Sovereign Wealth: Two ways African governments can hold DFIs accountable

Edward Jackson

Edward Jackson

Ted Jackson is President of ET Jackson and Associates Ltd, and Senior Research Fellow at Carleton University.
Edward Jackson

At a time when Africa’s rise has been stalled by a slow-down in the Chinese economy, depressed global commodity prices, continuing electricity brownouts, sustained high youth unemployment, and high-profile terrorist attacks,  there is little question that African governments need the investment capital of western development finance institutions (DFIs).

However, host governments face real obstacles to holding DFIs accountable for their actions. The good news is that there are solutions, and that African evaluators are well-positioned to help their governments overcome these challenges.

Development finance institutions play important roles

KFWTo be sure, there is much to like about what DFIs do and how they do it. Using equity, loans and guarantees, they invest in local financial institutions, including microfinance programs, infrastructure projects, manufacturing operations, and agriculture-sector businesses.  These investments create jobs, directly and indirectly.  DFIs insist on business discipline on the part of their investees.  They often apply social, environmental and governance standards to their investment partners, as well.

Plus, most DFIs have well-developed evaluation practices. Impact by Numbers For example, the German development bank, KfW, adheres to OECD criteria in framing its assessments.  Some employ multi-level theories of change, like that of the Private Infrastructure Development Group, a vehicle for DFIs and donors.

And they are significant players.  Fifteen European DFIs manage a combined portfolio of $33 billion ($10 billion of which is placed in Africa, the Caribbean and the Pacific) spread across 4,000 projects. Moreover, between 2004 and 2014, these organizations reported an increase in the value of their portfolios of a remarkable 240%.  America’s DFI, the Overseas Private Investment Corporation (OPIC), recently hit the $1 billion mark in its microfinance portfolio worldwide. DFIs are big, and they are getting bigger.

Impact ProgrammeFurthermore, some are becoming more intentional and targeted in the way they seek to achieve social and environmental impact with their investments.  OPIC has developed a new way of classifying and reporting on the impact of its investments.

The development finance arm of the UK’s Department for International Development (DFID) has launched an ambitious Impact Programme. Several funds of the Dutch DFI, FMO, target impact, as well.

EDFIIndeed, because of their size and stability, DFIs may hold the key to expanding the impact investing industry in such areas as renewable energy, sustainable agriculture and small business growth.  Recent studies document the extent of involvement of these institutions in East Africa and West Africa.

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But, DFIs prioritize the interests of their investors

At the same time, however, DFIs have also proven elusive from the point of view of African sovereignty. Their investment decisions prioritize, first and foremost, the interests of their financiers, western taxpayers, only after which the interests of the poor in investee countries are addressed.  And DFIs have been less than forthcoming in their reporting on the details of their deals, too often using the cover of commercial confidentiality to explain their lack of transparency.

As one African Finance Minister put it recently:  “These DFIs are working in my country, but I don’t know what they are doing.  And I’m the Finance Minister.”

There are two ways African governments can hold DFIs accountable

This situation is unacceptable, but it can be changed.  There are two practical ways in which African governments can hold DFIs accountable that are worth highlighting:

First, African governments can enable home-grown, development-oriented investors—private equity funds, public-private funds, non-profit impact funds, microfinance institutions, village loan funds and others—to form a Pan-African impact investment caucus to require DFIs to report their performance to continental and international bodies like the African Union and the Global Impact Investing Network.  Engagement and debate with the African caucus and governments should be regular business items on the agendas of these organizations.

Second, individual African governments can commission detailed, independent evaluations of the development, social and environmental performance of DFIs in their countries.  Using both qualitative and quantitative methods, these evaluations should examine the performance of a sample of the biggest DFI investments, and test the investors’ claims of benefits against actual results on the ground.  Third parties, like private foundations, might consider providing matching funds for these evaluations.

African evaluators should be centrally involved in these initiatives, applying their professional skills, ethics and independence at both the national and pan-African levels.  Their contributions would ensure that these reviews would be thorough, credible and actionable.

Development finance institutions can and should play an important role in Africa’s sustainable development.  They already do.  Now it’s time for the governments in whose territories DFIs operate to hold these development investors to account—because that’s what sovereign states do.

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