Report says more transparency needed to ensure aid funding used to leverage private finance for development is well invested

This article is more than 3 years old

This article is more than 3 years old

Aid donors are increasingly spending public money to encourage private investment in poorer countries but it is unclear where these funds are going and what impact they are having on development goals, according to a critical new report published on Thursday.

Some donors and development banks have claimed “blended finance” can help plug the gap in funding needed to meet the sustainable development goals (SDGs), one of which is to end extreme global poverty by 2030.

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Proponents argue that traditional aid is not growing fast enough but it can be used to encourage private investors to put their own money into projects that otherwise seem risky. Forms of blended finance include guarantees, insurance and some loans.

The report, from independent research group Development Initiatives, said that the discussion “has been based on very little evidence to date”. It warned that donors increasing this funding now are “doing so with inadequate information”.

Harpinder Collacott, executive director at Development Initiatives, said: “The information available … is just too limited for good decision-making. We do not know how we should be scaling up aid investments in this area, ensuring it is having the impact we need it to.”

The report analysed the limited data available on blended finance and argued that even at high rates of growth, it would be almost impossible for it to plug the SDG funding gap – which is estimated to be as high as $3.1tn (£2.49tn) annually by 2030.

Most of the money so far, the report added, has supported investments in wealthier developing countries and places with lower poverty rates. Energy, construction and mining projects received much of this finance.

“Development actors should not, therefore, see blending as a ‘[magic] bullet’,” the report concluded.

It said a common reporting standard needed to be developed and that donors must find a way to disclose more information on who ultimately benefits from this finance.

“Transparency isn’t just about international institutions reporting to the OECD [Organisation for Economic Co-operation and Development] – it is important for accountability at the local level,” stressed Dan Coppard, research director at Development Initiatives, who said it was “extremely hard” to trace this kind of spending to the ground.

“It largely bypasses governments in developing countries and goes right to the private sector,” Coppard added, noting that the complexity of some investment structures can make following the money even harder.

The report comes as OECD donors are considering changes to the rules on what spending can count as aid. A proposal being discussed would broaden the rules to allow support for private sector investment, including forms of blended finance, to count.

A 2016 OECD report argued: “Blended finance offers huge, largely untapped potential for public, philanthropic and private actors to improve the scale of investment in developing countries.”

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In July, a senior executive at the World Bank’s International Finance Corporation (IFC) argued: “These instruments can incentivise private finance for investments with strong social and development benefits that would otherwise not materialise due to higher actual or perceived risk.”

A 2016 report from the UN secretary general questioned the impact of blended finance. “There is insufficient evidence and ongoing debate on whether ‘blending’ mobilises additional private flows, supports national sustainable development priorities or increases sustainable development impact,” the report said.

Civil society groups and NGOs have also previously warned that there is little evidence to support spending more aid money to promote private investment. The lack of transparency around this spending has long been a point of criticism.

“We shouldn’t shy away from development assistance leading to commercial gain,” said Coppard, as long as there is also evidence of poverty reduction. But he said proposed changes to the aid rules “warrant substantial scrutiny”.

The “guiding principle”, argues the report, must be to ensure this finance “increases available resources for targeting poverty”, rather than encouraging “private investment … as an end in its own right”.

According to an OECD survey, aid donors helped “mobilise” $36.4bn in private sector investments between 2012-14.

The UK supported investments worth $2.7bn in 2014 – mostly through the CDC, the government’s main vehicle for supporting the private sector in developing countries.

Examples of blended finance include subordinate loans or equity stakes, guarantees where the donor agrees to repay a loan if the borrower cannot, political risk insurance, and technical assistance to conduct feasibility studies for the investment potential of a project.