Social Watch Report 2010

Privatizing European development finance:the role of the European Investment BankEU development finance architecture needs to be revamped in light of the significant changes that have taken place over the lastfew years due to the global crisis. Civil society organizations are raising concerns about the fundamental ambiguity surrounding thestatus of public banks such as the European Investment Bank (EIB), which is clearly not a regional development bank even thoughit pretends to finance development through friendly investment operations. There is a risk that the debate on rethinking Europeanaid and the wider role of development financing could be influenced by approaches promoting a corporate-driven agenda.Antonio Tricarico (coordinator)Campagna per la Riforma della Banca Mondiale (CRBM)European development finance is at a crossroads.The impact of the financial and economic crises onpublic finance in most EU member states is reversingthe trend seen in the last decade of increased OfficialDevelopment Assistance (ODA). 1 Although Europeangovernments remain major donors, providing morethan half of global ODA, it is increasingly clear thatthe EU as a whole will not reach its 2015 targets. Atthe same time, efforts to increase aid quality and effectiveness,strongly supported by European donorsin international forums, are at risk. 2In this negative context, a new and opportunisticnarrative has been emerging in official circles in Brusselsand in other European capitals that a more “holistic”approach to international development cooperationand development finance is needed. It aims towiden the definition of development finance to includecommercial and investment activities and prioritizeprivate sector intervention as an engine of economicgrowth and possibly development at large.At first such an approach might look like a reworkingof a Washington Consensus-style “trickledown effect.” However, despite the ideological biasin favour of private markets, a new vision and strategydealing with public and private partnership andreciprocal roles is being developed. This sees developmentfinance as not simply an instrument forpushing macroeconomic policy reform in the globalSouth – as has happened in the last decades – butincreasingly as a public lever to move private capital.In the context of economic crisis and the renewedimportance assigned by the G20 to developmentfinance and international financial institutions as keyinstruments of international public finance, this approachhas also become instrumental in supportingEuropean business worldwide at a time when privatecapital markets have dried up.Thus European development finance risks becomingpart of a long-term bail out plan benefitingEuropean business – framed by someone as “cor-1 CONCORD, “Broken EU aid promises push MillenniumDevelopment Goals out of reach, says CONCORD as OECDannounces aid figures,” media release, Brussels, 14 April2010.2 Organisation for Economic Co-operation and Development/Development Assistance Committee (OECD/DAC),Development Cooperation Report (Paris, 2010).porate welfare” – instead of helping the poor in theglobal South who had no responsibility for creatingthe crisis but suffered the most from its impacts.The involvement of the private sectorFinancing to the private sector by multilateral developmentbanks 3 (MDBs) has increased ten-fold since1990, from less than USD 4 billion to more than USD40 billion per year. Private sector finance is now amajor part of the overall portfolio of many multilateralsand constitutes nearly half of global ODA.Since the Monterrey Consensus in 2002 thepremise that financing for development was increasinglyto be extracted from international capital marketshas been implemented by major developmentinstitutions, with an increasingly residual and auxiliaryrole for aid in capacity- and institution-building,promoting an enabling environment for private investment,both domestic and foreign. These ideaswere reiterated at the Doha Review Conference onFinancing for Development in December 2008.Of course, development is much more thanaid spending, and the private sector can be a vitallyimportant engine for sustainable development, butprivate companies can also have detrimental impactson poverty, human rights and the environment, inparticular in the context of international private investments.Furthermore it should be clarified whichprivate sector – foreign or domestic, for profit orother actors – should be primarily awarded scarceinternational public support for achieving developmentgoals and under what conditions.International civil society has recently highlightedthat MDBs’ approach to the private sectorand development has not always sufficiently focusedon promoting sustainable development or reducingpoverty. 4 MDB project selection and monitoring andevaluation procedures have tended to prioritize commercialrather than social and environmental returns.The rapid growth of “arms-length” financial sectorinvestments through intermediaries such as private3 International or regional inter-governmental agencies suchas the World Bank or the African Development Bank.4 Action Aid, Bretton Woods Project, Christian Aid, CRBM,European Network on Debt and Development (Eurodad) andThird World Network (TWN), Bottom Lines, Better Lives?Multilateral Financing to the Private Sector in DevelopingCountries – Time for a New Approach, March 2010.Available from: .banks or private equity firms is a particular cause forconcern. As shown by new research several MDBbackedintermediaries operate via offshore financialcentres and could contribute to capital flight from theglobal South to the North. 5New approachThis trend culminated at the EU level in the proposalfor a “whole of the Union” approach 6 – drawing onthe G8-sponsored idea promoted under the ItalianPresidency in 2009 of a “whole of a country approach.”This would mean that not just ODA but alsoexport credits, investment guarantees and technologytransfers are counted towards the EU’s developmentcontribution. Trade and investment promotioninstruments would be used to leverage foreignprivate investment in developing countries as a keyengine for development.Such an approach draws on transformationsthat have already taken place within European developmentfinance. The EU “house bank,” the EuropeanInvestment Bank (EIB), which since the 1980shas slowly but consistently increased its volumeof operations outside the EU, has become a playerin development finance comparable with EuropeanCommission (EC) aid and major European bilateraldonors. The EIB can be regarded as a “European InternationalFinancial Corporation,” given its mandateof most often lending directly to the private sector forproject operations. At the same time, similar institutionsat bilateral level – the so-called European DevelopmentFinance Institutions (EDFIs) – financiallysupport primarily member countries’ private sectoroperations abroad in the name of development andare also growing their business and scope of action.European governments have already turnedtheir attention to how to boost these mechanismsrather than rethinking the ODA infrastructure throughinnovative financing mechanisms for development.5 Richard Murphy, “Investment for development: derailedto tax havens,” draft report on the use of tax havens byDevelopment Financial Institutions prepared for IBIS, NCA,CRBM, Eurodad, Forum Syd and the Tax Justice Network,April 2010.6 Commission of the European Communities, “SupportingDeveloping Countries in Coping with the Crisis,”Communication from the Commission to the EuropeanParliament, the Council, the European Economic and SocialCommittee and the Committee of the Regions, Brussels, 8April 2009.Social Watch29Privatizing European development finance