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Leveraging: The changing world of development finance
Donors and other development actors have always worked
with the private sector but the importance and nature of that Sustainable Development is
collaboration is rapidly changing. Whereas discussions
around the Millennium Development Goals (MDGs)
development that meets the needs of
concentrated on mobilising public finance, the focus of the the present without compromising
SDGs and FFD debates has been much broader on getting
the best mix of public and private finance, on domestic the ability of future generations to
resource mobilisation and on transformative structural
changes in areas such as tax, debt and trade.
meet their own needs. 4
1.Business Accountability For Development, by ITUC-TUDCN and EURODAD, supported by the 5. World Bank Group et al., Mobilising Climate Finance: a Paper Prepared at the Request of G20
CPDE, 2015. http://www.ituc-csi.org/business-accountability-for-development Finance Ministers (G20, 2011), 35, Cited in http://eurodad.org/files/pdf/520a33a10cae2.pdf
2.IFC (2008). The figures show a growth from around USD 4 billion to 40 billion per year from 1990 6. Business Civic Leadership Center (BCLC) and Corporate Citizenship, (2009). Cited in Davies
to 2010. (2011).
3. www.edfi.eu.
4. World Commission on Environment and Development (WCED), (1987),Our common
future.Oxford: Oxford University Press, p. 43.
Mongolian herders file complaint with EBRD about Mongolian iron ore company 9
In January 2012, the European Bank for Reconstruction and Development (EBRD) approved a debt financing
of 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 was
intended to support sustainable development of the Mongolian mining sector and help set corporate and
industry standards including transparency, environmental and social management practices.
Herders from the Gobi Altai Mountains in western Mongolia filed a complaint with the EBRD in December
2014 claiming that roads to service the mine had caused pollution, loss of livelihoods and displacement
of 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 EBRDs social and environmental standards had been breached and requested
a full assessment of the mines impacts, swift completion of the paved road with adequate overpasses,
restoration of degraded and polluted land, compensation for the loss of animals and the implementation
of a comprehensive livelihood restoration programme in consultation with all stakeholders involved. The
complaint is currently being reviewed.
Challenge of transparency development agencies have creation of a diversified local private sector in developing
a poor track record with respect to transparency of countries, while central to many national development
contracts, finance, and project impacts, especially when strategies, does not seem to be a priority.18
dealing with financial intermediaries, such as banks and
Challenge to demonstrate additionality DFIs frequently
private equity funds, and their clients. This is partly due to the
quote leverage ratios that are based on the assumption
desire to protect commercial confidentiality. For example, the
that all of their financing is new and additional, and that
IFCs Access to Information Policy has been criticised for
co-financiers would not have made any investments without
being far weaker than those of the public lending arms of the
the DFIs involvement. A study by UKAN19 of 19 available
World Bank Group.15 The European Investment Bank has
evaluations of leveraged projects using ODA found that there
recently adopted a more restrictive transparency policy,
is very little evidence of either financial or development
allowing the EIB to establish a new presumption of
additionality. It also found that there were few evaluations
confidentiality to keep secret internal investigations into
carried out of such projects, and that there was no common or
irregularities such as corruption and maladministration.16
robust approach to measuring additionality.20 A report by the
Challenge to link to national development priorities European Court of Auditors on EU blending activities21 claimed
the way that DFIs operate makes it difficult for them to align that the need for a grant to enable the loan to be contracted
their activities with the priorities of governments, local was demonstrated for only half of the projects examined.
businesses and poor communities in partner countries. DFIs
are usually driven by developed country priorities, with little or Challenges of selected financing mechanisms for
weak representation by recipient countries, as becomes infrastructure projects the need to facilitate private
evident when analysing the governance structure of existing sector involvement is one of the main drivers behind the
DFIs or the EUs Platform for Blending in External leveraging agenda. PPPs have been the selected financing
Cooperation. The sectoral focus of bilateral DFIs tends to be mechanism to structure much-needed infrastructure projects.
driven by home government priorities and business sector However, infrastructure PPPs have a poor track record of
serving poor customers and the financial track record of PPPs
expertise,17 rather than prioritising the sectors with most
is mixed at best. There is significant evidence to show that
potential for growth in a specific developing country context.
costs can be high for governments, as can risks and debt
Nine out of 23 donor policies explicitly reference supporting
the donor-country or their own businesses abroad. The arising from contractual obligations and contingent liabilities.22
14. Take Action: Stop EcoEnergys Land Grab in Bagamoyo, Tanzania, researched and written by criteria used by development cooperation actors to assess the additionality of engagements with
consultants Mark Curtis and Richard Mbunda and ActionAid staff, published 18 March 2015. http:// the private sector. The Interamerican Development Bank (2014) finds that the assessment of
www.actionaid.org/publications/take-action-stop-ecoenergys-land-grab additionality was mostly based on qualitative descriptions, often lacking objective supporting
15. Bretton Woods Project (2012). evidence.
16. http://www.counter-balance.org/eibs-new-transparency-policy-allows-for-more-secrecy/. 21. European Court of Auditors (2014). The effectiveness of blending regional investment facility
grants with financial institutions loans to support EU external policies, Special Report 16.
17. The ITUC study found that 9 out of 23 donor policies explicitly reference supporting domestic
businesses abroad and facilitating their investments and trade in developing countries. 22. Oxfam (2014) A Dangerous Diversion: Will the IFCs flagship health PPP bankrupt Lesothos
Ministry of Health?, Oxfam (2014) Investing for the few: The IFCs Health in Africa, Eurodad (2014)
18. ITUC, Op. cit. Where is the public in PPPs? Analysing the World Banks support for public-private partnerships,
19. UKAN (2015) forthcoming. Oxfam (2014) Moral Hazard? Mega public-private partnerships in African agriculture.
20. For example, Di Bella et al. (2013) point out that limited public information exists on the specific
Clear principles have been developed for the use of ODA. coverage of countries. A full list of the instruments examined
However, as shown above, the same level of attention in will be available in a background paper and many are
terms of contribution to sustainable development has not mentioned in the tables on pages 7 and 8.
been paid to other types of public finance, namely where it is
In general, they include
used to leverage private sector involvement.
UN treaties relevant to sustainable development and
Agreeing and implementing sustainable development
human and womens rights
principles for public-backed private finance is needed to:
Donor / institutions policies, tools and instruments of
Target all development finance towards sustainable
development effectiveness and due diligence
development outcomes
Voluntary codes of conduct for responsible investment
Make the most of the role of the private sector to promote
social, economic and environmental development Application of principles
objectives
Each donor has different ways of monitoring and evaluating
Minimise risks for people and the environment development projects. The proposed principles offer a
benchmark against which their monitoring frameworks can
Ensure transparent and accountable processes for the use
be assessed they draw attention to the key issues that any
of all public money
framework should address, at a minimum. They highlight that
Ensure that all development finance builds on projects must not only do no harm but also do good and
development effectiveness principles, including country have the maximum positive impact possible, in line with key
ownership, untying, and strengthening national social, economic and environmental elements of the
government systems. proposed sustainable development goals. The principles fall
Contribute to low-emission development pathways and into two main categories:
increase resilience of local communities Partnership and project principles which deal mainly with
how decisions are made with respect to project
development and implementation
Blended financing platforms could have a great
Sustainable development principles which focus on the
potential, particularly where there is a benefit to the
impacts that the projects aim to have
public sector. Where they are considered however, it
is important to ensure that these arrangements are Partnership and project principles:
subject to safeguards to verify that they contribute There are some principles that should govern which private
to sustainable development. They must not replace sector partners are chosen and the processes and
or compromise state responsibilities for delivering procedures common to all projects. Many donors have
on social needs. Such policies need to ensure fair already made a good start on implementing these more
returns to the public, while incorporating social, operational principles.
environmental, labour, human rights and gender Build on development effectiveness principles and
equality consideration. (UN Secretary General, The SDGs in order to be most effective, national
Road to Dignity by 2030) governments, citizens and local businesses should set the
agenda. Developing country governments should be
represented on an equal footing where decisions of
Proposed principles projects and strategies are made, particularly within donor
The principles proposed here are based on current practice institutions. Global agreements, and in particular the
and existing international standards and treaty obligations. proposed SDGs should set the overall objective and
By using existing standards that states have already signed direction of travel. All financing should be guided by
up to, the intention is to demonstrate that these are issues development effectiveness principles such as untying aid
that are already relevant and feasible to consider in and the use of country systems.
development projects that include the private sector. Show additionality and value for money
They are intended to provide a check-list for donors to governments need to be transparent on the terms of
ensure that key issues have been taken into account when finance, with clarity on expected financial and/or
deciding on using public resources to support the private development additionality as well as assessment of costs
sector. of different options.
The instruments have been chosen to represent a range of Share risk and minimise debt governments need to
institutions active in the field as well as good geographical be sure that leveraging does not create excessive risks or
Show additionality and value Avoid investing public money where other sources of finance might already be available without the EC Principles on Blending
for money involvement of donor agencies
Develop a coherent approach for measuring additionality and applying it to all projects as early as possible
Share risk and minimise debt Ensure that leveraging does not create excessive risks or debts by ensuring fair sharing of risk of risk and rewards OECD Principles for Private Sector Participation in
Ensure that over the course of the payment of the public liabilities created by the project, it generates the public Infrastructure, UNCTAD Investment Report 2014
revenue to repay these liabilities in full
Ensure transparency, Implement standards on community consultation before project approval (FPIC) and in project design, IATI, OECD Aid Effectiveness Principles, UNSG
accountability and implementation and monitoring Synthesis Report, Public Participation in Decision-
participation. Publish spending of all projects under International Aid Transparency Initiative (IATI); project data, including making and Access to Justice in Environmental
contracts, terms and conditions, and financial information should be made available under open data Matters, China EXIM, ADB SPS, BNDES, UNVGGTs
standards.Ensure that affected communities, NGOs and other parties have access to complaints
mechanisms that are fair, transparent and effective
Ensure good corporate ODA should only be channelled through private sector partners that: UN Anti-Corruption Convention, OECD Guidelines on
governance -a re committed to upholding human rights and sustainable development principles and standards across MNEs, UN Guiding Principles on Business and Human
their operations; Rights, UNPRI, UNGA General Resolution (2013)
- have clear monitoring and accountability mechanisms;
- observe local and national laws and international standards, including on anti-corruption;
- have sustainable exit strategies to ensure long-term benefits.
development
groups education, energy and financial services Report, UN Convention on the Rights of Persons
Preserve and prevent negative impacts on heritage Assist communities to use their cultural heritage for with Disabilities
including tangible objects, natural sites and traditional economic development, consistent with their wishes,
knowledge customs and traditions
Close the gender Identify and prevent any negative impact on groups Proactively address womens empowerment and gender IDB Gender Equality Policy and Implementation
Mitigate and adapt Reduce indirect and direct GHG emissions. Promote technologies and techniques that reduce GHG IDB, ADB, UNSG Synthesis Report, China EXIM,
to climate change Avoid new projects with high CO2 emissions such as emissions and promote a low carbon development path ADB SPS, AfDB ISS, SE4All