This week I am heading to the meeting of the “high and mighty” of this world in Davos, Switzerland. They may be mistaken in many aspects, but on one issue they are surely right: Private investment is key to development and poverty alleviation. If businesses don't earn money investing in developing countries, we will not be able to achieve the Sustainable Development Goals.
This summer, I visited a country that is dear to me. Indonesia is a nation with a lot of potential, which has made enormous progress over the last decades. I remain impressed by the country’s considerable network of toll roads, which provides a revenue stream to the operators that maintain the infrastructure. These toll fees may be low by Western standards, but they ensure that there is revenue to attract investors and it puts a price on road use. In a country where many don’t pay taxes, this toll system will force the users to pay for the infrastructure.
At the same time, the users benefit by avoiding some of the horrendous traffic jams in the capital Jakarta, and thus are able to deliver their goods or services more efficiently. This is one example of how investors and the private sector can make sure their investments will pay off, and at the same time make sure builders, market traders and others benefit from it in their everyday lives.
There is still a need for even more innovative and bold approaches that test new ways for the public and the private sectors to work together. Partnerships can bring the necessary scale of international projects, acting as a “game changer,” yet also providing feedback into policy settings that, until now, have been limited.
I am hoping that when I meet business people in Davos, we will focus on how earning money can be done in a way that also contributes to eradicating poverty, and providing for shared prosperity.
The Sustainable Development Investment Partnership, a pet project of mine, is one way of delivering on this. The partnership has been established by the World Economic Forum and the Organization for Economic Cooperation and Development, jointly with the United States and Sweden, but crucially also includes Citibank and Sumitomo Mitsui Banking Corp. as co-creators. It aims to provide a sustained and coordinated approach in order to deliver the scale, speed, transaction efficiency, and the risk mitigation necessary to unlock billions of dollars per year in additional finance to developing countries.
It will support inclusive growth and poverty alleviation through investments, thereby aiming to bring much needed private investment to the developing world — both to support economic growth and provide the opportunity for the United Nation’s global goals to be fulfilled.
Nine out of 10 employment opportunities in developing countries are created by private enterprise. Meanwhile, tax revenues from the private sector are necessary for governments to deliver public services. Developing countries now attract over half of all global financial flows. But the picture is patchy, with Asia receiving 30 percent, Latin America just under 20 percent and Africa only 5 percent. Developing countries need to focus on how they can attract foreign investors, as limits to available capital push up the project costs. This will eventually impact the man on the street — farmers who are dependent on an irrigation project, or small businesses dependent on competitive electricity availability.
Back in Indonesia, I saw how the strong stride of bringing in the private sector to build and maintain roads or construct rail and metro systems are not keeping up with economic growth. As a result, they are missing out on the opportunity of creating greater engagement in global value chains. I am not only talking about transport, but also other infrastructure sectors such as a lack of electricity generating capacity. Efforts need to be made to ensure that both investment and aid are directed towards productive infrastructure investments that benefit the poor.
The international community has signed up to the new global goals, but a concerted effort is required by the donor community to establish true partnerships with the private sector. Currently, too little of private worldwide assets are invested in sectors critical to the SDGs. The potential is close to unlimited in sectors such as infrastructure, telecommunications, water and sanitation. Together these have an estimated shortfall of up to $1.6 trillion per year.
I am sure there will be great discussions in Davos and good policies will be put forward on a multitude of topics. Aid money on its own cannot deliver the sustainable economic growth or ambition the world has for the SDGs. Investment is much larger and more important. As an optimist by nature I believe we can put in place new and innovative approaches — such as the Sustainable Development Investment Partnership — and, by linking aid agencies, the financial sector and governments, help make the future world an even better place.
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Erik Solheim is chair of Organization for Economic Cooperation and Development’s Development Assistance Committee since January 2013, and incoming executive director of the U.N. Environment Program. With a solid background in climate, the environment and peace building, Solheim was also Norway’s minister for international development from 2005 to 2012.
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