Billions of Development Dollars in Private Hands

Daan Bauwens

BRUSSELS, Jun 1 (IPS) – While governments and international institutions are focusing on a stronger role for the private sector in development aid, a new report by the European Network on Debt and Development (Eurodad) released yesterday suggests there is good reason to doubt this approach.

The report examined whether “external (non-domestic) public finance for private investments in the South lives up to promises to provide finance to credit-constrained companies in developing countries and to deliver positive development outcomes.”

To the contrary, the study found that most of the recent development investments went to tax havens and private companies from rich countries, while half of total private investments went directly into the financial sector.

In 2010 external investments to the private sector by international financial institutions (IFIs) exceeded 40 billion dollars. By 2015, the amount of public money flowing to the private sector is expected to surpass 100 billion dollars, almost one third of the total amount of aid to developing countries.

For decades, multilateral institutions and governments have invested in private companies operating in the developing world to provide aid and reduce poverty. However, since the 1990s the scale of support to private companies has increased dramatically.

The global financial crisis accelerated this process even further. The Netherlands, Spain, France, Italy and other donors have reduced their budgets for development aid because of the economic crisis.
Development assistance from other European countries has come to a complete standstill despite pledges to allocate 0.7 percent of gross national income (GNI) to aid by 2015 .

“In a time when aid budgets are being reduced, governments are looking at the private sector to fill the gaps,” Jeroen Kwakkenbos, policy and advocacy officer at Eurodad and author of report, told IPS. “At the same time the development finance institutions (DFIs), the bodies responsible for investments in the private sector, have always been around. So we asked ourselves: how do they work? What is really going on out there?”

Eurodad’s study took a closer look at the investments made by eight DFIs: the World Bank International Finance Corporation (IFC), the European Investment Bank (EIB) and national development finance institutions in Denmark, Belgium, the Netherlands, Norway, Spain, and Sweden between 2006 and 2010. In total, the report analysed over 30 billion dollars worth of private sector investments in the world’s poorest countries.

According to the findings, only one fourth of all companies supported by the IFC and the EIB were based in low-income countries. Furthermore, around forty percent of the companies on the list of beneficiaries were big companies listed in some of the world’s largest stock exchanges. Almost half, 49 percent, of the total amount of development finance went to companies based in one of the 34 Organisation for Economic Cooperation and Development (OECD) countries.

The study also showed that fifty percent of investments were made directly to the finance sector. “That is, commercial banks, hedge funds and private equity funds,” Kwakkenbos told IPS.

In that same time period, 2006-2010, the “DFIs assessed by Eurodad increased their portfolios by 190 percent”, the report stated.

“Development finance institutions say they are obliged to use these kinds of financial mechanisms because they don’t have branches in every country and can’t reach small and medium-sized enterprises (SMEs) in developing nations directly,” Kwakkenbos said, adding that this method makes it impossible to assess whether SMEs in poor nations receive the aid that was meant to reach them.

“Even in Europe it’s hard to get banks to lend to (SMEs). Plus the banks do not have to disclose any information on which company they have invested in nor (are they expected) to deliver any kind of development impact assessment. There is a lot of money (floating around) but we don’t know where it is going or whether it is being used effectively.”

The report also discovered that DFIs were investing heavily in companies based in tax havens or secrecy jurisdictions . No less than 36 projects between 2006 and 2010 were commissioned to companies based in tax havens. One fourth of all investments by the EIB went to companies in a secrecy jurisdiction.

“DFIs (claim) they do this because it is the best way to attract capital,” said Kwakkenbos. “Most people working for these institutions come from the banking sector, not from the development sector. They have a very finance-oriented perspective on things.”

But this method raises very thorny questions on the future of development finance and its ability to pull the poorest countries out of debt and poverty.

“What kind of development priorities are these companies looking at? How do they align themselves with country priorities in developing nations if they keep on bypassing the government and investing directly in the private sector? And, most importantly, how do you marry profits and development objectives? What is most important in the project? Is it development outcomes or the long term return on investments?” Kwakkenbos asked.