Addis Ababa hosted the Third UN Financing for Development conference from 13 to 16 July to improve the quantity and quality of financial flows for development. The resulting Addis Ababa Action Agenda (AAAA) addressed the right problems, but it provided little tangible and time-bound answers. The follow-up process of the UN FfD Forum will therefore be critical for future success.
The role and accountability of big business will be critical in terms of success of the agenda, and private financing was widely debated. The World Economic Forum (WEF) in Davos next January is an opportunity to issue a call to action on sustainable development goals (SDGs) which will replace the Millennium Development Goals.
The IMF is already conducting research and country diagnostics on the impact of inequality on growth, and similar arguments exist on the cost of gender gap and cost of disability on inclusive development. The question for businesses is: what is the cost of not investing in SDGs, rather than seeing it as a compliance or charitable issue?
Larger role and scale brings about new buzz-words
The FfD process is seen as critical for investing in the SDGs and the financial needs have shifted from billions to trillions, as the SDG financing gap is estimated at $2.5 trillion per year. In order to come up with trillions, the financing for development agenda has moved beyond aid towards aligning tax and private sector financing with sustainable development.
UK Secretary of State for international development, Justine Greening commented that the FfD “is the first ever agreement that allows us to harness private sector investment and developing countries’ domestic resources, including tax revenues, to turbo charge development.”
The official Addis negotiations focused heavily on the UN’s role in tax governance that ended without significant change as the final outcome document largely maintained the OECD’s dominance in rule-setting on tax issues. Additionally, the 200 side events in Addis touched on a range of issues including open data, and another event launched the Global Financial Facility in Support of Every Woman, Every Child.
On private finance, the ‘buzz words’ were blended finance and public-private partnerships. The UK government came in to support a private financing platform called the Sustainable Development Investment Partnership, while a new blended public-private partnership online portal, Convergence, was launched by the World Economic Forum.
On scale, even if it were feasible to blend and leverage all the aid money in the world at a ratio of 10 to 1 with aid, this still wouldn’t be enough to fill in the SDG financing gap. Such a scenario is hardly feasible in any case. On Public Private Partnerships (PPPs) the issue of cost of financing has been highlighted, leading to the IMF developing a PPP fiscal diagnostic tool.
And the sustainable development impact is the big concern. Studies by the UK’s Independent Commission for Aid Impact and the World Bank’s Independent Evaluation Group have not found evidence that private sector support projects have a sufficient impact on sustainable development. NGOs have also been critical of PPPs in health and of the overall trend.
Improving the quality of blending and leverating tools would need in particular to address gaps in SME financing. For instance, through working with developing country institutions such as investment funds and public development finance institutions based on sustainable development impact assessments.
The way forward – creating a set of shared standards for big business
To raise trillions of domestic and international private financing, markets need clear set of incentives from public authorities to guide the development of development orientated business environment. Lack of structures and rules mean much more volatile capital markets, where investors are weary of investing.
Indeed there are many principles already out there that apply on a voluntary basis, such Responsible Investment in Agriculture and Food Systems (RAI) and the Business and Human Rights Guiding Principles are seen as contributing to creating a race to the top and creating a set of shared standards that can be applied to supply chains. Initiatives such as sustainable capital markets and sustainable stock exchanges are important for aligning financial flows with sustainable development.
Creating more binding rules will also be important to create lasting change in the ways that markets work. Mandatory transparency is good starting point and thus public financial and non-financial reporting on a country-by-country basis could help investors, consumers and governments alike to create the incentives and level playing field for informed decisions in favour of sustainability.
This is already happening in terms of financial reporting in the EU banking and extractive sectors, and extractive reporting on payments in the USA. As for non-financial reporting, the landmark EU Directive paves the way for this becoming more common place.
In ensuring that Addis outcomes become actionable both the private sector and NGOs will need to find ways of working together more collaboratively to ensure we deliver adequate and good quality financing for the SDGs. It will be important to test new practices through strategic partnerships and to learn from each other’s experience in building a sustainable economy.
Policy dialogue is also important and the UN Financing for Forum, which will take place every April after the IMF and World Bank spring meetings. It will be a space to find the common ground between different governments on the tools and rules so that they achieve a real development impact.