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Legal Guide
July 2012
July 2012
International Law, Debt
and Finance, DFI
This document provides general information and comments on the subject matter
covered and is not a comprehensive treatment of the subject. It is not intended to
provide legal advice. With respect to the subject matter, viewers should not rely on
this information, but seek specific legal advice before taking any legal action
Any opinions expressed in this document are those of the author and do not
necessarily reflect the position and/or opinions of A4ID
The finance is generally offered in the form of long-term loans (between 10 and 25
years), equity investment and credit risk guarantees.
As well as providing finance, DFIs often act in co-operation with governments and
other organisations in providing, (or financially contributing to/supporting),
management consultancy and technical assistance. This assistance can be
project specific, or general.
DFIs aim to promote best practices in business, governance and environmental
standards in the funds or companies in which they invest.
on their income. Shareholders of a DFI will not usually require dividends to be paid
on their investment.
DFIs depend on profits from their investments to ensure they have the resources
for their ongoing engagements. CDC, for example, has received no government
funds for over 15 years. Instead, all profits are re-invested in the business
throughout its target emerging markets. DFIs can become very profitable because,
while they are required to take higher levels of risk than commercial investors, they
often naturally find themselves with first-mover advantage in certain markets. A
well known example is the Celtel telecommunications company in Africa, in which
DFIs invested early and later found themselves with significant profits.
Investment decisions of the DFI will be overseen by a supervisory and
management board. The make up of the supervisory board varies from DFI to DFI
and will not always include representatives of the government by which the DFI is
owned. For example, the supervisory board of the FMO does not include
representatives of the Dutch government.
Which investments are made on a day to day basis will generally be governed by
one or more of the following:
Assessing impact
DFIs take account of the financial returns to the investment, the economic
contribution through employment and taxes, the social impact on beneficiaries
and compliance with social and environmental standards.
Various monitoring and measurement models have been established to measure
the impact of DFI investments,5 some of which are based on developing standard
1
In 2009, approximately 45% of CDCs portfolio was invested in sub-Saharan Africa due to the low income
status of its various countries
2
FMO specialises in housing, energy and finance, on the basis that investments in these sectors make a real
impact
3
A perceived comparative advantage in selecting good fund managers may lead to a decision to favour funds
of funds as an investment mechanism
4
Sectors may be chosen by a bilateral DFI on the basis of its home countrys perceived comparative advantage
in those areas.
space being the first to enter or the last to leave a troubled sector. However, not all
DFIs were able to play a countercyclical or additional role; commitments and
investment fell in a number of DFIs in 2008-2009, including CDC, DEG and IFC.
DFIs have been criticised for using tax havens as the location for intermediate
holding companies when making investments and for participating in third party
funds domiciled in those locations. Certain DFIs have justified the use of such
entities on the grounds that they accommodate the requirements of institutional
investors who may invest alongside the DFI, whereas others have made it their
policy not to continue this practice.
The Future
DFIs should not lose sight of their responsibility to expand access to financing
through consistently searching out under-invested countries and sectors, while
working to maximise the social outcomes of their projects.
Improving the monitoring of impact on a macro scale is something various DFIs are
working on which should also allow us to undertake a broader evaluation of their
overall role in global development.
Primary Sources