Imagine investing your money in an account which promised to target 3.5% returns but when the annual statement comes it has actually generated 6.6%. Now imagine that investment also helped create over one million jobs, fostered economic growth across emerging markets, and bolstered economic growth in democracies across the globe.
Probably a little bit beyond your average current account, that’s for sure, but it is the reality of what the UK’s development finance institution (DFI) – British International Investment (BII) – is delivering for the taxpayers right now. Previously known as the Commonwealth Development Corporation, BII was set up 75 years ago to provide impactful investments across the world – and between 2012 and 2021 did deliver an average return across its portfolio of 6.6%. That’s taxpayers’ money being spent supporting womens’ economic empowerment, access to medicines, accelerating green technologies, and finding ways to support developing nations to mobilise private capital to meet their investment needs, while delivering a significant return on investment.
As well as the significant economic returns, BII is a vital piece of soft power, playing a vital geo-political role in boosting the UK’s standing abroad. No longer limited to investing in Commonwealth nations, development finance helps the UK fulfil its strategic responsibility to enhance security by bolstering our international standing and offering countries a safe and reliable alternative to investments through China’s ‘Belt and Road’ initiative.
Despite being a great British success story, development finance isn’t a well known or commonly understood area and despite reforms under the Cameron government, which set it on its current trajectory, there is much more the UK could be doing to capitalise on those successes. That is why the Centre for Policy Studies this week published a report by Gareth Davies MP, with a foreword from Minister for Development Andrew Mitchell, which puts forward three policy recommendations to build on the successes.
Firstly, the BII should be able to seek investment from additional sources beyond its primary (and currently sole) funding from the UK government through the FCDO. Total UK pension fund wealth amounts to over £6tn and savers are increasingly pushing funds towards ESG investing. Well the Environmental, Social, and Governance outcomes of development finance speak for themselves.
Secondly, the BII should harness a wider range of financial instruments to achieve its goals. According to its investment policy, the BII can ‘use any instrument which enables it to achieve the objectives set out in [its] Investment Policy’ – including, but not limited to, equity, debt, guarantees, grants, project preparation companies, funds, facilities and technical assistance. However, in practice, Davies argues the BII only uses a limited range of instruments heavily – most options remain unused, and the BII is overlooking opportunities to leverage unfunded risk, allowing investment from commercial insurance to be channelled indirectly by DFIs. By allowing larger loans to be put together more easily, this method also gets borrowers closer to their financing target quicker – saving time and reducing costs before the project even gets off the ground.
Finally, the BII should be free to invest in a wider range of countries and projects. Davies emphasises that this does not mean moving the BII’s portfolio away from the areas of pressing need, it is about investing sensibly in high-return opportunities – the proceeds of which can be re-invested in the most fragile states. The BII’s most recent five-year strategy acknowledges this, encompasses the ‘the larger economies of the Philippines, Indonesia and the Mekong region’. Davies sayss investing in larger and more developed economies, with larger potential returns, should be encouraged, especially when those countries are strategic allies in ‘geopolitically significant locations’. He highlights the US’s OPIC (now DFC) $300m commitment to Israel between 2012-18.
All of these proposals are seen in DFIs across the world, Britain cannot risk resting on its laurels. With a few tweaks to the system, the UK could build on the last decade of success and above-target returns, turbocharging development finance for the next decade and delivering not just fantastic outcomes abroad, but financial returns at home as well.
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