This article was originally published on Conservative Home on Tuesday 21 March 2023 here.
Gareth Davies is the MP for Grantham and Stamford.
In the last decade, one number has dominated almost all discussion of the UK’s international development policy: 0.7 per cent. This is the target set by the UN for the proportion of GDP spent on ‘Official Development Assistance’, and it has long been the subject of intense and irreconcilable differences of opinion in this country.
To some, with the UK currently committing 0.5 per cent, it is a measure of a moral shortcoming. For others it remains a measure of ludicrous excess.
But there is another, less noticed number, which may make all the difference to this debate. 6.6 per cent is the average return made over the last ten years by British International Investment (BII), the UK’s development finance institution, which is backed by the Government to fund private sector projects in less developed countries.
Whereas 0.7 per cent of GDP is a measure of input, 6.6 per cent return on investment is a measure of outcome. If an investment makes a return it means, for example, that a company is improving its productivity or expanding its workforce.
Crucially, BII fills a financing gap left by commercial investors in riskier economic contexts, meaning each successful investment is every bit as much an indication of impact as of acumen.All of this speaks to two important principles to inform our approach to international development.
First, if the dignity of a job and upgrades to infrastructure are the substance of poverty reduction and economic progress here at home, then the same is surely true for our global neighbours. Second, while grants clearly have their place in exceptional cases of humanitarian need, investment hardwires the right incentives for long-term success.
BII’s investments have mobilised $2.5 billion of additional third-party capital to create one million jobs and generate $10 billion in local tax revenues, as well as 250 TWh of energy. That is all in only the last five years.
For all the talk of numbers, we should not forget the human stories they represent: whole industries pioneered, economies galvanised, nations strengthened, and lives transformed.
Whether you are an advocate for foreign aid or domestic taxpayers, 6.6 per ceent is a measure of mission accomplished. We believe it can and should be the foundation for a new and needed consensus on international development policy.
In a multipolar world with competing spheres of influence, BII is an important instrument in our international relations which we should deploy without hesitation.
If 6.6 per cent replaces 0.7 per cent at the centre of our national conversation, we can shift both the perception and the reality of our international development work. Away from thankless obligation, and towards incredible opportunity – for us here at home just as much as for those in developing countries.
But to fulfil this promise, we need to continue to walk a narrow path between pure philanthropy and pure profit.
If return on investment takes a back seat, and impact alone drives the agenda, it only leads to a dead end. In search of riskier and nominally more impactful investments, BII is already lowering its minimum expected return to 2 per cent. It admits that it can continue to operate in ‘a steady state’ on this model, but requires new capital injections from the Government to expand its important work.
In the face of a $4.3 trillion financing gap worldwide, and in view of its successes and strategic significance, we should be lifting any ceiling on BII’s scale. In my essay published by the Centre for Policy Studies this week, I outline three ways to achieve this.
First, we should unlock new sources of capital for BII. In the Netherlands, the equivalent organisation – FMO – has a fund management arm which enabled it to mobilise EUR1.6 billion from institutional investors in 2021. Another EUR500 million was raised through bond issuance in 2020.
Adopting a similar approach here in the UK would not only provide BII with more resources but would allow pensioners and savers to join taxpayers in achieving both a meaningful impact and a healthy return.
Second, BII should explore new investment instruments. The International Finance Corporation (IFC) has used ‘unfunded risk’ instruments to mobilise billions from insurance companies. Under these arrangements, insurers shoulder a portion of the risk themselves, reducing both the cost of borrowing and the cost of lending to allow loans to go further.
Finally, we should expand the scope of BII’s investments and allow it to fund more projects in friendly nations that generate higher returns. Not primarily for our own benefit, but to generate proceeds that can be re-invested in fragile states.
In fact, it would be hugely self-indulgent if we were to congratulate ourselves for devoting a higher proportion of our investment to the most worthy causes when we could be investing a larger absolute amount in the development of those countries.
BII is already doing tremendous work. If we recognised and appreciated it more, it would do us a world of good. Better still, if we can scale up and strengthen BII, it will do good for the world – and that, I am sure, is a fool-proof investment.