A dangerous blend? The EU’s agenda to ‘blend’ public development finance with private finance

The EU’s blending agenda is supported by a narrative that focuses on bringing the private sector to the centre of its development strategies. However, it is also a convenient excuse for donors to give less ODA. In this report, we examine EU blending mechanisms in the context of a broader EU blending agenda.

Blending’ is a mechanism that links a grant element, provided by official development assistance (ODA), with loans from publicly owned institutions or commercial lenders. This is not a new phenomenon. What is new is the narrative of the European Union (EU), which argues that using ODA to leverage private finance is the solution following the financial crisis. There has been an increase in development finance institutions (DFIs) and EU donors using blending mechanisms to increase support and lending to private companies and to partner with private financiers by using ever larger quantities of ODA. Eurodad is concerned about this agenda and its implications for overseas development, which are examined in detail in this report.

The EU’s blending agenda is supported by a narrative that focuses on bringing the private sector to the centre of its development strategies. However, it is also a convenient excuse for donors to give less ODA, and it provides an opportunity for rich countries to support their own domestic companies. At the EU level, ODA funds have been increasingly channelled through European Commission (EC) blending facilities, and the EU hopes to use these facilities to channel a greater amount of ODA for private sector blending in the near future.

Eurodad’s report finds that

  • There is no reliable evidence to show that blending mechanisms meet development objectives.
  • Blending mechanisms risk undermining developing country ownership, which is vital for success in any development efforts.
  • These mechanisms are completely lacking in transparency and they are unaccountable.
  • The added value of the grant element is questionable.
  • Existing blending mechanisms may be wasting scarce ODA resources.

In this report, we examine EU blending mechanisms in the context of a broader EU blending agenda. We go on to look at the eight blending facilities that are managed by the EC to support public and private investments, and look in detail at the seven facilities managed by Directorate- General for Development and Cooperation (DG DEVCO). We question the governance structure of these facilities and the lack of ownership by developing countries. The final grant decisions are taken by the EC and European member states, and there are no formal mechanisms for civil society participation in the facilities so far. The report criticises the “appalling” lack of transparency regarding decision making for project approval and implementation, with little redress for affected communities.

Part 2 attempts to delve into the current EU blending portfolio, despite the lack of information available on the ODA it is allocating to European development finance institutions through blending mechanisms. The information that is available shows that 60 per cent of grants made through these mechanisms support large-scale investments in the transport and energy sectors. While there is a need for infrastructure investments, there is also a concern that large infrastructure projects typically involve significant trade-offs, do not always directly contribute to poverty reduction in the areas where they are located, and can have significant adverse impacts on local communities.

We look at the type of grants that have been approved, mainly in the form of direct investment, grants, technical assistance (TA) and interest rate subsidies. Technical assistance has been one of the most heavily criticised forms of aid, due to its failure to build long-term capacity in the recipient countries. Internal evaluations have pointed to other problems with TA in blending facilities, including a lack of strategic focus and its use to build a pipeline of deals for the lead European development finance institution, instead of responding to beneficiaries’ needs.

When looking at who benefits and who profits from the current increase in blending mechanisms, our report points out that – although the majority of the funding currently goes to support public investments – the EC plans a massive expansion in the private sector as financiers and beneficiaries. Unfortunately, there is little clarity about which section of the private sector would be targeted and how this would happen. The rationale is to provide access to finance for small and medium-sized enterprises (SMEs). However, so far there is not enough information to assess whether blended finance has actually reached its intended targets.

We go on to look at financial leverage and additionality. Assessing ‘financial leverage’ is beset by problems of deciding who is leveraging who. Existing facilities tend to ‘follow the market’ by focusing on already popular areas for investment by public and private entities. Existing European-level blending facilities have largely seen both sides of the funding question – grant and loan – provided by European publicly owned institutions. This means there is no real ‘leverage’ of any additional resources, only a pooling of existing funding.

The concept of ‘policy leverage’ highlights perhaps the most worrying aspect: a strong emphasis on delivering the donors’ objectives, which undermines ownership and means that non-developmental objectives will also be prioritised, such as promoting European companies or pursuing European policy interests.

Our report points out that there is little evidence available regarding how the EU-level blending facilities implement or even contribute to achieving the internationally agreed objectives of the aid effectiveness agenda, particularly the key principles of ownership, alignment, harmonisation and mutual accountability.

Eurodad recommends putting an immediate halt to any further ODA being channelled through European-level blending mechanisms, until there is:

  • A radical overhaul of the transparency and accountability of the current blending mechanisms.
  • A full and independent review of the effectiveness of existing mechanisms focusing on their development impacts, including whether – given their governance failings – they are suitable vehicles for ODA.

As a general principle, Eurodad believes that DFIs and aid to the private sector must demonstrate clear financial and development additionality, as well as complying with the guidelines of responsible finance, as outlined in Eurodad’s Responsible Finance Charter.