Hulp aan de private sector: de grote vraag is ‘hoe’

Donderdag 11 april vond het debat ‘Follow the Money’ plaats over de rol van het bedrijfsleven in ontwikkelingssamenwerking. María José Romero en Jeroen Kwakkenbos van Eurodad waren hierbij aanwezig. Romero reflecteert op het debat en vraagt zich af: is het mogelijk om twee (potentieel conflicterende) ambities van de Nederlandse regering, namelijk het uitbannen van extreme armoede en het ondersteunen van het bedrijfsleven om in het buitenland te ondernemen, met elkaar te verzoenen? Een frisse blik op het Nederlandse debat vanuit Brussel.

By María José Romero, Eurodad

A debate on the role of business in development cooperation last Thursday, 11 April in Amsterdam, raised one particularly revealing question for me: is it possible to reconcile two unrelated (and potentially conflicting) ambitions that the Dutch government has: “to eradicate extreme poverty” and “to facilitate success for companies doing business abroad”? Though most people agree that it’s important to unleash the potential of a thriving private sector, it’s also quite obvious that private companies are not development agencies.

In the case of the Netherlands, the new policy document “What the world deserves: A new agenda for aid, trade and investment” recently proposed by their trade and development minister, Lilianne Ploumen, has caused a polarised debate. On the one hand, politicians such as Christian Democrat Agnes Mulder say “the Netherlands does not need to be ashamed of their self-interest”. On the other hand, Bram Van Ojik of the Green Left replies, “of course it is okay if businesses seek profits and go for their self-interest. But just don’t use aid money for that goal, because aid is meant for poverty alleviation. (…) Poverty reduction effects of private business investment in developing countries: there are many shadow sides to that.”

I think the main point is not whether we should spend public money to support private sector development or not – we are actually already doing that through public procurement and development finance institutions (DFIs) – but rather how we should do it in order to reach development objectives. Sadly, the current model is seriously flawed, suggesting that something isn’t fit for purpose.

Eurodad research indicates that the vast majority of the public money channelled through both public procurement and DFI lending ends up in Organisation for Economic Co-operation and Development (OECD) companies and, in some cases, in tax havens. This means that these funds never reach the intended beneficiaries. This is also linked to poor governance mechanisms, which are crucial to determining the financial and development additionality provided by these resources.

On top of this, since the global economic and financial crisis, most bilateral and multilateral institutions have massively increased investments in developing countries’ financial sectors. Financial intermediaries (FIs), such as commercial banks, hedge funds and private equity funds, are some of the institutions chosen to channel public money. As Eurodad has shown in 2010, lending and investments in the financial sector by bilateral and multilateral DFIs increased, on average, more than two-fold compared to pre-crisis levels. This pattern seems to be here to stay. The rationale for doing this is the possibility of reduced transaction costs and of reaching small companies more easily. However, implementation raises many questions, as hedge funds and private equity funds in particular are normally very opaque in both portfolio and investment strategies.

Besides general statements of intent, it is almost impossible for external stakeholders to actually track whether bilateral and multilateral DFI lending and investments reached small companies and the real impact of this money on the ground. In its briefing Risky Business, Oxfam analyses the main problems of using this kind of intermediary to channel development finance, among them: “opacity, complexity, focus on financial returns over development impact, focus on financial risk over environmental and social risk, lack of oversight or ability to influence the business practices of investee companies, remoteness from the projects ultimately financed and the impacts they have on poor people.”

Some alarm bells have also been ringing inside the World Bank. A recent audit report by the ombudsman for the International Finance Corporation (IFC), the World Bank’s private sector arm, has revealed serious problems in the IFC’s knowledge of where its money ends up and the environmental or social impacts of its financial market lending. Alarmingly, the report also found cases where failure to comply with the requirements included in legal agreements, and major environmental impacts “did not cause the IFC to refuse additional IFC financing” to the client.

Coming back to the initial question, it seems that, in the current context, the objective of matching poverty reduction with support to the national private sector is, at least, not realistic. When using development money, why don’t Northern governments focus on promoting sustainable and equitable development, by recognising the importance of local ownership and aligning development cooperation strategies with the industrial or development priorities of developing countries? This seems a better place to start than supporting their own firms.  Development outcomes should be the overriding criteria for project selection and evaluation, while transparency and mutual accountability should be the norm. In short, proper implementation of the aid effectiveness agenda is still a good starting point.