Bankwatch

The current review of the European Investment Bank’s mandate for lending outside of the EU brings some of the pitfalls of the bank’s development lending to the fore and offers a chance for improvements.

by Xavier Sol, cross-posted from the Counter Balance blog

“The European Investment Bank is not a development bank, it is an investment bank designed to support EU policies, including external action”, Werner Hoyer, the president of the EIB repeated in the European Parliament on Monday. Looking at the EIB’s investment portfolio, the facts prove him right: The development impacts of the 6 billion euros that the EIB invests annually outside the EU often remain unclear.

Nevertheless the EIB has a development mandate, explicitly mentioned in the Lisbon Treaty and reaffirmed by the European Court of Justice (pdf). The current review of the document that defines this mandate (see box) offers an opportunity for EU decision-making bodies to take a closer look at the widespread NGO criticism of the EIB’s external lending.

The issues raised include problems with environmental pollution and a questionable approach to sustainable development. At the moment, however, most attention is being paid to increasing allegations of fraud and tax avoidance that come with a lack of transparency at the EIB, for instance:

  • The continued controversies surrounding the Zambian Mopani copper mine project led Christian Aid to file an official complaint demanding the publication of an internal EIB examination into alleged tax avoidance and neglect of pollution problems by Swiss commodities giant Glencore Xstrata’s.
  • Other corruption investigations are ongoing for the Sostanj power plant in Slovenia and the Ibori case in Nigeria.
  • The absolute lack of information on beneficial ownership for the EIB’s financing to intermediary institution (especially private equity funds) increases the risk of fraud and leaves the door open for tax dodging.

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Box – The EIB’s External Lending Mandate

The External Lending Mandate (ELM) (pdf) sets out the guidelines and priorities for the bank when lending outside of the EU. It determines the eligibility criteria for an EU guarantee for losses under loans when lending outside of the EU – except for ACP countries where the bank operates under the Cotonou agreement.

In theory when the EIB lends under its own risk these criteria don’t apply but in practice we see that the ELM determines the requirements for practically all its external loans. The next ELM will cover the period 2014-2020, with a mid-term review likely to take place in 2007.

The Commission’s proposal on the ELM has recently been sent to the European Parliament. The relevant committees will table their opinions in the next months and are expected to vote shortly after the summer, before the proposal goes to the Council following the EU co-decision procedure.

See more details on the legislative procedure >>>

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Quantity vs. Quality

During Hoyer’s hearing in the development committee of the European Parliament, MEPs focused on the volume of the EIB’s lending which is expected to rise significantly within the EU following the bank’s capital increase. But Hoyer emphasised that external lending will remain crucial for the bank and even asked the Parliament to safeguard a sufficient budget.

Rather than concentrating on quantity, we think that the EIB and decision-makers tasked to define its mandate first of all should focus on improving the quality of the loans. In that regard Thijs Berman (S&D) echoed our concerns that “too many project are lacking a clear development orientation” and that the EIB should look for “sound projects which are aimed at poverty eradication”.

Bill Newton Dunn (ALDE) raised the issue of financial intermediaries which are problematic due to their lack of transparency. “You say you keep track of every euro, please tell me your secret”, he asked Hoyer ironically. Dunn explicitly referred to the Ibori case (see above) and wondered how the EIB is addressing issues like fraud and money laundering.

While Hoyer recognised the risks and the need for more efforts to tackle corruption, the EIB has proposed little concrete action apart from awareness raising and trainings for its staff. The revision of its anti-fraud policy which is currently awaiting approval from the board is lacking coherence with other policy initiatives at international level such as the anti-money laundering directive or global initiatives to tackle tax havens.

Filling loopholes

The ELM provides the opportunity to remind the EIB of its development mandate and improve the quality of its lending. A key challenge is indeed to fill the gap between the technical wording of the binding EU legislation and the reality of the EIB’s operations on the ground which are often fraught with opacity.

MEPs like Dunn and Berman pointed out some of the weak spots. Other issues that need to be addressed in the bank’s next mandate are:

  • As the Sostanj case illustrated the EIB needs to find possibilities to freeze disbursements to companies that are under investigation by the EU’s anti-fraud office, OLAF and it should work out how to recover assets when beneficiaries have been found guilty of corruption.
  • In the fight against tax havens, following EU and US legislative initiatives, the EIB should demand country by country reporting from its beneficiaries.
  • More transparency is a classic demand. Above and beyond disclosing more information on beneficial ownership of its intermediated loans, the EIB should also proactively offer much more details on projects on its website.
  • Strengthening public participation in beneficiary countries, by affected communities and civil society at all project levels and information disclosure requirements would also mean a step forward for the bank.

The European Parliament is a key body to hold the EIB to account, and with the ELM it has an important tool at hand to significantly improve the way the bank will operate in the coming 7 years.

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Read more

Gaining control – A parliamentarian toolkit to get the EIB back on track

Counter Balance’s recommendations on the ELM (pdf – prepared in July 2012 for the European Commission’s assessment of the current external mandate of the EIB)

The proposed ELM text by the European Commission (pdf)

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