Chapter 3. The European Union’s financing for development
Overall ODA volume
The European Union seeks to play a co-ordinating role in encouraging member states to increase aid volume in support of the European Union’s collective development financing efforts, although many of its members still have a long way to go. For European Union actors, official development assistance has increased since 2010, mostly due to counting of European Investment Bank loans. In establishing the aid component of the new Multiannual Financial Framework 2021-27, the European Union is considering consolidating the different instruments.
The European Union is encouraging member states to meet ODA targets by 2030 and is developing a new Multiannual Financial Framework for 2021-27
Collectively, the European Union (EU) actors and its member states is the largest provider of official development assistance (ODA), with combined net disbursements of nearly USD 84.3 billion in 2016.1 As stated in the first European Consensus on Development in 2005 (European Commission, 2006), the EU was to carry out a co-ordinating role in encouraging member states to attain the targets of 0.7% ODA/GNI and of 0.15%-0.2% to least developed countries (LDCs) by 2015. However, these targets were not met, despite the Commission’s guidance set out in the Council conclusions in 2005 to all EU member states on roadmaps to achieve them, as member states alone can decide on their ODA allocations. Therefore, the commitments were reaffirmed in the new European Consensus on Development (the Consensus) in 2017, to be attained by 2030 (Council of the European Union, 2017).
In 2017, only Denmark, Luxembourg, Sweden and the United Kingdom achieved the 0.7% ODA/GNI target (OECD, 2018).2 ODA from the 20 EU countries who are also OECD DAC members represented 0.49% of their combined GNI or 0.40% in country average; these ratios nevertheless were higher than the 0.38% average of ODA/GNI for non-EU countries (OECD, 2018). On aid to LDCs, in 2016,3 only Denmark, Luxemburg, Norway, Sweden, and the United Kingdom met the 0.2% target and the Netherlands met the 0.15% target.
Net ODA of EU DAC members steadily increased in real terms from 2012 to 2016, but fell by 1.2% in 2017.4 This was due mostly to the decline of in-donor refugee costs. The EU discusses ODA performance with member states and the European Council every year in May after the release of preliminary DAC data.
Net ODA from EU actors in 2017 amounted to USD 16 billion (gross ODA was USD 18.5 billion).5 While the EU’s 2017 volume was greater than the 2015 volume, it was 6.7% lower in real terms than the 2016 volume, which was due mostly to a lower level of loan disbursements from the European Investment Bank (EIB). However, aid from the EU had spiked by 14.3% from 2015 to 2016 in a reflection of increased aid going to economic infrastructure and increased humanitarian aid, particularly to Morocco, Turkey and Ukraine. Thus, the 2017 ODA is still the highest level except for 2016. Going back further, ODA of EU jumped by 29% in 2011 over 2010, when the DAC agreed to count EIB concessional loans as ODA (Figure 3.1).
Source: OECD Creditor Reporting System database.
In terms of budget, ODA that EU reports to the DAC comprises part of the EU External Assistance and a part of EIB operations. External Assistance includes the European Development Fund and various geographical and thematic instruments of Heading 4 (Global Europe) of the Multiannual Financial Framework (MFF) 2014-20 - a seven-year framework that provides funding for development co-operation and all other EU operations. As shown in Figure 3.2, Heading 4 represents approximately 6% of the MFF envelope, of which more than 90% is directed to ODA-recipient countries (European Commission, 2018a).
Source: DAC Secretariat.
The EDF is the main instrument for the EU’s development co-operation in African, Caribbean and Pacific (ACP) countries. It has been separate from the MFF because its funding comes from contributions by member states based on a different internal agreement. As all ACP countries are developing countries, most EDF funding is ODA-eligible - for 2014-17, 91% of the EDF expenditure was reported as ODA.
The EIB’s annual funding programme for 2018 for all countries from its own resources is roughly EUR 60 billion. Approximately 10% of this amount is directed to ODA countries (EIB, 2017). This can still be a significant amount in terms of ODA. For example, in 2015-16, EIB disbursements comprised 27% of total ODA provided by all EU actors.6 The Bank’s lending activities are mainly funded via the issuance of bonds in the international capital markets that are purchased by both institutional and retail investors. In other words, EIB does not generally receive capital injections, although EU member states sometimes provide specific contributions to EIB from the European Development Fund7 as well as soften the loan terms through subsidies to EIB funds. Furthermore, most of the EIB loans are guaranteed by the Commission.
The draft Multiannual Financial Framework for 2021-27, currently under negotiation (European Commission, 2018c), would increase the Commission’s development co-operation budget by 30%, despite the impending withdrawal of the United Kingdom from the EU (Chapter 1). It further proposes to consolidate the different instruments and budgetise the EDF into the next MFF. Consideration is also being given to establish a subsidiary bank of the EIB that will exclusively serve developing countries,8 which could be a positive step in expanding the Bank’s ongoing work on development impact and in refining its focus on poverty reduction.
Reporting of the member states’ ODA contribution to the EU is complex; and EU actors have improved their own reporting
EU member states’ reporting to the DAC on their contributions toward the EU involves a complex series of steps. Member states pay into the general budget of the European Union through the MFF envelope. The EU then annually calculates the ODA expenditure, attributes an amount to each member state according to its share of contributions through the MFF and notifies each of its respective ODA amount (European Commission, 2018a). Member states subsequently report these amounts to the DAC as their contributions to the ODA part of the MFF. This means that the more the Commission can disburse MFF funds as ODA, the higher the amounts that member states can report as ODA (as part of multilateral aid) which will also count towards their ODA/GNI ratio. Contributions to the European Development Fund are voluntary, so member states report their individual contributions separately to the DAC. There is minimal reporting to the DAC by member states regarding the EIB because they generally do not contribute to the Bank’s capital.
Compared to the process of ODA reporting by member states, reporting of the Commission and the EIB on their ODA is straightforward and has improved greatly in recent years. Descriptions of many projects provide basic information on the objectives and general activities carried out. Nonetheless, some descriptions indicate the overall area of intervention without providing details of the exact content of the support. EU actors could therefore further enhance the quality of ODA reporting by standardising the elements to include in the project descriptions to increase transparency and accountability.
Bilateral ODA allocations
A relatively high proportion of ODA from the European Union is allocated to upper-middle income countries in Europe and particularly to Turkey, rather than to least developed countries. The commitment by the European Union to allocate ODA to human development has yet to be met. Additional efforts to concentrate on fewer sectors could also be explored.
The EU needs to set an example to member states by allocating more ODA to least developed countries
In 2015-16, the EU disbursed an average of approximately USD 17.1 billion in ODA per year, of which 99%, was disbursed as bilateral aid. This amount includes bilateral ODA channelled to multilateral organisations but excludes core funding to them.
Of the EU’s allocable bilateral ODA disbursements during this period, 43% went to upper-middle income countries (UMICs), 28% to lower-middle income countries (LMICs) and 29% to low income countries (LICs) or 27% to LDCs9 in 2015-16 (Figure 3.3). This proportion allocated to LDCs is particularly low compared to the country average of 20 EU-DAC members at 37% and that of other DAC members at 40%. In the same period. The income group breakdown has been fairly stable since 2012, the year following the DAC agreement to count the EIB’s concessional loans as ODA. These loans mainly target UMICs, including Serbia, Turkey and Tunisia. As a result, the proportion of EU allocable aid to UMICs shifted significantly, going from the smallest portion of aid among the income groups, or 25% in 2009-10, to the biggest at 43% in 2015-16.
Source: OECD Creditor Reporting System database.
Disaggregated by type of flow, 29% of allocable grants was disbursed to UMICs, 30% to LMICs, and 38% to LDCs. In the same period, 73% of allocable loan disbursements were directed to UMICs, 23% to LMICs, and 4% to LDCs - all by EIB. EIB loans to the top UMIC recipients were on concessional ODA terms, although these countries were generally receiving non-concessional loans from other multilateral development banks. It is worth noting that EIB operations financed from its own resources require the opinion of the Commission before being presented to the EIB Board of Directors for approval. Therefore, there is scope for the Commission to encourage more financing towards countries that have difficulty accessing private capital, such as LDCs and LMICs, while also bearing in mind the issue of debt sustainability.
In terms of regional distribution of the EU’s total allocable bilateral ODA, in 2015-16, 39% went to Africa, 22% to Asia, 7% to the Americas, and 31% to Europe10 - although the combined population of ODA recipient countries in Europe represents just 3% of that of all ODA recipient countries. The regional distribution trend and the absolute amounts have been fairly stable since 2011-12. However, the proportion to Africa was much higher at 48% in 2009-2010, one year before the EIB’s concessional loans started to be counted as ODA.
In 2015-16, among its 144 partner countries, the EU collectively was one of the top three largest donors in 75 countries and one of the top five largest donors in 118 countries. Turkey was the largest single recipient of bilateral ODA from EU in 2015-16, with USD 2.9 billion or approximately 17% of total disbursement (Annex C). Disaggregated by types of flows, the top recipient countries for loans - all by EIB - were mostly UMICs (Turkey, Serbia, Morocco, Tunisia, and India) and those for grants were mostly LMICs and UMICs (Turkey, West Bank and Gaza Strip, Afghanistan, Syrian Arab Republic and Ukraine). However, within grants, most of the top recipient countries of the European Development Fund, which is focused on poor ACP countries, were LDCs in Africa, among them Burkina Faso, Ethiopia, Mali and Niger.
In order to allocate more resources where they are most needed, the Commission has developed a methodology based on five indicators (Chapter 2). However, these criteria apply only to about one-third of total EU bilateral, as it excludes, for example, humanitarian aid and loans from EIB. As a result, the overall focus of EU’s ODA does not reflect targeting the world’s poorest countries. Therefore, in order to fill its co-ordinating role of encouraging EU member states to meet their target of 0.15%-0.2% of ODA to LDCs, the EU could direct more of its own aid towards the world’s poorest countries (Chapter 2).
The EU is yet to meet its human development allocation target; and refugee-related actions are not easily identifiable
In terms of sector allocation, the largest share of bilateral allocable ODA disbursement from the EU as a whole went to economic infrastructure (including water and sanitation) in 2015-16 at 35%. The next largest share went to humanitarian aid at 12%, followed by human development - which the EU defines as health, education and social protection - at 11%. Although the EU has a target to allocate at least 20% of its total ODA provided during the MFF 2014-20 to human development, it is yet to meet this commitment (COM, 2011; Council of the European Union, 2017).
Based on reporting to the Creditor Reporting System (CRS) by the Commission and EIB in 2016, an estimated USD 952 million of ODA spending was related to migration and refugees, constituting 5% of the EU total bilateral ODA, disbursed to Jordan, Lebanon, Turkey and the West Bank and Gaza Strip, among others. An estimated USD 134 million of this amount contributed to the EUR 1 billion budget of the EU Facility for Refugees in Turkey for the two years 2016-17 which was determined to be 97%-100% ODA eligible by the DAC Working Party on Development Finance Statistics (WP-STAT). At the same time, it is highly likely that some relevant activities have not been captured adequately due to the multisectoral nature of support for refugees. In this context, the new CRS purpose code on migration (15190), agreed by WP-STAT, is expected to provide more clarity on refugee-related costs in the future.
The Commission provides a significant amount of budget support; more effort could be made to concentrate on priority sectors
While it is not an allocation to a sector, the Commission’s budget support is worth noting as it provides significant leverage to engage with partner countries in policy dialogue for reform (Chapter 5 and Annex D). In 2015-16, 15% of the Commission’s ODA disbursement,11 and more specifically one-fourth of the EDF’s ODA, was disbursed as budget support. Of this amount, two-thirds went to sector support that targeted diverse areas including health, education, economic infrastructure and agriculture. The largest recipient countries for total budget support disbursement in 2015-16 were Burkina Faso, Georgia, Ghana, Jordan, Mali, Morocco, Niger, South Africa, Ukraine, and Tunisia.
In line with the concentration principle proposed in the Agenda for Change in 2011, but not reconfirmed in the Consensus, the EU’s country programmes have been focusing on a maximum of three sectors per country since 2014 (European Commission, 2018a, 2011). In Bolivia, for example, the Commission is focusing on water and sanitation, combatting drug trafficking and justice reform (Annex D). At the same time, the thematic funding, trust funds, investment funds and the EIB do not necessarily finance the three priority sectors in each country. Thus, further effort to concentrate on priority sectors to bring better synergy and coherence among EU actors could be explored.
Multilateral ODA allocations
The European Union channelled 18% of its total bilateral ODA to multilateral organisations as multi-bi funding in 2015-16. Given the fact that member states are also channelling funds to the same organisations, the EU could clarify the added value of its use of this modality.
The Commission allocates significant proportion of its bilateral funding to multilateral organisations
The EU, acting as an individual donor in its own right with a sui generis legal nature, provides significant amount of funds to multilateral organisations. However, unlike other DAC members, the EU does not provide a large proportion of core funding. In 2015-16, for example, just 1% of its total ODA, amounting to an annual average of USD 199 million, was disbursed as multilateral ODA, chiefly to the Global Fund to Fight AIDS, Tuberculosis and Malaria. Yet the EU channels a significant proportion of its bilateral ODA through multilaterals.12 Such funding comprised 18% of EU bilateral ODA or 24% of the Commission’s13 bilateral ODA in 2015-16, totalling on average USD 3 billion per year. In comparison, the 20 EU-DAC member states on average channelled 16% of their respective bilateral ODA to multilateral organisations.
These multi-bi contributions can be significant for the receiving organisations. For example, the EU was the second largest donor of the World Food Program in 2016, contributing to 15% of the organisation’s total funding (WFP, 2018). It also contributed to 9% of the public sector revenue of United Nations Children’s Fund (UNICEF, 2017) and 7% of the total contributions to the UNDP in 2016 (UNDP, 2017). In terms of specific sectors in 2015-16, 30% of these multi-bi contributions were targeted to humanitarian aid, 18% to public sector capacity building and 11% to the productive sector. Morocco, Serbia, Tunisia and Turkey were the top country recipients of EU multi-bi funding.
The value added of the Commission’s aid channelled through multilateral organisations could be further clarified
The 2012 DAC peer review of the EU noted that several EU stakeholders questioned the value added of European funds being channelled through multilateral organisations (OECD, 2012). This concern was again mentioned to the review team, with criticism concentrated on the significant transaction costs incurred by the receiving organisations in processing and programming multiple funding sources (Chapter 5). In response, the Commission has stated that it works with multilateral organisations that are: specialised or influential in managing global public goods, such as the fight against climate change; are more experienced on the ground (e.g. UNICEF and UNHCR in Yemen); and/or have greater perceived neutrality. In addition, the Commission’s multi-bi funding enables member states to provide support to refugee-related and other politically sensitive activities with a lower level of political visibility for the members.14 Nevertheless, as EU member states can provide core or multi-bi funding to the same organisations for similar types of activities, the rationale for the EU to channel such a high proportion of its ODA to other multilateral organisations may need to be explained more clearly.
Financing for development
To contribute to the Addis Ababa Action Agenda, the EU tracks various financing for development flows by member states and addresses issues such as domestic resource mobilisation, public finance management, trade, remittances and blending. The Commission is to be commended for establishing the External Investment Plan to mobilise private investment for sustainable development. In trying to mobilise private sector resources for development, however, there is a need for a whole-of-EU approach between the Commission and the EIB.
The European Union is demonstrating global leadership in financing for development
In responding to the call of the Addis Ababa Action Agenda, the EU monitors various financing for development flows by member states. It also promotes relevant activities by the EU and the member states such as domestic resource mobilisation, public financial management, remittances and blended finance (European Commission, 2018b).
In particular, under the EU’s Collect More - Spend Better approach adopted in 2015, the EU and member states contribute to improving domestic resource mobilisation and public financial management in partner countries. For example, as a major supporter and financial contributor to the World Bank’s Revenue Mobilisation Strategy and Public Financial Management Reform Programs, the EU helped Mali increase tax revenues as a share of GDP to 15% in 2016 from 12% in 2013 and Cambodia to 15% in 2016 from 11% in 2012 by working on tax policies and expenditures. In addition, the EU facilitated several developing countries joining the Global Forum on Transparency and Exchange of Information for Tax Purposes to combat illicit financial flows (Chapter 1).
On remittances, EU member states agreed in 2015 to reduce the average cost of legal remittance transactions to less than 3% and to eliminate by 2030 legal channels with costs of higher than 5%. This aim is in line with Group of Eight (G8) and Group of Twenty (G20) commitments to reduce burdensome transaction costs of migrant remitters, supported through price comparison websites, for example.15 As these efforts are a good start, an evaluation of progress to date would be useful, particularly in assessing the proportion of remittances benefitting from these actions.
In terms of blended finance efforts, the EU has set up eight regional investment facilities to mix grants with loans to soften the overall repayment terms, mostly for large infrastructure projects. In the last ten years, around EUR 5 billion in grants financed over 440 blended projects, leveraging approximately EUR 28 billion in loans from European finance institutions (European Commission, 2018b). At the same time, an evaluation of blended finance shows that while the projects were successful overall, the added value was unclear and transaction costs were high. Diversification was also deemed necessary since more than 90% of blending was implemented with four European development banks: the EIB, KfW, the French Development Agency (AFD) and the European Bank for Reconstruction and Development. Moreover, more than 80% of this blending served middle income countries and 75% was in large infrastructure sectors such as energy, transport, and water and sanitation (European Commission, 2016).
The EIB is mobilising private sector resources for sustainable development
The EIB is also contributing to the Addis Ababa Action Agenda because it considers the private sector to be vital for job creation and inclusive growth (EIB, 2016). In this context, the Bank recognises that access to finance is a major constraint to private sector development in developing countries. Therefore, the EIB offers different instruments to support the private sector. These include: loans to local financial intermediaries to modernise banking systems and foster SMEs; loans and equity investments in microfinance institutions to enhance access to basic financial services for the poorest; participation in private equity funds to provide much-needed expertise and risk capital to companies; direct loans to larger companies for strategic investment projects or for research and development where there is high potential for developmental impact; and guarantees for projects that are backed by the Commission.
Building on the success of its Green Bond, which was the first of its kind, the EIB is now also developing innovative financial instruments that will back activities supporting the delivery of the Sustainable Development Goals, particularly in water, health and education.16 One such instrument is the Sustainability Awareness Bond, which is scheduled to be issued in the third quarter of 2018. In 2016, EIB channelled USD 1.3 billion, or 26% of its loans, to the private sector, mostly in banking and financial services and energy.17 By comparison, although the time frame is different, the EIB mobilised on average USD 4.3 billion per year from the private sector through credit lines over the four-year period between 2012 and 2015, mostly in banking and financial services and infrastructure (Benn, Sangaré and Hos, 2016).18 As the vast majority of the mobilisation was in Turkey, followed by Ukraine, Serbia and Nigeria, EIB could reconsider how it can boost development finance in poorer countries as well.
The implementation of the new External Investment Plan needs attention
In 2017, the EU launched the External Investment Plan in an effort to mobilise private investors to contribute to sustainable development in Africa and the European neighbourhood countries. It aims to help improve the business environment by supporting regulatory, legislative, and governance reforms and provide technical assistance for businesses to develop financially attractive projects. The plan also includes the European Fund for Sustainable Development (EFSD), which offers guarantees to leverage public and private investment. With an input of EUR 4 billion, the EIP aims to leverage EUR 44 billion of total investments in Africa and in the Neighbouring Countries19 (European Union, 2017). The Plan also aims to tackle some of the root causes of irregular migration by helping to provide greater economic opportunities for people in their home countries and reintegrating returning migrants.
Regarding the EFSD guarantees, their design addresses the issues raised in the evaluation of blended finance, with increased number of partner financial institutions - including from the private sector - prioritisation of Sub-Saharan Africa, and diversifying the thematic areas of support, beyond infrastructure. In particular, none of the five investment facility windows focuses on large infrastructure projects, except for renewable energy projects. Furthermore, there are pricing incentives embedded in the EFSD guarantees that will ensure that the share of LDCs will increase substantially. EFSD is also intended to ensure additionality and avoid crowding out other private or public investments by supporting operations that contribute to sustainable development which could not have been carried out without the guarantees. Furthermore, EFSD guarantees typically have a higher risk profile than the portfolio of investments supported by eligible counterparts under their normal investment policies. By April 2018, 13 entities proposed 45 investment programmes totalling EUR 3.5 billion for the EFSD guarantee of EUR 1.5 billion.
In reaching out to the business community, the Commission has carried out numerous presentations on the EIP in EU member states and the neighbourhood countries - soon to launch in Sub-Saharan Africa - as well as at major international events. Furthermore, businesses that are interested in benefitting from the EIP are encouraged to contact one of the financing institutions managing the investment windows to obtain further information and submit investment proposals online. In assessing the proposals for the EFSD guarantees, the Commission seeks opinions of technical experts who include EIB staff. The EIP Secretariat is also staffed with experts with experience in mobilising private finance and working with the private sector.
The EIP is a commendable initiative for the EU to contribute to the Addis Agenda, particularly by addressing areas that are both upstream (policies) and downstream (financial instruments and technical support for businesses). Nevertheless, there are issues that require attention. First, the EU should keep ensuring that projects well target partner country priorities. Second, the added value of the EFSD in guaranteeing operations of development finance institutions of EU member states by using contributions originated from the same EU member states could be better elaborated to all stakeholders, including partner countries, the business community, and civil society. This is particularly the case since EU member countries can directly provide capital and other support to their own development finance institutions as intermediaries in reaching the private sector, without the high transaction costs and administrative burden associated with the EU’s blended finance operations. Third, a whole-of-EU approach to EIP through enhanced collaboration between the Commission and EIB - including at the strategic and country levels as well as to help improve the investment climate - could make the EU’s contribution to the Addis Agenda more coherent, comprehensive, and effective.
Bibliography
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Notes
← 1. This is the sum of net disbursements by EU DAC members and by EU actors, minus the member contributions to the EU to avoid double counting.
← 2. Preliminary figures.
← 3. 2017 data is not available at the time of writing due to the need to obtain income level data from multilateral organisations in order to impute DAC member’s contributions to multilaterals.
← 4. Preliminary figures.
← 5. The DAC does not include disbursements from EU institutions in the ODA/GNI ratio.
← 6. The ODA provided by the EIB is reported to the OECD DAC as part of EU institutions’ ODA.
← 7. EIB operations in ACPs and those in Overseas Countries and Territories are carried out under the ACP-EC Partnership Agreement (the “Cotonou Agreement”, 2000-2020), and the Overseas Association Decision, the legal framework for EU relations with these regions. Financing under these agreements is provided from the EDF - EU member states’ budgets which guarantee EIB loans– and EIB own resources, which the Bank borrows on the international capital markets. The External Lending Mandate supports EIB activity in the pre-accession countries, the Eastern and Southern Neighbourhood, Asia, Latin America and South Africa. Under the current External Lending Mandate period (2014-2020), the EU budget guarantees up to EUR 27 billion of EIB operations so roughly 3 billion per year.
← 8. From Reuters: https://www.reuters.com/article/us-eu-eib-exclusive/exclusive-european-investment-bank-plans-internationally-focused-offshoot-idUSKBN1E02XC and German Development Institute: https://www.die-gdi.de/en/the-current-column/article/why-we-need-a-european-development-bank/.
← 9. In 2015-16, 94% of this ODA to low income countries went to the least developed countries. The remaining 6% went to low income countries that are not LDCs: Democratic People’s Republic of Korea, Kenya, Tajikistan and Zimbabwe.
← 10. According to DAC statistics, Turkey is classified as a country in Europe.
← 11. The European Investment Bank is excluded as it does not provide budget support.
← 12. The top recipient organisations in 2015-16 were the World Food Programme, the United Nations Children’s Fund, the World Bank Group, the United Nations Development Programme, the United Nations High Commissioner for Refugees (UN Refugee Agency), and the United Nations Relief and Works Agency for Palestine Refugees.
← 13. The EIB does not provide multi-bi funding.
← 14. European Commission officials provided this explanation during the visit to headquarters by the Peer Review team.
← 15. One such website is envoidargent.fr in France, which includes information for just 25 countries and around 10 financial institutions and displays rates that are more than 18 months old.
← 16. Information provided by EIB officials during the visit to Brussels by the Peer Review team.
← 17. The source for this information is the OECD Creditor Reporting System database.
← 18. A new CRS code for the private sector as a channel is applied for data from 2016 onwards only. Therefore, it is not possible to determine how much of the EIB-disbursed funds reached the private sector during the 2012-15 period of the study.
← 19. See https://ec.europa.eu/commission/sites/beta-political/files/external-investment-plan-guide-nov17_en.pdf.