Inside Denmark’s plan to double capital for development finance
Denmark boosted its aid budget for 2024. One of the more controversial plans involved a drive to double the amount of capital available to the IFU, the Danish development finance institution.
By Burton Bollag // 02 January 2024Last year, Denmark announced plans to significantly increase its aid budget. Alongside this, it announced another change in ODA spending: More of Denmark’s foreign aid will be channeled through the Danish development finance institution, the Investment Fund for Developing Countries, or IFU. What that means is that Denmark will soon increase the portion of its foreign aid that — instead of going in grant funding to aid organizations — will be lent to private companies to get them to invest in low- and middle-income countries, in commercial ventures expected to contribute to development or climate goals. At the same time, in what officials are referring to as a “reform” of IFU, the institution will now focus its support more on private investments in three areas: Africa, fragile and post-conflict countries such as Ukraine, and helping low- and middle-income countries combat climate change, for example by developing renewable energy. The pledge to increase aid came from the country’s minister for development cooperation and global climate policy, Dan Jørgensen, who had faced criticism after a year in which the country missed the OECD target of spending 0.7% of GNI on aid, for the first time in five decades. Days later, Danish Prime Minister Mette Frederiksen used a speech at the September gathering of the U.N. General Assembly in New York to announce a more than doubling of the money managed by IFU. Jørgensen described the shift as “ground-breaking.” “We need new tools to free more private capital,” he said. “It is important to the climate, the developing countries and Denmark’s role as a green pioneer.” However, the shift was met with some skepticism and even criticism from the development community. For one, many want Denmark to devote new funds to meet the country’s commitments to fighting climate change, not move money from the existing foreign aid budget. In addition, some NGOs and researchers say it is not clear how much this strategy — of lending money or providing loan guarantees to promote private investments in lower-income countries — actually leads to poverty reduction and sustainable economic development. IFU provides loans, guarantees, and equity capital on a commercial basis, guided by two principles: that the investments it supports contribute to the U.N.’s Sustainable Development Goals, and that as much as possible the investments would not have been made without the added IFU support. Among the support IFU has provided in recent years are: DKK 291 million ($43.5 million) for Humania, a private health care company, to build hospitals in Egypt and Morocco; DKK 204 million ($29.5 million) for Suminter, an Indian company, to help small farmers convert to certified organic farming; and DKK 195 million ($28.2 million) for Bancosol, the largest microfinance bank in Bolivia. The capital managed by IFU will increase from DKK 15.6 billion in 2022 to around DKK 36 billion in 2030. The largest part of the increase will be money that IFU borrows from the Danish central bank. IFU is also planning to establish a new SDG investment fund, where Danish pension funds are expected to invest a total of DKK 3 billion, an IFU spokesperson said. Finally, the government will put in DKK 3.5 billion over the next seven years from the foreign aid budget. Søren Peter Andreasen, IFU’s deputy CEO, told Devex the increase in government support is fully justified: “It’s a limited part of the ODA budget but it allows the mobilization of considerably more private financing. For each Danish krone the government invests in IFU from the ODA budget, IFU is able to get three times more in private financing.” Direct government funding to IFU will still come to less than 3% of the country’s total foreign aid budget. Still, critics question the philosophy behind channeling more aid money through loans. Oxfam Denmark’s Secretary General Lars Koch, one of the sharpest critics of the increase in government funding of IFU, said the move “diverts aid away from poverty reduction.” Yet Denmark represents a growing trend among donor countries. The U.S., U.K., and Canada have all started recently to channel money through their DFIs, and similar reform is on the cards in Spain. “For over a decade, more and more ODA has been channeled through development finance institutions” such as IFU, said Karim Karaki, head of the economic recovery transformation team at the European Centre for Development Policy Management in Maastricht, Netherlands. “There has been a broad recognition that to find the $4.2 trillion needed per year to address the UN sustainable development goals, we have to attract more private money,” Karaki said. Still, he said, the critics are right to worry about whether the private investments promoted by institutions such as IFU really promote economic development: “There have been questions about the reporting systems of development finance institutions and their ability to capture their development impact.” In October, Denmark’s Council for Development Policy, a government-appointed expert body that provides strategic advice to the government on its foreign aid policy, reviewed the decision to double public funding of IFU. The council approved the move, but stressed the importance of continuing to monitor not only the size of the private investments IFU supports but also their development and poverty-alleviation impact. Several of the council’s 11 members went so far as to say they were skeptical as to whether the investments would achieve their ambitious goals in Africa and the fragile countries where they are made. A battle of ideas For several years, Denmark has been grappling with concerns about the best way to spend aid money, and divisions remain in the country’s aid community about whether the government has made the right bet. In 2019, an independent evaluation ordered by the Ministry of Development Cooperation and Global Climate Policy was quite critical of the IFU’s ability to manage and measure the development impact of the money it lends to private companies. In response, IFU invested heavily in professionalizing the selection of its loans and investments and monitoring their impact. More recently, in October, IFU told reviewers that it had hired nine more development experts and was now planning to place further experts in the countries where the institution supports private investments, all to better ensure and monitor strong development and climate impact. But critics remain skeptical. “Nobody involved in ODA would say you don’t have to mobilize more money,” said Oxfam Denmark’s Gregersen. “But IFU struggles to document its development impact. Putting more money into IFU with its track record so far is not the best way to spend Danish development aid.”
Last year, Denmark announced plans to significantly increase its aid budget.
Alongside this, it announced another change in ODA spending: More of Denmark’s foreign aid will be channeled through the Danish development finance institution, the Investment Fund for Developing Countries, or IFU.
What that means is that Denmark will soon increase the portion of its foreign aid that — instead of going in grant funding to aid organizations — will be lent to private companies to get them to invest in low- and middle-income countries, in commercial ventures expected to contribute to development or climate goals.
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Burton Bollag is a freelance journalist living in Washington, D.C. He was based for a number of years in Europe (Geneva, Prague and Bratislava) and as chief international reporter for Chronicle of Higher Education reported widely from Europe, Africa and the Middle East. He has also done radio reporting (for NPR from Geneva) and TV reporting from various locations.