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Open letter to the EU on the use of ODA to support private investments in developing countries

Added 08 May 2018

CSOs’ recommendations for the use of Official Development Assistance (ODA) to support private investments in developing countries, ahead of future EU Multiannual Financial Framework discussions 

Dear European Commission, European Parliament and Member States,

CSOs are concerned that the EU is intending to expand the External Investment Plan in the next MFF before its positive impact for people living in poverty has been demonstrated. We recognise that much more financial resources are needed if the global community is to reach the Sustainable Development Goals (SDGs) by 2030 and achieve the objectives of the Paris Climate Agreement. A responsible private sector is rightly identified as an important partner in the Agenda 2030. However, it is yet to be proved why the EU should allocate its small ODA budget in support of the private sector when, in its current design, the EIP does not deliver its stated sustainable development objectives.

With this letter we want to expand on our concerns in four main areas:

  1. The EIP’s contribution to Agenda 2030 and the Paris Agreement, and its core principles;
  2. The use of the EIP for tied aid;
  3. The governance, transparency and accountability framework of the EIP;
  4. The impact of the EIP on the level of countries’ indebtedness.

Our recommendations regarding the EIP in the new MFF are:

  1. Do an impact assessment of the current EIP and only expand it in the next MFF if it is demonstrated that the EIP brings sustainable development additionality and contributes to Agenda 2030’s core objective of leaving no-one behind; fulfils human rights obligations and aid effectiveness principles; enhances climate action; and reduces gender inequalities.
  2. Prioritise the use of grants in social sectors: health and education should be excluded from the scope of the EIP because of the risk of eroding universal access by privatising essential public services.

In the meantime, we urge you to:

  1. Focus support to the private sector on equitable and environmentally sound business models structured to serve local workers and entrepreneurs, and monitor that EU aid is not being used as a subsidy for European companies.
  2. Ensure local actors (civil society, MSMEs, trade unions, cooperatives) are involved throughout the entire process (selection and implementation of projects, monitoring and evaluation, policy dialogue). It is only through dialogue with these actors that the EU will be able to be responsive to their needs and aspirations, and design instruments that work for them.
  3. Step up the EC’s role on due diligence to guarantee compliance with international human rights and environmental commitments, instead of outsourcing its responsibilities to development banks and financial institutions benefiting from its grants and guarantees.
  4. Ensure that all beneficiaries, whether corporations or financial intermediaries disclose country level information about their sales, assets, employees, profits and tax payments in each country in which they operate in their audited annual reports, to ensure that the EIP does not exacerbate corruption or support tax avoidance. 

A healthy, educated workforce, well-functioning governance systems, stable policy and political environment and participatory democracies and social dialogue are all key factors in creating an enabling environment where responsible firms choose to invest, and help to make sure that the wealth created translates into well-being for all. In order to meet its development aid commitments, the EU needs to ensure that when its ODA is used to leverage private finance, it should not only ‘do no harm’ but also seek a positive development outcome.

We would be happy to discuss this further with you.

Action Aid

ACT Alliance EU

Action Contre la Faim

CAN Europe

CARE International

Counter Balance

Eurodad

Fair Trade Advocacy Office

Global Health Advocates

Oxfam International

World Vision

WWF

 

Background

On 2 May 2018, the European Commission released a Communication entitled "A Modern Budget for a Union that Protects, Empowers and Defends. The Multiannual Financial Framework for 2021-2027". The document indicates: “Building on the European External Investment Plan and its European Fund for Sustainable Development, a new external investment architecture will allow for the “crowding-in” of additional resources from other donors and from the private sector. This will help to address development challenges, by complementing grants with budget guarantees, other market based instruments, technical assistance, “blending”, and possible participation in the capital of development financial institutions, allowing to further advance the Union’s objectives and policies”

We recognise that much more financial resources are needed if the global community is to reach the Sustainable Development Goals (SDGs) by 2030. A responsible private sector is rightly identified as an important partner in the Agenda 2030. However, it is yet to be proved why the EU should allocate its ODA to support the private sector to get involved. We have several concerns that the current design of the EIP[1] does not allow it to achieve its stated sustainable development objectives and be the appropriate tool to alleviate poverty, reduce inequalities, and reach the most marginalised populations groups in developing countries.

Diverting scarce public aid resources away from sectors that benefit the poorest and most marginalised people, children and communities to support a model that has not yet been proven to work for people and the planet could lead to greater inequalities and undermine the development goals the EU has set itself. This would be inexplicable for European citizens. The EC’s Communication[2] from 14 February mentions that “Europe's spending programmes must reflect our determination to make sure that every euro is spent in the most efficient way possible and that results are quickly felt on the ground.” That would command the utmost care when dealing with blending public and private finance in EU external action.

Main recommendations

  1. Results to be based on leaving no one behind and ensuring gender equality

 

Leaving no one behind is a key principle underpinning the Agenda 2030. Even if a number of actors are seeking to significantly improve the attention paid to social and environmental risks of their investments, a poorly regulated financial sector has been a major contributor to widening economic, social and political inequality and wealth concentration. It is therefore paradoxical to count on the same actors to improve the livelihoods of people living in poverty without appropriate safeguards. Increasing inequalities has profound human rights implications and is also a central obstacle to the realisation of the SDGs and to global stability.

Social security, living wages, public services that are gender responsive and fully accessible to marginalised populations, and workers’ collective rights are among the main tools to reduce inequality. The private sector has an important function in paying taxes to support governments to deliver these services and ensure their responsibilities to their workers. If implemented equitably in a way that supports the rights of the very poorest, none of these activities are likely to offer much prospect of short-term commercial returns, so it is hard to achieve the alignment between public and private sector priorities on which blending relies. At least until the end of 2013, the design and implementation of EU blending projects generally did not have strong pro-poor dimensions: an independent evaluation[3] pointed out that most projects, examined in depth, did not convincingly target the poor or most marginalised, and “gender was rarely targeted’’. Therefore, it is clear that blending is often blind to inequalities and may further exacerbate them.

The decision to use blending, and the design and implementation of blended finance projects, have important gendered implications. Deeply-embedded patriarchal norms mean that women have a dual role in the economy: productive and reproductive. Women’s unpaid labour is often unrecognised and is an obstacle to women’s engagement in skilled and well-paid economic activities. Many women face a complex mix of social, economic and political discrimination, which reduces their chances of benefiting from blended finance projects, unless deliberate action is taken to address gender discrimination. Blended finance is not always a suitable vehicle to overcome these barriers. Even where blending is potentially suitable, for instance, in sectors that can ensure a revenue stream, it will be essential to pay close attention to the design and implementation of blended finance projects if they are to really empower women.

Finally, while there are major risks with social sectors and private investment, no sectors seem to be out of bounds for the EIP. Experience shows that the private provision of social services, such as health and education, generally fails to address the gender gap, or the increasing divide between rich and poor. These services often come with new or increased fees for users of services, if not, the government must repay the loan, leaving less resources to spend on essential and gender responsive social services, such as universal social protection. So not only is blending potentially diverting aid from the poorest countries to less poor countries but from important poverty reducing sectors like health and education to other sectors (energy, infrastructure….). The EU should exclude health and education from the scope of the EIP because of the risk to eroding universal access and should by no means encourage the privatisation of essential public services.

 

  1. Ensure there is no increase in tied aid in support of European companies

 

When aid is used to subsidise the European private sector, there is a risk that shareholders in Europe – rather than people living in poverty – will be the biggest beneficiaries. Rigorous safeguards need to be in place to ensure this disparity does not occur. Data from the Organisation for Economic Cooperation and Development’s Development Assistance Committee (OECD DAC) shows that a large share of aid already flows back to companies based in donor countries.[4] In the case of blended finance, the risk of aid being used to offer hidden support to donor country companies is likely to be even greater. Due to the complexity of the transactions involved there are multiple risks that benefits accrue disproportionately to companies based in the donor country. As yet, the OECD DAC has not agreed on safeguards to stop this from happening.

Informally ‘tying’ aid to donor countries in this way damages long-term development in developing countries. It means missing the opportunity to support equitable business models structured to serve local workers and entrepreneurs, such as social enterprises and cooperatives, including domestic MSMEs. Such support has the potential to empower marginalised producers and create a virtuous circle of local economic growth. ODA instruments should strive to identify pro-poor, development-oriented and people-centred private sector investments and prioritise local MSMEs or, failing that, foreign investments with documented positive effects on local decent employment, industry and communities.

The EU and its member states should focus their support to the private sector on equitable business models, and should monitor that EU aid is not being used as a subsidy for European companies.

 

  1. Strong governance, transparency and accountability mechanisms needed

Transparency in existing EU blending facilities - both at governing bodies and project level - has been insufficient so far to ensure communities can identify those financing the projects affecting them. As soon as the private sector is involved, the “protection of confidential and commercially sensitive information” translates into little transparency towards final beneficiaries. That creates an obstacle to accountability for human rights violations and environmental degradation. Supported projects should align with national development priorities of partner countries and partner country governments and local communities should be engaged in decisions affecting them.

The European Commission should step up its role on due diligence and check compliance with international human rights and environmental commitments, instead of outsourcing its responsibilities to development banks and financial institutions benefiting from its grants and guarantees. Transparency and accountability must be fulfilled. This should involve a public online database of all EIP and EFSD projects with relevant background information. In partner countries, all documents related to supported projects should be made publicly available in local languages and accessible formats (with a limited regime of exceptions for commercial reasons). 

All too often, investors’ rights are protected, and communities have no effective remedies. Dialogue with businesses does not involve trade unions, thereby undermining social dialogue rather than encouraging it. CSOs have little and shrinking space to voice their views and domestic democratic processes, and when they exist, may be put under pressure because the amounts involved generate a power imbalance between the EU and partner countries. As a result, EU economic interests may prevail over citizens’ aspirations. The EU needs to ensure that local communities and CSOs are involved in the monitoring and evaluation of the EIP by supporting CSOs to provide a watchdog role, do third party monitoring of partnerships and ensure citizens, trade unions and local communities have a voice while these projects are designed. This should take into consideration whether they are able to play this role effectively in a country context where civic space could be limited. Defending their livelihoods and land or natural resource rights can be outright dangerous to local communities and civil society in the face of potential intimidation and violence.

  1. Assurance that the EIP does not exacerbate corruption, tax avoidance and the level of indebtedness

 

Sound tax policies are needed to ensure the value created is kept in developing countries; any tax avoidance by corporations involved in the EIP will reduce government income. The EU should ensure that all beneficiaries, whether corporations or financial intermediaries, disclose country level information about their sales, assets, employees, profits and tax payments in each country in which they operate in their audited annual reports, to ensure that the EIP does not exacerbate corruption or support tax avoidance.

The increased use of blended finance instruments also represents an increase in the risk of debt creation in beneficiary countries. With concern growing over a looming debt crisis in the Global South as sovereign debt indicators continue to rise, safeguards have to be in place to ensure the use of blended finance does not undermine the debt sustainability of developing countries. Decisions to make use of these instruments must involve objective comparison with alternative forms of financing, including public borrowing, particularly when involving the proposed use of public-private partnerships. These comparisons should take into full account implicit and explicit state guarantees (contingent liabilities) over the lifetime of projects funded, and in turn, contingent liabilities should be adequately considered in assessments of the sustainability of beneficiary countries' debt stocks. Nonetheless, EU support to countries at high risk of debt distress should give preference to grant financing.

EU promotion of blended finance instruments must be accompanied by corresponding promotion of more responsible sovereign financing, including of a multilateral framework for sovereign debt restructuring.

 

Conclusion

The profound restructuring of the EU’s external funding instruments, as proposed in the Commission’s MFF proposal of 2 May 2018, jeopardises the EU’s development aid. The EFSD is included in the broad external instrument, which may have the benefit of being flexible, but which, as it currently is designed, is not accountable. As the MFF development process evolves, it is essential to ensure that aid goes where it is most needed. ODA is a scarce resource and should be used first and foremost for the actions that are the most effective in alleviating poverty, reducing inequalities, alleviating suffering and maintaining human dignity during and after crises. Its effectiveness should be measured by its contribution to the improvement of conditions in developing countries and must be based on the needs and the rights of recipients, including access to services, support for human rights, and improvement in good governance and democratic processes. EFSD, as a key part of the EIP, must not be expanded at the expense of other EU development instruments.

Further reading:

https://ec.europa.eu/europeaid/sites/devco/files/evaluation-blending-volume1_en.pdf

http://www.eurodad.org/Entries/view/1546810/2017/09/20/Unravelling-Tied-Aid

http://www.eurodad.org/Entries/view/1546054/2013/11/07/A-dangerous-blend-The-EU-s-agenda-to-blend-public-development-finance-with-private-finance

http://www.eurodad.org/blended-finance-briefing

https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/2017-Report-DAC-Untying.pdf (cf Table 5)

http://www.counter-balance.org/wp-content/uploads/2017/11/CB_EIP_d.pdf

https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/oxfam_advocacy_note_european_external_investment_plan__1.pdf 

[1] https://ec.europa.eu/europeaid/sites/devco/files/evaluation-blending-volume1_en.pdf; http://www.counter-balance.org/wp-content/uploads/2017/11/CB_EIP_d.pdf; https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/oxfam_advocacy_note_european_external_investment_plan__1.pdf

[2] https://ec.europa.eu/commission/sites/beta-political/files/communication-new-modern-multiannual-financial-framework_en.pdf

[3] https://ec.europa.eu/europeaid/sites/devco/files/evaluation-blending-volume1_en.pdf

[4] OECD DAC, 2017 Report on the DAC untying recommendation, Table 5: https://www.oecd.org/dac/financing-sustainable-development/development-finance-standards/2017-Report-DAC-Untying.pdf