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The Independent Commission for Aid Impact (ICAI) issued a report this week on the performance of CDC–the UK’s development finance institution–in low-income and fragile states. ICAI gives CDC an Amber/Red rating on its performance, which means “unsatisfactory achievement in most areas, with some positive elements.” In particular, the commission says that CDC has not done enough to monitor its performance. 

CDC responded with a statement:

“We are confident that the steps we’ve been taking over the last 18 months are addressing many of the points in ICAI’s report…

Our focus on supporting the poorest states has seen CDC commit, in the last five years, US$1.4 billion in 54 investments in DFID’s fragile and conflicted affected states (out of a total of 191 CDC investments worth $6.2 billion during the same period). One of those fragile states, Sierra Leone, saw CDC commit US$113 million in investment, equivalent to 6.4% of the country’s US$1.75 billion foreign direct investment in the last 5 years.”

Development finance institutions have increased their commitments in fragile and low-income countries.  The newly-established US Development Finance Corporation has also made a commitment in this area. At the recently-concluded Africa CEO Forum, Yana Watson Kakar, global managing partner at Dalberg tweeted:

As investments have ramped up, DFIs have taken some steps to increase transparency. For example, CDC has worked with the International Aid Transparency Initiative (IATI) to establish a standard for publishing to its website.  It has made some information on its investments available to the public. It publishes Board minutes and regularly holds consultations with civil society. 

But DFIs still have a long way to go become fully transparent, and they may not have much incentive to do so. As our colleague Owen Barder tweeted:

Currently, most DFI websites contain stories and videos, along with statements about jobs “supported” or “created” by the company’s initiative. For example, CDC says “last year, companies backed by CDC supported three quarters of a million direct jobs; paid US$3.5bn in taxes to their local governments and provided vital financial services to 47 million people in poor countries.” This type of information is hard to interpret and sometimes, it is also nonsensical

Here are a few steps CDC and other DFIs can take to provide transparent evidence-based impact analysis of their work:

  1. CDC—and all DFIs—must publish data on their portfolios that can be independently analyzed by clients, researchers, and policymakers. This must include information on the terms of loans or equity investments, the timeframes of projects, and outcomes such as sales and employment, measured against a baseline that is established prior to the start of the project.

  2. CDC must also assess its performance against any subsidies—explicit or implicit—that it has provided. This is particularly salient when aid funding is used. Reporting on subsidies is sometimes complicated and difficult but not impossible. 

  3. Externalities generated by projects—whether positive or negative—must also be measured. For example, changes in the price of land surrounding a project can sometimes swamp any direct gains or losses from the project. 

  4. CDC must establish a clear time frame within which to publish rigorous evaluations of investments in low-income and fragile states. The recently-created DFID-CDC Learning and Evaluation Committee can assist with this process. 

The bottom line is that without rigorous analysis of gains and losses, neither CDC nor any other DFI, can come to any accurate conclusions about the effectiveness of aid.

Disclaimer

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