Warning over increasing use of private finance for development

26 Feb 19

The “dangerous trend” of using private finance to pay for development could push governments further into debt, PF International has been told.

It has been estimated that trillions of dollars extra are needed to achieve the Sustainable Development Goals by 2030 – a financing gap that could be filled by private funds, according to organisations such as the UN and World Bank.

But there are risks that this could result in large debt burdens for developing countries, as the public sector will often pay loans back or pick up if projects fail.

Jean Letitia Saldanha, who is the new director of NGO network Eurodad, told PF International “privatisation of development” was a “big issue”.

“It is a dangerous trend in that the macroeconomic impacts are underestimated – particularly the way public leveraged private finance does not appear on the balance sheet, but the responsibilities kick in down the line.”

This means the recording of the cost of the project, which has to be paid back to the private sector eventually, will be postponed and the liabilities will be ‘off balance sheet’, which could expose the public finances to fiscal risks at a later date.

According to Eurodad, the value of public private partnerships in the development world has grown rapidly since 2004 – from $25bn to $164bn in 2012.

Letitia Saldanha said this is “really concerning”.

Jesse Griffiths, head of development finance at the Overseas Development Institute, said: “Private finance has an enormous role to play in delivering the SDGs. But public finance is equally important because it is mainly public finance that is used to deliver essential services.”

When public services or infrastructure are financed through private funds, such as through public private partnerships, there is often a cost to the user or the public sector – the government or donor government, sources tell PF International. This can, for example, be costs to access healthcare or a toll road.   

Griffiths said: “The more a service is developed with a commercial return, the fewer people are likely to have access because the fee of that service goes up.”

Speaking of PPPs, Tim Jones, senior policy and campaigns officer at Jubilee Debt Campaign, also said “there is no such thing as a free lunch” and “in most conceivable cases the public sector will pay far more than if public money had been spent in traditional ways”.

The World Bank has promoted the use of private resources and PPPs in the past.

A spokesperson for the World Bank told PF International that countries “ambitions” for sustainable growth and the international “far-reaching SDGs” is more than traditional financing models can accomplish.

“Countries need new ways of accessing finance and solutions, especially from the private sector,” a spokesperson said.

They added: “The World Bank Group firmly believes there should not be any hidden obligations or surprise liabilities that governments and taxpayers assume. We work with governments on how to assess and manage liabilities and we support the design of projects—PPPs—that bring efficiency and sustainability to service delivery.”

 

The UK’s secretary of state Penny Mordaunt proposed plans to change the rules on aid to include millions of pounds from the private sector in a speech last year.
This included ways for the private sector to invest in aid projects, which would count as ODA, and keep the profits. However, this move was seen as concerning.
At the time, Griffiths told PF International: “It could skew incentives and damage impacts. Decisions about where to spend UK ODA should be based on achieving development outcomes, rather than making a profit on investments.”
He explained that the poorest countries are the ones that need the most help but they were also the hardest to make profits in.
The UK Department for International Development channels ODA through its development finance institutions called CDC, which support the growth of businesses in the world’s poorest countries.
A DfID spokesperson said: “It is wrong to suggest that governments in developing countries will have to repay the debt and equity investments being made by CDC. These investments are made to private companies in Africa and South Asia and do not add to the debt levels of poor countries.
“These firms create jobs, provide essential services and boost local tax revenues which help transform economies, lift people out of poverty and achieve the Global Goals.”

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