PARIS — Even before the Sustainable Development Goals passed, it was clear that the private sector and private finance would be critical to achieving the ambitious objectives. But the conversation has evolved significantly since then — raising questions and creating new challenges.
“It’s about shifting the trillions of dollars that are there. We need to create the right ecosystem.”— Haje Schütte, head of the financing for sustainable development division, OECD
Development finance experts and stakeholders gathered at the Organisation for Economic Co-operation and Development in Paris, France, last week for its annual Private Finance for Sustainable Development Week to discuss emerging issues in the private sector’s role in development finance. Here are three key conversations to watch in the space this year.
Is ‘billions to trillions’ the right narrative?
With the adoption of the SDGs, a narrative emerged around the need to move from billions to trillions of dollars of financing and that private capital would be key to getting there.
Now, questions are emerging about whether that framing is effective, or in fact counterproductive. Civil society advocates at the meeting questioned whether the focus on mobilizing trillions is detracting from a focus on impact and whether the desire to seek capital is leading to a rapid increase in the use of private sector instruments and blended finance — without ensuring that the evidence is there to support the effectiveness of those tools.
Even Haje Schütte, head of the financing for sustainable development division at OECD, called for a change in the paradigm. “We need to move away from the narrative of billions to trillions,” he said. “It’s about shifting the trillions of dollars that are there. We need to create the right ecosystem.”
For many in finance, it is clear what investors want: a diversified portfolio, risk mitigation, and regulatory frameworks. So much of the narrative around billions to trillions doesn’t resonate. Philippe Valahu, the chief executive of the Private Infrastructure Development Group, called the narrative “terribly unhelpful” because it’s not a mystery what it will take to bring in investment. He added that some of the key issues, including creating more investible deals, are not being addressed or helped by the framing.
With so much of the conversation focused on attracting new capital, it is detracting from other key conversations — that there are too few transactions, and too few organizations effectively working to do the project preparation or ensuring that money that is available has a place to be invested, Valahu said.
The rush to mobilize private capital also has other potential downsides, including the creation of competition among development finance institutions. Those organizations all have financial targets to meet and there is a risk that in trying to do so, they will push the envelope in ways that they shouldn’t. It begs for better coordination among donors, he said.
Equally somewhat lost in the rush to focus on attracting private dollars is domestic resource mobilization, said Elliott Harris, chief economist at the United Nations Department of Economic and Social Affairs. “Mobilizing domestic resources needs more attention,” he said. “In areas not precisely suited to private finance, we need to think about the best ways to mobilize public finance” and official development assistance is not enough.
Evidence and transparency
With more dollars being delivered through development finance institutions and the growing buzz around blended finance, civil society is concerned about a lack of transparency and that there is insufficient evidence to show these private sector instruments are effectively achieving development impact.
“It’s taken off with fervor without thinking about where it’s a useful tool,” said Sara Harcourt, senior director of policy at the ONE Campaign, adding that while they understand the importance of the private sector, they want to be sure that the mechanisms being used are working for development. "There are so few projects, so little evidence. They are trying to figure out how to do this right, so they should slow down and make some more effort at data collection and transparency," she said.
OECD released a social impact investing report last week that also called for transparency to allow the sector to better collaborate and prove its impact.
Development finance institutions face a transparency dilemma, said Alex MacGillivray, director of evaluations at CDC, the United Kingdom's DFI. What they want is for impact goals to be distinct and relevant to what a business is doing, which means it should be closely linked to its commercial role. That link, however, makes it difficult to report on impact without giving up commercially sensitive information, he explained. CDC has spent a lot of time thinking about when it should do its evaluations so they can say something both consequential and also take place early enough that the information is useful, MacGillivray said.
Global Affairs Canada is working to define parameters of success but there isn’t yet enough of a track record or enough data about investing through these mechanisms to determine if they provide better impact than traditional overseas development assistance, said Elissa Golberg, the department’s assistant deputy minister for strategic policy. Canada believes they are effective tools, but is working to better measure and evaluate them.
How blended finance will be used in least economically developed countries is of particular concern to civil society, in part because thus far it has been used primarily in middle-income countries. A forthcoming report from the Overseas Development Institute found that less than 4 percent of blended finance deals are in low-income countries and that they tend to have a very low mobilization rate — only attracting about 37 cents in private money for every development dollar — said Samantha Attridge, senior research fellow at ODI. Finding a way to balance an increased focus on least-developed countries with the pressure to catalyze more outside funds will be another challenge for DFIs.
Creating an impact standard
In many ways, the private sector’s role in development is still at a nascent stage, and one of the challenges is a lack of standards and principles that can be used to define the industry, measure impact, and set policy.
“A harmonization approach is essential.”— Timothy Mohin, chief executive, Global Reporting Initiative
Many have recognized this need and about a dozen such initiatives were represented at the conference. The challenge is that with a proliferation of efforts, it may be difficult to agree on a single set of principles and standards.
In accounting, there are clear principles that, while imperfect, were agreed by a multistakeholder group and now define the way the industry works. And the impact community can learn from other efforts, including the Global Reporting Initiative, which created standards for sustainability reporting, said GRI Chief Executive Timothy Mohin. GRI is a standard-setting organization with independent governance that developed the standards through a multistakeholder public consultation. A similar process could be used to come up with impact standards. “A harmonization approach is essential,” said Mohin. “The danger is confusion, which leads to chaos.”
Clara Barby, CEO of the Impact Management Project — which is convening actors working on this issue — believes that within 10 years there will be a way of measuring impact that is similar to how risk is measured today. It will be imperfect, but as long as it is designed appropriately that is OK, she said.
Impact measures need to be fit for purpose, important to the companies and asset owners, and not overly complex, Barby said. There must also be standardization so there can be aggregation for a successful value chain and so the industry can learn from the data. It would also create the potential for regulations or tax incentives related to impact, Barby added.
While development finance actors — from OECD to the World Bank Group — are working on these issues, it could well be that companies themselves end up determining impact standards, said U.N. DESA’s Harris.
“Given that public finance seldom does real impact assessment it’s not fait accompli that they will align everyone around them,” he said.
Editor’s note: The OECD facilitated Devex's travel for this reporting. However, Devex maintains full editorial control of the content.