Development billions loaned to Western companies and investment banks

  
Development Finance Institutions like the European Investment Bank (above) are criticised for favouring western companies and excluding poor countries from their decisions. [Ingenhoven Architects/Flickr]

Billions of euros of public money are channelled into private sector projects in developing countries by organisations that favour Western companies and investment banks, and exclude the nations they should support, a report published today (10 July) has found.

Development Finance Institutions (DFIs), which include the European Investment Bank (EIB), are increasingly influential in funding development. They will invest $100 billion in the private sector by 2015. By then DFIs will provide money worth the same as two thirds of traditional aid or official development assistance (ODA).

More than half the money on average allocated for the private sector went to financial institutions, including retail and investment banks, said the report by the European Network on Debt and Development (Eurodad). There were serious questions over whether that helped development, it added. Investment banks are commercial institutions which invest in companies directly or though intermediaries such as private equity funds or hedge funds.

Companies from wealthier countries took the lion’s share of private sector contracts, the report found, and developing countries have virtually no say in how DFIs are run, or their decisions. At the World Bank’s International Finance Corporation (IFC), developing countries' voting power is still less than 30%, with most other DFIs not offering any vote at all.

The EIB's press spokesman for Africa, Richard Willis, said projects funded by the Luxembourg-based institution follow EU procurement rules and do not give preference to European contractors.

Eurodad has called for a review into public DFIs, which, as well as the EIB and IFC include the Asian Development Bank, and national institutions in Europe and abroad.

The review should be led by developing countries, before DFI operations are increased further, according to Eurodad, which represents 48 non-governmental organisations in 16 European countries.

European Investment Bank

Willis defended the EIB's track record and said it,“is committed to working closely with all stakeholders, including governments of the 160 countries where we operate, and a broad range of civil society groups. In all countries, inside and outside Europe, national governments have to approve all projects in their country requesting EIB support prior to this being granted.

"The development benefits of the EIB’s engagement outside Europe have ensured clean water, reliable energy, affordable housing, sustainable transport and new economic opportunities for millions of people.”

Maria Jose Romero, author of the report, disagrees. She said, “DFIs are not the right organisations to deliver on development goals, and their huge expansion is extremely worrying when so many questions about their operations remain.

“They are controlled by developed countries, with little input into strategies or governance from developing countries […] this means they will always be likely to be influenced by the desire to support companies from their home country. In fact, several have this objective in their mandate.”

DFIs are far less transparent than other development organisations, giving virtually no meaningful information available publicly on their activities, the report said.

Willis said EU institutions have already partly taken those criticisms on board. He said, “Earlier this year the European Parliament and European Council approved the External Mandate that governs EIB lending outside the EU. The EIB has also recently introduced a new framework to further strengthen assessment, measurement and reporting of the investment benefits and development impacts of its operations.”

Intermediated lending

Part of the problem is intermediated lending being used more and more by DFIs. Intermediated lending is when a DFI loans money to for example a bank, which then loans the money on.

Despite several calls from the European Parliament for the EIB to enhance its transparency and reporting requirements, the ultimate beneficiaries and the development impact of intermediated loans remain unknown, according to Eurodad.

The EIB admitted they could not get details of individual loans from the banks passing them on.

Willis said, “Both across the EU, and outside, the EIB supports investment by SMEs and in small projects through experienced local partners. Loans to final beneficiaries are closely monitored to ensure that the lower cost of the EIB supported loan is passed on and financial intermediaries assessed to ensure their capacity to manage intermediated loans.

"However, due to commercial banking practice details of individual loans cannot be provided.”

Xavier Sol, director of Counter Balance, which carried out the report’s research into the EIB, said: “The EIB is not fit for delivering on sustainable development. The crucial question remains for whom and in whose interest the bank is investing. This report confirms that the global poor are rarely allowed to have any influence on the answer."

Counter Balance cited an EIB investment in a Club Med resort in Morocco worth €14 million. While the EIB claimed it will contribute to sustainable tourism and local employment, local organisations attacked the impact on the environment and the land grabs that these gated resorts cause, it said.

Minimal support

The report, A Private Affair, took two years to research. It also found:

  • DFIs show minimal support for companies from low-income countries. Only 3% of EIB support outside of the EU goes to low-income countries, making it the worst performer of all DFIs in this respect
  • Investments are sometimes routed through tax havens, draining finance from developing countries
  • Most have no mechanisms for affected communities to seek redress should they be badly affected by DFI projects

Eurodad argued that the basic premise of using DFIs to increase foreign investment in developing countries is flawed. “Foreign investment entails risks as well as rewards, and can cause serious macroeconomic problems,” it said.

It recommended the review be carried out by a committee of independent experts from government, civil society organisations  and the private sector in developing countries.

The review should consider how DFIs can align their investment decisions to developing countries’ priorities and national development plans, how they can demonstrate their worth to development and how DFIs can comply with responsible investment guidelines.

Positions: 

Richard Willis, the European Investment Bank's press spokesman for Africa, said, "“The European Investment Bank is committed to working closely with all stakeholders, including governments of the 160 countries where we operate, and  a broad range of civil society groups. Today the EIB will continue this close cooperation and host working meetings with Ambassadors from more than 50 African, Caribbean and Pacific countries where the EIB has operated for more than 50 years. In all countries, inside and outside Europe, national governments have to approve all projects in their country requesting EIB support prior to this being granted. The development benefits of the EIB’s engagement outside Europe have ensured clean water, reliable energy, affordable housing, sustainable transport and new economic opportunities for millions of people.”

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