Publish What You Fund’s DFI Transparency Initiative has completed its fourth research work stream (Value of Investment: Mobilisation & Structure of Deal). The research report identifies a number of areas where consistency of reporting and Development Finance Institution (DFI) transparency could be improved. However, we also wanted to understand why this data matters to those in the development finance space, the hard reality of what’s available and what’s not, and the arguments behind why transparency is so important. Thomas Venon is a founding partner of Eighteen East Capital following a career spanning twenty years in the asset management industry. He was recently head of institutional business at African Alliance, and was previously a director at S&P Fund Research, and held senior positions at RBS/ABN Amro and Old Mutual. Thomas and our CEO, Gary Forster, sat down to discuss our research findings.
GF: Thomas, Eighteen East Capital plays a unique role in the development finance space, please can you tell us a little about your organisation?
TV: In a nutshell we focus on adapting and developing structures and solutions to help mobilise private capital so that it can align itself to what DFIs and MDBs are doing across emerging markets. We do so with the support of governments including those of the UK, Canada, and Sweden as well as that of philanthropic foundations and supra-national agencies such as UNECA. All the market building work we do is made available in the public domain.
GF: Thomas, as a member of our Expert Working Group for this work stream you’ve already seen the findings. But before we dig into the detail I wanted to get a sense of your experience of working with DFI investment data, and the fundamental issues you see.
TV: Sure, and let me use a recent piece of work to illustrate both the opportunities and the challenges relating to DFI transparency. We recently undertook a mapping exercise, documenting individual commitments made by DFIs over the past 10 years. The idea was to give private institutional investors an insight into what the DFI experience has to date been in these markets. We wanted to discuss risk and return data as well as the sectors and instruments relevant to DFIs, who often account for a significant part of the markets they work in. We had to build this picture using granular data because DFIs do not disclose information pertaining to their investments in a consistent fashion, and different institutions use different time frames, definitions, data points, etc. As a result, it was not possible to use this to answer our research question. We used a multi-pronged approach and engaged with individual DFIs to obtain information pertaining to their commitments. Some were surprisingly open, others simply referred us to their current disclosures, which we generally found insufficient.
Where we couldn’t obtain data through official channels or public disclosures we often turned to disclosures made by investee companies. And herein is a first interesting point about DFI transparency. A significant proportion of DFI money goes through financial intermediaries and companies which are subject to their own transparency and disclosure policies and regulations. These companies are often more transparent than the DFIs themselves. We found that much of the data that DFIs could not make available to us was already out there in the public domain. This should reassure DFIs that further transparency on their part wouldn’t create a problem given that much of this information is already available. At the same time, you can see how inefficient it was for us, or indeed any prospective investor, to compile the information we needed. In this context, efforts to resist enhanced transparency not only seem counter-productive, but ultimately futile.
“DFIs are pioneers, explorers, but without access to the maps they draft, others cannot follow, and much value is lost.”
GF: What about the argument that for DFIs to be more transparent would place an undue burden on their investees and/or makes it more difficult for the DFI to compete with other financers who don’t demand such transparency?
TV: The notion that DFIs need to obfuscate transparency to effectively compete against each other should in and of itself cause alarm bells to ring. Should they on the other hand find themselves competing against private sector funders, you would expect DFIs to step back. With regards to the additional reporting burden transparency might put on investees, the reality is that DFIs are already in possession of financial performance data pertaining to their investments. And to end with the ‘commercial confidentiality’ investees supposedly insist on, one could argue that a requirement for enhanced transparency would not be an unreasonable price to pay for access to public funding that cannot otherwise be sourced from the private sector. Should an investee feel that their negotiation position is strong enough to refuse to accede to demands for transparency, you need to ask whether this investee really needs public funding in the first place.
Maintaining good quality data is a resource-hungry process. DFIs have finite resources, human or financial, available to do this. Building markets and encouraging mobilisation should however be seen as integral to their mission, not as an extra burden. It behoves DFI shareholders to ensure they are adequately funded and incentivised to do so. We are very conscious of the drain on DFI resources the requests for data we are all having to make represent. Enhanced and adequately funded disclosure programmes would negate the need for this constant and inefficient back and forth.
GF: Something we’ve been working on as part of this project is the idea of an aggregation standard – a consistent way for DFIs to aggregate their data to a reasonable level (global, region, country, sector etc.) rather than the mismatch of data we currently see. What’s your feeling about something like this as a means of encouraging transparency in the short term while we endeavour to see granular project level data?
TV: Look, aggregated data can be misleading or insufficient in the context of private capital mobilisation. However, let’s be clear, given the current limited access to investment performance data this would be a huge step forward. But we must also recognise that non-disclosure is embedded in contractual practices. To allow for enhanced future transparency, DFIs need to adjust their contracts with investees today to provide transparency on investments tomorrow. Otherwise we’ll always bump up against the same contractual barriers in the future.
GF: Is there anything else you’d like to share.
TV: The main point I want to drive home is that capital doesn’t go in blind. Where DFIs are active and matter most, they are often the only systemic investors and the main custodians of investment data. If markets can’t see that data, they are blind and they will not move.
I should emphasise that we do enjoy working with DFIs – their teams are world leaders on these markets and development issues, they know more, they try more and they learn more than anyone else in this space. DFIs are pioneers, explorers, but without access to the maps they draft, others cannot follow, and much value is lost. And there is no such thing as bad data. If investors observe poor performance in places they will of course seek to allocate funds to where performance is better. That’s just how the market works. But if they see nothing at all, they will do nothing at all.
And here we can talk about GEMS (the Global Emerging Markets risk database) and the historical loan performance data it contains. This information should not be waved aside because it is historical and focused on default statistics. Markets are built on historical data, and the central role of credit rating agencies is specifically testimony to the crucial importance of credit assessment. GEMS represents a unique set of loan performance data in emerging markets where alternative sources are seldom available. While I recognise it might not contain all the information investors might want, opening GEMS up has the potential to be the most catalytic event to date towards the mobilisation of private capital for sustainable development.