As Europe uses aid to push private investment in Africa, NGOs push back

BERLIN — German aid group Bread for the World was planning to bring together civil society partners from across Africa to share their experiences with foreign direct investment projects last year, when the German government announced it would host a Compact With Africa meeting in November. With African leaders gathering in Berlin to discuss Germany’s role on the continent, it seemed a good opportunity to combine their networking with some advocacy.

None of the civil society representatives from Africa made it into the meeting.

The Compact With Africa was conceived ahead of Germany’s 2017 G-20 presidency as a way to encourage domestic private interest in Africa, but its priorities now appear to guide Germany’s approach to the continent, including — increasingly — the distribution of official development assistance. Reinhard Palm, who heads Bread for the World’s Africa department, did make it into the November meeting, only to realize that “it was an investor conference” with no room to discuss the degree to which development assistance is linked to the private sector, he said.

Palm recognized the experience in Germany as part of a pattern across Europe, where leaders are pushing private sector expansion in Africa — in part to shore up domestic support for aid among voters and industry, but also in the hopes it may create jobs that will help slow migration flows. The U.K. government held its own summit with African leaders in January, which was organized and funded by the Department for International Development but focused almost exclusively on trade. Again, African civil society was not invited.

Observers in Africa see the trend, too. “There’s lots of talk in terms of moving from billions to trillions [of dollars] for development, and this seems to be triggering the use of aid as a catalyst to mobilize the private sector,” said Vitalice Meja, executive director of Reality of Aid Africa Network, based in Nairobi.

He warned that the approach is undermining traditional development activities even as the European private sector remains wary of investing on the continent.

‘Somebody has to make money’

“There is a narrative being pushed that argues that private investment is going to trigger economic growth and, as a result, development will happen automatically in developing countries,” said Maria José Romero, policy and advocacy manager at Eurodad, a network of NGOs working in 20 European countries.

That narrative has encouraged European governments to direct their aid money toward spurring private sector growth, often through development finance institutions and in ways that benefit European businesses as much as African ones.

Germany has recently been at the forefront of this approach, with last year’s launch of AfricaConnect. Operated by the DFI Deutsche Investitions und Entwicklungsgesellschaft, or DEG, the €400 million ($447 million) project is offering loans to German and European businesses looking to break into African markets. But Berlin is not the first to take this tack. As early as 2010, the Netherlands began tying together its aid, trade, and investment agendas. And the EU launched its massive European Fund for Sustainable Development in 2016, hoping to leverage donor funds to bring private investors — and jobs — to Africa.

Although the use of blended finance has not grown as quickly as many expected, Romero said it appears set to be a major part of Europe’s future engagement with Africa. The approach uses development finance to lure private investors into projects that are meant to support the Sustainable Development Goals, but with outcomes focused as much on profitability as on the SDGs.

Romero said she is hearing blended finance come up in ongoing European Union budget discussions and expects a significant jump in the amount of ODA channeled through those facilities. She worries that will leave some of the poorest African countries behind, she said, since they may not be ready to take on the kinds of projects — and debts — that the approach is commonly used to support.

Eurodad has also warned that countries looking to boost their private sector can use the complexity of blended finance arrangements to obscure tied-aid provisions. Tied aid can only be used to buy products or services from the country that is putting up the money. Despite advocacy to reduce it, the practice is not slowing down.

Meja sees all these efforts to support domestic private sectors simultaneously with supporting development as undermining the actual intent of ODA.

“It’s supposed to be targeted toward poverty reduction and eradication, and it’s not being constructed with that in mind,” he said. “Instead, it’s being constructed with a vision that somebody has to make money and not that there is a need to transform people’s livelihoods.”

It is already having an impact, he said. African governments are attuned to this trend, and they are responding to it by improving the climate for foreign business, hoping for a private sector boom that Meja is skeptical will materialize. In the meantime, they are looking for other funding sources for programs that depend on ODA, though that funding may not exist.

Observers in Europe do not expect the trend to change, particularly given the obvious attractiveness to politicians.

“Perhaps there’s good intentions for Africa, but it shows their constituencies we’re doing something for German businesses,” Palm said. He doesn’t oppose efforts to encourage German private sector investment in Africa — only where those efforts depend on official development assistance.

Groups like Eurodad and Bread for the World are lobbying for greater transparency around how much ODA is actually going to the domestic private sector and new rules that would help limit it.

Eurodad is among a group of organizations lobbying the Organisation for Economic Co-operation and Development — which hosts a committee that sets the rules on aid spending for most of the world’s biggest donors — to more clearly define what counts as ODA, with an aim to “avoid private sector instruments reducing the effectiveness of ODA or just the fact of promoting donor commercial interests with ODA,” Romero said.

African civil society organizations worked with Bread for the World to create their own list of recommendations that puts their governments at the forefront of decisions about what kinds of investments are needed and explicitly involves affected communities, both in identifying the types of projects that are funded and in overseeing their implementation.

That would be a change from initiatives like the Compact With Africa, which is pumping public and private money into projects without addressing local conditions, such as supply chain gaps, that might boost sustainable employment, according to an analysis by Friedrich-Ebert-Stiftung.

“The narrative around ODA needs to change to investments that really help develop people,” Meja said.