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Abstract

Why consider foreign aid in the context of foreign direct investment (FDI)? Businesses glean an array of support from home governments as well as multi-lateral institutions to help foster FDI in energy and other sectors and to mitigate risk. In turn, FDI is often, indeed usually, seen as an important component of foreign aid and economic development assistance. Few developing countries and emerging markets have the internal wherewithal to fund critical infrastructure and/or to launch or support new industries or economic initiatives. Likewise, few foreign aid donors have the ability to fund the full cost of investment for economic development and growth. FDI is usually looked to as a “gap closer” but FDI will not flow without stabilizing conditions that often are part of foreign development assistance. Direct international donor assistance provides a distinct form of FDI support. For instance, foreign aid to countries can be in the form of technical assistance to encourage sectoral reform, build institutional capacity, create and/or improve transparency and often to address distinct and particular policy and regulatory undertakings such as “local content” rules. Foreign aid, by itself, is fraught with dilemmas, ranging from home country decisions about how to allocate assistance (which countries, for what purpose, with what metrics for results) to whether natural resources, energy and minerals should even be targets for spending. Foreign aid is subject to home country fiscal and political cycles, and so waxes and wanes. The misfit between the long-term nature of assistance goals and home country political cycles is problematic. Much donor assistance over the past 30 years has targeted energy sector reforms that embrace open, competitive markets and encourage reform of state owned enterprises. Too often, receiving governments are not well positioned to implement market-based reforms and “liberalization”. Metrics for evaluating success are difficult to design and often geared toward political imperatives within donating governments. Finally, many of the issues that hold back deepening of energy supply and access, along with transparency and anti-corruption measures and the like, emanate from subnational jurisdictions including indigenous communities and leaderships and the often-fraught histories between these groups and their sovereign governments. In contrast, for the most part, donor assistance and related programs, including those undertaken by non-governmental organizations or NGOs, remain directed toward national, sovereign government bodies.