By Liga Rudzite, Tallinn University of Technology
Support for the private sector as a tool for domestic resource mobilization in development cooperation contributes to the already complex nature of development, widening the scope of beneficiaries, but also of development practitioners. It can, and in many cases did, become an integral part of development cooperation. However, support for EU-based investors in partner countries may end up benefitting investors themselves, rather than the entrepreneurs in partner countries, in particular micro, small and medium enterprises.
EU policy makers need to ensure that the Neighbourhood and the World, Heading VI of the EU’s Multiannual Financial Framework 2021-2027, harnesses the contributions of the private sector to development goals and prevents it from causing harm. This policy paper argues that (1) there needs to be differentiation among various private sector actors in development cooperation, with a focus on supporting local private sector actors; (2) policy coherence for development instruments need to be enforced across sectors; (3) the EU should be cautious with increasing funding for Blending and Guarantee instruments, as their impact has not yet been properly assessed.
The development cooperation sector has long had a very difficult relationship with the private sector. One of the most heated discussions at The Third UN Financing for Development Conference in Addis Ababa in July 2015, focused on the active involvement of the private sector in development cooperation. On the one hand, there is a need for private sector resources to contribute to securing a balanced development of countries across the globe. On the other hand, there are doubts regarding the extent to which the interests of the private sector profit-making impede development paths. Local private sector can contribute to job creation and the improved quality of goods and services. At the same time, corporate human rights abuses are known to occur. Starting from supply chain issues, and ending with land grabs and extra-judicial killings, the corporate sector across the world can cause damage to sustainable development.
As the EU prepares for the final discussions on the Multiannual Financial Framework (MFF) 2021-2027, the development cooperation community rushes to express its opinions regarding the Heading VI, Neighbourhood and the World, and its private finance tools (CONCORD 2018). The draft Neighbourhood, Development and International Cooperation (NDICI) regulation with the European Fund for Sustainable Development Plus (EFSD+) and the External Action Guarantee are the focus of the debate, concerning whether the private sector can be given a share of resources to gain profits in areas previously safeguarded by public investment.
This policy paper discusses possible measures that can be adopted to ensure that the involvement of the private sector in development delivers on economic, social, and economic development goals. It outlines a set of recommendations that should be at the core of EU’s MFF 2021-2027 Heading VI.
Background of EU’s development cooperation policies
Since the 2002 Monterrey Conference, the global discourse on development cooperation has been shifting towards a broader understanding of the financial flows within the development cooperation field, encompassing public and private national and international funds.
This paradigm shift to public and private sectors’ cooperation has taken place also at the EU level. The EU’s DG DEVCO’s website maintains that the Official Development Assistance (ODA) can be only a small part of the development finance landscape, and that it needs to be seen together with investment, trade, good practices, and domestic resource mobilisation.
The role of the private sector in the EU’s vision of development cooperation has been growing since the Agenda of Change of 2011. Since then the EU has expressed its support for (1) a stronger local private sector in countries receiving development cooperation assistance, (2) leveraging private investments by businesses in partner countries, and (3) using policy dialogue to enable the business environment (European Commission 2011). Among the mentioned, most attention has been given to the guarantees provided for risky private investments in partner countries, which has become an important stream of EU aid. Since 2007 the EU has earmarked over 2 billion EUR to leverage investments in over 270 blended projects (European Commission 2015). In 2012 the EU launched the Blending in External Cooperation (EUBEC) platform, to mobilise public and private funding. The grants allocated to projects by 2015, mostly supported energy and transport infrastructure, already some of the most profitable sectors for private sector investment.
Blending also proved to be a favoured response to the EU’s Refugee crisis in 2015 and 2016. The European Fund for Sustainable Development within the External Investment Plan (EIP) of 2017 has been foreseen to leverage 44 billion EUR investment into EU Neighbourhood and Africa with the initial EU input of just over 4 billion EUR. The approved investment windows or priority investment areas have been: sustainable energy and connectivity, MSMEs financing, sustainable agriculture, sustainable cities, and digitalization.
Civil Society organizations were cautious about the EIP, pointing out that the negative formulation and understanding of migration shaped the EIP into an instrument of EU foreign policy, rather than development cooperation. They also insisted that the EIP was based around unsubstantiated claims and assumptions of sure links between investment, job creation, growth, and development. Instead, CSO’s advocated for prioritizing investment in local private sector actors, in particular, micro, small and medium enterprises (MSME’s) (Oxfam et al., 2016). So far, the EU has allocated nearly 2 billion euros to 28 guarantees which deal with microcredit (lending for MSMEs and agricultural business), sustainable energy, sustainable cities, digitalization, and local currency financing. Guarantees have been allocated to eleven financial institutions headquartered in the EU, USA and Cote d’Ivoire, such as European Bank for Reconstruction and Development, European Investment Bank, International Finance Corporation, and KfW (European Commission 2018a).
At the same time, 2018 marked the year when the overall aid delivered by the EU decreased, rather than increased. Thus, there has been a shift in development theory and practice from ‘top-down’ state-driven projects, to market-based initiatives led by the private sector.
The current negotiations of MFF 2021-2027 present an opportunity to ensure that investment in and by the private sector does not substitute public investment in development cooperation. It is also an opportunity to ensure the right measures are put in place to guarantee the investment in and by the private sector contributes to reaching development goals. This can be achieved by supporting local private sector actors and by ensuring the principle of policy coherence for sustainable development (PCSD).
Differentiation among various types of private sector actors and support the local private sector
Small and medium enterprises need to be strengthened as they offer access to resources for livelihood across the world. However, without differentiation between various private sector actors in development cooperation, multinational companies may gain easier access to public resources. Investments can be draining, rather than the cumulating of economic, social, and environmental resources. Consequently, investments may bring about instability, resource depletion, displacement and the increased reliance on wage labour below the poverty level.
Even though businesses are encouraged to comply with the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines on Multinational Enterprises, these are not binding instruments and cannot be enforced. Voluntary standard-setting initiatives and sustainability certification schemes have brought in their contribution, but currently they are not enough to ensure that the support to the private sector would strengthen the right kind of private sector actors.
A good illustration of this is the study of carbon footprint data of twenty-one of the US’s largest companies carried out by Walenta (2018) in a five year period (2010-2015), which found that under the current GHG Protocol: Corporate Standard (Protocol) companies were able to show a reduction in their owned emissions by 3 percent. At the same time, they did not need to indicate that the overall emissions of their value chains grew by 5 percent. This is just one example of opportunities to conceal the climate-related data in favour of initiatives that showcase a shift to sustainable development.
With the current Chapter VI of the MFF 2021-2027 there is a risk that a large portion of development cooperation funding will end up serving the interests of private sector companies from donor countries (within and outside of the EU). There are currently no criteria for differentiating among the economic actors that can apply for EU support through the EFSD+ instrument. The EU should prioritize local for-profit companies, cooperatives, social enterprises, and MSMEs, because these are often best placed to ensure decent livelihoods of farmers, workers, small-scale producers, local communities, and indigenous peoples.
An untapped resource: PCSD
The policy coherence for sustainable development (PCSD) principle is laid out in article 208 of the Lisbon Treaty, stating that ‘[t]he Union shall take account of the objectives of development cooperation in the policies that it implements which are likely to affect developing countries’ (TFEU). In practice, PCSD means that the governments need to ensure their policies don’t hurt the attempts of other countries to eradicate poverty and reach other development goals. It also speaks of improving opportunities to reach these aims by strengthening cross-sectoral cooperation.
Since the signing of the Lisbon Treaty, PCSD has become one of the main policy areas of the EU’s International Cooperation and Development policy. Following the Policy Coherence for Development Work Programme 2010-2013, PCSD has been included in the new European Consensus on Development, which foresees that PCSD should be applied across all policies and areas of the 2030 Agenda of Sustainable Development.
An example of an issue that has been raised through PCSD framework is the EU biofuels policy. EU subsidies for biofuels drove the demand for rapeseed and corn up, reducing the land available for food agriculture. The high demand also spilled over to third countries, where land-grabbing cases were reported by local farmers (CONCORD 2013). The European Commission’s proposal for establishing Multilateral Investment Courts for the settlement of investment disputes is another example of how EU policies may contradict development goals, as MIC’s pose a threat to partner countries in the face of foreign investors.
However, these and other PCSD issues have been tackled sporadically. The EU has been slow at making it a routine practice. CONCORD’s evaluation of the impact assessments carried out in 2018 show that only 5 out of the 76 of them were relevant to development. What’s more, only one out of the 5 cases presented an adequate analysis of its impact on partner countries. Even though the percentage was much higher in 2017, this shows how marginal PCD is in EU decision making (CONCORD 2018b).
PCSD also needs to be reflected on in the policy making process of the EU throughout 2021-2027. There needs to be sufficient and appropriate measures and tools in place to support it. There needs to be appropriate resources and understanding in place to carry out quality impact assessments.
In addition to this, there has so far been no evidence of the positive impact of blending, loans, guarantees and grants for the private sector on people’s lives in partner countries. Within the current Chapter VI of the MFF 2021-2027 the EU should refrain from increasing resources channelled into development through these instruments until their impact has been studied properly. Otherwise, the EFSD+ risks contradicting the development policies it is supposed to support.
Implications for EU policy makers
In order to ensure that the EU’s policies over the next Multiannual Financing Framework 2021-2027 contribute to the eradication of poverty and inequalities within and between countries, policy makers should acknowledge that private finance, while still important for development, cannot substitute public investment. Thus, policy makers should ensure that the Chapter VI of the next MFF:
- differentiates among the many and diverse private sector actors, focusing support around local private sector actors in partner countries;
- provides enough space and resources for the implementation of PCSD instruments;
- delays the increase of funding for Blending and Guarantees until a thorough impact assessment of these instruments is carried out, and their benefits for local communities in partner countries is better understood.
- Consolidated Versions of the Treaty on European Union and the Treaty on the Functioning of the European Union (TFEU) (2016). OJ C202, p. 141. Available at https://eur-lex.europa.eu/eli/treaty/tfeu_2016/art_208/oj (accessed on 06.11.2018.)
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- European Commission (2011). Agenda for Change, https://ec.europa.eu/europeaid/policies/european-development-policy/ agenda-change_en;
- Oxfam et al. (2016). CSO letter on the European External Investment Plan ahead of the Foreign Affairs Council of 28 November 2016. Available online https://library.concordeurope.org/record/1851/files/DEEEP-PAPER-2016-081.pdf?version=1 (accessed on 15.09.2018.)
- Walenta, J. (2018). The limits to private-sector climate change action: The geographies of corporate climate governance. Economic Geography, 94(5), 461-484.