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  • on 13.07.2015
  • at 09:00 AM
  • by Naomi Cohen

Op-ed: Private sector must help EU boost impact of development aid 0

In an op-ed written for Afronline, Roberto Ridolfi, director of Sustainable Growth and Development at the European Commission, encourages the private sector to team up with the EU to increase the impact of development grants and loans. Ridolfi outlines the benefits of this practice, called “blending,” which he will promote at the joint African Union-EU panel “Catalysing private sector engagement and resources for development: the EU and African perspectives” on July 15 at the UN’s third “Financing for Development” conference in Addis Ababa.

In an op-ed written for Afronline, Roberto Ridolfi, director of Sustainable Growth and Development at the European Commission, encourages the private sector to team up with the EU to increase the impact of development grants and loans. Ridolfi outlines the benefits of this practice, called “blending,” which he will promote at the joint African Union-EU panel “Catalysing private sector engagement and resources for development: the EU and African perspectives” on July 15 at the UN’s third “Financing for Development” conference in Addis Ababa.

Substantial investment is required to improve people’s living conditions in EU partner countries. As government and donor funds are far from sufficient to cover these needs, countries need to attract additional public and private financing to drive economic growth as a basis for poverty reduction. In this context, “blending” is recognised as an important means of leveraging additional resources and increasing the impact of EU aid.

Consisting in mixing EU grants with loans from eligible financial institutions (preferably European but also regional FIs such as the African Development Bank and the Caribbean Development Bank), EU blending has developed since 2007 as a key tool in financing development. Regional blending facilities and risk sharing mechanisms have been created since, enabling to cover all regions involved in EU external cooperation. From 2007 to the end of 2014, around € 2 billion have been allocated to about 250 projects, enhancing the mobilisation of around € 20 billion from eligible finance institutions and leveraging around € 44 billion. The main sectors in which blending was involved were energy, transport and water as well as private sector or environment. The EU contributes to projects under different forms, namely technical assistance, investment grants, interest rate subsidies, risk capital and guarantees. Hence, blending has become a key instrument in bringing private and public actors together for the benefit of developing countries.

Like development in general, blending implies developing countries’ ownership of the process and active support of development objectives. The effectiveness and impact of EU grants is increased thanks to FI loans and more trust in the financed country to be in capacity and strongly committed to fulfil its development objectives. Blending projects’ selection implies screening that projects are in line not only with the EU development priorities, but also with national development strategies, attesting to strong support on the field for the project.

In the perspective of Addis Ababa’s international conference on “Financing for Development,” the European Commission has two main messages to pass on about blending:

1) The first message is that blending has proven to be an innovative, flexible and promising instrument for the coming years. Involving the key stakeholders, it has a potential role in the Finance for Development discussions, as the grant resources to be allocated for 2014-2020 are likely to be multiplied by 3 in comparison to the previous programming period. From 2007, high leverage has been achieved (€ 2 billion grants for € 44 billion investment, a leverage of 22) and in the last few years, the Commission has endeavoured to improve the efficiency of blending and strengthen coherence with EU policies.

2) The second message is a question: what can blending propose today so as to improve its results and its impact on development? The European Commission has developed and is developing “Blending 2.0,” a new step in the development of blending so as to increase blending’s development impact. To sum up, it consists of making blending broader, deeper, smarter and faster.

Broader” because new initiatives have been developed so as for blending to cover new areas of development. The African investment facility, based on the model of the existing blending facilities, will aim to expand the investment leveraged in Africa with a larger scope than under the EU African Infrastructure Trust Fund, for instance, towards private sector development or support to the social sector. The AfIF will be operational in 2016. Moreover, new Commission initiatives entitled AgriFI and ElectriFI are designed to contribute to inclusive and sustainable growth in developing countries by supporting the private sector to provide business opportunities respectively in financing farmers and agri-entrepreneurs for AgriFI, and in accelerating access to reliable, affordable and sustainable energy services for ElectriFI.

Deeper” means that more resources are going to be allocated to blending, allowing blending to operate on a larger scale. EU grants are expected to at least double under the current 2014-2020 financing framework to reach up to € 8 billion that would enable around € 100 billion of total investment globally.

“Smarter”: thanks to more innovative ways of blending loans and grants, such as reliance on the private sector or the provision of non-sovereign loans,the management of TA will be an even more effective one and address debt sustainability.

Blending has also become “faster” thanks to the modernisation of EU blending governance. The works achieved by the EU Blending platform, involving different stakeholders such as FIs, produced 7 reports and enabled to streamline EU blending’s governance and management. These reports and additional information on the platform’s contribution are publicly available.

Another key contribution of blending is its role in fighting against climate change. Climate change windows created in all EU regional blending facilities allow a transparent tracking of all climate change-related projects funded by the EU and European FIs. From 2007 to 2014, 62 percent of blending projects were climate-relevant, attesting to the fact that blending is also a major source of financing for the fight against climate change. Blending’s contribution to leveraging private financing in the fight against climate change is to be underlined in the perspective of the preparation of Paris COP21 in December 2015.

Involvement of different actors is central in leveraging financing and addressing investment needs. A relevant way for it is to contact EU delegations responsible for identifying projects with financial institutions.

by Roberto Ridolfi

Photo Credit: Flickr/FAO News (Roberto Ridolfi, Director for Sustainable Growth and Development at the European Commission)

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