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The New EFSD+ and the EIB's

External Lending Mandate

STUDY

Requested by the BUDG Committee

Policy Department for Budgetary Affairs

Authors: Erik LUNDSGAARDE, María-Luisa SÁNCHEZ-

BARRUECO, Andreea HANCU BUDUI

Directorate-General for Internal Policies

PE 729.264 - February 2022

EN

The EFSD+ and the EIB's

External Lending Mandate

Abstract

This study provides an overview of the EFSD+, a core part of the NDICI -Global Europe Instrument. The study situates the EFSD+ in the context of previous EU experiences with the use of blended finance and guarantees to address external action objectives, focusing on the EIB's External Lending Mandate (ELM) and the European Fund for Sustainable Development (EFSD). The study examines key challenges related to the accountability and performance of these instruments to inform oversight of EFSD+ implementation. This document was requested by the European Parliament's Committee on Budgets.

AUTHORS

Erik LUNDSGAARDE, Independent Consultant

María-Luisa SÁNCHEZ-BARRUECO, University of Deusto

Andreea HANCU BUDUI, Independent Consultant

ADMINISTRATOR RESPONSIBLE

Stefan SCHULZ

EDITORIAL ASSISTANT

Lyna PÄRT

LINGUISTIC VERSIONS

Original: EN

ABOUT THE EDITOR

Policy depar tments provide in-house and external expertise to support EP committees and other

parliamentary bodies in shaping legislation and exercising democratic scrutiny over EU internal policies.

To contact the Policy Department or to subscribe for updates, please write to:

Policy Department for Budgetary Affairs

European Parliament

B-1047 Brussels

Email: Poldep-Budg@ep.europa.eu

Manuscript completed in February 2022

© European Union, 2022

This document is available on the internet at:

DISCLAIMER AND COPYRIGHT

The opinions expressed in this document are the sole re sponsibility of the authors and do not necessarily represent the official position of the European Parliament.

Reproduction and translation for non

-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is give n prior notice and sent a copy.

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The New EFSD+ and the EIB's External Lending Mandate

PE 729.264 3

CONTENTS

LIST OF ABBREVIATIONS 5

LIST OF BOXES 7

LIST OF FIGURES 7

LIST OF TABLES 8

EXECUTIVE SUMMARY 9

1. INTRODUCTION 13

2. BLENDED FINANCE AND GUARANTEES IN EU DEVELOPMENT POLICY 15

2.1.Definitions 15

2.1.1.Blended finance 15

2.1.2.Guarantees 17

2.2.Governance 18

2.3.Operational cycle 19

2.3.1.Blended finance 19

2.3.2.External action guarantees 20

2.4.Performance and Impact 22

3. PRECURSORS TO THE EFSD+: THE EIB'S EXTERNAL LENDING MANDATE AND THE EFSD 25

3.1.The EIB's External Lending Mandate 25

3.1.1.Rationale and Objectives 26

3.1.2.Governance and accountability 29

3.1.3.Implementation Profile 37

3.1.4.Assessment findings 45

3.2.The European Fund for Sustainable Development 51

3.2.1.Rationale and Objectives 52

3.2.2.Governance and accountability 55

3.2.3.Implementation Profile 59

3.2.4.Assessment Findings 64

4. THE EFSD+: FEATURES, PROSPECTS AND CHALLENGES 67

4.1.Context and Rationale 67

4.2.Governance and accountability 68

4.3.Expected Implementation Profile 70

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4.4. Overview of Current Policy Concepts 72

4.5. Key Issues in Monitoring EFSD+ Implementation 74

5.CONCLUSION 77

REFERENCES 79

ANNEX 87

The New EFSD+ and the EIB's External Lending Mandate

PE 729.264 5

LIST OF ABBREVIATIONS

ACP Africa, the Caribbean and Pacific

AFD Agence Française de Développement

CPF Common provisioning fund

DFI Development Finance Institution

DCI Development Cooperation Instrument

ECA European Court of Auditors

EFSD European Fund for Sustainable Development

EFSD+ European Fund for Sustainable Development Plus

EFSDr EFSD Regulation

EFSD-SB Strategic Board of the EFSD

EIB European Investment Bank

EIB-CM EIB's Complaints Mechanism

ELM External Lending Mandate

ELMd ELM Decision

ENI European Neighbourhood Instrument

EO European Ombudsman

EP European Parliament

EPPO European Public Prosecutor's Office

ESIF European Strategic and Investment Fund

FMO Financierings-Maatschappij voor Ontwikkelingslanden N.V.

FR Financial Regulation

GFEA Guarantee Fund for External Actions

HIPC Highly Indebted Poor Countries

IFI International Financial Institution

KfW Kreditanstalt für Wiederaufbau (German Development Bank)

LDCs Least Developed Countries

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MFF Multiannual Financial Framework

MoU Memorandum of understanding

MSME Micro, Small and Medium-sized enterprise

NDICI Neighbourhood, Development and International Cooperation Instrument

ReM Results Measurement Framework

TAG Technical Assessment Group

SDGs Sustainable Development Goals

SME Small and Medium-Sized Enterprise

WA Working arrangement

The New EFSD+ and the EIB's External Lending Mandate

PE 729.264 7

LIST OF BOXES

Box 1: Grant elements

under EU blended development finance 16 Box 2: Examples of EIB financing non-specific for climate change adaptation and mitigation 43 Box 3: Examples of expected results indicators by sector for ELM financed operations 46 Box 4: Example of a Guarantee called under the ELM 48

Box 5: Examples of EFSD Guarantee Agreements 60

Box 6: Examples of EFSD Blending Projects 61

LIST OF FIGURES

Figure 1: ELM

- Eligible countries per region 28 Figure 2: Signed financing per year under ELM (2014-2021, EUR millions) 37

Figure 3: ELM

- Financed countries per region 38

Figure 4: ELM Geographic Priorities 38

Figure 5: ELM Country Priorities 40

Figure 6: ELM Sectoral Priorities 41

Figure 7: Distribution of ELM Financing by Geography and Sector 41 Figure 8: ELM Climate-related Funding by sector (% of total climate-related funding) 42 Figure 9: ELM Climate-related Funding by Region 43

Figure 10: EFSD

- eligible countries per region 54 Figure 12: Sectoral emphasis of EFSD Guarantees (EU Contributions, EUR Millions). 62 Figure 13: Distribution of EFSD Blending Projects by Sector. 62 Figure 14: EFSD Guarantee Implementers (Share of Total EU Contribution to 2021). 63 Figure 15: Implementers of EFSD Blended Finance as of 2021 64

Figure 16: EFSD+

- Eligible countries per region 70

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LIST OF TABLES

Table 1: Calls made on the EU Guarantee during the 2014-2021 ELM (EUR million) 48 Table A.1: Evolution of ELM Financing 2014-2021 87 Table A.2: Regional Distribution of ELM Financing 87 Table A.3: Distribution of signed ELM Financing by Country 88 Table A.4: Distribution of ELM Financing by Sector 89 Table A.5: Distribution of ELM Financing by Region and Sector 90 Table A.6: Distribution of ELM Climate-related Financing by Sector 91 Table A.7: Distribution of ELM Climate Financing by Geography 91 Table A.8: Distribution of EFSD Blended Finance by Country (commitments). 92 Table A.9: List of Fragile and Conflict-Affected States, LDCs, and HIPC 93 The New EFSD+ and the EIB's External Lending Mandate

PE 729.264 9

EXECUTIVE SUMMARY

Background

Blended finance

and guarantees have attracted interest as tools to advance development goals because

they promise to mobilise additional financing for development by using limited public funds to perform

a de-risking function. While guarantees create a contingent liability for the EU budget, blended finance

products combine payable and non-repayable elements, often through regionally-oriented umbrella

facilities. Both tools rest on an increased reliance on development finance institutions and private actors

in development policy implementation. The technically complex features of these instruments raise policy and governance concerns, widening the gap and increasing asymmetry between public (EU) institutions and implementing actors from the viewpoint of specialised financial expertise and monitoring capacities. Inserting adequate ex-ante safeguards and ex-post accountability arrangements is of paramount importance to ensure compliance with EU development policy goals during

implementation. Hence the salience of concepts such as 'additionality' (linked to relevance) and 'results

measurement' (linked to performance), highlighted in literature. Within the framework of the Neighbourhood, Development and International Cooperation Instrument (NDICI -Global Europe ), the European Fund for Sustainable Development Plus (EFSD+) provides an

umbrella for blended finance and guarantee operations in EU external action. The EFSD+ integrates and

brings together lessons from formerly separate blending and guarantee instruments. The European

Investment Bank (EIB) has a long experience, starting in 1977, as a manager of external action guarantees

within its External Lending Mandate (ELM). The ELM provided a guarantee to back EIB lending in Pre- accession and Neighbourhood countries, countries in Asia and Latin America, and South Africa. By

contrast, EU experiences in blended development finance have centred on the regional blending facilities

that have expanded since 2007. Blending facilities have enabled the EU to provide innovative financing

for development and have been implemented by an array of multilateral and national actors. The original European Fund for Sustainable Development (EFSD) was the immediate precursor to the EFSD+. It was established in 2017 to facilitate investment in the European Neighbourhood and in Sub-

Saharan Africa. Like the ELM, The EFSD also integrated geopolitical goals, such as tackling the root causes

of migration. The integration of instruments reflected in the NDICI-Global Europe instrument and the EFSD+ expands

the financial and geographical scope for blended finance and guarantee operations, with an expectation

that financing priorities will follow the geographical emphasis on Sub-Saharan Africa and Neighbourhood countries outlined in the NDICI Regulation. The EFSD+ also aims to increase attention to investment needs in fragile states and LDCs.

With the EFSD+ legislative framework in place, the focus now shifts to how expected changes in blended

finance and guarantee operations will be implemented. This study concludes that attention to building

the evidence base on the effectiveness of guarantees and blended finance and to the management needs

of EU institutions to fulfil a stronger policy steering role are essential in monitoring the progress of EFSD+

implementation moving forward.

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Policy challenges

Managing a Diversified Development Finance Landscape Blending finance and guarantee instruments are implemented through indirect management. The ELM was an exclusive instrument for the EIB, while the EFSD has been impleme nted through a small set of DFIs, including the EIB. Even though the NDICI Regulation preserves an exclusive sovereign lending window for the EIB, the EFSD+ emphasises the promotion of an open investment architecture, implying that the selection of impleme ntation partners should be determined by their comparative advantages in advancing specific priorities. In a broader geopolitical context, the NDICI-Global Europe instrument signals an increased emphasis on mutually reinforcing cooperation among development finance

institutions (DFIs), alongside the European Commission, EEAS, the EIB and the EBRD. The 'Team Europe'

approach mirrors this shift, while enhancing the visibility of the EU's development contributions.

The Commission plays a gate-keeping role for DFI access to EU financing through the 'pillar assessment'

of eligible counterparts. The Financial Regulation depicts this examination as a technical shield to ensure

financial compliance and performance (thereby protecting the EU's financial interests). The inclusiveness

goal inherent in a commitment to an open financial architecture highlights challenges to expanding the

scope of participation in implementation of guarantees and blended finance beyond a relatively small group of DFIs. At ground level, preparatory work associated with blending and guarantee projects

stretches the resources of national financial institutions and agencies with more restricted mandates,

fewer resources and shorter experience. The 'European preference' principle whereby proje cts are primarily led by a European counterpart may consolidate a predominant position for traditionally stronger actors. At headquarters level, potential implementers may not have the same access to EU

institutions. The implementation of an open investment architecture will therefore require transparency

in the elaboration of selection criteria and attention to how priorities are communicated to potential

counterparts. The European Parliament should scrutinise the implementation of the open investment architecture and review how the collaboration between EU delegations and DFIs can be stimulated and improved in the context of the 'Team Europe' approach. Defining the implications of the 'policy first' principle

The 'policy first' principle foresees a strengthened alignment of investment priorities with the EU external

action agenda through strategic guidance and the integration of the EFSD+ into country programming

processes. It strengthens the strategic role of the Commission, the EEAS (including EU delegations) and

the influence of the EP through its resolutions. The policy first principle can be interpreted as both a top-down concept, encouraging implementation

to be strongly guided by an EU policy agenda or as a concept reinforcing locally determined priorities by

increasing the linkage of blended finance and guarantee operations to country-specific priorities. The EP

should remain vigilant in reviewing how the policy first approach addresses the second understanding

of the concept, focusing on development concerns associated with local ownership. In particular, the EP

should scrutinise whether the mandatory local consultations of stakeholders and beneficiaries are systematically organised, both through its scrutiny on the Commission and through independent hearings. The New EFSD+ and the EIB's External Lending Mandate

PE 729.264 11

Budgetary challenges

Enhancing technical expertise

The European Parliament should review the institutional adaptation in the Commission and EEAS to the

paradigm underpinning the EFSD+. This includes examining staff capacities or training needs on highly

technical matters linked to blended finance and guarantee instruments, in order to ensure that the EU

institutional actors are able to assume the increased management responsibilities concerning planning,

oversight and coordination that stem from the expansion of development finance operations through

the EFSD+. While the 'Team Europe' approach implies an interest in drawing on existing capacities within

the broader European DFI community to address deficits in staffing resources and expertise, the Parliament should consider what resources are needed within

EU institutions themselves to effectively

guide and review EFSD+ implementation.

Measuring additionality and performance

Assessments of blended finance point to challenges in measuring concepts that provide a rationale for

deploying these financing instruments. The concept of additionality, relating to the identification of

financial or development effects that would not have materialised in the absence of a given contribution,

has proven particularly difficult to operationalise. The regulatory framework for the EFSD+ emphasises

the importance of additionality, defined in relation to addressing market failures and crowding-in private

sector funding, as a core justification for applying its financing approach. The Commission is expected to

supply data on additionality alongside other indicators as part of its EFSD+ reporting obligations.

The experiences with the ELM and EFSD provide an indication of challenges in analysing the performance

of blended finance and guarantee operations. Difficulties stem not only from a lack of clarity on the

measurement of concepts such as additionality or leveraging effects but also from challenges in

distinguishing the effects of different financing streams and reconciling reporting frameworks for DFIs

that are subject to varied accountability frameworks. With the implementation of the EFSD+, the Commission aims to generate more consistent information on blended finance and guarantee operations through a harmonised results measurement framework. The European Parliament should review the

content and implementation of this framework to provide a foundation for substantive annual reporting.

Improving the quality of reporting for better scrutiny Our analysis of the precursors of the EFSD+ indicates that a strong regulatory framework exists that

enshrines sufficiently detailed reporting obligations. From that perspective, no major improvement is

needed. The implementation of these obligations faces practical challenges however, hampering effective oversight by the European Parliament and external observers. Reporting bodies tend to rely extensively on descriptive figures, expectations, and success stories. Obtaining a synchronous, relevant,

balanced, consistent and comparable picture of actual results from financial and operational reports has

proved challenging in the past. While rules on confidentiality of financial information admittedly constrain the reporting capacity of the Commission, a balance should be struck with its responsibility in overseeing the financial counterparts involved in budget management. From that perspective, the

Parliament's initiative to associate the ECA with the evaluation of the EFSD results was helpful. The

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12 PE 729.264

Parliament might wish to ask for improvements in the quality of reporting by the Commission as regards

compliance, performance, and control systems.

The study identifies

several areas for improvement that the EP might address through its scrutiny powers. A summary of relevant issues and recommendations is provided below.

Proposed areas of interest for EP scrutiny

Scrutiny of Compliance

What reasons justify the choice among technical assistance, guarantees, and other financial instruments? How does flexibility in instrument choice affect the attainment of programme goals? What factors explain the uneven resort to different instruments by sector and by region?

How can the framework to carry out systematic local consultations of stakeholders and beneficiaries be improved?

How does the Commission communicate expectations about calls on guarantees, report on calls and pursue the recovery of (at least a share of) calls on guarantees?

How can financial confidentiality and transparency requirements be reconciled to ensure fair project selection processes by DFIs?

Scrutiny of Performance

What are the drivers of the Commission's asset management policy as regards provisioning funds for guarantees? Are provisions placed in an efficient and prudent way?

How does the Commission's risk management framework affect decision-making and how does it influence DFI implementation choices? How can the Commission improve its oversight of project selection by DFIs to verify that the focus is placed on programme goals rather than merely supporting DFIs activities? Can sector- or region-specific patterns of project success -and failure be identified? How does the

EFSD+ facilitate learning about best practices?

How is the consolidated approach to blended finance and guarantees under the EFSD+ contributing to greater coherence and collaboration among EU institutions and European DFIs?

How do blended finance and guarantee operations complement other approaches in the EU development toolbox, especially in fragile states and LDCs?

Governance arrangements

How is the respect for EU policy objectives and standards ensured throughout the implementation chain by DFIs and financial intermediaries?

Accountability arrangements

Does the Commission oversee project implementation (performance and EU visibility) in a sufficient manner? Request ECA to carry out designated performance audits over guarantees in external action. Foster investment dialogue hearings in a more systematic way. The New EFSD+ and the EIB's External Lending Mandate

PE 729.264 13

1. INTRODUCTION

The European Fund for Sustainable Development Plus (EFSD+) is a key component of the EU's new Neighbourhood, Development and International Cooperation Instrument (NDICI), also referred to as

“Global Europe".

1 The EFSD+ builds on the EU's experiences with different development financing instruments, including blended finance and guarantees. These instruments aim to mobilise additional

investment for EU global development objectives by shaping the risk to return calculus for investors. They

are therefore considered to have a 'de -risking' function (Bayliss et al., 2020).

The NDICI

-Global Europe instrument has several ambitions. On a broad level, it aims to strengthen the

position of the EU as a global actor following a geopolitical logic. To expand the EU's global role, the

instrument provides a common framework to consolidate ten previously separate instruments, promotes flexibility in programming, and seeks to align instruments with global development objectives (Roba,

2021).

The current dynamic environment due to the COVID-19 pandemic provides an added stimulus for increasing the scale of the EU's development instruments and reorienting them to respond to new challenges (Bilal, 2020). Financing to support the achievement of the Sustainable Development Goals

(SDGs) lagged prior to the pandemic. However, the pandemic has given rise to a range of socio-economic

challenges globally that have resulted in added demands on strained financing sources (OECD, 2021).

Beyond creating additional financing needs, the pandemic has highlighted funding gaps with respect to

specific priority areas (e.g., the health sector) and for particular economic actors (e.g., small and medium-

sized enterprises). The ability of the NDICI-Global Europe instrument to adapt to the financing context

created by the pandemic offers a test of its flexibility. As implementation of the NDICI-Global Europe instrument proceeds, there is ongoing reflection on how to adapt and strengthen the European Financial Architecture for Development (EFAD). Debate on the future EFAD centres on how to make EU actions to promote sustainable development more cohesive and

impactful. Additional strategic engagement from the Council and a larger policy steering role for the

Commission present one dimension of proposed change. Another dimension of change relates to the

clarification of the respective strengths and future roles of diverse finance institutions that implement EU

programmes. This agenda raises questions about the division of labour between the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) as well as the

potential for improved coordination among national development finance institutions (DFIs) (Council of

the European Union, 2019; Council of the European Union, 2021).quotesdbs_dbs32.pdfusesText_38

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