Select Committee on International Development Fourth Report


3  ENABLING INVESTMENT CLIMATES

28. In its World Development Report 2005, the World Bank sought to distil the characteristics that mark a good investment climate. Such an environment:

  • is not just about generating profits for firms, but about improving outcomes for society as a whole;
  • drives growth by encouraging investment and higher productivity;
  • enhances the lives of people directly: as employees; entrepreneurs; consumers; users of infrastructure, property and finance and as recipients of tax-funded services or transfers;
  • encourages firms to invest by removing unjustified costs, risks and barriers to competition;
  • encourages higher productivity by providing opportunities and incentives for firms to develop, adapt and adopt improvements to the way they operate;
  • makes it easier for firms to enter and exit markets in a process that contributes to higher productivity and faster growth;
  • increases incentives for micro-entrepreneurs to move from the informal to the formal economy,
  • can expand the resources that governments have available to fund public services.[61]

29. In order to assess how these benefits can be secured by donors and other actors, this chapter will work through a number of sub-themes to consider how best to bring about the different elements of a good investment climate. These themes include: infrastructure; property rights; regulation, taxation and competition policy; the Investment Climate Facility; governance; corruption and irresponsible lending; improving investment climates in resource-rich countries and enabling investment climates in fragile, conflict-affected and least developed states.

30. Addressing the enabling environment is an important strand of donor approaches towards PSD. The World Bank estimated that the total assistance provided by major bilateral and multilateral donors for investment climate improvements averaged US$21.1 billion per year between 1998 and 2002 — or about 26% of all development assistance.[62] Investigating this statistic shows that it has been calculated by aggregating all policy-based support, technical assistance and infrastructure development extended to developing countries — a somewhat ambitious definition of what can be counted as investment climate work. Even so, the amounts directed to specific investment climate interventions are still huge, and the championship of the investment climate approach by the World Bank and other donors means these flows will increase. Accordingly, identifying the priorities for disbursing these funds is of urgent importance.

Infrastructure

31. The pivotal role of infrastructure in meeting development targets has been emphasised repeatedly during recent years, notably during the Millennium Summit, the World Summit on Sustainable Development in 2002 and the Commission for Africa in 2005. The need for infrastructure across the developing world is huge. One third of humanity is without access to electricity[63] and 40% do not have access to basic sanitation.[64] Increasing urbanisation will raise demand for these and other services — and for affordable housing and improved transport routes. Lack of infrastructure has profound implications for the rural poor, particularly regarding access to employment, essential services such as clinics and schools and reliable food and water resources. Whilst one MDG — Goal 7, the achievement of environmental sustainability — demonstrates an explicit commitment to improving infrastructure, the attainment of all eight goals relies on building and improving infrastructure services throughout the developing world. For instance, achieving universal primary education (Goal 2) relies upon the building of new schools and improved transport links.

32. Poor infrastructure is a significant obstacle to PSD. Both agricultural and industrial growth hinge on dependable infrastructure; markets work better for poor people if distances can be more quickly traversed, resources more efficiently transported and energy more reliably harnessed.[65] Currently, the most urgent need appears to be for agriculture-supporting infrastructure within Africa[66], especially irrigation and storage. Asia offers examples of countries where high levels of infrastructure spending — especially on agriculture-supporting infrastructure — over the 1990s have driven growth, particularly Vietnam and Bangladesh. Developing physical infrastructure (roads, bridges, flood defences) has been a critical part of rural development in these countries. Vietnam, which halved its poverty rate between 1993 and 2002, targeted infrastructure investments to regions with high poverty levels and prioritised large infrastructure investments in an effort to maximize growth (attracting some criticism for benefiting larger contractors rather than smaller operators). [67]

33. The nature of the challenge facing donors, governments and the private sector in regard to infrastructure overwhelmingly concerns funding. The Commission for Africa recommended that, in order to address the full scale of services needed, from rural roads and slum improvement to regional highways and large power projects, a doubling of infrastructure spending is required (an initial increase in donor funding of US$10 billion a year up to 2010 and, subject to review, a further increase to US$20 billion a year in the following five years). The 'Connecting East Asia' study (2005) estimated that the development of East Asia's infrastructure alone requires funding at least US$165 billion over the next five years.[68]

34. Currently approximately 70% of investment in infrastructure is made by the public sector, 25% by the private sector and 5% by donors. The donor flows consist of loans — albeit low cost ones — and the grant funding that does exist is small. The share of total ODA directed to infrastructure in sub-Saharan Africa dropped sharply during the 1990s — by over 30 percentage points, from 43% in 1973 to 12% in 2003.[69] As the Commission for Africa noted, this has resulted in a "backlog of investment […] that will take strong action, over an extended period, to overcome".[70] As the Secretary of State admitted to the Committee, "We went through a period in the Eighties and Nineties where it was rather fashionable to think the private sector will look after all investment in infrastructure, but it could not be more wrong."[71] The Commission for Africa estimated that the private sector is unlikely to finance more than a quarter of the major infrastructure investment needs within Africa.[72]

35. As Professor Keith Palmer told the Committee:

    "The challenge is to find a way of creating the infrastructure ahead of it being proven to be the right thing to do [...] My view is and has always been that unless donors are prepared to provide that sort of support [early investment in infrastructure] it will not happen. The private sector cannot take the sorts of risks involved."[73]

36. DFID is engaged in a number of initiatives focusing on mitigating risk in this way - for instance, the US$305million Emerging Africa Infrastructure Fund, a public-private financing partnership initiated in 2002 by a multi-donor group[74] — but, undoubtedly, could do more. It is crucial that the mistakes of the 1990s — assuming that the private sector will shoulder the burden of responsibility for infrastructure investments — are not repeated. Donors and governments should help mitigate risks that the private sector cannot afford to take. The current priority must be to emulate Asia's successes in building infrastructure in Africa, with a particular focus on agriculture-supporting infrastructure. To support this, DFID must engage with other donors to ensure that the Commission for Africa-recommended increase in donor funding of US$10 billion a year up to 2010 (and, subject to review, a further increase to US$20 billion a year in the following five years) is secured.

37. Large infrastructure projects are enjoying a resurgence of interest amongst donors. In 2005, the G8 proposed the creation of a new multi-donor initiative, the Africa Infrastructure Consortium. Members include the African Union, NEPAD, African Development Bank, ECOWAS, the World Bank and the EU. When it begins work later in 2006, the Consortium will have a particular focus on donor coordination and mobilising resources for national and cross-border regional infrastructure projects. DFID has pledged US$20 million over 3 years to help with the work of the Consortium.

38. Approval of DFID's leadership on the Consortium was tempered with concerns that 'big loans for big infrastructure' — ports, airports and road networks — must not be at the expense of more locally-sensitive, directly pro-poor operations, focusing on social infrastructure such as water and sanitation, and flexibly adapted to country-specific needs (therefore requiring mechanisms for consultation to ensure that poor people and the local private sector can express their views as to infrastructure priorities).[75] DFID has shown leadership in establishing the Africa Infrastructure Consortium. DFID now needs to use its authority amongst the Consortium donors to build on initial momentum and swiftly generate extra investment for African infrastructure. Efforts should be made, however, to balance big loans to governments with smaller, locally sensitive grants reflecting regional and national infrastructure priorities. Consultation mechanisms should be put in place to ensure that investments by the Consortium reflect the needs of poor people and the local private sector.

Property rights

39. Insecure or non-existent property rights inhibit investment climates. Formal legal title to homes and land is often required as collateral to obtain credit and guarantee investments. It is estimated that only 1% of the land in sub-Saharan Africa has been officially registered.[76]

40. The theory of property rights advanced by Peruvian economist Hernando de Soto contends that the primary obstacle preventing the developing world from benefiting from capitalism is its inability to produce capital. According to the de Soto thesis, poor people possess "dead capital" — assets, such as property, that are held in defective forms: houses but not titles, crops but not deeds, businesses but not statutes of incorporation (de Soto's 'The Mystery of Capital' puts the total value of such 'dead' capital at US$9.3 trillion across the developing world).[77] If clear property rights can be established, De Soto claims, poor people's assets will become "live" and they will be able to obtain credit and therefore lever themselves out of poverty through capitalism.

41. DFID is — justifiably — resistant to de Soto's claim that increasing security of property title is the solution to global poverty. The Department does, however, concur with de Soto's basic assumption that that a lack of secure property rights undermines incentives to invest and the ability of the poor to access credit.[78] DFID told us that they are becoming "more conscious of the importance of property rights in terms of unlocking PSD".[79] In some countries (Rwanda, South Africa and Tanzania), DFID is now the lead donor in this area and in 13 others it has specific projects involving property rights.[80] However, a real constraint to the Department's work on property rights exists at the human resources level. DFID admits that whilst, "in all our programmes there is an awareness of property rights", labour resources are constrained.[81] The Department does not employ property rights experts and relies on its 25 PSD Advisers and "external partners" such as UN agencies to implement its property rights programmes.[82]

42. DFID also seems to show hesitancy in scaling up its property rights work due to a reluctance to engage with a potentially politically-charged issue. DFID's submission states: "The challenge facing DFID and its partners is that 'property rights' and security of land tenure require political consensus for reform [...] We will do more in contexts where partner governments emphasise that this is an area where they welcome donor assistance".[83] We broadly accept DFID's claims that "governments have very strong views on land tenure"[84], and that in some contexts the issue of property rights has become politicised. Nevertheless, whilst DFID must in no way attempt to direct partner government policies on property rights, dialogue should be encouraged in countries where work on the issue is under-developed.

43. It is clear that varying country contexts make it difficult to have a standardised approach to property rights, and DFID is right to avoid "a blanket prescription for land rights in all contexts".[85] However, a more coherent policy on property rights would not preclude retaining a flexible approach. DFID is becoming more engaged in the property rights agenda but capacity and activity remains limited. There appears to be no specific staff expertise in this area within DFID and capacity needs to be stepped up. The need for flexibility across varying country contexts and sensitivity around a politically-charged issue should not prevent DFID from increasing and broadening its property rights programmes, as long as this expansion is underpinned by a coherent strategy and in-house expertise.

Regulation, taxation and competition policies

44. The manner in which governments regulate and tax firms, and operate competition policy, is a significant feature of the investment climate. All three policies offer governments a tool by which to channel private sector activity to wider social goals, such as the improvement of public services. Regulating business will help private sector activity move from the informal to the formal sector (informal businesses currently account for over half of all economic activity in developing countries[86]) and increase the national tax base. Taxation offers countries the opportunity to translate investment directly into social benefits, yet many countries reduce their tax rates to very low levels due to the perceived need to attract foreign direct investment, as Dr. Claire Melamed of Christian Aid told us: "This tendency of countries to think that, if they just reduce their tax rate enough, they will get investment and getting investment is all that matters, is quite a dangerous calculation for countries to make."[87]

45. Reducing barriers to competition is also of central importance: competition encourages market entry and reduces costs for consumers, as is borne out by the recent rapid spread in mobile phone use across Africa.[88] Streamlining 'red tape' makes business registration more efficient and boosts investment in the economy, and hence the amount available for public spending. Currently, the time to set up a new business ranges from two days in Australia to more than 200 days in Haiti.[89] As the World Bank points out, the challenge for governments is to fulfil these objectives without undermining the incentives for firms to invest and prosper.[90] New policies may be met with opposition; for instance, barriers to competition may benefit many firms — whilst increasing costs to other companies and consumers, and inhibiting innovation — and thus dismantling them is likely to unpopular with some companies.

46. Donors can help shape these policies through technical assistance to governments. Such assistance will form a major part of the new Investment Climate Facility, to which DFID has made a strong commitment (see next sub-section for further details). Witnesses emphasised how important technical assistance — to all levels of government — is and expressed a concern that such assistance must not be sidelined by increasing budget support.[91] Evidence emphasised the usefulness of business environment surveys[92], for example the DFID-supported SBP business environment case studies across southern African countries.[93] DFID must continue to support capacity building and technical assistance on regulation, taxation and competition policies, at all levels of government. DFID's support for business environment surveys is valued and should be extended, where possible.

The Investment Climate Facility

47. The Investment Climate Facility (ICF) is a major multilateral attempt to fund and implement investment climate improvements across Africa. The ICF is a public private partnership that was launched in June 2006 by (and in support of) NEPAD, the African Union and African Heads of State.[94] The ICF aims to facilitate joint action from the public and private sectors to improve business environments across Africa through technical assistance, grants, inputs such as market intelligence and property rights programmes, regulation, taxation and customs reform, financial markets, infrastructure, labour markets, competition and corruption. Its 'added value' amongst existing investment climate initiatives, such as the World Bank's Investment Climate Assessments, stems from it being the only African-'owned' initiative focusing specifically on the continent's investment climate. Other key benefits of the initiative include its action focus and its complementarity with existing initiatives in Africa — it will respond to issues highlighted by the African Peer Review Mechanism, the World Bank's Investment Climate Assessments and Doing Business Reports and the Africa Enterprise Challenge Fund.

48. The ICF was enthusiastically endorsed by the Commission for Africa, which recommended that donors and the private sector should come behind the ICF by finding required funding of US$550 million over seven years. DFID has led the way among donors in achieving this with its commitment of $30 million over three years. At the time of writing, the ICF's official launch in Cape Town was triggering fresh pledges of support from donors and the private sector, closing the shortfall in the US$110 million required for the initial phase.[95]

49. DFID has led the way amongst donors with its support for the ICF, an innovative policy representing an impressive, business-supported, African-'owned' partnership. The Facility has the potential to be a powerful vehicle in making Africa an easier and more attractive place to invest. However, now that initial phase funding is secured, the challenge is to ensure that the ICF focuses on bringing about sufficient, tangible changes in Africa's business environment. The ICF's role and the existing need have been well thought-out; time spent hiring consultants and carrying out more analysis must be avoided in preference to actively supporting programmes and technical assistance as efficiently as possible (without compromising on quality).

50. Concerns also exist about the scale of the ICF and whether it is too limited in size to make up the level of difference that is needed. The World Development Report 2005 clearly conveys the extent of the need for investment climate improvements: over half of the output from developing countries currently originates from the informal economy; over 90% of firms claim gaps between formal rules and business practice; costs associated with weak investment climates can amount to over 25% of sales (or more than three times what firms typically pay in taxes).[96] The Report recommends, in particular, that donors invest more in technical assistance to governments on how to improve their national investment climates[97] — a wise recommendation, but one that takes considerable resources. Whilst in many ways 'starting small' is beneficial to assessing national and regional needs and building momentum from the bottom up, the ICF's operations should be conducted with a view to potential increases in scale, to ensure that technical and other forms of assistance are sufficient to meet the huge need for investment climate improvements.

Governance

51. Economic and political governance is critical to countries' ability to turn growth into poverty reduction. Good investment climates are ultimately the responsibility of national governments, and the policies and behaviours that governments exhibit are of pivotal importance to securing investment, whether national or international. As UNDP's submission makes clear, "The central role of the private sector does not in any way diminish the role of public governance."[98] Good governance — strong institutions (especially the legal and judicial system) and a government's credibility and legitimacy — will enable governments to influence their country's investment climate and introduce sustainable, effective reforms. This is demonstrated by a number of countries that have strong growth but where poor governance has resulted in low development indicators: poor governance in Equatorial Guinea, for example, means that its massive oil wealth has failed to bring about improvements in human development indicators — the country is ranked 103 places lower on its 2002 human development performance (based on life expectancy, adult literacy, school enrolment and average income), than it is on its growth performance.[99] Conversely, good governance provides fertile ground for investment climate reforms and subsequent private sector growth and poverty reduction.[100] This is borne out by the case of Botswana, where good governance has enabled natural resource revenues to be used for social investments and poverty reduction.

52. Governance links closely to the following sub-sections on corruption and the natural resource sector. It is also closely integrated with all other aspects of PSD; witnesses repeatedly pointed out that financial sector reforms, improvements to infrastructure and so on all hinged on the presence of good governance.[101] A current instrument being used towards securing governance improvements across Africa is the innovative African Peer Review Mechanism (APRM), linked to NEPAD and based on the principle of self-monitoring, to which member states of the African Union voluntarily accede.

53. Companies such as Syngenta, de Beers and Anglo American spoke of the critical importance of governance in their investment decisions.[102] The Secretary of State stated that governance was essential to private sector development, and that governance would be a major theme of DFID's forthcoming White Paper.[103] Good investment climates hinge on strong economic and political governance. We hope to see the symbiotic relationship between good governance and private sector development emphasised across the Department's PSD policies.

Corruption and socially responsible investment

54. Corruption is a decisive barrier to creating stable investment climates and transparent markets. It creates weighty extra costs for the private sector and substantially undermines business confidence.[104] The Commission for Africa made a number of recommendations on corruption, including: improved transparency within developed country Export Credit Agencies (ECAs); the implementation of "all legal and administrative measures" to repatriate illicitly acquired state funds and assets and the ratification and implementation of the UN Convention Against Corruption by all states.

55. Progress on these recommendations is patchy. Movement on the first issue, regarding transparency within ECAs, has been slow but the UK's Export Credit Guarantee Department (ECGD) will finally implement new anti-bribery and corruption procedures (first introduced in 1 May 2004) in July 2006.[105] There are questions as to whether there are enough resources devoted to investigating bribery and corruption and securing prosecutions. However, the recent impasse in high-level discussions for improving ECA procedures on bribery suggests that not all G8 countries are taking their commitments seriously enough.[106]

56. On the Commission for Africa's second recommendation, DFID admits it "still has more work to do" regarding re-patriation of stolen assets, although it is receiving support in this from other countries including Switzerland.[107] Regarding the third recommendation, the UK has ratified the UN Convention Against Corruption[108] — however, at the time of writing, only 25 of the 123 other signatories to the Convention had also done so. DFID's general support to anti-corruption commissions and involvement in anti-corruption initiatives has been welcomed.[109] DFID should continue to place the eradication of corruption high on the donor agenda and lobby at the global level for commitment to anti-corruption measures. Specifically, DFID should actively encourage developed country ECAs to enhance transparency — internally and in the projects that they support — by implementing improved procedures on bribery and corruption; should seek to fulfil as swiftly as possible the Commission for Africa's recommendation regarding the implementation of "all necessary legal and administrative measures to repatriate illicitly acquired state funds and assets" and should lobby for the ratification of the UN Convention Against Corruption and the implementation of supporting legislation by all signatory countries.

57. Another constraint to good investment climates is irresponsible lending and investment. Socially Responsible Investment (SRI) upholds the need to invest responsibly in developing countries through the integration of social, environmental and ethical issues within standard investment practice.[110] The UK's network for SRI, the UK Social Investment Forum (UKSIF), builds its membership base from companies that offer SRI services such as ethically-screened funds (e.g. the DFID-funded Just Pensions programme[111]); microfinance initiatives (that is, financial services for poor people) and investments governed by social and environmental guidelines such as the Equator Principles.[112] The launch of the UN Principles for Responsible Investment (PRI) in 2005 established a global framework of institutional support for responsible investment.[113]

58. Banks and fund managers are in a central position to influence development outcomes through the loan and investment services that they extend to developing country governments and state-owned companies. Recently, a number of banks have come under scrutiny for the potentially negative impacts of such lending. A number of commercial banks have chosen to lend to countries with a history of corruption and economic mismanagement — such as Angola, Sudan and Zimbabwe — often securing this lending against future resource revenues.[114] Such high interest resource-backed loans are potentially lucrative for the lenders but are not generally subject to the rigorous anti-corruption conditions applied by multilateral or donor lending. The terms and amount lent are often not disclosed in the public domain, risking possible misappropriation of funds. It is argued that such loans undermine the IMF and World Bank's efforts towards fiscal transparency.[115]

59. UK banks are amongst those who have lent to resource-rich but corrupt and very poor African countries in this way. Increasing pressure has been brought to bear on such banks to re-consider the use of resource-backed and other non-transparent loans.[116] DFID and the UK Government should engage with UK banks to encourage a review of the use of resource-backed loans to developing countries, especially those with a history of corruption and economic mis-management. UK banks should take advice from the international financial institutions on adopting appropriate conditions for loans relating to levels of disclosure and oversight requirements.

60. Chinese banks have attracted particular criticism for a recent series of billion-dollar loans to Angola, Nigeria and Sudan, despite IMF condemnation of loans without governance clauses and inviting speculation that China is waging a neo-Colonial 'resource grab' on Africa.[117] Chinese Premier Wen Jiabao carried out a seven-nation tour of Africa in June 2006, seeking strategic relationships with oil-producing countries.[118] For instance, it is estimated that three quarters of Angola's oil output is now destined for China. This significant stake in the Angolan economy provides Chinese banks with a unique opportunity to positively influence Angola's investment climate and record on governance. However, over recent years, the state-owned Chinese Eximbank has made a number of loans to Angola — including a US$3 billion oil-backed credit line issued in 2005 — with no conditions attached.[119] We wrote to Eximbank on 24 May 2006 to ask about the justification for such loans, and whether Eximbank would be continuing to offer unconditional lending to Angola in the future. We have received no response.

61. As Ann Grant of Standard Chartered Bank made clear to the Committee, such lending must be brought into international regulatory structures: "The challenge now is to bring the huge economies of India and China and the banks and financial institutions that operate in those countries into [regulatory frameworks] [...] What we want is a playing field where everyone observes that level of regulation and where we are able to compete fairly."[120] China's growing interest in African investments requires donors and governments to find mutual interests that will encourage the Chinese authorities to regulate resource-backed loans and other provision of capital more tightly, to ensure that lending does not contribute to corruption and negative developmental outcomes.

Improving investment climates in resource-rich countries

62. In addition to tighter regulation of loans, a range of other interventions are crucial to improving the business environments of resource-rich but poverty-stricken countries. Resource-rich countries tend to experience weaker growth than non-resource-rich ones. The well-documented 'resource curse' — the self-perpetuating cycle of economic dependency, corruption and conflict to which resource-rich countries are prone — has contributed to weak growth in countries such as Equatorial Guinea, Angola, the Democratic Republic of Congo, Chad and Nigeria. Empirical evidence shows, however, that the 'resource curse' can be avoided. Through good governance, macro-economic stability and careful management of its diamond revenues, Botswana averaged 12% annual growth between 1975 and 1995.[121]

63. Mis-mananaged and non-transparent expenditure of the revenues from natural resources is a key contributor to corruption, poor governance and conflict. The payments made by oil, gas and mining companies to governments currently tend not to be made public, severely impairing the ability of citizens to chart these nationally-owned funds — and yet these flows are massive: the Overseas Development Institute estimates that due to high global oil prices, the annual surpluses of around US$35 billion received by the eighth largest resource-producing countries in Africa will easily dwarf the total amount of aid pledged by G8 governments to the whole of the continent in the coming years.[122]

64. DFID has attempted to develop a strategy to address these problems of transparency by initiating the Extractive Industries Transparency Initiative (EITI). The EITI — a partnership of oil, gas and mining companies, NGOs and producer/consumer countries — was launched by the Prime Minister in 2002, following pressure from civil society.[123] By increasing public knowledge of revenue levels, the Initiative aims to empower citizens and institutions to hold governments and companies to account. Twenty countries have endorsed the principles of EITI and 11 are currently at various stages of implementation. DFID has convened the EITI process since its inception and now jointly hosts the EITI Secretariat with the World Bank. DFID has spearheaded and hosted the EITI process over the past four years. DFID's leadership has secured buy-in to the process from companies and countries alike.

65. However, implementation of the EITI — that is, meeting the EITI criteria including the regular publication of all oil, gas and mining payments by companies to governments and all revenues received by governments — remains patchy. Whilst Nigeria and Azerbaijan have developed quite substantive EITI reports, other countries such as Ghana are 'stuck' at the early stages of reporting. Key oil-producing regions (North Africa, Middle East and Latin America) remain under-represented: the overwhelmingly majority of current EITI countries are in West Africa.[124] The EITI implementation process needs to be expedited within signatory countries. Under-represented oil and gas producing regions, such North Africa, the Middle East and Latin America, need to be brought on board.

66. Another primary concern with the EITI approach relates to poor implementation standards; in many countries, governments and companies propose aggregating payments and revenue data, thereby undermining accountability.[125] Civil society may not always be sufficiently empowered nor have the political space to serve fully in a watchdog role, as demonstrated by the case of the Democratic Republic of Congo, where two civil society members of the EITI National Commission were subjected to death threats in May 2006.[126] Parallel measures to build capacity and open the political space available to civil society will greatly enhance EITI's potential to improve transparency and accountability.

67. Moreover, civil society organizations argue that the whole premise of transparency is jeopardised by the EITI's reliance on a voluntary rather than mandatory approach.[127] Possible options for a mandatory mechanism include requirements in stock market listings or relevant national and international accounting standards.[128] DFID claims that, for now, the voluntary approach is the right one and that adopting the listings approach would risk excluding the 70% of resource revenues emerging from state-owned companies. However, the Department admits that the merits of adopting a mandatory approach should be revisited in two or three years' time.[129]

68. DFID's future involvement in EITI is unclear. DFID plans to withdraw from hosting the Secretariat in the near future ("sooner rather than later"[130]); they state that this is due to the need for international ownership rather than efficiency savings or other reasons.[131] Discussion is ongoing as to EITI's future governance and institutional arrangements. DFID is "actively considering" how to extend the principles of EITI to others sectors, most likely to be procurement, construction and/or arms.[132] DFID should keep an open mind as to potential strategies for underpinning the EITI with mandatory disclosure requirements and should, at the very least, actively consider transferring from a voluntary to a mandatory approach in 2008-9, when further international implementation and political will has been secured. DFID must energetically explore when, how and to whom EITI's Secretariat should be transferred, with the ultimate aim of international 'ownership' the driving decision-making factor. Securing and consolidating further 'buy-in' from other donors will be particularly important to achieving this. DFID needs to move ahead with extending the EITI framework to other sectors such as procurement, construction and arms.

Enabling investment climates in fragile, crisis-affected and least developed states

69. Resource-rich states are just one example of priority — and more challenging — contexts for investment climate work. Other such environments include fragile and crisis-affected states, which are an increasingly prominent area of DFID engagement.[133] DFID has an emerging work-stream on how to minimise the private sector's contributions to fragility or crisis, and maximise its solutions to these problems. The Department lists the following interventions as having helped the private sector contribute to stability and development: public works programmes in post-conflict situations; micro-finance; remittance initiatives; technical assistance on legislation, customs and taxation; financial sector restructuring and monetary policy advice.[134]

70. Property rights are omitted from this list but are clearly a significant strategy in building investment climates in fragile states.[135] Land and property titling assist with reconstruction and economic integration. Disciples of Hernando de Soto's approach to property rights even claim that integration into the formal property system can form part of anti-terrorism strategies.[136] DFID is working on property rights in a few fragile states - for instance, in Angola, where is co-funding the Luanda Urban Poverty Project, which has a considerable focus on land law.[137] However, DFID's property rights programmes are overwhelmingly concentrated in more stable states such as Uganda, Kenya, Rwanda, India and Vietnam. DFID should expand its resources for property rights work to ensure programmes and projects are prioritised for fragile and conflict-affected states.

71. But whilst property rights, access to finance and other interventions in the enabling environment will open market opportunities to a degree, PSD in such contexts may simply not be appropriate or possible. Wars tend to eliminate or seriously disable investment climates, and accordingly conflict prevention strategies are, of course, the ultimate tool for addressing PSD in fragile and conflict-affected states. As the Secretary of State himself admitted, "The very basic responsibility of governments is not having a war […] Somalia [is] a country devastated by 15 years of conflict, people are eking out an existence […] but is anybody going to come and invest money in Somalia while the conflict goes on? No, they are not."[138]

72. However, for states that are no longer in the throes of out-and-out war, DFID needs a clearer strategy for improving nascent, disabled and damaged investment climates. DFID's emerging work-stream in this area must be strengthened to develop a specific PSD strategy for fragile and conflict-affected states, with strong links to complementary policy areas such as transparency in the natural resources industry and conflict reduction. This is particularly important given DFID's increasing profile in such countries.

73. Another issue that this inquiry has grappled with is how to improve the climate for investment and PSD in the poorest countries. The Committee's visit to Malawi in February 2006 witnessed a country which is simply too poor to have much of a formal private sector. It is clear that in very poor countries, where there is very little capital or purchasing power, donors and governments have a particular obligation to step in and 'fill the gap' between private sector reach and the poorest of the poor. As Robert Annibale of Citibank told the Committee:

    "There is a public good about providing a certain level of inclusion into society, and some of that may need to come from specialised institutions understanding that post-conflict, war-affected or isolated communities or indigent people may not be reached by commercial models".[139]

74. To some extent, filling this gap is about pioneering investment in difficult business environments to create a 'demonstrator effect', which DFID has attempted to do for many years through its principal instrument for risk finance, CDC (see Chapter 5 for more information on the CDC). DFID also works with pioneering investors such as the IFC and helps to mitigate risks for the private sector by providing initial finance for infrastructure projects through the Emerging Africa Infrastructure Fund and GuarantCo.[140]

75. Microfinance is clearly of signal importance in reaching the financially excluded and thereby pulling the margins of the private sector right down to the poorest of the poor. DFID is often praised for its microfinance work[141], but its successes in this area need to be scaled up radically within the poorest countries; more than 90% of the population in African countries remains financially excluded.[142]

76. Instituting general measures to improve the investment climate — addressing competition, taxation, regulation, infrastructure and corruption — will be particularly pressing within the poorest and least developed countries. Yet beyond re-stating these wider PSD strategies, DFID had no specific strategies for improving the investment climates of least developed countries to share with the Committee. When asked about the specific example of Malawi, the Secretary of State's response was simply that it is "a small market…a very difficult example."[143] DFID had no clear answers to this inquiry on specific PSD strategies for the poorest countries, beyond work on the enabling environment and regional integration. A specific work-stream on improving the investment climate of the poorest countries would help identify a coherent strategy and more creative approaches towards this end.


61   World Development Report 2005, Overview (pp.1-15). Back

62   World Development Report 2005, p.190. Back

63   Electricite de France, 'Electricity for All: Timetables, Targets, Instruments' (2002), available online at http://www.geni.org/globalenergy/library/media_coverage/
electricite-de-france/electricity-for-all--targets-timetables-instuments.shtml. 
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64   UNICEF and WHO, 'Meeting the MDGs drinking water and sanitation target - A mid-term assessment of progress' (2004). Back

65   See Commission for Africa, Section 7.3.2 on Infrastructure (pp. 233-237). Back

66   Ev 187 [Professor Keith Palmer] Back

67   World Bank, 'Pro-Poor Growth in the 1990s' (2005). Back

68   Asian Development Bank, Japan Bank for International Cooperation and the World Bank, 'Connecting East Asia: A New Structure' (2005). Online at http://web.worldbank.org/WBSITE/EXTERNAL/
COUNTRIES/EASTASIAPACIFICEXT/EXTEAPINFRASTRUCT/
0,,contentMDK:20700727~menuPK:1833026~pagePK:64168445~piPK:
64168309~theSitePK:855136,00.html 
Back

69   Ian Curtis, 2005, 'Infrastructure in the Context of the 2005 Agenda', paper presented at Institution of Civil Engineers Conference: 'Accelerating Progress towards the Millennium Development Goals: Scaling-up Investment in Infrastructure', held in London, 28 November 2005. Back

70   Commission for Africa Report (2005), pp.233-234. Back

71   Q 444 [Hilary Benn, Secretary of State for International Development] Back

72   Commission for Africa Report (2005), p.233-234. Back

73   Q 247 [Professor Keith Palmer] Back

74   The Private Infrastructure Development Group (PIDG), whose founding members are DFID, the Swedish Government acting through the Swedish International Development Co-operation Agency, the Netherlands Minister for Development Co-operation and the Swiss State Secretary for Economic Affairs of the Government of the Confederation of Switzerland. Back

75   Q 206 [Petter Matthews] and Q 272 [Professor Keith Palmer] Back

76   UN Habitat Submission to Commission for Africa Report, 2004. Back

77   Hernando de Soto, 'The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else' (Black Swan Books, 2000). Back

78   DFID, 'An Assessment of Hernando de Soto's Work', internal DFID paper attached to letter sent by Hilary Benn, Secretary of State for International Development, to John Bercow MP (24 February 2006). Copy of letter placed in the House of Commons Library. Back

79   Q 65 [Sharon White] Back

80   Ev 145. See the sub-section on fragile, conflict-affected and least developed states later in this chapter for further discussion of the location of DFID's property rights programmes. Back

81   Q 66 [William Kingsmill] Back

82   Ev 141. DFID currently employs 25 PSD Advisers. Some are known as 'Enterprise Development Advisers' and others as PSD Advisers - to avoid confusion, this report will refer to all 25 positions as PSD Advisers. Back

83   Ev 141 Back

84   Q 66 [William Kingsmill] Back

85   DFID, 'An Assessment of Hernando de Soto's Work (24 February 2006). Back

86   World Development Report 2005, Overview. Back

87   Q 473 [Dr Claire Melamed] Back

88   World Development Report 2005, p.130. Back

89   World Bank, 'Doing Business in 2004 - Understanding Regulation' (Washington: World Bank). Back

90   World Development Report 2005, p.10. Back

91   Ev 305 Back

92   See, for instance, Ev 290 and Ev 291. Back

93   Ev 305 Back

94   The ICF was formally launched at the World Economic Forum on Africa, held in Cape Town from 31 May to 2 June 2006. Back

95  As of 29 June, donor contributions included: DFID US$30m; IFC US$30m; Netherlands 15m Euros; Ireland 2m Euro; European Commission: Pledged - amount to be determined. Corporate contributions included: Shell US$2.5m (over 5 years); AngloAmerican US$2.5m (over 5 years); Unilever US$1 (for first 2 years, remaining $1.5m dependent on performance in first phase); SABMiller US$2.5m. Back

96   World Development Report 2005, p.15. Back

97   Ibid, p.190. Back

98   Ev 321 Back

99   Statistics quoted in the Commission for Africa Report, p.222. Back

100   World Development Report 2005, p.37. Back

101   See, for instance, Q 166 [Jay Naidoo]. Back

102   Q 262 [Michael Pragnell], Ev 240 and Ev 220 Back

103   Q 405 [Hilary Benn, Secretary of State for International Development]. DFID, Eliminating World Poverty: Making Governance Work for the Poor, Cm 6876, July 2006. Back

104   Ev 177 Back

105   For further details, see http://www.thecornerhouse.org.uk/item.shtml?x=471570. Back

106   Ev 177 Back

107   Q 443 [Secretary of State] Back

108   Q 442 [Secretary of State] Back

109   Ev 178 Back

110   Ev 318 [UK Social Investment Forum] Back

111   'Just Pensions' was launched in 2000 by Traidcraft and War on Want and became a UK Social Investment Forum programme in 2002-2005, receiving core funding from DFID for this period. Back

112   Ev 318 and Ev 319. The Equator Principles are a set of voluntary guidelines for managing social and environmental issues in project financing. Back

113   Steve Waygood, 'A challenge for the industry', Financial Times (Responsible Business), 13 June 2006.  Back

114   See, for example, Gabriel Rozenberg, Jonathan Clayton and Gary Duncan, 'Thirst for oil fuels China's grand safari in Africa', The Times, 1 July 2006. Back

115   'The Other Side of the Coin: the UK and Corruption in Africa', Africa All-Party Parliamentary Group (March 2006). Back

116   For example, Global Witness, 'All the President's Men', (March 2002) and Africa All-Party Parliamentary Group, 'The Other Side of the Coin: the UK and Corruption in Africa', (March 2006). Back

117   Lester Holloway, 'Africa: the Chinese Takeaway', BLINK (25 April, 2006), available online at http://www.blink.org.uk/pdescription.asp?key=11422&grp=18&cat=183. Back

118   Gavin Stamp, 'China Defends its African Relations', BBC News Online, 26 June 2006 http://news.bbc.co.uk/1/hi/business/5114980.stm. Back

119   Reuters AlertNet, 'Angola: China entrenches position in booming economy' (17 April 2006). Back

120   Q 295 [Ann Grant] Back

121   Increase measured in average GDP per capita growth. Since 1995, the rate has slowed due to factors such as the HIV/AIDS pandemic, and currently stands at 5%. Back

122   Ev 301 [Publish What You Pay coalition] Back

123   The Publish What You Pay coalition of NGOs (www.publishwhatyoupay.org).  Back

124   See http://www.eitransparency.org/section/countries for a map of country membership of EITI. Back

125   Ev 302 Back

126   Ev 302 and 'Death threats against activists for denouncing abuses in the natural resource sector in the DRC', Publish What You Pay press release, 5 May 2006, available online at http://www.publishwhatyoupay.org/english/pdf/releases/pwyp_drc_050506.pdf. Back

127   Ev 302 Back

128   Ev 302 Back

129   Q72 [Sharon White] Back

130   Q74 [Sharon White] Back

131   Q73 [Sharon White] Back

132   Q75 [Sharon White] Back

133   DFID, 'Why we need to work more effectively in fragile states' (2005), available online at http://www.dfid.gov.uk/pubs/files/fragilestates-paper.pdf. Back

134   Ev 139 Back

135   See also the earlier Property Rights sub-section in this chapter. Back

136   The Economist, 'The Economist Versus the Terrorist' (30 January 2003), available online at http://www.economist.com/people/displayStory.cfm?story_id=1559905

. See Paragraphs 42 and 43 for further discussion of de Soto's ideas. Back

137   Ev 145 Back

138   Q 406 [Hilary Benn, Secretary of State for International Development] Back

139   Q 165 [Robert Annibale] Back

140   'DfID and the Private Sector' (2005), p.24. Back

141   See, for instance, Q 159 [Robert Annibale] Back

142   Ev 129. See Chapter 5 for more information on microfinance. Back

143   Q407 [Secretary of State] Back


 
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