Private profit for public good? Can investing in private companies deliver for the poor?

Added 29 May 2012

Donor governments and multilateral institutions have provided grants and loans to private companies operating in developing countries for decades. However, since the 1990s the scale of this support has increased dramatically. In 2010 external investments to the private sector by IFIs exceeded $40 billion. By 2015, the amount flowing to the private sector is expected to exceed $100 billion – making up almost one third of external public finance to developing countries. As global ODA stagnates, several aid agencies have suggested a dramatic scaling up of public finance devoted to supporting private sector investments.

Using ODA for private sector investment is contentious among civil society organisations. Public development finance can play crucial roles. However, it is fundamental that public finance is channelled to the companies and sectors that have least access to private capital markets, hence ensuring that scarce public resources are genuinely additional to private finance. They must also be channelled to firms and sectors that can deliver the best outcomes for the poor, thus ensuring that public development monies are used for intended purposes.

This report assesses 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. More precisely, it looks into how much development finance goes to the private sector, as opposed to the public sector; which institutions deliver this type of finance and how; which types of companies are benefiting the most from public support; and how development institutions ensure they support responsible investments that contribute to equitable and sustainable development.

For this purpose, Eurodad assessed recent grant and loan trends, and the portfolios of some of the largest multilateral and bilateral development agencies providing public support to private investments in developing countries. Eurodad’s sample included the World Bank International Finance Corporation (IFC), external lending of the European Investment Bank (EIB) through its African, Caribbean and Pacific countries (ACP) investment facility and Africa Infrastructure Trust Fund, and six bilateral DFIs from Denmark, Belgium, the Netherlands, Norway, Spain, and Sweden.

Read the full Eurodad report: Private profit for public good?Can investing in private companies deliver for the poor?

This report is also available in Spanish