Development & Human Rights • 27 Apr 2011
Fueling an anti-development machineBack to overview
So you’re a development bank and you have a problem: corruption associated with projects you fund. What are you going to do? You could hire independent investigators with punitive powers. You could increase penalties, like retraction of loans and heavy fines and bans. There are lots of other ideas in international anti-corruption agreements, some of which you’ve probably signed up to (on paper).
Or you could hand over vast tranches of public development money to hedge funds and financial speculators, who in turn will pass that cash through multiple offshore transactions, the vast majority of which are completely opaque, in the relentless pursuit of ‘alpha returns’ that are not only incompatible with sustainable development but violently opposed to it.
Guess which choice the development banks are making?
In 2006 the European Investment Bank made a €40 million loan to a Texan hedge fund called Emerging Capital Partners (ECP) to invest in Nigeria. EIB pledged that ECP’s investments “will be carried out with due regard to ecological and environmental factors and in accordance with both local law and World Bank standards.” Instead, according to Nigerian researcher Dotun Oloko: “ECP has invested in Nigerian companies which are reported to be “fronts” for the laundering of money said to have been obtained corruptly by the former Governor of Nigeria’s oil rich DeltaState, James Ibori… In each case it appears from the evidence and the relevant timelines that ECP knew or should have known of the connection with fraud before the investment took place.”
Ibori, rather brilliantly, is wanted on corruption charges in three continents, and was recently extradited to Britain. His wife, mistress and lawyer (that was some trial) are all doing time in the UK already. Less amusingly, as a direct result of Ibori’s activities, several Nigerian banks (including the one in which ECP invested) collapsed in 2009, necessitating a bailout by the Central Bank of Nigeria costing $2.6 billion.
What you have here, essentially, is an Anti-Development Machine: Western public funders doling out money to voracious hedge funds with neither interest or experience in development, which pursue the highest possible returns by fair means or foul, including linking up with corrupt officials, as a result of which a developing country has to find billions in public money to repair the damage.
The EIB says it had no knowledge that ECP’s investments were dubious—even though it kept doling out further tranches of the loan after Nigeria’s Economic and Financial Crimes Commission indicted Ibori for corruption in 2007. A political scandal is brewing up over the ECP case, and we’ll soon find out more about what the EIB did and didn’t know.
But in a deeper sense, EIB’s ignorance is exactly the point. Development banks have made an enormous shift away from project finance and into the more nebulous realms of equity funds and financial intermediaries (FIs) in recent years. 75% of the EIB’s Investment Facility, its vehicle for private sector investment in Africa, went to private equity and FIs in 2009, along with 80% of the IFC’s portfolio.
What those two sectors have in common is that almost by default, the originating bank has no idea what is going on. FIs are chains of financial institutions, at each level spreading money out to an untrackable array of projects. Equity funds often have an impossibly complex structure of investments that is impenetrable to outsiders. EIB’s ignorance over ECP and Nigeria isn’t unusual; it’s part for the course.
The result of that ignorance is a billion dollar bailout that a poor country simply cannot afford. Yet again we find the European Investment Bank not promoting development, but actively holding it back.
By Anders Lustgarten,
Counter Balance, Bretton Woods Project