01.08.2013 | Eurodad

EC position on financing for development

Mixed report card

On 16 July, the European Commission released the latest in its annual series of “Accountability Reports” on financing for development, together with a communication on Beyond 2015: towards a comprehensive and integrated approach to financing for poverty eradication and sustainable development.

Eurodad has pushed for a more radical agenda in post-2015 discussions, with new economic norms and targets, but the Commission explicitly backed away from this challenge, stating that, “at this stage, the EU should remain open to dialogue with partners, and the Communication does not propose new actions or commitments for the EU.”

Leveraging private finance – where’s the nuance?

In its communication, the Commission adopts an uncompromisingly positive attitude to leveraging private finance, saying that all countries should, “use public resources to invest in areas that leverage private investments towards policy priorities.” They argue that  “blending of grants with loans and equity, as well as guarantee and risk-sharing mechanisms can catalyse private and public investments, and the EU is actively pursuing this.”

In the accountability report, the Commission makes the claim that there is an “average 34:1 leverage between ODA grants and project financing achieved so far through blending.“ Eurodad and allies have cast doubt on these assertions and called for a cautious, nuanced approach, arguing that there are also significant costs and risks attached to mixing public and private money. The work of CSOs has forced the Commission to recognize the concerns – but only in the accountability report, which says that: “Some civil society organisations have however raised concerns regarding the increased use of blending for five reasons: (1) insufficient access to information about blending operations; (2) unclear monitoring and evaluation methods; (3) opportunity costs; (4) risk of financial incentives outweighing development principles; and (5) debt risks for developing countries.” Referring to the blending platform, the EC claims that “consultations are held with civil society organisations,” – a description Eurodad does not recognise – in fact CSOs have been largely excluded from the work of the platform. 

The European Parliament has pushed the Commission to take these concerns more seriously several times. In its June resolution on financing for development, the Parliament called “on the EU to properly evaluate the mechanism of blending loans and grants – particularly in terms of development and financial additionality, transparency and accountability, local ownership and debt risk – before continuing to develop blending loans and grants”.

Aid: danger of reopening ODA definition

The communication notes that, “while the EU collective ODA slightly decreased in 2012, the EU Heads of State and Government reconfirmed their commitment to reach 0.7% of GNI by 2015 despite the difficult economic situation.” While this reaffirmation is potentially quite positive, there are signs that the EC supports watering down the ODA definition in order to achieve these commitments. The communication posits that “the ODA concept is increasingly criticised for being too broad or for neither covering all development cooperation providers nor all relevant actions” and argues that “a single solid basis for capturing all finance that benefits developing countries should be elaborated”. Eurodad has previously raised serious concerns about this agenda, which is being pursued through the OECD’s Development Assistance Committee. While a reassessment of ODA could remove elements defined as problematic by civil society groups, current proposals would risk increasing the amount of inflated aid including through counting more loans as aid and expanding the role of guarantees and risk financing. Other proposals would risk including security finance under the umbrella of ODA.

The accountability report’s section on aid (development) effectiveness casts a wide net in terms of issues discussed, but narrows down EU priorities to a few of the commitments made by donors at Busan in 2011. These priorities are joint programming and transparency, though other commitments to better division of labour, country level results and mutual accountability frameworks are also noted. As with most things related to aid effectiveness, progress is unclear on the majority of areas. A first post-Busan progress report is scheduled for the second half of 2013, which can hopefully shed more light on what has been accomplished. The communication takes a strong position on country ownership and states that “each country should take ownership and demand that all external finance follows their national development plans which integrate agreed goals, in line with Busan principles.” While this is quite positive it is also up to donors to ensure that financial flows are predictable and do not come with potentially destructive policy conditionality that undermines country ownership.

Tax: will the EU rise to the challenge?

The EC communication recognises the importance of domestic resource mobilization, and of of tackling illicit financial flows, two longstanding Eurodad priorities. The Commission rightly notes that “loss of tax revenue is only one part of the negative impact of such flows, as they also discourage legitimate investments and undermine the wider social contract.”

As in last year’s accountability report, the main focus is on capacity building in developing countries, and the report states that ”the primary responsibility for development lies within developing countries themselves.” While it is right that developing countries must lead their own development, the main responsibility of the EU must be to prevent negative external factors posed by EU legislation and policies, which currently facilitate large-scale tax evasion and avoidance by European companies operating in developing countries. This responsibility is largely understated in the report, and commitments are weak.

The EU awards itself a gold star on the commitment to ”exploring country by country reporting by MNCs, exchange of tax information, transfer pricing and asset recovery”. Though the EU missed out on a big opportunity to implement country-by-country reporting last year in the review of the Accounting and Transparency directives, they subsequently agreed it reporting for the banking sector, and EU leaders have a new chance when now negotiating the non-financial reporting directive; the perfect opportunity to put in place legislation that will require full country by country reporting by all large companies. This is a test of political will.

Further, while it is commendable that some EU member states have committed to automatic exchange of tax information, there is a risk that developing countries will be left out of developing the standard or forced to implement too early, as noted in Eurodad’s analysis of the recent G20 meeting. The report highlights efforts by member states to sign bilateral tax information exchange agreements and double taxation agreements (DTA). However, research by Eurodad member SOMO shows how DTAs are used by multinational companies on a large scale to avoid tax payments in developing countries, seriously questioning their development impacts.

The report rightly identifies the problem of how private sector actors use tax havens to conceal untaxed wealth, “through means such as obstacles to the identification of beneficial ownership, bank secrecy and conduit companies”. However, the report fails in promoting a major obvious step towards the solution of tax haven secrecy, namely the opportunity posed by the review of the EU Anti Money Laundering Directive to put in place public registries of the beneficial owners of companies, trusts and foundations. This is currently being discussed at the European Parliament and among Member States, and while the UK and France have been pushing, including at the G8, it seems other Member States are dragging their feet. Failing to put in place such basic transparency measures, should clearly be seen as a sign of unwillingness to truly combat tax dodging.

Europe ducking sovereign debt reform

While the communication argues that countries should, “follow responsible sovereign borrowing and lending principles”, there is no detail about what this means, or reference to existing proposals such as Eurodad’s Responsible finance charter or UNCTAD’s Principles on promoting responsible borrowing and lending, which Eurodad has analysed in a recent briefing note. Only two EU Member States have formally endorsed these UN principles, but have not yet reported on compliance or implementation.

There is also a mention of the need to “strengthen the international financial architecture for debt sustainability and absorbing shocks,” but again no detail or commitments. The obvious and essential answer, promoted by Eurodad and partners for many years, would be an effective, fair and transparent sovereign debt workout mechanism, that could force creditors to take their share of responsibility for irresponsible lending, and prevent the self-destructive austerity policies being forced on many unfortunate populations. The accountability report finds that “existing debt workout mechanisms for Low Income Countries (e.g. HIPC, Paris Club) need to be adjusted to reflect a changing reality”, and quotes the 2012 Council Conclusion’s commitment that the EU “supports discussions, if relevant, on enhanced forms of sovereign debt restructuring mechanisms“. The only European country that already supports the processes that are ongoing at the UN on this issue is Norway, obviously not a EU member state. Given the current disastrous sovereign debt situation in Europe, no continent would benefit more from taking a bolder approach.

As far as low-income countries are concerned, IMF and World Bank assessments prove that close to half of them are in debt distress or are in risk of debt distress, and may face debt crises. The communication acknowledges that such crises are increasingly difficult to prevent or manage as “private lenders and non-Paris Club official lenders have become more prominent creditors to developing countries.“

Worrying, the accountability report states that many EU states do not see a need for structural changes; they prefer to promote the use of collective action clauses (CACs). The limitations of CACs to prevent or solve debt crises are widely acknowledged, including by the IMF. This is particularly true for LICs, many of which do not even issue bonds – the only category of sovereign debt to which CACs would apply. Moreover, the EU commitment to “take action to restrict litigation against developing countries“ gets a red light in the Report, which notes that no EU Member State has taken new action in this field. The Belgian law against vulture funds is not even mentioned.

Forward to an international FfD conference?

The EC communcitation argues that “an international conference should be organised to develop a comprehensive and integrated approach to financing, building on the outcome of the Expert Committee and the processes preparing a post 2015 framework.” If housed under the UN, to build on past conferences in Doha (2008) and Monterrey (2003), this could provide useful impetus to adopting a more forward looking agenda that could tackle the underlying problems with financing for development. There has already been discussion at the UN on this, and Eurodad will continue to follow the process closely.