Only two per cent of investments made by five of the world’s largest development finance institutions (DFIs) have reached companies based in the poorest countries since the outbreak of the Covid-19 pandemic.

A new briefing, published by the European Network on Debt and Development (Eurodad), looks at the actions taken by the World Bank’s International Finance Corporation (IFC), Dutch FMO, German DEG , French Proparco and US DFC*, between March and October this year. These institutions are supposed to invest in private sector projects in low and middle-income countries to promote job creation and sustainable economic growth.

It finds that despite committing at least US$ 7 billion in additional investments to tackle the Covid-19 crisis, these DFIs have concentrated on a limited number of sectors that are likely to be financially lucrative. This means that 65 per cent of investments have gone to the financial sector and infrastructure instead of directly to small and medium enterprises (SMEs) based in low-income countries. SMEs employ more than half of the population of the global south.

The briefing calls for DFIs to rethink the current model when they meet during the FIC summit next week. It calls for DFIs to prioritise investments that promote a sustainable and inclusive economy in developing countries. This requires a focus on development returns instead of financial returns and adapting business models to allow for more risk-taking.

Jan van de Poel, author of the briefing and Policy and Advocacy Manager at Eurodad, said: “As development actors, DFIs have a mandate to fight poverty and contribute to an economy that is sustainable and equitable. Yet this analysis shows that since March they have essentially continued with business as usual, which means relying on the financial sector to channel funds. This raises serious questions about whether the countries, sectors and clients most in need during this pandemic are actually being reached.”

The briefing also shows that 12 per cent of DFI investments – meant largely to support private sector activity - have gone to healthcare and education – raising serious questions about whether that is contributing to further commercialising these vital public services.

Van de Poel said: “The private sector could play a role in supporting the health sector, but DFIs must avoid promoting the privatisation or commercialisation of healthcare. There is sufficient evidence showing that the privatisation of health care is inefficient and risks creating financial barriers to those in need and hampering efforts to reduce inequalities in healthcare access.”

The briefing also calls for the institutions to take greater responsibility for the social and environmental outcomes of their activities, including human rights, labour rights, climate and gender impacts. It further demands an improvement in DFI governance and accountability." 

Van de Poel added: “In the coming days and weeks, institutions and the governments backing them will have an opportunity to embark on an ambitious rethink of the role and place of DFIs in the development finance landscape. They must not squander the opportunity of spaces like the Finance in Common summit to launch this new agenda before it is too late.”

ENDS

To read the full briefing, titled Development Finance Institutions and Covid-19: Time to reset, click here.

NOTES TO EDITORS:

• Development Finance Institutions (DFIs) are a sub-set of public development banks. They are specialised institutions set up to support public policy objectives, mainly private sector activities in developing countries. They are usually majority-owned by governments and benefit from public guarantees, while some source their capital from public development funds reported as official development assistance (ODA).
• *Bilateral DFIs are commonly from Northern countries, such as the Dutch FMO or French Proparco, or part of a larger bilateral development bank, such as the German DEG - all three are among the largest in the world. The US Development Finance Corporation was formed in 2018 after a merger of the independent Overseas Private Investment Corporation and several other funds and agencies. Multilateral DFIs are the private sector arms of multilateral and regional development banks, owned by national governments. The main multilateral DFI is the World Bank’s International Finance Corporation (IFC).