Are developing country institutions a help or a hindrance to post-2015 financing?

We still have a bit further to go in working out how to close the global development financing gap. Issues surrounding tax institutionalization, climate change, gender equality and debt sustainability have divided positions on financing the sustainable development goals and for whom.

Despite these issues, concrete steps have been taken in the direction of pooled financing mechanisms to satisfy the supply side of development financing demands. Canada, for example, has been pioneering blended finance as one such mechanism. It has partnered with Sarona Asset Management, the World Economic Forum and MasterCard Inc. Convergence is a blended finance hub being established in Toronto, Canada, to help underwrite blended finance partnership opportunities. These efforts exist alongside the World Bank’s Global Infrastructure Facility and are aimed at helping to close the long-existing gap between international and domestic public and private financial flows.

Essentially, trust funds, the private sector and philanthropic funding are now to be the main vehicles simultaneously driving post-2015 development financing, alongside traditional aid flows.

However it is one thing to generate cash, and another to know how to use it effectively and sustainably. The institutions in developing countries have long determined how effective official development assistance, remittances, foreign direct investment, and public and private investment are.

If post-2015 development financing is to remove the ring fences and direct these flows toward meeting the sustainable development goals, then we are still at the mercy of developing country institutions. We are now faced with two post-2015 questions, one general and one more specific: How will developing countries sustainably benefit from the integration of international and domestic public and private finance to meet the SDGs? And are developing country legislative frameworks compatible with initiatives such as blended finance?

Institutions determine how developing countries function. This is because we know that institutions constitute the collective norms, values, modus operandi and preferences of any polity. There is no greater embodiment of these “ways of working” than in the legislative framework of a country. Constitutions and statutes set out how governments work, how they partner with other governments and with nongovernmental actors. It is the legislative framework that determines the speed, levels of effectiveness and success of development initiatives.

I have found this to be the unshakeable truth from my professional experiences. One of the main challenges traditional public-private partnerships faced was how to realize returns over the payback period, after completion of infrastructural projects. Even if legislation is in place, there are very lengthy procurement rules and processes which have to be satisfied before contracts can be performed.

Development partnerships are not the only concern. The last decade after the Paris Declaration on Aid Effectiveness we witnessed donors struggling to harmonize and align their operations and modalities around the institutional frameworks in developing countries. Budget support, as one modality, often ran counterintuitive to its intended purpose of fostering ownership, largely because donors prescribed conditionalities within these packages through the back door, in an effort to influence how institutions should function. In the cases where conditions were not met in time, the funding windows closed, thereby defeating the purpose of this more “efficient” aid modality.

Without invoking specific cases here, the data is replete with examples of how budget support and other modalities increased fungibility risks to donors while attempting to obviate archaic institutional structures in developing countries. For this reason there was heavy reliance on political economy analyses instead of traditional feasibility studies to preface donor commitments. So institutions are still the linchpin of development effectiveness.

There are a few things we have to be mindful of while driving forward with the post-2015 development financing agenda. This is because we still need answers to critical questions. Conceptually, we are not sure what theory of change might successfully inform foregoing separate official flows from ODA, FDI, remittances and global philanthropic efforts in favor of pooled mechanisms; and practically, the details of initiatives such as blended finance and the Addis Tax Initiative are still being worked out.

However, what we are sure of is that the legislative framework in developing countries operates differently and might not be at the level of harmonization required for these initiatives to take off just yet. So wisdom dictates that we have to be mindful of at least three things:

1. Departmental siloes.

In developing countries, departmental centralization is a rarity. Tax administration is administered by specific tax authorities and taxation is invariably set out by laws separate from those governing charities and philanthropic activities. It might not immediately recognize blended funding, which integrates public, private and philanthropic flows.

This approach to development financing might end up pitting different government institutions against each other, when trying to work out taxable portions of social investments, separate from others. The work to harmonize these into already overburdened legislative frameworks might be very costly, requiring expensive tax and legal consultants to be retained, thereby potentially running counterintuitive to development effectiveness.

2. Procurement guidelines.

Loose procurement guidelines often lead to back-door kickbacks for developing country elites.

The blending of sources of funding for social investments might constitute an added layer incentivizing corruption, without benefits ever reaching the poor. This too counters sustainable development.

3. Legal and constitutional reform.

By any measure the post-2015 development financing initiatives being contemplated will require legal reform and, in some cases, constitutional reform. Work will be needed to determine and expand the original jurisdiction of courts and tribunals that might need to hear disputes or to expand the appellate jurisdiction of existing courts. These are mid- to long-term constitutional efforts that will run well beyond shorter-term blended finance return windows.

Developing country institutions still determine development effectiveness and their legislative frameworks constitute the aorta regulating official flows. It is imperative that we not only focus on the supply side of financing the post-2015 SDGs, but we should also be mindful of how best to make them sustainable in practice.

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