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Blending risks

by Pedro Morazán, Tobias Schäfer

Opinion

Andris Piebalgs, the EU commissioner for international development, visiting an infrastructure project in Togo

Andris Piebalgs, the EU commissioner for international development, visiting an infrastructure project in Togo

In the heat of the euro crisis, the EU is debating its next budget. An exciting aspect is the discussion on the innovative financial tool of “blending” public and private funds for development cooperation. The downside, however, is that policymakers’ previous focus on poverty alleviation is in danger of being dropped. By Pedro Morazán and Tobias Schäfer

Blending is supposed to contribute to mobilising fresh money for development purposes without affecting the na­tional budgets of EU member countries: EU subsidies are used to leverage private-sector capital. At the moment, the EU has eight regional Blending Facilities, including for Africa, Latin America and Asia. These Facilities pool money from bilateral donor agencies and allow them to implement joint programmes, thus facilitating expensive large-scale infrastructure investments with private-sector participation.

A good example was the installation of a submarine cable for Mauretania. Thanks to a € 1.6 million grant from the African Blending Facility, this country got an € 8 million credit from the European Investment Bank. Accordingly, Mauretania could afford its share of the total investment. The rest of the € 20 million was contributed by IMT, a communications corporation in which Mauretania holds a large stake.

According to best practice, recipient countries contribute to the investments themselves. Doing so boosts their sense of ownership, and helps to ensure long-term success. Blending enables governments to raise funds they could not access otherwise, either because their national debt is considered too great, or because their financial sectors are not sophisticated enough.

The blending approach certainly makes sense for large-scale infrastructure projects. The snag is that interventions designed to directly fight poverty (social programmes, education, health care et cetera) are likely to be neglected. By their very nature, private-sector firms’ most immediate concern is profitability, not poverty eradication. Indeed, social programmes hardly figure in the blending context so far. There are more risks:
– Blending can contribute to countries becoming over-indebted.
– The approach is unlikely to do much for least developed countries, where private investors do not see any scope for prof­itable infrastructure projects.
– Blending may crowd out other developmental instruments. In the EU context, blending will not help to increase ODA (official development assistance). In bilateral blending packages, private-sector loans count as ODA under certain conditions before repayment, but in multilateral settings, only public sector money is considered ODA according to international rules.

The European Commission plans to set up a new platform to link its Blending Facilities more effectively. It expects more coherence, better coordination and enhanced visibility. The new approach may actually prove quite valuable. Project proposals, however, must be assessed most diligently. Relevant aspects include:
– Ex-ante evaluations should be carried out and involve the public to safeguard projects’ wide acceptance as well as their poverty relevance.
– All European development banks should use the same criteria for poverty reduction, climate protection, social standards and other relevant issues.
– Partner countries’ ability to bear debt must be assessed with standardised and transparent methods.
– What is expected of private investors – whether they are from Europe or other world regions – must be spelled out precisely and controlled stringently.

It is too early to tell what blending will mean for partner countries in economic and political terms, nor is it obvious what role it will play in EU policymaking. In any case, the European Commission will have to make sure that blending leads to additional developmental impetus and does not happen at the expense of fighting poverty. Since that cannot be taken for granted, civil society must pay close attention.