Financing for development or for private interests?

Added 13 May 2015
This blog was first published in Dutch on Vice Versa Magazine

How can investments in and for the private sector contribute to development cooperation? This is more or less the key question on the agenda during the current Financing for Development (FfD) negotiations in New York. According to the European Union (EU), the answer lies with the risky use of public resources as a catalyst for private investment. However, this outsourcing of development cooperation to the private sector is accompanied by a serious lack of evidence about the real development impact, transparency, accountability and developing country ownership.  

In a way, you have to give the EU credit. By means of a well thought-through communication strategy, the EU has managed to place private finance at the heart of the FfD negotiations, promoting a greater role for development banks such as FMO, and the use of “innovative” financing mechanisms such as public-private partnerships (PPPs) and “blending” – the use of aid money to support companies investing in development. This one-sided narrative in favour of private finance has been highlighted once again by the recently revised draft of the FfD outcome document dated 6 May, which calls “on businesses to apply their creativity and innovation toward solving sustainable development challenges” and states that “an important use of ODA is to catalyse additional resource mobilization from other sources, public and private”, while “blended finance (…) offers significant potential to contribute resources, expertise and technology transfer in support of sustainable development.” 

It is expected that the G77 – a group of more than 130 developing countries – will not buy into the revised version, and rightfully so. The G77 has already challenged donor countries in the past over similar language in the zero draft released on 16 March, arguing that “the advantages for developing countries regarding the concept of blended finance are unclear and should be further explained”, and that “in terms of FfD the group is of the view that private finance should not take primacy over public finance”.  

Indeed, using public money and institutions to leverage private finance is problematic for many reasons, and generally fails to align itself with international agreements to improve the quality of aid:

  • There are significant problems when it comes to demonstrating positive results on development. For example, a 2014 report by the World Bank’s Independent Evaluation Group (IEG) looking into PPPs recently showed that “data are scarce on the effects on the poor” and that the World Bank’s development outcome ratings are insufficient for evaluating PPP projects properly. Oxfam has demonstrated just how detrimental the outcomes for developing country governments can be. In the case of Lesotho, a PPP hospital developed under the advice of the World Bank’s International Finance Corporation (IFC) locked the country’s Ministry of Health into an 18-year contract that is already using more than half of Lesotho’s health budget (51%), while providing high returns (25%) to the private partner. The G77 therefore argues that “the issue of public-private partnerships is important, but we want to caution that there are some risks and that those risks need to be mitigated. There is the experience that sometimes it is the government that is left with all the costs and the private sector with all the profits.”
  • Most institutions and facilities leveraging private finance face huge challenges in terms of adequate participation, accountability and transparency. Development banks, for example, face serious transparency problems, especially when dealing with financial intermediaries such as commercial banks and private equity funds, which often hide behind the confidentiality of their clients. This severely limits citizens’ ability to scrutinise the banks properly, and even the banks’ own abilities to track development outcomes – or, equally importantly, to fully respect human rights (see Oxfam’s new report on the human costs of intermediary lending by the World Bank). Furthermore, development banks’ decision-making structures and existing mechanisms are seriously biased in favour of developed countries. There is no formal representation of developing countries’ governments on the banks’ boards, thus substantially undermining the level ownership of investment decisions by partner countries. (The FMO, for example, is 51% owned by the Dutch state and 49% by commercial banks, trade unions and other members of the private sector. Even in cases like the controversial Barro Blanco dam in Panama – a project suspended by the local government due to social and environmental concerns and investigated by FMO’s complaint mechanism – the FMO actively lobbies the Panama authorities to continue business as usual, despite the serious development concerns raised). Likewise, the governance structure of regional blending facilities, which carry out EU blending operations in different regions around the world where the EU has development policies, gives preferential decision-making treatment to the European Commission. 
  • There is a high risk that private companies will be subsidised for investments that they would have made anyway, thus potentially displacing other investors. A report by the European Court of Auditors on EU blending activities during the period 2007-2013 claimed that “the need for a grant to enable the loan to be contracted was demonstrated for only half of the project examined”. 
Bearing all this in mind, the key alternative question that must be addressed should be the following: what is the EU, including the Netherlands, really trying to tell us? Isn’t the focus on private finance just an attempt to divert attention away from the fact that the EU has never fulfilled its commitment to delivering 0.7% of gross national income as aid? (Since 1970, just seven donor countries have met the 0.7% target. The Netherlands maintained the 0.7% target until 2013, before deciding to drop the ball just as the goal was in sight.) And are these “innovative financing mechanisms”, such as blending and PPPs, really that “innovative” or are they just a disguise for further, blatant support to western companies and their profit-making objectives in the aftermath of the crisis? 

Eurodad previously found, for example, that donor countries often choose their own companies as partners in development projects, while their development finance institutions (DFIs) show minimal support for companies from low-income countries. For instance, only 25% of companies supported between 2006 and 2010 by the EU’s European Investment Bank (EIB) and the IFC were domiciled in low-income countries. It is expected that these figures have not changed much today. Non-governmental organisations have pointed out that private investors are more attracted to middle-income countries, as these can provide better opportunities for profit. The shift towards profit runs the risk of promoting tools such as user fees for infrastructure and health services, which the poorest people cannot pay. 

The strong focus placed on leveraging foreign private capital is accompanied by a silence on the importance of the state in regulating private sector activities, particularly in the development arena. According to the South Centre – an inter-governmental think-tank – developing countries have become increasingly vulnerable to financial crises in recent years, due to an increased presence of foreign investors and financial institutions in their national markets. Not only is leveraging foreign capital through public resources an extremely opaque and self-serving practice, it could also have disastrous consequences for developing countries if the EU and others continue to block the methods needed to offset these risks, such as capital controls, an intergovernmental tax body to improve international tax cooperation, and debt workout mechanisms. In short, a fundamental shift in the way we discuss international private financial flows at the upcoming FfD conference is urgently needed.