EU Blending Facilities: Implications for Future Governance Options

This paper discusses the complementary use of grants and loans ( blending ) in the European Union’s (EU) external assistance. The wise persons' report (the so-called "Camdessus" report) established in the framework of the mid-term review of the EIB's external mandate suggested the creation of an "EU platform for cooperation and development". The Proposal for a Decision on the EIB external mandate (COM(2010) 174), which is under discussion, suggests that the Commission should study the development of this platform. The report's executive summary (p. 4) states: "The Commission and the EIB, in close collaboration with the Member States, should establish an “EU platform for external cooperation and development”, i.e. a mechanism for blending grants and loans. This report considers the pros and cons of possible future governance options for such a co-ordinating platform.

Whilst blending has emerged rapidly and is now common practice in development finance, there is currently a limited evidence base on the effects of blending. Whilst a sizeable literature exists about the theoretical use of loans and grants, there is little on how it works in practice, which methodology or procedure works best and whether a certain governance model is more effective in reaching its objectives. With respect to the EU’s existing blending facilities in particular, we face challenges because the majority have only been operational for less than three years.

Blending mechanisms, when adding grants to loans, aim to achieve a number of objectives, including the need to increase the volume of development finance in a context of constrained resources. A literature review suggests that compared to pure loans, blending mechanisms allow for:

• Making transfers to heavily indebted countries without exacerbating debt overhang problems; (although in practice most of the EU blending facility grants go to projects in the form of technical assistance and hence the grant element tends to be low in the facilities we examined, with a few exceptions);

• Addressing positive externalities to bring the financial rate of return closer to the economic rate of return for projects with a high socio-economic and/or positive environmental impact;

• Improving the quality of funded projects (in practice the grant component also allows projects to be funded which otherwise recipients are unable to finance, in addition to improving the quality of projects compared to a no grant situation);

• Strengthening ownership by funding measures which build on recipient countries’ policies; and to which the partner provides their own resources;

• Enhancing EU visibility, and supporting the division of labour by strengthening coordination between EU donors and lenders.