International Development Committee: Investment for Development: the UK’s strategy towards development finance institutions
February 2023
Word count: (3305)
This evidence is submitted by Christian Aid:
For further information contact Ashley Taylor ajtaylor@christian-aid.uk
Christian Aid is the official relief, development and advocacy agency of 41 sponsoring churches in Britain and Ireland. We work in all our country programmes through local partner organisations. Through their experience and expertise our partners are able to access some of the most vulnerable communities and ensure that their voices and needs inform our programmes.
Submission Questions:
The International Development Strategy, launched in May 2022, confirmed the cutting of the UK aid budget from 0.7% to 0.5% of Gross National Income. On 17th November 2022, the Autumn Budget affirmed that a return to 0.7% would be reviewed annually, but that the amount would stay at 0.5% of GNI until then. Christian Aid has previously highlighted the impact of this decision on global poverty at a time when most of the world’s poorest countries are increasingly experiencing a nexus of compounded vulnerabilities owing to climate change, Covid-19, rising debt and increased levels of conflict. This nexus of vulnerabilities means the world is now “tremendously off-track” to meet the SDGs.
Alongside the cuts to aid spending lies a trend of increasing percentages of aid being used to leverage private finance. British Investment Partnerships (BIP) is a packaging together of (mostly pre-existing) financing instruments to facilitate investment in development partner countries. At the core of this is the British International Investment (BII), which will scale up investments to around £9 billion between 2022 and 2026, in order for BIP to mobilise up to £8bn a year of public and private investment by 2025.
We know BIP is playing a collaborative role, liaising with other G20 members on the mobilization of £600bn for the Global Infrastructure Investment Fund and working with the G7 on getting overseas development aid (ODA) to eligible states, mainly in Africa and Asia for instance. Given its independence (see later comments) it is unclear whether BIP will have any particular responsibilities or oversight of BII. Greater clarity from BIP on its role as well as how it intends to achieve the targeted £8bn a year in terms of the proportions of ODA, other public money and private sector finance, is urgently required.
Christian Aid recognises that supporting market based solutions that promote economic development and create quality jobs in some of the world’s poorest places is an important part of the development mix. We also recognise the huge finance gap in funding development, including climate finance, that still need to be plugged. So clearly there is alignment to the FCDO development agenda at its broadest level.
There are questions, though, as to the effectiveness of different models in promoting equitable, sustainable, pro-poor development, and whether the shift towards greater levels of public development finance being directed towards leveraging private investment has gone too far. We are not yet convinced that this kind of blended public and private finance can really reach the world’s poorest and most marginalised, and how the negative impacts referred to below can be guarded against. It is unclear how FCDO evaluates the relative contribution of different parts of its agenda, such as on the basis of value for money or impact and how these are weighted.
The new BII strategy for 2022-2026 states that having a positive impact on low-income populations is one of its priorities and that investments will create better jobs and livelihoods for those in poverty, and improved goods and services that meet the needs of low-income populations. However, BII’s definition of low income is suppliers and customers who live below the US$5.50 per day purchasing-power-parity poverty line. This figure is close to the poverty line in upper middle-income countries, in contrast to the US$1.90 a day for low-income countries.
Historically, the poorest communities have not necessarily been the main beneficiaries of an investment by CDC, as well documented examples like the $25 million invested in East Africa’s largest shopping centre, one of 20 similar investment, have illustrated. BII needs to look at this going forward.
BII’s Chief Executive, Nick O’Donohoe, has argued that BII’s work must be considered in the context of the FCDO’s wider work. He commented that ‘there is a huge need for support among people who are living on less than $1.90, and the FCDO and the UK do a fantastic job of that, but it is not the only thing that we need to do. We need to help grow these economies, so that more people have a higher standard of living. That has been a precursor to poverty alleviation in every country.’ Whether FCDO and UK can continue to do the same ‘fantastic job’ with the budget so heavily reduced, especially if it is partly due to the amount of ODA going to BII, is doubtful.
Ticket sizes for BII’s direct investments are typically large, and therefore not suited to addressing important aspects of developing economies such as financing of the micro, small and medium enterprise (MSME) sectors, which play a crucial role in developing economies. One way round this issue is for BII to invest through financial intermediaries, but this creates significant challenges in ensuring full transparency and accountability, an area BII is already struggling with as mentioned later.
There are also clear inconsistencies with FCDO agenda at the thematic level. BII’s continued investment in fossil fuels (CAFOD estimate that as much as 20% of BII’s direct and indirect investments are still carbon-related) raises serious concerns as do the negative impacts created by some of its health and education investments. BIIs contribution to what constitutes official climate finance that is reported to UK ICF is also disputed.
Christian Aid is concerned by the possibility of political interference in BII’s strategic outlook. In announcing the release of the IDS, then Foreign Secretary Liz Truss argued that BII was an important tool to “[challenge] some of the geopolitical efforts by malign actors”. She told the Financial Times that BII would prioritise infrastructure investment, offering low- and middle-income countries ‘alternatives’ to taking on ‘strings-attached debt from autocratic regimes’ and non-market economies. She signalled that using economics as a foreign policy tool to exert more global influence was a “core part of the Global Britain agenda”.
BII’s Chief Executive, Nick O'Donohoe, has said that he did not recognise the controversial comments made by Liz Truss about BII’s mission, and argued that development still lies at the core of BII’s strategy. However, when the Government indicated a pivot to the Indo-Pacific and Caribbean, BII followed suit, undermining its claims of independence. This suggests BII is, in part, prioritising the UK’s geostrategic interests ahead of those living in poverty. And hence it likely follows that at least some of BII’s investments are focused more on promoting trade with the UK rather than pro-poor outcomes.
This rising increase in political interest is also adding to BIIs complex task of balancing different and sometimes competing priorities in climate finance, gender equality and low-income and fragile countries. It also means that BII, and DFIs generally, will (rightly or wrongly) likely begin to play a greater role in global decision-making and this should be monitored.
Christian Aid also believes there is scope for much greater collaboration amongst DFIs and other development institutions to develop strategies to provide finance to the most difficult to reach countries as well as being more proactive in engaging around long-term systemic change. This is about looking holistically at the structural barriers to lifting people out of poverty, instead of DFIs following each other into the same investments, which has the potential to crowd out private money.
Other times, single DFIs have invested with private companies where other investment partners would have potentially stepped in. For example, the BII invested $720 million, its largest investment ever, in developing ports in Africa with DP World. Although the creation of 138,000 jobs is undeniably impressive, it has been suggested that DP World would have been able to find other partners for this investment. DFIs could, and should, use their expertise to help governments develop reform programmes that would help attract some new capital, rather than investing in their place- though care must also be taken not to further restrict fiscal space in developing countries.
Unlike other public listing companies operating in the highly-regulated financial services sector, BII is not subject to the same intensive, rigorous daily scrutiny by institutional investors and analysts. This lack of scrutiny weakens the governance and internal oversight mechanisms and despite scrutiny from FCDO, NAO and ICAI we are concerned by the lack of effective public accountability, transparency and oversight. In particular, we see no formal role for developing country governments, local communities and local civil society organisations, in providing oversight of BIIs investments.
Transparency, or the lack of, generally is a real issue. It seems far from easy to track the large amount of money channelled through BII in a similar level of detail to that spent through bilateral programmes, grants to multilaterals or NGOs. BIIs supposed independence should not obfuscate good evaluation. As the recent report from Publish What you Fund notes “There is no published information about their investments since Aug 2021, and no demonstrable accountability to its stakeholders, particularly local communities”.
Publish What you Fund’s Aid Transparency Index, which focuses on aid generally, rather than just BII investments, states ‘FCDO has performed significantly worse in the 2022 Index compared with DFID’s performance in 2020. Its score is 13.5 points below DFID’s 2020 score and it fell 7 places to 16 in the ranking. It is now in the ‘good’ category, dropping out of ‘very good’ for the first time since we introduced the categories in 2013’. The Centre for Global Development has similar findings on development finance institutions generally and has set out minimum standards and principles for improving transparency.
We require much greater openness and give insight into how investment decisions generally are made within BII. In particular, BII should explain
A lack of transparency is particularly acute when investments are made via financial intermediaries (FIs) often companies like commercial banks, investment funds and hedge funds that on-lend financing to micro, small and medium-sized enterprises (MSME) in developing countries.
Christian Aid accepts there is some rationale for investing via FIs. It has the potential to increase both the breadth and depth of BII’s activity. As noted above, ticket sizes for direct investments are typically large, and therefore not suited for addressing important aspects of developing economies such as financing MSME sectors, which typically represent a large portion of a developing country’s gross domestic product and create the majority of new jobs.
However, investments via FIs have also proven to be amongst the most controversial. Accountability groups have regularly documented the harmful environmental and social consequences of FI investments and have raised concerns related to investments in coal power stations and links to other fossil fuels, the predominance of tax havens as domiciles for private equity funds and questions of corruption.
Greater transparency is critical in navigating the risks associated with FI lending. It is especially important for project-affected communities to know whether a DFI has indirectly financed a project that impacts them, so they can hold DFIs accountable and seek redress where harm is caused.
An example of poor transparency relates to disparities between disclosures by private equity funds and BII regarding its investment in Silverlands I. Silverlands is a private equity fund managed by SilverStreet Capital that focuses on agricultural investments in East and Southern Africa. SilverStreet Capital discloses an annual Impact and ESG Report that covers the funds under its management. This detailed report contains impact data including indicators such as “new jobs created” and “community participants impacted” that is disaggregated to the sub-investment level. It also discloses impact data specific to particular sectors such as cattle farming with indicators such as “cattle mortality” and “calving rate”. SilverStreet Capital’s ESG reporting makes specific reference to BII’s responsible investment code and IFC’s Performance Standards, publishing compliance rates to the former. However, BII does not disclose any information regarding either impact or E&S risks for their investment in Silverlands I. Given the fact that so much data is already publicly available there is no why they should be unable to.
Worryingly, DFI leaders have said that lending to FIs was prioritised during the pandemic as it was an effective way to quickly get money out to support local economies. In earlier submissions to the IDC, we noted and welcomed a suggestion from Andrew Mitchell that CDC should reduce the proportion of its investments made via third party fund managers. In 2018 research conducted by Oxfam indicated that FI investments represented 55.4% of the International Finance Corporation’s (IFC) total investment portfolio and 52% of CDC’s portfolio. However, BIIs latest report suggests this number may have fallen to around 33%, and 2021 new investment figures suggest it might fall further.
BII should clarify its expectations regarding the role and amount of intermediated investments in future. If it continues to use FIs, it needs to be clear on how it will address the problems that creates in sacrificing transparency in decision making and oversight. And if it doesn’t use FIs, or scales back its use, it needs to be clear on how will it reach MSMEs, or if doesn’t feel it can, it should be clear about that too.
It is extremely difficult to find an answer to this most fundamental question of how budget is determined. It is not clear whether it is simply in the Development Minister’s gift to essentially decide that a large chunk of the UK’s aid budget goes to BII or whether a more formal process exists. If it does, does it involve input from parliamentarians and others, and how is the poverty impact of spend on BII analysed compared to other ODA spend?
Given the cuts to ODA and the increases to BII (a threefold increase in funds over the last five years according FCDO 2021 Annual Report and Accounts and a suggestion that current levels are to be broadly maintained for the next five years according to the IDS), it seems pertinent to ask question about the absolute and relative impact of BII. As Christian Aid agrees that different modes of finance have a place in contributing to development outcomes, there is a case, in principle, for some ODA going through BII. But, this must be subject to the BII demonstrating considerable progress in relation to addressing the serious concerns regarding transparency and accountability set out in this submission. Given the pressure on BII to demonstrate a return on investment, especially in a context of the increasing percentage of ODA it receives from a smaller aid pie, there seems a real danger that this increases a focus on the bottom line (return on investment) rather than more holistic impact.
If BII is investing ‘patient capital’ for the long term, then arguably it is easier to scale up its investments than scale down. Capacity is likely to be an issue though and trying to scale investments too quickly will almost certainly create a bias towards bigger ticket items and investments through FIs, neither of which necessarily improve pro-poor outcomes as per comments above.
Critically, scaling up need not require more and more ODA. BII can recycled its returns (which have been relatively high in recent years) alongside leveraging private finance. While we are aware FCDO has guidelines for crowding in private finance on individual investments, it is unclear how much private financing BII expects to leverage in the tenure of its current strategy and it should clearly set out its intentions.
See comments above regarding our concerns governance, oversight and transparency.
BII notes that ‘it will publish information relating to its investments and operations, to the extent useful and relevant to interested third parties and as permitted by applicable law and the requirements of commercial confidentiality’. Given our comments on transparency, Christian Aid is far from clear on what BII considers to be ‘useful and relevant’, though it doesn’t seem to align with our own requirements.
Christian Aid is pleased to see that BIIs Catalyst Fund, which is aimed at higher risk transformational investments is expected to grow to 10-15 per cent of BII total portfolio by value by 2026 (it is currently about 8.5% in 2021). Unlike the Growth Fund, the Catalyst Fund seemed more closely aligned to achieving pro-poor outcomes.
Weaknesses in the ongoing management of investments (which are linked to the broader concerns over governance and oversight set out above) are very clearly evidenced by the growing volume of research showing the (unintended but not unpredictable) negative impacts that some of BII’s investments are having. The latest example made the headlines last month British taxpayers funding Kenyan hospital accused of imprisoning patients (telegraph.co.uk). In recent years, there have also been reports of investments in plantations in the Democratic Republic of Congo where workers were being mistreated A Dirty Investment: European Development Banks’ Link to Abuses in the Democratic Republic of Congo's Palm Oil Industry | HRW. Worryingly there seems to be no effective independent accountability mechanism for affected communities to make complaints about projects and seek redress.
BII has a real opportunity to build trust if it is open and transparent about where their investments have had negative (as well as positive) impacts. It should list these investments alongside its successes, set out the action it has taken in response to the negative impacts, including redress to those affected, and what it has learned and will do differently in future.
Aside from some baseline metrics in BII’s annual report, we again believe this is a difficult question to answer owing to the general lack of rigour in disclosure and transparency.
For example, the headline statistics on job creation - investments in 1300 plus businesses (705 in Africa and 451 in Asia) have supported close to a million jobs – this looks great, but we know this is indirect job creation and the data is not presented in a way that allows us to properly analyse it. We want to know the split of jobs created between middle income and low income countries, whether they are quality jobs with a positive impact on gender equity and whether we can be sure they would not have been created without BII investment.
Similarly, the headline figures for tax revenue of $3 billion from the new jobs created and $1.5bn from those companies that BII is investing in looks impressive, but needs to be unpicked to properly understand the impact.
BII should explain whether the profile of countries and sectors it invests in, mirrors the harder to reach places, or are they more likely to be ones which already have a certain degree of stable institutions, economic dynamism etc – essentially riding on the back of decent development waves. And, in sectoral terms, are the companies backed, ones that complement other UK (or other donors’) aid spending.