The document discusses reforming the European development finance architecture. It notes there are overlaps, gaps, and inefficiencies between the main EU institutions like the EIB and EBRD. It presents three options for improving coordination: 1) Make the EBRD the central institution; 2) Create a new institution with the EIB, EBRD, and others; 3) Build on the EIB subsidiary and portfolios. Short-term measures include improving political guidance and using new funds to incentivize better cooperation. A reformed system should focus on Africa and climate issues while also improving the business environment.

1. Remarks at SITE’s Development Day
Erik Berglof
London School of Economics and Political Science
Reforming the business
environment/investment
climate
Implications for European
development finance architecture

2. Example: EBRD and Russian Venture Fund
Copy Israeli Yozma – ten funds to develop a private VC market
1. Basic legal framework
2. Fund 1: Co-investing with Russian state-owned bank
3. Fund 2: Politically exposed person owner of the bank
4. Fund 3: Middleman suspect
RVC since then gone through several incarnations, but...

3. Investment climate:
Research – policy – implementation
• Transition => Law & Finance field => World Bank ”Doing Business”
(laws on the books); EBRD Business Environment Enterprise
Performance Survey (actual enforcement of laws) - made Andrei
Shleifer the most cited economist in the world
• Promote growth by changing specific laws or institutions
• Change business environment very difficult; political economy
• Investment climate – critical for sustainability of development

4. Getting rid of trade barriers on the books not enough
Source: World Bank Doing Business Survey, EBRD/World Bank BEEPS survey.
0
20
40
60
80
100
120
0 0.2 0.4 0.6 0.8 1 1.2
BEEPS: Are Customs and Trade Regulations an Obstacle to Business Operations?
DoingBusiness:TradingAcrossBorders
EST
LTU
SLO
HUN
MNT
CRO
SLK
BLG
LVA
FYRoM
BIHALB
ROM
SRB
POL

5. How to change development architecture
• Must strengthen domestic resource mobilisation in recipient countries
• Increase the scale at which Africa is assisted
• Deliver development assistance in new ways
• Need to facilitate private and institutional capital into development
• Require reforms to the investment climate (business environment)

6. • Policies in recepient countries – investment climate (governance);
debt sustainability; development of local currency and capital markets
• Policies in sending countries – regulation of institutional investors;
• Intermediation by international and national development finance
institutions; more equity; exercise governance

7. Different context
• New challenges – new instruments (not just grants) – ”old” institutions
• Many more players – good, but risk of fragmentation
• G20 Eminent Persons Group: systemic perspective + coherence
• ...but also a window in European development finance architecture

8. State of European development finance architecture
• Europe plays an important global role, but architecture also complex,
composed of a multiplicity of actors at EU and national levels.
• Overlaps, gaps and inefficiencies, sectoral and geographical,
especially in terms of presence and experience in Africa, of the main
European multilateral finance institutions, EIB and EBRD.
• Lack of experience in main institutions in countries with fragilities

9. EU- level institutions
• EIB – significant presence outside the EU and strong experience from
sovereign lending. Large-scale, low-risk private sector operations, but not
set up to crowd in private finance. Limited presence on the ground. ”Policy
taker” with little development experience and unsuitable risk practices
• EBRD – most experience from private sector and sub-sovereign lending;
strong innovation capacity; more of a development institution with strong
ground presence and suitable risk practices; not the same level of EU
control, non-EU shareholders; business model in fragile states?;
• Neither have significant presence in countries with large fragilities
• Neither can currently effectively deliver on education and health

10. European Commission
• Commission needs upskilling to lead effectively on development
• Scattered across several DGs without clear leadership
• Not sufficient attention and visibility at the highest political level
• Increasing overlap between core institutions (EIB and EBRD)
• NDICI + EFSD steps in right direction
• Good experience of country strategies and programming
• Global reach through delegations

11. National development finance institutions
• Important players delivering on EU development financing
• Good development impact and good sector coverage
• Good presence on the ground
• Delivers on national priorities, not necessarily aligned with EU

12. Short and medium term measures
• Improve weak political guidance and coherence of EU policy steer
• Improve visibility of EU development policy
• Create a strong EU development policy centre
• Incentivise European actors to work better together
• Using new NDICI instrument for improvement
• Ensure EU development financing efficiently delivers on EU priorities

13. Three options for EBCSD
• Work as part of the larger system with global institutions and national
development finance institutions
• Option 1: with EBRD at the centre (consent of non-EU shareholders)
• Option 2: new institution with EIB, EBRD and others as shareholders
• Option 3: build on EIB subsidiary and EIB external portfolios
• Option 4?

14. Conclusions
• Focus on Africa and climate, but also improve business environment
• Short-term measures + standstill on EIB-EBRD expansions
• creating a strong policy centre in the EU
• using the proposed NDICI as a catalyst for improvement
• concrete actions until a political decision taken on institutional restructuring
• Strong need for EBCSD – coherence of European development finance
• 3 options - Option 1 better development impact, but highly political
• All options should be explored in proper feasibility studies in 2020
• Unique opportunity: urgent need for reform + institution looking for mandate