What's at stake for Financing for Development – diverting public resources to leverage private finance?

In a few weeks’ time, Oxfam and others who work across the world to tackle poverty and inequality will be upping sticks to Addis Ababa in Ethiopia to discuss how the next decades of international development are paid for at the Third Financing for Development conference (aka #FfD3). But what’s really at stake?

This first of three international conferences this year the FfD conference in Addis Ababa will have a marked effect on the Sustainable Development Goals (SDGs) Summit in New York in September, and ultimately on December’s climate change deal that must be agreed in Paris. It’s a domino effect that will determine how development and climate action is funded for the next fifteen years.

Public money for public services

The SDGs success in tackling poverty and inequality and improving people’s lives will require the global community finding the funds to do so. This money can come from lots of different sources – from aid, collecting taxes and from attracting money from the private sector. It’s not good enough to just cough up the money, governments must ensure that these resources for development are invested to serve the public, not private, interest.

But there’s a danger in Addis. The current trend, particularly among rich countries who are aid donors, is to encourage the schools and the hospitals of the future to be funded by private finance. This means that the very services which are vital to overcoming poverty and inequality are run by institutions whose first priority is profit, not public service.

This shift from public to private finance is worrying. Public finance – and principally taxation – is important not just because of what it can pay for but because of how it works.  When we pay taxes we expect something back from our governments; it strengthens the relationships between us and our governments. It also pays for what private finance shouldn’t: government obligations to citizens in safeguarding their healthcare, education and social security needs

Who’s done the math?

Worse still, there isn’t even the evidence to back this shift to private finance. Without this evidence, there’s no guarantee that using public finance to get private investors to improve people’s lives actually works. The Millennium Development Goals – the development goals which precede the Sustainable Development Goals – were met and delivered most effectively through public finance.

The private sector and its finances are important for development and there is definitely a role for it to play, but using an increasing amount of scarce public money to leverage private finance generally fails to align itself with international agreements to improve the quality of aid. As this trend continues we are left with more questions than answers swirling around. Here are some of the most pressing ones:

  • Does private finance lead to positive changes in people’s lives? The evidence isn’t encouraging. Privately financed projects don’t often lead to positive results. Oxfam’s report A Dangerous Diversion shows how a private hospital in Lesotho is eating up more than half the country’s healthcare budget. The shift towards profits also risks generating costs – such as user fees for infrastructure, health and education services – that the poorest people are unable to pay.
  • Rich countries set the agenda. Often, private finance initiatives are driven by the priorities of the rich country donors and don’t align with the needs of governments, local communities or local businesses in developing countries.
  • Where’s the added value? Evidence suggests that the private finance could have delivered the project anyway, without being subsidized by public finance. One report from the European Court of Auditors shows that half of the projects assessed had needed a grant. This is therefore unnecessarily taking aid money away from where it is most needed: health, education and social security.
  • Dodgy practices. Oxfam knows what can go wrong when leveraging private finance fails to respect human rights and the environment. Our report The Suffering of Others documents the negative impacts on communities and the environment in many developing countries resulting from lack of oversight and poorly applied due diligence by the World Bank’s lending arm.
  • Where are the rules? Often rules to protect workers or the natural environment are poorly applied. We need legally binding sustainable development principles that all governments should apply to all projects where public and private finance is combined to ensure social and environmental justice. We also need governments to stick to existing standards such as the UN Guiding Principles on Business and Human Rights.

How are we going to put this straight at FfD3?

We will be pushing for the following changes, to ensure more success for development when private finance is used:

  • Filling gaps in funds through progressive taxation and financing public services
  • Private finance should not replace rich countries’ existing commitments on overseas aid
  • More regulation, accountability and transparency of private sector activities
  • Work to ensure fairer policies across the board, from tax to energy and agriculture, affecting the most marginalised people in developing countries
  • Building a private sector in development framework that focuses on smallholders and small businesses, empowering women entrepreneurs, encouraging local job creation and sparking equality-oriented outcomes so that there are more resources to redistribute.

The realization of an ambitious and transformative post-2015 sustainable development agenda will require a strong comprehensive financial framework that includes both rich and developing countries. This will all depend on political will and whether decisions are made based on short term self-interest or long term mutual gains.

2015 is still keeping its label as a massive year for development, but will have to produce concrete progressive agreements on FfD to make sure we can say the same for 2030.

This entry posted by Hilary Jeune (@hilaryjeune), Oxfam EU Policy Advisor, on 3 July 2015.

Photo: A pupil writing on the blackboard at the Pamaronkoh Community Primary School, Calaba Town, Freetown, Sierra Leone. Credit: Aubrey Wade/Oxfam

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