A private affair

Eurodad and Counter Balance demand developing country-led investigation as Development Finance Institutions set to invest $100 billion in the private sector by 2015.

Some of the world’s biggest public institutions which use billions of euros of public money to support private sector projects in developing countries are unaccountable, shadowy organisations that often favour Western-based companies and exclude the countries they are supposed to support from decision making, a report released today (Thursday July 10^th) has found.

'A Private Affair',published by the European Network on Debt and Development (Eurodad), is the result of two years of research into national and multilateral development finance institutions (DFIs), including the European Investment Bank (EIB) and the International Finance Corporation (IFC) – the World Bank’s lending arm.

Separate factsheets have been produced for the different DFIs, read the one covering the European Investment Bank here.

DFIs are fast becoming powerful actors financing development work. By 2015 the money going to the private sector from DFIs is expected to exceed $100 billion, which is equivalent to almost two thirds of official development assistance (ODA, or traditional ‘aid’).

The report finds that:

• Companies from wealthier nations have often received the lion’s share of contracts. Investments are sometimes routed through tax havens – which drain much-needed finance from developing countries.
• DFIs show minimal support for companies from low-income countries. Only 3% of EIB support allocated outside of the EU goes to low-income countries, making the EU DFI the worst performer of all DFIs in this respect.
• Developing countries have virtually no say in how these institutions are run, or the decisions they make. At the World Bank’s IFC, for example, developing countries’ voting power is still less than 30 per cent, with most other DFIs offering developing countries zero votes over decisions.
• The financial sector – especially investment banks – have been favoured by DFIs in recent years, receiving on average more than 50% of funding that has been allocated to the private sector, even though serious questions have been raised about the kind of development impact this will have.
• The basic premise of donors’ support for DFIs – to increasing Foreign investment in developing countries – is flawed, as foreign investment entails risks as well as rewards, and can cause serious macroeconomic problems..
• DFIs are extremely intransparent – far worse than other development organisations – with virtually no meaningful information available publicly on their activities. Most have no mechanisms for affected communities to seek redress should they be badly affected by DFI projects.

Recent examples of problematic investments by the IFC, for example, focused on Ghana and Jamaica and saw investments in Mövenpick ($26 million) and Marriot ($53 million),two multinational hotel corporations. These investments were justified by their potential to create jobs, but several actors have raised concerns in relation to their questionable development impact or need for public subsidy.

The EIB invested in a Club Med resort in Morocco (€14 million). 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.

Another major problem remains the opacity linked with the intermediated lending which is used more and more by DFIs. Despite several calls from the European Parliament for the EIB to enhance its transparency and reporting requirements, the ultimate beneficiaries and the development impact of intermediated loans remain unknown.

Maria Jose Romero, author of the report, said: “DFIs are not the right organisations to deliver on development goals, and their huge expansion is extremely worrying when so many questions about their operations remain. They are controlled by developed countries, with little input into strategies or governance from developing countries. Not only does this make them less likely to align their investments with national plans and needs, but also means they will always be likely to be influenced by the desire to support companies from their home country. In fact, several have this objective in their mandate, which can only divert attention from pure development objectives.Now is the time for an independent review of their operations and structures – but this must be led by experts from the countries they are supposed to be helping.”

Xavier Sol, director of Counter Balance, who carried out the report’s research into the EIB, said: “The EIB is not fit for delivering on sustainable development. Its culture, objectives and mechanisms are not fit for reaching those who are in most need. The crucial question remains for whom and in whose interest the bank is investing. This report confirms that the global poor are rarely allowed to have any influence on the answer.”

Eurodad recommends that a full review by developing countries should be carried out before DFI operations are increased any further. This should be carried out by a committee of independent experts from government, civil society organisations (CSOs) and the private sector in developing countries. This review should consider carefully the many concerns Eurodad and partners have consistently raised, including that:

• DFIs should align their investment decisions to developing countries’ priorities and national development plans.
• DFIs should demonstrate clear financial and development added value.
• DFIs should comply with the guidelines of responsible finance.[1]

[1] 'A Private Affair: Shining a light on the shadowy institutions giving public support to private companies and taking over the development agenda' is the culmination of two years of research and four larger Eurodad reports. Those reports are: Private Profit for Public Good (2012), Cashing in on Climate Change (2012), A Dangerous Blend (2013) and Private Finance for Development Unravelled (2014).