The development effectiveness of supporting the private sector with ODA funds

Development funding is increasingly being channelled through Development Finance Institutions. These national institutions are particularly solicited when using development aid money to free up further investment, known as leveraging. When used well, these tools have the potential to allow sectors of developing countries’ economies that wouldn’t otherwise attract investment to strengthen and expand. However, this joint TUDCN-CPDE research paper highlights a number of alarming shortfalls in how these institutions operate that can seriously undermine international development goals.

This new report, entitled ‘The development effectiveness of supporting the private sector with ODA funds’ examined nine Development Finance Institutions (DFIs). It is jointly produced by the CSO Partnership for Development Effectiveness (CPDE) and the TUDCN. Five case studies (available below) provided a background for the study which found that DFI practice is lacking in three vital areas :

Ownership

Ownership has been repeatedly highlighted as a fundamental pillar of development. In spite of that, the majority of the DFIs examined had policies that expressed a preference for supporting the interests of the donor country. This is in clear contradiction of the aim of promoting local ownership and that of ensuring that aid by untied from external interests. In the case of COFIDES (Spain) and OPIC (USA) they go as far as requiring that any investment they make benefit their national (donor) companies. It is perhaps no coincidence that these are the only two DFIs examined in the study that are part owned by private national stakeholders. The issue of private ownership needs to be addressed as it creates a bias that can evidently lead to the compromising of development interests. The concept of ownership also extends to setting the aims of projects. However, not one of the DFIs require that either developing country governments or local social partners be consulted in setting out the aims of a project.

Development results

In order to obtain a good and independent idea of what the development impacts are on the ground, there is a need for performance standards and monitoring systems to be accessible. However, reporting standards are insufficient across the board. There is currently too strong a reliance on self-reporting and limited use of monitoring indicators. Key documentation required for ensuring accountability is not made available. Furthermore, as highlighted by the Panama Papers, it is widely recognised that offshore financial centres (OFCs) have a negative impact on developing countries. It is astounding then that 75% of CDC’s (UK) investments went through jurisdictions that are among the 20 most secretive. This poses serious challenges to the transparency of the DFIs’ work.

Mutual accountability

Meanwhile, accountability flows in only one direction. There is a need for stakeholders to have access to essential information and for complaint procedures to be systematically put in place in order for the opinions of the beneficiaries to be heard. The ability of workers to get organised and raise a complaint to the relevant body is also questioned. This reflects a broader approach of DFIs to labour standards as distinct from development goals. This outlook is symptomatic of a general contempt for labour interests among DFIs which is otherwise illustrated by the fact that none of them require the board to include a workers’ representative.

In light of these findings, the current performance of DFIs is unsatisfactory. Examples of best practice can lead the way to a sustainable approach to the use of financial tools for development. We will be joining our voices to this call.

The full report is available here : EN FR ES

The full case studies are available here :