New Approaches to Scaling Private Sector Funding for Sustainable Development

By Sonja Gibbs, Managing Director & Head of Sustainable Finance, IIF

This blog is part of the
OECD Private Finance for Sustainable Development Conference

Welcome to 2020–the “Decade of Delivery” for the 2030 Sustainable Development Goals (SDGs). While the international development community remains hard at work on solutions, success over the next decade will require addressing an “SDG financing gap” of $5-7 trillion per year, with emerging markets making up $2.5-3 trillion of that.  This will create tremendous opportunities for the private sector across the spectrum of investment vehicles—including foreign direct investment, listed and unlisted equity and private equity, in addition to the wide variety of debt instruments.  Indeed, given the massive buildup of debt over the past two decades—to over 320% of global GDP, from around 230% in 1999—a shift towards more non-debt financing could be a more sustainable approach to closing the gap.

With fewer than 10 years left to achieve the SDGs, many low-income countries remain very far off-target. At slightly above 50, the low-income countries median on the composite SDG index—which measures country-level performance in achieving the SDGs—remains well below that of either mature or emerging markets (though there is substantial variance among low-income countries).

For low-income countries, scaling up SDG investments presents an acute funding challenge. Available estimates suggest that meeting development objectives for education, health, roads, electricity, and water and sanitation in these countries would entail additional annual spending of 15% of GDP. Considering the investment spending already being undertaken to support rapid population growth and urbanization, the average annual cost of achieving the SDGs in low-income countries is expected to exceed 50% of GDP over the coming decade, with financing needs on education, infrastructure and health alone accounting for some 40% of GDP annually. Given the scale of the challenge, real progress on SDG implementation will require effective mobilization of domestic and international capital, both public and private.

Too much debt

With the public sector still the main source of social and economic infrastructure in low-income countries, the challenge of meeting high SDG financing needs can add to concerns about debt sustainability. Given persistent budget deficits in many low-income countries—in part reflecting structural problems in tax collection as well as narrow tax bases—general government debt has risen rapidly in recent years, increasing from around 35% of GDP in 2011 to over 50% in 2018. Although mature economies saw a much bigger rise in government debt, and emerging market economies also built up higher debt levels, over 45% of low-income countries eligible for concessional financing under the International Monetary Fund’s Poverty Reduction and Growth Trust Program are either already in or at high risk of debt distress. This is in part a reflection of inefficiencies in public investment—nearly 40% of public investment in low-income countries does not turn into public capital stock. One potential remedy is greater use of public-private partnerships, which along with better governance, more predictable tax, legal and regulatory frameworks could improve the allocation and efficient use of public funds.  This in turn would reduce pressure on fiscal budgets. However, establishing an effective framework for monitoring public-private partnerships and associated contingent liabilities will be vital to managing key fiscal risks and encouraging private sector SDG financing.

Given that domestic government spending will be insufficient to address SDG gaps for low-income countries, greater access to external resources must be part of the solution. But adding more external debt financing also poses risks: since 2011, external debt in low-income countries has increased by some 10 percentage points to over 35% of GDP and is projected to rise further for many given the sustained current account deficits expected over the medium term. Countries with sizable external financing needs could end up with still larger current account deficits if they are unable to mobilize more domestic resources (e.g., via comprehensive tax reform and policies promoting domestic savings) to finance the incremental costs associated with the SDGs.

Another problem for many low-income countries is lack of transparency about the full extent and nature of their debt obligations—in some cases associated with “hidden debt” and/or poorly understood contingent liabilities, as well as weak governance.  The resulting uncertainty can increase the risk of debt distress, constrain market access and/or result in higher borrowing costs—all adding to the challenge of securing SDG financing.

Incentivizing private non-debt financing

Given the tremendous amount of capital needed to reach sustainable development goals in low-income countries, over-reliance on traditional debt financing can ultimately prove counterproductive, creating more challenges for the already-vulnerable populations the SDGs are meant to serve. Incentivizing funding alternatives and partnerships that promote non-debt-creating capital flows—particularly foreign direct investment and equity finance—can help.  However, significant acceleration in such flows would be needed to attain the SDG targets by 2030. Although some low-income countries have enjoyed a notable rise in foreign direct investment over the past decade, non-residential private foreign direct investment inflows (excluding debt instruments and reinvested earnings) to low-income countries make up on average less than 2% of GDP—and have been broadly stagnant in recent years. In contrast, non-residential private debt inflows amounted to some 0.5% of GDP annually between 2014 and 2018—a slight rise from less than 0.2% of GDP between 2009 and 2013.

Official Development Assistance –government aid to developing countries—could play a greater role in promoting foreign direct investment in low-income countries, while fostering social and economic infrastructure development in fragile and less-developed countries. The strategic use of Official Development Assistance financing and enhanced risk mitigation could help scale up private non-debt finance—for example, through blended finance, de-risking and public-private partnerships—and could mobilize much-needed international private capital for SDG-related long-term infrastructure projects. However, despite their vital role in financing the SDGs, Official Development Assistance inflows as a percentage of GDP have been on a downward trend since 2003. While contributions from the 30 members of the OECD’s Development Assistance Committee account for 60% of total Official Development Assistance flows into low-income countries, they remain well below donor countries’ 2015 pledges. International financial institutions can play a more active role in scaling up Official Development Assistance financing to deliver the SDG agenda, e.g. through poverty reduction strategy processes.

Bringing the decade of delivery to life

The path forward on SDG financing will obviously vary across countries, but the overall success of the SDG agenda requires global collaboration across a broad range of stakeholders, including international and regional development partners, national governments, and increasingly, the private sector.  To make the 2020s a true “decade of delivery” for the SDGs—without also adding decades of debt—ensuring a more targeted, more efficient global allocation of private capital is a vital step.