Aid Transparency and Subsidies to Private Companies: A First Step, But a Long Road Ahead

Today the World Bank’s private sector arm the International Finance Corporation (IFC) announced a step forward in its transparency around the use of aid resources to finance private companies. The Private Sector Window takes World Bank Group funds usually provided to governments in the world’s poorest countries at very low interest rates and uses them instead to support private investments in those same countries. The financing is provided on terms that the IFC wouldn’t normally provide because of concerns with risk or profitability—an effective or direct subsidy to the firms involved. Starting on October 1, the IFC’s estimate of the size of that subsidy for each investment will be published.​

That’s right and proper: When scarce aid, and scarce tax resources, are used to support private firms, citizens of donor countries and recipient countries alike have a right to know where the money is going to and how generous the terms. A number of us at CGD had been calling for greater transparency around subsidies to the private sector from the IFC and other development finance institutions, so this is a welcome first step. However, a few aspects have might be cause for concern:

  • It appears that the IFC is releasing the estimated subsidy element, but not the estimated market rates that the subsidy is below. It may not be able to publish all of the information that the market rate estimate is based on (some will be proprietary, some shared in confidence), but the central estimate itself need not be private.​ Without that additional information, it is difficult to interpret the value of or necessity for the subsidy itself.

  • Where the estimate of the market rate is based on a formula, that formula should be additionally published, along with the data used, where that is not proprietary. Note that the use of a formula implies there simply isn’t a market rate to estimate the size of the subsidy from, which also suggests fewer commercial sensitivities about reporting the data.​

  • Other development finance institutions which used subsidized finance should follow—or preferably leapfrog—the IFC’s lead. And all DFIs that are part of the GEMs Risk Database should agree that the credit risk data it provides, based on past deals by international financial institutions, should be openly published—suitably aggregated and anonymized if and where necessary. Providing this information would not only allow for a greater understanding of why and where subsidies might be necessary, but help private sector financiers to evaluate risk in developing countries, furthering the public policy aims of DFIs.​

The problems with the Private Sector Window as well as other DFIs’ approaches to the use of aid resources involve a lot more than opacity. The subsidy allocation process as a whole is considerably flawed, usually involving bespoke, uncompetitive deals with favored firms and a public policy objective often slapped on the back end rather than driving the process, as I note in my recent paper. Nonetheless, greater openness can only help. The IFC’s small step toward transparency should be followed by a giant leap by the DFI community as a whole.​


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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