Maximising the public-private investment multiplier

By Alain de Janvry and Elisabeth Sadoulet, Professors at the University of California at Berkeley and Senior Fellows at the FERDI
 

Development-finance

At the FERDI-IDDRI conference on “Development, Climate and Security” held in Paris on January 15, 2018, Barbara Buchner from the Climate Policy Initiative reported on the state of global climate finance flows for mitigation and adaptation. She made two points. First, finance is under-invested to combat climate change if the COP21 target in temperature increase is to be met. Second, private investment’s role in complementing public investment in climate finance is large, with an estimated 2/3 private for 1/3 public in current total contributions. This stresses the fundamental part private investment can play in meeting the COP21 objectives, particularly at a time when governments face multiple demands on public expenditures.

With public investment targeted to induce private investment, this raises the issue of public investment’s effect as a private investment multiplier. A useful way of thinking about the under-investment issue is consequently how to target public investment to maximise the public-private investment multiplier.

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Promoting innovation: Lessons from the Global Fund

By Guido Schmidt-Traub, Executive Director, Sustainable Development Solutions Network

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Since its inception in 2001, the Global Fund to Fight AIDS, Tuberculosis and Malaria has become a highly respected pooled financing institution that scores top marks in independent reviews.1, 2

It has disbursed some USD 40 billion in grants for complex disease control and treatment programmes in fragile and non-fragile countries alike.

Success was far from assured in 2001, as developing countries, particularly in sub-Saharan Africa, faced a perfect storm of surging HIV/AIDS, multi-drug-resistant tuberculosis and surging malaria deaths. Control and treatment interventions were available in high-income countries, but no one knew how to tackle the diseases in resource-poor settings. In particular, HIV/AIDS treatment was deemed impossible in Africa and was outside recommended approaches for tackling the disease.3

The Global Fund was designed precisely to tackle the lack of quality programmes and implementation mechanisms in developing countries. All too often, however, it is seen as just another funding mechanism. Many reviews lump it together with other multilateral mechanisms and trust funds.4

This is a mistake. The Global Fund has unique design principles that set it apart from bi- and multilateral financing mechanisms with the notable exception of Gavi.5

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Reflections on scaling up financing for development

By Charlotte Petri Gornitzka, Chair of the OECD Development Assistance Committee

Blended Finance Watering CanSpending last week at the World Economic Forum in Davos and today in the Private Finance for Sustainable Development conference, my head is spinning with financing for development issues.

Chairing the OECD Development Assistance Committee (DAC), I often find myself reminding members to uphold their aid levels and to use their public finance resources to stimulate private capital for sustainable development.

It’s a balancing act. Governments risk being accused of shying away from commitments when we talk too much about the “innovative financing tools” and about involving the private sector for development outcomes. It is true that upholding aid levels and directing them to countries most in need will continue to be important to leave no one behind. However, OECD countries must continue to move from talking to taking action when it comes to stimulating private finance.

Why? Faced with an estimated USD 2-3 trillion annual funding gap for achieving the Sustainable Development Goals, public or philanthropic capital will be able to meet only half of it; opportunities for the private sector, thus, are significant.

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Bridging the green investment gap in Latin America: what role for national development finance institutions?

By Maria Netto, Lead Capital Markets and Financial Institutions Specialist, Inter-American Development Bank, and Naeeda Crishna Morgado, Policy Analyst – Green Growth and Investment, OECD              

Green-investmentThe developing world urgently needs more and better infrastructure. Affordable and accessible water supply systems, electricity grids, power plants and transport networks are critical to reducing poverty and ensuring economic growth. The way new infrastructure is built over the next 10 years will determine if we meet the Sustainable Development Goal (SDGs) and the Paris Agreement objectives. Considering the long lifespan of most infrastructure projects, the decisions developing countries make about how they build infrastructure are critical: we can either lock-in carbon intensive and polluting forms of infrastructure, or ‘leap frog’ towards more sustainable pathways.

Many countries in Latin America are making this shift: thirty-two of them have committed to cut their emissions and improve the climate resilience of their economies, in infrastructure and other sectors, through Nationally Determined Contributions (NDCs). The cost is estimated at a staggering USD 80 billion per year over the next decade, roughly three times what these countries currently spend on climate-related activities. What is more, this is in addition to a wide investment gap for delivering development projects and infrastructure overall – the World Bank estimates that  countries in Latin America spend the least on infrastructure among developing regions in the world.
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With great data comes great responsibility

by Charlotte Petri Gornitzka, Chair, Development Assistance Committee
and Jorge Moreira da Silva, Director, Development Co-operation Directorate, OECD


This article is featured in the Development Co-operation Report 2017: Data for Development released today. Read the report and find out more about data for development.


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If USD 142.6 billion falls in the forest of development and no one hears it, does it matter?

That depends on who you are. While mothers in Afghanistan or South Sudan can tell you how their families’ lives have been transformed by effective development programmes every single day, strong data are needed to communicate how these billions of dollars improve the human condition and create more stable societies for all.

In 2016 official development assistance (ODA) to support development goals represented 0.32% of donor countries’ gross national income, an all-time high. However, aid to those who need it most, including least developed countries (LDCs), is declining. The June 2017 report card on the 2030 Development Agenda – the world’s roadmap to end poverty, inequality and injustice for all by 2030 through a set of 17 goals and 232 indicators – tells us progress is slow and data are incomplete.

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Development Finance 2.0: Improving Conditions for Local Currency Financing

By Harald Hirschhofer, Senior Advisor, TCX 1 

Development-Finance-shutterstock_524218915Achieving the UN Sustainable Development Goals (SDGs) will require very large investments measured in the trillions until 2030. To mobilise such amounts, policy makers try to crowd-in the private sector, its financial resources and its entrepreneurial creativity. But private sector engagement will not happen if risk-adjusted returns are perceived to be unattractive. While telecom and mobile banking have shown that achieving development goals also means good business, perceived risks in most other sectors and countries are still too high for expected economic returns.

That is why donors, recipients and development banks have been developing programs to lower and share risks, including policy and structural reform, technical assistance and information sharing, and providing financial de-risking instruments. Especially in situations where private investors perceive risks as higher than they actually are, such de-risking measures can be impactful in catalysing private investment flows. Accordingly, development finance institutions (DFIs) are expanding their focus from mere funding to blending risk tolerant donor funds with commercial capital to offer de-risking services and support for (perceived) high risk activities.

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Wanted: mechanism for additionality

By Paddy Carter, Research Fellow, Overseas Development Institute

development-financeAdditionality is the thorn in the side of Development Finance Institutions (DFIs). It means: making an investment happen that would not have otherwise. Of course, everybody in development wants to make things happen that would not otherwise, and the possibility that aid substitutes for domestic efforts is a concern in other contexts. But additionality torments DFIs because of the constant suspicion that they crowd out private financiers by investing in products that would have been viable without public support.

DFIs are regularly called upon to provide rigorous evidence that their investments are additional. Rigorous quantitative evidence, in the eyes of academics, requires some credible method of estimating the counterfactual (what would have happened otherwise). And that requires something like a randomised control trial or a natural experiment or a valid instrumental variable. Yet, none of these is feasible in the world of DFIs. And without that, we are unable to distinguish correlation from causation.
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Broadening financing options for infrastructure in Emerging Asia

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By Kensuke Tanaka, Head of Asia Desk, and Prasiwi Ibrahim, Economist at Asia Desk, OECD Development Centre 


Learn more about this timely topic at the upcoming
1st International Economic Forum on Asia
Register today to attend on 14 April 2017!


Kensuke-Prasiwi-AsiaForumAgreeing on the need for new infrastructure is one thing; finding a sustainable way to finance it is another. According to the ADB, an estimated USD 26 trillion (or USD 1.7 trillion per year) will need to be invested in infrastructure in its developing member countries1  between 2016 and 2030 if these economies are to maintain their growth momentum, eradicate poverty and respond to climate change2  .Given the scale of investment needed, countries in the region will not have sufficient funds to meet demand. Indeed, financing infrastructure investment has been a considerable challenge for the region. Political factors can further complicate financing when they lead to the inefficient allocation of public funds. How best to finance infrastructure is, therefore, a key concern for policy makers in the region.
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Unlocking the potential of SMEs for the SDGs

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By Lamia Kamal-Chaoui, Director, Centre for Entrepreneurship, SMEs and Local Development


Learn more about this timely topic at the upcoming
Global Forum on Development on 5 April 2017
Register today to attend


SMEs-Dev-MattersA universal definition of small – and medium-sized enterprises (SMEs) does not exist. What is generally undisputed, however, is the fact that the overwhelming majority of private-sector businesses in the world are SMEs and that SMEs account for a very large share of world economic activity in both developed and developing countries.

Look at the data. In the OECD countries where SME definitions are comparable, the contribution of SMEs to national employment ranges between 53% in the United Kingdom to 86% in Greece. The contribution of SMEs to national value-added 1 is between 38% in Mexico and 75% in Estonia. The SME share of economic activity is typically larger in OECD economies than in emerging-market economies, reflecting a mix of stronger SME productivity levels in the former and higher rates of economic informality in the latter. In emerging-market economies, SMEs are responsible for up to 45% of jobs and up to 33% of national GDP. These numbers are significantly higher when informal businesses, which are often more than half of the total enterprise population, are included in the count. Some estimates suggest that when the informal sector is included, SMEs in emerging-market economies account for 90% of total employment.
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Financing the SDGs in cities: Innovative new approaches

By Gail Hurley, Policy Specialist on Development Finance, Bureau for Programme and Policy Support, United Nations Development Programme

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Mumbai is among a growing number of cities exploring green bonds as an option for financing sustainable urban development.

 “Cities are major drivers of the global economy. Today, cities occupy only 2% of total land but account for 70% of GDP.” (Habitat III, 2016)

Many of the investments needed to achieve the Sustainable Development Goals (SDGs) will take place at the sub-national level and be led by local authorities, especially in urban areas. Massive public and private investments will be needed to improve access to sustainable urban services and infrastructure, to improve cities’ resilience to climate change and shocks, and to prepare them to host 2.5 billion new residents over the next three decades, particularly in developing countries.  If city authorities can meet these challenges head-on, the sustainable development dividends could be immense. This reality underscores the need to recognise and strengthen the capacities of local authorities as major actors in promoting sustainable development.
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