Development finance has changed substantially over the past decade. Private finance has replaced aid at the centre of global and national development initiatives, for both governments and international bodies. Development finance institutions (DFIs) have become some of the most important players in today’s development arena.

DFIs are government-controlled institutions that invest billions of Euros in private sector projects in developing countries every year – often using scarce aid money to ‘leverage’ this finance. By 2015 the amount flowing to the private sector is expected to exceed $100 billion, which is equivalent to almost two thirds of official development assistance (ODA, or traditional ‘aid’).

This report covers the main findings of Eurodad’s programme of research on DFIs, which has produced four major reports over two years. We have examined the way DFIs work with the private sector and explored the problems that they must tackle. We question whether they are the right institutions to hold such a dominant position in development finance and make concrete recommendations for reform.

Eurodad’s principal concern is that almost all DFIs are owned and controlled by rich country governments, with little effective input or influence from developing country governments, and even less from other developing country stakeholders.

European bilateral DFIs are owned and driven by European governments and consistently fail to include recipient countries in their investment decisions. Many multilaterals also structure their governance in favour of developed countries, with recipient countries playing a weaker role. This imbalance in power structures means, among other things, that companies from wealthy nations have often received the lion’s share of contracts. Investments are sometimes routed through tax havens, helping to legitimise their role in the loss of hundreds of billions of dollars to developing countries through tax dodging by multinationals.

This report finds that:

• 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 World Bank’s International Finance Corporation (IFC) were domiciled in low-income countries.
• The financial sector has been favoured by DFIs in recent years, receiving on average more than 50% of funding that has been allocated to the private sector. This has raised serious questions in relation to what kind of development impact investments in the financial sector have, particularly after the recent financial crisis, which was driven by irresponsible investment decisions and financial deregulation.
• DFIs’ selection of financial instruments is questionable. This is particularly true in the case of true in the case of equity and guarantees that have not been properly assessed or monitored.
• DFIs contribute to foreign private investments flowing into developing countries by supporting foreign companies or by investing their own (foreign) capital directly in local businesses. However, positive impacts of foreign investment can be accompanied by many risks, including macroeconomic problems. These problems have had a particular impact in the experience of Asian countries during their last financial crisis.
• DFIs face serious transparency problems, especially when dealing with financial intermediaries. DFIs’ transparency to the general public is limited, which in turn constrains the ability of stakeholders to effectively exercise external control.

The next few months are a crucial time for the future of development finance as the post-2015 debate continues and goals and targets for development finance are being set. Donors are realising that existing global public resources will not be sufficient to meet the world’s development needs. Many are increasingly turning to private actors – using scarce ODA to ‘leverage’ this sector. Eurodad recognises that there is a critical role for the private sector to play in development. However, foreign-owned and controlled institutions are not going to provide the country-owned and effective strategies necessary for developing countries to harness the private sector’s power for development.

Therefore, before increasing and deepening DFI operations further, a full review from a developing country perspective should be conducted. This should be carried out, for example, 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, as outlined in Eurodad's Responsible Finance Charter. 

Eurodad has also launched a research report entitled Private Finance for Development Unravelled: Assessing how Development Finance Institutions work. Read the report.

Eurodad has worked with its partners to compile a series of fact sheets on specific DFIs. Click here to read more.