European Network on Debt and Development DEVELOPMENT FINANCE WATCH
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Storm on the horizon? Why World Bank climate Climate Investment Funds could do more harm than good A new Eurodad report provides a critical analysis of the World Bank’s role in Climate Finance. Civil society actors have long been contesting the role of the World Bank as an appropriate channel for climate finance based on the Bank’s questionable green credentials and its history of advising economic policy reforms to developing countries. This report focuses on yet another concern regarding the role of the Bank in climate finance: how the World Bank is planning to disburse climate finance, via its Climate Investment Funds. It concludes that the Bank is not the best-placed institution to channel climate finance, nor does it set high standards for a legitimate and development-friendly climate finance architecture for the future. read more News » Private companies say "financial transparency: not a great idea" In November 2010, the European Commission (EC) opened a public consultation to “seek stakeholders’ views on financial reporting on a country-by-country basis by Multinational Companies (MNCs).” While several NGOs, including Eurodad, contributed to the public consultation with a strong plea for the EC to put in place country-by-country reporting standards for all sectors, more than half of the contributions to the consultation were from private sector companies, the vast majority of which wholeheartedly oppose the enhancement of financial transparency. The art of not paying taxes Defusing the debt bomb: a day at the World Social Forum |
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| Storm on the horizon? Why World Bank Climate Investment Funds could do more harm than good By Nora Honkaniemi
A new Eurodad report provides a critical analysis of the World Bank’s role in Climate Finance. Civil society actors have long been contesting the role of the World Bank as an appropriate channel for climate finance based on the Bank’s questionable green credentials and its history of advising economic policy reforms to developing countries. This report focuses on yet another concern regarding the role of the Bank in climate finance: how the World Bank is planning to disburse climate finance, via its Climate Investment Funds. It concludes that the Bank is not the best-placed institution to channel climate finance, nor does it set high standards for a legitimate and development-friendly climate finance architecture for the future. Section one of the report, The World Bank CIFs’ financing instruments: fit for development?, critically assesses whether the financing instruments by the World Bank contribute to – rather than hinder – equitable and sustainable development in the South. It finds that only one sixth of the pledged funds will be delivered as grants. Following the financial crisis, many already heavily indebted countries have been pushed further over the brink, and providing loans for climate finance has the potential to deteriorate the financial situation of these vulnerable countries even further. Section two, Why allocation criteria mean that recipients of climate finance aren’t always the most vulnerable, outlines how eligibility and allocation criteria may constrain the policy space available for developing countries to decide on their own pathways for sustainable development, and it may not favour a needs-based allocation of resources. Section three, Why private finance is a risky option for the climate crisis, finds that over one third of CIF funding is channelled to the private sector. However, it is unclear what safeguards are in place to ensure that the private sector – which by definition will seek to maximise their profits - contributes to support the most vulnerable and to address the needs of the poor. All too often, public funds intended for climate and development purposes in the poorest and most vulnerable countries are being instead used for subsidising high and middle income countries’ private sectors. Other risks include the high failure rates for private equity investments, the lack of transparency and environmental and social safeguards. The report concludes by outlining the reasons why – in light of the analysis of the Bank’s delivery of climate finance as it relates to the financing instruments - the World Bank is not the best-placed institution to channel climate finance or to set the highest standards for a legitimate and development-friendly climate finance architecture for the future. Based on the findings of this paper, Eurodad makes the following recommendations:
- While the greater share of funding for climate finance should be delivered as grants, all adaptation funding must be delivered as grants. - Lending for climate finance to countries in debt distress should not take place under any circumstances. Grants should be provided instead. Where and if concessional lending is accepted for mitigation in Low- and Middle-Income Countries, existing debt burdens must be taken seriously into account and repayment feasibility assessed realistically. - The use of financing instruments must be considered in light of developmental outcomes. Whereas loans and guarantees may pile up further debts for developing countries, private equity is a risky and opaque instrument, likely failing to deliver on intended climate purposes and often undermining developing country-led equitable and sustainable development. - No policy conditionality should be attached to climate financing. Eligibility for funds and their allocation must be based on need and vulnerability to climate change, not on performance-based methods, meeting policy conditions or complex and irrelevant sets of eligibility criteria and allocation frameworks. - Funding climate finance by channelling public funds through the private sector involves many risks. Stringent criteria and standards must be applied to private finance to ensure the intended objectives of the funding are realised and that they benefit those most affected. - The highest standards of transparency must be applied to the management and administration of climate funds, including the full disclosure of the terms and conditions of all financing agreements. Private companies say "financial transparency: not a great idea" By María José Romero
In November 2010, the European Commission (EC) opened a public consultation to “seek stakeholders’ views on financial reporting on a country-by-country basis by Multinational Companies (MNCs).” Country-by-country reporting standards would require that MNCs provide information on the profits earned and taxes paid in each of the countries where they operate. Eurodad and other civil society organisations believe that such reporting standards would enhance financial transparency and would provide crucial information needed by developing countries to enhance collection of taxes on the profits made by companies in their countries. While several NGOs, including Eurodad, contributed to the public consultation with a strong plea for the EC to put in place country-by-country reporting standards for all sectors, more than half of the contributions to the consultation were from private sector companies, the vast majority of which wholeheartedly oppose the enhancement of financial transparency. Why are reporting standards by MNCs important for poor countries? This is why over the years CSOs have strongly campaigned to set up country-by-country reporting standards. These calls have been heard by some decision-makers, including from the European Parliament, which are now calling for measures to improve the corporate governance of multinationals by imposing additional transparency requirements on their activities in third countries. What do MNCs think about improved financial transparency? Most of the private sector contributions were strongly calling against binding rules on country-by-country reporting at the EU level. They argue that: • Mandatory country-by-country disclosure may harm investors by revealing sensitive information and would place EU companies in a competitive disadvantage vis-à-vis non-EU companies. Clearly, these arguments show that companies are overly preoccupied by the interests of investors at the expense of the general public interest of the citizens in poor countries and the ability of their governments to mobilise domestic resources for development. However, even when narrowly assessing investor’s interests, as the fiasco of the global financial crisis shows, the case can be made that financial transparency could increase the investor’s ability to access information and better assess risks. Also, it could respond to a growing constituency of investors which may also take into account ethical considerations when taking investment decisions. A few companies show a small degree of openness, while the vast majority is overtly against The majority of submissions by private companies or business associations were very negative on the usefulness of having binding rules at EU level on financial reporting on a country-by-country basis. Strikingly, they also emphasised that they do not think that increased transparency would improve tax governance and accountability at either the global or the national level. Some companies, such as Repsol and Statoil, where not overly against setting up EU rules on the disclosure of financial information on a country-by-country basis, and stated that it would “be useful in order to improve domestic accountability and governance in natural resource-rich third countries.” Even a few investors support mandatory country-by-country reporting for all sectors. Calvert Asset Management Company, Domini Social Investments LLC, Harrington Investments, Inc., and Interfaith Center on Corporate Responsibility, among others, argued that “this would enhance the information available to us [investors] to assess risk arising within the corporations in which we invest and would assist us [investors] in making decisions on the allocation of the capital under our management to corporations operating in the world’s financial markets.” According to them, country-by-country reporting “would provide investors with information on the following issues, currently unavailable, but which would impact the decision making processes if available: Others, such as the KLP-group – one of Norway's largest life insurance companies and pension fund –, also advocate for standardised and predefined formats to allow for comparing information across companies. They argue that “if data cannot be used to compare one company to another, within countries, industries or regions, the data is more or less useless. This is very often the challenge with corporate responsibility (CR) data. CR data is subject to many deficiencies because it is voluntary and not standardized.” What measures would make the grade? Eurodad and other CSOs believe that legally binding measures at the EU level on country-by-country reporting are crucial to tackling illicit capital flight from developing countries and are a necessary first step to putting an end to tax evasion and avoidance from poor countries. Our submission highlights that country-by-country reporting should include the following points: • have a universal scope and apply to ALL countries in which the company operates. • be applied to all extractive companies and to large corporations with substantial economic impacts, without imposing additional reporting burdens on small companies. • create a level playing field for European companies, and help make financial transparency an international norm. Whereas public consultations simply allow the EC to gauge the views of different stakeholders, Eurodad is concerned that the overwhelming number of private sector submissions outnumbers and silences the CSO calls for greater transparency. The EC is committed to releasing a Communication on this issue by September 2011; and we hope that it will reflect the voices and concerns of the EU citizens that call for the highest standards of financial transparency and of financial honesty.
The art of not paying taxes By Carlos Bedoya, Latindadd
Latin America is the most unequal region in the world. Some governments, like those in Bolivia and Ecuador, have started to change how they deal with big enterprises so as to increase their tax income and finance the process of widening coverage and improving public services, but most people still have much lower incomes than the top strata of society. Latindadd, the network of social organizations, reports that the poorest 20% of the population in Latin America receive only 3.5% of the income while the richest 20% take 56.9%. Tax policy is a powerful tool to reduce inequity, and according to the Peruvian tax expert Luis Alberto Arias, although this debate has not really got under way in this part of the world, in Europe tax adjustment has been used effectively to bring countries’ Gini ratings (which measure inequality in societies) down by several points. In Latin America, tax pressure is approximately 20% of Gross Domestic Product (GDP) but in Europe the figure is double this. That is to say, for every 100 dollars produced in our region only 20 go in taxes, while in Europe 40 of the dollars created go to the coffers of the state. This shows how powerful taxation policy can be as an instrument to reduce poverty. This is the logic of imposing higher taxes on those who have higher incomes or more property, and spending more on state services for the whole population, with an emphasis on the most vulnerable sectors. This is the how a policy to promote equity works. It is true that Europe is passing through a period of severe economic difficulty due to the global crisis that has hit the continent extremely hard, but still its taxation systems are among the most progressive in the world. No one would dispute that the crisis has more to do with speculation and bad management in the financial field than with tax systems. Regressive taxation The other side of the coin are taxes on wealth and property, direct taxes, which yield relatively less than indirect taxes. In Latin America, direct taxation accounts for only 17% of total tax income, whereas what we all have to pay when we buy something amounts to some 40% of total income from taxation. With this in mind, it is clear that tax policy in the region is “pro rich” and not “pro poor”. In other words it is regressive, not progressive. This is one of the main causes of the huge inequalities there are in this part of the world. The notion that “investment and exports” is the only option for a country to develop is still the guiding ideology when the time comes to levying taxes. And with this philosophy underlying state policies, it is no surprise that the transnational enterprises are regularly granted advantages that range from tax stability contracts to tax evasion mechanisms such as “transfer prices” and “tax havens”. They take it easy This is called “transfer prices”. According to Rodolfo Bejarano, an economist with links to Latindadd, this is how, at the present time, some 60% of world trade is carried out: it consists of transactions between enterprises involved in the same matrix. Bejarano explains that when a transnational group controls enterprises that are on both sides of a commercial transaction it is easy for them to avoid paying taxes, and the countries in question can do nothing about it. This is why there is a close connection between price manipulation by transnationals and the developing countries losing tax income. By using this mechanism these enterprises can transfer their profits under cover. They assign unreal prices to their transactions involving goods or services, understating the value of sales or overstating purchases to suit their needs. Or they simply invent fictitious business operations. How much are we losing? There is no easy way out. The transnationals would have to provide timely information about all their operations and this would necessarily have to pass through an international tax control system with global accounting standards that could check the big enterprises’ trade operations to ensure they are legitimate. In other words, what is needed is global political will. Tax havens Alberto Croce of the SES Foundation in Argentina says these havens ought to be called “tax sewers”. They also serve to hide the losses of banks and large enterprises with classified investment accounts, which are very profitable. We were given a glimpse of these kinds of arrangements when the dirt on the world financial crisis, or some of it, came out. The first tax haven was Switzerland: in 1934 the Swiss decreed banking secrecy for their foreign clients. Since then these havens have been proliferating. There are some in the Latin American region, but without doubt the most efficient are the United States and five European countries. It was not for nothing that the Swiss ex-banker Rudolf Elmer gave WikiLeaks lists with the details of 2,000 people, financial institutions and multinationals in various countries that use banking secrecy to evade taxes. He said that the world should be aware of what he himself has always known in his day to day work. In the near future some very revealing information is going to emerge. Defusing the debt bomb: a day at the World Social Forum Yesterday I sent two letters to the French president, both of them asking him and the rest of the G20 to put an end to a world economy where capital flows from the South to the North- and I have met hundreds of people who I hope will do the same. The two lines of students waiting for the library at Dakar University to open were the most organised (and the longest!) lines I have ever seen. The rest of us, the participants at the World Social Forum 2011, surrounded them looking for information on where to organise our more than 700 events. Well-equipped with banners, stickers and a speaker, and all the auditoriums at the University still being using for regular classes, the best way to organise an event was to hijack a tent. So that’s what we did. Walking in the dusty sunlight from the library to our new base, we picked up colleagues from across the world. By the time we had started a couple of hours later, we had gathered about one hundred people to discuss problems and solutions of sovereign debt. “When the Belgians left the Congo they were kind enough to leave us their previously incurred debt”, said a debt activist from the Democratic Republic of the Congo who had found her way to the debt tent. There is no question that we need to establish rules for global finance. We need to avoid capital flowing out of developing countries, be it through payments of unjust debts or through loopholes in the international tax laws. The question is how and what the rules should look like. Today, Eurodad members and allies launched a few different campaigns and tools to make this possible. More than 100 networks and organisations have signed onto the South North Platform for Sovereign, Democratic and Responsible Financing . The platform has defined principles that should be followed in a loan contraction process, with the aim of ending the historically unjust and inequitable power relations between countries and elites, and the majority of the people. Let us know if you want to sign on! The platform is accompanied by Eurodad’s charter for responsible financing and Afr odad’s upcoming charter on responsible borrowing. However, rules and principles are useless unless those who break them can be held to account. This is one of the rationale behind the Defuse the Debt Crisis campaign, also launched this week, which calls for an international debt court that can conduct independent debt audits in countries with high or unjust debt burdens. You can take part by sending a letter to President Sarkozy, the president of the G20 in 2011, asking him to put this on the agenda for the 2011 G20 summit. Check out the website for more info and activities. Repayments of unjust debts are not the only way capital finds its way from the South to the North. Developing countries lose more money through tax dodging by multinational companies than they receive in aid. This was the basis for another campaign launch in Dakar today: End Tax Haven Secrecy! In my second letter to Sarkozy, I asked the G20 to take effective action on tax haven secrecy now. Being in Dakar has reaffirmed for me the value of gathering people, organisations and networks together to make strong and unified calls to change the financial system. Today was an effective mix of banners, stickers and online letters to the world leaders. Please take action and send your two letters today and pass on the links! Ending the UK’s support for toxic debt Eurodad member Jubilee Debt Campaign has issued a new report revealing how the UK’s Export Guarantee Department has a history of backing projects by large corporations in a handful of controversial sectors. The projects have led to human rights abuses, environmental destruction and corruption in the developing world, and often failed to deliver even on their stated aims. The report, “The Department for Dodgy Deals - Ending the UK’s support for toxic debt”, finds that: Over £2 billion of ‘toxic debts ’ from failed UK exports are being repaid by developing countries, making up 96% of Third World debt to the UK. Developing countries including Indonesia, Kenya and Pakistan have paid an average of £700 million a year to the department over recent years. Indonesia is still repaying debts based on arms sales to General Suharto and an overpriced, unproductive hydro-electric dam in Kenya. It has also supported a white elephant power plant in India, a ‘human rights free’ oil pipeline in the Caucasus and a dam in Lesotho which involved serious corruption. The Coalition government has failed to act on its pledge to end fossil fuel subsidies through the ECGD, despite taking action to beef up the Department’s role. The Liberal Democrats have a party policy to stop supporting arms sales through the ECGD. Recommendations It is possible for the ECGD to be a socially responsible actor, supporting human rights, sustainable development and new, green industries – an outcome that would benefit the UK as well as developing countries. But this requires tough, new impact standards and much better democratic scrutiny and accountability. The department must: Drop the unjust debts Audit existing ECGD debts and cancel those deemed illegitimate. Respect human rights Adopt mandatory standards on the environment, human rights and poverty. Stop supporting the export of arms and fossil fuel technology Prohibit support for arms and fossil fuels. Crack down on corruption Debar companies involved in bribery from receiving ECGD support. Become accountable to parliament and the public Establish and execute transparent and consistent procedures for monitoring and evaluation with an appropriate sanctions framework. PRESS RELEASE: New international debt justice campaign launches at World Social Forum in Dakar This week at the World Social Forum in Dakar, Senegal, several civil society organisations are launching a global campaign for a new international debt court. The campaign, “Defuse the Debt Crisis,” calls upon French President Nicolas Sarkozy (G20 Chair in 2011) and the international community to establish new rules for debt justice. These rules must ensure fair settlement of debt disputes when a country struggles to repay its loans or when the legitimacy of a debt is in question. Countries all over the globe are experiencing worryingly high levels of sovereign debt, much of which has been caused by reckless private lending which triggered the global financial crisis. Unsustainable and illegitimate debt impedes development and prevents poverty reduction in developing countries. A fair and lasting solution to the debt problem is urgently needed. “The European approach to the current debt crisis repeats the errors that helped turn the sovereign debt crisis of Southern countries in the 1980s into what was later called "a lost decade for development," says Oygunn Brynildsen Policy Officer at Eurodad. “Rather than holding investors responsible for the risks of their investments, public funds are being used at the expense of tax payers to bail-out the private sector,” she added. However, “there are alternatives to handle such protracted crises in ways which do not put the burden on the poor,” says Nuria Molina, Eurodad Director.. “Rather than condemning debtor countries to protracted adjustments, while securing profits from risky investments, governments must put in place fair and transparent debt workout mechanisms based on well-tested insolvency principles, ,” Molina said. The campaign calls for a Debt Court that is: The campaign website is: http://www.defusethedebtcrisis.org/ For more information contact: OR:
We encourage our readers to circulate this newsletter to interested colleagues. If you have problems downloading from the web and would like to receive mentioned documents as an e-mail attachment, please contact assistant@eurodad.org. Eurodad’s articles are also available for re-use in other publications with reference to the original source. EURODAD is a non-profit organisation (ASBL/VZW) based in EURODAD member groups across |
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