“Shadowy” development finance institutions accused of failing to hear voices of the poor, lend to rich country companies - report

by Astrid Zweynert | azweynert | Thomson Reuters Foundation
Thursday, 10 July 2014 20:43 GMT

Jin-Yong Cai, chief executive officer of the World Bank Group's International Finance Corp., addresses a news conference a forum in Yangon, Myanmar, Feb. 5, 2013. REUTERS/Minzayar

Image Caption and Rights Information
Report criticises development finance institutions for failing to make more loans to companies in low-income countries and not listening enough to the poor

LONDON (Thomson Reuters Foundation) – Billions of dollars of taxpayers’ money to tackle poverty in developing countries is being spent by public finance institutions to fund private sector projects with little input or influence from the people whose lives they are expected to improve, a report said on Thursday.

The European Network on Debt and Development (Eurodad) said development finance institutions (DFIs), such as the World Bank’s International Finance Corporation (IFC) and the European Investment Bank (EIB),  offer “minimal support” to companies in low-income countries and consistently fail to include recipient countries in their investment decisions.

"Eurodad's principal concern is that almost all DFIs are owned and controlled by rich country governments, with little effective input or influence from developing country governments, and even less from other developing country stakeholders," the network of 48 non-governmental organisations from 19 European countries said.

"This imbalance in power structures means… that companies from wealthy nations have often received the lion's share of contracts,” Eurodad said in its report, based on its research over the past two years.

The influence of DFIs, which are government-controlled institutions that invest in private sector projects in developing countries to help reduce poverty, has grown as governments scramble to finance their aid budgets and donors look for alternative ways to fund development programmes.  

The amount of private aid money being channeled through the private sector by 2015 is expected to exceed $100 billion, almost two thirds of official development assistance, the report said.


Eurodad’s research shows that just 25 percent of all companies supported by the EIB and IFC between 2006 and 2010 were domiciled in low-income countries.  Almost half of funds distributed by DFIs during the same period supported companies based in member countries of the Organisation for Economic Co-operation and Development, many of which are among the richest nations in the world, and some in tax havens, the report said.

Almost 40 percent of the beneficiary companies were big firms listed in some of the world’s largest stock exchanges, Eurodad found.

Eurodad  called for a review of DFI operations by a committee of independent experts from governments of low-income countries, civil society groups and the private sector in developing countries.

The EIB 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”. This includes regular meetings with civil society organisations and working groups with ambassadors from more than 50 African, Caribbean and Pacific countries.

“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, “Willis told Thomson Reuters Foundation. The EIB follows European Union procurement rules and has no preference for European contractors, he said.

 “It would be great if for every project you could find local companies,” Willis said. “But the reality is that quite often big global companies bring the expertise needed… We’re training people on the ground, so that those skills can be used on the ground next time.”

At the IFC, developing countries since 2010 have had a majority of seats on its executive board.  In an e-mailed statement Serene Jweied, IFC's head of media, said the World Bank's financing arm has steadily ramped up its investments to low-income countries in the past decade, while the rest of its lending has gone to many develping countries like India and Brazil that have large numbers of poor people.

"Since 2005, our investments in the 82 poorest countries, those eligible to borrow from the World Bank's International Development Association, have grown eightfold to a record $8 billion in fiscal 2014. That accounted for 32 percent of our overall investments for the year," she said. 

Critics also have called into question the development benefits of DFI’s investments. 

The report cites investments by Britain’s CDC, formerly the Commonwealth Development Corporation, which invested more than $260 million in 44 property and construction companies in Latin America, Africa and Asia to build gated communities, shopping centres and luxury properties in poor countries.

Investors said their funding would help secure local jobs but critics voiced concern that these investments were not a good use of aid money.

Among IFC investments that have come under fire from campaigners are $26 million invested in the Moevenpick restaurant chain and $53 million in Marriott hotels in Ghana and Jamaica, the report said. Both investments were justified by their potential to create jobs but were criticized for their questionable development input or need for public subsidy.

Our Standards: The Thomson Reuters Trust Principles.