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IFI governance

Analysis

Conference summary: Private Sector Turn

17 December 2010

The Private Sector Turn:
Private equity, financial intermediaries and what they mean for development

22 November 2010 in London, UK

Introduction
Agenda
Speakers
Logistics

On November 22nd 2010, CounterBalance and the Bretton Woods Project hosted a conference in London on “The Private Sector Turn” – the increasing shift from public to private funding in development finance, the forms it takes and what it means for activists and affected people. What follows is a summary of the day’s proceedings.

Audio summary of the day

Videos from the conference

Session One: Principles

Session Two: The growth of ‘arms length finance’




Session One: Principles

Topic: The growth of private sector finance and what it means for development

The morning session outlined what is going on. In 2000, 90% of multilateral development bank funding went to public sources, largely developing countries governments, and only 10% to the private sector. By 2007, the proportions were 30/60 and headed for a complete inversion, led by the World Bank’s private lending arm, the International Finance Corporation (IFC), and the EU’s house bank the European Investment Bank (EIB). Much of the private turn funding goes not only into private sector-led projects, but into two new and rapidly growing areas: global loans to chains of intermediary banks, and investments in private equity and hedge funds.

Anders Lustgarten of the Bretton Woods Project opened the conference by hypothesising three reasons for this shift. Firstly, donor countries desire to leverage public funds into more effective ways to capitalise on scarce resources. Secondly, the overt use of multilateral development lending for particular political interests; for example, the EU’s ‘energy grab’ – development lending supported investments in large energy projects. Finally, that it is the culmination of 30 years of ideology. That these are seeds sown on land cultivated by development banks whose opening up of economies and the steady withdrawal of support for public sector infrastructure gave impetus to this private sector turn.

Nuria Molina of Eurodad explained the key role of the IFC in this transition, noting that while the IFC justifies its interventions as helping small companies with limited access to credit, the reality is rather different. She argued that the IFC in effect supports large multinationals in OECD countries which have unclear development outcomes. Of all projects supported by the IFC since 2008, almost two thirds were for such companies whereas only 16% of beneficiary companies were domestic investors in low income countries. As the eight biggest IFC operations account for 60% of all lending of the institution over the last two years it is clear that the preference is for large projects. Moreover, the overwhelming majority are listed on stock exchanges making their need for such financing questionable.

Stephanie Fried of the Ulu Foundation noted that development banks are moving offshore into opaque intermediary and equity investments, and talked of the damaging effect this is having on bank safeguards and policies. These financial institutions are often engaged in a race to the bottom with regards to standards as opposed to the NGO position of upward harmonisation. Additionally, we see many MDBs moving towards the use of more opaque financial intermediaries which lack the appropriate environmental and social due-diligence.

Andrew Watt of the European Trade Union Institute, laid out the mechanisms of private equity investment, concluding that while rates of return and value addition are excellent for investors, their social impacts are highly damaging and a wave of bailouts may be around the corner.

Finally, Nick Hildyard of the Corner House concluded that “development finance is being revolutionised”: the volume of private sector investment in the south is nearly ten times that of China, the West’s favourite bugbear, and will only rise as India and China seek major equity investment in future projects. Nick concluded by listing ten reasons why private equity is incompatible with development:

  1. Most investments in clean-tech sector are predicated on the dubious solutions such as carbon capture and storage (CSS) and carbon trading.
  2. Private equity has a high failure rate: 70% fail – climate finance is too important to be allowed to fail
  3. There are no agreed standards and safeguards; worrying as clean technology projects prone to the same environmental and social risks
  4. The high tariffs charged on investments exclude the poor
  5. The rapid emergence of clean tech start ups in developing countries shows signs of it being the next big bubble with companies likely to divest quickly if said bubble bursts
  6. Danger of speculative capital flows
  7. Cultural impact: Private equity brings not only money but also an approach to money and capitalism that is extremely ruthless
  8. Financialisation of public sector: we see the private sector moving in and offsetting/securitising risk
  9. Who has control? Clean tech offers real opportunities for communities to have control over their own resources, do we want to give this to private equity firms?
  10. The overwhelming majority if not all use tax havens

Audio: Anders Lustgarten, Nuria Molina, Stephanie Fried, Andrew Watt, Nick Hildyard

Presentations: Nuria Molina, Stephanie Fried, Andrew Watt

Video: Anders Lustgarten, Nuria Molina (part 1, part 2), Stephanie Fried (part 1, part 2), Andrew Watt (part 1, part 2)

Session Two: The growth of ‘arms length finance’

The afternoon sessions focused more specifically on the two newest mechanisms of private investment, financial intermediaries and private equity, which between them received 50% of IFC new investment and 75% of EIB investment in Africa in 2009.

Topic: The use of financial intermediaries

John Christenson of Tax Justice Network kicked off the debate on intermediaries by defining what they are and how they work, noting in the process that current flows tend to focus on ‘rent-seeking behaviour’ with far too much going to mergers and acquisitions, stripping assets and leveraging them with debt typically through offshore subsidiaries.

Isabella Besedova of Bankwatch told the tale of the small and medium enterprise (SME) bailout orchestrated by the EIB after the financial crisis of 2008, and the bank’s failure to get the money where it was supposed to go, resulting in less than 0.25% of SMEs receiving funds in the allocated time.

Antonio Tricarico of CRBM followed up with a litany of EIB failures in investing in intermediaries in Africa. He also touched on the lack of transparency at the institution and the difficulties faced in accessing the relevant information as well as the questionable development effectiveness of many of the investments.

Dennis Long of EBRD wrapped up the first afternoon session with some history on why development banks began using financial intermediaries and some of the unexpected consequences. He talked about changes brought about by the buying up of local banks by larger international ones and the shift towards the making and taking of larger loans. He also asked the question – how big is an SME? Noting that as an IFC SME loan of up to $10 million is likely to be supporting an operation perhaps $500 million in size. The concept of SME has thus altered much in the last couple of decades.

Audio: John Christenson, Isabella Besedova, Antonio Tricarico, Dennis Long

Presentations: Isabella Besedova, Antonio Tricarico

Topic: Private Equity as development?

The final session on private equity was led off by an invaluable insider’s perspective from private equity attorney John Crutcher, who argued that PE is “fundamentally neutral”, though not designed for development, and that its impacts depend on oversight, research and due diligence. He believed that DFIs should play an active role in negotiations with private equity firms – writing required due diligence into contracts and monitoring progress after the cheques are signed – in order to ensure that development orientated goals are not compromised.

Independent researcher Dotun Oloko, in contrast, argued that private equity fuels corruption in developing countries, talking us through the case of Emerging Capital Partners, a Texan hedge fund backed by EIB instrumental in a money-laundering scandal costing hundreds of millions of dollars. Dotun was alarmed by the fact that a fund manager acting on behalf of a DFI could, when carrying out due diligence, miss that the beneficial owners of the company set to receive financial backing were at the time under investigation for corruption.

Richard Brooks of Private Eye, a long-term observer of the UK development finance group, CDC, which also invested in Emerging Capital Partners, declared himself “cynical about the possibility of using private equity for development”, based on several examples from CDC’s portfolio. He felt that, considering CDC’s investments in agriculture had all but disappeared and investments in infrastructure fell by 70% over a period of 20 years, it was hard to justify forgoing several investment opportunities in Ghana for a luxury shopping mall with questionable development benefits for the local population.

Audio: John Crutcher, Dotun Oloko, Richard Brooks

Presentations: John Crutcher, Dotun Oloko

The conference was a tremendous success in alerting a range of people with different experiences in development to the reality and implications of the privatisation and financialisation of development, and set out the boundaries of a lot of new NGO work and collaborations. To find out more, please contact

Anders Lustgarten (anders [at] bankwatch.org) or Desi Stoyanova (desislava [at] bankwatch.org)

This conference has been prepared with the financial assistance of the European Union. The contents of the website are the sole responsibility of Bretton Woods Project and can under no circumstances be regarded as reflecting the position of the European Union.

This conference has been prepared with the financial assistance of the European Union. The contents of the website are the sole responsibility of Bretton Woods Project and can under no circumstances be regarded as reflecting the position of the European Union.