Historically, DFID and other aid donors have mainly supported businesses by transferring funding in the form of grants. The recipient of a grant is under no obligation ever to repay any of this money. At the same time, many donors also operate Development Finance Institutions (DFIs). DFID’s DFI is CDC Group.12 Like other DFIs, CDC Group has mainly transferred funding in the form of investments rather than grants. The distinguishing feature of an investment, as opposed to a grant, is that the investor expects to recoup some or all of its initial outlay, perhaps with a financial return as well. This may happen in one of two ways. The original recipient may repay the investment directly. Alternatively, an investor such as CDC Group may be able to ‘realise’ its investment by selling to another investor. That will only be possible if the second investor in turn believes the recipient can generate enough of a surplus to justify the price paid.
In the past, DFID used the term ‘returnable capital’ to describe its loan, equity and guarantee investments. We support DFID’s recent decision to drop the term ‘returnable capital’, which was never defined and was poorly understood. The new terms, ‘Development Capital Investment’ and ‘Development Capital Grant’, both refer to funds that an end recipient receives in the form of loans, equity or guarantee investments. Development capital investment describes an investment whose return DFID itself expects to recoup. Development capital grant describes an investment whose return will go not to DFID but to an intermediary organisation, which will then recycle the proceeds into further development investment.
The new terminology thus has an internal focus that mainly reflects differences in the way DFID books a given transaction or project in its accounts. In turn, the different accounting treatments reflect other issues such as legal status and the nature of DFID’s control over the asset or entity in question. Although not a term that DFID uses, we have used the term ‘LEG’ in this report to reflect the nature of funds as experienced by end-recipients rather than features that are internal to DFID. It groups both development capital investment and development capital grants under one umbrella and describes them in terms that would be recognisable to an investee. For a further explanation and brief discussion of these issues, see Annex A3. Annex A2 includes an illustration of how DFID’s LEG investments reach end recipients.