Shining a light on the shadowy institutions that dominate the development landscape
Rich country governments and multilateral institutions have provided grants and loans to companies working in developing countries for decades. However, the scale of this support has increased enormously, and the institutions providing it – development finance institutions (DFIs) – are coming to dominate the development landscape now that private finance has replaced aid at the centre of global and national development initiatives. These institutions are not new, but we know very little about how they work and – vitally - what their impacts on the ground are. Despite the questions that hang over their operations and mandates, by 2015 the money going into the private sector from DFIs is expected to exceed $100 billion, which is equivalent to almost two thirds of Official Development Assistance (ODA).
Eurodad’s new report – A Private Affair
– sheds light on these organisations to expose their business models and look into their range of investment practices. The conclusion that we come to is that, as they are, they are simply not the right institutions to provide the country-owned and effective strategies necessary for developing countries to themselves harness the private sector’s undeniable power for development.
It is now well recognised that ownership by developing countries over their own development strategies is a key principle for “development effectiveness” and it often determines whether the eventual outcome is success or failure.
However, in the case of DFIs’ voting power, it is distributed according to who gives the institutions the most money, which has obvious political implications on who has power in decision making-processes and seems – frankly - short-sighted and unfair.
Many DFIs are therefore dominated by developed country governments while developing countries have virtually no say in how these institutions are run, or the decisions they make. At the World Bank’s International Finance Corporation (IFC) – which is the biggest player in town – the voting rights of middle and low-income countries are still less than 30 per cent, with most other European DFIs offering developing countries zero votes over decisions.
This imbalance in power structures means, among other things, that companies from wealthy nations have often received the lion’s share of DFI contracts. Even more worrying, investments are sometimes routed through tax havens, helping to legitimise their role in the loss of hundreds of billions of dollars to developing countries through tax dodging by multinationals.
Our report also sheds light on which countries and sectors benefit from DFI operations. In particular, two facts should be highlighted:
a) DFIs show minimal support for companies from low-income countries. For instance, only 25% of companies supported between 2006 and 2010 by the EIB and the IFC were domiciled in low-income countries, and currently, emerging economies get a big share of DFI investments.
b) Although they finance operations in a variety of sectors, such as infrastructure and agribusiness, they are increasingly focused on the financial sector, particularly commercial banking – on average 50% of their operations go to this sector.
These two facts reveal an investment pattern which focuses on “low hanging fruit” and casts doubt on whether DFIs are succeeding in supporting the most credit-constrained companies in the world’s poorest countries. This pattern also questions DFIs’ added value as development institutions, as companies operating on a global scale should be able to access credit or capital markets on commercial terms.
On top of this, the basic premise of donors’ support for DFIs – to increasing foreign private investment in developing countries – is itself flawed, as foreign investment entails many risks as well as rewards, and can cause serious macroeconomic problems. Nowadays, a more strategic approach to foreign investment is needed in international discussions about financing for development, focusing on quality, not just quantity.
During our research all of these questions surfaced again and again. Examples of worrying projects include the IFC investment in Mövenpick ($26 million) in Ghana and Marriot ($53 million) in Jamaica, two multinational hotel corporations. These investments were justified by their potential to create jobs, but there have been serious concerns in relation to their questionable development impact or need for public subsidy. In addition, the EIB investment in a Club Med resort in Morocco (EUR 14 million), also has been controversial. While the EIB claims it will contribute to sustainable tourism and local employment, local organisations denounce the impact on the environment and the land grabs that these gated resorts cause.
The next few months are a crucial time for the future of development finance as the post- 2015 debate continues and goals and targets for development finance are being set. We at Eurodad recognise that there is a critical role for the private sector to play in development. But two years of research, meetings and conferences with DFI representatives, and work with fellow CSOs, has persuaded us that DFIs are not set to deliver on development goals. It is time for developing country actors to lead the way. We recommend that a full review of current DFI operations takes place, including what developing countries expect from DFIs. This review should be led by experts from governments, civil society organisations and the private sector in developing countries, before the current expansion continues and billions more public funding is channelled through these shadowy, unaccountable institutions.