Eurodad and members have long questioned the impact of development finance institutions (DFIs) on development. One central problem is their weak or non-existant guidelines relating to fiscal contributions and investments through tax havens. The Belgian government is moving in the right direction with their reform of the Belgian DFI, BIO-Invest.
By Jan Van de Poel, Eurodad member 11.11.11
The Belgian government approved an important reform of the Belgian DFI, BIO-Invest, when ministers met for their last meeting before the summer. The new law will make it more difficult for BIO's investees to route their moneys through tax havens.
In 2012, Eurodad member 11.11.11 published a critical report that placed BIO at the centre of a hefty political debate. The development effectiveness of its investments was questioned and the report revealed nearly 111 million Euros of BIO’s investments were structured through tax havens such as the Cayman Islands and Mauritius.
Why did BIO do what it did? Why did a public investment company with a clear development mandate move into questionable projects such as Colombian fitness centres and environmentally unsustainable Peruvian asparagus plantations and tax havens? The answer is quite simple: the quest for return on investment.
The projects BIO invests in need to generate a ‘competitive’ return. Depending on market conditions, this return is somewhere around 5%. This required financial performance stands in the way of development performance. That is the fundamental flaw in the business model of BIO (and other DFIs). The main conclusion of 11.11.11’s report sparked quite a lively debate in parliament and the Belgian media. Paul Magnette, the former Minister of Development Cooperation, ousted BIO’s CEO and ordered an independent evaluation of the institution. Former NGO director Luuk Zonneveld became the new head of BIO. Eighteen months later, this debate has resulted in a new legal framework for BIO.
Is the new law effective?
Are we seeing the change we want? Well, yes and no, but mainly yes. In summary, BIO will not be able to invest in (some) tax havens and its investment objectives are aligned with Belgian development cooperation. BIO will have to focus more on micro and small, local enterprises that are so important to development. However, BIO’s required financial performance remains untouched.
Does this mean that 11.11.11 will have to redo its critical analysis in a few year’s time? That remains to be seen as the development minister has added an interesting element to the new legal framework. BIO will be able to ‘blend’ loans and equity with grant subsidies (a maximum of 100,000 Euros per project). The rationale is that this will increase access to finance for smaller and less developed small and medium-sized enterprises. Time will tell if this approach will deliver in terms of development. In the best case scenario, it will create opportunities for a development approach rooted in a chain of different interventions where BIO will probably be the last institution to step in as an investor. In the worst case scenario, it will open the door for scarce overseas development assistance to be diverted to supporting a private sector that is not fit for development while losing out on public service provision.
Exit tax havens?
In his announcement of the new law, the development minister promised the framework would be implemented later this year. BIO and its main shareholder – the Belgian government – will negotiate a contract determining BIO’s strategic priorities and governance structures. A first challenge will be the implementation of an article preventing BIO from structuring investments in tax havens. BIO will no longer be able to invest in companies or investment funds in countries that have an average corporate tax rate of less than 10%, nor in countries that do not sufficiently apply the Organisation for Economic Co-operation and Development (OECD) standard on information exchange.
Although it’s a clear step in the right direction, this regulation still raises concerns. First and foremost, it raises the issue whether 10% is a fair tax rate. Mauritius, for instance, a widely used tax haven, has a tax rate of 15% (in Belgium corporate tax is between 25-35%). On the other hand, it will be possible to structure investments in places such as Luxembourg or Delaware (US). Moreover, the debate at G20 and OECD level on the automatic information exchange is not decided yet. The current standard is still based on information exchange upon request, which has proven to be completely insufficient in terms of tackling harmful tax dodging.
In conclusion, 11.11.11 sees the proposed reform as a step in the right direction, but a lot can still be won or lost once BIO starts implementing this new framework in concrete strategies and programmes.