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UK development finance directed at some “questionable investments” without clear poverty focus

15 September 2023

International Development Committee calls for governance changes at British International Investment amid concerns over fraud and social and environmental harm.

Improving oversight, transparency and accountability

In a report today the House of Commons International Development Committee sets out the steps the UK’s development finance institution must take to improve oversight, transparency and accountability, after evidence that some investments do not have a clear poverty focus, are in conflict with the UK Government's policies or may actually have harmed society and the environment.

Building partnerships and investing for development is a prominent part of the UK's development offer, with British International Investment (BII) at the heart of the Government's International Development Strategy. While the Committee found that development finance institutions can make a substantive contribution to developing private markets in low- and middle-income countries, the Foreign, Commonwealth and Development Office (FCDO)'s 'hands-off' approach to overseeing BII's investment activity has resulted in some questionable investments. Financial intermediaries can deliver market expertise but can also result in UK taxpayers’ money being used to reward intermediary agents in low-tax jurisdictions.

The Committee says BII should strengthen its processes for assessing ‘additionality’ - a contribution beyond what the market could offer - for all future investments and where it cannot be demonstrated, BII must exit those investments as soon as practicable.

BII's investment in companies owned by high-net-worth individuals risks those investments not driving inclusive economic growth and restricts the ability of investments to reduce financial and social inequality. BII’s use of a $5.50 per day income marker to target investment activity has resulted in a high concentration of its portfolio in middle-income countries, with concerns that those investments are not always directly benefiting the world's poorest people.

Areas of concern

- BII holds some investments that conflict with UK Government policies, including some relating to fossil fuels. There has been no timetable from BII to adapt its legacy investment portfolio to align with UK interests.

- BII has concentrated 28 per cent of its global portfolio by value in India, a middle-income country. Five lower-middle-income countries account for a further 22 per cent of BII's total portfolio. In 2021, BII invested in just 15 fragile and conflict-affected states, with only Nigeria receiving more than one per cent of BII's total investment during that year.

- BII’s lack of control over investment intermediates has seen it invest in, or have difficulty divesting from, companies or projects that lack any obvious development outcome. Examples include a walk-in daycare surgery that restructured into a cosmetic surgery clinic in India. The restructuring occurred in 2015, while the investment was exited in 2023. A financial intermediary also invested Wine Connection, a business that holds food and beverage outlets across South-East Asia that remains an active BII investment.

- BII remains invested in Bridge International Schools through a financial intermediary despite allegations of violations of labour rights, child sexual abuse involving Bridge International Academy staff and students, and inadequate health and safety measures that led to the death of one child and the injury of another. BII did, however, divest from its direct investment in Bridge after allegations aired.

The recent UK Government decision to expand BII's remit to assist with the reconstruction of Ukraine demonstrates that the FCDO can intervene to steer BII's investment activity, even where BII does not have the necessary deep country knowledge and experience. The Committee recommends that FCDO should increase its oversight of BII and take a non-voting seat on the BII board: to ensure that BII's strategy and operations are consistent with the International Development Strategy and FCDO objectives, to protect taxpayers' interests and to ensure that BII's investments help the world's poorest people. It also says the BII must demonstrate the change created from its investments, such as those that promote gender equality and target under-represented groups. It must ensure that its entire portfolio is aligned with the UK Government’s development agenda.

Chair's comment

The Chair of the International Development Committee, Sarah Champion MP, said:

“Evidence to this inquiry has raised the concern that there is not enough oversight from Ministers on BII’s investments.

“It is not exerting sufficient control or transparency to ensure value for UK taxpayers’ money, or that outcomes match its remit or UK development goals and strategy. We certainly don’t need more business-as-usual investment in fossil fuels or through tax havens. The BII says it’s desperate to get out of dodgy subsidiary investments like a cosmetic surgery firm in India, but the fact that UK taxpayers’ money found its way there in the first place shows how poor control has been.

"With the ongoing hit to UK ODA, the pressure is on to target development assistance towards the poorest and most marginalised groups. The idea that FCDO representation on BII’s board somehow interferes with its commercial reputation doesn’t wash: the United States' International Development Finance Corporation, which has public sector Board representation, is the largest bilateral DFI in the world. The FCDO must create a stronger, clearer strategy for UK development investment with more oversight, more transparency, direct accountability to taxpayers and proof that of all BII’s work fully aligns with UK development strategy and goals.”

Further information

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