Development Finance Institutions (DFIs) are government-controlled institutions that invest in sustainable private sector projects. Their objective is to encourage development in developing countries while remaining financially viable themselves. The role of DFIs is rapidly growing in international development. Let’s see what our consultants think about this.
What is your own definition of DFIs?
“DFIs are national or supranational financial institutions whose mission is to finance and promote common national or supranational goals as well as common intangible values and help with their implementation in a particular country or in their member countries. While common supranational goals include responsible management of resources, sustainable transport, energy efficiency, smart and inclusive growth, basic infrastructure available to citizens, waste management and competitiveness, intangible values concern gender-balance, the right to an education, intolerance towards any kind of violence or humiliation and tolerance towards cultural, historical, country and language diversities.”
“In my view, a DFI is any kind of a public finance institution (bank, company, NGO) that is providing support for PEACE through reconstruction, rehabilitation of infrastructures or labor market evolution and thus a stable economic growth in war-torn and developing countries, including but not limited to the provision of public access to a basic and an advanced infrastructure, education and capacity building and gender equality.”
Why are DFIs relevant to international development?
“The development finance institutions have become crucial players in international development. DFIs have demonstrated a proven track record in structuring and financing projects that are generally smaller and located in poorer countries compared to those financed by multilateral institutions. In addition to country and sector expertise, DFIs demonstrate pace, innovation and flexibility in seeking joint solutions to the developmental bottlenecks of developing and emerging markets. Also, taking into account the current efforts in harmonizing procedures and key performance indicators for developmental effects, DFIs have become truly important players in international development policy.”
“DFIs exists not only to invest in safe but also conflict and corruption-blighted areas. When investing their funds, they leverage other investments, lowering investors’ risk appetite and return, and ultimately the cost of capital. DFIs have supranational authority to emphasize the advantages and drawbacks of their member states and publish these in their screening, development, transition or country reports. The DFIs’ remarks are closely monitored by national governments, trade partners, non-profit associations and investors for-profit-enterprises. Their data is a window into a country’s income level and growth drivers, competitiveness, rule of law, the quality of institutions, the level of corruption, infrastructure quality and other macroeconomic, hard and soft indicators.”
What is the major impact of DFIs in international development?
“DFIs set the development standards that become universal. They often provide bankability to otherwise non-bankable projects. They finance both commercial projects, such as public garages or factories, and large projects that are most often unattractive to other investors due to either having a long payback period or being a social rather than commercial interest. This way, DFIs contribute to horizontal infrastructure development across countries, taking care that certain projects are available to all their member states. Their impact is direct and measurable in terms of the larger number of implemented projects or size of approved funds, but also indirect and measurable in terms of the influence on institutions to implement certain rules of behavior or some commonly-accepted standards of behavior and zero tolerance towards any kind of violence or harassment.”
“DFI financed projects have to undergo internationally accepted feasibility studies before funding. The successful implementation of these projects supports access to international markets and thus, peace in the region. Private investments require political stability and security and only then will they follow the DFI capital flow. My favorite example is electricity: As soon as people have access to a reliable and affordable (!) electricity supply, economic growth is pre-programmed and warlords will lose their power. If this is not provided, the war will continue since people will be paid from evil sources. Peace is the main goal for DFIs.”
What are some consequences (both positive and negative) related to the rise of DFIs in international development?
“I would like to provide positive consequences related to the rise of DFIs in Lithuania. In 2009, Lithuania established a lending mechanism for residential energy efficiency using funds from JESSICA, a financial instrument developed by the European Commission and the European Investment Bank (EIB) in collaboration with the Council of Europe Development Bank (CEB), and funded through the European Regional Development Fund (ERDF). This allowed Lithuania to provide low-interest loans without burdening the state budget. The Government of the Republic of Lithuania has developed an innovative financing scheme (JESSICA Holding Fund) for this program. More than 700 million euros have been provided from JESSICA for energy efficiency projects. This helps to create new jobs, lower CO2 emissions, meanwhile allowing thousands of people to improve their living conditions and cut energy bills.”
“Positive: To create new workplaces and hope for the young generation. Negative: However, a lack of coordination between DFIs may lead to corruption and a lengthy, costly implementation or duplication of projects. Sometimes the support of “needed” politicians or warlords or the presence of visible minorities or English-speaking influencers in a civil society indicate the absence of cultural sensitivity, poor knowledge of history and traditions at DFI level. Often short-term rotation of the DFI staff and the hiring of inexperienced Project Managers when quickly adding new sectors hampers project implementation work in the field.”
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