Private-finance Blending for Development: Risks and opportunities | Aids | Finance

Please download to get full document.

View again

of 20
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Information Report
Category:

Documents

Published:

Views: 9 | Pages: 20

Extension: PDF | Download: 0

Share
Related documents
Description
Aid donors increasingly seek to inject private-sector resources into development by ‘blending’ official development assistance (ODA) with private finance. There is little evidence of the development impact, and projects often do not align with country ownership, transparency and accountability. It is not always clear whether ODA subsidies are necessary. Blending could support pro-poor projects, such as easing credit constraints for small- and medium-size enterprises. At a minimum, donors must subject blending projects to development effectiveness principles.
Transcript
  OXFAM BRIEFING PAPER FEBRUARY 2017 www.oxfam.org The Dutch Good Growth Fund has supported rose farming in Ethiopia through blended finance. Photo: DGGF PRIVATE-FINANCE BLENDING FOR DEVELOPMENT Risks and opportunities   Aid donors increasingly seek to inject private-sector resources into development by ‘blending’ official development assistance (ODA) with private finance. There is little evidence of the development impact, and projects often do not align with country ownership, transparency and accountability. It is not always clear whether ODA subsidies are necessary. Blending could support pro-poor projects, s uch as  easing credit constraints for small- and medium-size enterprises. At a minimum, donors must subject blending projects to development effectiveness principles.   2 EXECUTIVE SUMMARY Over the past decade, donors and international bodies have increasingly looked to inject private-sector resources and expertise into development by using official development assistance (ODA) — public finance —to ‘leverage’ private finance through ‘blending’ the two toget her. Donors claim that using ODA to subsidize and leverage private finance will bring in new investments to fill the $2.5 trillion annual funding gap required to reach the Sustainable Development Goals (SDGs). Donors also see blending as a way to support large-scale infrastructure projects in middle-income countries. Blended development finance is also a response to growing pressure among donors to link their own commercial interests with development policy. This briefing has been prepared by Eurodad to inf  orm Oxfam’s work on the blending of ODA with private finance (PF). It summarizes the findings of an in-depth research paper. The justification of PF blending is that ODA can be used to remove investment ‘barriers’ , making private finance invest in developing countries when purely commercial motives would have precluded this — and, at the same time, to improve development focus and outcomes. There is considerable uncertainty about how much ODA is currently being used for PF blending. Current figures suggest that usage may be as low as one per cent of total ODA, but donor rhetoric suggests that this may increase in the near future. There is little evidence about the development impact of PF blending mechanisms. The research on which this briefing is based indicates that PF blending mechanisms suffer from poor levels of ownership by recipient countries. The research also found weaknesses in transparency and accountability. PF blending often transfers responsibility for ODA to development finance institutions (DFIs). This can create conflict or tension between the expectations, policies and practices of ODA donors on the one hand, and those of the actual managers on the other. PF blending entails opportunity costs for donors: $1 of ODA cannot be spent twice, and in the absence of an increase in the overall level of aid, an increase in ODA used for blending could mean a decrease in its use for other, more traditional purposes, such as supporting the delivery of public services. The concept of additionality refers to the ‘added value’ of a specific form of finance. One of the main challenges of PF blending is ensuring that projects applying for support actually require some form of subsidy. A number of evaluations suggest that additionality is too easily assumed by donors. Leverage ratios are a controversial area in development finance, including in discussions of PF blending. Too often, donors make bold and unsubstantiated assumptions about the impact of the PF blending element. However, leverage ratios make sense only when some form of additionality can be demonstrated. In reality, a high leverage ratio (such as 1 to 50) means that the ODA element is heavily diluted. The following broad conclusions can be drawn from the analysis: PF blending potentially threatens the quality of aid. ã  It is much less transparent and accountable than other modalities. ã  DFIs used often do not meet basic aid effectiveness criteria, particularly ownership. ã  Currently there is poor evidence of impacts, and poor monitoring and evaluation.   3   ã  PF blending increases opportunities to use aid to support donor-country firms — incentivizing tied aid. Opportunity costs mean that more money for PF blending is likely to mean less money available for other uses of ODA, such as financing public services. PF blending is not likely to be suitable for poorer countries (in effect, it incentivizes aid to middle-income countries with attractive investment climates). There is a risk that, when it relies on external private finance, PF blending may crowd out the domestic financial sector in the host country. Nevertheless, most developing-country governments want private investment — both domestic and, frequently, foreign — to help develop their economy and create employment opportunities. So there is a rationale for PF blending if it supports national development strategies.  PF blending could play a particularly important role in helping developing-country small- and medium-size enterprises (SMEs) overcome credit constraints. Blending could also support projects where private-sector engagement has the potential to make a difference for opening up new markets that can benefit poor people, such as investments in companies producing renewable technologies that prioritize energy access or generic medicine producers.   The following principles can help ensure links between PF blending and sustainable development.   ã  Whenever donors use ODA and other public funds in support of private investment, they should subject these resources to development effectiveness principles. ã  Donors should judiciously monitor the share of their ODA that they devote to PF blending, attempting to minimize the diversion of aid from public investments. ã  Donors should carefully target PF blending to circumstances where it can help achieve clear sustainable development outcomes and poverty reduction. ã  PF blending should be conditioned upon corporate respect for human rights. ã  Donors should only engage in PF blending when they can demonstrate financial and development additionality; effective minimization of risks for people and the environment; promotion of women’s rights and economic opportunities ; and a strengthening rather than an undermining of the public sector. ã  Robust monitoring and evaluation of projects is essential. ã  PF blending projects must ensure no false accounting — donors need to measure actual subsidies, measure net flows ( i.e.  money returned to the donor via loan repayments as well as funds provided) and not count as ODA non-flows of aid (e.g. guarantees provided but not drawn down; aid funds actually spent in the donor country). ã  PF blending should promote business models that are structured to keep more value with local workers and entrepreneurs, focusing on domestic industry (including the domestic financial sector), particularly SMEs. ã  To the extent that companies are paying their fair share of taxes, private-sector development will provide an important source of revenues for the public sector in developing countries. Going beyond principles of how to engage in blended finance, there is a need instead to change the terms of the conversation: Although there is room for a private-sector approach within development cooperation, the share of ODA going to the private sector needs to be monitored. Overall, ODA should be directed at the public sector, which in turn is crucial to promoting and expanding private-sector investment. A healthy and educated workforce, and well-functioning institutions and domestic markets, are powerful incentives for private-sector investment. Other public goods that leverage private investment are climate change adaptation, infrastructure, and agricultural research and extension. It is often the lack of public sector investments in these areas that creates barriers to private-sector growth.   4 1 INTRODUCTION Over the past decade, donors and international bodies have increasingly looked to inject private-sector resources and expertise into development by using official development assistance (ODA, or ‘aid’)— public finance —to leverage private finance through ‘blending’ the two together. Ma ny member states of the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) laud the benefits of private-finance blending and proclaim a ‘new path’ for ODA. Their rationale for using ODA to subsidi ze and leverage private finance is that this will bring in new investments to fill the substantial funding gap necessary to reach the Sustainable Development Goals (SDGs). This briefing paper on the blending of ODA with private finance , which we shall call ‘private -finance blending’ (PF blending) , summarizes the main findings of an in-depth research paper prepared on the topic, 1  with an analysis of three different PF blending facilities: 1. The Dutch Good Growth Fund (DGGF); 2. The European Commission’s (EC) eight region al blending facilities; and 3. The World Bank-managed Global Financing Facility (GFF), a multi-stakeholder partnership that supports efforts to improve the health of women, children, and adolescents. 2 The briefing is structured as follows: ã  Section 2 presents the main points related to ‘leveraging for development’, including the definition of blended finance, the objectives, and other key aspects related to its functioning and scope. ã  Section 3 details the main challenges that arise when analysing PF blending from a development perspective, including principles and criteria for project selection; the discussion around additionality and leverage ratios; and the impacts of ODA reporting rules. Section 4 presents risks and opportunities of PF blending and actionable policy recommendations.
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks