In June 2024, the Trans European Policy Studies Association (TEPSA) published a policy brief by ECOPER chief consultant Aitor Perez. It discusses the scrutiny of EU-funded investments in developing countries, focusing on the European Fund for Sustainable Development Plus (EFSD+) and its role in bridging the financing gap for achieving the Sustainable Development Goals (SDGs).
The European Union (EU), as the largest donor globally, has not yet met its 0.7% financial commitment for official development assistance (ODA). Even if it did, the aid budget would still fall short of the additional resources needed by developing countries to achieve the SDGs. This financing gap, initially estimated at USD 2.5 trillion annually, has grown to USD 4 trillion per year due to multiple crises, including the COVID-19 pandemic, wars in the Eastern and Southern Neighbourhoods, and climate emergencies. These crises have not only reversed progress towards the SDGs but also deepened the financing gap.
In response, the EU and other OECD donors are seeking solutions to expand resource mobilization beyond public budgets. The EU has allocated a portion of its Global Europe Instrument to the EFSD+, which provides guarantees and subsidies to development banks and financial institutions. These institutions, including the European Investment Bank, combine these resources with other funds raised from capital markets and their own funds. The funding packages are then offered to investors, including private companies, to invest in developing countries and help bridge the development finance gap. According to the European Commission (EC), the EFSD+ mobilizes up to EUR 19.3 billion of public and private financing annually to help partner countries achieve the SDGs.
However, this approach, known as the financialization of development, has raised both high expectations and strong criticism. Some civil society organizations see it as a shift of political attention and scarce resources from the public sector and non-profit organizations towards private companies and financial intermediaries. Critics argue that this funding merely subsidizes investments that would have been made anyway in sectors and regions already served by commercial banks and private investors. They also highlight a lack of accountability and evidence on the development impact of such investments. Moreover, there are concerns about the potential negative effects on local communities, human rights, and governance in weak regulatory environments.
The EC, which provides strategic and policy leadership to the EFSD+, should address these criticisms with clear plans and reports on how the mobilization of resources through the EFSD+ contributes to development targets in priority countries and regions. However, managing guarantees and blended finance is more challenging than managing grants. Reimbursable aid is demand-driven and depends largely on the investor’s initiative. This makes it difficult to impose strategic and administrative conditions typically accepted by grant beneficiaries. Additionally, the involvement of multiple financial intermediaries complicates the strategic management and monitoring of funds on the ground.
To improve accountability and learning, the brief suggests several recommendations for the European Parliament (EP) and the EC. These include clarifying and narrowing expectations for the EFSD+, making the EFSD+ Result Management Framework public, incorporating the EC’s inequality marker into investment programmes, and conducting on-the-ground evaluations to assess the long-term impact of ODA-funded interventions. The brief also recommends providing the EP with meta-evaluations that aggregate findings from various sources and ensuring compliance with EU standards, including Environmental, Social, and Governance standards.
In conclusion, the brief emphasizes the need for improved accountability, transparency, and strategic management of EU-funded investments in developing countries. Enhanced evaluation and parliamentary scrutiny can bridge the knowledge gap and address controversies surrounding the EFSD+ and the Global Gateway strategy.