Development Finance Institutions on the spot over their investment policies


    Some of the locomotives that were bought by Rift Valley Railways.

    Download FACTFILE Institutions that participated in the Sh 16.5 billion (US$ 164 million) capital expenditure debt package to Rift Valley Railways (RVR).



    The ongoing World Bank investigations at Rift Valley Railways (RVR) have put international development financial institutions on the spot on how well they monitor the usage of millions of dollars they lend for development projects in the third world.

    Development Finance Institutions (DFIs) are government-controlled institutions that, often support private sector projects in developing countries using their tax payers money.

    According to a report released by international agency, Oxfam in April this year, 51 of the 68 companies that were lent money by the World Bank’s private lending arm International Finance Corporation’s (IFC) in 2015 to finance investments in sub-Saharan Africa use tax havens.

    Oxfam’s new analysis which focused on IFC’s investments in Sub-Saharan Africa shows that together these 51 companies, whose use of tax havens has no apparent link with their core business, received 84 percent of IFC investments in that region in 2015.

    It also reveals that the IFC has more than doubled its investments in companies that use tax havens in just five years – from $1.2billion in 2010 to $2.87billion in 2015.

    The RVR revelations come in the wake of the Panama Papers scandal which revealed how powerful individuals and companies are using tax havens to hide wealth and dodge taxes.

    And the European Network on Debt and Development (Eurodad) reveals in another report “ Going Offshore: How development finance institutions support companies using the world’s most secretive financial centres”

    The report says that developing countries lose billions of dollars every year through tax avoidance and evasion. Tax havens play a pivotal role in this by providing low or no taxation and by promising secrecy, allowing businesses to dodge taxes and remain largely unaccountable for their actions.

    This report, which covers three multilateral and 14 bilateral DFIs, looks not only at DFIs’ use of tax havens, but also at their standards when deciding where to channel their money. It also looks at the level of due diligence and portfolio transparency of these institutions as a way to assess civil society’s ability to hold them to account.

    To read the full report, click here

    In Oxfam’s study, the most popular haven for IFC’s corporate clients was Mauritius, where four RVR related companies that include Africa Railway Holding, Qalaa (Citadel Capital) Joint Investment Fund Management Ltd, East African Rail & Handling Logistics Co.Ltd and RVR Investments (PTY) Ltd are registered.

    According to the Oxfam report, 40 percent of IFC’s clients investing in Sub-Saharan Africa have links in Mauritius. Mauritius is known to facilitate “round-tripping.” This is where a company shifts money offshore before returning it disguised as foreign direct investment, which attracts tax breaks and other financial incentives.

    Sub-Saharan Africa is the poorest region in the world. It desperately needs corporate tax revenues to invest in public services and infrastructure. For example, the region lacks money to provide enough skilled birth attendants, clean water or mosquito nets, resulting in high rates of child mortality; one child in 12 dies before their fifth birthday.

    Oxfam’s Head of Inequality, Mr Nick Bryer, said the World Bank Group should not risk funding companies that are dodging taxes in Sub-Saharan Africa and across the globe.

    “It’s crazy to be giving with one hand and taking away with another – the UK government donates to the World Bank to encourage development, but by allowing investments in tax havens the World Bank’s lending arm is ultimately depriving poor countries of much-needed revenues to fight poverty and inequality,” Mr Bryer said in a statement.

    He added that the World Bank needs to put safeguards in place to ensure that its clients can prove they are paying their fair share of tax.

    Eurodad also shows in another report called “Secret structures, hidden crimes: Urgent steps to address hidden ownership, money laundering and tax evasion from developing countries” shows that tax evasion poses an acute challenge to developing and developed countries.

    From 2000 to 2010, illicit financial flows deprived developing countries of US$5.86 trillion. Tax evasion is not a victimless crime – for people in the developing world, the consequences of tax evasion can be a matter of life and death. If developing countries could recover this untaxed wealth, it could mobilise enormous resources for improving their public services and their citizens’ lives.

    The new Eurodad report “Secret structures, hidden crimes” finds that the hidden ownership of companies and other legal structures facilitates tax evasion, corruption and related crimes.

    Read the full Eurodad report: Secret structures, hidden crimes: Urgent steps to address hidden ownership, money laundering and tax evasion from developing countries

    The IFC invested more than $86billion of public money in developing countries between 2010 and 2015; 18.6 percent of it spent in Sub-Saharan Africa. The IFC has a significant focus on financial markets, infrastructure, agribusiness and forestry, among other sectors.

    While the IFC arguably leads the private sector with its disclosure, environmental and social standards, the public still has no access to information about where over half of the institution’s financing ends up, because it is done through opaque financial intermediaries.

    It also continues to face major challenges in measuring its overall development impact, and ensuring that the projects it funds do not harm local communities. This latest Oxfam research shows that the organisation also has a long way to go in ensuring that its clients are responsible tax payers.

    Oxfam has asked the IFC to develop new standards to ensure it only invests in companies that have responsible corporate tax practices.

    “For example, companies should be transparent about their economic activities so it is clear if they are paying their fair share of tax where they do business,” the Oxfam statement says.

    The international agency also asked Britain Prime Minister David Cameron to show strong leadership in tackling tax havens, beginning by intervening to ensure that the UK’s Overseas Territories and Crown Dependencies publish public registers revealing the true owners of companies based there.

    The international agency also urged the World Bank and IMF to work with governments around the world to further reform the international tax system and help prevent tax dodging by wealthy individuals and companies, including action to end the era of tax havens.

    Tax dodging using tax havens is estimated to cost poor countries $100billion in lost revenues every year.

    In a report called Monitoring and evaluation at Development Finance Institutions, (Eurodad) says that (DFIs) are increasingly expected to thoroughly report on the impacts of their operations, particularly on development and poverty reduction.

    The report says that given DFIs’ increased role in the development landscape, analysing these systems is opportune to identify their strengths and weaknesses, and to find out ways in which they can be improved.

    This briefing puts forward a framework to assess M&E systems against the following criteria: governance; development impact; effectiveness; and financial additionality.


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