The European Union (EU), along with other Organisation for Economic Co-operation and Development (OECD) donors, intends to fill the sustainable development goals’ (SDGs) financing gap by using aid as a lever for private investment. This promising idea is confronted with a knowledge gap on how to gear financial intermediaries and businesses towards concrete and accountable development goals. The evaluation of EU-funded investments in development countries and parliamentary scrutiny can bridge this gap, along with controversies on the interference of commercial interests in EU development policy.
The Sustainable Development Goals (SDGs) financing gap
With an annual budget of 11 billion1, Global Europe is the European Commission’s (EC) main financing instrument for external action for 2021-2027. It is a significant portion of the official development assistance (ODA) provided by the European Union (EU) as a whole, which amounted to EUR 70.2 billion in 2021 and represented 0.49% of EU gross national income.
The EU, being the largest donor in the world, has not yet met its 0.7% financial commitment. Even if it did, its aid budget would still not be commensurate with the needs of additional resources for developing countries to achieve the SDGs. This financing gap was estimated at USD 2.5 trillion annually at the time of adopting the SDGs. In 2024, multiple crises, like the COVID-19 pandemic, the wars in the Eastern and Southern Neighbourhoods, coups d’etat in the Sahel, and climate emergencies have not only reverted progress in achieving the SDGs, but have also deepened its financing gap, re-estimated by United Nations Conference on Trade and Development at USD 4 trillion per year.
Against this backdrop, OECD donors seek solutions that may expand resource mobilisation beyond the limits of public budgets. This is also the case of the EU Institutions, which have allocated a portion of the Global Europe Instrument to the European Fund for Sustainable Development Plus (EFSD+). The EFSD+ provides guarantees and subsidies to development banks and financial institutions (DFIs), including the European Investment Bank, so that they may combine these resources with other funds raised from capital markets, as well as their own. Their funding packages are in turn offered to investors, including private companies, which invest in developing countries, thus contributing toward bridging the development finance gap. According to the EC, the EFSD+ average annual budget of EUR 5.7 billion mobilises up to EUR 19.3 billion of public and private financing to help partner countries achieve the SDGs.
The increased use of credit and capital instruments in development cooperation is known as the financialisation of development. It has raised high expectations but also strong criticism. Some civil society organisations see it as a shift of political attention and scarce resources from the public sector and non-profit organisations towards private companies and financial intermediaries. Indeed, the most critical non-governmental organisations (NGOs) question the added value of this funding, stating that it merely subsidises investments that have been previously allocated to sectors, countries, and regions that are already served by commercial banks and private investors. They also point to a lack of accountability and evidence on the development impact of such solutions. Moreover, they warn against the possibility of ODA budgets resulting in private interests in weak regulatory environments, where profit can be made at the expense of the people’s lands, human rights, and good governance.
The Global Gateway strategy, for which the EFSD+ is the main financial tool, has further accentuated the controversy. According to NGOs, the strategy lacks transparency and clarity on its development orientation. It is also over-optimistic about its lever effect on the private sector, in an attempt to put commercial and geopolitical interests over development goals.
The knowledge gap
The EC, which provides strategic and policy leadership to the EFSD+ and its institutional architecture, should respond to criticism from NGOs with clear plans and reports on how the mobilisation of resources through the EFSD+ is contributing to development targets in priority countries and regions. However, when it comes to guarantees and blended finance, the EC and its Delegations on the ground do not have as much control as they have on grants.
Unlike grants, reimbursable aid is demand-driven. It depends, to a very large extent, on the investor’s initiative, who must not only repay the loan but also pay interest on it, and is difficult to impose with? the type of strategic and administrative conditions that grant beneficiaries typically accept. Moreover, the EU Institutions and financial investors in developing countries face several floors of financial intermediaries that make it more difficult to strategically manage the allocation of funds on the ground. Once the funds have been allocated, the collection of information on implementation and results is similarly difficult.
The way forward: enhanced evaluation and parliamentary scrutiny
Discussions on the opportunities and risks of EFSD+ have spilled over to the European Parliament (EP), whose capacities on aid scrutiny were enhanced by the Global Europe Regulation. However, these debates have not been sufficiently informed by evidence on the funds’ actual effects on their countries of destination, as the set-up of the EFSD+ was slow and did not reach a significant implementation rate in the first half of the multi-year financial framework (2021-24). On the contrary, the next EP faces the implementation of the most EFSD+ resources, along with the completion of the Global Europe Instrument and the design of a new Multiannual Financial Framework, that will partly coincide with the design of a new development agenda. In other words, it will be the right time for the EP to exert its scrutiny power on EU-funded investments in developing countries. The following are some ideas on how the EP, in collaboration with the EC, could contribute to improve accountability and learning on the EFSD+:
Clarify and narrow expectations
According to the Global Europe regulation, the EFSD+ must contribute to a wide array of goals, including job creation, climate change adaptation, support for vulnerable groups, the promotion of human rights, gender equality, poverty. etc. Consistently, the EFSD+ includes windows like “Human Development,” comprising broad sectors like health, education, and social protection, which creates high expectations. This reflects in the definition of investment programmes by DFIs which vaguely evoke many and diverse development goals in their investment programmes and make a loose use of terms like “poverty reduction.” In order for the EFSD+ to be properly evaluated, precision must be required for the strategic orientation of its investment programmes and pressure should be removed from these instruments to tick all the boxes of the sustainable development agenda.
Good management requires good measurement
The EC has developed an EFSD+ Result Management Framework that requires for DFIs to provide a concrete definition of results chains and consistent indicators. This is a great opportunity for accountability and result-oriented management, but it is not yet accessible to the public. Such a framework and its application to EU-funded investment programmes should be public, and its structure could serve as a basis for reporting to the EP.
Inequality marker
The EC has developed an inequality marker which aims to enhance reporting on EU aid by indicating the extent to which an intervention funded by the EU integrates inequality reduction goals. This marker should be incorporated to the investment programmes of European DFIs and their financial intermediaries.
The importance of evaluation
In development cooperation, it is common practice to conduct on-the-ground evaluations that assess the implementation and results of ODA-funded interventions, including longer-term impact on communities. Such evaluations follow internationally agreed criteria and well-established methods and standards. Considering the knowledge gap and controversies around the Global Gateway it is essential that this information reaches out to the EP.
Meta-evaluation and timing issues
While evaluation focuses on a single intervention, the EP scrutiny applies to the overall EFSD+ and Global Europe Instrument. The EC should provide the EP with meta-evaluations that aggregate findings from various sources. To this end, the EP must acknowledge that these evaluations are available long after budgetary implementation, long after the mid-term and final reviews of the GE Instrument. Yet, these reviews may present an opportunity to assess the effects of the guarantees and loan subsidies funded by the EFSD, the predecessor of the EFSD+, or other resources channelled through the European Investment Bank.
Compliance with EU standards
Considering NGOs’ claims about the negative effects of private companies’ operations on local communities, some of which are funded by DFIs, the EP should receive reports on the application of the Environmental, Social, and Governance standards – including statistics drawn from their grievance channels. This would be consistent with the Global Gateway idea that EU-funded investments in developing countries should reflect the EU’s democratic values.
1 All budgetary information in the brief refers to annual budgets, while most of the European Commission links indicated as references provide figures for the Multiannual Financial Framework that covers seven years.
This policy brief taps into TEPSA studies elaborated for the EP Development Committee including “The implementation of EFSD+ operations from an inclusive perspective” and “The future of the European Financial Architecture for Development”
