-based umbrella group of 48 development NGOs from 19 European countries


The views expressed in this opinion piece are the author's, not those of EUobserver.

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