Friday, December 17, 2010

Conference proceedings: Private Sector Turn

On November 22nd 2010, CounterBalance and the Bretton Woods Project hosted a conference in London on "The Private Sector Turn" - the increasing shift from public to private funding in development finance, the forms it takes and what it means for activists and affected people.

In 2000, 90% of multilateral development bank funding went to public sources, largely developing countries governments, and only 10% to the private sector. By 2007, the proportions were 30/60 and headed for a complete inversion, led by the World Bank's private lending arm, the International Finance Corporation (IFC), and the EU's house bank the European Investment Bank (EIB). Much of the private turn funding goes not only into private sector-led projects, but into two new and rapidly growing areas: global loans to chains of intermediary banks, and investments in private equity and hedge funds. Development banks are moving offshore into opaque intermediary and equity investments, with damaging effects on bank safeguards and policies, and a race to the bottom on standards. This is leading to increasing financialisation of the economy, with adverse cultural impacts, larger destabilising speculative capital flows, and many other ills.

Richard Brooks of Private Eye, a long-term observer of the UK development finance group, CDC, which also invested in Emerging Capital Partners, declared himself "cynical about the possibility of using private equity for development", based on several examples from CDC's portfolio. He felt that, considering CDC's investments in agriculture had all but disappeared and investments in infrastructure fell by 70% over a period of 20 years, it was hard to justify forgoing several investment opportunities in Ghana for a luxury shopping mall with questionable development benefits for the local population.

Independent researcher Dotun Oloko, in contrast, argued that private equity fuels corruption in developing countries, talking us through the case of a Texan hedge fund backed by EIB instrumental in a money-laundering scandal costing hundreds of millions of dollars. Dotun was alarmed by the fact that a fund manager acting on behalf of a DFI could, when carrying out due diligence, miss that the beneficial owners of the company set to receive financial backing were at the time under investigation for corruption.

TJN's John Christensen kicked off the debate on intermediaries by defining what they are and how they work, noting in the process that current flows tend to focus on 'rent-seeking behaviour' with far too much going to mergers and acquisitions, stripping assets and leveraging them with debt typically through offshore subsidiaries.

We now have a summary of the proceedings available, along with the presentations themselves.


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