Foreign Relations of the United States, 1964–1968, Volume IX, International Development and Economic Defense Policy; Commodities

117. Report by the Development Assistance Committee’s Ad Hoc Group on Private Investment¹

DAC(66)6

Paris, March 2, 1966.

I. Introduction

1. At its meeting on 12th May the D.A.C. agreed to establish an ad hoc Working Group to suggest a future programme of work in the field of private investment in the less-developed countries. This Group held its first meeting on 25th October, 1965² and elected Mr. Lamby of Germany as Chairman. Two further meetings were held on 6th December and on 9th February.³ The Working Group has invited representatives of B.I.A.C.,⁴ the O.E.C.D. Development Centre, the I.B.R.D., as well as the I.M.F. to participate in part of its deliberations.⁵

2. D.A.C. Member Governments have long been on record as recognizing the significant role played in economic development by private capital. One of the most obvious reasons for the importance of foreign private capital as a source of finance for economic development is the fact that budgetary limitations in the capital-exporting countries preclude the possibility that all the financial needs of the less-developed countries can be supplied by official assistance. In addition, of course, it must be recognized that foreign private capital, particularly in the form of direct investment, makes a contribution which extends far beyond the statistical addition it brings to the host country’s resources. For one thing, it is inevitably accompanied by the intangible but important factor of enterprise, in the sense of the capacity not only to conceive a project but also to bring together all the human and material resources necessary to carry it out. The immediate benefit of such foreign participation is that managerial and technical staff familiar with the process and the product will be available from the start. An especially important potential benefit to be derived from direct investment is the resultant investment in human resources through the training of local staff for technical and managerial posts.

3. Unfortunately, our knowledge of the amount, character and direction of private foreign investment as well as of the private overseas technical assistance activities is still very inadequate. Nor is there any real understanding of the economic impact of private foreign investment in the developing countries. The ad hoc Group feels that the D.A.C., in co-operation with other interested bodies, could make a particularly useful contribution in attempting to improve our knowledge of the flow of private investment and technical know-how and of its economic impact. Specific recommendations to this effect are put forward in the report.

4. The ad hoc Group feels that there are certain areas of policy where the D.A.C. could, by providing opportunities for review and consultation, advance and orient Government action to promote the flow of private investment and technical knowledge. There was general agreement that the effectiveness of private investment in promoting economic development could be enhanced through improved co-ordination and co-operation between official assistance activities and private investors and that there were a number of problems in this respect which might usefully be included in a D.A.C. work programme. The Group considers that it would be particularly useful for the D.A.C. to improve knowledge of the technical assistance provided by private enterprise and to seek ways of encouraging this kind of assistance. Other areas where the ad hoc Group felt able to put forward positive suggestions include the consideration of practical investment problems in specific countries, donor government development corporations, investment information and government incentives. In some other cases, the Group has come to the conclusion that further work would be desirable, but that the D.A.C. would not necessarily be the appropriate forum.

II. Basic Data on Private Capital

5. There was unanimous agreement in the ad hoc Group that the improvement of statistical information on the international movement of private capital and its impact on the economies of the less-developed countries should be a matter of high priority in the D.A.C. programme of work. Private capital flows from Member countries to less-developed countries have constituted a substantial portion of the total flow of resources in recent years, and the cumulative value of private foreign assets in the less-developed countries represents a significant factor in the development process of these countries. Unlike data on the flow of official capital, however, statistics on private capital movement are clearly inadequate in a number of respects. There are particularly serious gaps, for example, in the information available on the distribution of recorded flows both by sector of origin in the reporting countries and economic sector of utilisation in the recipient countries, and on the cumulative value and distribution of assets held in the less-developed countries, on investment income, in particular on reinvested earnings and repatriated income arising from direct investment, on the flow of portfolio investment and bank lending, and on changes in liabilities to residents of less-developed countries. Even with respect to those flows for which coverage is thought to be relatively good there are wide discrepancies in the concepts and methodology used in compilation and classification of statistics, so that any attempt to develop aggregate data on a balance of payments basis is hampered by problems of comparability as well as availability.

6. In order to overcome these shortcomings, the ad hoc Group recommends that the D.A.C. establish a Group of Experts on Private Capital Statistics with a mandate to explore thoroughly every aspect of the problem. The Expert Group should concentrate its work on a study of the concepts, definitions and methodology employed by Member countries in collecting statistics on private capital movements, with a view to (1) harmonizing these procedures to the maximum extent possible, and (2) improving the coverage and quality of future reporting in this field. In order to get a clear view of the practical problems of obtaining a full picture of the flow of private capital to less-developed countries, the Group of Experts may find it useful to try to develop a comprehensive set of statistics on the flow of private capital from all sources to individual less-developed countries by type of transactions and economic sectors for one or two recent years to serve as a benchmark for improved future reporting. The ad hoc Group considers that the precise work programme and priorities for such a study should be elaborated by the Group of Experts itself.

7. In all phases of its work, the Group of Experts would be expected to adhere to agreed international balance of payments concepts and definitions, and to co-operate to the fullest extent possible with the I.M.F. and other appropriate institutions.

8. While no strict time-table for the work of the Group of Experts can be established, it is hoped that preliminary findings can be reported to the D.A.C. before the end of 1966.

9. It would also be desirable to study in due course the economic impact of private capital on the development process of some selected less-developed countries. The objective of such a study would be to provide a factual statistical basis for assessing the contribution of the major categories of foreign private capital to the economies of the capital importing countries. The B.I.A.C. has indicated interest in this subject and it is hoped that the O.E.C.D. Development Centre would participate in this work. Further details of the scope and character of such a study remain to be worked out. It is hoped that practical suggestions may grow out of the work of the Group of Experts, which should be considered further by the D.A.C. itself or any other Group which may be established to continue the work on private investment.

III. Technical Assistance by Private Enterprise

10. The Group agreed that there was a need for better knowledge of the technical assistance provided in developing countries through private enterprise, as well as of the extent to which official aid might be used to encourage this kind of assistance.

It was agreed to recommend that:

(i) the Secretariat, in close co-operation with the B.I.A.C., should undertake an initial pilot survey covering a limited number of firms in D.A.C. Member countries. The firms selected would be those with substantial technical assistance activities benefiting nationals of less-developed countries. The survey would thus demonstrate the possibilities of providing effective technical assistance through private firms rather than constitute a statistical sample of what effort is in fact being made. Due attention would need to be paid to maintaining the anonymity of any firms which so desired;

(ii) information should be collated on the nature of current relationships between official aid and private enterprise in the technical assistance field (e.g. consultative arrangements, placing of trainees, direct or indirect subsidies, co-operation on projects);

(iii) consideration should be given to ways in which these relationships might be strengthened so as to encourage greater participation by private enterprise in technical assistance.

11. The Group also recommended that the role of private enterprise in technical assistance should be considered at a forthcoming meeting of the Expert Group on Requirements for, and Supply of, Technical Assistance which will be concerned with technical assistance in the industrial sector.

IV. Consideration of Private Investment Problems in Specific Countries

12. There is general agreement that the flow of private capital is very much affected by that complex of factors and considerations, obstacles and attractions, which has come to be called “investment climate”. The ad hoc Group agreed that action to improve the investment climate is of paramount importance; however, in view of the fact that full information is already available on the conditions and problems faced by foreign investors in the interested capital-importing countries it is not proposed that the D.A.C. should undertake any general studies in this field. (Attention is drawn in this connection to a recent study by the National Industrial Conference Board on “Obstacles and Incentives to Private Foreign Investment 1962–1964”).⁶ Any useful action would have to be directed to specific countries. In this connection two different approaches were considered: (1) consideration of private investment problems in consultative country meetings, and (ii) “investment conferences.”

(a) Consideration of the role of private investment by consultative country meetings

13. The Group felt that it would be useful for the various existing international arrangements set up to co-ordinate aid policies for specific less-developed countries, such as consultative country meetings and consortia, to pay attention to the role of private foreign investment. In particular it would seem useful to invite the I.B.R.D. to explore this possibility and to express its views on the desirability of discussing, in appropriate cases, contribution to development by local and foreign private investment in its consultative groups and consortia. It would also be useful if country or regional meetings held by the D.A.C. would pay due attention to the role of private investment in achieving development objectives.

14. It may be useful for a group of experts of D.A.C. Member countries to meet in advance of such meetings with a view to identifying the issues which may profitably be discussed and to provide relevant material. Such discussions would be directed primarily to the problems of co-ordinating official assistance policies and private investment. B.I.A.C. has indicated that it would be interested to contribute to this preparatory work. The country economic reports which have been or will be prepared by special B.I.A.C. missions will no doubt present useful background information.

(b) Investment Conferences

15. There was agreement that contacts between private investors and government officials of a specific host country to discuss the practical problems facing businessmen contemplating an investment in the country and, in turn, the problems confronting the officials in their attempts to regulate private investment in the context of overall policy can make a useful contribution. Such contacts do already take place in a number of less-developed countries on an informal basis. The ad hoc Group noted a paper submitted by the United States Delegation [DAC/PC(65)4]⁷ describing recent experiences with “private investment conferences” and putting forward practical suggestions for the way in which effective conferences might be organised and the respective contributions which the D.A.C. and B.I.A.C. might make.

16. While the utility of such investment conferences is recognized it was felt that, in principle, the D.A.C. was not the proper body to directly undertake such exercises. Therefore, the O.E.C.D. Development Centre and B.I.A.C. has been asked to explore the possibility of jointly organising such investment conferences and, if appropriate, to put forward to the D.A.C. practical suggestions to this effect. It was stressed by the ad hoc Group that investment conferences should only be undertaken with the full agreement and co-operation of the less-developed country concerned. In view of the special relationship between the B.I.A.C. and the O.E.C.D., the D.A.C. should be consulted on the selection of countries and subjects for discussion. It will, of course, also be useful for the D.A.C. to evaluate the results of such investment conferences.

V. Donor Country Institutions for providing finance to Private Investment in Developing Countries

17. Some Member countries have established financial institutions with varying public financial participation primarily designed to help finance private investment in less-developed countries. These institutions are the Commonwealth Development Corporation, the Commonwealth Development Finance Company in the United Kingdom, the German Development Corporation and, to some extent also, the Caisse Centrale pour la Cooperation Economique in France. On the multilateral level, the International Finance Corporation (I.F.C.) has similar functions.

18. These institutions encourage the growth of private enterprise by providing financing to firms in less-developed countries in association with private local or foreign investors. The main financial instruments of these institutions usually include: equity investments or participations in the form of equity, or long-term loans to private enterprises and local development institutions. It is recalled that there is also a similar institution, the A.D.E.L.A., which has been established by private investors from the United States, Japan and various European countries to foster the role of private enterprise in Latin America.

19. The ad hoc Group discussed whether the D.A.C. should organise an exchange of views and experience between interested governments. The Group noted that there are already bilateral contacts between the institutions concerned. It was agreed that it would be useful for the D.A.C. to provide an opportunity for discussion between interested Member Governments in particular with a view to making experience available to those Members who do not at present have such institutions.

VI. Provision of Investment Information

20. Member Governments can perform a useful function by providing potential private investors with information on economic, legal and institutional conditions in less-developed countries. The United States have developed a new instrument for the collection and dissemination of relevant data for private investors by setting up a “Catalogue of Investment Information and Opportunities” which brings together, for use by interested investors in all countries (1) studies on specific investment opportunities within a country; (2) studies of an industry within a country; and (3) studies pertaining to economic conditions, investment climate, and pertinent laws and regulations of a country. (A brief description of the “Catalogue” has been given by the United States Delegation in DAC/FC(65))2.)⁸

21. The ad hoc Group, including the representative of B.I.A.C., agreed that the Catalogue was a useful instrument and that the initiative of the United States Government was to be welcomed. In order to enhance the use of the Catalogue and to improve its coverage Member Governments are recommended to draw the attention of the business community to it and to make available for inclusion in the Catalogue any suitable material in their possession.

22. The German authorities are considering the collection of investment information along similar lines. If other countries should also follow this initiative it might be useful, at a later stage, to examine the possibility of integrating the national information into a multilateral instrument. Meanwhile, continued attention should be given to the optimum utilization of and contribution to the available information system.

VII. Incentives for Private Foreign Investment

23. Several Governments have taken special measures to stimulate the flow of private investment to less-developed countries. Such incentives include special tax measures, government loans to private investors, financial support of feasibility studies, investment guarantees and investment protection agreements, information programmes, etc. In addition, attempts have been directed, at international level, towards removing some of the special risks involved in foreign investment through such schemes as multilateral investment guarantees, the O.E.C.D. Draft Convention on the Protection of Foreign Property and the I.B.R.D. Convention on the Settlement of Investment Disputes.

24. The Group considered the usefulness of examining the effectiveness of special incentives provided to date by Member Governments. In view of the complexity of the factors determining private investors’ decisions and the great differences in Member countries’ economic and financial relationships with less-developed countries, several Delegations expressed doubt as to whether any general studies by the D.A.C. would lead to useful results. It was emphasized that conditions and policies of the less-developed countries themselves were by far the most important determinants of the flow of private capital. However, it was felt that a review by the D.A.C. of the experience of D.A.C. Member countries with their own incentives and the evaluation of their impact on the flow of capital might be useful in evaluating the effectiveness of the measures taken and in improving policies.

25. Fiscal incentives. At its Fifth Meeting, held in Tokyo in July 1961, the Development Assistance Group agreed to ask the Council of O.E.E.C. to request the O.E.E.C. Fiscal Committee to study the problem regarding the desirability and character of fiscal incentives in capital exporting countries. A report by the Fiscal Committee on “Fiscal Incentives for Private Investment in Developing Countries” was submitted to the D.A.C. and the Council in October 1964.⁹ The D.A.C. considered the report of the Fiscal Committee at its meeting on 12th May, 1965 and agreed to report to the Council that the majority of its Members had no objections to publication of the report. The O.E.C.D. Council approved publication at its meeting of 4th July, 1965.¹⁰ At a meeting in July 1965 the D.A.C. agreed that the matter of Fiscal Incentives should be included in terms of reference of the proposed ad hoc Working Group on Private Investment.

26. The ad hoc Group has no specific recommendation to make to the D.A.C. on the Fiscal Committee report. The report is now available to the public, and will no doubt be very useful to all concerned with these problems. The Fiscal Committee will probably review from time to time any measures which governments had taken in this field.

VIII. Report by D.A.C. Group of Experts on Access of the Inter-American Development Bank to European and Other Capital Markets

27. This report [DAC(65)12]¹¹ deals with the fiscal and institutional measures governing access by the I.D.B. to the capital markets of various Member countries; it sets out the views expressed by the Members about ways in which its access to the capital markets of all Members could be facilitated and states the conclusions and recommendations put forward by the Group of Experts. The D.A.C. had the report on its agenda at its meeting of 2nd July and 9th July, 1965. However, at that time it was agreed that the ad hoc Group of Experts on Private Investment would take account of the report in making its recommendation on a D.A.C. work programme on Private Investment.

28. The ad hoc Group did not feel that any further study was required of the problems raised in the report. The report should, therefore, be considered directly by the D.A.C. when it considered it opportune.

IX. Arrangements for Future Work on Private Investment in the D.A.C. Frame-Work

29. This report has identified a number of problems on which future work in the D.A.C. frame-work may be useful. The Group agreed that the three following items should receive priority attention in the work programme arrangements:

(a) improved statistical information;

(b) the pilot survey of technical assistance activities for private enterprise; and

(c) further discussion on incentives.

It remains to be decided how this work can best be organized. The ad hoc Group agrees that in view of its importance for the economic development of less-developed countries, private foreign investment and the related policy problems must be under continued examination in the D.A.C.

30. Regarding the work on statistical information it is recommended to set up a special Group of Experts on Private Capital Statistics. It remains to be seen, in the light of the work of this Group, whether it should also undertake the suggested studies on the economic impact of private foreign investment, or whether such study could be carried over any other way.

31. The majority of the Members of the ad hoc Group felt it would be useful to establish a continuing working party in order to implement the work programme on private investment proposed to the D.A.C. in this report.

1. Source: Washington National Records Center, RG 286, Advisory Committees on Foreign Aid: FRC 73 A 159, GAC Memoranda Jan./June 1966. No classification marking. An attached cover note indicates that the report, which provided suggestions for a “D.A.C. Work Program in the Field of Private Investment,” was prepared by the Secretariat in cooperation with the Chairman of the Ad Hoc Group as a result of discussions in the Group and was submitted for consideration at the March 11 DAC meeting.
2. See Document 112.
3. A summary and assessment of the December 7 (not December 6) meeting are in CEDTO 471 from Paris, December 9, and CEDTO A–398 from Paris, December 31. (Both in Department of State, Central Files, AID 1) A summary of the February 9 meeting was transmitted in CEDTO 700 from Paris, February 11. (Ibid.)
4. Business and Industry Advisory Committee to O.E.C.D., comprised of one business representative from each member country. [Footnote in the source text.]
5. Representatives of the following D.A.C. Members participated in this work: Austria, Belgium, E.E.C. Commission, France, Germany, Japan, Netherlands, Norway, Sweden, United Kingdom and the United States. [Footnote in the source text.]
6. Not found.
7. Brackets in the source text. “Paper Submitted by the United States Delegation on Private Investment Conferences,” November 30. (Washington National Records Center, RG 286, DAC Material: FRC 70 A 5922, Program (DAC Work Program) 1965) This paper was the third of three submitted in November 1965 by the U.S. Delegation to the Ad Hoc Group on Private Investment. The first paper was “Suggestion for Proposed Statistical Studies on Economic Effects of Private Foreign Investments” (DAC/PC(65)1), November 25. (Ibid.) For the second, see footnote 8 below.
8. “Catalog of Investment Information and Opportunities,” November 25. (Ibid.)
9. Report by the Fiscal Committee on Fiscal Incentives in Capital Exporting Countries for Private Investment in Developing Countries (C(64)139), October 28. (Washington National Records Center, RG 286, DAC Material: FRC 70 A 5922, Private Enterprise—Investment 1964)
10. Not further identified.
11. Not found. Brackets in the source text.