Bilateral and multilateral Development Finance Institutions (DFIs) are government-controlled and invest in private sector projects in developing countries. These institutions have a long history. However, over the past few years there has been a sharp increase in the amount of support they offer to the private sector, on the basis of non-overseas development assistance (ODA) sources of revenue. This gives these institutions a greater role in the field of development finance.

Since 2002 the International Finance Corporation (IFC) has increased its investment commitments six-fold and in 2013, it stood at more than US$18 billion. At the European level, from 2003 to 2012 the consolidated portfolio of the 15 members of the association of European Development Finance Institutions (EDFI) increased from EUR 10 billion to EUR 26 billion, which represents a 160 per cent increase. However, serious questions have been raised about the development impact of these investments and the lack of transparency and accountability of these institutions.

This report assesses the portfolios of six of the largest multilateral and bilateral DFIs that are providing support to private investments in developing countries, highlighting the main features of DFI operations, as well as their potential strengths and weaknesses. It offers an exploration of the different challenges and risks of DFI financial instruments, such as loans, equity and guarantees. The objective is to inform and support civil society organisations’ advocacy and campaigns towards DFIs, as well as to contribute to the broader debate on the impacts of private financial flows.

This report finds that:

• The objectives of DFIs are often multiple and their mandates vary. Some explicitly include development as their overarching objective, whereas others prioritise support to an efficient private sector as the missing link between development and financial profitability, or have mandates that do not explicitly recognise development outcomes. Although development impact is the key focus for all DFIs covered in this report, they are organised as private corporations with commercial and profitability considerations, which often implies a trade-off between these goals.
• Due to the nature of DFIs’ shareholding and/or their voting power structures, the six DFIs in our sample are dominated by developed countries. While the capital base of multilateral DFIs is supplied by member state governments and voting power is based on capital stock, bilateral DFIs’ ownership varies between being fully state-owned and fully privately owned.
• DFIs and development agencies are frequently interlinked, as most DFIs receive transfers from shareholder governments to support their activities. These resources are aimed at private sector beneficiaries either through direct subsidies (e.g. in the form of interest rate subsidies) or indirectly through the conditions under which DFIs operate (e.g. cheaper borrowing costs). However, each institution presents different features in this regard and currently it is difficult to know how many DFI operations are reported as ODA because of the lack of harmonised reporting standards and poor data.