August 4, 2022

Does Australia need a Development Finance Institution (DFI)?

The DFI debate has been going on for years – rearing its head periodically as the region faces development financing challenges. Advocates for a DFI point to Australia as an outlier, especially when compared to other OECD countries like Canada and the United Kingdom. Others ask is it worth it, or is there an alternative development financing option?

With the energy of a new Government and talk of a development financing review we asked the experts what they think.

Matt Morris
Development Economist

Before diving into a DFI, policymakers should assess the full range of financing tools available and the needs of the region. There are four sets of questions to guide consideration:

1. Does Australia have a comparative advantage in providing finance for private projects? Even established DFIs find it difficult to do well. Challenges include identifying projects, structuring transactions, and managing risks. Despite vast teams of specialists and sophisticated systems, DFI results tend to disappoint. So, is Australia well placed to do better?

2. How well is Australia currently doing? The lack of transparency of AIFFP and EFA make it hard to assess their performance, investments, and learn lessons. A rigorous, independent evaluation would provide valuable insights.

3. Are there better ways to improve financing for development to the region? Establishing a DFI is only one option and one tool. Other options include: funding partnerships with existing DFIs, or disciplined development finance through AIFPP and EFA. Alternatively, lifting development effectiveness through concerted action with other donors and Pacific partners and overhauling the aid and economic capabilities of DFAT may achieve just as much impact.

However, I have left the most existential question until last:

4. What do partners in the region need and will finance achieve it? The DFI debate is a discussion that must be had with Pacific policymakers and leaders: listening to what they need, and how they want partners (including Australia) to improve financing for development (including the tools of grants, loans, equity, or technical support). 

A call for a DFI may be a convenient piece of advocacy, but more analysis and debate are needed. And it should be done in true partnership with the Pacific.

Matt is an economist and sustainable development professional with over 25 years experience in the sector. At the Lab, we love Matt’s graph-laden twitter feed, thought-provoking contributions to the Development Policy’s Centre’s blog and ability to ask the challenging, and often-much needed, questions.

Amanda Robbins
Founder & Managing Director, Equity Economics

Before diving in, we should first be able to answer: What problem are we trying to solve? What mechanisms already exist? And what is Australia’s comparative advantage in this space? 

DFIs have a role where access to concessional finance is a major constraint on a nation’s development. However, in many countries where Australia is focused, the underlying challenges aren’t necessarily caused by a lack of access to finance. Even where investment is low, infrastructure is inadequate and debt levels are high, the underlying causes of underdevelopment often involves a range of barriers to trade and investment such as poor planning and infrastructure pipelines, corruption and human capital constraints. Often, structural reform is required in order to sustainably address these barriers to development, rather than financing the status quo.  

No amount of funds Australia channels through its own DFI will, counter China’s capacity and influence in this space, if that is driving the push for an Australian DFI. Rather, Australia should look to offer skills and capacity where we have a comparative advantage. This could be in improving the development, prioritisation and governance of infrastructure and other investments, as well as supporting economic and social policy reform where Australia has expertise valued by our neighbours.    

Finally, where access to new sources of finance is essential to development, a range of mechanisms, including DFIs, exist already. Australia already funds a number of these. The International Finance Corporation, for example, already invests substantially more into East Asia and the Pacific than any other region, and far exceeds Australia’s own ODA. While these existing institutions are far from perfect, replicating them is a poor use of limited development resources. 

DFIs are a useful tool in development, but they are no panacea to the complex challenges confronting the Indo-Pacific region and should be weighed against other approaches Australia is more uniquely placed to pursue.

An economist, former political staffer and World Vision employee, Amanda is a practical operator in the development landscape.  At the Lab, we love Amanda for her no nonsense approach to problem solving, her ability to blend the discipline of economics with policy nous and the great team she leads at Equity Economics.

Brigid O'Farrell
Policy & Advocacy Advisor, Australian Council for International Development

The possibility of a DFI is gaining momentum. Australian NGOs are increasingly interested in seeing Australia step up its efforts to crowd in private investment to bridge this gap. There’s also renewed political interest, with Minister Conroy committing to a DFAT-led review of new forms development finance this year. Australia currently works with multilateral development banks and international financial institutions, has an export credit agency, and is trialing several blended finance programs. But we could go much further in attracting or crowding in private finance for development objectives. The AIFFP, for example, has so far blended ODA grants with sovereign loans and attracts minimal additional private capital. Whether or not this would change in a standalone institution, depends on how it is designed and delivered. 

Experiences of other countries show five critical preconditions for success with DFIs: clarity of purpose, accountability and transparency to ensure investments achieve impact, a calculated but healthy risk appetite, the ability to match projects to truly catalytic investment, and the capacity to recruit, build and retain (in-house) the development and financial expertise required. Australia must establish these preconditions first and carefully work through how any new development financing modalities will adapt to the market conditions of our region (investments in the Pacific and Southeast Asia will look very different). 

Australia’s first step should be to expand existing high-performing programs, build strategic coherence between these various financing modalities, and develop the critical workforce and governance enablers. Perhaps down the track it will make sense to bring these instruments and enhanced capabilities together under a new institution.

Australia is lucky to have young professionals like Brigid pursuing their careers in security and international development.  At the Lab, we enjoy Brigid for the wisdom and wits she brings from her Oxford studies, Lowy Institute and Centre for Strategic International Studies experiences and we look forward to collaborating with her more as she faces an exciting career ahead.  

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