The Private Sector Turn
Private equity, financial intermediaries and what they mean for development

by Nicholas Hildyard

first published 22 November 2010

The Private Sector Turn conference explored the increasing shift from public to private funding in development finance, the forms it takes and what it means for activists and affected people.

In recent years, there has been a major expansion in lending to the for-profit private sector within development finance. A decade ago, some 90 per cent of multilateral development bank funding went to public sources, largely developing country governments, and just 10 per cent to the private sector. By 2007, however, the proportions were nearly reversed. The private sector portfolio of the World Bank's International Finance Corporation (IFC) has more than quintupled since 2002, while the European Investment Bank's (EIBs) operations in Africa and elsewhere are almost exclusively private.

More and more of these private investments are channelled not into projects (such as dams, power plants or roads) but to financial intermediaries (such as banks) and to private equity and hedge funds. Despite these mechanisms being implicated in the financial crises of recent years, their use is increasing, suggesting that development finance is becoming simply another section of financial markets.

Nicholas Hildyard of The Corner House described the substantial growth of for-profit private sector investment (particularly private equity funds and pension funds) in infrastructure, such as water treatment plants and drinking water supply systems, telecommunications networks, power stations, dams, railways, roads and ports.

Until the 1990s, the vast majority of infrastructure projects in the developing world were funded by national governments, with substantial project-specific loans from multilateral development banks (MDB), such as the World Bank. While state-generated finance (derived, from taxation, user fees, borrowings and reserves) still remains the principal source of funding for infrastructure in most developing countries, the role played by the private sector has increased substantially over the past two decades, particularly in those countries classed by investors as “emerging markets” (China, Brazil and India).

Little of this private sector finance is conditional upon meeting international environmental or social standards – in sharp contrast to Official Development Assistance. Northern governments invariably blame China for undermining development standards instead of their encouragement of their own private sector investors.