Evaluation of blending facility exposes serious failures

Added 20 Sep 2013

The long-awaited mid-term evaluation of the Neighbourhood Investment Facility (NIF), published last month, raises some serious concerns about the trend of linking Official Development Assistance (ODA) to loans from public finance institutions or commercial lenders – a trend that’s commonly known as ‘blending’. These concerns are in line with issues already raised by Eurodad several times and confirm the findings included in a soon-to-be published Eurodad report on the EU’s blending agenda.

Historically, blending mechanisms have been used to subsidise loans to the public sector. However, recently different institutions –  including the European Commission (EC) – have used them to increase their support to the private sector and to attract private finance support. The EC has set up eight blending facilities to support public and private sector investments covering all the regions where the EU has development cooperation in place. The NIF, for example, specifically aims “at mobilising additional funding to cover the investment needs of the EU Neighbouring region”. A total of €839 million was earmarked by the EC and Member States for 2007-2013, although EC plans indicate that this amount will increase considerably from 2014.

Concerns and recommendations

The mid-term evaluation of the NIF was commissioned by the EC and analyses the instruments and processes of this blending facility over the period 2008-2011, with the intention of drawing lessons and recommendations for its future work. Despite the evaluation’s description of the NIF as “an effective instrument, with relevance to the European Neighbourhood Policy”, the evaluators rightfully raise concerns about its project selection and eligibility criteria, consultation process and the effectiveness of its governance structure. The evaluation also states that the NIF “has no specific follow up and monitoring mechanisms to appraise social and environmental impacts at project, regional and portfolio levels.

The evaluation also warns against the risks of using blending mechanisms to leverage financial resources. According to the EC, financial leverage refers to the ability to attract “additional public and private resources for stronger development impact”. While the evaluation report shows that NIF “achieved its goal to leverage significant financial resources through grants”, the evaluators also warn that “in all forms of financial leverage”, “the high leverage ratio might give to [private] financing institutions a predominant influence in the selection, the design and the implementation of projects”.

This is in line with the concerns of Eurodad and partners: higher leverage ratios mean lower contributions by the public body and therefore imply less influence on the design and implementation of the projects. The high leverage ratio might increase the influence of private investors, whose primary objective is to lend money. This might contradict EU development priorities and NIF strategy objectives, such as inclusive growth and poverty reduction.

The evaluation recommends several important changes, although it fails to emphasise their relevance, saying that they “are meant to address specific aspects that deserve to be strengthened” and not to drastically change the instrument.

Their recommendations are as follows:

  • “prioritize projects according to their relevance and apply selection criteria”;
  • “increased focus on issues of inclusive growth and poverty reduction”;
  • “increase transparency of governance, publication of operations boards minutes and decisions”;
  • “inclusion of civil society in NIF consultation mechanisms” and
  • “improve involvement of civil society in assessment of social and environmental impacts”.

The evaluators also push for “a closer dialogue between EU Delegations and financial institutions”, which they describe as “essential to enhancing NIF’s additionality”.

The Tbilisi Railway Bypass Project – a case of blending gone wrong

The mid-term evaluation report examines the case of the Tbilisi Railway Bypass Project – to construct a railway to bypass the centre of Tbilisi in Georgia. It was cited as an example “where relevance to beneficiaries’ needs is not clearly established”. The problems with this controversial project are not news for local and European civil society organisations (CSOs)They were also previously covered by Eurodad and partners in their submission to the consultation conducted in the run-up to the EU Platform for Blending in External Cooperation.

Eurodad’s submission pointed out that the project was problematic both from an environmental and a social point of view. The railway was relocated to a densely populated area near Tbilisi Sea, threatening its drinking water supply and forcing hundreds of people to resettle without adequate compensation. To make matters worse, to avoid the need for compliance with the social and environmental standards of the development finance institutions that were involved, the Georgian Railway Ltd. decided to cancel the disbursement of a loan and finance the railway with its own resources.

NIF has also faced serious problems in terms of local ownership. In the Tbilisi case, Georgian CSOs raised the concern that public consultations at all stages of the project development were flawed. The evaluation backs the CSO’s concerns, recommending a “reinforced consultation process, including civil society”, as well as “improving involvement of civil society in assessment of social and environmental impacts”. 

This case also casts doubts on why the European Bank for Reconstruction and Development (EBRD)/European Investment Bank (EIB) loan was approved and the project was selected by the NIF for a grant contribution. To avoid similar cases, the evaluation calls for improving the “criteria for prioritization” that allow selecting interventions that are relevant to social goals, inclusive growth and poverty reduction.

The concerns raised in the mid-term evaluation report – as well as controversial elements in the Tbilisi case – strengthen Eurodad’s conviction that existing European-level blending mechanisms such as the NIF are highly problematic instruments in terms of meeting development objectives.

Forthcoming Eurodad research will explore these issues in more detail.