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“Radical Reform” Urged for Private-Sector Development Support

Jim Lobe

WASHINGTON, Apr 23 2010 (IPS) - Policies and initiatives by multilateral development banks (MDBs) to support the private sector in developing countries need to be carefully reviewed and reformed to ensure they are reducing poverty and protecting human rights and the environment, according to a new report by a coalition of six major non-governmental organisations (NGOs).

The report, which was released on the eve of this weekend’s annual spring meetings of the World Bank and the International Monetary Fund (IMF) here, notes that annual financing by the MDBs to the private sector has skyrocketed from less than four billion dollars 20 years ago to 40 billion dollars in 2009.

With the MDBs calling for major increases in their resources to help developing countries recover from the global financial crisis that broke out in September 2008, the report argues that “radical reform” of these agencies’ mandates and operations supporting the private sector is necessary.

“In the aftermath of the financial crisis, there have been calls to increase multilateral financing to the private sector, and the (MDBs) are seeking to expand their activities, including their private sector activities, through additional public funding to increase their capital base,” according to the 24-page report, entitled “Bottom Lines, Better Lives?”

“However, this paper finds that without a radical overhaul of the MDB’s overall approach, such an expansion could risk doing more harm than good,” concluded the report, which was co-produced by ActionAid, Christian Aid, the Bretton Woods Project, Eurodad, Italy’s Campagna per la Riforma de la Banca Mondiale, and the Malaysia-based Third World Network (TWN).

In addition to the World Bank, the major MDBs with private-sector operations include the European Bank for Reconstruction and Development (EBRD), the African Development Bank (AfDB), the Asia Development Bank (ADB), and the Inter-American Development Bank (IADB).

The World Bank’s private-sector affiliate, the International Finance Corporation (IFC), is by far the largest of all of the MDBs’ private- sector operations, which, in addition to loaning or investing in private sectors operating in the developing world, also provide policy advice and technical assistance to both private companies and governments.

The IFC mobilised 14.5 billion dollars in new investments, including 10.5 billion dollars of its own resources, in private companies in developing countries in fiscal 2009, which ended last June.

The report stressed that the private sector can be a vitally important engine for sustainable development. But it can also be destructive to the goals of promoting sustainable development, reducing poverty, and protecting human rights and the environment, it said, noting that extractive industries, such as oil and mining, have often contributed to the “resource curse” that has stymied development in many countries.

While the MDBs since the mid-1990s have been relatively small players compared to overall private-sector activity and financing, their operations can exert a disproportionate influence on policies pursued by host countries and foreign investors.

Unfortunately, however, they have pursued “an investment climate approach” to the private sector, which has often meant “prioritising attracting foreign investment rather than focussing on those private sector activities that will do most to contribute to sustainable development and build a vibrant national private sector,” according to the report.

That result has not been surprising given the dominance of western countries on the MDB governing boards. “A pre-condition for any reform to improve the effectiveness of MDBs is fundamental change to governance structures to make them more democratic, transparent and accountable to the people who are most impact,” the report noted.

Similarly, MDB private-sector operations have generally used a “banking model” with the result that most of their support has focussed on sectors in developing countries in which investment reaps the highest financial returns, as opposed to those that favour the poor and other vulnerable sectors of the host population.

Accordingly, the MDBs’ project selection, monitoring and evaluation procedures have tended to give priority to commercial or profit-making rather than social and environmental returns, the report said, noting that internal reports by the banks themselves have often come to a similar conclusion.

The report expressed particular concern over the rapid growth of “arms-length” financial-sector investments in which the MDBs have delegated much of their work to intermediary private banks or equity firms in an effort to build up local financial sectors. The report noted that this part of the MDB investment portfolios is “extremely poorly monitored, based almost exclusively on self-reporting”.

The IFC’s portfolio of financial-sector investment grew seven-fold between 2004 and 2008, from 1.7 billion dollars to 12.3 billion dollars, according to the report, which also noted “evidence that the environmental and social performance of MDBs’ financial sector investments is consistently low”.

The report urged several major reforms, including the downgrading the importance of attracting foreign capital in favour of efforts designed to support “a strong and diverse national private sector, tailored to specific country circumstances”.

In addition, MDB private-sector activities should only focus on areas where sustainable development benefits are high and private finance weak, according to the report.

With respect to the “arms-length” financial-sector investments, the report called for supporting strong, locally-owned institutions that are focussed on providing financial services to the poor and supporting sustainable development.

IFC spokesman Aaron Rosenberg said the report was “not bad”, but complained that “it just doesn’t go very deep in terms of actually discussing the challenges of development and what role the private sector should play”.

“The report starts from the premise of questioning the value in private sector financing from MDBs, which we fundamentally don’t agree with,” he told IPS. “The number one thing that the poor want is job, (and) the private sector, especially the SMEs (small and medium enterprises), is the number one creator of jobs.”