Risky Business: Intermediary lending and development finance

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This issue briefing highlights the increasing use by development finance institutions of financial intermediaries to channel their funding. It identifies features of this lending and the implications for affected communities’ access to land and resources. It also provides recommendations for addressing concerns related to these investments.
  Oxfam R IN w   Issue Br  SKY ERME w.oxfa   iefing BU DIARY m.org/ INE LENDI row Thinidcore T Thinof chbaFIinf edincoininf finInCFIthDdeanbuHisdepeco S G AN is issue brititutions ontifies featmmunities’ ommendat HE RIS e last ten yetitutions thatprojects or pannelled thr nks, or credilending is berastructure ducation. For ested $20mntroversy suolvement in rastructure iance suppor 2011, over hrporation (a . 3  The Euro last ten yeaIs promote tveloping ecod private fint is often sor wever, quesachieving thvelopment.ople living in ncern.     DEV fing highli financial ires of this access to lions for ad E OF ars have se fund develorogrammesiugh financia agencies. coming comevelopment,example, thequity in therounding thwater. 1  A re developing from develalf of the ovmember of tean Investrs, so that it he role of FInomies, thence plays a ely lacking. tions are bei desired resI-funded acpoverty con LOPM hts the inctermediarilending andnd and resressing co INANCI n a surge in pment. This n developinl intermediamon across and even b Internation $100m Asia World Banent study of countries fopment finanrall portfolio he World Baent Bank hanow accoun in helping te is a gap tocritical role ing asked abult of enviroivities that icerning land   NT FI easing use s to chann the implicurces. It alcerns relat AL IN the use of a model depar  countries. Iies (FIs), suall sectors, isic services l Finance C Water Fund’s support f 350 private nd that 125 ce institutionof the Internnk Group) ws doubled its for nearly o reach sma be filled: ac economic out whether mentally supact negatiand resourc ANCE by developl their funditions for af so providesed to these ERME new model ts from the dnstead, fundh as private cluding climlike healthcorporation (I. This has fur private secequity funds had receives (DFIs). 2 ational Finaas made up use of this 0 per cent ll businessecess to finannd social dethis new motainable proely upon thees are of par    18Ap   ent financng. It ectedinvestment IARIE f lending by irect financi are equity fundate finance, re and C) has elledtor backing developmecef lending to odel over f lending. 4 . 5  Indeed, in cial services velopment, el of lendin-poor rights of ticular ril 2012 e.   g,nt  2 WHAT IS A DEVELOPMENT FINANCE INSTITUTION? DFIs, unlike private banks, are guided by both the need to generate profit for their stakeholders and public policy objectives. The IFC, in common with other DFIs, has an explicit poverty reduction mandate. The IFC’s Performance Standards, which provide environmental and social safeguards, act as a benchmark for many other DFIs, including the Dutch FMO and the UK’s CDC. Multilateral and regional DFIs are owned by their member states. Bilateral DFIs can be co-owned by national governments and private interests. See Table 1  for examples of these different types of DFI. Table 1: Examples of DFIs Bilateral DFIs Regional DFIs Multilateral DFIs UK:  CDC Group plc France:  Proparco Netherlands: Netherlands Development Finance Company (FMO) Germany:  Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG) Sweden:  Swedfund Norway:  Norfund US:  Overseas Private Investment Corporation (OPIC) Japan:  Japan Bank for International Cooperation (JBIC) Canada:  Export Development Canada (EDC) Spain:  Compañía Española de Financiación del Desarrollo (COFIDES)  Asian Development Bank (ADB) Inter-American Development Bank (IDB)  African Development Bank (AfDB) European Investment Bank (EIB) European Bank for Reconstruction and Development (EBRD) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA)  3 PROBLEMS OF DFI LENDING TO FIs DFI lending to FIs is handled quite differently from lending directly to a project. Differences in change models, transparency, results sought and achieved, and defining and managing risks are significant. And yet, many activities funded through FIs mirror those funded via DFI direct investment – including extractive industry projects, commercial forestry plantations, dams or power plants and agribusiness. Among these are investments that can significantly impact local communities. It is striking that the only two complaints relating to IFC FI lending taken to the IFC’s redress and compliance mechanism, the Complaints Advisor Ombudsman (CAO), both involve land disputes. One case is that of a tree plantation project in Uganda, to which Oxfam and the Uganda Land Alliance are co-signatories with the affected communities; the other is the GKEL coal mine in India ( see Box 1 ). Box 1: GMR Kamalanga Energy Limited (IFC-backed coal-fired power plant in Odisha, India) In July 2011, the CAO accepted a complaint from communities affected by the GMR Kamalanga Energy Limited (GKEL) project. This sub-project was financed by the IFC through a 2007 $100m equity investment in the India Infrastructure Fund (IIF).   GKEL acquired 486 hectares of land. This included irrigated prime agricultural land and 362 hectares of private land that provided food and employment for nearly 1300 families. These people were displaced by the land acquisition for the GKEL project. The complainants allege that no livelihoods restoration plan was in place. Many families were not properly compensated, and hundreds lost access to land, crops, and property. The complainants also allege that proper consultation procedures for land acquisition were not adhered to, and that violence and intimidation accompanied the project. 8   The complainants tried for months to find out even the most basic information about the project and its backers. They say that, by protecting FIs from scrutiny and permitting high levels of secrecy, the IFC is having a harmful impact.   The IFC’s presence in this deal also appears not to have improved transparency, accountability, safeguards, or benefits for affected communities. Even leaving aside the serious impacts of the GKEL project on the local community and environment, it is difficult to see the economic value of this project. It is not clear how providing finance for large-scale carbon-intensive power projects in India, where big industrial projects have relatively good access to commercial finance, fulfils the purpose of bringing additional finance to the small and medium-sized enterprises (SMEs) sector, or to projects with particular potential for pro-poor impact. This is especially relevant in Odisha, which has the lowest per capita access to energy of any state in India, and where this kind of project will not address the issues of connectivity and last-mile delivery that could really help the rural poor gain access to energy. ‘Isolating the project information from [the] public eye creates more havoc than solution, because there are no strong disclosure and safeguards standards that the company is bound to follow. It then spares the company from accountability.’ 6   Vijayan MJ of civil society organization Delhi Forum, one of the co-complainants ‘Are these the types of information the IFC does not want to share with us and the greater public because it will jeopardize the interest of its client? Will the World Bank Group remain mum to safeguard its borrower? What about the real dangers we now face?’ 7   Bhakta Bandhu Behera, a project-affected person from Manibeda village  4 In 2011, the CAO announced a review of the IFC’s financial sector investments. This was in response to rising concerns about the institution’s use of FIs. The review is due to be published in the summer of 2012. It will focus on whether the IFC’s social and environmental standards are being met in FI investments. The problems associated with DFIs lending to FIs are summarized below. Failure of DFIs to leverage positive change DFIs could do much better at using their financial and reputational influence to ensure better results, as US Attorney John Crutcher explains: ‘A DFI can use its power as an 'anchor investor' to specify the types of activities and measures that would best contribute to positive change and avoid harm. However, DFIs often fail to make the most of this power. Once funds have been disbursed to the FI, the DFI's influence tends to be reduced significantly.’ 9   This point is especially important because DFIs say their investment attracts other private investors who value their credibility and knowledge. Conflicting priorities DFIs and FIs often have different objectives. FIs make profit-motivated investment decisions. It is difficult to expect them to have a strong motivation to alleviate poverty, or to have an understanding of how to do so. Yet, it is the FI itself that identifies the projects to be supported and the results to be accomplished. DFIs do not use a screen to determine if a given FI uses a pro-poor lens to guide its investments. This means that the benefits of strong growth often fail to reach the poorest people. 10  This is compounded if projects fail to protect access to land and other natural resources, which is vital in addressing inequality. Reduced transparency When DFIs directly fund risky activities, extensive amounts of information are provided to the Board of Directors of the DFI and made public. In contrast, the public has virtually no access to information about activities funded by most FI clients of DFIs. This includes activities posing serious risks to communities and the environment. For example, when the IFC lends through an FI, the public has no access to information about the FI’s high-risk activities and activities that pose a risk of 'substantial impact. 11  See Table 2  for an overview of transparency requirements at the IFC. FIs are required to disclose information only to local communities for higher-risk projects. 12  However, the IFC provides relatively little oversight of this disclosure. 13  (See Box 2 .) Cases such as the GKEL coal-mine project in India show that information and consultation are often poor or absent. It can be extremely difficult to investigate and achieve redress after the fact. Early disclosure of information is vital for deals involving acquisition of land and other natural resources.
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