What will FCDO's British Investment Partnerships do for development?

When the U.K. Foreign, Commonwealth & Development Office published its new international development strategy in May, curious readers encountered a new concept: “British Investment Partnerships.” Unabashedly geopolitical, the strategy leaned heavily into the themes of trade and economic investment, seeking also to “deliver for people here in the UK … [through] export opportunities … creating jobs right across the country.” China was not mentioned by name in the document but is widely understood to be the source of “economic coercion and restriction” that the U.K. seeks “to offer an alternative to.” But what are British Investment Partnerships, and what is their aim? And can BIP help deliver on development, all while competing with China? BIP encompasses the development finance institution formerly called CDC Group and now known as British International Investment, or BII; “Just Energy Transition Partnerships” as part of the Clean Green Initiative; the British Support for Infrastructure Projects program; other development finance instruments for mobilizing investment; the provision of U.K. guarantees on loans using “FCDO’s balance sheet”; and UK Export Finance, a preexisting government agency. According to the strategy, FCDO will “work with both government and private sector partners” and “mobilise up to £8 billion of UK-backed financing a year by 2025 including from the private sector, targeting the main barriers to investment.” FCDO did not respond to Devex’s questions on how much of that £8 billion would be aid, what it viewed as the main barriers to investment, how the government’s focus on BII was divided between BIP and its other strands, and whether any further information on the other strands could be provided. According to a source with knowledge of FCDO’s internal organization, BIP comes under the responsibility of Jenny Bates, director general for the Indo-Pacific at FCDO. British International Investment BII is widely seen as the favored development tool of Foreign Secretary Liz Truss, despite having faced criticism in the past about lacking a strong anti-poverty focus in its investments — an accusation denied by executives at the recently revamped development finance institution. “We naturally play a central role in the Government’s … [BIP] agenda,” a BII spokesman wrote to Devex. “Our role is in providing high quality and sustainable investment into the private sector in eligible countries, and across vital sectors from renewable energy to digital infrastructure.” Even before BIP was announced, BII Chief Executive Nick O’Donohoe told Devex that Truss was “putting investment very much at the center of her foreign policy discussions.” BII is also the government’s “primary vehicle for delivering climate finance to BII-eligible countries that are the most vulnerable to the impacts of the climate emergency,” according to the spokesman, with a target for 30% of new commitments over five years to be in climate finance. BII has just announced a $200 million investment in a consortium to provide hydropower to Rwanda, Burundi, Malawi, Madagascar, and the Democratic Republic of Congo. It estimated that this would create 180,000 jobs, provide energy for the equivalent of 3 million people, and avoid 270,000 metric tons of greenhouse gas emission per year. U.K. foreign policy is currently undergoing an “Indo Pacific tilt,” which has made its way into BII’s strategy. Despite the dominance of China, Australia, and the United States in the region, the BII spokesman said its focus there will be on “supporting countries most vulnerable to the impacts of the climate emergency through the provision of climate finance,” though he was not able to give an example of planned projects for this. BII executives have claimed it will retain a “core” focus on working in Africa, though it will not provide investment in state-run projects — which experts like Abhishek Sharma, a senior director of transport and logistics at TradeMark East Africa, told Devex is often required for making progress on trade infrastructure. BII is not only self-financing but has also enjoyed continued funding — £646 million in 2021, when it was still CDC Group — despite the U.K. aid cuts. This was due to the Treasury’s preference for allocating the type of capital spending that finances BII, according to Stefan Dercon, a former policy adviser at FCDO. The institution is “emblematic” of the British government’s approach to development “because it is there to do investment” and “leverage market and private investment,” rather than providing direct aid, said David Lawrence, a research fellow at Chatham House. Despite its rebranding and relatively new climate strategy, BII remains controversial for some aid workers, who dislike seeing official development assistance being used to finance private companies. “There are some people in the development sector who don’t like that approach because it’s more corporate and involving companies, which is what BII was set up to do,” said Lawrence. It’s also faced long running criticisms around the transparency of its investments, which BII denies, saying its portfolio is available online. A key criticism of BII is that it has not invested enough in fragile and conflict-affected settings, which the organization has denied. “In 2021, 60 percent of our disbursements (over $1 billion) were in FCAS” countries and regions, according to the spokesman, who noted that it was the highest percentage since the organization began collecting that data in 2012. “BII is also a founding partner in the Africa Resilience Investment Accelerator – set up specifically to increase investment in fragile and conflict afflicted states in Africa,” added the spokesman. A breakdown of the 2021 FCAS disbursements will be available when BII’s annual review is published, according to the BII spokesman. It was unclear whether this included the controversial $200 million investment in telecoms in Ethiopia as part of a consortium — named the Global Partnership for Ethiopia — with companies including Vodafone and Safaricom. The investment is controversial because the Ethiopian government has been accused of creating a famine in the Tigray region of the country. A further criticism of BII has been around additionality — whether BII’s participation in an investment scheme has really made a difference to the decision of major corporations to make an investment, such as in Ethiopian telecoms. The spokesman said in that case, the consortium was “created specifically to bring about transformational economic and social impact through the provision of affordable mobile and internet connectivity in Ethiopia.” Without BII’s “patient capital and expertise” the consortium would not have been able to make the “impact-led bid,” the spokesman added. “BII is also playing a key role in creating accountability mechanisms for achieving impact – for example, we have agreed the formation of a board level impact committee that will steer, track and explore opportunities to deliver social impact,” added the spokesman. Speaking to parliamentarians in March, O’Donohoe said “Additionality is a rather nuanced concept … it is more of a judgment … It is not just about being the only person who will put the money in, but how you will use your influence if you put your money in, in terms of running and growing the company and, hopefully, achieving development impact from the company.” Just transitions The U.K. government — as the host of the 26th United Nations Climate Change Conference, or COP 26 — played a key role in the South Africa Just Energy Transition Partnership, which is also supported by the United States, France, Germany, and the European Union. While still in its infancy, Just Energy Transitions is intended to help wean lower-income countries off fossil fuels by developing a cleaner energy sector, while protecting the livelihoods associated with the existing energy industry. The government plans to “support countries to mobilise public and private finance to deliver on their climate ambitions ... These will provide a platform for low- and middle- income partner countries to work with climate finance donors, international financial institutions and private investors to achieve a just energy transition,” according to the strategy. Work in this area is not just done by FCDO. The Cabinet Office’s COP 26 unit and the Department for Business, Energy and Industrial Strategy have played key roles in climate diplomacy. Alok Sharma, the U.K. president for COP 26, visited South Africa in June to monitor progress on the country's transition partnership, and announced £1.5 million for technical assistance to the project. “This country-led approach puts fairness at the heart of the transition from coal to clean energy and will deliver high levels of finance and support to South Africa in achieving this ambitious transition,” said Sharma. Sarah Colenbrander, the director of the climate and sustainability program at the ODI think tank, citing the six-month update on progress advancing South Africa's Just Energy Transition Partnership, said other middle-income countries like India, Indonesia, and Vietnam were “optimistic about international support for phasing out coal and scaling renewables.” "Each one [of these countries] sees a JETP as offering the potential to overcome the fragmented climate finance architecture with its heavy transaction costs, and instead move towards more programmatic climate finance that genuinely aligns national development priorities and international climate goals," Colenbrander wrote to Devex. At a recent ODI event, Colenbrander said that climate-focused officials from Egypt, India, and Nigeria had expressed optimism, but also uncertainty, about South Africa’s just transition program. Infrastructure Infrastructure is a key aspect of BIP, and is largely framed in the strategy as a means to support environmental goals, but advocates say better facilities like roads, border posts, and logistics hubs also hold significant prospects for economic development. But this emphasis is also viewed as an attempt to compete with China’s Belt and Road Initiative. The strategy announced British Support for Infrastructure Projects, worth nearly £500 million, to “facilitate concessional loans to help partner governments access high quality and affordable infrastructure finance.” The spending review has allocated £2.4 billion for three years, which aims to leverage further finance “in particular for cleaner and more reliable infrastructure,” according to the strategy. FCDO will also support organizations like the Private Infrastructure Development Group with “advice, guarantees and early-stage risk capital.” But the U.K. aid cuts and continuing budget uncertainty have had a significant effect on the perception of the U.K. as an infrastructure donor, according to Sharma at TMEA. “On the ground, the way British aid is being reoriented is different, there is a reduction in infrastructure spend that is being made, largely because infrastructure spend commitments are long term,” Sharma told Devex by phone. He continued: “While there is so much uncertainty regarding the volume of British aid coming now, the [FCDO] country offices are looking to reduce or end their support for infrastructure.” Sharma said the “significant reduction in infrastructure spending and future commitment to infrastructure spending” was impacting his organization “a lot.” He added that prior to the aid budget reduction, the U.K. was TMEA’s largest donor. Infrastructure helps development because the “impact of poor logistics and congestion of the trade process is highest on the poor,” said Sharma. He said poor logistics can, for instance, increase the cost of imported rice, commonly a major food staple and portion of people's food budgets. Improved digital infrastructure — like the one TMEA is working on between the U.K. and Kenya — can also support exports from lower-income countries by improving regulatory compliance and trust in products, according to Sharma. He said: “For export value chains to happen and incomes in Africa to rise, you need these to be put in place.” The U.K. government has used its position to help leverage larger projects for TMEA, and the country is home to a lot of infrastructure expertise, said Sharma, but “the real blood in the system comes from the finance.” He added, “If the UK shies away from playing a role in financing it really goes out of the equation.” As for competing with China in Africa, “the current strategy seems to be a difference between the words which are being spoken and the action on the ground,” said Sharma, characterizing the U.K. as more focused on rhetoric and China on action. He said there is a “network of Chinese companies who are constantly in talks with the government and … backed up with financing from government owned banks as well as their own commercial banks … they already come with financing for that [particular] deal. So then when that company is talking to the government, the government knows that it’s serious. Since they are the only players in the market with such a facility, naturally the governments gravitate towards them.” Chinese companies are able to “move very quickly,” he said, making it difficult to compete with “such close coordination between private sector companies and governments. No-one else seems to be doing that, definitely not the U.K.”