Belgium moves in right direction with DFI reform, but more steps are needed
On 5 December, the Belgian Parliament voted in favour of the reform plan of its national Development Finance Institution (DFI), BIO-Invest. This indicates that 11.11.11’s report “Doing business to fight poverty”, which shares many of Eurodad’s concerns, had a significant impact. The report put BIO at the centre of the political debate after revealing that BIO has been investing in coal plants and luxury hotels through tax havens. The new law will put an end to these malpractices, although more steps are needed. BIO invests aid money in companies in developing countries. Therefore, it is not like other private companies, but is linked to Belgian development policy. That is why Eurodad and its member 11.11.11 have claimed that BIO should be judged on the goals of sustainable development and poverty reduction rather than anything else.
BIO exits from tax havens
The reform will forbid BIO from structuring its investments through offshore constructions in tax havens, since these contribute to capital flight and tax evasion. More specifically, the Belgian DFI will no longer be allowed to invest in companies or investment funds in countries that have an average corporate tax rate of less than 10% or in countries which refuse to comply with recently strengthened standards to automatically share bank information with other tax administrations.
As CSOs in Europe and globally have pointed out for years now, this is a crucial measure since developing countries annually miss out on billions of euros that could be derived from tax revenues.
The quest for return on investment continues
Although this reform should be considered as an important step in the right direction, more change is needed. In its report, 11.11.11 demonstrated that BIO often made wrong decisions as a direct result of its quest for return on investment. Without this expectation, BIO would be able to invest in more relevant projects and take the necessary risks which are inherently part of start-up entrepreneurship in developing countries.
This minimum return on investment contradicts, for instance, the government’s agriculture objectives to increase food security in partner countries through small-scale farming. Belgian CSOs are therefore calling for the creation of a special fund as part of BIO which would be exempted from the requirement to generate a minimum return on investment. This recommendation has not been picked up so far, despite the fact that BIO is open to the idea.
The use of grants to subsidise investments is part of reform plan
Another aspect of this reform is that it will make it possible for BIO to use grants to subsidise its investments, which in fact is a form of ‘blending’. In theory, this should make financing small and medium-sized enterprises (SMEs) in developing countries easier.
At the EU level, BIO already has some experience in using blending mechanisms which link EU grants with its loans and equity. BIO participates in one of the eight blending facilities - the EU-Africa Infrastructure Trust Fund - set up by the European Commission to support public and private investments in all of the regions where it has development cooperation programmes. Eurodad has repeatedly raised its concerns about the EU’s blending agenda and more specifically the European Commission’s narrative to increase private sector blending. Eurodad’s latest report on blending, entitled “A Dangerous Blend?”, finds that there is no reliable evidence to show that blending mechanisms meet development objectives. In addition, European blending mechanisms are being implemented with poor transparency and accountability. However, the reform does not mention something specific about this engagement.
In the case of BIO, as in the other development financial institutions involved, it is crucial to assess the added value of the grant element as there is a risk of wasting scarce ODA to subsidise private companies that do not need these resources for the project to happen.
Transparency still a major problem
CSOs have also repeatedly called for more transparency. The current law states that a management contract needs to be signed between BIO and the government to strengthen the relevance, coherence and effectiveness of the DFI. This offers the Belgian government a great opportunity to secure its development objectives and expectations. In addition, it will be possible to hold BIO accountable in cases where the DFI does not meet these objectives.
Nevertheless, there is still a lot of room for improvement. The reform plan does not address CSO demands to increase parliamentary supervision and to provide detailed information about the real development impact. Moreover, the plan does not mention concrete selection criteria for enterprises to receive financial support from BIO.
Eurodad member 11.11.11 believes that this reform is a step in the right direction, but also argues that the government could have shown more ambition. The withdrawal from tax havens is an important step, but to avoid the situation that ODA is used to build five-star hotels or fitness centres, the required return on investment needs to be addressed as well.