14 EU Development Assistance: blending
grants and loans
| Committee's assessment
| Politically important |
| Committee's decision | Cleared from scrutiny; drawn to the attention of the International Development Committee
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| Document details | European Court of Auditors' (ECA) Special Report: The effectiveness of blending regional investment facility grants with financial institution loans to support EU external policies
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| Legal base | Article 287(4) TFEU; —
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| Department | International Development
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| Document number | (36451), —
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Summary and Committee's conclusions
14.1 This European Court of Auditors' (ECA) Special Report looks
in detail at "blending" — an innovative form of
development financing increasingly used by the Commission —
which uses grant money to leverage additional loan financing in
order to achieve development outcomes. Blending is targeted to
investment opportunities, usually major infrastructure projects
with potential development impact, which could be viable but do
not attract sufficient funding from market sources.
14.2 Since 2007, the Commission have set up eight
regional investment facilities — essentially a pool of grant
money available specifically to leverage additional loans —
in eight different regions.[60]
These cover the entire sphere of external action outside of the
EU. In the period 2007-13, over €2.1 billion has been allocated
to these facilities. Blended finance proposals originate with
finance institutions, which bring projects to the Commission who,
through agreed governance arrangements, can approve, approve in
principle or refuse a grant to make the loan viable. The UK is
a voluntary donor to one of the blending facilities — the
EU-Africa Infrastructure Trust Fund (ITF). So far the Department
for International Development (DFID) has contributed £67million.
14.3 The ECA published this Special Report on 22
October 2014, under cover of the following press release:
"AUDIT IN THE FIELD OF EU EXTERNAL ACTIONS:
EU AUDITORS WARN THE INCOMING COMMISSION ON THE USE OF BLENDING
"Blending is the next big thing in EU development
policy funding. Operating in a budgetary straitjacket, the incoming
Commission will be under huge pressure to stretch the leveraging
of EU funds with loans to its limits" according to Karel
Pinxten, the ECA Member responsible for this report. "It
is paramount that blending is only used when the Commission can
clearly demonstrate its added value. The audit shows that this
was not always the case in the past" continued Mr Pinxten.
"For nearly half of the projects examined
by the auditors there was insufficient evidence to conclude that
the grants were justified. For a number of these cases there were
indications that the investments would have been made without
the EU contribution.
"While the European Court of Auditors (ECA)
report, published today, delivers a positive verdict on the set-up
and general effectiveness of blending regional investment facility
grants with financial institution loans, it points out a number
of key issues which need to be urgently addressed.
"Mr Pinxten referred to the risks which
arise when blending is not used with sufficient care and attention
— "Firstly, it may lead to a waste of EU development
funds when programmes/projects, that would have been undertaken
anyway, are subsidised. The Commission, when using blending instruments,
must make sure that it does not become the "sponsor"
of financial institutions. Secondly, if not used with great care,
blending may lead to a debt bubble in some third world countries
with limited revenues to service their debt".
"The Commission has indicated that it wishes
to extend the use of blending and this will involve a considerable
amount of development aid in future years. As at 31/12/2013, the
Commission had already entered into contracts for over €1.6
billion for the regional investment facilities".[61]
14.4 To improve the future management of blended
projects, the ECA recommends that the Commission should:
— ensure
that the allocation of EU grants is based on a documented assessment
of the added value resulting from the grants in terms of achieving
EU development, neighbourhood and enlargement objectives;
— disburse funding only when the funds
are actually needed by the beneficiary;
— improve its monitoring of the EU grant
implementation;
— increase its efforts to ensure that appropriate
visibility is afforded to EU funding by defining clear visibility
requirements for financial institutions and requiring the EU delegations
to be involved in visibility actions.
14.5 Full details are set out in the "Background"
section, together with the Commission's responses (see paragraphs
14.17-14.28).
14.6 The Parliamentary Under-Secretary of State at
the Department for International Development (Baroness Lindsay
Northover) is pleased that this report has contributed to the
evidence base on the Commission's use of blending, and that, in
general, the ECA found the set-up and general effectiveness of
blending to be positive. The Minister notes that blending is still
a relatively new form of financing, which the Commission is pioneering
— so it is right that the Commission continues to improve
and strengthen the project approval process over time. She is
also pleased that the Commission has committed to doing more to
strengthen its future management and demonstration of justification
for loans through the blending facilities; has fully accepted
the vast majority of the recommendations; and it is already working
to implement many of them. She notes that the Commission contends,
contrary to the report, that in each of the blended loans analysed
there was a strong justification for the loan, but accepts that
the failure may have been in effectively demonstrating it, rather
than in a misallocation of these grants; and concludes that the
Commission must do more "to establish additionality"
— evidence that blending is leveraging additional money
towards development objectives. She notes that the Commission
is resisting the proposal that the Commission has not yet committed
to adapting its ROM (Results Orientated Monitoring) process and
methodology to the specific characteristics of blending, and says
she will monitor progress on this: the results framework should,
she says, provide a basis with which to assess the projects financed
by the Commission's blending facilities, and, during implementation,
it will be vital to clearly define success criteria in order to
understand whether this is the best use of the Commission's resources.
The Minister would also like to ensure that the focus of the Commission
is not only on leveraging public sector finance, but also on unlocking
the significant private sector finance which is critical to realising
the potential for economic development (see paragraphs 14.29-14.31
below for full details).
14.7 This European Court of Auditors' Special
Report is in many ways like any other: most of its assessment
is positive, but some matters need attention; the Commission argues
over some of the details, but accepts the broad thrust of the
ECA's recommendation, and says that it is already implementing
at least some of them. What makes this warrant drawing to the
attention of the House, though, is the observation by the main
author that blending is "the next big thing in EU development
policy funding", and that with the incoming Commission inevitably
being "under huge pressure to stretch the leveraging of EU
funds with loans to its limits", it is "paramount that
blending is only used when the Commission can clearly demonstrate
its added value".
14.8 EuropeAid — i.e., the Directorate-General
for Development and Cooperation —implements a wide range
of the Commission's external assistance instruments financed by
the European Development Funds (EDF) and the general budget; almost
all the EDF interventions are managed by EuropeAid. Yet there
would seem to be a long way to go in the crucial area of metrics.
14.9 The Minister refers to the Commission's ROM
(Results Orientated Monitoring) process and methodology and its
results framework. As of now, however, the Commission has yet
to establish the sort of results framework that its counterparts,
both international and bilateral (e.g. DFID) have long-established,
to provide an accountability tool to communicate results to stakeholders
and a management tool to provide performance data to inform management
decisions, thus ensuring that resources are allocated efficiently.
14.10 Back in April, the then Minister (Lynne
Featherstone) declared:
"Better, timelier results data is vital
if we are to secure good value for money in our development programmes
and demonstrate this to UK taxpayers. This is something the UK
has been consistently calling for since DFID's Multilateral Aid
Review…was first published in 2011."
14.11 She pointed out that the proposal was not
something new and that, on the contrary, it would do no more than
bring the EU into line with other multilateral and bilateral development
actors, including her own Department. She also pointed out that
the costs of implementing a results framework would be "more
than offset in the long run by increased value for money from
Commission aid programmes."[62]
14.12 Yet, under the rubric "Using our experience
to improve the quality of our development engagement", EuropeAid[63]
nonetheless asserts that it "has a long and rich experience
in evaluation" and "recognises that the evaluation of
its interventions is crucial if it is to learn from experience
in order to enhance its effectiveness in development cooperation".[64]
14.13 This suggests that the new Minister might
need to do a touch more than simply monitor the Commission's progress
in adapting its ROM process and methodology to blending, and in
devising and implementing a proper results framework, if the clearly
defined success criteria are ever to be established that she rightly
regards as vital to understanding the effectiveness with which
the Commission uses the EU taxpayers' resources in its development
activities around the globe.
14.14 We also draw this chapter of our Report
to the attention of the International Development Committee.
14.15 We now clear the Court of Auditors' Special
Report.
Full details of
the document: European
Court of Auditors' (ECA) Special Report No. 16/2014 — The
effectiveness of blending regional investment facility grants
with financial institution loans to support EU external policies:
(36451), —.
Background
14.16 The European Court of Auditors carries out
audits, through which it assesses the collection and spending
of EU funds. It examines whether financial operations have been
properly recorded and disclosed, legally and regularly executed.
It also, via its Special Reports, carries out audits designed
to assess how well EU funds have been managed so as to ensure
economy, efficiency and effectiveness.[65]
14.17 This ECA Special Report looks in detail at
blending — an innovative form of development financing increasingly
used by the Commission. Blending mechanisms combine loans from
financial institutions with grants. Blending gives grant donors
the possibility of leveraging their external cooperation funds
by mobilising loans from financial institutions. It also allows
them to have an impact on the formulation of policies and/or on
the way projects are set up and managed. Furthermore, blending
loans and grants can promote cooperation between stakeholders
in development aid and can enhance the visibility of aid.
14.18 Since 2007, the Commission and the Member States
have set up eight regional investment facilities that cover the
Commission's entire sphere of external cooperation. Over the 2007-13
period, the EU allocated €2.106 billion to such facilities.
Development-finance institutions identify projects and apply for
grants, which are approved by executive bodies comprising the
Commission, Member States and other donors. The financial institutions
contract most technical assistance and monitor the projects.
14.19 The Court's audit covered the regional investment
facilities from when they were set up. The Court specifically
assessed the effectiveness of blending regional investment facility
grants with loans from financial institutions. The audit focused
on the setup and management of the regional investment facilities
and on the extent to which the intended benefits of blending were
achieved. The audit work consisted of an analytical review, interviews
with Commission staff, a survey of 40 EU delegations, 22 of which
replied, visits to the four main financial institutions and an
examination of a sample of 30 grants awarded to projects.
14.20 The Court concludes that blending the regional
investment facility grants with loans from financial institutions
to support EU external policies has been generally effective.
The regional investment facilities were well set up but the potential
benefits of blending were not fully realised due to Commission
management shortcomings.
14.21 The Member States and the Commission have ensured
that the regional investment facilities were properly set up and
they are now firmly established. The lending element of the funding
was mainly provided by four European financial institutions, which
identified the qualifying investments. Over the last seven years,
they have identified sufficient projects for committing the funding
available.
14.22 The 30 projects examined by the Court were
all judged to be relevant for the regions and countries concerned.
However, the approval process undertaken by the Commission was
not thorough, and the decisions to award the grants, at a particular
level, were frequently not convincingly evidenced. Guidance on
what criteria the Commission should use in its decision-making
was also lacking. Once grants were approved, the advance disbursements
were unnecessarily high. The Commission's monitoring did not ensure
that the added value of grants was achieved in all cases.
14.23 The regional investment facilities provided
the development partners with a platform for working closely together
and for undertaking very large projects, which would have been
difficult to finance otherwise. The justification for awarding
grants for blending with loans was clear in certain cases, especially
where concessionality criteria had to be met. However, in other
cases, in fact in about 50% of the cases examined, this was not
evident.
14.24 The Commission did not fully capitalise on
the potential for a positive impact on the way projects were set
up or for a wider impact on sector policy. The visibility of EU
support has been limited so far although the Commission started
to address the situation.
14.25 The Court makes a number of recommendations
for the Commission to improve the effectiveness of the regional
investment facilities. The recommendations concern project selection
and grant approval, disbursement of funds, monitoring of the implementation
of EU grants, and enhancing the visibility of EU aid.
14.26 The Commission welcomes this Special Report
as well as the draft recommendations, which it says will further
enhance the management of the blending facilities. With government
and donor funds being far from sufficient to cover the manifold
needs of developing countries, who need to attract additional
public and private financing to drive economic growth as a basis
for poverty reduction, and supporting inclusive growth and job
creation a key priority of EU external cooperation, blending is
an important vehicle for leveraging additional resources and increasing
the impact of EU aid. The Commission argues that the EU grant
often enables projects as a whole and can therefore mobilise more
additional financing than loans from financial institutions. The
Commission notes that it is responsible for set-up of the facilities,
which is assessed positively in the report, while the development
finance institutions are responsible for the daily management
of the projects and implement the budget tasks that have been
entrusted to them, in compliance with the rules of the indirect
management mode laid down in the Financial Regulation; the Commission
says it has devised this set-up taking full account of the potential
benefits of the facilities and considers that its management has
been adequate.
14.27 The Commission produces some 60 detailed comments.
In sum, it considers that:
— the
realisation of the potential benefits should take into account
the nature of the grants (e.g. technical assistance) and the results
of the implementation of the projects;
— the approval process was thorough: all
relevant stakeholders are adequately involved and the Commission
adapts the consultation process to the specificities of the projects,
and sufficient and complete information is available during the
decision-making process;
— added value is assured in all cases:
projects are submitted to the competent Operational Board only
when all the project components have been clarified and its added
value is apparent;
— justification for the financing was clear
in all cases; and
— in all cases, the priorities of the facilities
have been aligned to EU sector policies for each of the regions
(clearly stated in their respective Strategic Orientations).
14.28 Nevertheless, the Commission, says:
— the
arrangements for advance disbursements are being reviewed in the
new contract templates for financial instruments;
— it will look into ways for the achievement
of a wider impact on sector policy as well as for enhancing visibility
of EU support; and
— the recommendations made by the Court
are totally aligned with the reform of the facilities that the
Commission has started at the end of 2013 and which is now entering
the approval phase.
The Government's view
14.29 In her Explanatory Memorandum of 11 November
2014, the Minister professes herself pleased that overall the
blending facilities, and their initial set-up, were found to be
effective, and particularly that in many cases blending resulted
in projects that were better targeted towards development outcomes
than unblended loans.
14.30 She then continues as follows:
"It is, however, of some concern to the
UK that the ECA claims there was insufficient evidence of the
need for the grant element of the loan in many of the individual
projects that they analysed. It is important to strengthen the
evidence of the additionality of the grant element to clearly
demonstrate the value for money and general effectiveness of blended
finance. However, the UK notes that blending is still a relatively
new form of financing, and something that the Commission is pioneering
— so it is right that the Commission continues to improve
and strengthen the project approval process over time. The Commission
also contends, contrary to the report, that in each of the blended
loans analysed by the ECA, there was a strong justification for
the loan. The UK considers it essential that the Commission continues
to do more to establish additionality, however it accepts that
the failure may have been in effectively demonstrating it, rather
than in a misallocation of these grants. The UK continues to use
its position as a bilateral donor to the EU-Africa Infrastructure
Trust Fund to push for positive changes."
14.31 With regard to the Commission's response, the
Minister says:
"The Commission disagrees with some of the
specific conclusions of the report. For example it states that
the approval process was thorough and that the justification for
financing was clear in all cases. However, the UK is pleased that,
in accepting nearly all of the recommendations in the report,
the Commission has committed to doing more to strengthen its future
management and demonstration of justification for loans through
the blending facilities. As demonstrated in their response, in
many cases, the Commission is already implementing these changes.
"The Commission accepts all recommendations
of the report in full except for one of the specific actions to
improve its monitoring of its grant allocations, which it partially
acknowledges. This action was to include EU-Africa Infrastructure
trust fund (ITF) in the ROM (Results Orientated Monitoring) process
and adapt ROM methodology to the specific characteristics of blending.
The ROM process provides an independent review of EU funded external
interventions. The Commission has agreed that it will look into
whether the ROM can be adapted to suit blending, but has not committed
to including the ITF at this stage. The UK is content with and
will monitor progress on this.
"The UK also welcomes that the Commission
has already included a results framework in its project application.
In line with the recommendations of the report it is important
that this framework adds value to the application procedure, has
a real impact on grant approval and can provide evidence for projects
to be accurately assessed.
"The UK is pleased that this report has
contributed to the evidence base on the Commission's use of blending,
and that, in general, the report found the set-up and general
effectiveness of blending to be positive. The UK also supports
the recommendations of the report to increase management oversight,
especially around the need to show clear additionality of the
Commission's blended grants. The UK is, therefore, pleased that
the Commission has fully accepted the vast majority of the recommendations,
and that it is already working to implement many of them.
"Overall, the UK supports the Commission
in continuing to explore using innovative finance, such as blending,
to achieve development objectives. It is positive that the Commission
is seeking to improve the value for money of its limited grant
resources. However, in the medium term, the UK will need to see
a clear demonstration of additionality from blending - evidence
that blending is leveraging additional money towards development
objectives. The results framework should provide a basis with
which to assess the projects financed by the Commission's blending
facilities, and, during implementation, it will be vital to clearly
define success criteria in order to understand whether this is
the best use of the Commission's resources. The UK would also
like to ensure that the focus of the Commission is not only on
leveraging public sector finance, but also on unlocking the significant
private sector finance which is critical to realising the potential
for economic development."
Previous Committee Reports
None.
60 ITF: EU-Africa
Infrastructure Trust Fund AIF: Asian Investment Facility
CIF: Caribbean Investment Facility IFCA: Investment
Facility for Central Asia LAIF: Latin America Investment
Facility NIF: Neighbourhood Investment Facility IFP:
Investment Facility for the Pacific WBIF: Western Balkans
Investment Framework. Back
61
See http://www.eca.europa.eu/Lists/ECADocuments/INSR14_16/INSR14_16_EN.pdf. Back
62
See (35735), 17709/13: Forty-seventh Report HC 83-xlii (2013-14),
chapter 1 (17 April 2014), Paving the way for an EU Development
and Cooperation Results Framework. Back
63
EuropeAid: Directorate-General for Development and Cooperation
- EuropeAid implements a wide range of the Commission's external
assistance instruments financed by the EDFs and the general budget.
Almost all the EDF interventions are managed by EuropeAid. Back
64
See http://ec.europa.eu/europeaid/egeval_en. Back
65
See http://www.eca.europa.eu/en/Pages/ecadefault.aspx for full
details of the ECA's work. Back
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