Ninth Report - Investment for development: The UK’s strategy towards Development Finance Institutions

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. (Paragraph 11) Governance

Under the current arm’s-length relationship, BII holds some investments that conflict with the UK Government’s policies, such as those relating to fossil fuels and there have been few attempts by BII to adapt its legacy investment portfolio to align with UK interests. The recent UK Government decision to expand BII’s remit to assist with the reconstruction of Ukraine demonstrates that the FCDO can intervene to steer BII’s investment activity, even where BII does not have necessary deep country knowledge and experience. The United States’ International Development Finance Corporation (DFC) demonstrates that public sector Board representation is not inherently damaging to a DFI’s commercial reputation given that, at the time of writing, this was the largest bilateral DFI. To ensure that BII’s strategy and operations are consistent with the International Development Strategy and FCDO objectives, to protect taxpayers’ interests and to ensure that BII’s investments help the world’s poorest people, FCDO should increase its oversight of BII and take a non-voting seat on the BII board.

The FCDO and BII can both benefit from greater collaboration at the country office and regional levels.

The FCDO must work collaboratively with BII throughout its operations to deliver the International Development Strategy’s objective of supporting countries to grow thriving economies by 31 March 2024. It should do this at both country office and regional levels by sharing institutional knowledge and ensuring that BII’s investments complement the FCDO’s bilateral programme. This should be built into the single country plan of each country where BII operates: the plan should outline operational synergies between FCDO and BII staff, identifying where the FCDO’s bilateral programmes complement BII’s investment activity and finding opportunities for further collaboration.

We do not find BII’s approach to tracking gender lens achievements to be dynamic or suitably stretching to achieve greater development impact. Performance monitoring of key metrics to track other key indicators is also absent from BII’s strategy and public reporting.

The FCDO must incorporate SMART targets into its strategy documents that stretch the development impact that BII achieves, such as the number of quality jobs created through its gender lens investments. This must be done by March 2024 to achieve active governance over BII and to ensure that BII’s investments are achieving greater impact for the world’s poorest people. (Paragraph 37) 56 Investment for development: The UK’s strategy towards Development Finance Institutions

The FCDO should have more oversight of the regional split of BII’s funds. It should actively monitor the thematic and geographic split of BII investments and include this within its annual reporting of ODA expenditure. The profiling of BII investment activity should also reflect the FCDO’s priorities, and this should be guided by the FCDO setting geographic and thematic handrails. The geographic and thematic areas of BII expenditure should be reported alongside the FCDO’s annual programme expenditure so the UK taxpayer has true sight of how UK ODA has been spent regionally and across thematic areas.

BII should articulate the work it strives to do to promote gender equality and target under-represented groups through its investee businesses by setting its own proposal for impact. This should set out the categories of people that are being targeted, the impact that the investments are targeting and the target outcomes and key metrics that will be measured to show the change created from BII’s investments.

A British Investment Partnerships strategy is urgently needed to drive effective co- ordination of actors within the BIPs and to ensure the International Development Strategy’s objective of delivering development in partnership achieves maximum impact. The FCDO must create this strategy, outlining its expectations of all parties involved in those partnerships, by 31 March 2024. The strategy must define inputs, outputs and outcomes measured by entity and progress against these metrics must be publicly reported each year. (Paragraph 49) Poverty reduction

Some of BII’s investments in middle-income countries have been poorly targeted and do not appear to be reaching the poorest and most marginalised people. In some cases, BII investments have tenuous links to development impact. By concentrating its investments in middle-income countries, there is a risk that BII will lose its development focus and prioritise financial returns.

BII must better distribute its investment across countries with different development needs and income status by capping the proportion of investments that it holds in middle-income countries, at a percentage determined by the Minister for Development, by 31 March 2025. The rate should be defined within BII’s investment policy and frequently monitored through BII’s published reporting.

To ensure that poverty reduction is central to BII’s investment decisions, BII must pursue investments that demonstrate a clearer focus on driving inclusive economic growth and reducing financial and social inequality.

In some instances BII has not demonstrated the additionality of its investments and is consequently competing with and crowding out commercial investors.

BII must target nascent markets that struggle to stimulate investment from the private sector. BII must annually assess the value it adds to investee companies. Where BII has not proven its additionality to an investment or its case for additionality is no longer valid, BII should exit that investment. (Paragraph 66) Investment for development: The UK’s strategy towards Development Finance Institutions 57

Financial intermediaries can deliver market expertise, but such investment vehicles can result in UK taxpayers’ money being used to reward intermediary agents in low- tax jurisdictions. In some cases, the onward investments made by intermediaries have rewarded businesses with weak or questionable links to development.

To ensure that poverty reduction is central to BII’s investment decisions and to prioritise investments that are critical to recipient countries’ development needs, BII must: (a) take responsibility for where its money is invested by exerting greater oversight and control over the activities of financial intermediaries who invest UK taxpayers’ money. (b) ensure that its investments reduce inequality by targeting investments that generate tax receipts in the country of operation rather than channelling money through low-tax jurisdictions that ultimately promote tax savings for those intermediary agents. (c) rigorously monitor all its intermediated investments to ensure that it can intervene before its money is invested in companies whose values are not aligned with the International Development Strategy.

While the Abraaj example suggests that BII’s internal control flagged suspected fraudulent activity, in light of other reports we are forced to conclude that BII’s internal control failed to identify and prevent some investments that appear to have harmed society and the environment in low-income countries. In those cases, BII was slow to investigate and to act in response to alleged wrongdoing by investee companies.

The FCDO must hold BII accountable for its due diligence and ongoing monitoring of its direct and indirect investments. To that end, FCDO must audit BII’s investment portfolio over a rolling five-year period against a set of environmental, social and governance (ESG) and development impact standards to validate BII’s internal assessments. (Paragraph 95) Accountability and Transparency

BII must ensure that its entire portfolio is aligned with the UK Government’s development agenda. With a diminished ODA budget there is more pressure to target development assistance towards the poorest and most marginalised groups: consequently, there is a greater responsibility for BII to actively manage its portfolio. It should place a greater emphasis on the impact delivered with the money it controls.

To deliver accountability and transparency and to operate in lockstep with the International Development Strategy, BII must assess the impact of its portfolio under previous strategy periods and actively manage its portfolio. BII must perform annual assessments of the impact delivered by all of its portfolio investments, including those businesses that are invested in through financial intermediaries. BII must divest from those investments that do not have a clear development objective and do not 58 Investment for development: The UK’s strategy towards Development Finance Institutions align with the International Development Strategy. In conclusion to these concerns expressed by the Committee and some that submitted evidence, we recommend the Minister maintain closer scrutiny on the whole budget and the proportion of the ODA budget allocated to BII. At a time of limited availability of the development budget, the taxpayer needs assurance that Official Development Assistance is used to support the world’s poorest people in the most effective way.

BII needs to work towards greater transparency of its investment data. As BII has stewardship over taxpayers’ money, there is greater responsibility to ensure propriety over its investments by annually publishing performance data. We welcome BII’s steps towards improving its transparency by creating a new role for a Transparency and Disclosures Officer. We note however that there is scope for considerable improvement in BII becoming a more transparent institution.

BII must prioritise the monitoring and reporting of investment activity and transparently report its financial and impact data. This should include, but not be limited to: (a) the number and type of jobs created, (b) types and value of capital mobilised, (c) the 2X Challenge assessment of its portfolio according to the five 2X Challenge criteria, (d) how the 2X classification has improved an investee company above employment levels currently found in the market for a given country. BII must also adhere to publishing a full annual listing of its investments in coal, oil and gas so an external assessment can be made on its progress against its Climate Change Strategy and a net zero portfolio, as previously recommended within our 2021 report on UK Climate Action and International Development around COP26. The data should be complete for all BII’s investments, published in a timely manner and allow for comparability over time. Where investments have not achieved their planned annual impact outcomes, BII should disclose the reasons for any short-comings and set out its plan for recourse.

BII should use Publish What You Fund’s DFI Transparency Index as a roadmap to increase the transparency of its operations and public disclosures. (Paragraph 117) Investment for development: The UK’s strategy towards Development Finance Institutions 59