To boost its development cooperation and to fill funding gaps, the European Union is increasingly resorting to “blending”. While using tax payer-funded aid to encourage the engagement of private companies and investors in development can be helpful in certain cases, new Oxfam research has confirmed that private money is not a magical tool to end poverty. The EU should therefore ensure its private-sector initiatives don’t come at the detriment of continued public investment that has proven to achieve concrete, positive results, writes Hanna Saarinen, Oxfam’s EU policy advisor on investment in agriculture.
For years, African agriculture has suffered from underinvestment. African governments and aid donors are rightly looking at how best to increase funding to improve agricultural production and livelihoods. Responsible businesses can play an important role in this effort if their engagement really helps to achieve sustainable and equitable development and if it really works for people.
High hopes, but not enough evidence
Blending aims at lowering the risk of a company’s investment in a developing country, and hence attracting additional money for development. Oxfam has analysed blending operations in the agricultural sector, funded by the European Union, the Netherlands and the United States.
The result: there is a significant lack of data on the question of whether blending can actually help reducing poverty and inequality.
While the EU and other donor governments praise blending as a way to attract substantial additional funds for development, to create jobs and increase farmers’ revenues and agricultural production, our analysis shows that to date there is actually limited evidence to support such promises.
And the winners are… those already better off
The declared primary goal of international development aid is to support the most marginalised people. But research indicates that blending is better suited to support the development in lower- to middle-income countries or in countries with better public institutions, where the rule of law is respected. In the agricultural sector, it is more suitable for farmers with greater access to information and productive resources like land and funding, and who are ready to operate in formal markets. The reason is that such farmers are likely to involve less risk for investors.
This also means that blending risks to worsen social and economic inequalities between better-off people and the most marginalised who risk being left further behind. Structural and cultural discrimination against women also means that men rather than women are more likely to benefit from blending, unless well-designed targeted measures to support women entrepreneurs are put in place.
Blending also involves the risk of development aid being used to support EU-based companies and their commercial interests, rather than the local private sector, like smallholder farmers or smaller companies in the agri-food sector. Some of the blending facilities analysed by Oxfam, for example the Dutch Good Growth Facility, contain elements to specifically support businesses in the Netherlands to invest in developing countries.
Public finance better placed to address root causes of poverty
There are clear limits for private finance in agricultural development. The ultimate problem is that blended finance is not an appropriate way to address the fundamental drivers of poverty, exclusion and inequality: the lack of representation of many farmer communities in democratic processes as well as limited access to education and other basic public services. It is public support to agriculture, when done well, that has the highest potential to reach marginalised farmer groups, or those who operate in informal markets and are not convenient partners for formal private sector operations.
In that sense, blending risks being a poor match with the realities of the people it is supposed to support – and for the investors themselves who look for investment environments with sufficient infrastructure and reliable rules and regulations. A case in point is that, while there are huge funding needs at local levels, the EU has difficulties in finding suitable agricultural projects to fund through its blending programmes.
Empowering aid
While blended finance can fill a niche in specific country contexts and when dealing with better-resourced farmers, more evidence of results is needed to justify putting more development aid money into blending in the agricultural sector.
The starting point should not be how to best entice private sector actors to participate. Instead, aid programmes should be designed with a bottom-up approach, ensuring that partnerships are aligned with the interests of target countries and communities, and only then estimate whether private sector actors have a role to play.
There is a risk that too strong a focus on mobilising private finance distracts aid donors from core priorities of development aid. The EU should be a frontrunner in revitalizing public investment in agriculture to support the people who can make a real difference in feeding their communities and help them develop: small-scale producers, and especially women, who hold a potentially transformative role in that development.
For this, the EU should focus on empowering small-scale farmers and uplifting the role of women, for instance by supporting their land rights and their access to markets and finance. This type of work, supported by public funding, has in the past proven very powerful in reducing poverty and inequalities and should be strengthened.
Scarce development aid funds can only be used once – so the EU and other donors should be sure the money it spends has the strongest development impact possible and that the funding tools used are fit for purpose.
