Private sector involvement and the SDGs
Several international institutions advocate for the pivotal role of the private sector in achieving the SDGs. The use of blended finance has been growing among donors, such as the European Union. How do you see channelling public funds for the private sector? What are its main risks and advantages, especially regarding Least Developed Countries?
Blended finance is usually used as a ‘catch-all’ term to describe the combination of public and private funds for funding development projects, however there is no consensus on the definition. In fact, at least 15 different definitions are used by different organisations, which present problems for comparative analysis of scale and impact evaluation.
In the past, blended finance at the EU level had focused on combining EU grants with public non-concessional loans and some limited private resources to support private or mixed projects. However, this practice has now reoriented and focuses entirely on the use of public funds to leverage private commercial finance. The rationale behind this stems from the idea of a ‘financing gap’, which cannot be filled by public funds. In this context, blending is considered as an effective way of attracting private sector resources on the grounds that capital markets would enable a flow of resources to areas where expected returns are higher. To achieve this, Sustainable Development Goals (SDGs) are framed as a way of promoting socio-economic growth in developing countries. While it is clear that private finance might be needed in certain sectors and for certain projects, this misses the fact that capital markets are complex and the mismatch between supply and demand cannot simply be addressed through the inclusion of private finance.
In stark contrast to the high ambitions of raising private finance under the blended finance model, research shows that to date, the amount of private finance has been limited in comparison to public counterpart funds. The main sectors attracting blended finance have been banking and infrastructure. Funds have mostly been mobilised for middle income countries, while low income countries and the least developed countries have attracted a very small share. In spite of their small size in blending, the inclusion of private finance reorients the development model and creates a series of new risks, which should be carefully considered before promoting the use of blended finance even further at the EU and at the global level.
These risks include excessive emphasis on private sector or commercial needs at the expense of public sector alternatives, the tendency to promote the domestic commercial interests of OECD companies thereby incentivising tied aid, and the high level of cost incurred by the public sector in recipient countries to attract private finance. Blended finance also holds the potential for limiting the ownership of recipient countries as this model of financing pivots Development Finance Initiatives (DFIs) and external stakeholder at the core of the national development agenda. Lack of transparency in blended finance projects also makes it hard to evaluate the returns generated by the projects and analyse the nature of impact. There is also a high opportunity cost of using aid in this way, as the resources used for blended finance cannot be channelled through other instruments that have a proven track record of delivering development results, such as budget support. These risks can end up undermining the main objective of ODA, which is poverty reduction, leaving communities and countries even more vulnerable (see Eurodad briefing on blended finance and leave no one behind and Eurodad and Oxfam report on blended finance).
The multifaceted risks raised by the blended finance model are contrary to the long-term structural growth needs in developing countries. This is especially of concern when considering the category of Least Developing Countries (LDCs). These countries are vulnerable due to a lack of structural resilience; they lack institutionalisation of industrial and investment opportunities and suffer from poor development indicators. The use of blended finance in these countries risks contribution towards indebtedness, inhibiting the much-needed transformation of their weak economic models to strengthen public infrastructure and mobilise domestic resources areas such as health and education.