How Do We Pay For Sustainable Development?

The post-2015 sustainable development goals will require private investment

John McArthur | May 28, 2014

Five Categories Where Large Private External Investment Could Take Place

The above general principles apply across the investment horizon.  However, the post-2015 agenda entails at least five distinct investment categories, each with its own norms and challenges (see the below table).

In dollar terms the largest of these is infrastructure, most of which is comprised of energy investments, in addition to transport and water.  At a practical level the energy and transport investments are generally the same projects as those needed to promote low-carbon energy production.  We therefore dub this category “infrastructure and decarbonization,” the latter term referencing a significantly accelerated decline in the rate of carbon intensity per unit of primary energy in the economy. Recently, the number of large infrastructure projects in this category that cannot move forward because of a variety of obstacles has soared. The IFC, for example, tracks infrastructure projects of over $1 billion. It has a long list of over 20 such projects globally. It has also found that there has been a dramatic rise in the number of possible infrastructure projects in Africa, with over 200 being developed, compared to only a few PPP projects a year being completed just a few years ago.

Unblocking these projects will require a combination of actions: regulatory strengthening, new risk bearing instruments, clarity on the grants framework for subsidizing clean energy and other issues. The key point is that these issues are specific to the nature of large infrastructure projects and if capital is to flow into these areas, specific solutions must be found. It is also likely that changes will be needed in the international financing architecture to push this agenda forward, perhaps through the creation of new infrastructure facilities, or through a drastic strengthening of existing multilateral capabilities.

A second category is agriculture and food systems, which can play an especially important role in instigating structural change in low-income economies. Here, there is often a need for complementary investments in transport, rural credit systems, climate risk insurance, and for streamlined mechanisms to coordinate public and private sector activity. While there are promising examples in this area, they remain isolated and have not yet been institutionalized. A number of international forums exist to promote agricultural investments, but they are not well coordinated with each other.

A third area is extractive industries.  More than half the countries in Africa are categorized by the IMF as rich or prospectively rich in natural resources. Recent exploration activity suggests that production of key commodities could increase by 50 percent over current levels. But private investments in this area have so far provided disappointingly few development benefits. New public private partnerships could change this, but they would have to support better revenue management in host countries, more sustainable service provision in local areas after mining operations cease, and stronger development benefits for local communities.

A fourth area is social sector investments, such as in health services and education where social enterprises are keen to provide greater access and improved quality to the population.  In many countries, however, the hybrid nature of a social enterprise is not even recognized in law. Enterprises are instead classified as either for-profit, in which case they are ineligible to receive grants from public entities, or non-profit, in which case they cannot charge enough for their services in order to expand and reach scale. New platforms to encourage social enterprises, such as the Development Innovations Venture platform launched by USAID, could provide a vital bridge in getting more private capital to flow into this market segment.

A fifth area is in the service sector of the real economy, including the financial sector. Financial intermediaries in developing countries play a key role in mobilizing foreign private capital, sometimes acting as a retail agent (for example for schemes aiming to reach small and medium enterprises). Often, the presence of local capital is also an important indicator of the success of an investment, and financial firms in host countries play a valuable matching role between local and foreign investors. But the ability of some financial firms to gain access to global capital markets is limited by idiosyncrasies in global credit ratings, which often resist giving higher ratings to individual firms (like a national development bank) as compared to the sovereign rating.

The table below presents a schematic approach outlining how policymakers can think about diagnosing and addressing key challenges for each investment category.  All components are of course underpinned by the need for an efficient and transparent regulatory environment for business.    There are many “links in the chain” for each investment category. The key point is that private capital is not something that be encouraged in the abstract or simply with economy-wide reforms in developing countries. It can be unlocked if there is specific attention to the key obstacles in specific sectors, and if global public finance through ODA and non-concessional instruments is effectively deployed. In some cases, institutional changes at the global level may be needed.

The five areas of focus we have identified are all areas that appear to be promising candidates for much larger amounts of private capital to flow to developing countries at all income levels. However, we should stress that the global investment incentives and mechanisms for infrastructure and decarbonization present the most significant current mismatch between required and available financing systems, and the area where the overlap is potentially greatest between sustainable development needs and the profit motivation, if an appropriate blend of finance is properly constructed.   The absence of a few billions of dollars in public financing incentives could be holding back several hundreds of billions of dollars of private finance for necessary infrastructure investments.

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This BLOG  looks at pensions and their impact on what are called Public Private Partnerships or P3’s these are not really about private funding at all but about two streams of public funding, pensions and government with private capital a third partner.
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