Do we need a European Development Bank?

(13.11.2019 – Kommentar der Anderen) A recent report to the EU proposes the creation of a new European Climate and Sustainable Development Bank. Peter Wolff, researcher at the German Development Institute, and Xavier Sol, director of Counter Balance, comment on the Pros & Cons of adding a new institution to the existing financial architecture for development.

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Peter Wolff, Deutsches Institut für Entwicklungspolitik (DIE) Copyright: x-default

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Peter Wolff, Associate Researcher, German Development Institute/Deutsches Institut für Entwicklungspolitik (DIE)

A new report to the European Commission suggests to create a European Development Bank in order to consolidate the fragmented European system of development finance and enable Europe to act more strategically and more visible at a global level. Instead of creating a new bank the article suggests to create a new European Fund for Sustainable Development which would enable a more strategic management of European development resources by using the existing development banks as implementers.

Funding sustainable development requires long-term capital

The transition towards sustainability is the challenge of the 21st century, with the Sustainable Development Goals and the Paris Climate Agreement being important guideposts for EU policy. Since government budgets are constrained and commercial banks are not able to provide the needed long-term „patient“ capital, development banks are an important source of funding for public and private investments in sustainable development.

European development finance – a fragmented picture

There are two development banks at the European level: The European Investment Bank (EIB), owned by EU member countries, which is mainly funding investments in the EU and in EU accession countries; and the European Bank for Reconstruction and Development (EBRD), owned by 69 countries with a 54% stake of the EU (after Brexit), financing the transition to market economies in eastern Europe and Central Asia. Additionally, there are 19 national development finance institutions.

A new report suggests to consolidate this fragmented European system into a European Climate and Sustainable Development Bank with the EIB and the EBRD at the core. The rationale for having „one single institution in the medium term as the European actor outside of the EU for climate and development financing“ is to have one EU institution which is acting at eye level with other global players, enabling better internal coordination and greater external visibility.

Due to their different ownership structure EIB and EBRD cannot just be merged. Therefore, the report suggests three options: one with the EBRD at the core, one with the EIB at the core, or a completely new bank with EIB, EBRD and national development banks as shareholders. All three options have certain disadvantages: in the EBRD the EU influence is limited; the EIB has little experience in developing countries; setting up a new bank would be costly and time consuming.

The EU needs a strong center – a new European Sustainable Development Fund

A solution to this puzzle could be to create a new European fund for development and climate investments as an apex institution which would allocate grants and guarantees to those of the 21 European development finance institutions which offer the best knowledge and capacities for each specific purpose. Actually, the EU Commission has already suggested to create a new instrument (NDICI) which would consolidate several existing funds and the new European Fund for Sustainable Development (EFSD) into one instrument with a coherent management structure. This consolidated fund could leverage a multiple in loans for investments in sustainable development outside the EU through the implementing banks.

The new European Commission will have to decide soon on the issue, also because of its consequences for the new multi-annual budget of the EU (2021-27). The challenge is that the new European Commissioner for International Partnerships will have to coordinate with other Commissioners responsible for climate policy and external action. This calls for strong leadership by the Commission itself and member countries. Otherwise, Europe - despite being the largest provider of official development and climate finance globally - would allow China and the US to call the shots in the global development finance system.

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Xavier Sol, Counter Balance

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Xavier Sol, Director, Counter Balance

The European Union is a significant player in the development field, and development finance is currently a central piece in the EU’s toolbox. Hence, a serious assessment of how EU development finance can play a stronger and better role in contributing to the well-being and equitable development of people and territories outside of Europe is necessary.

In this regard, the report from the High Level Group is interesting food for thought. And we agree with one of its conclusions: a status quo is not desirable.

Indeed, as watchdogs NGOs monitoring the operations of the key European development banks – the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) - we have documented many shortcomings in how these banks fullfil their development mandates. These shortcomings relate to transparency and access to information practices,  enforcement of sustainability standards, support to fossil fuel projects, and Human Rights due diligence, and little emphasis on development outcomes.

Unfortunately, the proposal to create a European Development Bank is unlikely to deliver on the goal to better support sustainable development and poverty eradication. Two of the proposed scenarios rely on awarding more responsibility to already existing institutions – the EIB and the EBRD – which are not fit for purpose.

The scenario building the EU Development Bank into a revamped EBRD looks politically challenging, as it would require an enormous diplomatic effort for the EU Member States to become the only shareholders of the EBRD. It would also require changing the Bank’s mandate and whole way of working. Trying to reconcile EU development objectives with the EBRD would most likely dilute the objectives to an unacceptable degree.

Using a subsidiary of the EIB does not look like a sound idea neither. There are serious concerns raised by NGOs and the European Commission itself about the overall lack of development orientation at the EIB. The EIB would have to deeply reform its governance, policies and procedures if it, or a subsidiary, is ever to act as a genuine development bank. At the moment, it simply is not. The EIB lacks expertise, skills, human resources and relevant procedures necessary to deliver development results and implement the “do no harm” principle. There is a significant risk that the current shortcomings in the EIB operations are simply repeated in the future under a subsidiary which is likely to end up re-packaging the EIB activities outside of Europe with a new “development” label but without enough emphasis on accountability, transparency and democratisation of the new structure and its governance framework.

And the third option – setting up a new institution from scratch, looks like a waste of financal and human resources. There is little rationale to the set-up of a new institution, as the reform of current institutions and instruments should be a top priority for the EU, and duplication would only be increased by creating another bank.

There are important avenues for reforms at the level of the EIB, EBRD and for the EU External Investment Plan and its successor under the next EU budget (2021-2027). Enhancing complementarity between these institutions and instruments should be an objective. But if the EU is not able to make existing institutions more transparent and accountable, with stronger environmental, social and human rights standards at its core, it is doubtful that it would manage to set up a model new development bank.

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