The UK has recently joined the ranks of a growing number of rich countries – including Sweden, Finland and the Netherlands – that are shifting the focus of their development efforts away from traditional grants to “blended finance” models that include loans, equity investments and guarantees to private sector actors.
Speaking at the London Stock Exchange this week, the UK Secretary of State for International Development Justine Greening announced a “radical shift” in policy that will see a doubling of aid focused on economic development activities to £1.8 billion in 2015-16 (from 2012-13 levels), greater partnership/co-investment with the private sector, and the appointment of DfID’s first director-general for economic development.
She had this to say about her agency’s new focus:
“I believe you can’t build a sustainable public sector without helping to build a private sector. Sustainable public services need a funding stream of tax receipts and that means a thriving private sector. A strategy to do one without the other risks a short term improvement for people in poverty without a long term plan to make sure those gains are locked in.”
In recent months the European Union has also embarked on a process of redefining how it plans to engage and integrate the private sector into its development strategy, with a new communication planned for June.
A number of important trends are pushing donors in this direction, with important implications for traditional aid:
- Most of the world’s poor now live in middle-income countries where aid is a decreasing share of resources available for development (compared to domestic resources, for instance). Since aid is no longer the “game-changer” it used to be, donors must find ways to stay relevant and add value in a changed development landscape, by catalyzing markets;
- The global financial crisis means that donors/governments have less money to work with and must therefore find creative ways to leverage limited resources and unlock additional sources of funding; and
- The world is becoming increasingly globalized, which is a double-edged sword: on the one hand, the nature of today’s problems are increasingly complex (too complex for any single actor to tackle on their own); on the other, a more interconnected world translates into increased opportunities for mutually beneficial partnerships among a growing diversity of players. Donors must find ways to break down traditional barriers and effectively partner with them.
“Blended finance” and innovative finance more broadly offer an opportunity to do all that and more. However, important questions need to be addressed, not least of which is: How can we ensure that such projects do not become a loophole for cash-strapped donors to limit increases to their development budgets by investing in activities with a cash-back guarantee but little development impact, or worse, by diverting aid resources to promote domestic commercial interests?
We know better than to assume that any and all activities that contribute to economic growth will automatically translate into poverty reduction (as evidence by a recent UN report). We also know that the evidence base for the development impact of public-private partnerships is scarce (here’s one review of the available evidence). So, how do we make aid fit for purpose in the 21st century while ensuring that scarce public dollars are being used effectively to combat poverty?
That is the question.
While I don’t have any enlightening answers for you (and would love to hear from folks who do), it seems that the extent to which this new trend goes “mainstream” will depend at least in part on whether such activities will count towards countries’ overseas development assistance (ODA), and thus, the 0.7% GNI target that donors are scrambling to meet by 2015. Under the current definition, most innovative finance mechanisms do not qualify as ODA due to strict rules on concessionality, flow characteristics and intermediaries. However, efforts are currently under way to try to modernize it. It’s an important space to watch in the coming months.