Private
finance
Debt
Tax
justice
Aid
Financial
architecture

Eurodad advocates for more effective flows of development finance to developing countries. In recent years, development institutions have dramatically increased their lending and investments to the private sector. As a result, Eurodad’s work is increasingly focusing on these flows.

The increasing shift towards the private sector in development finance is based on the uncontested assumption that greater private financial flows to developing countries are an effective way to support development, regardless of the terms and conditions under which they take place. Indeed, a vibrant private sector is crucial for development, as it creates jobs, provides essential goods and services, and is a source of tax revenue. However, not all private sector activities have a positive impact in development terms.

Eurodad research shows that public flows supporting private sector investments have failed to deliver positive development outcomes in the past. All too often development finance institutions support investments by large transnational companies from rich countries as opposed to smaller companies in poor countries. These institutions also fail to ensure that the companies they invest in comply with a minimum set of responsible finance standards, which would ensure they pay their fair share of taxes in the developing countries where they operate.

Eurodad believes that certain conditions need to be put in place to make sure that private investments have a positive impact on the poor. It works to put forward proposals to increase the development effectiveness of increasingly diversified North-South financial flows, and to ensure that all these flows comply with responsible financing standards.

For decades, donor governments and multilateral institutions have provided grants and loans to private sector companies operating in developing countries. However, the scale of this support has increased dramatically since the 1990s. In 2010, external investments to the private sector by international financial institutions (IFIs) exceeded US$40 billion. By 2015, the amount flowing to the private sector is expected to exceed US$100 billion.

Bilateral development finance institutions (DFIs) from industrialised countries and private sector arms of multilateral development banks (MDBs) have channelled most of these flows. In the past, this support has been in the form of loans, equity investments and guarantees. However, recently these institutions have begun to provide an increasingly larger share of overseas development assistance (ODA) to the private sector.

The increasing role of these institutions as key players in the development finance agenda has taken place despite the lending institutions’ unclear development mandates and poor track records for delivering pro-poor development results.

Eurodad is committed to deepening the knowledge among non-governmental organisations (NGOs) of the quantity and quality of these flows, their impacts on development and the role and policies of DFIs. 

DFIs and IFIs have historically focused on infrastructure and energy. However, since the global economic and financial crisis, most institutions have massively increased investments in developing countries’ financial sectors. The World Bank’s International Finance Corporation (IFC) is the leader in this field with more than 40% of financial sector investments, a proportion that is growing steadily and a pattern that other institutions have followed.

Commercial banks are by far the largest recipients of funds among financial intermediaries (FIs), although private equity funds and other opaque investment mechanisms are quickly becoming favoured vehicles. This has increased the lack of transparency over the use and effectiveness of public development finance.

One of the main arguments provided by IFIs and DFIs to justify this massive shift to the finance sector is their willingness to scale up funding for micro, small and medium- sized enterprises (MSMEs). However, besides general statements of intent, it is almost impossible for external stakeholders to actually track whether development money has reached the intended beneficiaries (MSMEs). This is because the financial intermediaries do not provide disaggregated data in their annual reports about which projects and companies they supported and what development impacts were achieved.

Together with members and allies, Eurodad is committed to putting forward proposals to ensure that the funds channelled through FIs are accountable, transparent and development-oriented. 

The notion that public investments should be used to ‘leverage’ additional investments from private actors is increasingly used in a variety of development finance forums. The World Bank has become one of the leading proponents of this concept, in some cases with aid and in others with guarantees. Several European governments and institutions have followed this pattern.

In practice, different DFIs are using a set of different financing instruments to channel their funds. The most prevalent by far are direct loans to domestic and non-domestic private sector enterprises in developing countries. However, the use of equity as a financing instrument is rising rapidly.

In addition, many donor agencies and international institutions are increasingly supporting public-private partnerships, ‘blending’ facilities and other mechanisms designed to leverage private investment. Blending facilities link ODA with loans from public finance institutions or commercial loans to make them concessional. The EU has been pushing strongly for an increased use of this finance mechanism.

Eurodad is committed to deepening NGOs’ understanding of the financing modalities used by DFIs and their implications. Some of these mechanisms might pose financial and debt risks for developing countries, which might in turn undermine their capacity to contribute to positive development outcomes.