Development Finance Institution - Subsidies

Subsidies

The term ‘subsidy’ is used here in its broadest terms (an explicit or implicit transfer from the public sector (here: the state backing the DFI) to the private sector). These transfers result in different conditions available in DFI operations than would be normal practice in the commercial financial sector. Transfers can be aimed at private sector beneficiaries directly (e.g. in the form of interest rate subsidies) or indirectly through its effects on the conditions under which DFIs are allowed to operate (e.g. lower costs of capital because public shareholders do not require commercial rates of return on their investments).

This definition includes a broad spectrum of issues, and goes beyond technical assistance grants in infrastructure to the raison d’etre of DFIs because without some transfer of finance or guarantees, DFIs would not be able to invest in infrastructure as they do at present. There are three main forms of subsidies in the operations of DFIs in practice:

1. High level of liquidity;
2. An ability to access technical assistance funds; and
3. Subsidies passed on directly to beneficiaries.