Helping developing countries escape poverty represents a big opportunity for businesses and economic interests in rich countries. State-owned or part state-owned development finance institutions (DFIs) are in charge of channelling towards the private sector part of the official funds intended to aid less advantaged countries. But the benefits of these public-private projects in developing countries remain unclear.
The idea that private sector involvement in development projects helps strengthen poor countries’ economic systems is widely accepted and firmly rooted in rich states. Illustrative of this is the fact that, according to the EDFI (Association of European Development Finance Institutions, gathering 15 DFIs), the combined portfolio of investments committed by its members has tripled over the last ten years, reaching €36.3 billion (over US$40 billion) at the end of 2015.
Yet the financing of private sector projects with public funds operates in a blurred space between assisting development (as it facilitates investments that would not otherwise go to emerging countries) and promoting economic expansion in the donor countries, which often take advantage of it to benefit their business interests.
The report on The Development Effectiveness of Supporting the Private Sector with ODA Funds – published in June by the Trade Union Development Cooperation Network (TUDCN-ITUC) and the CSO Partnership for Development Effectiveness (CPDE), uses case studies to illustrate the ineffectiveness of combined public-private investment projects in many parts of the globe.
The Spanish international development cooperation agency, the AECID, injected considerable sums of money into a water management company partly owned by a Spanish firm, in Cartagena (Colombia). Every month, this same company cuts off the water supply of thousands of people who cannot afford to pay the bills. Canadian aid supposed to improve the agricultural and forestry sectors in Peru is channelled through an NGO from the donor country that is sponsored, among others, by big mining companies. Despite its initial objective, the NGO’s main efforts are in fact focused on improving the image of the extractive industry. These are just two of the many examples covered in the report.
The researchers, who studied nine development finance institutions (from the US and Europe), reached the conclusion that most DFIs further their own country’s economic and business interests through their investments in emerging countries, rather than targeting the needs of these countries. The US development finance institution, OPIC, even specifies that its activity “advances U.S. foreign policy and national security priorities”.
The Belgian Investment Company for Developing Countries, BIO, meanwhile, simply states that its mission is to support a strong private sector in developing and/or emerging countries. “There is no direct link to either Belgian companies or the Belgian economy,” Tom De Latte, the spokesperson for BIO, tells Equal Times. “We are, of course, always open to private investors – Belgian or otherwise – that can help us achieve our mission, but are definitely not bound by them,” he adds.
This is not, however, the position usually taken by DFIs.
“Institutions of this kind cannot and should not be considered as Official Development Assistance (ODA) or international development cooperation,” Sebastián Ortiz, a researcher from the development and cooperation research institute, IUDC, at the Complutense University of Madrid explains. “There is no doubt that in their current form, priority is given exclusively to the interests of the ‘donor’ country, or the institutions granting the credit lines, and, most particularly, the companies wanting access to the market of the ‘recipient or beneficiary’ country.”
Over the last 15 years, the OECD (made up of 35 countries, from which the largest share of the aid comes) has reached the consensus that official development assistance is aid that is untied, that is, aid “administered with the promotion of the economic development and welfare of developing countries as its main objective” and that “is concessional in character and conveys a grant element”.
Criteria favouring donors’ own interests
The TUDCN-ITUC and CPDE report points out that, over and above each institution’s specific mandate, some of the eligibility criteria for financing, established by the DFIs, favours the predominance of companies from developed countries. Some of the economic criteria laid down by the DFIs in terms of profitability, return on investments and track record also mean that funds are more likely to go to multinationals or companies from rich countries than to small and medium sized enterprises in developing countries, which despite generally having weaker structures and capacities nonetheless have a greater impact on the recipient country’s development.
Favouring companies from donor countries can run counter to the needs of the countries receiving the assistance, especially given that none of the DFIs covered in the report have an obligation to include the government or social partners from the recipient country in any phase of the project being financed.
In addition, their economic and profitability criteria also create a bias towards higher-income developing countries, where investment is less risky. The fact, moreover, that projects are usually drawn up by clients, which then apply for financial support from a DFI, “makes it difficult to incorporate decent work factors in the initial stages of the project design”, even though most DFIs have committed to promoting good labour standards.
“The benefits in terms of human development [of projects receiving combined funding from the DFIs] are quite scarce, if there are any at all,” according to Ortiz. “At best, they could be said to have some positive economic effect, in that they create jobs, contribute to growth or attract foreign direct investment but, more often that not, these same companies that receive funding in their country of origin also receive indirect funding in the destination country, in the form of tax cuts or exemptions.”
Development through tax havens
According to the “Going Offshore” report, draw up in 2014 by Eurodad (a network of European NGOs working to push governments to change the global economic and financial system), DFIs often use tax havens to channel their investments, rather than the financial institutions of the country receiving the assistance. Between 2000 and 2013, the British CDC Group, for example, sent a total of US$3.8 billion (around €3.4 billion) to funds operating through tax havens. Norway’s Norfund, for its part, had channelled 46 out of 165 investments, amounting to US$339 million dollars (some €300 million), through tax havens by the end of 2013.
As for Belgium’s BIO, the report points out that in June 2014 the institution was involved in a total of 42 investment funds, 30 of which were domiciled in tax havens. These investments amounted to US$207 million dollars (some €184 million).
The spokesperson for the Belgian institution, De Latte, explains that, “BIO will always try and invest directly in the targeted country”, as the institution considers the payment of taxes to be an important factor in a country’s development. He points out, however, that an extraterritorial financial centre has to be used as an intermediary on some occasions, to be able to operate, “due to the current lack of an appropriate legislative framework”. But to avoid any suspicion of malpractice, the information on where their clients are registered is available on its webpage.
According to the EDFI, quoted in the TUDCN-ITUC and CPDE report, so-called tax havens make it possible for their members to “play a catalysing role in attracting institutional capital into developing countries and to ensure that their capital, and the institutional capital invested alongside it, is invested in accordance with sound environmental, social and governance policies”. Eurodad, however, underlines the lack of transparency within DFIs regarding the use of such territories.
But it is not only rich countries’ DFIs that succumb to the temptation of using lax legal frameworks for their activities. According to Ortiz, “There are some very ambivalent stances on tax evasion in certain developing countries, and in those where economic orthodoxy predominates, not only is there very low tax pressure but either tax exemptions or very low taxation rates are promoted, on the pretext of maintaining a favourable climate for foreign direct investment.”