Delivering Sustainable Development: A principled approach to public–private finance

8/9/2019 Delivering Sustainable Development: A principled approach to public–private finance

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The sustainable development goals (SDGs) will require

signicant nancing. Governments across the world areincreasingly looking at ways of working with the privatesector in order to meet nancing needs and they will needto nd ways of maximising the contribution of these actors.

This depends on ensuring that activities undertakenconform to high standards of sustainable development,including ensuring social and environmental justice.

This discussion document provides initial ideas for how todo this by proposing a set of principles to assistgovernments to apply best practice, international standardsand learning more systematically to help ensure bestoutcomes for sustainable development.

It draws on existing practice, such as standards andsafeguards, and information from interviews with donors. Itis rooted in accepted global standards and legally bindingprinciples, such as the UN’s sustainable developmentprinciples, development effectiveness principles as well asthe human rights obligations of both the state and theprivate sector as reected in the UN Guiding Principles on

Business and Human Rights. The document goes beyond

mitigating risks to ensure a positive and responsiblecontribution to sustainable development, while maintaininga clear call for effective safeguards.

This is not the nal answer, but the start of a path towards it. Itis intended as an input to the UN Financing for DevelopmentConference (FFD) in Addis Ababa in July 2015. Here asystematic and consistent approach can be agreed.

The proposal is for all governments to apply the followingsustainable development principles to all projects wherepublic nance is used in conjunction with private nance.

The principles will be used both in the process of projectand programme design and development as well as in anymonitoring and accountability mechanisms. These high-level principles should be used with explicit reference toand in adherence with the best practice rules andsafeguards mentioned above, and not as a substitute forthem.

The diagram below shows the broad principles that weconsider the most relevant.

Delivering sustainable development:A principled approach to public-private nance

A Sustainable Development Trafc Light

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Showadditionality

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Ensure goodcorporategovernance

Share risk andminimise debt

Ensuretransparency,accountability

and participation

Build ondevelopment

effectivenessprinciplesand SDGs


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2 Delivering sustainable development: A principled approach to public-private nance

Donors and other development actors have always workedwith the private sector but the importance and nature of thatcollaboration is rapidly changing. Whereas discussionsaround the Millennium Development Goals (MDGs)concentrated on mobilising public nance, the focus of theSDGs and FFD debates has been much broader – on gettingthe best mix of public and private nance, on domesticresource mobilisation and on transformative structuralchanges in areas such as tax, debt and trade.

There are many ways that this money is leveraged by donorinstitutions, but it has often been through DevelopmentFinance Institutions (DFIs) – government-controlledinstitutions that invest in private sector projects in developingcountries. They can be multilateral or bilateral. The WorldBank Group’s IFC has played a dominant role in setting

standards, but bilateral institutions like the UK’s CDC andmultilateral facilities like Private Infrastructure DevelopmentGroup (PIDG) are also key. This paper focuses on the fullrange of donor institutions that mobilise private capital, withparticular emphasis on DFIs as the biggest players.

Donor governments have obligations under international law,which are relevant to their engagement with the privatesector, as reected for human rights in the UN GuidingPrinciples. The majority of institutions and facilities aresignatories to voluntary codes of conduct, like the EquatorPrinciples, the UN Principles for Responsible Investment(UNPRI), or other responsible nancing frameworks. Thesecommitments are often complemented by institutional codesof conduct, due diligence and other internal policies. Forexample, the IFC’s Performance Standards are often used byother institutions and facilities.

However, the implementation of these standards ischallenging. Various donors we interviewed recognised thatthis is a new area and that their thinking around impact andaccountability is still emerging. An analysis of 10 internationaldevelopment agencies which focussed on relationship withmultinational corporations shows that agencies are at variousstages of developing their initiatives and that commitmentsare difcult to quantify due to lack of, or differences in,reporting. 6

International public nance, whether Ofcial Development Assistance (ODA) or concessional or non-concessionalloans, remains absolutely key for sustainable development.It is therefore essential to ensure that where public nance isused to mobilise additional resources through the privatesector – known as “leveraging” – it also has the maximumcontribution towards sustainable development results.

Although “leveraging” is not a term used in a consistent way,it is dened by the World Bank as: “the ability of a publicnancial commitment to mobilise some larger multiple ofprivate capital for investment in a specic project orundertaking.” 5 That is, it involves a small amount of publicmoney or a guarantee being put on the table to encouragethe investment of a larger sum of private money.

Leveraging: The changing world of development nance

1.Business Accountability For Development, by ITUC-TUDCN and EURODAD, supported by theCPDE, 2015. http://www.ituc-csi.org/business-accountability-for-development

2.IFC (2008). The gures show a growth from around USD 4 billion to 40 billion per year from 1990to 2010.

3. www.ed.eu.

4. World Commission on Environment and Development (WCED), (1987), Our commonfuture. Oxford: Oxford University Press, p. 43.

5. World Bank Group et al., “Mobilising Climate Finance: a Paper Prepared at the Request of G20Finance Ministers” (G20, 2011), 35, Cited in http://eurodad.org/les/pdf/520a33a10cae2.pdf

6. Business Civic Leadership Center (BCLC) and Corporate Citizenship, (2009). Cited in Davies(2011).

Public engagement with the private sectorto advance sustainable development

Most development actors, bilateral and multilateral,

have increased their engagement with the privatesector. An ITUC study found that the private sectoris a main priority in 19 out of 23 donor developmentstrategies examined. 1 This policy priority has beentranslated into financial support. According to theInternational Finance Corporation (IFC), there hasbeen a ten-fold growth of financial commitments tothe private sector with public money between theearly 1990s and 2010. 2 By 2015, the amount flowingto the private sector is expected to exceed USD 100billion – which is equ ivalent to almost two thirds ofofficial development assistance (ODA). Between 2003and 2013, the consolidated portfolio of Europeandevelopment finance insti tutions increased from EUR10 to 28 billion. 3

Sustainable Development isdevelopment that meets the needs ofthe present without compromisingthe ability of future generations tomeet their own needs.4“

”


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3Delivering sustainable development: A principled approach to public-private nance

Using public money to leverage private nance presentsmany challenges. Most of them are due to the conictbetween the different expectations and incentives driving thepublic and the private sectors, the way the nancialinstitutions and facilities are governed, the lack of commonstandards and the systems needed to implement them.Furthermore, using ODA in this way means there is lessmoney available for the things only ODA can support, i.e.programmes and projects targeted to ght poverty directlythrough essential services. 7

Challenge of delivering sustainable development results – donors face challenges demonstrating effects on povertyreduction in developing countries, including impacts onreducing inequality, on women’s rights and on marginalisedgroups. This is partially due to the nature of investing in theprivate sector, where social outputs are not the primaryobjective of the private sector partner, and are difcult tomeasure. A 2014 review by the Bank’s Independent EvaluationGroup looking at 128 World Bank-nanced Public-Privatepartnerships (PPPs) found that the main measure of ‘success’is protability – other factors are rarely considered. 8 Wheredonors do focus on development impacts, they tend to targeta narrow set of outcomes such as a broad measure of jobcreation, rather than systematically identifying opportunities forpositive impacts. They sometimes have strong safeguards tomitigate harm, but these are often poorly implemented and

enforced, as the recent CAO audit of IFC nancial sectorinvestments has powerfully shown. Additionally, there is thechallenge to ensure that all new developments are part of alow carbon development pathway.

Challenges of participation, accountability and redress – while most institutions and facilities leveraging privatesector investment are at least partly owned by donorgovernments, there is limited formal consultation and rareparliamentary scrutiny. Dialogue with affected communitiesand Civil Society Organisations (CSO), both in donor andbeneciary countries, is insufcient, in particular in seekingconsent and in the establishment of grievance mechanismsto resolve and remedy disputes. 10 Consultations withbusiness associations or rms in the developing countriesinvolved are also rare. While the IFC and other multilateralinstitutions have already put in place independent grievanceand redress mechanisms, European bilateral institutions andfacilities rarely have such mechanisms, or are in the processof developing them. 11 At the same time, Project PreparationFacilities (PPFs) are compressing the time for projectpreparation, expediting land acquisition, and standardisingbidding, procurement and other processes. 12 In someinstances, this reduces the possibilities to properly identifyand involve stakeholders in development initiatives, openingthe possibility of negative human rights impacts. 13

Main sustainable development challenges in using public moneyto leverage private nance

7. ActionAid, April 2014.

8. http://ieg.worldbankgroup.org/evaluations/world-bank-group-support-ppp.9. See http://bankwatch.org/news-media/blog/guest-post-mongolian-herders-le-complaint-ebrd-about-mongolian-iron-ore-company; EBRD complaint: http://bit.ly/1wXEoCy; Steinweg and Schuit(2014) Impacts of the Global Iron Ore Sector, and SOMO (2014) When the dust settles.

10. EURODAD (2014) Pri vate Finance for Development Unravelled: http://www.eurodad.org/les/ pdf/53bebdc93dbc6.pdf..

11. Ibid

12. http://www.worldbank.org/en/news/press-release/2014/11/13/statement-heads-multilateral-development-banks-imf-

13. ICF International (2014).

Mongolian herders le complaint with EBRD about Mongolian iron ore company 9

In January 2012, the European Bank for Reconstruction and Development (EBRD) approved a debt financingof up to USD 30 million and equity financing of up to USD 25 million to the Mongolian private mining company

Altain Khuder LLC for the development of its Tayan Nuur iron ore mine in western Mongolia. The project wasintended to support sustainable development of the Mongolian mining sector and help set corporate andindustry standards including transparency, environmental and social management practices.

Herders from the Gobi Altai Mountains in western Mongolia filed a complaint with the EBRD in December2014 claiming that roads to service the mine had caused pollution, loss of livelihoods and disp lacementof herders in the Gobi Altai mountain region. Customary mobile grazing rights had also been undermined.Complaints made directly to the company were met with intimidation and legal action.

The herders claimed that the EBRD’s social and environmental standards had been breached and requesteda full assessment of the mine’s impacts, swift completion of the paved road with adequate overpasses,restoration of degraded and polluted land, compensation for the loss of animals and the implementat ionof a comprehensive livelihood restoration programme in consultation with all stakeholders involved. Thecomplaint is currently being reviewed.


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14. Take Action: Stop EcoEnergy’s Land Grab in Bagamoyo, Tanzania, researched and written byconsultants Mark Curtis and Richard Mbunda and ActionAid staff, published 18 March 2015. http:// www.actionaid.org/publications/take-action-stop-ecoenergys-land-grab

15. Bretton Woods Project (2012).

16. http://www.counter-balance.org/eibs-new-transparency-policy-allows-for-more-secrecy/.

17. The ITUC study found that 9 out of 23 donor policies explicitly reference supporting domesticbusinesses abroad and facilitating their investments and trade in developing countries.

18. ITUC, Op. cit.

19. UKAN (2015) forthcoming.

20. For example, Di Bella et al. (2013) point out that “limited public information exists on the specic

criteria used by development cooperation actors to assess the additionality of engagements withthe private sector”. The Interamerican Development Bank (2014) nds that “the assessment ofadditionality was mostly based on qualitative descriptions, often lacking objective supportingevidence”.

21. European Court of Auditors (2014). The effectiveness of blending regional investment facility

grants with nancial institutions loans to support EU external policies, Special Report 16.22. Oxfam (2014) A Dangerous Diversion: Wi ll the IFC’s agship health PPP bankrupt Lesotho’sMinistry of Health?, Oxfam (2014) Investing for the few: The IFC’s Health in Africa, Eurodad (2014)Where is the public in PPPs? Analysing the World Bank’s support for publi c-private partnerships,Oxfam (2014) Moral Hazard? ‘Mega’ public-private partnerships in African agriculture.

Challenge of transparency – development agencies havea poor track record with respect to transparency ofcontracts, nance, and project impacts, especially whendealing with nancial intermediaries, such as banks andprivate equity funds, and their clients. This is partly due to thedesire to protect commercial condentiality. For example, theIFC’s Access to Information Policy has been criticised forbeing far weaker than those of the public lending arms of theWorld Bank Group. 15 The European Investment Bank hasrecently adopted a more restrictive transparency policy,

allowing the EIB to establish a new presumption ofcondentiality to keep secret internal investigations intoirregularities such as corruption and maladministration. 16

Challenge to link to national development priorities – the way that DFIs operate makes it difcult for them to aligntheir activities with the priorities of governments, localbusinesses and poor communities in partner countries. DFIsare usually driven by developed country priorities, with little orweak representation by recipient countries, as becomesevident when analysing the governance structure of existingDFIs or the EU’s Platform for Blending in ExternalCooperation. The sectoral focus of bilateral DFIs tends to be

driven by home government priorities and business sectorexpertise, 17 rather than prioritising the sectors with mostpotential for growth in a specic developing country context.Nine out of 23 donor policies explicitly reference supportingthe donor-country or their own businesses abroad. The

creation of a diversied local private sector in developingcountries, while central to many national developmentstrategies, does not seem to be a priority. 18

Challenge to demonstrate additionality – DFIs frequentlyquote “leverage ratios” that are based on the assumptionthat all of their nancing is new and additional, and thatco-nanciers would not have made any investments withoutthe DFIs’ involvement. A study by UKAN 19 of 19 availableevaluations of “leveraged” projects using ODA found that thereis very little evidence of either nancial or developmentadditionality. It also found that there were few evaluationscarried out of such projects, and that there was no common orrobust approach to measuring additionality. 20 A report by theEuropean Court of Auditors on EU blending activities 21 claimedthat “the need for a grant to enable the loan to be contractedwas demonstrated for only half of the projects examined”.

Challenges of selected nancing mechanisms forinfrastructure projects – the need to facilitate privatesector involvement is one of the main drivers behind the“leveraging” agenda. PPPs have been the selected nancingmechanism to structure much-needed infrastructure projects.However, infrastructure PPPs have a poor track record ofserving poor customers and the nancial track record of PPPsis mixed at best. There is signicant evidence to show thatcosts can be high for governments, as can risks and debtarising from contractual obligations and contingent liabilities. 22

Rural communities in the Bagamoyo district of Tanzania are opposing a sugar cane plantation project plannedby EcoEnergy, a Swedish company that has secured a lease of over 20,000 hectares of l and for the next 99years. In the first phases of the project, approximately 1,300 people – mainly farmers – will lose some or allof their land and/or their homes. There will be further displacements in subsequent phases and ActionAidestimates that hundreds of people could be affected.

EcoEnergy’s plan to develop a sugar cane plantation is a flagship project of the New Alliance for Food Securityand Nutrition, the G8’s African agriculture initi ative. It receives direct support from the African DevelopmentBank (AfDB), the International Fund for Agr iculture Development and the Swedish International Development

Agency. The project is thus proceeding according to the Operational Safeguards of the AfDB and thePerformance Standards of the IFC.

These standards, while stressing that involuntary resettlement should be avoided, do not require securingFPIC of all project-affected people, but only of indigenous people. In this project, as affected communities arenot indigenous people, they have not been offered the choice of whether to be resettled or not; they have onlybeen offered a choice of whether to receive compensation in cash or land for being resettled. These are twodifferent things.

EcoEnergy’s Land Grab in Tanzania: the importance of Free, Prior and InformedConsent for all communities (FPIC), March 2015 14


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5Delivering sustainable development: A principled approach to public-private nance

Clear principles have been developed for the use of ODA.However, as shown above, the same level of attention interms of contribution to sustainable development has notbeen paid to other types of public nance, namely where it isused to leverage private sector involvement.

Agreeing and implementing sustainable developmentprinciples for public-backed private nance is needed to:

• Target all development nance towards sustainabledevelopment outcomes

• Make the most of the role of the private sector to promotesocial, economic and environmental developmentobjectives

• Minimise risks for people and the environment

• Ensure transparent and accountable processes for the useof all public money

• Ensure that all development nance builds ondevelopment effectiveness principles, including countryownership, untying, and strengthening nationalgovernment systems.

• Contribute to low-emission development pathways andincrease resilience of local communities

coverage of countries. A full list of the instruments examinedwill be available in a background paper – and many arementioned in the tables on pages 7 and 8.

In general, they include• UN treaties relevant to sustainable development and

human and women’s rights

• Donor / institutions’ policies, tools and instruments ofdevelopment effectiveness and due diligence

• Voluntary codes of conduct for responsible investment

Application of principles

Each donor has different ways of monitoring and evaluatingdevelopment projects. The proposed principles offer abenchmark against which their monitoring frameworks can

be assessed – they draw attention to the key issues that anyframework should address, at a minimum. They highlight thatprojects must not only do no harm but also do good andhave the maximum positive impact possible, in line with keysocial, economic and environmental elements of theproposed sustainable development goals. The principles fallinto two main categories:

• Partnership and project principles – which deal mainly withhow decisions are made with respect to projectdevelopment and implementation

• Sustainable development principles – which focus on theimpacts that the projects aim to have

Partnership and project principles:

There are some principles that should govern which privatesector partners are chosen and the processes andprocedures common to all projects. Many donors havealready made a good start on implementing these moreoperational principles.

• Build on development effectiveness principles andSDGs – in order to be most effective, nationalgovernments, citizens and local businesses should set theagenda. Developing country governments should berepresented on an equal footing where decisions ofprojects and strategies are made, particularly within donorinstitutions. Global agreements, and in particular theproposed SDGs should set the overall objective anddirection of travel. All nancing should be guided bydevelopment effectiveness principles such as untying aidand the use of country systems.

• Show additionality and value for money –governments need to be transparent on the terms ofnance, with clarity on expected nancial and/ordevelopment additionality as well as assessment of costsof different options.

• Share risk and minimise debt – governments need tobe sure that leveraging does not create excessive risks or

The need for a new approach to public-backed private nance

“Blended financing platforms could have a greatpotential, particularly where there is a benefit to the

public sector. Where they are considered however, itis important to ensure that these arrangements aresubject to safeguards to verify that they contributeto sustainable development. They must not replaceor compromise state responsibilities for deliveringon social needs. Such policies need to ensure fairreturns to the public, while incorporating social,environmental, labour, human rights and genderequality consideration .” (UN Secretary General, TheRoad to Dignity by 2030)

Proposed principles

The principles proposed here are based on current practiceand existing international standards and treaty obligations.By using existing standards that states have already signedup to, the intention is to demonstrate that these are issuesthat are already relevant and feasible to consider indevelopment projects that include the private sector.

They are intended to provide a check-list for donors toensure that key issues have been taken into account whendeciding on using public resources to support the privatesector.

The instruments have been chosen to represent a range ofinstitutions active in the eld as well as good geographical


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debts that could jeopardize future development and thatthere is a fair allocation of risk to all parties. Any liabilitycreated should be offset by revenues generatedthroughout the life of the project.

• Ensure transparency, accountability andparticipation – projects should be designed,implemented and monitored in a participatory andinclusive way with full transparency and meaningfulparticipation and consultation, including free, prior andinformed consent for all affected communities. Allbidding and procurement processes should betransparent. All project documents should be in thepublic domain, including expected impacts and rate ofreturn. Affected communities, NGOs and other partiesshould have access to complaints mechanisms that aretransparent, fair and effective.

• Ensure good corporate governance – public fundsshould only be channelled through private sectorpartners who are committed to upholding human rightsprinciples and standards, as well as sustainabledevelopment principles and standards, across theirentire operations.

Sustainable development principles:

While donors are often good at looking at the operationalelements of a project involving the private sector, they aremuch less advanced in monitoring the potentialdevelopment impacts of a project, beyond the immediateoutputs. It is important to look at maximising benets thata project could bring, as well as ensuring that interventionsdo no harm.

Poverty alleviation and social development – whilstsome social aspects of development are covered bycurrent instruments and standards, these are quitedisparate. Signicant improvements to systematicallyaddressing impacts on all dimensions of poverty andvulnerability are needed. For example, there should bestandards in place to close the gender gap and to secureaccess of women and vulnerable communities to – andcontrol over – land. Projects should avoid land grabs andought to help develop inclusive communities, e.g. throughinfrastructure provision that enhances the access to

essential services for poor communities. It is also importantto address differential access of men and women to property,assets, credit, employment, and education; and to alleviatewomen’s unpaid care burden.

Equitable environmental sustainability – environmentalsustainability is a key pillar of sustainable development.Safeguards to prevent and mitigate environmental harm aresomewhat represented in current approaches. However,much more could be done to promote a positive contributionof the private sector to environmental sustainability, whereaccess to systems, measures and technologies is inclusive.For instance, mechanisms for pollution control, wastemanagement and for mitigating and adapting to climatechange should be transferred to vulnerable or poorercommunities. In addition, projects should have the obligationnot to destroy natural resources and to promote theirsustainable management and the restoration of degradedecosystems. Projects should also keep greenhouse gasemissions in line with low-carbon development pathways,promote sustainable access to energy and actively contributeto increasing the resilience of communities.

Inclusive and sustainable economic development – amore robust approach to assessing the quality of economicdevelopment is necessary to ensure that economicdevelopment is sustainable and reaches the majority of thepopulation. The focus should be on building thrivingdomestic markets, supporting local business and ensuringthat marginalised groups such as women, children,indigenous groups, or people with disabilities have access todecent jobs and sustainable livelihoods. In particular, donorsneed to think about whether the intervention is contributingto economic diversication, fostering strong linkagesbetween foreign investment and local businesses. Allbusinesses should pay a fair share of tax.

Next steps

These initial proposals will be developed further and a nalversion presented in Addis Ababa in July. We welcomecomments and suggestions from governments, business,international institutions and civil society groups.

For more information please contact:

Graham Gordon, CAFOD, [email protected]; Hilary Jeune, Oxfam International, [email protected];Ruth Kelly, ActionAid UK, [email protected]; Maria Jose Romero, EURODAD, [email protected]; DominicWhite, WWF, [email protected]; Mareen Buschmann, BOND, [email protected]

April 2015


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Delivering Sustainable Development: A principled approach to public–private finance