Investment for development: The UK’s strategy towards Development Finance Institutions – Report Summary

This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.

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Summary

Development finance institutions can make a substantive contribution to developing private markets in low- and middle-income countries by pioneering new and emerging industries, promoting positive change through investment activities and stimulating private-sector investment to develop markets. Building partnerships and investing for development is a prominent part of the UK’s development offer, with British International Investment (BII), the UK’s development finance institution, at the heart of the Government’s International Development Strategy. Yet the Foreign, Commonwealth and Development Office (FCDO)’s ‘hands-off’ approach to overseeing BII’s investment activity has resulted in BII making some questionable investments. Some investments do not appear to have a clear poverty focus, some may have harmed society and the environment, while others conflict with the UK Government’s policies.

To ensure greater oversight of BII’s operations, we recommend that the FCDO take a non-voting seat on the BII board. Closer collaboration between BII and the FCDO at country office level would improve the co-ordination of UK Official Development Assistance (ODA) spend overseas. BII should also better articulate the work it undertakes to show the change created from its investments, such as those that promote gender equality and target under-represented groups.

BII’s use of $5.50 per day to target its investment activity has resulted in a high concentration of its portfolio in middle-income countries, where we have concerns that some of those investments are not directly benefiting the world’s poorest people. We recommend that BII should cap the proportion of its portfolio held in middle-income countries at a percentage determined by the Minister for Development to ensure its investments are focused on reaching the poorest and most marginalised people.

BII’s investment in companies owned by high-net-worth individuals risks those investments not driving inclusive economic growth and restricts the ability of investments to reduce financial and social inequality.

Demonstrating additionality of investments is key to the rationale for funding development finance institutions. We observed some instances where BII had not demonstrated such additionality. We therefore recommend that BII strengthens its processes for assessing additionality to ensure all future investments can be demonstrated to be additional. We also recommend that BII exit, as soon as practicable, those of its existing investments where additionality has not been proven or is no longer valid.

BII’s use of financial intermediaries to make investments on its behalf has been found to dilute the control BII has over its money and its ability to divest from businesses that do not share the UK Government’s core development values. Examples included an intermediated investment that had initially been made to a healthcare provider that subsequently merged with a cosmetics clinic in India, and BII’s inability to fully divest from an education provider in Africa following complaints by civil society groups. We therefore recommend that BII improve its oversight, monitoring and control of all intermediated investments.

As BII is investing on behalf of the UK taxpayer, it is accountable to the public and has a responsibility to operate as a transparent institution. Yet BII’s public disclosure of its monitoring and reporting of investment data is lacking. There is scope for considerable improvement in transparency that must be urgently addressed.

Our Inquiry

To inform our work and building on previous inquiries, we took oral and written evidence from non-government organisations, experts, national development finance institutions, a financial intermediary, BII representatives and from the FCDO. We heard from the US State Department and received a private briefing from BII. We visited Nepal in March 2023 to see BII’s investments in practice and to speak with those BII investees. We thank everyone who contributed to this work.

When we began this inquiry in the spring BII had not published its data for 2022. The written evidence we received, together with ICAI’s March 2023 report on UK Aid to India, was therefore based primarily on BII’s 2021 data. We have continued to use the 2021 data in our report, to ensure clarity and consistency with the written evidence: we have, however, drawn attention to points on which the 2022 data (published on 11 July) indicates a significant change from the picture in 2021.1