Jeroen Kwakkenbos, EURODAD
Sasanka, Oxfam International; Grow Campaign
Carlos Bedoya, LATINDAD
Moderator: Nancy Alexander, Heinrich Boell Foundation
Jeroen Kwakkenbos – Private profit for public good
Analysing how donors deal with the private sector
Starting with ODA, we found that direct transfers are relatively small, while most transfers are done through the back door via procurement and other processes.
Our main port of call has been through blended ODA with financing from capital markets.
We examined portfolios of development finance institutions, IFC, EIB, those specialising in private sector lending and six European donors, including the Netherlands, Norway, Spain, Sweden, Belgium, and Denmark
We asked are these groups filling gaps, giving finance to those who do not raise finance otherwise?
Are DFIS and Aid agencies filling gaps?
Recall that the private sector is not monolithic, and is a broad and heterogeneous set of actors. We sought to identify who could both benefit from financing and deliver impact – so we asked are they reaching domestic enterprises in developing countries, with impacts that can lead to job creation and so on? Hence SMEs, and particularly young SMEs, was our focus. We found only 25% of EIB and IFC investment went to entities domiciled in low-income countries. Almost half of the support ends up in OECD countries, and tax havens – at which point the trail stops, especially in secrecy jurisdictions. Half of the development mandated finance went to companies in the North and based in tax havens.
The types of companies invested in were 40% listed on some of the world’s largest stock exchanges. The leveraging that is being discussed is essentially moot, as the money does not go to where it should.
2) Do limited public resources go where they are most needed?
This need not be problematic – however the principal recipients were hedge funds and often n large and obscure entities hiding behind corporate secrecy protection the actual ability to account for any developmental impacts, so assessing compliance is redundant. We found that many of these DFIs were sought out as countercyclical investments, however even this case only 22% of IFC funds went to LICs, while 59% went to private equity entities.
Note that public procurement is hugely significant, 53% of ODA can be used to procure goods and services form the private sector, which itself is often in LICs the bulk of domestic economic activity, both ODA and public procurement.
We can safely say that most ODA is being challenged to firms in donor countries, and to companies in the same country as the donor. Contracts often have to be published in the donor language for example.
3) Are DFIS and aid agencies delivering development outcomes and poverty eradication?
We find that only voluntary guidelines are signed, if at all, and generally the reliance on financial intermediaries means that accounting for the development impact of an investment is nigh on impossible. Secondly there is no harmonisation, and the structuring of investments is often entirely unique, and also obscures the impact on the ground.
Additionally the investments seek out easy investments, such as extractives or other large scale industries, while claiming additionality and usually neglecting any additional basis to claim ‘development’ impact. The arguments against this leverage approach are often ignored, in particular about how leverage agreements transfer risk to the public sector.
We found that DFIs and agencies are not filling a gap, are not reaching entities with real financing constraints, instead mainly going to northern companies. Development impacts are entirely obscure, for the most part. DFIs and development agencies have not shown any benefits from the channelling of public resources through private institutions that could not be achieved via traditional forms of development cooperation, with questionable basis given the underlying development principles used to justify the outlay.
Sasanka Thilakasiri – Oxfam work on poverty and land issues
We sought to drill down on the issues that Eurodad and Bretton Woods Project have highlighted, in particular the role on financial intermediaries. It’s important to understand that the or of the private sector, and in particular intermediaries, it is another step in the chain to dilute.
We see an unchecked and unbridled over-reliance on the private sector, and I want to go into the financial intermediary model and to discuss how perhaps specialised intermediaries have shown themselves to be more effective.
There are significant concerns regarding due diligence, and applying social and environmental protections, and the difficulty of tracking developmental outcomes. The work that we’ve done, showed that over 40% of the entire IFC portfolio ($6-7bn) goes via financial intermediaries. Their argument based on the need to reach small entities in developing countries, yet they conflate this process with large-scale and multinational financial institutions.
For example the World Bank Group’s agriculture action plan has sown a significant increased spend on agricultural investment, ostensibly emphasising small holder farmers, we’ve found that this is not the right route.
Two examples that are at the compliance adviser ombudsman, involving financial intermediaries, which shown that a serious shortfall occurred in land dispossession.
A food security example, relating to the Global Agriculture Food Security Program, GAFSP, which has a public and private sector window, the former of which has the capacity to be ‘fantastic’. This demonstrates highly accountable and procedurally consistent model. The private sector window is poles apart, and though this is public finance the governments’ prerogative is to ensure the financing reaches private sector actors. We ask whether the IFC is the best trustee of such funds, and whether other institutions with more presence on the ground is appropriate.
We have developed a program relying on specialised intermediaries, that have direct access to local communities, and the ability to integrate into local supply chains.
The review of the IFC’s portfolio – about 2/3 years in the making – the CAO conducted an audit review – they did a first pass audit of 931 projects across all the types which I discussed. They sought to cover comprehensively types of activity and distinct projects, including visiting the projects themselves to see how well the performance standards were being applied.
The principal issue is that the IFC response, which had the opportunity to issue a management response, which the initial draft was actually blocked by the President.
The main issues in the report included risk and risk assessment. The audit found that when they talked to the FIs, they categorised risk as purely commercial and financial viability. The IFC focuses on their performance standards, updated in 2012, as the basis for risk categorisation consistent with World Bank categories, but this relies on self-reporting by the FI, with next to no oversight. IT also suffers from loopholes, e.g. microfinance is automatically considered to be band 2. For example a Cambodian commercial bank, cited in a Burma event yesterday, this Eclida has a track record of providing loans on un-repayable terms and result in losing their land – yet this is automatically classified as being in band 2.
Secondly, transparency – there are over 6 million sub-projects, and though there cannot be equal rigour across so many projects, nevertheless it appears that partly by hiding behind commercial confidentiality which is often spurious in the context of poverty eradication, which industry often concedes in the main.
Thirdly, compliance – the audit found that 90% compliance still was based on a box checking exercise, and in many cases the implementation is neglected nor is there strict requirement to demonstrate that processes behind the exercise are implemented. Hence great policies on paper are not connected to outputs on the ground.
Finally, access to redress mechanisms – making communities aware that they have access and how to access redress is incredibly difficult to lodge a complaint, and it took an organisation as large as Oxfam a year to be able to support.
A large civil society coalition has gained ground, as we know that the Bank board has convened to discuss the concerns we raised, which have accepted that the IFC work is not good enough, requiring a revised management response. A workshop today at 2pm by IFC is a consultation on this process.
President Kim highlighted his vision paper of his October 2013 strategy, and the goals on poverty and inequality are prefaced on the role of the private sector.
Carlos Bedoya, LATINDAD
This is a theme which Latindad has been observing and worrying about for some time, since the 1990s, however we feel that now the moment is riper due to the multilateral institutions raising and proposing an enormous amount of money toward this leveraging process.
It is presented as if there are a number of benefits achievable via support to the private sector – infrastructure, energy, public services including health and education.
The emphasis is on private intermediaries, and the possibility of a win-win, by job creation and profit-creation, and thus the state expands its coverage and provision of access.
In Latin America, we have many experiences with public private partnerships, identifying many positive and negative experiences.
There are 3 problems which LATINDAD had identified in the negative experiences.
- The first issue is the possibility of exploiting public funding to maximise private profits, e.g. in Social security, where people receive services which may not be needed, which has been documented in hospitals which conducted a series of interventions which were clearly seen to be unnecessary
- This neoliberal concept of the privatisation of the state – this is therefore a transfer of the responsibility of the state of its role and functions, including for development, hence this combination contains an incompatibility of the public role of development and the private mandate to maximise their profit.
Thus private entities often cancel the provision of unprofitable services which are nevertheless contingent on the provision of services which are human rights.
- The other problem is the capture of ODA resources, and their transformation into a support to private sector entities, rather than as they were hitherto support to NGOs and social institutions or groupings. On the public side this may even be counted as ODA.
Currently, given the infrastructure gap that Latin America suffers from, the Inter-American Development bank emphasises this and the use of public money in pension funds, and argues that the path to development is to channel these resources to public-private partnerships
The flow of capital in Latin American lately has reflected three factors, firstly the low rates/returns due to the policies that occur in the United States and Japan, hence the carry trade taking funds from northern economies to Brazil is a case in point. Secondly the high prices of raw materials are creating high inflows of capital, such as in the case of gold, copper and other materials since 2002 have increased insignificantly. This is also related to the on-going crisis in developed economies, which is pushing capital towards new frontiers.
This inversion of capital flows are principally captured in the extractives sector, principally oil, gas and minerals. There are three types of flow, including sovereign debt, and private debt which we see creating a potential future debt problem, and the FDI which as I pointed out is focused principally on the extractive sectors.
Hence in Latin America, public resources in the region have been accumulated in the form of principally US treasuries.
So, what is the source of funding for the private sector?
- International cooperation, ODA
- Regional and multilateral institutions, e.g. IADB
- Possibility of public private partnerships
In terms of ODA, we are seeing more interest in combining concessional and non-concessional credit – blending – which we believe more funding to the private sector will be counted as ODA. Civicus recently reported on how NGOs who now have to compete with companies raising funding for so-called social responsibility, which is often little more than marketing.
So, in terms of the windows from some of the regional institutions, the IDB’s private sector window lends directly to private entities, they also channel many high interest rate loans to small producers, and in 2011 in Latin America 1.5 billion USD were directed just to the private sector in Latin America.
This issue, in particular in Latin America, is a policy of financing to the private sector which for example in Brazil with BNDES, a lot of funding is directed to domestic companies in order to support their expansion. Another area of significant use of public private partnerships, increasingly in the health sector, and for many ears already in the energy and other sectors.