If development finance institutions are to contribute to meeting the Sustainable Development Goals through creating jobs and building financial markets, then significantly more transparency is needed.
The current lack of information doesn’t mean that DFIs are necessarily undertaking ill-conceived investments. It is critical to understand how DFIs build financial markets and crowd-in other sources of funding, especially as they use public money. They need to share pricing information, including their risk and return data, and outcome data, including the metrics that are used to evaluate performance, ensuring the opportunity for improved learning, better coordination, and ultimately, improved impact.
DFIs' spending has doubled in the past five years and as they play a greater role in global development, they are also facing greater scrutiny.
DFIs are an increasingly important piece in solving the development puzzle. We’re seeing governments invest in new, more flexible and ever larger DFIs — including the new U.S. Development Finance Corporation, FinDev in Canada, and the recent recapitalization of the CDC Group in the United Kingdom.
In many cases, these same organizations are using ever greater quantities of official development assistance, in some cases for blended finance or for more concessional loans, guarantees, and equity. All of this is key to the “billions to trillions” narrative — the hope that DFIs can attract, or “mobilize,” private finance to provide the scale of funding needed to meet the requirements of the SDGs.
With the increased focus on blended finance, the issue of transparency has also come to the forefront — see the Tri Hita Karana Roadmap for Blended Finance as an example. Despite being wholly funded by billions of dollars of public money, it is the use of precious and unique official development assistance funds that has attracted so much attention from civil society and think tanks and increased concerns about DFIs lack of transparency.
Some DFIs do publish substantial data about their activities to the International Aid Transparency Initiative, the global transparency standard for aid and development finance. However, these examples are rare. Across the board, DFIs argue that their business models are not well suited to the IATI standard, saying, for example, that providing forward-looking budget information is neither possible nor practical because of the time and uncertainty involved in finalizing deals.
Likewise, DFIs also contend that commercial confidentiality prevents the publication of large volumes of data. Performance information — such as the impact of a project — could be “market sensitive” and thereby considered judgment on the health of an investee company.
For example, if an investment in a chain of health facilities in Nigeria had a target of employing 7,500 health staff, publishing a number below that might indicate performance issues and could negatively impact the company’s ability to attract further funding.
Yet the wider world is changing. Initiatives such as Open Contracting and Open Corporates are making huge strides. The traditionally opaque extractives sector is undergoing a major shift too, with news that the Extractives Industry Transparency Initiative standard will now require the publication of new or amended contracts and licenses starting in January 2021.
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This, coupled with changes in payment transparency, environmental reporting, and disaggregation of gender data, signals a victory for the many stakeholders that have worked on this issue tirelessly for so many years. It is also indicative of the systemic, almost cultural, changes taking place as more transparency becomes increasingly the norm.
For DFIs, this shift is apparent in their willingness to engage with us on transparency discussions to date. While the issues still need to be worked through and resolved, we genuinely believe there is significant good faith and a desire to improve on both sides of the table.
Encouragingly, a number of key DFIs have expressed their willingness to come together for serious and structured discussions about transparency as it pertains to their operations, which we are keen to support.
Such discussions would need to also include experts from think tanks and civil society, governments and local accountability groups, bringing their experience from initiatives such as Open Corporates and EITI to bear, and from years of research and advocacy undertaken by groups such as the Bank Information Center Europe and International Accountability Project.
To reach informed transparency decisions and to best balance the unique roles of DFIs within the aid and development space, it is important to unpack their operations into a series of component issues that reflect how their organizations work. The issues will likely include mobilization; use of subsidies; community accountability; environmental, social and governance; and impact measurement. This approach would provide an opportunity to address each issue, understand the arguments from multiple perspectives and gather best practices to ultimately try to determine specific transparency outcomes.
Whether such a process could lead to a common agreement as to what DFI transparency should look like is unknown. But with the arguments on the table and examples of what the potential for greater transparency is, as well as what has already been achieved by other DFIs, we would at least be able to determine where the challenges to achieving greater transparency genuinely are and where they are not.
Questions include: If it will never be possible to disclose pricing information what does that mean for DFI’s goals of building markets? If DFIs can’t share impact information what does that mean for effectiveness and learning? Will every DFI have to make the same mistakes or recreate the wheel unilaterally? And what does “billions to trillions” mean in a context where we can’t measure the difference we’re making?
Having these more fundamental discussions and getting greater clarity on these issues is a step we all need to take now.