Time to reform the EU’s development financing architecture

6.12.2019 274 0 0

The Group of Wise Persons provided three proposals for the European Union on the issue of reforming the European Union’s development financing architecture. Proposals envisage a European Climate and Sustainable Development Bank that would streamline and improve the efficiency of the development financing system in the European Union. The reform would benefit both the EU and the countries in need of development aid, addressing key faults in the current system and targeting some current key policy issues for the European Union.

The European Union has identified a need to reform their development financing structure, with the possible ways to carry the reform proposed by an EU ordered independent report by a group of Wise Persons. The report came out in October and was delivered for European finance ministers for further discussions. The reform is fuelled by deepening development challenges in Africa, such as increasing financial needs, growing population, poverty, climate change, and other side effects caused by these issues. These challenges require increasing investments in the future in order to achieve the development goals set by the European Union.

During the on-going Finnish Presidency of the Council of the EU, the discussion on restructuring the development financing architecture has been actively promoted. Finland’s Development Minister Ville Skinnari brought out the importance of the reform from the perspective of the EU’s Common Foreign and Security Policy, so the European Union can better answer to geopolitical and global challenges. The report by the Wise Persons identified three possible alternatives in carrying out the reform, but it remains to be seen how the Member States respond to these specific solutions even though the need for restructuring is widely accepted.

Problems with the current system

The current development financing architecture in Europe is highly complex with a multitude of actors interacting inside the system with overlapping functions. This has led to severe inefficiencies and coordination problems, making a reform necessary to improve the functioning of the system benefitting both the countries in need of European development aid and the European Union itself. The current system includes the European Commission, the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), and a number of national development finance institutions. It is exactly the relation between these actors that is the main target of the proposed reform.

All of the actors have internal problems as well. The European Commission lacks a single voice on development due to the complex structure of developing policy inside the Commission. There is not a single main interlocutor for development issues. Commission’s financing is also often difficult to obtain for institutions with less experience in heavy administrative procedures. The European Investment Bank on the other hand has problems with the lack of development-orientation in their board and operations outside of the EU. It also severely lacks expertise to analyse the development impacts of its operations and has no close interaction with development finance institutions on the ground, resulting in sub-optimal practices from the perspective of development. Regarding the EBRD, the EU Member States only have a simple majority on the board, leading to a need to get the support of non-EU countries to steer strategic decisions, severely hindering the implementation of EU priorities in EBRD.

The largest structural issue in the system is the absence of a policy centre able to define and develop the development policies in an efficient manner, creating inefficiencies and overlaps. The development funding comes from a network of different actors, making overall policy coherence difficult. The main actors in the system, especially the EIB and the EBRD, also lack experience working with low-income countries and there is not enough strategic coordination among all of the EU’s financial actors regarding development. These structural issues, and the internal problems of the actors, are presented with potential fixes from the Group of Wise Persons, from immediate short-term actions to the larger structural reforms.

Proposed solutions

The Group of Wise Persons proposes solutions both in the short-term and long-term. In the short-term the most immediate concern should be the creation of a strong policy centre in the European Union for development issues. This requires the strengthening of the European Council and the Council of the EU’s role in steering development policy and giving strategic guidance for the actors. The role of the Commission should also be strengthened as the single interlocutor on development issues and the coordinator of all development actors inside the Union. The existing mechanisms on coordination among EU Member States in multilateral development institutions should be strengthened, or new ones created, in order to promote collective support of EU priorities inside the institutions. The European Union also should create an overall brand out of EU’s global development strategy and other related development financing. These short-term reforms are not too complex or demanding, and therefore could and should be implemented following a fairly quick timeline.

The main, more long-term oriented, reforms target the interplay of the EU development finance actors. Maintaining status quo is not an option for the future, but instead a single well-capitalised development actor should be created to be the development finance centre, with the European Commission being the development policy centre. The finance centre should be able to use all possible financial instruments to support development and climate strategies, but without taking away space from the existing development finance institutions. Such an institution would need to have an inclusive ownership, but with the controlling majority in the hands of the EU Member States to make sure the fulfillment of EU development policies. The Wise Persons propose three different ways to achieve this outcome, the creation of an “European Climate and Sustainable Development Bank”. All three options come with additional costs, like capital needs, annual contributions, political and legal complexity, and time for implementation.

First option is to create the European Climate and Sustainable Development Bank from the EBRD and the external financing activities of the EIB. For the EBRD to be able to become the European Climate and Sustainable Development Bank, it would need to be reformed to achieve a strong EU majority on their board. The mandate of the EBRD should be increased from Europe to global functions with the main focus initially on sub-Saharan Africa, an EU policy priority. The EIB would also need to transfer its external financing operations to the EBRD and focus only on Europe in the future.

The second option is creating a new European Climate and Sustainable Development Bank with mixed-ownership. The shareholders of the bank would be the EIB, the European Commission, the EBRD, Member States, and possibly other actors like national development finance institutions. In this case, like in the first option, the mandate would have to be global but the initial main focus on sub-Saharan Africa. The bank should be part of the global system and cooperate with other financial actors. It would require a mix of financing and development expertise to give it the required capabilities to be a proper development bank. In this scenario the EIB would not transfer its external financing operations, but instead discontinue them and focus only on Europe.

The third option is a compromise between the first and second options. In this alternative the European Climate and Sustainable Development Bank would be created as an EIB subsidiary. The EIB would be only a minority shareholder in order to facilitate participation from the European Commission, Member States, and national development finance institutions. Like in the other options, the mandate would be global with an initial focus on sub-Saharan Africa. The EIB would have to separate its external finance activities to the new subsidiary.

There are a lot of similarities among the three proposals. All of them envisage the creation of a European Climate and Sustainable Development Bank with a global mandate and starting with a strong focus on key EU policy priority area, sub-Saharan Africa. They also require the EIB to either transfer or stop its external (outside of the European Union) activities and instead focus only on European countries. The main difference concerns how the bank should be found: either through a reform of the EBRD or creating a new entity.

What to think from all of this?

The proposals clearly highlight the need to answer to the growing crisis in sub-Saharan Africa with its ever-growing list of problems and challenges, all of which can have long-term implications for the European Union through increased instability and migration. This proposal also acts as a call for the Union to play the role it deserves in the global development finance system, as it already is the largest development aid contributor in the world. The creation of a specific EU development policy brand further underlines this point, since it would make the whole of EU’s development operations into a coherent soft power project, somewhat resembling the same idea behind it as China’s Belt and Road Initiative. Successful reform would then better address parts of key policy agendas of the EU outside of Europe and further increase the soft power resources and global clout of the Union. Naturally, it would also be important from the point of development itself, benefitting the countries in need of aid with more coherent development strategies and flows of money.

The chance of this reform taking place does not seem too far fetched either. Politically it is not the most controversial issue, since most countries accept the need for development activities, and one of the only contentious things seems to be the amount of money funnelled into development aid. Even though the reform would need capital costs from the Member States, it would still ensure that the Member States are getting more out of their investments than they are now. The first option would also not involve heavy additional costs, since the EBRD is already capitalized. The obstacles in front of the reform are the overall difficulties in getting major reforms done in the European Union, and with the first reform option additional difficulties would come from the need to reform an institution not fully in control of the European Union and its members. With all of the reforms impacting also the EIB, the process for the reform has to be led by the EU Member States.

All of the three options have their advantages, also when considering the reform actually getting done politically, but the task should be easier due to the lack of strong antagonistic ideological positions like on some other reform issues. It remains to be seen how fast the process will be, but it is likely to get done. Even more importantly, it should be done.

TEXT Anttoni Saarinen
PICTURE European Communities

The author studies international relations at Tallinn University. Interests include the EaP initiative as well as environmental issues.

Tagit: Kehitysyhteistyö Kategoriat: Afrikka, Kehityspolitiikka, Nostot, Yleinen
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