Hundreds of development banks are convening next week at the Finance in Common Summit, the first global meeting of all public development banks. The aim of this meeting is ambitious: both discussing the public banks’ role in countering the COVID-19 pandemic and designing ‘a financial system whereby public development banks would have the ability to reorient and leverage all financial flows in the direction of climate and the Sustainable Development Goals (SDGs)’.
While encouraging at first sight, what is at stake is the type of development model that will be promoted by the international development community. This includes a continuous emphasis on the role of blended finance and increasing reliance on the private sector in bridging the financing gap to reach the SDGs in developing countries. The ‘billion to trillions’ and ‘maximising finance for development’ catchphrases are perhaps the best known examples of the new paradigm of development finance.
These approaches have however had significant consequences, many of which exposed by the COVID-19 crisis, with decades of austerity measures and privatisation strategies undermining public health systems and social protection. This blogpost, extracted from an upcoming report of Counter Balance and CEE Bankwatch Network, draws attention to some of these risks and highlights the need to move towards an approach to development that strengthens the provision of public services and public goods rather than undermines them.
The blended finance push
The rationale behind blended finance is to use public development finance to trigger private investments and leverage private funds, by using public subsidies to reduce the risks for the private investor, enhance the investment’s return, or a mix of both. While originally broader in meaning, the notion of ‘billions to trillions’ has become synonymous with the mobilisation of private capital for development.
Multilateral development banks (MDBs) such as the World Bank have been central to promoting this narrative. This notion has also been taken up by the EIB. Several reports have, however, shown that there is a significant disconnect between the ‘billion to trillions’ catchphrase and the operational reality of blended finance.
Setting unrealistic expectations
Imposing such unrealistic quantitative targets is not only misleading but can be seriously damaging. There is, for instance, a risk that development aid will be diverted away from where it is most needed, such as investments in public health, education and the social protection necessary to eradicate extreme poverty and reduce inequalities. Mobilising private capital is much easier for countries that are richer and sectors that are more commercial, therefore defeating the overall objective of maximising development in the poorest countries.
These exaggerated claims also give the impression that financing gaps can be met by mobilising the private sector alone, therefore reducing the pressure for development aid to be increased or even maintained. The false promise of ‘billions to trillions’ may also detract from other highly needed efforts and policy measures, such as increasing mobilisation of domestic tax revenues and fighting tax avoidance and tax evasion.
A threat to democracy and the perpetuation of inequalities
Alongside the ‘billions to trillions’ slogan, the push for blended finance is also promoted through the ‘maximising finance for development’ approach. Originally introduced by the World Bank as the ‘cascade approach’, its main objective is to promote private sector finance over public finance. There are, however, dangerous consequences to this. The promotion of such agendas is a threat to democratic control over development policy, as it increasingly shifts the decisions of what gets financed to a handful of investors.
Policymakers, taxpayers, and those affected by a project should be able to know how much was invested, what it costs (the subsidy), what additional private finance was mobilised and what its impact was. It is crucial for policymakers to understand the value of such an approach versus that taken by other types of financing, but the opacity and complex architecture around blending instruments have raised the important issues of transparency and accountability, in particular at the EU level. A recent study published in May 2020 on blended finance, commissioned by the European Parliament, provides very clear conclusions in this regard: “Blending can create longer-term risks for development agencies and costs for recipient governments. Traditional evaluations often do not capture the full impact of such policies. Furthermore, there is an opportunity cost to using ODA in this way and blending may promote the perspective of financial investors over development outcomes”.
As a recent paper from the United Nations Conference on Trade and Development (UNCTAD) argues, if money flows to fill the financing gap for SDGs under the form of loans only, the debt stock would surge in low income countries, which is unsustainable. Relying on private finance is also not a silver bullet, since the historical track record is that private finance has been ineffective in financing public goods and infrastructure. As outlined in the report, the financialisation inherent in the maximizing finance for development approach has contributed to inequality, financial instability and the perpetuation of the Global South subordinated position in the world economy. These are also precisely the underlying conditions that make the COVID-19 crisis and the social and economic fallouts resulting from it significantly worse.
The need for a better approach to development
There is an urgent need to temper the expectations of the ‘billions to trillions’ rhetoric and rethink the ‘private finance first ideology’ that is being promoted through such narratives. The financialisation and privatisation of development finance are unlikely to support the emancipation of developing countries and only risk deepening the fallouts from the COVID-19 crisis.
Rather than seeing the role for public finance as only to translate the SDGs into ‘bankable projects’ and creating a conducive investment climate for the private sector, the role of public development banks should be to scale up public investments and to adopt a human rights and people-centred approach to development that strengthens the provision of public services instead of weakening them.