International development aid going to private companies

Last year world leaders gathered at the Fourth High Level Forum on Aid Effectiveness in Busan, South Korea to discuss the future of international aid. Amongst the negotiations and political wrangling there was one message that governments appeared to agree on: that the most effective and fairest way to administer international aid would be to hand control over to recipient governments. However, despite this apparent consensus, new research shows that donor governments are continuing to invest public money into private companies, many of which are based in affluent, developed countries.

A new report by the European Network on Debt and Development (Eurodad) has examined around $30 billion of private sector investments in the world’s poorest countries. The donations were made by European governments, the European Investment Bank (EIB) and the World Bank, among others.

Almost half of these investments went to firms based in OECD countries. Many of these are major companies, around 40% of those examined by Eurodad, were listed in some of the world’s largest stock exchanges.

UK based companies are not missing out. Out of the top 15 investments from the EIB and the World Bank International Finance Corporation (IFC), two are investments to UK domiciled companies: Helios Towers and Vodafone Ghana.

By comparison, only 25% of companies supported by the EIB and IFC were domiciled in developing countries.

What is more, Eurodad’s research found many of the biggest investments in international aid are in fact going to firms based in tax havens.

The report went further.  It found that 50% of aid given by the EIB was given through financial sector intermediaries. Giving to financial insitutions reduces transaction costs and can facilitate investments in micro, small and medium enterprises. However, these financial intermediaries include banks, hedge funds and private equity funds and many have extremely opaque reporting systems.  The result? It’s very hard to track how money is being invested.

Development Finance Institutions (DFI) and aid agencies argue that private sector companies can leverage more finance from their investments than development institutions could mobilise alone.

But Jeroen Kwakkenbos, Eurodad’s private finance analyst and author of the report, disagrees. He argues that the term leverage is too vague and results are not clear-cut.

‘Private investment where it’s needed and appropriate can be valuable, but there is little evidence that donors and international institutions have a clear plan. Too much public money ends up supporting rich country firms. Too little goes to nurture the domestic private sector in the world’s poorest countries,’ he said.

Eurodad predicts that by 2015 around a third of all external public finance going to developing countries will be handed to private sector companies.

Read the full report here

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