Investing in Private Sector Development: What are the Returns?

This report reviews current development impactevaluation systems in European development financeinstitutions (DFIs). It concludes that some of theseinstitutions have clearly reformed their systemsrecently, are giving a higher priority to developmentimpact, and that this is illustrated in the increasingamount of data they are collecting. CDC and Norfundnow have extensive systems of social and environmentalreporting. However, there are problems remaining interms of what the data tells us about developmentimpact, particularly how much change can beattributed to the contribution of the developmentfinance institutions. In current systems the numbersare complex, their significance is opaque and theinfluence that the results have on actual investmentdecision-making is unclear.In light of this review we argue that the DFIs shouldintroduce more precise indicators on investmentdomicile, incorporating a preference for onshoredomicile; on the investment vehicle (broadly funds,firms, SMEs, MFIs), including a ceiling on managementfees and enduser interest rates; an influence measure,to mandate change either by using conditionality ondisbursements or government policy, and to particularlyaddress the problem of influence in intermediatedinvestments; a target sector indicator, with a preferencefor supplyconstrained sectors with proven developmentalimpact; and an employment process indicator, to ensuretrade union recognition and workers’ rights.There is also a need for a pollution managementindicator to ensure extra-territorial compliance withEU environmental law in DFI projects, and reform of thecorporate governance indicators to benchmark themwith relevant international standards, which would alsopositively impact on development.We argue that indicators whose line of causality tonormative outcomes is unclear should be removedbecause of their weak substantiation in research.This means that indicators on headcount employment,tax paid and currency effects are flawed. These shouldbe dropped or redesigned as comparative indicators toconsider displacement effects (for employment),business models and counterfactual cases (for tax),and country-by-country accounting with details ofintrafirm transfer pricing (to monitor currency effects).In terms of the systems as a whole there is a need forwider public participation. In particular, democraticaccountability and consideration of the political economyof development would be served better by an ex anteplanning and consultation process which should bemandatory for large, risky or contentious investments.Despite commendable recent reform, developmentimpact assessments tend to begin once the keydecisions, on who, how and where investments will bemade, have already been determined. The DFIs, privateequity funds and commercial bank intermediaries arelargely ‘black boxes’ into which the public cannot see,and decisions made within the supply institutions are notclearly influenced by the data provided by developmentimpact evaluation systems. Improvements to thebusiness and investment model (which is criticalto development effects) would require governmentintervention, and can be only partly influenced byimproved development impact assessment systems.