Co-authored by Dan Coppard
At a recent meeting in Paris, a German government representative took us through their approach to blending public money with private investment and development finance institutions (DFIs). Germany recently spent €40,000 of official development assistance (ODA) to leverage €300,000 of private sector funding to scale-up water and sanitation programmes. The investment reached 9.5 million people, of whom nearly 2 million were living in extreme poverty. So is this a good joined-up investment?
Well, only 18% of the people reached were below the poverty line, but the actual numbers of poor people who benefited were much larger than they would have been if the same volume of ODA had been delivered through a grant. That’s because ODA only had to meet 13% of the costs. Grant funding is still needed, but the opportunities to deliver at scale – vital in sectors like energy and infrastructure – can be helped by blending commercial and official investment and releasing grant funding to reach people who would otherwise not benefit. See Using data to get better results on poverty eradication: what you need to know.
How can we improve synergies between ODA and other sources of development finance and promote private-public partnerships for sustained development?
Many development agencies are now working directly with businesses to:
- Deliver development impacts through public-private partnerships
- Provide grants and loans to increase access to affordable finance for small and medium sized enterprises (SMEs)
- Support innovation, reducing red tape to create conditions for innovation, developing corporate capacity to innovate through business advice and support
Sustaining progress over the long term needs a range of financing actors involved at different stages of development. No one institution alone can provide the finance, expertise and experience required.
Government aid agencies and philanthropic institutions such as foundations have substantial experience in project seeding and are more willing to take risks in difficult environments but lack capital. DFIs specialise in providing softer loans, guarantees and equity for projects in emerging economies that would generally not be taken up by private investment because of high or unknown risks and technology costs. But DFIs aren’t able to scale-up and sustain projects for the longer term. This is where private investment comes in.
What are the challenges and how can they be overcome?
Incentives for donors
Donors and commentators spend a lot of time arguing about whether spending should ‘count’ as ODA. This debate needs to move on and focus on how can we mobilise more and better resources, but in the current climate there are two areas where changing the rules could give donors stronger incentives.
- Guarantees can enable private investment by underwriting some of the risk. At the moment, the only time a guarantee appears in the aid statistics is if the investment has failed and been drawn down.
- ODA loans are important for countries that find it hard to get credit. Adjusting the ODA rules could provide incentives for responsible loans to more risky environments, building confidence in commercial investors.
Serious focus on poverty
Micro, small or medium companies are the lifeblood of a broad-based growing economy but are often bypassed. Just 0.4% of the European Investment Bank’s portfolio is said to go to these sectors and most DFI finance is directed to a wealthier subset of developing countries. But can more of it go to lower income countries, especially in sub-Saharan Africa? Investment needs are high here and the scale and depth of poverty makes reaching people living well below $1.25 particularly difficult.
The reality is we don’t yet know that much about the impact of such finance on poverty. But we do know that unless the impact on poor people is put front and centre, such potential will not be realised. This will not happen automatically. Business and private investment must now also carry some of the risk and be willing to partner with public projects with the specific goal of making sure a percentage of those who benefit from the investment are the poorest people.
There are two things that are vital to enable this: transparency and data.
- Transparency is a pre-condition for effective combinations of different resources. If the domestic government, commercial investors, aid agencies and private providers do not know how other resources are being deployed, they can’t get optimal value from their own finance or create an effective blend or mix.
- Data on where, when and how the impact is felt is needed to make the most of opportunities for business investments and to use scarce government and ODA revenues effectively. Can business know-how on customer feedback contribute to a data revolution in understanding the poverty returns to private investment?
 European Parliament, ‘Financing for development post-2015: improving the contribution of private finance’, forthcoming.