World's biggest investment bank in dire need of reform

World's biggest investment bank in dire need of reform

2nd March 2008

Glencore operations in Zambia, and Freeport's in DR Congo, come under a critical spotlight as NGOs critique the European Investment Bank.

The shadowy bank that has loaned £150bn of your cash

The Observer

2nd March 2008

The European Investment Bank is bigger than the World Bank or the IMF. Yet, critics complain, the little-known lender is lavishing taxpayers' money on 'pet projects', some of which fly in the face of development priorities.

Heather Stewart reports.

Middle Eastern sovereign wealth funds are bestriding the global economy, gobbling up assets, and private equity 'locusts' are grabbing a share of industry. But Europe has its own, taxpayer-backed investment bank, which has quietly doled out a mind-boggling 200bn euros (£150bn) over five years in loans. Now campaigners say it is time for the Luxembourg-based European Investment Bank to step out of the shadows.

Bigger than the World Bank or the International Monetary Fund, the EIB lends as much each year as the budget of the lavish Common Agricultural Policy, but few have heard of it. It faces little public scrutiny and holds just one press conference a year, something many banks in the red from the credit crunch would give anything for.

In a dingy conference room in Brussels last Thursday, the EIB's president, former Belgian finance minister Philippe Maystadt, proudly announced that it had recently completed its second ever public consultation; and it is 50 years since the bank was set up. EIB loans have traditionally been used to support reconstruction projects in the expanding European Union, and that's where much of the cash still goes, from power plants in Germany to railways in Spain. But an increasing proportion - almost 2bn euros last year, with plans for much more - is now spent in Africa, Latin America and the Mediterranean, often on controversial projects that campaigners say the EIB lacks the expertise to oversee. 'It's basically a huge black hole in the middle of EU development policy,' says Anders Lustgarten, of non-government organisation the Bretton Woods Project.

Richard Howitt, Labour MEP for the East of England, agrees. 'It doesn't have the capacity to assess projects internally - and the consequence is that British taxpayers' money is going to private companies, to fund oil pipelines and major infrastructure projects in the developing world, where there can be no assurance that there's no breach of labour standards, or environmental damage.' The European Parliament will debate the EIB's annual report this week, and Howitt plans to table amendments calling for independent, external evaluation of its projects.

Established in the Treaty of Rome, the EIB is underpinned by financial guarantees from EU member states, so it can borrow cheaply from the financial markets - much like the Treasury's ill-fated bond plan for keeping Northern Rock out of public hands. This gold-plated government guarantee - and the fact that it tends to stick to low-risk projects - means it has had little trouble raising cash, even after the credit crunch began. In fact, Maystadt says it has benefited from the resulting 'flight to quality'.

Although member states do not have to write the EIB a cheque every year, it uses the promise of their financial support to lower its borrowing costs, so its loans are in effect subsidised by European taxpayers. 'We are owned by all of the member states of the EU. They all have a triple-A credit rating, and the benefit of that is that because we don't have to make a profit, we lend the money on attractive terms,' says a spokeswoman. Some of the beneficiaries of this taxpayer-backed generosity seem strange. Many are high-profile, highly successful European firms, such as Spain's Telefonica, receiving support for expansion into new markets outside Europe; others are involved in projects whose social and environmental benefits are not obvious - though they may be lucrative investments.

In Zambia, for example, the EIB provided 50m euros (£38m) to the Swiss mining firm Glencore to back the Mopani copper mine, one of the world's largest. Glencore, which was founded by the controversial financier Marc Rich, is the largest shareholder in Xstrata, and thus a key player in the £44bn mega-mining merger with Brazil's Vale, currently under discussion. It had a turnover of more than £50bn last year. 'We don't understand why Glencore should benefit from a loan from the EIB,' says Anne-Sophie Simpere, of Friends of the Earth.

The Zambian government is seeking to renegotiate all its mining contracts, concerned that it receives a paltry share of the proceeds. There have been safety concerns about Mopani, and local people were poisoned by a leak of acid into local drinking water in January. 'As the financier of the project, the EIB could take measures against this,' says Simpere.

Eberhard Gschwindt, who oversees mining projects for the EIB, believes everything possible was done by Glencore and the local authorities to alleviate the situation. But he warned: 'From Luxembourg, we cannot micro-manage these kinds of incidents.' He says the EIB funding was specifically to pay for a smelter, which would reduce the pollution in the local area.

Asked whether he believes the EIB has the skills to assess the economic benefits of such projects, Maystadt said, 'We employ a lot of engineers - we have about 80 engineers, and experts in several fields, and certainly we have experts in the mining industry.'

But anti-poverty campaigners say mining expertise is beside the point, and the EIB should be focusing less on which projects are more profitable, and more on where it can do most good. 'They think Africa has nothing except copper, diamonds and gold; and they don't take time to study what's going on the ground,' Simpere says. One official who works regularly with the EIB says simply: 'Basically, they're bankers.'

The EIB's support for the Mopani project also underlines the mismatch between its approach and Europe's development priorities. In 2002, the EU launched a 'mining sector diversification strategy' for Zambia, aimed at developing alternatives to copper and cobalt, on which the country is heavily dependent; yet the EIB's loans still helped to fund a copper and cobalt mine.

'It's perpetuating anachronistic power relationships, and getting what Europe has always got from the developing world - cheap raw materials, and cheap labour: but it's doing it under the guise of development,' says Lustgarten.

In the Democratic Republic of Congo, the EIB is poised to provide up to 100m euros to US firm Freeport McMoRan for another natural resources project, the Tenke Fungurume copper and cobalt mine. Like Zambia, the DRC government is revisiting its mining contracts, many signed during years of civil war. The EIB says it will not disburse the loan until the Tenke deal has been cleared by Kinshasa. But campaigners are furious that by saying it was prepared to back the project before the review, the EIB appeared to be pre-judging the review's conclusions.

In Ethiopia, the EIB was one funder of the Gilgel Gibe dam, another hugely controversial scheme. Now in its third phase, it is being built by Italian construction firm Salini, which conceived the plan and secured additional funding from the Italian government.

The World Bank refused to back the scheme, because Ethiopia already has more electricity than it consumes - only 12 per cent of the population are linked to the power grid - so much of the new capacity is exported to Kenya; while the dam has displaced local tribes.

The procurement of the dam by the Ethiopian government is now under investigation by Italian prosecutors. The EIB argues it was only involved in providing funds for certain specific sub-contracts; but Salini was allegedly handed the project without formal tender.

Simon Brooks, Britain's vice-president at the EIB, says, 'if there have been irregularities in procurement, we will be very upset', but insists that he believes the dam is 'a good project'. In theory, the bank's lending decisions are democratically accountable, because they are overseen by a board of directors drawn from each of the member states, usually from the finance ministry - and its lending is constrained by a battery of specific targets.

But since these board members are based in their home countries, and meet just 10 times a year, for three hours, it is difficult to see how they can do more than rubber-stamp the 300 or so projects the bank undertakes every year.

Insiders say the real power lies with the EIB's management committee, which consists of eight vice-presidents, including Brooks, based at its headquarters. Minutes of its meetings are not published, but it is widely suspected that there is a culture of swapping favours, where one country agrees to support a favoured project in exchange for the go-ahead for their own pet plan. 'What you've got to understand about the EIB is that it's basically a very, very political institution,' says one person who knows it well.

There are questions in Europe too about how the EIB assesses potential projects. In Hungary, for example, it backed a new line for the Budapest metro which local politicians complained was not the cheapest or most efficient option.

A number of British-based companies, including BT, National Grid and Jaguar, have benefited from the EIB's largesse: it lent 4.2bn euros in the UK last year. It has also provided funding for a number of PPP and PFI deals, including schools in Newcastle - and to the doomed Metronet consortium to upgrade the London Underground. 'In Britain, when you turn on the tap, turn on the lights, or increasingly throw things away, you're probably involved in something the EIB has invested in,' says Brooks. He expresses surprise at how little known the bank remains in the UK.

Its approach may be low key, but it is a measure of how seriously member states take the power of the EIB that an unseemly political scuffle has broken out behind the scenes about who should be its next boss. With Maystadt expected to step down as president next year, half way through his allotted term, it had been assumed that a German would take over - particularly after the French installed their man, Dominique Strauss-Kahn, at the top of the IMF.

But now the Germans are making a bid for the presidency of the smaller but highly influential European Bank for Reconstruction and Development (EBRD). Angry Eastern European governments believe Berlin has done a shady deal, swapping the EBRD job for support for Italian finance minister Tommaso Padoa-Schioppa as Maystadt's successor.

The EIB is about to face greater scrutiny. When Tony Blair secured a review of the EU's budget in exchange for a deal on Britain's EU rebate in late 2005, he had the EIB firmly in his sights; and that review is due to be completed by next year. When the EIB's last lending mandate was negotiated, British officials also managed to have inserted a promise of a review of its operations by independent 'wise persons', due to be assembled in the next few months.

At the same time, a growing band of social and environmental campaigners, who cut their teeth on the World Bank and IMF, are scrutinising the EIB's work in the developing world, and on its own doorstep. They admit that the EIB is now at least trying to listen - but there is still a long way to go; and the horse-trading over the top job is a reminder that it is a deeply politicised institution with member-states accustomed to directing it towards their own pet projects. Anyone wanting to subject the world's biggest multilateral lender to radical reform will have a long, tough fight on their hands.