With nothing to require companies to invest in line with the development agenda, corporate ventures in Africa might come to resemble Chinese neocolonial corporate models that do not actually alleviate poverty but rather enable it.
The European Union’s annual Development Days event brings together hundreds of policymakers, experts and practitioners to discuss how to invigorate development assistance. The gathering serves as a convenient point of reflection, not only on the EU’s overall policy approach, but also on the major policy developments of the previous year, such as the introduction of the European Fund for Sustainable Development (EFSD) in late 2017 and the European Parliament’s April proposal to restructure the sovereign debt financing system.
Coupled with an overall increase in development funding over the next decade, one could argue that the EU is taking major steps to magnify the impact of its development assistance. However, significant concerns about the ultimate effectiveness of the EFSD, the private sector component of the European External Investment Plan (EIP), as well as a weak response to the European Parliament’s sovereign debt initiative have dampened enthusiasm about where the EU’s development policy is heading in the long term.
In May, just before Development Days, the European Commission unveiled the EU’s new budget for 2021-2027. Coming in at €123 million, the final budget exceeded all expectations and includes a 20% increase in allotments for development policy. This is even more impressive when considering the eventual loss of €1 billion from joint EU programs due to the United Kingdom’s expected departure from the union.
However, this optimism is tempered by uncertainty surrounding the new EFSD that aims to promote private sector investment in Africa and countries “near the EU” by leveraging investment risks through public funding guarantees. Also known as “blending,” private sector involvement in development has been around for a decade to help implement the EU’s 2030 Agenda for Sustainable Development, which attempts to tackle the most pressing challenges facing humanity by the ambitious deadline of 2030.
But if private sector development financing is counted toward official development assistance (ODA), as a new Organisation for Economic Co-operation and Development methodology proposal suggests, this will mean rerouting funds to companies instead of traditional financing recipients, such as governments and civil society organizations. This is not necessarily a bad thing, as long as private sector actors are ultimately as effective in achieving the sustainable development goals normally funded by ODA.
This aspect of blending still seems to be aspirational. A European Commission evaluation of similar blending instruments over the past 10 years did not demonstrate a substantial development impact. The exception was among middle-income countries, as opposed to the poorest nations the EFSD purports to assist. Additionally, a separate EU evaluation of previously used blending mechanisms shows that some projects could have been financed solely through private capital. This contradicts one of the main arguments in support of blending, which is that private financing would have been too risky.
Another concern with the EFSD is that the system which is supposed to ensure a company’s investment goals is aligned with the sustainable development agenda is rather weak. While a number of civil society organizations pushed for the mandatory inclusion of corporate, governance and environmental criteria in the selection process in the end, the final regulation just includes a watered-down “preference” for companies that disclose this information. In addition, the European Parliament was only given observer status on the EIP steering board, meaning it does not have decision-making influence on the strategic direction of the fund. The overall success of the EIP will depend on the ability of the European Parliament to fully exercise its observer role and call out potentially dubious investment projects.
Oversight of how the funds are ultimately used could also become an issue. Take for instance the increasing diversion of funds from development initiatives to refugee and security projects, despite the EU’s public commitment to the 2030 agenda. Instead of going to the countries with the greatest development financing needs, these funds are going to countries that are the greatest source of migrants. A similar scenario could emerge with the EFSD.
With nothing to require companies to invest in line with the development agenda, corporate ventures in Africa might come to resemble Chinese neocolonial corporate models that do not actually alleviate poverty but rather enable it to become more entrenched through low wages and little to no reinvestment of profits in the local economy.
All of this comes at the expense of genuine efforts to make sovereign debt financing work for development. For some African countries, debt servicing is a major expense that eats up a large portion of a nation’s GDP — money that could otherwise be used to pursue development objectives. The European Parliament’s call to establish a “binding international framework for orderly, predictable debt restructurings” would prioritize debtor countries’ development needs over creditors’ more narrow interests. Yet despite these advantages, the European Commission continues to be reticent about adopting a binding code of conduct for private sector actors.
Although the EU is undertaking major steps to increase financing for development, there are plenty of reasons for caution. Close attention must be paid to monitoring how the EFSD will be implemented in practice, to see whether this instrument will actually work in the interest of developing countries it’s supposed to help. Moreover, a strong investment fund should be complemented by a strong sovereign debt financing mechanism that puts an end to spiraling developing countries further into unsustainable debt.
*[Young Professionals in Foreign Policy is a partner institution of Fair Observer.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.